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

Thursday, January 30, 2014

Secular Stagnation

Today on the podcast, good news and bad news.

Good news is, a group of econophiles in Seattle and the Northwest has incorporated the nonprofit Institute for Dynamic Economic Analysis. The mission is nothing less than the comprehensive reform of economics. Our chief economist is Steve Keen, whose books and lectures and videos demonstrate his fitness for the task. Our executive director is your obedient servant here speaking. Members of our board include Michael Hudson and Dirk Bezemer. The website is still under construction, but you can find it at IDEAeconomics.org.
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The bad news is: That's it for the Demand Side podcast. What? Now six years and change, 618 episodes. Rushing to get in place in November 2007 in time to call the recession. Now all these years later, and we still haven't called the end of the recession. Bouncing along the bottom with downside risks.

We will continue to post raw relays here, from voices we think may be useful. Weekly is our intention. But our distinctive dour look will be moving over to the IDEA blog. It may be, in coming months, we'll generate a podcast from that site, but our energies are now elsewhere: supporting the work under Steve -- including his forthcoming Finance and Economic Breakdown, facilitating the development and use of Minsky-- the dynamic modeling software that incorporates credit and banking, providing the blog forum for disciplined discussion of relevant posts, coordinating with like-minded individuals and organizations, offering access to data and research tools, hopefully for every level, and delivering you the opportunity to contribute money, time and talent to the necessary reformation of a quasi-science. Maybe we can raise something that deals with the real world in useful ways.

As I say, we are just getting started at IDEA -- an acronym too cute by half. What you get when you look at the website is a preview, here ahead of the rest of the world, because I have to explain the shutdown. Our official roll out is February 17. If you want to be on that first e-mail list, send your name and e-mail address to demandside at live.com.

So again, relays continue here, but in a less sophisticated -- if that is possible -- format.

All this does not explain the new look at DemandSideEconomics.net, the site -- or former site -- of the transcripts. Somehow, perhaps by my distraction with this new venture, we lost control of the Domain Name. The next day it is what you see there. No content, but at least it is not porn. We are in the process of moving the transcripts to demandsidetranscript.net, but have not yet been able to master the technicalities of that. You can find everything at demandsideblog.blogspot.com in the meantime.

Now, all that aside, on to today's podcast. It is a relay of sorts. It is the "secular stagnation" speech Larry Summers gave at the IMF a couple of weeks ago, which we reproduce in its entirety. We do that not because of its substance, but because of the remarkable absence of substance. The audience does not want to hear such heresy, and Larry must step lightly. It is wonderful to witness.

You all know Mr. Summers. One-time member of the three amigos -- Summers, Robert Rubin and Alan Greenspan, feted on the cover of TIME for their competence in producing the New Economy of the 1990's. Larry is aggressive and caustic. Champion of deregulation -- with Rubin and Greenspan. Later failed president of Harvard. Architect of the Timely, Targeted and Temporary stimulus package in the spring of '08 that also turned out to be ineffectual. Later Obama's chief economist -- to the chagrin of Austin Goolsbee who was Barack's chief advisor during the '08 campaign and actually landed the slot as chief of the Council of Economic Advisers. Summers is largely credited with choosing the stimulus that was too small and very badly designed. You'll remember the promises of 8-1/2 percent unemployment that turned out much higher and went a long way to discrediting federal spending as an antidote to recession. Obama famously said, "Heckuva job, Larry," on a Sunday talk show as Larry was leaving. Adding, "pun intended." Summers is also one of the recipients of the Dynamite Prize from Real World Economic Review, along with fellow amigo Alan Greenspan and arch-monetarist Milton Friedman, as the three who did most to blow up the economy.

Here he is bowing and curtsying to Stan Fischer, new vice chair at the Fed, Ben Bernanke, and others. The audio is followed by a few notes from Paul Krugman, who does his own genuflecting before beginning.


What does "secular stagnation" mean. As near as we can tell, its usage here is analogous to the work of Ptolemaic astronomers. Whenever a new star was identified, and in order to fit its movement in to the belief that the Earth was the center of the universe, a new celestial sphere had to be invented and described and explored and so on. Here we have a phenomenon, secular stagnation -- the rotting of middle class conditions. Many years of study and pontification have to be expended to fully integrate this into the previous economic theories.

OR you could look at Keynes, Irving Fisher, Keyserling, Minsky, Galbraith the elder, Galbraith the younger, Steve Keen, Michael Hudson and a good many more who have been describing it for years, with demand at the center. As Keynes said and James Galbraith repeated in his excellent book The Predator State, there is no supply curve for labor. It is all about demand.

This fussing around with the zero lower bound and so-called natural rate of interest being below zero is so much needless befuddlement. If the natural rate of interest means anything, it is the expected return on investment. Why not raise the expected return, rather than try to lower the interest rate? That would mean public investment, public jobs, doing things that need to be done.

On the other hand, you need to give Summers a little credit. Among those years of secular stagnation are some that he is responsible for. At least he took the credit at the time.

What does Paul Krugman have to say?

Here I have to tread lightly and maybe do a half a bow. I know Krugman is a favorite of some of the listeners. He writes very well. He can describe the shortcomings of the Right in exquisite detail. His overall critique of others is good. But his policy prescriptions. They are in the right direction, but this fascination with the zero lower bound. And more, his suggestion that it would all be so simple. We think ... well, let's just say it ignores some institutional obstacles.

Krugman's piece is worth reading. It is appended to the transcript, if you can get there. demandsideblog.blogspot.com or, coming soon, demandsidetranscript.net.

So there you have it, the last episode of the Demand Side podcast. As I say, whether because we can't let go or because we want you to have something worthwhile to listen to, we will be publishing relays of others in the future. We've learned a lot. Thank you for listening.

Today's podcast brought to you by IDEA, an acronym too cute by half, but it does mean something. The Institute for Dynamic Economic Analysis, IDEAeconomics.org. Look for it February 17.

This is Alan Harvey, from the Demand Side.


I’m pretty annoyed with Larry Summers right now. His presentation at the IMF Research Conference is, justifiably, getting a lot of attention. And here’s the thing: I’ve been thinking along the same lines, and have, I think, hinted at this analysis in various writings. But Larry’s formulation is much clearer and more forceful, and altogether better, than anything I’ve done. Curse you, Red Baron Larry Summers!

OK, with professional jealousy out of the way, let me try to enlarge on Larry’s theme.

1. When prudence is folly

Larry’s formulation of our current economic situation is the same as my own. Although he doesn’t use the words “liquidity trap”, he works from the understanding that we are an economy in which monetary policy is de facto constrained by the zero lower bound (even if you think central banks could be doing more), and that this corresponds to a situation in which the “natural” rate of interest – the rate at which desired savings and desired investment would be equal at full employment – is negative.

And as he also notes, in this situation the normal rules of economic policy don’t apply. As I like to put it, virtue becomes vice and prudence becomes folly. Saving hurts the economy – it even hurts investment, thanks to the paradox of thrift. Fixating on debt and deficits deepens the depression. And so on down the line.

This is the kind of environment in which Keynes’s hypothetical policy of burying currency in coalmines and letting the private sector dig it up – or my version, which involves faking a threat from nonexistent space aliens – becomes a good thing; spending is good, and while productive spending is best, unproductive spending is still better than nothing.

Larry also indirectly states an important corollary: this isn’t just true of public spending. Private spending that is wholly or partially wasteful is also a good thing, unless it somehow stores up trouble for the future. That last bit is an important qualification. But suppose that U.S. corporations, which are currently sitting on a huge hoard of cash, were somehow to become convinced that it would be a great idea to fit out all their employees as cyborgs, with Google Glass and smart wristwatches everywhere. And suppose that three years later they realized that there wasn’t really much payoff to all that spending. Nonetheless, the resulting investment boom would have given us several years of much higher employment, with no real waste, since the resources employed would otherwise have been idle.

OK, this is still mostly standard, although a lot of people hate, just hate, this kind of logic – they want economics to be a morality play, and they don’t care how many people have to suffer in the process.

But now comes the radical part of Larry’s presentation: his suggestion that this may not be a temporary state of affairs.

2. An economy that needs bubbles?

We now know that the economic expansion of 2003-2007 was driven by a bubble. You can say the same about the latter part of the 90s expansion; and you can in fact say the same about the later years of the Reagan expansion, which was driven at that point by runaway thrift institutions and a large bubble in commercial real estate.

So you might be tempted to say that monetary policy has consistently been too loose. After all, haven’t low interest rates been encouraging repeated bubbles?

But as Larry emphasizes, there’s a big problem with the claim that monetary policy has been too loose: where’s the inflation? Where has the overheated economy been visible?

So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest. And this hasn’t just been true since the 2008 financial crisis; it has arguably been true, although perhaps with increasing severity, since the 1980s.

One way to quantify this is, I think, to look at household debt. Here’s the ratio of household debt to GDP since the 50s:

Ratio of household debt to GDP
Ratio of household debt to GDP
There was a sharp increase in the ratio after World War II, but from a low base, as families moved to the suburbs and all that. Then there were about 25 years of rough stability, from 1960 to around 1985. After that, however, household debt rose rapidly and inexorably, until the crisis struck.

So with all that household borrowing, you might have expected the period 1985-2007 to be one of strong inflationary pressure, high interest rates, or both. In fact, you see neither – this was the era of the Great Moderation, a time of low inflation and generally low interest rates. Without all that increase in household debt, interest rates would presumably have to have been considerably lower – maybe negative. In other words, you can argue that our economy has been trying to get into the liquidity trap for a number of years, and that it only avoided the trap for a while thanks to successive bubbles.

And if that’s how you see things, when looking forward you have to regard the liquidity trap not as an exceptional state of affairs but as the new normal.

3. Secular stagnation?

How did this happen? Larry explicitly invokes the notion of secular stagnation, associated in particular with Alvin Hansen (pdf). He doesn’t say why this might be happening to us now, but it’s not hard to think of possible reasons.

Back in the day, Hansen stressed demographic factors: he thought slowing population growth would mean low investment demand. Then came the baby boom. But this time around the slowdown is here, and looks real.

Think of it this way: during the period 1960-85, when the U.S. economy seemed able to achieve full employment without bubbles, our labor force grew an average 2.1 percent annually. In part this reflected the maturing of the baby boomers, in part the move of women into the labor force.

This growth made sustaining investment fairly easy: the business of providing Americans with new houses, new offices, and so on easily absorbed a fairly high fraction of GDP.

Now look forward. The Census projects that the population aged 18 to 64 will grow at an annual rate of only 0.2 percent between 2015 and 2025. Unless labor force participation not only stops declining but starts rising rapidly again, this means a slower-growth economy, and thanks to the accelerator effect, lower investment demand.

By the way, in a Samuelson consumption-loan model, the natural rate of interest equals the rate of population growth. Reality is a lot more complicated than that, but I don’t think it’s foolish to guess that the decline in population growth has reduced the natural real rate of interest by something like an equal amount (and to note that Japan’s shrinking working-age population is probably a major factor in its secular stagnation.)

There may be other factors – a Bob Gordonesque decline in innovation, etc.. The point is that it’s not hard to think of reasons why the liquidity trap could be a lot more persistent than anyone currently wants to admit.

4. Destructive virtue

If you take a secular stagnation view seriously, it has some radical implications – and Larry goes there.

Currently, even policymakers who are willing to concede that the liquidity trap makes nonsense of conventional notions of policy prudence are busy preparing for the time when normality returns. This means that they are preoccupied with the idea that they must act now to head off future crises. Yet this crisis isn’t over – and as Larry says, “Most of what would be done under the aegis of preventing a future crisis would be counterproductive.”

He goes on to say that the officially respectable policy agenda involves “doing less with monetary policy than was done before and doing less with fiscal policy than was done before,” even though the economy remains deeply depressed. And he says, a bit fuzzily but bravely all the same, that even improved financial regulation is not necessarily a good thing – that it may discourage irresponsible lending and borrowing at a time when more spending of any kind is good for the economy.

Amazing stuff – and if we really are looking at secular stagnation, he’s right.

Of course, the underlying problem in all of this is simply that real interest rates are too high. But, you say, they’re negative – zero nominal rates minus at least some expected inflation. To which the answer is, so? If the market wants a strongly negative real interest rate, we’ll have persistent problems until we find a way to deliver such a rate.

One way to get there would be to reconstruct our whole monetary system – say, eliminate paper money and pay negative interest rates on deposits. Another way would be to take advantage of the next boom – whether it’s a bubble or driven by expansionary fiscal policy – to push inflation substantially higher, and keep it there. Or maybe, possibly, we could go the Krugman 1998/Abe 2013 route of pushing up inflation through the sheer power of self-fulfilling expectations.

Any such suggestions are, of course, met with outrage. How dare anyone suggest that virtuous individuals, people who are prudent and save for the future, face expropriation? How can you suggest steadily eroding their savings either through inflation or through negative interest rates? It’s tyranny!

But in a liquidity trap saving may be a personal virtue, but it’s a social vice. And in an economy facing secular stagnation, this isn’t just a temporary state of affairs, it’s the norm. Assuring people that they can get a positive rate of return on safe assets means promising them something the market doesn’t want to deliver – it’s like farm price supports, except for rentiers.

Oh, and one last point. If we’re going to have persistently negative real interest rates along with at least somewhat positive overall economic growth, the panic over public debt looks even more foolish than people like me have been saying: servicing the debt in the sense of stabilizing the ratio of debt to GDP has no cost, in fact negative cost.

I could go on, but by now I hope you’ve gotten the point. What Larry did at the IMF wasn’t just give an interesting speech. He laid down what amounts to a very radical manifesto. And I very much fear that he may be right.



Friday, January 24, 2014

Transcript: Inequality, Poverty and Wealth: Galbraith, Gates, Bloomberg, Rogoff, Roubini, Bremer



That is the best we've heard. The book is highly technical but highly useful as well. Inequality and Instability, A Study of the World Economy Just Before the Crisis, by Galbraith and a large company.

On the other end of the spectrum, Bill Gates and Michael Bloomberg are making the round on behalf of the billionaires offensive against poverty. Gates and Bloomberg are talking up how philanthropists such as themselves are turning things around.
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Bill and Mike

We had to check it out, so we went to the UN to see how this remarkable event had occurred without our being aware. It's so good we don't even know what people are dying from. Well, they're dying from poverty, lack of basic sanitation, unclean water, hunger and the attendant diseases and strife. What we found at the UN Millennium Goals project was that yes, Bill and Mike are right, extreme poverty is in decline. Not so much in numbers, which are pretty much flat, but in terms of the percentage of the population. Key note: Middle income is defined today as about $7,100 gross national income per capita. That is GDP per capita. Sounds okay. By comparison, the US GNI per capita is 52,300 per capita. That is, above the $51,700 median HOUSEHOLD income. Hard to make comparisons, but a middle income nation is about one-seventh the U.S. Naturally when you measure things in per capita terms you are washing out the income inequality. Didn't want you to get too cheerful.

The Millennium Development Goals were set in 1990, a very dark time. Progress to meeting them by 2015 looks better than progress to meet the Kyoto Accords, but not by a lot. Honored a lot in the breech.

The official reports are glossy and positive, though it is not so heartening to us to see kids sitting in the dirt eating a pasty gruel out of plastic bowls. We cringe to think of how this is better.

A brief look at the eight goals. One (a)reduce extreme poverty by half. On target -- for two thirds of the nations, (b) productive and decent employment. Nope. Maybe halfway there, (c) reduce hunger by half, not happening. In fact, in two regions -- Western Asia and Oceania, we're going the wrong way.

Two: Achieve universal primary education. Not going to happen. Enrollment is higher, though.

Three: Promote gender equality and empower women. (a) equal enrollment in primary schools, pretty much done, though total enrollment is below targets, (b) paid employment, not a chance, (c) women represented in national parliaments, goals not met.

Four through Eight

Reduce child mortality, improve maternal health, combat HIV, Malaria and other diseases, ensure environmental sustainability (which refers to clean drinking water, decent sanitation and improving slums; it does not refer to climate change) Not so good. Missing the goals.

This is not a case of jumping only halfway across the canyon. On the other hand, you don't set a goal to make yourself feel bad about not getting halfway there.

What has happened? According to the summary charts Eastern Asia has done well. I guess that would be China. Living better in the cities if you can breathe in the cities. Sub-Saharan Africa is still suffering. Good progress in drinking water, halting the spread of tuberculosis, reducing infant mortality, but not in reducing hunger or mitigating the condition of slum dwellers. Most of the poor live in rural areas and work in agriculture. Children are more likely to be poor, with a poverty rate above 50% in low income countries. Only one-quarter have access to clean water and sanitation.

Now we are not quite so wedded to our dismal look as to denigrate the efforts of tens of thousands of people who work hard for little pay to help make things better, apparently having escaped the neoclassical motive assumption. The work of Bill Gates, although his billions are founded more on monopoly profits than innovation, are helping real people in real ways.

We'll just quote the chief policy recommendations of the UN Millennium Development Goals Gap Task Force:

Reach a development-oriented conclusion of the Doha Round of trade negotiations, implement the commitment to eliminate all forms of agricultural export subsidies, and to provide duty-free, quota-free market access to Less Developed Countries products, assure timely debt relief for critically indebted developing countries.

Yes, agriculture is the major industry of LDC's, Less Developed Countries. Agriculture in the developed world, the industrial farms of the U.S., but also in Europe, is subsidized massively. The Doha round was the round after the Uruguay round of trade negotiations. There the developed nations got what they wanted, with the promise that agriculture and the interests of the LDC's would be taken up in due course. Oops. Didn't happen.

Meanwhile onerous and often odious debt continues to burden developing countries. Debt incurred by dictators or through corruption, often on behalf of big projects promoted by Western megacorporations, cannot be written off. There is no bankruptcy for nations. A country like Ecuador with oil revenue can afford to play hardball and demand writedowns, but other nations are at the mercy of the markets. Exacerbating this was the imposition of Neoliberal strategies that have never worked, AS CONDITIONS FOR DEBT ASSISTANCE by the IMF and World Bank.

Nice to have a few billionaires on the job, though.

There is much more in this arena. But Demand Side says, the right thing to do is to develop and empower the agricultural sectors of less developed nations, with low fossil fuel, sustainable methods. To enable them to compete in world markets, rather than running them out of business with extraordinary subsidies to American and European industrial farms. The U.S. needs itself to turn to smaller-scale, sustainable farming. People making a living on their farms in the LDC's is a recipe for stability, creating a social fabric from dignified work and a base for development. Continued dependency is a recipe for human disaster.

Is our thought

Now, from Doha, Ian Bremer, Nouriel Roubini, Kenneth Rogoff. A sequence in which we agree with Rogoff and disagree with Roubini. Bremer is just stating the facts.


Bremer with Roubini:

Today's podcast brought to you by the most coherent review of the Demand Side podcast we've read. We even put it up as a separate post. From Dan Lett and Liquid Lunch. The review's last paragraph makes me wonder if he has a camera in the room. Quoting

Demand Side Economics is not out to entertain: it expends little energy on production values and Alan Harvey's delivery is drier than a Churchill martini. Having never found a reliably genuine image of Harvey online, I always imagine his dour monologues delivered by Droopy the dog, and I suspect that the excellent transcripts he provides with each episode are really repurposed scripts. But there is a charm to the deadpan, and Harvey's glum sense of humour delivers the occasional wry smile. As an economics neophyte, I appreciate the clarity and scope of these podcasts, and I feel just that little bit better equipped to withstand the barrage of economic crypto-science masquerading as objective information.

Thank you,

Charts of 25 years:


Thursday, January 23, 2014

The Most Coherent Review of the Podcast to Date -- from Dan Lett at Liquid Lunch

Review: Demand Side Economics (podcast)

One positive effect of the 2008 financial collapse is that it has energized popular scrutiny of mainstream economic theory. The average person remains in the dark about credit default swaps and derivatives trading, but they are increasingly aware that economic theory is not the unified science its practitioners often pass it off as. The evidence is unavoidable: inequality and unemployment are at critical levels, de-regulated free-market "equilibrium" feels like an economic hurricane at the human level, governmental financial predictions are less reliable than guesses, and TV economists now only wear ties that colour-coordinate with "crimson-faced embarrassment". In times like these, dissenting voices need to deliver alternative economic visions in an accessible vernacular: the Demand Side Economics podcast is such a voice.

"Demand side" refers to a school of economic thought inspired by John Maynard Keynes that opposes many of the assumptions of mainstream "neoclassical" economics. In very basic terms, neoclassical models favour free-market forces (deregulation, low taxation) as the natural determinants of healthy economies, whereas demand side models favour central interventions (infrastructure spending and taxation) to mitigate boom-and-bust instability. The "demand" aspect refers to the prioritization of people's ability to participate in the economy (i.e. work and spend) over the freedom of capitalists to maximize profits at any social cost.

Host Alan Harvey delivers the demand side perspective in episodes that generally follow one of three formats. (1) Demand-side interpretations of current economic data; Harvey's current analytic mantra - "Bouncing along the bottom with downside risks" - reflects his deep pessimism toward a political culture in denial that persists with bankrupt economic thought (see "Forecast Friday" episodes). (2) Critique of what Harvey views as the hopelessly misguided (and, as he often intimates, intentionally misleading) analyses of mainstream economists and pundits - "Idiot of the Week" sections smack less of ad hominem spite than a genuine frustration at the partisan role played by supposedly objective, scientific analysts. (3) Finally, "Demand Side Relays" deliver edited speeches and broadcasts from like-minded economists (including Steve Keen and Joseph Stiglitz), with minimal commentary from Harvey.

Quite clearly Demand Side delivers a particular view, and if the last five years has taught us anything it is that we should be suspicious of any economic philosophy that claims to be "a system that works." But Harvey's podcast also does a great non-partisan service in identifying the questionable role of academics in propagating economic ideology. Take the case of Harvard economists Reinhart and Rogoff, whose 2010 paper - which concludes that economic growth stalls in countries when their debt-GDP ratio reaches 90% - became a key source of legitimacy for widespread international policies of austerity. Reinhart and Rogoff's paper has since been discredited as biased, of questionable methodology, and riddled with errors including a basic excel spreadsheet anomaly(!) This revelation came three years too late to offer any comfort to the people of Greece, the UK, and a number of other populations who are needlessly enduring brutal austerity policies. How did such an influential publication make it through the peer-review process? What other bogus studies are currently propping up public policy? Who exactly is funding and influencing the findings of presumably neutral scientists? Merely laying claim to scientific basis has proven to be no guarantee of accuracy or political objectivity in the past: we should remember that eugenics, craniometry and polygenism were all post-hoc scientific attempts to legitimize manifest racist inequality as expressions of the natural order of things. Could economic theory not be used to serve similarly nefarious interests?

Demand Side Economics is not out to entertain: it expends little energy on production values and Alan Harvey's delivery is drier than a Churchill martini. Having never found a reliably genuine image of Harvey online, I always imagine his dour monologues delivered by Droopy the dog, and I suspect that the excellent transcripts he provides with each episode are really repurposed scripts. But there is a charm to the deadpan, and Harvey's glum sense of humour delivers the occasional wry smile. As an economics neophyte, I appreciate the clarity and scope of these podcasts, and I feel just that little bit better equipped to withstand the barrage of economic crypto-science masquerading as objective information.

Friday, January 17, 2014

Transcript: Forecast and Voices

Barry Ritholz, William Dunkelberg, Bill White, William Cohan, P.J. O’Rourke and Bill Gross. The real heavyweight here is Bill White, formerly of the Bank of International Settlements and now the OECD. We featured White and his, well, white paper on the financial cycle last spring. There he was among the first economists, if not the first, with any significant position in an international institution to take a coherent look at debt. We haven’t seen his latest, but the interview is excellent.
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First the forecast. Forecast Friday. Forecast for Fourteen. The beginning of the year is again seeing consensus forecasts in the 3 and 3-plus range. Our estimate is less than half that for real GDP. Of course, we predicted at least one negative print last year. Almost hit it, but not quite. Still, our pessimism was the right call. The optimists were again disappointed.

This year we are again going negative, but not in the aggregate. We expect real median household income to continue to decline. We expect the adjusted headline unemployment to stay above 10 percent for the entire year, with the all-in U-6 measure continuing above 13 percent.

You can see online the chart comparing official U-6 and headline with our adjustments – which simply take into account the participation rate. BUZZ Oops. In our previous chart we misidentified the employment-population ratio as the participation rate. The difference modest, but not zero. It is better to use the participation rate with our methodology, because it is so simple. Simply adding the difference between the benchmark rate and the current rate. Now this is playing with the denominator, too, but unless we get elaborate and thus open to mistakes, we'll have to settle for this. We've put up both, the unemployment rates -- headline and U-6 -- adjusted for participation and adjusted for employment to population ratio. They are instructive.

You often hear, Unemployment is 7 percent, 6.7 percent, BUT ... the difference is primarily due to people dropping out of the workforce. These adjusted measures take the "but" out of it. They combine the two, adding those lost to the workforce to those unemployed. It is certainly not overstating the difficulties of the great majority of those lost to the workforce to call them "unemployed."

Now, In coming weeks we hope to join the theoretical arguments abroad in economics. Lawrence Summers, Mr. Timely Targeted and Temporary -- recently spoke to the effect that we have been experiencing a secular stagnation for many years. This has raised that possibility to a level of respectability it has not enjoyed heretofore, and threatens to include those who have long made this point in the argument. It may mean those -- like Steve Keen -- who have been stubborn in that view will be getting a hearing. It makes for more lively discussion, in any event, when the observed fact is not simply ignored or derided.

Now, a menagerie of voices for illustration of why we have our negative view. Like I said at the top, the heavyweight is Bill White. We'll start, however, with Barry Ritholz, one of the more astute eyes on the Street -- Wall Street -- columnist for Bloomberg and others, here with William Dunkelberg, former Demand Side Idiot of the Week and still chief economist for the NFIB, National Federation of Independent Business. Dunkelberg here leading off with an explanation of the latest Small Business Optimism Index.


First off, we should be happy that the bifurcated economy of John Kenneth Galbraith is visible even through the conservative glass, if you're close enough. The problem Dunkelberg defines elsewhere is uncertainty over health care and the minimum wage. But this is the part of the economy -- small business, Dunkelberg's independent businesses -- that is subordinate to the market the way corporations are not. Subordinate to slack demand, increasing supply costs. Corporate America -- a not too apt designation, since these huge institutions fly their own flags and span continents where governments are more often subservient than not -- anyway, Corporate America is doing fine so far. They are happy with their health care, since it gives them a leg up on the market-dependent sector in competition for talent.

Now for the main event, William White, Bill White. White's cache is his tenure at the Bank for International Settlements, the bank of central banks. It is the world's oldest international financial institution, established in 1930. But he is not there anymore. White has moved to the OECD. The point of highlighting his CV is that White is virtually alone among the banking elite in offering a coherent, almost Minskyan, version of what is going on. Note particularly here that, contrary to the meme that deleveraging is proceeding apace, total debt has jumped 30% since the crisis. The world is more in debt today than five years ago by a big number.


Bill White

Now for something completely different. First William Cohan, author of three bestsellers, including HOUSE OF CARDS on the last days of Bear Stearns. Also, among other things, a Bloomberg contributor. The second voice, P.J. O'Rourke, author of Parliament of Whores, now of NPR's WAIT WAIT DON'T TELL ME, and sometime fellow at the Cato Institute.



William Cohan and P.J. O'Rourke. To cleanse your pallet, from the largest bond fund in history, PIMCO, no less, the house that brought you the phrase "new normal," here is Bill Gross.


Bill Gross, mega-bond fund manager.

Today's podcast brought To you by Pope Francis, Jorge Mario Bergoglio. Why Capitalism? We read from the apostolic exhortation a couple of weeks ago, and played the response from Rush Limbaugh, that it was pure Marxism coming out of the mouth of the pope. His response from an interview with Italian newspaper La Stampa, Pope Francis was asked about criticism.

“Marxist ideology is wrong. But I have met many Marxists in my life who are good people, so I don’t feel offended,” the Pope said. “There is nothing in the Exhortation that cannot be found in the social Doctrine of the Church.”

“The only specific quote I used was the one regarding the ‘trickle-down theories’ which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and social inclusiveness in the world."

"The promise was that when the glass was full, it would overflow, benefiting the poor. But what happens instead, is that when the glass is full, it magically gets bigger, nothing ever comes out for the poor."

Friday, January 10, 2014

Transcript: New Year's Report: Economic Events Widely Reported that Never Really Happened

The folks that are in the top 20% of the income distributions, in the population, they account for 60% of the spending. The top 5% account for 35% of the spending. You know, that's just not healthy, you know, longer run. I do think our most significant long-term problem is the distribution of income and wealth.

That was Mark Zandi -- Conservative with open eyes. Adviser to John McCain's presidential bid. That combined with yesterday's Wall Street Journal revealing that one in three U.S. households was below the poverty line some time in 2013. Tells you all you need to know.
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Today on the podcast, our annual New Year's review of events -- economic events -- widely reported that never really happened. How is that? Largely because economists and economic commentators tend to see what they expect. So they report things before they actually happen or assume what is happening is what they expect. There is no more common phrase when you listen to Bloomberg or CNN than "We are beginning to see signs of ..." dot dot dot. As in, "We are beginning to see signs of corporate investment or capital spending." "We are beginning to see signs of a turnaround in small businesses." There used to be a code word, "green shoots," but that has shriveled in usage under the heat of actual events. The entirety of the recovery, Demand Side would say, is composed of those beginnings that never really came to fruition, and the recovery is brightest in the eyes of those who expect it, or those whose eyes are fixed firmly on the stock market.

It might be countered that Demand Side is seeing what he expects: Bouncing along the bottom with downside risks. An economy on life support. But at least you have not heard the phrase, "We are beginning to see signs of..." Either we are blind to the good news because -- as other economists -- we are wedded to our prior views. Or, possibly, we are right.

There is a long list,

Of course, it begins with "The economy is gaining strength, is humming along, is well into recovery." We spend most of our time telling you how bad things are and the list is too long to dwell on that here today. Let's move to number two.

The financial sector has stabilized, banks are safe, lending is back to normal, we can move on.

Not. 2013 was a year of conflict in financial regulation. Armies of banking lobbyists vs. the public interest, fought on the grounds of the U.S. Congress and the various regulatory authorities. It was bad news in 2012 when the London Whale's massive speculation in credit default swaps was characterized as hedging. It not only burnt up billions of JP Morgan Chase money, but turned the tide of opinion against Jamie Dimon, formerly the golden boy. Now not so much.

The fines and penalties levied against JP Morgan are evidence of a corrupt system, one that was corrupt when he was the golden boy, and one that is still corrupt. Just yesterday, or Wednesday, actually, JPM added another 2.6 billion to that tally for its role in the Bernie Madoff Ponzi scandal. This was the largest ever amount for violating the Secrecy Act, which requires banks to file reports on potentially suspicious activity. JPM set the all-time record for all US corporations for any penalty settled for 13 billion for its sales of mortgage backed securities before the financial crisis.

The number of nine figure settlements is too long for today. In ten figures in 2013, Morgan Chase has ponied up $1.8 billion for improper foreclosures, the robo-signing debacle, where it added $3.7 billion in aid for some of the homeowners it screwed. Later in the year it paid out $4.5 billion to 21 institutional investors for dodgy MBS it sold them before the crisis. Other big fines have come in for rigging the Japanese yen vs. LIBOR, defrauding credit card customers, and manipulating California and Midwest electricity markets. That's just one bank. One we bailed out in 2008 and 2009 and continue to feed with cheap Fed money and too big to fail insurance.

The Financial Services Oversight Council last year identified emerging threats from fire sales and run vulnerabilities in money market funds and broker-dealers operations in the tri-party repo market. The LIBOR rigging scandal has still not installed a rate that is regulated. Self-reporting of rates is still the mode of the day. Not sure if anybody got jailed in that, but if so, it wasn't in the U.S. The other frauds have gone without punishment. The fines are a cost of doing business. One can only imagine what they got away with.

Certainly there is no stability in Wall Street employment. Head count continued to fall over 2013. Sadly, average annual compensation per employee at Goldman Sachs dropped by $100,000 by the end of 2013, down to only $314,000. It is likely the ex-Enron traders on the commodity desks are still in the 1%, which is above $360,000. Investment and trading operations continue to be downsized. The casino just isn't paying out like it used to, or rather the number of tables has shrunk. The industry used to be the target of the best and the brightest. Now more than 20% of Wall Street employees want out, according to an industry survey. Many of them will get their wish.

But business is good, right?

Number three on our list was business is getting back to normal. It is finally okay.

I guess it depends on what you mean by okay. If you mean the balance sheet looks good at the bottom and the stock price is doing well, maybe so. If you mean the components of companies such as their employees and suppliers have come back, not so much. The huge corporate layoffs are still laid off. Balance sheets look good because debt is cheap -- for the big guys -- and they are not investing.

Okay also depends on what you mean by business. The corporate side of the economy is okay in the above sense. But small business -- those who actually operate in a free market -- the darlings of the market fundamentalists and the Neoclassicals -- have not recovered. They are getting squeezed by slack demand from their consumers, but also by ever more difficult terms from the megacorporations to whom they are suppliers or from whom they buy their inputs.

The NFIB -National Federation of Independent Business -- optimistm indext last reported for November did actually rise, but it remains at deep recession levels. Sales, hiring, taxes and government led the complaints from the business owners surveyed.

Side note. We don't make this point often enough,There are two private sectors. The corporate sector and the market sector. Whenever somebody asks you if you have a theory of the firm, say, "Which one? The megafirm which controls its supply chain, manipulates its consumers and has captured its regulators and legislators, Or the market firm, which hires, buys and sells, and borrows without control?"

The standard economic theory obscures this difference to the point that even small businessmen don't understand it. They think of themselves as little brothers -- except perhaps the smaller and regional banks who don't get the too big to fail insurance and the consequent lower borrowing costs that the big banks get.

John Kenneth Galbraith wrote forty years ago: "Few features of the neoclassical economics arouse more admiration for its effect than the way it rationalizes and conceals the disadvantages of the weak. One theory of the firm applies for all.... The small firm that is subordinate to the market is greatly cherished by the neoclassical pedagogy. Economists abuse that which they love."

In 1988 the AEA, when it still had credibility, that is the American Economic Association, ran two sessions back to back on the economics of Galbraith. Afterward he was asked what he himself thought was his major contribution, he replied:
The things that have concerned me most is the bimodal character of the modern economy and the unwisdom of having an economic instruction that assumes that General Motors, General Electric, and Mitsubishi are of the same order of structure, motivation and institutional character as are agriculture, handicrafts, artisan activities and services. I believe that the modern economy needs to be seen in terms of the very different character of the great corporations from the small competitive enterprise, which does conform in a general way to classical and neoclassical market theory. Additionally ... I do not believe that the modern economy functions, either in its microeconomic or its macroeconomic behavior, in a socially acceptable fashion. I accordingly believe that there is a large role for state intervention which cannot be decided by general theory, but involves a pragmatic consideration of the social consequences in the particular case.
The NFIB's , independent business, must now work longer, harder and cheaper to stay afloat. A hidden wage reduction. Their homes are not much good for collateral. Life is not good.

Moving on.

Number four: The fracking revolution is an economic Godsend. Widely reported ....

The farmers and ranchers of the northern plains are not convinced it is a godsend. The occupants of small towns in Pennsylvania are not convinced. Everybody is convinced on Wall Street, though. You know our opinion on the environmental collapse being engendered by fossil fuels. The real economic recovery is in green jobs and new energy, rebuilding transportation, retrofitting buildings, dealing with education and infrastructure. Having somebody in from Texas for six months of construction who bids up rents and then leaves is not economic development. The cheap energy which is supposed to help domestic manufacturing will generate, even by optimistic estimates, paltry numbers of jobs. Burning more fossil fuel, cracking and pressurizing the geology, is going to allow more robots and more profits, but the cost will be paid in environmental sustainability and community health.

Number five: The housing market is in recovery, set to take off. Everyone has heard this.

Case Shiller prices are back to 2004 levels anyway. That reported December 31. Up 13 plus percent year-over-year. Many months of positive numbers. Of course if the housing market goes down 40 percent and comes back 20 percent, we're still 25% below the top, since the denominator has changed. But that's picky.

Prices are one thing. Quantity is another. In spite of all the growth in the economy over the past fifty years, home sales for the first eleven months of 2013 were higher than only five other years in that fifty-year period -- the first four years of the Great Recession and a single year in the depths of the Reagan-Volcker recession of 1982. Quite the recovery.

What sales action there has been was juiced by demand from foreign money in gateway cities, and by hedge funds buying up distressed properties and foreclosures to turn them into rentals. That is a healthy housing market? Take those influences, for3eign money looking for US real estate and vulture funds and ... well ... Another false dawn.

Meanwhile interest rates have risen a little and volume has gone down. With the end of QE and the end of shovelling of money into MBS, we may see more interest rate rises. QE, the experiment that didn't work and leaves a huge obstacle in the way.

Headwinds for Housing? Some. Real median household income is now back below 2004 by about ten years, at $51,000. Property taxes are going up. Affordability is going down. Banks are beginning to show signs of easing lending standards. That phrase should have warned you that they did not to any meaningful degree do that in 2013. Single family housing starts are up, maybe you heard. But the bottom line is that sales are still at depression levels.

Meanwhile, as reported at EconIntersect, home equity lines of credit -- HELOC's -- are about to reset. These were the get-the-cash-out-of-your-equity loans that banks pushed on homeowners during the bubble years.

Quoting from Keith Jurrow:

To see the danger of a HELOC reset to the borrower, you need to understand what a HELOC is. A HELOC is similar to a business line of credit and has some similarities to a consumer credit card as well. Using the residence as security, a homeowner is usually given a line of credit with a prescribed limit upon which the borrower can draw at any time. During the zaniest bubble years, some banks actually offered HELOCs where the available credit increased automatically as the equity in the house rose along with the home’s value. For bubble-era HELOCs, the homeowner received a draw period of anywhere from five to ten years when funds could be drawn. During this draw period, the borrower was usually required to make interest payments only. The rate was adjusted monthly and was pegged to the prime rate. Here is the problem. At the end of the 10-year draw period, the loan becomes fully amortizing. The repayment period was typically between ten and twenty years at the end of which the HELOC had to be fully repaid. HELOCs were irresistible because the interest-only monthly payment was not very much – often only a few hundred dollars. Why worry about the fact that in ten years it would become fully amortizing? Borrowers focused on the soaring value of their home.

The earliest bubble era HELOCs are beginning to face the end of the 10-year draw period. Take a good look at this chart showing originations of both HELOCs and closed-end second mortgages from the New York Federal Reserve Bank. HELOC originations are in red. You can see that they began to soar in 2003. Those HELOCs have started to reset this year. An increasing number of resets will occur next year with the 10-year anniversary of the 2004 vintage HELOCs. Still more will reset in 2015 and nearly as many in 2016. Now take another look at the earlier chart showing quarterly HELOC originations. The annual origination figures look like this: That is a total of 10.8 million HELOC originations during the peak bubble years. This does not even include those originated during 2004. Nearly 40% of these bubble era HELOCs were opened in California where the average amount was roughly $130,000. For those HELOCs originated between 2004 – 2007 which are still in existence and have an accompanying first mortgage, it is no exaggeration to say that 98% or more of those properties are now underwater. Now here is the truly frightening part. When the 10-year draw period ends, the HELOC converts to a fully amortizing loan. The payoff period varied from a minimum of ten years to a maximum of twenty. Most had fifteen year payoff periods. How much might the monthly payment increase? Let’s take a typical California HELOC from 2004 with a balance of $150,000. Using today’s average HELOC rate of 5.5%, the interest-only payment would be about $687 per month. When the loan becomes fully amortizing with a payoff period of fifteen years beginning some time in 2014, the monthly payment would soar to roughly $1,225 per month. Quite a jump! If the loan balance was higher, the leap in monthly payment would be even greater. How many HELOC borrowers will be willing and able to pay this amortizing amount?

This graph shows us the delinquency rate of HELOCs based on the year of their origination. Clearly, the delinquency rates are highest for the two years 2006 and 2007. The graph is important because it tells us that the delinquency rate for HELOCs originated during the bubble era is much higher than the overall 5% rate reported by some of the “too-big-to-fail” banks for their entire HELOC portfolio.


When the 2004 HELOCs begin to reset in January, the payment shock for the borrowers will be huge. I am confident that many of them will see their monthly payment double and even triple.

Housing recovery? Not so much

Number 6: Inflation is low but stable.

Housing affects inflation. All those rents going up are right in the inflation numbers. Never mind the great deflation in actual house prices. It's owners equivalent rent that matters. Other real assets are deflating. The proof is that in spite of low interest rates and lots of cash, nobody is building more. A great deal of the inflation is in health care, which is lower to be sure, and in housing. The inflation is specifically not in incomes, as they continue to plummet for the median household.

With low inflation or outright deflation, we have lost the best way out of the mess. The way we used in 1980 and 1973 and even 1991. Inflate down the real cost of the debt. With O'Hoover austerity and entrenched financial interests holding on to their debtors by the throat, we are in for a long,s low slog until the next crisis.

Why would we want inflation? Costs going up doesn't seem like much of a boon for the economy. We want inflation as it is properly defined. A general rise in prices and incomes. Because the debt is fixed, so if everything else rises and debt stays the same, it is lower in relative terms. This exposes the foolishness of the current thinking, because inflation today IS strictly about costs of goods and services going up. It is plainly not incomes which are rising. So it is really not inflation, it is just price rises. We would say, with incomes and asset prices going down, we have deflation.

Number 7: Widely reported, Economic conditions in Europe have stabilized.

Well, we don't have crisis watch in the news every day. Does that mean things are good? No. It simply means the financial markets are no longer in panic. The ECB has taken on the bad debts of many banks, it has promised to lend freely to Spain and Italy should they come under attack, and it has generally talked tough. Stagnation and depression continues. The social costs continue to mount. Greece and Spain, Portugal and Ireland, it is either exit or radicalize. The poor are getting poorer. This is not a happy time, and it is not a stable time. Political disruption has to come out of poverty and unemployment. Debts that cannot be repaid will not be repaid. The Troika's remedy for Greece has proven poison. They started with debt at 120% of GDP. With the madness of austerity, it has shrunk to 180% of GDP. You have to be standing upside down to see that as progress. Unfortunately, the monetary authorities at the ECB, IMF and EU are indeed inverted. We can only hope that the transition to anti-bank, write-down-the-debt, socially coherent policies is democratic and peaceful. The exact situation was faced in the 1930's by Hitler. His economic miracle was repudiating the debt and employing people directly.

Number 8: Unemployment ... widely reported ... is getting back down to normal levels. Employment is growing strongly.

Oddly nobody seems to be taking a victory lap. Of course, 7 percent is not good, but it is better. Right?

No. Adjusted unemployment is still high. We repeat our chart here, showing unemployment adjusted for participation. We're at 11 percent in 2007 terms. Employment growing at 200,000, 250,000, a month is a good number. Not so much. 500,000 is a good number. At the present rate of growth of employment, it will be 2019 before we see pre-crisis employment levels that match the labor force. And today, even in absolute numbers, we are employing fewer people than six years ago.

Say it with me, bouncing along the bottom. Sloped downward as most of those new jobs pay less than those that are lost. Many are part-time. This is stagnation.

Check out the link to Steven Rattner at the New York Times, or google Rattner New York Times title "America in 2013, as told in charts."