Mark Thoma, who supported (and probably voted for) the man during the primaries, is dumuch more gracious than I am:

A vague promise from Democrats about the future is all but worthless right now, we've had too many promises broken already. Obama's promises in particular mean nothing.

The nicest thing I can do is describe this as BarryO's "Only Nixon could go to China moment." But that's because that slimy cocksucker was willing to sell out two countries—Formosa and Tibet—so he could discuss panda sex with Margaret Trudeau.

Obama's version is selling out Democrats and Middle-Class and Aspiring Middle-Class Americans. When the best hope is that Stan Collender is right that bending over and sucking off isn't going to be good enough for House Republicans, it's time for all you idiots who said no one should run against BarryO "from the left" to do the honorable thing and find your wakizashi and prepare four cups of sake. (I'm certain there will be plenty of kaishkunin volunteers to aid you in Doing the Right Thing.)

Democrats may still run someone against Obama from the left, though Timothy McVeigh is unavailable. But the attempt to destroy their political viability has been executed perfectly. Glad BarryO "plays eleven-dimensional chess" now?

Hey remember me? Just a quick driveby to start some discussion.

Classical, neo-classical, and neo-liberal economics all share a common mistaken psychological premise, one that is simple but deep, and in itself explains why they don't understand the aims of Progressive Taxation.

Label it how you like, the academic discipline that emerged from England in the 18th and 19th century implicitly, hell I'll make it stronger, explicitly assumed that the goal of capitalism is accumulation, i.e. getting more an more numbers on the right side of the ledger sheet. Which assumption seems blindingly obvious, which is why it is simple and goes so deep. In this model taxation on gains from capital serve to displace investment on the equally simple assumption that if you tax something people do less of it. Again perhaps blazingly obvious.

But it doesn't hold up well against the historical record either narrowly considered in relation to 18th and 19th century England or more broadly across cultures and across history. Instead in most of those cultures and most definitely in Georgian and then Victorian England the evidence is strong that capitalists saw investment as the means to different ends, those of consumption and display that in turn would lead to societal status. You only have to look at the great Country Houses that were built during this period, with no expenses spared inside or out whether that be on landscape architects or silversmiths. And even a passing familiarity with say English literature of the time shows this on full display, the manufacturing classes rushing to build those country houses and buy their daughters way into society as soon as they could afford it, the facts on the ground clearly show that the driving goal of most investors was to finance consumption and display in the form of dress and habitations. Let us put it this way Scrooge was not then or now considered the hero, and throughout history the miser has been a despised and mocked figure.

Now this runs directly against the "blindingly obvious" assumption that the goal of investment is purely accumulation. So what happens when we substitute 'consumption and display'? Well a couple of things. First we can recognize that under some circumstances accumulation IS display, rankings on the list of 'the most wealthy X of Y's' being just as important as more explicit displays of status on the British and European pattern. And since the U.S. doesn't have patents of nobility, this aspect of accumulation as display has an outside importance. But in any case none of it seems to effect the other side of the equation, very few billionaires not named Warren Buffet actually resist the temptation to buy the multiple mansions, the penthouse apartments on Central Park, the yacht, the vacations in the South of France, the jewelry, the trophy or society wives (depending on whether they are new or old money). You just don't have the MOTUs reinvesting every single penny, instead when given an opening they can and do spend and often in the most conspicuous ways possible, there not being much difference between an American billionaire of today and a 16th century British Duke or more to the point a 19th century Manchester industrialist in this regards. Instead re-investment is often seen as just the vehicle needed to climb to the next consumption level.

So what does this have to do with progressive taxation? Well once you accept the assumption that the fundamental goal of investment among the upper classes is consumption and display and further that in most cases that consumption doesn't have the multiplicative effects on the wider economy that re-investment would then the goal of progressive taxation becomes obvious, and by the way a lot less socialist than the old shibboleth of redistribution. The goal of progressive taxation in the classical political liberal position dominate in this country from 1913-1980 was to penalize consumption and favor re-investment. After all at least under current law gains on capital are by and large not exposed to federal taxation until they are realized, if instead they are plowed back into productivity improvements they are at the corporate or individual level largely tax exempt. It is only when you take the equity out in the form of interest, dividends or simply cashing out equity that tax is encured.

The logical conclusion of this model is that if we accept the principle that to tax something is to induce people to do it less, if nothing else by increasing its marginal cost, then Supply Side becomes the Voodoo the Elder Bush always said it was. Lowering top marginal rates and taxing capital gains at half the rates of capital income would under my model have the effect of encouraging consumption and discouraging reinvestment. Whereas high rates would have the opposite effect. Which has the advantage of being testable, if we had to constrast the 50s and the 80s in terms of the consumption patterns of the near the top level of capitalists and managers we see a lot less conspicuous consumption among the former than we do in the post Reagan-era. In the 50s and 60s only Greek shipping magnates could afford the kind of consumption patterns that became common in before, during, and after the Enron era and certainly continuing today. From my perspective all Supply Side did was to lower the cost of consumption in pre-tax dollars, purchases that were inconceivable in the days of 90 and then 70% top rates have become routine in the days of 15%.

Which suggests that the current neo-liberal surrender to the idea that any increase in tax on capital inevitably will lead to disinvestment, almost as if it were an accounting identity, when history suggests the effects are the other way around, capitalists wanting to maintain the same level of consumption in a higher tax environment simply needing to intensify their re-investment rather than lazily take those gains out in the form of salaries, bonuses, and dividends.

You could sum up the whole argument by saying that Manchester and allied schools of economics assumes that everyone behaved like a Northern European Calvinist Burgher, or more narrowly that the triumph of capitalism was represented in the premises of Scrooge and Marley.

BTW this substitution of 'consumption' for 'accummulation' has explanatory powers far outside the narrow confines of capitalist taxation. A great deal about peasant economies that have historically baffled both branches of liberal economics, that which led to Chicago and that which gave us Marx, in my view stemmed from not getting that most peasants even in the strictest systems organized their economic life around consumption targets rather than growing net worth (say by acquiring more fields). You get a strong whiff of this with the modern bafflement that the French would substitute 35 hour weeks with seven weeks of vacation for longer hours that would lead to higher net worth. Do they not want to get rich? Well yes, but to what end? Adopt a consumption based model and lots about the European system and early retirement here starts making perfect sense.

After the US report on Q2... Angry Bear and credit market weakness in the eurozone, Rebecca takes a look at the retail side of the economy:

Retail sales in Germany and Spain were reported last week for the month of June. On a working-day and not-seasonally adjusted basis, real retail sales fell 7.0% on the year in Spain. In contrast, working-day and seasonally adjusted real retail sales surged over the month in Germany, 6.3%, and posted a 2.6% annual gain.
But the Spanish data is better than the non-seasonal numbers would suggest. In fact, accounting for seasonal factors as in the manner done by the Federal Statistical Office of Germany, Spanish real retail sales posted a monthly gain, 1.2% in June. Don't get too giddy on me - the Spanish data looks awful in a small panel (time series and cross section).

The rest of the post is here: Real retail sales in Europe: will German consumers save the day? Maybe, perhaps

by Mike Kimel

Observations From the Past 3.5 Years

Being alive in the past 3.5 years provides the following lessons:

1. Significant elements of the government, influenced to one or another degree by private sector lobbying and contributions, have done a poor job at leading the country.
2. Significant elements of the financial industry, influenced to one or another degree by government rules and regulations, have done a poor job of investing assets.
3. Significant elements of the home buying public, influenced to one degree or another by government policy and the financial sector, have done a poor job at buying houses.
4. Significant elements of the economics profession, influenced to one degree or other by ideology and a mercenary mindset, have done a poor job of understanding the economy.

That raises a few questions:

a. Is there any way to show that of the elements described above, the private sector or public sector is more or less inefficient at what they do?
b. Of the elements described above, which of those that failed at what they did on average, have paid or will pay a price, and which of those that failed at what they did, on average, have or will "failed upwards?"
c. Given b, which of the elements described above can be counted on to create a "next time around" or of making that next time around worse?

Bureau of Economic Analysis today reported that real gross domestic product in the US increased at an annual rate of 1.3% in the second quarter of 2011. This (newly revised - see below) acceleration in real GDP was driven primarily by a slowdown in import demand, stronger federal spending, and a pickup in non-residential fixed investment. Real gross domestic purchases - GDP minus net exports - was weaker than the headline, increasing 0.7% on the quarter, reflecting the positive contribution from external demand. Domestic demand is barely growing - remember these are annualized rates, not q.q rates.


READ MORE AFTER THE JUMP!

More below the fold...

Rebecca takes note of credit growth in many of the Euro countries and notes indications of continued deteriorating macro economies in Newsneconomics:


Today the ECB released details on monetary aggregates for the euro area. According to the statement on the asset side of the consolidated balance sheet of the euro area monetary financial institutions (MFIs):

the annual growth rate of total credit granted to euro area residents decreased to 2.6% in June 2011, from 3.1% in the previous month. The annual growth rate of credit extended to general government decreased to 4.6% in June, from 5.7% in May, while the annual growth rate of credit extended to the private sector decreased to 2.2% in June, from 2.5% in the previous month

Weak credit growth is entirely consistent with the deteriorating pace of the macroeconomy (see Edward Hugh's post here). How does 2.2% annual credit growth compare to history?

If the debt ceiling is not raised at some point the US government will be unable to meet all of its obligations.

I assume that they will make their interest payments and bond redemptions on schedule and the shortfall will be in paying social secutiry, medicare, military and other obligations. This will naturally impact aggregrate demand and generate a significant negative impact on the economy. Given the severe weakness in the economy this shock most likely would tilt the economy into a recession.

This is rather straight forward analysis, but the more severe situation would be the consequences of the government failing to redeem T bonds and/or T bills or failing to make an interest payment of these debt obligations.

Large business and financial institutions do not leave large sums sitting around not earning interest. For the most part firms invest idle balances in T bills. This reached the point long ago where banks introduced sweep accounts where they will go through a firms deposits late in the day and sweep their balance out and invest them in T bills overnight. This is where the risk free instrument comes to play a major role in the financial system and the economy. In many ways the risk free investment of T bills are like the oil in an engine. It provides the buffer or lubrication in the financial system that allow the various moving parts of the economy to move freely and not rub against each other. If the risk free instrument of the T bill is removed from the system there is nothing around of sufficient size to provide the lubrication that the system requires. Thus, if firms no longer have T bills or risk free instruments to invest in there is a danger that the financial system will seize up like an engine without oil. It becomes a question of confidence and we could quickly have a repeat of something like what happened in 2008 after Lehman Brothers went bankrupt and lenders pulled in their horns and refused to lend to otherwise good credits. This is why those claiming that the US defaulting on its debts would not have severe and wide-ranging consequences are completely wrong. It is why some of the largest financial institutions are already starting to take measures to protect themselves against this possibility.

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Brad DeLong asks why it hasn’t been done, if it hasn’t been done.  The biggest problem I can see is that you don’t know how insane the participants are—and that will have a major effect on how much damage is done when.

Don’t get me wrong; the damage is already being done; it has been since at least May, and if Barack H. Obama weren’t an idiot, he would have been mentioning that over the past two months.  Unfortunately, the sun is yellow on our world, and counterfactuals are masturbatory, not participatory, acts.

So let’s start with what we know:

i= r + π^e

Nick Rowe apparently would have us believe his (completely understandable) claim that i would not be directly affected by a short-term default. This strikes me as absurd.

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GOP Delays Debt Limit Vote After Damaging CBO Score

National Journal Reports

When President Obama told Americans to contact their representatives to show support for his debt-ceiling plan, the response was so strong it knocked out several websites for leading GOP House members.

National Journal checks at 10 p.m. and 11 p.m. of websites for House Speaker John Boehner, R-Ohio, House Majority Whip Kevin McCarthy, R-Calif., and Rep. Michele Bachmann, R-Minn., showed a "Server is too busy" response on an otherwise blank screen. Boehner’s separate representative site was down, also, though the district and House Majority Leader sites of Rep. Eric Cantor, R-Va., were working.

The site for the speaker is up and running but I don't know what is happening with Boehner's seperate representative site. My search of www.house.gov* gives two dead links johnboehner.house.gov/ and johnboehner.house.gov/contact give pages with just

"Bad Request (Invalid Hostname)"
Huh ? Was the site hacked ? Did he shut it off ? is www.house.gov as functional as the House of Representatives ?

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by Mike Kimel

Why Economists (On Average) are Terrible Forecasters

My colleague, Rebecca Wilder, had a post at her site entitled Economists are terrible forecasters - why trust them anyway?. The reason why economists as a general rule are lousy forecasters is obvious: there are no penalties to being wildly wrong.

Prominent examples abound. Dow 36,000 anyone? No housing bubble in 2005. I can go on forever, but these aren't even as as it gets. At least these are bad forecasts of the future. There are plenty of bad forecasts of the past, or even the hypothetical past, too. My favorite example, in fact, of a bad forecast came in 2002, when a group of prominent policy economists, advisors to the then President, told the world that barring the 2001 recession, the US would have enjoyed double digit growth in fiscal 2002. And nobody said peep. It wasn't front page in the newspapers. It wasn't in the newspapers at all! Nobody involved paid any price for it, except the public who had to endure the policies "supported" by such an incredibly inane analysis. In fact, just about everyone involved went on to bigger and better things - Governor of Indiana, Dean of the Business School at Columbia, etc.


If there are no penalties to being wrong, there also usually aren't any benefits to being right. Consider, well, me for example. Regular readers know I don't make predictions often, but I like to be right when I do make 'em. I can't think of anyone else who called both the start and end of the Great Recession, in both cases running against the grain, but you aren't likely to see me on TV any time soon. (I will admit my forecasts weren't perfect: I misunderestimated the stupidity of the policy responses of both Bush and Obama and thus didn't expect it to be quite as bad as it turned out.) I can even think of two forecasts made for a then employer that I suspect together cost me a job, despite the fact that the forecasts turned out to be spectacularly right.

Its been said its better to be wrong in the same way as everyone else than to be right alone. That's certainly true for economists. Unfortunately, that is a bad thing for anyone who listens to economists.

Republicans are crazier than I imagine possible even taking into account the fact that they are crazier than I imagine possible.

Concept due to Brad Delong

It appears that the debt ceiling deal under consideration includes $ 1 trillion in cuts, no tax increases and setting up a committee to pretend that there will be $ 3 trillion more. This shows that the Democrats are spineless and that they know the Republicans really are crazy and aren't bluffing.

But wait not so fast. There is a stumbling block

But the two sides were still fighting over how to force Congress to produce the second round of savings. Boehner wants to set another debt-limit vote early next year, while Democrats are insisting on a plan that would postpone another debt-limit showdown until after the 2012 presidential election.

So far the Republicans have forced the very serious villager radical centrists to admit that they are crazy. New headline: "Opinions on existence of planet differ, maybe the Republicans don't have a point." They have also convinced a majority of self described Republicans that they are too unwilling to compromise and that taxes on the rich should be increased.

Thus they have decided that they are doing so well that the demand a chance to do it again just before an election.

(cross-posted from Skippy, The Bush Kangaroo. Just because.)

Next week the Bureau of Economic Analysis will release its estimate of Q2 US GDP growth. Of 69 economists polled, the bloomberg consensus is that the US economy grew at a 1.8% annualized rate spanning the months of April to June over January to March. In all, this quarterly growth rate implies just 1.9% annualized growth during the first half of 2011. Not much of an expansion.

Economists have put their 'hope' into the second half of 2011. But high frequency data show that the third quarter is setting up to be a doozy as well. This is too bad because we're talking about jobs and the welfare of American families here.

I like to follow two weekly indicators to get a feel for the labor market and the corporate trucking business. The message is clear: the economy is not improving.
READ MORE AFTER THE JUMP!

More below the fold...

by Mike Kimel

Revisiting the Cactus Theory of Development

Tyler Cowen links to this paper by this paper by Allen, Murphy and Schneider (warning, PDF!!).

Cowen notes:

It is a common view that North America had to play catch-up, but the extensive data sets in this paper suggest that North American wages were up to twice as high as the general level of wages further south.

Honestly, I don't know how anyone could be surprised. I think I covered the topic fairly well a few years ago so I'll reproduce it in its entirety below.

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Even the normally level-headed Buce—who knows better and lets us know he knows better—tries to give Tyler Cowen’s broadside at Fannie and Freddie the benefit of some (contrived) doubt.  I’ve already screamed about the legerdemain of Cowen’s post elsewhere, so let’s go for the philosophical underpinnings.

Let’s give some ground first.  Buce is spot-on with:

One is the question whether Fannie/Freddie misbehaved in the years leading up to the pop.  On that point, I don't think anybody can quarrel that Fannie (at least) has an appalling record of institutional misbehavior: rapacious and corrupt and willing to do whatever it could to pervert the lawful structure of good government--in short, they behaved like a money center bank. [emphasis mine]

I can and will quarrel that it depends on how you define “misbehaved.”  As Bakho notes chez DeLong:

More below the fold...

Will those who are claiming that the economy is recovering and things are better please explain why, as of today, we have sixteen straight weeks of "seasonally adjusted" UI claims above 400,000?

I'm now convinced that there will be no troop reductions in Afghanistan, Iraq, Libya, or any of the other places where we're conducting unpaid-for, possibly illegal, wars between now and late 2012 if only because those soldiers would come home and raise the unemployment rate.

Rebecca Wilder has shifted to publishing her insightful articles on Europe back to her Newsneconomics platform, but will continue to publish on US topics and US/Europe connections on Angry Bear.

I think that the shift is smart...the audience for Angry Bear is focused more on the US and as the election cycle is already quite heated probably will remain so. The material on Europe tends to get lost.

The Financial Times, for instance, picks up her material rather quickly through the Newsneconomics name. Therefore, for now Rebecca has chosen to write for Angry Bear and to keep us abreast of the Eurozone through Newsneconomics.

Such an arrangement allows for a different audience to communicate with each other in comments, many who are economists and readers who live in the Eurozone and whose primary interest is in their own news.

But Eurozone news remains quite pertinent to Angry Bear readers, hence I will post excerpts and a link to her posts through Angry Bear.

Ireland's Bank run by Rebecca Wilder

I knew that the Irish deposit base was shrinking - I just didn't realize the severity of the situation. In sum, €21.4 bn in household and non-financial business deposits have been drawn down since their respective peaks.

Irish businesses in aggregate have been in a silent bank run since 2007, households since 2010. So how big is €21.4 bn? Roughly 14% of Irish GDP.

by Daniel Becker

Being that we're about to experience austerity because we are convinced we can't spend money properly such that we actually end up with more after rather than less ...  which is very depressing to me and defeatist in presentation, I present my new theme song:  That's how it goes.

More below the fold...

by Mike Kimel

Home Values: Delusional Buyers, Bank Squeezers and Zillow

Via Barry Ritholtz, a link to a post at Time Moneyland post which led to a post at the Zillow blog:

Zillow recently compared the asking price of 1 million for-sale homes with those homes’ previous purchase price, then factored in the change in the Zillow Home Value Index at the ZIP code level to determine the home’s current market value.

We found sellers who bought after the housing bubble burst, in 2007 or later, price their homes 14 percent above market value. Those who bought before the housing run-up, prior to 2002, overprice by nearly 12 percent. Somewhat surprisingly, sellers who bought during the run-up, from 2002-2006, seems to be the most realistic, pricing their homes 9 percent over market value.

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The latest Washington Post ABC poll has some dramatic results

" Even among Republicans, 58 percent see the GOP as too resistant to a deal, up from 42 percent in March.

In the new poll, fully 50 percent of conservative Republicans and “strong” tea party supporters say the GOP leadership is too unwilling to make a deal on the deficit. "

When they've lost the tea partyers they are in trouble.

Also

More than eight in 10 — including 80 percent of Republicans — say there would be serious harm to the U.S. economy if the government could not continue to borrow money to fund its operations and pay its debts after Aug. 2.

I wouldn't be surprised if, had the question been asked that way, a plurality would say they opposed raising the debt ceiling.

But best of all, 54% of self identified Republicans want to soak the rich, that is rais taxes on incomes over $250,000.

Finally cutting Medicaid is the least popular option for reducing the deficit opposed by 74%. You read that right Medicaid.

Full results can be found with repeated clicking (in the past, the Washington Post didn't hide them so thoroughly).

I'm writing a few long posts—you've been warned—but that machine doesn't have Internet access right now.* So I'm just going to point to Kash, who writes about something else:

In looking at the data I was struck by how small (relatively) the worldwide market for gold really is. That means that relatively small inflows of funds into the market for gold could potentially have very large effects on the price of gold. And that in turn means that the price of gold could be very sensitive to a number of factors that have nothing to do with economic conditions or inflation....

[M]oving just 0.1% of the financial wealth of US households into gold could be enough to have a dramatic impact on the price of gold. Note that the same can not be said of other asset prices that we care about; it would be difficult to discern any price effects whatsoever of a move of an additional $50 billion more or less per year into the stock market (valued at over $50 trillion around the world), the bond market (also with a total value in the tens of trillions of dollars), or real estate.

[A] good advertising campaign by gold producers could be enough to move the price of gold. Imagine that an effective, sustained advertising campaign, targeted at wealthy, conservative individuals in the US, is able to persuade 25,000 of them per month to switch a portion of their financial assets into gold....Such an advertising campaign would have the effect of pushing $15 billion per year into the market for investment gold -- very possibly enough to have a significant impact on the price of gold, given how small the overall market for gold is.

[A] very similar thing happened to the market for diamonds in the middle of the 20th century. The DeBeers diamond cartel used an incredibly successful advertising campaign in the 1950s to cement the idea of the diamond as the premier gemstone, and in so doing permanently changed the value of diamonds.

Whether or not you like that analogy, the central point here is a very simple one. Since the market for gold is so small, its price may be strongly affected by things that have nothing to do with the state of the economy.

Kash's analysis—read the whole thing—should drive the final stake through the heart of the idea that, in the current economy, gold is anything more than what I quoted Warren Buffett as saying it is more than a year and one-half ago.

*In this context, does anyone know how to add the Windows Live Writer app to a Droid X?

I had a post on the federal deficit talks and the speeches made to 'resolve' the political emergency, perhaps to turn into a fiscal emergency, and surely to further idealogy. But this picture was so much more accurate.


(no attribution found)

It's now two years after the end of the Great Recession, and the unemployment rate has ticked downward just 9 pps (percentage points) since its 10.1% peak. Pundits call this an expansion since GDP has fully retraced its recession losses; but the unemployment rate tells a very different story.

(click to enlarge)


The chart illustrates the unemployment rate after 24 months since each recession's end spanning 1948 to June 2011. The business cycle dates are set by the National Bureau of Economic Research. The rates are indexed to the first month of each cyclical recovery for comparison, and the raw data are referenced in the table at the end of this post.

MORE AFTER THE JUMP!

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Industrial production was reported to have increased 0.2% in June as compared to - 0.1% declines in April and May. The entire gain was in mining and utilities as manufacturing output was unchanged.

The chart shows industrial production this cycle compared to other cycles. The old forecasting rule of thumb was that it took about a year from the bottom till industrial production surpassed its prior peak. You can see that on average this was a good rule in both mild and severe recessions. But this cycle some 19 months pass the bottom output is at 111.1 versus 120 at the peak. Despite all the talk of the rebound in manufacturing is clearly weak compared to historic norms and the thesis that manufacturing is returning to its old glory days is at best unproven.

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Not Scarcity, But Surplus is the Problem (Just as Dismal, though)

by Noni Mausa, lifted from comments at Economist's View

They were discussing scarcity last week at Economist's View. But to my mind scarcity isn't our core problem. I wrote (and then edited a bit for this post):

=======

Yes, scarcity of resources is fundamental to econ theory, and it's a real concern, not just an abstract factor for calculations.

But less often mentioned is the truism that human beings, working in concert, produce surplus. Generally this is very great surplus. In any society beyond the most desperately poor, this surplus is sufficient at least to support the 1/3 to 1/2 of the population who cannot support themselves-- children, and the elderly and disabled...

This surplus ... inevitably leads to the specialized class we would call the wealthy. This clan has existed as far back as we have written records. They may be more useful, or less useful, to their host societies, but they can only exist when those societies produce large surplus.

Economics talks about managing scarcity, but ... our real problem is managing the surplus.

Sandwichman takes a stab at Ecological Headstand with Tenacity of Textbook Truism.

CBS Marketwatch Devalues their Brand. Kash views the carnage:

Despite all the rhetoric and posturing we see in the media and in Washington D.C., it is safe to say categorically that the U.S. Treasury will not default on its debt after August 2nd, even if the debt ceiling is not raised. Not only will the Treasury be able to pay interest on U.S. debt obligations, but there is money for other essential programs as well. However, there will be some serious cutting that has to happen because spending clearly exceeds revenues.

Yes, quite. In fact, some specific numbers are provided in this column: federal spending would instantly have to be reduced by about $100bn per month. By the end of 2011 federal spending would be about $500 bn lower for the year than it would have been otherwise.

I've made this point before, but for numbers that large, anyone who wants to pretend to have some understanding about the economy has to think about macroeconomic effects. In particular, spending cuts of that size would reduce the US's 2011 GDP by multiple percentage points. The Q3 and Q4 GDP growth rates wold probably be on the order of between -5% and -10%. Recall that during the recession of 2008-09, GDP only fell by about 4% in total. The unemployment rate would be likely to rise by several percentage points from its current level of 9.2%, to perhaps 15% or more of the US population. Recall that at its worst, the unemployment rate during the Great Recession only reached 10%.

So when you read someone blithely writing that the federal government will not default in the absence of a debt ceiling deal, and instead will merely have to trim excess spending, remember that what they're really advocating is a new and deliberately caused Great Depression. And not just in economists like me.

Can it really be that bad? Well, yes. This is what Marketwatch allows to be given their imprimatur, as one Kurt Brouwer presents "in a Q&A format...what I believe you need to know at a basic level":

If we do not raise the debt ceiling by August 2nd, we will not default on Treasury obligations. Nor, will we have trouble making Social Security payments. However, there would be a big drop — roughly 44% — in government spending because that percentage represents the difference between government revenues which would be about $200 billion for the full month of August and [sic] $172 billion for August if we start counting after the first week when the deadline hits. Spending is slated to be over $300 billion that month.

Kash is right; that's about $100B a month. So how does Brouwer solve that $100B+ shortfall?

The [Bipartisan Policy Center] study projects there will be $172 billion in federal revenues in August and $307 billion in authorized expenditures. That means there’s enough money to pay for, say, interest on the debt ($29 billion), Social Security ($49.2 billion), Medicare and Medicaid ($50 billion), active duty troop pay ($2.9 billion), veterans affairs programs ($2.9 billion).

That leaves you with about $39 billion to fund (or not fund) the following:

Defense vendors ($31.7 billion)

IRS refunds ($3.9 billion)

Food stamps and welfare ($9.3 billion)

Unemployment insurance benefits ($12.8 billion)

Department of Education ($20.2 billion)

Housing and Urban Development ($6.7 billion)

Other spending, such as Departments of Justice, Labor, Commerce, EPA, HHS ($73.6 billion) [formatted for style]

Oh, he doesn't.

Now, does Brouwer prioritize payments by "bang for the buck" (multiplier effect)? No. Paying interest on debt supersedes even the Social Services. If you're looking to do as little damage as possible to your domestic economy (this is our government, not China's), you don't prioritize paying the interest on the debt (multiplier well <1, especially in the current businesses-are-cash-rich environment) before food stamps, welfare, and UI (multiplier for all >1; those people are liquidity-constrained in a way that coupon-clippers never will be).

And if you want to be a viable long-term investment, you don't cut your current investment in long-term human capital (DoE, EPA).*

So what do you do, pay bond interest, or pay for parts and repairs on that military equipment that keeps active-duty military active? If you're sane, you put troops on the line in priority over investors whose interest payment won't be the source of their next meal or the protection from that next IED.

What does Brouwer say about these choices?

No doubt picking and choosing who gets paid and who doesn’t would be chaotic. And, lots of programs would not get their funding and that would lead to plenty of screaming. Nonetheless, it should be clear from this exactly how much we are spending in excess of government revenues. And, that could and should lead to a sober assessment of what government can and cannot do.

Ayup. Government can, if they ignore Brouwer's advice, keep Brad DeLong calling this "The Little Depression," keep people employed, and set up future growth with trained workforces and people who are not starved into unhealthiness.

Or it can do what Brouwer wants, and pay bond market investors who don't need the cash while soldiers die and people starve.

Mark Thoma should be ashamed to share pageviews with this guy.

*As Beverly's post notes, Texas notes that "beginning 25 years ago, the state began significantly increasing its education funding and therefore the quality of its workforce." Conservatives used to see the value of human capital development in creating an environment for jobs, and I still hold to that one.**

**Rick Perry has, of course, reversed this, so anyone looking to start a business in the mid-2030s might do well to avoid the Lone Star State. Unless, of course, everyone else follows suit.

If Obama's first term is a different thing than GW's third term, why is Obama's Secretary of Defense telling US troops that that they're in Iraq because the US was attacked on September 11?

Note:This was going to be short pieces about things I missed during a week of illness. It turned into a Very Long Piece riffing on two posts from Capital Gains and Games. And that's without even mentioning the bravura work Stan Collender is doing there: see, for instance, this note that a deficit reduction bill with tax increases is very possible if you just ignore John Boehner.

1. Small Businesses exist in the United States solely as a vehicle for people to commit tax fraud more easily.
   
   I don't see any other realistic conclusion from this piece by Pete Davis. He tries to hide it, putting an idiotic suggestion with an Order of Magnitude's less value fist, and mostly got people in comments to talk about COLAs, because economists are stupid that way. But the big number—$2,900,000,000,000—remains the big number.
   
   The only proper conclusion from the entries after the first two would be that Pete Davis can't do mathis very fond of negative-NPV solutions. You could conclude from this that Pete is really stupid, but we know better. Besides, Len Berman of Forbes already went there, concluding, "Pete, you know better, and you’re just enabling them." The integrity of posters at CG&G doesn't usually get questioned so directly in the mainstream.
   
   
2. And there's good reason for that. Andrew Samwick has argued for years that stealing from the Greenspan Commission's "making Social Security solvent for future generations" fund, and I expect him to continue to do so, just as I will continue to argue that everything in the Greenspan Commission documents says that was not the idea. But Andrew has me worried—possibly in a good way—about his idea of how to combine economics and family:
   

   Actually, the government should budget the way families should. It's just not clear that families actually do what they should. Both families and the government should budget countercyclically -- their savings rates should be higher during periods of growth than during periods of economic decline, so that their consumption can remain steady across booms and busts. The problem that both the government and families are having today is that neither one saved enough during the most recent boom, and so both are having to cut back more than would be ideal during this protracted downturn.

   
   Now Andrew—who is younger and cuter than I—is starting to sound like the old man telling us to get off his lawn. Either that or he has just discovered that Lifecycle Theory of Economics doesn't work so smoothly in reality as in the standard models. Or both. So it's probably safest if I use that paragraph as a springboard to talk about Countercyclical Policy, Rational Expectations, and MMT (below the fold).

More below the fold...

Health Care Thoughts: Draft Exchange Rules Published

The Obama administration has published draft rules for the formation and operation of Affordable Insurance Exchanges, a key element in the PPACA (Obamacare) plan to increase insurance coverage.

There is a 75 day comment and then more time to digest the comments before final rules are issued. Implementation is due by January 1, 2014.

See the rules here, 244 pages (link fixed)

Tom aka Rusty Rustbelt

by Beverly Mann

Update: Business journalist Merrill Goozner has a terrific in-depth deconstruction of the so-called Texas Miracle at TheFiscalTimes, at Perry's Texas Miracle less than meets the eye, published last Friday.

Texas, the jobs engine? Or Texas, the jobs-laundering engine?

An op-ed piece mentioned by a reader two weekends ago in the LA Times, called Texas, the jobs engine? by Rick Wartzman, executive director of the Drucker Institute at Claremont Graduate University, begins:

For the last few weeks, I've been unable to get a startling statistic out of my head: Since the recession officially ended, Texas has created more than 4 of every 10 new jobs in America.

That's right, Texas: the reddest of red states, home to gun lovers and school textbooks that openly question whether the Founding Fathers intended for the separation of church and state. I am no ideologue. Still, whenever I get political, I tend to tilt reflexively to the left, making the jobs figure a bit disconcerting at first.

More below the fold...

by: Daniel Becker

Ok some more information to bolster my position that my flower shop being down this year another 4.5% compared to last year (at least the decline is leveling off) is not the results of government debt or too much taxation or banks not lending or unions... nope, my shop is off because of one thing: Lack of income in the hands of the many and nothing to date has been done to change that.

As noted here and here, monetary policy is not going to cut it. (Please pray for the Greeks.)

Or I should say, not cutting it for anyone who earns a penny because someone else had an extra penny to spend beyond their non-discretionary expenditures. That is, they are at the point of autonomous consumption, but not at the point of offsetting income earned from their cognitive or physical labor with that earned from money. That means we're talking about the bottom 90% of the income earning population. (The top 10% own 82% of the stock.)

More below the fold...

Over at Economist' View he has posted a nice set of charts on the GDP Gap, employment versus the long term trend and other measures of how much excess capacity the economy has that have become very popular among economists over the last couple of years.

http://economistsview.typepad.com/economistsview/

But these charts never include profits in their analysis and I would suggest that readers should know how profits look versus their long term trend.

Over the last 50 years the long run growth rate of S&P 500 earnings per share has been about 7%.

Moreover, even if you look at the more recent trend of operation earnings the trend growth rate has been almost this high.

More below the fold...

by Mike Kimel

A Post: Tax Burdens, Presidents, and Subsequent Economic Growth - A Few Pictures, Part 1

Last week I had a post looking at the relationship between the change in the tax burden in the first two years of a Presidential administration and the growth of real GDP during the remaining years of the administration. I've done variations of this exercise before. It turns out that the more an administration reduced the tax burden in its first two years, the slower the growth the in real GDP over the remainder of its term in office administration. Assuming the result is more than an artifact of the data (and it does seem to correspond with other results I've reported here over the years), it requires an explanation. While (I am not happy to report) an increased tax burden might in and of itself stimulate faster economic growth, I suspect a bigger effect is that a) the easiest way to move the tax burden is by increasing or decreasing tax regulation and b) there is a correlation between an administration's views on tax regulations and its views on other regulations that are intended to prevent externalities. This theory is supported by the fact that the relationship between lower tax burdens and slower growth is strengthened by not including the administrations that served only four rather than eight years makes the relationship stronger.

More below the fold...

Jobs growth is a lagging indicator of economic activity, so the June report confirms that the US economy has been in a deep rut (Marshall Auerback calls it a 'fully-fledged New York City style pot hole'). Yes, the US economy is growing; but sub-2% really 'feels' like stagnation, if not recession for many. As always, Spencer provides a fantastic summary of the employment report here on AB: 'bad news', he says.

I call it abysmal, both relative to history and on a cross section. The chart below illustrates the unemployment rates across the G7 spanning 1995 to 2011.

Across the G7 economies, the level of the US unemployment rate is second only to France. This is true on a harmonized basis as well.
READ MORE AFTER THE JUMP!

More below the fold...

Mark Thoma remembers that in the last Congressional elections, Republicans campaigned on how the Democrats were bringing uncertainty to the economy.

"Does anyone think that uncertainty has been reduced since Republicans gained a majority in the House of Representatives?"

The employment was bad news as payroll employment only rose by 18,000 as compared to the last months disappointing rise of 25,000. Government employment fell 39,000 versus 48,000 in
May. Private payrolls expanded only 57,000 that was even weaker than the prior months 73,000. Over the last two months payroll employment was essentially unchanged.


Moreover, the household survey reported an employment drop of -445,000. This lead to the unemployment rate rising to 9.2%


Historically the household survey tend to lead the payroll survey and the very poor performance of the household survey is extremely discouraging.

More below the fold...

Op ed by Nancy Ortiz

Scott Hochberg's article Making E-Verify Mandatory: The Perfect Storm for Crippling the Social Security Administration and Jeopardizing the Social Safety Net discusses issues regarding the e-Verify system and a move in Congress to make it mandatory for everyone hired for a job in the US. He points out that eVerify is every bit as much a threat to SS and Medicare as any of the other benefit, COLA, or Medicare provider cuts now being discussed. I read Hochberg's article with great interest and have a few additional points to add to his excellent analysis of this subject.

When the Immigration Reform Act took effect in 1987, I was the manager of the SS office in Northern Santa Barbara County in strawberry, broccoli, lettuce and wine grape country. Thousands of migrant workers pass through the area at the height of the picking season between January and May. Many stay with or without authorization so that about 60% of the population is Hispanic and/or non-English speaking/non-US national. You will find similar demographics up and down the California Central Coast in agricultural areas, so there's nothing unusual about this.

More below the fold...

In addition to the controversy over the ARRP position on Social Security, there are other issues affecting retirement that surface via immigration legislation. Scott Hochberg has given Angry Bear permission to post his article from this weekend from Huffington Post. (hat tip coberly)

Making E-Verify Mandatory: The Perfect Storm for Crippling the Social Security Administration and Jeopardizing the Social Safety Net by Scott Hochberg

There has been much recent buzzing about AARP's ambiguous, half-denied statements about their (new?) willingness to cut Social Security benefits, and rightly so. As the largest membership organization of seniors in the country, AARP's tactical gamble could be an unfortunate game-changer in any deficit deal negotiated behind closed doors in Washington.

But believe it or not, one of the biggest threats to Social Security this summer could come from an entirely different direction, from an initiative whose main target is not even related to social program spending.

More below the fold...

by Mike Kimel

Presidents, Tax Burdens, and the Subsequent Economic Growth


Over the years, I've posted variations of the graph below a few times:

Figure 1


The graph shows the change in the tax burden (i.e., current federal receipts / GDP) from the year before an administration took office to its second year in office on one axis, and the annualized growth in real GDP from its second year to its last year in office on the other axis. So, to use GW as an example, the graph shows the change in Federal Receipts / GDP from 2000 to 2002 on one axis and the growth rate in real GDP from 2002 to 2008 on the other axis.

More below the fold...

I'll make this quick, since I'm going to get in trouble for writing on a national holiday. But the pace of annual jobs growth is too slow to generate strong wage and salary income. Much empirical research has been dedicated to the estimation of consumption functions, generally finding that labor income is the primary driver of consumption (here's a primer at the Federal Reserve Board). However, by extension jobs growth is highly correlated with wage and salary growth, roughly 50% of personal income - this is the relationship I analyze here.

Roughly half of the BEA's measure of personal income comes in the form of wage and salary, so called labor income and simply referred to as 'wages' from here on out. This is highly correlated with nonfarm payroll growth, both in nominal and real terms (92% and 79%, respectively, since 1996). The chart below illustrates the correlation between real wage growth and nonfarm payroll since 1982 (I use real wage so as to account for the effects of inflation).


The annual pace of real wage gains and jobs growth have declined over time (jobs growth is measured using the nonfarm payroll). Simply eyeballing the data, there's a structural shift roughly around 1996, as listed in the table below.

Using these two time periods, 1982-1995 and 1996-05/2011, I estimate a simple model of real wage growth on nonfarm payroll growth. The chart for the 1996-2011 model is illustrated below; and for reference, the regression results across both time periods are copied at the end of this post.

READ MORE AFTER THE JUMP!

More below the fold...

by Beverly Mann

I Beg to Differ (in Part), Mr. Will

A few days ago I posted a post on my blog that responds to George Will’s claim in his weekend Washington Post column that the auto bailout was a privatization of profits but a socialization of losses. The full post, which is at Annarborist, and is called I Beg to Differ (in Part) Mr. Will, George Will says:

In 1994, Bill Clinton proposed increasing homeownership through a ‘partnership’ between government and the private sector, principally orchestrated by Fannie Mae, a “government-sponsored enterprise” (GSE). It became a perfect specimen of what such “partnerships” (e.g., General Motors) usually involve: Profits are private, losses are socialized.

—“Burning Down the House,” George F. Will, Washington Post, June 30

More below the fold...

I suggest these questions, but this is not a question about ideal jobs in imagination but real jobs that are attainable.

I think all of us have some notion of what elements constitute a 'good' job in the broad perspective (policy and macro), and given human nature varies according to personal goals, age, and circumstance. It has also varied widely in historical context. The term is used a lot in policy debates on employment and unemployment as well.

It is much easier to reach a consensus on the definition of a bad job than to agree on what constitutes a good job.

Is a good job one in a particular industry or sector?

The question of the length of employment contracts matters?

Is a good job one that comes with employer-provided benefits?

What is the relationship between wages and the definition of a good job?

A final question about the definition of a good job involves the relationship of the worker to the employer.

Personal satisfaction of some kind? Social status? Conscience?

by Beverly Mann

Judge Sutton Channels … Me??

Sixth, the anti-commandeering principle of the Tenth Amendment adds nothing new to this case. True, the Tenth Amendment reserves those powers not delegated to the National Government “to the States” and “to the people.” True also, a critical guarantee of individual liberty is structural and judicially enforceable—preserving a horizontal separation of powers among the branches of the National Government, INS v. Chadha, 462 U.S. 919, 957–58 (1983), and a vertical separation of powers between the National Government and the States, New York, 505 U.S. at 181. Odd though it may seem in light of American history, States’ rights sometimes are individual rights. See Bond v. United States, 564 U.S. __, No. 09-1227, slip op. at 9 (June 16, 2011). Doubt it? Go to any federal prison in the country to see how a broad conception of the commerce power has affected individual liberty through the passage of federal gun-possession and drug possession laws and sentencing mandates.

More below the fold...

So I use Pandora on my Droid, and it's pretty reasonable. I haven't done anything complicated, or even created any mixes. And when I pick Bruce Cockburn Radio or Stevie Wonder Radio or Don Henley Radio or any of the other stations that are perfectly safe to play while at work, there will occasionally be tracks by other artists, but they're fairly similar: Stevie gets followed by Aretha, Cockburn gets followed by an instrumentalist or a McGarrigle sister, Henley gets followed by mellow Genesis or Peter Gabriel ("In Your Eyes") or Phil Collins solo.*

So I was very surprised when I launched Pandora from my laptop's browser today, still on the Don Henley station. Here are the first four songs it chose:

1. Led Balloon, "Stairway to Heaven" (live, no less)
   
2. Bon Jovi, "Wanted Dead or Alive"
   
3. Lynyrd Skynyrd, "Sweet Home Alabama," and
   
4. Queen, "We Will Rock You"

If I wanted to listen to a set list like that, I would just tune in one of the local mediocre commercial stations. At least their commercials are more interesting.

(Hint to investors: if a company only has one advert that it uses when the app is first used—even after the user clicked through and signed up—they have more of a problem with their business model than Patch.)

From what I can tell, we're back in the Built-to-Flip model of Internet investing.

The "Don Henley" station is now playing The Rolling Stones's "Paint It Black." Love the song, own the Decca collection they're linking it to. Not what I would expect to hear between Coldplay and Steeler's Wheel, though.

Paying $36/year to upgrade my account seems much more unlikely than it did even this morning. The next two songs were "Another One Bites the Dust" and this:

which was the second track by that band in an hour—matching the actual number of Henley/Eagles tracks played.

Either their algorithm is really dumb, or they assume all their listeners obsess over Axl's vocals on "I Will Not Go Quietly." Not the way to bet in the mass market.






*I have some standards: the latter would be an immediate thumb down, but I know why I'm getting it: after you let the Genesis-recorded Ode to Adultery ["In Too Deep"] play, Collins's sententious solve-hunger song ["Another Day in Paradise'] or the insufferable "Take Me Home" probably will be suggested sooner rather than later.)