We have seen the argument from some commission participants (Peterson for one) that Social Security is too expensive for those who need it and pay for it because it is an 'entitlement'. We also have read from some Congress members (Senators Kyl and McConnel) that tax cut extensions of the Bush presidency are not deficit producing and need not be part of pay go.

The Fiscal Times has an article on considerations being undertaken by the Commission for Deficit Reduction. (H/t coberly).

The main theme in this article is that the "tax expenditures" home mortgage deduction and health insurance premium deductions are actually government spending (I assume in relation to the deficit) and thereby letting these taxpayers keep their money is bad. (Because these are "tax expenditures" and not "tax cuts"?)

I see a pattern here unfolding in this series of electioneering statements. Maybe politicians can put it altogether for us before the elections so we know who should pay and who should not in a less confusing way.

Quote is below the fold, bolding is mine:

More below the fold...

The WSJ and the Commerce Department realize what everyone else already knew.

The recession was deeper -- and subsequent recovery slower -- than the government originally estimated, the Commerce Department said Friday.

Second quarter real GDP was reported to have increased at a 2.4% rate so that the four quarter growth was 3.2%. As the chart shows this is a very weak first year of recovery compared to the old historic norm before the "great moderation" emerged when growth averaged 7.6% in the first year of recovery. But it was stronger than the 2.6% and 1.9%
increase in the weak recoveries of 1991 and 2001.



This leaves real GDP 1.1% below the prior peak in the fourth quarter of 2007. To regain the prior peak in the third quarter real GDP would have to grow at a 4.5% rate. By historic norms this is easily doable, but in today's world it is unlikely.

Within the data real exports grew at a 14.1% annual rate, about the same as the 14.0% rate in the first quarter. But real imports surged at a 28.8% annual rate compared to a 11.2% rate in the first quarter.

Real final sales to domestic purchasers accelerated to a 4.1% annual rate compared to 1.3% in the first quarter. But because trade was a major negative, real final sales of domestic product only expanded at a 1.1% and 1.3% rate in the first and second quarter, respectively. Domestic stimulus is working, but because of the international leakages it is being dissipated abroad and the economy is not responding. This is the real structural problem the economy is facing and reflects the major hurdle that did not exist before the US started borrowing abroad to live beyond its means in the early 1980s.

More below the fold...

Robert Waldmann

I thought the only thing she knew was that she is a libertarian. Now I realize she doesn't even know what the word "libertarian" means. She wrote

Will the new head of the CFPA crack down on mortgages that offer prepayment options? [skip]

Of course not. There is no constituency for such a thing except for a few crazy libertarians.

So libertarians think that the government should crack down on a product that consenting adults buy from consenting banks ? McArdle has some addled idea that she supports the market, by which she means, she opposes everything Democratic policians do. If one invented a product (the 30 year fixed rate mortgage with a prepayment option) with great success in the market, respect for the market requires banning it.

She thinks banning contracts that parties chose to sign is "libertarianism." She has learned nothing and forgotten the one thing she learned once.

Amazingly the thorough takedown at the Irvine Housing Blog, didn't mention this howler (target rich environments and all that). It does note that McMegan makes a plainly false claim about a time series, but that's birdie for the course.

Two full paragraphs long McMegan quote in case I distorted meaning by removing context after the jump.

More below the fold...

Hat tip Calculated Risk for the Alan Blinder and Mark Zandi paper How the Great Recession Was Brought to an End.

Michael Boskin writes that double dip downturns are more the rule than the exception.
http://www.project-syndicate.org/commentary/boskin10/English

I find this to be a very misleading article. What he is writing about is what happens in an actual recession when sometimes real GDP does bounce up for one quarter before resuming its fall.

But that is not the impression the article actually presents. Most readers will think he is talking about a recovery -- when the economy experiences several quarters of sequential growth and surpasses the prior peak before quickly falling into a second recession.

As he correctly points out this happened once, after the 1980 recession when the economy rebounded strongly and surpassed the prior peak two quarters after the bottom.

But it is the only example of a double dip recession in the post WW II US history --as this table demonstrates. It is a table of real GDP in recoveries with real GDP at the economic trough set equal to 100. the quarters where real GDP is less than the prior quarter are in red. The red quarters in the 1980 column are the 1981-82 recession.



As the table shows the only double dip is the 1980-81 recovery that was only four quarters long before the 1981-82 recession started. Also note that before 1982, when the great moderation emerged, the norm was for a four year business cycle of three years of recovery and one year of recession. The Fed tightened sharply during the 1980-81 recovery because they thought the 1980 recession was too mild and did not generate sufficient economic slack to sharply dampen inflation. This deliberately aborted recovery -- when real GDP surpassed the prior peak -- is the only example of what I would call a double dip recession. The Feds tightening also generated recessions in other OECD countries that Boskin cited to demonstrate that double dip recessions are more the norm than the exceptions.

I'm still trying to make up my mind if this article was; one, just a rapidly written article that is accidentally misleading; or two, an article designed to justify the NBER recession committee not having ruled that the 2009 recession is over; or three, something else.

If second quarter real GDP comes in as expected it will be about the same as the prior peak so the US economy should surpass the prior peak this year. In my book that qualifies this past year as a recovery and the NBER should declare the 2009 recession to be officially over.

by Bruce Webb

One raging argument that needs to be settled by the end of this year is what to do about the sunsetting of Bush tax cuts. Now it seems there are three general end points here: one, do nothing and they all expire at year's end; two, extend them all, perhaps permanently; or three do the Obama thing and selectively extend cuts for couples making under $250,000 while letting higher income households revert to Clinton era standards. Well I am perfectly ready to debate the political and social justice aspects of any of these but maybe am not equipped to answer the following technical question.

The argument against allowing tax cuts to expire on the top 2% is that it would be counter-productive in a time of recession presumedly because it would serve to cut back on investment by that same top 2%. But if they are all sitting on their money anyway, resisting personal spending and as the controllers of capital sitting not only on piles of corporate cash but also on huge banking reserves hence choking off liquidity via loans to smaller banks and small businesses how exactly is nicking them an extra 3% or so in top marginal rates actually creating a net retreat in investment? It seems the argument that "If you tax the rich in a recession they won't lend/invest" kind of fails somewhat if they aren't lending/investing to start with. What does Kent Conrad know about this equation that I don't know?

Gosh, if I only knew some smart, forward thinking economists to pose this question to.

The sarcasm of the title of my recent post notwithstanding, there are some things economists understand to be true that are. Among those:

• People respond to incentives

As with the Supreme Court, economists extend this principle to organizations, on the (generally correct) idea that organizations are made up of people who act in their own best interest.  (It isn’t, pace the old joke, that they wouldn’t pick up a $100 bill lying on the sidewalk; it’s that they would never believe someone would drop one there in the first place.)  This is how you get to teach courses in “Organizational Behavior” and the like—it’s not the madness of crowds if they all act “rationally” on an individual basis. (More Skinner than Ballard, but I sidebar.)

In economic models, as I obliquely ,mentioned last post, there is no risk-free arbitrage: if there were, “the market” would eliminate it, because it would mean someone was dropping $100 bills on the sidewalk, and the “the market” would make certain that person (or organization) was bankrupted, or at least suffered enough of a loss to change its behavior.

If you need proof of that:

Note that there were a nominal amount of excess reserves being held by some institutions even before interest was paid. We can treat them basically as rounding errors and systemic inefficiencies; given the skewness of the risk-reward, it has always been safer to put an extra $20,000 or so “in reserve” for late transactions, counterparty failures to deliver, or just plain calculation errors. Think of it as the equivalent of taking $60 out of the ATM when you only expect to need $40; the ability to pay taxes you forgot to calculate, upgrade a shirt from poly to cotton, or buy a bottle of water “on impulse” is more valuable (utile) than the day’s interest on that $20 (currently, just over 1/100,000th of a cent from one of my TBTF financial institutions; half that from the other). And so it goes for reserves.

But in September of 2008, the Fed decides to pay interest on reserves—including Excess Reserves. The banks can now make 25 times what they pay in interest, risk-free, just by holding onto money.  The Fed is, essentially, leaving $100 bills on the sidewalk.

Hasty disclaimer: it’s doing so for all the right reasons: the banks need to rebuild strengthen their balance sheets, and nationalization is off the table.  Every little bit helps. Conceptually, economic theory indicates that one should pay “interest,” in some form, for the right to use another’s capital. (That this breaks down in the details is subject for a discussion over tonics.)

I’m using monthly, blended data—nothing so clear as the BarCap analyst examined in the last post—but it’s fairly easy to see what happens even on that trend. Excess Reserves in October are two orders of magnitude higher than they were a few months. They more than double for November, and then stay in a fairly narrow band until around the time the “recovery” began. From August of 2009 until the end of the year, they rise again, just missing the magic $1 Trillion mark in October, breaking it in November and not dropping below again.

It’s free money; why wouldn’t the people who run the banks take it?

And they do.  So the number of $100 bills being dropped on the sidewalk would be expected to decline—save that the Fed has no liquidity constraint, even if we’re ignoring a right of seignorage. And the participants come by each night, picking up more.

The externalities of such a situation are obvious.  The most direct solutions are two: either (1) stop dropping the bills or (2) show the banks that there are better investment opportunities on a risk-adjusted basis.

Joe Gagnon (h/t Brad DeLong) advocates the former.  It is unclear (to me) whether Gagnon is advocating the full cessation of paying 0.25% on reserves or just a temporary cessation until market rates rise, but in either case he recognizes the perils of risk-free arbitrage. (Bruce Bartlett is shriller—and possibly more extreme—than I am on the matter.)

The other option is rather more problematic, not so much because the pump hasn’t been primed as that the water used was rather dirty, with a significant underestimation of the amount of rust that needed to be addressed only compounding the issue.

The result is approximately what one might have reasonably predicted in the goods and non-financial services economy: the Federal G(f) barely compensated for the State –G(s), and only the multiplier effect of that spending actually happening “expanded” anything. (Or, more accurately, some businesses did not fail so rapidly and the cost of some services did not rise so quickly as they would have ex-“stimulus.”)  The good news is that there was a barrel of water between the diving board and the ground; the bad news is that the barrel wasn’t full, so the dives had to be better than excellent, with minor injury virtually a best-case scenario.

The non-financial private-sector, in short, has not been able to recover, while the financial sector—propped up by those $100 bills—shows evermore “strength” on the back of dicey assets being held by the Fed, higher fees and lower interest rates for their “customers,” and—of course, $2.5 Billion a year in from the taxpayer.

Sooner or later, we’ll be talking about real money. For now, though, we’re just talking about the real economy.  What we have here isn’t (quite) a dead shark—as I said earlier, the private sector has performed amazingly well in the face of opposition to it from the Fed and the banks—but it has a diving tank in its mouth and Tim Geithner et al. taking shots at it will a high-powered rifle. We can only hope that former NYC “financial cop” Geithner isn’t as good a shot as another former NYC cop transplanted to a land he doesn’t like or understand.

This recession caused a severe disruption in the labor market for teen employment. The chart below illustrates the unemployment rate alongside the employment-to-population ratio for those aged 16-19 years.

The visual is quite striking: at the peak of the business cycle, December 2007, the difference between the employment-to-population ratio over the unemployment rate was roughly 17.3 percentage points (pps). In June 2010, however, the difference narrowed fully to -0.3 pps.


This is a growing problem for our youngest workers. In April, the OECD issued a press release (featuring related research) calling for government support for "youth" unemployment across the member countries:

The report’s message is that governments need to do much more to help young people. Some have benefitted from broader efforts to help the unemployed. But more policies are needed that target young people, especially those with poor education and skills. These “at-risk” youngsters now account for between three and four out of ten of all young people in the OECD and are at risk of long-term joblessness and reduced earnings.

Back in June, the LA Times argued that young workers in the US, workers aged 16-19, are being displaced by college graduates and other skilled workers; in better times these workers would not take jobs normally filled by teenagers.

The recession has been particularly cruel to those aged 16-19. However, the chart above illustrates that the downward trend is both secular and cyclical, as the employment-to-population ratio has trended down since 2000.

More below the fold...

Robert Waldmann

Brad DeLong and Paul Krugman consider the increase in the number of job vacancies to be bad news -- to be a sign that long term unemployment has made it hard to increase employment even if there are vacant jobs. The high vacancies are held to be a sign of a problem which is more persistent and less absurdly easy to deal with than low aggregate demand.


I comment after the jump

More below the fold...

As Brad DeLong has noted, Tim Geithner believes it is time for “the economy has now recovered sufficiently for government to begin to make way for private business investment.”  In short, he expects “the private sector” to do the heavy lifting in these joyous times of economic recovery.

Cynics among us—why, yes, that might well include me—would note that the private sector has had to do much of the heavy lifting for the past several quarters, in the face of what is varyingly described as “a precipitous decline in Aggregate Demand” or “a rise in unemployment.” (You say overextended credit, I say bankrupt.)  And that its performance has been, not to put too fine a point on it, exemplary in the face of the constraints presented.

Yes, I’m praising the efforts of the private sector.  Not just because small businesses especially are trying to sustain current levels of production and services in the face of tightened credit and the aforementioned AD decline, but also because they, as LBJ once observed in another context, have been put into the position of trying to run a race when the shackles are just being removed from their ankles.

I blame the banks.

Now you know it’s me.  The problem is, the evidence is on my side.  Recall that the alleged reason we needed to “save” the banks is that they are Financial Intermediaries, taking a slice out of the matching between Investors (Savers, in most economics models) and Capitalists, who borrow to recombine Capital (K) and Labor (L) into a new product that presents a better return than the old one.

Call it "creative destruction." Call it "capitalism." Call it "economic growth."

Let us ignore—though it Abides, like Earth or a steaming pile of elephant dung—that the “intermediaries” were making somewhere between 30 and 40% of the total profits in the U.S. for the past decade. We can (1) pretend that those were all payday lenders, (2) be a “first-best economist” and claim that is the way things should be, or (3) realize it’s a problem and leave addressing it for another time.*

But let us not ignore that capital supply is essential to growth possibilities. With labor abundantly available, the limitation on creating new product is essentially The Big K, and it’s “Main Street” proxy, money.

As noted above, in most models of economic growth, we treat Savings as being equal to Investment.  This makes sense: even when the Financial Intermediaries were making $3 or $4 of every $10, they were reinvesting in better systems, better technology, better analysis, and better methods.  Low Latency leads to High-Frequency Trading (HFT) which leads to…well, let’s be nice and just say “greater firm profits.”  Even if only 50% of those profits are being directly reinvested, they are being reinvested, while the rest produces at worst greater paper investments and at best a higher velocity of money and/or a multiplier (“trickle-down”) effect from increased spending.**

Put your money in a Mutual Fund, it’s Invested. Buy a stock, it’s invested.  Put it in a Demand Deposit Account (what used to be a “Savings” or “Checking” account), and it’s invested (“swept”) by the Financial Intermediary, who gives you a share of the profits in the form of interest.

Not to sound like a broken record, but Excess Reserves put a spanner in that last one.  Don’t believe me, ask economists Bruce Bartlett or Joe Gagnon.  Or just look at a graphic of M2 and what I’m calling “Intermediary Private Investment” (M2 minus the Excess Reserves maintained by Financial Intermediaries).

 

As Excess Reserves are not Seasonally Adjusted, I used the NSA version of M2.  As noted in my previous post, up until September of 2008,  the Fed did not pay interest on Excess Reserves (or Reserves, for that matter), so that excess reserves were essentially a rounding error—funds kept because of the asymmetric risk-reward of a miscalculation, or “precautionary savings.”  They tended to total about $1-2 Billion on average, rather minor in the context of $7-8 Trillion.***

But once you hit September of 2008, the growth in M2 is more than negated by the growth in Excess Reserves. Indeed, the horizontal line on the graphic above is the level of Intermediary Private Investment in August of 2008—nine months into the “Great Recession.”—isn’t exactly reaching for the skies.  But it’s also significantly higher than the current I, as opposed to S.

(Note that the NSA trend is also downward since the alleged beginning-of-recovery months of June-July, 2009. That the performance has been as good as it has been in such a context is amazing.)

When Savings=Investment, there is potential for growth. When savings go into mattresses—for good reason, especially in the pre-FDIC days—intermediaries cannot do their job so efficiently as the models presume.

What are we to call it when Intermediary Private Investment is significantly less than Savings—when not the people, but the intermediaries themselves, are stuffing money into their own, interest-bearing mattress?

I would suggest “bad economics,” but that term seems too applicable to more general conceits.

*I would rather lose what is left of my eyesight and hearing than take the second position; others, from Scott Sumner explicitly to Brad DeLong implicitly, have significantly variant mileages, which is why there’s a horserace for describing economic policies in the past decade or so. They are winning, while I received several decent paychecks over the time.

**It is left as an exercise whether the “trickle-down” effect is positive or significant.

***Another sign of improved technology is that the growth in reserves decelerates—funds are used more efficiently by the intermediaries—after ca. 1990/1991; the trend moves slightly upward in the Oughts, though that is both relatively minor and possibly due to complications related to the expansion of products offered.

op-ed by Run

“The Messenger Again Wears A Skirt (Mama Tucker on Brooksley Born)”

Taking a page from his former boss and mentor Larry Summers, Geithner behind closed doors has expressed opposition to Dr. Elizabeth Warren heading up the Consumer Financial Protection Bureau as reported by The Huffington Post.

For those of you who may not recall, Larry Summers testified in front of Congress about Brooksley Borns efforts to regulate CDS as:

“casting a shadow of regulatory uncertainty over an otherwise thriving market."

While one could not predict what Brooksley may have been able to accomplish if given the go-ahead, it is pretty certain the market place as Greenspan describing it as “self-regulating” did little to regulate itself. At least, Larry had more balls than Timothy and Brooksley would have been more proactive than either Larry or Timmy.

Make no mistake, Dr. Elizabeth Warren has asked the pointed questions needing to be asked of Timothy Geithner “Show Me The Money” on You Tube. Joining Timothy Geithner is Senator Dodd, the same as Greenspan, Levitt, and Rubin joined Larry Summers in opposing Brookley Born.

“Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,” Alan Greenspan

“I thought it was counterproductive. If you want to move forward . . . you engage with parties in a constructive way,” Rubin told the Washington Post. “My recollection was . . . this was done in a more strident way.”

“characterized as being abrasive.” Arthur Levitt
“Prophet and Loss.” Stanford Magazine, April 2009.

HEALTH CARE thoughts: The Taxpayer Advocate and others are unhappy

National Taxpayer Advocate Nina Olson is reported to be unhappy about the major IRS role in the new health care regime. Olsen believes the IRS is already overworked (she used “overtaxed” in her annual report issued this month, a great pun) and needs more money and time in order to do the job.

“Obamacare” (PPACA) requires the IRS to create an entirely new enforcement and penalty system, while the Service struggles to deal with such programs as the new home buyers credit, not to mention the regular work burying the agency.

Estimates of resource needs vary, and nothing is very concrete yet, but certainly a substantial increase in manpower and infrastructure will be necessary, very soon (and the IRS never moves very fast).

Then it gets worse.

Obamacare includes various add-ons, one of which will require additional Forms 1099 for supplies purchased to be filed by millions of businesses and entities and then sent to hundreds of thousands of businesses and entities and copied to the IRS so everything can be matched. This is supposed to minimize the “tax gap” and cut down tax evasion.

(For example, I will have to send a 1099 every year to Staples.)

Problem is, Congress clearly does not understand how tax evasion really occurs and this will distract the IRS from more important work, and clog the processing capabilities for an eternity.

(I am quite certain Staples is already reporting my purchases.)

In a strange twist, credit card purchases are apparently exempt. This could be because credit cards will be traced via another route (worrisome) but more likely because some bank lobbyists got inside the sausage factory (so I could eliminate the 1099 to Staples by using my credit card).

The story of the health care reform bill is just getting started, and lots of problems are ahead.

Tom aka Rusty Rustbelt

Rdan here...Linda Beale adds a comment I lifted from an e-mail:

Its no secret that the IRS Is overtaxed—its becoming the primary agency for all kinds of jobs—tax collection, sure, but also health, social security, environmental, aging generally…..

and as for the 1099s, yes, that is another paperwork mountain that will go to the IRS. Fine if it is all computerized and matched, but that may be a big if.

The problem with most enforcement, these days, is that it takes quite an effort to do anything to catch up with all the effort that is being put into nonenforcement.

Linda M. Beale

The Economist asks:

Is America facing an increase in structural unemployment?

and invited economists answer here.

UPDATE: Jason Linkins at one of the non-Breast-Enhanced sites of the Huffington Post did a burlesque of which I can only dream on the same piece.

Via Chris Hayes's Twitter feed (and he got it from David Sirota), the following is from "No more 'me first' mentality on entitlements":

While it does not happen often, our political system is capable of making unpopular decisions that are in our collective best interest. In 2008, during the most severe financial crisis in 80 years, Republican and Democratic leaders in Washington came together to do something deeply unpopular: bail out the financial system via the Troubled Assets Relief Program. These leaders understood the consequence of inaction was economic devastation for Americans. Passing TARP was the right thing to do.

[B]ailing out the financial system went directly against our shared beliefs in free markets and fair play. While the vast majority of Americans did not cause the financial crisis, we all had to sacrifice to stop it. Such a cultural violation has angered people nationwide, which makes cutting entitlements more difficult because it will again betray our sense of fairness.

The challenge of entitlements is more difficult than the financial crisis: First, we must reach consensus to make cuts before the fiscal crisis is upon us....If we wait until the bond market shuns Treasurys, the economic consequences could be dire. Virtually overnight, we could have far less money to spend on priorities such as defense, education and research.

Cutting entitlement spending requires us to think beyond what is in our own immediate self-interest. But it also runs against our sense of fairness: We have, after all, paid for entitlements for earlier generations. Is it now fair to cut my benefits? No, it isn't. But if we don't focus on our collective good, all of us will suffer.

I've resequenced the above paragraphs a bit, but remained faithful to the argument as presented.

The author: Neel Kashkari, who is described as "a managing director of the investment management firm PIMCO, served as an assistant Treasury secretary during the George W. Bush administration. He led the Office of Financial Stability and ran the Troubled Assets Relief Program until May 2009."

His sacrifices for the sake of TARP are well known; indeed, documented in the paragraph above. And, gosh, isn't it nice that he pushes an argument that would make fixed-rate securities—you know, the thing PIMCO is famous for trading—more valuable?

It's good to know that "Me First" needs to change, and nice to see the Post presenting a prime example of why.

Data 101

US new home sales rebound in June in the Financial Times today and New Home Sales: Worst June on Record at Calculated Risk.

Both headlines are "true".

Much of the same data sources and figures are used. The differences in information are not as stark as the headlines suggest after reading the articles. CR offers a broader historical context but that context is not left out of the Financial Times. Both appear to offer information for the same purpose, as information (ie. not information from National Realtors Assoc.). Yet I come away with very different feelings about the nature of this news in a casual reading.

by Mike Kimel

Cross posted at the Presimetrics Blog.

A Look at the Current Recession, A Signpost for the Start of Recessions & Some Thoughts on the Likelihood of a Double Dip

These days there’s a lot of talk about whether the recession is going to double dip. And frankly, there’s a lotta yadda yadda, some bad news, and some not-so-bad news. You’ve heard it all before, you don’t need to hear it again from me, and frankly, I’d like to take a different approach. Before launching in, links to all data sources will be provided at the bottom of the post.
Let’s get started with a look at the pace of recoveries from recessions and how the current one compares to others. The graph below shows the percentage change in real GDP per capita each quarter from the end of a recession. Every recession since 1947, the first year for which quarterly data is available, is depicted.

Figure 1

The graph makes a few things apparent. First, it is clear that the double dip or no double dip, the current recovery is pretty feeble. Second, the most recent recoveries have all been pretty feeble.

Things look even worse when one looks at recoveries from deep recessions:

Figure 2



Part of this feebleness is no doubt due to the government’s policies. As I’ve noted before, the data shows that when tax rates were cut during or right after a recession, recoveries were slower and shorter. And both GW and Obama were happily cutting taxes of one sort or another during the latest recession. And of course, the government spending they threw on as a stimulus was in large part ill-conceived, going to benefit primarily some of the parties most responsible for the meltdown, buying toxic assets at inflated prices, and trying to prop up housing prices that should have been allowed to fall.

More below the fold...

Robert Waldmann

Oh good, Kevin Drum and Matthew Yglesias disagree. This is bound to be interesting.

Drum remembers the good old days when liberals had less respect for the standard results of simple neoclassical economic models.

The specific issue is that firms are using credit scores to decide who to hire. This can trap some people as they can't improve their credit score without a job and can’t get a job with their current credit score. Kevin Drum thinks the practice should be banned. Matthew Yglesias isn't sure.

More below the fold...

The New York Times and The Guardian report on the posting of archival documents by Wikileaks. Reporting appears to be similar so far until they are read and sorted.

by Bruce Webb

Over at Open Left they are revisiting the concept of Conservatism and whether it is a coherent philosophy. And after concluding that Conservatives by and large have failed to come up with their own definition proceeded to advance some of their own, that it is about enabling aristocracy, or institutionalizing suffering, or whatever. What is Conservatism: Conservatives Have No Idea. Well I don't think we get very far simply dismissing conservatism as a pathology, in particular it doesn't get us very far in explaining small town and rural conservatism and particularly that of people who are not really in a socio-economic position to oppress anybody, the normal explanations based on race and economic class more or less breaking down in places like North Dakota.

Is it possible to come up with a common denominator of Conservatism, one that doesn't reduce to institutionalized capitalist racism (which conclusion unfortunately is where too many of us liberals tend to gravitate to)? Well I think so, and probably not surprising anyone who has read my stuff, I locate it in a time and a place far detached from 20th century America. More in extended entry.

More below the fold...

Robert Waldmann

For decades, I have been advising Democrats to focus attention on the progressivity of the tax system. This is an issue where the vast majority of US adults totally disagree with the Republicans and which people care about. My policy proposal and political strategy is to increase progressivity increasing taxes on the rich and cutting taxes on everyone else. This is still too politically effective and sound policy demagogic for many mainstream Democrats – it seems that the Democrats are debating whether to try to do this. However, they have decided to make the Republicans debate extending Bush’s tax cuts for families with income over 250,000 and individuals with income over 200,000. This means they have decided to campaign on tax increases (possibly paired with tax cuts).

I have long claimed that this is not just good policy but also good politics. Polling is clear, most US adults say they support this. The issue is whether the Democrats will get their message across. Simply put, they are proposing a tax increase on the highest income 2%. Will Republicans convince the public that Democrats are increasing their taxes ? The Republicans managed exactly that in 1993 and 4.

To me it looked good so far, and I get to reasons to worry after the jump.

More below the fold...

by Mike Kimel

Presimetrics on, er, in Parade (Magazine)

Cross-posted at the Presimetrics blog.

For a long time, I knew the date that Presimetrics, the book I wrote with Michael Kanell, was going to be released – August 11. The date was recently pushed back later in the month. But, the other day some interesting news came up…

Parade Magazine – the Sunday news magazine – will have a quiz based on the book in their Intelligence Report column on August 8th. Parade is distributed with more than 400 newspapers and has a circulation of over 32 million, the largest in the U.S. I believe they will also set up an on-line Q&A with Michael Kanell and I where readers can write in with what is on their mind.

Obviously, all of us involved in the book are very excited by this unexpected development. Black Dog & Leventhal, our publisher, is naturally moving up the release date so I believe the book is now expected to ship at the end of this month.

FWIW, I’m not that good at self-promotion and tooting my own horn, but I think our book can make a contribution to the discourse. Not only do we make a systematic effort to point out graphically what happened across a wide range of issues (and why), we emphasize time and again the importance of looking at information in an easy, intuitive, and methodical way. We think these are things that can have a big effect on society as a whole. If you believe in our approach, please help us get the word out!

Thanks!

Mike

For those interested in more information on job creation in the Employment Dynamics data
base these three article provide very good information.


Cordelia Okolie, “Why Size Class Methodology Matters in Analyses of Net and Gross Job Flows.” July 2004 Monthly Labor Review

Jessica Helfand, Akbar Sadeghi and David Talan, “Employment Dynamics: Small and Large Firms Over the Business Cycle.” March 2007 Monthly Labor Review

Tim Kane, The Importance of Startups in Job Creation and Job Destruction (PDF from the Kauffman Foundation Research Series, July, 2010)


All three are pdf files and for the second article the link takes you to the Monthly Labor Review where you can directly access the article.

The subject is more complex than generally thought as different methodologies can create significantly different results.

Standard analysis is that military spending for WW II provided the significant Keynesian stimulus that ended the depression. I have nothing new to add to that debate, but I recently looked at the data and found it somewhat surprising.

The surprise was not in what happened to military spending as the military swung from 0.5 million personnel in 1940 to 11.4 million in 1944 and back to 1.6 million in 1947. The total population grew from 132.1 million in 1940 to 144.1 million in 1947.



Rather the surprise is what happened to civilian real GDP ( real GDP less real military spending). Real civilian GDP fell -18.4% in 1942 and -14.8% in 1943. The peak to trough drop of -26.9% was almost as severe as the -30.4% drop from 1929 to 1933. Of course this is tempered somewhat by a -0.5% and -2.4% drop in the civilian population in 1942 and 1943, respectively. No wonder they imposed rationing of many goods, they just were not available. But civilian real GDP rebounded 0.4%, 17.4% and 58.5% in 1944, 1945 and 1946, respectively.
Total real GDP fell -1.1% in 1945 and -11.0% in 1946. Obviously, this recession like the major recession of 1922 was driven by the drop in military spending. This rebound took the civilian economy back to the 5.6% trend growth line that prevailed from 1933 to 1950. I'm not going to make any observations about what this means for economic analysis-- that can be done in the comments -- but the data is very interesting. The ability of the civilian economy to rebound so strongly clearly reflected the high savings -- partially forced -- during the war.
Is that just the opposite of what we have now?

More below the fold...

It was their idea, so it's no surprise they like paying interest on reserves, even excess reserves:

For quite a while, the Fed was quite happy to have that money on its books. Indeed, the power to pay interest on reserves was considered a key tool to keep control over all the liquidity the Fed pumped into the system during the financial crisis. The Fed wanted to see bank lending increase, but in a controlled fashion, so as not to fan the flames of an inflation surge.

But as worries about the outlook have risen, the game has changed. Some see a move to drive all those reserves into the economy as a key way to produce better economic growth. Markets got to thinking Fed Chairman Ben Bernanke would indicate this as a possible path when he testifies before the Senate Wednesday and the House of Representatives Thursday on the economic and monetary policy outlook.

Economists, however, think ending the interest on reserves policy would be a bad idea.

Right, because the $2,534,722.22 a year paid in interest on $1 Billion in excess reserves is a drop in the bucket for the U.S. Federal deficit.

And because the risk-free rate of return that features in so many economic models should be different for intermediaries (financial institutions) than wealth-creators (businesses).

And because "excess reserves" are money issued by the government which is inflationary because of the multiplier effect of money—which, of course, assumes the money is being invested. (As this money is, in taxing our tax dollars and giving them to Vikram Pandit, Ken Lewis, Lloyd Blankfein, and Jamie Dimon [in descending order of theft; YMMV].)

And, of course, because that $1 Billion that is not being used in the economy would only produce about $5-8 Billion in GDP, which is roughly, what, 50,000 to 80,000 new jobs?

But, of course, banks have better use for the money than potential workers.

[Barclays Capital’s Joseph Abate] noted much of the money that constitutes this giant pile of reserves is "precautionary liquidity." If banks didn't get interest from the Fed they would shift those funds into short-term, low-risk markets such as the repo, Treasury bill and agency discount note markets, where the funds are readily accessible in case of need. Put another way, Abate doesn't see this money getting tied up in bank loans or the other activities that would help increase credit, in turn boosting overall economic momentum. [emphasis mine]

Oh, well, since they're not going to lend the money anyway, we should have no trouble paying them interest on it. What is The Fed other than a mattress stuffed by tax dollars?

The key phrase is "precautionary liquidity." If you assume that the recovery started in June or July of last year,* then you would expect "excess reserves" held for "precautionary liquidity" to have declined over time, as the need for "precautions" is reduced as the economy becomes safer. But that hasn't been the case.

Choose one (or both) from: (1) the banks don't believe the economy is recovering or (2) the banks are holding assets on their books at higher levels than they know they are worth, and are therefore using "excess reserves" to cover real losses until they can't any more.


It is unclear whether Abate sees the banks's unwillingness to be intermediaries as a feature. But at least he knows not everyone is doing it.

Abate buttressed his argument that banks really just want to stay liquid by noting who is holding reserves at the Fed. He said the 25 largest U.S. banks account for just over half of aggregate reserve levels, with three by themselves making up 21% of the reserves.

So the biggest of the Too Big to Fail banks have decided not to act as financial intermediaries, preferring instead to continue feeding from the taxpayer trough (where the $25MM in interest really is a drop in the bucket) and/or pretend that they are more solvent than they really are.

And, according to the Wall Street Journal, economists believe we should continue to pay those banks for misvaluing their assets and refusing to perform their economic function.

The economic theory I learned is that capital is paid its marginal product. The marginal product of those excess reserves is zero, while the required reserves are intended to explicitly provide "precautionary liquidity."

Unless the TBTF banks are arguing that the Fed's current Reserve Requirements are too low—a possibility, perhaps, though the FT cites evidence contrariwise—the basis of all economic and financial theory indicates that they should receive no interest on those reserves.

An "economist" who says otherwise is either lying or selling something.

*I would argue—see yesterday's post—that June 2009 is rather eliminated by the non-recovery of more than half the states's job markets a full year later.

CoRev brought up the claim that small firms account for 70% of job creation in the US economy.

Several years ago the Small Business Administration and Census began an annual survey of employment by firm size.

You can find the data here:

http://www.census.gov/econ/susb/historical_data.html

Here is a table of what the joint survey of employment by firm size found. From 1988 to 2006 -- the most recent year published -- small firms (under 500 employees) share of total employment fell from 54.5% to 50.2% of private employment. Over the entire period employment by small firms grew 13.3% while large firms employment grew 21.8%.

That sure does not look like small firms account for 70% of employment growth.

Care to show us the data supporting the claim that small firms account for 70% of job growth.


The other interesting results of the survey was that payroll per employee in large firms averages 125% of that in small firms. The Small Business Administration published a study that claimed small business account for over 50% of business real GDP. They based this result on the claim that productivity was much larger in small firms. But if small firms salaries are so much smaller than large firms salaries I find it hard to accept that their productivity is higher.




In the comments I was sent to the BLS to look at the business Dynamics data. I confess I was familiar with the data, but had never looked at it in terms of firm size. Yes, in a summary statement the BLS says that small firms account for some two-thirds of job growth over the period 1993-2009 that would seem to support the claim that most jobs are created by small firms. But within the BLS business dynamics database they also publish data on the level of employment by firm size. This data agrees roughly with the SBA-Census data that most employment growth was in larger firms. Obviously this is inconsistent with the same source -- BLS Business Dynamics -- stating that most jobs were created by small firms.

To be honest, I am confused. Can anyone explain this?

More below the fold...

Dodd-Frank Wall Street Reform and Consumer Protection Act (Enrolled Bill [Final as Passed Both House and Senate] - ENR)

Bill Text
111th Congress (2009-2010)
H.R.4173.ENR

Update: The link did work this morning, but was temporary it seems. I will correct the link and update again.

Update: Link works to hyome page, then when at Thomas there is a link on the right for HR 4173 in latest bills....search works as well.

Jim Hamilton used the Federal Reserve Flow of Funds data to present a question: who will buy “the additional $8 trillion in net new debt that would be issued over the next decade under the CBO's alternative fiscal scenario.”

I thought that the analysis was curious and too "partial". If one believes the deleveraging story, then domestic private saving is going to rise. The answer to his question seems pretty obvious…

Let’s say that consumption goes back back to the 1960’s-style 62% of GDP, then get ready for household Treasury accumulation. Spanning the decade of 1960, households held on average 30% of the Treasury's liabilities.

A simple example illustrates my point. If the Treasury’s book doubles to $16.5 trillion, and the household share of Treasury holdings rises to 30% – as of Q1 2010 the stock of Treasuries outstanding was just about $8.3 trillion (see L.209 here) – then households will accumulate over $4 trillion of those new Treasuries. That's just households, and holding all else equal (like financial funds and businesses).

So the answer is: the domestic private sector.

Rebecca Wilder

More below the fold...

The WSJ Economics Blog, discussing June 2010 unemployment rates by state, uses the headline "Most Regions Show Improvement"*

I suppose we should be encouraged by the headline and not look at the text:

Washington, DC and 16 states recorded jobless rates in excess of 10%. North and South Dakota continued to have the lowest rates in the country, at 3.6% and 4.5%, respectively.

Despite the improvements in the jobless rates, 27 states posted a decline in payroll employment, while 21 notched increases. Montana and Alaska had the highest percentage increase from the previous month, while New Mexico and Nevada reported the largest percentage drops. [emphasis mine]

Less money is being paid in a majority of states. The clearest explanation, then, remains that the "decline" in U-3 reflects people dropping out of the work force, not being employed.

It gets more interesting if you look at the Year-on-Year Change. There, 28 of the 50 states show a U-3 unemployment rate that is higher than or equal to last year's. (The District of Columbia's U-3 rate declined by 0.1% over that time, so it is only 10.0% now.)

And the improvements are, lest we forget, from a high plateau. The 14 states with the greatest drop in their unemployment rate year-on-year have an average current rate of 8.4%—and a median rate of 8.95%, the average being skewed by the above-mentioned North Dakota, with it's 9.3 people per square mile and total population under 650,000, 37% of which are not of working age.

Dropping North Dakota from the "biggest YoY winners" moves the median current unemployment rate to 10.0%, while the average is slightly above 8.75%.

If this is a recovery, then my December 2009 prediction that this will turn out to be a "cursive-zed" recession may turn out to be optimism.






*Also, "Jobless Rates Drop in Most States."

Tom aka Rusty Rustbelt

HEALTH CARE - PUBLIC POLICY DILEMMA

Fifty years ago much mental illness treatment was done in-patient in state run facilities, and many of them were hellholes (One Flew Over the Cuckoos Nest was probably too positive compared to what I saw early in my career).

The de-institutional movement (starting in the late 60s) caused a build up of community based services, and in combination with better therapies has made a much better (although not perfect) system. In many areas the mental illness and substance abuse facilities are run through common governance, some areas not so.

But there are still people who need in-patient services, especially those who also have chronic physical health problems, and there are too few beds and too few payment paths to accommodate those patients.

So what to do?

Some are being dumped into geriatric nursing homes, and not surprisingly the results range from not very good to disastrous. Exact numbers are hard to come by, because the reporting mechanisms do not always separate those admissions. Generally we hear about these cases after something goes terribly wrong and hits the media.

More below the fold...

By Daniel Becker


An ad I've been seeing recently aired by BP is promoting how much work they are doing to clean up the oil spill. It is designed to leave you feeling comforted that they are on top of it, they are cleaning it up in a massive effort. Say, 29 million gallons of oil and water sucked up. Wow. 29 million gallons.

Ever think about how big that is? Every stop to get out the calculator and crunch a few simple numbers to see how big 29 million is? Did you ask: I wonder how much that is in relation to the guesstimated barrels of oil spilled? Do you even think you need to know? Did it occur to you that maybe, in order to make an informed voting decision, you should see just how big a mess the oil spill is by comparing it to the 29 million gallons BP is impressing people with? You know, figuring it out because there is the possibility that this oil spill thing really is more than you might think as it relates to catastrophes to tell your grand kids about.

No? Yes? Maybe? I don't know?

More below the fold...

Hat tip Calculated Risk: The WSJ reports Senate Set to Extend Jobless Benefits. This is an extension of the qualification dates for existing tiers of extended unemployment benefits, not additional weeks of benefits.

by Dale Coberly


“SOCIAL SECURITY POLICY OPTIONS” JULY 2010

A USER FRIENDLY GLOSS ON THE CBO REPORT

The first thing that strikes me about the CBO report is that the language is unnecessarily negative. They tell you that Social Security is running out of money. They tell you this three times in three ways. They don't tell you that this means a whole lot less than you think it does.

They say “for the first time since...1983...outlays will exceed...annual tax revenues.” They don’t tell you that in 1983 the tax was increased exactly so that revenues would exceed outlays, increasing the size of the “Trust Fund,” in order to create a bigger reserve to carry Social Security through times, like the present recession, when outlays exceed revenues.

It has long been known that through this increased Trust Fund the baby boomers have paid in advance for their own retirement. But CBO just forgets about the Trust Fund and says “starting in 2016...the program’s annual spending will regularly exceed its revenues.” Forget about the two and a half trillion dollars the program has in the bank.

CBO tells you that “the trust funds... will be exhausted in 2039.” But they don’t tell you that Social Security can go right on paying benefits on a “pay as you go” basis, just the way it was designed to do. This could require a reduction in the “replacement value” of benefits, but not a reduction in their “real value” as compared to today’s. The “replacement value” is the amount of the monthly benefit as a percent of the worker’s adjusted average lifetime monthly income. (The “adjusted” income includes an effective interest that is equal to inflation plus the increase in average national per capita real incomes for each the year since the tax was paid on that income.) The reason the reduction would be needed is that the next generation of retirees are expected to live longer than the last. To avoid a reduction in monthly benefits, the same replacement rate could be paid, over the longer life expectancy, with a payroll tax increase at that time of about 1.9% of payroll for each the worker and his boss.

They do manage to tell you in a footnote that to bring Social Security "into actuarial balance over the 75 years, payroll taxes would have to be increased 1.6%." This is about eight dollars per week for a worker making 50,000 dollars per year. They are not in a hurry to tell you that there is no need to increase the tax that eight dollars per week today. There is no need, and much harm in raising the tax too soon. All it would do would be to increase the Trust Fund... increase the amount of money that Congress "borrows" from Social Security and then blames Social Security when it doesn't want to pay it back: "you should have taken the bottle away from me. you know I can’t be trusted."

The eight dollars doesn't need to be paid today. It can and should be phased in over about forty years. A rate that would never be "felt" as more than 80 cents per week. but would average twenty cents per week per year while incomes were going up an average of ten dollars per week per year. (Again, these amounts are in today's money.)

More below the fold...

by Linda Beale
crossposted with Ataxingmatter

Goldman's Settlement with the SEC

On July 15, it was announced that Goldman had reached a settlement of the SEC's charges regarding material misrepresentations in an Abacus CDO deal, acknowledging that its materials were "incomplete". See Chan & Story, Goldman Pays $550 Million to Settle Fraud Case, NY Times (July 15, 2010).

Goldman sold the deal to buyers without informing them of the involvement of the counterparty to the deal. The counterparty was Paulson, a hedge fund manager, who had personally selected "most likely to fail" mortgages on offer and gotten Goldman to create a CDO package with those deals in it so that he could bet against the deal. The bet against the deal was a naked credit default swap. The person who bought the other side of Paulson was essentially buying a deck intentionally stacked against him, rather than a more diversified cross-section of subprime mortgages. Not surprisingly, that particular Abacus deal was particularly bad and went south within months of its creation and sale.

Now, in my view naked credit default swaps should be illegal. They are nothing but an insurance contract when the protected insurance buyer has no insurable interest in the reference property. As many have observed, such a situation presents a dangerous moral hazard-- it is like letting an arson take out an insurance contract on the most expensive house in the neighborhood and then reap the benefit of the payout after he burns the house down. Nonetheless, the financial lobby is extraordinarily powerful, and Congress did not yet bite the bullet to ban naked credit default swaps in the financial reform package. (I say "yet" because I am convinced that we must dampen the use of such derivatives or stand by to witness destruction of both financial system and economy through continuing crises fueled by rampant speculation.)

More below the fold...

by Mike KImel
Cross-posted at the Presimetrics blog.

CountryWide goes Kafka - a First Person Narrative

This post is going to be a bit different, at least for me. Generally I like to write things that are more data oriented, and that involve some pictures and figures. But this is a little story that happened to my wife and me, only a few weeks back, and I think it provides a bit of an illustration about how the economy works, or doesn't, in these post-Housing Bubble days. Its an absurd story, it makes no sense whatsoever, it cannot possibly happen in a civilized country, much less one that calls itself capitalist, but every word is true. So here goes...

My wife, deep into her third trimester of pregnancy, went out to run some errands with my mother and a family friend. It was pouring, and when they got back to the house, they saw a piece of paper stapled to a little tree at the end of our driveway. It was a notice from the Sheriff's Department that our house was going to be auctioned off on October 1st.

Now, obviously it had to be a bad joke. After all:

1. We had only bought the house the previous year and were about two months ahead on our mortgage.

2. The plaintiff was CountryWide, which is not the company with which have a mortgage.

3. The name of the defendant from whom the home was to be foreclosed was not the legal owner of the house - that is to say, my wife or I. In fact, the name of the defendant was similar to the name of the previous owner of the home, but the spelling was definitely off.

4. From what we heard of Sheriff's auctions, notices tend to be left on the door. Not stapled to a tiny little tree in the pouring rain.

But when my wife checked the Sheriff's site on-line, it turns out that, indeed, our home was slated to be auctioned off on October 1st. Multiple calls to the Sheriff's office were not returned. As to CountryWide - who exactly do you call at CountryWide? There's no "Press 4 if you have no relationship with CountryWide but we're trying to seize your house anyway." Ironically, if we did have a delinquent CountryWide mortgage, getting somewhere with them might have possible as any of their call center representatives would have been able to handle taking a payment. But the situation we were in, that they put us in, isn't one of the options that their call center seems equipped to sort out.

More below the fold...

by Linda Beale
crossposted with Ataxingmatter

Overpaying CEOs

The Wall Street Journal reports today on a study by three academics on CEO pay. They are Streedhari Desai (Harvard), Jennifer George (Rice) and Arthur Brief (Utah), and their study is "When Executives Rake in Millions: Meanness in Organizations" (available on SSRN). Here's the abstract:

The topic of executive compensation has received tremendous attention over the years from both the research community and popular media. In this paper, we examine a heretofore ignored consequence of rising executive compensation. Specifically, we claim that higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers. We present findings from two studies - an archival study and a laboratory experiment – that show that increasing executive compensation results in executives behaving meanly toward those lower down the hierarchy. We discuss the implications of our findings for organizations and offer some solutions to the problem.

Trends in this country are ominous.

1. Wages for the middle class have stagnated, especially with the waning power of labor unions to demand an adequate share of corporate revenues (a result of the decades-long effort of neocons and multinational corporations to kill labor unions and make new unionization efforts in previously nonunionized industries very difficult through generous provisions for employer control and significant hurdles for union approval).

2. The middle class has therefore depended more on debt than it should, a dependency that has been encouraged by the financialization of the economy and the hunger of the financial institutions and shadow banking system for "product" from which it can reap multiple layers of fees and excess profits. That easy flow of credit led directly to the financial crisis that caused the Great Recession.

More below the fold...

Mark Thoma posted yesterday Is Galbraith Right that Deficits are Never a Problem? on Paul Krugman's NYT piece I Would Do Anything For Stimulus, But I Won’t Do That (Wonkish) on MMT and soveriegn debt (using Angry Bear's posting of Jamie Galbraith's testimony to Congress as a link), and has included Jamie Galbraith's response. It is worth reading.

Ed Harrison at Creditwritedowns weighed in here.

Calculated Risk has posted a 5 series on Sovereign Debt both historical and comparative internationally.

More to come from other economists.

by Linda Beale
crossposted with Ataxingmatter

tax extenders legislation

As most everyone knows, the Bush tax cuts were passed as temporary measures, with a provision sunsetting the cuts at the end of 2010. Back when the GOP controlled Congress passed the series of Bush tax cuts, they knew that they were creating a whopping deficit but said that deficits don't matter. They were worried enough about appearances, though, to make the tax cuts temporary and be able to claim lower deficits than if they had been made permanent from the outset. They were quite clear that they planned to make the tax cuts permanent eventually, but they figured that revenue losses of $1.3 trillion or so in the first ten years of the tax cut were about all that they could get by with.

In the meantime, a few things came along that upset the applecart. First, the deregulatory agenda combined with casino banking to create a "perfect storm" financial crisis that quickly mushroomed into a deep recession. In Bush's last years in office, billions were committed to bailout the financial system and plans were begun to put in place an economic stimulus package to attempt to thwart another depression along the lines not seen since the 1930s. Second, the ongoing wars in Afghanistan and Iraq continue to swallow billions annually. In that context, making the revenue reductions permanent starts to sound like crazy thinking.

Obama campaigned (somewhat foolishly, from my perspective) on retaining the tax cuts for those in the lower four quintiles, but letting the cuts lapse as scheduled for the wealthiest Americans ($250,000 or more in income). The fact is that we have huge revenue demands from the banking crisis/recession and the ongoing wars, and we cannot afford to continue a foolish fiscal policy by extending the tax cuts permanently.

One of the obvious items that should be allowed to lapse is the treatment of dividends as net capital gains subject to the preferential rate. GOP Senators, like Chuck Grassley from Iowa, are arguing that all of the tax cuts must be extended, even for the rich. See Heflin, Senate GOP: Small Businesses Would Suffer if Tax Cuts Expire, July 13, 2010. They claim that we shouldn't tax the rich, because the rich will put their money into small businesses and that will be good for business: taxing the rich would mean that it would "dry up the funds of small-business owners and make it harder for them to expand their operations." Id.

They even got Holtz-Eakin--a Republican economist--to argue that we need to extend tax breaks for the wealthy on the old claim that tax cuts foster economic growth. This is like the claim that the estate tax causes the loss of small family farms--it sounds good, is picked up by the media, fits the ideology of the "starve the beast" crowd, but it has the unfortunate attribute of not being true. We have achieved growth more consistently in periods of higher taxes, not vice versa. The "theory" on which the "tax cut equals growth" rests is a mixture of outright buffoonery (the Laffer curve "idea" drawn on a napkin and treated as though it were a scientific hypothesis by the Tax Foundation and Cato Institute types) and irrelevance (the Chicago School economic theory that makes assumptions so far removed from reality that it cannot be considered a reliable instrument for policy considerations).

Update: Rdan..Republican tax nonsense is worth a read and has a great chart.

More below the fold...

by Linda Beale
crossposted with Ataxingmatter

Senate passes HR 4173 finance reform conference report
[updated to add information on Geithner's opposition to Warren 7:12 pm]

On a 60-39 vote, the US Senate passed the Dodd-Frank H.R. 4173 financial reform conference report today. While the bill imposes some new restrictions and creates a consumer protection agency, most of the impact will come (if it comes) through regulation as the new systemic risk council oversees bank issues and decides whether activities of banks pose sufficient risk to be regulated or eliminated. Capital requirements and leverage requirements, for example, are not directly set in the bill. The US is likely to settle with the capital and leverage standards set by Basle III, the discussions going on now at the Bank for International Settlements regarding updating of the 2004 standards. In those talks, thje banks lobbying are making inroads on the fairly tough standards originally proposed in December, as officials yield to fears (cited by the banks) that tough capital and leverage requirements will dampen the economic revival. See, e.g., Damian Paletta and David Enrich, Banks Gain in Rules Debate: Regulators Seen Diluting Strictest New 'Basel' Curbs; Credit Crunch Fears Remain, Wall St. Journal, July 15, 2010, at A1.

More below the fold...

by Linda Beale
crossposted with Ataxingmatter

Tenneco CEO's Wall St. Journal on "American Capitalism"

Gregg Sherrill, the CEO of Tenneco, Inc., seems to think that Capitol Hill and the White House are "bashing" the "entire free enterprise system"--saying that the business world has "taken a pounding on Capitol Hill and at the White House" but except for the copmanies that were part of the "easy credit and disguised risk that so spectacularly collapsed", American business "has nothing whatsoever to apologize for." Speaking up for American Capitalism, Wall. St. Journal Op-Ed, Jul. 15, 2010, at A17.

But the op-ed is a straw man argument tilting at windmills.

First, Sherrill notes a study cited by The Economist that finds that most Americans "prefer the free enterprise system to any collectivist alternative." Reading that, you'd think that there was a major debate in this country about switching from capitalism to socialism. But there's no such thing going on. Nobody is pushing a socialist agenda, in which the government would permanently take over means of production. Many politicians are reluctant to speak out strongly for the traditional American values of a market that is regulated for the common good rather than allowing corporate titans (and their wealthy elite shareholders) set the laws to suit themselves. In fact, the push for the last four decades (dating from Reagan's swearing in) has been the opposite--to change America's system of tempered capitalism to one of no-holds-barred "free markets" along the lines espoused by the Chicago School's Milt Friedman, who didn't care much about democracy but did care a lot about starving government and letting capital have a free reign no matter what the detriment to ordinary folks.

More below the fold...

Yves Smith offers several ideas worth considering on the future of Elizabeth Warren and protecting consumers at Elizabeth Warren in Treasury Crosshairs Again.

by Tom aka Rusty Rustbelt

BOOMER (LACK OF) BUSINESS ETHICS

I recently had lunch with a friend of mine, one of the most sophisticated financial planners in the country. He has an interesting practice, about half wealthy executives and entrepreneurs, and the other half labor union pension plans. He made a huge ton of money for most of them by anticipating the financial meltdown and bear market.

As we started lunch he launched into a tirade.

"Tom, when we started in this business most of our clients were from the WWII generation, and they were honest, loyal, diligent and easy to work with. Sadly they are dying off.

Our own generation, the boomers are a bunch of self-centered, disloyal, unfocused, undisciplined bunch of greed heads. I hope Generation X does better."

I agreed with most of this, as I have seen a rapid deterioration of business ethics over the past 35 years. To be fair though, there are many ethical boomers, including my friend. Just not enough.

No surprise that most of the key players in the financial meltdown were boomers, with a helping hand from Gen X.

Can we turn this around, or is the self-indulgent drug, sex and rock-and-roll ethical framework now more or less permanent?

While the yield curve is widely followed and recognized as a leading indicator of the economy, another interest rate measure--quality spreads -- is not as widely recognized as a leading indicator of the economy.



Maybe that is because it is not quite as reliable as the yield spread and has also given false recession signals. However, quality spreads do move in lockstep with another widely used measure of economic strength, industrial capacity utilization.

Capacity utilization was unchanged last month as manufacturing capacity utilization fell from 71.7 to 71.4 while capacity utilization in mining rose from 85.8 to 86.1 and in utilities it rose from 80.2 to 82.3. Also note that industrial capacity was unchanged last month while it has fallen -0.5% over the past 12 months. Do not read the fact that industrial capacity was unchanged as a signal that the decline in actual capacity is ending. With a 0.5% annual rate of decline it shows up in the capacity index falling one month and being unchanged the next month. This was just an unchanged month.


Total industrial output only rose 0.1% last month after rising 8.2% over the past year. The small gains consisted of a -0.4% drop in manufacturing output while mining and utilities production rose 0.4% and 2.7%, respectively. Essentially the only sector to experience solid gains was energy as even semiconductor output fell 0.2%.


Quality spreads imply that this is just the first of multiple weak industrial production reports.
The normal cyclical pattern is for industrial production to rise strongly in the recovery phase of the cycle until the prior peak has been surpassed. But it is now starting to look like output growth is flattening out well short of the previous peak.

by Rebecca Wilder

As a global economic slowdown is very likely underway, inflation expectations are being watched closely.

David Beckworth comments on inflation expectations in the US using the Treasury Inflation-Protected Securities (TIPS) market (he commented previously on an alternate measure of inflation expectations at the Federal Reserve Bank of Cleveland). He argues that the aggregate demand effect is the dominant factor dragging US inflation expectations.

However, inflation expectations are falling globally. The chart above illustrates the 10-yr break-even expected inflation rates for the UK, Germany, Canada, Italy, and the US using their respective inflation-indexed bond markets (TIPS in the US). Notably, declining inflation expectations is not specific to the US.

Of interest, the onset of the downward trend across break-even inflation rates coincides with policy announcements in Europe:

1. the bailout of Greece, and
2. the European Financial Stability Facility (EFSF)
   

Inflation expectations in Italy has taken the biggest hit, falling 55 basis points since May 2 2010 (as of June 12, 2010). But the trend has been broad-based, hitting even "sticky" UK inflation expectations.


The chart illustrates the same 10-yr inflation expectations rates as in the first chart but indexed to the start of 2010 for comparison.

Market participants in the UK, Germany, Canada, Italy, and the US reacted similarly to the European policy measures. The most likely reason for the drop in Eurozone country inflation expectations - Germany and Italy - is the direct adverse impact on aggregate demand of fiscal austerity measures and the indirect impact via trade. In the UK, Canada, and the US, the decline in the euro will have lagged and adverse impacts on relative trade patterns.

More below the fold...

CBS News reports:

Wallace asked Kyl on "Fox News Sunday": "At a time Republicans are saying that they can't extend unemployment benefits unless you pay for them, tell me, how are you going to pay that $678 billion to keep those Bush tax cuts for the wealthy?"

Responded the Arizona senator: "[Y]ou should never raise taxes in order to cut taxes. Surely Congress has the authority, and it would be right to -- if we decide we want to cut taxes to spur the economy, not to have to raise taxes in order to offset those costs. You do need to offset the cost of increased spending, and that's what Republicans object to. But you should never have to offset cost of a deliberate decision to reduce tax rates on Americans."

And just when you think it was simply a rash statement, along comes the back up:

Now Senate Republican Leader Mitch McConnell is backing up Kyl's position.

"That's been the majority Republican view for some time," McConnell told TPMDC. "That there's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject."

McConnell's argument is that even though the government would be forgoing hundreds of billions of dollars in revenue by extending the tax cuts on relatively wealthy Americans, that loss will be more than offset by the growth spurred by keeping the money in taxpayers' pockets.

Rebecca Wilder and Ian Masters on Radio KPFK Daily Briefing have a conversation on economic policy and social consequences (July 13, about 43 minutes into the show).

Reader benamery 21 comments on US energy consumption from a previous post at Angry Bear on a better picture of what drives energy consumption in China. The NYT article used air conditioning and shopping malls as one metaphor for the good life that the Chinese are striving for, but he would advise caution for those wanting to Americanize our image of China at least in the short term (decades).

Residential air conditioning is only 2.8% of U.S. energy consumption (including electrical system losses at 31.5% system efficiency), and the average occupied square feet is a LOT bigger than a Chinese apartment. A/C isn't the U.S. energy monster, that's the private automobile. A/C uses less energy than residential space heating (5%) or water heating (3.0%) or appliance use (9.4%). It takes on importance from an energy perspective because it drives electricity PEAK demand (not total energy consumption) in large parts of the country.

A look at another lifting from comments by sparaxis at Oildrum from China Energy Group at Lawrence Berkeley National Laboratory.

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