Erratic inquiries of Stowe Boyd, who means well, despite everything.
Also writing stoweboyd.com and beaconstreets.com.

Posts tagged with ‘economics’

What passes these days for sound policy is in fact a form of economic self-mutilation, which will cripple America for many years to come.

Paul Krugman, The Mutilated Economy

Krugman cites new research from the Federal Reserve Board’s lead economists that pegs the actual cost of the austerity measures that are US policy these days at a reduction of 7% of US economic potential, which equates to $1T per year for years to come.

Yes, a trillion dollars per year for the next decade.

As Krugman puts it, 

the evidence is overwhelming that by failing to respond effectively to mass unemployment — by not even making unemployment a major policy priority — we’ve done ourselves immense long-term damage.

Are our so-called leaders listening to this? Not a chance. And the reports authors are pessimistic about turning this around even with aggressive policies at this point: the damage is too deep.

Mr. Rehn’s forecast revised French growth down to 0.9 percent in 2014 from a forecast of 1.1 percent made back in the spring, while growth in Spain for 2014 was revised down to 0.5 percent from an earlier 0.9 percent projection.

Both countries are also on course to narrowly miss important interim deficit targets previously agreed to with the European Union, according to the outlook.

Jabbing back at Mr. Rehn from Paris, the French finance minister, Pierre Moscovici, said that Brussels officials were wrongly assuming that French policy would remain unchanged and failing to take into account the government’s plans to cut spending.

But with the French public wearying of the seemingly never-ending lineup of new taxes since Mr. Hollande took office last year, and with municipal elections looming in 2014, it is not clear how much latitude the government has to address the budget deficit.

Even so, Mr. Rehn said he was “counting on these countries to undertake serious and effective economic reforms to boost competitiveness, growth and employment,” having already given them both an extra two years to meet deficit targets. He was referring to France and Spain.

Marie Diron, a senior economic adviser at EY, a consultancy, said the outlook for the euro area was broadly in line with those by her own company. But she was “less optimistic about the strength of the recovery” that Mr. Rehn projected for the euro zone of 1.1 percent next year and 1.7 percent in 2015. “Weaker growth,” she warned, “would mean that the risk of deflation is more significant than implied” by the forecast.

Mr. Rehn acknowledged that “unemployment remains at unacceptably high levels” in Europe and was unlikely to improve quickly.

According to the forecast, unemployment in the euro zone will rise to 12.2 percent for 2013 and remain at that level through next year, compared with a rate of 11.4 percent in 2012.

“This forecast once again confirms that doing nothing does nothing for the European economy,” Hannes Swoboda, who leads the powerful Socialist bloc in the European Parliament, said in a statement. “An illusory ‘turnaround’ has been announced — always just around the corner — for years now, but never materializes,” said Mr. Swoboda, a lawmaker from Austria.

James Kanter, E.U. Predicts Anemic Growth and High Unemployment in 2014

Rehn continues to sell bad news in the near term by sugar coating the future, always pointing to turnaround that austerity is supposed to spark, always next year, but next year never comes.

The stark reality is that continued austerity will lead to a lost decade for Europe, and contribute to a worldwide economic stagnation.

I am no growthist, arguing for endless boom. But the Austerians aren’t offering up plans to adjust to the new abnormal, they are just sacrificing a decade on the altar of their failed ideology. A decade we could be using to develop postnormal economics, and to invest heavily into creating a sustainable world order, which will take many decades. So, its best we start now instead of waiting for a miracle to happen.

In the face of stagnation, reform is essential. The euro zone is unlikely to survive without the creation of a legitimate fiscal and banking union to match the growing political union. But even if that happens, Southern Europe’s sky-high debts will be largely indigestible. Will Angela Merkel’s Germany accept a one-off debt restructuring that would impose losses on Northern European creditors and taxpayers but preserve the euro zone? The alternatives — disorderly defaults, higher inflation, a breakup of the common currency, the dismantling of the postwar political project — seem worse.

In the United States, which ostensibly has the right institutions (if not the political will) to deal with its economic problems, a potentially explosive fiscal situation could be resolved through scurrilous means, but only by threatening global financial and economic instability. Interest rates can be held lower than the inflation rate, as the Fed has done. Or the government could devalue the dollar, thereby hitting Asian and Arab creditors. Such “default by stealth,” however, might threaten a crisis of confidence in the dollar, wiping away the purchasing-power benefits Americans get from the dollar’s status as the world’s reserve currency.

Not knowing who, ultimately, will lose as a consequence of our past excesses helps explain America’s current strife. This is not an argument for immediate and painful austerity, which isn’t working in Europe. It is, instead, a plea for economic honesty, to recognize that promises made during good times can no longer be easily kept.

That means a higher retirement age, more immigration to increase the working-age population, less borrowing from abroad, less reliance on monetary policy that creates unsustainable financial bubbles, a new social compact that doesn’t cannibalize the young to feed the boomers, a tougher stance toward banks, a further opening of world trade and, over the medium term, a commitment to sustained deficit reduction.

In his “Future of an Illusion,” Sigmund Freud argued that the faithful clung to God’s existence in the absence of evidence because the alternative — an empty void — was so much worse. Modern beliefs about economic prospects are not so different. Policy makers simply pray for a strong recovery. They opt for the illusion because the reality is too bleak to bear. But as the current fiscal crisis demonstrates, facing the pain will not be easy. And the waking up from our collective illusions has barely begun.

Stephen D. King, When Wealth Disappears

The chief economist at HSBC, the author of When the Money Runs Out: The End of Western Affluence, is describing the postnormal economy, and seems to be implying, earlier in the editorial, that we are headed for a revolution.

(via stoweboyd)

Another Day In Paradox: The Downside Of The Upside

Daniel Alpert does a great job of characterizing the opening decade of the postnormal, an age of apparent oversupply, where people are underemployed because there seem to be no safe investments and there is a world full of others willing to work for less, in a dreadful race to the bottom. The answer — massive investment in retooling infrastructure in the advanced economies — would seem to be the right way to move, but the austerians would rather starve the poor than build high speed trains or green electricity grids.

Daniel Alpert, The Rut We Can’t Get Out Of

We are in an age of global oversupply: an oversupply of global labor (hence high underemployment); an oversupply of global productive capacity (hence ultra-low inflation); and an oversupply of global capital (hence low interest rates).

This explains why, around the middle of each of the past three years, activity petered out after predictions earlier in the year that the economy would finally achieve escape velocity.

The jobs created have been mainly low wage and part time. Growth in domestic manufacturing is still slow, and business spending has fallen, though corporations are flush with profits. Debt-saddled households continue to see real incomes deteriorate (even with very low inflation). Sales of new homes have suddenly reversed course. Rents are falling in several markets where home prices have recently increased. Even the seemingly unflappable stock market has been seesawing because of the uncertain economic signals.

Why do we seem unable to get out of this rut? In short, our policy makers are still fighting the last war. We are no longer faced with a world in which supply-side economic remedies — easy money, reduced taxation, fiscal belt-tightening and deregulation — can spur new capacity and the creation of well-paying private sector jobs.

A “reverse supply shock” that resulted from the sudden emergence, especially in the 1990s, of the productive potential of enormous, previously walled-off populations from Eastern Europe to Latin America to East and South Asia, helped fuel successive bubbles.

Hundreds of millions of people who once lived in sleepy or sclerotic statist and socialist economies now compete directly or indirectly with workers in the United States, Europe and Japan, in a world bound by lightning-fast communications and transportation. Countries that were recently poor (and still are, on a per-capita basis) find themselves with huge surpluses and sovereign wealth funds. The rich countries of the world, while still rich, struggle with monumental levels of debt, both private and public, and unsettling questions about whether they can compete globally.

Beginning in the late 1990s, a wave of capital, much of it the result of trade surpluses and big piles of savings in Asia, flooded the world’s capital markets. But consideration of global imbalances has taken a back seat in domestic policy circles. The causes of the crisis, it is often said in New York and Washington, lay mainly in too much risk-taking by the lords of finance, along with too big an appetite for debt among ordinary people.

But one can’t properly understand the financial crisis without appreciating how the rise of the emerging nations distorted the economies of rich countries. And you can’t chart a course to more growth and stability in the developed world without recognizing that many of these distorting forces are still at work. Cheaper credit through monetary easing, for example, doesn’t yield much in an era when cheap capital already exists in abundance.

So we are living in the downside of the upside: enormous excess capital means that an additional increase in capital makes no difference. Political will to invest capital is at an all time low, although interest rates for the US government is almost zero. 

Welcome to the postnomal. Another day in paradox.

And today the US government has shut down, which is the newest wrinkle in the efforts of Tea Partiers to reaffirm their core values of starving the poor to death at any costs. After all, that’s the message: poor people don’t deserve the health insurance the Affordable Care Act now guarantees. Just like the roll back on food stamps, school programs, and other safety net programs. After all, the poor are excess to the needs of the holy market forces, aren’t they?

This is simply the most egregious example of the unwillingness of the far right obstructionists, the bankers, and the rentiers to accept the imperative metanarrative of our era: the world is a shared commons, not spoils for the winners of capitalist or state gamesmanship. A commons that should be shared equitably by all, and controlled through governance that puts the world before life, life before man, and the respect of others before love of self. 

(via stoweboyd)

Slovakia Rejects Euro Bailout - NYTimes.com →

Slovakia rejects most recent round of bailouts, demonstrating exactly how rickety the 17 country ratification process is. It is unclear whether a new government there — the existing one fell as a result of the bailout ratification effort — will recant, and now EU officials are talking about a ‘workaround’: basically preparing to move ahead with the bailout without ratification by the Slovaks.

What quantitative advice are we supposed to provide to policy makers and politicians about how much effort to spend on averting climate change if the conclusions from modeling fat-tailed uncertainties are not clear cut? Practical men and women of action have a low tolerance for vagueness and crave some kind of an answer, so they have little patience for even a whiff of fuzziness from two-handed economists. It is threatening for us economists to admit that constructive ‘‘can do’’ climate change benefit-cost analysis may be up against some basic limitations on the ability of quantitative analysis to yield robust policy advice. But if this is the way things are with the economics of climate change, then this is the way things are. Nonrobustness to subjective assumptions about catastrophic outcomes is an inconvenient truth to be lived with rather than a fact to be denied or evaded just because it looks less scientifically objective in benefit-cost analysis. If this limits the ability to give fine-grained and concrete answers to an impatient public, then so be it.

— Martin Weitzman, Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change

I Guess You *Are* Entitled To Your Own Facts

GOP and Dems are seeing different worlds:

Who’s Delusional? - Andrew Sullivan via The Daily Beast

Sullivan credits this enormous boost in Dems’ economic confidence to Bill Clinton’s speech at the DNC. My take is that they are hearing the jobs number touted as sign that Obama’s policies are working. But the GOP is listening to attack ads on TV, I bet, or Fox news.

We are in a post-fact world, as Farhad Manjoo styles it, where every group can potentially live in it’s own version of reality.

Sullivan closes his piece:

And so when I read or hear Republicans talking about this failed presidency in apocalyptic terms, I feel rather like Mark Lilla. It’s not that I disagree. I cannot even begin to see how a conversation can begin. We have different experiences of reality. But that’s why, I think, this election is so fascinating. It will, by default, offer us a direct take on the majority’s perception of reality. If that isolates the GOP on the losing side, they may need David Byrne:

And you may ask yourself
Am I right?…Am I wrong?
And you may tell yourself
MY GOD!…WHAT HAVE I DONE?

Dissecting The News For The Official Version Of The Future

Reading an editorial I was struck at how deeply the preconceptions of late stage capitalism — post modernism — are embedded in everything. See my notes embedded below:

The Economy and the Blame - NYTimes.com

Mr. Obama is not free from responsibility for the economy. He did not push hard enough for a larger stimulus and more robust housing relief. He also changed focus prematurely from creating jobs through stimulus to reducing the deficit through spending cuts.

[By ‘responsibility for the economy’ translates to ‘Obama is not greasing the machine to get us back to higher growth’, because growth is essential. ‘Robust housing relief’ means figuring out a way to defuse the housing bust without subsidizing widespread default on monies owed by homeowners to investors. We are going to see millions more foreclosures.]

But Mr. Romney doesn’t criticize the president for those mistakes. He criticizes the use of government to help the economy — including the stimulus, the auto rescue, health care reform and financial regulation — all the while calling for more tax cuts and deregulation, policies that inflated the bubble and led to bust. He wants to couple those policies with savage budget cuts, fantasizing that a swift reduction in the deficit would boost economic growth.

[I agree with the editors that the austerians are wrong.]

Temporary factors, like the Midwest drought, are behind much of the recent weakness. But, over all, the economy is too weak to make steady progress on its own or to withstand premature austerity. A wobbly economy can easily be toppled by external events like the euro crisis, a downturn in China or violence in the Middle East.

[The midwest drought is not temporary. We are headed for a long period — potentially hundreds of years or more — of climate change that will lead to a growing region of significantly lower rainfall in much of the US. So the economic ‘weakness’ will be endemic.

The downturn in China and the euro crisis are not temporary, either. They are both hitting the limits of growth, just like us.

The economic arbitrage that has been fueling China’s growth is a fluke, an imbalance being exploited by the Chinese ruling class and global corporations. It’s not a function of better education, or richer energy reserves: it’s a trick. And now that the Chinese people are starting to demand civil rights — including more money, heath care, and a vote — the Chinese miracle will slow and then stop. It would be even more obvious if we were factoring in the endogenous costs of globalism, like the pollution and global warming involved. (PS Don’t forget the drought in China, too.)

The economy is inherently ‘wobbly’ — subject to rapid swings of increasing amplitude — because we are reaching the end of peak resources of all sorts: peak oil, peak water, and peak food, for example.]

Politicians can control fiscal policies. The challenge is to foster the recovery and then put the budget on a sustainable path. Meeting the first challenge requires a belief that government has a stimulative role to play at times of economic weakness and a willingness to play it, which only Mr. Obama has demonstrated. Meeting the budget challenge requires raising taxes, which Mr. Obama is prepared to do but Mr. Romney is not.

[There is no ‘recovery’ possible. We are going to have continued economic instability, and wrenching change in nearly every aspect of life. The simplistic tinkering with economic levers — like the Federal interest rate, or quantitative easing — have served only to convince investors to keep playing the game. Fundamental changes to the system are needed to transition to a sustainable, steady-state economy, but the NY Times is still buying into the postmodern neoliberal global economy mantra.]

He has assumed voters will reject Mr. Obama because of the weak economy. They may well re-elect him because the economy needs more help.

[I would have expected the NY Times and others on the liberal side of things to be stronger advocates for federal hiring: gearing up to the infrastructure push we need to transition away from the 20th century model of personally-owned cars, highways, and suburban sprawl to a 21st century model of mass transit, shared vehicles, and increasing urban density. But they are gradualists, and believe too much in free markets.]

My hope is that more people begin to reject the official version of the future that dominates policy discussion, even in the liberal wing of the ruling elite. The official future is something like this:

  1. Markets go up and down, so this current downturn is temporary. The president and our leaders can shift the economy back onto a sensible growth trajectory of 5% or so a year, so things will go back to normal.
  2. Weather patterns shift back and forth, so this current period of drought will swing back soon. 
  3. Once the housing overhang is solved — by a growing economy (see 1, above), encouraging people to buy all the empty houses — people’s homes will be the cornerstone of the American dream again, and the kids will move out of the basement and buy a starter home in the suburbs.

Except it’s all wrong. It’s not temporary. Welcome to the Postnormal.

"Are Americans Better Off Today Than They Were Four Years Ago" Is A Dumb Question

Dean Baker exposes the stupidity below the ‘better off today’ question that so many are asking, implying that Obama hasn’t done enough for the economy:

Dean Baker,  "Are Americans Better Off Today Than They Were Four Years Ago?" The Question That Exposes Incompetent Reporters

Suppose your house is on fire and the firefighters race to the scene. They set up their hoses and start spraying water on the blaze as quickly as possible. After the fire is put out, the courageous news reporter on the scene asks the chief firefighter, “is the house in better shape than when you got here?”

Yes, that would be a really ridiculous question. Hence George Stephanopoulos was being absurd when he posed this question to David Plouffe, a top political adviser to President Obama on ABC’s This Week. Bob Schieffer was being equally silly when he asked Martin O’Malley, the Chairman of the Democratic Governors Association, the same question on CBS’s Face the Nation.

A serious reporter asks the fire chief if he had brought a large enough crew, if they had enough hoses, if the water pressure was sufficient. That might require some minimal knowledge of how to put out fires.

Similarly, serious reporters would ask whether the stimulus was large enough, was it well-designed, and were there other measures that could have been taken like promoting shorter workweeks, as Germany has done. That would of course require some knowledge of economics, but it sure makes more sense than asking if a house is better off after it was nearly burnt to the ground.

(h/t Paul Krugman, who said, ‘Obama came to office in the midst of the worst economic crisis since the 1930s. The question should be how well he dealt with that crisis — and in particular whether the man seeking to replace him would have done better.’)

Between 1995 and 2007 the UK population increased by 5%, the housing stock increased by 10% and house prices increased by 350%, meanwhile mortgage lending by banks increased by 630%. Which of these figures is more likely to have led to a 350% rise in house prices: a 5% rise in population growth which is matched by an increase in supply of housing; or an unprecedented increase in mortgage lending from the banks?

There is further support from Australia and the US where empirical studies have been carried out which show that in US and Australian housing markets house price rises definitely are linked to increased mortgage lending. If it’s true in Australia and America why shouldn’t it be true here?

Australian Economist, Steve Keen, who is responsible for the studies says in an article entitled ‘House Prices and the Credit Impulse’: “Population dynamics – even immigration dynamics – have nothing to do with house prices. What determines house prices is not the number of babies being born, or immigrants – illegal or otherwise – arriving, but the number of people who have taken out a mortgage, and the dollar value of these mortgages. For changes in house prices, what matters is the acceleration of mortgage debt.”

In one sense whether house price rises are driven by population or lending is immaterial and that’s in the effect they have on buyers, especially first time buyers. According to Moneywise, nowadays the average UK home costs six times the average annual salary. And so, according to a study by housing charity, Shelter, access to home ownership is increasingly becoming a matter of inheritance only.

Even more sobering, according to the same report, a similar increase in the cost of private renting means the average time taken to save enough money for a deposit on a house is now 45 years compared to eight years in the past. All of which contributes to the average age of first time mortgage buyers rising by 10 years every decade.

Why exactly is it so expensive for us to own a home? - Lee Williams via Independent Econoblog