Tag Archives: Economic growth

It’s Not Just the Economy, Stupid.

Over the past few years it’s become fashionable in sophisticated political circles to argue that presidential campaigns themselves barely matter. What matters is the economic fundamentals. When the economy is strong, the incumbent party wins. When the economy is lousy, the incumbent party loses. All the rest is just a bunch of sound and fury, signifying nothing.

I’ve long had some problems with this attitude. I don’t think there’s any question that the state of the economy matters, and I agree that political journalists probably ought to pay more attention to this than they usually do. At the same time, it’s easy to go overboard. For one thing, political scientists have come up with a lot of different models, and they don’t all rely on the same economic measures. Nor do they make the same predictions. Nor do they even claim (in most cases, anyway) to explain more than about 60-70% of the variance in how well the parties do. So even if the models are accurate, there’s plenty of scope for other factors to influence presidential elections too.

But are they accurate? It’s easy to be impressed by a model that accounts for past election results with high accuracy. That’s a nice looking regression line, buddy.  But it’s quite another thing for your model to predict elections in advance, and that’s the acid test for any election model. Until now I’ve never seen anyone do a systematic review of actual predictions by the various models, but today Nate Silver filled that void, taking a look at model predictions since 1992.

The results aren’t pretty:

In total, 18 of the 58 models — more than 30 percent — missed by a margin outside their 95 percent confidence interval, something that is supposed to happen only one time in 20 (or about three times out of 58).

Across all 58 models, the standard error was 8 points of vote margin or 4.6 points of incumbent vote share. That was much larger than the error that the models claimed they would have — about twice as large, in fact.

The “fundamentals” models, in fact, have had almost no predictive power at all. Over this 16-year period, there has been no relationship between the vote they forecast for the incumbent candidate and how well he actually did.

Nate argues that the state of the economy does have some predictive power. He figures it at about 40%, but says that most current models don’t even do that well because they’re poorly designed. That doesn’t surprise me: this is a really hard subject with lots of hard-to-answer questions. What matters most, the absolute state of the economy or whether it’s on an upswing/downswing?

Should we look at GDP growth or unemployment? Or something else, like disposable income? Do voters respond to some variables, like inflation, only when they get above a certain level? Etc. This is hard stuff, and we don’t have a whole lot of data points to work with.

What’s more, common sense suggests that other things matter too. For example, I just can’t accept as coincidence that since 1950, incumbent parties have nearly always won after one term in office and nearly always lost after two terms. If I used that as my only rule, I’d have an accuracy rate of 87%. (Though only 80% if you count Al Gore as the popular-vote winner in 2000.)

All of this is one reason why I’m reasonably optimistic about Obama‘s chances in November. Yes, the economy is still in weak shape. But it’s improving (I think, or at least I continue to tell myself while I hold my breath), which I suspect is at least as important as its absolute level. What’s more, his party has been in power for only one term and he’s a strong candidate running against a weak Republican field. Put all that stuff together, and I think his odds look pretty good.

As long as Greece can keep the lie up for about eight more months and Merkel can keep persuading the good Germans to continue to be good Germans, and North Korea stays sedated, and Iran keeps rattling and not thrusting, and no other big bubble bursts (like the student loan bubble for instance), and oil doesn’t go to $150., and no other Soldier loses it in Afghanistan and blows away 20 or 30 innocents, and mexico isn’t taken over by drug gangs, and the rest of Europe can keep their pants on, and Iraq doesn’t erupt in civil war (which will clearly be Obama’s fault) and the Supreme Court doesn’t find the “Obamacare” mandate to be unconstitutional, or even if it does, and the Chinese, well you get the picture. Say again, why would anyone want this job?

Bottom line: the economy matters, but it’s probably wise not to get too deterministic about these things. Monocausal explanations are often appealing, but just as often wrong. The world is a very complicated place.


No Inflation? HAH!

Congress keeps telling Social Security recipients that because inflation is low, there won’t be a cost of living increase. Congress does this because they don’t want to give Seniors a cost of living increase, and also, because they don’t actually shop for gas and food, they wouldn’t know if there was inflation or not.

The Bureau of Labor Statistics doesn’t include food or energy costs in their index, which makes absolutely no sense.

CBS News recently reported that the rate of inflation, as calculated by the American Institute for Economic Research (AIER), clocked in at a whopping 8% over the past year.

This number is in stark contrast to the relatively modest inflation rate of 3.1% being reported by the government’s Bureau of Labor Statistics.

The AIER calculates what they refer to as an Every Day Price Index (EPI). The EPI only looks at the cost of goods the average household buys every month, and factors in only those costs which are subject to price fluctuation. For example, mortgages are typically stable over the course of a year so those numbers are ignored. They wouldn’t change unless a person moves or refinances, so they don’t act as a good measure of inflation from month to month.

Another measure of inflation comes from John Williams’ Shadow Stats. Williams calculates the consumer price index (CPI) using the same model as the government did prior to 1990. Williams also calculates the CPI using the same model as the government did prior to 1980. In each case, the government changed the way it calculated inflation in order to give the appearance of less inflation.

If we calculate the inflation rate the same way the government did prior to 1990, the inflation rate averages around 6.5%, which is basically double the official rate. However, if we measure inflation the same way the government did back prior to 1980, the inflation rate clocks in at a mind-numbing 11%, which I am sure is closer to the actual truth.

In the current official model, the state makes widespread use of hedonics and substitution to hide real inflation rates. It must do so in order to keep the interest it pays on Treasury Inflation-Protected Securities (TIPS) and Social Security cost of living adjustments low. If the government used real consumer inflation rates, it would become readily apparent that the U.S. is completely insolvent in much the same way Greece is insolvent today.

If other nations should catch on to this, they would begin dumping U.S. treasuries in order to protect themselves from a U.S. default, the same situation Greece is facing today. People don’t want to hold Greek debt because they fear they will not be paid back with money that has any value. In other words, they fear that the Greek state will simply print money to make the interest payments.

It appears that this situation may already be taking place with some major U.S. creditors. The Chinese have dumped over $100 billion worth of U.S. treasuries in the month of December, which is a continuation of a trend that has been going on since April of 2011. Chinese holdings of U.S. treasuries are down $300 billion since April of 2011.

This creates a dangerous situation for the U.S.. If enough governments dump U.S. treasuries because they fear the U.S. is insolvent,  interest rates will skyrocket – unless the Fed prints the money to buy those bonds. However, if the Fed buys the bonds, domestic inflation rates will skyrocket.

If you’re like many Americans, you may find the recent economic news somewhat perplexing. Government reports show the economy improving and inflation under control. And yet, it may well feel as though your standard of living is eroding, and you may be shocked by prices when you go shopping. Well, there’s a reason for the disconnect between  reported statistics and your personal experience – and much of it has to do with the nature of inflation.

The fundamental problem is this:  – economists and laypeople talk about inflation as though it can be measured accurately and represented by a single number. In reality, though, inflation is a judgment call and varies enormously depending on what part of the economy is under consideration. Thus the discrepancy between what you see in print and what you experience at the grocery store.

These discrepancies have been highlighted in recent weeks as various authorities reported economic statistics for 2011. The Consumer Price Index rose a modest 2.9% over the past 12 months. On the other hand, a report on Thursday by an independent research organization calculated that prices of “everyday items” rose more than 8% last year.

The latter report on everyday prices, by the American Institute for Economic Research, an organization with free-market leanings that originated at MIT in the 1930s, was particularly interesting in its details. On the plus side, there were double-digit price declines for televisions and computers, while some other kinds of consumer electronics declined at single-digit rates. But those improvements in affordability were massively overshadowed by the big price increases in 2011:

Meat and milk rose more than 9%

Coffee was up 19%

Peanut butter, a staggering 27%.

Heating oil climbed 18%.

Children’s clothes were up 6% for boys, 9% for girls.

Gasoline rose almost 34%.

With Oil at $120 a barrel, the cost of everything will be impacted from packaging to transportation. No wonder food prices have skyrocketed.

And, even those figures are only averages. Inflation is higher for the affluent (who at least can afford it). Indexes of luxury goods climbed anywhere from 6% to 15% last year. More serious, inflation for people age 62 and older is typically as much as two percentage points higher than the overall CPI, in part because of medical expenses.

This enormous variability in the inflation rate filters through to other economic statistics, as well.  So-called real growth in the economy or household incomes is calculated by subtracting inflation from figures in today’s dollars. The smaller the inflation adjustment, the higher real growth will appear, and the larger the inflation adjustment, the weaker real growth will be.

Indeed, the reported economic upturn in the fourth quarter can be attributed almost entirely to an unusually low inflation adjustment. Most measures show consumer prices rising at close to a 3% annual rate, and the inflation adjustment for GDP growth was at least 2.6% in each of the first three quarters of 2011. But in the fourth quarter, the inflation adjustment used to calculate real GDP was less than 1%. If fourth quarter growth had been based on the same inflation rates used earlier in the year, there would have been no upturn, which is what I believe actually happened – already weak growth would have slowed further between the third and fourth quarters.

There may be valid reasons that inflation in the industrial economy measured very low for the fourth quarter. But that doesn’t necessarily reflect your own personal reality. For example, workers’ real incomes have risen slightly in the past few months, according to government inflation measures. But if those workers face continually rising prices at the grocery store and elsewhere, their own experience will be that the recession has not ended and that their standards of living are still falling.

Some commentators have tried to make current conditions sound rosier by pointing out that prices of a few key big-ticket items are falling, offsetting the price rises on everyday items. This argument is faulty for two reasons. First, big-ticket items such as housing and autos are highly cyclical. Their contribution to long-term inflation depends on their trend over time, not on temporary lows near an economic trough.

Second, people don’t buy cars and houses every day. Your monthly budget isn’t affected by what you might have paid for your home some years earlier. Indeed, this underlines the extent to which your own inflation rate depends on your personal circumstances. A renter might be affected by price trends in the real estate market, but someone with a long-term fixed-rate mortgage wouldn’t be.

There are, in fact, multiple difficulties in trying to account for cyclicals and highly volatile items such as oil when measuring inflation. But insofar as such things can be assessed, they suggest more inflation in the future, not less. Depressed home prices will likely rebound at some point if the economic recovery gains momentum. And current high oil prices will eventually factor into inflation as transportation costs get passed along for many goods. If Iran or Europe turn into the likely nightmares they will probably become, Oil could go to $400 barrel.

In the final analysis, what matters most to you is your own personal experience of the economy. And you’re probably feeling higher inflation and weaker growth than the economic statistics coming out of Washington would suggest. If you really want to know what’s happening to your own standard of living, go shopping for groceries.

Taking a Closer Look at Economic Insecurity.

Over the past few years Scott Winship has made a career out of scolding liberals for exaggerating the recent growth of economic insecurity, and I’ve learned a lot by reading his critiques. But I find that I always have a problem with his pieces: he simply pushes back too hard in the opposite direction. If there are different measures of some variable, he always picks the one that minimizes the problem. If there are alternate explanations for a trend, ditto. If different datasets say different things, ditto again. The right answer is always the one that makes the problem look the smallest.

I was reminded of this today while reading “Bogeyman Economics,” a long piece in National Interest whose takeaway is that a careful examination of the data suggests that economic insecurity hasn’t risen much at all in recent years. But Winship’s thumb is invariably on the scale. In his look at income volatility, for example, he reviews some valuable criticisms of previous research. But he also dismisses the use of an alternate dataset without offering much of an explanation and insists that a proper look at the data — which measures the portion of working-age adults who experience a 25% year-to-year income decline — suggests very little change over the years. But look at his own chart:



The number of families with big income drops has “increased only slightly,” he says, and even accounting for cyclical fluctuations “the claims of dramatically increased volatility simply don’t stand up.” But a simple look at the data says different. I added the green line going roughly through the middle of the data, and it shows the number of at-risk families rising from about 8% to 12%. That’s a 50% increase, which is significant by any measure. What’s more, if you look at the trend line going through the peaks, which correspond to economic recessions, the increase is even greater. In other words, the impact of recessions has become larger and larger over the past four decades — exactly the concern of those who write about economic insecurity.

Other examples litter the piece. Maybe some of the income drops in the chart above are voluntary, he suggests, without presenting any evidence that voluntary income losses have risen. He calls a joblessness increase of 3% to 6% between 1968 and 2007 “modest,” even though it represents a doubling. Long-term unemployment is up a lot, he concedes, but hey — it’s a small number of people in absolute terms. Really? A 2% bankruptcy rate per year — up nearly 10x since 1980 — isn’t very much. (And we should be suspicious of the number anyway, though Winship provides no data to suggest why.) Credit card debt has doubled, but that’s OK because it’s only among a minority of Americans. The ranks of those without health insurance has gone up by 12 million, but it’s a small worry because it represents an increase of only 4 percentage points (which looks small on a chart that goes from 0 to 100). And throughout it all, virtually every statistic is tied to medians, even though we should expect that income insecurity has probably grown the most in the bottom third or fourth of the population.

I get what Winship is doing. He believes that horror stories of increased economic insecurity have been exaggerated for political effect, so he’s fighting back. And he makes some good points along the way. But, his evidence is so obviously cherry picked that I never know what to trust and what not to trust. After all, in a rich country, economic insecurity will never affect more than a smallish portion of the country, which means that even substantial changes can almost always be dismissed as modest in absolute terms. (A 20% increase in a quarter of the population, for example, nets out to an overall increase of only 5%.) By this measure, a rise in unemployment from 6% to 10% — which only affects 4% of the population — is hardly worth noticing. But as we all know, this is actually a sign of a deep and major recession. And, we are no longer a rich country.

“If we are to effectively confront the fiscal and economic challenges of the 21st century,” Winship concludes, “we will need to begin by seeing things as they really are.” I agree. But that goes for both sides. A fair look at the data is fine, but not one that seems to bend over backward time after time to minimize long-term trends that suggest very real problems and very real distress.

Absolute Must Read.

DAVID STOCKMAN: You’d Be A Fool To Hold Anything But Cash Now

This is an Associated Press story.
NEW YORK (AP) — He was an architect of one of the biggest tax cuts in U.S. history. He spent much of his career after politics using borrowed money to take over companies. He targeted the riskiest ones that most investors shunned — car-parts makers, textile mills.

 That is one image of David Stockman, the former White House budget director who, after resigning in protest over deficit spending, made a fortune in corporate buyouts.

But spend time with him and you discover this former wunderkind of the Reagan revolution is many other things now — an advocate for higher taxes, a critic of the work that made him rich and a scared investor who doesn’t own a single stock for fear of another financial crisis.

Stockman suggests you’d be a fool to hold anything but cash now, and maybe a few bars of gold. He thinks the Federal Reserve’s efforts to ease the pain from the collapse of our “national leveraged buyout” — his term for decades of reckless, debt-fueled spending by government, families and companies — is pumping stock and bond markets to dangerous heights.

Known for his grasp of budgetary minutiae, first as a Michigan congressman and then as Reagan’s budget director, Stockman still dazzles with his command of numbers. Ask him about jobs, and he’ll spit out government estimates for non-farm payrolls down to the tenth of a decimal point. Prod him again and, as from a grim pinata, more figures spill out: personal consumption expenditures, credit market debt and the clunky sounding but all-important non-residential fixed investment.

Stockman may seem as exciting as an insurance actuary, but he knows how to tell a good story. And the punch line to this one is gripping. He says the numbers for the U.S. don’t add up to anything but a painful, slow-growing future.

Now 65 and gray, but still wearing his trademark owlish glasses, Stockman took time from writing his book about the financial collapse, “The Triumph of Crony Capitalism,” to talk to The Associated Press at his book-lined home in Greenwich, Conn.

Within reach was Dickens’ “Hard Times” — two copies.

Below are excerpts, edited for clarity.


Q: Why are you so down on the U.S. economy?

A: It’s become super-saturated with debt.

Typically the private and public sectors would borrow $1.50 or $1.60 each year for every $1 of GDP growth. That was the golden constant. It had been at that ratio for 100 years save for some minor squiggles during the bottom of the Depression. By the time we got to the mid-’90s, we were borrowing $3 for every $1 of GDP growth. And by the time we got to the peak in 2006 or 2007, we were actually taking on $6 of new debt to grind out $1 of new GDP.

People were taking $25,000, $50,000 out of their home for the fourth refinancing. That’s what was keeping the economy going, creating jobs in restaurants, creating jobs in retail, creating jobs as gardeners, creating jobs as Pilates instructors that were not supportable with organic earnings and income.

It wasn’t sustainable. It wasn’t real consumption or real income. It was bubble economics.

So even the 1.6 percent (annual GDP growth in the past decade) is overstating what’s really going on in our economy.

Q: How fast can the U.S. economy grow?

A: People would say the standard is 3, 3.5 percent. I don’t even know if we could grow at 1 or 2 percent. When you have to stop borrowing at these tremendous rates, the rate of GDP expansion stops as well.

Q: But the unemployment rate is falling and companies in the Standard & Poor’s 500 are making more money than ever.

A: That’s very short-term. Look at the data that really counts. The 131.7 million (jobs in November) was first achieved in February 2000. That number has gone nowhere for 12 years.

Another measure is the rate of investment in new plant and equipment. There is no sustained net investment in our economy. The rate of growth since 2000 (in what the Commerce Department calls non-residential fixed investment) has been 0.8 percent — hardly measurable.

(Non-residential fixed investment is the money put into office buildings, factories, software and other equipment.)

We’re stalled, stuck.

Q: What will 10-year Treasurys yield in a year or five years?

A: I have no guess, but I do know where it is now (a yield of about 2 percent) is totally artificial. It’s the result of massive purchases by not only the Fed but all of the other central banks of the world.

Q: What’s wrong with that?

A: It doesn’t come out of savings. It’s made up money. It’s printing press money. When the Fed buys $5 billion worth of bonds this morning, which it’s doing periodically, it simply deposits $5 billion in the bank accounts of the eight dealers they buy the bonds from.

Q: And what are the consequences of that?

A: The consequences are horrendous. If you could make the world rich by having all the central banks print unlimited money, then we have been making a mistake for the last several thousand years of human history.

Q: How does it end?

A: At some point confidence is lost, and people don’t want to own the (Treasury) paper. I mean why in the world, when the inflation rate has been 2.5 percent for the last 15 years, would you want to own a five-year note today at 80 basis points (0.8 percent)?

If the central banks ever stop buying, or actually begin to reduce their totally bloated, abnormal, freakishly large balance sheets, all of these speculators are going to sell their bonds in a heartbeat.

That’s what happened in Greece.

Here’s the heart of the matter. The Fed is a patsy. It is a pathetic dependent of the big Wall Street banks, traders and hedge funds. Everything (it does) is designed to keep this rickety structure from unwinding. If you had a (former Fed Chairman) Paul Volcker running the Fed today — utterly fearless and independent and willing to scare the hell out of the market any day of the week — you wouldn’t have half, you wouldn’t have 95 percent, of the speculative positions today.

Q: You sound as if we’re facing a financial crisis like the one that followed the collapse of Lehman Brothers in 2008.

A: Oh, far worse than Lehman. When the real margin call in the great beyond arrives, the carnage will be unimaginable.

Q: How do investors protect themselves? What about the stock market?

A: I wouldn’t touch the stock market with a 100-foot pole. It’s a dangerous place. It’s not safe for men, women or children.

Q: Do you own any shares?

A: No.

Q: But the stock market is trading cheap by some measures. It’s valued at 12.5 times expected earnings this year. The typical multiple is 15 times.

A: The typical multiple is based on a historic period when the economy could grow at a standard rate. The idea that you can capitalize this market at a rate that was safe to capitalize it in 1990 or 1970 or 1955 is a large mistake. It’s a Wall Street sales pitch.

Q: Are you in short-term Treasurys?

A: I’m just in short-term, yeah. Call it cash. I have some gold. I’m not going to take any risk.

Q: Municipal bonds?

A: No.

Q: No munis, no stocks. Wow. You’re not making any money.

A: Capital preservation is what your first, second and third priority ought to be in a system that is so jerry-built, so fragile, so exposed to major breakdown that it’s not worth what you think you might be able to earn over six months or two years or three years if they can keep the bailing wire and bubble gum holding the system together, OK? It’s not worth it.

Q: Give me your prescription to fix the economy.

Broccoli Vegetables

A: We have to eat our broccoli for a good period of time. And that means our taxes are going to go up on everybody, not just the rich. It means that we have to stop subsidizing debt by getting a sane set of people back in charge of the Fed, getting interest rates back to some kind of level that reflects the risk of holding debt over time. I think the federal funds rate ought to be 3 percent or 4 percent. (It is zero to 0.25 percent.) I mean, that’s normal in an economy with inflation at 2 percent or 3 percent.

Q: Social Security?

A: It has to be means-tested. And Medicare needs to be means-tested. If you’re a more affluent retiree, you should have your benefits cut back, pay a higher premium for Medicare.

Q: Taxes?

A: Let the Bush tax cuts expire. Let the capital gains go back to the same rate as ordinary income. (Capital gains are taxed at 15 percent, while ordinary income is taxed at marginal rates up to 35 percent.)

Q: Why?

A: Why not? I mean, is return on capital any more virtuous than some guy who’s driving a bus all day and working hard and trying to support his family? You know, with capital gains, they give you this mythology. You’re going to encourage a bunch of more jobs to appear. No, most of capital gains goes to speculators in real estate and other assets who basically lever up companies, lever up buildings, use the current income to pay the interest and after a holding period then sell the residual, the equity, and get it taxed at 15 percent. What’s so brilliant about that?

Q: You worked for Blackstone, a financial services firm that focuses on leveraged buyouts and whose gains are taxed at 15 percent, then started your own buyout fund. Now you’re saying there’s too much debt. You were part of that debt explosion, weren’t you?

A: Well, yeah, and maybe you can learn something from what happens over time. I was against the debt explosion in the Reagan era. I tried to fight the deficit, but I couldn’t. When I was in the private sector, I was in the leveraged buyout business. I finally learned a heck of a lot about the dangers of debt.

I’m a libertarian. If someone wants to do leveraged buyouts, more power to them. If they want to have a brothel, let them run a brothel. But it doesn’t mean that public policy ought to be biased dramatically to encourage one kind of business arrangement over another. And right now public policy and taxes and free money from the Fed are encouraging way too much debt, way too much speculation and not enough productive real investment and growth.

Q: Why are you writing a book?

A: I got so outraged by the bailouts of Wall Street in September 2008. I believed that Bush and (former Treasury Secretary Hank) Paulson were totally trashing the Reagan legacy, whatever was left, which did at least begin to resuscitate the idea of free markets and a free economy. And these characters came in and panicked and basically gave capitalism a smelly name and they made it impossible to have fiscal discipline going forward. If you’re going to bail out Wall Street, what aren’t you going to bail out? So that started my re-engagement, let’s say, in the policy debate.

Q: Are you hopeful?

A: No.

Greece Readies a Head-fake on Europe.

You may think that the Greek struggle is trivial on the world stage, but as those of you who have been following this blog know, I believe that it is the linchpin that will decide the fate of Europe and the trajectory of the American economic recovery over the next few months. I believe that Greece will claim to accept  the austerity measures, take the $40B in the tranche and then withdraw from the Euro, default on it’s debt and devalue the Drachma. The country would then be solvent and have enough tax revenue to cover its operating expense without implementing any austerity measures at all. A win for the Government and a win for the people.

Talks between Prime Minister Lucas Papademos and the three political leaders in his government stalled early Thursday, but the leaders pledged to resume talks in order to reach an agreement on austerity measures demanded by Greece’s financial backers in return for a $170 billion bailout.

Greek and European Union flags fluttered near the Parthenon in Athens on Wednesday.

If the leaders do not accept the measures, Greece’s foreign lenders will not give it the aid it needs to prevent a default as soon as March. It would also jeopardize a bond swap under which private investors would take losses of up to 70 percent. But as dawn neared on Thursday, the line between Greek political theater and international financial trauma was difficult to discern.

In a sign that an agreement was still expected, Mr. Papademos’s office said in a statement early Thursday that the three parties had agreed on all issues except one and that they would continue the discussion “immediately,” so that it could be completed ahead of the meeting of euro zone finance ministers scheduled for Thursday evening in Brussels.

But in a dramatic late-night twist, while Mr. Papademos held talks with Greece’s foreign lenders, one of the three leaders participating in the government, George Karatzaferis, the leader of the Popular Orthodox Rally, or L.A.O.S., issued a statement after 1 a.m. saying that he was unwilling to agree with the terms of the new bailout and indicating that he might withdraw from the government.

That would leave the burden for accepting the austerity measures — including sweeping wage and pension cuts — on the other two parties in the coalition, the Socialists and center-right New Democracy party.

Although Greece’s so-called troika of foreign lenders — the European Commission, European Central Bank and International Monetary Fund — have indicated that they will ask for written agreements from the party leaders that they will support the loan agreement, the government is still expected to be able to approve the agreement without Mr. Karatzaferis’s party.

Even if he does pull out of the coalition, the government will still have a majority in Parliament, where L.A.O.S. has only 16 of the coalition’s 252 seats.

With elections expected as soon as April, the parties are fighting for their political survival.

One of the most controversial austerity measures is a 22 percent reduction in the minimum wage, to around $775 a month. The cut is expected to affect all salaried workers, because the base wage is used as a benchmark by employers.

The leaders appear to have agreed to that, according to the statement by the prime minister’s office.

But the leader of New Democracy, Antonis Samaras, said they had foundered over cuts to pensions. Mr. Karatzaferis, whose populist, hard-right former opposition party has been losing ground with voters since it joined the government, said he would support Mr. Samaras to prevent proposed cuts to supplementary pensions. Mr. Papademos met with troika officials late into the night to try to fill a $300 million budget shortfall that would be left if the pensions were not cut.

Analysts suggested that the coalition partners were seeking to avoid blame for the agreement in hopes of leaving Mr. Papademos as the principal target of public anger.

Jean-Claude Juncker, the prime minster of Luxembourg, who heads a group of euro zone finance ministers, had scheduled a ministerial meeting for Thursday that he had previously said he would call only if Athens were ready to sign off on the plan.

Even that meeting would not be the final word. But it would allow for preparations for a bond swap under which private investors would take losses of up to 70 percent, according to one person briefed on discussions who agreed only to describe them anonymously.

Some details of the bailout remained unclear, but it appeared increasingly likely that the European Central Bank would agree to forgo at least some of its potential profits on Greek bonds once the government in Athens had agreed to the austerity measures.

The first installment of the bailout was supposed to be a $118 billion tranche in March, but officials are now saying that it might be limited to about $40 billion to ensure that Greece continues to abide by the terms in coming months.

U.S. Growth Quickens in Q4, but 2012 Looks Awful.

The U.S. economy grew at its fastest pace in 1-1/2 years in the fourth quarter, but a strong rebuilding of stocks by businesses and weak spending on capital goods hinted at slower growth in early 2012.

U.S. gross domestic product expanded at a 2.8 percent annual rate, the Commerce Department said on Friday, a sharp acceleration from the 1.8 percent clip of the prior three months and the quickest pace since the second quarter of 2010.

It was, however, a touch below economists’ expectations for a 3.0 percent rate.

“The economy ended 2011 on a fairly positive note, but the composition of growth in the last quarter is not favorable for growth early this year,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

Sweet made the comments before the report was released. For the whole of 2011, the economy grew 1.7 percent after expanding 3 percent the prior year.

Growth in the fourth quarter got a temporary boost from the rebuilding of business inventories, which was the fastest since the third quarter of 2010, after they declined in the third-quarter for the first time since late 2009.

Inventories increased $56.0 billion, adding 1.94 percentage points to GDP growth. In other words, excluding inventories, the economy grew at a tepid 0.8 percent rate, a sharp step-down from the prior period’s 3.2 percent pace. So, take out the inventory re-build and what do we have? Less than 1% GDP growth in 4Q.

The robust stock accumulation suggests the recovery will lose a step in early 2012.

Also pointing to slower growth, business spending on capital goods was the slowest since 2009, a sign the debt crisis in Europe was starting to take its toll.

Expectations of soft growth led the Federal Reserve on Wednesday to say it expected to keep interest rates at rock bottom levels at least through late 2014.

Fed Chairman Ben Bernanke said the central bank, which forecast growth this year in a 2.2 percent to 2.7 percent range, was mulling further asset purchases to speed up the recovery.

The Fed warned the economy still faced big risks, a suggestion the euro zone debt crisis could still hit hard.

#43: Greece

“The Fed is attempting to shield the economy from a potentially more severe recession in Europe,” said Sweet. “Even though the economy improved last quarter there are a number of headwinds and a lot of uncertainty surrounding Europe, emerging markets and also U.S. fiscal policy.”

Treasury Secretary Timothy Geithner told the World Economic Forum in Davos the U.S. economy still faced big challenges.

“We’re still repairing the damage done by the financial crisis. On top of that we face a more challenging world. We have a lot of challenges ahead in the United States,” Geithner said.

Consumer spending, which accounts for about 70 percent of U.S. economic activity, stepped to a 2 percent rate from the third-quarter’s 1.7 percent pace – mostly driven by pent-up demand for motor vehicles. Take that out and you have a unsustainable 1% growth rate.

The Japanese earthquake and tsunami had disrupted supplies early in the year, leaving showrooms bereft of popular models.

Spending was also lifted by moderate inflation.

A price index for personal spending rose at a 0.7 percent rate in the fourth-quarter, the slowest increase in 1-1/2 years, after rising at a 2.3 percent pace in the July-September period.

A core inflation measure, which strips out food and energy costs, increased at a 1.1 percent rate after rising 2.1 percent in the third quarter.

The increase last quarter was the smallest in a year and put this measure well below the Fed’s 2 percent target. We need to become realists, not optimists. These prediction shortfalls are not healthy to the collective zeitgeist.


Sluggish income growth amid an 8.5 percent unemployment rate, which has prompted households to tap savings and credit cards to fund their purchases, is expected to weigh on consumers as the new year unfolds.

The saving rate came in at a 3.7 percent rate in the fourth quarter, slowing from the prior period’s 3.9 percent pace.

“Though the unemployment rate has improved, the jobs market remains a major challenge. Part of the decline in the unemployment rate is due to the fact that … people have stopped looking for work,” said Adolfo Laurenti, deputy chief economist at Mesirow Financial in Chicago.

“The high level of people out of the workforce and underemployed people show there isn’t really much income generation to contribute to a better spending pattern.”

About 23.7 million Americans are either out of work or underemployed.

The shrinking labor force suggests the economy’s long-term growth potential has slipped below 2.5 percent.

A sustained growth pace of at least 3 percent would likely be needed to make noticeable headway in absorbing the unemployed and those who have given up the search for work.

Business spending grew at a sluggish 1.7 percent rate, pulling back sharply from the third-quarter’s 15.7 percent pace. WOW. 15.7% down to 1.7% – doesn’t that scare anyone?

Though exports held up despite slowing global demand, an increase in imports left a trade gap that sliced off 0.11 percentage point from GDP growth.

Despite an anticipated slowdown in growth this year, analysts do not believe the economy will fall into recession. Really???

“The United States has enough momentum to offset the losses coming from Europe,” said Laurenti. Come-on, Man.

Unseasonably mild winter weather helped home construction post its fastest growth pace since the second quarter of 2010, with much of the increase going to meet rising demand for rental apartments.

Spending on nonresidential structures fell. Government spending shrank for a fifth consecutive quarter, reflecting a large decline in defense and still weak state and local government outlays. Really uplifting news, eh?

Why Most Economists Are Just Plain Wrong!

Nouriel Roubini and me. Hard to argue the facts.

Good stuff Mimi – thanks.

Macroeconomic indicators for the United States have been better than expected for the last few months. Job creation has picked up, though most all of it is minimum-wage jobs. Indicators for manufacturing and services have improved moderately. Even the housing industry has shown some signs of life, though as I point out in the previous post a close examination of the 5% increase suggests it is closer to a real 1% increase. And consumption growth has been relatively resilient though far from strong.

But, despite the favorable data, US economic growth will remain weak and below trend throughout 2012. Why is all the recent economic good news not to be believed?

First, US consumers remain income-challenged, wealth-challenged, and debt-constrained. Disposable income has been growing modestly – despite real-wage stagnation – mostly as a result of tax cuts and transfer payments. This is not sustainable: eventually, transfer payments will have to be reduced and taxes will be raised to reduce the fiscal deficit. Recent consumption data are already weakening relative to a couple of months ago, marked by holiday retail sales that were merely passable.

At the same time, US job growth is still too mediocre to make a dent in the overall unemployment rate and on labor income. The US needs to create at least 150,000 jobs per month on a consistent basis just to stabilize the unemployment rate. More than 40% of the unemployed are now long-term unemployed, which reduces their chances of ever regaining a decent job. Indeed, firms are still trying to find ways to slash labor costs.

Rising income inequality will also constrain consumption growth, as income shares shift from those with a higher marginal propensity to spend (workers and the less wealthy) to those with a higher marginal propensity to save (corporate firms and wealthy households).

Moreover, the recent bounce in investment spending (and housing) will end, with bleak prospects for 2012, as foreclosures come to the market in earnest, tax benefits expire, firms wait out so-called “tail risks” (low-probability, high-impact events), and insufficient final demand holds down capacity-utilization rates. And most capital spending will continue to be devoted to labor-saving technologies, again implying limited job creation. The professional jobs that have been lost are not coming back.

At the same time, even after six years of a housing recession, the sector is comatose. With demand for new homes having fallen by 80% relative to the peak, the downward price adjustment is likely to continue in 2012 as the supply of new and existing homes continues to exceed demand. Up to 40% of households with a mortgage – 20 million – could end up with negative equity in their homes. Thus, the vicious cycle of foreclosures and lower prices is likely to continue – and, with so many households severely credit-constrained, consumer confidence, while improving, will remain weak.

Given anemic growth in domestic demand, America’s only chance to move closer to its potential growth rate would be to reduce its large trade deficit. But net exports will be a drag on growth in 2012, for several reasons:

  • The dollar would have to weaken further, which is unlikely, because many other central banks have followed the Federal Reserve in additional “quantitative easing,” with the euro likely to remain under downward pressure and China and other emerging-market countries still aggressively intervening to prevent their currencies from rising too fast.
  • Slower growth in many advanced economies, China, and other emerging markets will mean lower demand for US exports.
  • Oil prices are likely to remain elevated, given geopolitical risks in the Middle East, keeping the US energy-import bill high.

It is unlikely that US policy will come to the rescue. On the contrary, there will be a significant fiscal drag in 2012, and political gridlock in the run-up to the presidential election in November will prevent the authorities from addressing long-term fiscal issues.

Given the bearish outlook for US economic growth, the Fed can be expected to engage in another round of quantitative easing. But the Fed also faces political constraints, and will do too little, and move too late, to help the economy significantly. Moreover, a vocal minority on the Fed’s rate-setting Federal Open Market Committee is against further easing. In any case, monetary policy cannot address liquidity problems – and banks are flush with excess reserves.

Most importantly, the US – and many other advanced economies – remains in the early stages of a deleveraging cycle. A recession caused by too much debt and leverage (first in the private sector, and then on public balance sheets) will require a long period of spending less and saving more. This year will be no different, as public-sector deleveraging has barely started.

Finally, there are those tail risks that make investors, corporations, and consumers hyper-cautious: the Eurozone, where debt restructurings – or worse, breakup (which is my bet) – are risks of systemic consequence; the outcome of the US presidential election; geo-political risks such as the Arab Spring, military confrontation with Iran, Israel,  instability in Afghanistan and Pakistan, North Korea’s succession, and the leadership transition in China; and the consequences of a global economic slowdown.

Given all of these large and small risks, businesses, consumers, and investors have a strong incentive to wait and do little. The problem, of course, is that when enough people wait and don’t act, they heighten the very risks that they are trying to avoid.

2012 is probably going to be worse than 2008-2011. Batten down the hatches.

Consumer Delinquencies Fall in Most Loan Categories in Third Quarter

Consumer credit delinquencies fell in seven of 11 loan categories in the third quarter, according to the ABA Consumer CreditDelinquency Bulletin. This is a good co-indicator pointing forward that suggests P2P and social lending are becoming safer, more widely-accepted platforms for financing.

The composite ratio, which tracks delinquencies in eight closed-end installment loan categories, dropped to 2.59% of all accounts, 29 basis points lower than the previous quarter and 42 basis points lower than 2010’s third quarter.

The categories showing improvement in the delinquency rate are personal loans, direct auto loansindirect auto loans, RV loans, marine loans, home improvement loans and home equity loans.

Bank card delinquencies were stable, rising just three basis points to 3.25%. That was well below both the 3.64% registered in 2010’s third quarter and the 15-year average of 3.94%.

Household debt levels continue to fall and are getting easier to manage. Subtle improvements in the economy such as lower gas prices and a better job market have reduced some of the stresses facing consumers,” ABA Chief Economist Jim Chessen said.

“Improvement in delinquencies over the next year hinges on the housing market, which still poses an enormous challenge to continued economic growth. Job creation and income growth are also a must if we hope to see delinquencies continue to fall,” he said.