"The GOP's Great Depression agenda"

Ryan Cooper at WaPo "Plum Line":

Paul Ryan has set everyone’s socks ablaze with a new comment suggesting he wants to shake down the country again over the debt limit. This inevitably inspired a lot of amateur psychoanalysis attempting to figure out whether he was serious or just pandering to the base. Whether that is true is an important thing to figure out, but the deeper subtext here is that the Republican Party continues to organize itself around the kind of austerity agenda that, should they obtain enough power to implement it, would cause another recession immediately, possibly a very bad one.

"Austerity for Dummies"

A "layman's guide" to anti-austerity from Stephanie Kelton @ New Economic Perspectives that does a pretty good job of tackling the central arguments in non-econospeak terms:

1. When we allow our economy to operate below full employment (as now), we are sacrificing trillions of dollars in lost output and income each year. We can never go back and recover it.  It is gone forever.  You’ve seen the debt clock?  Here’s the lost output clock.

2. Capitalism runs on sales. In survey after survey, we find that the Number One reason businesses are slow to hire and invest in new plant & equipment is a lack of demand for the things they produce.  Businesses hire and invest when they’re swamped with customers.  See this story in The Wall Street Journal.

3. The two decades after WWII certainly aren’t the only time that robust growth reduced the DEBT/GDP ratio.  During the late 1990s and early 2000s, the economy grew at an above average clip.  Unemployment fell to 3.7%.  Inflation remained modest.  There was a job vacancy for every job seeker in America — genuine full employment.  Because people were working, there was less spending to support the unemployed (food stamps, unemployment compensation, etc.) and more people paying income taxes. The deficit disappeared, and the national debt fell to around 40% of GDP.  So you do not need post-WWII conditions to support the argument that economic growth is the way to reduce the debt.

4. The debt/GDP ratio falls when the denominator grows faster than the numerator.  Right now, just about everyone is fixated on using austerity (raising taxes and slashing spending) to reduce the numerator (DEBT).  The problem, as Europe has kindly shown us for years, is that austerity “works” by crushing incomes, which in turn crush sales (or what we call GDP).  So instead of bringing the ratio down, austerity hampers growth, which causes deficits and debt loads to rise.

The Sequester's Impact on Recession and Recovery

The New Republic asked a range of economists whether the sequester will throw us back into recession. Here are some answers:

With $85 billion in budget cuts set to take effect Friday, when the sequester kicks in, there's been plenty of debate about whether the economy will spiral back into a recession. In search of some clarity, The New Republic asked economists from across the political spectrum a simple question, "Will the sequester start another recession?"...

It could. And either way, it's dumb policy.
"My reaction is possibly, but improbably. That said, it's pushing policy in exactly the wrong direction. At a time when the economy still needs a stimulus to promote recovery rather than restrictive policies to prevent overheating. I think job one economically today is to restore full employment, that is today's problem. Tomorrow's problem will be to deal with long term budget imbalances, but trying to curb long term budget imbalances now carries the high probability of delaying economic recovery and the possibility of turning recovery into decline and, were that to happen, it would be a major misfortune for the nation." — Henry Aaron, senior fellow of economic studies at the Brookings Institution

Probably not. But we'll notice a difference.
"In my view it will have a noticeable hit on the growth rate of between 0.5 and 0.9 percentage points. That won't put us in a recession but it will definitely slow improvements to unemployment and the job market." — Austan Goolsbee, professor of economics at the University of Chicago and former chairman of the Council of Economic Advisers

It's certainly not good for the economy.
"It's not helpful. However, trading the sequester for long-term Social Security and Medicaid/Medicare benefit cuts would be worse. Short-term cuts are fairly easy to reverse if it's done quickly." — James Galbraith, economist, University of Texas at Austin

The Walmart World

George Packer @ The New Yorker  takes a look at the fragility of the Walmart consumer economy after decades of increasing income inequality and years of Great Recession:

If you were to write a social history of America through the story of business, what would be the most significant companies in the years since the Second World War? I’d divide the period into two: from 1945 to the mid-seventies, I might name General Motors and Woolworth’s. They set the standard for corporate success and behavior during a period that could be called the Roosevelt Republic, when a social contract underwrote American life. It included an expanding middle class, a strong safety net, high marginal tax rates, a white male establishment that grudgingly made way for other groups, a bipartisan approach to legislation in Washington, and a business culture that was cautious, loyal, hierarchical, and unimaginative.

In the decades since the mid-seventies—you could call it the Reagan Republic, but I prefer the “Unwinding”—the social contract has frayed to the point of disintegration. The middle class has shrunk; tax rates (especially on upper brackets) have plunged; inequality has exploded; the safety net (especially for the poor) has weakened; the old power structure has given way to a more diverse and broad-based upper class based on education; bipartisanship—well, you know; and business culture has become entrepreneurial, fast, risk-taking, and harsh. The trade-off: more freedom, less security.

Two companies have defined the years of the Unwinding: one is Apple, the other, Walmart. Steve Jobs’s genius for design and marketing helped create the consumer taste of that educated upper class—the spare, sleek, Bauhaus-inspired devices; the turtlenecks and jeans; the self-congratulatory language of revolution and inspiration; the Einstein fetish—with the Apple Store a kind of secular temple for devotees in prosperous cities and suburbs, mostly along the two coasts.

Jobs’s stylistic and philosophical opposite was Sam Walton. He came out of the heartland, where he saw the potential for a strategy of low cost and high volume in overlooked backwaters like Siloam Springs, Arkansas, and Coffeyville, Kansas. Walmart’s period of explosive growth coincided with decades of wage stagnation and deindustrialization. By applying relentless downward pressure on prices and wages, the company came to dominte both consumer spending and employment in small towns and rural areas across the middle of the country. The hollowing out of the heartland was good for Walmart’s bottom line: its slogan might have been an amoral maxim attributed to Lenin—“The worse, the better.”

"The folly of deficit fearmongers"

Dean Baker @ The Guardian:

The news that the UK, with negative growth in the fourth quarter of 2012, faces the prospect of a triple-dip recession, should be the final blow to the intellectual credibility of deficit hawks. You just can't get more wrong than this flat-earth bunch of economic policy-makers.

They're pretty much batting zero. They failed to foresee the collapse of housing bubbles in the US and Europe and its consequent downturn. They grossly underestimated its severity after it hit. And their policy prescription of austerity has been shown to be wrong everywhere that applied it: in the US, the eurozone and, especially, the UK.

By all rights, these folks should be laughed out of town. They should be retrained for a job more suited to their skill set – preferably, something that doesn't involve numbers, or people.

But that's not what is happening. The people who got it all wrong are still calling the shots in the UK, the IMF, the European Central Bank, and Washington. The idea that job security would have any relationship to performance is completely alien in the world of economic policy. With few exceptions, these people enjoy a level of job security that would make even the most powerful unions green with envy.

Of course, the cynical among us might note that the highest earners have done just fine. High unemployment rates undermine workers' bargaining power, which ensures that almost all gains from economic growth go to those at the top. In the US, the profit share of national income is near its post-second world war high.

Even if this upward redistribution was not a deliberate goal, it certainly affects the urgency with which policy-makers attend to depressed economies and high unemployment. If the stock markets were tumbling, as they were in 2008-09, there would likely be a lot more attention devoted to fixing the economy. (And if you think a plunging stock market has to mean that the economy is going down, you need to study more economics.)

Instead of focusing on glaring issues, like how the economy is down 9m jobs from its trend growth path, or how the typical worker's real wage has risen by just 2% over the last decade, the policy people in Washington are debating how to reduce the deficit. This makes about as much sense as debating the right color to paint the White House kitchen.

Income Inequality Stifles Economic Growth

  Annie Lowery @ New York Times:

Income inequality has soared to the highest levels since the Great Depression and the recession has done little to reverse the trend, with the top 1 percent of earners taking 93 percent of the income gains in the first full year of the recovery.

The yawning gap between the haves and the have-nots — and the political questions that gap has raised about the plight of the middle class — has given rise to anti-Wall Street sentiment and animated the presidential campaign. Now, a growing body of economic research suggests that it might mean lower levels of economic growth and slower job creation in the years ahead, as well. 

“Growth becomes more fragile” in countries with high levels of inequality like the United States, said Jonathan D. Ostry of the International Monetary Fund, whose research suggests that the widening disparity since the 1980s might shorten the nation’s economic expansions by as much as a third. 

Reducing inequality and bolstering growth, in the long run, might be “two sides of the same coin,” research published last year by the I.M.F. concluded. 

In the United States, since the 1980s, rich households have earned a larger and larger share of overall income. The 1 percent earns about one-sixth of all income and the top 10 percent about half, according to statistics compiled by the respected economists Emmanuel Saez of the University of California, Berkeley, and Thomas Piketty of the Paris School of Economics. 

Romney's plan to dig a deeper hole...

John Cassidy at The New Yorker:

In today’s Wall Street Journal, the Columbia economist Glenn Hubbard, who is one of Mitt Romney’s top economic advisers, has an op-ed piece entitled “The Romney Plan for Economic Recovery.” When I saw the headline, I felt a rush of anticipation: at last, I thought, here is the big new jobs initiative that the G.O.P. campaign is relying on to turn things in its favor.

I was mistaken. The first two thirds of Hubbard’s piece is taken up with an attack on the Obama Administration’s economic record: ineffective stimulus, too much regulation, failure to tackle the housing market—all very familiar stuff. When Hubbard eventually gets to laying out Romney’s alternative, there is nothing new either, just a reiteration of the existing policy plaform: a vague promise to cut federal spending and reduce the budget deficit, an even vaguer plan to cut taxes but in a “revenue-neutral fashion,” and a commitment to repeal Obamacare and Dodd-Frank. Judging by this piece, and by recent statements from Romney himself, the G.O.P. campaign still doesn’t have a recovery program worth the name. Indeed, if we are to believe the evidence of our eyes and ears, he remains committed to immediate spending cuts that could well bring on another recession.

Public sector austerity is killing economic recovery

Heidi Shierholz and Josh Bivens at Economic Policy Institute explain that cutbacks in the public sector are the key to understanding the current stagnant "recovery" that has turned deep recession into lingering depression.  The private sector - while still not robust enough, given the deep trough created by the 2008 financial meltdown - is recovering at a pace consistent with previous recessions.  But prior recessions weren't accompanied by cutbacks in state and local employment that we are currently seeing.  As Bivens and Sheirholz demonstrate, this strangling of the public sector is the single biggest difference from previous recessions that weighs upon current potential recovery:

(T)he most glaring weakness in the current recovery relative to previous ones is the unprecedented public-sector job loss seen over the last three years. The figure belowshows that private sector job growth in the current recovery is close to that of the recovery following the early 1990s recession and is substantially stronger than the recovery following the early 2000s recession.



Yet, as the figure below shows, the public sector has seen massive job loss in the current recovery—largely due to budget cuts at the state and local level — which represents a serious drag that was not weighing on earlier recoveries.



How many more jobs would we have if the public sector hadn’t been shedding jobs for the last three years?  The simplest answer is that the public sector has shed 627,000 jobs since June 2009.  However, this raw job-loss figure understates the drag of public-sector employment relative to how the economy functions normally.

End This Depression Now! - Aid to the States Edition

Ben Polak and Peter K. Schott explain at NYT's Economix why unemployment is far greater for much longer into the "recovery" phase of the private sector in this extended recession:

Why is the recovery from this recession different from recoveries from past recessions? In the previous two recessions, it took 32 months for nonfarm employment to reattain its June 1990 peak, and 48 months for it to reattain its January 2001 peak. Assuming the economy keeps adding nonfarm employment at the current rate, it will have taken 88 months to reattain its January 2008 peak. The explanation most often heard is that “financial crises are different”: after a debt crisis, shaken consumers are reluctant to spend and shaken firms are reluctant to hire, slowing private-sector job growth even after the recession has bottomed out.

There is some truth in this, but it is not the whole story. In fact, while the latest recession was particularly deep, the recovery in private-sector employment, once it finally started, has not been particularly slow by recent historical standards. In the 27 months since the start of the current employment recovery, the private sector has added 4.3 million jobs, fewer than the 5.0 million it added in the 27 months after February 1992 but not many fewer than the 4.5 million it added in the equivalent period after August 2003.

Source: Bureau of Labor Statistics

But there is something historically different about this recession and its aftermath: in the past, local government employment has been almost recession-proof. This time it’s not.

An appeal to the Fed - take aggressive action to help recovery

At NYTs, Former Council of Economic Advisors Chair Christina Romer:

THE next meeting of Federal Reserve policy makers, on June 19 and 20, will probably be contentious. The latest employment report, showing anemic job growth for a third consecutive month and an uptick in unemployment, will surely make some Fed members want to take additional expansionary action. Others, however, appear steadfastly opposed.

The argument for additional monetary action is straightforward. By law, the Fed is supposed to aim for maximum employment and stable prices. But the unemployment rate is 8.2 percent — a good two percentage points above what even the most pessimistic members say is its sustainable level. Moreover, the spate of disappointing data and the deepening crisis in Europe make continued weakness all too likely...

Some Fed members contend that monetary policy has already done its share. Other policy makers, they say, need to step up. Both the Fed’s chairman and its vice chairwoman have talked about the need for additional near-term fiscal stimulus as part of a gradual deficit-reduction plan. And many Fed committee members have called for a more aggressive housing policy. Indeed, the Fed raised some hackles in January when it sent an unbidden white paper to Congress, outlining possible administrative and legislative initiatives to deal with problems like foreclosures and underwater homeowners. 

I agree that we need more effective fiscal and housing policies. But neither is likely to happen, at least not before the presidential election. As a result, the Fed is the only plausible source of immediate help for the American economy. It was set up as an independent body precisely so that somebody can do what’s right when politicians can’t or won’t. 

The Very Serious, Very Crazy People

Martin Wolf at Financial Times, via The Professor:

Austerians - Brit PM Cameron and German Chancellor Merkel

Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events.

More Keynesian Blather From Paul Krugman...

 You can't shut Paul Krugman up:

(I)f you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5%. That is by definition throwing us into recession or depression.

Oh, wait a minute.  That was Mitt Romney doing that Beltway "gaffe" thing, where blurting out the truth is seen as a "mistake," especially when it runs counter to every crank proposal Romney has endorsed that has been forthcoming from the Ryan Austerity Megaphone of the GOP - the dominant party "intelligentsia," who are either economically illiterate or WANT to plunge the country into even deeper extended depression.

Jon Chait notes: "Romney says this as if it’s completely obvious that reducing the deficit in the short term would throw the economy back into recession, even though he and his party have been arguing the opposite case with hysterical fervor. Republicans have committed themselves to Austrian economic notions and other hoary doctrines justifying the position that reducing deficits is a helpful way out of a liquidity trap"

I'm not convinced Willard M. Romney is particularly smart, but it's clear that beneath the nauseating facade of sheer cynicism there's still some small grain of common sense.  The fact that he's a practiced liar when glibly espousing the GOP far Right's agenda as his own - albeit subject to the occasional "Beltway gaffe" as in the CNN interview - appears to be the only "redeeming" feature of his candidacy, not a fatal flaw.  Which is pathetic.

(updated)

"New York Federal Reserve Estimates 3.6 Million Foreclosures Will Occur In The Next Two Years"

Pat Garofalo at Think Progress:

While foreclosure rates hit a four-year low in 2011, the early signs for 2012 don’t look good when it comes to housing, as banks have begun to work through a backlog of foreclosures that were delayed by the foreclosure fraud scandal. In fact, the New York Federal Reserve anticipates that 3.6 million foreclosures will occur in the next two years, piling on to the 1 million in 2010 and the 800,000 last year. “The ongoing weakness in housing has made it more difficult to achieve a vigorous economic recovery,” said New York Fed President William Dudley. “Housing has inhibited economic activity through a number of channels.” (HT: Realty Biz News)

"The Foreclosure Crisis: A Government in Denial"

Bruce Judson at New Deal 2.0:

The financial crisis began with the housing crisis and it will not end until we resolve housing. Government policymakers who seemingly ignore this basic fact are leading the nation to another potential catastrophe.

This past week, a number of important events occurred in Washington, including important recess appointments by President Obama. However, the most noteworthy event did not make front page news: the Federal Reserve’s (apparently) unsolicited memo to the committees of Congress that oversee financial services warning of the dangers the current housing market poses for the economy.

This represents an extraordinary action and underscores both the seriousness of the continuing crisis and the absence of meaningful discussion of the problem in Washington. Bernanke’s memo reviewed federal actions to date and effectively concluded that they were unlikely to solve this national tragedy.

The memo concluded, in part:

The challenges faced by the U.S. housing market today reflect, in part…a persistent excess supply of homes on the market; and losses arising from an often costly and inefficient foreclosure process (and from problems in the current servicing model more generally)… Absent any policies to help bridge this gap, the adjustment process will take longer…pushing house prices lower and thereby prolonging the downward pressure on the wealth of current homeowners and the resultant drag on the economy at large.

This memo is notable for several reasons. First, it’s important to remember that when the Fed speaks, it does so in sober, limited terms. So an unprompted Fed warning suggesting “a persistent excess of supply” and a “resultant drag on the economy” is comparable to the Secretary of Homeland Security holding a press conference to warn of the risk of an imminent national emergency. Second, an unprompted memo from Bernanke to the House means that he is so deeply worried he felt the need to speak out in as strong a voice as his position permits. Third, the Fed rarely speaks on issues unrelated to its direct activities. Indeed, The Wall Street Journal subsequently wrote, “For an institution that jealously guards its independence, the Federal Reserve is wading into treacherous political waters.”

"It's cheaper for the U.S. to finance its debt today than it was when we last had surpluses"

The much-hyped hysterics pushing deficit reduction as some "solution" to our woes in the midst of our Great Recession were terrible economics any way you look at it.

That this agenda was rooted as much in the GOP's desire to worsen the economy as their back door to the White House and control of Congress more than any faith in "markets" seems likely given what the actual markets for US debt were telling us as the debate unfolded. Ezra Klein at Wonkbook:

In Washington, 2011 was all about dangers posed by America’s deficits. Republicans said deficit reduction was priority number one. Democrats mostly went along. But in the markets, the story was precisely the opposite. As Daniel Kruger reports in Bloomberg, demand for American debt was stronger in 2011 than in any year since 1995. It's cheaper for the U.S. to finance its debt today than it was when we last had surpluses...

The Payroll Tax Cut Extension - GOP holds recovery hostage

Be careful where you point your gun...

Economist Mark Thoma on what is at stake with the payroll tax and unemployment insurance extensions, which the GOP is determined either to halt or to hold hostage by linking to unrelated legislation that the President has vowed to veto: 

Congress has not been able to agree on extending the payroll tax cut, and as it stands, payroll taxes will increase in January. What impact will this gridlock have on the economy? What about the expiration of unemployment benefits, another effect of the failure to produce legislation on the payroll tax cut?

The payroll tax cut amounts to around $1,000 per year for the typical household, which adds up to a around $120 billion per year in additional purchasing power for the total workforce. If the payroll tax cut is not extended when Congress reconvenes, losing that much purchasing power would make an already slow recovery even slower...

The GOP candidates' plan to wreck the economy

Tim Dickinson at Rolling Stone on the GOP "Crazy":

The Little Rascals

While threatening to slash the safety net for millions of Americans, the GOP candidates are also committed to a brutal austerity program that would tip the nation back into recession – if not a full-scale depression. The proposal in question is a constitutional amendment that would require the federal government to pass a balanced budget each year.

According to Macroeconomic Advisers, a top economic forecaster, balancing the budget in 2012 alone would throw 15 million Americans out of work, double unemployment to 18 percent and contract the U.S. economy by 17 percent. Going forward, the government would be barred from borrowing money during hard times to provide unemployment benefits, food stamps and other essential aid to those in need. As a result, the analysts report, "recessions would be deeper and longer." Even in times of plenty, a balanced-budget amendment would "retard economic growth" by increasing economic uncertainty – which Republicans have repeatedly blamed as the root of the current lackluster recovery.

Read Dickinson's complete "The GOP's Crackpot Agenda" HERE.

Wonkblog on the Eurocrisis

This doesn't explain the Eurocrisis, but it helps explain areas of potential impact on the US economy - the worst of which, in the apparently still dense jungle of finance, seem still unknown.  Brad Plumer at Wonkblog:

With the crisis in Europe still raging, analysts are frantically trying to game out what a euro zone implosion would mean for the United States. Yesterday, the Federal Reserve Bank of San Francisco put out a research note pegging the odds of a U.S. economic contraction in early 2012 at “greater than 50%,” noting that a European sovereign debt default (Greece, say) would very likely plunge us into recession.

Part of the reason for that is that Europe is one of our major trading partners — accounting for about one-fifth of U.S. exports. Over at Real Time Economics, Josh Mitchell put together a handy chart, using Wells Fargo data, showing which states export the most goods to Europe, and hence would get hit hardest by a Europe slump:


Utah’s gold exports, South Carolina’s auto exports, and West Virginia’s coal exports are potentially at greatest risk. The one sliver of good news is that, as Wells Fargo notes, most states have major trade flows primarily with countries like the United Kingdom, France, the Netherlands and Germany, rather than the most fragile countries like Greece and Italy and Spain. So it’s tough to say, exactly, how a slowdown overseas would play out here.

Meanwhile, the bigger, scarier unknown is whether financial mayhem in Europe could wreak havoc on U.S. banks.

Wall Street thrives while Main Street struggles

Corporate profits are at a 60 year high - but 40% of small businesses see their earnings declining. Travis Waldron at Think Progress has it:

Even as the economy struggles, corporate profits continue to rise. Wells Fargo, the largest consumer lender in America, announced today that its third-quarter earnings rose 21 percent, to $4.1 billion. Citigroup, the nation’s third-largest bank, also released its earnings statement today, announcing that its third-quarter earnings rose 73 percent over last year, with $3.8 billion in profits. Even though JP Morgan Chase saw its earnings fall from a year ago, it still raked in more than $3 billion in profits.

Corporate profits as a share of the nation’s gross domestic product, in fact, are at their highest point since 1950. Recent snapshots, however, tell a much different story on Main Street, where small businesses are limping through an economic recovery that treated corporations much more kindly. According to the National Federation of Independent Businesses’ September report, two out of every five small businesses reported that profits are falling:

"Bernanke's Mostly Right"

Administration critic Robert Kuttner gives Federal Reserve Chair Ben Benanke pretty good marks on the substance of his testimony before Congress this past week.

I would not expect these guys could agree on ordering lunch - and while the substance of the commentary is worrisome, it's heartening to see some of the distance lessen between Bernanke and one of the administration's toughest liberal critics:

Fed Chairman Ben Bernanke says the economy is on the verge of another recession—“close to faltering” was his euphuism of choice in his testimony to Congress Tuesday—and there is only so much the Federal Reserve can do about it.

For once, he is mostly right.