James Pethokoukis

Politics and policy from inside Washington

Looks like the Fed is taking its foot off the gas pedal

Jul 6, 2009 18:23 UTC

From Gluskin Sheff economist David Rosenberg:

At the same time, it looks as though the Fed is now in the process of snugging monetary policy. We don’t hear from the inflation-ists that the central bank has actually been allowing its bloated balance sheet to lose some weight in recent weeks and that the growth rate in the once-red-hot monetary aggregates is shrinking and the monetary base is also shrinking. Over the last 13-weeks, the monetary base has contracted at a 23% annual rate (!), M2 growth has softened to a 1.4% annual rate and MZM has slowed to a mere 4.6% annual rate.

Unemployment a leading indicator?

Jul 6, 2009 18:02 UTC

No, says economist Mike Darda of MKM Partners:

At no time in history — from the deflationary wipeout of the 1930s to the inflationary recessions of the 1970s and early 1980s, to the balance sheet downturn of 1990-1991, to the bursting equity bubble and the 2001 recession — was the labor market or the unemployment rate a leading indicator of either the business cycle or stock market trends.

My spin: Unless, of course, the jobless rate is a leading indicator of a double-dip recession.


Mohammad El Erian takes the opposite side of Darda’s argument in a recent FT commentary. “America’s Jobs Data is Worse Than We Think”

“….The unemployment rate is traditionally characterised as a lagging indicator and, as such, is viewed as having limited predictive power. After all, unemployment is a reflection of decisions taken earlier in the cycle so the rate always lags behind the realities on the ground – or so says conventional wisdom.

This conventional wisdom is valid most, but not all of the time. There are rare occasions, such as today, when we should think of the unemployment rate as much more than a lagging indicator; it has the potential to influence future economic behaviours and outlooks.

Today’s broader interpretation is warranted by two factors: the speed and extent of the recent rise in the unemployment rate; and, the likelihood that it will persist at high levels for a prolonged period of time. As a result, the unemployment rate will increasingly disrupt an economy that, hitherto, has been influenced mainly by large-scale dislocations in the financial system.

In just 16 months, the US unemployment rate has doubled from 4.8 per cent to 9.5 per cent, a remarkable surge by virtually any modern-day metric. It is also likely that the 9.5 per cent rate understates the extent to which labour market conditions are deteriorating. Just witness the increasing number of companies asking employees to take unpaid leave. Meanwhile, after several years of decline, the labour participation rate has started to edge higher as people postpone their retirements and as challenging family finances force second earners to enter the job market. ”

Here’s another way of looking at the situation. From RealClear Markets. “Get Ready For 14% Unemployment” — Louis Woodhull. He makes the case for the link between Government deficits and unemployment. The key factor is the negative effect of deficits on Private Business Investment (PBI).

http://www.realclearmarkets.com/articles  /2009/07/06/get_ready_for_14_percent_un employment_97295.html

“…Here’s why. Because a lot of PBI goes toward offsetting depreciation and increasing productivity, it takes a 5% year-over-year increase in PBI to produce a 1% increase in the number of jobs. Correspondingly, a 5% decrease in PBI will yield a 1% reduction in total employment.

The unemployment rate a year ago was 5.5%. Because the potential labor force is growing, we need employment to increase by 1% annually to keep the unemployment rate from going up. The 37.9% investment decline reported by the BEA can be expected to eventually produce a reduction in total employment of about 8.5%. Accordingly, we can expect unemployment to rise to about 14% within a year unless the downward slide of PBI is reversed………………………………….

While doing nothing to boost demand, Obama’s “stimulus” will depress PBI, and therefore employment. This is because the “stimulus” plan requires selling an additional $787 billion in government bonds. The money to buy these bonds will have to come from somewhere, and much of it will come from people who would otherwise invest in starting or expanding businesses. Indeed, the bonds will have to be priced so that this risk-free investment is more attractive to investors than their other alternatives.

In the fourth quarter of 2008, the Federal government ran a deficit of $303 billion (and therefore had to sell $303 billion of new bonds) and business investment fell by 21.7%. In the first quarter of 2009, the Federal deficit was $650 billion and business investment fell by 37.3%. The economy is being forced to invest in Barack’s Bailout Bonds rather than in businesses that create jobs.

Virtually everything the Obama administration wants to do will have the effect of increasing unemployment. As bad as joblessness is now, be prepared for it to get much, much worse.”

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The politics and economics of a second stimulus plan

Jul 6, 2009 17:47 UTC

I would doubt whether the WH thinks a second stimulus works for them politically or economically:

1) It’s clear they are closely watching interest rates to see if the”bond vigilantes” are getting spooked by all the debt. The surge in yields from mid-March to mid-June forced Team Obama to start talking about deficit reduction. Would they want to risk a further backup in rates by announcing a $500 billion package to aid cash-strapped  cities and states? Higher rates would be recovery killer.

2) It’s one thing to admit that you, like pretty much everyone else, underestimated the depth of the recession. But why didn’t the WH push for a package that was more front-loaded or had more tax cuts or, as liberals wanted, just much bigger in case the bears were right? Those questions go to the heart of the administration’s economic competence.

3) What if the WH pushed for a second stimulus package and lost? Or what if the effort drained energy away from getting healthcare and climate change passed? Those are big risks for a plan that might not help much before the 2010 midterms anyway.

4) With 90 percent of the dough yet to be spent, the whole thing makes the WH look panicky.


Leadership counts — it’s key in a crisis and we are certainly not thru this yet. The realities of California having to issue warrants and the dysfunction in the NYS legislature hampering normal debt issue amongst other very important & critical tasks will further highlight the divide between feckless political manuveurs & sound governmental stewardship.

The floodgates opened with Federal interference/take-over in private industry. No one can be surprised that some willing States ( and lobbies & industries – etc.) would be far behind in lining up at the Fed trough.

Nifty opinion – http://www.bloomberg.com/apps/news?pid=n ewsarchive&sid=abPswcmJHZVA

I really believe that the administration does not understand their policy consequences, and so many of their positions are having/will generate an inverse out come. So like the Bloomberg opinion piece says, they wanted to limit and decrease Lobbyist influence — instead they create a hot bed of Lobbyist activity in the place you would want it least., Their JOBS, JOBS, JOBS is a JOB KILLER.

Both Carter & Wilson were better men than they were Presidents. Let’s hope this isn’t some kind of redux.

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Palin explained, kind of …

Jul 4, 2009 13:26 UTC

I think this hunk by Mark Halperin on Sarah Palin’s resignation is pretty good:

1. This means she can’t run for president in 2012.

2. She would have been a stronger candidate for 2012 if she had stayed in office.

3. Republican primary and caucus voters in 2012 will care if she served out her term or not.

4. This means she is definitely running in 2012.

5. Making the announcement on the Friday of a holiday weekend was really stupid.

6. Until today, Palin was well positioned to run in 2012.

7. Palin made the decision not to run for re-election all of the sudden.

8. Palin’s rhetoric about the politics of personal destruction was not heartfelt.

9. Palin’s ambition is limited to electoral politics.


All she ever was was a political ploy used by an old man trying to be president; without the 100% hand-of-GOP directing her every move, she showed her true colours, and they were not at all impressive or competent. I suppose it does show one thing though – that she was not lyng when she compared herself to a hockey-mom… that’s really about all she is. Just an average person who was thrust in the spotlight because she had the right ‘look’. I desperately hope this is the last we hear of her. The farright in America seem to think that average Joes and Janes need to be in positions of power. I, humbly, disagree WHOHEARTEDLY!!! What an insane approach to politics… I suppose this is wasted typing time, as so many vote down partylines, regardless of who they’re voting for.

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Deflation nation

Jul 4, 2009 12:43 UTC

From David Goldman at Inner Workings:

An aging population increases its purchases of securities and decreases its purchases of goods as it saves for retirement. Americans have saved nothing for the past ten years, and the capital gains that they considered savings-substitutes have vanished. That means that an enormous savings deficit accumulated over more than a decade has been exposed, and that Americans must attempt to correct it quickly and under the worst of circumstances. That creates a deflationary shock that a few trillion dollars’ worth of stimulus cannot begin to mitigate. America may have the worst of both worlds: currency devaluation AND price deflation, as in the 1930s.

Obama will do ‘whatever it takes’ to boost the economy? Really?

Jul 2, 2009 19:56 UTC

On CNBC today, WH economist Christina Romer said the president is committed to “doing whatever it takes” to turn around the economy. And she did not rule out a second stimulus plan. Yet the president will not cut corporate taxes or investment taxes —  even temporarily much less in a permanent way that would boost confidence and certainty. I think the WH believes it can pretty much ride this out, 2012 being a long way a way and Dems have structural advantages in 2010.


So people REALLY want the Republicans back? Are they insane or simply unconscious? The best thing for this country would be for Bush to have been the last Replublican President and a new, non-religious alternative Party formed that is not dedicated to selecting the next country to invade. And one that cares about the people who put them in office.

Taxes, shmaxes. If they want to take from you, they will. You can do NOTHING about it other than to limit interests hostile to you from power. They call it “democracy” and we do not have it. Less every year.

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This is how bad that jobs report was …

Jul 2, 2009 19:40 UTC

Economist David Rosenberg thinks the jobs report was, in effect, a boot heel stomping all over the green shoots:

1) The headline came in at -467k compared with -350k consensus and the back revisions were negligible (+8k). At no time in the 1990 or 2001 recessions did we ever come close to seeing such a detonating jobs figure, not even at the depths of those downturns, and yet we have a whole industry of ‘green shoot’ advocates today telling us that the recovery has already arrived. As always, the devil was in the details.

2) In almost every industry, job losses were deeper in June than they were in May. The diffusion index fell to 28.6 from 31, which means that nearly three-quarters of the corporate sector is still in the process of shedding jobs.

3) The Household Survey showed a 374k job decline, and all centered in full-time jobs. In fact, we have lost a record 9 million full-time jobs this cycle, more than triple what is normal in the context of a post-WWII recession, with over 2 million pushed onto part-time work (and the number of people now working part-time because they have no other cho! ice due to the weak economy has more than doubled).

4) This in turn has take the total hours worked in the private sector down to a new record low of 33 hours from 33.1 hours in May – in fact, what this means is that if companies had kept hours worked at May’s levels, then to achieve the same labour input that they achieved would have required a 800,000 job slice!

Bill Gross: America’s dark economic future … Happy Independence Day!

Jul 2, 2009 13:50 UTC

Pimco bond guru — and occasional White House economic adviser –  Bill Gross paints a really depressing economic future

The fact is that American consumers have suffered a collapse in wealth of at least $15 trillion since early 2007.  … And when potential spenders feel less rich by that much, the only model one can use to forecast the future is a commonsensical one that predicts higher savings, lower consumption, and an economic growth rate that staggers forward at a new normal closer to 2 as opposed to 3½%.  … As unemployment approaches 10%, what is less well publicized is that the number of “underutilized” workers in the U.S. has increased dramatically from 15 to 30 million. Those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking, total 30 MILLION people. The number is staggering. Commonsensically, one has to know that many or most of these are untrained for the demands of a green-oriented, goods-producing future economy. Imagine a welding rod in the hands of an investment banker or mortgage broker and you’ll understand the implications quicker than any economist using an econometric model. …

If long-term economic growth declines by 1½% then profit growth will as well. This, after settling at perhaps half of absolute peak profit levels of 2007, because of the rise of savings rates from 0 to 8% or higher. But to add to the woes of the investor class, one has only to observe that their share of the pie is shrinking. What does the General Motors example tell us all about the rebalancing of power between the investor class and the proletariat? What do trillion-dollar deficits and the recent reinitiation of PAYGO government programs tell you about the future of corporate tax rates? They’re headed higher. Do you really think that a national health care program can be paid for with cost-cutting as opposed to tax hikes at insurance companies and benefit-paying corporations throughout all sectors of the American economy? The new normal will not be investor-friendly unless your forecasting dial is turned to “Pollyanna” or your intelligence quotient is significantly less than 100.


P.S. Gross was aggressive & determinedly stepped into what would appear to be an extremely illiquid P.P.I.P investment but at the same time is critiqueing Yale’s “illiquid” investments. What’s his basis? How does he validate and measure the investment opportunity? Would he recommend that Yale abandon it’s plan & lobby to buy PPIP’s?

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Unemployment in June at 9.5 percent … or is it 10 percent?

Jul 2, 2009 13:35 UTC

According to the Labor Department, the economy lost 467,000 jobs and the unemployment rate ticked up to 9.5 percent in June.  But lots of workers have stopped looking for work and that skews the unemployment rate. If workers were looking for jobs in the same numbes as they were in June 2008 (we are talking about the labor force participation rate which was 66.1 percent then and 59.5 percent now), the unemployment rate would be at 10 percent.

Also consider that the broader unemployment measure (unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers) is 16.5 percent. Even worse, the unemployment duration numbers took a sharp dive.

Oh, and those folks who are working are working fewer hours:

In June, the average workweek for production and nonsupervisory workers on private nonfarm payrolls fell by 0.1 hour to 33.0 hours–the lowest level on record for the series, which began in 1964.  The manufacturing workweek rose by 0.1 hour to 39.5 hours, and factory overtime  was unchanged at 2.8 hours.


http://www.bls.gov/news.release/empsit.t 01.htm
This is the link I referenced above.

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Wal-Mart and rent seeking

Jul 1, 2009 19:53 UTC

Government intrusion into the marketplace has so many unintended and unforeseen consequences — like Wal-Mart (!) coming out in favor of government mandate that employers provide health insurance. Why? Here is how a flabbergasted Heritage Foundation explains it:

Why would Wal-Mart – the nation’s largest employer – endorse such an idea. Simple: It would cripple many of their competitors. Much ink has been spilled on the effect Wal-Mart has on small retailers. Wal-Mart’s large size enables them to extract low prices from manufacturers, and that – combined with efficient, computerized inventory operations enables them to undercut – and sometimes drive out of business – small “mom-and-pop” retailers.

An employer mandate to provide health insurance would enhance Wal-Mart’s cost advantage. Wal-Mart has 1.4 million U.S. employees, and can negotiate a health insurance contract for them all at once. As a large multi-state employer, they can self-insure and provide coverage under federal ERISA regulations, which exempts them from costly compliance with most state health insurance regulations.

Wal-Mart’s small competitors have neither of these advantages. Employers with less than 20 employees often pay more than twice as much per employee for the same coverage, and small employers must comply with sometimes-onerous state regulations.

Supporting the employer mandate is just another way large business can harness the forces of government to hobble their smaller competitors. The employer mandate would impose much higher costs per employee on small retailers than it would on Wal-Mart. They would have to charge higher prices to compensate, which would put them at a substantial competitive disadvantage. Many of these small retailers would be forced out of business.

And the befuddled Michael Cannon of the  Cato Institute has a moment of clarity:

A couple of years ago, I shared a cab to the airport with a Wal-Mart lobbyist, who told me that Wal-Mart supports an “employer mandate.”  An employer mandate is a legal requirement that employers provide a government-defined package of health benefits to their workers.  Only Hawaii and Massachusettshave enacted such a law.

I couldn’t believe what I was hearing.  Wal-Mart is a capitalist success story.  At the time of our conversation, this lobbyist was helping Wal-Mart fight off employer-mandate legislation in dozens of states.  Those measures were specifically designed to hurt Wal-Mart, and were underwritten by the unions and union shops that were losing jobs and business to Wal-Mart.

But it all became clear when the lobbyist explained the reason for Wal-Mart’s position: “Target’s health-benefits costs are lower.”

I have no idea what Target’s or Wal-Mart’s health-benefits costs are.  Let’s say that Target spends $5,000 per worker on health benefits and Wal-Mart spends $10,000.  An employer mandate that requires both retail giants to spend $9,000 per worker would have no effect on Wal-Mart.  But it would cripple one of Wal-Mart’s chief competitors.


The plan that is most likely be passed excludes employers with 25 or less employees from the mandate.

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