Monday, April 11, 2011

Today's links

1--Warning! Inequality May Be Hazardous to Your Growth, Andrew G. Berg and Jonathan D. Ostry, via Economist's View

Excerpt: Many of us have been struck by the huge increase in income inequality in the United States in the past thirty years....Somewhat to our surprise, income inequality stood out in our analysis as a key driver of the duration of “growth spells”.

We found that high “growth spells” were much more likely to end in countries with less equal income distributions. ... Inequality seemed to make a big difference almost no matter what other variables were in the model or exactly how we defined a “growth spell”.

The upshot? It is a big mistake to separate analyses of growth and income distribution. A rising tide is still critical to lifting all boats. The implication of our analysis is that helping to raise the lowest boats may actually help to keep the tide rising....

When there are short-run trade-offs between the effects of policies on growth and income distribution, the evidence in our paper doesn’t in itself say what to do. But our analysis should tilt the balance towards the long-run benefits—including for growth—of reducing inequality....

2-- Ludicrous and Cruel, Paul Krugman, New York Times

Excerpt: Many commentators swooned earlier this week after House Republicans, led by ... Paul Ryan, unveiled their budget proposals. They lavished praise on Mr. Ryan, asserting that his plan set a new standard of fiscal seriousness....

First, Republicans have once again gone all in for voodoo economics — the claim, refuted by experience, that tax cuts pay for themselves. ...

And about those spending cuts: leave health care on one side for a moment... According to the budget office ... the proposal calls for spending on items other than Social Security, Medicare and Medicaid — but including defense — to fall ... to ... just 3.5 percent of G.D.P..., less than we currently spend on defense alone... How could such a drastic shrinking of government take place without crippling essential public functions? The plan doesn’t say.

And then there’s the much-ballyhooed proposal to abolish Medicare and replace it with vouchers... [P]rivatizing Medicare does nothing, in itself, to limit health-care costs. ... The only way that can happen is if those vouchers are worth much less than the cost of health insurance. In fact, the Congressional Budget Office estimates that by 2030 the value of a voucher would cover only a third of ... Medicare as we know it. So the plan would deprive many and probably most seniors of adequate health care.

And that neither should nor will happen. Mr. Ryan and his colleagues can write down whatever numbers they like, but seniors vote. And when they find that their health-care vouchers are grossly inadequate, they’ll demand and get bigger vouchers — wiping out the plan’s supposed savings.

In short, this plan isn’t remotely serious; on the contrary, it’s ludicrous.

And it’s also cruel..., of the $4 trillion in spending cuts he proposes over the next decade, two-thirds involve cutting programs that mainly serve low-income Americans. And by repealing last year’s health reform,... the plan would also deprive an estimated 34 million nonelderly Americans of health insurance.

3--Misguided Meltzer, Tim Duy, Fed Watch via Economist's View

Excerpt: Inflation is not a general increase in prices. That is a one-time price increase, or a shift in relative prices. Inflation is a continuous increase in the price level, which, to be perpetuated, needs to be matched by increasing wages – something Meltzer admits is not happening. Without an increase in wages, the current gains in headline inflation will prove to be transitory. Meltzer then brings up the boogieman of the 1970s:

Mr. Bernanke tells us that inflation won't be a problem as long as unemployment remains at an unacceptable level. But considerable research shows that this reasoning is badly flawed. During the inflation of the 1970s, for example, the discredited "Phillips Curve"—which suggested that high unemployment and rising prices shouldn't go together—persistently underestimated inflation and misled the Fed into pursuing an ever more expansive policy. If the Fed looked, it would find many other countries that experienced high inflation and high unemployment together.

Yes, inflation can coexist with high unemployment, but only in the presence of accelerating wage growth. This combination existed in the 1970s, but not now. Look at the historical record. The path of unit labor cost growth prior to 1980 is very different from that experienced since 1980. Until unit labor costs start accelerating, fears of a return to the 1970s are misplaced. Next Meltzer tries to redefine the CPI:

Those who doubt that the United States is headed for inflation remind us that increases in the consumer price index (CPI), and the "core" CPI that omits food and energy prices, remain modest. But the CPI and the core CPI are currently misleading because 40% of the CPI and 25% of the core CPI represent housing prices and are heavily dependent on statistical estimates of what homeowners would pay to rent their homes. Most of us never see these prices and do not pay them the same way we pay for food, gasoline and health insurance.

First, Meltzer does not even understand when the data is actually poised to work in his favor. Apartment vacancy rates are falling, suggesting that rents, and thus housing component of CPI, are set to rise. Perhaps Meltzer would be happy to use the housing prices that people actually pay, but those are falling, which is not exactly consistent with his argument. Notice also that Meltzer wants to narrow the CPI down to only those items going up in price. Why not to those items going down in price? He continues:

Furthermore, the Fed treats gasoline and oil price increases as a transitory blip. That's almost certainly correct about the effect of Arab unrest or the Japanese tsunami. But much of the rise in oil prices came before these events and was in response to the strengthening world economy. Prices will likely continue to rise as the world economy grows. Meanwhile, world grain prices have been driven up by the foolish U.S. ethanol program. When ethanol raises corn prices, prices for substitutes like wheat and rice rise also. There is no sign that Congress will repeal the ethanol program.

Meltzer conveniently ignores that rising commodity prices have simply reversed the losses sustained during the recession. Apparently he would be happier if the Fed induced a recession to offset that terrible improvement in the global economy. On top of which he wants the Fed to “fix” the relative price changes induced by Congress. Good luck with that....

Yes, that’s right – Meltzer’s solution to the inflation threat is to tie the hands of the Federal Reserve so that they cannot liquidate the balance sheet if necessary. More:

…Almost half of the Fed's currently held assets, more than $1 trillion, have 10 or more years until maturity, so all of them would be off the table as far as financing inflation during the gradual economic recovery. As the mortgages mature and are paid off, the bad bank's assets decline. The reduction in the bad bank's assets means that its liabilities, the excess reserves, would also decline—though that would be years away.

No, if the Fed cannot sell the assets, then they are not “off the table,” they are the centerpiece of the table. If you are worried about inflation, you don’t want to entrench a system that ensures that excess reserves would decline “years away.” You want the exact opposite – to drain the reserves right now.

Rather than admitting that the Fed has not induced a monetary collapse, that the world has not ended, that Treasury rates are mired below 4%, that he is simply wrong, Meltzer offers a completely backwards policy proposal. A short step from there to complete irrelevance.

4--The Wall Street Leviathan, NYRB via The Big Picture

Excerpt: This should give you the flavor of the article:

“Dodd-Frank Act has largely pushed responsibility for writing and implementing the new rules onto existing regulators, including the Federal Reserve, the Securities and Exchange Commission, the Commodities Futures Trading Commission, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. This will likely prove a damaging flaw. These regulators are by and large the same agencies that tolerated the excessively risky behavior in the first place. Even if they write effective rules they will face pressure from Wall Street lobbyists and mostly Republican legislators to soften restrictions and eliminate some of the critical ones. If the restrictions remain intact, which is likely in view of the Democratic majority in the Senate, the question remains whether the regulators will enforce them vigorously once the economy recovers and the crisis fades in memory. Several agencies have already missed the deadlines to write new rules. Some are worried that the Consumer Financial Protection Bureau will be neutralized by Congress. Wall Street spent $2.7 billion on lobbying between 1999 and 2008 and is lobbying vigorously again…” (link at site)

That is a damning indictment of a government controlled by Wall Street.

5--Number of the Week: U.S. Spends 141% More on Health Care, Mark Whitehouse, Wall Street Journal

Excerpt: 141%: How much more the U.S. spends on health care, per person, than the average OECD nation

At a time when politicians in Washington are battling over — among other things — the future of the U.S. health-care system, it’s instructive to see just how well that system operates. According to the Organization for Economic Cooperation and Development, we’re doing a terrible job.

A new report finds that the U.S. spends far more on health care than any of the other 29 OECD nations, and gets less health for its money. Annual public and private health-care spending in the U.S. stands at $7,538 per person, 2.41 times the OECD average and 51% more than the second-biggest spender, Norway. Meanwhile, average U.S. life expectancy is 77.9 years, less than the OECD average of 79.4.

Improving the health-care system could go a long way toward fixing the U.S. government’s finances. The OECD estimates that if the U.S. reached the efficiency level of the best-performing countries, the government could save the equivalent of 2.7% of economic output every year. That’s enough to solve about a third of the country’s budget-deficit problem.

The hard part is figuring out how to make the system work better. Here, the report attempts to derive some guidance from the experience of the most successful countries.

6--Wholesale Inventories Rise, but Sales Drop, Wall Street Journal

Excerpt: The inventories of U.S. wholesalers rose in February but their sales fell, a sign of uncertainty in the economic recovery.

Wholesale inventories increased by 1.0% to a seasonally adjusted $437.99 billion, the Commerce Department said Friday. The growth in inventories wasn’t necessarily an indication wholesalers were stocking up in anticipation of future sales. Rather, goods piled up as sales fell 0.8%, to $378.97 billion. Also, the 1.0% increase in inventories was driven by a big gain in petroleum stockpiles amid rising oil prices.

But the drop in sales wasn’t too worrisome. Sales in January had surged 3.3%, revised down from an originally estimated 3.4%. Year over year, sales were 13.7% higher since February 2010.

Inventories in January rose 1.0%, revised down from an originally estimated 1.1% gain. Inventories were 12.7% higher than February 2010.

The report showed wholesalers had enough goods on hand to last a little longer than a month. The inventory-to-sales ratio measures how many months it would take for a firm to deplete its current inventory. The ratio rose to 1.16 in February, from 1.14 in January. Despite the increase, the gauge is at a level that’s considered low, indicating room for further gains in manufacturing as companies, faced with rising demand, order goods to keep shelves filled.

Consumer spending has been picking up lately, and the jobs market has improved. An extension of income-tax cuts has put more money in consumers’ wallets, helping remove some of the sting of rising food and gasoline prices, and falling home values....

Inventory rebuilding, a big driver of the early stages of the economic recovery, slowed at the end of 2010 as sales surged. Stockpiling subtracted from GDP in the fourth quarter.

7--Consumers Step Up Student, Auto Loans, Cut Back on Credit Cards, Wall Street Jouranal

Excerpt: U.S. consumers stepped up borrowing in February but cut back again on their credit cards, giving mixed signals on the strength of the economic recovery.

Overall consumer credit outstanding increased at an annual rate of 3.8%, rising $7.62 billion to $2.420 trillion, the Federal Reserve said Thursday in a monthly report. The gain was the biggest since June 2008 and the fifth in a row. Economists surveyed by Dow Jones Newswires had forecast the Fed data would show consumer credit rising by $5 billion in February.

The bigger-than-expected gain was driven by an increase in a category that includes federal student loans, the data indicate. Amid high unemployment, some Americans have gone back to school.

The economy isn’t growing fast enough to bring down the jobless rate much. Consumer spending has been picking up somewhat. Most big retailers saw gains last month in same-store sales. High-end shoppers flocked to Saks Inc. and Nordstrom Inc., a report Thursday said. However, while an extension by Congress of income-tax cuts put more money into the pockets of Americans, gasoline prices have cost consumers at the pump.

Revolving credit, or credit-card use, fell $2.71 billion to $794.03 billion in February, a sign of caution among consumers. Revolving credit has gone up only once since the flare-up of the 2008 financial crisis, which led to consumers paying down debt and lenders writing off overdue balances.

Nonrevolving credit increased $10.33 billion, or 7.7%, to $1.626 trillion. The category includes loans for cars, mobile homes, tuition and other things. Auto sales rose strongly in January and in February, government data on U.S. retail sales show, an encouraging sign given the sharp rise in gasoline prices.

8--The Destruction of Money: Who Does It, Why, When, and How?, The Atlantic

Excerpt: When Money Disappears

You probably know that the Federal Reserve controls the money supply, the technical term for the amount of money in the economy. When the money supply expands, money flows into the financial system. When the money supply contracts, money drains out of the financial system. But how does the money actually disappear?

The Fed expands the money supply through a couple of methods. For simplicity, let's consider "security purchasing." When the Fed wants to expand the money supply, it buys a security -- let's call it Asset A -- from a bank. Then it electronically transfers money to that bank. There is now additional money in the financial system that the bank can use to provide loans.

The nice part about being the Fed is that it doesn't actually need to mail a box of dollar bills to pay for these securities. Instead, it creates a "reserve balance" liability on its balance sheet. The transaction is completely electronic. No hard currency changes hands.

Then, when the Fed is ready to reduce monetary supply, it sells Asset A. This puts the security back into the financial market and reduces money in the system, again electronically. Is that money destroyed?

On the one hand, the money no longer exists in the financial system. On the other hand, it was only there temporarily in the first place. When the Fed gets that money back, it merely reduces the size of its reserve balance liability. In a sense, money is only "created" during an expansionary cycle electronically, through an accounting mechanism. It's then "destroyed" in a similar, but opposite, accounting entry....

How much money does the Fed destroy? In 2010, its cash offices destroyed 5.95 billion notes. In 2009, that number was even larger at 6.05 billion notes. A large proportion of those notes were $1 and $20 bills, which are the workhorses of the American economy. In 2010, 2.6 billion $1 bills were destroyed.

Those dollars in your wallet won't last forever. Eventually, they will likely end up shredded and replaced by newer, crisper banknotes. But don't fret: although money is being destroyed on a regular basis, it's being crated even more quickly. Currency grows at a relatively stable rate each year. So the net amount of money out there doesn't generally decline. In that sense, money is really never destroyed.

9--Crisis at Japan Nuclear Plant Shifts to New Blast Risk, VOA News

Excerpt: Workers are pumping nitrogen into one of the reactors at Japan's damaged nuclear plant in an attempt to prevent an explosion caused by dangerously overheated fuel rods.

Wednesday's crisis at the Fukushima plant came after technicians finally stopped a leak of highly radioactive water from the power station that dramatically increased the amount of radiation found in nearby ocean waters.

Chief Cabinet Secretary Yukio Edano said the water leak stopped before 6 a.m. Wednesday local time. Until then, water samples in the vicinity had shown radiation levels up to 7.5 million times the allowable limit.

However, Edano said it is too early to say with confidence that the problem has been solved, and that officials from the Tokyo Electric Power Company are trying to determine whether radioactive water is leaking from any other location.

Radioactive water dumping continues

The government official apologized to neighboring countries for Japan's failure to notify them before it began pumping thousands of tons of low-level radioactive water into the sea near the plant - an issue separate from the water leak into the ocean.

Edano said the pumping will continue, possibly until Friday, in order to drain a storage area that will be used to hold much more dangerous water - up to 200,000 times as radioactive - from inside the reactor. He said steps have been taken to ensure better communication with nearby countries before such action is taken in the future....

New threats

Officials at TEPCO, which operates the Fukushima plant, said a dangerous hydrogen buildup is taking place at its number-one reactor. Japan's NHK television quoted officials saying hydrogen is accumulating inside the reactor's containment vessel - an indication that the reactor's core has been damaged.

Hydrogen explosions destroyed the outer housings of two of the plant's six reactors during the first days of the nuclear crisis that followed the earthquake and tsunami on March 11.

And highly radioactive water has accumulated in lower levels of several reactors, following weeks in which workers pumped in massive amounts of water to prevent fuel rods from overheating. The water needs to be removed before workers can complete repairs to the permanent cooling systems.

10--Terror Suspects Held Weeks in Secret, Kimberley Dozier, AP Intelligence Writer

Excerpt: KABUL, Afghanistan April 8, 2011 --- Black sites," the secret network of jails that grew up after the Sept. 11 attacks, are gone. But suspected terrorists are still being held under hazy circumstances with uncertain rights in secret, military-run jails across Afghanistan, where they can be interrogated for weeks without charge, according to U.S. officials who revealed details of the top-secret network to The Associated Press.

The Pentagon has previously denied operating secret jails in Afghanistan, although human rights groups and former detainees have described the facilities. U.S. military and other government officials confirmed that the detention centers exist but described them as temporary holding pens whose primary purpose is to gather intelligence.

The Pentagon also has said that detainees only stay in temporary detention sites for 14 days, unless they are extended under extraordinary circumstances. But U.S. officials told the AP that detainees can be held at the temporary jails for up to nine weeks, depending on the value of information they produce. The officials spoke on condition of anonymity because the program is classified.

The most secretive of roughly 20 temporary sites is run by the military's elite counterterrorism unit, the Joint Special Operations Command, at Bagram Air Base. It's responsible for questioning high-value targets, the detainees suspected of top roles in the Taliban, al-Qaida or other militant groups.

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