Political Economics

[G M]

The LA County Sheriff's Dept. will provide police services under contract to Maywood.

[Rarick]

I figured as much, better to get stretched some than let a crime bazaar develop. That would take serious effort to fix.  Isn't the LAPD dealing with budget issues too?

[G M]

Every law enforcement agency is struggling right now.

[G M]

http://www.nytimes.com/2010/07/04/your-money/04stra.html?_r=2

His advice: individual investors should move completely out of the market and hold cash and cash equivalents, like Treasury bills, for years to come. (For traders with a fair amount of skill and willingness to embrace risk, he suggests other alternatives, like shorting the market or making bets on volatility.) But ultimately, “the decline will lead to one of the best investment opportunities ever,” he said.

Buy-and-hold stock investors will be devastated in a crash much worse than the declines of 2008 and early 2009 or the worst years of the Great Depression or the Panic of 1873, he predicted.

For a rough parallel, he said, go all the way back to England and the collapse of the South Sea Bubble in 1720, a crash that deterred people “from buying stocks for 100 years,” he said. This time, he said, “If I’m right, it will be such a shock that people will be telling their grandkids many years from now, ‘Don’t touch stocks.’ ”

The Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end, he said. That unraveling, combined with a depression and deflation, will make anyone holding cash “extremely grateful for their prudence.”

[G M]

http://hotair.com/archives/2010/07/07/state-local-govts-eyeing-layoffs-as-porkulus-expires/

Running out of other people's money.

[Crafty_Dog]

Prechter has an absolutely horrendous track record.  Alan Reynolds has a really good one.  Here is what he says (btw I disagree quite a bit, but I do respect the man and pay attention to what he says):
===================
Money
Get Real: This Is Not 1932
Brian S. Wesbury and Robert Stein
07.07.10, 6:00 AM ET


Want to be invited to A-list parties? Want people to think you are smart? Then don't smile and don't say anything positive--especially about the economy. Pessimism has become so pervasive that people will believe just about anything, as long as it is negative.

Over the July 4 weekend, after a jobs report that showed 83,000 new private-sector jobs were created in June, the Drudge Report had not one but two headlines that compared the U.S. economy of 2010 to that of 1932. In other words, the U.S. is back in Depression. This is a complete overreaction and is indicative of the severe case of economic hypochondria that seems to have gripped the nation and the world.

One symptom of this disease is that common sense is suspended. The simple explanation is tossed aside and data releases are dredged and sifted to find the most dire possible explanation for any economic information.

For example, every 10 years the United States Government conducts a census, and every 10 years the government hires hundreds of thousands of very temporary workers to help in the effort. Some time between April and June total employment goes up and down by an amount that often swamps the underlying trends of employment.

In May total payrolls increased 433,000, but then fell by 125,000 in June. So rather than explain this to people, the Pouting Pundits of Pessimism said things like, "All the jobs in May were government jobs." And then last Friday, after the June jobs report, they said, "Jobs fell for the first time in seven months." Both of these reactions were misleading.

They could have said, "Once we adjust for the Census, private-sector payrolls increased by 33,000 in May, and then accelerated in June to 83,000." While both months were disappointing when compared with previous recoveries, the data shows six consecutive months of private-sector job creation.

Another interpretation that defies common sense involves labor force data. When 805,000 more people said they were looking for a job in April, the pessimists said, "See how many people had been discouraged ... the unemployment rate will never fall as they start looking again." And in June, when the labor force fell by 652,000, they said, "This is the only reason that the unemployment rate fell."

This is crazy. It defies common sense. Economic data is volatile, so quarterly data might be better. And in the second quarter the U.S. added 357,000 private-sector jobs--more than 50% greater than the 236,000 added during the first quarter.

New orders for durable goods, a leading indicator, are up 10% at an annual rate in the past three months. Excluding transportation, they are up 25%. If we look at just machinery orders, they are up 63% in the past three months and 23% in the past 12 months. This is not a depression.


Yes, housing has fallen. But what should we expect after a huge government program to support housing activity ends? Remember Cash for Clunkers? Activity was artificially boosted by the program, then it fell, then it recovered as the normal forces of economic activity kicked in again. The same thing will happen with housing in the months ahead.

So could we be repeating 1932? We suppose anything is possible, but these fears are based on a faulty comparison with history. In 1932 the M2 measure of the money supply fell by 16.5% -- the third of four consecutive yearly declines between 1929 and 1933. Meanwhile Herbert Hoover pushed through the largest tax hike in American history. The lowest tax rate rose from 1.5% to 4% (at $1 dollar of taxable income), the 6% rate (which kicked in at $10,000) rose to 10%, and the top rate more than doubled from 25% to 63%.

Today the M2 measure of money is growing, and tax rates, while scheduled to go higher in 2011, are nowhere near the levels of the 1930s. And there is no Smoot-Hawley Tariff Act.

None of this is to say that the government is not making it more difficult for business. Clearly the uncertainty of new laws, spending, taxes and regulations is throwing a wet blanket over the entrepreneurial side of the American economy.

But two things are true. First, productivity is so strong that the economy is growing despite massive increases in the size of government. The U.S. is creating jobs, even if the rate of growth is less than previous recoveries. Profits are still rising. In fact, analysts are still raising earnings estimates.

Second, the market has so much negativity priced in that it is cheap on just about any basis. Based on forward earnings, the PE ratio for the S&P 500 is under 12. And our capitalized profits model shows that stocks are severely undervalued. Based on very conservative inputs, we continue to believe the fair value for the Dow Jones industrial average is 14,500.

Pessimism creates value. Optimism has traditionally been rewarded. We remain optimistic.

Brian S. Wesbury is chief economist and Robert Stein senior economist at First Trust Advisors in Wheaton, Ill. They write a weekly column for Forbes. Wesbury is the author of It's Not As Bad As You Think: Why Capitalism Trumps Fear and the Economy Will Thrive.

[Crafty_Dog]

2010 is Not 2008
by Duncan Frearson, Smith Street Capital

July 6, 2010

"Fool me once shame on you, fool me twice shame on me." This saying appears to be governing market behavior lately. Soft economic data has become the calling card for a market rout. Managers, fearful of another unforeseen collapse, have been selling down positions and de-risking their portfolios.

Why then should an investor buy what seemingly smart managers are selling? I believe the “rottenness” has already been purged from the system, to paraphrase Andrew Mellon, and the healing has begun.

Anyone who has kids knows when the lights go out, the boogey man appears. We are in the unfortunate position where problems in Europe, the end of some government stimulus programs, some large budget gaps and a growing oil leak have turned off the market’s lights. The boogey man has entered the mind of the market causing some fearful behavior.

At the end of day the earnings power of a company is all that matters and thus understanding customer behavior is paramount. For the economy as a whole we should ask ourselves: are we currently spending beyond our means? Individuals are earning at record levels – around $10,103 billion for real disposable personal income in Q2 and we are only just beginning to push real spending beyond Q4 2007 levels leading to a savings rate in the 3.5% range, according to government data. The debt service coverage ratio and the financial obligations ratio both indicate the consumer is de-leveraging into a more stable financial foundation.

 



Source: Federal Reserve

 

The only real historical precedent for a double dip that is relevant happened in the early 1980s. A look at this prior period indicates a double dip recession is possible, but it requires action to make it happen.

The 1980s double dip came courtesy of a Federal Reserve that began to fear a pick up in inflation after the economy began to recover.

Of course their fear was warranted given inflation was the main reason for the prior economic malaise, but it would seem unlikely that the Federal Reserve will put any brakes on this time around (in fact they have stated they will not) and thus with a more stable consumer in the mix a collapse back to the late 2008/early 2009 level of economic activity appears highly unlikely.

On the corporate front, cash positions are at record levels for S&P 500 companies giving these firms confidence in their current operations and reducing the risk of sharp resource reductions.

U.S. states and EU nations are reducing budget gaps. They have provided liquidity and spending as the private sector reduced activity.

In the EU, the reduction in spending of the core nations will be slow allowing fears to eventually subside and any funding problems will be offset by ECB bond buying and the emergency SPE fund.

In the 1930s, U.S. government spending virtually doubled as a percentage of GDP creating an enormous economic dependence on this stimulus and thus a significant dip in activity when it was turned off. In the core EU nations no such boost has occurred and thus a reduction in economic activity from a cut in spending will be muted, at best, given their stable employment picture.

The longer the reductions are strung out and the longer stability is maintained, the more consumers will feel comfortable about increasing their spending. Ironically, U.S. states are increasing general fund expenditures in their FY 2011 budgets to $635.3 billion from $612.9 billion in FY 2010, according to the National Governors Association. Increased tax revenue from improving economic activity, the usage of remaining American Recovery Act Funds and “rainy day” funds will help stabilize a recovery.

Clearly, the U.S. received an initial boost from exports and government spending but this has provided a pathway for private sector restructuring. The Chinese have begun to talk down their economic activity somewhat but we should look to what they do as opposed to what they say.

Their interests are aligned with our interests, and their export sector needs a healthy global economy to continue to bring a few hundred million people out of the countryside. They maintain adequate gold reserves under the ground domestically and their willingness to backstop the U.S. dollar and their aid in keeping U.S. stimulus spending virtually interest free is a testament to their desire to move the global economy out of recession.

Confidence is slowly returning as employment stabilizes. Gallup polls suggest higher income consumers are beginning to spend more and this will filter down to middle income and eventually to lower income consumers even in light of the declining equity markets due to restructured personal balance sheets. Companies, in turn, will respond with increased production, inventory rebuilding and increased hiring.

Given this, I expect to see buyers enter the marketplace as interest rates drop and affordability increases. It is very unlikely we will have the same situation in 2010 that occurred in 2008 where no financing was available for purchasing activity.

We need to be patient as the healing occurs after such an economic downturn. The larger macro economic picture has improved and with global coordination among central bankers of the world we can get back to business as usual, albeit with a little less leverage this time around.

Duncan Frearson, CFA, is a co-managing partner at Smith Street Capital.

[Crafty_Dog]

The arguments for and against a double dip recession are a media-inflamed straw man.  Whether or not it occurs is irrelevant.  The salient issue is whether or not real GDP can resume a consistent growth rate sufficient to cause the millions of unemployed to get hired at compensation packages equivalent to their pre-layoff situation less any decline in their household debt service and discretionary spending costs.  Unless that occurs quickly, there will be more structural changes in the US economy for the worse.

 

On his blog, Scott Grannis (Marc: SG has been recommended here many times) notes that corporate profits are rising but corporations are not reinvesting most of those profits into their businesses with hiring.  That’s because anyone in this email circular who has ever operated his or her own business knows that you don’t hire new people until you need to hire them.  Businesses are finding that they don’t need to hire more people yet, because they can make do at current staffing levels and bring in temps when needed.  In fact, businesses are still laying off temporary and full time workers.  That’s why weekly jobless claims still exceed 450,000.

 

The other issue is demographic.  A lot of private sector layoffs occurred to higher income baby boomers in what would normally be their peak earnings years.  Also, a lot of them have seen their retirement nest eggs destroyed twice in the past decade.  Wages are the best way a person has to recoup lost investment funds.  However, the older baby boomers now must compete with younger workers and entry level workers for the same jobs.  Right now, they are losing most of those battles.  The result will be a greater demand for social security benefits by age 62-66 boomers.  This will destroy the current actuarial assumptions of social security.

 

The pessimists like Roubini forecast growth in real GDP.  They just see annualized growth of <2% in the second half of this year.  So, let’s discuss the real issue in the US.  How does an economy that was 60-70% consumer spending dependent and that grew for the past 10 or more years primarily based upon leverage resume those same growth rates with less leverage, with disposable income concentrated in less people, and with a government taxation and expenditure system that must itself deleverage?  I question whether the traditional macro-economic indicators cited in the article are merely correlations.  And, this time, we are experiencing another low probability economic event.  After all, since Q4 1960, there have been only 5 quarters in which nominal GDP declined on an annualized basis.  Three of those five quarters were Q4 2008, Q1 2009 and Q2 2009.

[Crafty_Dog]

Rick, the economy is not dependent on consumer spending, and consumer spending is not dependent on leverage. You're using Keynesian thinking (demand drives supply) rather than supply side thinking (supply drives demand). The only things that make the economy grow are 1) more work, 2) more efficient work, 3) investment, and 4) risk taking. If you have those, then you have the wherewithal for consumers to spend more. Leverage doesn't create new demand, it only redistributes demand (Peter borrows from Paul; Peter spends more, Paul spends less).

[DougMacG]

Interesting debate Crafty.  All sides make good points though I find Scott's supply side conclusion compelling.  Leveraging and de-leveraging will change consumption patterns somewhat - like we saw with the artificial 'wealth effect' of people borrowing back paper gains from the equity in their homes.  But real wealth is created on the production side by investing, risk taking, producing and selling the goods and services across the globe. 

A perfect example of why Keynesian, demand side domestic policies fail is the cash for clunkers program.  We put free money into the program to re-energize Ford, GM and Chrysler. The administrative costs were as high as the credit. The main beneficiaries turned out to be Toyota and Honda.  Some of the money from Japanese companies stays in the U.S. but the program is inefficient (understatement) when it is working and the after-affect is zero - or negative.

(I also find targeted programs of tax credit or public spending initiatives to be a violation of equal protection principles.)

Meanwhile, while we are allowing our successful tax rate cuts to expire - the opposite of stimulus - Taiwan is lowering its corporate tax rate again to stay competitive with Singapore.  China lowered its rate in Jan. 2008, right when our recession was beginning.  When a liberal tells you that after raising taxes on the rich the rates won't be that much worse than those under Reagan, remember this:  We aren't competing in a 1983 world.

Regarding double dip vs slow growth vs crash etc...  we will see.  I really don't know how far we can go in the wrong direction on the policy front before it all comes crashing down.  And if we take the root canal approach, chopping public spending while leaving nothing but pain and uncertainty for the private sector investor/employer, it could be a long hard grind out of this mess.

[Crafty_Dog]

I apologize if I have misused any economics jargon.  When I use the term “consumer spending”, I mean those personal consumption expenditures on goods and services that comprised about 70% of nominal GDP in the final revision for Q1-2010.  Those numbers tell a story of survival on a personal level unique to every household affected by this recession.

 

The three largest categories of increased personal consumption spending between 12/31/08 and 3/31/10 occurred in the categories of gasoline (+$59 billion), health care (+$42 billion) and financial services/insurance (+$21 billion).  Federal government consumption expenditures increased $42 billion during the same period.  The difference between total federal consumption expenditures plus investment of $1.2 trillion and actual amount of federal expenditures of nearly $4 trillion during the same 15 month period is very sobering.  Therefore, about $2.8 trillion of federal transfer payments occurred during a time that nominal GDP rose $236 billion.  A tad more than 50% of that nominal GDP increase occurred in the three PCE categories of gas, healthcare and financial services/insurance.  However, the real value of those expenditures only increased $15.9 billion – all but $100 million was in health care.  So, people were mostly paying more to keep the same level of necessary expenses while their health issues increased.

 

As to employment and the corporate hoarding of cash, I believe that my argument is very supply-side with a slight Austrian twinge.  The longer people remain unemployed, the more they rely upon government transfers and their savings.  With interest rates low to “stimulate” the economy, people do not receive any meaningful returns on their savings.  Eventually, they must sell assets whether in the form of retirement account withdrawals, housing or other assets.

 

As to leverage, it is often needed for liquidity.  It can be in the form of a credit card, home equity loan, business credit line or even a pay day loan.  Most people use leverage to buy homes, cars, vacations and other big ticket items.

 

As to the money supply, if most of the money sits on bank balance sheets as capital and in corporate bank accounts as cash, then your four factors of economic growth stagnate.  There is not more work.  Employable people lose their skills so that they become less productive.  Employed people work longer hours to the point that they become less productive.  Corporations don’t invest in growing their outputs.  Risk taking declines because the people with the cash are less willing to take the risk and the people willing to take the risk don’t have the cash.  Sam’s Club can’t finance every risk taker with vendor financing.

 

All of this has caused me to question the validity of the entire discipline of macroeconomics.  Maybe it’s all a crock similar to MPT and the risk management models that failed in the credit markets.  Yes, that may be a low probability event.  Of course, in 2003, the housing crash was a low probability event for the Fed.

[Body-by-Guinness]

Timothy P. Carney: President’s initiative revs up corporate welfare
By: TIMOTHY P. CARNEY
Examiner Columnist
July 9, 2010
President Obama is not "anti-business," as many conservative critics charge. He's just anti-free market. To better understand this distinction, just look at his latest initiative: trying to double U.S. exports in five years.

Obama's National Export Initiative, embraced by the big business lobby, is a raft of subsidies, handouts and "public-private partnerships." Obama uses the phrase "free trade" to describe this push, but there's nothing free about corporate welfare.

The heart of Obama's initiative is accelerating the activity of the Export-Import Bank, a government agency that subsidizes U.S. exports. Ex-Im lends money directly to foreign companies or governments -- or guarantees private bank loans -- so that the foreign buyers will buy American.

Calling Ex-Im "corporate welfare" isn't a slur -- it's a description. The White House brags that, as part of Obama's export initiative, "Ex-Im has more than doubled its loans to support American exporters from the same period last year. ... "

Perhaps to blunt the corporate-welfare charge, the administration portrays Ex-Im as a savior of small business. Last month, Ex-Im Chairman Fred Hochberg held a photo op in Centennial, Colo., trumpeting the jobs saved at Stolle Machinery by a subsidy enticing a Saudi Arabian company to buy machinery from Stolle.

But check out the minutes from the Ex-Im board meeting at which the Stolle subsidy was finalized. The other subsidies given either final or preliminary approval weren't so photo-op friendly: a federal guarantee for JP Morgan to subsidize a Boeing aircraft sale to Turkey's Pegasus Airlines; another loan guarantee for Boeing to sell jets to Asiana Airlines; $20 million in financing to subsidize GE turbines going to Slovakia; a direct loan of more than $20 million to the Pakistani government to buy GE locomotives; and yet another Boeing subsidy guaranteeing jet sales to Nigeria.

If you think Boeing's showing up a lot, you're getting the point. Last year, Ex-Im dedicated 64 percent of loans and long-term guarantees to subsidize Boeing sales. Yes, this federal agency exists mostly to subsidize one corporation.

Which brings us to the President's Export Council. Its chairman is Jim McNerney, CEO of Boeing. It makes sense that the nation's largest exporter should hold this seat -- and pocket most export subsidies -- but this just goes to show why increasing government tends to benefit the biggest businesses.

If there were no Ex-Im, and no President's Export Council, Boeing's size wouldn't be so advantageous.

McNerney this week expressed his confidence that Obama's council will advance policies to "expand free and fair trade." Of course, "free trade," when spoken by a politician, lobbyist or CEO, really means "subsidized trade."

And the other Export Council nominees bring with them a whiff of subsidy suckling. Jeff Kindler is CEO of Pfizer and chairman of the Pharmaceutical Researchers and Manufacturers of America.

PhRMA, the country's largest single-industry lobby, was a key champion -- and top beneficiary -- of Obama's health care bill. In fact, Pfizer justified Kindler's raise this year by pointing to his successful lobbying for Obamacare.

Patricia Woertz, another Export Council nominee, runs Archer Daniels Midland, a legend in the field of subsidy suckling. ADM's core business for decades has been corn-based ethanol -- a fuel that exists only because of federal subsidies and mandates. Ironically, ADM also depends on protectionism -- tariffs on imported ethanol, but also sugar quotas that drive up the price of sugar and thus create demand for corn syrup as a sweetener.

These sorts of businesses -- that live off of subsidies, handouts and government protections -- thrive under Obama. As a result, more businesses will come to the government teat. Meanwhile, increased taxes and regulations make it harder to make an honest buck.

It's reminiscent of how Ronald Reagan described the 1970s. "Back then," he said, "government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."


Timothy P. Carney is The Washington Examiner's lobbying editor. His K Street column appears on Wednesdays.



Read more at the Washington Examiner: http://www.washingtonexaminer.com/opinion/columns/Obama-revs-up-corporate-welfare-98062834.html#ixzz0tDPN5oyE

[G M]

http://www.ft.com/cms/s/0/83c978de-8b8a-11df-ab4d-00144feab49a.html

America: Optimism on hold
By Alan Beattie and Robin Harding

Published: July 9 2010 20:40 | Last updated: July 9 2010 20:40


 
Shopped out: downtime at the Mall of America, one of the biggest in the US. Job growth remains too slow to support the rise in consumption required for a self-sustaining recovery


A month ago, it all seemed to be going so well. Growth in the US economy was picking up. The financial system was, mainly, functioning. The risk of contagion from Europe had diminished after an unprecedented €110bn ($139bn, £91bn) bail-out from the European Union and the International Monetary Fund. Things were creeping back towards normality.

Then in early June, as Alan Greenspan, former Federal Reserve chairman, put it, the economy hit “an invisible wall”. The US had a run of bad news – disappointing job growth; unexpectedly low employment; indices suggesting manufacturing and services losing momentum; renewed jitters from Europe’s sovereign debt markets and its banks. While most economists think it unlikely this heralds the famous double-dip recession feared by policymakers, it does come at a time when America’s monetary and fiscal authorities are struggling for room to manoeuvre.

[DougMacG]

WSJ editorialized a while back - that 'Keynes is Dead', the way of thinking, not the man.
Scott Grannis says Supply Side is the key.
Yet we still run our policies through the failed Demand Side model,
from Krugman to Obama, to all of the committees in congress.
Keynesian in a nutshell says: you can "stimulate' the economy
with deficit spending, dropping oodles of money on people, and you will alleviate the downturns.
It must be true, both Obama and Krugman are Nobel Laureates. (So is Yassir Arafat)

It must be true, even though...
In the time of the Great Depression - we had a stock market crash,
like we did in 1987, and at other times,
but for the Great Depression we had the New Deal.
We opened the spout and poured money around.
Money we didn't even have.
And unemployment grew. And it grew and it grew.
So more we spent... and unemployment went to 20...and stayed there.

But this time is different,
or is it so different???
We had the crash - this time it was housing.
We had the panic with the banks, and we had the bank failures.
So we spent and we spent.
The deficit exploded, from 160B to 1.6T, a tenfold expansion.

So what is the result?
Unemployment more than double, from under 5, to just over 10.
What next? you might ask...
Double again.

[DougMacG]

Since Pelosi-Obama took control of congress and the federal government in Jan. 2007 deficit spending increased tenfold and unemployment went from 5% to 10%. 

Seems like just numbers on a page?  Watch it happen month by month, county by county in full color across the fruited plain:

http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html

[G M]

http://news.yahoo.com/s/ap/20100712/ap_on_bi_ge/us_governors_debt_commission

Debt commission leaders paint gloomy picture
           
By GLEN JOHNSON, Associated Press Writer Glen Johnson, Associated Press Writer – 2 hrs 36 mins ago
BOSTON – The heads of President Barack Obama's national debt commission painted a gloomy picture Sunday as the United States struggles to get its spending under control.

[ccp]

Sounds like panic mode if you ask me.  There is nothing magical about Clinton.  He was fortunate to have an internet boom/bubble while he was in office along with improved efficiencies/productivity that all burst just after he left.  Tax cuts kept things going for awhile. 
I don't think one needs to be an economist (whose predictions are next to guessing anyway) to see that until we lower expectations, raise retirement on Soc. Security on a national scale and localities stop allowing public employees to retire before 65 with pensions funded by tax payers, somehow hold down medical costs, and people wake up and realize they have to accept jobs they don't like (at least younger people who are fit to work physical labor) instead of sitting at home collecting checks then I don't see any long term upside.  Even tax cuts will only do so much for so long.

Although I am a primary care physician and the "medical home" model is bieng pushed, quite frankly, I don't see it as a means to reign in on costs unless, one means rationing care.  This idea of saving money by keeping people "healthy" (as though I can get everyone to start excercising and eating like a vegetarian etc.) is absurd.  Indeed it may/probably raises long term costs by keeping people alive longer utilizing more Soc. Sec. Medicare, and  health care dolllars on the backs of fewer workers.

When people died within three years of retirement (in the 1930's) rather than 15 (or if you are a public employee who can retire at 48, thus *35* years) the costs to taxpayers/workers was obviously less than it is now.  And of course this is even without stating the fact that there are far more older non working people for far fewer workers today.

Unless Clinton is ready to face these facts than forget about him.  And until Cans can do the same, tax cutting while I agree with overall is great and a lot better than bigger government, is unfortunately not the long term answer by itself.

****Obama enlists Bill Clinton's aid on economy
           WASHINGTON (Reuters) – President Barack Obama sought Wednesday to lift sagging confidence in his economic stewardship by enlisting the help of predecessor Bill Clinton, as a leading business group issued a scathing critique of the administration's policies.

Clinton, who presided over the 1990s economic boom, was to join Obama at a White House meeting with business leaders at 2:35 p.m. Eastern time to encourage job creation and investment, including in clean energy.

The U.S. Chamber of Commerce, a leading business group, issued a rebuke of Obama's economic agenda, accusing him and his Democrats in Congress of neglecting job creation and hampering growth with burdensome regulatory and tax policies.

Four months before the November congressional elections, Republicans have tried to paint Obama and his Democrats as anti-business.

Obama is increasingly turning to former President Clinton to help win over voters and the business community.

Clinton, seen by many in corporate America as sympathetic, has helped the White House by campaigning for Democratic candidates running in November's elections.

And Obama Tuesday named former Clinton administration veteran Jack Lew as the White House budget chief to help cut the huge deficit.

With unemployment stubbornly high, polls have reinforced Democrats' fears of big losses in November.

A survey by The Washington Post-ABC News showed 54 percent of Americans disapproved of Obama's leadership on the economy. In a CBS News poll, only 40 percent of Americans said they approved of Obama's handling of the economy.

JOBS SAVED

To counter such perceptions, the administration trumpeted an analysis from the White House Council of Economic Advisers that said government funding of clean energy, economic development, construction projects and other initiatives was spurring "co-investment" by the private sector.

The report, unveiled by CEA Chairman Christina Romer and Vice President Joseph Biden, estimated that Obama's $862 billion economic stimulus package had saved or created roughly 3 million jobs, and was on track to meet its goal of 3.5 million jobs by the end of this year.

"The impact of the fiscal stimulus suggest that the (Recovery Act) has raised the level of GDP as of the second quarter of 2010, relative to what it otherwise would have been, by between 2.7 and 3.2 percent," the report said.

"Real GDP growth is expected to remain steady in the second half of 2010 and throughout 2011."

But an open letter from the Chamber of Commerce threatened to overshadow that analysis. The Chamber's letter gave Obama credit for stabilizing the economy and preventing another Great Depression.

"But once accomplished, the congressional leadership and the administration took their eyes off the ball," the letter said.

"They neglected America's number one priority -- creating the more than 20 million jobs we need over the next 10 years for those who lost their jobs, have left the job market, or were cut to part-time status -- as well as new entrants into our workforce."

The Chamber released the letter to coincide with its "Jobs for America" summit in Washington Wednesday.

High budget deficits are among the complaints business groups have lodged against the Obama administration. A healthcare overhaul, financial regulatory reform and proposals to cap carbon emissions are cited by some corporate chieftains as examples of regulatory overreach.

(Additional reporting by Alister Bull and Patricia Zengerle; Editing by Alistair Bell and Eric Beech)****

[Crafty_Dog]

Forgive me, but fcuk the Chamber of Commerce.    Not only were Stimulus 1,2, & 3 not responsible for preventing a depression (a point on which some reasonable people disagree) but more pertinently here it is not the fg job of the government to CREATE jobs!!! The CoC here is simply the corporate face of the same fascist economic model of which BO is the socialist face.  BOTH are about the government directing the economy.  I certainly don't remember hearing many complaints out of the CoC when Bush was getting the ball rolling.

It is the government's job to get out of the way!!!

PS: Regarding Willie, his presidency was a giant mess until Gingrich and the Reps took over Congress.  Also relevant, but not due to Bill's doings, were the peace dividend from the collapse of the Soviet Empire; the rollback of welfare, and the cuts in the capital gains tax rate.

[Rarick]

Agree Crafty.  Newt actually had to lead a congressional strike to get attention when the Republicans were a majority.  It was labelled divisive, angry conservative, etc., but it got the budget under control.  Is was so in control that Clinton later decided to claim he balanced the budget.  Luuurve that slick move, he actually got away with it...........

[Body-by-Guinness]

The CBO Warns the Nation; Is Anybody Listening?

By Janice Shaw Crouse
Warning signs are everywhere -- most of them carefully phrased and nuanced, but warnings, nevertheless. Greece and, closer to home, California are painful reminders of what could happen. CNBC is reporting that the Dow is repeating patterns that prevailed just before the Great Depression. The U.S. workforce suffered one its sharpest declines ever -- a drop of 652,000 -- in June. Economists claim that "wages are flirting with deflation." It's hard to find good news on the financial front. Now, the Congressional Budget Office (CBO) just released its "Long-Term Budget Outlook" to confirm what people already feared: The national debt is devastating for the future of America. According to the CBO, "the federal government has been recording the largest budget deficits, as a share of the economy, since the end of World War II." As a result, the CBO paints a very bleak picture of our nation's future prospects. Further, as the world's remaining superpower, this country's terrible financial condition affects all other nations -- a fact that makes the CBO report even more alarming.

To compound the alarm, the CBO admits to understating the severity of the problem because its report does not include the negative impact that "substantial amounts of additional federal debt" would have on other aspects of the nation's economy.

We've been warned; is anybody listening?

The CBO made it clear that ObamaCare -- the health reform package that was shoved down the nation's throat -- did not "diminish" the problem; plus the economists at the CBO think that the president's pledge of tax cuts for the middle class will make matters worse and that health care costs will continue to "spiral out of control." Indeed, some analysts believe the Obama health care package locked in the unsustainable health care spending path. These expert evaluations confirm my recent report, Obamanomics, in which I noted: "Americans are learning that ObamaCare will pile on to an already insurmountable debt. ... It is obvious that ObamaCare is an unmitigated disaster for both our health care system and the nation's fiscal future."  The CBO does not mention the failure of the stimulus bill -- the American Recovery and Reinvestment Act -- that was supposed to create jobs, but unemployment remains close to double digits, and there has been no impact on either employment or payrolls. In short, the national debt is pushing us toward a fiscal crisis, and ObamaCare is expected to add $10 trillion to that debt over the next decade.

Almost no one questions the assertion that ObamaCare and its impact on the national debt are devastating for the future of America.

Nile Gardiner, a D.C.-based foreign affairs analyst for the British Telegraph, wrote, "America is sinking under Obama's towering debt." Thomas R. Eddlem, in the New American, wrote, "CBO Labels Current U.S. Debt Path 'Unsustainable.'" While such headlines are alarmist, they are accurate. While Greece has already faced a financial meltdown and the U.K. is launching austerity measures to deal with its debt crisis, the Obama administration is ignoring the warning signs about the nation's debt crisis and downplaying the devastating report from the CBO.

The CBO report notes that the federal debt will likely reach 62 percent of GDP by the end of this year. One projection is that the debt-to-GDP ratio will be 80 percent by 2035, and another projection is far bleaker -- 87 percent by 2020. That latter, more likely scenario means "the growing imbalance between revenues and noninterest spending, combined with spiraling interest payments, would swiftly push debt to unsustainable levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2025 and would reach 185 percent in 2035." As the CBO noted, such numbers are "uncharted territory." Put simply and appallingly, these numbers mean that "health care costs, Social Security and interest on the national debt will exceed all tax money coming in to the federal government by 2035."

Such an unheard of level of debt to GDP would "reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment -- which, in turn, would lower income growth in the United States. Growing debt would also reduce lawmakers' ability to respond to economic downturns and other challenges."

In other words, the U.S. would face an unprecedented fiscal crisis that would lead, inevitably, to America's decline and to international instability of unimaginable dimensions. John Shaw, at MarketNews.com, described previous CBO reports as seeming like a car headed "steadily, inexorably, toward a cliff and nobody seems able or willing to grab the steering wheel or slam on the brakes. Ahead a calamitous event looms." Shaw claims that this year's report is similar, only worse. "The car is still moving toward great danger, the cliff seems closer, the fall ahead seems more dangerous than ever -- and the margin for error is almost gone."

Sadly, Shaw's dismal picture is not sobering enough. Douglas W. Elmendorf, director of the CBO, noted that the nation's debt to GDP surged from 40 percent to 62 percent in just two years. Elmendorf's most realistic scenario is 87 percent debt to GDP by 2020, 223 percent by 2040, and a "mind boggling" 854 percent by 2080. All this, Elmendorf said, "could include higher interest rates, more foreign borrowing, less private investment and lower income growth, if not a full-blown fiscal crisis."

Note that nobody is talking about dismantling the out-of-control entitlement system, including ObamaCare, which is the cause of this crisis. Instead, the proposed "cures" include continuing with business as usual and "piling on" America's already beleaguered middle class. Those who recommend increasing revenues and cutting spending acknowledge that it would be an intricate balancing act, where the wrong action at the wrong time could make the "sharp deterioration in the fiscal situation" even worse. The situation is bad. And, as Robert Reich, former U.S. Secretary of Labor, said, "The booster rockets for getting us beyond it are failing."

Page Printed from: http://www.americanthinker.com/2010/07/the_cbo_warns_the_nation_is_an.html at July 16, 2010 - 04:18:34 PM CDT

[DougMacG]

We were warned earlier in the year by economic optimists even with supply side credentials not to count politically on the economy staying weak through the mid-terms.  Even if the real multiplier for the false stimulus is 0.5 or 0.8 instead of 1.5 as advertised, there still should be some temporary boost in the economy from the massive infusion.

But there are other factors: These hit and miss, piecemeal, drive-by 'stimulus' programs - cash for clunkers, homeowner credit, a bridge here and a building there - don't build any confidence as we know they are short-lived.  Meanwhile a host of other issues put a cloud over the future on risk-taking, hiring and expansion: the coming tax hikes, the coming cap-trade penalties, the coming healthcare trainwreck, the debt crisis, the unfunded entitlement crisis, etc. etc.  These new, lowered forecasts leave plenty of room to underperform as well as we continue to NOT address any of the challenges we face.

http://news.yahoo.com/s/ap/20100714/ap_on_bi_ge/us_fed_forecast

Fed paints weaker picture of growth and employment
AP

WASHINGTON – Federal Reserve officials have a slightly dimmer view of the economy than they did in April, reflecting worries about how the European debt crisis could affect U.S. growth and job prospects.

Fed officials said Wednesday in an updated economic forecast that they think the economy, as measured by the gross domestic product, will grow between 3 percent and 3.5 percent this year. That's a downward revision from a growth range in their April forecast of 3.2 percent to 3.7 percent.

The Fed's latest forecast sees the unemployment rate, now at 9.5 percent, possibly staying at that figure or in the best case falling to 9.2 percent. In the April forecast, the Fed had a slightly lower bottom number of 9.1 percent.

The Fed said in the minutes of its June 22-23 meeting that its lower economic projections reflected "economic developments abroad" — a reference to the debt crisis that began in Greece and threatened to spread to other European countries.

While reducing the forecast for growth and employment, the Fed also saw less of a threat from inflation.

The Fed predicted that a key inflation gauge that's tied to consumer spending would show prices rising 1 percent to 1.1 percent this year. That's down from an April forecast that consumer prices would increase by 1.2 percent to 1.5 percent.

The absence of inflationary pressures gives the Fed leeway to keep interest rates low to try to bolster growth as the economy recovers from the deepest recession since the 1930s.

The new forecast was compiled at the last meeting of the Fed's interest rate-setting Federal Open Market Committee on June 22-23. At that meeting, the FOMC, which is composed of Fed board members and the 12 Fed regional bank presidents, kept a key rate at a record low of 0 to 0.25 percent, where it's been since December 2008.

The Fed's new forecast made only minor changes to its outlook for growth, unemployment and inflation. But those changes underscored a view that economic prospects were slightly weaker.

The factors the Fed cited were household and business uncertainty, weak real estate markets, a tough job market, waning fiscal stimulus and still-tight lending by banks.

The Fed in April had said only a minority of Fed officials thought it would take more than five or six years to reach the Fed's goals for maximum employment with low inflation. But in the new minutes, the Fed changed that to say that "most" expected it to take "no more than five or six years."

Beyond this year, the Fed forecast growth in 2011 to be in a range between 3.5 percent to 4.2 percent. The upper limit of that range was reduced from 4.5 percent in the April forecast.

The expectation for the unemployment rate next year was also nudged higher to a range of 8.3 percent to 8.7 percent. That was up from a range of 8.1 percent to 8.5 percent in April.

[Body-by-Guinness]

And think, these dynamics are about to come to medical care.

Public Transit: A Classic Example of Government in Action

Posted by Randal O'Toole

Since 1970, the number of workers needed to operate America’s public transit systems has increased by 180 percent while the inflation-adjusted cost of operating buses, light rail, and heavy rail (the only modes whose costs are known back to 1970) increased by 195 percent. Yet ridership on those modes increased by only 32 percent.



Flickr photo by Bradlee9119.

Each transit worker produced 53,115 transit trips in 1970, but only 26,314 trips by all modes in 2008. The real cost per rider grew by 124 percent, while subsidies (fares minus operating costs) grew by more than 8 times. Though capital cost data prior to 1992 are sketchy, capital costs also grew tremendously, almost certainly by more than operating costs. By any measure, then, transit productivity has declined more than 50 percent. “It’s uncommon to find such a rapid productivity decline in any industry,” noted the late University of California economist Charles Lave.

(All transit data are from the 2010 Public Transportation Fact Book, tables 1, 12, and 38. 1970 dollars adjusted for inflation using the GDP deflator.)


What accounts for this huge decline in productivity? Simple: government ownership. Prior to 1965, most transit systems were private and the industry as a whole was declining but profitable. In 1964, Congress passed the Urban Mass Transit Act, which promised federal capital grants to any government-owned transit systems. Cities and states quickly took over private transit systems, and transit agencies soon discovered that the federal government was just as willing to fund expensive transit systems as inexpensive ones, so they overbought, purchasing giant buses where small ones would do and building expensive rail lines where buses would do.

To cover their operating losses, transit agencies taxed as large an area as they could, but were then politically obligated to provide transit service to the entire taxed area. While transit’s main market is in the dense inner cities, agencies began running buses and, in many cases, building rail lines to relatively wealthy low-density suburbs that have three cars in every garage. The result of overbuying and extended service was lots of nearly empty buses and railcars: the average transit vehicle load is only about one-sixth of capacity, so if you are the sole occupant of a five-passenger SUV, you can be smugly proud that the car are driving has a higher occupancy rate than public transit.

On top of this, to be eligible for federal transit grants, Congress required transit agencies to obtain the support of local transit unions, giving unions leverage to negotiate generous pay and benefits packages. The highest-paid city employee in Madison, Wisconsin last year was a bus driver who earned nearly $160,000. The New York Times recently documented that more than 8,000 employees of the New York Metropolitan Transportation Authority (MTA) earned more than $100,000, with one collecting $239,000, last year.

Union employees reach such lofty pay levels by putting in lots of overtime. MTA even pays $34 million a year in overtime to employees who are on vacation, on the theory that if they weren’t on vacation they would probably be working overtime. When Los Angeles’ transit agency tried to save money by hiring more employees so it won’t have to pay as much overtime, union workers went on strike for 30 days and forced the agency to back down.

The American Public Transportation Association (APTA), a lobby group whose budget is several times larger than all of the highway lobby groups in DC combined, promotes increased subsidies for transit by claiming transit is better for the environment than automobiles — a claim the Cato Institute has refuted. Per passenger mile, transit and cars actually use about the same amount of energy and emit the same amount of pollution. In fact, all but a handful of transit system are far worse for the environment than cars. Moreover, cars are rapidly becoming more energy efficient, while transit has grown less energy efficient as agencies run more and more empty buses and trains into remote suburbs.

Urban transit buses are some of the most energy-intensive vehicles around because they are mostly empty. Yet private, intercity buses are some of the most energy-efficient vehicles in the country because the private operators know to run them where people want to go, and thus they average half to two-thirds full.

APTA’s other argument for transit is that it saves people money. Many transit agencies have a calculator on their web sites purporting to show how much people can save riding transit instead of driving their cars. But all these claims ignore the huge subsidies to transit.

This Cato briefing paper compared the costs of different forms of travel in 2006. Updating to 2008, auto owners spent about 22 cents a passenger mile driving, and subsidies to highways added another penny a passenger mile. Airfares averaged about 14 cents a passenger mile, and subsidies to airports added another penny. Amtrak fares averaged 30 cents a passenger mile, and subsidies brought the total to nearly 60 cents. Urban transit is about the most expensive form of travel in the United States, with fares averaging only about 21 cents a passenger mile but subsidies of 72 cents a passenger mile. This makes transit 4 times as expensive as driving.

In short, those who want to get people out of their cars and onto transit are trying to get people from an inexpensive, convenient, and increasingly energy-efficient form of travel to an expensive, inconvenient, and increasingly energy-wasteful form of travel.

The real solution for transit is privatization. Private operators would use smaller buses and would mainly serve the dense inner cities that have low rates of auto ownership. At a broader level, the transit industry offers lessons for anyone who thinks that government can do a better job at providing goods and services than the free market.

http://www.cato-at-liberty.org/2010/07/19/public-transit-a-classic-example-of-government-in-action/

[DougMacG]

(Should be under Founding Fathers)
Milton Freidman as re-told by Scott Grannis as he views at the great pyramids:
http://scottgrannis.blogspot.com/

A politician and a union boss are walking by a construction site. They see two giant machines excavating the ground in preparation for the foundation of a large building. Each machine is operated by a single person. The union boss laments that if it weren't for the machines, there could be hundreds of workers digging the foundation with shovels, creating so many more jobs and (presumably) so much more prosperity. The politician sneers, and says, "just think how many thousands of people could be employed here if it weren't for shovels, and they had to dig the foundation with their hands!"

[DougMacG]

Time permitting I will try to post and answer the thought leaders of left-economics like Krugman, Reich and Obama.  Reich hits his facts mostly right on this one.  These companies scaled back unprofitable operations, improved productivity and made money.  Problem is that he mentions ONLY big businesses that are CLOSELY TIED to big government: GM, Ford, GE.  These companies IMO have more in common with big government than they do with free enterprise.  He fails to mention the reasons WHY they move operations off-shore: tax rates, regulations, energy availability, labor rules etc. etc. All the things he favors.

In this story, we see the 'success' of the chosen companies with their teams of lawyers and lobbyists that have successfully gamed the system to make money while employing fewer and fewer in the US.  That is an accomplishment for them - at our expense with wind turbine tax credits for GE, hybrid tax credits for auto makers, artificial barriers to entry keeping competition down, etc.  The story of the American economy today is everything that is not in this story.  What are the rest of us supposed to do, the ones who did not have lobbyists cutting special deals, the ones who play by the rules and end up just having to pay for all the burdens we put on investors, employers, risk-takers and heaven forbid anyone who ends up eeking out a profit.

As an alternative, how about we all compete EVENLY on a level playing field, in a system designed to compete successfully in the 2010's globally competitive markets.

http://www.businessinsider.com/great-decoupling-of-corporate-profits-from-jobs-2010-7
The Great Decoupling Of Corporate Profits From Jobs
Robert Reich |  Jul. 27, 2010

[Crafty_Dog]

"Time permitting I will try to post and answer the thought leaders of left-economics like Krugman, Reich and Obama."

Doug:

An excellent start on a most worthy mission.  I look forward to more.

[Rarick]

Doug highlights a major part of the problem.  The lobbies are financing elections and reelections, that has corrupted the process.  That influence has disenfranchised the people for all practical purposes.  With the everyday mom and pop out of the loop, is it surprising that congress ends up doing more harm than good?

[DougMacG]

"The lobbies are financing elections and reelections, that has corrupted the process."

The lobbyists and campaign contributions make perfect sense when they are used to defend the business or industry against legislation that would harm them.  But you would think that any proposed legislation designed with preferential treatment for an individual business or industry would be instantly rejected as opposing our founding principles.  Not so. 

[Rarick]

Right I have no problem with opposing new laws- defending.  There are too many cases where these guys are proposing or writting the laws being passed...............

[Body-by-Guinness]

Even Keynesian Accounting Can’t Find All That ‘Stimulus’

Posted by Alan Reynolds

From January 2009 to the present, President Obama and his team have repeatedly made grandiose claims about the economic benefits of shoveling money at shovel-ready projects or green jobs.  “It is largely thanks to the Recovery Act that a second Depression is no longer a possibility,” said the President.   He also claimed that lavish spending alone (not Federal Reserve actions or bank bailouts) is what prevented the unemployment rate from “getting up to . . . 15%.”

If any of that were remotely close to being true then, as a matter of simple accounting, rising federal spending would have shown up as a huge offset to falling GDP in 2009, and also as a major component of the modest increase in GDP growth in early 2010.   On the contrary, the table below shows that the increase in federal nondefense spending contributed only two-tenths of one percent (0.2) to the change in GDP in 2009.  That was no better than 2008 when the Recovery Act did not exist.  If nondefense spending had not increased at all in 2009 (unlike 2008) then GDP would have fallen 2.8% rather than 2.6% — scarcely the difference between a recession and a “second Depression.”  If nondefense federal spending had not increased at all in 2010, the economy still would have grown at a 3.6% pace in the first quarter, 2.1% in the second.  Cutbacks in state and local spending were a trivial damper on GDP growth last year, contrary to recent speculation, and real state and local spending rose significantly in this year’s second quarter (unlike the first).

This is just an exercise in crude Keynesian accounting, not economics.  Yet it nonetheless makes the stimulus bill look like a huge waste of money.  The reason Keynesian accounting is no substitute for economics is that governments can only spend other peoples’ money.  To claim that such spending is a net addition to “aggregate demand” is to ignore those other people — namely, current and future taxpayers.

Nobel Laureate Robert Lucas put it this way:

If the government builds a bridge . . . by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash.  It has no first-starter effect.  There’s no reason to expect any stimulation.  And, in some sense, there’s nothing to apply a multiplier to.  You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge.  And then taxing them later isn’t going to help, we know that.

[Crafty_Dog]

Alan Reynolds is awesome

[Crafty_Dog]

 

Quantitative Easing Two:
Not even a week had passed since ECB President Trichet’s article, “Stimulate No More – It Is Now Time to Tighten,” before Federal Reserve Bank President James Bullard thrusts himself into the debate with his paper, “Seven Faces of ‘The Peril.’”

Dr. Bullard’s concluding sentences:  “To avoid [the Japanese] outcome for the U.S., policymakers can react differently to negative shocks going forward. Under current policy in the U.S., the reaction to a negative shock is perceived to be a promise to stay low for longer, which may be counterproductive because it may encourage a permanent, low nominal interest rate outcome. A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.”

The New York Times (Sewell Chan) had a reasonable spin on Bullard’s piece:  “A subtle but significant shift appears to be occurring within the Federal Reserve over the course of monetary policy amid increasing signs that the economic recovery is weakening.  … James Bullard, the president of the Federal Reserve Bank of St. Louis, warned that the Fed’s current policies were putting the American economy at risk of becoming ‘enmeshed in a Japanese-style deflationary outcome within the next several years.’  The warning by Mr. Bullard… comes days after Ben S. Bernanke, the Fed chairman, said the central bank was prepared to do more to stimulate the economy if needed…”

Reading Dr. Bullard’s paper - and listening carefully to his comments – recalls Dr. Bernanke’s historic speeches back in late-2002:  “Asset-Price ‘Bubbles’ and Monetary Policy”; “On Milton Friedman’s Ninetieth Birthday”; and “Deflation:  Making Sure ‘It’ Doesn’t Happen Here.”  Dr. Bernanke fashioned the backdrop – erudite academic justification for aggressive “activist” monetary management - and today the Federal Reserve appears poised to embark only farther into perilous uncharted waters.  Last week, I presumed that Mr. Trichet’s stark warning against further stimulus was in response to market clamoring for additional quantitative easing from the Fed.  It would now appear his comments may have been directed squarely at our central bank.

“The Peril” in Dr. Bullard’s title is in reference to a 2001 academic article “The Perils of Taylor Rules.”  In simple terms, many accept the thesis that there is potential “peril” confronting a monetary management regime at the point when policymakers have lowered rates to near zero – yet the inflation rate remains stuck in negative territory (“deflation”).  Japan is used as a contemporary example of how policymakers failed to act convincingly to ensure operators throughout the markets and real economy understood that deflationary pressures would not be tolerated.

From Bullard:  “The policymaker is completely committed to interest rate adjustment as the main tool of monetary policy, even long after it ceases to make sense (long after policy becomes passive), creating a second steady state for the economy. Many of the responses to this situation described below attempt to remedy this situation by recommending a switch to some other policy in cases when inflation is far below target. The regime switch required has to be sharp and credible. Policymakers have to commit to the new policy and the private sector has to believe the policymaker.”

Ten-year Treasury yields dropped to 2.92% today.  Benchmark MBS yields sank 15 bps in two sessions to 3.49%.  The markets are taking Dr. Bullard’s talk of a “sharp and credible” regime switch – Quantitative Easing Two – seriously.  The dollar dropped another 1.1% this week and the CRB Commodities index jumped 2.9 %.  The market backdrop is increasingly reminiscent of the summer of 2007.  The initial ’07 eruption in subprime incited market weakness and volatility, an aggressive Federal Reserve response, a weak dollar and quite a run for commodities markets.

Back in 2002, I thought (and wrote as much) Dr. Bernanke’s monetary views were radical and dangerous.  He burst onto the scene as the right guy at the right time to lead an epic battle against the scourge of deflation.  I view the period 2001 through 2006 as a historic period of faulty analysis and failed monetary management.  In short, zealous policy measures were implemented from a flawed analytical framework.  While fighting so-called deflation risk, our central bank accommodated a perilous Bubble throughout mortgage and Wall Street finance.  The Fed’s “activist” approach was an unmitigated disaster.  Dr. Bullard’s paper addresses this period from an opposing perspective:  “2003-2004… This period was the last time the FOMC worried about a possible bout of deflation.”

From Bullard:  “The Thornton [St. Louis Fed economist] analysis emphasizes how the FOMC communicated during this period, and how the market expectations of the longer-term inflation rate responded to the communications. At the time, some measures of inflation were hovering close to one percent, similar to the most recent readings for core inflation in 2010. At its May 2003 meeting, the Committee included the following press release language: .... ‘the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level.’ At several subsequent 2003 meetings the FOMC stated that ‘…the risk of inflation becoming undesirably low is likely to be the predominant concern for the foreseeable future.”

During the three-year period ’02-’04, benchmark MBS yields averaged 5.22%, down significantly from the 7.16% average from 2000-’01.  The Fed was “successful” in jawboning rates lower, in spite of the unprecedented surge in demand for mortgage borrowings.  “Activist” monetary policymaking circumvented market forces, allowing a huge increase in the demand for mortgage Credit to be satisfied at historically low market yields. 

Well, you either believe that the market forces of supply and demand should be left to determine the price (market yield) of finance - or you don’t.  And you either appreciate that the price of finance plays a fundamental role in the effective allocation of financial and real resources in a Capitalistic system – or you disregard this critical dynamic at the system's peril.  Inarguably, Federal Reserve rate policy and communications strategy were instrumental in distorting market prices (MBS, real estate, stocks, etc.) and perceptions of risk and, in the process, fomenting the great mortgage/Wall Street finance Bubble.

Focusing instead on the general price level, or “inflation,” Dr. Bullard comes to a very different conclusion with respect to policy performance during this crucial period:  “In the event, all worked out well, at least with respect to avoiding the un-intended steady state. Inflation did pick up, the policy rate was increased, and the threat of a Japanese-style deflationary outcome was forgotten, at least temporarily. Was this a brilliant maneuver, or did the economic news simply support higher inflation expectations during this period?”

Regular readers know that I use the terms “Keynesian” and “inflationism” interchangeably.  Inflationism has been an influential concept for centuries; Keynes just created the most sophisticated and alluring conceptual framework.  I argued against the Keynesians earlier in the decade.  The critical flaw in their theoretical construct is that the Federal Reserve somehow controls “THE” general price level.  This is a dangerous myth perpetuated by those committed to activist monetary management.

The Keynesians take Credit for thwarting the deflationary forces from earlier this decade.  After declining to about a 1% y-o-y rate during the first half of 2002, inflation was a “safer” 4% or so by 2006.  This, it was said, provided policymakers the latitude they required to ensure the U.S. did not succumb to the Japanese predicament.  In the process, total U.S. mortgage Credit almost doubled in just six years.  The aggregate of consumer prices may have been reasonably tame, but asset prices and economic maladjustment were not.  The Fed used mortgage Credit to reflate the system and, not surprisingly, we now face a much worse predicament.

The problem with inflationism has always been that once it gets ingrained within the system – in the Credit system, the real economy, within market perceptions, expectations and asset prices – there’s just no turning back.  The more protracted the inflationary Credit boom – and the more problematic the associated Bubbles – the more unpalatably painful the bust is viewed in the minds of politicians and central bankers.  Historically, it often became a case of “just one more bout of money printing to get us over the hump.”  Just get through the pressing crisis and then it will be time to find monetary religion. 

It is the nature of protracted Credit Bubbles that devastating busts are held at bay only through increasingly expansive monetary stimulus.  Invariably, this corrosive process destroys the soundness of system debt and the underlying currency.  Too often, a crisis of confidence in private debt incites a dangerous cycle of public Credit (“money”) inflation.  Commenting this morning on CNBC, Dr. Bullard stated, “In monetary policy, you can never say you’re done.”  This is precisely the nature of inflationism.

Dr. Bullard makes passing mention of Bubble risk:  “The FOMC’s near-zero interest rate policy and the associated ‘extended period’ language has caused many to worry that the Committee is fostering the creation of new, bubble-like phenomena in the economy which will eventually prove to be counterproductive.  One antidote to this worry may be to increase the policy rate somewhat, while still keeping the rate at a historically low level, and then to pause at that level.”

When I read (and listen) to such comments from our leading central bankers, I can only scratch my head and ponder the degree to which they appreciate financial and economic history – including recent financial crises.  Dr. Bullard’s paper suggests that the Japanese predicament of long-term substandard growth is the worst-case scenario for the U.S. economy.  It is more likely the best-case.

And I find myself increasingly frustrated by the ongoing “inflation vs. deflation debate.”  With today’s low level of consumer price inflation, those arguing that deflationary forces are the paramount systemic risk now dominate policy dialogue.  Most tend to be inflationists.  Most argue for additional stimulus and see little risk in such activist policymaking. 

I see risks altogether differently.  We are in the late-phase of a multi-decade historic Credit Bubble.  The greatest risk at this point is that massive issuance of non-productive governmental debt foments a crisis of confidence at the very heart of our monetary system.  The top priority must be to ensure that such a devastating outcome is avoided – and at significant unavoidable cost.  It is imperative that we as a nation come to the recognition that real financial and economic pain must be endured to protect the long-term viability of our monetary system.  The inflation rate is not the key issue.  And efforts to try to inflate our way out of structural debt problems are a lost cause.  We must instead move forcefully to rein in our deficits and avoid further debt monetization in order to protect the soundness of our money and Credit - or else risk a financial crash. 

Most regrettably, Washington policymaking (fiscal and monetary) is on a trajectory that will inevitably destroy the creditworthiness of our nation’s vast liabilities. With ominous parallels to the mortgage/Wall Street finance Bubble, Federal Reserve policies have fostered Bubble dynamics throughout our Treasury, agency and debt markets, more generally.  Instead of market dynamics working to discipline Washington’s profligate debt expansion, Federal Reserve interventions ensure that a distorted marketplace again accommodates perilous Credit excess.  Our central bankers should heed Mr. Trichet’s warning.  Additional quantitative ease will only fuel the Bubble and risk calamity.
 

[DougMacG]

Regarding the Romer research paper that demonstrated that an exogenous tax increase, like the one coming Jan. 1, will be HIGHLY CONTRACTIONARY.  Crafty wrote (over at Tax Policy): "Isn't C. Romer that chunky bureaucratic drone female who is BO's chief economist?  Fascinating that she would think this AND publish it!'

We were all over this one, Romer is OUT.  Gone like McChrystal. Publishing economic consequences of irresponsible policies is now considered insubordination.  Let me guess, she wants to spend more time with family...
----------------
http://www.washingtonpost.com/wp-dyn/content/article/2010/08/05/AR2010080506682.html

Christina Romer, chair of Obama's Council of Economic Advisers, to resign

[G M]

http://hotair.com/archives/2010/08/08/kudlow-panic-setting-in-at-wh-over-economy/

Kudlow: Panic setting in at WH over economy

[DougMacG]

"Panic setting in at WH over economy"

The panic at the White House is over the loss of political power.  The economic carnage is really not that surprising based on their stubborn adherence to anti-growth policies.

Kudlow is right.  4% growth is needed to move at all out of this conundrum. Economists typically consider breakeven 'growth' to be around 3.1%  Anything less is moving in the wrong direction.

But sustained 4% growth is not possible with anti-growth, anti-wealth, anti-private-sector policies.  Divided government alone, after the election, is not going to fix that.  The Dem party needs to reform its views economically from the inside, but it is the liberals representatives in liberal districts that will survive this and the moderate Dems in conservative leaning districts that will be leaving congress.

[DougMacG]

I know no one here is reading or following Krugman, our nation's Keynesian-Marxist spiritual leader, but here is Paul Ryan's reply to Krugman's latest attack on the 'Ryan Roadmap':
------
http://www.jsonline.com/news/opinion/100160259.html

Despite watching European welfare states collapse under the weight of their own debt, those running Washington are leading us down precisely the same path. With the debt surpassing $13 trillion, we can no longer avoid having a serious discussion about how to address the unsustainable growth of government.

Unfortunately, rather than make meaningful contributions to this conversation and bring solutions to the table, Democrats have attempted to win this debate by default. Relying on demagoguery and distortion, the left would prefer that entitlements - often labeled the "third rail" of American politics - remain untouchable, and the column by Paul Krugman of The New York Times is indicative of the partisan attacks leveled against the plan I've offered, a "Roadmap for America's Future."

When I introduced the "Roadmap," my hope was that it would spur an open and honest discussion about how our nation can address its fiscal challenges. If we are truly committed to developing real solutions, this discussion must be free of the inflammatory rhetoric that has derailed past reform efforts. In keeping with this spirit, it is necessary to clarify some of the inaccurate claims and distortions made recently regarding the "Roadmap."

The assertion by Krugman and others that the revenue assumptions in the "Roadmap" are overly optimistic and that my staff directed the Congressional Budget Office not to analyze the tax elements of the "Roadmap" is a deliberate attempt to misinform and mislead.

I asked the CBO to analyze the long-term revenue impact of the "Roadmap," but officials declined to do so because revenue estimates are the jurisdiction of the Joint Tax Committee. The Joint Tax Committee does not produce revenue estimates beyond the 10-year window, and so I worked with Treasury Department tax officials in setting the tax reform rates to keep revenues consistent with their historical average.

What critics such as Krugman fail to understand is that our looming debt crisis is driven by the explosive growth of government spending - not from a lack of tax revenue.

Krugman also recycles the disingenuous claim that the "Roadmap" - the only proposal certified to make our entitlement programs solvent - would "end Medicare as we know it."

Ironically, doing nothing, as Democrats would prefer, is certain to end entitlement programs as we know them, and in the process, beneficiaries would face painful cuts to these programs. Conversely, the "Roadmap" would pre-empt these cuts in a way that prevents unnecessary disruptions for current beneficiaries.

It reforms Medicare and Social Security so those in and near retirement (55 and older) will see no change in their benefits while preserving these programs for future generations of Americans. We do not have a choice on whether Medicare and Social Security will change from their current structure - the true debate is if and how these programs will be made solvent.

Far from the "radical" label that critics have tried to pin on it, the Medicare reforms in the "Roadmap" are based on suggestions made by the National Bipartisan Commission on the Future of Medicare, chaired by Sen. John Breaux (D-La.). That commission recommended in 1999 "modeling a system on the one members of Congress use to obtain health care coverage for themselves and their families." With respect to Medicare and Social Security, the "Roadmap" puts in place systems similar to those members of Congress have. There has been support across the political spectrum for these types of reforms.

By dismissing credible proposals as "flimflam," critics such as Krugman contribute nothing to the debate. Standing on the sidelines shouting "boo" amounts to condemning our people to a future of managed decline. Absent serious reform, spending on entitlement programs and interest on government debt will consume more and more of the federal budget, resulting in falling standards of living and higher taxes as we try to sustain an ever larger social welfare state.

The American people deserve a serious and civil discussion about how to reduce our exploding debt and deficit. By relying on ad-hominem attacks and discredited claims, Krugman and others are missing an opportunity to contribute to this discussion and are only polarizing and paralyzing attempts to solve our nation's fiscal problems.

I reject the notion that these problems are too big or too difficult to tackle or that it is acceptable to leave future generations of Americans an inferior standard of living than we enjoy. The "Roadmap" shows that a European-style social welfare state is not inevitable, that it is not too late for our nation to choose a different path and that we can do so in a way that preserves our freedoms and traditions.

[ccp]

ON the yahoo news, another liberal MSM outlet written by someone who read a NYT published article from David Stockton.  I cannot pull up the NYT article since I don't subscribe.  It is interesting how the claim is it is all the fault of Republicans.  I see it more as the fault of liberals with Republicans trying to keep up with "conservative compassion" so to speak.  I have pointed out before that I do agree the widening gap between wealth and non wealth is a huge problem that is getting bigger.  It is not merely that wealthy people are the only ones with brains, the only ones who work hard. It is in our capitlistic society once they reach a certain lelel they do indeed hold all the cards.  I have never heard an answer about this from the right.  OTOH I don't believe welath confiscation and doles are the answer either.

In any case blaming republicans for this coming catastrophy and not dems is in my very humble and arm chair opinion ridiculous.  Yet some points appear to have some merit on the face of the logic of the arguments. 

Lastly I don't know how accurate this guy's assesment of Stocktons take is since no doubt he is a grinning liberal happy to post all over this hit piece on the Republicna party.

 Aug 11, 2010, 12:06PM EDT - U.S. Markets close in 3 hrs 54 mins
Reagan Insider: 'GOP Destroyed U.S. Economy'
by Paul B. Farrell
Tuesday, August 10, 2010

ShareretweetEmailPrintCommentary: How: Gold. Tax cuts. Debts. Wars. Fat Cats. Class gap. No fiscal discipline

"How my G.O.P. destroyed the U.S. economy." Yes, that is exactly what David Stockman, President Ronald Reagan's director of the Office of Management and Budget, wrote in a recent New York Times op-ed piece, "Four Deformations of the Apocalypse."

Get it? Not "destroying." The GOP has already "destroyed" the U.S. economy, setting up an "American Apocalypse."

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Yes, Stockman is equally damning of the Democrats' Keynesian policies. But what this indictment by a party insider -- someone so close to the development of the Reaganomics ideology -- says about America, helps all of us better understand how America's toxic partisan-politics "holy war" is destroying not just the economy and capitalism, but the America dream. And unless this war stops soon, both parties will succeed in their collective death wish.

But why focus on Stockman's message? It's already lost in the 24/7 news cycle. Why? We need some introspection. Ask yourself: How did the great nation of America lose its moral compass and drift so far off course, to where our very survival is threatened?

We've arrived at a historic turning point as a nation that no longer needs outside enemies to destroy us, we are committing suicide. Democracy. Capitalism. The American dream. All dying. Why? Because of the economic decisions of the GOP the past 40 years, says this leading Reagan Republican.

Please listen with an open mind, no matter your party affiliation: This makes for a powerful history lesson, because it exposes how both parties are responsible for destroying the U.S. economy. Listen closely:

Reagan Republican: the GOP should file for bankruptcy

Stockman rushes into the ring swinging like a boxer: "If there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation's public debt ... will soon reach $18 trillion." It screams "out for austerity and sacrifice." But instead, the GOP insists "that the nation's wealthiest taxpayers be spared even a three-percentage-point rate increase."

In the past 40 years Republican ideology has gone from solid principles to hype and slogans. Stockman says: "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."

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--------------------------------------------------------------------------------
Visit the Banking & Budgeting Center 

No more. Today there's a "new catechism" that's "little more than money printing and deficit finance, vulgar Keynesianism robed in the ideological vestments of the prosperous classes" making a mockery of GOP ideals. Worse, it has resulted in "serial financial bubbles and Wall Street depredations that have crippled our economy." Yes, GOP ideals backfired, crippling our economy.

Stockman's indictment warns that the Republican party's "new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one:"

Stage 1. Nixon irresponsible, dumps gold, U.S starts spending binge

Richard Nixon's gold policies get Stockman's first assault, for defaulting "on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world." So for the past 40 years, America's been living "beyond our means as a nation" on "borrowed prosperity on an epic scale ... an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves."

Remember Friedman: "Just let the free market set currency exchange rates, he said, and trade deficits will self-correct." Friedman was wrong by trillions. And unfortunately "once relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors."

And without discipline America was also encouraging "global monetary chaos as foreign central banks run their own printing presses at ever faster speeds to sop up the tidal wave of dollars coming from the Federal Reserve." Yes, the road to the coming apocalypse began with a Republican president listening to a misguided Nobel economist's advice.

Stage 2. Crushing debts from domestic excesses, war mongering

Stockman says "the second unhappy change in the American economy has been the extraordinary growth of our public debt. In 1970 it was just 40% of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970." Who's to blame? Not big-spending Dems, says Stockman, but "from the Republican Party's embrace, about three decades ago, of the insidious doctrine that deficits don't matter if they result from tax cuts."

Back "in 1981, traditional Republicans supported tax cuts," but Stockman makes clear, they had to be "matched by spending cuts, to offset the way inflation was pushing many taxpayers into higher brackets and to spur investment. The Reagan administration's hastily prepared fiscal blueprint, however, was no match for the primordial forces -- the welfare state and the warfare state -- that drive the federal spending machine."

OK, stop a minute. As you absorb Stockman's indictment of how his Republican party has "destroyed the U.S. economy," you're probably asking yourself why anyone should believe a traitor to the Reagan legacy. I believe party affiliation is irrelevant here. This is a crucial subject that must be explored because it further exposes a dangerous historical trend where politics is so partisan it's having huge negative consequences.

Yes, the GOP does have a welfare-warfare state: Stockman says "the neocons were pushing the military budget skyward. And the Republicans on Capitol Hill who were supposed to cut spending, exempted from the knife most of the domestic budget -- entitlements, farm subsidies, education, water projects. But in the end it was a new cadre of ideological tax-cutters who killed the Republicans' fiscal religion."

When Fed chief Paul Volcker "crushed inflation" in the '80s we got a "solid economic rebound." But then "the new tax-cutters not only claimed victory for their supply-side strategy but hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts." By 2009, they "reduced federal revenues to 15% of gross domestic product," lowest since the 1940s. Still today they're irrationally demanding an extension of those "unaffordable Bush tax cuts [that] would amount to a bankruptcy filing."

Recently Bush made matters far worse by "rarely vetoing a budget bill and engaging in two unfinanced foreign military adventures." Bush also gave in "on domestic spending cuts, signing into law $420 billion in nondefense appropriations, a 65% percent gain from the $260 billion he had inherited eight years earlier. Republicans thus joined the Democrats in a shameless embrace of a free-lunch fiscal policy." Takes two to tango.

Stage 3. Wall Street's deadly 'vast, unproductive expansion'

Stockman continues pounding away: "The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector." He warns that "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." Wrong, not oblivious. Self-interested Republican loyalists like Paulson, Bernanke and Geithner knew exactly what they were doing.

They wanted the economy, markets and the government to be under the absolute control of Wall Street's too-greedy-to-fail banks. They conned Congress and the Fed into bailing out an estimated $23.7 trillion debt. Worse, they have since destroyed meaningful financial reforms. So Wall Street is now back to business as usual blowing another bigger bubble/bust cycle that will culminate in the coming "American Apocalypse."

Stockman refers to Wall Street's surviving banks as "wards of the state." Wrong, the opposite is true. Wall Street now controls Washington, and its "unproductive" trading is "extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives." Wall Street banks like Goldman were virtually bankrupt, would have never survived without government-guaranteed deposits and "virtually free money from the Fed's discount window to cover their bad bets."

Stage 4. New American Revolution class warfare coming soon

Finally, thanks to Republican policies that let us "live beyond our means for decades by borrowing heavily from abroad, we have steadily sent jobs and production offshore," while at home "high-value jobs in goods production ... trade, transportation, information technology and the professions shrunk by 12% to 68 million from 77 million."

As the apocalypse draws near, Stockman sees a class-rebellion, a new revolution, a war against greed and the wealthy. Soon. The trigger will be the growing gap between economic classes: No wonder "that during the last bubble (from 2002 to 2006) the top 1% of Americans -- paid mainly from the Wall Street casino -- received two-thirds of the gain in national income, while the bottom 90% -- mainly dependent on Main Street's shrinking economy -- got only 12%. This growing wealth gap is not the market's fault. It's the decaying fruit of bad economic policy."

Get it? The decaying fruit of the GOP's bad economic policies is destroying our economy.

Warning: This black swan won't be pretty, will shock, soon

His bottom line: "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 ... 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."

Wrong: There are far bigger things to "pity."

First, that most Americans, 300 million, are helpless, will do nothing, sit in the bleachers passively watching this deadly partisan game like it's just another TV reality show.

Second, that, unfortunately, politicians are so deep-in-the-pockets of the Wall Street conspiracy that controls Washington they are helpless and blind.

And third, there's a depressing sense that Stockman will be dismissed as a traitor, his message lost in the 24/7 news cycle ... until the final apocalyptic event, an unpredictable black swan triggers another, bigger global meltdown, followed by a long Great Depression II and a historic class war.

So be prepared, it will hit soon, when you least expect.

[Body-by-Guinness]

More pessimism. . . .

Is this finally the economic collapse?


By Keith R. McCullough, contributorAugust 11, 2010: 2:07 PM ET


FORTUNE -- The Great Depression. Wall Street in 1987. Japan in 1997. Points of economic collapse are generally crystal clear in the rear-view mirror. Professional politicians in Japan have been telling stories for 20 years as to why they can prevent economic stagnation. In the US, the storytelling started in 2007. All the while, stock market and real-estate prices have repeatedly rallied to lower-highs, then collapsed again, to lower-lows.

Despite the many differences between Japan and the US, there is one similarity that continues to matter most in the risk management model my colleagues and I use at Hedgeye, our research firm -- debt as a percentage of GDP. Now that the US can't cut interest rates any lower, the only option left on the table is what the Fed just announced it would start doing -- buying Treasury debt. And that could lead the country to the brink of collapse: According to economists Carmen Reinhart & Ken Rogoff, whose views we share, crossing the 90% debt/GDP threshold is the equivalent of crossing the proverbial Rubicon of economic growth. It's a point from which it's almost impossible to return.

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On July 2nd, we cut both our third quarter 2010 and full year 2011 GDP estimates for the US to 1.7%. At the time, the consensus around US economic growth estimates was about 3%. Now we're starting to see both big brokerage analysts and the Federal Reserve gradually cut their GDP estimates, but not by enough. Even our estimate for 2011 is still too high.

Slowing growth, both domestically and in China, is core to our bearish views on both the strength of the US dollar and US equities. There will be a downward bias to our US growth estimates as long as debt-financed-deficit-spending continues to be the solution politicians and central bankers turn to as a fix to our financial crisis.

Markets trade on expectations. Yesterday's zig-zag in the S&P 500 was unlike most sleepy August trading days in America. That's because the 'government is good' crowd leaked word that this second round of "quantitative easing," known as QE2, was coming, and that Ben Bernanke was going to respond to our buy-and-hope begging. (The first round of quantitative easing was the Fed's unprecedented purchase of agency debt to prop up the housing market, along with credit facilities for big banks, which began in 2008 and ended earlier this year.)

To think that we have institutionalized market expectations to this degree is downright frightening. It seems impossible but true that all rallies start and end with rumors about what Fed Chairman Ben Bernanke, a humble looking man of government, had to say at 2:15 PM EST yesterday afternoon, or any other day he makes a statement.

So now what?

With 40.8 million Americans on food stamps (record high) and 45% of the unemployed having been seeking employment for 27 weeks or more (record high), what's left if (or when) QE2 doesn't kick start GDP growth? Should we start begging for QE3? Should we cancel the bomb of the National Association of Realtors' existing home sales report, scheduled for public release on August 24th? Or should we bite the bullet and accept that current economic policy dictates 0% returns-on-savings, even as Washington continues to lever-up our future to the point of economic collapse?

Before the Fiat Fools -- Hedgeye's name for political actors and bankers who have placed their hopes of economic recovery in printing endless supplies of new cash -- run out campaigning for QE3, maybe they should analyze some real time market results to yesterday's announcement of QE2:

1)The US dollar is battling for resuscitation after 9 consecutive down weeks -- down 9% since June.

2) US Treasury yields are making record lows on the short end of the curve, with 2-year yields striking 0.49%.

3) The yield spread (in this case the difference in return between 10-year and 2-year Treasury bills, which shows a long-term confidence when high) continues to collapse, down another 4 basis point day-over-day to 223 basis points.

4) The S&P 500 is down below its 200-day moving average (a common signpost for the health of a market or stock) of 1115.

5) US Volatility (VIX) is spiking from its recent stability.

6) In Japan, long time quantitative easing specialists found their markets closing down overnight by 2.7%, which makes them down 11.9% for the year to date.

Lest our doom and gloom seem built entirely on technical measurements, what they boil down to is actually quite simple -- an idea about our country which dates back to 1835. Alexis De Tocqueville, author of Democracy in America, which was published that year, seemed to warn of this day when he wrote: "The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."

-- Keith R. McCullough is CEO of Hedgeye, a research firm based in New Haven, Conn.

[Body-by-Guinness]

Why I'm Not Hiring
When you add it all up, it costs $74,000 to put $44,000 in Sally's pocket and to give her $12,000 in benefits.
By MICHAEL P. FLEISCHER

With unemployment just under 10% and companies sitting on their cash, you would think that sooner or later job growth would take off. I think it's going to be later—much later. Here's why.

Meet Sally (not her real name; details changed to preserve privacy). Sally is a terrific employee, and she happens to be the median person in terms of base pay among the 83 people at my little company in New Jersey, where we provide audio systems for use in educational, commercial and industrial settings. She's been with us for over 15 years. She's a high school graduate with some specialized training. She makes $59,000 a year—on paper. In reality, she makes only $44,000 a year because $15,000 is taken from her thanks to various deductions and taxes, all of which form the steep, sad slope between gross and net pay.


Daniel Henninger discusses how Robert Rubin and Alan Greenspan agree that Americans should send more of their paychecks to Washington. Also, Fannie and Freddie ask for more cash within weeks of an Obama pledge to end taxpayer rescues.

Before that money hits her bank, it is reduced by the $2,376 she pays as her share of the medical and dental insurance that my company provides. And then the government takes its due. She pays $126 for state unemployment insurance, $149 for disability insurance and $856 for Medicare. That's the small stuff. New Jersey takes $1,893 in income taxes. The federal government gets $3,661 for Social Security and another $6,250 for income tax withholding. The roughly $13,000 taken from her by various government entities means that some 22% of her gross pay goes to Washington or Trenton. She's lucky she doesn't live in New York City, where the toll would be even higher.

More

Some Firms Struggle to Hire Despite High Unemployment
Faces—and Fates—of the Jobless
Employing Sally costs plenty too. My company has to write checks for $74,000 so Sally can receive her nominal $59,000 in base pay. Health insurance is a big, added cost: While Sally pays nearly $2,400 for coverage, my company pays the rest—$9,561 for employee/spouse medical and dental. We also provide company-paid life and other insurance premiums amounting to $153. Altogether, company-paid benefits add $9,714 to the cost of employing Sally.

Then the federal and state governments want a little something extra. They take $56 for federal unemployment coverage, $149 for disability insurance, $300 for workers' comp and $505 for state unemployment insurance. Finally, the feds make me pay $856 for Sally's Medicare and $3,661 for her Social Security.

When you add it all up, it costs $74,000 to put $44,000 in Sally's pocket and to give her $12,000 in benefits. Bottom line: Governments impose a 33% surtax on Sally's job each year.

Because my company has been conscripted by the government and forced to serve as a tax collector, we have lost control of a big chunk of our cost structure. Tax increases, whether cloaked as changes in unemployment or disability insurance, Medicare increases or in any other form can dramatically alter our financial situation. With government spending and deficits growing as fast as they have been, you know that more tax increases are coming—for my company, and even for Sally too.

Companies have also been pressed into serving as providers of health insurance. In a saner world, health insurance would be something that individuals buy for themselves and their families, just as they do with auto insurance. Now, adding to the insanity, there is ObamaCare.

Every year, we negotiate a renewal to our health coverage. This year, our provider demanded a 28% increase in premiums—for a lesser plan. This is in part a tax increase that the federal government has co-opted insurance providers to collect. We had never faced an increase anywhere near this large; in each of the last two years, the increase was under 10%.

To offset tax increases and steepening rises in health-insurance premiums, my company needs sustainably higher profits and sales—something unlikely in this "summer of recovery." We can't pass the additional costs onto our customers, because the market is too tight and we'd lose sales. Only governments can raise prices repeatedly and pretend there will be no consequences.

And even if the economic outlook were more encouraging, increasing revenues is always uncertain and expensive. As much as I might want to hire new salespeople, engineers and marketing staff in an effort to grow, I would be increasing my company's vulnerability to government decisions to raise taxes, to policies that make health insurance more expensive, and to the difficulties of this economic environment.

A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up. From where I sit, the government's message is unmistakable: Creating a new job carries a punishing price.

Mr. Fleischer is president of Bogen Communications Inc. in Ramsey, N.J.

http://online.wsj.com/article_email/SB10001424052748704017904575409733776372738-lMyQjAxMTAwMDAwODEwNDgyWj.html

[Rarick]

The projected revenues for health care are going to be massively out of synch too.  It may be cheaper to just pay the penalty for your average citizen than to try and do it legally right?  Washington doesn't even seem to understand people are going to try and minimize the economic impact of this massively unpopular legislation by doing the same thing the people did during prohibition.  Bypass the government as best they can until a repeal can be arranged.......

[ccp]

Friends, Americans (what is left of us), countrymen (also what is left of us),

One hospital where I work has just made pay and benefit cuts to all its employees.  Another where I used to work has just laid off 200.

It is felt that this is just for openers.  ONe MBA type states that 2011 will be far worse as the health care sector tends to lag the general economic business sector.

In my mind there is no question this is just the tip of an iceberg.  As 45 more million people come on to the rolls the insurers will have to raise their rates so much there will be public outcry.  Of course the Dems will rush to the "rescue" and continue consolidation towards the "end stage disease" (if you will pardon my medical imagery) of single payer full government controlled health care.

This IS the road map.  Make no mistake or be fooled by anything else Bamster and the rest of the far left, which he certainly IS part of despite those hucksters on CNN claim he is not, want.

*Only* a political win this fall and in 12 will stop this steamroller.  If not the groundwork they have put into place will lead the chemical reaction to its inevitable end - Czar Berwick as supreme dictator telling the masses what they can and cannot have, who gets what, who does not get what, everyone is the same and he and some mock panel of "experts" will decide it all.

That is not to say we don't need something done about health care.  And I am the first to admit I am not sure what the answer is.  But I am totally against this continued, forced, and expanding redistribution of wealth as the answer to the country's problems.  It is destroying the leadership role of the US.

And make no mistake about it - you can't give access to care to 45 million without costs skyrocketing.  Thus we will have rationing, restirctions, waits, and the rest.
Keeping people out of ERs won't save anywhere near enough to make up for the office visits, drugs screening and the rest.

It is total propaganda.  They know this and they have their plan to respond to this ready in the wings - that is the ONLY answer is single payer gov controlled internet controlled care.  And Bill Gates is heavily promoting this at least in part because he wants MSFT technology to have an in with the "revolution".  I really wnat to see this blithering little weasel geek have his father or mother or he himself have to wait on line for a CT someday and maybe they will day waiting.  Does anyone think that will happen to this guy or his family?  I wouldn't bet a dime on it.

I have to get off my soap box now.

[DougMacG]

CCP: "And make no mistake about it - you can't give access to care to 45 million without costs skyrocketing.  Thus we will have rationing, restrictions, waits, and the rest."

A market has participants like buyers, sellers, investors, etc.  A non-market like Healthcare has who knows what anymore, lobbyists, interests, special interests, union representatives, gatekeepers, caseworkers, and former professionals who are now public employees or worse.

My experience currently that I find relevant is with a public utility which is a government sanctioned monopoly.  Aug. 1,  I called for electrical service because it was shut off on my tenants who had moved out.  (Aug. 1 was a Sunday, they don't answer phones.) August 2, never got passed 'on-hold'.  Aug. 3 got my urgent need heard and secretly entered.  Unfortunately they didn't tell anybody and my request died.  Aug. 11 reached again told same thing.  Aug 12, got someone out to verify old tenant gone.  He said power back on probably 'tomorrow. Aug 13, told possibly 2 more weeks to get electric service - which involves re-connecting 3 wires on the pole, 5 minutes of work once a truck actually pulls in. 

3-4 weeks without electricity, is this a 3rd world country? No, it's one of the wealthiest metros in the world.  A rental home is my place of business.  I can't  clean carpets, light or show the place or collect any revenue while I wait - like a fool.  I even bought a generator and created a new set of problems without solving any.  Meanwhile, major damage sets in.  I am unable to operate a sump pump or a dehumifier, water damage and mold is setting in.  'Customer Service Rep' today said, "we don't care about that..."

Why did this happen?  No competition.  Where else am I going to go?  Nowhere and they know it.  And frankly, no oversight.  I contacted the public utility commission.  They wrote back saying to download forms and file a complaint if not resolved.  That is a neat trick without electricity.  I'll use maybe a magic wand. 

Soon that will be ALL of healthcare.  One supplier, government sanctioned.  If they tell you to wait in line, you can wait in line.  If you leave and come back - go to the end of the line.  If you ask how long, they can tell you any answer, or no answer, with no consequence and no oversight.  If you wish to file a complaint, again - wait in line - you weren't the first to think of that.

I let my health coverage lapse lately.  10+ plus years self employed with absolutely no payout from the policy.  New laws say they will have to let me back in at the same price as the people who kept coverage.  That is not insurance and the new system will have no resemblance to a market.

[Body-by-Guinness]

I'm having trouble wrapping my head around this story. Is there some fiscal restraint implicit in the gutting of one untouchable program to fund another?

Dems may use food stamp money to pay for Michelle Obama's nutrition initiative
By Russell Berman    - 08/14/10 06:00 AM ET

Democrats who reluctantly slashed a food stamp program to fund a state aid bill may have to do so again to pay for a top priority of first lady Michelle Obama.

The House will soon consider an $8 billion child nutrition bill that’s at the center of the first lady’s “Let’s Move” initiative. Before leaving for the summer recess, the Senate passed a smaller version of the legislation that is paid for by trimming the Supplemental Nutrition Assistance Program, commonly known as food stamps.

The proposed cuts would come on top of a 13.6 percent food stamp reduction in the $26 billion Medicaid and education state funding bill that President Obama signed this week.
Food stamps have made multiple appearances on the fiscal chopping block because Democrats have few other places to turn to offset the cost of legislation.

Party leaders raided the budget to find off-setting tax increases and spending cuts to pay for their top legislative priorities, including the roughly $900 billion healthcare law. Congressional pay-as-you-go rules require lawmakers to offset all non-emergency spending.

Democrats have turned to the food stamp program because funding increases enacted in the stimulus package last year were already scheduled to phase out over time. The changes proposed in the state aid and nutrition bills would simply cut off that increase early, in March 2014. Because the cuts would not take effect for more than three years, Democratic leaders have voiced the hope that they will be able to stop them in future legislation.

But House liberals are balking now, saying that while they swallowed the food stamp cuts to pay for urgent funding for Medicaid and teachers, they will not vote for more cuts in the child nutrition bill. In a letter sent this week to Speaker Nancy Pelosi (D-Calif.), 106 House Democrats urged the speaker to take the House version of the child nutrition bill, which does not slash food stamps, rather than the Senate version.

“This is one of the more egregious cases of robbing Peter to pay Paul, and is a vote we do not take lightly,” the lawmakers, led by Reps. Jim McGovern (D-Mass.) and Keith Ellison (D-Minn.) said of their vote on the state aid bill.

The House version of the child nutrition bill, authored by Rep. George Miller (D-Calif.), passed the Education and Labor Committee earlier this year, but lawmakers must find a way to pay for it before it comes to the floor for a vote. “Chairman Miller is working to find other ways to pay for this bill,” a spokeswoman said when asked if cuts to the food stamp program would be used.

A House leadership aide noted that the food stamp decrease approved in the state aid bill will not take effect right away and will leave the program at the same funding level it was at before the stimulus law was signed. “That doesn’t mean many Democrats are not concerned about the issue, but this is a process which gives us time to deal with immediate issues (like jobs) and helping the economy grow, while giving you time to deal with the food stamp issue,” the aide said.

The nutrition bill is clearly a priority for Michelle Obama, who has made a push for healthy eating one of her signature policy issues at White House. When the House version of the nutrition bill won committee approval in July, it marked the first time she weighed in publicly on pending legislation.

The Obama administration has not directly addressed the debate over the food stamp cuts, but it is backing the Senate bill. “We strongly supported the Senate action and look forward to working with the House to get a final bill onto the president’s desk,” an administration official told The Hill.

The $4.5 billion Senate bill would expand eligibility for school meal programs, establish nutrition standards for all food sold in schools and provide a 6-cent increase for each school lunch to help cafeterias serve healthier meals. The $8 billion House version includes more money for expanding access to school lunches for children in low-income households.

The deeper food stamp reductions in the Senate version would set an earlier date — in November 2013 — for eliminating the increased benefits passed last year.  A family of four would see their benefit reduced by $59 a month, or about 9 percent. The bill would also cut funding for nutrition education programs aimed at low-income neighborhoods and households.

“It’s very sad. I think it’s just illustrating what dire straits our federal government budget is in,” said Sheila Zedlewski, director of the Urban Institute’s Income and Benefits Center. “It’s unprecedented to raid one safety net program to feed another.”

This story was updated at 1:40 p.m.

Source:
http://thehill.com/homenews/house/114271-dems-consider-more-food-stamp-cuts-to-fund-child-nutrition-bill

[DougMacG]

"I'm having trouble wrapping my head around this story. Is there some fiscal restraint implicit in the gutting of one untouchable program to fund another?"

Sorry BBG but you won't be able to see their logic with your brain screwed on frontwards; you have to turn it around backwards and tilt it a bit.

The First Lady's pet program has to be paid for, even though nothing is paid for when we already spend a trillion and a half a year more than revenues.  Food for the poor never has to be paid for, even though that is a meaningless designation anyway.  Democrats are confident in their ability to restore spending from food stamp cuts blindfolded, in their sleep, before breakfast, even restore the spending from their new position - in the minority.

Putting the poor and their self-centered needs for food aside for a moment, the main thing is that the first lady gets what the first lady wants.

[Body-by-Guinness]

Obama's Bad Bets

"Recovery Summer" goes bust

BY James Pethokoukis

August 23, 2010, Vol. 15, No. 46
Declaring a “Recovery Summer” victory tour at the start of June must have looked like a pretty safe wager for the Obama administration. The economy seemed to have shifted firmly into gear during the spring. Lawrence Summers, director of the National Economic Council, told the Financial Times in early April that the economy was “moving toward escape velocity. You hear a lot less talk of ‘W’-shaped recoveries and double-dips than you did six months ago.”

A big reason for White House optimism was a stronger job market. The economy added an average of 320,000 net new jobs a month during March, April, and May, about half of them in the private sector. Granted, the unemployment rate still hovered close to 10 percent. But if the economy kept growing at a 3 percent annual clip or greater—creating lots and lots of new jobs in the process—unemployment would eventually fall, perhaps dramatically. As one White House insider remarked upon reviewing all the macro-indicators and then evaluating the economic team’s performance, “It looks like we got things just about right.”

Since then, however, the economy has fallen back to earth, and “Recovery Summer” looks more like a bad bet. Private sector job growth has fallen by two-thirds, and the unemployment rate is still at a sky-high 9.5 percent. And if the size of the U.S. workforce, as measured by the Labor Department, had stayed constant since April—instead of shrinking by a million—the unemployment rate would be 10.4 percent. Jobless claims are at their highest level since February. Worse yet, the expansion is decelerating. After growing by 5.7 percent in the final quarter of 2009 and 3.7 percent in the first quarter of 2010, GDP advanced by just 2.4 percent from April through June, according to the Commerce Department. And new data show the final second-quarter number may actually be closer to flat, with growth for the rest of the year just 1 to 2 percent at best.

The White House didn’t count on a summer swoon. Then again, it has suffered bouts of premature and unfounded economic optimism before, a malady that has led it to make a number of losing bets and faulty assumptions—which, in turn, have created an even worse environment for growth and jobs. Among them:

- High unemployment is a psychological anomaly. Republicans love to mock the now-infamous chart prepared by administration economists that showed the $862 billion stimulus would prevent unemployment from hitting even 8 percent. But the White House has continued to be overly hopeful about jobs. Here’s why.

Obama advisers noticed that the Great Recession seemed to be violating an economic rule of thumb called Okun’s Law (named after JFK adviser Arthur Okun), which describes the relationship between economic growth and unemployment. As bad as the recession was, unemployment shouldn’t have risen to 10.1 percent, according to Okun. Maybe just 9 percent or so. The administration’s explanation for the overshoot: Panicky businesses shed workers willy-nilly because they feared another Great Depression.

But now with the worst behind and the economy growing again, there should have been a “catch-up” phase during 2010 when job growth would far exceed GDP growth. (That, even though there’s no historical precedent for such an Okun mean reversion.) Yet revised GDP numbers show that the statistical fit between unemployment and growth has actually been much tighter than Team Obama first calculated. Unemployment rose so much simply because the downturn was deeper than preliminary numbers showed. Without much stronger growth, unemployment will stay high.

- America has economic immunity. The White House is no fan of the idea that the U.S. economy has entered a stagnant economic state, what Pimco bond guru Bill Gross has labeled the “New Normal.” It describes a situation where debt overhang after a financial meltdown forces consumers and businesses to retrench for years. The result is a lengthy period of slow economic growth, high unemployment, and big budget deficits.

There’s plenty of academic research to back Gross up. The economists Kenneth Rogoff of Harvard and Carmen Reinhart of the University of Maryland have found that the aftermath of bank crises in places like Scandinavia and Japan is usually marked by “deep and lasting effects on asset prices, output, and employment.” Similarly, the Cleveland Federal Reserve Bank concluded that such banking events cause “negative long-term effects on the economy, such as slow growth, high interest rates, and lower living standards.”

Sound familiar? Now even though all this seems to pretty accurately describe what America is currently going through, Team Obama has been continually dismissive of such scenarios. They argue the U.S economy is so big and unique—it possesses the world’s reserve currency, for instance—that international comparisons are misleading at best, useless at worst. As the saying goes, it can’t happen here.

- Ben Bernanke’s got our backs. During the 2000 presidential campaign, Senator John McCain joked that if former Federal Reserve chairman Alan Greenspan died, it would be wise to prop up his corpse and keep him on the job, like the title character in the movie Weekend at Bernie’s. Few observers hold Fed chairmen or the central bank in such high esteem these days. But the White House apparently does. After passing a giant stimulus in 2009, the administration pivoted to “the agenda”—health care, financial reform, cap and trade. Jobs and the economy? Certainly the combination of higher government spending and oodles of monetary stimulus from Ben Bernanke & Co. would be enough to spur a return to growth.

Yet the deluge of Fed money seems to be sitting on the sidelines. As economist David Gitlitz of High View Economics points out, interbank lending, a major funding source for consumer and business loans, has shrunk from nearly $500 billion to less than $175 billion since the fourth quarter of 2008. The Fed’s low interest rate policy is great for bank profits—institutions are able to get a decent return by borrowing cheap and plowing the money into government debt—but that has done little to boost lending to job creators or the rest of the economy.

And Obama may now start to comprehend the frustration of predecessors such as George H.W. Bush and Richard Nixon when the Fed seemed to be unaccommodating to their economic and political concerns. Even though the recovery looks to be faltering, the Fed’s recent policy meeting showed the central bank is taking only the tiniest of baby steps toward another round of “quantitative easing” by buying more Treasuries or other securities. Not that “QE2” would be a magic bullet for the economy. The White House is learning, as CNBC’s Lawrence Kudlow puts it, “the Fed can print more money, but it can’t print jobs.”

To some degree, the tendency of the Obama White House to “slide down the slope of hope” is understandable. A New Normal scenario, for instance, looks like an economic recipe for a one-term presidency. Easier to dismiss it than seriously consider and perhaps accept it. And relying on both the Fed and its own onetime, trillion-dollar dose of fiscal steroids to restore prosperity—set it and forget it—freed the administration to spend its remaining political capital on passing its domestic policy wish list.

But the results of that policy positivism have been gloomy and seem unlikely to brighten. A recent analysis by the San Francisco Fed of forward-looking economic indicators finds that “the macroeconomic outlook is likely to deteriorate progressively starting sometime next summer, even if the data suggest that a renewed recession is unlikely over the next several months.” The job market is also full of worrisome signs. The extended period of high unemployment may be turning from cyclical to structural, where there are not enough qualified and employable applicants for new job openings. If that happens, even higher economic growth may do little to lower unemployment.

Of course, the administration could dramatically change course and join with a more Republican Congress next year to both lower the long-term debt outlook and boost the economy by slashing taxes on capital and corporations (which mostly passes through to workers). But don’t bet on it.

 

James Pethokoukis is a columnist for Reuters.



Source URL: http://weeklystandard.com/articles/obamas-bad-bets

[ccp]

"police firefighters retiring at 50 then getting other jobs for 30 years"

I know there are at least some officers who come to this board.

I would like to clairfy this comment.

I did not post this to disparage them or their service in any way.  But times are changed.  People are living longer.  We cannot afford to have public empolyees retiring sooner than the average employee with pensions that pay out for the term of their life.  There must be a better way to reward them or compensate them that makes more sense.  Perhaps increase their pay by 5 or 10% and have the extra go into a 401K.  Maybe have a 50% employee match or something.  But I am sorry and hope I don't offend anyone here.  Yet when I lived in Florida we would see retired police all the time.  Age 48 or 50.  How would I not resent this.  I never agreed to pay for them to have 40% of their lives paid for through taxation.  Yes they do risk life and limb.  But not that much.  It is rare for police of firefighters to be killed in action.

I cannot make it equivalent that someone who serves in law enforcement or fire protection is the same as those who serve in the military wherein I do want them taken care of for life in return for their service.

Anyone is welcome to respond.  Call me out, cuss me out but please feel free to respond.  I do think many people feel as I do.  I also think many are really afraid to say anthing about this in public.  No one wants police to be mad at them.  Of course this board is public anyway since it goes right to the internet and I know everything I do online is monitored in my unique circumstance.

[G M]

Pay cops and firefighters minimum wage, no benefits. Let's see how that works out.

[ccp]

So are you saying we need to continue the pensions or else no one will become a police officer or firefighter?

Perhaps you are correct. I don't know.

[G M]

I can't comment on firefighters, but for police officers the expectation is that it takes about 3-5 years working patrol (after the academy and field training) to be fully proficient at the job. Working special details, detectives also has a long learning curve involved. There is also such a thing as institutional knowledge from veterans on patrol, but patrol like the combat arms of the military, is a young man's game. You would be fine having a 60 year old detective working a case, but you don't want a 60 yr. old patrol officer trying to run down a mugger.

I've seen conflicting stats on police life spans, but it's not just the line of duty deaths you have to factor in, it's the physical and psychological stressors related to the job. It's the cumilative injuries that add up. Just wearing 20-30 pounds of duty gear every day on your waist results in long term back pain for most everyone. No matter where you work, you see the worst of humanity, you learn the sights, sounds and smells of the ugliest things that can possibly happen. I just finished another series of blood tests for all the wonderful things commonly floating around, having had my forearm torn open by the fingernails of a career offender at work.

The realities of the job are far from glorious, and these days the job just gets worse and worse. The only thing that keeps a minimally acceptable amount of recruits coming in is the bad economy and the fact that there are fewer LE jobs these days.

[G M]

http://formerspook.blogspot.com/2010/08/unsustainable.html

Saturday, August 14, 2010
The Problem With Petty Officer Gurney


Petty Officer First Class Ethan Gurney will retire from the Navy this fall, after 20 years of service. Critics of the military retirement system say that's too soon, creating long-term fiscal problems for the Defense Department (Stars and Stripes photo).


According to a Pentagon advisory board, Navy Petty Officer First Class Ethan Gurney represents what's wrong with the military retirement system.

Petty Officer Gurney joined the Navy out of high school, and has served honorably as an electronics technician for almost two decades. This fall, after reaching 20 years of active duty service, Gurney will retire from the Navy and begin drawing a retirement check--at the ripe old age of 38.

From the board's perspective, that's too soon. With advances in medicine and increasing longevity, Gurney and his fellow military retirees will live for decades after leaving active duty, collecting billions of dollars in pensions, health care and other benefits.

The Defense Business Board, tasked by Defense Secretary Robert Gates to find ways to cut Pentagon spending, says the current retirement system is "unsustainable" and must be fixed. Without reforms, payments for military retirees will grow from $47.7 billion this year, to just under $60 billion by 2020.

As Stars and Stripes recently reported:

The 25-member group of civilian business leaders suggests that the Defense Department look at changing the current system, even hinting at raising the number of years troops must serve before being eligible for retirement pay.

The current system “encourages our military to leave at 20 years when they are most productive and experienced, and then pays them and their families and their survivors for another 40 years," committee chairman Arnold Punaro told board members at their quarterly meeting late last month.

Among the "reforms" being suggested by the advisory panel: delaying payments to retirees, in exchange for earlier "vesting" in the program. One proposal being studied by the board would provide a limited retirement benefit for military members who serve as little as 10 years. Those personnel would receive their pension at age 60 under the reform plan, while those with 20 years of service would begin receiving checks at age 57--almost 20 years after some of them leave active duty.

The hypocrisy of the "reformers" is almost laughable. Board chairman Arnold Punaro worries about a system that "encourages [military members] to leave when they're most productive and experienced, then pays them, their family and their dependents for the next 40 years."

But Punaro hasn't declined his military retirement check. Turns out that Mr. Punaro is also a retired Major General in the Marine Corps. According to Forbes, he currently works as an executive Vice President at defense contractor SAIC, where his total compensation in 2009 topped $2.7 million. That's almost three times what Petty Officer Gurney will collect in military retirement pay, even if he lives to age 80. And we didn't include Punaro's USMC pension in that total, either.

Fact is, the typical military retiree is a lot closer to Gurney than General Punaro. When he leaves active duty later this year, Petty Officer Gurney will receive a gross monthly pension of just over $1,800. By the time you deduct federal and state taxes and allotments for such items
as the Survivor Benefit Plan (SBP), dental insurance and other expenses, Gurney's "rich" pension will be closer to $1,400 a month.

Indeed, the average person retiring from the military at the 20-year point is an E-6, the same rank as Petty Officer Gurney. Most are married, with kids in school, and (if they're lucky) that $1,400 pension will cover their mortgage payment. Compare that to say, the average annuity for a state employee in New York, New Jersey or California, and tell us
who's getting rich in retirement.

Punaro's critique also misses a pair of critical points. There are two primary reasons the military has always embraced an early retirement system. First, it's a powerful recruiting and retention tool, particularly for mid-level officers and NCOs, who form the backbone of our armed forces. Allowing retirement at the 20-year point keeps a lot of mid-level officers and non-commissioned officers in uniform, ensuring an adequate supply of experienced personnel.

By comparison, if the military allows individuals to earn delayed benefits after only 10 years of service, it would only accelerate the exodus of skilled troops. Individuals with highly marketable skills (including intelligence, nuclear power, special forces and contracting, to name a few) would leave at the first opportunity, further eroding experience levels at the most critical ranks.

Additionally, there's the matter of who's best suited for certain military jobs. No offense to General Punaro, but jobs like Marine rifleman, Army ranger, Air Force combat controller and Navy fighter pilot (to name a few) are best handled by the young. True, experience does improve with age, but reflexes, vision, hearing and physical conditioning tend to deteriorate as we get older. And sometimes, experience is no substitute for the strength, speed and stamina found in younger troops.

Another critic of the current system, Nathaniel Fick of the left-leaning Center for a New American Security, has wondered "Why we're paying 38-year-olds" as they embark on their second full career. Fick, a former Marine Corps officer, made the comment in a recent article published at the Foreign Policy website.

We think the best rejoinder to that argument comes from Petty Officer Gurney, a man who is (supposedly) the poster boy for problems in our military pension system. For 20 years of dedicated and faithful service, Gurney simply expects the Navy to meet the promise it made to him. And he observes that (relatively) few people are willing to meet the demands for that 20-year pension:

"No rational person would put up with 20 years of the hardships that you’re forced to endure if it wasn’t for the brass ring at the end of it all called instant retirement,” said Petty Officer 1st Class Gurney.

[snip]

“The continuous deployments, living conditions, remote and hazardous duty stations are unique to the military,” he said. “This isn’t a civilian company, so any civilian model that you use to compare to the military is impertinent. To do so is irresponsible at best.”

Bravo Zulu, Petty Officer Gurney. Couldn't have said it better ourselves. Unfortunately, Secretary Gates now views the military retirement system as Fiscal Problem #1, so some sort of reforms appear inevitable. Never mind that the current system has served the military well, and payments will eventually decline, as retirees from Korea, Vietnam and the Reagan eras pass on.

One more thing: we find the current fixation on military retirement rather curious, for other reasons. The Pentagon has suddenly discovered that its payments for retiree medical coverage are out-of-control, just months after the Obama Administration pushed through national health care coverage. Gee...doesn't DoD have the option of potentially pushing military retirees into the national plan, saving billions of dollars each year--and creating more "urgency" for preserving the new system? Coincidence? You decide.

Likewise, Secretary Gates (and his bosses in the White House) would like to find other ways to save money at the Pentagon. If they can put off pension payments for years after military retirees leave active duty, so much the better. I'm sure that DoD's actuaries have already calculated the number of personnel who will die during that "gap" between their retirement ceremony and the age of 57 or 60, when the first retirement check rolls in. How much would DoD save using that approach, and where will that money goes? So far, Dr. Gates hasn't answered that one.

Equally galling is the growing demand for the reform of military retirement benefits, while the "big" entitlement programs (Social Security, Medicare, Medicaid) just keep on growing. Even at the inflated totals cited in the Stars and Stripes article, military pensions represent only a fraction of our annual Social Security payments--and that system will go broke long before the armed forces retirement system. But it's (apparently) more important to fix military pensions, with little regard for the long-term impact on retention and experience levels in the ranks.

Go figure.

[DougMacG]

It is not (IMO) the amount civil servants are paid, it is the process that is screwed up.  I don't know what amount of money it would take to hire and retain good people for key positions in any location but we all know stories of where it is all skewed.  I remember my daughter's principal saying he had one thousand applicants for each teaching position open - this was during economic boom, not recession. You could call it high pay or low pay, fair or unfair pay, but we know for certain it is above market pay. That principal went on to retire right as he entered what would have been the peak of his business executive career at age 55, left the community, draws a good check, and entered another career.  A family member retired from the federal government with full pension in his 40s, an air traffic controller. They want the controllers out of traffic control because of the stressors, but same employer also hires national park attendants or whatever.  Move the beat cop to detective if deserving or other position that fits his/her current abilities.  If still on the beat at 55-65, I would give the deserving officer a firearm with a little better range.  In Minneapolis, the police don't run down muggers or investigate the crime anyway, so here age shouldn't be an issue.  Note that I did see DBMA video of a youthful aging athlete training on hills with very heavy packs at beachside and I (similar age) still enjoy defeating college athletes at my sport (tennis), though the aches and pains do increase over time.  My parents age 85 self-employed still work, by their own choice.

I wouldn't want to judge the real value of what anyone does, the danger that military, fire or police officers face, nor would they want to pay full value for my sacrifices and dangers as an inner city landlord.  We get what the market will bear and what it will take to get the right person to come in and do the job.

What I hate is when they disguise or deny the money we pay.  Telling us a teacher makes 50 or 60k when we pay out 90k because they aren't counting the deferred money or the benefits as pay. It is all pay. If they want portions of their pay in forced savings, health benefits, pension funds, taxes or anything else, that is their business.

The concept of public employees union violates the reason I thought that workers needed to organize - the greedy capitalist has disproportionate power over the lowly worker.  How can it be that a government of the people, by the people and for the people needs it's power to negotiate curtailed?