Relevant and even prescient commentary on news, politics and the economy.

I Hate Austerity

What’s your mental image when you hear the word “austerity?” Do you see in your mind’s eye a few Grecian elders standing around in simple white robes, or monks in a monastery having their evening meal of a potato, a small bowl of soup and a crust of bread, while they listen to the 12th Psalm ? or perhaps you imagine a bank manager in a shabby suit with trouser creases nonetheless sharp as a knife, whose old shoes are polished to a mirror-like shine? or his sister the librarian with her hair tied back in a bun so tight you could crack eggs on it?

Of course these are all stereotypes, but when we pick a powerful word like “austerity” to define a culture-wide plan of action, all of those stereotypes are consciously considered by the person designing that plan of action.

Austerity is one of several American images of virtue. Austere people are not wasteful, they save their money, they use the same dining room table and dishes for 50 years, they subscribe to Consumer Reports — and take notes. They steadily save 20% of their income for decades on end, and they buy with cash when they buy it all. They think about what they’re going to say before they say it, and often say little or nothing.

There are several virtues, depending on how you count. Faith, Hope and Charity are the high theological virtues, and Fortitude, Justice, Prudence and Temperance are the others, the so-called Earthly Virtues. (Chastity comes in there somewhere, also, if I remember correctly, but that’s probably not part of this essay.)

In any event, an austere person probably exhibits all four of the earthly virtues, and this doesn’t make him a very desirable consumer. So why are we again being told that the ownership society ought to be replaced by the Benedictine society, or possibly something along Buddhist lines?

Ah, but you see this particular “austerity” is only intended to be temporary, partial austerity, nothing permanent. It’s not austerity for all, just austerity for you.

Since I am a boomer, I know legitimately “austere” people, although they might not think of themselves that way. Most of them are 20 or 30 years my elders, and their austerity sprang from a time when you save your money because if you didn’t have a little put away, there was no likelihood that anyone else would help you when you needed it, and you were almost certain to need it. Spending — especially North American hobby spending — would have been seen by The Austere Generation as a ridiculous waste of time and money. Example: my high school best friend’s parents, who built their own house after World War II, are still in it, with the furnishings and furniture practically unchanged over the past 50 years. Clean as a pin, watertight above and below, a little house that needs and knows nothing of Extreme Makeovers.

It strikes me that business would not intentionally want a country full of austere people. They’ve certainly worked hard against it for decades. And government doesn’t benefit from it either, at least in the long run. In a consumer-driven economy, austerity on the part of the people means lower GDP, lower tax revenues, and animal spirits in hibernation. So, why this pervasive need to talk up the virtue of austerity?

Because, I think, the Austere American also has other qualities.

They talk little, they complain little, if the crop fails they just wait for the following year and try again. Great misfortune is treated as an act of God and an occasion to practice fortitude, another one of those virtues. The word “laconic” was invented for them. All of them prefer silence to noise, and they are slow to anger. (Remember, I’m still working with the stereotypes.) They are not dramatic, and very inclined to see their job as keeping their family and community functioning despite downturns.

In other words, I think what is wanted is not the saving, the careful judgment, or the patience of austerity. What’s wanted is the reluctance to complain in the face of loss — the loss of investments, the dialing back of pensions and salaries and so-called “entitlements”, and the erosion of civic freedoms.

What exactly does “austerity” mean? Here, from the Merriam-Webster dictionary we find:

aus•tere

Etymology: Middle English, from Anglo-French, from Latin austerus, from Greek austēros harsh, severe; akin to Greek hauos dry — more at sere. Date: 14th century

1 a : stern and cold in appearance or manner b : somber, grave
2 : morally strict : ascetic
3 : markedly simple or unadorned
4 : giving little or no scope for pleasure
5 of a wine : having the flavor of acid or tannin predominant over fruit flavors usually indicating a capacity for aging

“Harsh, severe, dry, stern and cold, strict, simple, giving little or no scope for pleasure.” Does that sound like a fun social policy? The only glimmer of hope in here has to do with wine.

Now, this usage is hardly new. To see how the word is used in government pronouncements, have a peek at the very useful Google News Archive search for austerity:

The word has long and consistent use over time, but golly — look at that jump for 2010.

Nip into any timeframe in that link to see what the word means in the news of the day, and it appears to always mean “no soup for you!”, i.e. cuts to public service pay, and cuts to services. The word seems to travel with other words like “riots,” and “general strikes.”

When an old farmer watches a promising crop washed away by a mid-summer flood, the correct response is patient perseverance because Mother Nature can’t be taken to small claims court. She can’t have her assets frozen and a bankruptcy panel divide up the capital among her creditors. She can’t be voted out of office.

However when a citizen watches the promises and investments of decades eroded or washed away by businesses that want the cake but not the dirty diches, or governments who want the tax contributions but not payouts for services already paid for, the old farmer’s appropriate response is not patient perseverance — not the austerity of suffering — but incisive, stern, severe demands for accountability and the keeping of promises made one or two generations before — the austerity of judgment.

“Austerity” is not a synonym for resignation. Remember the final dictionary definition? the wine that is preserved and enriched over time by the bitterness of tannin? the wine that lasts for years, and still has a bite when it leaves the bottle? That is the kind of austerity we need in the face of “austerity.”

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The hourless recovery

There was an interesting blog post over at the Macroblog (Atlanta Fed) regarding productivity. John Robertson and Pedro Silos highlight the contributions to GDP growth from various factors, including productivity and employment. One of their findings:

As this chart shows, relatively high labor productivity growth during a recession is not a phenomenon isolated to the 2007–09 and 2001 recessions (for present purposes, the end of the most recent recession is identified with the trough in GDP in the second quarter of 2009). All recessions from WWII through 1970 also featured sizable growth in labor productivity.

The article focuses on the contribution of productivity gains to GDP growth during a recession and the early stages of the recovery. The authors do not comment on, however, a very interesting bit of their story: the “hourless” recovery. Lockhart speaks of this curtly in his speech – the focus of the macroblog article:

Current data on the use of part-time workers suggest that businesses have some scope to increase hours without hiring new full-time employees.

The precipitous drop in hours worked has differentiated this labor downturn from previous cycles (papers here and here). According to the BLS Q1 2010 productivity report, the recovery of the 2007-2009 recession has so far been “hourless”, which is consistent with the previous two cycles.

The chart illustrates the contributions to output growth from hours and productivity for the the first three quarters of recovery spanning the last six recessions. Note: the current recession has not officially been dated as having ended, but June or July 2009 is the “whisper” talk for now. I will simply call Q3 2009 as the onset of the recovery, since GDP grew that quarter.

The “hourless recovery” is underway: a cumulative 3.3% of output has been generated over the last three quarters (using the BLS productivity report) via a 0.9% drop in aggregate hours. I argued last year that adding back hours cannot generate sufficient output growth for sustainable “recovery”; however, productivity growth has been strong enough that the productive hours cycle has not even begun.

It’s likely that the large service sector is the drag that is driving the “hourless” recovery because manufacturing hours are red hot.

(The weekly hours series are indexed to 100 for comparison.)

The chart illustrates average weekly hours of production and nonsupervisory workers in manufacturing and private industry payroll. Manufacturing weekly hours, 41.5 hours per week in May 2010, recovered 5% off the low of 39.4 hours in March 2009. Furthermore, May 2010 set a ten year record, breaking past levels not seen since July 2000 (not shown in chart but you can see it here). In contrast, total private weekly hours remain below pre-recession levels, just 1.5% off of the June 2009 low, 33.0 hours.

The BLS breaks down average weekly hours for all workers by industry since 2006. The service sector is the lion’s share of the private payroll (~85%). Of the service sector payroll, 68% remains short of pre-recession weekly hours worked: trade, transportation, and utilities, professional and business services, and education and health services.

Adding hours still won’t provide a large growth impetus, as I argued here; however, the service industry has yet to see the burst in hours like in manufacturing. As such, I agree with the overall conclusions of the Robertson and Silos article:

Hence, it will probably take awhile to see how President Lockhart’s forecast of continued modest employment growth pans out.

Rebecca Wilder

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Industrial Production and Housing Starts


Industrial production and housing starts were reported today. It has been well covered elsewhere, but I though I would make a couple of comments.

Compared to other cycles this recovery in industrial production continues to be moderate.

It is stronger than in the weak recoveries, but compared to the depth of the downturns the rebound is quite weak. The good point is that in the early stage of a recovery industrial production is driven largely by inventory rebuilding. But we have probably passed that point in the cycle as the economy shifts from the recovery stage to the expansion stage. This means that we are now seeing quite strong industrial production that is driven by changes in final demand rather than by inventory restocking. This implies that good growth in industrial production is likely to continue in contrast to previous expansions when industrial production growth flattened out after inventory restocking ended.

The other point in the report was that capacity utilization was rising. Normally rising capacity utilization is an important driver of business capital spending and is a good omen for continued growth. But that optimistic premise should be tempered by the point that one of the reasons capacity utilization is rising is that industrial capacity is actually contracting.

It is down -1.3% from a year ago, the largest contraction on record.


In contrast to growth in industrial production housing starts actually fell from 659,000 to 593,000. This reflects the major difference between the two economic sectors. Industrial production is being driven by a rebound in final demand while final demand for housing is weak. Moreover, this weakness in housing demand reflects the over a decade of over-production in housing that built excess supply that still has to be worked off.


The fundamental driving force behind housing demand is household formation. In the short run other factors enter the picture. But no matter how many bells and whistles you add to the model, household formation will remain the most important factor. It is not a good determine of month to month fluctuations in the housing market but it is the key factor driving long term demand. Household formation is essentially a function of young people leaving home and setting up independent house keeping. That is one reason it is surprisingly cyclical as in hard times young people either remain or return home. But the long run trend is clear. After the baby boomers leaving home and setting up housekeeping lifted household formation to over 2 million annually in the 1970s and 1980s household formation has fallen to under 1.5 million annually. Moreover, it should remain at that low level unless we have some fantastic rebound in immigration.


This is easy to see if you look at a smoothed series of household formation and housing starts. In the 1970s and 1980s annual housing starts averaged over 2 million. But this was accompanied by household formations of over 2 million annually. So over that period supply and demand were in rough balance and despite the highly cyclical nature of both economic series, significant long term imbalances never developed. But look at what has happened since the late 1990s. Housing starts have significantly outpaced household formation creating a large supply of excess housing that will have to be worked out of the system. But with household formation now expected to remain well below 1.5 million this implies an extended period of housing starts remaining at or near their current low levels rather than the historic pattern of strong rebounds. This cycle the pent-up demand for housing is negative.

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Debt, Deficits, and Defense

Debt, Deficits, and Defense…The Sustainable Defense Task Force set in motion by Rep. Barney Frank has comprehensive suggestions. It is more specific than other suggestions I have read.

David Ignatius of the Washington Post sees deficits concern as a possible unifying process among right/left thinking. I don’t see it.

Bruce Bartlett comments on deficits and defense spending here and here.

Concerns about budget deficits and rising debt levels are leading to fractures in the heretofore unified conservative support for ever-higher defense spending. At least a few Republicans are now openly suggesting significant cuts in the defense budget, raising concerns among conservatives primarily concerned about national security. I believe that ultimately national security conservatives will be forced to choose between cuts in the defense budget and tax increases to reduce deficits.

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Lest we forget healthcare…a few notes and links

Health care reform blog reminds us both complexity of costs:

Thus, areas with high medical spending do not have offsetting lower pharmaceutical spending; in fact, if the coding practices in different regions are not too dissimilar, the substantial variation in pharmaceutical spending does not seem to be strongly associated with variations in medical spending at all. Spending on pharmaceuticals itself is variable and thus warrants scrutiny similar to that given to medical spending, in order to glean lessons about optimal prescribing, insurance characteristics, and resource allocation. Our findings reinforce the importance of understanding the drivers of geographic variation, since increases in medical spending or pharmaceutical spending do not appear to be associated with offsetting savings in the other realm. Using this more complete measure of spending reveals that area-level variation in total spending is not driven primarily by patient characteristics. These data may offer us an opportunity to gain insight into the underlying causes of the intensity of use of health care resources and the potential for public policy actions to improve the value of the health care delivered in the United States.

(Bolding is mine)

Good health care less money

Advocates for health care reform (including yours truly) have frequently argued that it is possible to reduce the amount of care without reducing the quality–or, to put it more simply, that less care doesn’t have to equal worse care.

Several other links point to information to quality and costs:

Is more care better?


The Cost Conundrum

What a Texas town can teach us about health care.
by Atul Gawande

Massachussett is still wrestling with cost:

The Mass Hospital Association did not offer access to their membership white papers when I asked, just public positions. These are the latest on the website. If represzentative. the two suggested are disappointedly indicative of the inability of insurance companies and the big hospitals to come to terms with cost despite promises of cooperation in MA.

Mass Hospital Association points to wage increases as problem:
Lots of data, but the end result appears to epmphasize the idea that higher costs of the private sector subsidizes the public sector, but cost reduction strategies appear limited. Global payment system billed as a cost savior of major proportions.

Mass Hospital Association primary recommendation to cost reduction appears to be through insurance plans:

“Employer/employee cost reduction through reduction of services and at least increased co-pay…..insurance plans are ‘rich’, premiums high because insurance mix is too rich.”

In the deficit atmosphere in MA, the public sector ‘too rich’ insurance plans will come under attack through a change in law on making health plans part of wage negotitions mandatory…towns will be able to change terms unilaterally is my bet.

Martha Coakley, Attorney General for MA, has a report showing utilizationhas not increased nearly as fast as prices over the last 3-4 years.

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FATCA (foreign account tax compliance act

By Linda Beale
crossposted with Ataxingmatter

FATCA (foreign account tax compliance act

FATCA (foreign account tax compliance act–or is it the anti-fatcat act?)
The attention of US tax enforcement has been focused on offshore issues for some time. Of course, the most conspicuous part of that has been the ongoing dispute with UBS, a Swiss bank that facilitated tax evasion by US taxpayers under the Swiss banking secrecy rules. After some breakthroughs, the US was at the point of prosecuting the bank and got it to agree to release information on 4500 of the most significant accounts. But then a Swiss court intervened, requiring a parliamentary approval of the agreement. The upper house approved, but the lower house balked. The upper house has now re-approved the measure, with the hope that the lower house will now act in time to have the agreement approved before the June 18 end of the session. Meantime, Germany has purchased information on about 20,000 Swiss secret accounts, in its extensive efforts to stem tax evasion. The US initiated a voluntary disclosure program, which netted about 15,000 accountholders. All of those efforts mean that there will be lots more information to track back to the perpetrators, and a much greater possibility that those trying to evade taxes or assist people in evading taxes will be caught. That is all good news.

Further, as part of the HIRE Act, Congress passed a number of provisions earlier this year intended to make it much harder for wealthy Americans to hide assets offshore and evade paying their fair share of taxes on the income from those financial assets. That part of the HIRE act is called “FATCA”–the foreign account tax compliance act, and is a major step forward in requiring information reporting about offshore assets and backing that requirement up with penalties. A big part of FATCA is a requirement that foreign banks must either agree to disclose information about US investors or be subject to the statutory withholding regime (a 30% rate).

Doug Shulman spoke to OECD on June 8 about the US efforts to ensure greater tax compliance in the face of globalization. The following is an excerpt of those remarks in which he discusses FATCA. The full speech is available here.

Transparency has also been enhanced through the U.S. Qualified Intermediary – or “QI” Program. Since 2001, the QI system has provided the United States a way to work with foreign financial institutions to ensure that investors in offshore accounts are indeed eligible for the relief from our source-based withholding taxes that they claim, and the system has worked effectively. However, the system is not without its limitations. The QI information-gathering rules are focused mainly on ensuring that withholding tax relief is appropriate, and almost no detailed information flows from the QIs to the IRS about the identity, income or overall tax position of any accountholder. Moreover, not all foreign financial institutions choose to be a QI.

Enter center stage the Foreign Accounts Tax Compliance Act – or FATCA – which was enacted this year as part of the HIRE Act. This is the most important development in international information reporting in a generation. It is a big step forward in our efforts to reduce tax evasion by creating transparency and accountability in the offshore financial markets.

FATCA provides IRS with the tools we need to crack down on Americans hiding assets overseas. Let me speak to some of the Act’s broad policy provisions and what they mean to taxpayers and foreign financial institutions. At its core, FATCA makes it much more difficult for US individuals to hide assets in offshore accounts. First, it increases information reporting by U.S. taxpayers holding financial assets outside the United States and imposes stiff penalties for failure to comply. It expands due diligence standards, so that we have a better line of sight to U.S. beneficial owners of accounts. It also ramps up the stakes for foreign financial institutions that will have to agree to disclose U.S. investors to the IRS or feel the pain of a substantial new withholding tax on U.S. income and gains.

I also believe that the mere enactment of FATCA should prompt preparers and advisors to expand their due diligence regarding offshore account issues, including, but not limited to income tax reporting. Overall, FATCA makes the world a much riskier place for US taxpayers still trying to hide their money anywhere around the world.

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