Goolsbee goes au naturel

I never thought I’d ever hear an economic adviser to a Democratic administration justify taking a natural path to recovery when the US economy is reeling from a basic lack of aggregate demand.   The comments were just about as Chicago school as you could get.   It was just another reheated bowl of smoking green shoots.

“Our effort now as a government should be to get the private sector to help them stand up and lead the recovery,” Goolsbee told “This Week” anchor Christiane Amanpour, citing efforts on regulatory review, while maintaining policies such as reduced payroll taxes through the end of the year. “We’ve got to rely on policies that are trying to leverage the private sector and give incentives to private sector to be doing the growth.”

I didn’t catch Obama economist Austan Goolsbee with Christian Amanpour on ABC which is where I got that quote.  I caught up with him on Candy Crowley’s Sunday show.  From what I can tell, the story line was about the same.  According to Goolsbee, whatever recovery we’re experiencing from the worst financial crisis we’ve had since The Great Depression is in the hands of the private sector who just needs to appreciate the gentle nudge they’ve already gotten. Goolsbee conveniently ignored every thing going on in the recent economy except a small window’s worth of job creation.  He declared that there was no downward trend in the economy.  I felt like I was watching a big ol’ flaming head tell me to ignore the man behind the curtain. But, I musn’t be the only one that was watching the little man behind the curtain given that the one month’s worth of data turned into “DOW plunges into longest weekly losing streak since 2004” last week.  I don’t think that’s the end of that either.

Scarecrow at FDL calls it the best speech evah given by President Romney’s chief economic adviser.

Goolsbee correctly told us that a smart economist wouldn’t get overly excited about one month’s jobs and growth numbers but would instead look at the overall trend. Of course what he wouldn’t want to concede is that GDP grew at a meager annual rate of 1.8 percent over the first three months of 2011 and so far was predicted to grow at only 2.8 percent for the next three. And the overall trend for job growth was still not enough to make a serious dent in unemployment unless you believe taking 5-10 years to get back to full employment is okay.

So Goolsbee was in denial from the opening moment because he didn’t have a decent story to tell even in his own framework. When Amanpour asked him what the Administration could or should be doing to improve conditions, he ticked off items you’d expect to hear from a typical GOP Presidential adviser: we’ve got to get the debt under control; we have a White House effort to identify and get rid of governmental regulations that are preventing the private sector from growing the economy; we should pass “free trade” agreements backed by the Chamber of Commerce; and we should leverage limited public dollars to release billions in private funding for investments.

Goolsbee’s bottom line: “It’s now up to the private sector.” That’s exactly what you’d expect from President Romney’s economic adviser.

It took Paul Krugman and Chrystia Freeland, over the absurd denials by Martin Regalia of the Chamber of Commerce, to remind ABC’s audience that business confidence and concerns about taxes and regulations aren’t the problem: business polls repeatedly show businesses aren’t expanding/hiring much because the demand for their products is weak. Demand is weak because the recession and the housing market crash depleted consumers’ wealth and they’re worried about losing their homes and jobs. You don’t need a degree in economics to grasp the logic of that. When private spending is still depressed, only government spending is keeping the economy afloat, and the stimulus is phasing out.

Now, I hate to keep writing about the same things over and over again.   I know I’m not the only one.   Brad DeLong has finally discovered there is no Plan B.  There is only full speed ahead with deficit reduction which is a great long term goal but a disastrous short term strategy.  Mark Thoma is even more straightforward.

Policymakers have been telling us to have patience for some time now, but patience ran thin long ago. We need action, not excuses to do nothing based upon Republican talking points. We have millions of people out of work, we face the prospect of a five to ten year recovery for employment, yet the administration has no plans to even try to push Congress to do more.

I stuck the nifty graph up top because it basically shows that most businesses aren’t expanding because they don’t have customers and they don’t see the economy improving.  Again, tax breaks don’t do businesses any good when they don’t have revenues. Low interest rates aren’t working either.  That means the Fed basically can’t do anything via monetary policy either at this point. The graph and the following analysis are from the  NFIB which tracks small business trends. They come from their latest poll of small and independent businesses.

The percent of owners planning capital outlays in the next three to six months fell 3 points to 21 percent, a recession level reading. Money is cheap, but most owners are not interested in a loan to finance equipment they don’t need. Prospects are still uncertain enough to discourage any but the most profitable and promising investments. Four percent characterized  the current period as a good time to expand facilities (seasonally adjusted), down 1 point from March and 4 points lower than January. The net percent of owners expecting better business conditions in 6 months slipped another 3 points to negative 8 percent, 18 percentage points worse than in January. Uncertainty is the enemy, and there is plenty of it to convince owners to “keep their powder dry”. Apparently consumers feel much the same way, as more customers spending more money would overcome the reluctance of owners to hire and make capital outlays. One in four still cite “weak sales” as their top business problem.

There is nothing mysterious about the fiscal policy solution to your basic lack of aggregate demand. What’s mysterious is the complete lack of concern about the significantly high unemployment rates, the continued foreclosure crisis, and the downward trends in both consumer and business confidence.

I guess I know what happens with the phone rings at 3 a.m.

No one picks it up and then some one goes on TV the next day and says we’ve done all we can do.  For this they expect re-election?

Tuesday Reads

Good Morning!! WTH is going on with the weather? When I got up yesterday, the temperature was -9 degrees! It got up to about 10 degrees during the day and back into the below zero numbers last night. On top of that, we have another nor’easter coming on Wednesday and Thursday. How much more of this can we take? Even southern states have been getting snow and cold this winter. Meanwhile, it’s way warmer than usual in the Arctic regions.

According to this article by Justin Gillis in The New York Times,

The immediate cause of the topsy-turvy weather is clear enough. A pattern of atmospheric circulation that tends to keep frigid air penned in the Arctic has weakened during the last two winters, allowing big tongues of cold air to descend far to the south, while masses of warmer air have moved north.

The deeper issue is whether this pattern is linked to the rapid changes that global warming is causing in the Arctic, particularly the drastic loss of sea ice. At least two prominent climate scientists have offered theories suggesting that it is. But others are doubtful, saying the recent events are unexceptional, or that more evidence over a longer period would be needed to establish a link.

Since satellites began tracking it in 1979, the ice on the Arctic Ocean’s surface in the bellwether month of September has declined by more than 30 percent. It is the most striking change in the terrain of the planet in recent decades, and a major question is whether it is starting to have an effect on broad weather patterns.

Ice reflects sunlight, and scientists say the loss of ice is causing the Arctic Ocean to absorb more heat in the summer. A handful of scientists point to that extra heat as a possible culprit in the recent harsh winters in Europe and the United States.

Apparently it’s all related to the jet stream being too “weak” and something called the “arctic fence.” Interesting article, check it out.

The Chicago Sun-Times is raising some questions about one of the judges who may have to decide what to do about Rahm Emanuel’s appeal of the ruling yesterday that he cannot run for Mayor of Chicago. The Illinois Supreme Court Judge in question is Anne M. Burke, who is married to a powerful Chicago Alderman–one who doesn’t support Rahm’s candidacy.

Now that Rahm Emanuel has been tossed off the mayoral ballot by an appeals court, Ald. Edward M. Burke (14th) and his wife, Illinois Supreme Court Justice Anne M. Burke, will each have a role in Chicago’s mayoral election.

Ed Burke, the city’s most powerful alderman, has said he’s backing Gery Chico — a former staff member for Burke and Mayor Daley who’s trailed Emanuel in every poll on the mayor’s race.

In the past Justice Burke has recused herself from cases involving Chicago politics. What will she do this time?

Dakinikat will probably like Paul Krugman’s latest blog post: The War on Demand.

Something really strange has happened to the debate over economic policy in the face of the Great Recession and its aftermath — or maybe the real point is that events have revealed the true nature of the debate, stripping away some of the illusions. It’s a bigger story than any one point of dispute — say, over the size of the multiplier, or the effects of quantitative easing — might suggest. Basically, in the face of what I would have said is obviously a massive shortfall of aggregate demand, we’re seeing on all-out attack on the very notion that the demand side matters.

This isn’t entirely new, of course. Real business cycle theory has been a powerful force within academic economics for three decades. But my sense is that the RBC guys had very little impact on public or policy discussion, simply because what they said seemed (and was) so disconnected from actual experience.

Now, however, we’re seeing a much more widespread attack on demand-side economics. More than that, it’s becoming clear that many people don’t so much disagree with the idea that demand matters as find it abhorrent, incomprehensible, or both. I fairly often get comments to the effect that I can’t possibly believe what I’m saying about monetary or fiscal policy, that no sensible person could believe that printing money or engaging in deficit spending will increase output and employment — never mind that all I’m saying is what Econ 101 textbooks have been saying for the last 62 years.

It seems the powers that be are determined to put us into a deep depression by basing policy decisions on Reaganite voodoo economics. And no matter how hard Krugman tries, I don’t think the guys in charge are going to wake up to reality.

There was a terrible suicide bomb attack at Domodedovo airport in Moscow yesterday.

Russian President Dmitry Medvedev has vowed to track down and punish those behind an apparent suicide bomb attack at Moscow’s Domodedovo airport killed 35 people and injured more than 100.


Unnamed officials said three suspects were being sought over the attack.

Suspicion has fallen on Russia’s restive North Caucasus region.

Last March the Russian capital’s underground system was rocked by two female suicide bombers from Russia’s volatile Dagestan region, who detonated their explosives on the busy metro system during rush hour, killing 40 people and injuring more than 80.

But the airport was up and running again very soon after the attack, according to The New York Times.

Just hours after a suicide bomber struck at the international arrivals terminal at Moscow’s busiest airport on Monday afternoon, passengers coming off flights from abroad were being ushered through the very same terminal where bodies had only just been removed.

Some inbound flights had to circle for a time after the bombing, and some arriving passengers had to wait on the tarmac before being asked to make their way through the terminal. But Domodedovo Airport is an important transport hub for Moscow, the capital, and the authorities decided to keep it open.

Sheets of blue plastic had simply been hung to block out the scene.

Meanwhile, people continued to arrive to pick up loved ones and to embark on flights out of the city. It was as if officials, passengers and Muscovites in general were displaying a particular brand of Russian stoicism, if not fatalism.

The Huffington Post reported “exclusively” last night that:

The bipartisan panel appointed by Congress to investigate the financial crisis has concluded that several financial industry figures appear to have broken the law and has referred multiple cases to state or federal authorities for potential prosecution, according to two sources directly involved in the deliberations.

The sources, who spoke on condition they not be named, declined to identify the people implicated or the names of their institutions. But they characterized the panel’s decision to make referrals to prosecutors as a significant escalation in the government’s response to the financial crisis. The panel plans to release its final report in Washington on Thursday morning.

In the three years since major lenders teetered on the brink of collapse, prompting huge taxpayer rescues and amplifying an already painful recession into the most punishing downturn since the Depression, public indignation has swelled while few people who played prominent roles in the crisis have faced legal consequences.

That may be about to change. According to the law that created the Financial Crisis Inquiry Commission, the panel has a responsibility to refer for prosecution any evidence of lawbreaking. The offices that have received the referrals — the Justice Department, state attorneys general, and perhaps both — must now determine whether to prosecute cases and, if so, whether to pursue criminal or civil charges.

Very interesting. Will Obama’s Justice Department act? Stay tuned….

I know I should be linking to stories about the SOTU, but I just can’t bear to do it. I’m already bored with the whole thing. So I’ll end with this story about new research on what is making the honey bees sick.

Ecologist Colin Henderson co-authored a study that may have identified the cause of the honeybee illness that has plagued U.S. bees since 2006. Henderson, 59, is an associate professor of biology at the University of Montana. He and colleagues there found a correlation between colony collapse disorder (CCD) and a lethal combination of a parasite and a virus.

The study, on which Army scientists at the Edgewood Chemical Biological Center near Baltimore also collaborated, has been called groundbreaking (though also controversial because one of the study’s lead authors previously received funding from a maker of pesticides that some blame for CCD). By the way, for an overall house pest control service, consider having bed bug treatment lexington ky at The honeybee die-off strikes about 20 to 40 percent of commercial beekeepers in a good year, Henderson says, and up to 60 percent in a bad one. When it hits a beekeeping operation, it can take out up to 70 percent of its colonies.

There’s an interesting interview of Henderson in the article.

So….. What are you reading this morning?

When Deficits Matter …

keynescolourThere’s a lot of misunderstanding in popular culture (most started during the Reagan years) about deficit spending and the public debt. Deficits tend to increase naturally during bad economic times due to what we economists call automatic stabilizers. These are spending programs (most of which were built into the economy during the New Deal) that adjust as the business cycle changes. Taxes naturally go down during a recession because less people are making money and business earn less revenue and sell less. Government expenditures go up because people rely on unemployment insurance and other government programs more during bad economic times.

Then, there is discretionary fiscal policy that the government undertakes to offset the business cycle. The Keynesian framework suggests that the government should deficit spend by increasing its direct spending or lowering taxes during bad economic times and then quit spending and decreasing taxes during good times.

Neo-Keynesian economists (like me) never suggest running perpetual deficits which build up our government debt over time. The debt accrues interest and it can eventually become a substantial part of current government outlays if the interest rates are high enough or the debt becomes a big enough percentage of current output (GDP). A huge deficit and/or debt can eventually impact a growing economy. We appear to be on the path to that result now.

The “deficits don’t matter” meme that came from the likes of vpResident Evil Dick Cheney is anathema to neo-Keynesians despite Republican falsehoods to the contrary. It’s pretty much why we saw Democratic President Bill Clinton try to address the excesses of the Reagan Administration (the real tax and spend president of the 20th century) during his administration. The deficit management program during the Clinton years was very much in keeping with what neo-Keynesians believe is a responsible approach to fiscal policy. When the economy is good, you increase taxes to suppress the tendency for the economy to create inflation and you take advantage of the incoming revenues to lower the debt and run a surplus.

The surplus does double duty since it is essentially “government saving”. It takes the government out of the bond markets and provides more money for the private sector to grow. Hence, there is a role for surpluses during boom times. Government surpluses tend to funnel money to private business and suppress any inflationary pressures in a fast growing economy. Plus, they can be banked in rainy day funds to be spent during bad economic times.

So, that’s the Keynesian fiscal policy theory in a tiny nut shell.

So what does this mean? It’s a link to a Reuters piece called “Obama to raise 10-year deficit to $9 trillion”.

The Obama administration will raise its 10-year budget deficit projection to approximately $9 trillion from $7.108 trillion in a report next week, a senior administration official told Reuters on Friday.

The higher deficit figure, based on updated economic data, brings the White House budget office into line with outside estimates and gives further fuel to President Barack Obama‘s opponents, who say his spending plans are too expensive in light of budget shortfalls.

The White House took heat for sticking with its $7.108 trillion forecast earlier this year after the Congressional Budget Office forecast that deficits between 2010 and 2019 would total $9.1 trillion.

“The new forecasts are based on new data that reflect how severe the economic downturn was in the late fall of last year and the winter of this year,” said the administration official, who is familiar with the budget mid-session review that is slated to be released next week.

“Our budget projections are now in line with the spring and summer projections that the Congressional Budget Office put out.”

The first thing I’m hoping it means is that the Obama administration is going to quit putting out rosier-than-rosy scenarios (and even more hopefully, quit using them for fiscal policy decisions). In other words, my fervent prayer is that they’re getting real. Second, it means this:

Record-breaking deficits have raised concerns about America’s ability to finance its debt and whether the United States can maintain its top-tier AAA credit rating.

Politically, the deficit has been an albatross for Obama, a Democrat who is pushing forward with plans to overhaul the U.S. healthcare industry — an initiative that could cost up to $1 trillion over 10 years — and other promises, including reforming education and how the country handles energy.

Why, after years of deficit spending by federal government, are we in danger of becoming a developing nation? Why are we seeing a continuation of what is essentially, Reaganomics (a failed economic hypothesis, but a popular ideological and political meme) instead of retreat to the proven theories of macroeconomics?

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He’s no FDR

DeLong skewers the the Stimulus Plan Claim via the Unemployment rate

DeLong skewers the the Stimulus Plan Claim via the Unemployment rate with stylized facts

With the release of financial regulation reform and healthcare reform that has Wall Street breaking open the bubbly, I just want to join the chorus of highly skeptical economists. The tune of the last few days is hard to miss. Take this piece from the NY Time’s Dealbook as an example: Only a Hint of Roosevelt in Financial Overhaul. There’s also Paul Krugman’s Op-Ed Column today Out of the Shadows which is the typical on-the-one-hand-on-the-other hand economist behavior. (Could I just mention in passing that I like the OLD Paul better? The one that was an out spoken advocate for liberal economists? I’m not sure what happened at that White House Dinner, but I’m beginning to think we now have a Manchurian economist at Princeton. Oh, where is our Shrill One?) Oh, and you can still read my first impressions here. I’m going to start with Financial Reform but don’t leave me yet. Brad deLong takes on Christine Romer’s The Lessons of 1937 at The Economist and since he still hasn’t been invited to dinner at the White House, it’s classic Brad.

So what does Krugman think about the Alphabet Soup Agency reheat slugging its way through that perpetual Hall of Wall Street minions we know as our Congress? He believes that it throws some light on the shadow banking industry in that the Alphabet Soup gang at the FED get to see more balance sheets and books. There is also a stab at standardizing the process, but custom fitted Credit Default Swaps remain. The essential riskiness remains. Let’s examine the Krugman critique.

But what about the broader problem of financial excess?

President Obama’s speech outlining the financial plan described the underlying problem very well. Wall Street developed a “culture of irresponsibility,” the president said. Lenders didn’t hold on to their loans, but instead sold them off to be repackaged into securities, which in turn were sold to investors who didn’t understand what they were buying. “Meanwhile,” he said, “executive compensation — unmoored from long-term performance or even reality — rewarded recklessness rather than responsibility.”

Unfortunately, the plan as released doesn’t live up to the diagnosis.

Well, maybe the White House Pastry chef did not completely overwhelm the shrill one.

Tellingly, the administration’s executive summary of its proposals highlights “compensation practices” as a key cause of the crisis, but then fails to say anything about addressing those practices. The long-form version says more, but what it says — “Federal regulators should issue standards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value” — is a description of what should happen, rather than a plan to make it happen.

Furthermore, the plan says very little of substance about reforming the rating agencies, whose willingness to give a seal of approval to dubious securities played an important role in creating the mess we’re in.

In short, Mr. Obama has a clear vision of what went wrong, but aside from regulating shadow banking — no small thing, to be sure — his plan basically punts on the question of how to keep it from happening all over again, pushing the hard decisions off to future regulators.

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Charge! (Or Not)

Fed Chairman Ben Bernanke testified before congress this week and highlighted one of the big future worries facing the economy.  What will be the impact of all this government borrowing on the near and long term economic look and the financial markets?  Brad Setser put the deficit explosion into perspective in his blog at the Council of Foreign Relations on June 2.

The story is clear. Government borrowing has increased dramatically. It topped 15% of GDP in the last two quarters of 2008. In 2007 and early 2008 it was more like 3% of GDP. But private borrowing has fallen equally sharply. Total borrowing by households and firms fell from over 15% of GDP in late 2007 to a negative 1% of GDP in q4 2008.

Both charts highlight the risk that worries me the most. In both the early 1980s and the first part of this decade, both the private sector and the government were large borrowers. And in both cases, borrowing rose faster than domestic savings, so the gap was filled by borrowing from the rest of the world. The trade and current account deficit rose. In the early 1980s, the US attracted inflows by offering high yields on its bonds. More recently, it did so by borrowing heavily from Asian central banks, together with the governments of the oil-exporting countries. But now yields are low (even after the recent rise in the yield on the ten year Treasury bond), and need to be low to support a still weak US economy. And China (and others) are visibly uncomfortable with their dollar exposure; banking on their continued willingness to finance a large external deficit seems like a stretch.

The challenge this time around consequently will be to bring down the government’s borrowing as private borrowing resumes.

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