Tuesday, May 31, 2011

Today's links

1-- Against Learned Helplessness, Paul Krugman, New York Times via Economist's View

Excerpt: Unemployment is a terrible scourge across much of the Western world. Almost 14 million Americans are jobless, and millions more are stuck with part-time work or jobs that fail to use their skills. ... Nor is the situation showing rapid improvement. This is a continuing tragedy, and in a rational world bringing an end to this tragedy would be our top economic priority.

Yet ... on both sides of the Atlantic a consensus has emerged among movers and shakers that nothing can or should be done about jobs. Instead..., one sees a proliferation of excuses for inaction, garbed in the language of wisdom and responsibility. ...

There’s nothing wrong with our workers — remember, just four years ago the unemployment rate was below 5 percent. The core of our economic problem is, instead, the debt — mainly mortgage debt — that households ran up during the bubble years... Now that the bubble has burst, that debt is acting as a persistent drag on the economy, preventing any real recovery in employment. And once you realize that the overhang of private debt is the problem, you realize that there are a number of things that could be done about it.

For example, we could have W.P.A.-type programs putting the unemployed to work doing useful things like repairing roads — which would also, by raising incomes, make it easier for households to pay down debt. We could have a serious program of mortgage modification, reducing the debts of troubled homeowners. We could try to get inflation back up to the 4 percent rate that prevailed during Ronald Reagan’s second term, which would help to reduce the real burden of debt. ..

2--The Truth About the American Economy, Robert Reich's blog

Excerpt: The U.S. economy continues to stagnate. It’s growing at the rate of 1.8 percent, which is barely growing at all. Consumer spending is down.

It’s vital that we understand the truth about the American economy....During three decades from 1947 to 1977, the nation implemented what might be called a basic bargain with American workers. Employers paid them enough to buy what they produced. Mass production and mass consumption proved perfect complements. Almost everyone who wanted a job could find one with good wages, or at least wages that were trending upward.

During these three decades everyone’s wages grew — not just those at or near the top.

Government enforced the basic bargain in several ways. It used Keynesian policy to achieve nearly full employment. It gave ordinary workers more bargaining power. It provided social insurance. And it expanded public investment. Consequently, the portion of total income that went to the middle class grew while the portion going to the top declined. But this was no zero-sum game. As the economy grew almost everyone came out ahead, including those at the top.

3--What Manuel Zelaya's return means for Honduras, Mark Weisbrot, Guardian

Excerpt: Former Honduran President Zelaya's return home Saturday has important implications for the western hemisphere that, we can predict, will be widely overlooked. Zelaya was ousted from the presidency when he was kidnapped at gunpoint by the military on 28 June 2009. Although no hard evidence has yet emerged that the US government was directly involved in his overthrow, the Obama administration did everything it could to help the coup government to survive and then legitimate itself through elections that most of the rest of the hemisphere, and the world, rejected as neither free nor fair.

Zelaya's return represents a partial reversal of that coup d'etat and Washington's efforts to consolidate it, just as President Aristide's return to Haiti after seven years in exile, on 18 March – despite furious efforts by the Obama administration, and even President Obama himself, to prevent it – is a partial reversal of the 2004 US-organised coup that overthrew the democratically elected government of Haiti. And it is another demonstration of how the western hemisphere has changed: the agreement for Zelaya's return was mediated through the governments of Venezuela and Colombia, with no US involvement or even lip-service support until it was over....

The Obama administration lost a lot of trust throughout the hemisphere as a result of its support for the Honduran coup government, and so it was not surprising that US Secretary of State Hillary Clinton was smart enough to endorse the Cartagena agreement (for Zelaya's return) after it was signed. She had been lobbying, without success for the past year and a half, to get Honduras admitted back into the Organisation of American States, from which it was kicked out after the coup. It is assumed that this new accord will pave the way for Honduras' readmission, so she can spin it as a victory for Washington. But it clearly is not.

The agreement met some of the demands of President Zelaya and his allies, but not others. It allows for the participation of the National Front for Popular Resistance, which struggled against the coup and subsequent repression, as a legal political party. It also states that people can organise plebiscites of the kind that Zelaya was overthrown for organising. And it has guarantees for the safety and security not only of Zelaya, but also of others who fled after the coup and remain in exile; it also contains certain non-enforceable human rights guarantees....

On the positive side, it is good to see Latin American countries taking control of the mediation, with Washington relegated to the sidelines. The biggest mistake they made after the coup was to allow Hillary Clinton, along with Oscar Arias of Costa Rica, to hijack the mediation process. Clinton's goal was the exact opposite of restoring democracy in Honduras, and she succeeded. There will be many struggles ahead for the Honduran pro-democracy movement, and they will need a great deal of solidarity and help from outside, especially in opposing the repression. But this accord is, at least, a step in the right direction.

4--What happens when the government tightens its belt, Naked Capitalism

Excerpt: Spending equals income. Someone has to spend for incomes to exist. For incomes to grow there has to be growth in spending. There are three sources of spending growth in a macroeconomy – the external sector (if net exports are positive); the private domestic sector; and the government sector (if the budget is in deficit).

That is indisputable. Economic growth is defined in terms of production and production only occurs if there are goods and services being purchased. Firms do not produce to hold inventory. Firms may invest in response to their guesses about future sales. These guesses will be heavily influenced by current consumer actions.

So when you get commentators and high-level monetary officials arguing that growth comes from not spending you have to ask why anyone would listen to their views and why they are paid to express them. I don’t mind bloggers who do it for free saying what they like but when highly-paid and highly-visible express views that are not grounded in any economic theory that is comprehensible but nonetheless seek to influence the policy debate then I get angry.

5--Number of the Week: Glut of Vacant Homes Complicates Recovery, Wall Street Journal

Excerpt: 14.3 million: The number of homes vacant year-round as of the end of March 2011

How long will the housing market take to hit bottom? A lot depends on whether people will want to occupy millions of empty homes.

Five years after the housing bust began, the market is still groaning under the weight of a near-record 14.3 million vacant residences. That’s about 3 million more than what was normal before the bust — a glut that could take more than 13 years to eradicate, given the depressed rate at which Americans have been starting new households and assuming construction of new homes remains at April’s low annualized level of only 551,000.

With so many homes waiting to be occupied, it’s hard to imagine how prices nationwide could recover anytime soon (though, of course, the experience of individual local markets can differ). The only hope, and a perverse one, is that many of those homes are actually phantom inventory — built in such awful locations, or in such disrepair, that nobody will want to live in them. Such an outcome could precipitate heavier losses for the people or banks that own the homes, but it could also mean a quicker recovery for the market as a whole.

Even if a big chunk of the U.S. housing stock can be written off, though, that might not be enough to generate a rebound in house prices. The bust has eroded many peoples’ faith in housing as an investment, mortgage loans are harder to get, and the millions of families still in or near the foreclosure process typically won’t be in a position to buy. As more people choose or have no choice but to rent, the U.S. homeownership rate is heading down. As of the end of March, it stood at 66.5%, the lowest point since 1998.

6--Australian Professor Steve Keen explains why private sector debt dynamics drove both the Great Depression and the Great Recession, Credit Writedowns (must watch video...short)

7--Economic Soft Patch Creates Political Problems, Wall Street Journal

Excerpt: Washington politicians are discovering what has been evident to consumers and economy watchers. The U.S. economy is barely growing, and hiring isn’t strong enough to bring down the jobless rate.

If energy prices recede and job growth beats current expectations, the recovery could rev up on its own in the second half. Washington decision-makers don’t appear to want to take that gamble. But they will be caught between a rock and a hard place. Do they keep past promises to reduce government’s role or step in to jumpstart growth?....

The economy is losing momentum. Jobless claims have been above 400,000 mark for seven weeks. Pending home sales — a measure of future home buying — plunged 11.6% in April. And consumers have had to shift more of their money to buying gasoline and food, leaving other spending barely rising.

Yet politicians have to square current talk of more government help with their past comments about the need to cut government spending....

But U.S. businesses are awash in money. They booked a record level of profits in the first quarter – -and layoffs are rising this quarter. Moreover, in the short run, less revenue worsens the deficit — the same issue the GOP has been railing against for more than a year.

One help to growth would be a weaker dollar, which would make U.S. goods more competitive on global markets.

U.S. exports added more than one percentage point to gross domestic product growth last quarter — only to be swamped by a larger gain in imports. If exports can outpace imports, they would boost growth as well as increase job gains.

Congressional leaders and the Treasury secretary, however, continue to recite the mantra that a strong dollar is in the best interest of the U.S. — even if the foreign-exchange markets don’t see fundamentals supporting a stronger currency.

Politicians will have to choose: keep up the current rhetoric about deficit cutting now and letting markets work. Or admit that if the recovery remains tepid, government intervention is needed.

8--More Effects of Austerity in the UK, The Streetlight blog

Excerpt: The outlook for the UK in the midst of its austerity program looks worse and worse. From the FT this morning:

Why the British economy is in very deep trouble

Here’s something for the Chancellor and the Office for Budget Responsibility (OBR) to chew on: a warning from Dr Tim Morgan, the global head of research at Tullett Prebon, that the deficit reduction plan won’t work and the UK is headed for a debt disaster.

Morgan says sectors that account for nearly 60 per cent of UK economic output are critically dependent on debt (public or private) and set to contract rather than expand. This will render economic growth implausible and means the burden of public and private debt will prove too heavy for the nation to carry:

Over the past decade, the British economy has been critically dependent on private borrowing and public spending. Now that these drivers have disappeared – private borrowing has evaporated, and the era of massive public spending expansion is over – the outlook for growth is exceptionally bleak.

Sectors which depend upon either private borrowing or public spending now account for at least 58% of economic output. These sectors are now set to contract rather than expand, which renders aggregate economic growth implausible. And, without growth, there may be no way of avoiding a debt disaster.

...Short of almost unthinkably drastic restructuring, there may be no way out of Britain’s low-growth, high-debt trap.

9--Recession Forecasts? Yield Curve Says No Way, Caroline Baum, Bloomberg

Excerpt: ...the yield curve, is saying there will be no recession anytime soon.

With the Federal Reserve’s benchmark rate at zero to 0.25 percent and the 10-year Treasury note yielding 3.06 percent, the spread between the two interest rates is among the widest in history. It’s the reverse configuration, an inverted yield curve with short rates above long rates, that augurs recession.

The spread -- or the "term structure of interest rates," as it’s known in academic circles -- isn’t some mystical talisman with omniscient powers. It derives its prognosticating ability from the simple fact that one rate is artificially pegged by the central bank while the other is determined by the market. Their relationship encapsulates the stance of monetary policy.

When the yield curve is steep, as it is now, it’s an inducement for banks to expand their balance sheets -- borrow short, lend long -- and increase the money supply. That bank credit isn’t growing now owes more to the hangover from a period of excess leverage and new-found religion on lending standards than any restrictive policy on the part of the Fed.....

The time to worry about recession is when the Fed raises the funds rate to the point where the yield curve inverts. Within a year or two, it’s curtains for the economy.

10--The Economy Is Wavering. Does Washington Notice?, New York Times

Excerpt: The latest economic numbers have not been good. Jobless claims rose last week, the Labor Department said on Thursday. Another report showed that economic growth at the start of the year was no faster than the Commerce Department initially reported — “a real surprise,” said Ian Shepherdson of High Frequency Economics.

Perhaps the most worrisome number was the one Macroeconomic Advisers released on Wednesday. That firm tries to estimate the growth rate of the current quarter in real time, and it now says annualized second-quarter growth is running at only 2.8 percent, up from 1.8 percent in the first quarter. Not so long ago, the firm’s economists thought second-quarter growth would be almost 4 percent.

An economy that is growing this slowly will not add jobs quickly. For the next couple of months, employment growth could slow from about 230,000 recently to something like 150,000 jobs a month, only slightly faster than normal population growth. That is certainly not fast enough to make a big dent in the still huge number of unemployed people.

Are any policy makers paying attention?...

The most sensible response for Washington would be to begin thinking more seriously about taking out an insurance policy on the recovery. The Fed could stop worrying so much about inflation, which remains historically low, and look at how else it might encourage spending. As Mr. Bernanke has said before, the Fed “retains considerable power” to lift growth.

The White House and Congress, meanwhile, could begin talking about extending last year’s temporary extension of business tax credits, household tax cuts and jobless benefits beyond Dec. 31. It would be easy enough to pair such an extension with longer-term deficit reduction.

11--More confirmation of a slowdown, Comstock Partners, Pragmatic Capitalism

Excerpt: Our comment of two weeks ago outlined the major headwinds likely to impact both the economy and stock market over the period ahead, while last week’s comment discussed the actual economic slowdown that was already happening. Events of the past week have confirmed these views.

The Chicago Fed’s National Activity Index of 85 coincident indicators for April dropped to minus 0.45, its lowest level since last August. The index has now been below zero for five of the last eight months, as is the three-month moving average. This means that the economy was probably growing below trend in the first quarter, and possibly the second as well.

First quarter revised GDP growth was not revised upward as the consensus expected, but remained at the originally reported 1.8%. Moreover the underlying data deteriorated as consumer spending growth was revised down to 2.2% from 2.7% and inventory accumulation was revised up by $9 billion. Furthermore, major firms have been reducing their second quarter GDP growth estimates to well below 3%. Recall that toward the end of 2010 most pundits were looking for 4% growth in the quarters ahead.

Initial weekly unemployment claims, reported today, rose to 424,000 and have now remained well above 400,000 for the seventh straight week after a period of coming in below that level. This does not bode well for upcoming monthly payroll employment.

The ECRI Weekly Leading Index was down again last week, the fourth decline in the last six weeks, and the lowest since the week of January 15th. A slowdown in this indicator generally suggests a period of tepid growth in the period ahead.

The May numbers for both the Richmond and Kansas City Fed indexes fell sharply, confirming the previously reported results for the Philly Fed and the Empire State Manufacturing Survey. This strong unanimity strongly suggests that industrial production is still extremely sluggish in May. These results are consistent with the April decline in core capital goods orders of 2.6%. Similarly, shipments dropped 1.7%.

Keep in mind that this has happened during a period during which QE2 poured reserves into the financial system, the stock market rallied and fiscal policy was boosted by the reduction in payroll withholding. With all of that we have an economy that is growing below trend and fading rapidly. Now QE2 is ending within weeks, fiscal policy is about to tighten and housing prices are still falling with lots of additional supply still coming.

The stock market has now stalled for over three months and appears to be in the process making a top.

12--Roubini Sees Stock-Correction ‘Tipping Point’, Bloomberg

Excerpt: Nouriel Roubini, the economist who predicted the global financial crisis, said stock markets are at the “tipping point” of a correction as economic growth may begin to slow...

“Until two weeks ago I’d say markets were shrugging off all these concerns, saying they don’t matter because they were believing the global economic recovery was on track,” Roubini said. “But I think right now we’re on the tipping point of a market correction. Data from the U.S., from Europe, from Japan, from China are suggesting an economic slowdown.”

The world economy is losing strength halfway through the year as high oil prices and fallout from Japan’s natural disaster and Europe’s debt woes take their toll....

“Until now, equity prices were supported by better-than- expected earnings, sales and profit margins,” Roubini said. “But all three are under squeeze. With slow global economic growth, they’re going to surprise on the downside. We’re going to see the beginning of a correction that’s going to increase volatility and that’s going to increase risk aversion.”

13--Send In The Cranks, Paul Krugman, New York Times

Excerpt: ... let’s also note that we’ve had a strong test of monetary doctrines these past three years, and the inflation worriers have been proved overwhelmingly wrong. Yes, they’ve seized on the rise in commodity prices since last summer; but they have yet to find any signs of domestic inflation, as opposed to movements in prices determined on world markets and strongly driven by China and other emerging markets.

Look, very early on I tried to explain that “printing money” — what people who say that really mean is increases in the monetary base, which includes bank reserves as well as currency — doesn’t cause inflation, or even a rise in broader definitions of the money supply, when you’re in a liquidity trap. And I illustrated the point with historical examples. Here’s Japan: ("must see" chart)

And I predicted that we’d see the same kind of result — huge increases in the monetary base not translating into rises either in broader money or in prices — this time around. And sure enough:...

So we have the whole Republican party jumping on to a doctrine that has not only been wrong historically, but has been wrong in the very recent past.

14--Greek, Irish Risks Transferred to ECB, The Big Picture

Excerpt: Speigel has an interesting discussion on the Euro:

Since the beginning of the financial crisis, banks in countries like Ireland, Portugal, Spain and Greece have unloaded risks amounting to several hundred billion euros with central banks. The central banks have distributed large sums to their countries’ financial institutions to prevent them from collapsing. They have accepted securities as collateral, many of which are — to put it mildly — not particularly valuable.

Risks Transferred to ECB: These risks are now on the ECB’s books because the central banks of the euro countries are not autonomous but, rather, part of the ECB system. When banks in Ireland go bankrupt and their securities aren’t worth enough, the euro countries must collectively account for the loss. Germany’s central bank, the Bundesbank, provides 27 percent of the ECB’s capital, which means that it would have to pay for more than a quarter of all losses. (charts)

15--Bush-Era Tax Cuts Projected As Largest Contributor To Public Debt [CHART], Huffington Post

Excerpt: If the Bush-era tax cuts are renewed next year, that policy will by 2019 be the single largest contributor to the nation's public debt -- "the sum of annual budget deficits, minus annual surpluses" -- according to new analysis from the non-partisan Center for Budget and Policy Priorities.

These tax breaks, combined with the cost of fighting wars in Iraq and Afghanistan, will account for nearly half the public debt in 2019, measured as a percentage of economic output, the CBPP's analysis shows. Even the cost of the economic downturn, combined with the cost of the legislation passed to stem the damage, won't be as burdensome as the weight of the Bush-era tax cuts, the chart below suggests. See if you can find the debt associated with the Trouble Asset Relief Program and the rescue of Fannie and Freddie:...("eye popping" chart)

Tax cuts for the highest earners were renewed late last year, as part of a deal that extended tax breaks for middle earners and reauthorized unemployment insurance. In an April speech, President Barack Obama laid out a plan to reduce the nation's deficit and debt, suggesting that he would strive to make sure the tax cuts for the highest earners expire naturally in 2012.

If tax cuts do expire as scheduled, that would win significant debt relief for the government, CBPP says:

[S]imply letting the Bush tax cuts expire on schedule (or paying for any portions that policymakers decide to extend) would stabilize the debt-to-GDP ratio for the next decade. While we'd have to do much more to keep the debt stable over the longer run, that would be a huge accomplishment.

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