Let’s Make a Deal (or not)

Posted: November 12, 2010 | Author: | Filed under: Bailout Blues, Economic Develpment, Global Financial Crisis, Team Obama, U.S. Economy | Tags: , , , | 6 Comments

The U.S. and South Korea have failed to reach an agreement in a trade deal that would have boosted U.S. agriculture exports.  The deal would’ve included concessions to South Korea on automobiles and that was not going over well with domestic automakers like FORD and their related labor unions.  As with all trade arrangements, there are usually winners and losers.  Ranchers and U.S. consumers would’ve been on the winning side of the deal.  The U.S. auto industry and related interests were the potential losers.

Arrangements probably failed due to the tough stance the U.S. is taking on the dollar and foreign exchange pegs these days. No one is happy with QE2 around the world.  We’ll get to that in a minute.  I’m going to quote from the WSJ on this so you need to realize that what’s written here is very pro-free trade.  What was being negotiated at the moment was removal of some trade barriers on both sides.  Political consensus here was that Obama is trying to look more “pro-business”.  Part of South Korea’s problems, oddly enough, is that they are ‘too green’ for America’s stuff. Can you imagine a Democratic president trying to get a country to be less environmental friendly?

One stumbling block was Korea’s refusal to change a provision in the 2007 pact that provided an immediate end to a 2.5% tariff the U.S. levies on imports of Korean cars, said House Ways and Means Committee Chairman Sander Levin (D., Mich.). The U.S. wanted the tariff reduced gradually, while Korea eliminates safety and environmental rules that U.S. auto makers, led by Ford, said help keep Korea the world’s most closed car market. The effect of reducing the U.S. tariff more slowly likely wouldn’t be large because South Korea’s Hyundai Motor Co. already gets around it on more than half of the cars it sells in the U.S., by making them in Alabama and Georgia.

Compounding the stalemate, Mr. Levin said, were U.S. concerns that Korea’s proposed system for settling disputes wasn’t likely to work.

The U.S. also wants Korea gradually to drop its ban on imports of U.S. beef from older cattle, which began after the U.S. had a case of mad-cow disease seven years ago. Previously thought the easier of the two issues, it is a hot button politically for Korea and prompted a walkout by Korean negotiators.

In the end, the parties ran out of time. U.S. Trade Representative Ron Kirk said, “We won’t be driven by artificial deadlines,” though it was Mr. Obama who set the G-20 deadline.

The president alluded to the political pressures. “If we rush something that then can’t garner popular support, that’s going to be a problem,” said Mr. Obama, who had criticized the moribund 2007 Korea pact when he was a candidate. “We think we can make the case, but we want to make sure that that case is airtight.”

So, if you want the White House explanation, here’s Austan Goolsbee in a white house white board moment. I’m not sure what it says when the head of the President’s economic advice team has to give us all lectures, but any way, here’s the deal via Austan.

So, the G20 thing seems to be an exercise in every one going their own way.  No one likes the hot money issue or the weakening dollar.  So much for cooperation.  Guess the only thing we’re exporting  these days are financial bubbles.

The U.S. Federal Reserve decision last week to pump $600 billion into world’s biggest economy has stolen the spotlight away from China’s currency. Brazilian Finance Minister Guido Mantega said today that the Fed’s move may inflate commodities prices and proposed the world move away from using the dollar as the main reserve currency. Former Chinese central bank governor Dai Xianglong this week faulted the U.S. for adopting policies without regard for the dollar’s global role.

The policy fissures and concern countries may react with currency devaluations and capital controls underscore how the G-20 unity displayed during the financial crisis has given way to national divisions as members chart their own recovery path.

“The last thing a developing economy wants is for that liquidity to distort their asset markets and create a destabilizing bubble,” Stephen Roach, Morgan Stanley’s nonexecutive Asia chairman, told Bloomberg Television in an interview yesterday. “The process is not going to work if they don’t come up with a multilateral solution.”

If you want to read how the QE2 could possibly work and if it will be scaled up, I suggest going over to Tim Duy’s FedWatch for a wonky and some what long analysis. Oh, and there are plenty of those nifty graphs that I always love in the piece about the recovery.  He’s going with the blowing bubbles is good narrative.  Interesting.  Duy says the FED has no choice because the Federal Government is so out of it on Fiscal Policy.  Even more interesting and sadly true.

Flooding the market with money is dangerous business.  It risks distorting prices and capital allocations.  We simply don’t know where the money will wash up.  I know that is in vogue to believe there is a nice, obvious story that links an increase in the money supply to an increase in nominal GDP, but that only works on paper.  In the real world, the paths between money and output and prices are complicated.  The ultimate composition of aggregate demand matters.  It matters a lot – distortions have consequences.  Warsh’s risks amount to a laundry list of the possible distortions that might occur as the result of ongoing quantitative easing.  And he clearly takes those risks seriously.

It makes me think that I haven’t been taking those risks seriously enough.  But when monetary policy is the only game in town, what choice do you have?  You do what you can up to a point…but then you throw it back to Congress and say “you take responsibility for the mess you created by abdicating your role in crafting long run, stabilizing macroeconomic policies.”  Warsh has set the stage for doing exactly that.

Of course, seriously, if we really have to throw this back to Congress, we are absolutely done for.  Cooked.  Toast.  Somebody remember to tell the last guy to turn off the lights on his way out.  Better to take our chances with the next bubble.

Aiyee … I’m about reading to move my money into alligator belly futures.  At least that makes a good gumbo if you fail to get out in time.

The Cat Food Commission Weighs In

Posted: November 10, 2010 | Author: | Filed under: Team Obama, U.S. Economy | 51 Comments

I’m going to read more about this in the next few days and I’ll write what I can glean from it when I do.  Both of my daughters are visiting today so I’m not able to sit down and look things over.

Just wanted to pass on some links and comments coming from the President’s Panel on Spending.  It looks like a mixed bag on the surface.  Here’s some details from the NYT. Surprise! Surprise!  Social Security is ON the table and cuts are suggested.

The plan would reduce projected Social Security benefits to most retirees in later decades — low-income people would get higher benefits — and slowly raise the retirement age for full benefits to 69 from 67, with a “hardship exemption” for people who physically cannot work past 62. And it would subject higher levels of income to payroll taxes, to ensure Social Security’s solvency for the next 75 years.

The plan would reduce Social Security benefits to most future retirees — low-income people would get a higher benefit — and it would subject higher levels of income to payroll taxes to ensure Social Security’s solvency for at least the next 75 years.

But the plan would not count any savings from Social Security toward meeting the overall deficit-reduction goal set by Mr. Obama, reflecting the chairmen’s sensitivity to liberal critics who have complained that Social Security should be fixed only for its own sake, not to balance the nation’s books.

Most appalling is the plan calls for taxes cuts. Here’s Krugman’s take on that.

OK, let’s say goodbye to the deficit commission. If you’re sincerely worried about the US fiscal future — and there’s good reason to be — you don’t propose a plan that involves large cuts in income taxes. Even if those cuts are offset by supposed elimination of tax breaks elsewhere, balancing the budget is hard enough without giving out a lot of goodies — goodies that fairly obviously, even without having the details, would go largely to the very affluent.

I mean, what’s this about? There is no — zero — evidence that income taxes at current rates are an important drag on growth.

The more I read, the more I can’t believe that this was a commission put together by a Democratic President.  It’s horrid!  Mankiw (Bush economist) thinks it’s great.  DeLong joins Krugman with a big thumbs down.  DeLong’s headline says it all:   Yes, the Entitlement Commission Was an Unforced Error by the Obama Administration.  Here’s some random comments as he kept reading the abomination.

At the time I asked why you would take a budget arsonist like Alan Simpson and give him a Fire Chief hat. I never got a good answer.

…

Oh my God! Ration city, here we come!

What clowns vetted this thing?

…

A 23% top marginal tax rate?

Hoo boy!

TPM-DC calls their presser “eye popping”.

Their recommendations are more or less a list of the third-rail issues of American politics, including cuts in the number of federal workers; increasing the costs of participating in veterans and military health care systems; increasing the age of Social Security eligibility; and major cuts in defense and foreign policy spending. They also encompass a range of tax system reforms that have been floated by many in Washington for years to little effect, including funding tax rates reductions by eliminating many beloved credits and deductions.

We don’t have a two party system any more.  We have Republicans and Theocratic Republicans.

Who can come along and save us from people like these?

I’ve got some more updates from the currency wars and this thing to plow through.  I’ll start more things tomorrow!!! Promise!!!

——————————————————————————————

Boston Boomer here with some more reactions to the Catfood Commission proposals:

Jane Hamsher has a quote from Richard Trumka, president of the AFL-CIO:

The chairmen of the Deficit Commission just told working Americans to ‘Drop Dead.’ Especially in these tough economic times, it is unconscionable to be proposing cuts to the critical economic lifelines for working people, Social Security and Medicare.

Some people are saying this is plan is just a “starting point.” Let me be clear, it is not.

This deficit talk reeks of rank hypocrisy: The very people who want to slash Social Security and Medicare spent this week clamoring for more unpaid Bush tax cuts for millionaires.

What we need to be focusing on now is the jobs deficit. Working families already paid for Wall Street’s party that tanked our economy. If we actually want to address our economic problems, we need to end tax breaks that send American jobs overseas and invest in creating jobs by rebuilding our crumbling infrastructure and green technologies.

The Hill talked to Bernie Sanders and other liberals

“The Simpson-Bowles deficit reduction plan is extremely disappointing and something that should be vigorously opposed by the American people,” Sanders said in a statement.

Sanders has been among a group of congressional liberals who have threatened to defeat the commission’s recommendations if it curtails Social Security benefits in any way. Sanders has said of the commission’s recommendations that Congress would “vote it down” if it touched on Social Security, and Rep. Raúl Grijalva (D-Ariz.), joined by 136 other House Democrats, has written to similarly warn the commission.

The proposals released on Wednesday, charged Grijalva, co-chairman of the Congressional Progressive Caucus, would only favor the wealthy.

“The path this plan would set is not good for the public. Congress should be having a realistic, productive conversation right now about how to reduce our budget deficit and maintain a secure retirement system for those who have earned it,” he said in a statement. “Instead, we’re debating a proposal from a commission dedicated to cutting crucial social programs and reducing corporate and upper-income taxes at the same time. This is not a recipe for a healthier American economy.”

We need to keep in mind that the co-chairs do not have support from the rest of the commission for these shock doctrine proposals. They also have no power to enact their sick proposals unless the President and Congress support them.

Currency Considerations

Posted: November 9, 2010 | Author: | Filed under: Economic Develpment, Global Financial Crisis, U.S. Economy | Tags: , , , , | 25 Comments

Here’s a few links to help you follow the currency crisis as the world’s finance ministers move from APEC meetings to the G20 meeting.  EconBrowser has a very distinguished economist blogging there with some interesting points on East Asian Exchange Rates and China. Willem Thorbecke is an important researcher in the area so this is an extremely wonky post with a lot of nifty graphs.  It basically looks, however, at an important issue.  The issue  is China’s vast trade surplus which has been used in the past to purchase US Treasury securities and its exchange rate that’s been pegged to the Dollar at varying levels over the years.  US Secretary of Treasury, Timothy Geithner, has been discussing this recently and it’s likely to be a central focus at the G20 meetings in Seoul.

The interesting thing about this research is that it shows it’s not just the Chinese currency and its exchange rates, but the entire Far Eastern area and all their currencies that have created the situation.  Thorbecke suggests that these are peg to a basket of currencies rather than just the dollar.

These results indicate that if policymakers are concerned about China’s surplus, they need to consider exchange rates throughout East Asia rather than the Chinese exchange rate alone.

The enormous surpluses in processing trade relative to the U.S. generate pressure for nominal exchange rates throughout Asia to appreciate relative to the dollar. If East Asian currencies were to appreciate against the dollar, it would be advantageous if they could appreciate together while maintaining some measure of intra-regional exchange rate stability. By reducing intra-regional exchange rate volatility and the associated uncertainty, this would facilitate the flow of FDI and intermediate goods in Asian production networks. It would also produce a smaller appreciation of real effective exchange rates in East Asian countries since the majority of their trade is intra-regional. Finally, it would overcome the collective action problem that arises as individual countries in the region resist appreciations because they do not want to lose competitiveness relative to neighboring countries.

Ma and McCauley [5] found that during the 2006-2008 period when China managed its exchange rate relative to a basket of currencies and other Asian countries also managed their currencies relative to currency baskets, there was considerable exchange rate stability between the renminbi and other East Asian currencies. Thus, if China again adopts a regime characterized by a multiple-currency, basket-based reference rate with a reasonably wide band, the huge surpluses that East Asia is running against the U.S. in processing trade would cause currencies in the region to appreciate in concert against the U.S. dollar. Market forces could then allocate these appreciations across supply chain countries as a function of the size of their surpluses in processing trade.

China’s finance officials are actually calling for a stable dollar.  This article is from Bloomberg.com.  It quotes China’s Pension Chief. There’s a consensus that this particular idea won’t fly in the District.

The world needs a stable dollar, Dai Xianglong, chairman of China’s National Council for Social Security Fund and a former head of the nation’s central bank, said today at a forum in Beijing. He spoke two days before a Group of 20 summit aimed at addressing global imbalances in trade and investment flows.

Dai’s proposal follows charges by Chinese officials that the Federal Reserve’s plan to buy $600 billion of Treasuries risks inflating asset bubbles in emerging markets. While Treasury Secretary Timothy F. Geithner said Nov. 6 the U.S. takes its global responsibilities “very seriously,” Fed Chairman Ben S. Bernanke has said his focus must be on the American economy.

The idea “is unlikely to fly given that the U.S. would like to maintain the flexibility of its currrency and the ability to lower its value when it needs to boost exports or inflation, as is the case now,” said Dariusz Kowalczyk, a Hong Kong-based senior economist and strategist at Credit Agricole CIB. “Even a range won’t be acceptable to the U.S.”

Because of all this back and forth, Gold is setting more record highs.  This is from Canada’s Globe and Mail.

At the heart of gold’s climb are concerns over the value of currencies amid mounting tension in the runup to the G20 meeting in Seoul, South Korea, this week. The U.S. is pointing its finger at China, pressing for appreciation of the yuan, while many other countries are pointing fingers at the U.S. central bank over a $600-billion bond-buying scheme that roiled the U.S. dollar before it was even announced.

Again, you can see international concerns over the QE2 announced by the U.S. Fed.

There are basically three things that influence someone’s demand for money.  The first is their need for money as a transactions vehicle.  This means you need money to spend your income for stuff you need and want.  The second dimension is a precautionary demand.  That is you want something that is a safe store for purchasing power that you do not want to spend right now.  This is a place to put your money that can be related to an interest rate, but is frequently just sort’ve your choices between stuffing your savings in a safe place like gold, your mattress or your savings accounting or keeping it in your checking accounting and ignoring it.  It could just be cash in your pocket too.  The last thing that influences how much money people want to hold has to do with speculation. You can casino bet on money too.  The Fed takes all these things into account when it determines how much currency, reserves, bank deposits, and treasuries it wants floating around the world.  Every time you see a move to gold, you know that part of it is the desire to protect future earning power by some but it is also a very powerful market for speculation. The dynamics here are complex so don’t be taken in that all this gold buying is just a good thing for gold bugs and a bad thing for people who hold dollars. There is profit to be made in these Currency Wars.

Right now, the world is going through a massive economic re-balancing. The old idea that China will sell us stuff — while lending us the money to buy it — is unwinding.

In fact Ben Bernanke has declared a currency war on China’s undervalued RMB. Good ol’ Ben says we can make the dollar cheaper than the Chinese yuan, and he aims to prove it.

The Fed recently proclaimed its desire to create and buy $600 billion in U.S. Bonds. “The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August,” said Bernanke.

Ben is taking this approach because it works right up until it doesn’t.

It worked after the past five bubbles popped, and it looks to be working this time.

When Ben floated the idea of a $600 billion cash infusion, stock prices rose and long-term interest rates fell in anticipation.

I know some of you will point out that the RMB is pegged to the dollar, and therefore the dollar can’t fall… But it does cause an inflation problem in China, which is a de facto re-balance.

According to Bloomberg, “Over the past five years the real-estate prices have tripled. And as property makes up a third of living costs on average, this alone means the real yuan value has doubled.”

Chinese Commerce Minister Chen Deming said as much in an interview on October 26th: “Uncontrolled” issuance of dollars is “bringing China the shock of imported inflation.”

Look for more information on this and what it means to you as we move through the Seoul meetings of the G20.  This could mean some major relative price changes between what you see in prices now on goods coming in from China and what you will see in the future.  This means that major retailers–like Walmart–that rely on cheap Chinese and Far East Asian goods may have some surprises come down the pike.  Because Walmart is “America’s store”, it will likely effect the buying power of all U.S. households.

A Jobless Horizon

Posted: October 28, 2010 | Author: | Filed under: jobs, The Great Recession, U.S. Economy | 17 Comments

Many economists are still forecasting a rather bleak jobless recovery in our future.  The latest outlook  from Macroadvisors (h/t to Mark Thoma & Economist’s View) suggests that we won’t see substantial job creation until the end of 2013.  This would be a full four years after the technical end of the recession.  That’s not good.

A jobless recovery is an unpleasant and stubborn thing.  Basically, the GDP of a country will grow which means the production of goods and services available to the economy increases, but that growth rate isn’t sufficient enough to create jobs.  This has all kinds of ramifications and none of them are pleasant.  In the past, we’ve trended towards decreasing employment in many sectors and there’s a lot of reasons for that.  First, we’ve improved processes through technology or consolidation of businesses which were typical of earlier points in time.  This continues but to a lesser extent.  Second, globalization has been an important factor–especially recently–as manufacturing and other industries seek outsourcing and other countries’ markets as a way to improve their bottom lines.  The interesting thing about the Macroadvisor forecast is that it indicates that the main source here is just plain slow growth. This is the most troubling because it’s usually the easiest thing for the government to correct by increasing its domestic demand.

Here are their main points:

  • The U.S. is in the midst of another “jobless recovery,” in the sense that employment gains have been meager relative to enormous job losses that occurred during 2008 and 2009.
  • We anticipate that job gains will continue at a moderate rate, and that the pre-recession peak in private nonfarm payroll employment won’t be reached until 2013, nearly 4 years after the recession ended.
  • This would be roughly comparable to the time it took to regain the pre-recession peak in employment following the 2001 recession, but approximately twice as long as the recovery in employment following the 1990–91 recession and approximately four times as long following recessions in 1970, 1973–75, and 1981–82.
  • The overwhelming factor contributing to the much more sluggish pace of job creation in recent recoveries is much slower growth of output.
  • In contrast, other factors — including productivity growth and changes in the workweek — have played only minor roles in accounting for slower growth of private nonfarm payrolls in recent recoveries.
  • The severity of the decline in employment during 2008 and 2009 is largely accounted for by the weakness in output during the recession, and not by anomalous behavior of productivity.

This is also troubling in other ways.  Some of it, as their analysis points out, seems to be due to an increasing trend in our economy.  In other words, this has become a pattern in the last three recoveries and it’s just progressively getting worse.   It is looks like we’ve reached a growth plateau.

Some of this is also because of the reasons pointed out above.  The U.S’s strongest periods of growth occurred during periods where other countries were not growing so quickly in terms of production.  If you think of the post World War 2 period–a time many folks consider the ‘golden age’ of the US–you should realize that we were one of the few intact industrialized nations left standing.  We were nearly the world’s sole supplier and every one else needed goods.  The last 60 years have been a story of the rest of the world developing its production capacity.  We are no longer the world’s company store.  Now, we have become the world’s biggest customer.

Another reason is the political climate that changed abruptly during the Reagan Revolution. We seem keen on supporting business who can go just about any where for workers and consumers now, but have no desire to prop up U.S. households.  Incomes have been down for some time.  Now, borrowing capacity is down.  While businesses can take their capital some place else, households are unlikely to do that.  We keep our labor some where in the U.S. and with the recent decline of our home values and ability to sell homes, we are almost limited to our current situations at the moment. U.S. Labor is not a very mobile factor.

At one point, government could be counted on to give some Keynesian tweaking by increasing its employment.  This still happened during the Reagan years by revitalizing the military capital. Think about all those new Navy ships.  This was less necessary during the Clinton years because of the boost to productivity and incomes from information technology plus the cold war peace dividend.  Now, all we see are state balanced budget amendments that force states to take recessionary actions during recessionary times and ignore spending prohibitions during good times. We also have such low taxes from the Dubya years, that any attempt to regain some traction there is going to be met with intense political ill will.  This imbalance–if anything–will get worse because the last two years and Democratic political capital were wasted on political efforts not associated with job creation.  We’re seeing meager attempts at tax incentives and those are likely to continue. This will not help the American household or create jobs for them.  Eventually, forces will be such that deficit reduction attempts will prevail and all bets will be off if job growth isn’t sufficient by then.

What does that mean for most of us?  Well, it means more stagnant incomes and downsized lives.  It means trying to avoid using credit and looking for ways to pad that rainy day fund.  It also means that it may take a very long time to find that job you really want and deserve.  You may have to move to get it and you may have to sell a home–if you have one–at a price that will put a hamper on your retirement plans.  And ah, you’re retirement days, with decreased income  and employment comes decreased contributions to both social security and related funds.  Something you should–if you can–try to offset.  Something, however, the government cannot offset without doing something to the programs.

One of the most troubling things of all of this is the likely decreased contributions to sustaining Social Security and Medicare from the decreased incomes and labor participation.  This–and political will to decimate the system–will make it highly unlikely that either program will make it through the next five years unscathed.  I can almost guarantee it given the Cat Food Commission’s goals and composition.  I can also foresee Wall Street attempting to get access to your funds to play speculation games.  This will make your return subject to market momentum and whims.

I think it’s more important for us to make our voices heard to government on all these issues or an erosion of middle class lifestyles will likely result.  This is where it’s also important to argue from a rational economic viewpoint rather than the anti-government hysterics of the tea party. Yes, we all agree that’s something amiss.  Yes, we can see that our dollars are going to the wrong people.  But the deal is this, if you continue to lose income and job standing, taxes are really irrelevant.  And this brings me back to the slow growth forecast above.  You see, we are a consumer economy, and of course our economy will grow slow if there are no jobs and no decent pay levels with which we can purchase things.

Again, corporations can buy things and people from any where and they can move at will. There are growing markets in China, India, and even Vietnam.  We, however, are pretty much stuck with situation.  And that is why every one needs to vote their interests and not their anger.

It’s still the Economy Stupid! (version 9.999999999)

Posted: July 30, 2010 | Author: | Filed under: Global Financial Crisis, U.S. Economy | Comments Off on It’s still the Economy Stupid! (version 9.999999999)

Personal Consumption Expenditure Revisions via Calculated Risk Blog. (People are not partying like it's 1999.)

Chatting up the ladies of The View is not going to get the majority of people’s minds off the worsening economy. The recovery is definitely slowing down and there are signs in the latest national product and income reports that are very disturbing to us necromancers of macroeconomics. The persistently high unemployment rate is taking its toll on consumer spending. Since that’s the main driver of the U.S. economy, things are not improving. It looks like on a sideways  slide.

One of the things that I really noticed is what Keynes referred to as the paradox of thrift in action. The personal savings rate for the second quarter was reported as 6.2 percent of disposable income. This is significantly higher than the 4 percent that most of the forecasters had anticipated. Coupled with poor consumer sentiment, this is a bad sign.

Confidence among U.S. consumers fell in July to the lowest level since November, posing a threat to the biggest part of the economy.

The Thomson Reuters/University of Michigan final index of consumer sentiment declined to 67.8 this month from 76 in June. The preliminary measure was 66.5.

Employment growth has been slow to take hold and lower home prices are depressing wealth. The lack of confidence may further restrain consumer spending, which accounts for 70 percent of the economy, and limit the pace of growth.

“Consumers have a lot to be concerned about,” Eric Green, chief market economist at TD Securities Inc. in New York, said before the report. “Private job growth is showing signs of slowing, not accelerating,” he said, and stock prices have declined since peaking in April.

People are not feeling secure enough about their wealth (home values, stock portfolio values, etc.) and their jobs to spend money. Instead, they are either saving their money or paying down debt. Either behavior has a bad result for the economy because it doesn’t translate into immediate spending. Because banks are building liquidity and capital and boosting their incomes via fees and arbitrage of investments, they are not lending. This means consumer savings is not translating into business investment. Plus, what business in their right mind is going to expand their concerns when you don’t see customers coming through the doors?

In fact, one of the most interesting trends we’re seeing right now is that businesses are buying equipment and not hiring workers. What profits they do manage to make is going to upgrade existing capital.

The fact that businesses seem to be investing more in equipment than in hiring may be a reason why households have been reluctant, or perhaps unable, to pick up the pace of their spending.

“There are limits on the degree to which you can substitute capital for labor,” Mr. Ryding said. “But you can understand that businesses don’t have to pay health care on equipment and software, and these get better tax treatment than you get for hiring people. If you can get away with upgrading capital spending and deferring hiring for a while, that makes economic sense, especially in this uncertain policy environment.”

Even the Federal Reserve is worried about the current trends.

On Thursday, James Bullard, president of the Federal Reserve Bank of St. Louis, warned that the Fed’s policies were putting the economy at risk of becoming “enmeshed in a Japanese-style deflationary outcome within the next several years.”

The warning by Mr. Bullard, who is a voting member of the Fed committee that determines interest rates, came days after Ben S. Bernanke, the Fed chairman, said the central bank was prepared to do more to stimulate the economy if needed, though it had no immediate plans to do so. On Friday, the government will release its estimate of gross domestic product for the second quarter of this year.

At the Fed, Mr. Bullard had been associated with the camp that sees inflation, the central bank’s traditional enemy, as a greater threat than deflation brought on by anemic growth. Until now he had not been an advocate for large-scale asset purchases to reinvigorate the economy.

Meanwhile, Congress seems completely out to lunch when it comes to fiscal policy. There’s a concerted effort by the right wing of the Republican party and many DINOS to push a meme that it’s all the fault of selfish poor people. I was appalled to read this particular bit of that in WaPO (h/t to BB). The current line is to push people’s needs to actually cash in on the insurance programs they’ve paid for to help them through bad times (e.g. social security, medicare, unemployment insurance) as ‘entitlements’ or some kind of welfare. This branding of safety net insurance programs is horrifying. My father paid for his social security benefits for over 70 years since its inception. To suggest that he’s adopted a “me first” attitude because he’s cashing in on his benefits it’s beyond morally reprehensible. Indeed, Neel Kashkari –a former Bush Treasury appointee–suggest that we should sacrifice further for the good of U.S. corporations. It’s like the fact they’ve been underpaying us for our increased productivity for decades now wasn’t enough sacrifice.

Cutting entitlement spending requires us to think beyond what is in our own immediate self-interest. But it also runs against our sense of fairness: We have, after all, paid for entitlements for earlier generations. Is it now fair to cut my benefits? No, it isn’t. But if we don’t focus on our collective good, all of us will suffer.

When a Republican like Kashkari starts talking about the ‘collective good’ you best mind your wallets. He touts TARP bailouts while telling us we need to fork over our future social security benefits. (Notice he works for Pimco now, he undoubtedly wants to churn up some investment fees from privatized social security accounts and forced saving.)

If you dig deeper into the numbers, it appears that the only reason we’ve experienced lackluster growth has been due to programs like the home credits for first time buyers, cash for clunkers, and money to states that have been used to save state workers jobs. Basically, government programs have given a short, one time injection into various markets but it’s not stopping their trends. It’s only slowing the momentum.

I’ve mentioned that Louisiana is about ready to go off the ‘budget cliff’ in a year and that all state schools and health facilities face an across the board cut of around 24%. From what I can tell already, most of that will come by nearly halving the work force at nearly all state run institutions. No wonder Republicans want to cut ‘entitlements’. How can you shift so many folks on to unemployment rolls and still save the state budget? Louisiana isn’t even one of the worst states like California. (Although if Bobby Jindal continues to have his way, it will be.) If any thing, states like California should be asking the Federal government to stop subsidizing North Dakota and Nebraska and send them back their federal tax money. Without that money, states like Louisiana would’ve been in the dumps at least two years ago.

I’m not sure why the group that’s in Washington DC doesn’t seem to get the extent of the bad news when it comes to the economy. It’s either purposefully ostrich-like or purposefully callous. Maybe it’s because a lot of them have forgotten what it’s like to live through continually high unemployment and job insecurity. It’s possible that there’s just way too many lawyers there and none of them have actually had experience with running a business or working like a serf for an unappreciative corporation.

Whatever it is, they need to get over themselves really quickly. If these patterns continue, it’s going to be a long slow decade and I for one, will not look kindly on any one that asks me to sacrifice for the good of corporate profits. This is especially when that sacrifice comes to giving back benefits that I’ve paid for since I was 15 years old and got my first job with a paycheck.

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