Tuesday, July 19, 2011

Today's links

1--A Consumer Bust? Or a Wage Bust? David Leonhardt, New York Times

Excerpt: Robert Reich, the professor, blogger and former labor secretary, sent the following e-mail in response to my Sunday column on the great consumer bust:

I enjoyed your piece in Sunday’s Times — but I don’t think the underlying problem is so much that American consumers have for years spent beyond their means as it is the means of typical consumers haven’t kept up with what the growing economy could have (and should have) been able to provide them.

The great divergence between productivity and median wages started in the late 1970s, as you know, and has become far more dramatic in recent years. If we move toward a more investment and production economy without enlarging the portion of national income going to the vast middle class, we’ll be left with an even greater imbalance –- and there’s no way net exports will correct it.

2--The Crumbling Case for Cutting Spending to Stimulate the Economy, Chad Stone, CBPP

Excerpt: Empirical support for the view that sharp, immediate cuts in government spending would be good for the U.S. economy was never strong, and it’s getting weaker.

The Economist is on the case, highlighting two new studies showing that austerity and growth don’t mix in the short term. ...

The first new study is from the International Monetary Fund. In its 2010 World Economic Outlook, the IMF put the kibosh on the idea that deficit reduction would boost economic growth in the short run. IMF researchers have now presented a revised and extended version of that analysis reaching the same conclusion.

The second new study, by Roberto Perotti, backs up those of us who have been arguing for some time that these international examples have little in common with current U.S. budget and economic conditions. What makes the Perotti study so significant is that he has been one of the leading researchers cited by advocates of sharp, immediate cuts in government spending.

Perotti conducted detailed case studies of the four largest multi-year deficit-reduction efforts that researchers have commonly regarded as spending-based. He found that they were actually much smaller, and much less tilted toward spending cuts, than previous studies had assumed.

Perotti also found that all four countries’ economies benefited from a rapid decline in interest rates and a moderation of wage growth, which in turn made domestic firms more competitive internationally; an expansion of exports was key to economic growth in three of the four cases. ...
In short, the more closely you look at the evidence for the claim that cutting federal spending dramatically right now would be good for the economy, the less convincing that claim becomes.

3--Manpower CEO: Businesses ‘Living on the Edge’, Sudeep Reddy, Wall Street Journal

Excerpt: The U.S. economy is experiencing “summer doldrums” as employers maintain extreme caution in their hiring, says Manpower Inc. Chief Executive Jeffrey Joerres.

With weak demand at home and risks mounting abroad, U.S. firms are using the business practices they installed over the past decade to control their expenses and match hiring closely to demand, the head of the Milwaukee-based staffing giant said in an interview with Wall Street Journal reporters.

“There is no reason to take a risk in today’s world,” Joerres said. “I don’t know of one client that doesn’t feel like they’re living on the edge.”

Firms today have learned to adjust quickly to a soft patch in the economy, he said. Many were “hitting the pause button” this spring when several shocks — renewed troubles in Europe, Japan’s supply-chain problems — hit the world economy. Today, employers can halt world-wide hiring in “literally 48 hours,” Joerres said. “Before, that glide path used to take 60 days before you could come in and stop it.”

4---Weak Growth Is Not Only in Rear-View Mirror, Kathleen Madigan, Wall Street Journal

Excerpt: The lethargy isn’t over.

The U.S. economy’s weak growth rate was supposed to end with the first half. After all, temporary drags, particularly high energy costs and disruptions related to the Japanese disaster, were key headwinds last quarter.

Recent reports, however, suggest the third-quarter economy is just limping along. While not a “soft spot,” the expected growth rate is so meager it is unlikely to lower the jobless rate by much.

Two major economic shops lowered their outlooks last week. First, economists at J.P. Morgan reduced their expectations for third-quarter real gross domestic product. They now expect real GDP growth of 2.5% this quarter, down from a prior view of 3.0%. Then on Friday, the crystal-ball gazers at Goldman Sachs brought down their forecast, also to 2.5%, from 3.25% previously.

At 2.5%, growth would still be higher than the 2% or so generally estimated for the first half. A big reason is the expected rebound in vehicle production. The Japanese supply chain is functioning again, and U.S. automakers are boosting this quarter’s production plans. Those improvements will lift industrial production and factory payrolls.

Even so, 2.5% isn’t great. The U.S. economy cannot rack up impressive growth numbers when its important household sector is beset by worries over deleveraging, falling wealth, and weak jobs prospects.

5--Proof of a housing bubble in China, VOX

Excerpt: Our results indicate the presence of a house-price bubble. In Figure 1it can be seen that increasing imbalances have emerged over the past two years. For example, real house prices in Shanghai have been 28% above the long run equilibrium in 2008, and 35% in 2009. While the evidence is similar for Beijing, the increase is more spectacular in Shenzhen. Compared to the cointegrating relation, real house prices are overvalued by 66% in 2009, after 23% in 2008. In general, the bubble is more pronounced in the special economic zones and the south-eastern coastal regions. Overall, the size of the bubble is 20% in 2008 and 25% in 2009, regardless of whether GDP or population weights are applied....

Further analysis indicates that changes in real house prices cause inflation, but not vice versa. In contrast, there is no causality from house prices to GDP growth. Therefore, a decline in house prices may contribute to a lower inflationary environment without huge negative effects on real economic development.

6--Consumer Sentiment declines sharply in July, Calculated Risk

Excerpt: The preliminary July Reuters / University of Michigan consumer sentiment index declined sharply to 63.8 from 71.5 in June.

In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices. However, even with lower gasoline prices, consumer sentiment declined sharply - possible because of the heavy coverage of the debt ceiling charade.

This was well below the consensus forecast of 71.0 and definitely in the recession range.

7--House to Vote on $2.4 Trillion Debt Increase, Spending Cuts, Bloomberg

Excerpt: The U.S. House plans a vote next week on a measure that would raise the government’s debt limit by $2.4 trillion, cut spending, cap government expenditures and propose a balanced-budget constitutional amendment, Republican Representatives Sean Duffy and Billy Long said.

Fed Asset Purchases

The S&P 500 rallied 93 percent from its low in March 2009 through yesterday as the Federal Reserve used large-scale asset purchases to buoy the economy and companies posted earnings that beat analysts’ estimates. Of the 12 S&P 500 companies that have posted results so far this earnings season, 10 have beaten forecasts for per-share profit.

8--Inflation Day, Paul Krugman, New York Times

Excerpt: OK, so the new report is out. Headline prices actually down, as predicted, but core inflation running above the Fed target on a monthly basis.

So what should we conclude?

First, no hyperinflation here.

Second, about that core: it’s important to make a distinction between core-as-concept and core-as-usually-measured. The concept is that of inertial prices, which are set for extended periods and can get into a leapfrogging pattern of sustained inflation that’s hard to undo. The usual measure is just consumer prices less food and energy. This is clearly closer to the concept than the headline number, but not at all a perfect proxy.

In particular, it’s clear that core-as-measured prices are “adulterated” by commodity prices. Higher fuel prices, for example, get reflected in the price of airline tickets, which are in the core-as-measured. So are used car prices, which rose at an annual rate of around 20 percent in June; is this really inertial inflation?

Looking at the forest instead of the trees — and in particular noting that wages are still flat — and it’s hard to see an inflation problem looming here. The market certainly doesn’t.

Oh, and a modest rise in inflation would, of course, actually be a good thing, because it would help resolve our debt overhang.

9--The Wrong Perversity, Paul Krugman, New York Times

Excerpt: Ryan Avent is upset, rightly, at the way that Obama keeps invoking the confidence fairy, in effect buying in to the doctrine of expansionary austerity — even as a growing body of research grinds what little plausibility the doctrine had into dust.

Yet perverse things do happen; it’s just that we’re focusing on the wrong perversity.

As Brad DeLong argues, there’s a very good case to be made that we’re currently living under conditions in which fiscal contraction actually worsens the long-run deficit. Why? The argument runs like this:

1. Fiscal contraction reduces output in the short run; this immediately means that part of the initial gain in terms of a lower deficit is offset by reduced revenue and higher safety-net spending. These effects are especially large when you’re in a liquidity trap, so monetary policy can’t fight the fiscal contraction.

2. Reductions in short-run output and employment take a toll on long-run growth, too: capital investment is depressed, workers lose their skills, and so on. This in turn reduces future revenues.

3. Meanwhile, with real interest rates very low — actually negative on 5-year bonds — the cost of borrowing now in terms of future debt burden is also very low.

So there is no plausible argument on behalf of the claim that fiscal contraction expands output; there is, on the other hand, a very plausible argument to the effect that fiscal contraction doesn’t even help the fiscal situation.

So guess which perversity is considered a suitable position for Serious People, and which isn’t?

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