The inequality that matters

Trichet Calls for `Maximum’ Flexibility of Region’s Rescue Fund – European Central Bank President Jean-Claude Trichet said European governments should consider extending and broadening the region’s bailout fund, stepping up pressure on leaders to fight the fiscal crisis.  “We’re calling for maximum flexibility and maximum capacity, quantitatively and qualitatively,” Trichet told reporters at an event in Frankfurt late yesterday, responding to a question whether the European Financial Stability Facility should be able to buy government bonds.  The ECB is pushing governments to shoulder more of the burden in tackling the fiscal crisis after Ireland was forced last month to seek a bailout, sparking concern that contagion will spread through the euro region. The ECB last week bought the most sovereign debt since June and Spanish bonds today fell for a seventh day as it paid more in a debt sale.

The SPECTRE of Inequality – Krugman – I’m still a couch potato, box of tissues close at hand. So I’m watching stuff my Tivo thought I might want to see, which happened to include the old Bond film Thunderball. And I found myself thinking about inequality. You see, there’s a scene early in the movie when the minions of SPECTRE, the evil conspiracy, are shown reporting on their profits from dastardly activities. And the numbers are … ludicrously small. I know that’s a running gag in Austin Powers, But it’s true, it’s true!  Even the big one — demanding a ransom for two stolen nuclear warheads — is 100 million pounds, $280 million. Adjusted for inflation, that’s about $2 billion — or one-eighth of the Goldman Sachs bonus pool. It’s just an indicator of how huge top incomes have become that what were once viewed as impressive numbers, the kind of thing only arch-villains might demand, now look trivial. Or maybe the other way to look at it is that we have a lot more arch-villains around than we used to.
Three Good Economic Reports – Americans were greeted today by three good economic reports:
  • Retail sales rose for the fifth consecutive month in November, and the October and September figures were revised up sharply. The 0.8 percent increase in November over October topped forecasts, and the 2.8 percent rise in department store sales was the fastest growth in two years.
  • The National Federal of Independent Business’s small business optimism index also rose for the fourth consecutive month, giving hope that the nation’s small companies may start hiring again.
  • The producer price index also increased more than expected, dampening concerns about deflation.

Another report, on business inventories, came in somewhat below expectations but is unlikely to have much effect on overall gross domestic product. In fact, in light of recent upward revisions to inventories and retail spending, the output outlook is looking somewhat better:

Fed Statement Following December Meeting – The following is the full Fed statement following the December meeting:
• The target range for the federal funds rate remains at 0 to 1/4 percent
• The policy of reinvestment of principal payments remains
• no change to the plan to purchase an additional $600 billion of longer-term Treasury securities by the end of June 2011.
• the key sentence "likely to warrant exceptionally low levels for the federal funds rate for an extended period" remains

The Fed Leaves the Target Rate and QEII Unchanged – The committee in charge of monetary policy, the FOMC, met today and decided to leave the target interest rate unchanged. The committee also decided to continue with its plans to implement QEII, a plan that attempts to stimulate the economy through the purchase of $75 billion in Treasury securities per month until a target level of $600 billion is attained. The continuation of present policy is not a surprise at all, committee members have been signaling in recent speeches that nothing would change, so the real question is when the Fed is likely to alter course. As the Fed notes, presently the recovery is too weak to bring down unemployment, long-term inflation expectations are stable, and actual inflation is trending downward (it’s presently below the Fed’s target). So long as those conditions persist — high unemployment, stable inflation expectations, and actual inflation below target — the Fed will not change its policy. How long will the conditions persist? Nothing will change until the Fed sees a couple of quarters of solid data showing that unemployment is falling and inflation is becoming a problem, so the policy is likely to stay in place for at least the next two Fed meetings.

Is coal a backstop fuel for oil? – Usually when I draw the standard price path graph–say that 3 times fast–for the oil/renewable transition, I don’t think to put coal as a transition fuel between oil and renewables. Maybe I should. Coal may be the last thing on earth that many investors would consider putting a dime into. But the world is on course to transition back to coal. You may wish it wasn’t the case, but it’s inevitable. Coal isn’t as clean of a fuel source as other options – but there is room for clean coal technologies to improve, and I believe they will.

Upbeat data, downbeat Fed – THEY say a central banker is someone who lies awake worrying that someone, somewhere, might be happy. That seems to be what the Federal Reserve is trying to prove by raining on a parade of upbeat economic and market developments with a morose economic assessment. “The economic recovery is continuing”, it allowed, a mite more upbeat than last month’s description of the recovery as “slow”. That’s it for the good news. The rest of the statement repeats last month’s litany of negatives: household spending is constrained by powerful headwinds, employers are reluctant to hire, and expected inflation is edging lower. The statement seems a little out of place amidst the accumulation of upbeat economic news, and the tax deal announced last week which eliminates the single greatest risk to the outlook, namely, an inadvertent tightening of fiscal policy. Just today a report of strong retail sales led to a round of forecast upgrades. Retail sales rose 0.8% in November from October, and by 1.2% excluding autos. Both were stronger than expected (though some of the rise came from higher petrol prices), and confirm what we suspected from anecdotal reports: the holiday shopping season is off to an auspicious start. Discretionary categories like apparel, sports/books/music, and general merchandise were all strong. Key September and October components were also revised up. Morgan Stanley sees consumption rising 3.5% annualised in the current quarter, and overall GDP up 4.4%. JPMorgan raised its fourth quarter number to 3.5% from 2.5%, and Macroeconomic Advisers, with one of the lowest estimates on the street, raised its projection to 3.1% from 2.7%. Even before the additional stimulus in the tax deal is felt, this tells us that the economy had more underlying momentum than we realised. This has the bond market running scared: the 10-year yield is up 11 basis points today to 3.38%.

The 99ers Are Coming – As Michael Powell wrote last week, President Obama’s compromise with Republicans may keep the existing 99-week structure of unemployment in place, but it does nothing to help those Americans who are, or will become, unemployed beyond 99 weeks. Ninety-nine weeks is just shy of two years. Given that the recession began exactly three years ago, and that some people live in states that don’t even qualify for all 99 weeks of unemployment, it should be no surprise that some Americans (like this television producer), have already exhausted their benefits. Many more are coming. As the Calculated Risk blog observes, the peak of job losses was in early 2009.Two years from early 2009 is early 2011. With job creation still sluggish and the long-term unemployed most likely becoming  less attractive candidates to employers, perhaps we should start preparing for a flood of jobless workers newly without safety nets.
Q3 2010: Mortgage Equity Withdrawal – The following data is calculated from the Fed’s Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity (hence the name "MEW", but there is little MEW right now!), normal principal payments and debt cancellation. For Q3 2010, the Net Equity Extraction was minus $86 billion, or a negative 3.0% of Disposable Personal Income (DPI). This is not seasonally adjusted. This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.  The Fed’s Flow of Funds report showed that the amount of mortgage debt outstanding declined sharply in Q3, and this was probably mostly because of debt cancellation per foreclosure and short sales, and some from modifications, as opposed to homeowners paying down their mortgages. .
Two Reasons India Will Overtake China By 2025 – Interesting article here making big predictions about two of the BRIC economies, India and China. One of the major issues China faces (along with much of the developed world) is a declining birth-rate and an aging society and the strain this situation will put on the economy in terms of productivity and government finances. On the other hand, India has a young and vibrant workforce “giving India a very important advantage over China as it has a much healthier dependency ratio.” See graphic below.  Furthermore, the “IT services industry in India is thriving on their cheap labour costs, educated and English-speaking workforce, and their entrepreneurial bosses.” It seems companies from developed countries are tapping into this resource and according to this report, India was “ranked third place in global foreign direct investments in 2009 and will continue to remain among the top five attractive destinations for international investors during 2010-11.” With this in mind, perhaps such a bold prediction is not so far from the truth!

Peak Oil, Then Coal – When will production of oil and coal peak?  After the peak, production will decline because supplies are being depleted and no new sources are to be found.  Peak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline.  Optimistic estimations of peak production forecast the global decline will begin by 2020 or later, and assume major investments in alternatives will occur before a crisis, without requiring major changes in the lifestyle of heavily oil-consuming nations. These models show the price of oil at first escalating and then retreating as other types of fuel and energy sources are used. Pessimistic predictions of future oil production operate on the thesis that either the peak has already occurred, that oil production is on the cusp of the peak, or that it will occur shortly.  The most recent edition of the respected science journal Nature contemplates the end of cheap coal with an analysis of the decline of global coal supplies by Post Carbon Institute Fellows David Fridley and Richard Heinberg.  The estimates for global peak coal production vary wildly. Many coal associations suggest the peak could occur in 200 years or more, while scholarly estimates predict the peak to occur as early as 2010. Research in 2009 by the University of Newcastle in Australia concluded that global coal production could peak sometime between 2010 and 2048.

Europe should rescue banks before states (George Soros) The architects of the euro knew that it was incomplete when they designed it. The currency had a common central bank but no common treasury – unavoidable given that the Maastricht treaty was meant to bring about monetary union without political union. The authorities were confident, however, that if and when the euro ran into a crisis they would be able to overcome it. After all, that is how the European Union was created, taking one step at a time, knowing full well that additional steps would be required. With hindsight, however, one can identify other deficiencies in the euro of which its architects were unaware. A currency supposed to bring convergence has produced divergences instead. That is because the founders did not realise that imbalances may emerge not only in the public sphere but also in the private sector. That lack of a common treasury first became apparent as a problem after the bankruptcy of Lehman Brothers on October 15 2008, when the threat of a systemic collapse forced governments to guarantee that no other systemically important financial institution would be allowed to fail.

The inequality that matters – Here is a new and longish piece by me, on the inequality debates, in The American Interest.  It’s about which kinds of inequality matter and which do not.  Most of them do not: A neglected observation, too, is that envy is usually local. At least in the United States, most economic resentment is not directed toward billionaires or high-roller financiers—not even corrupt ones. It’s directed at the guy down the hall who got a bigger raise. It’s directed at the husband of your wife’s sister, because the brand of beer he stocks costs $3 a case more than yours, and so on. Furthermore there is a natural rising inequality in a world of strivers and slackers.  But some forms of inequality are more dramatic and are associated with unstable incentives: If we are looking for objectionable problems in the top 1 percent of income earners, much of it boils down to finance and activities related to financial markets…The first factor driving high returns is sometimes called by practitioners “going short on volatility.” Sometimes it is called “negative skewness.” In plain English, this means that some investors opt for a strategy of betting against big, unexpected moves in market prices.
Inequality and crisis – "DOES economic inequality cause crises?" asks economist Ed Glaeser at the New York Times‘ Economix blog. Mr Glaeser surveys the literature as it relates to a handful of different inequality-crisis mechanisms and he concludes that inequality was likely "only a small part of the story", at least during the most recent crisis. But Mr Glaeser neglects one potential causational avenue in his analysis. Happily, that relationship is explored in a thoughtful piece in the American Interest magazine by economist Tyler Cowen. Mr Cowen begins his essay by describing the ways in which inequality is not a problematic feature of American society. Much of the recent rise in American inequality can be explained, he writes, by demographic shifts or education, as well as the changing return to high achievement thanks to improvements in communications technologies. But one aspect of rising inequality is more pernicious: If we are looking for objectionable problems in the top 1 percent of income earners, much of it boils down to finance and activities related to financial markets

Riots break out in Rome –Protesters set fire to cars, threw paint and smoke bombs at the Italian parliament and clashed with riot police today in Rome’s worst violence for years after prime minister Silvio Berlusconi survived a confidence vote. Via del Corso, the main street stretching through the historic centre, near Mr Berlusconi’s office and home to some of the capital’s smartest shops, was a battle scene of smoke, teargas and bloodied faces. Smoke rose from the Pincio Hill above the famed Spanish Steps as protesters set fire to private cars, overturned heavy trash bins and prevented fire crews from putting out the flames. At least 50 people were injured, including several policemen, and more than 40 protesters were detained, police said. . The protesters were mostly students but also included workers and immigrants. Television pictures showed dozens of people throwing stones at police, with officers in riot gear beating the protesters back and chasing them among narrow cobblestoned alleys.

Economics by Invitation: Why are government bond yields rising? – The Economist – This week, government bond yields have risen around the world, on the debt of troubled European countries but also for relative safe havens like Germany and the US. Why have yields risen? Are different factors at work in different countries? Will there be additional sovereign debt crises in 2011? And will an American crisis be among them?Guest contributions: 5

Columbia Eminent Domain Case Will Not Be Heard – So the Supreme Court will not hear the eminent domain case involving Columbia University, which finagled the state into seizing local land and transferring it to the school.  That means that the landowners who don’t want to sell have no recourse.  Worse, it reinforces the precedent of Kelo–that the government can take land and transfer it to private actors even when there’s only a trivial and dubious public gain involved.  In the case of Columbia, there’s a tangible public loss–they’re going to tear down one of the few gas stations in Manhattan in order to give Columbia’s privileged students more space.  And what public benefit does the city get?  We’re talking about taking taxpaying private properties and transferring them to a non-profit which will not pay taxes, and will turn a large swathe of Manhattan into a quasi-compound for some of the wealthiest and most privileged people in the city. Which is, of course, the most sick-making aspect.  I am not against eminent domain for public uses like hospitals or railroads.  But by no stretch of the imagination could Columbia University be called a public accommodation.  One’s gut and one’s social conscience rebel at the seizure of private property which is taken precisely because it serves, or is owned by, poorer people.  One’s gut and one’s social conscience positively riot at the thought of taking this seized land and handing it over to wealthy private institution that almost exclusively serves the affluent class.
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