Next Strategy: Declare Victory, Go Home

(kinda graphic video, you’ve been warned)

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

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

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

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

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

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

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

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

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

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

…

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

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

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

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

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

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

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

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

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

“We’re making progress,” she said.

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

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

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An Economic Exercise in Wishful Thinking

Warning: Do NOT use before making economic policy.

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

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

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

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

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

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

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

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

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

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

News for those not Interested in Death and Sex Watches

or When Will Journalists actually Report Real News?

So for those that don’t want to see the People Magazine section on the front page of every news paper and as the lead in to every TV news item, let’s look at some real news.

Climate Change : The American Clean Energy and Security Act:

Should we be questioning the Climate Change Numbers? Surprise from the WSJ? Not. It’s still an interesting read in light of the Waxman-Markey attempt to push through cap and trade.

The Climate Change Climate Change: The number of skeptics is swelling everywhere.

Among the many reasons President Barack Obama and the Democratic majority are so intent on quickly jamming a cap-and-trade system through Congress is because the global warming tide is again shifting. It turns out Al Gore and the United Nations (with an assist from the media), did a little too vociferous a job smearing anyone who disagreed with them as “deniers.” The backlash has brought the scientific debate roaring back to life in Australia, Europe, Japan and even, if less reported, the U.S.

In April, the Polish Academy of Sciences published a document challenging man-made global warming. In the Czech Republic, where President Vaclav Klaus remains a leading skeptic, today only 11% of the population believes humans play a role. In France, President Nicolas Sarkozy wants to tap Claude Allegre to lead the country’s new ministry of industry and innovation. Twenty years ago Mr. Allegre was among the first to trill about man-made global warming, but the geochemist has since recanted. New Zealand last year elected a new government, which immediately suspended the country’s weeks-old cap-and-trade program.

Greenpeace opposes Waxman-Markey

“Since the Waxman-Markey bill left the Energy and Commerce committee, yet another fleet of industry lobbysists has weakened the bill even more, and further widened the gap between what Waxman-Markey does and what science demands. As a result, Greenpeace opposes this bill in its current form. We are calling upon Congress to vote against this bill unless substantial measures are taken to strengthen it. Despite President Obama’s assurance that he would enact strong, science-based legislation, we are now watching him put his full support behind a bill that chooses politics over science, elevates industry interests over national interest, and shows the significant limitations of what this Congress believes is possible. “As it comes to the floor, the Waxman-Markey bill sets emission reduction targets far lower than science demands, then undermines even those targets with massive offsets. The giveaways and preferences in the bill will actually spur a new generation of nuclear and coal-fired power plants to the detriment of real energy solutions. To support such a bill is to abandon the real leadership that is called for at this pivotal moment in history. We simply no longer have the time for legislation this weak.

I would hate to see this piece of legislation move through the House of Representatives with out media coverage and robust discussion. You’ll remember that I explained cap and trade earlier in case you want a review.

In Remembrance of an Angel

Farrah Fawcett (February 2, 1947 – June 25, 2009)

Some how, every generation of woman has their own girl next door with which to compete and identify.  Just like the iconic picture of Betty Grable’s legs during World War 2 and Marilyn Monroe’s restless white dress during the 1960s, those of us who went to university during the 70s most likely dealt with a boy who’s dorm was decked with Farrah. I never tried to get that Farrah do, but I knew many girls that spent hours with perm solutions, dyes, and rollers, trying.  If there was ever a living barbie doll, Farrah was it.

Then, as usual, we find out there is more to the pin-up girl than the pin-up alone.  As we grew up, we found out she actually could act (The Burning Bed, 1984) and she was a woman of substance.  (If not substance abuse,  if you remember that David Letterman interview).  Some how,  Farrah always proved the survivor. The actress recently has received acclaimed from her very public fight with  cancer. 

Fawcett made a heartfelt documentary in 2008 entitled “A Wing & a Prayer: Farrah’s Fight for Life“, which follows her battle with Cancer and is a must watch, very touching…

Oddly, enough, as the announcement of her death pinged from my blackberry across the room, I was standing at one of those infernal machines that causes my breasts to hurt for days and saves many, many women’s lives.  As a cancer survivor myself of 19 years next month, each time some we lose another person, I realize how much farther we need to go in handling this problem.  My dad started radiation this week for a lump on his neck.  It’s always a reminder of how close I was and we all our to a battle for our life.

Farah was 62.  Her long time significant other Ryan O’Neill was with her at the time.  They have a son,Redmond, together who like many other things in her life, has proved a challenge.  Ryan was on tv as recently as last week insisting that Farrah had decided that she would finally marry him and was hoping to get Redmond released for a short visit.  From all accounts, she died peacefully this morning.

Oh to be a Fly on those Fabled Marble Walls

The Federal Open Market Committee (FOMC) meets today. Those folks are the ‘deciders’ when it comes to monetary policy. This should be an interesting meeting for a number of reasons. First, new regulations proposed by the Obama administration definitely put the Fed in the catbird seat. Second, Bernanke is coming close to his expiration date. Third, a number of prominent economists are wondering about the Fed’s exist strategy from the current wide open floodgates and the pressure is on not to enable another bubble. Fourth, we find that three banks have suspended their Tarp Dividends meaning that all is not happiness and light in bank balance sheet land. The intrigue of all this pulls this financial economist away from her research agenda which is not good for my CV but very good for turning the dismal science into a Walter Winchellesque moment. Now, just where to begin …

‘Good Morning, Mr. and Mrs. North and South America and all the ships at sea…let’s go to press!’

Let’s go to Banking. Headline: The Scam Continues on you, Mr and Mrs. North and South America. Let’s dish the dirt on those banks that are behind in their loan payments to the U.S. taxpayer as reported today by the WSJ who keeps track of that sort’ve thing. It seems three banks have suspended their TARP ‘dividends’. They can miss six before they technically default. (Ask yourselves, if I missed five housepayments would I still be IN my house or out in the street by number six?) The banks are: Pacific Capital Bancorp (CA), Seacost Banking Corp of Florida (FL), and Midwest Bank Holdings Inc (IL).

Treasury spokeswoman Meg Reilly said Monday that “a number of banks” that got taxpayer-funded capital under TARP are no longer paying dividends to the government. “Treasury respects the contractual rights of [TARP recipients] to make decisions about dividend distributions, and that banks are best positioned to decide how to manage their own capital base.”

The moves are a sign of the deepening misery for large swaths of the U.S. banking industry, suffering under bad loans and the recession even as large firms such as J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. rebound from the crisis, including by repaying their TARP funds last week. The halted dividends also raise questions about the Treasury’s assertions that the capital infusions represented sound taxpayer investments because they were only going to healthy institutions.

“Here the government has given the banks money at great terms, but the fact that they can’t keep up with it is worrisome,” said Michael Shemi, an investor at New York hedge-fund firm Christofferson, Robb & Co. “It tells you of the deep problems of community and regional banks.”

It’s the Jobs, Stupid!

One glance at the national income accounts for the U.S. gives us the bottom line. Approximately 67 % of the spending in the country comes from households and nearly the same proportion of the source of that spending comes from wages and salaries. It may be all about oil revenue in places like Venezuela and Kuwait, but in the United States, it’s all about job creation. The job losses in this Great Recession–when compared with the other post-WW2 recessions–are much worse as you’ll see in the graphic on the left.

The news from the jobs market is bleak and that is one of the reasons I have trouble buying any green shoot hoopla. Take this headline from the Wall Street Journal “Cuts are Here to Stay, Companies Say”.

Many companies that have cut jobs, pay and benefits during the recession may not be quick to restore them.

According to a new survey, 52% of companies expect to employ fewer people in three to five years than they did before the recession began. The survey of 179 companies was conducted this month by consulting firm Watson Wyatt Worldwide Inc.

Among employers who have cut salaries, 55% expect to restore the cuts in the next year. But 20% expect the cuts to be permanent. Of employers who have increased employee contributions to health-care premiums, 46% don’t plan to reverse the increases. Of all survey respondents, 73% said they expect employees to shoulder more of the cost of health care than before the recession began.

The job market always lags the business cycle since companies are really slow to both fire and hire near the turning points. Companies like to insure they are not letting trained workers go needlessly and they don’t like to take on any costs if their revenues aren’t trending upward. Of course, recessions hit different segments of the labor market differently. A Weekly Standard headline “No Country for Burly Men” has one of the most interesting examples of the demographics of the Great Recession.

A “man-cession.” That’s what some economists are starting to call it. Of the 5.7 million jobs Americans lost between December 2007 and May 2009, nearly 80 percent had been held by men. Mark Perry, an economist at the University of Michigan, characterizes the recession as a “downturn” for women but a “catastrophe” for men.

Men are bearing the brunt of the current economic crisis because they predominate in manufacturing and construction, the hardest-hit sectors, which have lost more than 3 million jobs since December 2007. Women, by contrast, are a majority in recession-resistant fields such as education and health care, which gained 588,000 jobs during the same period. Rescuing hundreds of thousands of unemployed crane operators, welders, production line managers, and machine setters was never going to be easy. But the concerted opposition of several powerful women’s groups has made it all but impossible. Consider what just happened with the $787 billion American Recovery and Reinvestment Act of 2009.

Obama and the Enhanced Status Quo

We were promised changed. What we are getting is perpetuation of the status quo. Let’s try this headline at the Guardian on for size “Goldman Sachs to make record bonus payout”.

Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm’s 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms.

A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm.

Staff in London were briefed last week on the banking and securities company’s prospects and told they could look forward to bumper bonuses if, as predicted, it completed its most profitable year ever. Figures next month detailing the firm’s second-quarter earnings are expected to show a further jump in profits. Warren Buffett, who bought $5bn of the company’s shares in January, has already made a $1bn gain on his investment.

The bold part says it all. There continues to be a systematic elimination of competition from merger mania in the financial sector which has created two classes of too-big-to-fail institutions. We now have those that function completely with government funding and those that function by funding candidates for government. Goldman Sachs is benefiting immensely from both.

He’s no FDR

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.

Dismal Economists: Getting Real on those Green Shoots

I’ve been concerned about the lack of real evidence for the administration’s green shoot hypothesis. It seems that I’m not the only one. A new Wall Street Journal Poll shows that Americans are increasingly ‘wary’ of the deficit and Obama’s economic intervention as Obama’s poll number’s slip.

But the poll suggests Mr. Obama faces challenges on multiple fronts, including growing concerns about government spending and the bailout of auto companies. A majority of people also disapprove of his decision to close the military prison at Guantanamo Bay, Cuba.

Nearly seven in 10 survey respondents said they had concerns about federal interventions into the economy, including Mr. Obama’s decision to take an ownership stake in General Motors Corp., limits on executive compensation and the prospect of more government involvement in health care. The negative feeling toward the GM rescue was reflected elsewhere in the survey as well.

A solid majority — 58% — said that the president and Congress should focus on keeping the budget deficit down, even if takes longer for the economy to recover.

Laura Zamora, 40, of Orange, Calif., voted for Mr. Obama but says she is frustrated by the economy and finds her support for the president waning. She says she’s facing a possible layoff as a local government worker in California.

“He’s bailing out the private sector. He’s putting all kinds of money into the private sector,” says Mrs. Zamora. “The money should be going to social programs, not to bailing out banks and GM. It should go to people who are unemployed.”

The survey of 1,008 adults, conducted Friday to Monday, had a margin of error of plus or minus 3.1 percentage points for the full sample.

The poll shows as the economy really worsens, people are becoming more reality-based. Speaking of reality based, let’s get back to numbers that show the public’s concerns are much warranted. You will not want to miss this VOXEU study showing what two economists have found when comparing the Great Depression with the current Great Recession. They’ve charted the numbers back-t0-back and are even going as far as saying that we are in a Global economic Depression. You really need to check the graphs and the analysis out in “A Tale of Two Depressions”. Dr. Barry Eichengreen and Dr. Kevin O’Rourke are both research/historical economists and bring the stylized facts home.

This is an update of the authors’ 6 April 2009 column comparing today’s global crisis to the Great Depression. World industrial production, trade, and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better. The update shows that trade and stock markets have shown some improvement without reversing the overall conclusion — today’s crisis is at least as bad as the Great Depression.

New findings:

• World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
• World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
• There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
• The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
• Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.