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Why Au-scare-ity Still Has Traction

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Many economists have been watching Britain’s experiment with austerity for quite a while.  Britain has been following a course of using cuts in government programs along with mass layoffs of public sector workers in attempt to stimulate economic growth.  Back in February, economist Dean Baker made this observation:

Three months ago, I noted that the United States might benefit from the pain being suffered by the citizens of the United Kingdom.  The reason was the new coalition government’s commitment to prosperity through austerity.  As predicted, this looks very much like a path to pain and stagnation, not healthy growth.

That’s bad news for the citizens of the United Kingdom.  They will be forced to suffer through years of unnecessarily high unemployment.  They will also have to endure cutbacks in support for important public services like healthcare and education.

But the pain for the people in England could provide a useful example for the United States.

*   *   *

Prior to this episode, there was already a solid economic case that large public deficits were necessary to support the economy in the period following the collapse of an asset bubble. The point is simply that the private sector is not prepared to make up the demand gap, at least in the short term.  Both short-term and long-term interest rates are pretty much as low as they can be.

*   *   *

From this side of the pond, though, the goal is simply to encourage people to pay attention.  The UK might be home to 60 million people, but from the standpoint of US economic policy, it is simply exhibit A:  it is the country that did what our deficit hawks want to do in the US.

The takeaway lesson should be “austerity does not work; don’t go there.”  Unfortunately, in the land of faith-based economics, evidence does not count for much.  The UK may pursue a disastrous austerity path and those of us in the United States may still have to follow the same road anyhow.

After discussing the above-quoted commentary by Dean Baker, economist Mark Thoma added this:

Yes — it’s not about evidence, it’s about finding an excuse to implement an ideology.  The recession got in the way of those efforts until the idea that austerity is stimulative came along. Thus, “austerity is stimulative” is being used very much like “tax cuts increase revenues.”  It’s a means of claiming that ideological goals are good for the economy so that supporters in Congress and elsewhere have a means of rationalizing the policies they want to put in place.  It’s the idea that matters, and contrary evidence is brushed aside.

There seems to be an effort in many quarters to deny that the financial crisis ever happened.  Although it will eventually become absolutely imperative to get deficits under control, most sober economists emphasize that attempting to do so before the economy begins to recover and before the unemployment crisis is even addressed – would destroy any chance of economic recovery.  Barack Obama’s opponents know that the easiest route toward subverting the success of his re-election campaign involves undermining any efforts toward improving the economy to any degree by November of 2012.  Beyond that, the fast-track implementation of a British-style austerity program could guarantee a double-dip recession, which could prove disastrous to Obama’s re-election hopes.  As a result, the pressure is on to initiate some significant austerity measures as quickly as possible.  The propaganda employed to expedite this effort involves scaring the sheeple into believing that the horrifying budget deficit is about to bite them in the ass right now.  There is a rapidly increasing drumbeat to crank-up the scare factor.

Of course, the existence of this situation is the result of Obama’s own blunder.  Although he did manage to defeat Osama bin Laden, President Obama’s February, 2009 decision to “punt” on the economic stimulus program – by holding it at $862 billion and relying on the Federal Reserve to “play defense” with quantitative easing programs – was a mistake, similar in magnitude to that of allowing Bin Laden to escape at Tora Bora.  In his own “Tora Bora moment”, President Obama decided to rely on the advice of the very people who helped cause the financial crisis, by doing more for the zombie banks of Wall Street and less for Main Street – by sparing the banks from temporary receivership (also referred to as “temporary nationalization”) while spending less on financial stimulus.  Obama ignored the 50 economists surveyed by Bloomberg News, who warned that an $800 billion stimulus package would be inadequate.  In April of 2009, Obama chose to parrot the discredited “money multiplier” myth, fed to him by Larry Summers and “Turbo” Tim Geithner, in order to justify continuous corporate welfare for the megabanks.  If Obama had followed the right course, by pushing a stronger, more infrastructure-based stimulus program through the Democrat-controlled Senate and House, we would be enjoying a more healthy economy right now.  A significant number of the nearly fifteen million people currently unemployed could have found jobs from which they would now be paying income taxes, which reduce the deficit.  But that didn’t happen.  President Obama has no one else to blame for that error.  His opponents are now attempting to “snowball” that mistake into a disaster that could make him a one-term President.

Former Labor Secretary Robert Reich saw this coming back in March:

House Majority Leader Eric Cantor recently stated the Republican view succinctly:  “Less government spending equals more private sector jobs.”

In the past I’ve often wondered whether they’re knaves or fools.  Now I’m sure.  Republicans wouldn’t mind a double-dip recession between now and Election Day 2012.

They figure it’s the one sure way to unseat Obama.  They know that when the economy is heading downward, voters always fire the boss.  Call them knaves.

What about the Democrats?  Most know how fragile the economy is but they’re afraid to say it because the White House wants to paint a more positive picture.

And most of them are afraid of calling for what must be done because it runs so counter to the dominant deficit-cutting theme in our nation’s capital that they fear being marginalized.  So they’re reduced to mumbling “don’t cut so much.”  Call them fools.

Professor Simon Johnson, former Chief Economist of the International Monetary Fund, recently brought the focus of the current economic debate back to where it belongs:

In the nation’s latest fiscal mood swing, the mainstream consensus has swung from “we must extend the Bush tax cuts” (in December 2010) towards “we must immediately cut the budget deficit.”  The prevailing assumption, increasingly heard from both left and right, is that we already have far too much government debt – and any further significant increase will likely ruin us all.

This way of framing the debate is misleading – and very much at odds with US fiscal history.  It masks the deeper and important issues here, which are much more about distribution, in particular how much are relatively wealthy Americans willing to transfer to relatively poor Americans?

*   *   *

The real budget debate is not about a few billion here or there – for example in the context of when the government’s “debt ceiling” will be raised.  And it is not particularly about the last decade’s jump in government debt level – although this has grabbed the headlines, this is something that we can grow out of (unless the political elite decides to keep cutting taxes).

The real issue is how much relatively rich people are willing to pay and on what basis in the form of transfers to relatively poor people – and how rising healthcare costs should affect those transfers.

As the Tea Partiers flock to movie theaters to watch Atlas Shrugged, perhaps it’s time for a porno send-up, based on a steamy encounter between Ayn Rand and Gordon Gekko called, Greed Feels Good.


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Some Good News For Once

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Since the Great Recession began three years ago, Americans have been receiving a daily dose of the most miserable news imaginable.  Our prevalent nightmare concerns the possibility that gasoline prices could find their way up to $10 per gallon as Muammar Gawdawful takes Libya into a full-scale civil war.

Some people tried to find a thread of hope in the latest non-farm payrolls report from the Bureau of Labor Statistics.  The report was spun in several opposing directions by various commentators.  The single statement from the BLS report which seemed most important to me was the remark in the first sentence that    “. . .  the unemployment rate was little changed at 8.9 percent . . .”.  Nevertheless, David Leonhardt of The New York Times noted his suspicion that “the government is understating actual job growth” while providing his own upbeat read of the report.  On the other hand, at the Zero Hedge website, Tyler Durden made this observation:

Wonder why the unemployment rate is at an artificially low 8.9%?  Three simple words:  Labor Force Participation.  At 64.2%, it was unchanged from last month, and continues to be at a 25 year low.  Should the LFP return to its 25 trendline average of 66.1%, the unemployment rate would be 11.6%.

Indeed, the ugly truth is that as you spend more time pondering the current unemployment situation, you find an increasingly dismal picture.  Economist Mark Thoma came up with a “back of the envelope calculation” of the benchmarks he foresees as the unemployment situation abates:

7% unemployment in July of 2012

6% unemployment in March of 2013

5% unemployment in December of 2013

4% unemployment in September of 2014

If anything, relative to the last two recoveries, this forecast is optimistic.  Even so, it will still take two years to get to 6% unemployment (and if the natural rate is closer to 5.5% at that time, as I expect it will be, it will take another five months to fully close the gap). Things may be looking up, but we have a long way to go and it’s too soon to turn our backs on the unemployed.

Only three more years until we return to pre-crisis levels!  Whoopie!

For those in search of genuinely good news, I went on a quest to come up with some for this piece.  Here’s what I found:

For the truly desperate, the Salon website has introduced a new weekly feature entitled, “The Week In Uppers”.  It is a collection of stories, often including video clips, which will (hopefully) make you smile.  The items are heavy on good deeds – sometimes by celebrities.

I was quite surprised by this next “good news” item:  A report by Rex Nutting of MarketWatch, revealing this welcome fact:

.   .   .  the United States remains the biggest manufacturing economy in the world, producing about 20% of the value of global output in 2010  . . .  (Although fast-growing China will pass the United States soon enough.)

Even though we may soon drop to second place, at least our unemployment rate should be in decline by that point.  Here are some more encouraging factoids from Rex Nutting’s essay:

In 2010, U.S. factories shipped $5.03 trillion worth of goods out the door, up 9% from 2009’s horribly depressed output, according to the Census Bureau.

*   *   *

In 2010 alone, productivity in the manufacturing sector surged 6.7%. Fortunately for workers, it looks as if companies have squeezed as much extra output out of labor as they can right now.  For the first time since 1997, factories actually added jobs during the calendar year in 2010, as they hired 112,000 additional workers.

There will be further job gains as factories ramp up their production to meet rising demand, economists say.

According to the Institute for Supply Management’s monthly survey of corporate purchasing managers, business is booming.  The ISM index rose for a seventh straight month in February to 61.4%, matching the highest reading since 1983.

*   *   *

What is the ISM telling us?  “The manufacturing sector is on fire,” says Stephen Stanley, chief economist for Pierpont Securities.  The new orders index rose to 68%, the highest since 2004, and the employment index rose to 64.5%, the highest since 1973.

Factories are hiring because orders are stacking up faster than they can produce goods.

What’s behind the boom?  In part, it’s domestic demand for capital goods and consumer goods.  Businesses are finally beginning to believe in the recovery, so they’re starting to expand, which means new equipment must be purchased.

Be sure to read the full report if you want to re-ignite those long, lost feelings of optimism.

It’s nice to know that if you look hard enough you can still find some good news (at least for now).


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A Preemptive Strike By Tools Of The Plutocracy

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The Financial Crisis Inquiry Commission (FCIC) was created by section 5 of the Fraud Enforcement and Recovery Act (or FERA) which was signed into law on May 20, 2009.   The ten-member Commission has been modeled after the Pecora Commission of the early 1930s, which investigated the causes of the Great Depression, and ultimately provided a basis for reforms of Wall Street and the banking industry.  As I pointed out on April 15, more than a few commentators had been expressing their disappointment with the FCIC.  Section (5)(h)(1) of  the FERA established a deadline for the FCIC to submit its report:

On December 15, 2010, the Commission shall submit to the President and to the Congress a report containing the findings and conclusions of the Commission on the causes of the current financial and economic crisis in the United States.

In light of the fact that it took the FCIC eight months to conduct its first hearing, one shouldn’t be too surprised to learn that their report had not been completed by December 15.  The FCIC expects to have the report finalized in approximately one month.  This article by Phil Mattingly and Robert Schmidt of Bloomberg News provides a good history of the partisan struggle within the FCIC.  On December 14, Sewell Chan of The New York Times disclosed that the four Republican members of the FCIC would issue their own report on December 15:

The Republican members of the panel were angered last week when the commission voted 6 to 4, along partisan lines, to limit individual comments by the commissioners to 9 pages each in a 500-page report that the commission plans to publish next month with Public Affairs, an imprint of the Perseus Books Group, one Republican commissioner said.

Beyond that, Shahien Nasiripour of the Huffington Post revealed more details concerning the dissent voiced by Republican panel members:

During a private commission meeting last week, all four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal.

I gave those four Republican members more credit than that.  I was wrong.  Commission Vice-Chairman Bill Thomas, along with Douglas Holtz-Eakin, Peter Wallison, and Keith Hennessey issued their own propaganda piece as a preemptive strike against whatever less-than-complimentary things the FCIC might ultimately say about the Wall Street Plutocrats.  The spin strategy employed by these men in explaining the cause of the financial crisis is to blame Fannie Mae and Freddie Mac for the entire episode.  (That specious claim has been debunked by Mark Thoma and others many times.)  This remark from the “Introduction” section of the Republicans’ piece set the tone:

While the housing bubble, the financial crisis, and the recession are surely interrelated events, we do not believe that the housing bubble was a sufficient condition for the financial crisis. The unprecedented number of subprime and other weak mortgages in this bubble set it and its effect apart from others in the past.

Many economists and other commentators will have plenty of fun ripping this thing to shreds.  One of the biggest lies that jumped right out at me was this statement from page 5 of the so-called Financial Crisis Primer:

Put simply, the risk of a housing collapse was simply not appreciated.  Not by homeowners, not by investors, not by banks, not by rating agencies, and not by regulators.

That lie can and will be easily refuted —  many times over —  by the simple fact that a large number of essays had been published by economists, commentators and even dilettantes who predicted the housing collapse.

Yves Smith provided a refreshing retort to the Plutocracy’s Primer at her Naked Capitalism website:

This whole line of thinking is garbage, the financial policy equivalent of arguing that the sun revolves around the earth.  Yes, the US and other countries provide overly generous subsidies to housing, and curtailing them over time would not be a bad idea.  But that’s been our policy for decades.  Calling that a major, let alone primary, cause of the crisis, is simply a highly coded “blame the poor” strategy.  In reality, both the run-up to the crisis and its aftermath were one of the greatest wealth transfers from the citizenry at large to a comparatively small group of rentiers in the history of man.

*   *   *

This pathetic development shows how deeply this country is in thrall to lobbyists.  But these so-called commissioners, who are really no more than financial services minions out to misbrand themselves as independent, look to have overplayed their hand.  This stunt shows more than a tad of desperation on the part of banks and their operatives in their excessive efforts block any remotely accurate, and therefore critical, report on the industry.

Perversely, this development may be a positive indicator on several fronts.  First, the FCIC report may be tougher and more probing than I dared hope.

The fact that a pre-emptive strike by the Plutocratic “Gang of Four” has been initiated with the release of their Primer could indeed suggest that that their patrons are worried about the ultimate conclusions to be published by the FCIC next month.  The release of this Primer will surely draw plenty of criticism and attract more attention to the FCIC’s final report.  Nevertheless, will the resulting firestorm motivate the public to finally demand some serious action beyond the lame “financial reform” fiasco?  Adam Garfinkle’s recent essay in The American Interest suggests that such hope could be misplaced:

Obsessed with vacuous celebrity, Americans make it easier than ever for plutocrats to sail under the radar.  Corporate heavyweights and bankers may be suborning Congress and ripping off  “we the people” left and right, but we’re too busy dancing with the stars to notice.

Will this situation ever change?



Demolition Derby

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June 24, 2010

They’re at the starting line, getting ready to trash the economy and turn our “great recession” into a full-on Great Depression II (to steal an expression from Paul Farrell).  Barry Ritholtz calls them the “deficit chicken hawks”.  The Reformed Broker recently wrote a clever piece which incorporated a moniker coined by Mark Thoma, the “Austerians”,  in reference to that same (deficit chicken hawk) group.   The Reformed Broker described them this way:

.  .  .  this gang has found a sudden (upcoming election-related) pang of concern over deficits and our ability to finance them.  Critics say the Austerians’ premature tightness will send the economy off a cliff, a la the 1930’s.

Count me among those who believe that the Austerians are about to send the economy off a cliff – or as I see it:  into a Demolition Derby.  The first smash-up in this derby was to sabotage any potential recovery in the job market.  Economist Scott Brown made this observation at the Seeking Alpha website:

One issue in deficit spending is deciding how much is enough to carry us through.  Removing fiscal stimulus too soon risks derailing the recovery.  Anti-deficit sentiment has already hampered a push for further stimulus to support job growth.  Across the Atlantic, austerity moves threaten to dampen European economic growth in 2011.  Long term, deficit reduction is important, but short term, it’s just foolish.

The second event in the Demolition Derby is to deny the extension of unemployment benefits.  Because the unemployed don’t have any money to bribe legislators, they make a great target.  David Herszenhorn of The New York Times discussed the despair expressed by Senator Patty Murray of Washington after the Senate’s failure to pass legislation extending unemployment compensation:

“This is a critical piece of legislation for thousands of families in our country, who want to know whether their United States Senate and Congress is on their side or is going to turn their back on them, right at a critical time when our economy is just starting to get around the corner,” Mrs. Murray said.

The deficit chicken hawk group isn’t just from the Republican side of the aisle.  You can count Democrat Ben Nelson of Nebraska and Joe “The Tool” Lieberman among their ranks.

David Leonhardt of The New York Times lamented Fed chairman Ben Bernanke’s preference for maintaining “the markets’ confidence in Washington” at the expense of the unemployed:

Look around at the American economy today.  Unemployment is 9.7 percent.  Inflation in recent months has been zero.  States are cutting their budgets.  Congress is balking at spending the money to prevent state layoffs.  The Fed is standing pat, too.  Bond investors, fickle as they may be, show no signs of panicking.

Which seems to be the greater risk:  too much action or too little?

The Demolition Derby is not limited to exacerbating the unemployment crisis.  It involves sabotaging the economic recovery as well.  In my last posting, I discussed a recent report by Comstock Partners, highlighting ten reasons why the so-called economic rebound from the financial crisis has been quite weak.  The report’s conclusion emphasized the necessity of additional fiscal stimulus:

The data cited here cover the major indicators of economic activity, and they paint a picture of an economy that has moved up, but only from extremely depressed numbers to a point where they are less depressed.  And keep in mind that this is the result of the most massive monetary and fiscal stimulus ever applied to a major economy.  In our view the ability of the economy to undergo a sustained recovery without continued massive help is still questionable.

In a recent essay, John Mauldin provided a detailed explanation of how premature deficit reduction efforts  can impair economic recovery:

In the US, we must start to get our fiscal house in order.  But if we cut the deficit by 2% of GDP a year, that is going to be a drag on growth in what I think is going to be a slow growth environment to begin with.  If you raise taxes by 1% combined with 1% cuts (of GDP) that will have a minimum effect of reducing GDP by around 2% initially.  And when you combine those cuts at the national level with tax increases and spending cuts of more than 1% of GDP at state and local levels you have even further drags on growth.

Those who accept Robert Prechter’s Elliott Wave Theory for analyzing stock market charts to make predictions of long-term financial trends, already see it coming:  a cataclysmic crash.   As Peter Brimelow recently discussed at MarketWatch, Prechter expects to see the Dow Jones Industrial Average to drop below 1,000:

The clearest statement comes from the Elliott Wave Theorist, discussing a numerological technical theory with which it supplements the Wave Theory’s complex patterns:  “The only way for the developing configuration to satisfy a perfect set of Fibonacci time relationships is for the stock market to fall over the next six years and bottom in 2016.”

*   *   *

There will be a short-term rally at some point, thinks Prechter, but it will be a trap:  “The 7.25-year and 20-year cycles are both scheduled to top in 2012, suggesting that 2012 will mark the last vestiges of self-destructive hope.  Then the final years of decline will usher in capitulation and finally despair.”

So it is written.  The Demolition Derby shall end in disaster.





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