MacroEconomic Malpractice

If the U.S. economy was a patient, I’m sure we all would be talking medical malpractice by now. After having 8 years of nothing to lecture on during the Clinton years other than, yes Keynesian economics works, we are now on our 9th year of wtf? (Feel sorry for my poor undergrads.) We’re still dealing with the spinning of the complete failure of Voodoo Economics, Trickle-down economics, Reaganomics or Supply Side economics from the free spending, tax dollar giveaway as success story with no real point other than supporting faith based economic hypotheses and the rights of the ultrarich to stay that way in to something it was not. I simply cannot believe that any REAL democratic administration with some roots in the Clinton years could possibly be choosing to continue the failed policies of the right.

So, since I’ve been on a populist rant over Wall Street Bonuses, let me just fuel the fire some more with this little piece in the Washington Post website today with the unsurprising title “Bailout Overseer Says Banks Misused TARP Funds”. No kidding cupcake. Why do you suppose the same risk happy folks that got their bonuses last year are getting big ones this year? We might as well funded a national road trip to Vegas.

Many of the banks that got federal aid to support increased lending have instead used some of the money to make investments, repay debts or buy other banks, according to a new report from the special inspector general overseeing the government’s financial rescue program.

The report, which will be published Monday, surveyed 360 banks that got money through the end of January and found that 110 had invested at least some of it, that 52 had repaid debts and that 15 had used funds to buy other banks.

logo-mr-monopolySo, we’re basically funding a real time game of monopoly. Okay, Republicans, let me just explain this to you ONE more time. MONOPOLY is the antithesis of market capitalism. It isn’t Socialism. Socialism is NOT an economic concept any more than GOD is a Buddhist one. It’s the difference between, I buy houses in Houston and I buy All the houses in Houston. We actually prove markets are efficiently working by comparing competitive markets to centrally planned ones and find the same result when they are. However, that’s IFF (if and only if) things in both circumstances are perfect (which they NEVER are). We live in a land of frictions and 30 years of research shows that we’ve just about got as much chance of having the Pure Capitalist dream as we do the Pure Marxist dream. Zip, Zilch, nada, no way! Our lives our lived in imperfect markets where government sometimes steps in to make things worse, and some times steps in to make things better. We’re basically in the search for the middle path.

Right now, we’re funding and sustaining a financial market structure that perpetuates extraordinary profits for the capital owners, less products available to the market, and higher prices for every one. It is also well-researched that bigger institutions do not bring efficiencies of scale to the market so how is this a good thing? Just pick up any basic microeconomics book and study market structures. The bottom line is a welfare loss for the market as resources will be inefficiently used, quantities will be reduced, prices will be higher, and the demand side of the market will experience a loss of welfare. (Sorry, I keep having to remind myself I have the summer away from theory, but I’m an old dog and that’s a new trick for me.) The empirics on this have supported these theories for hundreds of years!

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It’s still the Jobs Stupids!

Lining up for 'Hoover Stew' during the Great Depression

Lining up for 'Hoover Stew' during the Great Depression

More economists are taking up their keyboards trying to tell folks why the Great Recession is different. More importantly, why recovery from the Great Recession will be different. Today’s analysis comes from Dr. Brad DeLong at Grasping Reality with both Hands and The Economic Populist. Let me just offer up the titles first. The Economic Populist says “We are So Screwed” and Delong announces “Fasten Your Seatbelts for the Jobless Recovery“. No one but the Obama economics team is whistling Prosperty is just around the Corner. So, grab that bowl of Dubya/Obama Stew and let’s delve even deeper into why the job markets really worry me.

Brad’s believes that the worst of things are over and that we may actually being seeing the ‘trough’ or low point of the The Great Recession right about now. However, he’s not ready to sing “Happy Days are Here Again” primarily because he sees a jobless recovery along the lines of what we saw during Dubya’s first term only more aggravated. Remember the post 9/11 recovery that only felt like a recovery to the very rich while the rest of us saw our incomes stagnate so we had to finance our day-to-day things by borrowing and de-saving? DeLong’s crystal ball sees that kind of recovery without our ability to borrow or sell off over-priced assets. He believes we may have stalled the freefall, but we are in no way positioned for hooverbuttondynamic growth because we’re not going to have any spare income to spend even if we’re lucky enough to have a job.

It is likely to be a recovery. The central tendency forecast right now is that real GDP contracted at a rate of 1% per year or less between the first and second quarters of 2009, and will grow between the second and third quarters at a rate of 2% per year or so. When the NBER Business Cycle Dating Committee gets around to it, it is most likely to call the end of the recession for June 2009, second most likely to call it’s end in April, and a recession-end date later than June 2009 is a less likely possibility. One reason that we are likely to see a recovery starting… right now… is the stimulus package. It probably boosted the real GDP annual growth rate relative to what otherwise would have been the case by about 1.0 percentage point in the second quarter, and is going to boost the annual GDP growth by about 2.0 percentage points between now and the summer of 2010–after which its effects tail off.

But it will not feel much like a recovery. After the 1982 recession the turnaround in employment lagged the turnaround in GDP by only six months. Thereafter employment growth was very strong: in the eighteen months up until the end of 1984, growth in work hours averaged 4.8% per year. it took only 7 months after the 1982 recession trough for the employment-to-population ratio to rise above its trough level (1980: 2 months. 1975: 5 months. 1970: 18 months. 1961: 13 months. 1958: 4 months. 1954: 8 months.) By contrast, it took 29 months after the 1991 recession trough for the employment-to-population ratio to exceed its trough level, and 55 months after the 2001 recession trough for the employment-to-population ratio to do so. Productivity growth in the immediate aftermath of the end of the 1991 and 2001 recessions was surprisingly rapid: rapid enough to eat up all of real demand growth and more as businesses decided to take advantage of the economic downturn to slim down their labor forces and become more efficient.

Today–unless we get much faster real GDP growth than currently looks to be in the cards–we are headed for a jobless recovery. The answer to the economic question–was the stimulus sufficient to rapidly return the economy to something like normal unemployment?–is likely to be: “h— no, it was much too small…”

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When Will They Ever Learn?

The Blogging Econ heads are still news makers today as we have more and more reports of record profits at Goldman pigs-playing-poker1Sachs and examples of blatant corportist propaganda at CNBC. I learned yesterday that many folks are listening, it just isn’t necessarily the ones shaping and setting policy. We also see a completely unsustainable budget coming down the pipe per the Director of the CBO. Why is it that policy makers seem to want us in dire straights? Are their sources of campaign funds so sacred that they’re willing to bring down the U.S. economy? Where does a Cassandra start?

Matt Taibbi and Paul Krugman focus in on the GS profits. So, I’m all for making a decent rate of return, that’s necessary to keep a company in business and it’s required to attract capital to grow a market. However, record setting, extraordinary profits are symptoms of a market out-of-whack. In the most simplest of analysis it could mean there are minimally too few providers of a service which can also lead to some form of market manipulation, information hiding, or information asymmetry allowing them to reap extraordinary profits. I basically think we’re seeing GS game the market based on raiding underpriced AIG assets with a free source of capital. This means the profits are straight from taxpayer funding. No wonder these guys don’t want to pony up any equity to us based on profitability and want to dump TARP funds (with their compensation restrictions) as quickly as possible. How can Washington miss that they’re back at their same old games?

This is from Taibbi who basically lays it out. They’re taking our tax dollars and buying assets with tax dollar in government-selected subsidized fire sales, creating arbitrage profits (some through their own huge market shares now that much of their competition is gone) and churning themselves some nice bonuses. In music, that’s called riding the gravy train. It’s a no risk, no brainer, no lose situation. Why would that require bonuses? [You can mark my words on this. They looted (with government enabling) AIG and the next one up will be CIT.]

So what’s wrong with Goldman posting $3.44 billion in second-quarter profits, what’s wrong with the company so far earmarking $11.4 billion in compensation for its employees? What’s wrong is that this is not free-market earnings but an almost pure state subsidy.

Krugman, a microeconomist with specializations in trade theory, sees it too.

The American economy remains in dire straits, with one worker in six unemployed or underemployed. Yet Goldman Sachs just reported record quarterly profits — and it’s preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us?

First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America.

Second, it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away.

Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.

Meanwhile, back in the Main Stream Media, also known as the Wall Street and K Street propaganda factory, CNBC has tired to rosy up Dr. Doom’s forecasts to enable its masters arbitrage profits. Roubini made it clear that his views on the economy have remained unchanged despite the attempts to make it look otherwise.

Nouriel Roubini, the economist whose dire forecasts earned him the nickname “Doctor Doom,” said after markets closed Thursday that earlier reports claiming he sees an end to the recession this year were “taken out of context.”

“It has been widely reported today that I have stated that the recession will be over ‘this year’ and that I have ‘improved’ my economic outlook,” Roubini said in a prepared statement. “Despite those reports … my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.”

Several business news outlets, picking up on a report initially from Reuters, earlier Thursday cited Roubini as saying that the worst of the economic financial crisis may be over.

The New York University professor was quoted by Reuters as saying that the economy would emerge from the recession toward the end of 2009.

Reports of his comments helped trigger a late rally in the stock market.

Did you read that bit about triggering a late rally in the stock market? Pity the poor suckers that believed CNBC and of course, watch the deposits grow of the folks that placed the offsetting market transactions. And, let’s see, which market insiders would probably know that was BS? I don’t think you have to be Ms. Marple or an SEC investigator to figure that one out. It was just a simple mistake, wasn’t it?

Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security (Percentage of GDP)
Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security (Percentage of GDP)

Another thing that really has sugared my cookies is this report coming out of the Congressional Budget Office (CBO) one of the few bastions of economic thought in the beltway that tries to look out for the real constituents of Washington D.C.. The Director of the CBO,Doug Elmendorf, had this to say to a Senate Committee followed by a post to his blog.

The current recession and policy responses have little effect on long-term projections of noninterest spending and revenues. But CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010. This higher debt results in permanently higher spending to pay interest on that debt. Federal interest payments already amount to more than 1 percent of GDP; unless current law changes, that share would rise to 2.5 percent by 2020.

There’s also his bottom line.

Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy.

Okay, am I just being a little too wonky here or are these three things perfectly clear to any one who has the audacity to be informed?

Norway, anyone?
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Next Strategy: Declare Victory, Go Home

(kinda graphic video, you’ve been warned)

The economy just won’t drink the koolaid and behave. I wonder if that old Mission Accomplished banner is still lying around the White House basement ? After all, white house economics adviser Christina Romer, via the FT says she’s “upbeat on economy.” So, who do I believe:  the Obama administration or my lying economist eyes?

The US economy will feel a substantial boost from the Obama administration’s emergency spending package over the next few months,says Christina Romer, a senior White House official, who has warned against tightening monetary and fiscal policy before recovery is well established.

Ms Romer, chairman of the US president’s council of economic advisers, told the Financial Times in an interview she was “more optimistic” that the economy was close to stabilisation.

But while hopeful that America could yet experience a V-shaped recovery, she said it was much too soon to begin tightening policy: “We do not want to repeat the mistake Japan made in the 1990s, when the moment things started to improve they tightened policy.”

Meanwhile, David Axelrod, a senior White House adviser, told NBC Television yesterday the administration would be open to further stimulus if needed. “Let’s see in the fall where we are, but right now we believe what we have done is adequate to the task. If more is needed, we’ll have that discussion.”

Ms Romer’s comments come as opposition Republicans step up their attacks on the $787bn fiscal stimulus, pointing out that it has not prevented unemployment from hitting a quarter-century high of 9.4 per cent.

Ms Romer said stimulus spending was “going to ramp up strongly through the summer and the fall”.

“We always knew we were not going to get all that much fiscal impact during the first five to six months. The big impact starts to hit from about now onwards,” she said.

Calculated Risk must not see what Christine sees in the numbers. If you still are in the dark as to how exactly bad the employment situation is, go check out their graphs. You can also follow my lying eyes over to the Washington Post where the headline and Neil Irwin’s headline: 467K Jobs Cut in June; Jobless Rate at 26-Year High. Come on guys!!! Drink koolaid or DIE!!!!

Employers kept slashing jobs at a furious pace in June as the unemployment rate edged ever closer to double-digit levels, undermining signs of progress in the economy, and making clear that the job market remains in terrible shape.

Wages, meanwhile, were little changed, with average weekly pay for non-managerial workers falling to $609.37, from $609.51. With many people losing their jobs, and those who remain at work making less money, American consumers will be hard-pressed to increase their spending later in the year, despite higher confidence and rising wealth through the stock market.

So, I know the job market always lags the economy, but please Christina, look at the last paragraph.    Let’s go to the NYjob losses in Junes NY Times Times.   Here’s their nifty little graphic and here’s some of their reality-based commentary.

The losses for June brought the tally of jobs shed since the beginning of the recession to 6.5 million — a figure equivalent to the net job gains over the previous nine years.

“This is the only recession since the Great Depression to wipe out all jobs growth from the previous business cycle,” Heidi Shierholz, an economist at the labor-oriented Economic Policy Institute in Washington, said in a research note. She called this fact “a devastating benchmark for the workers of this country and a testament to both the enormity of the current crisis and to the extreme weakness of jobs growth from 2000 to 2007.”

Let me just say, that when 70% of the GDP of a country depends on household spending, none of this is good news.  But hey,  the koolaid club just keeps on spinning right here in the same NY Times article.

“We’re seeing a kind of leveling off here,” Labor Secretary Hilda L. Solis said in an interview. “We would have done much worse had we not put the recovery plan in place.”

Early this year, the administration projected that the unemployment rate would peak near 8 percent with the stimulus in place. With joblessness already well above that target, some economists are arguing for another dose of government spending — a call Ms. Solis dismissed as premature. Much of the spending is still in the pipeline and trickling out slowly into the economy, particularly in construction projects that require government permits and planning, she said.

In offering the slow pace of stimulus spending as a partial explanation for higher unemployment, Ms. Solis effectively echoed the criticism that some leveled at the spending package when it was devised: that many of the projects would take too long to have their intended effect.

But Ms. Solis expressed assurances that the program was proceeding according to the administration’s plans.

“We’re making progress,” she said.

What are they on over there?  Look at the Calculated Risk Graphs. (Ones that I’ve put up here before but are still being updated in a progressively negative direction.) Those graphs put this downturn into the perspective of all the last downturns since World War 2.  Even a petulant clown with fear of numbers can’t miss the trend! This isn’t progress unless you call minusculely less down progress!   I’m not seeing any turning points!

The next move has to be for them to declare victory in the rose garden or send us all koolaid with our unemployment checks. Do they really think we are all this dumb?

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An Economic Exercise in Wishful Thinking

Warning:  Shouldn't before making economic policy during desperate times.

Warning: Do NOT use before making economic policy.

In today’s NY Times, David Leonhardt is very clear about the role of hope and wishful thinking among the Obama economics team. They got the unemployment numbers very, very wrong and as a result, we got a stimulus package that was underdesigned and oversold. If you read me or for that matter, Paul Krugman or Joseph Stiglitz, you were warned about the likely result. While this m.o. among Obama and his minions comes as no surprise to folks here, we’re beginning to see the resulting shock and awe as every one else awakens to policy based on the empty rhetoric of hope and no real change. Precious time, political majorities and capital are being wasted on an enhanced status quo.

In the weeks just before President Obama took office, his economic advisers made a mistake. They got a little carried away with hope.

To make the case for a big stimulus package, they released their economic forecast for the next few years. Without the stimulus, they saw the unemployment rate — then 7.2 percent — rising above 8 percent in 2009 and peaking at 9 percent next year. With the stimulus, the advisers said, unemployment would probably peak at 8 percent late this year.

We now know that this forecast was terribly optimistic. The jobless rate has already reached 9.4 percent. On Thursday, the Labor Department will announce the latest number, for June, and forecasters are expecting it to rise further. In concrete terms, the difference between the situation that the Obama advisers predicted and the one that has come to pass is about 2.5 million jobs. It’s as if every worker in the city of Los Angeles received an unexpected layoff notice.

There are some fundamental things in the labor market that the Obama Team somehow overlooked. The first is the unwinding of the automobile network and all the supporting infrastructure around the supply and sales chain. The second is the impact on the states of low tax revenues and high unemployment insurance payouts. Some how, in focusing on the impact of the financial crisis, they appeared to haven forgotten some basic underlying macroeconomic dynamics. At least, that is my take. They may have kept their eye on the ball, but they failed to look around the bigger field of play.

Leonhardt points to two possible explanations as to why so many very bright people got it so wrong. He argues that because the stimulus package was designed poorly and hurried through with the rosy scenario coloring the numbers, that it is possible that the stimulus package has done nothing and that as a result, things are getting worse. That’s hypothesis number one. His second hypothesis is the more likely one in both his and my opinion. That is that the economy is deteriorating further and this is despite of the stimulus. Again, this would be due to a bad forecast and an even worse policy prescription. So he’s laid out the ground work for the big question while giving a slight nod to some potential for the stimulus plan.

The stimulus package does seem to have helped. But its impact has been minor — so fahand-da-vincir — compared with the harshness of the Great Recession.

Unfortunately, the administration’s rose-colored forecast has muddied this picture. So if at some point this year or next the White House decides that the economy needs more stimulus, skeptics will surely brandish that old forecast.

Worst of all, the economy really may need more help.

Well, you know, on the one hand, on the other hand. However, whichever hand you choose, this is a policy failure we couldn’t afford.

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