Wednesday, June 22, 2011

Today's links

1--The GOP Myth of 'Job-Killing' Spending, Economist's View

Alan Blinder is worried:

The GOP Myth of 'Job-Killing' Spending, by Alan Blinder, Commentary, WSJ: ...I'm worried about the damage that might be done by one particularly wrong-headed idea: the notion that ... government spending destroys jobs.

No, that's not a typo. House Speaker John Boehner and other Republicans regularly rail against "job-killing government spending." ... Using the same illogic, employment should soar if we made massive cuts in public spending—as some are advocating right now.

Acting on such a belief would imperil a still-shaky economy that is not generating nearly enough jobs. So let's ask: How, exactly, could more government spending "kill jobs"? ...

Despite ... evidence and logic, some people still claim that fiscal stimulus won't create jobs. Spending cuts, they insist, are the route to higher employment. And ideas have consequences. One possibly frightening consequence is that our limping economy might have one of its two crutches—fiscal policy—kicked out from under it in an orgy of premature expenditure cutting. Given the current jobs emergency, that would be tragic....

2--A Lesson on the Federal Reserve Board and the Deficit, Dean Baker, CEPR

Excerpt: Let's take this great moment of national deficit hysteria to teach people a bit about the Federal Reserve Board and the deficit.....One thing that the public could tell Ben Bernanke to do is to hold on to $3 trillion in government bonds and/or mortgage backed securities over the next decade, instead of selling these assets back to the public. This matters hugely for future deficits.

Although you will not hear it discussed in the Washington Post, the Fed refunds the interest it earns each year back to the Treasury. If it hold $3 trillion in bonds that earn an average interest rate of 5 percent a year (the Congressional Budget Office's projected interest rate for the longer term), this translates into $150 billion a year refunded to the Treasury. That would come to $1.5 trillion over a decade.

It is not easy to find spending cuts or tax increases that total $1.5 trillion, but the Fed could accomplish this task just by holding on to the assets it has purchased as part of its quantitative easing programs. To put this number in perspective, this $1.5 trillion in savings would close roughly half of the projected shortfall in Medicare over the program's 75-year planning horizon. That would end a lot of hyperventilating by Republicans who are yapping about Medicare's looming bankruptcy.

There is no obvious downside to the Fed holding onto these assets. The increase in the reserves of the nation's banking system could be inflationary when the economy recovers, but this can be easily countered by raising banks' reserve requirements.

3--A Tax Break for the “Job Creators” That Will Not Increase Jobs, Econospeak

David Kocieniewski should get high marks for excellent reporting. He starts by noting a supply-side proposal and its rhetoric:

Some of the nation’s largest corporations have amassed vast profits outside the country and are pressing Congress and the Obama administration for a tax break to bring the money home … Under the proposal, known as a repatriation holiday, the federal income tax owed on such profits returned to the United States would fall to 5.25 percent for one year, from 35 percent. In the short term, the measure could generate tens of billions in tax revenues as companies transfer money that would otherwise remain abroad, and it could help ease the huge budget deficit. Corporations and their lobbyists say the tax break could resuscitate the gasping recovery by inducing multinational corporations to inject $1 trillion or more into the economy, and they promoted the proposal as “the next stimulus” at a conference last Wednesday in Washington. “For every billion dollars that we invest, that creates 15,000 to 20,000 jobs either directly or indirectly,” Jim Rogers, the chief of Duke Energy, said at the conference. Duke has $1.3 billion in profits overseas.

If you are thinking we tried this a few years ago, David reminds us that we did:

But that’s not how it worked last time. Congress and the Bush administration offered companies a similar tax incentive, in 2005, in hopes of spurring domestic hiring and investment, and 800 took advantage. Though the tax break lured them into bringing $312 billion back to the United States, 92 percent of that money was returned to shareholders in the form of dividends and stock

David cites this analysis:

Repatriations did not lead to an increase in domestic investment, employment or R&D -- even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained. Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders. These results suggest that the domestic operations of U.S. multinationals were not financially constrained and that these firms were reasonably well-governed. The results have important implications for understanding the impact of U.S. corporate tax policy on multinational firms.

4--Banking’s Moment of Truth, New York Times

Excerpt: Capital matters. Let me put that another way. The current fight over additional capital requirements for the banking industry, eye-glazing though it is, also happens to be the most important reform moment since the financial crisis broke out three years ago. More important than the wrangling over Dodd-Frank. More important than the ongoing effort to regulate derivatives. More important even than the jousting over the new Consumer Financial Protection Bureau....

I should point out that the proposed international standards — Basel III, as they’re called, which are still being negotiated by regulators around the globe — would require banks to hew to capital requirements of only 7 percent, not 14 percent. They are also talking about adding capital surcharges of up to 3 percent, on a sliding scale, to the 30 largest, most systemically important institutions worldwide, meaning that JPMorgan Chase, for instance, would have capital requirements of 10 percent.

There are many experts, including Admati and, one suspects, Tarullo himself, who think this is still too low. The Basel committee has already agreed, somewhat absurdly, to delay the implementation of the requirements until 2019. (Good thing the world’s banks aren’t going to have any big problems between now and then!) And because the Basel standards, whatever their final form, must still be enacted and enforced by individual country regulators, there is no guarantee that every country will agree to them.

But the U.S. should, no matter what other countries do. Banks always want capital requirements to be as low as possible, because the less capital they have, the more risk they can take and thus the more money they can make (and the bigger the executives’ bonuses). But so what? Trading some bank profits for a safer financial system is a deal most Americans would take in a heartbeat.

5--Fed Views, FRBSF

Excerpt: GDP grew at a 1.8% annualized rate in the first quarter of 2011, a significant slowdown from the fourth quarter of 2010. Several temporary factors helped push down first-quarter GDP growth. Data released in recent weeks suggest that this sluggishness will persist longer than initially anticipated. We now forecast second-quarter GDP growth will come in at around a 2½% annualized rate. But growth should rebound in the third quarter. We expect GDP to expand at an annualized 3½% rate in the second half of the year and to continue to strengthen throughout 2012.

* Among the temporary factors that have pushed down GDP growth are the effects of the supply chain disruptions caused by the earthquake in Japan, the recent tornadoes and floods in the South and Midwest, and the spike in commodity prices, especially oil. The winding down of these temporary factors depressing economic activity should contribute positively to GDP growth in the third quarter.

* In addition to these temporary factors, however, other data signal that the recovery's momentum is weaker than earlier data had suggested. The pace of hiring slowed in May, with only 54,000 jobs added to nonfarm payrolls. This increase was far below the average of 182,000 jobs per month gained from January through April.

* After declining by a percentage point earlier this year, the unemployment rate has stalled around 9% since February. In May, it ticked up a tenth of a percentage point to 9.1%. Consistent with our forecast of sluggish GDP growth, we now expect the unemployment rate to decline to around 8% by the end of 2012.

* Growth of household spending has tapered off. Personal consumption expenditures grew at an annual rate of 0.6% in April, well below the first-quarter pace of 2.2%. Meanwhile, real disposable personal income declined at an average annualized rate of 0.4% in the three months ending in April 2011. This suggests that the purchasing power of U.S. households is not growing at the rate it was in the second half of 2010.

* Some of the effects of reduced income growth on consumer spending could potentially be offset by increases in household wealth. However, since the beginning of May, U.S. stock market indexes have declined about 6%. Moreover, homeowners continue to see the value of their houses-their most important investment-decline. House prices are continuing to slide in most parts of the country, although the rate of decline varies substantially from state to state.

* Since consumer spending makes up 71% of expenditures in GDP, the drag that declining house prices cause on consumption is important for understanding the momentum of the recovery. More than three-quarters of U.S. household spending comes from people who own their homes rather than rent.

* The final factor pointing to reduced momentum of recovery is the slowdown in the manufacturing sector's growth. Manufacturing has been a pocket of strength during the past six months. However, industrial production did not grow in April, partly because of the supply chain disruptions related to the Japanese earthquake. In addition, the Institute for Supply Management manufacturing purchasing managers index showed a sharp decline in the share of manufacturers reporting growth in their activity levels in May. The Federal Reserve Bank of San Francisco's Tech Pulse Index showed a similar deceleration in tech-sector growth.

* On the upside, foreign demand for U.S. goods was robust in April. Over the past year, the dollar value of U.S. exports increased 18.8%.

* The anticipated sluggishness of the recovery implies that the economy will continue to show substantial slack. This should restrain underlying inflationary pressures. Consequently, we expect headline inflation to wane as the effects of recent commodity price increases wear off. We anticipate that headline PCE inflation will subside below a 1½% annualized rate in the second half of this year.

6--Ciudad Juarez is all our futures. This is the inevitable war of capitalism gone mad, Guardian

Excerpt: Mexico's drug cartels are actually pioneers of the global economy in their business logic and modus operandi....War, as I came to report it, was something fought between people with causes, however crazy or honourable: like between the American and British occupiers of Iraq and the insurgents who opposed them. Then I stumbled across Mexico's drug war – which has claimed nearly 40,000 lives, mostly civilians – and all the rules changed. This is warfare for the 21st century, and another creature altogether....

But this is not just a war between narco-cartels. Juarez has imploded into a state of criminal anarchy – the cartels, acting like any corporation, have outsourced violence to gangs affiliated or unaffiliated with them, who compete for tenders with corrupt police officers. The army plays its own mercurial role. "Cartel war" does not explain the story my friend, and Juarez journalist, Sandra Rodriguez told me over dinner last month: about two children who killed their parents "because", they explained to her, "they could". The culture of impunity, she said, "goes from boys like that right to the top – the whole city is a criminal enterprise".

Not by coincidence, Juarez is also a model for the capitalist economy. Recruits for the drug war come from the vast, sprawling maquiladora – bonded assembly plants where, for rock-bottom wages, workers make the goods that fill America's supermarket shelves or become America's automobiles, imported duty-free. Now, the corporations can do it cheaper in Asia, casually shedding their Mexican workers, and Juarez has become a teeming recruitment pool for the cartels and killers. It is a city that follows religiously the philosophy of a free market.

"It's a city based on markets and on trash," says Julián Cardona, a photographer who has chronicled the implosion. "Killing and drug addiction are activities in the economy, and the economy is based on what happens when you treat people like trash." Very much, then, a war for the 21st century. Cardona told me how many times he had been asked for his view on the Javier Sicilia peace march: "I replied: 'How can you march against the market?'"...

Narco-cartels are not pastiches of global corporations, nor are they errant bastards of the global economy – they are pioneers of it. They point, in their business logic and modus operandi, to how the legal economy will arrange itself next. The Mexican cartels epitomised the North American free trade agreement long before it was dreamed up, and they thrive upon it.

Mexico's carnage is that of the age of effective global government by multinational banks – banks that, according to Antonio Maria Costa, the former head of the UN Office on Drugs and Crime, have been for years kept afloat by laundering drug and criminal profits. Cartel bosses and street gangbangers cannot go around in trucks full of cash. They have to bank it – and politicians could throttle this river of money, as they have with actions against terrorist funding. But they choose not to, for obvious reasons: the good burgers of capitalism and their political quislings depend on this money, while bleating about the evils of drugs cooked in the ghetto and snorted up the noses of the rich.

So Mexico's war is how the future will look, because it belongs not in the 19th century with wars of empire, or the 20th with wars of ideology, race and religion – but utterly in a present to which the global economy is committed, and to a zeitgeist of frenzied materialism we adamantly refuse to temper: it is the inevitable war of capitalism gone mad. Twelve years ago Cardona and the writer Charles Bowden curated a book called Juarez: The Laboratory of Our Future. They could not have known how prescient their title was. In a recent book, Murder City, Bowden puts it another way: "Juarez is not a breakdown of the social order. Juarez is the new order."

7--US orders news blackout over crippled Nebraska Nuclear Plant report, The Nation

Excerpt: A shocking report prepared by Russia’s Federal Atomic Energy Agency (FAAE) on information provided to them by the International Atomic Energy Agency (IAEA) states that the Obama regime has ordered a “total and complete” news blackout relating to any information regarding the near catastrophic meltdown of the Fort Calhoun Nuclear Power Plant located in Nebraska.

According to this report, the Fort Calhoun Nuclear Plant suffered a “catastrophic loss of cooling” to one of its idle spent fuel rod pools on 7 June after this plant was deluged with water caused by the historic flooding of the Missouri River which resulted in a fire causing the Federal Aviation Agency (FAA) to issue a “no-fly ban” over the area.

Located about 20 minutes outside downtown Omaha, the largest city in Nebraska, the Fort Calhoun Nuclear Plant is owned by Omaha Public Power District (OPPD) who on their website denies their plant is at a “Level 4” emergency by stating: “This terminology is not accurate, and is not how emergencies at nuclear power plants are classified.”

Russian atomic scientists in this FAAE report, however, say that this OPPD statement is an “outright falsehood” as all nuclear plants in the world operate under the guidelines of the International Nuclear and Radiological Event Scale (INES) which clearly states the “events” occurring at the Fort Calhoun Nuclear Power Plant do, indeed, put it in the “Level 4” emergency category of an “accident with local consequences” thus making this one of the worst nuclear accidents in US history.

Though this report confirms independent readings in the United States of “negligible release of nuclear gasses” related to this accident it warns that by the Obama regimes censoring of this event for “political purposes” it risks a “serious blowback” from the American public should they gain knowledge of this being hidden from them.

8--Debt ceiling and austerity come at a cost, Pragmatic Capitalism

Excerpt: A recent note from SocGen highlights the risk of austerity in the USA. They believe the debate over the debt ceiling is likely to result in some “painful” austerity measures (Via Societe Generale):

“Debt ceiling negotiations are making progress.

Details of any agreement are unknown. It seems the Bipartisan group is tying an increase in the debt ceiling with a $4trn 10-year austerity plan to reduce the deficit. Number similar in size to the President’s Debt Commission report.

Long-term austerity plan could be a drag on the recovery.

The size of the cuts would be a major drag on growth beginning 2013. If Commission’s plans were adopted: cumulative austerity measures from 2012 to 2015 should amount to around $900bn (size of necessary fiscal adjustment increasing each year). Growth and the fall in the unemployment rate would be restrained. Fed would have to lean against the fiscal winds to keep the recovery moving. Inflation and unemployment still undershooting Fed’s targets by 2015 under the austerity scenario. Fed would have to lean against the wind to achieve its dual mandate. Austerity measures necessary. But may be quite painful.”

9--QE3, Credit Writedowns (wonkish)

Excerpt: The FOMC has already considered offering unlimited quantitative easing to target specific interest rates and buying municipal bonds has been broached by well-connected Fed watcher David Blanchflower. I want to focus on the interest rate caps here because I believe this is politically more feasible, and therefore more likely.

When it comes to quantitative easing, we have to look both at the quantitative and the easing. Going back to the Fed’s failure to reduce longer-term interest rates during QE2, it has more to do with the quantitative than the easing. Ultimately, one can influence the price or the quantity of something, but not both. And with QE2, the Fed decided to influence the quantity (of bank reserves), when its stated aim was to influence price (of money reflected by interest rates).

It is unlikely that the Fed will go back to the well for the same policy since QE2 has proved ineffective. So now that the economy is weak again, it will up the ante and target rates instead of specific easing quantities. This has the potential political benefit of the Fed’s not having to expand its balance sheet. The Fed would essentially guarantee a rate and let the markets move interest rates to that level. Of course, the Fed would promise to defend the rate(s) if and when necessary. The Fed may be tested initially, but punters would lose their shirts fighting a market player with a potentially unlimited supply of liquidity. So I would expect the balance sheet effects for the Fed to be muted. And clearly, if QE3 reduced rates in addition to having largely the same impact as QE2 as well, it would be a more powerful tool.

10--Federal shadow housing inventory is getting bigger, FT Alphaville

Excerpt: Here’s Goldman again:

As the GSEs and FHA begin to take on a larger and larger share of seriously delinquent loans and, ultimately, foreclosed properties, how policymakers approach the operations of these entities could become an important factor for home prices, since these entities could in theory be used to hold supply off of the market in an effort to support prices....

However, the federally backed entities have not shown much sign of trying to hold properties back from the market. The FHA may be particularly constrained by costs, since it has been trying to raise its capital level after concerns last year that it would fall below required minimums. But the Treasury is providing temporarily open-ended financial support to the GSEs, so they do not have the same constraint. (though the administration would probably prefer to avoid further losses at the GSEs if possible). Despite federal support, the GSEs have not made any significant new attempts to hold supply off the market.

Indeed, Goldman says the first quarter of this year was the first since 2009 that the GSEs and FHA acted as a combined net supplier of foreclosed properties to the market. They expect the agencies to assume ownership of as many as 180,000 properties per quarter, or 700,000 over the next year.

Which would mean — if the federal entities decide to keep selling as they’ve been doing so far — there would be a whopping 30 per cent increase in the number of properties feeding into the market.

We’ll say it again – the supply! The supply!

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