It's Still The Economy, Stupid

Friday, October 24, 2003  

Money supply growth remains flat

Broad money supply continues to stagnate, with seasonally adjusted M2 falling $5.2 billion and adjusted M3 falling $14.2 billion in the week ending 10/13. Not seasonally adjusted, M2 fel $4.4 billion and M3 increased $16.8 billion for the week. Since July 7th, adjusted M2 has decreased $7.6 billion and adjusted M3 has decreased $101.4 billion. Unadjusted, M2 has fallen $23.6 billion and M3 has fallen $111.6 billion in the past fourteen weeks.

The result is being felt in bank lending activity. Total bank lending has fallen $28.5 billion, seasonally adjusted, since June 2003. The bulk of the drop has been in holdings of Treasury and agency securities, which have declined nearly 10%, or $98.9 billion. Real estate loans have increased $77 billion or around 6% (around 20+% annualized), which explains why the housing bubble has gone on despite mortgage rates rising over 1%.

It is interesting to note that only about one-seventh of total bank lending is "commercial and industrial" loans, the kind of investments that most mainstream economists prefer because they result in more future productive capacity. About 70% is in real estate and asset-backed securities that by definition earn zero return, as they aren't actually "producing" anything but rather trading assets that are already produced.

This is what our lending system has evolved into. Banks will not loan you money for a car or house, instead Honda lends you the money and the bank buys a security issued by Honda backed by your car loan. Only a tiny amount is going to General Motors or Ford to produce more cars. If Honda invests in the U.S., the return on that investment goes to Japan. The investment that Americans make is what they do with the wages Honda pays them. Most people just spend it, another "investment" that earns zero by definition. It's no wonder interest rates in the U.S. are approaching zero. You have to cut them to that level to make credit markets centered around speculation and consumption profitable.

posted by Teddy | 11:21 AM |

Thursday, October 23, 2003  

Wampum is 'the man'
Analyzing the unemployment claims, that is. I'm just going to send you over there from now on.

posted by Teddy | 10:32 AM |


Intel Dump has an engaging post on Rumsfeld's memo and the metrics of success.

As Sec. Rumsfeld points out, the problem is this: If you choose the wrong metrics, your execution will invariably orient on those metrics and produce unintended results.

But unfortunately it ends with this conclusion:

In my book, the only metric that matters in America's war on terror is this one: # of terrorist attacks on U.S. persons or interests at home and abroad.

The closer we get that measurement to zero, the closer we get to victory. Every other measurement of success and every other strategy ought to feed up to this aggregate metric. I think the metrics put forward recently by the White House and Pentagon (e.g. # of schools built in Iraq) are irrelevant to this all-important metric of success. At best, you can make an attenuated argument that winning hearts and minds of Iraqis with schools will help to reduce the recruitment pool for international jihad, but that's a really big stretch. There are other aggregate and granular metrics which do matter, such as # of terrorists in U.S. custody, money frozen through anti-terrorism financial investigations, number of suspected terrorists denied entry visas, etc.

While I agree that Phil's metric is better than things like the number of schools we open, it touches to the heart of a basic economics issue: just what does this data mean?

With political spin, definition is key. From how Bush defined "possession of WMDs" to "intent to possess WMDs", or when Clinton actually asked to specify the definition of "is". Do we define a terrorist attack as "a major event", like the U.S.S. Cole, 9/11 or the bombing of the marine barracks in Lebanon? If so, we need to be prepared to see a data series that is zero for nearly all observations (shall we say monthly), and has shown no progress over the entire series, no matter how far back you go (Pearl Harbor a terror attack? The Maine? Fort Sumter?). If we define it like John Ashcroft did in Afghanistan, where those that fought back were terrorists rather than opposition forces, well we're losing that battle fairly convincingly. Plus, if we use number of dollars seized, number of terrorists arrested, number of suspected terrorists denied visas, why don't we just arrest everybody, take their money, declare victory and go home?

Unfortunately this war isn't about metrics, it's about moral judgement. Should the U.S. be allowed to attack a nation unilaterally that poses it no threat in the pursuit of terror? Should we be allowed to detain people indefinitely on "terrorism" charges without the due process of law in the pursuit of terror? Should we spend billions of dollars fighting an enemy that seems just as ubiquitous today as 20 years ago? Can giving corporations convicted of massive fraud no-bid contracts in Iraq be seen as a positive step in the war on terror? Is lying to the American people allowed and then how much, and how much can we know about our methods and motives in this war?

These are questions the Administrations side doesn't want us to answer, because they KNOW the answers and it's not what they want to hear. So instead they change the subject and talk about metrics. Their metrics, of course. Not the number of U.S. soldiers killed or Iraqi civilians dead and maimed, but metrics that have little to do with our situation in Iraq. Terrorists that can strike U.S. soil are not in Iraq, they would be in the U.S. A detained suspected terrorist, if s/he really was going to do something, would no longer be able to commit a terrorist act. It's the non-detained ones we have to worry about.

In Vietnam they had metrics, the body count. By that standard My Lai was a roaring success. By that standard, grunts would change five dead to 50 just so their commanders could say they were making more progress than other commanders. Neither of these metrics won the war, or ever could. If anything, Rumsfeld's memo should show these metrics are even harder to define now (but what's harder than hopeless?), and without hope of knowing when we've "succeeded" we should at least keep our troops from getting killed and maimed on a daily basis.

All the important moral questions were asked before the war. The people against the war were not against it because we couldn't win, they were against it because it was an illegal act of aggression by the U.S., because Iraq had very little to do with 9/11 terrorism, because there was almost no hope of instituting a non-Hussein government that Iraq and the U.S. would accept, because it would unite all anti-U.S. Arabs against us and horrify pro-U.S. Arabs into neutrality, because our earlier experiment in Afghanistan wasn't over and wasn't even near success, and because is was flat out morally wrong. Bringing the spectre of Saddam Hussein is not an excuse. His existence did not justify any of these actions any more than two wrongs make a right.

posted by Teddy | 10:21 AM |

Double dose of Terkel

When I get depressed about things, it's nice to be inspired by someone like Studs Terkel, who has a new book out, btw.

So anyway, I tell him I'm doing a book about people in Chicago, and he says, "Sure, I'll talk to you." As he talks to me... He came from a family where he was in fear of everything. He took his kids to the beach: Fear of drowning, it wasn't joy. And he wanted to be a man among men, but he felt like he was nothing. One day, a big shot says to him, "How about joining a patriotic group of Americans? John Birch is fighting all the Commies." "Yeah, I'll do that, they're big shots!" So he joined the John Birch Society. He talks about the Commies, how he'd rather be dead than red, and he goes on and says, "I lost a job as a guard at the county jail." "Why'd you lose the job?" "Because they say I'd fraternized with the prisoners. The prisoners are mostly black, you see." "Well, what do you mean you fraternized?" "Well, one day, a guy says 'What time is it?' One of the inmates. And I say, 'What, do you got a plane to catch or something?' and I walk away. And then I say, 'You know what? Why'd I say that? This guy's in here for 20 years.' I went back to apologize to him. And you know what? I'll tell you a secret"—this same John Birch guy—"I trust black people more than I do white people. I think they're more honest." As he talks more and more, the guy is yes and no. He could go either way, this guy. He's a mixture. I found that in doing this book, rules of thumb went out the window. People are an admixture... It's been an adventure for me, all these books. This one, of course, was the toughest, because it's the most abstract. About hope, you know? The others were about specific events: the Depression, WWII, race, working. But this... I thought it would be abstract, but it turns out it's very personal. And it's of the moment. A lot of people feel helpless about things, hopeless, "The hell with it." And here are these people I'm talking about: the prophetic minority I told you about, there in the flesh, around us, you see. It becomes a very personal book.


Well, that's what we mean by participation, you see. If they take part... Even if it's a little gathering in the neighborhood, about a neighborhood problem. You know how it spreads out. That neighborhood problem becomes a city problem, city problem a national one, national one a world one. It starts with you. So when they take part in something... This is in all the books I've had. Many people begin questioning and hopeless, like in the Vietnam War. In one of my books, there's a housewife, very devout Catholic, and she hated those kids who were protesting, but she's complaining in her neighborhood about something. The elder [Chicago Mayor Richard J.] Daley is planning an expressway through the community, and "Oh, what's going to happen to our block? Our homes are going to go!" And one day, somehow she met a young priest who was active, who said, "Why should anybody's homes go? Let's challenge the highway. Do we need another expressway here? Don't we go fast enough?" They challenged it, and a group was born, Citizens Action Program. Do you follow? It came out of a local thing, and she became a tremendous peace advocate and civil-rights advocate. She didn't start out that way, but participating in something, that's what's part of it.

And from an interview in In These Times.

Hope Dies Last (the name of my new book) is a phrase used by Jessie de la Cruz, who worked very closely with Cesar Chavez organizing the farm workers. She said that whenever times were bleak, they had a phrase, “la esperanza muere Ultima—hope dies last.” Because what is the alternative? Despair. And with despair, all that is left is the head in the oven, or about 20 sleeping pills and a couple of martinis—or in my case a dozen martinis.

Doing this blog is something, even if it's nothing. I certainly don't expect to be Atrios, or even Angry Bear. I don't expect to be right either, and I appreciate all the constructive comments and extensions of topics raised here. It's been a pivot to get me involved in the community (buying a house has helped too) and as mentioned above that is the beginning...

posted by Teddy | 8:50 AM |

Millions have lost pension benefits in the recession

More specifically, 3.3 million since 2000. This is mainly due to layoffs from companies with pensions, workers moving from companies that offer pensions to those that don't, and companies abandoning matching 401k programs.

In place of a pension, these workers are going to have to rely on Social Security or their own savings. Personally, I think a company backing out of funding a pension program is the shittiest thing they can do. It's not like workers in their 50's can go back and start over, especially when they've put in decades of service for the company. It's one thing if the company is bankrupt, but if they deliberately booked 10% pension gains through the 1990s to pad their earnings and they cry poverty now, that's a sorry excuse.

posted by Teddy | 6:49 AM |

Wednesday, October 22, 2003  

Hey, dude! Adam Smith just called you stupid

I love it when someone can use the father of modern economics to shoot down those "free market" hypocrites.

Well, here, once again, is Adam Smith, from the Wealth of Nations, on what things are like when the workers have no defense, speaking of current conditions in the Britain of his day when labor unions were effectively banned:

"What are the common wages of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour.

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer. ...

We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate. To violate this combination is everywhere a most unpopular action, and a sort of reproach to a master among his neighbours and equals. We seldom, indeed, hear of this combination, because it is the usual, and one may say, the natural state of things, which nobody ever hears of. Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy, till the moment of execution, and when the workmen yield, as they sometimes do, without resistance, though severely felt by them, they are never heard of by other people."

Oooooh! Burn!

I'm a big believer in the invisible hand as an equilibrating force, which is exactly how Adam Smith saw it. The competing forces of supply and demand drive price toward some equilibrium point. The equilibrium price is not right, moral, or the "free market" price, it's just a point the force is working toward. Impeding that force tends to be very expensive, but something like a labor union is not an impediment to that force, it is simply allows the force to push toward a different point. Nor is the transfer of income from rich to poor impeding the invisible hand, even though the result is a different mix of resultant prices.

What impedes the invisible hand is if some entity forces the exchange price to a different point (or pays market participants to not participate and do so). Even then, this is not "wrong", just inefficient. When the U.S. asks Japanese carmakers to restrict exports in order to protect U.S. jobs, all it does is protect them more expensively than in free-market competition where we paid the unemployed autoworkers a stipend. Since our production possibilities are limited, it also drops our potential output by the welfare loss, though the results are unclear (ex: if the redistribution of money helps the Japanese invest in a cure for cancer it might actually be a boon.)

The free-marketistas just don't get it. Apparently they close their textbooks right after reading about the invisible hand, and also never crack a philosophy, political science or sociology book thereafter. If they're not ignorant, they just intentionally dishonest. And thus begets "analysis" like this, the rantings of a spoiled child that throws a temper tantrum when asked by his parents to "share".

There's an economic basis for fairness and social contracts. A more equitable distribution of income results in a more socially beneficial mix of commodities produced. Giving people the chance to satisfy their needs by socially conventional means results in a drop in the number that need to resort to illegal methods. It's surprising that 200 years after Adam Smith, people still don't have that message in their heads.

posted by Teddy | 10:55 AM |

Merck to lay off 4400.

Corporate earnings are so good, Merck will lay off 4400. Seems they only earned $1.83 billion in the third quarter, so something had to be done. Yesterday, Sony announced they were canning 20,000 worldwide.

posted by Teddy | 7:53 AM |

Tuesday, October 21, 2003  

Reading List 10/21

Standard Schaefer's interview of Michael Hudson critiques neoliberal economic policy in Chile on Counterpunch. Dean Baker's October Beige Book analysis sees little sustainable strength in the U.S. economy. The IHT reports on the capacity glut driving the job-loss recovery. Marshall Auerback discusses the Chinese economy. It's official, the 2003 budget deficit was $374.22 billion. Brad DeLong begs to differ with Joseph Stiglitz about the impact of Clinton's deficit cutting activities. Is there any reason for this column? Any at all? Wampum once again validates this site (hmm, how come not cross posted anymore, I get so lonely). And finally, your moment of Cavuto

posted by Teddy | 8:59 AM |

What is this, penny-ante poker?

John Snow predicts two million new jobs by the next election.

I would stake my reputation on employment growth happening before Christmas," Mr. Snow said in the interview, which a spokesman confirmed as accurate.

Don't CEO's know that saying about writing checks...and your butt. I guess when you're a Treasury Secretary in the Bush II administration, you're gambling somewhere off to the left of the $2 tables.

Come back Nicholas Brady! All is forgiven.

posted by Teddy | 7:17 AM |

Monday, October 20, 2003  

Post-welfare America

The NY Times has an article today, curiously in the regional section, about an August study of welfare recipients. It always piques my curiosity when a story starts off with an unsupported statement that contradicts the rest of the article's conclusions, so I found myself googling to find the original Urban Institute study. I'd recommend reading every article (none seem to be very long). It's replete with a number of "No duh!" moments as well as being a very good primer on the complications of reforming welfare.

Among the findings that strain the obvious:

Only 28% of welfare recipients are working. Almost half have at least one barrier (language, infant child, less than HS education, serious health condition) that prevent them from holding a job. Those that are working return to welfare less frequently if other services (insurance, child care, help with expenses) are provided when they leave. Over 25% of those that left welfare between 1999-2002 returned, up from 20% from 1996-1999. Those disconnected from welfare and the workforce rose from 9.8% to 13.8%. Median hourly wages for those leaving welfare in 2002 was $8.06. The Earned Income Tax Credit reaches more families than welfare or food stamps and the rate has remained stable since 1996, unlike the other two. Financial hardship has increased, with the 1.3 million lowest income households seeing an average 8% decline in financial resources since 1996...and plenty more.

One thing that continually surprises me is how relatively cheap these programs are. EITC is a $30 billion annual program. Food stamps is $20 billion. TANF is between $16-20 billion. Combined these are less than the Presidents current request for Iraq funding. It always hits me as strange that we spend many times the amount required to help the needy at home in order to blow up and rebuild countries far away.

posted by Teddy | 12:28 PM |

Inflationary Depression

My father, who majored in economics like his father before him, loves to bore me with the story of how he got an A in his intermediate economics class. The year was 1960 and his professor was one of those old-fashioned ones that felt an A deserved outstanding work. As a result, around half of the people taking his class got Cs and about a third got Bs, with the remainder getting lower grades. An A was so rare in his class that nobody could remember the last time one was given. Anyway, my dad wrote a mid-term paper describing an "inflationary recession", which impressed the old coot so much that he gave my dad an A- on the paper and a B+ in the course. He never lets that story die, seeing how the sixties and seventies were a series of inflationary recessions (aka "stagflation"). His story is much longer, directly increasing in length by the number of drinks he's had, but that is the gist of it.

This got me thinking of the possibility of an inflationary depression. The asset and credit bubbles were so extreme during the 1990s that one can't help think that once they have popped the consequences should be dire. But let's give credit to the inflationists who feel that the Fed can simply print its way out of outright deflation, so that the experience of the 1930s will remain forever an increasingly distant memory.

Certainly today's economy is something that most economists have not seen before. How else to describe an economy where GDP growth estimates for the coming quarter can top 6%, yet the Fed has short-term interest rates pegged at 50-year lows with no intention of raising them anytime soon, and official inflation remains stubbornly under 3%? How else to describe an economy where companies continue to report double-digit gains in profits on single-digit gains in sales, while half of those profits are extraordinary items? Or one where 6% unemployment is viewed as "bad" in the context of 2.7 million lost jobs since early 2001 and the sub-4% unemployment rate that prevailed during the last years of the previous decade? Or one where senior citizens get meager increased in Social Security yet massive increases in health-care and pharmaceuticals costs?

Classic hyperinflations, the most famous being Weimar Germany of the 1920s, were impoverishing to those whose assets and incomes were in things that did not appreciate at the same rate that the currency depreciated. Hence the stories from that era of seniors on a fixed pension who cashed out a lifetime of savings to buy a loaf of bread.

There is very little difference, incidentally, between this story and that of the senior citizen whose savings was in stocks or real estate during the Great Depression. They too, cashed out their assets at a huge loss in their wealth, the only difference being that the price of the asset crashed rather than the price of the money that bought it.

So if we run from the premise that a Depression (being the opposite of the boom that preceded it) was not prevented, but only disguised, it explains quite a bit. Those that managed to hold the assets, such as real estate, have done quite well on paper. There is little mention of how much debt needed to be acquired to benefit, nor how many years they will have to work to pay it back, but in today's age the assumption is that things will just continue to inflate as they have always done.

Little is asked of the 31% or so who do not already own this wonderful asset. With income and home prices rising at 5% per year, a $150,000 house that required a $120,000 mortgage becomes a $311,000 house needing a $249,000 loan in just 15 years, even though the ratio of home price to income stays constant at 5. For those who only see their incomes rise at half that rate, after 15 years the house is now 7.2 times their annual income and they need a $268,000 loan to participate in this "miracle". The impoverishment is slow and subtle, but the American Dream becomes just a dream for the next generation, unless through the miracle of modern finance we can extend mortgages to 40 or 50 years, and have charities front the money for a down payment (kindly fronted by home builders who coincidentally make the sale).

In this way you can have a Depression without even noticing it much. Nobody realizes their being impoverished by having more and more debt to pay back, or their incomes aren't quite keeping up with everything they have to buy (at least until one is dependent on the state for income). Nobody seems to think the income or jobs flowing abroad make much of a difference either, as long as the credit is available and there are debt-service counselors for the few million that have "accidents" every year. As long as you're not one of the steadily growing population of have-nots, things seem just peachy.

And there's no shortage of promises that eventually things will go back to normal. The jobs will come back with just one more tax cut, even though the deficit threatens to grow to the greatest on record. The stock market rallies, even though this isn't quite enough to make up for the last bear market. Earnings "beat expectations", even though more and more of those earnings are based on forecasted pension returns and previously written off inventory that was finally sold.

If there are debt problems you just restructure and refinance. Extend the terms and lower the interest rate and the problems go away. Even if your company is indicted for massive fraud, just clean house, let the storm blow over and pay off any unsatisfied lenders with a quiet new equity offering. After all, the financial companies are rolling in dough and the mutual fund companies need to spend their cash on something. Lather, rinse and repeat. This can go on forever, right?

posted by Teddy | 9:07 AM |