Mystery Economic Theater 2010

[cheesehead]

David Stockman's done it again -- telling the truth about the conservatives' turn from fiscal responsibility to fiscal irresponsibility, starting with Reagan.

(See post #53 for an earlier instance. This time, it's the NYT rather than PBS.)

"Four Deformations of the Apocalypse"

http://www.nytimes.com/2010/08/01/op...=1&ref=opinion

(with my underlined emphasis)

Originally Posted by David Stockman

. . .

More fundamentally, Mr. McConnell’s stand puts the lie to the Republican pretense that its new monetarist and supply-side doctrines are rooted in its traditional financial philosophy. Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too. But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.

But, as someone pointed out elsewhere ( http://climateprogress.org/2010/08/0...comment-288374 comment #2),

"... calling what Republicans are for Keynsianism is an insult to Keynesianism. What Republicans are for is straight class warfare. More for the rich, less for the poor. Their concerns for deficits and public debt are so many crocodile tears..."

This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. More specifically, the new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one.

The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. Now, since we have lived beyond our means as a nation for nearly 40 years, our cumulative current-account deficit — the combined shortfall on our trade in goods, services and income — has reached nearly $8 trillion. That’s borrowed prosperity on an epic scale.

. . .

The second unhappy change in the American economy has been the extraordinary growth of our public debt. In 1970 it was just 40 percent of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970. This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.

... (part of what I've frequently pointed out for a number of years) ...

. . .

The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector. Here, Republicans have been oblivious to the grave danger of flooding financial markets with freely printed money and, at the same time, removing traditional restrictions on leverage and speculation. As a result, the combined assets of conventional banks and the so-called shadow banking system (including investment banks and finance companies) grew from a mere $500 billion in 1970 to $30 trillion by September 2008.

. . .

The fourth destructive change has been the hollowing out of the larger American economy. Having lived beyond our means for decades by borrowing heavily from abroad, we have steadily sent jobs and production offshore. In the past decade, the number of high-value jobs in goods production and in service categories like trade, transportation, information technology and the professions has shrunk by 12 percent, to 68 million from 77 million. The only reason we have not experienced a severe reduction in nonfarm payrolls since 2000 is that there has been a gain in low-paying, often part-time positions in places like bars, hotels and nursing homes.

. . .

The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing — as suggested by last week’s news that the national economy grew at an anemic annual rate of 2.4 percent in the second quarter. Under these circumstances, it’s a pity that the modern Republican Party offers the American people an irrelevant platform of recycled Keynesianism when the old approach — balanced budgets, sound money and financial discipline — is needed more than ever.

Commenter #11 at http://climateprogress.org/2010/08/0...comment-288402 also sees it the same (mostly) way I do:

john atcheson says:
August 1, 2010 at 10:05 pm

The Republicans have boxed themselves in. Cutting taxes was never really about supply side economics, it was a stealth way to gut and cut government — to shrink it until they could “drown it in a bathtub.”

The reason they needed a stealth approach was that while people supported the general notion of tax cuts, they didn’t like the specifics. When Newt Gingrich laid out his Contract on America, complete with hits, and then began to implement it, they lost support.

It was a clever plan: Demonize government as wasteful, cut away until it was eviscerated, pretend that the magic markets would solve all problems by pure serendipity. But the more successful they were, the closer they came to the day when they would reap the harvest of failure their policies were bound to create.

And now it has.

Unfettered markets were a tragic and complete failure. Tax cuts reduced revenue. Deregulation hurt ordinary citizens, but were a bonanza for the wealthy and powerful.

And once that happened it was bound to become obvious what the real agenda was — to fashion a country for the wealthy, by the wealthy and of the wealthy — for the corporations, by the corporations and and of the corporations.

And so it has.

And the Republicans are hoisted on their own petard. Deficits are bad when it means a mere $33 billion for the unemployed, but irrelevant when it means an astounding $2.3 trillion in deficits to extend the tax cuts for the rich.

Reality is immune to Fox propaganda, and impervious to mindless bluster from talk show radio. It doesn’t matter how many times Republicans click their ruby red tax cutting slippers and wish it were so — thirty plus years of evidence shows supply side is a fantasy.

And now, if the Democrats are smart, possessed of an ounce of integrity and a gram of courage, they will take on this dangerous set of myths that is destroying our country, and engage in a genuine national dialog about the role of government, the need to regulate, and the importance of honesty.

But don’t bet on it. The cynics suggest this politics is nothing more than a Kabuki dance or some modified version of good cop-bad cop in which each party plays its role, while representing the same corporate fat cats.

I used to think they were paranoid. But as Sherlock Holmes used to say, “strip away all that is not possible, and you will find the answer.”

I’m down to two possibilities: 1) the cynics are right; or 2) the Democrats really are as stupid as they act.

I'd agree that the Democrats have never laid this out to the American public as plainly as it deserves to be -- and I'm puzzled as to why not.

(Should I feel guilty for not having cc:ed the DNC on my editorials all these years? Surely they have someone who can analyze the conservative turn as well as Mr. Atcheson and I can, haven't they?)

Republicans, please note that I'm not championing the Democratic party here; it's just that they're the natural avenue for exposing what's been wrong with the GOP since the late 1970s. What I really want is a GOP that's returned to fiscal honesty and integrity.

[garo]

Very thought provoking article by Stockman. There was another excellent article on a related theme - how things have been getting harder and harder for the American middle-class - by Ed Luce in the Financial Times on Friday. Where one honest working class wage used to be enough, now two wages are not nearly enough. While Luce talks briefly about the reasons for this change, it is quite clear to me from all the other commentary I've been reading that the rising power of the corporations and the super-rich has had a large role to play in this. These things haven't just happened. The rich in the US have waged a multi-front war against the middle-class - in the media, in Congress and through think-tanks and action committees and dare I say even through freshwater economists and the Fed - and they have won comprehensively.

It started with Reagan's massive tax cuts for the rich - the top marginal rate went from 70% to 28% in his terms - and increases for the poor by significantly increasing the regressive payroll taxes. And this trend has continued over the past three decades with the rich gaining an ever larger share of the increase in wealth.

The Crisis of middle-class America
By Edward Luce
http://www.ft.com/cms/s/2/1a8a5cb2-9...44feab49a.html

The slow economic strangulation of the Freemans and millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the ­multiple is above 300.
The trend has only been getting stronger. Most economists see the Great Stagnation as a structural problem – meaning it is immune to the business cycle. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start. Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility.
Alexis de Tocqueville, the great French chronicler of early America, was once misquoted as having said: “America is the best country in the world to be poor.” That is no longer the case. Nowadays in America, you have a smaller chance of swapping your lower income bracket for a higher one than in almost any other developed economy – even Britain on some measures. To invert the classic Horatio Alger stories, in today’s America if you are born in rags, you are likelier to stay in rags than in almost any corner of old Europe.

Statistics only capture one slice of the problem. But it is the renowned Harvard economist, Larry Katz, who offers the most compelling analogy. “Think of the American economy as a large apartment block,” says the softly spoken professor. “A century ago – even 30 years ago – it was the object of envy. But in the last generation its character has changed. The penthouses at the top keep getting larger and larger. The apartments in the middle are feeling more and more squeezed and the basement has flooded. To round it off, the elevator is no longer working. That broken elevator is what gets people down the most.”

Like her husband, ­Connie Freeman was raised in a “working-class” home in the Iron Range of northern Minnesota near the Canadian border. Her father, who left school aged 14 following the Great ­Depression of the 1930s, worked in the iron mines all his life. Towards the end of his working life he was earning $15 an hour – more than $40 in today’s prices.Thirty years later, Connie, who is far better qualified than her father, having graduated from high school and done one year of further education, makes $17 an hour.

[ewmayer]

Cheesehead, I figured you would enjoy Stockman`s eloquent and informed GOP bitch-slapping. :P

To be fair, Stockman gives much-too-short schrift to e.g. Clinton's going merrily along with the GOP's radical-deregulatory agenda, or to living-way-beyond-one's-means being a thoroughly bipartisan pastime, perhaps because it is the sheer hypocrisy of the GOP in this regard that galls him the most.

Paul Krugman may find himself deeply conflicted on the Stockman piece - He will love the Republican-bashing, but the anti-Keynesian "we must live within our means, and take the harsh fiscal medicine that requires" ... not so much. [No comment on as yet on Krugman`s NYT blog].

[ewmayer]

A ZeroHedge reader posted this very funny September 2009 piece from Matt Taibbi`s blog, describing his impressions of Federal Reserve bête noire Alan Grayson:

Congressman who went werewolf on me now spooks Fed officials

Alan Grayson, Bernie Sanders, Ron Paul and others keep hammering away at this whole Fed-secrecy issue, and every now and then we get some pretty interesting exchanges. Zero Hedge relates this one between Grayson and Fed counsel Scott Alvarez. It’s becoming abundantly clear that at some point we’re going to start to hear details about monstrous front-running operations involving the major banks on Wall Street.

I recommend that everyone watch this clip just for the sheer entertainment value ... I have personal experience with… well, let’s call it the unique personality of Alan Grayson. In his capacity as an attorney he once basically threatened to have me dismembered and have my body parts dumped in a tin canister and fired into the center of a burning supernova. And that’s actually underselling the real language he used. We were having a disagreement about the use of information given to me by a certain source in a story about military contracting, and in the middle of what had been a normal contentious argument between two sane adults, dude suddenly assumed this crazy monster-voice and just went medieval on me. He was roaring into the telephone about how he was going to crush me, how I was going to wish I had never messed with him, how I didn’t know who the hell I was dealing with, and so on. One phrase I remember in particular was, “I am going to strip the bark off of you!” It came totally out of the blue and it was like being on the telephone with a metamorphosing werewolf — the whole performance genuinely freaked me out. I may even have peed a little, I can’t remember.

When I heard Alan Grayson was running for Congress, I remember thinking to myself, That Alan Grayson? The lunatic? It can’t be, I thought. I kept imagining trails of half-eaten sheep leading to his campaign appearances. But it turned out to be true. And when I checked, his platform turned out to be quite sane and even kind of interesting. Then he got elected and I suddenly started seeing his name attached to all of these calls for transparency, various crusades for FinReg reforms, etc.

And now every time I see Alan Grayson, he’s tearing some freaked-out bureaucrat a new asshole in the middle of some empty conference room in the Capitol somewhere. I see the looks on the faces of these poor souls and I know exactly what they’re going through. Which is just hilarious, frankly. Especially since these people all tend to deserve it, like this nebbishy little creep Alvarez quite obviously does.

And let`s not forget this mid-May epistle about Sarah Palin`s carefully crafted "redneck hearts and minds" (ok, at least the hearts) strategy for winning the White House in 2012:

I, Sarah Palin, Goes Redneck

Palin by the way seems to have settled in on a new rhetorical strategy, which is basically to run out one or another version of her “pit bull” line over and over again and not say anything else at all. She’s tuned in to the fact that her audiences literally can’t get enough of having their lunatic self-images massaged (“I’m a violent, illiterate pig who eats with her mouth open just like all you outstanding Americans!”) and aren’t really interested in much else beyond that — issues are really secondary.

Sure, she’ll talk about immigration, or health care, or gun rights, but all that boring stuff is really secondary to the more important business of reassuring her audiences that it’s okay to be a slob who does nothing but shoot cute animals and watch TV. Most of all, Americans — the same Americans who buy everything TV tells them to buy and vote for the same shysters year after year, swallowing one lie after another whole — love to be told how tough and fearsome and independent they are. She was massaging this spot in a speech to a coalition of women against abortion group in Washington the other day:

Palin, a potential 2012 presidential candidate, delivered calls to action to an audience dominated by women. “The mama grizzlies, they rise up,” she said, to laughter. “You thought pit bulls are tough. You don’t want to mess with the mama grizzlies. And I think there are a whole lot of those in this room.”

The crowd went nuts at this. Palin has figured out that this is really all you have to do to win elections in this country — flatter middle Americans’ moronic fantasies about themselves. The great thing about flattery is a) you can’t overdo it as hard as you try, and b) it doesn’t pin you down to messy political positions, controversies, things you can be harassed about by Chris Matthews and other press weasels.

It’s basically a risk-free strategy. You get up on stage and you say, “I’m just like all you idiots. And you idiots rock!”

[ewmayer]

Denninger has a nice updated graph of "what does the real U.S. GDP look like if you subtract government borrowing?" here. To those who keep repeating the propaganda about "THE economic recovery" based on GDP "turning positive in 2009-2010", I ask "Which economy are you talking about?"

On a related theme, Mish links to a nice Business Week piece by economist Michael Mandel which assails the very term "Gross Domestic Product" and the oft-repeated bromide about "U.S. consumer spending is 70% of GDP":

As a textbook author, there are few things that frost me more than hearing “consumer spending is 70% of gross domestic product,” because it perpetuates two very large and very misleading untruths.

First, the category of “personal consumption expenditures” includes pretty much all of the $2.5 trillion healthcare spending, including the roughly half which comes via government. When Medicare writes a check for your mom’s knee replacement, that gets counted as consumer spending in the GDP stats.

At a time when we are wrangling over health care reform, it’s misleading to say that “consumer spending is 70% of GDP”, when what we really mean is that “consumer spending plus government health care spending is 70% of GDP.”

Second, an awful lot of those back-to-school dollars are going to imported clothing and school supplies (how many of those laptops and iPods do you think are made in the U.S.?). A dollar of consumer spending does not translate into a dollar of domestic production.

In fact, the whole way that the BEA presents the GDP statistics points the public debate in the wrong direction. GDP stands for “gross domestic product”—that is, domestic production. But the breakdown of GDP is into expenditures categories—personal consumption expenditures, government consumption expenditures, etc.

I think we need to move towards presenting GDP in terms of production, rather than spending. We need a shift from the consumer to the producer as our main unit of analysis.

My Comment: B-b-b-but, that would undo a half-century of "economic progress" in the U.S. (and much of the "developed" world) which rested on several religiously held economic beliefs, including:

1. You don`t have to actually produce anything of value to create wealth, you can just shuffle money around and take a cut;

2. Debt is a form of wealth, and can be treated as equivalent to wealth in economic models and analysis;

3. Consumption means someone has to produce the thing being consumed, so increased consumption = increased production, and no matter where the consumption or production are occurring, or whether they balance for a country: It`s all good, "because it`s all part of the global economy", or something.

Mandel`s proposal amounts to stigmatizing those who consume more than they produce ... what is he, some kind of closet commie?

The biggest lie about U.S. companies

The biggest lie about U.S. companies. Commentary: Healthy balance sheets? They owe $7.2 trillion, the most ever

BOSTON -- You may have heard recently that U.S. companies have emerged from the financial crisis in robust health, that they've paid down their debts, rebuilt their balance sheets and are sitting on growing piles of cash they are ready to invest in the economy.

You could hear this great news pretty much anywhere -- maybe from Bloomberg, which this spring hailed the "surprising strength" of corporate balance sheets. Or perhaps in the Washington Post, where Fareed Zakaria reported that top companies "have accumulated an astonishing $1.8 trillion of cash," leaving them in the best shape, by some measures, "in almost half a century."

Or you heard it from Dallas Federal Reserve President Richard Fisher, who recently said companies were "hoarding cash" but were afraid to start investing. Or on CNBC, where experts have been debating what these corporations are going to do with all their surplus loot. Will they raise dividends? Buy back shares? Launch a new wave of mergers and acquisitions?

It all sounds wonderful for investors and the U.S. economy. There's just one problem: It's a crock.

This July resembled the previous July in several key respects. What does this suggest for the markets for the rest of 2010?

American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression.

You'd think someone might have noticed something amiss. After all, we were simultaneously being told that companies (a) had more money than they know what to do with; (b) had even more money coming in due to a surge in profits; yet (c) they have been out in the bond market borrowing as fast as they can.

Does that sound a little odd to you?

A look at the facts shows that companies only have "record amounts of cash" in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don't look at the liabilities, the picture looks great. Hey, why not buy a Jacuzzi?

My Comment: The bit at the end of the full article which begins with "But why is this line being spun?" is a real gem.

In the meantime, the equity markets are busily pooh-poohing such "fundamentalist gloom and doom" and partying like it's 1999. "There has never been a better time to pile into stratospheric-P/E-multiple stocks..."

[ewmayer]

Jonathan Weil, a.k.a. "The last remaining Bloomberg columnist who is certifiably a vertebrate", has nice little epistle on high and low finance in latter-day America:

Gambling Bank’s Money Turns Out to Be Illegal: Jonathan Weil

As we approach the second anniversary of the Treasury Department’s oft-maligned Troubled Asset Relief Program, here’s a trivia question to see just how much you have learned about the way justice is meted out in Bailout Nation.

If you were a banker, which of the following activities would be more likely to land you a quick trip to the federal penitentiary? Is it:

(a) Misrepresenting your dying bank’s financial condition in order to secure almost $300 million in TARP bailout cash and then quickly proceeding to lose it all, or

(b) Embezzling about $235,000 from your employer to support your compulsive-gambling addiction and pay off personal debts?

The correct answer, naturally, is “b.” In this country, when it comes to matters of high-finance crime and punishment, little pigs get slaughtered, while hogs get fat -- convicted Ponzi schemer Bernard Madoff being this rule’s most notable exception.

The facts here aren’t hypothetical. This actually happened at a San Francisco-based lender with assets of $10.9 billion called United Commercial Bank, which is in the spotlight again following a report last month by the Federal Deposit Insurance Corp.’s inspector general on the causes of its failure.

The mid-level bank officer who stole the money to support his gambling habit, Alex Yan, 50, was sentenced to 27 months in prison in June 2009 and ordered to pay restitution to UCB of $235,695. He pleaded guilty about two months after a grand jury indicted him in November 2008, which happened to be the same month UCB received its $298.7 million under the TARP Capital Purchase Program.

Bye-Bye TARP Money

Treasury lost its entire investment when UCB failed a year later. At the time of UCB’s closure, which cost the FDIC’s insurance fund $1.5 billion, an FDIC press release said the bank’s problem loans might have been identified earlier were it not for “alleged fraud exercised by former senior management, currently under investigation by the relevant authorities.” So far, Yan remains the only former UCB banker charged by the government with breaking the law.

My Comment: The SEC would like to investigate the big fraud here, but their employees are far too busy blowing *their* employer`s money and bandwidth on online gambling and video porn. (Note: that latter link is to a Washington Post article, not to a porn site ... "Were this a link to an actual porn site, your computer would have already been rendered unusable by a flood of viruses, worms and self-replicating popup ads").


And Matt Taibbi`s latest Rolling Stone article on the financial oligarchy:

Wall Street's Big Win. Finance reform won't stop the high-risk gambling that wrecked the economy - and Republicans aren't the only ones to blame

Cue the credits: the era of financial thuggery is officially over. Three hellish years of panic, all done and gone – the mass bankruptcies, midnight bailouts, shotgun mergers of dying megabanks, high-stakes SEC investigations, all capped by a legislative orgy in which industry lobbyists hurled more than $600 million at Congress. It all supposedly came to an end one Wednesday morning a few weeks back, when President Obama, flanked by hundreds of party flacks and congressional bigwigs, stepped up to the lectern at an extravagant ceremony to sign into law his sweeping new bill to clean up Wall Street.

Obama's speech introducing the massive law brimmed with celebratory finality. He threw around lofty phrases like "never again" and "no more." He proclaimed the end of unfair credit-card-rate hikes and issued a fatwa on abusive mortgage practices and the shady loans that helped fuel the debt bubble. The message was clear: The sheriff was padlocking the Wall Street casino, and the government was taking decisive steps to unfuck our hopelessly broken economy.

But is the nightmare really over, or is this just another Inception-style trick ending? It's hard to figure, given all the absurd rhetoric emanating from the leadership of both parties. Obama and the Democrats boasted that the bill is the "toughest financial reform since the ones we created in the aftermath of the Great Depression" – a claim that would maybe be more impressive if Congress had passed any financial reforms since the Great Depression, or at least any that didn't specifically involve radically undoing the Depression-era laws.

The Republicans, meanwhile, were predictably hysterical. They described the new law – officially known as the Dodd-Frank Wall Street Reform and Consumer Protection Act – as something not far from a full-blown Marxist seizure of the means of production. House ­Minority Leader John Boehner shrieked that it was like "killing an ant with a nuclear weapon," apparently forgetting that the ant crisis in question wiped out about 40 percent of the world's wealth in a little over a year, making its smallness highly debatable.

But Dodd-Frank was neither an FDR-style, paradigm-shifting reform, nor a historic assault on free enterprise. What it was, ultimately, was a cop-out, a Band-Aid on a severed artery. If it marks the end of anything at all, it represents the end of the best opportunity we had to do something real about the criminal hijacking of America's financial-services industry. During the yearlong legislative battle that forged this bill, Congress took a long, hard look at the shape of the modern American economy – and then decided that it didn't have the stones to wipe out our country's one ­dependably thriving profit center: theft.

[ewmayer]

Corrigendum: My previous post should read "Jonathan Weil, a.k.a. "The last remaining male Bloomberg columnist who is certifiably a vertebrate" ... Caroline Baum is JW's female counterpart in non-spinelessness.

-----------------------------

Great in-depth Reuters article on "China`s new housing boom" ... this will not end well. (I forwarded the link to Mish, BarryR and ZeroHedge ... ZH ran with it, in case you want to see a bunch of reader replies running the usual gamut from racist/moronic to deeply insightful):

Special Report: China bets future on inland cities: China has put big money down on a momentous gamble: rush to build new cities in its poor interior, then wait for people to come and help drive the economy to a new stage of growth.

Here in this corner of the Chinese hinterland, the government has widened farm lanes into highways, turned wheat fields into an industrial park, spent a fortune on government offices, and set up a school for thousands of students in what was a dusty town a few years before.

Old, cracked gravestones have been bulldozed to make way for a housing estate featuring 60 apartment buildings, a winding creek and tennis courts, the latest such development in Gushi.

But the roads are mostly deserted apart from the odd goat herd trundling along them. The industrial park features a handful of workshops and no big factories. Vast new housing estates fan out from the original town center, most of them uninhabited. Skeletons of half-built villas, stained from neglect, are splayed across fields.

About 1,000 km (600 miles) south of Beijing in Henan province, Gushi is a microcosm of this latest face of China's urbanization, featuring ambitious officials, angry farmers, countryside capitalists, a new batch of consumers -- and empty buildings.

Over the past three decades, rural migrants flocked to big, prosperous cities along the coast. Now, in its revamped model of urbanization, the government is trying to bring cities to its farmers, a project that could absorb more residents than the entire population of the United States in the coming decades.

Farmers such as Xiang Wenjiang are not at all sure they like what they see rising up from their muddy fields.

"This is my land, but now it's all been sold," said the wiry, sun-beaten Xiang, eyeing a row of apartments under construction advancing toward his hut. "I won't leave until they give us the right money for moving, not just a few coins."

The apartment complex encroaching on Xiang's land is part of a vast urban development juggernaut that has become a new engine of economic growth as global demand sputters. It offers enormous opportunities for the companies that dig up the raw materials needed to build the new cities; that make the cars for the new roads and the washing machines for the new homes.

But such high hopes come with ample scope for disappointment. If the unprecedented population shift from villages to cities is mismanaged, it could squander resources, radicalize peasants and damage China's prospects.

My Comment: Good grief, "a new engine of economic growth" ... we heard similar bunk about the U.S. housing bubble. "New engine of economic mismanagement and ultimate ruin" is more like it. And there should no "if" qualifying the last sentence of the above snip - there is no doubt that China`s government-mandated trillion-dollar lending-spree-to-counteract-recession has helped fuel a colossal speculative land-price-construction-and-housing bubble ... you literally have entire cities built to spec sitting vacant out in what used to be farmers` fields (and often on what was prime cropland). Absolute lunacy.


FT has a nice piece on what they dub Great Stagnation, which I prefer to describe as "the demise of the middle class":

The slow economic strangulation of the Freemans and millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the ­multiple is above 300.

The trend has only been getting stronger. Most economists see the Great Stagnation as a structural problem – meaning it is immune to the business cycle. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start. Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility.

My Comment: Note that the "average incomes for families" includes all wage earners in a household - On that basis one might expect the increasing number of women entering the work force from the 1970s (Aside: Note that the widespread availability of oral contraceptives for women in much of the developed world beginning in that decade is perhaps the best correlate of the "opening of the floodgates" for women in colleges and the workforce) through the 1990s to result in a dramatic increase in average household income, but while the resulting rise in the labor-force participation rate is reflected in total GDP, the concomitant decrease in the percentage of households headed by married couples partly - but only partly - offsets the effect of more women working as far as average-wage-earners-per-household is concerned.

Between more-wage-earners-per-household and a multidecadal trend - now broken in the private sector, and as a result taken over by a desperate federal government - of ever-increasing indebtedness due to borrowing about 10% of GDP in order to keep up with the Joneses (more accurately, to keep up with what one has been conditioned to believe the Joneses are managing to do fo without themselves going deep into hock), an apt phrase seems to be "running ever faster just to stand still".

[garo]

Finally, someone puts the ranting and raving rabidly anti-public sector worker Mish right!

http://krugman.blogs.nytimes.com/201...ing-cadillacs/

I think the easy way to think about this is to realize that about half of state and local workers are teachers and academic administrators — which means that they’re college-educated, at minimum. And think about it: how many ambitious young people do you know saying, “My goal in life is to become a high school teacher — that would put me on easy street”?

Public sector wages and pensions account for about a third of the total budget! Also, I find it surprising that people haven't yet drawn a connection between Reagan's union-busting and the decline of the US middle class and the huge increase in the wealth of the top 1%. Honestly!

[ewmayer]

Originally Posted by garo

Finally, someone puts the ranting and raving rabidly anti-public sector worker Mish right!

http://krugman.blogs.nytimes.com/201...ing-cadillacs/

Krugman is always very quick to accuse others of intellectual laziness and inferences-not-supported-by-data; It seems to me he is the one guilty of doing so here. First of all, his argument is purely hypothetical/anecdotal. In fact, quite a few of the complaining-teacher-and-public-school-administrator types I've seen on TV whining about budget cuts appear to fit the mold of "I expect lifetime employment with zero accountability". How else do you explain the persistent practice of teacher's unions fighting tooth and nail against any proposals for performance reviews and merit-based raises?

But Krugman pulls a clever little rhetorical ploy here: He adds the qualifier "ambitious" to "college-educated" to argue that "if teaching were such a cushy profession, why aren't ambitious top-notch college grads flocking to it?"

Uh, perhaps because people who fit the "ambitious, highly-qualified" mold tend to gravitate to careers filled with new challenges? I can personally attest to this sort of thing ... my first post-PhD job was the academic tenure track. There, one's graduate research program provides plenty of challenges, but I gotta tell you, teaching - especially the "canned" courses at the undergraduate level - felt like intellectual death to me once you got around to teaching a given subject for the 3rd or 4th time. For me the private sector has less job security, but intellectually and professionally dull, it is not. So perhaps public education tends to attract decently-or-minimally-qualified folks who want job security more than they do a professional challenge.

I'm not saying the old saw "those who can't do, teach" is necessarily true, just that one can just as easily make that argument as the one PK tries to make.

Public sector wages and pensions account for about a third of the total budget! Also, I find it surprising that people haven't yet drawn a connection between Reagan's union-busting and the decline of the US middle class and the huge increase in the wealth of the top 1%. Honestly!

It seems to me that you are conflating 3 issues here:

1. Reagan`s effective dismantling of the PATCO union when he fired all the striking air traffic controllers;

2. Reagan's general anti-union views, based on his perception that union labor made U.S. business less competitive;

3. The ongoing process of private industry offshoring jobs to places with cheap labor and "business friendly" regulatory climates (often = lax labor and environmental laws)

Are you claiming that unionized labor is somehow less subject to global wage arbitrage (i.e. offshoring) than non-union? Or that the process of offshoring was somehow less under Clinton than it was under Reagan and the 2 Bushes? (Hello ... NAFTA, anyone?)

Mish is generically anti-union, but especially so when it comes to public-sector unions (PSUs). Are you claiming that PSUs are in some way beneficial to the countries where they are strongest, or that in the U.S. (and e.g. Greece, Italy and France in Europe) they have done something other in the past several decades than turn themselves into bloosucking, budget-busting economic parasites whose average pay and benefits (relative to their working hours and educational/professional qualifications) grossly exceed those offered by the private sector for comparable positions?

If so, please provide some actual data backing up your claims. I can provide reams of data showing PSU employees are grossly overcompensated ... so far all I've seen from you is generic "Reagan bad! Republican evil!" tendentious polemics.

[ewmayer]

China Tells Banks to Take Back Trust Firms Loans, People Say

China’s banking regulator ordered banks to transfer off-balance-sheet loans onto their books and make provisions for those that may default, three people with knowledge of the situation said.

The assets linked to wealth management products provided by trust companies must be shifted onto banks’ balance sheets by the end of 2011, the people said, declining to be identified as the matter isn’t public. Lenders should prepare provisions equal to 150 percent of potential losses, they said.

The move may increase pressure for capital-raising at Chinese banks, which Fitch Ratings last month said had more than 2.3 trillion yuan ($339 billion) of off-balance sheet assets. It also underscores concerns about the health of the banking industry after a person with knowledge of the matter said regulators last month ordered lenders to conduct stress tests to gauge the impact of home prices falling as much as 60 percent.

The regulator’s order “will plug the loophole that more and more banks now employ to get around government lending curbs,” said Liao Qiang, a Beijing-based analyst at Standard & Poor’s. Bringing loans back on to the balance sheet will restrict banks’ ability to expand lending while “their capital requirement will increase,” Liao said.

My Comment: Chinese FinReg folks are correctly (but belatedly) very worried about bad loans made in the past several years by banks ... You throw nearly a trillion $ in EZ-money at the banks, mandate that they lend it out ASAP, what do you expect the result will be?


Caroline Baum on "The Recovery":

Economy Lost Momentum While I Pulled Weeds: Commentary by Caroline Baum

The post-mortems on the July employment report made me realize I’d missed the recovery.

While I was watching my garden grow, the U.S. economy “lost momentum,” according to every news report I read or heard over the weekend. Somewhere between the budding of the peonies and the blooming of the rudbeckia, private-sector job growth downshifted.
...
Which brings me to the point: In order to lose momentum, the U.S. economy has to have momentum to begin with. If it had any, I missed it.

What we had was a government-prescribed course of amphetamines (to keep it up), antibiotics (to prevent infection) and antidepressants (to make it feel better). It endured regular steroid injections from both monetary and fiscal authorities. And it still has no real muscle.

Inventory restocking isn’t a strategy for long-term growth. It’s an adjustment to the dramatic drawdown in 2009. When it’s done, it’s done, unless businesses and consumers are interested in investing and spending.

Inventory accumulation accounted for more than half of gross domestic product growth in the fourth quarter, three- fourths in the first quarter and a little less than half in the second quarter.
...
On the fiscal front, the government threw huge sums of money at the economy. It paid people to buy cars and homes. It paid them to weatherize their houses, maybe the same ones the government paid them to buy. It paid them to buy appliances for the houses the government paid them to buy. And it paid banks to modify mortgages.

What did we learn from this exercise? That, by golly, if someone were planning to buy a home anyway, an $8,000 tax credit acts as an inducement to do it that much sooner!

So, yes, if the goal is to put money in the pockets of people who will spend it, as Democrats in Congress are wont to say, then the $862 billion fiscal stimulus has been a smashing, but not lasting, success.

Now what? The recipients of government largess buy goods and services, putting money in someone else’s pocket. That’s the Keynesian argument for more spending to stimulate aggregate demand.

Miles to Go

How does that tie in with the innovation and entrepreneurship that are the real source of job creation?

Hard to see how. President Barack Obama is working against himself and his party by bashing banks, insurance companies and energy producers in an effort to get his legislative agenda through Congress. That strategy has a populist appeal, but it’s not the way to win friends and influence people in the business community.

There is no quick fix, no painless solution, for what ails the U.S. economy. It took a long time to accumulate enough leverage and bad debts to sink the economy. It should take at least as long to recover.

The government is prolonging the adjustment by throwing good money after bad in housing, preventing prices from falling to levels that would encourage buyers. That’s one kind of momentum we can afford to lose.

[ewmayer]

Postscript on Krugman: He also makes many of the same asrguments in his latest NYT op-ed. It's a lot of the usual Krugmanesque Keynesian-Utopia claptrap:

"...And the federal government, which can sell inflation-protected long-term bonds at an interest rate of only 1.04 percent, isn’t cash-strapped at all. It could and should be offering aid to local governments, to protect the future of our infrastructure and our children."

...a.k.a "Our future lies in borrowing our way out of debt! Check out the low teaser rates on U.S. government borrowing!" ... but I do agree with his point about the hypocrisy of all the newly-minted deficit chickenhawks in congress who at the same time want to keep the Bush tax cuts for the rich.