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

Canceling Student Loan Debt Petition

Alan Collinge of the Student Loan Justice Org. has a petition promoting the cancellation of Student Loan Debt. When Angry Bear ran (April 1) his commentary on Student Loan Debt asking for signatures, there were 161,000 signatures on the petition. A couple of days later, the number of signatures was approaching 200,000 Today, I was advised, they now have 211,000 signatures.

If the Fed will be supporting the asset-backed markets, the primary corporate bond markets, the secondary corporate bond markets. The Fed will also purchase of Treasuries, mortgage backed securities in vast amounts. Fannie Mae and Freddie Mac also made some announcements. There were also rumors of a special carve-out just for Boeing and GE even though Boeing refusing to give an ownership  stake to the Fed. At the least, the Fed could discount the price paid and sell back at market.

The issue for Alan, the Student Loan Justice Org, and its members is; why not bail out people with excessive student loan debt much of which is the result of interest from forbearance, penalties, etc.?

The student loan justice.org is needs your help by your signing the President Trump: Cancel Student Loans NOW petition. Please join student loan justice.org and the 211,000 (up from 161,000) signers of the petition calling for President Trump to prioritize canceling student loan debt. Doing such would cause many citizens burdened with debt to be more productive promoting economic growth.

Angry Bear has posted Alan’s words over the years on Student Loans and the resulting Student Loan debt to which there is no bankruptcy relief; the same relief our president has enjoyed multiple times, also abused by corporations who gambled on Wall Street, and used in every day by businesses, unions, and ordinary citizens caught up in bad economies. There is a large economic potential benefit to freeing them from the loan debt so as to be more productive.

Read the petition and if you can spare a signature, please add your name.

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A last look at the 2009 – 2020 expansion

A last look at the 2009 – 2020 expansion by New Deal democrat

All of the most important economic from February has been reported. Since that was the last month before coronavirus derailed everything, I thought I would take a look back and see what shape the economy was in just before the moment of impact.

As usual, the 4 coincident indicators that the NBER usually looks for in determining whether the economy is in expansion or contraction are: industrial production, nonfarm payrolls, real sales, and real personal income minus government transfer receipts. Here’s what they look like through February, with each normed to a level of 100 as of August 2019, first in a longer term view:

And now focused on the past year:

Note that all 4 flattened or rolled over at the outset of the 2008 recession. In 2016, production turned down and income flattened, but both jobs and sales continued to increase. In the latter part of 2019 into early 2020, production and sales turned down, but jobs and income continued to increase.

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Weekly Indicators for March 23 – 27 at Seeking Alpha

Weekly Indicators for March 23 – 27 at Seeking Alpha by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

As you might expect, almost all of the “hard” indicators have crashed. What sticks out is that consumer spending, as measured by chain store sales, has not – even though one week ago the coronavirus restrictions were very much in place in many regions.

As usual, clicking over and reading will bring you thoroughly up to date. It also helps reward me for my efforts, especially now that I have cut back on posting there in order to spend a lot of time documenting what is happening and what is likely to happen going forward with the coronavirus pandemic.

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Mass testing for Covid-19: economics, politics, and policy options

The Covid-19 epidemic is creating a painful dilemma for policymakers.  On the one hand, we need to practice social distancing to keep people healthy and to prevent our hospitals from being overwhelmed.  Unfortunately, this strategy is causing a severe economic contraction as people avoid contact with others.

An ideal response to this dilemma would have three basic components.  First, we would implement a hard, nation-wide lockdown to slow the spread of Covid-19.  This would “flatten the curve” and save lives by preventing hospitals from being inundated with patients in the next few weeks.  It would also buy time to put in place the testing, prevention, and surveillance measures we will need to start cautiously re-opening our economy.  Putting these measures in place should be the second element of our strategy.  Finally, as Paul Romer and Alan Garber argue, we need a major effort to increase our capacity to test for Covid-19, and to produce masks, gloves, and other forms of personal protective equipment (PPE) by an order of magnitude or more.  The ability to do mass testing and to provide masks and other PPE to most Americans will substantially reduce the risk that the epidemic drags on for many months and leads to an economic catastrophe.  (For further discussions, see here, here, and here.)

In this essay I explain why it is important to massively increase our ability to produce Covid-19 tests and PPE.  I also discuss how this can be done, considering the apparent reluctance of the Trump administration to lead this effort.  I make four basic points.

First, the ability to test millions of people daily for Covid-19 and to produce PPE for millions of Americans will require a large up-front capital investment by manufacturers that may turn out to be unneeded, but this investment is socially justified to lessen the risk of a severe and protracted economic shutdown.

Second, without firm contractual commitments from the government, businesses will not invest at the scale required to ensure that we can avoid a disaster.  Several factors will deter adequate investment by industry; the most important is probably the risk that the epidemic will abate and they will not be able to recover their investment costs.  The government can overcome this problem by agreeing to pay companies for tests and PPE even if the epidemic abates, by subsidizing investment in the capacity to produce tests and PPE, etc.  The critical point is that the government needs to make binding commitments NOW, it cannot wait to see if the epidemic can be brought under control using other means.  Valuable time has already been lost.

Third, the powers that the President has under the Defense Production Act to directly control the use of resources are not particularly useful if our goal is to spur investment in the capacity to produce tests and PPE.  We need to give firms incentives to invest in new capacity using contracts, competitions, and similar tools.

Fourth, an ambitious effort to expand production of tests and PPE will inevitably lead to genuine contracting failures and to situations that create the perception of failure.  Trump is clearly anxious to avoid setting ambitious goals and taking actions that might later be used to criticize him.  In response, Congressional Democrats want to force Trump to exercise his powers under the Defense Production Act.

This is a mistake.  Trump would likely veto any bill that tried to force him to act, and, in any event, it is very difficult for Congress to force a reluctant President to act.  Fortunately, there is no need for contracting efforts to be directed by the President.  Rather than trying to force a reluctant Trump to exercise his contracting powers under the DPA, Congress should either delegate the power to an agency, or it should create incentives itself, directly.  I will sketch out how this can be done.  The same point applies to efforts to organize mass testing, the distribution of equipment, and other activities where direct commands are an effective means of achieving our goals:  Congress should accept that Trump is unwilling (and arguably unable) to lead these efforts and try to work around him in ways that he can accept.

Mass testing and distribution of PPE mitigate the risk of economic disaster

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A Dog that Didn’t Bark

The USA is about to experience the largest fiscal policy shift since World War II. The House is debating whether to add $ 2,200,000,000,000 to the Federal Budget Deficit (counting loans as if they were expenses because that’s what they do). There appears to be a near consensus as all are speaking in favor. It is just possible to guess which are Republicans

I’m sure there is a similar near consensus that Rep Thomas Masie of Kentucky, who made them fly to DC by threatening to call a quorum, is a jerk (the Rep. is short for reprehensible). I don’t really wonder if someone is going to get knifed in the members only men’s room.

The Supply of Treasury securities is about to experience the largest shock in history. So what is happening to the price in anticipation of the huge supply shock ?

Quick find the shift from arguing about $ 2.5 billion vs 8.5 billion to arguing about $ 100 billion more to discussing $ 1800 billion more to approving $ 2200 billion more on the graph.

The rate is not quite at the all time record low, but it is close. One might argue that a huge Federal Debt will crowd out investment, beause it will create an illusion of wealth which makes people consumer more so the Fed will have to achieve high real interest rates in order to keep the economy from overheating. One can argue that the huge debt will cause high inflation (perhaps because the Federal Government is the world’s main dollar debtor and can make the dollar worth as little as they want) which will imply high nominal interest rates.

But one will not be able to convince investors of this. the invisible bond vigilantes clearly have got their hands on Harry Potter’s invisibility cloak.

This isn’t even a matter of much debate (except for Massie). It is clear that stimulus will help the USA and also, in particular, the GOP. When the interests of the USA and the GOP allign there is (almost) no debate, because Democrats care about the country and not just about hurting the other party. In 2009 Republicans demonstrated that they were partisans not patriots. Today, Democrats are demonstrating they are patriots more than they are partisans.

Many economists (some winners of the Nobel memorial prize) should admit that they were totally wrong. But of course they won’t.

Some economists whose response to the horrible Trump tax cut was more debt no problem can say “I told you so”

I told you so.

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Let’s get real about coronavirus testing . . .

We do not know how severe the covid-19 epidemic will be or how much economic and social pain it will cause, but it clearly has the potential to kill hundreds of thousands or even millions of Americans, and the economic consequences could include a deep recession and even a financial crisis that will cause misery to tens of millions of people.

Testing is key to getting the epidemic under control, and it is not clear to me that policymakers are being nearly as aggressive about expanding testing capacity as they should be.  Think of two alternative testing strategies.  One strategy is to selectively test people who have symptoms or who may have been exposed to someone with the disease.  The alternative strategy is to develop the ability to do mass screenings for the virus among the general population.  (There are various intermediate strategies one can imagine, such as doing mass screenings in local areas with a high incidence of disease.)  Of course, selective testing is the place to start, but the ability to do mass screenings would allow us to pro-actively identify and isolate almost all carriers and would thus avoid the need for widespread social isolation which is wreaking havoc on the economy.  Selective screenings, in contrast, may or may not be able to contain the epidemic sufficiently to allow normal economic activity to resume.

I am not sure what is being done to expand our testing capacity, but if we want to develop the ability to do mass screenings, we need to make it a priority nowThe government will need to contract with equipment manufacturers and other suppliers (of reagents, swabs, protective gear, etc.) for large capacity commitments on a short timeline.  I have no idea what this would cost or even if it is feasible, but if there is even a small chance that the epidemic will last for six months or return next winter, it seems that a $10 or $20 billion investment in testing capacity would be short money.

The Democrats should jump on this as they take up the next coronavirus response bill.  Not only is it good policy, it will give them an opportunity to highlight the fumbling, timid response of the Trump administration to the crisis.

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Walter Bagehot Explains to the Fed What They Should Have Done on Thursday

The day before yesterday, the Fed made a somewhat unusual announcement of $500,000,000,000 of REPO offers a day for three days in a row. The idea was to let banks unload risky assets before they panicked nipping a financial crisis in the bud.

This move was controversial. Unfortunately many critics act as if the Fed was giving away $ 1,500,000,000,000 rather than buying assets with it. I hazard a guess that the Fed will profit from the operation (their efforts to save the financial system in 2009 generated the largest profits recorded in human history as an unintended side effect). However, it is also clear that the transaction amounts to a subsidy to banks. The Fed will pay a higher price than would have cleared the market. $ 1.5 Trillion will do that. Back in 2009 the Fed bought mortgage backed securities at the market rate when they were the only buyer in the market. This means that the open market operation was a massive subsidy (which also generated record profits).

The fact that the Fed pays much more than the market would without their intervention is pleasant for banks. Driving up the price of risky assets is part of the point of the operation. However it is also very irritating.

Fortunately someone figured out what they should have done. Walter Bagehot explained it clearly in 1873. The idea is that the central bank should lend freely accepting as collateral assets which would be accepted by private agents in normal times but not during the crisis. But Bagehot did not advise lending at the rate which prevailed before the crisis. Rather the maxim is lend freely at a penalty rate

 

First. That these loans should only be made at a very high rate of interest. This will operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applications by persons who did not require it. The rate should be raised early in the panic, so that the fine may be paid early; that no one may borrow out of idle precaution without paying well for it; that the Banking reserve may be protected as far as possible.

 

Another way of putting it is that the Fed should buy risky assets at a price markedly lower than the pre.crisis price and contract to sell them back to banks at normal prices after the crisis is expected to be over. This is the REPO is the same as a collateralized loan irritating finance terminology issue (also there is no O in repurchase so why the hell is it called a REPO).

Another way of putting it is that we don’t want solvent firms to go bankrupt and be liquidated. In plain English this means if one can save a firm with a loan, then one should. The idea is that the firm should still exist when the crisis is over. In other words, the shares of the firm will still have positive value and won’t be worthless pieces of paper.

Bagehot’s point is that we also want that positive value to be low. Firms (which must be depositary institutions according to the Federal Reserve Act) should still exist even if they have to borrow from the lender of last resort. But to make sure it is the lender of very last resort, they shouldn’t be worth much.

Any value of a firm which needed the lender of last resort is basically a gift to owners who messed up and a moral hazard.

To combine this with the need for equity capital, it is possible to TARP, that is make the penalty rate loan junior to other debt as preferred shares not bonds.

Another point is that sometimes obtaining annual profits of only $97,700,000,000 is not satisfactory performance.

The main point is that if the Fed can make $97,700,000,000 while also granting a massive subsidy, then the previous arrangement was not efficient. The problem is that entities with deep but not infinitely deep pockets can’t always bear risk. The solution is for the government to be the residual claimant. That’s called socialism and the market says it works.

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The Stock Market in Presidential Terms

Before the recent swoon stock market market performance under Trump had been quite favorable. The market gain since his inauguration (100) had been (144) similar to those under Clinton (141) and Obama (150). At this point Ike actually had the best return ( 170) but Ike and Truman are not included  in the chart because it is too cluttered already.

After the recent market drop he is now more or less in the middle of the pact for recent presidents  — even with JFK-LBJ and behind most democrats and ahead of most republicans.

But if he wants a strong market-economy going into the election it is easy to see why he strongly favors the 50 basis point cut by the Fed. The market doesn’t seem quite sure what to make of the Fed’s actions, first rallying strongly and then turning negative.  It still does not have a handle om what economic impact to expect from the coronavirus. Maybe the Fed fears a bigger impact than markets were already discounting. Or, maybe the Fed is just taking out insurance in the face of extreme uncertainty.

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Where is the puzzling growth in service jobs coming from?

Where is the puzzling growth in service jobs coming from?

Continuing with my week of follow-up stories based on last Friday’s jobs report, I noted last Friday that there was a completely anomalous upwards revision of nearly 100,000 jobs in the last 8 months of 2019. This after a -500,000 decrease, based on full data, in the previous 12 months!

So I took two approaches: a bottoms-up micro view, and a top-down macro view — and got contradictory answers. This post is up at Seeking Alpha.

Since that article was posted, a correspondent pointed out that some of the biggest upward revisions were to the retail trade. So here are a few supplemental graphs.

First, all retail jobs plus all leisure and entertainment jobs:

Next, the sectors of retail with the biggest gains:

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Does America Hate Its Children?

December 2012,  Robert Reich wrote about America’s children   .   .   .    Remember the Children.

“America’s children seem to be shortchanged on almost every issue we face as a society.

Not only are we failing to protect our children from deranged people wielding semi-automatic guns.

We’re not protecting them from poverty. The rate of child poverty keeps rising – even faster than the rate of adult poverty. We now have the highest rate of child poverty in the developed world.

And we’re not protecting their health. Rates of child diabetes and asthma continue to climb. America has the third-worst rate of infant mortality among 30 industrialized nations and the second-highest rate of teenage pregnancy, after Mexico.

If we go over the “fiscal cliff” without a budget deal, several programs focused on the well-being of children will be axed – education, child nutrition, school lunches, children’s health, Head Start.

Even if we avoid the cliff, any “grand bargain” to tame to deficit is likely to jeopardize them.

The Urban Institute projects the share of federal spending on children (outlays and tax expenditures) will drop from 15 percent last year to 12 percent in 2022.

At the same time, states and localities have been slashing preschool and after-school programs, child care, family services, recreation, and mental-health services.

It seems as if every one of usual major interests have political clout – except children. They can’t vote. They don’t make major campaign donations. They can’t hire fleets of lobbyists.

Yet they’re America’s future.

If you follow the link to Robert Reich’s commentary you can read what major interests have the clout and dominate America’s interests.

 

Eight years later, January 2020 and Paul Krugman is asked a question by a correspondent.

“What important issue aren’t we talking about?”

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