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Going Nowhere Fast

April 27, 2011

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Jeff Fisher:

My presumption is that capital markets are inherently unkind, don’t actually care about things like fairness, are concerned about discounted cash flows, and so the beneficiary of productivity is the corporate shareholder unless society intervenes socially some other way. Does that provide cruelness to some people? Yes. But capital markets have never been kind. There is nothing new about this.

I am not expecting suddenly what I call the great humuliator or the spiritual function behind capital markets to turn into a benevolent soul.

That was billionaire Jeff Fisher talking to Bloomberg, answering the question of why we don’t find the public’s largesse to the private capital markets reflected in an echoing willingness to finance real investment or mitigate the huge employment losses. The answer is capital moves mechanically to its own advantage. If managers don’t obey, there are soon new managers.

Later on today’s podcast we have Christina Romer, Idiot of the Week, but first, No matter how much hot air emanates from Wall Street and Washington, it still doesn’t fill the sails of the real economy.
As Calculated Risk said recently

There are currently 130.738 million payroll jobs in the U.S. (as of March 2011). There were 130.781 million payroll jobs in January 2000. So that is over eleven years with no increase in total payroll jobs.  
And the median household income in constant dollars was $49,777 in 2009. That is barely above the $49,309 in 1997, and below the $51,100 in 1998.

Just a reminder that many Americans have been struggling for a decade or more. The aughts were a lost decade for most Americans.  

And I’d like to think every U.S. policymaker wakes up every morning and reminds themselves of the following:   

There are currently 7.25 million fewer payroll jobs than before the recession started in 2007, with 13.5 million Americans currently unemployed. Another 8.4 million are working part time for economic reasons, and about 4 million more workers have left the labor force. Of those unemployed, 6.1 million have been unemployed for six months or more.

Ted Kavadas presented ten troubling charts recently at Seeking Alpha.

What are they?

Housing starts tanking from 2007 and now scraping the baseline. Any help from the Fed’s low interest rates is off the bottom of the chart.


The Federal Deficit hit 1.4 trillion before its little bounce, as the taxpayer absorbed the financial sector collapse.


Federal Net Outlays troubles Mr. Kavadas, but the non-indexed chart is difficult to interpret.


State & Local Personal Income Tax Receipts , percent change year-over-year shows no recovery and hides the absence of any federal help.


Total Loans and Leases of Commercial Banks, percent change, uh-oh, credit is contracting.


Bank Credit – All Commercial Banks . Confirm that, credit is contracting.


M1 Money Multiplier. This is a silly chart. At best it shows a deleveraging quotient.


Median Duration of Unemployment, twice as high as any other period in the post World War II era.


Calculated Risk’s chart of employment recessions in the postwar, showing the current downturn, before it is over, is going to surpass all other downturns combined in terms of total months of work lost. Just eyeballing it, I would say we are about halfway there.


And finally, a chart that depicts the V-shaped bull. This particular one is the Chicago Fed National Activity Index which depicts broad-based economic activity. It went in a hole and came back up to zero, but on the left side, you see it is percentage change year-over-year, so a level as opposed to change description would be very much like the employment chart, Down to the bottom and now bouncing along.



We certainly don’t see Christina Romer in the same category as, say, a John Taylor or Greg Mankiw or Glenn Hubbard, but we are featuring her on Idiot of the Week. She is, and her economics are, as dangerous to our future as any of the market fundamentalist crackpots who still get a sober hearing. The problem is much as it is with the deficit debate.
Barack Obama was recently fond of saying, don’t make the perfect the enemy of the good. Obama and his crew have made the inadequate the enemy of the practical and useful by characterizing that inadequate as good. Like don’t make the car the enemy of the b icycle, or maybe it should be don’t make the bicycle the enemy of the unicycle. Don’t make the highway the enemy of the dirt road. Don’t make the subway the enemy of the oxcart. We could spend a lot of time looking for the most apt alnalogy.
Obama is helped in this regard by the screaming Republican Right which has staked out a position beyond the boundaries of the bizarre. No, Obama’s position is not that foolhardy, but it is plenty foolhardy. The oven the enemy of the open fire in the floor. And it is all the more dangerous as poison for the fact that it doesn’t stink so much.
In that theater, the premise is that best case for the American people lies somewhere in between the extremes of Democrat and Republican. These extremes are freezing and minus ten. What we need is growing weather. And the American population seems to get it. According to the most recent Washington Post-ABC poll, 78 percent of Americans oppose cutting spending on Medicare as a way to reduce the debt, and 72 percent support raising taxes on the rich – including 68 percent of Independents and 54 percent of Republicans.

As Robert Kuttner said recently,

“if Americans also knew two-thirds of [Republican Paul] Ryan’s budget cuts come from programs serving lower and moderate-income Americans and over 70 percent of the savings fund tax cuts for the rich – meaning it’s really just a giant transfer from the less advantaged to the super advantaged without much deficit reduction at all – far more would be against it.

And if people knew that the Ryan plan would channel hundreds of billions of their Medicare dollars into the pockets of private for-profit heath insurers, almost everyone would be against it.”

Obama may have gotten leverage on the Republicans for 2012, but the economy needs more than a Democratic victory, it needs some New Deal policy.

But that is another discussion, here we want to talk with Christina Romer, professor of economics at UC Berkeley, former chair of Obama’s Council of Economic Advisers. She begins by counseling against accepting a new normal of high unemployment.

I certainly don’t think anyone should accept that. One of the key facts about any economy is that even in good times the unemployment rate isn’t zero. There is a certain amount of unemployment that comes because you have to match people with jobs. What people said, I think most economists thought, before the current recession, that number for the United States was about 5 percent.
So the whole question is, “Has that normal level of unemployment risen to something like 8 or even 9 percent. And I certainly don’t think so. It would be devastating if it had, because that normal unemployment rate is where you tend to come to rest over the long haul. And I can’t think of anything worse for this economy or for Americans if we came to rest at 8 or 9 percent unemployment.


The normal rate of unemployment is full employment. There is no reason to accept less. The fact that we have accepted underemployment, mis-employment, mal-employment and unemployment for the past thirty years does not mean it is any way to run an economy. Demand Side has railed against the so-called “normal rate” for a long time. What does it mean to be “normal.” It means nothing about the labor market, it means that inflation is not happening to a degree that alarms the oligarchs. And at present it doesn’t even mean that. Since it is patently apparent that no pressure on inflation is coming from the labor side, it means that unemployment is where it is and that is okay with the powers that be.

Christina Romer:
One of the things you hear, for example, is that we’ve had some changes in our industrial structure, that construction and finance are probably going to be smaller sectors of the economy than they were before the crisis. So some have said that just that readjustment of changing construction workers and finance workers into other industries can make the normal unemployment rate higher. But one of the things I do in the column is a back of the envelope calculation to say that right now there are about 1.3 million workers that used to be in those troubled sectors. If under the very unrealistic assumption that they never found another job, were permanently unemployment, What would that do to the unemployment rate?

That would raise the normal unemployment by about a percentage point. So to say that kind of structural change explains a three or more percentage point rise in the natural rate, I think, just doesn’t make sense.
One of the things that I actually talked about in the column is the long-run shrinkage of manufacturing as a share of employment is actually an argument against the notion that that kind of structural change raises the normal unemployment rate.

Because that’s been going on for decades. It certainly was going on all through the 1990s, and yet the 1990s were a time when normal unemployment was certainly at 5 percent. Some people think it might have even been lower than that toward the end of the 1990s. So normally an economy can adapt to changes in industrial structure. That’s a hallmark of a healthy economy is that industries die and other industries grow and workers have the flexibility to move to those new industries.

What I argue is that where we are today is that we have a lot of cyclical unemployment. We’re still a very sick economy. Jobs aren’t being created anywhere. That’s why it’s hard, regardless of what industry you used to be in, if you’re unemployed today, it’s hard to get reabsorbed into the labor market. We just aren’t creating jobs.

Certainly if you believe as I do that most of what we’re seeing today is still cyclical unemployment, then that is caused by inadequate demand. It means consumers aren’t buying enough, firms aren’t investing enough, so there isn’t demand for products, so there isn’t demand for workers. So the remedy for that are programs that stimulate demand. Everything from more aggressive quantitative easing by the Federal Reserve to additional fiscal actions like more public investment, which the president called for in his State of the Union. Or maybe a payroll tax cut on the employer side of the Social Security tax as a way a way of encouraging firms to be hiring more workers.


Have we not tried enough of the Helicopter Ben approach. If it was going to work, would it not have worked by now. Of course, you need to reduce unemployment by hiring people directly doing things that need to be done. $30 billion a year buys a million jobs. Far more efficient than hundreds of billions in tax giveaways and inefficient bonuses to corporations and the rich. You get the people on the payroll, paying taxes, doing things we need done. Business gets what it needs most – customers!

Christina Romer

One of the things that I feel so strongly about is, even if I’m wrong, and more of the unemployment today is structural, or normal, than I think the evidence suggests, that doesn’t mean you say, “Ah, it’s not our problem, let’s just live with it. It just means the kinds of solutions that you’re looking for would be different. You’d have to work much more on, How do you help workers, you know, match up with the available jobs? How do you help workers move if the jobs aren’t where they are? It puts a real premium on retraining as a way of dealing the unemployment. You never want to say the unemployment is high, so we shouldn’t do anything about it. What this debate is over, is it the normal unemployment or is it cyclical unemployment, matters to what the remedies you suggest would be.

Retraining for what, barista? Beer truck driver? Medical coder? Retraining is the last vestige of the capitalist apologist. It does not put anybody to work except the retrainer. Infrastructure is falling apart, education is disintegrating – which reminds me that soon we are going to be ruled by the rich because the rich will be the only ones who can afford to get a decent education. We already have lost the meritocracy that arose with the GI Bill. It is only going to get worse as education is rationed more and more by price.

Christina Romer, Idiot of the Week


And now we have depressed ourselves. The Demand Side forecast is for negative growth by the end of the year. We called the commodity bubble back in November. Even consensus Q1 2011 GDP is now down to 1.8 % (advance release tomorrow Thursday).

Our puzzle is why anybody should expect it to get better. It’s like they’re looking at the sky hoping for a change in the weather. It is not rocket science. Outcomes derive directly from the demand profiles. No government spending. Cutbacks in states and localities. Consumers stressed by high debt and the commodity bubble. Confidence shaken by attacks on the social safety net by the Republicans. No prospect that policy-makers will do anything about anything. In our opinion, more cheap chips to the speculators will only raise the speculation premium. Marginal cash outlays to consumers will cause them to improve their balance sheets before they start buying that next home. People with jobs have a robust profile of consumption. A few more dollars on the margin of the average consumer does not raise their profile very much.

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