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Recession, the real economy, and whether to cede a point to win an argument

March 8, 2011

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Heather Boushey

And this is the moment when I often think about people like my mom. Right? She’s a good person, typically votes Democratic. Not an economist. Doesn’t get it. You can’t explain to her why we can have deficits from now until as far as the eye can see and that that won’t make something bad happen to the economy. It just doesn’t … You can’t connect with people with that message. So as much as I completely agree that we need to spend, right… I mean I could bore you for hours with all the things we need to do to get people back to work, and the importance of deficit spending, and the importance of Social Security and Medicare, that isn’t the conversation we’re having now, because nobody but those of us in this room understand that that’s what’s going on.

We’re not going to be able to do anything until we get to a place where the fact that the place that the Congress can’t comprehend that because the public can’t comprehend that isn’t our major, ah, sticking point.

I think we actually lost this debate a decade ago, or even longer, and we’re still sort of dealing with the aftershocks of it. The last time we had a surplus, or projected surplus, was in the end of the Clinton era. The national conversation became what to do with that surplus.

And the answer was “Give it to rich people, because they’re the ones who create jobs.”

We all know that that didn’t work. We gave massive tax cuts to the richest people in this country, and what that led to was a decade of McMansions and Hummers, the lowest investment growth in the post-World War II period, and the lowest growth in employment that we’ve seen in any economic recovery.

That was Heather Boushey of the Center for American Progress.

Today on the podcast, the Demand Side prescription, what it will take to get us to recant the recession call, some notes on the independence of the Fed from Simon Johnson, more audio from oil insiders on the bubble, and a few mixed data messages. Like when you lose 8.4 million jobs, the biggest group of which paid over $19, and you get back fewer than 1.3 million, the greatest number of which pay under $12.91, is it evidence of recovery, or further evidence of deterioration?

The Demand Side Prescription

It would be easy to forget what the answer from the Demand Side is, since it has been relegated to a dustbin in the current fervor over non-issues.

One, reduce unemployment by hiring people directly. A self-financing, zero-cost employment program can be found in energy retrofitting, where the labor and materials get paid back in seven to ten years by the savings in energy costs. Zero net cost activities in health care, education and infrastructure maintenance also abound. But notice, GDP is not affected if there is zero cost. High cost health care, plenty of security services, locking people up, big ticket surgeries, now there is GDP growth. Of course, if we really wanted to produce stability and security, we would initiate single-payer health care. In one step it would end the funding problem for Medicare, eliminate the biggest cause of financial anxiety in households, and free up substantial resources from paper shuffling to be used in service delivery.

We digress. The point is, there are plenty of useful things for people to do, from infrastructure to education to health care to public safety. This produces immediate economic stability by adding another strut under the floor of demand.

Two, cut the enormous burden of private debt by reducing mortgage debt. Either by our favorite, the principle write-down through negotiation, or by enlightened bankruptcy proceedings. Contrary to the method of shoveling money to private lenders, this can be done by not shoveling money anywhere, just stopping the favoritism to the lenders. Force the two sides in this private contract to the table. Reducing debt immediately produces stability and growth by increasing financial security in households and clearing the system for a healthy restart to housing.

Three, increase government revenues by taxing the wealthy, taxing financial transactions, and taxing dirty energy. There is no economic reason to exalt and coddle the rich. The post-war experience is ample evidence that income equality is conducive to economic vitality, not income disparity. Casino capitalism is unstable and inefficient. Taxing transactions will reduce that. If Wall Street moves to Shanghai or London or Bern or Frankfurt, at least they will be farther from the American taxpayer. Dirty energy is subsidized by the unwillingness to force producers and consumers to bear the cost of their activity. Market capitalism is absurd as an economic system if costs are not included in the market price.

Public deficits and debt are not important in and of themselves. As Heather Boushey commented at the top of today’s podcast, we have lost that argument already. But tax policy can get our moral and social priorities pointing upward instead of downward.


At the same time, we have to stop running our economy for the benefit of the financial system. A profitable financial system needs to be the by-product of a profitable real economy. It will never be the cause. Finance is a tool of growth. We make a fundamental and tragic mistake when we put the cart before the horse. When we get demand going and get investment in needed public goods going by way of the public sector, we will have a healthy economy, not before.

So. That is the Demand Side prescription. Rebuild America by rebuilding America and avoiding environmental collapse. Or keep the high-flyers and entrenched interests in charge so they can party until the coach goes off the cliff.


Now a note from Simon Johnson on the situation at our quote independent unquote Fed.

Bankers traditionally dominate the boards of regional Feds. We can argue about whether this is a problem for most of them, but for the New York Fed the predominance of big Wall Street institutions has become a major concern.

At the bottom of the Web page listing its current board members, you can review who belonged to the board every year from 2000 to 2008. Note the presence of influential bankers in the past such as Richard Fuld (Lehman), Stephen Friedman (Goldman) and Sanford Weill (Citigroup). Their firm hand helped guide the New York Fed into the crisis of 2007-8.

The Dodd-Frank legislation reduced the power of big banks slightly in this context, so that the president of the New York Fed is no longer picked by Wall Street’s board representatives (as was Timothy F. Geithner, who was president of the New York Fed until being named Treasury secretary, and William Dudley, the current president and former Goldman Sachs executive).
But the current board of the New York Fed still includes Jamie Dimon, the head of JPMorgan Chase and an outspoken voice for allowing banks to operate with less capital by paying out dividends.

In fact, Mr. Dimon has a theory of “excess capital” in banks that is beyond bizarre – asserting that banks (or perhaps any companies) with strong equity financing will do “dumb things.” This is completely at odds with reality in the American economy, where many fast-growing and ultimately successful companies are financed entirely with equity.

If the New York Fed’s top thinkers have convincing reasons for not wanting to increase capital in our largest banks – if, for example, they agree with Mr. Dimon – they should come out and discuss this in public (and some evidence to support their thinking would be nice).

That’s from Simon Johnson, former chief economist at the IMF, for whatever credibility that provides. Author of 13 Bankers and predictor of future problems in the banking sector.

Indeed, the Fed is not independent, but captured by its constituent private banks. The presence of non-regulator Alan Greenspan for 16 years and now Bail-out Ben Bernanke, whose academic work recommended him to the position. His analysis was that not bailing out the bad practices of banks is what precipitated the Great Depression. Similarly, his prescription for the recovery is ever lower interest rates. We’re not sure on how he stands with regard to Greenspan’s notorious one percent rate that is widely construed as having contributed materially to the housing bubble. Oh, I guess we are sure, Bernanke prefers zero. Add MORE debt to a private debt problem.


As to predictions, good jobs numbers … well, not as bad job numbers … cause us to reflect on what would it take for us to abandon our Recession call?

For many months, now going on twenty –one, Demand Side has held to his contention that we are not in recovery, but that the Great Recession continues. We are bouncing along the bottom, not recovering.

With the official unemployment rate now below 9.0 percent, and reports of great strength in manufacturing and the other happy talk, it is perhaps time for us to define what it will take for us to abandon our recession call.

If we could get back to pre-recession employment numbers, that is all it would take. Just employ the same percentage of the population as in the month before the recession. Wait. We’ll do better. We won’t require there to be an increase in jobs to match the increase of the population. And we don’t even need to get up to the actual number. What if we recover only seventy-five percent of the jobs lost? Then you have our promise, we will fold our tents and move on, admitting we are no longer in recession.

Let’s see, at say 200,000 new jobs per month, the figure that made the banner headlines this past week. We will be issuing our retraction, let’s see, twenty-five months from now. That would be April 2013. Five and a half years after the onset. And that’s only ninety percent of employment with no accounting for new entrants into the job market. How laughable is that?

On the down side of recent numbers, BEA reduced its call on Q4 2010 GDP growth from 3.17% to 2.79%, (Inside the BEA’s New Lower Estimate of 4Q-2010 GDP Growth) a drop of about .4% and only a statistically insignificant 0.24% higher than their growth estimate for 3Q-2010 (2.55%). And a recent survey by the National Employment Law Project shows that most of the new jobs created since February 2010 (about 1.26 million) pay significantly lower wages than the jobs lost (8.4 million) between January 2008 and February 2010.(new data brief)

While the biggest losses were higher-wage jobs paying an average of $19.05 to $31.40 an hour, the biggest gains have been lower-wage jobs paying an average of $9.03 to $12.91 an hour.
And we note that the Congressional Budget Office estimates that 70 percent of the stimulus money had been spent by the end of 2010, and the effect on employment is waning. (The Downside of the 2009 Stimulus)
We give the remaining spending higher multiplier effects than the tax cuts and candy for business that have been spent, however. Still, it is waning. The triple witching hour of expiring stimulus, expiring QE2 and big cuts in state and local budgets is coming about the middle of the year.

Of course, long before we have to account for our call on the recession, we will have had to account for why our negative growth call for the second half of the year didn’t come through. We will not have to backtrack on our new commodity bubble call, though. It is the flavor of the month in the financial media. At least commodity PRICES are.


We know that at this time of the year refineries will shut down to retool and load up on different feed stocks to that they can focus on making summer-grade gasoline. So that phenomenon is well known. And where we stand there, crude oil demand falls this time of year, because refineries aren’t boiling as much oil, and we tend to cannibalize our existing product as we prepare. If you look at crude oil supplies, we are well above normal. Gasoline supplies, we are well above normal. Diesel fuel supplies, we are well above normal. So we certainly have the wherewithal to withstand the maintenance season, which only lasts until late March, early April. Again, that’s certainty. We’re weathering that well. But what we’re also weathering is a firestorm of money coming in from Wall Street.

As of a week ago yesterday, Tuesday, speculators on the Nymex were long net 206 million barrels of oil. Think about that. 206 million barrels of oil. The capacity at the Nymex delivery hub at Cushing OK is only 38, maybe 40 million barrels. So speculators own five and a half times the amount of oil that you can even deliver into Cushing OK right now.

That just gives you perspective on how bullish they are. So even if they wanted to store that oil in Cushing, they couldn’t. Again, because, they own five and a half times the amount of oil sitting in there.


Well, in terms of physical oil supplies, we’re actually in a pretty good position here. The global stocks are very ample. Supplies are pretty comfortable around the world, if you look at the physical supply situation. What has been driving the prices is this anticipation that something, that there will be some kind of a cutoff, there will be some kind of a loss. One of the things that has happened in the oil market is that it has become a much more, what I would call “financialized” market. Instead of just having oil companies and oil traders and people involved in the physical business, you also have a lot of investors that are very active in this sector now.

It is seen as an alternative investment that can be very attractive to people. And so when you have that kind of development, you get people trading on the expectations of what’s going to happen, and where that investment is going to go. It becomes more, say, like the stock market, or something like that. A lot of that anticipation is what is driving the price as much as any immediate physical problem.

In order, that was Stephen Shork of the Shork Report and Tom Wallin, editor of Petroleum Intelligence Weekly.

And finally, we will be reviving our Demand Side relay presentations beginning late this week, with relays from the Economists for Peace and Security Symposium held late last year. On the first card are Heather Boushey (boo SHAY) and Thomas Palley (PAIL-ey).

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