Wednesday, March 6, 2013

Today's links

1---As Dow Sprints to New High, the Middle Class and Manufacturing Languish, naked capitalism

Matt Phillips fleshes out how badly ordinary Americans have fared. From the Atlantic (hat tip Ed Harrison):
The stock market alone hasn’t repaired the damage done to American household finances in recent years. In many ways Americans are still sucking wind after the gut punch they suffered in 2008. Here’s a look.
These haven’t gone anywhere but down since the recession hit. Real median US household income — that’s “real,” as in “adjusted for inflation” — was $50,054 in 2011, the most recent data available from the US Census Bureau. That’s 8% lower than the 2007 peak of $54,489.
Yes, it’s true that those 2011 data are pretty old. But if consumer expectations are any reflection on income levels, it doesn’t look like the pay has gotten anywhere back to normal pre-crisis levels. And while the US economy has gotten back on track, workers’ pay has been a progressively shrinking piece of total GDP since the recession hit.
So the new high on the Dow appears mainly to be a reflection of the way corporations have been able to squeeze workers, even after the biggest economic upheaval since the Depression. So all the market giddiness is really about how secure the have feel in their advantaged position.

It has long looked like outsourcing and offshoring are not about improving flexibility and innovation, but about what managers usually say it is about: lowering labor costs. But it’s actually a form of looting, just not the financial kind. The reduction in manufacturing floor costs is partially offset by an increase in managerial coordination, so it’s actually a transfer from blue to white collar workers, particularly the very top executives. And it increases risks of the enterprise. Look at how even master logistician WalMart has experienced major supply chain screw-ups. And what would happen, say, if all that saber-rattling in the Middle East finally leads to a hot conflict with Iran? If oil prices shoot up, the economics of transporting intermediate products around the world might not look so hot.

It’s perverse that stock market averages are treated in the business and popular media as a proxy for the health of the economy. They are now the indicator, at most, of the well being of the wallets of the wealthy, which is coming more and more at the expense of everyone else.

2---The Fed Is Still Way Out to Lunch on Financial Bubbles, CEPR

3---Forget Spending Cuts, the U.S. Economy Really Needs a $2 Trillion Stimulus, Fiscal Times  

More than five years after the start of the Great Recession in December 2007, the U.S. economy is still mired in a depressed state of output, and economic growth has decelerated below rates needed to bring us out of this slump. But our current macroeconomic policy — driven entirely by a contractionary fiscal approach — is poised to further slow near-term growth and delay recovery. What is needed at the moment is renewed pursuit of an expansionary fiscal policy in order to restore full economic health. The signs calling for additional targeted stimulus and cautioning against austerity are all there, if only policymakers would recognize them.

History and international experience teaches that policymakers must fight deep economic slumps until they are ended. We cannot afford to repeat the “Mistake of 1937,” when policymakers prematurely withdrew fiscal and monetary support, pushing the economy into a steeper contraction than experienced during the Great Recession.

This lesson has not been heeded on the other side of the Atlantic, and the results of prematurely pulling back fiscal support have become unambiguous. Austerity measures pushed the United Kingdom back into recession in late 2011, and the U.K. economy has contracted in five of the nine quarters through the end of 2012. Japanese Prime Minister Shinzo Abe, on the other hand, recently announced a large infrastructure stimulus program and is pressuring the Japanese central bank to loosen policy to get the economy out of its prolonged slump. But Japan is trying to exit from an adverse equilibrium of slow, saw-toothed growth, big deficits, disinflation, and low interest rates that has lasted roughly two decades — and which is widely attributed to past self-induced macroeconomic policy failures.....

Perhaps John Maynard Keynes’s most important insight in his magnum opus, The General Theory of Employment, Interest and Money, is that economies can settle into multiple equilibria (as opposed to the single, full-employment equilibrium of the classical theory). Keynes concluded that government policy is sometimes necessary to boost effective demand and move the economy to a healthier equilibrium, particularly when — as today — a glut of savings persists (at the expense of demand) despite low interest rates. That’s what economists refer to as a “liquidity trap.”

Today, the U.S. economy is in just such an adverse equilibrium, with output depressed $985 billion (5.9 percent) below its potential — what the economy could produce with higher, but noninflationary, levels of employment and industrial capacity utilization. The economy has been depressed at least 5 percent below potential for four years now, and cumulatively has forgone $4.5 trillion in national income to date, with another $2.8 trillion of lost income built into the Congressional Budget Office’s (routinely optimistic) forecast.

Achieving full economic recovery will require faster economic growth than that which has characterized the recovery, and much faster than growth than is projected for 2013...

So, how much expansionary fiscal policy would it take for U.S. policymakers to ensure full economic recovery? A new Economic Policy Institute paper estimates that roughly $600 billion to $700 billion worth of deficit-financed, high bang-per-buck fiscal support would be needed in 2013 alone to close the output gap. Somewhat more support would be needed in subsequent years to counteract any demand shortfall due to the deficit reduction imposed by the Budget Control Act. An estimated $1.5 trillion to $2.2 trillion would be needed over the next three years, before a new virtuous cycle was humming and the Federal Reserve could begin raising interest rates. Put differently, policymakers would need to enact deficit-financed fiscal stimulus two to three times larger than the Recovery Act.

Given the misplaced emphasis on deficit reduction since 2010 — $3.1 trillion worth of austerity was enacted in the 112th Congress, including sequestration (policy savings excluding reduced debt service) — this is obviously politically impossible. Policymakers are refusing to even discuss a guaranteed return to full employment, abdicating government’s social compact to target full-employment that had prevailed since the Great Depression.

Allowing productive economic resources (both people and capital) to sit idle and atrophy is exceptionally inefficient. Bouts of depression leave economic scars, and estimates of long-run U.S. economic potential are already being revised downward because of the sustained state of depressed economic activity. CBO’s forecast implies that forgone national income resulting from this depression will rise to $7.3 trillion by 2017, but as noted, their projections are consistently over-optimistic. If trend economic performance is instead sustained, an additional $8.4 trillion of national income may be lost by 2022. This would also mean that cyclical budget deficits persist, likely adding between $1.8 trillion and $3.5 trillion to budget deficits over the next decade, relative to forecasts.

4---DEA chiefs urge Obama to nullify Washington and Colorado pot laws, RT

5---Housing Prices Are Booming Again…., prag capitalism

6---Fed’s Lacker: ‘Small Errors’ in Policy Tightening Could Have Large Impact, WSJ

The Federal Reserve will have a difficult task when it moves from its current easy-money stance to policy tightening given the massive size of its balance sheet, said Jeffrey Lacker, president of the Richmond Federal Reserve Bank.
The central bank is continuing to pour on the economic stimulus, buying $85 billion in bonds per month. But with the economy showing signs of steady improvement, Mr. Lacker and others have begun to think about a reversal–including raising interest rates set near zero and ultimately unwinding the Fed’s more than $3 trillion balance sheet.
“We’ll be in such uncharted territory,” he said Tuesday at a National Association for Business Economics conference. “The consequence of small errors is going to be large, with a large portfolio

7---Fed’s Plosser Wants Bond-Buying Effort to Be Wound Down, WSJ

The Federal Reserve should be moving to put an end to its aggressive bond-buying program, given the rising odds that such a monetary policy stance will cause economic trouble, a top Fed official said Wednesday.
The current state of “monetary policy is posing risks to the economy in terms of financial stability, market functioning, and price stability,” Federal Reserve Bank of Philadelphia President Charles Plosser said.
“In light of what I believe are meager benefits, should economic conditions evolve as I currently anticipate, I believe we should begin to taper our asset purchases with an aim of ending them before year-end,” the official said in a speech given to a local business group in Lancaster, Penn.



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