Archive for the ‘Economic recovery’ Category

The Bureau of Labor Statistics has released its Employment Situation Summary for May and the economy added 217 thousand jobs in May. As the Washington Post reports:

The strong report, which was released Friday, marks the fourth consecutive month that the country has added more than 200,000 jobs — a key benchmark for a healthy economy. The national unemployment rate held steady at 6.3 percent.


May’s job gains also mean the country has recaptured all the jobs lost during the recession, and employment is now at an all-time high of 138.4 million people.

On the other hand…

economists were quick to point out that the nation’s population has also grown. The share of people who have a job remains smaller than when the recession started in 2007. An analysis by the liberal Economic Policy Institute found that 7.1 million more positions need to be created to fill that gap.

ZeroHedge has a nice graphic that reflects the current situation and asks a simple question: “Is the US worker’s cup half full or half empty?

May jobs breakdown

I was struck this past May when I asked my graduating seniors about their plans post-graduation. The responses, rank ordered: (1) moving home or in with friends/siblings in the hope that something will happen; (2) moving home and then off to graduate or law school; (3) unpaid internship; and (4) job (and this category included a gig on an organic farm in the Northwest). In contrast, before the collapse almost all of my seniors who were not going on to grad school had jobs locked up, the best ones having been hired months before graduation. Most of my recently graduated students seem to believe that the glass is half empty…at the very least.

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This has been a mixed week for economic news. On the positive front, the Bureau of Labor Statistics announced that the economy added 288,000 jobs, bringing the unemployment rate to 6.3 percent, the lowest since 2008 (see New York Times coverage here). While this would appear to provide evidence that things are, in fact, improving, there are some important caveats: 806,000 exited the labor force, bringing the labor participation rate down to 62.8 percent. Moreover, there is an interesting disjunction between the two sources of data on unemployment: the Establishment Survey figures of 288,000 new jobs does not match the more volatile Household Survey that reports a loss of 78,000 jobs (see Zero Hedge for some additional commentary and Vox for a nice overview of the differences between the two surveys).

I would be surprised if these numbers hold up once the revisions are in. The simple reason: they don’t fit with some bad economic news released earlier this week.

On Wednesday, the Commerce Department’s Bureau of Economic Analysis reported that the economy has essentially stalled, generating a 0.1 percent annual growth rate in the first quarter. As Megan McArdle commented on the GDP report:

the fact remains that we seem to be stuck. Six years after the financial crisis, we still haven’t entered anything that could really be called a “recovery.” A recovery would mean some sort of catch-up growth that reabsorbed stranded workers and capital. Instead, we’re barely limping forward, and the most cheerful thing we can say about any of it is that at least we’re no longer falling back.

For once, Megan McArdle may be the optimist. As Ylan Q. Mui (Wonkblog) notes: many are suspecting that when all the adjustments have been done, we may learn that the economy actually shrank. Newly released Census Bureau data on construction spending was far weaker than expected: “instead of the 0.2 percent boost in private nonresidential construction spending assumed in the GDP calculation, there was likely a 5.7 percent decline.”

Bottom Line: Even if economic growth is as reported on Wednesday (.1 percent), it is hard to see how this anemic performance could generate 288,000 new jobs—the best performance since January 2012. I am assuming that revisions will be forthcoming.

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I always find polls to be interesting. In my mind, one of the more fascinating things is when there is a large disjunction between individuals’ assessment of X (e.g., the environment, crime, education, the economy) as they experience it and their assessment of X as the nation experiences it. I often attribute the differences to the simple fact that the latter question is strongly influenced by the way in which X is portrayed by the media and political elites. One might be satisfied with the environment as one experiences it at home, for example, but the media provides heavy coverage of environmental catastrophes, oil and chemical spills, etc.

In the latest NBC/WSJ Poll (results here), 61 percent report being very/somewhat satisfied when asked to assess their “own financial situation today.” At the same time, when asked “how satisfied are you with the state of the U.S. economy today?,” only 28 percent say they are very/somewhat satisfied. 71 percent claim to be dissatisfied (37 percent somewhat dissatisfied, 34 percent very dissatisfied).

Another question: how well is the economy working for different types of people? Fully 81 percent believe it is working very/fairly well for the wealthy whereas only 22 percent believe it is working very/fairly well for the middle class. There is an obvious tension here, given that “middle class” is the modal category and a majority (71 percent) is very/somewhat satisfied with the economy as they experience it. Similar to the earlier example of the environment, one might hypothesize that the disjunction is a product of the way in which the economy is portrayed in the media and by political elites. (more…)

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It appears that President Obama’s address on inequality was the beginning of a larger move to the left and an embrace of economic populism. As Edward-Issac Dovere  (Politico) explains:

[Obama is] connecting to progressive populism with an aggressive, spending-oriented, activist government approach to the economy personified by Elizabeth Warren and Bill de Blasio. Obama’s already backed raising the minimum wage, the start of what White House officials say will be a 2014 domestic agenda — including his State of the Union address and budget — that centers around income inequality and what the government is doing to increase economic mobility.


Obama needs his base invested to help him recover from his low poll numbers and give his party a platform as Democrats try to make the House competitive and hold onto to their majority in the Senate. And those in the coalition that won Obama two elections — young people, African-Americans, Latinos, single women and immigrants — are precisely the ones hit hardest by the doldrum economy.

Will this strategy succeed? The answer would seem to hinge on three things.

  1. Success in shifting the focus from the sluggish economy (e.g., the “jobs deficit,” problems of long-term unemployment, dramatic reductions in the labor force participation rate) to inequality in income distributions and the claim that these inequalities (rather than economic policy or the intrinsic problems of recovering from a financial crisis) have impeded recovery.
  2. Success in convincing voters that the correct policy response to this situation is an expansion of social policy expenditures (e.g., increases in Social Security) and a higher minimum wage
  3. Success in convincing voters that they should, in essence, vote themselves a raise in the 2014 midterm elections since there are limits to what can be achieved through executive action.

I am skeptical that this strategy will succeed for a host of reasons (e.g., the contours of public opinion, the likelihood that ongoing problems with Obamacare implementation will dominate the news, the President’s lack of follow through on priorities announced in the State of the Union). But given the poor economic performance since the financial collapse there is likely a growing pool of desperate  voters open to these claims. They may  apply a sufficiently high discount rate to the future that the long-term fiscal consequences of expanded social policy expenditures will not matter much.

For those who are interested in reading more, see Alex Pareene, “Why Elizabeth Warren Baffles Pundits” (Salon), Frank James, “Is Economic Populism a Problem or a Solution for Democrats?” (NPR) and Third Way’s John Cowan and Jim Kessler’s op-ed (WSJ), “Economic Populism is Dead”

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Last week, President Obama gave a speech on economic mobility and argued that addressing economic inequality was “the defining challenge of our time.” He stated:

But we know that people’s frustrations run deeper than these most recent political battles.  Their frustration is rooted in their own daily battles — to make ends meet, to pay for college, buy a home, save for retirement.  It’s rooted in the nagging sense that no matter how hard they work, the deck is stacked against them.  And it’s rooted in the fear that their kids won’t be better off than they were.  They may not follow the constant back-and-forth in Washington or all the policy details, but they experience in a very personal way the relentless, decades-long trend that I want to spend some time talking about today.  And that is a dangerous and growing inequality and lack of upward mobility that has jeopardized middle-class America’s basic bargain — that if you work hard, you have a chance to get ahead.

President Obama asks (and answers) an important question: “if, in fact, the majority of Americans agree that our number-one priority is to restore opportunity and broad-based growth for all Americans, the question is why has Washington consistently failed to act?  And I think a big reason is the myths that have developed around the issue of inequality.” According to the President, the myths include: (1) “the myth that this is a problem restricted to a small share of predominantly minority poor,” (2) “the myth that growing the economy and reducing inequality are necessarily in conflict,” and (3) “the belief that the government cannot do anything about reducing inequality.” Even if these are correctly seen as myths (the address provides some qualifications) the problem may be found in the premise. (more…)

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Ah, yes, a bit of nostalgia from the “summer of recovery”: the Car Allowance Rebate System (CARS), also known as Cash for Clunkers.

It seemed quite promising to many in the halcyon days of 2009.  Citizens could trade in their old gas guzzlers (which were subsequently destroyed) for a rebate that could be applied to purchase a more fuel-efficient car. It would simultaneously stimulate the economy (and the auto industry) and improve the environment. Undoubtedly, as part of the stimulus efforts, it would pay for itself.

Ted Gayer and Emily Parker have a new paper and policy brief at Brookings on the program. (For a brief overview, see Kevin Robillard’s piece in Politico). The discussion below draws from the policy brief.

How did Cash for Clunkers perform?

  • By the end of the program, 677,842 vehicles were traded for vouchers, at an overall cost of $2.85 billion (some $4,200 per rebate).
  • But according to Gayer and Parker, the program only added 380,000 additional sales to what would have occurred absent the program, and these were largely sales that were pulled forward from sales that would have normally occurred in the future. “Ten months after the end of the program, the cumulative purchases from July 2009 to June 2010 were nearly the same, showing little lasting effect.”
  • And while there was a short-term addition of $2 billion to GDP, it was simply pulled forward from the next two quarters.
  • Cars for Clunkers did create jobs, but at a cost of $1.4 million per job.

There are some additional information in the brief on the distributional impacts (surprise: the recipients tended to be more affluent than those who purchased a new or used car during the same period without a rebate) and the environmental impacts (surprise: Cash for Clunkers was not a cost-effective means of reducing carbon emissions).

Bootlegger-Baptist coalitions (a term coined by economist Bruce Yandle) are common in politics (particularly in regulation). In essence, a Bootlegger promotes a policy that will further its economic interests. It  legitimizes its efforts by forming a coalition (often implicit) with the Baptists, who appeal to higher values or the public good. A simple example: renewable fuel standards. Agribusiness secures a market for corn ethanol, and draws on environmental advocates for cover.  In Cash for Clunkers, the bootlegger is easy to identify: auto dealers. Robillard’s article notes that the program retains the support of the National Automobile Dealers Association, which strongly advocated the program at its inception and lobbied quite effectively for its expansion from $1 billion to almost $3 billion. Its spokesperson noted: “There’s no question Cash for Clunkers was the best Obama administration program to date.”  From the perspective of the industry, what’s not to like? It provided a de facto subsidy for the industry, and industry self-interest was veiled by tying it to the larger goals of promoting the needs of the unemployed and saving the earth. Even if the Baptists were hung out to dry (another parallel with ethanol), what’s the harm? The $2.85 billion price tag (not including interest) will fall to future generations (i.e., the children who had the brief privilege, in 2009, to ride in their parents’ new cars).

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Here are quarterly data on “usual weekly earnings” in current dollars from the Bureau of Labor Statistics. The first graph shows the first (lowest) decile of wage earners. The second shows the ninth (why not the tenth? BLS does not make that an option). These data should be relevant to the debate over whether most unemployment we’re seeing in the U.S. is structural or cyclical.



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President Obama visited Phoenix yesterday to give a speech on homeownership. The promotion of homeownership has been on the agendas of the past several presidents (e.g., George W. Bush and the “ownership society) and much of President Obama’s speech could have been written by HUD secretaries Jack Kemp or Henry Cisneros. While there is little new in the President’s speech, two things were particularly noteworthy.

First, the administration appears committed to addressing Fannie and Freddie, the two government-sponsored enterprises (or GSEs) that played a central role in fueling the bubble. President Obama talked about “laying a rock-solid foundation to make sure the kind of crisis we just went through never happens again.” He continued:

That begins with winding down the companies known as Fannie Mae and Freddie Mac. For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag. It was “heads we win, tails you lose.” And it was wrong.

Oddly enough, Dodd-Frank did little more than note that “the hybrid public-private status of Fannie Mae and Freddie Mac is untenable and must be resolved” and stated that financial reforms “would be incomplete without enactment of meaningful structural reforms.” That task was put off for another day. Perhaps the day is nearing. (more…)

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A Grand Bargain?

Tuesday, President Obama proposed a “grand bargain” as part of his jobs tour (a tour that marks the third anniversary of Vice President Biden’s “Recovery Summer” tour). The grand bargain is relatively simple: corporate tax cuts (to 28 percent), including a one-time lower tax on profits earned overseas that would arguably entice firms to repatriate these funds and provide a temporary spike in revenues. These revenues, in turn, would be used to promote additional stimulus projects (a White House fact sheet can be found here). As President Obama explained (White House transcript):

But if we’re going to give businesses a better deal, then we’re also going to have to give workers a better deal, too.  (Applause.) I want to use some of the money that we save by closing these loopholes to create more good construction jobs with infrastructure initiatives that I already talked about. We can build a broader network of high-tech manufacturing hubs that leaders from both parties can support. We can help our community colleges arm our workers with the skills that a global economy demands. All these things would benefit the middle class right now and benefit our economy in the years to come.

Oddly enough, the New York Times was unimpressed: “only the packaging was new. The president essentially cobbled together two existing initiatives that have been stalled in Congress: corporate tax changes and his plan to create jobs through education, training, and public works projects.”


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Seems like Washington is trying to return to the “ownership society.” As Zachary Goldfarb reports in the Washington Post:

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.

The article continues:

Deciding which borrowers get loans might seem like something that should be left up to the private market. But since the financial crisis in 2008, the government has shaped most of the housing market, insuring between 80 percent and 90 percent of all new loans, according to the industry publication Inside Mortgage Finance. It has done so primarily through the Federal Housing Administration, which is part of the executive branch, and taxpayer-backed mortgage giants Fannie Mae and Freddie Mac, run by an independent regulator.

The FHA historically has been dedicated to making homeownership affordable for people of moderate means. Under FHA terms, a borrower can get a home loan with a credit score as low as 500 or a down payment as small as 3.5 percent. If borrowers with FHA loans default on their payments, taxpayers are on the line — a guarantee that should provide confidence to banks to lend.

This seems like a novel plan. Let us try to drive economic growth by creating a bubble in real estate. What ever could go wrong?

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For some time, J. Bradford DeLong has been referring to the current economic episode as the “Lesser Depression.” He has now dropped the “Lesser.” His evidence from the bond market is worth reviewing (in particular, the yield on 30-year Treasuries). His conclusion: we may be looking at “a slack and depressed economy, if not for the next generation, at least for most of it.”

At the same time, as the Hill reports, the OECD projects “that U.S. gross domestic product would grow at a 3.5 percent clip in the year’s first quarter and 2 percent in the second quarter,” viewing the slow growth rate of 0.4 percent in the fourth quarter of 2012 as being the product of “one-off factors.”

Given the choice (the bond markets vs OECD forecasts) I would normally bet on the markets. But, given the Fed’s extraordinary interventions in the past few years, can we really trust information we glean from the bond markets?

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A new Washington Post-ABC poll focuses on voter perceptions of whether Obama or Romney would do more to improve the economy (poll results here, discussion here).

When asked “Who would do more to advance the economic interests of middle-class Americans,” Obama wins over Romney, 50% to 44%.  When asked who would do more to advance the economic interests of financial interests, Romney wins 56% to 33%. When asked who would do the most to advance the interests of the wealthy, Romney wins 68% to 21%.

Thus far, a win for Obama. The take home message: there is a strong class division at play. To the extent that Obama can exploit class divisions, he will be successful (after all, we are a middle class nation and as the poll reveals, the majority believe that Obama will advance the interests of the middle-class).

But this lesson seems to be the wrong one to glean from the poll results. When white voters are asked “Who would do more to advance the economic interest of you and your family?” the poll reveals the following results:

  •  Working class: Romney 44%, Obama 42%
  • Comfortable in current class: Romney 49%, Obama 41%
  • Middle class: Romney 53%, Obama 38%
  • Struggling to remain in current class: Romney 55%, Obama 32%
  • Laid off/knows someone whose been laid off: Romney 56%, Obama 32%
  • Upper middle class/better off: Romney 61%, Obama 29%

This raises an interesting question: how could a majority believe that Obama would advance the interests of the middle class when members of the middle class (and working class, and upper middle class, etc) believe that their best bet is Romney?

Public opinion is interesting and frustrating. In one of the classes I teach (environmental policy) I provide students with some data that shows two things: (1) a majority believe the environment has gotten worse, and (2) a majority believe that the environment, as they experience it, has improved. Both can’t be true simultaneously. I use this example to explain that people tend to gain their impression of macro-conditions via the media, which focuses on sensational stories, even if the larger story stands at odds with their own experiences. As a result, a majority thinks the environment has improved for them but has become worse for everyone else–an impossibility, to be certain.

The media seems committed to a distinct meta-narrative:  Obama will promote the interests of the middle class whereas Romney will cater to the 1 percent. To some extent, it appears, voters have accepted this portrayal. Yet, in their own assessment of how the candidates would impact on the economic welfare of themselves and their families, they depart from the meta-narrative.

This is not good news for the Obama campaign, particularly if voters will decide in November  based on their projections of how a given candidate’s victory will impact on them and their families. This is the big lesson.



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The last week has brought a fair amount of attention to the Obama campaign attacks on Romney and Bain Capital, most of which might have been lifted straight out of the “vulture capital” meme started by the Rick Perry campaign. It all started with Corey Booker’s rejection of the Obama strategy on Meet the Press ( a decision that is reportedly paying off quite nicely). It then spread quickly, ultimately finding an expression in Romney ads.

Steve Ratner, former Obama car czar and financier, has an interesting piece in the NYT that is worth a quick read.  A few quick quotes:

In fact, Bain Capital — like other private equity firms — was founded and managed for profit: ideally, huge amounts of gain earned legally and legitimately. Any job creation was a welcome but secondary byproduct.

The language in one prospectus seeking Bain Capital investors was clear: “The objective of the Fund is to achieve an annual rate of return on invested capital in excess of the returns generated” by other investments. Any job creation was accidental. …

That’s not wrong; it’s part of capitalism. Whatever its flaws, private equity has made a material contribution to sharpening management. But don’t confuse a leveraged buyout with job creation.

Ratner chastises Romney for claiming responsibility for all jobs created, even after he left Bain, while deflecting any responsibility for jobs lost. It seems that Ratner has a point.

Yet, if this was Romney’s mistake, he is not alone. All we have heard in the past 3 years and 5 months is that every job lost since inauguration day was the product of Bush’s policies whereas every job created (and/or saved) since inauguration a product of the Obama policies. There is no honest accounting, no recognition that some jobs have been lost or created in spite of public policy decisions.

The President seems to have altered his tone—only slightly—and now claims that there is nothing wrong with private equity firms. But even successful management of a private equity firm does not qualify you to be president where you must make jobs.

At least Ratner et al are directing attention back to the fact that capitalism’s primary function is not to generate an endless stream of jobs, even if this is one of the beneficial byproducts.

One only wishes we could apply the same lesson to government. Government’s primary job is to defend life, liberty, and property rights. If it restricts itself to these functions, there may be a stream of new jobs. But as with private equity, it is one of the beneficial side effects, not its primary function.

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The unemployment rate fell again, hitting a three-year low of 8.1 percent. But, as the New York Times explains:

The unemployment rate ticked down to 8.1 percent in April, from 8.2 percent, but that was not because more unemployed workers found jobs; it was because workers dropped out of the labor force.

The share of working-age Americans who are in the labor force, meaning they are either working or actively looking for a job, is now at its lowest level since 1981 — when far fewer women were doing paid work. The share of men taking part in the labor force fell to 70 percent, the lowest number since the Labor Department began collecting these data in 1948.

Of course, if you are a glass-half full guy,  you might interpret the numbers a bit differently:

“Today’s employment report provides further evidence that the economy is continuing to heal from the worst economic downturn since the Great Depression”said Alan B. Krueger, chairman of the Council of Economic Advisers, “but much more remains to be done to repair the damage caused by the financial crisis and the deep recession.”

At what point are we going to stop looking at the unemployment rate as an indicator of economic health? If people keep dropping out of the labor force at this rate, we might simultaneously have “full employment” and new record lows in workforce participation just in time for election day.

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Robert Wenzel gave an address to the New York Fed earlier this week. It is worth reading in its entirety (here). You can read some positive reviews by Vox Day (Vox Populi) and Tyler Durden (Zero Hedge, see some of the comments).

On economic methodology:

I hold the view developed by such great economic thinkers as Ludwig von Mises, Friedrich Hayek and Murray Rothbard that there are no constants in the science of economics similar to those in the  physical sciences. …

I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry. And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist.

On Bernanke’s reign at the Fed:

There have been more changes in monetary policy direction during the Bernanke era then at any other time in the modern era of the Fed. Not under Arthur Burns, not under G. William Miller, not under Paul Volcker, not under Alan Greenspan  have there been so many dramatically shifting Fed monetary policy moves. Under Chairman Bernanke there have been significant changes in direction of the money supply growth FIVE different times. Thus, for me, I am not at all surprised at the current stop and go economy. The current erratic monetary policy makes it exceedingly difficult for businessmen to make any long term plans.

On Bernanke’s appeal to Operation Twist, Wenzel notes that it seems quite peculiar, given that a 2004 Fed paper coauthored by the current chairman concluded:

 “Operation Twist is widely viewed today as having been a failure, largely due to classic work by  Modigliani and Sutch”


“Operation Twist does not seem to provide strong evidence in either direction as to the possible effects of changes in the composition of the central bank’s balance sheet.”

After additional comments on the Fed (none of them positive), Wenzel ends on a delightful note:

The noose is tightening on your organization, vast amounts of money printing are now required to keep your manipulated economy afloat. It will ultimately result in huge price inflation, or,  if you stop printing, another massive economic crash will occur. There is no other way out.

Again, thank you for inviting me. You have prepared food, so I will not be rude, I will stay and eat. 

Let’s have one good meal here. Let’s make it a feast. Then I ask you, I plead with you, I beg you all, walk out of here with me, never to come back. It’s the moral and ethical thing to do. Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths and four-legged rats.

The address contains a nice primer on Austrian economics, a lively critique of current policy, and a lot of head scratching. One can only imagine how it was received at the New York Fed. 

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Sheila Bair, former FDIC chair, has made the following proposal (WaPo), in part, to illustrate the absurdity of what we view as sound economic policy.

The set up:

Are you concerned about growing income inequality in America? Are you resentful of all that wealth concentrated in the 1 percent? I’ve got the perfect solution, a modest proposal that involves just a small adjustment in the Federal Reserve’s easy monetary policy. Best of all, it will mean that none of us have to work for a living anymore.

The delivery:

Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)

Of course, this brilliant plan would solve multiple problems, ranging from that pesky 1 percent (we would all be 1 percent) to education and social welfare (who needs it, if we are all members of the investing class). As for the long-term fiscal implications (not that anyone cares any more), we could simply print more money.

If it works for the financial community…why wouldn’t it work for the rest of us. This summer could be “recovery summer.”

Well played, Ms. Bair.

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As the economy slowly claws its way out of the financial crisis and the deepest and most prolonged recession since the Great Depression, it is good to know that some of the lending practices that contributed to the collapse are once again being deployed. As Jessica Silver-Greenberg and Tara Siegel explain in today’s NYT:

as financial institutions recover from the losses on loans made to troubled borrowers, some of the largest lenders to the less than creditworthy, including Capital One and GM Financial, are trying to woo them back, while HSBC and JPMorgan Chase are among those tiptoeing again into subprime lending.

Credit card lenders gave out 1.1 million new cards to borrowers with damaged credit in December, up 12.3 percent from the same month a year earlier, according to Equifax’s credit trends report released in March. These borrowers accounted for 23 percent of new auto loans in the fourth quarter of 2011, up from 17 percent in the same period of 2009, Experian, a credit scoring firm, said.

But I thought the new regulations were going to put an end to these practices? No, in fact, they have stimulated their return:

The banks, for their part, are looking to make up the billions in fee income wiped out by regulations enacted after the financial crisis by focusing on two parts of their business — the high and the low ends — industry consultants say. Subprime borrowers typically pay high interest rates, up to 29 percent, and often rack up fees for late payments.

Thankfully, “the push for subprime borrowers has not extended to the mortgage market, which remains closed to all but the most creditworthy.”  My guess: it is only a matter of time until these practices revert to the old normal.

As most accounts of the financial crisis suggest, moral hazard was a significant problem.  Financial institutions assumed that they could act with reckless abandon and assume risk but the costs, should things collapse, would be socialized by the government. The events of the past few years have only reinforced this assumption.

As Solomon remarked:

 “As a dog returns to his vomit, so a fool repeats his folly.”   Proverbs 26:11

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Great news on unemployment, as the rate falls to 8.3 percent (Bureau of Labor Statistics report here).  All the normal disclaimers apply, of course (e.g., thing are not quite as rosy when you include those who have fallen out of the labor force in the past few years). But nonetheless, this is good news for the nation (unless you are banking on a bad economy to shape the outcome of the 2012 election or to serve as the lead in to a another editorial on why the stimulus was too small).

Ron Brownstein (National Journal), the potential ramifications for the President’s reelection bid can only be positive:

“Looking forward to 2012, one challenge for Obama has been that groups that he needs to turn out in big numbers — groups at the core of his coalition — have been among those hit hardest by the sustained downturn. Many of them are still suffering. But Friday’s unemployment number showed bigger gains for African-Americans and Hispanics than for whites. And young people, another key Obama block from 2008 that has also been heavily affected, also saw big improvements. For each of those three groups, the unemployment rate is now the lowest it’s been essentially since Obama took office.”

Ben Casselman (WSJ) provides a useful overview of the BLS report. Bottom line:

“Today’s jobs report carries good news on both fronts. The unemployment rate fell, and the employment-population ratio rose. That means the improvement in the labor market is real — people actually found jobs.”

Of course, this improvement may only prove temporary (e.g., if the projections are correct for the Eurozone, there may be some negative consequences for the US growth rate in the next year). But it is always nice to end the workweek on a positive note.

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David Brooks has an interesting piece in today’s NYT (I must admit, he has written more than a few fine columns this year).  He notes that the Obama administration assumed office drawing on parallels to the Great Depression and FDR. It has since abandoned this historical analog and turned, instead, to the Progressive Era. The remainder of the column argues quite persuasively that there are few useful parallels to be found here.

A teaser:

One hundred years ago, we had libertarian economics but conservative values. Today we have oligarchic economics and libertarian moral values — a bad combination.

In sum, in the progressive era, the country was young and vibrant. The job was to impose economic order. Today, the country is middle-aged but self-indulgent. Bad habits have accumulated. Interest groups have emerged to protect the status quo. The job is to restore old disciplines, strip away decaying structures and reform the welfare state. The country needs a productive midlife crisis.

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The House seems ready to vote down the Senate bill extending the payroll tax cut for two months while requiring the President to decide on the Keystone XL oil pipeline within 60 days (see coverage here and here). The bill—apparently negotiated with the Speaker’s blessings—seemed to be a strategic coup. Passed (89-10) by a bipartisan majority in the Senate, it seems to work against the dominant narrative of the Republican obstructionism. By extending payroll tax cuts for two months, it would limit the GOP=Grinch meme that will undoubtedly fill the airways. By forcing a decision on the pipeline, it will force the administration to alienate one of its two core constituents: organized labor (which strongly supports the pipeline) and environmentalists (who strongly oppose it). The president wanted to delay a decision until after the election to avoid having to reinforce fissures in his support base.

The House GOP rank-and-file wants a one-year extension to take the issue off of the table until after the elections. At the same time, it wants it paid for via spending cuts rather than tax increases. Speaker Boehner, who supported the Senate bill, seems once again incapable of reigning in the rank-and-file.

There is a strong case to be made against extending the payroll tax cut. Our entitlement programs are already on life support; cutting the flow of revenues will only hasten their collapse. And given the need to reduce the size of the deficit, there is a strong case for spending cuts.

Good politics often makes bad policy. But the political benefits of the Senate bill appear too good to pass up.

Or am I missing something?

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Edward Luce, FT, provides an interesting argument on the many ways in which the current economic challenges in the US are going to be difficult (if not impossible) to solve. He illustrates his argument with some rather painful statistics in “Can America regain most dynamic labor market mantle?”

  • The unemployment rate would be 11 percent today (not 8.6 percent) if those who have become “discouraged” and dropped out of the labor force were still counted.
  •  At the current rate of job creation, it will take 78 months to recovery the pre-recession job levels, compared with the 6 months in took to recover from the 1982 recession, the 15 months it took to recover from the 1991 recession, and the 39 months it took to recover from the 2001 recession.

Paul Krugman wrote a column for the Sunday NYT (“Depression and Democracy”) that declared the current economic conditions in the US and Europe to be tantamount to depression. He writes:

“It’s time to start calling the current situation what it is: a depression. True, it’s not a full replay of the Great Depression, but that’s cold comfort. Unemployment in both America and Europe remains disastrously high. Leaders and institutions are increasingly discredited. And democratic values are under siege.”

Krugman’s piece focuses on the political implications for Europe, but his argument has clear implications for the US. Unsurprisingly, his core claim seems to be that all of this could have been avoided had policymakers embraced stimulus instead of austerity.

Luce, in contrast, provides a far more interesting argument that engages long-term structural changes in the US economy. Although there is a case to be made for educational reform, fiscal stabilizers, and infrastructural investments, he concludes with a rather suggestive quote from former budget director Peter Orzag:

 “The truth is that we don’t know how to fix the US labour market – we are in uncharted territory…It would help to spend more on retraining and on infrastructure and to have a more rational immigration system. But these wouldn’t fundamentally transform the situation for the middle class … It is not yet clear what, if anything, could.”

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The nation added 120,000 jobs in November, driving the unemployment rate to 8.6 percent, the lowest since March 2009. This might seem to suggest that we have turned a corner. Except, as reported in the NYT:

The rate fell partly because more workers got jobs, but also because about 315,000 workers dropped out of the labor force, and the jobless rate counts only people who are actively looking for work.

120,000 get jobs while 315,000 exit the labor force. If the denominator continues to fall at this pace, we could hit full employment by this time next year.

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Events in Europe should give us pause, as Eric Dash and Nelson D. Schwartz note in “Crisis in Europe Tightens Credit Across Globe.” (NYT)

Europe’s worsening sovereign debt crisis has spread beyond its banks and the spillover now threatens businesses on the Continent and around the world. From global airlines and shipping giants to small manufacturers, all kinds of companies are feeling the strain as European banks pull back on lending in an effort to hoard capital and shore up their balance sheets. The result is a credit squeeze for companies from Berlin to Beijing, edging the world economy toward another slump.

The deteriorating situation in the euro zone prompted the Organization for Economic Cooperation and Development on Monday to project that the United States economy would grow at a 2 percent rate next year, down from a forecast of 3.1 percent growth in May.

There is little reason to believe that we are even close to seeing the end of the economic crisis that began in 2007-08. While commentators in the US will focus on how the poor economic performance will impact on Obama’s reelection efforts, Gideon Rachman (FT) asks whether a modern version of the 1930s would lead Europe back to a dark era of nationalist parties and conflict.

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Phil Izzo had a rather dispiriting piece in yesterday’s WSJ.  It reports the results of the WSJ survey of 50 economists. The key passage:

Americans’ incomes have dropped since 2000 and they aren’t expected to make up the lost ground before 2021, according to economists in the latest Wall Street Journal forecasting survey.

From 2000 to 2010, median income in the U.S. declined 7% after adjusting for inflation, according to Census data. That marks the worst 10-year performance in records going back to 1967. On average, the economists expect inflation-adjusted incomes to rise over the next decade, but the 5% projected gain isn’t enough to reach prerecession levels.

This comes as no surprise to students of economics and political economy. Indeed, I would argue that the above forecast might prove overly optimistic, given the broader demographic changes in the US and OECD, the problems of unfunded liabilities, the amount of deleveraging that is required, the instability in international financial markets, and the growing power of emerging economies.

But even if we stick with the assumption that there will be no gains in inflation-adjusted median incomes for the period 2000-2021, the ramifications could be significant.

On the policy side, it would be far easier to find a path to long-term fiscal sustainability in an economy that generates growing revenues and declining demand for income support.

On the political and cultural side, the implications could be equally important. For most of US history—and most certainly, for the postwar period—there was a broadly held expectation of growing incomes and an improved quality of life. To be certain, this expectation was dashed for much of the population, as inflation adjusted wages began to stagnate in the 1970s. But what happens when this expectation is thoroughly discredited and the vast majority of the population comes to believe that tomorrow will be no better than today—and perhaps a good deal worse?

  • Will individuals assign a higher discount rate to the future?
  • Will they stop investing in human capital?
  • Will the decline in fertility rates accelerate?
  • Will politics simply degenerate into a redistributive battle over a shrinking pie?

Or am I being overly pessimistic?

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Former Speaker (and aspiring economist) Nancy Pelosi is speaking about unemployment again as she works to drum up support for the American Jobs Act. When heralding the success of the $862 billion American Recovery and Reinvestment Act, she noted:

Well, let me just say that as a matter of fact that the Recovery Act saved millions of jobs–or saved or created millions of jobs for our economy. Without the Recovery Act and accompanying federal interventions, whether from the Fed, or cash for clunkers, or other initiatives, the unemployment rate last year at the time of the election would have been fourteen and a half percent, not nine and a half percent. But if you’re a voter and you don’t have a job that doesn’t mean anything to you, and that’s right, because nine and a half percent is too high. But we were near a depression under the Bush economic policies. We were in a depression, we were in a meltdown under our fiscal situation. And we had deep, deep deficits. And now we have to dig out of that. So I believe the recovery package was a success in terms of job creation. It wasn’t fully appreciated. The fact is that it made a big difference. It made a big difference in helping us have a running start on electronic medical records, which are going to be job creators and improve quality of care, lower cost, expand access, and, again, create jobs.

Of course, by Ms. Pelosi’s own words, this is a rather unimpressive accomplishment. As you might recall, in the early days of 2009, she proclaimed: “Every month that we do not have an economic recovery package, 500 million Americans lose their jobs. I don’t think we can go fast enough to stop that.” (the clip, that simply never gets old, is here). By that accounting, the stimulus package should have created or saved (to use the current term) some 6 billion jobs in its first year alone.

Ms Pelosi went on to explain the intended effects of the new stimulus:

 hopefully it will have an explosive effect that people with jobs will become consumers who help create jobs. Which takes us back to small businesses which is what we think if people have jobs and we have more consumers, our small businesses will thrive. People will be more entrepreneurial, take risks, keep us competitive, whether it’s talking about making chocolate candy comes to mind, or children’s clothes, or high-tech inventions in their garage as Steve Jobs did those decades ago.

Ah yes, how could one forget the ways in which Ford’s successful economic policies created the preconditions for the founding of Apple in the summer of 1976? I have not read the forthcoming biography of Steve Jobs by Walter Isaacson, but I am sure that it will devote at least a chapter to how Whip Inflation Now contributed to the rise of Silicon Valley.

I think there are some decent components in the American Jobs Act, some are humane (e.g., cutting payroll taxes, extending unemployment), others make commonsense (e.g., promoting infrastructure investment while the cost of capital is low). Politically,  I also think it would be in the GOP’s best interest to pass these components quickly. For all the entertainment value, I am not convinced that the former Speaker is the best spokesperson for the administration’s economic policies.

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The new CNN/USA Today poll on the economy offers few surprises.

  • 90 percent of those polled characterize the economy as poor (40 percent somewhat poor + 50 percent very poor). This is the worst outcome since December of 2008 when 93 percent characterized the economy as poor.
  • The majority (52 percent) blame Bush and the Republicans. It is interesting to note that this is the best showing to date for the GOP.  In July, by comparison, 57 percent blamed Bush and the Republicans. Since then, the percentage blaming Obama and the Democrats has increased (from 29 to 32 percent) while the percentage blaming both the GOP and the Democrats equally has increased (from 10 to 13 percent).

Now for the surprise: although the administration needs to place the economic problems squarely at the feet of the GOP and keep it there until the election, it is getting little help from Vice President Joe Biden. In a radio interview yesterday, the Vice President was quite frank and accurate in his assessment:

“Even though 50-some percent of the American people think the economy tanked because of the last administration, that’s not relevant,” said the vice president. “What’s relevant is we’re in charge.”

“Right now, we are the ones in charge, and it’s gotten better but it hasn’t gotten good enough,” Biden told WLRN. “…I don’t blame them for being mad. We’re in charge. So they’re angry.”

Biden said it is “totally legitimate” for the 2012 presidential election to be “a referendum on Obama and Biden and the nature and state of the economy.” He said Americans will need to make a choice between what the Obama administration is offering to address the problem and what is being offered by the eventual Republican nominee.

I can’t imagine that the administration was pleased to hear Joe Biden’s admission of responsibility.  Anyone who has read Suskind’s new book Confidence Men can get some useful insights as to the lack of clarity and the internal disarray surrounding economic policy within the Obama White House. But Republicans should not be overjoyed at the Vice President’s moment of clarity. If he is correct, the 2012 election will hinge on whether the Republican nominee has anything of substance to say on how best to promote recovery. Beyond a critique of Obamanomics and few well worn statements about taxes and regulations, has anyone heard anything rising to the level of a credible alternative?

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There have been quite a few interesting pieces on Solyndra in the past few days (see here, here, here, here and here for some good examples of recent coverage).  As most of you know, Solyndra was one of the beneficiaries of the administration’s efforts to engage in a green industrial policy, receiving a loan guarantee of $535 million as part of the 2009 stimulus. Solyndra was something of a poster child for the administration’s recovery program. It was building solar cell panels and creating the jobs of the future. It even figured prominently in the video the administration posted on its success stories (here, at 3:08).

The President made a special visit to the firm to publicize his administration’s successes in May 2010. On August 31, 2011, Solyndra announced it was filing for Chapter 11 bankruptcy. A week later, the FBI raided Alas, Solyndra in support of an investigation by the Department of Energy’s Inspector General. Since then, White House emails have been subpoenaed and the House has begun an investigation.

It is too early to arrive at any conclusions regarding the political significance of the story. It may be what one should expect with most industrial policy fiascos—a mix of hubris, transfer-seeking, and general ham-handedness. In other words, it might simply be business as usual. In this case, the administration’s seemingly endless desire for photo ops may have been combined with the kind of cronyism that was regularly denounced on the campaign trail but seems to be intrinsic to our system regardless of whether Democrats or Republicans are in charge.

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Barro on the Economy

This weekend, economist Robert Barro had an interesting piece in the NYT entitled “How to Really Save the Economy.”  Although there is nothing particularly new for those who have followed Barro over the years, it is worth a quick read. Drawing on Keynes, Barro calls for a mix of policies that would create the conditions necessary to create the stable expectations and environment that would stimulate investment.

The key proposals:

reforming Social Security and Medicare by increasing ages of eligibility and shifting to an appropriate formula for indexing benefits to inflation; phasing out “tax expenditures” like the deductions for mortgage interest, state and local taxes and employer-provided health care; and lowering the marginal income-tax rates for individuals.

I would add three more: reversing the vast and unwise increase in spending that occurred under Presidents Bush and Obama; introducing a tax on consumer spending, like the value-added tax (or VAT) common in other rich countries; and abolishing federal corporate taxes and estate taxes.

As you might guess, Barro is skeptical that these changes could be implemented in the current political climate (Republicans support a VAT? Democrats support elimination of corporate taxes?). Nonetheless, he makes a strong case for this policy mix the piece is well worth a few minutes of your time.

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I want to piggy-back here on Mark’s great post on urban planning and the poor. I’ve been playing around with some state-level data on local land-use regulations and cost of living. The last decade in the U.S. has been one of very slow productivity growth. As a result, fast-growing states tend to be those with low growth in cost of living. This explains not just states like Texas but North Dakota as well (and at the other end, California). Take a look at the list of states with highest annualized real personal income growth over 2000 to 2007 (the deflator, a state cost of living index, comes from the newest, 2009 Berry et al. data, which explains why the series ends at 2007):

1. Louisiana – 2.8%
2. Wyoming – 2.8%
3. North Dakota – 2.6%
4. South Dakota – 2.1%
5. Oklahoma – 1.9%
6. Arkansas – 1.8%
7. Mississippi – 1.5%
8. Nebraska – 1.5%
9. Montana – 1.5%
10. Kansas – 1.4%

Surprised? These are hardly “knowledge economies.” In some cases, mining or energy accounts for strong growth, and indeed in multiple regression mining share of GDP in 2000 does strongly explain subsequent real personal income growth (per capita or total). And in Louisiana’s case Hurricane Katrina chased away a lot of low-income people. But part of the story is elastic housing supply leading to low growth in house prices during the 2000-2007 bubble. A better measure of state economic success is arguably total rather than per capita income growth, which rewards states that attract people. Here are those numbers:

1. Wyoming – 3.6%
2. Nevada – 3.1%
3. Florida – 3.0%
4. South Dakota – 2.8%
5. Arizona – 2.8%
6. Arkansas – 2.6%
7. Texas – 2.6%
8. North Dakota – 2.6%
9. Oklahoma – 2.5%
10. Louisiana – 2.5%

Again, these states have in common slow growth in housing prices during the bubble. And what explains slow growth in housing prices? Land-use regulation. I use the Gyourko et al. land-use regulation variable to predict both cost of living in 2000 and growth in cost of living over 2000-2007. It is an extremely strong predictor of both (statistical significance>99.99%). When net 2000-2007 in-migration (% of 2000 population) is regressed on both 2000 cost of living and the land-use regulation index along with controls (economic and personal freedom, 2000 accommodations GDP per capita), both are highly statistically significant and negative. When total personal income growth is regressed on migration, controls, and the land-use regulation index, land-use regulation is insignificant while migration is highly significant and positive. No surprise there – land-use regulation doesn’t reduce total factor productivity, but it does discourage labor inflows.

So here’s the big story of growth in those states that have experienced it in the last decade: lack of land-use regulation –> slow growth in cost of living –> more in-migration –> more income growth. Highly regulated states like California (-0.4% annual growth), Oregon (0.1%), Massachusetts (0.1%), and New Jersey (0.3%) could learn something. If we are entering a “great stagnation,” we may have to squeeze increases in living standards out of lower prices rather than innovation for a while.

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The web is a buzz with Paul Krugman’s supposed comments regarding yesterday’s earthquake:

“People on twitter might be joking, but in all seriousness, we would see a bigger boost in spending and hence economic growth if the earthquake had done more damage.”

Given the comment a just over a week ago regarding the economic benefits of an alien invasion, this may, in fact, be credible.  If we set aside Bastiat and the broken window fallacy, we can take pleasure in the fact that the new job program may be arriving sooner than the President’s upcoming speech.

Hurricane Irene is scheduled to hit the US in the next few days. If it fades from a category 4 to a category 1, we will know who to blame: the Tea Party and the GOP’s obsession with austerity.

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Last Friday, I had a post on the “Cost of Government Day.” According to a piece by Grover Norquist and Patrick Gleason, “the Cost of Government Day arrived Aug. 12 — meaning that the average American toiled 224 days to foot the bill for this year’s total cost of government.”

One reader (Greg) questioned the numbers: “Wouldn’t that make the government 61% of the whole economy? … What am I missing?”

The piece in question went beyond the issue of taxation to include the costs imposed by regulations, claiming that (on average) Americans worked an additional 77 days to pay for the $1.8 trillion in regulatory burdens.

The Cost of Government Day Report (p. 18) provides a somewhat more expansive discussion of the costs of regulation (although one wishes for a bit more on the underlying methodology). It notes:

Our conservative estimate of total regulatory costs takes into account only the cost of complying with regulations: the material resources and labor needed to carry out compliance. For example, if a regulation requires new pollution control equipment for power plants, compliance costs include the costs of manufacturing, installing, operating and maintaining the equipment.

It does not include “the negative economic effects of regulatory requirements—the deadweight loss of these policies” (i.e., the value of “goods and services forgone due to government rules”). “These hidden costs stifle the growth of the economy because they introduce inefficiencies and distortions, while reducing the economic reward left over for productive activity.”

In an op-ed today, Senator Kay Bailey Hutchison quotes Investors Business Daily:

“If the federal government’s regulatory operation were a business,” Investors Business Daily reported, “it would be one of the 50 biggest in the country in terms of revenues, and the third-largest in terms of employees, with more people working for it than McDonald’s, Ford, Disney and Boeing combined.”

The op-ed makes the argument that the growth of the regulatory state in the past 3 years has played a central role in impeding job growth, particularly among small businesses. The senator is seeking support for the Regulation Moratorium and Job Preservation Act she co-sponsored which would “place a moratorium on burdensome federal regulations until the national unemployment rate falls to 7.7 percent — below where it was when Obama took office.”

One cannot deny that the introduction of new regulations—and the anticipated introduction of future regulations—creates additional uncertainty for businesses, thereby impeding recovery. Yet, I can’t imagine that President Obama’s much anticipated but yet-to-be delivered job speech will include support for something like the Regulation Moratorium and Job Preservation Act given that  we have been told (repeatedly) that deregulation and the Bush administration’s commitment to laissez-faire  (insert laugh line here) were the causes of the catastrophic financial crisis.

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As efforts continue to frame the debates over recovery, Paul Krugman discussed the merits of World War II and the potential benefits of an alien invasion on Fareed Zakaria’s GPS this past Sunday (video clip here).

Michael Pento (HuffPo) provides a useful critique. Money quote:

“the Keynesian economist’s favorite pastime is seeing people waste their lives digging holes in the ground or sacrifice their lives in war. Both acts create economic growth according to the topsy-turvy logic of men like Krugman.”

As efforts continue to frame the debate over recovery, Tim Cavanaugh (Reason) asks an important question: How Long Will it Take Keynes to Die?

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The President is on the tail end of his Midwestern bus tour, which was designed to focus on the issue of jobs. While there is no shortage of presidential remarks (punctuated by the obligatory hand shakes, autographs, and baby kissing), the lack of substance exhibited by the President is frustrating the NYT (see today’s lead editorial):

“Now, on a bus tour in the Midwest, he is bitterly pointing the finger at his opponents for their refusal to consider any new revenues to tackle the deficit and their insistence on deep near-term spending cuts that will only cause more economic pain. His anger is long overdue. But it would be much more effective if he combined it with strong ideas of his own for how to fix the economy, rather than the thin agenda he is now promoting.”

Yesterday’s editorial sounded the same note, suggesting the explanation could be found in the administration’s timidity:

“Mr. Obama and his advisers are still debating whether it is worth pushing any bold proposals, fearing that voters will see it as a failure if they don’t make it through Congress. That is an excuse for not trying.”

The Times is likely too harsh. The President’s armored bus tour (far different than the Biden Summer of Recovery tour from last summer) has allowed the President to gather much needed information. While some critics might question why the President would go to these states, given that Iowa and Minnesota have lower unemployment rates than the nation (6% and 6.7% respectively). However, as the WSJ notes, Press Secretary Jay Carney explained that the President was going to these states precisely for this reason: he wanted to see what was working.

The good news: this information will undoubtedly find an expression in a plan. Indeed, the administration has announced a bold, new plan. Well, alright, not a plan. But at least there is now a promise of a post-Martha’s Vineyard, post-Labor Day speech that will announce a plan. The AP cites a senior administration official who has presented the broad outline of the new jobs plan:

“The president’s plan is likely to contain tax cuts, jobs-boosting infrastructure ideas and steps that would specifically help the long-term unemployed. The official emphasized that all of Obama’s proposals would be fresh ones, not a rehash of plans he has pitched for many weeks and still supports, including his “infrastructure bank” idea to finance construction jobs.”

All of the proposals will be “fresh ones, not a rehash of plans he has pitched for many weeks”? The suspense builds. According to the AP report, “the [senior administration] official spoke on condition of anonymity because Obama has not yet disclosed his plans. No final decisions on the economic package have been made.”

The plans are going to be fresh but as of yet are undisclosed and have not yet been decided on. Precisely the assurance that the markets need in these rather tumultuous times.  Nonetheless, the President seems confident that the fresh, new economic ideas will force Congress to act. In his words:

“Hopefully, when they come back in September, they’re going to have a wakeup call that says we need to move the country forward.”


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This is a comment that I have heard a few times in the past few weeks regarding the issue of austerity. The Tea Party forced the GOP to embrace austerity, and we know that when FDR mistakenly listened to Treasury Secretary Morgenthau in 1937 and cut back on expenditures, the economy entered a rapid decline. The lesson, of course, is that austerity can impose a terrible cost on an economy that has not yet recovered.

As most Pileus readers will undoubtedly note, 1937 may be rich in lessons. As we know, the Federal Reserve imposed significant increases in reserve requirements. FDR’s rhetoric (remember that delightful phrase from the state of the union: “In spite of our efforts and in spite of our talk we have not weeded out the overpriviledged”) and efforts to introduce confiscatory tax rates created extreme regime uncertainty. As for fiscal policy, I am uncertain that there are great lessons to be learned.

I was updating some data I have generated on per capita domestic spending. The figures exclude defense spending, not because defense isn’t important but rather to get a sense of the trend line absent international crises, wars, etc.  The figures are adjusted for inflation (all presented in 2005 dollars) and the raw data is drawn from the typical sources (e.g., OMB Historical Tables, Census Bureau population figures). These figures are presented graphically below.

The most striking thing about these figures is how miserly the New Deal was by contemporary standards. The peak level of New Deal domestic spending in the 1930s was $809 per capita. This occurred after the “War Springs conversion” when FDR embraced active fiscal policy. The much cited austerity occurred after 1936, when per capita spending fell from $658 to $580. Remember, these figures are in 2005 dollars. In other words, the change in fiscal policy reduced federal domestic spending by approximately 21 cents per day per person.

A second striking thing about these figures is now much federal domestic spending per capita has increased overtime. Many look longingly to the good old days when the Gipper told us that government was the problem, not the solution. During his watch, domestic spending per capita increased from $4670 to $4951 (once again, in 2005 dollars). Once again, to place things in perspective, per capital domestic spending in 1988 was 6.12 times greater than the peak for the 1930s, in inflation adjusted dollars.

Moving forward, this year, the federal government’s per capita domestic spending is $7936. This is 9.81 times greater than peak per capita spending during the New Deal. Even if per capita spending were reduced to the levels of the last year of the George W. Bush presidency ($7066), it would be 8.73 times the New Deal peak (and for those who would rather look to more contemporary examples, 2.57 times greater than the peak of Great Society spending ($2746 per capita, 1968).

It is difficult to determine what the fiscal policy lessons of 1937 are when domestic spending per capita has increased so dramatically in the intervening decades. The biggest lesson is one that is often ignored. As much as many love to wag their finger at Lyndon Johnson or FDR, the levels of spending they engaged in was miniscule by today’s standards.  Critics may label any reduction in current spending as an exercise in austerity, but one wonders if we have any idea what austerity would really look like.

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Jobs, Jobs, Jobs

Now that the debt problem has been solved deferred, the attention of Washington turns to jobs (one of the issues that was seemingly unaddressed during the Summer of Recovery, 2010).

Just ask the President:

Obama offered little praise for the $2.1 trillion deficit package during a press conference at the Rose Garden, instead vowing to fight for “new jobs, higher wages and faster economic growth” in the coming months

And the Senate Majority Leader:

Flanked by his top lieutenants, Senate Majority Leader Harry Reid (D-Nev.) told reporters that Congress’s No. 1 job was “creating jobs for the American people.” Added Schumer: “It’s now time for Congress to get back to our regularly scheduled programming, and that means jobs.”

And House Minority Leader Pelosi:

 “It’s time for us to completely focus on jobs.”

As a sign of the deep commitment to jobs, Congress is taking a break from mud farming. It has adjourned until after Labor Day to kiss babies and raise campaign contributions, thereby securing the only jobs that truly matter.

As for the President (via Chicago Tribune):

With a debt ceiling deal completed Tuesday, Obama has on tap a 50th birthday fundraising concert at the Aragon on the North Side. The event features OK Go, Herbie Hancock and Jennifer Hudson. The president’s birthday is Thursday.

Big-dollar donors will attend a dinner fundraiser along with the concert at a cost of $35,800 a person. As has been the practice, the money raised will be divided between Obama’s re-election fund and the Democratic National Committee.

The exit from Washington may be a good idea given that the dog days of summer are bringing much bad news on the economic front, with continued instability in the EU, an unexpected decline in consumer spending, a slowing in manufacturing, continued threats of a debt downgrade, and a route in the stock market yesterday that turned the S&P negative for the year.

Thankfully, new job numbers will be released on Friday, creating a new opportunity to talk about jobs, before returning to the routine fundraising.

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