Tuesday, January 18, 2011

Today's links

1--A Mixed Bag of Data, Tim Duy, Fed Watch via naked capitalism

Excerpt: A Mixed Bag of Data, by Tim Duy: Today's data flow suggests ongoing expansion, but should also send a note of caution. Industrial activity continues to respond to firming demand, but capacity has yet to show solid gains. Firms are still not sufficiently confident, or lack sufficient demand, to justify widespread investment. Similarly, consumer spending continues along its upward trend, although the increase in energy costs are likely constraining the pace of that growth and keeping a lid on consumer confidence. Something of a mixed bag largely consistent with the general consensus view.

Start with the better than expected industrial production report, via Bloomberg:

Industrial production in the U.S. rose in December more than forecast, boosted by gains in business equipment and home electronics that indicate factories remain at the forefront of the recovery as the new year begins.

Output at factories, mines and utilities climbed 0.8 percent, the most in five months, after a revised 0.3 percent increase in November, figures from the Federal Reserve showed today in Washington. Economists forecast a 0.5 percent gain, according to the median of 82 projections in a Bloomberg News survey. Manufacturing climbed 0.4 percent, and utility output increased 4.3 percent as snowstorms swept parts of the nation....

Looking at the the CPI release, one gets something of a different story:

The energy index increased in December. The gasoline index rose sharply and accounted for about 80 percent of the all items seasonally adjusted increase. The household energy index, which declined in November, increased as well. The food index increased slightly in December, with the fruits and vegetables index rising notably....

Bottom Line: Data generally in line with a sustainable growth, but expectations that the economy is about to take off remain premature. Inflation fears still appear overblown given that inability to pass higher commodity prices through to consumers. Energy prices, however, do appear to be constraining consumer spending. Overall better data will continue to be reflected in Fedspeak, but time is running short to change the current asset purchase program.

2--Friedman and the Paleomonetarists, Paul Krugman, New York Times

Excerpt: What did I mean here when I said that Milton Friedman was on the same side of the divide as Keynes, and the other side from people like Ron Paul? I meant that Friedman-type monetarism was technocratic, not moralistic; he advocated a constant growth rate of the money supply on the basis that it works better than activist policy, not on the grounds that printing money is confiscation.

In fact, Friedman was in favor of printing money. He wanted to stabilize broad monetary aggregates like M2, not the monetary base (which is the stuff the Fed actually prints). His criticism of the Fed during the Depression was that it didn’t do enough to prevent a fall in M2 — that is, that it didn’t print enough money. He was all for devaluation as a way to get prices and wages in line. And he pretty clearly favored quantitative easing.

It says something about the times we’re in that Milton Friedman now looks left-of-center, at least on monetary issues.

3--U.S. Plans to Sue 4 States Over Laws Requiring Secret Ballots for Unionizing, New York Times

Excerpt: The National Labor Relations Board announced on Friday that it planned to sue Arizona, South Carolina, South Dakota and Utah in an effort to invalidate recently approved state constitutional amendments that prohibit private sector workers from choosing a union through a process known as card check.

The labor board asserts that the amendments conflict with federal laws and are pre-empted by those laws.

The state amendments were promoted by various conservative groups concerned that Congressional Democrats and President Obama would enact legislation allowing unions to insist on using card check, in which an employer recognizes a union as soon as a majority of workers sign pro-union cards. That method makes it possible for employees to unionize without elections. But Congressional Republicans blocked such legislation.

Under current law, employers can insist that secret ballots be used when unions are trying to organize private sector employees. But unions had hoped that the card check bill would make it easier to unionize workers because card check lets them gather majority support, often without giving employers the opportunity to campaign against the union....

The labor board said, “The four amendments differ in language, but all conflict with federal law by closing off a well-established path to union representation recognized by the Supreme Court and protected by the National Labor Relations Act.”

4--Time For Fed To Emphasize Other Price Gauges, Wall Street Journal

Excerpt: Right now, all price indicators point in the same direction: inflation is low and should stay low. The consumer price index published by the government Friday showed that overall, or headline, inflation rose an annual 1.5% in December 2010 as gasoline prices jumped. Net of energy and food, however, core inflation rose by only 0.8% last year, about half the level the Fed wants to see it at. Indicators from the Cleveland and Dallas Fed are at similar low levels.

But if prices begin to rise, as economists expect, there are serious risks brewing: traditional core inflation can be misleading in times of a protracted increases in energy prices, like the one the global economy could be facing. What’s more, since Americans drive their cars and eat every day, the Fed’s current public focus on the ex-food and energy measure gives people more reason to be suspicious of the central bank.

Higher demand from the rapidly-growing economies in China and India could mean that international energy and food prices are on a long-term upward trend. That’s partly why other powerful central banks around the world, such as in Europe, prefer to focus on headline inflation.

“Because of China, we might be seeing a structural change in global energy and food prices,” said Enrico Giovannini, head of Italy’s national statistic office Istat, pointing to high demand for items like oil and meat from the Asian country’s rapidly-growing economy. Several economists share this view.

5--Capacity Utilization and Unemployment, Economist's View

According to the latest data released by the Fed, both capacity utilization and industrial production increased in December:

Industrial production increased 0.8 percent in December after having risen 0.3 percent in November. ... At 94.9 percent of its 2007 average, total industrial production in December was 5.9 percent above its level of a year earlier. The capacity utilization rate for total industry rose to 76.0 percent, a rate 4.6 percentage points below its average from 1972 to 2009....

Why has the relationship changed, i.e. why are GDP and industrial production recovering faster than unemployment, and why has this relationship changed over time? I wrote this in response to that question for a "Room for Debate" at the NY Times, but it got bumped due to the events in Arizona and I don't know if it will run:

The outlook for the economy has improved a bit recently, but we still have a lot of ground to make up – millions of workers who lost jobs during the recession are still in need of employment – and it will take quite of bit of time to close the gap. Thus, I am still expecting a slow recovery for output and an even slower recovery for employment....

I hope I am wrong, but I believe these factors will interact to produce an extended period of unemployment.

6--A Conversation With Barry Eichengreen, New York Times

Excerpt: Mr. Eichengreen: The transition away from a dollar-dominated international monetary and financial system is coming whether we like it or not — I don’t think that it’s really possible to fight it. The issue, rather, is to secure a place for the dollar in the multiple-international-currency system that is coming. Were we to so bungle our fiscal and financial affairs that foreigners lost confidence in the dollar and shifted away from it en masse, then the costs to the U.S. would be considerably higher than the $225 billion you cite above....

Q. Yes, I thought you’d be mentioning our fiscal situation. You don’t seem optimistic. Congress and the president recently added to the debt by extending the Bush tax cuts, among other things, and 2012 — an election year — doesn’t seem a likely time for tax increases or spending cuts. Is that why, as you write on the Oxford University Press blog, “Currency crises generally occur right before or after elections”? And do you think there is a significant chance of a currency crisis in this country so soon?

Mr. Eichengreen: I write in the book that the U.S. has at most five years to get its fiscal house in order. You’ll see from that recent blog post that I’ve now grown more pessimistic. For a crisis to happen already around the time of the 2012 election it would have to be precipitated by political events that unnerved investors. There would have to be a display of political discord so deep that investors concluded there was no way that the parties could work together to close the budget gap. There would have to be Congressional pressure on the Fed to resist raising its interest rates in response to inflation because higher rates would increase the government’s funding costs. There would have to be opportunistic proposals to tax the Treasury bond interest paid to foreigners. Not my baseline scenario, but fiscal gridlock has produced such things. Just ask our Latin American friends for a history lesson.

7--State Budgets: Year Ahead Looms As Toughest Yet, Huffington Post

Excerpt: In the first weeks of 2011, Republican and Democratic governors alike have begun detailing across-the-board pain for education, health care, transportation, public safety and other programs. Some say the year of reckoning for state and local governments is at hand, with calls for structural changes that could radically shift expectations of what services government provides....

New York Gov. Andrew Cuomo proposed eliminating 20 percent of state agencies by combining duties, such as merging the Insurance Department, Banking Department and the Consumer Protection Board into the Department of Financial Regulation. It's part of "radical reform" to pull his state out of its fiscal crisis. And Gov. Chris Christie in New Jersey skipped a $3.1 billion payment to the state's pension system in a push to cut benefits for public workers, while proposing higher employee contributions and a boost in the retirement age from 62 to 65...

And any revenue gains could be more than offset by the expected loss of federal stimulus money. Most of the $814 billion stimulus program was designed to help states provide essential services and give a boost to the economy, but will start to run out this summer. A new round of stimulus funding is unlikely with Republicans controlling one house of Congress. Top GOP lawmakers say they will try to provide states with relief by reducing mandated programs, not by giving them more money.

8--What Obama Should Say About the Deficit, Christina Romer, New York Times via Economist's View

Excerpt: My hope is that the centerpiece of the speech will be a comprehensive plan for dealing with the long-run budget deficit. ... The need for such a bold plan is urgent — both politically and economically. ...
So what should the president say and do? First, he should make clear that the issue is spending and taxes over the coming decades, not spending in 2011. Republicans ... have pledged to cut nonmilitary, non-entitlement spending in 2011... Such a step would do nothing to address the fundamental drivers of the budget problem, and would weaken the economy...

Instead, the president should outline major cuts in spending that would go into effect over the next few decades, and that he wants to sign into law in 2011. ...

President Obama needs to explain that ... there is no way to solve our budget problem without shared sacrifice. At the same time, he should ... ensure that spending cuts not fall on the disadvantaged.

Finally, the president has to be frank about the need for more tax revenue. ... The only realistic way to close the gap is by raising revenue. ...Congressional Republicans will have to come to terms with this fact...

None of these changes should be immediate. With unemployment at 9.4 percent and the economy constrained by lack of demand, it would be heartless and counterproductive to move to fiscal austerity in 2011. ... But legislation that gradually and persistently trims the deficit would not harm the economy today....

9--Number of the Week: Big Banks Gobble Up Market Share, Wall Street Journal

Excerpt: Size has advantages. But in the case of the biggest U.S. banks, it could also be one of the greatest weaknesses in the global financial system.

The top five U.S. commercial and investment banks — Bank of America, J.P. Morgan Chase, Citigroup, Wells Fargo and Goldman Sachs — have emerged from the financial crisis larger than ever. As of the third quarter of 2010, they had a total of $8.6 trillion in assets, according to data provider Capital IQ. That’s 13.3% of all U.S. financial firms’ assets, up from 11.8% three years earlier, when the financial crisis hit.

Size can be good, allowing banks to compete globally and provide services to customers at the lowest possible cost. But it also gives the top banks a lot of political influence. That could be a problem at a time when new financial-reform legislation has given U.S. regulators more leeway than ever in reshaping the rules by which the banks operate....

Under the new Dodd-Frank legislation, the U.S. banking system could be completely transformed or stay pretty much the same. Regulators, for example, have the power to set strict limits on how much debt — or leverage — banks can use to finance their activities. The new Office of Financial Research will actually have subpoena power to obtain the information it needs to assess the risks in the system....

What seems forgotten is that banks’ increasing size, together with governments’ own parlous finances, could prevent taxpayers from bailing anyone out next time around. To be sure, tougher rules for big banks could push more risky activity into the shadows, creating another challenge for regulators. But unless we create a world in which banks can’t be too big to fail, we could soon come face to face with banks that are too big to save.

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