Friday, August 5, 2011

Weekend links

well, so much for that recovery!

1--"Average Wages Fell, Too", Economist's View

Excerpt: U.S. incomes fell sharply in 2009, by David Cay Johnston, Commentary, Reuters: U.S. incomes plummeted again in 2009, with total income down 15.2 percent in real terms since 2007, new tax data showed on Wednesday.

The data showed an alarming drop in the number of taxpayers reporting any earnings from a job -- down by nearly 4.2 million from 2007...

Average income in 2009 fell to $54,283..., its lowest level since 1997 when it was $54,265 in 2009 dollars, just $18 less than in 2009. The data come from annual Statistics of Income tables that were updated Wednesday. ...

No income tax was paid by 1,470 of the 235,413 taxpayers earning $1 million or more in 2009, compared with the 959 taxpayers with million-dollar-plus incomes who paid no income taxes in 2007. ...

The data from tax returns showed a startling drop in the total number of taxpayers reporting any wages. A taxpayer, as defined by the IRS, can be an individual or a married couple. The data showed almost 4.2 million fewer taxpayers reported wages in 2009 than in 2007, with about 116.7 million taxpayers reporting wages and salaries in 2009 -- down from about 120.8 million in 2007.

Average wages fell, too, sliding $1,106 to $48,917 from $50,023 in 2007. ...

2--No Return to Normal, James Galbraith, Washington Monthly (from the archives)

Excerpt: ... the initial package was affected by the new team’s desire to get past this crisis and to return to the familiar problems of their past lives. For these protégés of Robert Rubin, veterans in several cases of Rubin’s Hamilton Project, a key preconception has always been the budget deficit and what they call the "entitlement problem." This is D.C.-speak for rolling back Social Security and Medicare, opening new markets for fund managers and private insurers, behind a wave of budget babble about "long-term deficits" and "unfunded liabilities." To this our new president is not immune. Even before the inauguration Obama was moved to commit to "entitlement reform," and on February 23 he convened what he called a "fiscal responsibility summit." The idea took hold that after two years or so of big spending, the return to normal would be under way, and the costs of fiscal relief and infrastructure improvement might be recouped, in part by taking a pound of flesh from the incomes and health care of the old....

Geithner’s banking plan would prolong the state of denial. It involves government guarantees of the bad assets, keeping current management in place and attempting to attract new private capital. (Conversion of preferred shares to equity, which may happen with Citigroup, conveys no powers that the government, as regulator, does not already have.) The idea is that one can fix the banks from the top down, by reestablishing markets for their bad securities....

Auerback plainly illustrates by how much Roosevelt’s ambition exceeded anything yet seen in this crisis:

[Roosevelt’s] government hired about 60 per cent of the unemployed in public works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York’s Lincoln Tunnel and Triborough Bridge complex, the Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown. It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country’s entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock.

In other words, Roosevelt employed Americans on a vast scale, bringing the unemployment rates down to levels that were tolerable, even before the war—from 25 percent in 1933 to below 10 percent in 1936, if you count those employed by the government as employed, which they surely were. In 1937, Roosevelt tried to balance the budget, the economy relapsed again, and in 1938 the New Deal was relaunched. This again brought unemployment down to about 10 percent, still before the war....

Auerback plainly illustrates by how much Roosevelt’s ambition exceeded anything yet seen in this crisis:

[Roosevelt’s] government hired about 60 per cent of the unemployed in public works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York’s Lincoln Tunnel and Triborough Bridge complex, the Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown. It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country’s entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock.


In other words, Roosevelt employed Americans on a vast scale, bringing the unemployment rates down to levels that were tolerable, even before the war—from 25 percent in 1933 to below 10 percent in 1936, if you count those employed by the government as employed, which they surely were. In 1937, Roosevelt tried to balance the budget, the economy relapsed again, and in 1938 the New Deal was relaunched. This again brought unemployment down to about 10 percent, still before the war.

The New Deal rebuilt America physically, providing a foundation (the TVA’s power plants, for example) from which the mobilization of World War II could be launched. But it also saved the country politically and morally, providing jobs, hope, and confidence that in the end democracy was worth preserving. There were many, in the 1930s, who did not think so.

What did not recover, under Roosevelt, was the private banking system. Borrowing and lending—mortgages and home construction—contributed far less to the growth of output in the 1930s and ’40s than they had in the 1920s or would come to do after the war. If they had savings at all, people stayed in Treasuries, and despite huge deficits interest rates for federal debt remained near zero. The liquidity trap wasn’t overcome until the war ended.

3--The Hostage Crisis Continues: Why Obama Can’t Pivot to Jobs and Growth, Robert Reich's blog

Excerpt: He (Obama) says he wants an “infrastructure bank” that would borrow money from private capital markets to pay private contractors to rebuild our nations roads, bridges, airports, and everything else that’s falling apart.

Fine, but the new deal he just signed may not let him do this either – if the infrastructure bank relies on federal funds or even federal loan guarantees to attract private money. The only way he could create an infrastructure bank without sweetening the pot would be by privatizing all the new infrastructure. That means toll roads and toll bridges, user-fee airports, and entry fees everywhere else.

Apart from its potential unfairness to lower-income people, such a privatized infrastructure would have the same effect as a tax increase. After paying more for roads and bridges and all other infrastructure, Americans would have less cash for to spend on goods and services. That means no boost to the economy.

4--Rates of Wrath, Paul Krugman, New York Times

Excerpt: Not good news in stock markets — but you really have to look at the bond markets to get the full awfulness of the situation.

The US 10-year bond rate is now down to 2.5%. So much for those bond vigilantes. What this rate is saying is that markets are pricing in terrible economic performance, quite possibly a double dip. And it also says that Washington’s deficit obsession has been utterly, totally wrong-headed.

Meanwhile, Italy’s spread against German bonds is soaring even further. What are markets pricing in here? Default as a real possibility; maybe even euro breakup. The latter certainly sounds a lot more plausible now than it did a few months ago.

Oh, by the way, how do I know that falling rates in America and rising rates in Italy are both bad news? Part of the answer is that you have to look at the context. My old teacher Charles Kindleberger used to say about balance of payments analysis that everyone wanted a single number that told you whether things were good or bad, but what you really needed, always, was a story.

But if that doesn’t satisfy you, you can always make sure to look at more than one market. Italian stocks are plunging, which tells you that the rate rise isn’t about economic optimism; so are US stocks, which tells you that our rate fall isn’t about optimism regarding US solvency.

5--Analysis: Obama, Bernanke out of ammo to boost jobs growth, Reuters

Excerpt: The United States has a jobs problem and there's not a lot President Barack Obama or Federal Reserve Chairman Ben Bernanke can do about it.

In the face of rising risks of a recession that could imperil his re-election chances next year, Democrat Obama wants Congress to extend a payroll tax cut and emergency unemployment benefits that are due to expire in December.

But the Republican-controlled House of Representatives is emboldened by budget concessions it made Obama swallow to lift the country's debt limit this week and he has little political leverage to win significant fresh spending to aid growth.

"Obama does not have much presidential persuasion left. He is running out of capital," said James Thurber, of American University's Center for Congressional and Presidential Studies.

6--Does debt deal put mortgage-interest deduction in play?, McClatchy Newspapers

Excerpt: Just as Social Security and Medicare benefits were dangled above the shredder in the debt ceiling debate, another of Washington's sacred cows could end up on the chopping block soon as well.

The mortgage interest deduction, which allows 35 million homeowners to write off their mortgage interest payments, may be in for serious restructuring if ongoing efforts to pare the bulging federal debt are broadened.

As part of the just-concluded debt ceiling debate, a bipartisan group of senators known as the "Gang of Six" proposed lowering the limit on mortgages eligible for the deduction from $1 million to $500,000 and restricting the tax break only to primary residences.

But as it has through decades of federal budget cuts and crises, the popular provision emerged unscathed in the debt-limit compromise that President Barack Obama signed into law Tuesday. That reprieve, however, may not last.

7--Discuss: BEA revised 2009 & ’10 Personal Income Sharply Lower, The Big Picture

Excerpt: American’s spending turned negative in June (-0.2%) for the first time since September 2009. Without government largesse (personal transfer receipts) personal income would have declined. Personal income increased $18.7 billion, or 0.1 percent…Personal current transfer receipts increased 9.5 billion, in contrast to a decrease of $1.4 billion. Government largesse is 51% of income growth.

The BEA revised 2009 and 2010 personal income sharply lower. Yes, once again US beancounters overstate economic strength for years and the Street is mum on the scheme.

Personal income was revised up $69.1 billion, or 0.6 percent, for 2008; was revised down $244.7 billion, or 2.0 percent, for 2009; and was revised down $167.5 billion, or 1.3 percent, for 2010.

Disposable personal income (DPI) (personal income less personal current taxes) was revised up $71.6 billion, or 0.7 percent, for 2008; was revised down $246.1 billion, or 2.2 percent, for 2009; and was revised down
$195.0 billion, or 1.7 percent, for 2010

http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm

We have screamed for years that jobs & income are the key economic indicators. Everything else is just background music. The average American continues to experience worse economic conditions that most of Wall Street and DC realize or understand.

Americans on food stamps jumped 1.1 million in May to 45,753,078 from 44,647,861 (+12/1% y/y).

8--Market Craters: Dow Falls 512 Points, Naked Capitalism

Excerpt: What we are seeing today is not as bad as the worst days of the crisis, but it ins’t much consolation for investors who had gotten back in the pool on the belief that the system had been patched up reasonably well and the economy was on the mend.

All the authorities did was patch up a predatory banking system with duct tape and bailing wire and hoped enough cheerleading would restore confidence. And after the banks got their bailout money, the mood seemed to be “we spent so much on them, we don’t have anything left for anyone else.” The alarming rise in government deficits, which was primarily the result of the crisis (falls in tax revenues and increases in automatic stabliizers like unemployment payments) and not discretionary spending, has led to a deadly combination of austerian policies (which is making debt to GDP ratios worse, see Ireland, Latvia, and Greece for proof), dysfunctional government responses, faltering recoveries, and deliberate shredding of social contracts. It’s like watching a house burn and then having people throw Molotov cocktails at it.

The pattern of serious financial crises is the market meltdown hits first, then the real economy plunge takes place later. Our officialdom had been patting itself on the back that “better” policy responses had stopped the sort of damage that the US suffered in the Great Depression and Japan experienced in its post bubble hangover. But the GDP revisions of last week included some stunning reductions to 2008 figures which called the comparatively cheery story we’ve been told into question. And the powers that be have refused to take the important step of writing bad debt down. Zombification was treated as the solution to our woes, when the result of past financial crises shows that taking the losses early which does result in a worse initial GDP hit, leads to much better outcomes. And here, the casualty has been not only growth but to a fair degree our political system, as the corporocrats have used the crisis to solidify their position.

The numbers as of this hour (I’m on a poor person delayed Bloomberg, but the amplitude ain’t gonna change much with something a tad fresher):

S&P down 3.63% (yowza), Dow down 3.31% (updated as of close, double yowza, Dow down 512, or 4.3%, S&P down 4.8%)

Oil down 5% to just under $87 a barrel

The yen has weakened markedly as a result of the Japanese intervention but is still in nosebleed territory at 79. The euro is at 1.41

The immediate trigger for the wipeout was yet another bad data release, this of consumer confidence, on top of general wobblies (yields on Italian and Spanish government debt have gone into “beyond redemption” terrain, and Italy is so large that any program would require measures well beyond what the Eurozone has in place). The narrative from Bloomberg:

A global rout in equities drove the Standard & Poor’s 500 Index to its worst nine-day slump since March 2009, while two-year Treasury yields plunged to a record low amid concern the economy is weakening. The yen pared losses, recovering from the biggest drop versus the dollar since 2008 that was triggered as Japan sold its own currency.

9--Minus 512, 2.4 Percent, Paul Krugman, New York Times

Excerpt: OK, OK, we always need to bear in mind Paul Samuelson’s line about how the stock market had predicted nine of the last five recessions. Still, the markets do seem to be telling us a couple of things:

1. The world looks a lot more like the way it’s viewed by the Krugman/Thoma/DeLong axis (hey, I like it) than as viewed by, say, the WSJ editorial page.

2. Policy makers have been worrying about the wrong things, obsessing over deficits when the real problem was lack of growth.

There are intimations that this could turn out to be more than a mere market plunge; European stresses are starting to make some nasty financial ripples that suggest a possible mini-Lehman event, although I think — I hope — governments and central banks will head this off. But if you had any doubts that we were on the wrong track, this should resolve them.

10--Sharp fall in consumer spending, manufacturing in US, WSWS via Information Clearinghouse

Excerpt: Economic data released this week provides further evidence that economic growth in the US has virtually come to a halt. The Commerce Department reported Tuesday that consumer spending fell by 0.2 percent in June, the first monthly decline since September of 2009. Personal income increased a negligible 0.1 percent, the smallest gain since last November, according to the department. Wages and salaries remained unchanged.

These figures followed similarly disastrous data on manufacturing released Monday by the Institute of Supply Management. The institute reported that its US purchasing managers index (PMI) fell in July to its lowest level in two years, while new orders contracted for the first time since 2009.

The data on consumer spending and manufacturing is consistent with the figures released Friday by the Commerce Department on overall economic growth. That report showed second quarter growth of the US gross domestic product (GDP) slowing to a mere 1.3 percent on an annualized basis. The Commerce Department also revised downward its estimate of GDP growth in the first quarter from 1.9 percent to a negligible 0.4 percent.

The data on consumer spending helped fuel the sharpest sell-off of US stocks in a year on Tuesday. The Dow Jones Industrial Average fell 265 points (2.2 percent), dropping the index well below 12,000. The Standard & Poor’s 500 Index declined 32 points, or 2.6 percent. The Nasdaq index fell 75 points (2.8 percent)....

The Economic Policy Institute, a Washington think tank, said Monday it expects that the agreement on raising the federal debt ceiling, together with other expected budget-cutting measures, will result in the loss of 1.82 million jobs and a reduction of 1.5 percent in the US gross domestic product in 2012...

Other analysts are even more pessimistic. David Kelly of JPMorgan Chase told Bloomberg News Tuesday that the current rate of economic growth will likely result in a net decline in US payrolls for July, the first contraction in 9 months.

The US slowdown is part of a global trend. Indices of corporate purchasing activity, released by most countries Monday, showed marked declines from previous rates. The figures for China, India, and the euro zone were near their lowest levels in two years. JPMorgan Chase’s global manufacturing purchasing managers index fell from 52.3 in June to 50.6 in July.

11--A Secret War in 120 Countries; The Pentagon's New Power Elite, Counterpunch

Excerpt: Somewhere on this planet an American commando is carrying out a mission. Now, say that 70 times and you're done... for the day. Without the knowledge of the American public, a secret force within the U.S. military is undertaking operations in a majority of the world's countries. This new Pentagon power elite is waging a global war whose size and scope has never been revealed, until now.

After a U.S. Navy SEAL put a bullet in Osama bin Laden's chest and another in his head, one of the most secretive black-ops units in the American military suddenly found its mission in the public spotlight. It was atypical. While it's well known that U.S. Special Operations forces are deployed in the war zones of Afghanistan and Iraq, and it's increasingly apparent that such units operate in murkier conflict zones like Yemen and Somalia, the full extent of their worldwide war has remained deeply in the shadows.

Last year, Karen DeYoung and Greg Jaffe of the Washington Post reported that U.S. Special Operations forces were deployed in 75 countries, up from 60 at the end of the Bush presidency. By the end of this year, U.S. Special Operations Command spokesman Colonel Tim Nye told me, that number will likely reach 120. "We do a lot of traveling -- a lot more than Afghanistan or Iraq," he said recently. This global presence -- in about 60% of the world's nations and far larger than previously acknowledged -- provides striking new evidence of a rising clandestine Pentagon power elite waging a secret war in all corners of the world......

What he did let slip, however, was telling. He noted, for instance, that black operations like the bin Laden mission, with commandos conducting heliborne night raids, were now exceptionally common. A dozen or so are conducted every night, he said. Perhaps most illuminating, however, was an offhand remark about the size of SOCOM. Right now, he emphasized, U.S. Special Operations forces were approximately as large as Canada's entire active duty military. In fact, the force is larger than the active duty militaries of many of the nations where America's elite troops now operate each year, and it's only set to grow larger.

Americans have yet to grapple with what it means to have a "special" force this large, this active, and this secret -- and they are unlikely to begin to do so until more information is available. It just won't be coming from Olson or his troops. "Our access [to foreign countries] depends on our ability to not talk about it," he said in response to questions about SOCOM's secrecy. When missions are subject to scrutiny like the bin Laden raid, he said, the elite troops object. The military's secret military, said Olson, wants "to get back into the shadows and do what they came in to do."

12--Consumer Moods Sour More in August, Wall Street Journal

Excerpt: U.S. consumers are gloomier this month, according to a survey released Thursday.

The Royal Bank of Canada said its consumer outlook index dropped to 40.2 in August from 43.7 in July. The August reading is the lowest since November 2009.

The RBC current conditions index fell to 28.9 from 33.4. The expectations index declined to 49.4 from 53.1.

“There will no doubt exist a strong inclination to highlight recent debt ceiling wrangling as having weighed on confidence this month,” said Tom Porcelli, RBC’s chief economist.

Although the survey showed 54% of respondents said the debt ceiling crisis made them feel less confident about the U.S. recovery, Porcelli cautioned against attributing all the August drop to the debt discussions.

That’s because other worries are also evident. Within the RBC survey the employment index continue to slide and inflation concerns picked up after falling for two consecutive months. The RBC inflation index rose to 75.1 from 72.3 in July and 73.6 in June.

Recent economic data have suggested the recovery is in trouble at the start of the third quarter. On Friday, the Labor Department will report on the state of the July labor markets. The median forecast is for a gain of 75,000 jobs and the unemployment rate to stay at 9.2%.

In a series of special questions, RBC asked about back-to-school shopping. Among parents of school-aged children, 40% plan to spend less this year than in 2010, and only 9% expect to spending more.

The RBC consumer outlook survey is conducted on-line via Ipsos’ Public Affairs.

13--The Wrong Worries, Paul Krugman, New York Times

Excerpt: In case you had any doubts, Thursday’s more than 500-point plunge in the Dow Jones industrial average and the drop in interest rates to near-record lows confirmed it: The economy isn’t recovering, and Washington has been worrying about the wrong things. ...

For two years, officials at the Federal Reserve, international organizations and, sad to say, within the Obama administration have insisted that the economy was on the mend. Every setback was attributed to temporary factors — It’s the Greeks! It’s the tsunami! — that would soon fade away. And the focus of policy turned from jobs and growth to the supposedly urgent issue of deficit reduction.

But the economy wasn’t on the mend. ... Where was growth supposed to come from? Consumers, still burdened by the debt that they ran up during the housing bubble, aren’t ready to spend. Businesses see no reason to expand given the lack of consumer demand. And thanks to that deficit obsession, government, which could and should be supporting the economy..., has been pulling back.

Now it looks as if it’s all about to get even worse. So what’s the response?

To turn this disaster around, a lot of people are going to have to admit, to themselves at least, that they’ve been wrong and need to change their priorities, right away. ... Those plunging interest rates and stock prices say that the markets aren’t worried about either U.S. solvency or inflation. They’re worried about U.S. lack of growth. And they’re right...

14--The Republican’s Double-Dip, and What Must Be Done, Robert Reich's blog

Excerpt: .....the economy looks like it’s dead in the water. The Commerce Department reports almost no growth in the first half of the year. And job growth is just about at a standstill. Far fewer jobs were generated in May and June than necessary just to keep up with the growth in the potential labor force – meaning the employment picture is actually worsening. Investors fear tomorrow’s (Friday’s) jobs report for July will show more of the same.

Secondly, investors now know the federal government’s hands are tied. The original stimulus is over; the Fed’s “quantitative easing” is over.

This week’s deal over the debt ceiling cinches it. The market is now on its own — without enough rocket power get out of the continuing gravitational pull of the Great Recession.

Now that the deal is done, Obama and the Democrats will have a much harder time passing anything close to the stimulus necessary to breach the gap between what consumers (who are 70 percent of the economy) are willing to spend and what the economy can produce at or near full-employment.

Not incidentally, the Commerce Department’s revised data for what happened to the economy in 2008 and 2009 shows the drop to have been far greater than had been supposed. The economy plunged 8.9 percent in the fourth quarter of 2008 – the steepest quarterly decline in more than half a century. And in 2009 household buying declined almost 2 percent (compared with a previous estimate of 1.2 percent). That’s the biggest contraction in almost sixty years.

This means the original stimulus should have been much larger in order to offset the drop. With cash-starved state and local governments simultaneously scaling back their own spending, the federal stimulus needed to be even bigger.

So much for Republican claims that the original stimulus “didn’t work.” Of course it didn’t, given the size of the slide....

We need a bold jobs bill to restart the economy. Eliminate payroll taxes on the first $20,000 of income for two years. Recreate the WPA and the Civilian Conservation Corps. The federal government should lend money to cash-strapped states and local governments. Give employers tax credits for net new jobs. Amend the bankruptcy laws to allow distressed homeowners to declare bankruptcy on their primary residence. Extend unemployment insurance. Provide partial unemployment benefits to people who have lost part-time jobs. Start an infrastructure bank.

No comments:

Post a Comment