Megan McArdle hits some points that pretty much doom Europe and, if it is not already too late, the US. They are contradictions and conditions that make recovery from all this fiscal irresponsibility almost impossible. It involves social welfare, democracies and why that combination simply can’t find the necessary ability heal itself.
When I was a young and naive economics writer, I used to write about developing countries a fair amount. Time and again they would make these bizarre and pointless moves, like suddenly and for no apparent reason defaulting on a bunch of debt. They would engage in obviously, stupidly unsustainable fiscal practices that caused recurring crises. They would divert critical investment funds into social spending which was going to become unsustainable when underinvestment reduced government revenue. And the other journalists and I would cluck our tongues and say "Why can’t they do the right thing when it’s so . . . bleeding . . . obvious?"
Then we had our own financial crisis and it became suddenly, vividly clear: democratic governments cannot do even obvious right things if the public will not tolerate it. Even dictators have interest groups whose support they must buy.
This has come home to me forcefully several times over the last few years, but never more than now. The leaders of the eurozone have a dual mandate to keep the euro intact, and to not do the things which could keep the euro intact. They cannot fiscally integrate to the extent necessary because, as I wrote for the Daily the other day, the Greeks do not want to act like Germans, and the Germans do not want to share their credit rating with anyone who won’t.
It is a bit like the Ohio vote on unions. In a heavily union state, those who benefit the most vote to continue the situation where they benefit. In democracies like Europe where people’s property are up for re-distribution, those who benefit from such redistribution are always going to vote to continue the status quo. And, of course, politicians who benefit from the vote of that constituency are going to try to find every way they can to accommodate that constituency.
So even when it is “so … bleeding … obvious”, to most economic observers as to what action must be taken, nothing happens or, in some cases, it gets worse.
At some point, though, the bill comes due. We’ve talked about the laws of economics and how unyielding they are. Oh you can screw around and play some games that allow you to defy them for a while, but like gravity, it all will finally come tumbling down.
We’re there. We’re at the falling down stage if things don’t change drastically.
But there is seemingly no stomach for drastic change.
And that leaves us to try to figure out what the world will look like after the collapse of the Western social welfare system is complete. Because it is seeming like its not a matter of “if”, but “when”.
Today’s economic statistical releases:
Thanks to the debt crisis in Europe, interest rates are dropping here, and the Mortgage Bankers Associations says that’s why purchase applications jumped 10.3% last week.
The Ceridian-UCLA Pulse of Commerce Index rose 1.1% in October after three consecutive negative months.
Today’s economic statistical releases:
The NFIB Small Business Optimism Index came roaring back this month rising 1.3 points to a still depressed 90.2.
In the weekly retail sales numbers, ICSC-Goldman reports same-store sales rose 1%, though the year-on-year rate dropped to 2.7%. Redbook, meanwhile, says year-on-year sales slowed significantly to 3.1%.
I think I’ll check, but I’d guess that if you ever looked up the definition of the term “gas bag” you’d be likely find the picture of ex-Speaker of the House Nancy Pelosi next to it. She’s much more illustrative of the term than say some generic bag filled with hot gas.
“But I’ll tell you this,” said Pelosi, “if President Obama and the House congressional Democrats had not acted, we would be at 15 percent unemployment. Again, no consolation to those without a job, but an important point to make."
At her Oct. 6 briefing, Pelosi said: “Without the Recovery Act and accompanying federal interventions, whether from the Fed or ‘Cash for Clunkers’ or other initiatives, this unemployment rate last year at the time of the election would’ve been 14.5 percent, not 9.5 percent.”
Between her and Debbie Wasserman Shultz, you could compile a book length list of the groundless claims they’ve made. And this is right up there in the top 10 for Pelosi. Of course she doesn’t cite any basis for this claim but there it is nonetheless.
So what about her numbers? Well, lets look at the numbers an agency which at least ran some came up with:
A report published by the Congressional Budget Office in August estimated that in the fourth quarter of 2011, the stimulus signed by President Obama in 2009 would have the impact of reducing the national unemployment rate between 0.3 points to 1.1 points from what it otherwise would have been. The report also said that although CBO initially estimated that the stimulus would cost $787 billion, CBO had subsequently increased its estimated cost to $825 billion.
It was on the basis of these numbers that Barack Obama made the claim that spending this money would keep the unemployment rate under 8%. It went to 9.5% from about 4.8%. In real math, that’s 4.7 points. So essentially Pelosi is just adding the two (9.5 and 4.7 and adding a few tenths) to get her "14.5%” number. There is obviously no backing for this claim.
Oh and cost per job? Well, pick your number but whichever you choose, these were expensive jobs:
According to the CBO report, 600,000 to 2 million people have jobs as of now that were "created or retained" because of the $825 billion stimulus. If the maximum number of 2 million is accepted, that works out to a cost of $412,500 per job. If the minimum number of 600,000 is accepted, that works out to a cost of $1,375,000 per job.
So any way you slice it, expensive. But back to Pelosi. Even if you accept the higher number of 2,000,000 and add that into the unemployed while subtracting it from the employed total and divide it out, you come up with roughly 10.5%. Even if you accept the projection’s top end estimate that 2,000,000 more jobs would have gone, you can’t get to her number from there.
Also note the “points” the CBO report claims might have been shaved by the so-called stimulus. They are nowhere near the 4.7 Pelosi wants you to believe in.
Yeah, I know, typical political nonsense. I just have to wonder, and the question and her answer are on video at the link, whether anyone in the press even challenged the numbers? Since she’s used them twice recently, I’d guess not. Also note her attempt to again blame Bush and the Republicans with her “300 days the Republicans were in power” and claim they did nothing to create jobs at that time. And then look at the unemployment rate at that time (mentioned above). Duh. Again, I doubt that was challenged.
Typical of the “watchdog press” of today I’d say. And very typical of Nancy Pelosi and the “lets make numbers and claims up out of thin air” crowd.
It’s all about employment today.
The Monster employment index rose three points to 151 as online recruiting increased in October.
What everyone is really interested in today, though, is the monthly Employment Situation. A disappointing 80,000 net new jobs were created last month, which was well below an already dismal expectation of 90,000 jobs. On the plus side, sharp revisions to prior months were unveiled. September jobs were revised to 158,000 from the originally reported 103,000, while August jobs were revised to 104,000 from the original 57,000. Sadly, we need in excess of 300,000 new jobs per month to begin growing jobs at a rate that will begin to replace the million lost since 2008. Earnings rose 0.2% last month, while the average workweek remained steady at 34.3 hours.
Essentially, the job market remains moribund, though the unemployment rate dropped to 9.0%. But, that drop in the unemployment rate reflects an increase of 277,000 in employment from the household survey, rather than discouraged workers leaving the workforce, which is a positive sign, as that figure has increased for three months in a row. The broadest measure of labor underutilization, the U-6 unemployment rate (Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force) also fell to 16.2% from last month’s 16.5%.
Today’s economic calendar is fairly full, so let’s get cracking:
Initial jobless claims continue to drop slowly, with this week’s claims tallying 397,000, finally getting us below the awful 400,000 mark. Once again, though, last week’s number was revised upward to 406,000. These upward revisions have become quite commonplace.
Retail sales growth for October is mixed at best, trending at about 3% for same-store sales and about 5% for total sales.
Nonfarm business productivity jumped an annualized 3.1% in the 3rd quarter, much better than expected. Compensation growth, on the other hand, was restrained, rising an annualized 0.6%. Overasll, unit labor costs fell -2.4%.
Bloomberg reports that their consumer confidence index dropped to its lowest level since the 1st quarter of 2009, to -53.2.
Strong sales for non-durable goods and an upward revision to durable goods resulted in a better-than-expected 0.3% jump in September factory orders.
The ISM Non-Manufacturing index continues to point to steady, if slow, growth in the service sector, with the index at 52.9, just one tick below last month’s 53.
Today’s economic statistical releases:
ADP estimates that October private payrolls rose 110,000, little changed from September’s revised 116,000.
Challenger’s layoff report shows that layoff announcements eased in October to 42,759.
The Mortgage Bankers’ Association reports that mortgage purchase applications rose by 0.2% last week. Mortgage rates for 30-year conforming loans fell 2 basis points to 4.31%.
A day after the White House said that the State Department would make the call, President Obama has decided he’ll make the ultimate decision on the Keystone XL pipeline which would bring petroleum product from the tar sands of Canada to the US.
This has become a cause the “climate change” crowd has embraced and have tried to paint as one which would supposedly increase “global warming”. Of course the actual science of “global warming” doesn’t support the contention that the earth is warming, however that is a part of the science that these folks have decided to ignore.
The fact that Obama has chosen to make the decision himself may confuse some – why not let the State Department, who makes decisions such as this when a foreign nation is involved? Well that’s what makes me uneasy. There’s an election coming and his environmental base has been very disappointed in him. Read between the lines of the statement he made and the answer he provided to a question:
“We need to encourage domestic oil and natural gas production,” Obama added. “We need to make sure that we have energy security and aren’t just relying on Middle East sources. But there’s a way of doing that and still making sure that the health and safety of the American people and folks in Nebraska are protected, and that’s how I’ll be measuring these recommendations when they come to me.”
The “but” is rather pregnant isn’t it?
Then the question concerning jobs and the promise of thousands of jobs if the pipeline is approved. Will that have an effect on his decision?
“It does, but I think folks in Nebraska like all across the country aren’t going to say to themselves, ‘We’ll take a few thousand jobs if it means that our kids are potentially drinking water that would damage their health or rich land that’s so important to agriculture in Nebraska are being adversely affected,’” Obama said, adding, “because those create jobs, and you know when somebody gets sick that’s a cost that the society has to bear as well. So these are all things that you have to take a look at when you make these decisions.”
For your information, petroleum pipelines crisscross this country. In fact, more than 168,000 miles of petroleum pipelines have been in operation, safely, for decades. 85% of all petroleum product is moved by pipeline.
So this isn’t about “safety” – the product has been moved in safety for years. It’s much like the fracking argument. It is unfounded and based in fear of something that isn’t true. And like the fracking argument, the opposition likes to try to frame the procedure as something new and dangerous. Well it isn’t new. Fracking has been in use since 1948 very safely and over a million wells have been developed using it.
The argument used by opponents of the Keystone XL pipeline is that the petroleum shipped in that pipeline is more corrosive and dangerous than regular petroleum product. The Association of Oil Pipelines answers that question:
Opponents have also wrongly suggested that crude from the Canadian oil sands is somehow more corrosive than other heavy crudes, which have been moved safely for decades. It is not. The oil sands may be produced differently, but the product readied for pipeline transportation will be behave like any other heavy crude oil. There is simply no evidence pipelines carrying diluted bitumen behave any differently than a pipeline carrying conventional crude oil, or that diluted bitumen is more corrosive than other crude oils. Pipeline operators don’t build multi-billion dollar assets to then destroy them with a corrosive product.
So Obama gets to decide between jobs and increased energy security and politics. We currently get 400,000 barrels a day from the oil sands in Alberta. This pipeline promises to add another 700,000 barrels a day from a secure source. Or will Canada be forced to build a pipeline to the west coast and ship it to China?
This should be a no brainer. Jobs along with safe transportation of a vital commodity which powers our economy is a winner for the nation. But this is a president in political trouble and desperately trying to shore up his eroding base.
Will he put the well being and energy security of America and Americans first?
Or will he play the politics card?
Unfortunately, the latter is much more probable than the former, given how political Obama is. Don’t be surprised if he turns down jobs and energy security for the promise of increased political support from his base.
Today’s economic statistical releases:
Weekly retail sales: ICSC Goldman reports a 0.7% weekly rise in same-store sales and 3% year-on-year, while Redbook reports a year-on-year rate of 5.2%.
Despite some positive indicators, the ISM Manufacturing Index fell to a weaker than expected 50.8 from 51.6 last month. On the positive side, the key sub-index of new orders, which have been contracting for the last 3 months, show expansion in this report. The prices paid index also dropped substantially as prices for manufacturing inputs fell.
Construction spending in September gained 0.2% over the pervious month, which is still positive, but far slower than last month’s 1.4%. On a year over year basis, spending fell -1.3%.
Most intuitively know you can’t borrow your way out of debt, so it seems like a silly question on its face. But the theory is that government spending creates a simulative effect that gets the economy going and pays back the deficit spending in increased tax revenues. $14 trillion of debt argues strongly that the second part of that equation has never worked.
The current administration and any number of economists still believe that’s the answer to the debt crisis now and argue that deficit spending will indeed get us out of the economic doldrums we’re in. William Gross at PIMCO tells you why that’s not going to work:
Structural growth problems in developed economies cannot be solved by a magic penny or a magic trillion dollar bill, for that matter. If (1) globalization is precluding the hiring of domestic labor due to cheaper alternatives in developing countries, then rock-bottom yields can do little to change the minds of corporate decision makers. If (2) technological innovation is destroying retail book and record stores, as well as theaters and retail shopping centers nationwide due to online retailers, then what do low cap rates matter to Macy’s or Walmart in terms of future store expansion? If (3) U.S. and Euroland boomers are beginning to retire or at least plan more seriously for retirement, why will lower interest rates cause them to spend more? As a matter of fact, savers will have to save more just to replicate their expected retirement income from bank CDs or Treasuries that used to yield 5% and now offer something close to nothing.
My original question – “Can you solve a debt crisis by creating more debt?” – must continue to be answered in the negative, because that debt – low yielding as it is – is not creating growth. Instead, we are seeing: minimal job creation, historically low investment, consumption turning into savings and GDP growth at less than New Normal levels.
Not good news, but certainly the reality of the situation. Deficit spending has been the panacea that has been attempted by government whenever there has been an economic downturn. Some will argue it has been effective in the past and some will argue otherwise. But if you read through the 3 points Gross makes, even if you are a believer in deficit spending in times of economic downturn, you have to realize that there are other reasons – important reasons – that argue such intervention will be both expensive and basically useless.
We are in the middle of a global economy resetting itself. Technology is one of the major drivers and its expansion is tearing apart traditional institutions in the favor of new ones that unfortunately don’t depend as heavily on workers.
Much of the public assumes we’ll return to the Old Normal. But one has to wonder, as Gross points out, whether we’re not going to stay at the New Normal for quite some time as economies adjust. And while it will be a short term negative, the Boomer retirements will actually end up being a good thing in the upcoming decades as there will be fewer workers competing for fewer jobs.
But what should be clear to all, without serious adjustments and changes, the welfare state, as we know it today, is over. Economies can’t support it anymore. That’s what you see going on in Europe today – its death throes. And it isn’t a pretty picture.
So? So increased government spending isn’t the answer. And the answer to Gross’s question, as he says, is “no”.
The next question is how do we get that across to the administration (and party) which seems to remain convinced that spending like a drunken sailor on shore leave in Hong Kong is the key to turning the economy around and to electoral salvation?