Tuesday, October 12, 2010

10/12/10 Post

Stocks drop as Fed rate-setter rattles investors
World markets fell Tuesday after a leading U.S. rate-setter dampened expectations that the Federal Reserve is preparing a massive monetary stimulus next month and amid mounting speculation that China is planning to raised reserve requirements for banks to cool lending.
US Cities Face Half a Trillion Dollars of Pension Deficits
Big US cities could be squeezed by unfunded public pensions as they and counties face a $574 billion funding gap, a study to be released on Tuesday shows.
Recession job losses: Worse than first thought
The government currently estimates that 2.2 million jobs were lost from April of 2009 through March of this year, a significant portion of the 7.8 million jobs lost since the start of 2008.
The Biggest Tax Hike Ever? It Depends on Who You Ask
If Congress returns after the Nov. 2 midterm elections and does nothing, allowing the Bush tax cuts to expire, then New Year's Day will usher in the nation's biggest tax increase since the end of World War II, according to Gerald Ahern, spokesman for the Tax Foundation, a nonpartisan tax monitoring group.
More Balk at Cost of Prescriptions
A review of insurance-claims data shows that so-called abandonment—when a patient refuses to purchase or pick up a prescription that was filled and packaged by a pharmacist—was up 55% in the second quarter of this year, compared with four years earlier.
Obama Highway Plan Fuels Talk of Gas Tax Hike
Two former transportation secretaries who recently co-chaired a panel that proposes gas tax hikes and user fees to pay for government transportation projects joined President Obama Monday as he called for a $50 billion immediate investment in roads, rails and runways.
GOP sets sights on reshaping reform
An all-out assault on government-sponsored loan enterprises, increased oversight of regulatory agencies and retooling the Wall Street regulatory overhaul are on tap if the Republicans retake the House.
A Gold Era for the Yellow Metal
A bull market during today's economic uncertainty suggests gold will keep rising in coming years, although at a slower pace than in recent times. Prices could average $1,500 an ounce by 2015.
Can they all get along?
Perhaps the biggest question surrounding implementation of the landmark Dodd-Frank Wall Street reform bill is one of personality: Can Timothy Geithner and Elizabeth Warren get along?
Wall Street Pay: A Record $144 Billion
Financial Overhaul Has Affected Structure but Not Level; Revenue-to-Compensation Ratio Stays Flat.
Credit crisis for small business?
While the credit crisis has eased for Big Business, the president has argued for months that additional help was needed to get loans flowing again to small businesses, so they can expand and hire more workers.
GOP Tries to Capitalize on Expanding House Field
Despite months of preparations by the House campaign committees, the latest party spending demonstrates the Congressional playing field remains relatively fluid three weeks before Election Day.
Unemployed find old jobs now require more skills
The jobs crisis has brought an unwelcome discovery for many unemployed Americans: Job openings in their old fields exist. Yet they no longer qualify for them.
Where Having It All Doesn’t Mean Having Equality
Courtesy of the state, French women seem to have it all: multiple children, a job and, often, a figure to die for... What they don’t have is equality: France ranks 46th in the World Economic Forum’s 2010 gender equality report, trailing the United States, most of Europe, but also Kazakhstan and Jamaica.
Foreclosure freeze could undermine housing market
Before a housing recovery can occur, all those foreclosed properties have to be re-scrutinized by the banks and then sold. With any foreclosure-related deal open to legal challenge, that inventory could be taken off the market while the legal challenges make their way through the courts.
Trio Share Economics Prize
Nobel Goes to Professors Who Help Explain Why Joblessness Remains High Now.
Senior citizens brace for Social Security freeze
Seniors prepared to cut back on everything from food to charitable donations to whiskey as word spread Monday that they will have to wait until at least 2012 to see their Social Security checks increase.
Why you can't find a job
While most people think businesses simply aren't hiring enough to absorb the millions of unemployed workers, a rising tide of prominent economists dispute that. They claim that there are jobs out there, just not the right candidates to fill them.
Immigration and the housing glut
Why are so many homes still sitting vacant? The U.S. Census offers some clues: falling immigration and more doubling up by young people.
Divided Fed is 'dysfunctional'
Financial markets are banking on another bond-buying spree by the Federal Reserve, but the central bank's policymakers aren't presenting a unified front on the controversial idea. The lack of a clear message could be one factor holding back the recovery, said several economists.
States to Probe Mortgage Mess
Attorneys General Hope Lenders Will Re-Write Loans With Troubled Documents.

Small Business Optimism Ticks Up
The NFIB said four of the index’s 10 subindexes fell, four increased and two were unchanged in the month.
Work Choices, Money, and Status
...the long run effect of the higher marginal tax rate is much higher than anything you might have predicted, because it has affected cultural norms. I worry about this much more near the median of the income distribution than at the very high end.
Two Top Economists Spar on Outlook for Economy, Policy
As part of a panel discussion at the National Association for Business Economics gathering in Denver, Stanford University professor and George W. Bush-era Treasury official John Taylor locked horns with Macroeconomic Advisers economist and former Federal Reserve governor Larry Meyer.
CR Index: Consumers see gains, but still cite stress, low confidence
The Consumer Reports Trouble Tracker Index, which focuses on both the proportion of consumers who have faced financial difficulties as well as the number of negative events they have encountered in the past 30 days, has declined for four straight months.
NABE Forecasters Cut Growth Outlooks
According to a study released by the National Association of Business Economics Monday, analysts now expect to see the U.S. gross domestic product rise by 2.6% this year, versus the 3.2% expectation held back in May.
The people are upset at Greg Mankiw
I say keep your eye on the ball, filter out the analytically irrelevant social information, and consider that, even if you wish to raise taxes on the wealthy, that a ninety percent marginal rate -- even at a non-universal margin -- is a sign that something really is amiss.
Secondary Sources: Emerging Markets, QE and Dollar, QE and Markets
A roundup of economic news from around the Web.
Response to Queries
[Mankiw's] recent Times column generated more email and blogosphere commentary than usual. While it is impossible for me to answer all the questions raised, I thought it might be useful to address three of the more common ones.
How To Make Atlas – And Your Hip Surgeon – Shrug
The more you tax and regulate things, the less you get of those things. What’s really important to understand is the “less you get” part is not linear. There’s a tipping point where you may get nothing if you pile on too many burdens. The supplier always has a choice to supply or not. Capital can go on strike. Atlas can shrug.
Work of Economics Nobel Winners Informs Current Labor Debate
Though the theories are useful for many markets where interactions are more complicated than matching buyers and sellers, including housing and monetary theory, the committee cited its application to the labor market as a key contribution.
Is Residential Real Estate Recovering?
It is difficult to forecast a bottom of the housing market because of the “shadow” market and government and legal issues which thwart foreclosures.
A thought experiment
If you put enough people in the factories pretending to make tanks, there’s less stuff to buy out in the rest of the economy. You’d be poorer as a group. Not as poor as when you actually built the tanks. And not as poor as when people died in real fighting. But you’d still be poorer if lots of people were working in the fake factories.
Why Are China, India and Brazil Rebounding Faster Than the U.S.?
Rapidly growing economies aren’t generating the ideas and technology to propel growth; rather, they’re using ideas and technology from advanced countries to catch up.
Exports and the Depression of 1920-21
One of the steepest financial crises and depressions in U.S. history began in January 1920 and lasted for 19 months. During that depression, Americans each month exported, on average, $583.6 million worth of goods. During the 19 months immediately following that depression, Americans each month exported, on average, a mere $321.0 million worth of goods. That is, exports during this period immediately after the depression were only 55 percent of what they were during the depression.
Number of the Week: Consumers in China, Brazil Discover Debt
In 2009, the year the global recession hit bottom, the aggregate credit-card balances of Chinese consumers rose 17.1% even as those of U.S. consumers fell 8.7%, according to a study by financial consultancy Lafferty Group. Brazilians increased their balances by 28.9%, part of a 9.2% rise throughout Latin America.
Duration of Unemployment
In Setpember 2010, the number of unemployed for 27 weeks or more declined to 6.123 million (seasonally adjusted) from 6.249 million in August. It appears the number of long term unemployed has peaked, but it is still very difficult for these people to find a job - and this is a very serious employment issue.
Why TARP was wrong
It restored confidence in the nation's largest financial institutions, by declaring them too big to fail. But it in no way restored confidence in the biggest financial market, the market for mortgage-related securities. That market is still in agony. The latest problem is the "foreclosure scandal."
Unofficial Problem Bank List 877 Institutions
"The number of institutions on the Unofficial Problem Bank List remained unchanged this week at 877 but assets rose slightly from $416.1 billion to $417.3 billion."
Monetizing All the Debt, All the Time
The oracles at Goldman say that $750 billion of QE2 is priced in to the market, and possibly $1 trillion — a frightful prospect that was hardly diminished by today’s lost jobs report. On top of that, there’s $300 billion to $400 billion in annual GSE run-off that needs replenishment under QE1.5. So Brian Sack, the monetary apothecary who operates the New York Fed’s drive-thru window, is going to be giving Wall Street a lot of POMO. Call it $100 billion per month of Permanent Open Market Operations, and be done.
Schedule for Week of Oct 10th
The key release this week will be September retail sales on Friday. Also Fed Chairman Ben Bernanke will try to explain the objectives of QE2 on Friday "Monetary Policy Objectives and Tools in a Low-Inflation Environment".
What The September Unemployment Reports Mean
What is discouraging, but expected by The Daily Capitalist, was that the broadest measures of unemployment are going up, including the broadest measure, U-6 unemployment.
Unemployment by Level of Education and Employment Diffusion Indexes
Note that the unemployment rate increased sharply for all four categories in 2008 and into 2009.
Does government spending create jobs?
...the link between government spending and jobs is not nearly as automatic as many people think.
America's Perpetual Decline
"Twenty-two years ago, in a refreshingly clear-sighted article for Foreign Affairs, Harvard's Samuel P. Huntington noted that the theme of "America's decline" had in fact been a constant in American culture and politics since at least the late 1950s."
Austerity or prosperity?
One of the most mindless aspects of the multiplier is to treat is as a constant, such as 1.52. It can’t be a constant, not in any meaningful way. If the government conscripted half of the US population to dig holes all day and conscripted the other half to fill them back in, and paid each of us a billion dollars a day for the task, and valued holes that were dug and holes that were filled in at a trillion dollars a hole, then GDP would be very very large, unemployment would be zero and there would be no stimulating effect and we would soon be dead from starvation.
Obama and Infrastructure
The President is continuing his push for the federal government to go deeper into debt in order to fund infrastructure projects. While nobody disputes that the country has infrastructure needs, the precarious nature of federal and state finances indicate that policymakers need to starting thinking outside the box.
Mirror, Mirror, on the Wall, Which Nation Has the Most Debt of All?
The Economist has a fascinating webpage that allows readers to look at all the world’s nations and compare them based on various measures of government debt (and for various years).
It Can Happen Here
Government really can be cut: case studies from Canada, New Zealand, and the United States.
Nightmare on Every Street
How to carve Fannie and Freddie into pieces.
How the Obama Tax Hikes Affect You
The Heritage Foundation Center for Data Analysis has estimated the impacts of the Obama tax hikes and found they would: 1) decrease inflation-adjusted gross domestic product (GDP) by $1.1 trillion by 2020; 2) decrease business investment by $33 billion a year; 3)decrease personal savings by $38 billion in 2011 alone; 4)decrease consumer spending by $706 billion through 2020; and 5) kill an average of 693,000 jobs a year through 2020.
No Relief for Jobs Killed by Drilling Ban
Shallow-water rig workers and those in industries unrelated to oil drilling are losing their jobs and being denied access to relief funds.
High and Hidden Costs: There is Nothing Free about the Wind
Though wind farms produce emissions-free energy, they bring certain costs with them. One cost the wearisome low-frequency noise emitted by enormous blades.
If You Cant Beat Them, Silence Them
Faced with the obvious failure of their policies, the left is now desperately seeking to avoid accountability by blaming others.
Why QE2 Won't Be Enough
A look at how the markets have anticipated this second round of quantitative easing and what it will actually accomplish.
Dollar Depreciation and the Higher Cost of Living
Strategists talk about dollar depreciation and how it impacts consumers and investors.

Research, Reports & Studies
RCM: Wells Fargo Economics Group: Weekly Economic & Financial Commentary
U.S. Review: Disappointing Jobs Report Gives Fed Ammunition; Global Review: Central Bankers Off To the Races!

Economists’ Comments & Opinions
Strong Support For All Bush's Tax Cuts
A solid majority (56%) said they wanted tax cuts extended even for households with more than $250,000 in income and individuals with more than $200,000. Only 39% wanted the rich to pay more.
Obama Drags Recovery in Raw Deal for Contracts: Amity Shlaes
Gibbs is right about the unintended consequences. But those consequences aren’t the ones he means. By making foreclosure harder for lenders, the president makes it possible that banks will lend less next time.
RAHN: Lessons from Down Under
Unlike most of the world, Australia did not have a recession during the last two years. In fact, it has not had a recession in the last 19 years. Its economic growth rate is higher than in the United States, and the unemployment rate there is only 5.1 percent.
Jobless America threatens to bring us all down with it
A depression may have been averted, but nothing has been fixed. This is the depressingly downbeat message that came across loud and clear from last weekend's annual meeting of the International Monetary Fund.
First the stimulus, now the hangover
In short, when it comes to private job growth, the last decade has been a lost decade.
Obama and the Politics of Outsourcing
During difficult economic periods, people are tempted to seek refuge in the false promise of protectionism. This is true of both America and India... But the fact is that for every job outsourced to Bangalore, nearly two jobs are created in Buffalo and other American cities.
Do We Really Need a Central Bank?
...Fed functions seem compelling at first glance, but given a careful rethink, it becomes apparent that much of what it does is either ineffective or superfluous, and could be handled much more skillfully outside this government-chartered monopoly.
I Can Afford Higher Taxes. But They’ll Make Me Work Less
HERE’S the bottom line: Without any taxes, accepting that editor’s assignment would have yielded my children an extra $10,000. With taxes, it yields only $1,000. In effect, once the entire tax system is taken into account, my family’s marginal tax rate is about 90 percent. Is it any wonder that I turn down most of the money-making opportunities I am offered?
Boehner's 'Plan B' for ObamaCare
Republicans would do exactly what House Speaker Nancy Pelosi so memorably predicted would happen once the health-care bill passed: find out what's inside it. Mr. Boehner says his priority is full repeal. But he also knows he is in for a fight. In this fight, hearings would help Republicans accomplish several things.
Bernanke needs inflation for QE2 to set sail
It would have at best a modest effect in a large, liquid market such as Treasury bonds and, therefore, is unlikely to dig the US economy out of its current hole. There is, however, another option: for the Fed to clarify its “exit strategy” from its current, unconventional monetary stance.
The Economics of Drug Violence
Statistically speaking, Mexico is a relatively safe place with 12 murders per 100,000 inhabitants in 2009. The trouble is that the violence is concentrated, and according to one economist I talked with here, that's because the drug-trafficking business is structured much like Colombia's was in the 1980s and '90s.
The IRS and the latest licensing outrage
...the IRS will consider adopting a sweeping licensing scheme that would place the careers of 700,000 tax preparers in jeopardy and likely harm over 87 million American taxpayers while benefiting a few politically-favored insiders.
Tariffs Benefit Few, at Cost to All
Australia can teach President Barack Obama and his economic advisers a lesson on how to defeat protectionism in the US and elsewhere. At their Washington meeting in November 2008, leaders of the Group of 20 nations made a commitment to "resist" protectionism. At their London summit in April 2009, they undertook to "reject" protectionism. And at the Pittsburgh meeting in September 2009 — just days after Obama neither "resisted" nor "rejected" but put a 35 per cent tariff on Chinese tyres — the G20 vowed to "fight" protectionism.
The necessity of overseeing reform
Overseeing implementation of Dodd-Frank is the most important task the Senate Banking, Housing and Urban Affairs Committee faces heading into the next Congress.
Fed's Yellen: Low rates can fuel bubbles
When low interest rates stay too low for too long, easy money can fuel asset bubbles, Janet Yellen told a room full of economists Monday, in her first public remarks as the Federal Reserve's new vice chairwoman.

"I would argue there is less of a moral hazard after the crisis than before, b/c the public will tolerate less bailout & more panic now." -ModeledBehavior, Twitter

Graph of the Day
Cato: President Obama and Education Politics As Usual
See: Poverty Rates by Marital Status & Living Arrangement
Update: Unemployment Rate With and Without Recovery Plan
See Also: Dear Congress: Don't blow it on Bush tax cuts

Book Excerpts
"Ever since the beginning of modern science, the best minds have recognized that "the range of acknowledged ignorance will grow with the advance of science." "In science the more we know, the more extensive the contact with nescience." Unfortunately, the popular effect of this scientific advance has been a belief, seemingly shared by many scientists, that the range of our ignorance is steadily diminishing and that we can therefore aim at more comprehensive and deliberate control of all human activities. It is for this reason that those intoxicated by the advance of knowledge so often become the enemies of freedom ... The more men know, the smaller the share of all that knowledge becomes that any one mind can absorb. The more civilized we become, the more relatively ignorant must each individual be of the facts on which the working of his civilization depends." –F.A. Hayek, The Constitution of Liberty, (1960)

Did You Know
"The household survey portion of the BLS' September 2010 employment situation report delivered news we were surprised to see: the number of teens counted as being employed plunged by 112,000. Meanwhile, young adults saw their employed ranks increase by 3,000 while the number of individuals Age 25 or older counted as having jobs surged by 250,000... For teens, the decrease in the number of employed teens in September 2010 brings the percentage share of teens within the entire U.S. workforce to a new all-time low of 3.06%...To put this new record low in teen employment in perspective, since their employment numbers peaked at 6,241,000 in November 2006, the number of teens (Age 16-19) in the U.S. workforce has fallen by 1,980,000, or 31.7% of that peak figure."