I spent an hour on the phone yesterday in a conference call with James Marple, senior economist with TD Bank. Here are my notes. They’re rough… I haven’t polished them up, but it gives you a pretty decent overview of what he views with regard to deficits, debt, and the current debate.
Bullets:
Overall:GDP revised downward from Q108 today, showing recession far deeper than they knew. Revisions resolve mystery between job loss and GDP numbers. Housing market still a drag on the economy, but is mostly a legacy indicator at this time. Best deficit reduction scenarios would include tax and entitlement reforms to raise revenues with spending cuts in the future to avoid a double-dip or slower growth.
Debt ceiling: No historical precedent for what is happening now, which means predictions are not concrete. 4 possible scenarios, best to worst:
As I keep saying, Social Security is a pay-as-you-go program which funds itself. All Social Security needs to stay 100% funded through the next 50 years is to remove the cap on earnings placed there under Ronald Reagan as a perk for the well-to-do, and raise the rate by one percent.
To say that Social Security is part of a "cancer" as Erskine Bowles does, is the same as saying that the United States cannot meet its own bond obligations -- which is decidedly not true. But the Very Serious People, contrary to the facts spelled out by economists like James Galbraith and Paul Krugman, have decided that the best way to deal with their own gnawing sense of economic uneasiness is to grind the boot heel into the backs of the lower classes -- just to show us who's boss!
BOSTON -- The co-chairmen of President Obama's debt and deficit commission offered an ominous assessment of the nation's fiscal future here Sunday, calling current budgetary trends a cancer "that will destroy the country from within" unless checked by tough action in Washington.
The two leaders -- former Republican senator Alan Simpson of Wyoming and Erskine Bowles, White House chief of staff under President Bill Clinton -- sought to build support for the work of the commission, whose recommendations due later this year are likely to spark a fierce debate in Congress.
"There are many who hope we fail," Simpson said at the closing session of the National Governors Association annual meeting. He called the 18-member commission "good people with deep, deep differences" who know the odds of success "are rather harrowing."
Bowles said that unlike the current economic crisis, which was largely unforeseen before it hit in fall 2008, the coming fiscal calamity is staring the country in the face. "This one is as clear as a bell," he said. "This debt is like a cancer."
The commission leaders said that, at present, federal revenues are fully consumed by just three programs: Social Security, Medicare and Medicaid. "The rest of the federal government, including fighting two wars, homeland security, education, art, culture, you name it, veterans -- the whole rest of the discretionary budget is being financed by China and other countries," Simpson said.
"We can't grow our way out of this," Bowles said. "We could have decades of double-digit growth and not grow our way out of this enormous debt problem. We can't tax our way out. . . . The reality is we've got to do exactly what you all do every day as governors. We've got to cut spending or increase revenues or do some combination of that."
Back in 1983, we made a deal. The deal was this: for 30 years poor people would overpay their taxes, building up the trust fund and helping lower the taxes of the rich. For the next 30 years, rich people would overpay their taxes, drawing down the trust fund and helping lower the taxes of the poor.
Well, the first 30 years are about up. And now the rich are complaining about the deal that Alan Greenspan cut back in 1983. As it happens, I agree that it was a bad deal. If it were up to me, I'd fund Social Security out of current taxes and leave it at that. But it doesn't matter. Once the deal is made, you can't stop halfway through and toss it out. The rich got their subsidy for 30 years, and soon it's going to be time to raise their taxes and use it to subsidize the poor. Any other option would be an unconscionable fraud.
For a slightly more detailed version of this explanation, see here. Note that "poor" is actually shorthand for both the poor and the middle class, while "rich" actually means both the rich and the upper middle class. This distinction comes into play because payroll taxes, which have built up the trust fund for the past 30 years, are primarily paid by the poor and the middle class, while income taxes, which were kept artificially low over that same period and will soon need to raised in order to pay off the trust fund debt, are primarily paid by the rich and the upper middle class.
So here, Erskine. Here's a crying towel. Because I notice you're not talking about letting the massive Bush tax cuts ($1.8 trillion) for the wealthy expire, nor are you suggesting that the Medicare Part D benefits ($1.2 trillion) that Big Pharma loves so much be renegotiated. You're definitely not talking about single-payer health care.
Nor are you suggesting that maybe, just maybe, we could cut back on spending for that "policeman to the world" thing.
Nope. It's only Social Security, Medicare and Medicaid that has you in a tizzy. You know how we see that, Erskine? It's a declaration of class war.
Hey, this oughta cheer everyone up -- we set a new record! We're in the history books!
June 4 (Bloomberg) -- Unemployed Americans are facing the longest wait on record to find work, a sign faster economic growth is needed to reduce the jobless rate from close to a 26- year high.
Hey, I have an idea! Why don't we stop paying unemployment, cut jobless programs by 50%, and start slashing social programs to cut the deficit? That'll fix the economy!
The average duration of unemployment jumped to 34.4 weeks in May from 33 weeks the prior month and 16.5 weeks in December 2007, when the recession began, a Labor Department report showed today in Washington. The number of unemployed has almost doubled to 15 million since the start of worst slump since the 1930s.
“We need faster growth, because without it, we won’t get the jobs,” said Henry Mo, an economist at Credit Suisse in New York. “We are working in that direction, but it’ll take a very long time to resolve the long-term unemployment problem. The Federal Reserve acknowledges that the labor market will take time to fully recover.”
How, exactly, are we "working in that direction" when Wall Street is pressing for deficit reduction?
Private payrolls rose by 41,000 in May, today’s Labor Department report showed, trailing the 180,000 gain forecast by economists. Including government workers, employment rose by 431,000, boosted by a jump in hiring of temporary census workers. The jobless rate fell to 9.7 percent from 9.9 percent as Americans discouraged by the lack of available jobs dropped out of the labor force.
“If that level of private job creation continues, it will not make a substantial dent in the unemployment rate,” Federal Reserve Bank of Atlanta President Dennis Lockhart told reporters today after a speech in Braselton, Georgia. “It is my view we will make progress on unemployment. Perhaps by the end of 2011, we will be below 9 percent.”
And really, it might even be 8 percent, if enough of us die from hunger -- or suicide. Isn't this a great country?
This is something that's always stuck in my craw. When the economy is bad (you know, bad for us, not the rich), the politicians love to tell us it's simply a matter of retraining and why, before you know it, we'll all be employed again!
I think we all know that's a load of horse manure. The fact is, for most of us, the global economy is a tide that just keeps going out. Major corporations continue to play "find the cheapest country" and move their manufacturing facilities. So where, exactly, are the jobs for which we're supposed to retrain?
Enrollment in job-training initiatives across the USA has swelled since the recession began as dislocated workers in shrunken industries such as manufacturing, construction and real estate retool for growing fields such as health care, renewable energy and computers. But a diploma is not necessarily a ticket to a job or higher earnings, especially with the jobless rate still hovering near 10%.
"Training doesn't create jobs," particularly as a nation emerges from recession, says Anthony Carnevale, head of Georgetown University's Center on Education and the Workforce. "It's jobs that create the demand for training."
Many enrollees do land positions weeks after graduating, and experts say retraining is often the best option for a laid-off worker in a battered industry. But others hunt for months, or even years, with some using federal dollars to retrain multiple times for different occupations. Part of the problem: Though economists say the recession ended last summer, high unemployment pits graduates against both experienced workers who were laid off in the slump and newly trained colleagues. Sometimes job centers funnel too many workers into the same field.
Officials "in my system walk a tightrope every day," says Jane Oates, an assistant secretary for the Labor Department. "It's very difficult to do 100% foolproof projections anytime, but during a recession it's really complicated."
Job forecasts can be undercut by unforeseen events such as a plant closing. The promise of some categories projected to be plentiful, such as green jobs, has yet to be fulfilled. And the training system itself is beset by poor communication.
Participation in worker retraining funded by the federal Workforce Investment Act (WIA) jumped 70% to 672,000 in the year ended last June, Labor says. But the portion of those in jobs related to their training one year after graduating fell to 67.6% from 83.2% in 2006.
Wyman got $16,500 in federal funding to attend the Hobart Institute of Welding Technology after his employer, a Delphi auto plant, closed. The Huber Heights, Ohio, resident was always good with his hands; at Delphi, he operated a drill and stamping press. And welders' wages start as high as $19 an hour, a nice bump from the $16 he'd been earning.
Asked about Wyman's job search, Heath MacAlpine of Montgomery County's Department of Job and Family Services, says the region's manufacturing and construction were pounded by the recession. But he says funding Wyman's training wasn't a mistake: "We're not investing for this recession. If we don't have the stockpile of trained talent, we're not going to have the fuel to drive this recovery."
As employers ramp up hiring, he says, they'll run out of laid-off welders and Wyman "will suddenly find himself in demand."
Wyman isn't sure how long he can wait. He and his wife, Jessica, borrow from her parents to pay the rent, and the couple and their two children are relying on food stamps. He frets if he doesn't find work soon, he'll get rusty and "lose the ability to weld."
EK: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators.
JG: No, I think the danger is zero. It's not overstated. It's completely misstated.
EK: Why?
JG: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn't be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.
So there are two possibilities here. One is the theory is wrong. The other is that the market isn't rational. And if the market isn't rational, there's no point in designing policy to accommodate the markets because you can't accommodate an irrational entity.
EK: Then why are the bulk of your colleagues so worried about this?
JG: Let's push a bit deeper on the CBO forecasts. They publish a baseline set of projections. One of those projections holds the economy will return to a normal high-employment level with low inflation over the next 10 years. If true, that would be wonderful news. Go down a few lines and they also have the short-term interest rate going up to 5 percent. It's that short-term interest rate combined with that low inflation rate that allows them to generate, quite mechanically, these enormous future deficit forecasts. And those forecasts are driven partially by the assumption that health-care costs will rise forever at a faster rate than everything else and by interest payments on the debt will hit 20 or 25 percent of GDP.
At this point, the whole thing is completely incoherent. You cannot write checks to 20 percent to anybody without that money entering the economy and increasing employment and inflation. And if it does that, then debt-to-GDP has to be lower, because inflation figures into how much debt we have. These numbers need to come together in a coherent story, and the CBO's forecast does not give us a coherent story. So everything that is said that is based on the CBO's baseline is, strictly speaking, nonsense.
EK: But couldn't there be a space between the CBO being totally correct and the debt not being a problem? It seems certain, for instance, that health-care costs will continue to rise faster than other sectors of the economy.
JG: No, it's not reasonable. Share of health-care cost would rise as part of total GDP and the inflation would rise to be nearer to what the rate of health-care inflation is. And if health care does get that expensive, and we're paying 30 percent of GDP while everyone else is paying 12 percent, we could buy Paris and all the doctors and just move our elderly there.
EK: But putting inflation aside, the gap between spending and revenues won't have other ill effects?
JG: Is there any terrible consequence because we haven't prefunded the defense budget? No. There's only one budget and one borrowing authority and all that matters is what that authority pays. Say I'm the federal government and I wish to pay you, Ezra Klein, a billion dollars to build an aircraft carrier. I put money in your bank account for that. Did the Federal Reserve look into that? Did the IRS sign off on it? Government does not need money to spend just as a bowling alley does not run out of points.
What people worry about is that the federal government won't be able to buy bonds. But there can never be a problem for the federal government selling bonds. It goes the other way. The government's spending creates the bank's demand for bonds, because they want a higher return on the money that the government is putting into the economy. My father said this process is so simple that the mind recoils from it.
EK: What are the policy implications of this view?
JG: It says that we should be focusing on real problems and not fake ones. We have serious problems. Unemployment is at 10 percent. if we got busy and worked out things for the unemployed to do, we'd be much better off. And we can certainly afford it. We have an impending energy crisis and a climate crisis. We could spend a generation fixing those problems in a way that would rebuild our country, too. On the tax side, what you want to do is reverse the burden on working people. Since the beginning of the crisis, I've supported a payroll tax holiday so everyone gets an increase in their after-tax earnings so they can pay down their mortgages, which would be a good thing. You also want to encourage rich people to recycle their money, which is why I support the estate tax, which has accounted for an enormous number of our great universities and nonprofits and philanthropic organizations. That's one difference between us and Europe.
Economics is like actuarial science: Voodoo predictions based on a set of assumptions and mathematical models. The thing is, none of those models work when behavior is erratic, rules broken and and focus put on the quick buck rather than true growth. If no other lesson from the financial meltdown resonates, let that one ring.
Alan Greenspan knows it too. That's why he came before Congress on October 28, 2008 and told them he was wrong:
He was wrong, yes, but now he's not willing to blame the Wall Street moguls for everything. In March, he gave this gem of an interview to Bloomberg News. Here are some of the mind-boggling parts:
HUNT: Right. Let’s talk about the subprime a little bit. You said in your Brookings speech, I’m going to quote you, “We at the Federal Reserve (this was a footnote I think actually) were aware -
GREENSPAN: I’m impressed.
HUNT: - (inaudible) as early as 2000 of instances of some highly irregular subprime mortgage underwriting practices but regrettably viewed it as a localized problem subject to standard prudential oversight, not the precursor of what was to happen.”
Is that saying you saw instances of highly irregular underwriting, but you didn’t dig deeper?
GREENSPAN: No, we knew that there was a lot of egregious underwriting going on. The critical issue is that it wasn’t subprime per se that created the triggering of the crisis. It was securitized subprime. And securitization didn’t happen until mid-2003, 2004 in the volume, including not only securitization but essentially adjustable rate mortgages - subprime adjustable rate mortgages
I had to read that twice, but I think I understand it now. My interpretation: "We knew there were a lot of toxic assets being created, but it was ok because at that point they weren't carved up and bundled as securities."
If there was a lesson to learn from those three events it is this: Bad loans make bad investments. If that has the ring of truth, how on earth can Greenspan sit and admit with a straight face that he knew bad loans were being made?
Of course, Greenspan loves hedge funds now, especially since he consults for one of the biggest ones, and has since January, 2008. They love him too. Digby points out that the guy who loves him best is John Paulson. THAT John Paulson. The Goldman-Sachs-is-in-very-deep-trouble John Paulson. Let that deep conflict of interest sink in.
His next tidbit made my head explode. In a discussion about the deficit, the current recovery, whether it's sustainable, and whether a value-added tax makes sense he says this:
GREENSPAN: The problem, however, is very much the type of issue that Greece has got. We can find money to bail them out in the short run. But unless the underlying system contracts, the deficit contracts, it’s just delaying the problem.
So I’m not convinced by any means that we can succeed in stabilizing this long term outlook strictly from a value added tax because unless we come to grips with the fundamental issue, which is the fact that we have promised in the ways of benefits for Medicare, for Social Security physically more than we have assets to deliver with.
So the economy can only grow so far and right now the claims on the real economy, forget finance, are getting larger and larger. And it is not an issue just in Social Security I might add, its money. You can always print money and solve it.
Medicare is a defined - is not a defined benefit program. It is one based on the physical needs of the population.
Those darn American people again. Sitting around on Main Street, getting in the way of the economic recovery with their health care and retirement needs. Those entitlements.
This is the same guy who gave away the Treasury to the rich guys by green-lighting Bush tax cuts. The same guy who testified that cutting the deficit and creating a surplus was the way to economic growth in the 90s before he said if the deficit got too low and the US got too solvent, it could cause economic problems in 2000. The same guy who let John Paulson endow a chair in economics in his name at NYU so he could leave a legacy of inconsistent, erratic, self serving conservative monetary policy to students in perpetuity.
If you're in the mood for some common sense abuse, read the whole thing. He'll explain why big banks shouldn't be broken up but why they shouldn't be bailed out, why regulators missed the warning signs of the meltdown (I'd argue they ignored them, didn't miss them), why Fannie and Freddie were good before they were bad, and more.
It would be so nice if something made sense for a change. - Alice in Wonderland
The fact that many of them joined the Tea Party after losing their jobs raises questions of whether the movement can survive an improvement in the economy, with people trading protest signs for paychecks.
This wasn't necessary. A real, properly put together stimulus bill would have got them back to work. For example, a program to make every building in America be at least energy neutral and preferably creating energy, would have kept them usefully employed.
The bottom line in America today is that while everyone who isn't paid not to know, knows how to fix what's wrong with America (for example, instead of Health Care Reform, pass single payer), nothing that really fixes anything fundamental will be allowed to occur.
America is controlled by what economists call rent-seeking behaviour. Virtually everyone important has a revenue stream, and they don't want anyone to take that revenue stream away. So pharma and insurance companies, who would have been damaged badly by single payer (they would have lost hundreds of billions) made sure that a plan to provide everyone with better health care for a third less than current costs was never even considered.
The most important game in America today is the contest for control of government, so that government can directly or indirectly give you money. Health care "reform" in which the government decided to force Americans to buy private health insurance or be fined is merely the latest (and most blatant) example. Virtually every industry, from finance to telecom to agriculture is involved in this game. It is in all their interests to make sure the game continues, but they do fight amongst each other for the spoils.
This game will continue until the US can no longer afford it. Indeed, even now, some industries are taking it on the chin, loosing out to their better connected cousins. For example, the current downturn has seen the prison-industrial complex taking losing out. They get most of their money from State governments, and the States simply cannot afford to keep locking up so many people at so much cost.
This is the downward spiral of a great power in senescence. It ends in collapse, reformation or revolution, when it becomes clear that the rents of the Ancien Regime can no longer be afforded, and too many of those who were bought off are thrown off their dole.
The Tea Partiers, however misguided they may be in many respects, have been thrown off the dole. Whatever they are called, they will not be going away.
It disturbs me that the administration is so focused on property values instead of useful strategies like allowing bankruptcy judges to reduce mortgage values. But hey, what do I know?
The housing market is facing swelling ranks of homeowners who are seriously delinquent but have yet to lose their homes, and this is threatening a new wave of foreclosures that could hit just as the real estate market has begun to stabilize.
About 5 million to 7 million properties are potentially eligible for foreclosure but have not yet been repossessed and put up for sale. Some economists project it could take nearly three years before all these homes have been put on the market and purchased by new owners. And the number of pending foreclosures could grow much bigger over the coming year as more distressed borrowers become delinquent and then, if they can't obtain mortgage relief, wade through the foreclosure process, which often takes more than a year to complete.
Hmm. Maybe it would be a good idea to, oh, I don't know, add another tier onto unemployment benefits?
As these foreclosed properties add to the supply of homes for sale, they could undercut housing prices, which have increased modestly through December, according to the most recent figures in the S&P/Case-Shiller home prices index. That rise partly reflected a slowdown in the flow of foreclosed homes onto the market.
The rate at which J.P. Morgan Chase seized properties, for example, peaked in the middle of 2008 and fell steadily last year, according to a February investor report. But the bank expects repossessions to increase this year, nearly doubling to 45,000 by the fourth quarter.
There is a lot of despair out there, and the commercial real estate foreclosures are just beginning. Maybe it would be a good idea if we just helped people losing their homes instead of trying to reinflate the housing bubble?
How are people supposed to take care of their families on month-to-month contract jobs - and why doesn't anyone seem to care?
Companies have hired more temps for four straight months. Yet they remain reluctant to make permanent hires because of doubts about the recovery's durability.
Even companies that are boosting production seem inclined to get by with their existing workers, plus temporary staff if necessary.
"I think temporary hiring is less useful a signal than it used to be," says John Silvia, chief economist at Wells Fargo. "Companies aren't testing the waters by turning to temporary firms. They just want part-time workers."
The reasons vary. But economists and business people say the main obstacle is that employers lack confidence that the economic rebound has staying power. Many fear their sales and the overall economy will remain weak or even falter as consumers spend cautiously.
Companies also worry about higher costs related to taxes or health care measures being weighed by Congress and statehouses. That's what Chris DeCapua, owner of employment firm Dawson Careers in Columbus, Ohio, is hearing from clients.
DeCapua says corporate demand for temporary workers has surged. That's especially true for manufacturing-related jobs involving driving forklifts, assembling products, packing merchandise and loading it on trucks.
Yet that demand hasn't spilled over into a demand for permanent workers. And DeCapua doesn't see it turning around anytime soon.
