AMERICAN FUTURE

Today will probably be remembered as the day that the U.S. became firmly and publicly involved in the Eurozone crisis. Late this morning, the President held a press conference that was unusual in at least two respects: (1) it was on a Friday – and a summer Friday, at that, and (2) after an introductory paragraph, the next six paragraphs dealt with the Eurozone crisis. Here’s the six paragraphs, with my highlighting:

Right now, one concern is Europe, which faces a threat of renewed recession as countries deal with a financial crisis.  Obviously this matters to us because Europe is our largest economic trading partner.  If there’s less demand for our products in places like Paris or Madrid it could mean less businesses — or less business for manufacturers in places like Pittsburgh or Milwaukee.

The good news is there is a path out of this challenge.  These decisions are fundamentally in the hands of Europe’s leaders, and fortunately, they understand the seriousness of the situation and the urgent need to act.  I’ve been in frequent contact with them over the past several weeks, and we know that there are specific steps they can take right now to prevent the situation there from getting worse.

In the short term, they’ve got to stabilize their financial system.  And part of that is taking clear action as soon as possible to inject capital into weak banks.  Just as important, leaders can lay out a framework and a vision for a stronger eurozone, including deeper collaboration on budgets and banking policy.  Getting there is going to take some time, but showing the political commitment to share the benefits and responsibilities of a integrated Europe will be a strong step.

With respect to Greece, which has important elections next weekend, we’ve said that it is in everybody’s interest for Greece to remain in the eurozone while respecting its commitments to reform.  We recognize the sacrifices that the Greek people have made, and European leaders understand the need to provide support if the Greek people choose to remain in the eurozone.  But the Greek people also need to recognize that their hardships will likely be worse if they choose to exit from the eurozone.

Over the longer term, even as European countries with large debt burdens carry out necessary fiscal reforms, they’ve also got to promote economic growth and job creation.  As some countries have discovered, it’s a lot harder to rein in deficits and debt if your economy isn’t growing.  So it’s a positive thing that the conversation has moved in that direction, and leaders like Angela Merkel and Francois Hollande are working to put in place a growth agenda alongside responsible fiscal plans.

The bottom line is the solutions to these problems are hard, but there are solutions.  The decisions required are tough, but Europe has the capacity to make them.  And they have America’s support.  Their success is good for us.  And the sooner that they act, and the more decisive and concrete their actions, the sooner people and markets will regain some confidence and the cheaper the costs of cleanup will be down the road.

As far as I know, this is the first time that the Eurozone has taken center stage in a presidential statement. The timing and content suggest to me that some important decisions by European leaders may be taken over the weekend. Further, despite the nod to Merkel, Obama’s words can be interpreted as an attempt to exert pressure on the German Chancellor to relax Germany’s insistence on austerity. Having said this, however, it’s far from clear to me what concrete steps the U.S. can take that would persuade the German government to alter its policies.

. . . on the fiscal cliff:

According to CBO’s estimates, the tax and spending policies that will be in effect under current law will reduce the federal budget deficit by 5.1 percent of GDP between calendar years 2012 and 2013 (with the resulting economic feedback included, the reduction will be smaller). Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent, CBO expects—with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession.

Public outrage can produce results.

With the exceptions of  two Republicans – Tom Coburn (Okla.) and Richard Burr (N.C.) – and one Democrat — Jeff Bingaman (N.M.) — the Senate passed the STOCK Act.

The STOCK Act calls for members of Congress to report stock and other financial transactions within 30 days and require that these filings be available online. It also requires members of Congress, their staff and about 2,000 top policymakers in the executive branch to publicly disclose the terms of home mortgages. And an amendment by Senator Richard Shelby (R-Ala.) was adopted requiring securities trades and financial disclosure statements for about 3,000 executive branch employees to be published online.

These 50 items were collected and posted by The Economic Collapse blog. Together, they paint a terrifyingly ugly picture of economic conditions in what was once the “wealthy” United States of America.

The blog’s authors blame everything on the Fed and want it to be shut down. While their analysis and recommendation are, shall we say, a bit extreme, facts are facts.

Here’s the list:

Continue reading ‘Economic Numbers “That Are Almost Too Crazy to Believe”’ »

“2011 will be remembered as the year in which the American public lost much of any remaining faith in the men and women they elect and send off to Washington to represent them.”

If you’re surprised, you’ve been living on another planet.

A new record-low 11% of Americans approve of the job Congress is doing, the lowest single rating in Gallup’s history of asking this question since 1974. This earns Congress a 17% yearly average for 2011, the lowest annual congressional approval rating in Gallup history.

The record-low 11% rating is based on a Gallup survey conducted Dec. 15-18 . . . The previous low Gallup reading for congressional job approval was 13%, recorded in August, October, and November of this year, and in December 2010.

With the election of Obama and the Democrats regaining control of Congress, congressional job approval by self-identified democrats soared during the first few months of 2009. By mid-2009, the trend reversed, as shown in the next chart. Now, there’s little difference among Democrats, Republicans, and Independents.

I hesitate to call this a cause-and-effect relationship, but, as shown in the following chart, the two most recent sustained uptrends in disapproval began with a Republican occupying the Oval Office. Note, too, that most of the current increase in disapproval took place before the implosion of the financial system (I would have thought it would be the other way around), and that there was a sustained downtrend in disapproval in the Clinton years, during which first the Democrats and then the Republicans controlled Congress.

He was for it before he was against it. From the New York Times:

A day after the Senate overwhelmingly approved legislation to extend a payroll tax cut for two months, House Republicans made clear Sunday that they would not support the measure.

Speaker John A. Boehner, who had urged his members on Saturday to support the bill, did an about-face on Sunday and said he and other House Republicans were opposed to the temporary extension, part of a $33 billion package of bills that the Senate passed Saturday . . . The measure would be effective through February.

But in an interview with NBC’s “Meet The Press” on Sunday, Mr. Boehner said the two-month extension would be “just kicking the can down the road.” “It’s time to just stop, do our work, resolve the differences and extend this for one year,” he said. “How can you have tax policy for two months?”

Mr. Boehner’s remarks on “Meet the Press” came less than 24 hours after a conference call in which he tried to sell the package to his rank and file, pointing to a provision that would speed Republican-supported construction of an oil pipeline, known as Keystone XL, from Canada to the Gulf Coast. But many Republican lawmakers were not buying what their leader was urging them to do, chiefly because they objected to the tax cut extension’s cost.

There’s only one possible conclusion: the rank and file — a.k.a. the Tea Party — has won another round. Can the approval rating of Congress drop below the recent 9 percent? It should.

And the American people have lost — again.

Visit msnbc.com for breaking news, world news, and news about the economy

If there were a dissembler-of-the-year award, my vote would go to Michele Bachmann. Just listen to this:

Visit msnbc.com for breaking news, world news, and news about the economy

In its lead article, the Economist says that the recent EU summit was “A comedy of euros.”

Once again Europe’s leaders have failed to solve the euro crisis. The new treaty could easily be killed by the markets or by its rejection in one or more euro-zone country. The EU has suffered plenty of disappointing summits without the sky falling in—a good many of them in the past year. But unlike the marathon dispute over a new constitution, the euro is in a race against time because markets are pushing countries to insolvency. As investors and voters lose faith, the task of saving the single currency grows harder. Sooner or later, the euro will be beyond saving.

[...] [The Eurozone's] members could strike a grand bargain that deploys the ECB’s balance-sheet and some form of Eurobond in exchange for fiscal integration. The question is not whether they can save the currency, but whether enough of them are prepared to pay the price. This summit suggests not.

Elsewhere in the December 17 issue:

• “The European Union and the euro: Game, set and mismatch” — What do you get when you mix political differences and inept diplomacy? Britain’s bust-up with the rest of the EU.
• “The Euro crisis: Damned with faint plans” – Euro-zone government bonds have not been made safe—and the euro project remains in peril.
• “European banks: Staggering to the rescue” — Europe’s troubled banks and broke governments are in a dangerous embrace.
• “Economics focus: One nation overdrawn” — Lessons for Europe from America’s history
• “The coalition after the veto: State of the union” — Nick Clegg and David Cameron, and the parties they lead, are deeply divided over Europe. But the coalition is indissoluble for now.
• “Financial services in Britain: The blitz spirit” — Britain’s banks face a battalion of threats, not all of them foreign.
• “Bagehot: How Britain could leave Europe” — British grumpiness about the EU feels familiar; actually, big new dangers lurk.

“Economics focus: One nation overdrawn” provides some interesting links:

• Michael Bordo, “The United States as a Monetary Union and the Euro: A Historical Perspective” (2004)

Our historical perspective leads to the conclusion that Europe achieved monetary union much more rapidly than did the United States but that integration on the real side, especially in the labor market, which ultimately is what is required for the EMU project to be successful, has lagged way behind. The question then arises, will the necessary real side reforms required to foster greater flexibility occur at a pace that will come into play in the face of the vicissitudes of the world business cycle and changing world patterns of activity? Will political will continue to provide the glue to keep the EMU going in the face of slow integration? Will it take the equivalent of the U.S. Civil War to either destroy it or strengthen it? Or will institutional adaptation occur in a learning-by-doing process?. Will adding on 10 new countries to the EMU at much lower levels of economic development help the project like the Louisiana Purchase and the Mexican War did for the United States or will it be like the counter factual exercise of the United States acquiring Mexico and Central America? The historic events basically allowed the United States to expand its territory, provide land for new settlers, and acquire vast resources. The counterfactual exercise would involve adding on a densely populated, culturally different region, at a much lower stage of economic development.

The evidence so far suggests that the best case scenario is guarded optimism. A more likely outcome based on the European response to the recent world downturn is probably not so rosy.

• Michael Bordo et. al., “A fiscal union for the euro: Some lessons from history” (2011)

The history of fiscal federations provides us with a number of conditions necessary for a fiscal union to function smoothly and successfully and thus also the monetary union on which the fiscal union is based. The first and probably the most important condition is a credible commitment to a no-bailout rule for the members of the fiscal union. The second one is a degree of revenue and expenditure independence of the members of the fiscal union reflecting their political preferences. The third condition is a well-developed transfer mechanism to be used in episodes of distress. This transfer mechanism can be facilitated by the establishment of a common bond. The fourth condition is a capacity to learn from past mistakes and adapt to new economic and political circumstances.

The Eurozone was created without an effective fiscal union. The institutions that were established to serve as the foundation for the fiscal union (the Maastricht Treaty and the Stability and Growth Pact) – to discipline domestic fiscal policies – did not function as planned as revealed by the crises and recession from 2007-2009 and onwards. The lessons from the historical experience of the five federal states surveyed by us could be helpful for the Eurozone to avoid disintegration.

I’ve previously commented on the fact that our representatives and senators (and their staff members) are exempt from insider trading laws and that attempts to change this inexcusable situation have been buried in committee.

If at first you don’t succeed try, try again. On November 15, the Republican Senator from Massachusetts introduced S.1871 (the “Stop Trading on Congressional Knowledge Act”), a bill

To prohibit commodities and securities trading based on non-public information relating to Congress, to require additional reporting by Members and employees of Congress of securities transactions, and for other purposes.

The bill has been read twice and referred to the Committee on Homeland Security and Governmental Affairs.

That’s where similar bills have languished in the past. Only if there is public outcry will this time be different.

This was written yesterday, before the formal announcement that no agreement had been reached.

If the so-called Super Committee has reached the end of the road without achieving its assigned debt reduction goals, it is not necessarily bad news. Conversely, if they are still working toward some kind of a deal, there are risks that we need to be aware of.

Stepping back a bit, there is a fundamental impediment to making substantive progress in a representative political system, where it is essentially impossible for an existing government to pre-commit to an important plan of action, since anything announced is subject to change as a result of shifting political or market reactions. The Budget Control Act that set up the super committee was an attempt to get around that impediment by limiting democracy – assigning the task to 12 members who met in private according to a strict timeline, with a subsequent straight up-or-down vote by the full Congress. The budget act also toughened the consequences of failure by setting up mandatory sequestration of spending in areas that the Congress does not want to see cut to the extent specified. Unfortunately, those provisions do not appear to have worked.

As it turns out, it is quite possible that the super committee does not agree to do anything at all, which would probably mean that both the Democrats and the Republicans see an advantage to such failure in the coming political contest. On the other hand, it is also possible that the committee will deliver some mixture of spending cuts and sequestration over the next day. If they do go this route, however, it will likely be through mere assertion rather than a concrete program, meaning they will announce the formation of a committee to find a set amount of spending cuts and revenue enhancement. Meanwhile, the recent op-ed piece in the Wall Street Journal by former senator Phil Gramm sent the message to Republicans that there will be feasible ways to limit the damage caused by sequestration in the event of super committee failure.

We are thus now facing an almost unlimited range of possible outcomes in terms of spending cuts and tax increases, and the impact of this uncertainty on markets is impossible to determine, as is the reaction from rating agencies.

Our biggest near-term concern is that the fiscal baseline for 2012 already includes a sizable pothole in the expiration of extended unemployment benefits and the payroll tax holiday. This would amount to a swing of 2% of the structural budget from deficit to surplus. That is a significant fiscal tightening for an economy that is already experiencing weak growth and high unemployment. In addition, at the end of 2012 the Bush tax cuts expire. To avoid these three things will require affirmative actions by Congress plus approval by the president.

If the super committee fails to do anything, the good news is that Congress then has the opportunity over the next year to figure out a better way to improve the fiscal outlook. Conversely, if the super committee does something hollow and merely asserts a path to spending cuts and revenue enhancements, subject to an up-or-down vote before the year-end holidays, it is possible that the payroll tax cut and extended unemployment benefits will be allowed to expire due to inaction. For the time being, the US economics team still expects these policies to be extended and for the US to avoid a recession in 2012, but the odds are looking more difficult.