Monday, August 1, 2011

Today's links

1--Amid Debt Battle, More Americans Say Economy Getting Worse, Gallup

Excerpt: Seventy-three percent of Americans in Gallup Daily tracking over the July 22-24 weekend say the U.S. economy is getting worse. This is up 11 percentage points from the three days ending July 6, and the worst level for this measure since the three days ending March 12, 2009.

Economic Confidence at Recessionary Levels

As a result of the declines in Americans' assessments of the economy's current state and its future direction, Gallup's Economic Confidence Index fell sharply to -46 in the three days ending July 24 -- worsening from -41 before the weekend and -30 at the beginning of the month.


The president, the Treasury secretary, and congressional leaders worried openly over the weekend about what might happen in the international financial markets if a debt-ceiling increase agreement wasn't reached. They feared trouble in the Asian money markets when they opened on Sunday night and on Wall Street on Monday morning. Although there were some losses in the money markets after a debt ceiling deal failed to materialize, these were far less than might have been expected -- particularly in light of what government leaders were saying.

Still, Gallup's data show that Americans' perceptions of the future of the U.S. economy should be the real concern for policymakers and the overall economy. All of the talk about default likely has weighed on consumer confidence, as has the dismal jobs market, increasing gas prices, and the economic soft patch.

2--Disastrous GDP numbers make double dip scare real, Credit Writedowns

Excerpt: The US Bureau of Economic Analysis reported the following at 830AM ET:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent.

The immediate reaction was a drop in the dollar to record lows against the Japanese yen and Swiss franc, a drop in Ten-year yields to 2.88%, a drop in the Dow Futures to –137 and a rise in the Gold price by $10 to $1626.

While the headline number was well below expectations of 1.8%, what must be noted are the major revisions. Q1 2011 is now reported as +0.4%. That’s a major downward revision which demonstrates that QE2 was in fact doing nothing for growth and that the US is already at stall speed even without the negative impact of the European sovereign debt crisis and the debt ceiling fiasco. The double dip scare is real.

3--Real GDP still below Pre-Recession Peak, Chicago PMI declines, Consumer Sentiment Weak, Calculated Risk

Excerpt: GDP: Not only has growth slowed, but the recession was significantly worse than earlier estimates suggested. Real GDP is still not back to the pre-recession peak...

The final July Reuters / University of Michigan consumer sentiment index declined slightly to 63.7 from the preliminary reading of 63.8 - and down sharply from 71.5 in June. .

4--The Centrist Cop-Out, Paul Krugman, New York Times

Excerpt: The facts of the crisis over the debt ceiling aren’t complicated. Republicans have, in effect, taken America hostage, threatening to undermine the economy and disrupt the essential business of government unless they get policy concessions they would never have been able to enact through legislation. And Democrats — who would have been justified in rejecting this extortion altogether — have, in fact, gone a long way toward meeting those Republican demands.

As I said, it’s not complicated. Yet many people in the news media ... portray the parties as equally intransigent; pundits fantasize about some kind of “centrist” uprising, as if the problem was too much partisanship on both sides.

Some of us have long complained about the cult of “balance,” the insistence on portraying both parties as equally ... at fault on any issue... The cult of balance has played an important role in bringing us to the edge of disaster. For ... there is no penalty for extremism. Voters won’t punish you for outrageous behavior if all they ever hear is that both sides are at fault....

But making nebulous calls for centrism, like writing news reports that always place equal blame on both parties, is a big cop-out — a cop-out that only encourages more bad behavior. The problem with American politics right now is Republican extremism, and if you’re not willing to say that, you’re helping make that problem worse.

5--The Shape of Inequality And Its Impact on Growth, Jared Bernstein, On the Economy

The Iron Man (John Irons) makes an important point here: economic inequality doesn’t grow just because folks at the top do better. It also grows because folks at the middle and bottom do worse.

This figure from EPI shows the fanning out of real hourly wages, indexed to 100 in 1973, over the last few decades. Clearly, the top continuously pulls away from the pack, as can be seen by the lines for the 90th and 95th wage percentiles.

There was little wage inequality in the 1970s, but in the 1980s, the bottom was falling, the middle flat, and the top rising—a basic fanning out of the wage distribution.

The latter 1990s were once again different. The high end continued to rise but low and middle real wages grew together, and at a pretty decent clip. The cause of the nice bump was the full employment conditions that prevailed for a few years back then, and as I’ve stressed, that dynamic leads to broad-based growth which pushes back against rising inequality....

Full unemployment delivers more broad-based gains, and this feeds back into longer, more durable, and just plain better recoveries.

I’d go further—still in hypothesis mode, but I’ll bet I’m right. High levels of inequality depress longer-term growth by depressing more broad-based consumption—you end with a lot going on at Walmart and Nordstrom without enough going in the middle—and dampening investment both in human and physical capital.

6--A Recovery That Repeats Its Painful Precedents, New York Times

Excerpt: Twenty-five million Americans still could not find full-time jobs last month. And hopes for the second half of the year are under the cloud of a political crisis that has cast doubt on the government’s willingness to pay its bills.

Roughly four years since the start of the financial crisis, and two years since the official end of the resulting recession, what has taken hold in their wake is a new kind of great moderation — an era of slow growth.

“The problem is that some persistent and deep currents are restraining our progress,” John C. Williams, president of the Federal Reserve Bank of San Francisco, said on Thursday.

Perhaps the most important is the closely linked combination of housing and consumer spending. It is a longstanding pattern that the Americans recover from recessions by building more homes and filling them with things. But there is no need to build homes while millions sit empty.

The San Francisco Fed estimates that construction may not return to the average level of prebubble activity before 2016, sidelining a major industry....

“We did a pretty good job of fixing bank balance sheets, but I think that household balance sheets are the ones that have suffered the most,” said Mark Thoma, a professor of economics at the University of Oregon. “We could have done much more to help households.”

The government, another engine of past recoveries, also is dragging on this one. Reductions in government spending reduced the pace of growth in the first quarter by more than one percentage point, and the cuts have continued.

7--Graphic of the Day: Who Borrowed? Who Loaned?, Econbrowser

Excerpt: great graphics, "must see" chart

8--Jobs Deficit, Investment Deficit, Fiscal Deficit, New York Times

Excerpt: Like many economists, I believe that the immediate crisis facing the United States economy is the jobs deficit, not the budget deficit. The magnitude of the jobs crisis is clearly illustrated by the jobs gap – currently around 12.3 million jobs.

That is how many jobs the economy must add to return to its peak employment level before the 2008-9 recession and to absorb the 125,000 people who enter the labor force each month. At the current pace of recovery, the gap will be not closed until 2020 or later....

The jobs gap is primarily the result of the dramatic collapse in aggregate demand that began with the financial crisis of 2008. Even with unprecedented amounts of monetary and fiscal stimulus, the recovery that began in June 2009 has remained anemic, because consumers, the major driver of private demand, have curbed their spending, increased their saving and started to deleverage and reduce their debt — and they still have a long way to go.

As I asserted in my last post (and many other economists, including Lawrence Summers, Alan Blinder, Christina Romer, Peter Orzsag and Robert Shiller, have made this point, too), the jobs gap warrants additional fiscal measures to increase private-sector demand and promote job creation....

Sadly, current signals from Washington indicate that such measures will not be taken.

Instead, the risk grows that large, premature cuts in government spending will reduce aggregate demand, will tip the economy back into recession and drive the unemployment rate back into double digits.

Even if no budget deal is reached and no major spending cuts are made in the near future, there is now a serious risk that the rating agencies will downgrade government debt because of the political stalemate over a long-run deficit reduction plan. That would almost surely produce higher interest rates that could sink the economy into recession again....

Even before the onslaught of the Great Recession, the labor market was in serious trouble. Job growth between 2000 and 2007 was only half what it had been in the preceding three decades.

Productivity growth was strong, but far outpaced compensation growth. Between 2002 and 2007, productivity grew by 11 percent, but the hourly compensation of both the median high-school-educated worker and the median college-educated worker fell.

During the same period, the real median income for working-age households declined by more than $2,000. The 2002-7 recovery was the only American recovery on record during which the income of the typical working family dropped....

To fashion the appropriate policy responses to these long-term structural problems in the labor market, it is first necessary to understand their causes. The key contributors are three:

1. Skill-biased technological change that has automated routine work while increasing the demand for highly educated workers with at least a college education, preferably in science, engineering or math.

2. Globalization or the integration of labor markets through trade and more recently through outsourcing.

3. The declining competitiveness of the United States as a place to do business.
Recent studies

9--Economists React: ‘Recovery? What Recovery?’;Economists and others weigh in on the latest reading on gross domestic product, Wall Street Journal

Excerpt: Recovery? What recovery? Economic growth has largely stalled led by a depressed consumer and budget cutting state and local governments. Household spending came to a screeching halt as vehicle sales tanked in the spring. That created a sharp decline in durable goods spending. Businesses continued to invest but the demand for equipment and software grew at the slowest pace in two years. And then there were state and local governments, where budget cutting has become de rigueur. The slicing and dicing reduced economic growth by over 0.4 percent point. That is not chump change and shows that my comment that there is no such thing as a free budget cut was not just a cute phrase. Thankfully, the trade deficit narrowed on solid increases in exports and weak imports. That kept growth above one percent. –Naroff Economic Advisors

–Recovery, we hardly knew ya! Economic growth is clearly flagging in the U.S., and the most troubling thing about it is that distress in Washington limits the policy response. As a result, we see a greater potential that the current slow patch could transition into a longer period of deeply disappointing results, and even a possible recession. While odds of such a recession are still modest, today’s results indicate an increasing probability. –Guy LeBas, Janney Montgomery Scott

–The U.S. is facing some major headwinds and challenges as it emerges from the worst recession in our lifetimes. Growth of this order is not only not enough to bring down the unemployment rate but would be coincident with an increase in unemployment. Fortunately, we do not expect this rate of growth to be repeated in the second half. However, and as we have been writing about lately, the current debate in Washington is having a negative effect on private sector activity and to the extent this continues, we have to believe that growth during the remainder of the year if not 2012 will be even lower than we originally thought. –Dan Greenhaus, Miller Tabak

10--Stagnation Nation, Paul Krugman, New York Times

Excerpt: The GDP estimates for second quarter are out, and they’re ugly. Basically, very weak growth for the first half of 2011 — indeed, growth well below the economy’s potential, so we’re actually losing ground in the effort to reduce the gap between what we should be producing and what we’re actually producing. This is a recipe for rising, not falling, unemployment.

What’s causing the stagnation? A big factor is falling government spending: “government consumption and investment spending” has been falling sharply as the stimulus runs out and state and local governments slash. Anyone talking about fiscal austerity should know that in practice we’re already doing it, with the usual results.

So given a stagnant economy suffering from falling government spending, what is all our political debate about? Spending cuts! After all, we have to appease those invisible bond vigilantes, who are suckering us in by cutting long-term rates to 2.87% as of right now.

11--Former Intel Chief: Call Off The Drone War (And Maybe the Whole War on Terror), Wired

Excerpt: Ground the U.S. drone war in Pakistan. Rethink the idea of spending billions of dollars to pursue al-Qaida. Forget chasing terrorists in Yemen and Somalia, unless the local governments are willing to join in the hunt.

Those aren’t the words of some human rights activist, or some far-left Congressman. They’re from retired admiral and former Director of National Intelligence Dennis Blair — the man who was, until recently, nominally in charge of the entire American effort to find, track, and take out terrorists. Now, he’s calling for that campaign to be reconsidered, and possibly even junked.

Starting with the drone attacks. Yes, they take out some mid-level terrorists, Blair said. But they’re not strategically effective. If the drones stopped flying tomorrow, Blair told the audience at the Aspen Security Forum, “it’s not going to lower the threat to the U.S.” Al-Qaida and its allies have proven “it can sustain its level of resistance to an air-only campaign,” he said.

It’s one of many reasons why it’s a mistake to “have that campaign dominate our overall relations” with countries like Pakistan, Yemen, and Somalia. “Because we’re alienating the countries concerned, because we’re treating countries just as places where we go attack groups that threaten us, we are threatening the prospects of long-term reform,” Blair said.

12--Who Owns Treasury Debt?, The Big Picture

More great graphics

13--The Corrosion of the Conservative Economic Mind, Paul Krugman, New York Times

Excerpt: First Michael Boskin, now John Taylor: there seems be an epidemic of politically conservative economists who used to be technically competent repeating the obviously wrong falsehood that Reagan ushered in an era of “unprecedented” growth.

No matter what measure you use, it just ain’t so — and I thought every macroeconomist in America knew it wasn’t so. Here’s one measure that the BLS happens to have put in a convenient chart, so that I’m not choosing the dates, they are:(chart)

This shows what everyone was supposed to know: we had an awesome performance in the generation following the war (despite very high tax rates on the rich and a very strong union movement); we had a long period of poor productivity performance that spanned the Ford, Carter, Reagan, and Bush I administrations; we then had a revival during the Clinton administration, but even so not up to postwar standards. By the way, I don’t give Clinton credit for that revival; it was about learning to use technology. But in any case, there is no hint of a Reagan miracle in the data.

14--Anti-stimulus, Paul Krugman, New York Times

Excerpt: Here’s the CBO estimate of the effect of the Recovery Act on the deficit — not identical to its likely effect on the economy, but a rough guide — in billions of dollars, by fiscal year (fiscal years start in October of the previous calendar year):

(See chart)

So stimulus has been fading out fast; in effect, we’re pursuing a contractionary fiscal policy. Meanwhile, the underlying source of our slump, the high level of consumer debt inherited largely from the housing bubble, has declined only slightly.

And quelle surprise, as Yves Smith would say, the economy is sputtering.

If you do the 1937 thing, you shouldn’t be surprised at getting the 1937 result.

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