A first guess: -0.4% off of fiscal 2012 real GDP growth, with an unemployment rate in November 2012 0.2% above the baseline.
A hideous waste of opportunity. There is nothing in there to boost employment and capacity utilization. Absolutely nothing.
A first guess: -0.4% off of fiscal 2012 real GDP growth, with an unemployment rate in November 2012 0.2% above the baseline.
A hideous waste of opportunity. There is nothing in there to boost employment and capacity utilization. Absolutely nothing.
The White House says:
Office of the Press Secretary
FOR IMMEDIATE RELEASE
July 31, 2011
BIPARTISAN DEBT DEAL: A WIN FOR THE ECONOMY AND BUDGET DISCIPLINE
The debt deal announced today is a victory for bipartisan compromise, for the economy and for the American people…
No. It is a loss for the American people: it is not the way that they want to reduce the long-term deficit. It is certainly not a win for bipartisan compromise.
And it is not a win for the economy.
It is better than default would be--but default was never in the cards, at least not with lawyers at the president's disposal 10% as inventive as those who claim that we are not engaged in "hostilities" in Libya.
US economic policy is not yet triple A: A budget deal… better than the alternative of no deal… will bear little resemblance to the comprehensive package which Ben Bernanke and many economists have called for. That comprehensive package would introduce credible medium term policy changes to ensure fiscal sustainability in coming decades, while avoiding an excessive tightening in budgetary policy in the short term. So what does it seem we will get? Precisely the opposite…. [A] tightening in the budgetary stance of some 4 to 5 percentage points of GDP over the next two years. This tightening, however, is only about half of what would be required to ensure that the US attains a position of long term debt sustainability…. [T]he economy seems likely to be hit by a sizeable, early fiscal tightening, while failing to achieve longer term debt sustainability. This seems to be precisely the wrong way round….
In Britain, a credible medium term path for fiscal consolidation has been accompanied by a large fall in the exchange rate, and a highly expansionary monetary stance. Admittedly, that mix has, so far, resulted in nothing better than a very sluggish economy…. Both of these two escape routes are now strewn with difficulties in the US case….
[T]he price of removing its self-created problem with the debt ceiling seems likely to be that fiscal policy will be tightened at a time when the economy is already weakening.
Now is not a prudent time to strike a deal that cuts spending this year. Yet Obama is about to do so, rather than take any of a wide number of steps he could take to preserve the credit of the United States of America and be a good steward of the economy.
Marc Ambinder, last December, warned him about what was going to happen. And he ignored Marc.
Paul Krugman remembers:
Q Mr. President, thank you. How do these negotiations affect negotiations or talks with Republicans about raising the debt limit? Because it would seem that they have a significant amount of leverage over the White House now, going in. Was there ever any attempt by the White House to include raising the debt limit as a part of this package?
THE PRESIDENT: When you say it would seem they’ll have a significant amount of leverage over the White House, what do you mean?
Q Just in the sense that they’ll say essentially we’re not going to raise the — we’re not going to agree to it unless the White House is able to or willing to agree to significant spending cuts across the board that probably go deeper and further than what you’re willing to do. I mean, what leverage would you have –
THE PRESIDENT: Look, here’s my expectation — and I’ll take John Boehner at his word — that nobody, Democrat or Republican, is willing to see the full faith and credit of the United States government collapse, that that would not be a good thing to happen. And so I think that there will be significant discussions about the debt limit vote. That’s something that nobody ever likes to vote on. But once John Boehner is sworn in as Speaker, then he’s going to have responsibilities to govern. You can’t just stand on the sidelines and be a bomb thrower.
And so my expectation is, is that we will have tough negotiations around the budget, but that ultimately we can arrive at a position that is keeping the government open, keeping Social Security checks going out, keeping veterans services being provided, but at the same time is prudent when it comes to taxpayer dollars.
Menzie Chinn's take on the GDP revisions:
Econbrowser: Tales from GDP revisions: [In the previous unrevised data,]GDP fell at a 7% SAAR rate in 2008Q4 (the quarter that Don Luskin conjectured in September 2008 might be the start of unprecedented prosperity); in the revised figures, the decline was 9.3%…. As an interesting aside, the advance estimate (released at the end of January 2009) for 2008Q4 growth was only -4.1%…. The 2008Q4 q/q ar change is now only rivaled by the 1958Q1 q/q change (-11.1%).
The increase in GDP relative to 2009Q1 (when the ARRA was passed) is the same as before…. In other words, the revisions do not alter the estimated growth trajectory of the economy. If one considers the effect of the stimulus as relative to where the economy started (recalling the ARRA only really started kicking in in 2009Q2), then one’s views should not be altered…. On the other hand, it is even more clear now that the size of the stimulus was wholly inadequate…. The output gap is more negative than originally estimated (based on January 2011 CBO estimate of potential), and is now getting more negative…. [T]he implied output gap, at -6.9% in 2011Q1 versus the previously implied -5.3%, is daunting…. [T]he output gap is widening, as fiscal stimulus is withdrawn, and the economy continues to encounter headwinds from high energy costs, faltering foreign demand for US goods, and uncertainty regarding future demand and fiscal policy.
It strikes me that this seems an odd time to embark upon fiscal consolidation that is front-loaded -- i.e., has cutbacks in current or near-horizon spending….
The revisions have some implications for Okun’s law…. [T]he mystery is not why current (post-recession) employment growth is so slow (given GDP growth), but rather why it was so low at the end of the recession (09Q1, 09Q2)…. [T]here was no underprediction of employment growth subsequent to the recession (as one might have expected on the basis of past experience, particularly after the 1990-91 recession)…
Beyond The Top One Percent: John Quiggin makes the case that redistribution of income away from the top 1 percent is essentially the only thing that matters in American politics....
I really do think it’s an unduly limited view of political life. Even with several decades of median wage stagnation, the fact of the matter is that the median American household has quite a lot of money compared to the median household of almost every other country. And yet, I think there are a lot of other respects in which quality of life in the United States falls short. We spend a lot of time in traffic jams. We have both a frighteningly high murder rate and a frighteningly high level of incarceration. Our health care system is very inefficient. Americans work very long hours and have unusually little vacation time. It’s not clear to me that any of these issues can be usefully tackled primarily by focusing on higher taxation of the very wealthy.
What’s more, even in narrowly economic terms, I do think there’s a real need to tackle the issue of scarcity. The different debates about “gentrification” are instructive in this regard. The basic shape of the issue is that with housing in limited supply, those with less money will tend to be pushed out by those with more money. The result is very inegalitarian from the perspective of quality of life. And yet even if the income gap were narrowed, the scarcity would remain and it would still be the case that the richer households push out the poorer ones. To me, it’s an indication that we need to spend a fair amount of time thinking about the scarcity as such and ameliorating it. In America today, a house in a safe neighborhood with good public schools featuring a convenient commute to the central business district of an economically vibrant city is a scarce commodity. This scarcity is a problem — or perhaps an interlocking set of problems — that, like the inefficiency of the health care system and the brutal inefficacy of the crime control system needs to be tackled on its own terms.
The first rule of any negotiation in which you don't want to be taken to the cleaners is to say three things:
We are going to be dealing with each other for quite a while; it would be very nice if our interactions are win-win, because if they start out win-lose then they tend to degenerate to lose-lose very quickly.
I would really like a deal on this issue.
I don't have to have a deal on this issue--I could do X, and while X is not as good as a deal it is better for me than simply me letting you take me to the cleaners.
Matthew Yglesias recounts Obama's extraordinary negotiating failure:
Compromise In The Works: The rumored deals flying around Washington today all sound pretty bad. And how could they not be? The White House started with a position that:
- Failure to raise the debt ceiling is unacceptable.
- The country should enact substantial deficit reduction in 2011.
- Any deficit reduction package must include revenue increases.
But (1) and (3) were in significant tension. The White House strategy for getting (3) was to persuade the public that (3) was the correct position. They did that, and all polls showed that public opinion was on their side. But then an underpants gnome problem arose. They didn’t dissolve parliament and call for a snap election. Eric Cantor said “no” and once he said “no,” (1) collided with (3) and the White House dropped (3).
Once you’re there, how is the deal not going to be bad?
Then various people spent the past few weeks desperately trying to toss the President some kind of weapon he could use for leverage. Platinum coins, 14th amendment, weird option swap schemes, etc. But the President didn’t want to pick any of these up.
In that negotiating context, how can a decent deal emerge?
Let me reserve judgment until the surrender-and-visit-to-the-cleaners is actually set out, but I suspect that come Tuesday I will be forecasting a double-dip. Horrible for the economy. Horrible for America. Horrible for the world. And horrible for Obama's aspirations for a second term as well.
It's very hard to understand how he has wound up in this position.
One possibility is that Cantor and Boehner have figured out something that has been inherent in the system since FDR but that few people recognized. Perhaps the President is now the ultimate status quo player in the government: Whatever goes wrong the public takes to be his fault and his responsibility. If anything goes badly wrong his political adversaries pick up the pieces and are strengthened.
In that case, whenever the desires of the president conflict with the desires of the speaker of the House, the president has little leverage. Any speaker who does not fear disaster can roll any president. In this future, any bill that a speaker insists is must-pass gets attached to a debt-ceiling increase, and--unless there are people in the Senate equally willing to risk disaster, which is unlikely because senators are status-quo players too--so becomes law.
It's like a parliamentary system, with the debt-ceiling votes filling the role of votes of confidence.
Matthew Yglesias is depressed:
I actually think that whatever the contours of the deal, at this point the biggest damage is to the overall system of government. Obama has successfully transformed massive debt ceiling hostage taking from an act of breathtakingly irresponsible brinksmanship into a proven effective negotiating tactic. Suppose he gets re-elected in 2012. What’s he going to do when this issue recurs in 2013? Every time the president’s party has fewer than 60 votes in the Senate, we may face a recurrence of this crisis.
I'm not sure he should be that depressed--depressed yes, but not that depressed. Perhaps we will see Nancy Pelosi doing this to President Romney in 2013.
Remember the state of play: Macro Advisers (and many others) are forecasting roughly 3.4%/year real GDP growth over the next six quarters, with a large 1.2 oercentage-point decline in the unemployment rate--Okun's Law would suggest 0.6 even with that GDP forecast--accompanying it.
I suspect a bunch of the unemployment snapback is based on an assumption in the model that if you deviate from Okun's Law you are likely to snapback. That deviation that we thought existed is now gone as a result of the revised GDP path. I suspect that the next forecast iteration will show an end-of-2012 unemployment rate closer to 8.5% than to 8.0% even if the GDP path remains the same.
But let's concentrate on the GDP path. Karl Smith writes:
Structure of a Recovery « Modeled Behavior: I haven’t seen the internals of the Macro Advisors model but these numbers don’t sound off to me as a baseline. How would they come about?
- Rapid increase in multi-family housing built to rent….
- An end to fiscal contraction. The contraction in State and Local spending has been an intense blow to both employment and GDP. However, this should be coming to an end…. What we need is for State and Local to simply stop contracting.
- Net Exports. This is a hard call with all that is going on in Europe but both inflation and growth in the developing world should be slowing US import growth and increasing US export growth.
- Believe it or not, consumer spending. Consumer spending has not been a superstar but until the last quarter it was decent enough. Gas prices are the biggest variable here, but again I do not see the fundamentals supporting oil over $100 a barrel….
- Continued heavy investment in Equipment and Software by businesses. The current strength in E&P is hard to explain and its easy to see it going away. However, if you just assume that something that we don’t fully understand is boosting investment and look at it from a business cycle perspective then a strengthening economy should lead to even more rapid E&P accumulation.
Now, of course predictions are hard – especially about the future…. However, gloom is not a model. You have to base your best guess on your best understanding of the underlying economy. To me that points to growth, even if we have seen a string of disappointments over the last nine months.
It could happen. The future is uncertain. But I cannot help thinking that it would be wise to bet against Karl Smith's future's happening:
If people were going to try to move out of their sisters' basements into multi-family units, I think that they would have done so already--and that we would already have see rents rising. I do expect a multi-family housing construction boom, but it will follow rather than precede a rise in rents that has not happened yet.
Fiscal contraction is ongoing, and accelerating.
The Asian Import Fairy could show up, but I see no reason to think that trends will be markedly different from what they have been in the past year and a half.
Lots of people now know people who lost their job and have not yet managed to find another appropriate one even though it has been years. That is likely to impact consumer willingness to spend in a way that is hard to incorporate into the baseline model.
Businesses have been taking advantage of relatively healthy cash flows and low interest rates to invest in equipment and software at a very gratifying pace--a pace that I would say ought to be associated with above-trend capacity growth. But if demand is growing at less than trend and the capacity utilization rate is low, why should above-trend capacity growth continue?
We have had a non-declining 9% plus unemployment very low interest rate economy for two years now. And the employment-to-population ratio has not moved. Something about the future must be different from the recent past in order to get it to move upward. Starting in 1994 it was the dot-com boom that pulled us out of that jobless recovery. Starting in 2004 it was the housing boom that pulled us out of that jobless recovery. What is going to pull us out of this jobless recovery? I don't see it yet.
In my view the chance that the unemployment rate will be 9% or higher at the end of 2012 has just crossed 50%, heading upward.
Noahpinion: A real Laffer: AOne more short note on John Cochrane's paper…. A "dynamic Laffer effect" is a permanent effect of tax rates on growth rates…. Cochrane… suggests a value of "only" -0.02…. Sounds small and insignificant, right? It makes sense that taxes have some negative effect, however small, on the rate of growth, right?
Except it doesn't make sense. If taxes change the long-term growth rate, then tiny differences in tax rates between countries will, over a long enough time scale, cause countries' incomes to diverge. A country with a 10.01% tax rate will eventually become infinitely richer than a country with a 10% tax rate.
But you don't need to invoke infinity to see how silly this is. Here's a numerical example. The United States takes in about 27% of our GDP in tax revenue. Using Cochrane's numbers, a country that took in only 6% of its GDP in tax revenue would - all else being equal - grow about 3% per year faster than us, year after year. In a mere 24 years, that country would be twice as rich as us. After a century, they would be 19 times as rich as us. That's about the same as the current disparity between us and sub-Saharan Africa.
In other words, dynamic Laffer effects can't exist, because, as a physics prof of mine liked to say, "then the Universe would explode." Tiny differences in tax rates among rich nations would eventually add up to massive differences in wealth, and we'd see exponential divergence instead of the convergence that we see in the real world. The nonexistence of dynamic Laffer effects is a stability condition of growth theory.
And yet the existence of these Universe-exploding effects is absolutely central and crucial to conservative policy ideas.
Noahpinion certainly can play this game. But a lot of other people, it seems, cannot...
To the Head of the Security Police and SD, SS-Gruppenfuehrer Heydrich:
Supplementary to the task entrusted to you by the decree of January 24, 1939, to solve the Jewish question under the prevailing circumstances by emigration or evacuation in the most favorable way possible, I herewith commission you to carry out all necessary preparations in regard to organizational, practical and material matters for a total solution of the Jewish question in the German sphere of influence within Europe.
Macro Advisors and other mainstream forecasters certainly expect the unemployment rate to decline: a typical glide path has “headwinds” keeping the unemployment rate at 9.2% until the end of this year, and thereafter has it declining from 9.2% to 8.6% in half a year and to 8.0% by the end of 2012.
I really do not see where this forecast is coming from.
It is certainly the case that over an average year in the entire 1948-2010 period the unemployment rate converges 23% of the way back to its sample average level of 6.1%. That regression coefficient starting with 9.2% late this year would get us to 8.7% by mid-2012 and to 8.1% by end 2012.
But since 1990 mean reversion in the American unemployment rate has ebbed away. Since 1990 we have closed on average not 1/4 but rather 1/14 of the gap between the current unemployment rate and its long-run sample average over the course of a year.
The underlying logic of the forecast and the model appears to be that the strong mean-reversion in unemployment we saw in the business cycles from 1948-1990 is still there. However, since 1990 after all three recessions--the recession of 1990-1991, the recession of 2001, and the recession of 2007-2009--the return of unemployment to normal has been held back by special, temporary factors. The forecast is thus that these special, temporary factors are about to end--or, at least, will end six months from now.
And I don't see why the factors that are keeping unemployment from falling are special, temporary, and about to end rather than the new normal, persistent, and likely to endure.
Is he really in favor of dropping the conforming loan limit? Are they actually going to drop the conforming loan limit? It seems simply insane to me: yet another contractionary shock to the housing market is not something that Dr. Bernanke should be ordering right now.
Bernanke: Private sector ready for conforming loan limit drop: Federal Reserve Chairman Ben Bernanke said in a House committee hearing Wednesday the private market is set to fill the void when the conforming loan limits on government-backed mortgages expire in October – at a higher cost to homebuyers.
Congress raised the conforming loans limits in 2008 to allow Fannie Mae, Freddie Mac and the Federal Housing Administration to insure, guarantee and buy more mortgages at a time when private funding froze during the financial crisis.
Without an extension, the maximum mortgage amount will drop to $625,500 from $729,750 in high-cost areas on Oct.1.
"As far as Fannie Mae and Freddie Mac are concerned, there is a tradeoff there between supporting the higher priced homes and weaning the housing finance system off of unusual limits it was put under during the crisis," Bernanke said. "I understand the private sector is taking at least a significant number of the jumbo mortgage market but at a higher cost."…
According to Capital Economics, only 5% of the loans bought or guaranteed by Fannie and Freddie fell above where the conforming loan limit will drop to in October.
Very Serious Suckers: Jonathan Chait has an excellent piece documenting the way in which what he calls the establishment, and I call Very Serious People, misjudged the way the debt ceiling thing would play out:
The failure to understand the crisis we were entering was widely shared among centrist types. When Republicans first proposed tying a debt ceiling hike to a measure to reduce the deficit, President Obama instead proposed a traditional, clean debt ceiling hike. He found this position politically untenable for many reasons, one of them being that deficit scolds insisted that using the debt ceiling to force a fiscal adjustment was a terrific idea, and that connecting the deficit debate to a potentially cataclysmic financial event was the mark of seriousness.
He then goes on to show how the usual suspects — the WaPo editorial page, the Committee for a Responsible Federal Budget, the Concord Coalition, etc. welcomed a crisis over the debt ceiling in the belief that it would lead to fiscal goodness.
This was terrible policy, even if it had worked: now is not the time for fiscal austerity, and the way the VSPs have shifted the whole conversation away from jobs and toward deficits is a major reason we’re stuck in the Lesser Depression.
But it also showed awesome political naivete. As Chait says, the first thing you need to understand is that modern Republicans don’t care about deficits. They only pretend to care when they believe that deficit hawkery can be used to dismantle social programs; as soon as the conversation turns to taxes, or anything else that would require them and their friends to make even the smallest sacrifice, deficits don’t matter at all.
I can’t help but notice that Chait’s list of chumps is basically the same as the list of people who puffed up Paul Ryan and gave him an award for fiscal responsibility. Enough said.
What’s really awesome here is the blindness. Anyone reading the newspapers with an open mind had a pretty good idea of what would happen in the debt fight; only Washington insiders managed to fool themselves.
But they’re Very Serious.
The Financial Times must stay, of course. But what else? I want must-reads but also smart people who think differently than I do.
What do people recommend?
UPDATE: So far we have the indispensable Ta-Nehisi Coates, David Frum, Bruce Bartlett, and Daniel Larison...
WSJ on Debt Crisis: Reject Reality: I used to write editorials for the Wall Street Journal myself, 20 years ago now. So I’m well aware of the challenge faced by those assigned to compose these documents. The strict demands of the paper’s ideology do not always lie smoothly over the rocky outcroppings of reality. It can take considerable skill to match the two together….
If you were to write a story about government debt, you’d probably be inclined to write about… decisions about expenditure and decisions about revenue…. And that’s why, my friend, you would wash out as a WSJ editorialist. They wrote this editorial without any reference to revenues whatsoever. Boom! Gone! Don’t deny reality. Defy reality….
One of the many traps and impediments facing a Journal editorialist writing about debt is that up until 2009, the US debt burden rose most under the two presidents the Journal most ardently supported: Ronald Reagan and George W. Bush. The debt burden declined most under the presidents the Journal most despises – Dwight Eisenhower, Bill Clinton and Jimmy Carter. How to deal with this troubling problem? It must have taken some searching, but the Journal managed to find a chart vaguely relating to debt that went up under Clinton and stayed flat under Bush…. What’s so great about this chart is that it excludes two of the biggest federal spending programs: Medicare Part B and Medicaid, both of whose costs rose faster in the Bush 2000s than in the Clinton 1990s. Isn’t that ingenious? Would you ever have thought of doing that? Again – that’s why you would wash out. This is not a job for just anyone.
But maybe my favorite bit of the editorial is the solemn warning at the end that unless the US corrects its course, it may follow in the wake of Greece. The Greek crisis, as almost every economist published on the Journal oped page would acknowledge, is the product of the collision of heavy Greek borrowing against the hard constraint of the Euro currency. And guess which US newspaper was the most passionate advocate of the Euro currency? Guess which paper wants the US to be tied to some basket of commodities all the better to inflict Greek-like crises on Americans?
No, no, I wont answer. Like the Journal’s editorialist, I’ll follow the motto: the less said, the better.
Why oh why can't we have a better press corps?
How insurance improves living standards : Imagine a world where the Japanese government did not insure its population against extremely low probability events like the recent earthquake — this is Greenspan’s example, not mine. The toll of death and suffering in one of the richest countries in the world, which was catastrophically high to begin with, would soar, and the Japanese government, through inaction, would be killing thousands of its own citizens, in a heartless and entirely avoidable decision. Meanwhile, the broader Japanese economy would suffer much more greatly than it already is.
In other words, the Japanese government doesn’t need to be “pressed” to save its citizens’ lives in the event of a disaster; that’s its job.
What’s more, the second part of Greenspan’s thesis is equally incoherent, if not quite as morally monstrous. According to Greenspan, things like “expensive building materials whose earthquake flexibility is needed for only a minute or two every century” are “idle resources” and therefore in economic terms a waste of money. But a significant part of the Japanese economy is comprised of companies and individuals engaged in manufacturing and installing precisely those expensive building materials. It’s hard to see how the production of goods and services means that the economy is not engaged in the production of goods and services.
And it’s simply not true that the insurance industry acts as a brake on the economy, an area where otherwise-productive resources go to be wasted and squandered. Indeed, there’s a strong case to be made that when we remit our insurance premiums to someone like Berkshire Hathaway, they’re invested rather better than if they remained sitting in our checking account.
Rebutted by Paul Krugman:
The Corrosion of the Conservative Economic Mind: First Michael Boskin, now John Taylor: there seems be an epidemic of politically conservative economists who used to be technically competent repeating the obviously wrong falsehood that Reagan ushered in an era of “unprecedented” growth…. [I]t just ain’t so… every macroeconomist in America knew it wasn’t so. Here’s one measure that the BLS happens to have put in a convenient chart, so that I’m not choosing the dates…. [W]e had an awesome performance in the generation following the war (despite very high tax rates on the rich and a very strong union movement); we had a long period of poor productivity performance that spanned the Ford, Carter, Reagan, and Bush I administrations; we then had a revival during the Clinton administration, but even so not up to postwar standards. By the way, I don’t give Clinton credit for that revival; it was about learning to use technology. But in any case, there is no hint of a Reagan miracle in the data.
So what on earth is going on with people like Boskin and Taylor? It’s not hard to guess; but as Dan Quayle said, a mind is a terrible thing to lose.
Laura D'Andrea Tyson: [T]he immediate crisis facing the United States economy is the jobs deficit, not the budget deficit. The… jobs gap – currently around 12.3 million jobs. That is how many jobs the economy must add to return to its peak employment level before the 2008-9 recession and to absorb the 125,000 people who enter the labor force each month. At the current pace of recovery, the gap will be not closed until 2020 or later….
The jobs gap is primarily the result of the dramatic collapse in aggregate demand that began with the financial crisis of 2008. Even with unprecedented amounts of monetary and fiscal stimulus, the recovery that began in June 2009 has remained anemic, because consumers, the major driver of private demand, have curbed their spending, increased their saving and started to deleverage and reduce their debt — and they still have a long way to go…. [T]he jobs gap warrants additional fiscal measures to increase private-sector demand and promote job creation. Sadly, current signals from Washington indicate that such measures will not be taken. Instead, the risk grows that large, premature cuts in government spending will reduce aggregate demand, will tip the economy back into recession and drive the unemployment rate back into double digits….
Although the jobs gap and the high unemployment rate are the immediate problems in the American labor market, they are not the only ones. And there is no sign that the budget negotiations in Washington are going to address these other problems, either…. Job growth between 2000 and 2007 was only half what it had been in the preceding three decades…. Between 2002 and 2007, productivity grew by 11 percent, but the hourly compensation of both the median high-school-educated worker and the median college-educated worker fell…. Employment grew in high-education, high-wage professional technical and managerial occupations and in low-education, low-wage food-service, personal-care and protective-service occupations; employment fell in middle-skill, white-collar and blue-collar occupations. The drop in middle-income manufacturing jobs was especially precipitous…. The United States is underinvesting in three major areas that help a country create and retain high-wage jobs: skills and training of the work force, infrastructure, and research and development. Spending in these areas currently accounts for less than 10 percent of all federal government spending, and this share has been declining over time…. Such investments fall into the “non-security discretionary spending” category of the federal budget, the category in line to be cut to historic lows to reduce the government deficit over the next decade….
The labor market is suffering from two problems: an immediate jobs gap, primarily the result of inadequate demand, and a long-term shortfall in rewarding employment opportunities for American workers, primarily the result of structural forces…. [E]ven when demand has recovered, many of the good jobs lost during the last decade will not be replaced by new good jobs without significant public investments to strengthen the attractiveness of the United States as a production location…
Project Syndicate: BERKELEY – It is hard right now to write about American political economy. Nobody knows whether the debt-ceiling tripwire will be evaded; if so, how; or what will happen if it is not.
If no deal to raise the debt ceiling is reached by August 3, interest rates on United States Treasury bonds could spike, or they could remain stable, as investors decide they have other problems to worry about. Or the US Federal Reserve, the Peoples Bank of China (PBC), or both – or even some other body – could support the market. Or interest rates could rise if people expect a much weaker global economy – and, in a weaker global economy with no inflation, investors should be holding more US Treasuries, not fewer.
Frankly, no one knows what legislative deal will be struck to raise the debt ceiling. All we know as of this writing is that a deal would probably involve cuts in near-term spending, meaning weaker growth and higher unemployment over the next 18 months. And we can assume that it would be repealed and replaced by something else come January 2013, either by a re-elected President Barack Obama, or by a new, Republican president.
So, rather than talking about the US debt ceiling, let us think instead about all of the things that the debt-ceiling impasse has prevented the US government from doing during the past six months – all of the useful policies that might have been debated and enacted, but were not.
The risks imposed by global warming, for example, have not gone away. The sooner the world starts preparing to deal with those threats, the better. Another six months should not be lost.
The employment-to-population ratio in the US remains flat – mired at the very low levels to which it fell during the recession. With households desperately trying to rebuild their balance sheets, and with capital investment remarkably healthy, the only places to boost spending to restore capacity utilization and unemployment to normal levels are exports, government purchases, and construction investment. But opportunities to pursue the necessary policies have not been grasped. Here, too, another six months should not be lost.
Likewise, the US could have fulfilled its normal role as the conductor of the international economic orchestra. It has not, even as the European Union continues to respond inadequately to its own slow-moving solvency crises. The mandarins of northern Europe continue to measure out a drip-feed of support with coffee spoons. Another six months have been lost.
America faces long-run and short-run problems: decaying infrastructure, weakening educational systems, and a dysfunctional health-care system that produces sub-standard outcomes at twice the cost of any other industrial country. Solving any of these three problems would go a long way toward resolving the long-run financing imbalance between current tax rates and America’s long-run social-insurance promises that the debt-ceiling debate’s instigators supposedly want to address.
But the US government won’t address them. Six months that could have been spent boosting the long-run growth potential of the American economy through infrastructure investment, educational reform, or an overhaul of health-care financing – greatly easing America's long-run deficit and debt dilemmas in the process – have been lost.
During the run-up to World War II, Winston Churchill, speaking in Parliament, lamented “the years that the locusts hath eaten” – the period during which preparatory action to face the great crisis of his day (the rise of Continental fascism) could have been taken, but was not. Over the past century – with the notable exception of the Great Depression – the US political system has been remarkably good at foreseeing crises long before they have happened, and at least setting the foundation for dealing with them when they have occurred.
But so far in the third millennium, this skill – or simply run of luck – has deserted the US. My view is that the problem would fix itself easily if only the Republican Party of Dwight D. Eisenhower could stage a comeback (though without Richard Nixon and Joseph McCarthy).
It is becoming increasingly clear, however, that the problem is one not only for the US, but for the rest of the world as well. Since December 7, 1941, the world has in large part been able to rely on global governance by a somewhat-competent hyperpower. That America may be gone for good. If it is, the world needs to develop other institutions for global management – and quickly.
Saying over and over again that August 3 is the date that checks start bouncing, claiming that there are no additional devices that can be used to avoid the crunch, and now claiming that it must make payments in the order in which they arrive. All these seem to me to be wrong. The standard assumption among people I talk to is that we understand that Treasury is saying these things to put pressure on the congress, but that we all informed observers no better--that we are in on the con. But there is no surer sign that you are the mark somehow than confidence that you are in on the con…
Felix Salmon is equally puzzled:
Can Treasury prioritize bond payments?: One of the more curious pieces of rhetoric in this whole debt-ceiling debate is coming from Treasury…. [I]t’s trying as hard as it can to get people to believe that if the debt ceiling isn’t raised, it’ll end up defaulting on Treasury bonds. Here’s Binyamin Appelbaum:
Officials have said repeatedly that Treasury does not have the legal authority to pay bills based on political, moral or economic considerations. It cannot, for instance, set aside invoices from weapons companies to preserve money for children’s programs…
This is scary — it raises the unthinkable spectre of a payment default on America’s bonded debt. Maybe that’s exactly what Treasury wants: a mini-crash in the bond market could be just the thing to concentrate minds in Congress…. But is it actually true?… Appelbaum pointed me to this report from the Congressional Research Service…. [A]lthough it all gets very murky very quickly, that’s largely the fault of Treasury, which seems to be doing its best to muddy the waters….
GAO’s 1985 opinion posits that Congress’s legislative silence simply leaves the determination of payment prioritization to the discretion of the Treasury Department. Conversely, Treasury appears to assert that the lack of specific legislative direction from Congress operates as a legal barrier, effectively preventing it from establishing a prioritization system. “Appears to assert” is right. A lot of this asserting is taking place on background: Treasury will talk a lot about the legality or otherwise of prioritizing payments if it’s off the record, but try to shine some daylight onto those arguments and they tend to scurry into the shadows. Check out how carefully Tim Geithner chooses his words here:
The idea of “prioritization” has been rejected by every President and Secretary of the Treasury who have considered it. It is unwise, unworkable, unacceptably risky, and unfair to the American people. There is no alternative to enactment of a timely increase in the debt limit.
All of this is absolutely true. But note the word conspicuous by its absence here: “unlawful”. When pressed, Treasury will say that prioritizing debt repayments is unwise — but will stop short of saying that they’re not allowed to do that. And insofar as Treasury’s legal argument has any basis at all, it seems to be based on the absence of any explicit instructions from Congress with regard to what should be prioritized. Yet Treasury is the agency saying most vocally that it doesn’t want Congress to pass any such law.
If push comes to shove and the debt ceiling isn’t raised, then, my base-case scenario is that the government will continue to pay all of its debts… find some other way of ensuring that the government meets all its obligations — not just Treasury bonds, but everything else as well. After all, Treasury has repeatedly said that any kind of failure to pay an obligation constitutes an event of default — it’s not just bond coupons which matter.
Felix's view is the common view on Wall Street and of Ms Market. But it is, after all, based on a belief that Felix (and Wall Street, and Ms Market) are in on the con…
Message to Congress: RInflationary price rises and increases in the cost of living are today threatening to undermine our defense effort. I am, therefore, recommending to the Congress the adoption of measures to deal with this threat. We are now spending more than $30,000,000 a day on defence. This rate must and will increase. In June of this year we spent about $808,000,000-more than five times the $153,000,000 we spent in June, 1940. Every dollar spent for defense presses against an already limited supply of materials. This pressure is sharply accentuated by an ever-increasing civilian demand. For the first time in years many of our workers are in the market for the goods they have always wanted. This means more buyers for more products which contain steel and aluminum and other materials needed for defence. Thus a rapidly expanding civilian demand has been added to a vast and insistent demand by the government.
Those who have money to spend are willing to bid for the goods. The government must and will satisfy its defense needs. In such a situation, price advances merely determine who gets the scarce materials, without increasing the available supply. We face inflation, unless we act decisively and without delay. The consequences of inflation are well known. We have seen them before. Producers, unable to determine what their costs will be, hesitate to enter into defense contracts or otherwise to commit themselves to ventures whose outcome they cannot foresee. The whole production machinery falters. peculators, anticipating successive price advances, withhold commodities from essential military production. Costs to the government increase, and with it the public debt. Increases in the workers' cost of living, on the one hand, and excessive profits for the manufacturer on the other, lead to spiraling demands for higher wages. This means friction between employer and employed.
Great profits are reaped by some, while others, with fixed and low incomes, find their living standards drastically reduced and their life-long savings shrunken. The unskilled worker, the white-collar worker, the farmer, the small investor all find that their dollar buys ever less and less. The burden of defense is thrown haphazardly and inequitably on those with fixed income or whose bargaining power is too weak to secure increases in income commensurate with the rise in the cost of living. And over all hovers the specter of future deflation and depression, to confuse and retard the defense effort and inevitably to aggravate the dangers and difficulties of a return to a normal peacetime basis.
Economic sacrifices there will be and we shall bear them cheerfully. But we are determined that the sacrifice of one shall not be the profit of another.... Faced now with the prospect of inflationary price advances, legislative action can no longer prudently be postponed. Our national safety demands that we take steps at once to extend clarify and strengthen the authority of the government to act in the interest of the general welfare. Legislation should include authority to establish ceilings for prices and rents, to purchase materials and commodities when necessary, to assure price stability, and to deal more extensively with excesses in the field of installment credit. To be effective, such authority must be flexible and subject to exercise through license or regulations under expeditious and workable administrative procedures. Like other defense legislation, it should expire with the passing of the need, within a limited time after the end of the emergency....
I recognize that the obligation not to seek an excessive profit from the defense emergency rests with equal force on labor and on industry, and that both must assume their responsibilities if we are to avoid inflation.
I also realize that we may expect the wholehearted and voluntary cooperation of labor only when it has been assured a reasonable and stable income in terms of the things money will buy, and equal restraint or sacrifice on the part of all others who participate in the defense program. This means not only a reasonable stabilization of prices and the cost of living but the effective taxation of excess profits and purchasing power. In this way alone can the nation be protected from the evil consequences of a chaotic struggle for gains which must prove either illusory or unjust, and which must lead to the disaster of unchecked inflation.
FRANKLIN D. ROOSEVELT.
The White House, July 30, 1941.
One of the most puzzling things that those of us in the Rubin wing of the Democratic Party face is that we get no credit for any of the good things we do in the eyes of "centrist" commentators, and the Republicans get no blame for any of the bad things they do in the eyes of "centrist" commentators.
No More Mister Nice Blog tries to explain what is going on:
No More Mister Nice Blog: YES, PAUL, THESE PEOPLE ARE DESTROYING AMERICA, BUT THEY'RE NOT REALLY A CULT OF CENTRISM: I agree that these people bear a great deal of the responsibility for our plight, but I don't really think they're a cult of centrism per se. If Barack Obama had taken office and pursued a genuine left agenda -- large tax hikes on the wealthy, nationalization of failing banks, a return to Glass-Steagall, single-payer health care -- I can guarantee you that any continued economic weakness wouldn't be blamed on "everyone." It would be blamed on liberalism. And the same would go for a debt crisis.
The cult only says that "everyone's at fault" when Republican extremism is at fault. That's because the cult's real problem isn't a lust for centrism -- it's an aversion to acknowledging that Daddy GOP beats us. It's the kind of denial that takes place in households where there's domestic abuse.... At all times, the system accepts the notion that Republicans are good and decent and well-meaning, even in failure (see, e.g., George W. Bush). At all times, it accepts the notion that what Republicans are advocating is within the pale. If Republican extremism becomes so blatantly obvious that it must be acknowledged, extremism on the other side must be found (or invented, or blown up out of proportion), so Daddy GOP won't be charged with abuse -- the story we agree on is that "everyone" was fighting. And we just go on living that way.
Why oh why can't we have a better press corps?
The Malevolent Ex-Maestro: [T]he most offensive thing intellectually is the incredible fallacy of claiming that higher capital requirements for banks amount to keeping resources idle. Hello? Bank capital doesn’t consist of canned food or steel ingots held in a vault somewhere, and raising capital requirements doesn’t mean that food or raw materials have be stored in a bunker. All that’s happening when you increase capital requirements is that you are requiring that banks reduce their leverage, financing more of their portfolio from equity and less from deposits or borrowing. And this has nothing to do with resource use; it’s about the distribution of risk. Specifically, raising capital requirements means that if something goes wrong, more of the cost will be borne by the bank’s owners, less by depositors, lenders, and/or whoever (including the taxpayer) insures those deposits or loans. It’s true that shifting the equation in this way will discourage risk-taking — but that’s a feature, not a bug. In case you hadn’t noticed, banks took too many risks in the past, helping land us in the mess we’re in.
Global crisis: Policy failure on a massive scale: MAYBE everything will turn out all right…. As each day passes, however, frustration grows. Leaders in America and Europe are dallying with failure on an epic scale.... America and Europe are flailing because their leaders are failing. They seem to be too small for the tasks at hand, too petty, and too myopic.
The challenges facing Europe and America are big, but they're not mysterious. In Europe, the issues are sovereign debt, vulnerable banks, and a poorly designed currency area. It's not tricky to see what must be done…. European leaders know what they need to do. They have been slow to do it for two reasons. First, the magnitude of the commitment necessary to save the union is uncertain…. And second, the distribution of the costs of the commitment is uncertain, and no individual entity wants to pay a penny more than is necessary. The concerns are understandable, but this thrift is fundamentally wrong in the context of the current crisis….
In America, the situation is more ridiculous still. The economy is vulnerable. New data continue to reveal just how weak growth was in the second quarter. The economy may scarcely have expanded at a 1% annual pace. Unsurprisingly, job growth was too slow to keep up with a growing labour force, and the unemployment rate began rising again…. Washington seems practically excited to stamp out optimism. Congress has spent the first month of the third quarter dangling the prospect of a full blown fiscal crisis over the heads of American firms and households…. [W]hile tens of millions of workers are un- or underemployed and wages flat, the government is doing its absolute best to kill the latest growth rebound in its crib. It is shocking.
Again, it's not like the correct policy path is incredibly complicated. Here, I'll sum it up in three quick steps:
- Don't cause a major crisis.
- Do spend more and tax less for the next year or so. D* Do spend less and tax more after that.
See? That's really easy! If you wanted to move up to more complicated ideas, you could talk about using the opportunity of record low borrowing costs to make needed, long-overdue investments in critical American infrastructure. Instead, Congress seems determined to convince the world that America shouldn't be allowed to borrow at all, except at highly punitive rates…. It's inexcusable. And it is a direct result of a leadership in Washington that is too small-minded to see the danger it's courting by recklessly pursuing a foolish ideological agenda.
Right now, Angela Merkel doesn't look like the leader Europe needs to spare it a wrenching crisis. Jean-Claude Trichet looks like the wrong man in the wrong place at the wrong time. Barack Obama looks like a man who picked a fight he couldn't finish. John Boehner looks to be too worried for his political future to cow a caucus apparently hungry for catastrophe….
Maybe everything will turn out all right. Shame on the leaders of Europe and America for working so diligently to ensure that it doesn't.
Jon Chait points out politely--very politely--that Dan Balz is simply not competent at his job:
Boehner Still Controls The GOP: Here's another example of reporting that badly misdiagnoses the situation. Dan Balz writes in the Washington Post:
House Republicans have spent the past two weeks debating debt-ceiling proposals that have no possibility of becoming law at this time. What they discovered Thursday is that they couldn’t even get a majority of themselves to agree.
Not true. They have a majority of themselves to agree. What they lack is the requisite 90% of themselves [needed to pass a bill through the House]. Balz continues:
The changes Boehner has been forced to make to his proposal probably will make it even more difficult for his rebellious colleagues to accept any compromise that comes over from the Senate.
The rebellious colleagues are not going to be voting for a compromise with the Senate. They don't need to. Their votes will be replaced with Democratic votes. Boehner's problem will not be with with two dozen most right-wing members of his caucus, but with the median members of his caucus, who will determine what kind of compromise Boehner can accept.
Read the (print) Washington Post, and if you believe it you may well wind up knowing less than you knew before...
Yes, it is insane. But Ms Market's apparent belief is that a U.S. "default event" would have no affect on the chances of payment of the coupons and principal on the 10-Year Treasury bond in the long run, but would exert a powerful depressing effect on the economy in the short run--hence a greater excess supply of savings, a lessened demand for risk, and higher prices for long U.S. Treasury bonds.
Michael Mackenzie and Tim Braithwaite:
US Treasury makes plans for default: US Treasury officials raised the possibility of delaying its benchmark quarterly debt sales in August at a meeting with big Wall Street dealers on Friday held at the Federal Reserve Bank of New York. The Treasury decided against releasing a contingency plan on Friday but – with one eye on Capitol Hill and another on Wall Street – officials could announce as soon as the weekend how they would prioritise payments if the debt ceiling was not raised.
According to a note from Morgan Stanley, the meeting with the 20 primary dealers – who underwrite Treasury debt sales and deal with the markets desk of the New York Fed – focused on the bill auctions next week and a possible delay of the quarterly debt refunding sales, which involves the auction of new three-year, 10-year and 30-year securities.
The news accelerated the fall in Treasury yields in mid-afternoon trading on Friday, with the 10-year note at 2.79 per cent, down 16 basis points – its lowest level since November.
Had the Recovery Act been continued, our average rate of GDP growth over the past three quarters would have been not 1.3%/year but instead 2.7%/year.
I had thought that Christina Romer had gotten a commitment from Obama in 2009 that there would be "no 1937s": no premature phase-out of fiscal stimulus before the recovery was well established…
America's economy: Distress signal: BEA revised its national accounts numbers back to 2007 for this release, and the picture revealed is far darker than anyone previously believed. From 2007 to 2010, real output declined by 0.3% per year on average. Previously, BEA had estimated annual growth of 0.1% over that period. The decline in output during the intense period of financial crisis was significantly more severe than economists had thought. In 2008, the economy shrank 0.3%, rather than holding flat, as earlier estimated. In 2009, the economy shrank 3.5%, worse than the earlier 2.6% projection. During the ugliest months of the crisis, in the fourth quarter of 2008 and the first quarter of 2009, output declined at a shocking 8.9% and 6.7% annual pace, respectively. It is now clear that the American economy has yet to reattain its previous peak in real output, achieved three full years ago.
If nothing else, this awful report helps to solve a number of lingering mysteries…. Arguments that unemployment must be structural, given the failure of projected growth rates to generate new hiring, now look silly. Projected growth rates were simply overstated…. Those overly optimistic assessments of the likely impact of interventions… also make much more sense now. Policymakers were fighting a fire far more intense than they recognised.
Of course, the previous underuse of countercyclical policy suggests that it's more important than ever to get policy right now. Unfortunately, Washington is failing miserably on this score. Policy stances that were inadequate before now look dangerously tight. The Federal Reserve should have all the excuse it needs to reconsider its decision to halt purchases of government assets. Despite all the warnings about inflation, the core Personal Consumption Expenditures price index, which the Fed follows closely, rose just 1.3% in the year to the second quarter. That's far too low.
Meanwhile, Congress' behaviour looks incredibly reckless…. [W]hile America needs to address its medium- and long-run fiscal challenges, immediate austerity would be a mistake. The dire economic situation undergirds this point: Washington should delay immediate fiscal cuts…. Instead, it seems as though the best possible outcome of the current debt-ceiling impasse is a deal which hacks away at current spending, increasing the government drag on growth. The risk remains, however, that Congress will fail to reach a deal in time…. Given consumer anxiety, the risk of a catastrophic government failure, however small, isn't helping.
And of course, there is no shortage of trouble elsewhere. All signs indicate that now is the time for policymakers to rush to the tiller and pilot the ship quickly and decisively back on course. Instead, leaders have left the economy adrift, even as rocks loom ahead.
No Growth, No Jobs, and No Help From Washington: While Washington sets itself on fire, the economy is frozen stiff. GDP has grown 1.6% in the last year, a third lower than analysts had thought as early as yesterday. Between January and March this year, it grew by 0.4%, which means it practically stopped. If you're wondering why there are no new jobs, you can probably stop wondering. There is no real recovery. Meanwhile, Washington is debating whether or not to shut down government borrowing. It goes without saying -- or, I hope it goes without saying -- that there couldn't be a worse time to shut down Washington, fire government workers, or front-load spending cuts. The end of stimulus has already resulted in the firing of so many state and local government workers, that total government has now declined by more than the private sector.
A national economy is complicated. But what's hurting us is simple. Incomes and spending aren't growing for the vast majority of workers. The San Francisco Fed found that typical consumer is spending $2,000 less this year than he would be if pre-recession growth had continued. The other components of GDP -- business investment, exports and government spending -- aren't strong enough to compensate for that basic, central weakness.
The debate in Washington over the debt ceiling is about improving our fiscal health. But the chief indicator of fiscal health is our debt-to-GDP ratio. Debt as a share of the economy is the only thing that matters. If the economy isn't growing, it does not matter how small your deficits are. The ratio won't decline, and your fiscal health won't improve.
What would be the ideal way out of this mess?… [H]igher deficits today, from more spending or lower taxes (or both)…. If government doesn't continue to pursue high deficits, we're dooming ourselves to month after month of jobless, "recovery-less" recovery. Which is to say: Basically, we're doomed.
Steve Clemons falls victim to the pointless contrarianism disease:
It's not attractive.
There is no upside to default.
Michael Kinsley was smart enough to play the pointless contrarian game and get away with it. He is unique.
Richard Grossman is puzzled by John Taylor:
John Taylor does not understand the word “unprecedented&rdquo: John Taylor argues that:
the best way to understand the problems confronting the American economy is to go back to the basic principles upon which the country was founded—economic freedom and political freedom...
[H]e is a little vague on exactly what “economic freedom” means, but cites (among other things) the Patient Protection and Affordable Care Act the Dodd-Frank Wall Street Reform and Consumer Protection Act as examples of economically damaging overreaching on the part of the government.... Taylor’s claim that they are hurting the economy are unfounded.
Taylor’s assertions about recent American economic history are also without foundation in fact. He writes:&
With lessons learned from the century’s tougher decades, including the Great Depression of the ’30s and the Great Inflation of the ’70s, America entered a period of unprecedented economic stability and growth in the ’80s and ’90s. Not only was job growth amazingly strong—44 million jobs were created during those expansions—it was a more stable and sustained growth period than ever before in American history...
Taylor has got the numbers mostly wrong.... [R]eal GDP in the US grew by about 3% in both the 1980s and 1990s. Compare that with the 1950s and 1960s, when real GDP grew by 4.13% and and 4.43%.... Then compare it with the 4% growth rate experienced between 1870 and World War I.... Taylor’s statement becomes even more difficult to fathom.... [E]mployment rose by 35 million between 1980 and 1999, and only by 21.5 million between 1950 and 1969. But, of course, there were many more people employed in 1979 than in 1949, so employment growth was higher during the 1950s and 1960s (38%) than in the 1980s and 1990s (36%).
Taylor argues that the the 1980s and 1990s were decades of spectacular economic success. He is wrong.
Mark Lillis reports:
Rep. Hoyer endorses 14th Amendment option as a last-resort solution: President Obama should invoke the 14th Amendment to hike the debt ceiling unilaterally as a last resort to prevent a government default, House Minority Whip Steny Hoyer (D-Md.) said Thursday.
"It's arguably his power to do so," Hoyer told MSNBC.
"Very frankly, if it came down to his looking default in the eye on Tuesday or taking this action, as President Clinton said, better to take the action and find out later that perhaps he went beyond his authority but at least protected the credibility of the United States of America," he said.
The remarks align Hoyer with a number of other House Democratic leaders, who are urging Obama to invoke the Constitution to prevent a government default if Congress fails to raise the debt limit before an Aug. 2 deadline.
First of all, unless something really weird happens--like the Treasury prepaying an extra $10 billion to somebody before it has to--it's not August 3 but rather August 10. Why Geithner and Obama keep saying August 2 I have no idea: still saying August 2 seems a way to completely and permanently blow your credibility.
Second, it's not that nothing bad happens until some drop-dead date happens and then something very, very bad indeed happens. Bad things are happening now as a result of the debt-ceiling crisis--and, with the economy as weak as it is, these aren't bad things we should be letting happen. The bad things that happen will get gradually worse as time passes, but if it is good to find a technical fix on August 2 it is better to find a technical fix and announce it on July 29, and still better to have announced a technical fix on July 1, if not June 1.
Obama is not the big bad actor here. The biggest bad actor is the Republican Party. The second biggest bad actor is the "opinions of shape of earth differ" press corps. But in failing to be a proper steward of the economy and avoid creating pointless risk and fear, Obama has not done well at all here.
The appropriate time to pull whatever technical fix Obama has in his pocket out is not August 2, but rather this morning.
And the yield on the Ten-Year Treasury bond is now less than 2.9%.
And fiscal contraction is--surprise, surprise--still contractionary. Let's go to the back of the envelope: shrink government purchases by 0.5% of GDP between last fall and this spring and you shouldn't be surprised to see this put 1% of fiscal drag on the level of real GDP, and thus make the first half growth rate 2% lower than it would otherwise have been.
And, of course, the next round of state and local fiscal contraction hits the economy this quarter and next quarter...
8:30a BREAKING U.S. GDP up 1.3% in second quarter from weak Q1
8:30a Q1 GDP revised much weaker than previous estimate
8:30a U.S. Q2 GDP up 1.3% annualized vs. 1.6% expected
8:30a Q1 GDP up revised 0.4% vs. prev. est.1.9%
In the first six months of 2011 real GDP grew at an annual rate of only 0.8% per year. At that growth rate, unemployment will rise at about 1 percentage point per year.
I need to see the guts of the numbers, but unless there is something very odd in them, the chance that the unemployment rate will be above 9% in November 2012 just crossed 50% heading upward.
A rational Federal Reserve would:
A rational administration would:
Back in 1932 Herbert Hoover was very strong on how the economy needed the federal government to develop a plan for balancing his budget. Herbert Hoover was also very strong on how the housing sector needed federal government intervention and guarantees--the Homeowners Loan Corporation and similar things--and how business needed support to reduce risks--the Resolution Trust Corporation. I have been listening and I don't hear any of those last two from Obama.
8:30 AM EDT Friday:
The bond market still thinks that this debt-ceiling mess is all a game of Dingbat Kabuki, with no long-term implications at all.
Mark Gongloff reports:
S&P Bluffing on US Downgrade?: Here’s a little good news, maybe, depending on how much credit you give Morgan Stanley on such things: Morgan Stanley economist David Greenlaw doubts the rating agencies have the guts to downgrade the US. In a Bloomberg TV interview with Margaret Brennan, Mr. Greenlaw said he thought a downgrade would be avoided, because he thinks politicians will do just enough to enable the rating agencies to spare the US without losing face.
“We think they’re unlikely to follow through on the threat of a downgrade, as long as [politicians] give them something they can hang their hat on,” he said. Such a hat-rack could include a new deficit-fighting commission (a feature of House Speaker Boehner’s plan) and/or a plan to get to the $4 trillion in deficit reduction SP says it wants. “We think they’ll avoid downgrading,” he said.
And he doubts the rating agencies really have a stomach for a downgrade, and all the market turmoil that could come with it: “They don’t have a model in place,” he said. “There are all sorts of ramifications to downgrading the US, and they just haven’t taken the steps necessary to put in place a downgrade of the US sovereign credit.”
I don't have a model of S&P. I don't think that they should downgrade the U.S.--from an economic-forecasting perspective it would be wrong to do, and from an institutional-survival perspective it would be dangerous to do. But that does not mean that they will not do so.
Why oh why can't we have a better press corps? Paul Krugman:
The Centrist Cop-Out: The facts of the crisis over the debt ceiling aren’t complicated. Republicans have, in effect, taken America hostage, threatening to undermine the economy and disrupt the essential business of government unless they get policy concessions they would never have been able to enact through legislation. And Democrats — who would have been justified in rejecting this extortion altogether — have, in fact, gone a long way toward meeting those Republican demands.
As I said, it’s not complicated. Yet many people in the news media apparently can’t bring themselves to acknowledge this simple reality. News reports portray the parties as equally intransigent; pundits fantasize about some kind of “centrist” uprising, as if the problem was too much partisanship on both sides.
Some of us have long complained about the cult of “balance,” the insistence on portraying both parties as equally wrong and equally at fault on any issue, never mind the facts. I joked long ago that if one party declared that the earth was flat, the headlines would read “Views Differ on Shape of Planet.” But would that cult still rule in a situation as stark as the one we now face, in which one party is clearly engaged in blackmail and the other is dickering over the size of the ransom?
The answer, it turns out, is yes. And this is no laughing matter: The cult of balance has played an important role in bringing us to the edge of disaster. For when reporting on political disputes always implies that both sides are to blame, there is no penalty for extremism….
As you may know, President Obama initially tried to strike a “Grand Bargain” with Republicans over taxes and spending. To do so, he not only chose not to make an issue of G.O.P. extortion, he offered extraordinary concessions…. Obama effectively staked out a position that was not only far to the right of the average voter’s preferences, it was if anything a bit to the right of the average Republican voter’s preferences.
But Republicans rejected the deal. So what was the headline on an Associated Press analysis of that breakdown in negotiations? “Obama, Republicans Trapped by Inflexible Rhetoric.” A Democratic president who bends over backward to accommodate the other side — or, if you prefer, who leans so far to the right that he’s in danger of falling over — is treated as being just the same as his utterly intransigent opponents. Balance!…
[F]or those who insist that the center is always the place to be, I have an important piece of information: We already have a centrist president….. The president, as we’ve seen, was willing, even eager, to strike a budget deal that strongly favored conservative priorities. His health reform was very similar to the reform Mitt Romney installed in Massachusetts. Romneycare, in turn, closely followed the outlines of a plan originally proposed by the right-wing Heritage Foundation. And returning tax rates on high-income Americans to their level during the Roaring Nineties is hardly a socialist proposal. True, Republicans insist that Mr. Obama is a leftist seeking a government takeover of the economy, but they would, wouldn’t they? The facts, should anyone choose to report them, say otherwise.
So what’s with the buzz about a centrist uprising? As I see it, it’s coming from people who recognize the dysfunctional nature of modern American politics, but refuse, for whatever reason, to acknowledge the one-sided role of Republican extremists in making our system dysfunctional. And it’s not hard to guess at their motivation. After all, pointing out the obvious truth gets you labeled as a shrill partisan, not just from the right, but from the ranks of self-proclaimed centrists.
But making nebulous calls for centrism, like writing news reports that always place equal blame on both parties, is a big cop-out — a cop-out that only encourages more bad behavior. The problem with American politics right now is Republican extremism, and if you’re not willing to say that, you’re helping make that problem worse.
I know some people inside the White House do. But he doesn't.
Dean Baker comments:
President Obama Doesn't Understand the Origins of the Deficit: This fact should have been highlighted in the news reporting.... Obama asserted:
For the last decade, we have spent more money than we take in. In the year 2000, the government had a budget surplus. But instead of using it to pay off our debt, the money was spent on trillions of dollars in new tax cuts, while two wars and an expensive prescription drug program were simply added to our nation’s credit card. As a result, the deficit was on track to top $1 trillion the year I took office.
This is seriously mistaken.
The Congressional Budget Office's projections from January of 2008, the last ones made before it recognized the housing bubble and the implications of its collapse, showed a deficit of just $198 billion for 2009, the year President Obama took office. In other words, the deficit was absolutely not "on track to top $1 trillion."... Obama does not have the most basic understanding of the nature of the budget problems the country faces. He apparently believes that there was a huge deficit on an ongoing basis as a result of the policies in place prior to the downturn. In fact, the deficits were relatively modest. The huge deficits came about entirely as a result of the economic downturn.... This misunderstanding of the origins of the budget deficit could explain President Obama's willingness to make large cuts to core social welfare programs, like Social Security, Medicare, and Medicaid...
… and the state were a committee for managing the affairs of the bourgeoisie…
Well, the big bourgeoisie--the bankers--are really annoyed at Boehner. Interestingly, they are not so annoyed at Obama: they understand that he has not created this mess.
With any luck they will draw the lesson that, as Clive Crook put it in one of his few moments of courage, "the Republican Party… deserve[s] political annihilation" for this clown show, and shift their political weight over to supporting the Rubin wing of the Democratic Party.
Tom Braithwaite, Michael Mackenzie, and Robin Harding:
Bank chiefs send US debt default warning: Wall Street’s leading chief executives intervened in the US debt debate on Thursday, writing to President Barack Obama and Congress to warn of “very grave” consequences of a default and urging them to cut a deal “this week”.
Lloyd Blankfein of Goldman Sachs and Jamie Dimon of JPMorgan Chase were among 14 chief executives of banks and insurers who signed the letter, along with Rob Nichols, the head of the Financial Services Forum, the umbrella association for the biggest financial groups in the US.
The letter said a default, which is still perceived as unlikely, or a downgrade from a triple-A credit rating, which analysts believe is increasingly likely, “would be a tremendous blow to business and investor confidence – raising interest rates for everyone who borrows, undermining the value of the dollar, and roiling stock and bond markets”….
The Treasury has so far refused to make public any contingency plans for the event that there is no rise in the debt ceiling. Unless the Treasury says, for example, whether it would prioritise interest payments, then it is hard for the Fed to discuss the implications with banks…. Banks are concerned about a wide range of operational issues as well as the broader question of how the Fed would support the financial system if there were disruption caused by a failure to raise the debt ceiling. For example, they would like to know whether the Fed would be willing to lend against Treasuries with a defaulted interest payment, which would support the repo market. At a broader level, they would like to know whether the Fed will support the refinancing of Treasury securities by stepping in and buying any unsold stock at auctions…. [B]anks want to know what support the Fed would offer if there were a run on money market funds…. They also want to know how the Fed would handle their capital and liquidity regulation if, for example, Treasuries fell in value or they experienced large inflows or outflows of deposits and how principal and interest payments would be made.
The obvious answer is that the Fed would buy enough Treasuries at a high enough price to keep September 2008 from coming again, but not so much to keep interest rates from spiking and panicking congress into passing a debt ceiling increase. But the obvious answer, earlier, was that the Fed would engage in quantitative easing until nominal GDP was on track to return to it pre-recession trend, and the Fed did not do that.
That seems to me the only way that he can faithfully execute all the laws. Otherwise, he has to break some--or have the Treasury Secretary violate his fiduciary duty as trustee of various trust funds.
Minting high-denomination platinum coins, by contrast, creates no such problems. And is completely legal.
I suggest that he immediately mint 50 ten-pound liberty-head coins, each of them denominated at $100 billion, and temporarily store them in the Treasury Secretary's office. Then the Treasury Secretary can take them up one at a time to the Federal Reserve Bank of New York in a special armored train as required.
Think how much money the federal government could make from the movie rights alone..,
The Platinum Coin Option: I keep hesitating to write about this because it sounds insane, but Jack Balkin’s a professor at Yale Law School so I’ll let him say it:
Sovereign governments such as the United States can print new money. However, there’s a statutory limit to the amount of paper currency that can be in circulation at any one time. Ironically, there’s no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds.
It’s right here in 31 USC § 5112 “Denominations, specifications, and design of coins.” It’s super-prescriptive about all kinds of things until you get to section (k):
(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.
It actually seems to me that there’s a colorable argument that President Obama is legally obliged to order Secretary Geithner to order the mint to start creating large denomination platinum coins. The debt ceiling is legally binding. We can’t borrow any more money. But at the same time, the Social Security Act is still valid. There are appropriations bills that extend through September. The assumption is that starting August 2, the Treasury will start “prioritizing” payments. But whence the legal authority to do that. By contrast, the legal authority to mint platinum coins is right there in the statute. This would, I assume, lead to a downgrading of American sovereign debt.
I would furthermore say that by the failure of President Obama to have taken this step last month he has already violated his oath of office. One of the laws he is required to faithfully execute requires that he prevent the debt of the United States from being questioned. Yet by his inaction the debt of the United States is, right now, being questioned--and is being increasingly questioned more and more as time passes.
Robin Hanson appears to think that people have the right to send killer robots off to hunt down people who use their ideas without paying.
Me? I think this is an example of how thinking too much about property rights can madden the mind.
You have no fundamental right to enjoy the innovations produced by others without compensating them. You owe them, at least your gratitude. Yes for now it may be best to let you take innovations freely without paying, since the alternative seems too expensive. But you have no right to expect that situation to last forever, any more than ranchers had a right to expect they could forever let their animals trample nearby farms...
The Right To Ideas : Robin Hanson is apparently the kind of libertarian who believes in government-created monopolies over the use of ideas…. I’m not really sure what sense the term “fundamental right” is being used here…. Are we sad that Isaac Newton was unable to patent a method for calculating instantaneous rates of change? Does Hanson think he should be paying royalties to Michael Spence every time he writes about signaling? Obviously, people who come up with smart ideas have the right to not share those ideas with the world. But the idea that a person, having shared his ideas with the world, now has the right to call the cops and have people arrested for taking inspiration from the idea without paying for a license in advance seems odd. Which is exactly why historically government regulation of idea-copying has been the exception rather than the rule. Maybe some of those exceptions have done some good. But the trend toward every stronger IP rules seems to me very difficult to explain as progressive vindication of some kind of natural right to not have your ideas imitated.
My own ideas on this particular subject (and of course other subjects) are deeply indebted to the thinking of others, and I like to think that in my work I’ve also influenced other people’s thinking. It’s all to the good that this pattern of mutual influence occurs without licensing agreements. The lack of “incentive” to innovate with new ideas isn’t holding me back nearly as much as I would be held back by inability to borrow ideas from other people.
Daniel Kuehn writes:
A Technical Problem--Like the Debt Limit--Demands a Technical Solution. But the White House Won't Go There: I personally don't see why we have to make this complicated as even a 14th amendment issue. Obama has conflicting legislation: he is told what revenue to raise, he is told what money to spend, and he is told what debt to issue. Congress can't legislate arithmetic - Obama HAS to break one of these laws. For me it's not some sneaky Constitutional measure. It's a matter of following the laws that Congress has the clearest authority to pass first: appropriation acts and revenue acts.
Without the Fourteenth Amendment, Obama can obey the tax laws, the spending laws, and the debt limit law--by defaulting on the debt. With the Fourteenth Amendment, Obama cannot default on the debt: he has to choose one of the other options. And the settled legal principle is that later laws are deemed to repeal earlier ones if that is what is necessary to make things coherent.
Does anybody have any doubt that any Republican President--Bush II or Bush I or Reagan or Ford or Nixon or Eisenhower or Hoover or Coolidge or Harding or Taft of Roosevelt--in Obama's current situation would not hesitate but would use one of the many, many technical fixes to the debt ceiling problem, just as Clinton used a technical fix when he faced the same problem in 1995-1996?
What Obama is thinking remains incomprehensible: a riddle inside a mystery inside of an enigma. But Michael Tomasky attempts to read the tea leaves:
President Obama Should But Won't Raise the Debt Ceiling Unilaterally: Barack Obama surely has to be thinking hard about invoking Section 4 of the 14th Amendment, unilaterally raising the debt ceiling, and getting on with it. With the House Republicans now rejecting a proposal (Harry Reid’s) that is 100 percent cuts and no revenues, there can be little question in the minds of most non-Kool-Aid-swilling Americans about the identity of the unreasonable party. Indeed it could be argued that acting unilaterally now is the only responsible move. Bill Clinton... would pursue this course. And yet one senses the president is highly reluctant to do it. Why?
Three explanations strike me as plausible….
The first reason would be the straightforward and obvious one that he and his handlers fear the political repercussions. Some Republicans, and certainly the right-wing noise machine, will crow for impeachment. Obama and his White House are not exactly a group that itches for a fight. They would be dragged perforce into a partisan mud-wrestling match, which Obama has proved time and again he doesn’t want. And there are some legitimate legal questions surrounding the use of the 14th Amendment…. But in fact, this would in many ways be a gift to Obama. Calls for impeachment would likely perform the nifty trick of getting both left and center on his side….
The second reason Obama… really believes—still!—in civic-republican notions of government as an arena for reasoned deliberation. That he could still think this is akin to a child believing in Santa Claus until he’s 15—but apparently he does…. From this perspective a unilateral action would be almost impious…. Obama’s position has declined from admirable principle to indefensible fetish. Politics simply isn’t going to get better and more deliberative any time soon.
The third reason… is… Unilateral action would be at odds with Obama’s image of himself…. But Obama badly overestimated his abilities here. The contemporary American right ain’t the Harvard Law Review, where he was once able to get conservatives and critical race theorists to sit in the same room and reason together. Does he still really believe he can do this with today’s Republican Party? He apparently does. It’s hard to figure out why else he would have used Monday night’s speech to continue to argue for a “balanced” approach that was already off the table. He really must have thought Republicans would be inundated by constituent phone calls, come to their senses, and realize that, by golly, they’d better sit down and reason with Mr. Reasonable. If Obama thinks that, then he is caught up in mere egoism, and he is paradoxically harming the republic he believes he is….
[I]f Obama moved forcefully and said. “I am the president, and I met them here and here and here, and they wouldn’t budge, and I’m finished with them, and now is the time to act,” I have little doubt that the markets—and the people—would react positively. That would prove that he’s a leader, and it would force him to choose sides. It’s high time he did both.
Free-marketeers and inflation: Missing Milton Friedman | The Economist: I don't claim that the right, loosely defined, is chock full of Murray Rothbard fanatics. And whatever it is that is keeping Ben Bernanke's Fed from loosening up, it's not the enduring intellectual legacy of Murray Rothbard. At least, not directly. But I do believe elements of Ron Paul's Rothbardian monetary philosophy enjoy a great deal of currency on the grassroots right, and I believe this exerts a considerable gravitational force on the institutional right, such that arguments for zero or very low inflation are accorded more weight than they would were Milton Friedman still in full effect.
If only the free-market right still had such a powerfully persuasive "technician advising the state how to be more efficient", our economy might now be slightly less screwed. Maybe it would help were "advising the state to be more efficient" less widely considered "evil work".
We really, really need better quality control here.
One Bad Bigot Don’t Spoil The Whole Bigot Barrel, Baby: Shorter Ross Douthat:
With notably rare exceptions, like the massacre of innocent children, people like that Norwegian guy have some valid concerns about the browns.
Alternate Ross Douthat:
Say what you will about
the tenets of National Socialismextremist genocidal tendencies, Dude, but at least it’s an ethos.
Indeed. Ross Douthat:
Ross Douthat: “Al Gore or the Unabomber?”… juxtaposed passages from the former vice president’s eco-manifesto “Earth in the Balance” with quotes from Theodore Kaczynski’s critiques of industrial civilization and asked the reader to guess which writer was which. Was it the bearded hermit who hailed “isolated pockets of resistance fighters” for struggling against modern society’s “assault on the earth”? No, that would be the former vice president. Was it Kaczynski, the mathematics Ph.D. turned mad bomber, who complained about the “destructive” impact of bringing a child into “the hugely consumptionist way of life so common in the industrial world”? No, Gore again….
Anders Behring Breivik… has roughly the same relationship to the cultural right that Kaczynski had to certain strains of environmentalism. The darkest aspects of his ideology belong strictly to the neo-fascist fringe. But many of his beliefs and arguments echo the rhetoric of mainstream cultural conservatives, in Europe and America alike…. [H]is critiques of multiculturalism and immigration resemble arguments that have been advanced, not just by Europe’s far-right parties, but by mainstream conservative leaders….
How should European conservatives react?… [His crimes should be denounced and disowned…. But this doesn’t mean that conservatives need to surrender their convictions…. Europe’s cultural conservatives are right: Mass immigration really has left the Continent more divided than enriched, Islam and liberal democracy have not yet proven natural bedfellows…. For decades, Europe’s governing classes insisted that only racists worried about immigration, only bigots doubted the success of multiculturalism and only fascists cared about national identity…. Conservatives on both sides of the Atlantic have an obligation to acknowledge that Anders Behring Breivik is a distinctively right-wing kind of monster. But they also have an obligation to the realities that this monster’s terrible atrocity threatens to obscure.
28th July 1941: During a short stroll after the situation conference, F. [Fuhrer] spoke with Schm. and myself about further developments in the east. It was on account of these that he was not sleeping at night, since he was uncertain about many things. Within his breast two souls wrestled: the political-strategic, and the economic.
Politically he would say that the two principal suppurating boils had to be got rid of: Leningrad and Moscow. That would be the heaviest blow for the Russian people and the Communist Party. Goring had assured him that it could be done by the Luftwaffe alone, but since Dunkirk he [Hitler] had become a little sceptical. Economically speaking there were quite different objectives.
Whereas Moscow was a big industrial centre, the south was more important, where oil, wheat, more or less everything was located necessary to keep the country going. A land where milk and honey flowed.
One thing at least was absolutely required, and that was a proper concentration of forces. To use Panzers in fighting to demolish cities, that was a sin against the spirit. They had to operate in the open areas of the south. He had already started to hear the cries of those from whom they had been stripped; but that was neither here nor there.
OS X 10.7 Lion Ditches the Disk, Offers Cloud-Only Recovery: And what happens if your computer goes belly-up? Is there a recovery disk in the box? Nope. Apple gets around this by partitioning the boot drive and putting a utility called Lion Recovery onto it. When you have trouble, press Command-R when you start up and you’ll be booted into recovery mode. From there you can repair the disk, reinstall Lion or restore from a Time Machine backup.
I know what you’re thinking. What if the drive is completely dead?… [I]f you slot in a brand-new, bare hard drive, the Mac will boot into “Internet Recovery” mode. This connects to Apple’s servers and grabs a copy of Lion Recovery, and you go from there. This works thanks to firmware installed on Lion-capable Macs bought from now on.
The bad news is that you need an Internet connection to do it, and we all know that hard drives always fail at the most inconvenient moment. The worse news is that, even if you have an Internet connection, it’s going to take a long time to download that 3.5GB installer file.
"I now know it is a rising, not a setting, sun" --Benjamin Franklin, 1787
J. Bradford DeLong—that's me—is a professor of economics at the University of California at Berkeley, a research associate of the National Bureau of Economic Research, a weblogger for the Washington Center for Equitable Growth, and was in the Clinton administration a deputy assistant secretary of the U.S. Treasury.
My best work extends from business cycle dynamics through economic growth, behavioral finance, political economy, economic history, international finance to the history of economic thought and other topics.
Among my best works are: "Is Increased Price Flexibility Stabilizing?" "Productivity Growth, Convergence, and Welfare," "Noise Trader Risk in Financial Markets," "Equipment Investment and Economic Growth," "Princes and Merchants: European City Growth Before the Industrial Revolution," "Why Does the Stock Market Fluctuate?" "Keynesianism, Pennsylvania-Avenue Style," "America's Peacetime Inflation: The 1970s," "American Fiscal Policy in the Shadow of the Great Depression," "Review of Robert Skidelsky (2000), John Maynard Keynes, volume 3, Fighting for Britain," "Between Meltdown and Moral Hazard: Clinton Administration International Monetary and Financial Policy," "Productivity Growth in the 2000s," "Asset Returns and Economic Growth."
I have signed up with the Leigh Speakers' Bureau for non-academic and non-public service talks...