Removing the rungs...

Pretty soggy and I've got my video sent for this week, so I need to post. At least, I'm out of excuses. And this is a topic I been grappling with for many months with little success unraveling.

Basically put, does the free enterprise system which so many of us have defended for so long somehow broken down or been superseded? It's hard to look at the flood of numbers that indicate troubling trends and not ask the question anyway.

For example, the story on median income is simply appalling.

Some important caveats: As I (and others) have said before, presidents probably get much too much credit when the economy is doing well and much too much blame when the economy is doing poorly.Mr. Obama in particular inherited an economy that was really just starting the death spiral set off by the financial crisis, as you can see in the chart above. And as Carmen Reinhart and Kenneth Rogoff have shown, economies struck by major financial crises generally take 10 years to fully recover.We’re currently in Year 5 after the crisis first hit.  Since median household income hit bottom in the first quarter of 2010, it has risen about $769.36, not nearly enough to cover the ground lost on the way down. [More]

But the story is not grim at all for some of us.

[Source]

And this is the crux of the matter. THE big debate in economics is whether wildly unequal outcomes are now baked into the capitalistic cake, so to speak. Have we reached a point where the leveling mechanisms (economic mobility) are not up to the task of preventing an ever more concentrated wealth distribution?

But here’s where I become less optimistic than the president. Imagine that same prognosticator had added one more bit of clairvoyance: Despite all those positive trends, the real median weekly pay of full-time workers in mid-2014 would be slightly lower than it was in mid-2011. Or than it was in mid-2008, the year before Mr. Obama took office. Or in mid-2000.It’s certainly possible that we’re on the verge of a pay surge, much as we were in the mid-1990s, when the situation also seemed bleak. It’s also possible that the forces behind the great wage slowdown – from globalization to our often-sclerotic government to (at least for many workers) technological change – are still more powerful than the positive forces. In that case, the wage slowdown won’t end until the country makes much more progress in improving education, cutting medical waste and energy costs and creating a more responsive, nimble government.Either way, the great wage slowdown, or the end of it, will help set the tone for American life in the coming decade. It has already done so in the century’s first 15 years, causing widespread unhappiness with the country’s direction and leading voters to shift partisan directions multiple times. The political turmoil isn’t likely to end until the economic reality changes. [More]

One of our most central beliefs in the US has been the idea of any person could make it big. While that's still true, it is now so rare that we use the same handful of examples to defend it (Zuckerberg, et al.) instead of pointing to people in our neighborhood of circle of friends.

We have been enamored with the example of "the self-made man". I just don't see that option as any more relevant that lottery winners as paradigms of conduct. Mostly because, along with others, I now see circumstance as having become more defining than character.The dynamite and ginger Jack brought to the roofing trade was necessary to exploit this advantage. But listening to him describe the factors that produced Eastern’s early success, I realized I’d fallen prey to the same fallacy that had led Milton Gordon to attribute the achievements of Jewish garment workers solely to their industry and ambition, and not the conditions in which their ethic thrived. The self-made mythology has evolved in its 200 years: from an exuberant celebration of opportunity in the young republic to a stern admonition against excess in the antebellum years; from a naive story of pluck rewarded in the post-Civil War-era, to a brazen defense of money-getting in the Gilded Age; from a beacon to the great wave’s huddled masses, to a pep talk for the young women of the digital age. The one constant, however, has been the idea that character trumps circumstance. I’d caught myself buying into it.Jack knew better. Though an unapologetic believer in the power of hard work to lift men above their means, he allowed that even the hardest worker can’t impose his will on the world—he acknowledged that other men, and other forces, played a role in his rise. Over the years, I now saw, I had revised my father’s story in the retelling to emphasize his accomplishment, and his agency, just as William Temple Franklin had done with his grandfather Benjamin’s story. I’d counted myself a skeptic. It turned out I’d been a believer, and a mythmaker, all along. [More of a superb essay]

My father was a devoted reader of Horatio Alger in his youth. The wretched prose and simplistic plots shaped his view of how the world worked.  I just couldn't see it. After all this time, I think I have found our divergence point: the value of simple labor.

I think we have reached a level of technology that is relentlessly devaluing hard physical labor. Even in agriculture, the idea that hours in the field will translate to success is quietly recognized as incomplete, if not flawed. You need to pick your parents carefully, and memorize the plat book before dating.

Moreover, the example of a hired man going on to become a successful independent farmer pretty much ended with my generation, IMHO. As much as I have suspected our profession evolving into a hereditary agristocracy, I am now convinced.  And to my embarrassment, I am fueling the change by building a castle with ramparts and moat for our family.

Bankers unclear on the concept...

Out in Kansas, home of the famous "Fighting 'Flation Hawks", bankers recently gathered to complain how the Federal Reserve was ruining their lives.

"Interest rates have been low longer than needed," said Jim Farrell, president of Farmers National Company and chair of the Omaha branch board of directors of the Kansas City Fed. "The low rate doesn't seem to be stimulating anything now.""Beware of unintended consequences," Farrell added. Discounted interest rates get factored into farmland values, which influence cash rents and that drives up the cost of production, Farrell noted.Another consequence: "Some have called it a 'retirement tax,' because retirees are paying the price, [by not being compensated for their savings]," said Farrell.In fact, George pointed out, "We've seen signs of 'reaching-for-yield' behavior in the leveraged loan market, subprime auto lending and corporate bonds."The lack of alternative investments has been a factor in keeping farmland values high, noted Doug Stark, president of Farm Credit Services of America, based in Omaha."Lower interest rates have also pushed some savers, who traditionally relied on safer assets, into riskier securities," said George. And there is growing concern these savers, especially those retired or nearing retirement, may not understand those risks, George noted. [More]

It's unsettling to me to hear remarks like these from people in charge of our financial system. My understanding of the system seems to be strongly at odds with their POV.

For example, there are easy ways to tell when interest rates need to rise: inflation comes to mind. When people want to buy stuff and services more than they do save money, prices will begin to rise. This demand-pull doesn't seem to be what we've seen for years.  In fact, inflation remains historically low.

The Labor Department’s latest consumer price index report suggests concerns about inflation pressures may again be premature. U.S. consumer inflation firmed last month but largely decelerated outside a jump in gasoline prices, and food costs in particular slowed after surging in recent months.Indeed, the Fed’s preferred measure of inflation—the Commerce Department’s personal consumption expenditures index–has been undershooting the central bank’s 2% target for two years. Any reading that finally approaches 2% – and even one that surpasses it slightly – is likely to be welcomed rather than feared by Fed Chairwoman Janet Yellen and many of her colleagues. [More]

Let's see what this looks like:

[Source]

Another sign rates are too low would be bond yields. If US debt wasn't paying enough interest the price of bonds would drop to raise the effective yield. But signs of investor reluctance just aren't there.

[Source]

And while the bankers complained that savers were being "forced" into riskier investments to get some yield, this is another indication we have plenty of money looking for work. Just like we now seem to have more than enough corn, the price has plummeted. For many, it is hard to think of money as a commodity, but the same supply/demand principles apply. 

Here's a curious indicator about the abundance of savings.

A report released Thursday by bank consulting firm Moebs Services Inc. calculated the average balance for U.S. checking accounts at $4,436 at the end of last year — more than double the average of $2,100 over the 25 years of the annual survey.During good economic times, when unemployment and inflation are low, the average balance in consumer checking accounts is about $1,400, the survey noted."When times get difficult, the consumer sits things out and checking balances get larger, normally upward to $3,000 or a bit beyond," the study said. "Generally there is higher unemployment, lower inflation and falling prices." [More]

The idea of more money than can be used by borrowers simply eludes many people. The belief that money has intrinsic value is deeply ingrained in our minds. Perhaps this is necessary, because if we ever did try to come to grips with the fact that it's jut a piece of paper or a number on a screen we'd panic. And buy gold.

But this, I believe, is the big reason why interest rates are low - there are oodles of money being saved, much less being spent. And as for needing money for investing in new business ideas, that's not happening either.

[Source]

The surplus of savings has gone on long enough to trigger a sense of entitlement in savers - they deserve a decent return! It turns out if nobody wants to use your money, you don't. Money earns a return, it isn't a built-in guarantee.

Finally, these bankers seem to have forgotten they control their interest rates. The Fed can't prevent them from raining what they pay savers. Of course, they would have to charge more to borrowers in return, who would likely go to a) borrow less or b) find another cheaper lender. The Fed doesn't tell banks what to charge. 

Exacerbating the problem is how banks have voluntarily linked loan rates to the prime rate (which links to the Fed funds rate) so as to "automate" and shift blame for rate changes. This is a real help when going up, but less fun for them when rates are falling. Again, this was their choice, not the Fed.

This is simply low demand. While $3 corn may help that situation for some ag banks, right now more saving is going on than spending.  The worst (for them) news is this is unlikely to change very fast. Economic growth is largely being garnered by the saving class, not the spending (borrowing) class.

Banks have the same problem I have: too much product for current demand. Carping about the Fed won't help, and raising interest rates could actually make the problem worse.  Until loan demand and inflation show some life, they need to figure out some other way to make a buck.

The longer, the worser...

 Or something like that. There are several theories floating around about the enigma of the long-term unemployed. Tyler Cowen, whom I often struggle to follow, has a very interesting post and column that at least illuminates some of the possibilities.

Many of these labor market problems were brought on by the financial crisis and the collapse of market demand. But it would be a mistake to place all the blame on the business cycle. Before the crisis, for example, business executives and owners didn’t always know who their worst workers were, or didn’t want to engage in the disruptive act of rooting out and firing them. So long as sales were brisk, it was easier to let matters lie. But when money ran out, many businesses had to make the tough decisions — and the axes fell. The financial crisis thus accelerated what would have been a much slower process.Subsequently, some would-be employers seem to have discriminated against workers who were laid off in the crash. These judgments weren’t always fair, but that stigma isn’t easily overcome, because a lot of employers in fact had reason to identify and fire their less productive workers.In a nutshell, what we’re facing isn’t your grandfather’s unemployment problem. It does have something to do with modern technology, and it will be with us for some time. [More]

I find this pretty persuasive, but also think we are largely underestimating the effect of technology, even though it is getting attention. Perhaps it is not as obvious as robots on the assembly line, but more along the lines of me troubleshooting and sending my new iMac back (yes - total FAIL) without ever talking to another human. Even the tech support guys in India are losing out.

People with little economics training intuitively grasp this point. They understand that some human workers may lose out in the race against the machine. Ironically, the best-educated economists are often the most resistant to this idea, as the standard models of economic growth implicitly assume that economic growth benefits all residents of a country. However, just as Nobel Prize-winning economist Paul Samuelson showed that outsourcing and offshoring do not necessarily increase the welfare of all workers, it is also true that technological progress is not a rising tide that automatically raises all incomes. Even as overall wealth increases, there can be, and usually will be, winners and losers. And the losers are not necessarily some small segment of the labor force like buggy whip manufacturers. In principle, they can be a majority or even 90% or more of the population. [More]

Economists also constantly look back to data and anecdotes about past technology advance that spurred so much growth that displaced workers were easily absorbed into new industries, with even higher pay. I know we always think this time is different, but that cannot be ruled out either. A disruptive technology could wipe out whole sub-sectors, and recently has.

Farmers too often let their eyes glaze over on such subjects. But many will lose farms and careers as consolidation continues. More importantly, the job prospects of our children and grandchildren become much more arbitrary. 

TC's point about men and service jobs is chilling as well. 

[Good comments after the post about people like TC on tenure grasping the feeling of unemployment.]

Thanksgiving stuff(ing)...

 I suppose this is a kind of Junkbox, but specifically targeted to today.

First, if you're struggling for things to list when your turn at the table to be thankful comes around remember these 5 economic trends. Dibs in this one:

5) Debt burdens keep on falling. The ratio of Americans' income going to meet debt obligations has plummeted in recent years, as consumers have both reduced debt burdens (by paying them down and in some cases defaulting) and benefited from lower interest rates. The debt service ratio was only 9.89 percent in the second quarter, hovering near an all-time low of 9.84 percent from late 2012 (the data go back to 1980). That ratio was 13.5 percent in the third quarter of 2007, before the crisis. Congratulations, America! You're making progress in getting your household debts to a more manageable level.

Even though I have been following economic numbers, this reminder was a pick-me-up. Maybe it's because they can't pack enough doom-mongering in farm publications right now.

To be fair, I am convinced one thing about this ag downturn that will be unique for my lifetime at least is remarkably low odds for a massive government bailout, like the infamous extra AMTA payment.

This conviction is certainly coloring my plans for the next few years, which have proven to be a little trickier to map out with dual goals of enough retirement income and a manageable debt for Aaron. Looking at the spreadsheets, I really needed just one more year of $5+ corn to arrange the numbers in a smooth, trouble-free path. 

But since when has my ability to plan been that accurate? Like many of my generation, working past 66 probably won't kill me. 

I do think that high costs will force down rents faster than experts think. In short, DuPont and Monsanto will eat landowners lunch as well as operators. Rents are, in the end, residual, and with lenders poised to say "no" much earlier, 2014 rents could show a significant drop.

*****

I filled up for $3.09 recently (see above).  I could get used to this. But I wasn't aware of one of the factors in the price drop.

Many Gulf Coast refiners are taking advantage of the boom in shale-oil drilling in the Midwest and producing ever more diesel for export to Europe and Asia. That's a lucrative business. And that refining process also produces more gasoline for domestic consumption. So, as The Wall Street Journal reports, refiners can still make a profit from exporting diesel abroad even if they're creating a glut of gasoline here at home. [More]

I also think it might be part of refiner and oil producer plans to do what they can to keep prices low if the EPA goes through with the mandate revision. Nothing would cement the idea of ethanol making gas prices higher than gas selling with a "2" in front of it right after the mandate was eased, IMHO.

Nonetheless, thanks Europe!

*****

I could do this if I wanted to...

*****

Meanwhile, back in Africa, the lack of industrialization to provide jobs is threatened by an emerging pattern of premature deindustrialization. 

The economic, social, and political consequences of premature deindustrialization have yet to be analyzed in full. On the economic front, it is clear that early deindustrialization impedes growth and delays convergence with the advanced economies. Manufacturing industries are what I have called “escalator industries”: labor productivity in manufacturing has a tendency to converge to the frontier, even in economies where policies, institutions, and geography conspire to retard progress in other sectors of the economy.That is why rapid growth historically has always been associated with industrialization (except for a handful of small countries with large natural-resource endowments). Less room for industrialization will almost certainly mean fewer growth miracles in the future. [More]

There simply will not be as many "factory jobs" anywhere in the world, let alone Africa. This reinforces my belief that forcing industrial agriculture into sub-Saharan Africa would be devastating to local economies even as they make money for investors, since  our type of ag is very labor-light (and getting more so).

*****

Go watch the game. Or The Wrath of Khan.

What an answer...  

Could look like. Will Wilkinson, one of my favorite libertarian writers responds to a one-sided post by Jonathon Chait and near the end hits a nerve with me.

That said, it remains that egalitarian anti-corporatism is a genuinely excellent, genuinely egalitarian idea. I would prefer to see it combined with a really solid scheme of social insurance. But we never see this combination because neither party is interested in it. Many Democratic partisans are even less interested in anti-cronyism than many Republicans, unless they think it will hurt Republican fund-raising, and that just goes to show that Democratic egalitarianism is as opportunistic and superficial as the Republican love of liberty. The Democratic Party is as bound up with corporate interests no less, or not much less, than the GOP. Yet Mr Chait says that "Pretending Democrats are actually succoring elites is a handy way for [advocates of conservative populism] to avoid grappling with the central issue", which is that Republicans don't like downward redistribution. Mr Chait apparently cannot see that Democrats do succor elites, that our political system is finely tuned so that the succoring will continue no matter who is in power. Moreover, all the deeper mechanisms that generate and reproduce America's peculiar patterns of income and wealth—the definition of intellectual-property rights, the structure and governance of corporations, the marginalisation and persecution of undocumented workers, the de facto apartheid of America's systems of criminal justice and public education, the evolution of family structure—seems to lack reality in Mr Chait's mind, perhaps because none affords an obvious angle for partisan electoral advantage. Rather than get bogged down in all this tricky stuff, Mr Chait prefers to reduce the whole question of inequality, of economic populism—of American politics altogether!—to a single issue, progressive redistribution, on which Democratic electoral interest and moral self-satisfaction happen to comfortably intersect. Democrats most certainly do succor elites, and this sort of glib self-righteousness about inequality is one of the ways they do it. [More]

This is where the gap between what I used to believe 10 years ago and today probably is the greatest. I have come to the realization that our system inherently marches toward lop-sided wealth and well-being distributions if left unsupervised, so to speak.

Reversing our slide to near feudal wealth distribution will be difficult, I fear. And while I find that condition morally repugnant, the bigger issue could be it causes our USA-type economy to breakdown. 

It appears there are many ways to categorize the two main lumps in our current wealth/income distribution accounting:

• Takers - makers
• Spenders - savers
• Consumers - investors

It is this last dichotomy that uncovers the issue for me. Even if we simply stipulate that the wealthy are entitled to the fruits of their labor, or more likely their capital, when the returns come rolling in they invest, not spend. After all, they can only spend so much and can only marginally improve an already comfortable lifestyle.

This is why, unlike many ag economists, I don't see land prices swooning. Even with lower income from farming, there is little reason to shift these illiquid assets into something else, and even less urgency. Farmland sales will slow to a crawl perhaps, but there is so much wealth in the hands of investors vs. consumers that any quality asset will hold and even attract more. 

Wealth is piling up in the hands of non-spenders. While I agree saving is a virtue, postponing consumption for a greater benefit in the future is clearly more virtuous for those in the middle or lower levels than it is for the rich. Saving for them is merely not troubling to do anything else.

But without consumers/spenders won't our economy slog along? That seems to be what we're seeing. Companies are not hoarding cash because of Obamacare, regulations, or taxes. The simply don't see enough demand to warrant a new factory or more workers.

Meanwhile, trillions rush into any investment that seems to offer non-zero returns. If you think it's bad now wait until the income/wealth ratios get even more extreme. 

My view on wealth distribution amazingly is not a particularly extreme position because most Americans 1) don't know how lop-sided things are and 2) agree it should be less so.

 But danged if I can discover any reliable mechanism to alter the trends. The last time we saw a "great leveling" was WWII, and that seems to a rather drastic option. Hence my lesser of evils is to see a stronger safety net, which should resonate with farmers, I would think.

Wilkinson apparently agrees, which comforts me I haven't drifted too far off the planet in my fantasies. But like me, he stuggles to see how our political system and economic obliviousness will make changes possible.

The difference between DOC and DOA*...  

Is that the Department of Commerce works to get better, unlike the Dept. of Ag (NASS - I'm talking at you).

The big picture is this: Recalculating the treatment of all “artistic originals” that fit the bureau’s definitions would have increased the economy in 2007 by about $70 billion, or 0.5 percent. And R.& D., particularly in the field of biotechnology, would have added more than $200 billion. Combined, these two changes would have swelled G.D.P. by almost 3 percent, Mr. Kornfeld said. How it will affect G.D.P. this year and in the restatement of past numbers was being calculated as we spoke. Brent R. Moulton, the bureau’s associate director for national accounts, said the statistics would be out this week. He noted that other nations had been making such shifts as well.

The changes could have profound implications. R.& D. and the creation of entertainment originals have generally been treated as a cost of doing business, reducing G.D.P. Now they will be recognized for their potential to add economic value for years to come. Business software has been treated this way since the 1990s. “It makes sense to expand our definitions,” Mr. Landefeld said. “That’s something the bureau has done for decades.”

But the bureau’s changes will widen the gap between corporate and national economic accounting, said Baruch Lev, a professor of accounting and finance at New York University. Despite the change in G.D.P. accounting, he said, R.& D. is still generally treated as an expense, not as an investment, in calculating profits and tax liability.

“National accounting — G.D.P. accounting — is giving us a more accurate picture of the world,” he said, adding that various intangibles might constitute as much as 50 percent of the value of publicly traded companies. These assets don’t show up on corporate balance sheets, he said, keeping investors “in the dark about the true value of many of the companies traded in the stock market.” [More]

I would offer that even our ancient sector is subject to changes in wealth creation and structure. Yet doing things we've done them since we used pencils (and no faster!) is ingrained in our government monitor. 

As more of our economy arises from intellectual and seemingly ephemeral goods/services, better acknowledgment of this change in the statistics will guide policy toward better outcomes. It also prevents undue emphasis remaining on tangible production as "real" and deserving more favorable treatment.

*I think I'm going to use this apt acronym for the Department of Ag more often.

Gray work...  

There has always been an underground economy in the US, but most of us have thought of it as essentially illegal stuff - drugs, mob, gambling, etc. That may be the smallest part of it, as effects of the Great Recession drag on.

Another clue to the underground economy comes from government data on the percentage of Americans who forego banking services, finding other ways to handle their money. The percentage of Americans who are "unbanked" or "underbanked" rose from 25.8 percent in 2009 to 28.3 percent in 2011. Some of those people may be low-income customers getting hit with a slew of new banking fees, forcing them to reject traditional banking. But others may be choosing to keep their money out of the mainstream financial system so that nobody checks up on them.
We tend to think of the underground economy as a place where Mafiosi and other types of criminals operate. But that's more or less a constant. The new underground economy may entail a lot of people doing honest work, such as freelancers and consultants who used to be full-time professionals, computer-repair people laid off from corporate IT departments, home remodelers benefiting from a revived housing sector, people running eBay business, and retirees earning a few extra bucks by running errands for busy parents. The Internet obviously makes it easier to work from home these days, another boon for the gray market. [More]

There are many things that could be causing this, but taxes and regulations usually get most of the blame. Also employers keep hired workers in the gray market to enjoy significant advantages over the formal labor market.

The increasing importance of the gray economy isn’t only a reaction to the downturn: studies suggest that the sector has been growing steadily over the years. In 1992, the I.R.S. estimated that the government was losing $80 billion a year in income-tax revenue. Its estimate for 2006 was $385 billion—almost five times as much (and still an underestimate, according to Feige’s numbers). The U.S. is certainly a long way from, say, Greece, where tax evasion is a national sport and the shadow economy accounts for twenty-seven per cent of G.D.P. But the forces pushing people to work off the books are powerful. Feige points to the growing distrust of government as one important factor. The desire to avoid licensing regulations, which force people to jump through elaborate hoops just to get a job, is another. Most important, perhaps, are changes in the way we work. As Baumohl put it, “For businesses, the calculus of hiring has fundamentally changed.” Companies have got used to bringing people on as needed and then dropping them when the job is over, and they save on benefits and payroll taxes by treating even full-time employees as independent contractors. Casual employment often becomes under-the-table work; the arrangement has become a way of life in the construction industry. In a recent California survey of three hundred thousand contractors, two-thirds said they had no direct employees, meaning that they did not need to pay workers’-compensation insurance or payroll taxes. In other words, for lots of people off-the-books work is the only job available.
Sudhir Venkatesh, a sociologist at Columbia and the author of a study of the underground economy, thinks that many workers, particularly younger ones, have become comfortable with casual work arrangements. “We have seen the rise of a new generation of people who are much more used to doing things in a freelance way,” he said. “That makes them more amenable to unregulated work. And they seem less concerned about security, which they equate with rigidity.” The growing importance of services in the economy is also crucial. Tutors, nannies, yoga teachers, housecleaners, and the like are often paid in cash, which is hard for the I.R.S. to track. In a 2006 study, the economist Catherine Haskins found that between eighty and ninety-seven per cent of nannies were paid under the table. [More]

To be fair, I resisted for most of my career hiring full-time help largely because of the paperwork headache and liability issues employment adds. I did handle part-timers by the book (mostly).

But it is the whacking size of this hidden economy that interests me. While our economy could be doing much better, it may not be doing as badly as we think. We're just not getting the tax revenues from it we should be.

Maybe a carbon tax or other consumption type taxes (VAT) would be a better way to fund government than increasingly hard-to-track income.

The wealth enigma...  

I remain convinced one of the biggest problems farmers have understanding global economics (into which we have been merged) is the sheer size of the mountains of wealth in the world. As I work to get some sense of scale, there are surprises that stagger me still.

Like this:

 [Source]

After you try to wrap your mind around $200T, remember - this does not include real estate or other hard assets, just financial assets. And it's not some exaggerated measure of derivative leverage either.

Is it any wonder our corn market can be messed up so fast and easily by a tiny splash of liquidity from this ocean?

Remember stocks?...  

Somehow amidst all the doomsaying and predictions of collapse (especially if Obama was re-elected), a funny thing happened. Equities plodded along toward a quiet boom.

One of the biggest trends underlying the strengthening of the U.S. economy has happened so gradually, and with so little discussion, that it was easy to miss. But facts are facts, and while many people didn’t notice it, the U.S. stock market has been on an absolute tear, rising back to near its pre-crisis level.
Tuesday was a typical day in this long rally, which has proceeded with only a few interruptions since March 2009. The Standard & Poor’s index rose 0.4 percent, enough to make Americans’ 401k accounts a little bit more flush, but not dramatically enough to prompt any outpouring of celebratory confetti or even a hint of the bubble-era mentality that flourished in the late 1990s (The TV ad for a brokerage in which a tow truck driver hit it rich day trading is but a distant memory).

The Standard & Poor’s 500 is almost . . . all . . . the . . . way . . . back

But add up those days of 0.4 percent gains—there have been a lot of them in the last four years–and it is a remarkable run. Tuesday’s close left the S&P only 4.6 percent below its all-time high in October 2007, meaning it could enter record territory after just a couple more good days. We are living through the strongest stock market rally since the late 1990s–though this one has far, far more solid fundamentals underlying it.
The rise is a major, major reason that Americans’ household finances are looking better. [More]

Ezra nails it, I think. The climb has been so relentlessly boring it hasn't attracted the attention it deserves. But, giddy optimist that I am, I think this is pretty damn good news. What we didn't need is more volatility and skyrocketing share values. This pedestrian recovery gets more solid every moment.

While I don't think the "wealth effect" will be infecting households anytime soon, there will be a relief from economic anxiety in stages. Adding to this anti-apocalyptic sentiment is news like this.

New England’s power grid operator says wholesale electricity prices dropped by nearly 23 percent regionally last year thanks to falling natural gas prices and decreased demand.

ISO New England said Wednesday that electricity prices are now at their lowest levels since 2003.

The lower wholesale prices don’t necessarily mean quick drops in monthly power bills. Utility regulators in the six New England states set retail rates in advance, and because the rates are in place for intervals of months or years, the lags between drops in wholesale and retail prices can vary.

But since the ISO expects the trend of low recent natural gas prices to continue, the savings should be coming.

‘‘With that trend line continuing, consumers will definitely see the benefit,’’ the ISO chief operating officer, Vamsi Chadalavada, said.

The ISO says wholesale power prices dropped from $46.23 per megawatt hour in 2011 to $36.09 last year. That means buyers paid $1.5 billion less for electricity in 2012 — from $6.7 billion in 2011 to about $5.2 billion last year.

The driver in the falling wholesale rates is a 20 percent decrease in the price of natural gas, New England’s dominant fuel for electricity production. The ISO said the region is benefiting from stepped up production from the nearby Marcellus Shale field in New York and Pennsylvania.

But lower electricity demand — due in part to the economic downturn, milder weather and better energy efficiency — also has pulled down prices, according the ISO. [More]

Just like the combination of more efficient cars, different driving habits, and Bakken has, and continues to reshape our energy burden, analogous trends all over our economy are turning the curves we all thought would extend to unsustainability. These fruits are just beginning to ripen. There also considerable knock-on benefits from each one.

I am not convinced this is bad news for commodities, either. Sure, fast money fueled some pretty spectacular spikes, but there is still plenty of wealth to wander into our markets from time to time. Maybe fundamentals will be able to exert slightly more influence, which would certainly make them a little easier to comprehend.

What if the unthinkable happens?...  

As you plan for 2013 what are some of the things not on popular radar? Here's my list:

Housing recovers - sales, prices, construction, jobs - the whole industry bounces back sharply. It may not be as unlikely as we have been thinking.

[Click to enlarge]

Months of supply declined to 4.8 months in November. This is the lowest level based on months-of-supply since September 2005.
Whenever I talk with real estate agents, I ask why they think inventory is so low. A common answer is that people don't want to sell at the bottom. In a market with falling prices, sellers rush to list their homes, and inventory increases. But if sellers think prices have bottomed, then they believe they can be patient, and inventory declines. Another reason is that many homeowners are "underwater" on their mortgage and can't sell.
Note: the Mortgage Debt Relief Act of 2007 was extended for another year. This means homeowners can sell their homes "short" (for less than they owe if the lender approves) and they don't have to pay taxes on the debt forgiveness. This will keep the short sale market active in 2013.
If prices increase enough then some of the potential sellers will come off the fence, and some of these underwater homeowners will be able to sell. It might be enough for inventory to bottom in 2013.
Right now my guess is active inventory will bottom in 2013, probably in January. At the least, the rate of year-over-year inventory decline will slow sharply.  It will be very interesting to see how much inventory comes on the market during the spring selling season! [More]

The deficit narrows sharply, accelerating current tends.

[Same drill]

My guess is the deficit will decline to around 5.5% of GDP this year. If there is no change in policy, I expect the deficit to continue to decline over the next few years.
However, later this decade, the deficit will probably start to increase again, mostly due to rising health care expenditures. This is the long term issue, and health care spending needs to be addressed to put the debt on a sustainable path long term.
The key points are: the cyclical deficit will slowly decline, and there is a long term issue, mostly related to health care costs that we need to start to address in the next few years.
We'd be in better shape without the structural deficit and if we had avoided the great recession (I did my best to alert policymakers in 2005).   But that is water over the dam.  The bottom line is this is all very solvable. [More]

The economy is actually stronger than we think, meaning a seemingly brutal package of budget cuts won't totally stall growth. Not saying it would be a good idea, but less catastrophic than current opinion. So if Republicans ever do take the plunge and actually specify something to cut, getting their way won't be the end of the world, IMHO.

The debt limit needing to be hiked at the end of February—now, that’s a crisis. Republicans believe that the public is currently on their side. On Friday, John Boehner showed House Republicans a poll from the Winston Group, testing their messaging and positioning on the debt limit. The pollster had asked voters whether “any increase in the nation’s debt limit must be accompanied by spending cuts and reforms of a greater amount,” basically describing the “Boehner rule” that had governed 2011’s debt talks. Seventy-two percent of voters agreed with the “rule.” Now that it was decoupled from popular policies, like higher taxes on the rich and more funding for entitlements, it was winnable.

If you dug into the poll, the results were much more ominous for Republicans. The Winston Group asked its subjects about a few programs that could theoretically be slashed. There were seven possibilities: Reducing government programs “for people like you,” cutting defense spending, means-testing Social Security, raising the Medicare retirement age, raising taxes, ending charitable tax deductions, and ending the mortgage deduction. Only one of these—means-testing Social Security—won more support (61 percent) than opposition (35 percent). The tax ideas were loathed by an overall 2-1 margin; the entitlement ideas were opposed by a narrower margin.

When you talk to House Republicans, the people with the most leverage in the coming faux crisis, they’re not sure what to do with this. They worry about the “message.” In the “fiscal cliff” talks, they felt like they were made to look unreasonable. Whenever they propose a specific entitlement cut, they’re pilloried. This was one reason why the Republican leaders’ Dec. 3 response to “cliff” negotiations, a three-page open letter, suggested “more than $900 billion in mandatory spending [cuts]” without specifying what might be cut. [More]

We could avoid default and enact an array of significant cuts and tax reform. OK - now you're just LOL, but should this occur many are totally unprepared. Agriculture would be a super-mucho-prime target for such cuts, especially now budget hawks smell blood from a wounded quarry.

With the new Congress opening Thursday, they'll have to start the farm bill process over again, most likely with even less money for agriculture programs this year and the recognition that farm interests have lost some of the political clout they once held.
"I think there's a lot of hurt feelings, that all of this time and energy was put into it and you've got nothing to show for it," said Roger Johnson, president of the National Farmers Union.
Senate Agriculture Committee Chairwoman Debbie Stabenow, D-Mich., said it even more bluntly on the Senate floor just after she learned that the bare-bones extension would be part of the fiscal cliff deal.
"There is no way to explain this," she said angrily as the deal came together New Year's Eve. "None. There is absolutely no way to explain this other than agriculture is just not a priority." [More]

An even worse corn crop. I don't think this, but NOBODY is talking about even the remote chance of a yield below last year.

China puts it into overdrive. Already the giant players seems to have sidestepped its slowdown, and if their middle class keeps growing demand, those hysterically optimistic economic forecasts of just a few years ago will be dusted off and recycled. Early signs are popping up.

Steel stocks have enjoyed quite a Santa Claus rally, thanks to a country that doesn't even celebrate Christmas. China is the world's biggest steel consumer, and recently improving industrial production, home sales, and electricity-generation there have swiftly lifted local stocks 16% in the past month -- and propelled global steel stocks to an 18% gain. [More]

The pattern is obvious here: I think we may be hampered by undue pessimism about economic possibilities.  Much of this comes from apocalyptic debt rhetoric (28.7 gazillion dollars for every man, woman and dog in America!!!). Some may come from intuitive uneasiness with economic immobility - too few ladders that hard work and diligence will allow you to scale to better lifestyles.

But most of it, I think is the age-old fear of being seen as foolishly ignorant of the dangers facing us.
Luckily being foolish is now part of my senior-citizen job description.
 

 

The rise of North America...  

To the consternation of many who are still struggling with the election result, the American recovery is still crawling along. Sign of doom are actually fading, the fiscal cliff not withstanding. And compared to the rest of the West, it is definitely more hopeful.

[Source]

I will admit it is a remarkably boring, and still too slow, rate of growth, but maybe it is the best we can expect with US government austerity already underway for the past three years, which is a definite anti-stimulus.

But the real surprise for NA is right under our noses, cartographically speaking. Mexico is getting its economic act together.

Let's apply the "extent of the market" analysis to Mexico's improving fortunes. The focus of trade policy is certainly relevant:

By throwing open its market under the North American Free-Trade Agreement (NAFTA) with the United States and Canada and a host of other bilateral trade accords, Mexico has become a base from which carmakers export to both halves of the Americas, and worldwide. Volkswagen, for example, makes all its Beetles and Jettas there. Although Nissan produces some vehicles at a Renault plant in Brazil, most of those it sells in Latin America come from two plants in Mexico. In all, 2.1m of the 2.6m vehicles produced in Mexico last year were exported.
By contrast, in Brazil the main aim of public policy has been to push carmakers to build local factories from which to supply the country's huge domestic market. Only 540,000 of the 3.4m vehicles manufactured in the country last year were exported. Around three-quarters of Brazil's car exports go to Argentina. Mercosur, to which both countries belong, has long aspired roughly to balance trade in cars and car parts between the two.

I wonder over the long run whether other factors aren't also working in Mexico's favour. America's weight in Mexico's market potential may be rising thanks to rapid population and economic growth in America's Sunbelt. Cultural and social ties are almost certainly rising across the two economies thanks to large-scale immigration from Mexico. The prospects for substantial convergence in incomes north and south of the border look better than they have in some time: a fascinating and heartening development. [More]

So let's sum up. We have Canada to the north quietly, albeit slowly, steaming along, a slow but resilient recovery in the middle (US), and strong growth south of the border. Add in encouraging signs in the housing market, and the predictions of the hard right could be upended: things very well might get better.

Morality and debt...  

There has been a robust debate in the econoblogs regarding the Eurozone crisis and how the economic strength of Germany does or does not grant them the moral "high ground".  I have noticed this is often how debtor/creditor arguments devolve - the virtues of the lender versus the vices of the borrower. Tyler Cowen does an excellent job of listing the facets of this debate, and sums up this way:

I believe that the Germans have approached this crisis with some bad economic theories, a lack of understanding of how government spending cuts can be self-defeating in the short run, and a good deal of more or less deliberate self-deception about its partners in the union, not to mention Germany’s own ability and willingness to act “fully European.”  I’m also not sure that Germany has a path out of this which leaves their own financial system intact.  You can rack up the moral and practical minus points there in considerable number.  That said, I see a lot of intellectuals dismissing the perspective outlined above, rather than figuring out why it makes so much sense to so many people, not just in Germany.  I think the financial elites in the periphery countries themselves actually see it quite clearly.

The result is significant misunderstandings about what can happen and will happen in the eurozone.  Germany cannot and will not drop its moral perspective, even if there is some theory — and yes theory is the right word here, because no one knows these broad guarantees will work — of how a broader and far more costly commitment can set things right.

In reading American discussions of the eurozone, I am frequently reminded of earlier discussions of the Soviet Union.  Most outsiders simply didn’t realize how little social capital was left in the system, though some of the Soviet insiders did.  Might the same be true of the eurozone?  I’m not calling these countries corrupt, rather there may be remarkably little cross-national cultural capital, and remarkably little deep public support for a costly EU bargain, so little that many German (and other) insiders know that no grand bargain can be sustained or even seriously attempted.

I believe we need to be exposed to this moral perspective, and this intellectual Turing test, as a bracing slap in the face, as a wake-up call, and I see our unwillingness to do anything with this perspective, other than summarily dismiss it as a kind of tragic juvenile moralizing, as a sign of our own decline, right here in the USofA.

But it's the same transaction, people!  How can lending be an act of moral superiority and the borrowers' actions be cast as morally suspect? If nothing else, hasn't the lender then engineered the "fall" of the borrower?

To be sure, the economic and cultural character of Germany resonates with the "work ethic" moral training remains a powerful part of Western societies: hard work, thrift, gratification delay, self-determination, etc. But I think we may be outgrowing those values or at least failing to modify them to present economic realities.

One of the most powerful of these new realities is the abundance of wealth. In the face of that surplus the choices for investors are not always an array of solid, high return productive assets, but a sorry collection of higher-risk, low yield instruments. I do not disallow the German culture its moral high ground connected to thrift and good choices, but I do wonder why they should not bear responsibility for their investment choices - both private and public. Why were they pouring money into Greek, Spanish, Irish debt to such a degree they could not suffer bad consequences? Aren't they guilty of bad investment strategy at least? Should not they bear the consequences of buying junk?

This is the dilemma of capital surplus countries and individuals. You will seldom find another place to park your money as "virtuous" as your own business, since they would likely be in capital excess, too.

Meanwhile, Ezra Klein reports from the financial front lines.

Over the course of dozens of interviews conducted in Berlin over the last few days, I've spoken to members of Angela Merkel's government, members of the opposition Social Democrats, industrialists, and bankers. No one has evinced even the slightest willingness to see the euro zone crack apart. But nor have they quite said they're willing to save it. Rather, they remain serenely confident that they will save it. But they don't have a surefire strategy. They have a bet. A big one.
That's really the key to understanding the German psychology on the euro. In America, we keep asking why they don't join with the European Central Bank to end the run on the European periphery. The answer is simple: they don't want to end the run on the European periphery. To them, the run on Italy and Greece and Portugal and Spain is a feature, not a bug. It's leverage, and they want to use it.
Look how much it has already gotten them. Greece, Portugal, Italy and Ireland are working their way through stringent deficit-reduction plans. The widely disliked governments of Greece and Italy, which proved unequal to the task of fiscal reform, have been toppled. There is a good chance that the euro zone might become what Germany has always wanted it to be: a fiscal union, in which the members meet their deficit targets and reform their labor markets. And none of this would have happened without the markets making their run at the European periphery.
So to understand the German position, look at it from their perspective: Why in the world would Germany let up the pressure now? When they're so close to amending the very treaty underlying the euro zone? When France has joined with them on a set of reforms? When the market is doing what the Germans never could?
I worry this makes the Germans sound like puppetmasters. They're not. Many of their intended reforms are very sensible. The flaws they point to in the euro zone are, indeed, deep, structural flaws in the euro zone. They do envision a future that includes sacrifice on their part: eurobonds that raise Germany's cost of borrowing and a bailout fund -- excuse me, a fiscal stabilization fund -- that they contribute heavily to.
So my concern isn't that the Germans are selfish and calculating. It's that, without quite realizing it, they have become reckless. They are trying to time the market, betting that they can, in essence, manage the run -- that they can do just enough to keep the pressure on without letting matters get totally out of hand. They are like a doctor who, faced with an unhealthy patient presenting signs of a heart attack, demands to see the patient lose weight before they will administer the life-saving treatment.
In almost all of their arguments, the Germans are right. The euro does need to be fixed. But first it needs to be saved. The Germans are betting that this is their opportunity to do both. If they're right, it will have been a remarkable play. If they're wrong, it will have been a disastrous one. [More]

It will be some time featuring very low rates before this curious economic puzzle gets solved. The idea of excess money struggling to get a return despite being the trophy of economically prudence and self-discipline will take some time getting used to. My guess is we are nearing that time as the last of the ~5 year investment instruments roll over into sub 1% territory. I'm seeing it at my bank, and now in Europe.

[Update: Rats! As soon as I labored through this post, Kevin Drum explains it much better. And with punctuation, spelling and charts. It's a must-read for those newly interested in the euro.]

Savers need borrowers just as much as the reverse. Meanwhile, the ag markets have a huge stake in this political turmoil as we obviously miss the extra money in the pits.

The really big problem...  

I have become more convinced than ever our global economy is confronting a growing obstacle in the form of human-obsolescence on the producer side. Sure we need consumers to buy goods and services, but our demand for workers to supply them languishes without signs of a turnaround. (Which also explains the lack of consumers, duh.)

It is hard to look at technology and not see the the reason. The recession has had the odd consequence of promoting technical upgrades to lower production costs, lowering even further the need for people.

The question for me is not when where will the consumers come from, but what will they do to earn a living?

FEAR of displacement from one's job by a superefficient machine is as old as modern economic growth (which is to say, about two centuries old). It is somewhat surprising that there has not been more made of the possibility of technological unemployment during the recent recession and lacklustre recovery. Technological unemployment was widely cited as a problem in the 1920s and 1930s, a time during which productivity was soaring, inequality and unemployment were high, and instability was the norm.
The argument that rapid technological change may be generating labour market problems is given a lift in an interesting new ebook by Erik Brynjolfsson and Andrew McAfee, entitled Race against the machine. The opening chapter attempts to cast the book as a means to understand present high unemployment, which is a little unfortunate; most of current labour market weakness can be explained by weak growth, and weak growth is well explained by weak demand. It is, however, a useful contribution to the discussion of what has gone wrong in the American economy in recent decades.
The stylised facts of that poor performance are increasingly well known. Real median income has stagnated, especially over the last decade. Inequality has risen dramatically, driven by huge increases in top incomes. Employment growth has disappointed. At least some of the blame for all of this, the authors argue, can be laid at the foot of new technology. It's an interesting twist on the themes developed by Tyler Cowen in his ebook The great stagnation. Mr Cowen argues that a major slowdown in innovation is constraining potential growth, while new progress in information technology isn't providing benefits to most workers. Mssrs Brynjolfsson and McAfee tweak the argument, writing that innovation has been gathering pace and having an increasing impact on labour markets. In a nutshell, new technologies are displacing workers faster than the economy can find new uses for them. [More worth reading]

The standard answer is education, but there are signs that solution isn't working like it used to as well. Demand for college graduates is slow, salaries are dropping, and meanwhile education costs spiral upwards.

Adding more graduates to this scenario seems like pouring fuel on the fire to me. What is often ignored is technology is replacing all kinds of workers - not just those on assembly lines. In fact, the very lowest level jobs may be the most secure: hotel maids, garbage collectors, nurses aides, janitorial workers, etc.

Stanley Aronowitz and William DiFazio wrote a pretty gloomy book in 1994 with the striking title, The Jobless Future. Here is a Harvard Educational Review discussion of the book (link). What is most discomforting in reading the book today is the degree to which the factors they identify seem to be today's headlines. What does jobless mean here? In a word, it means that the US and other OECD countries will never recover the number and quality of jobs they need in order to regain the middle class affluence they had in the 1950s and 1960s. The future will involve work -- but not enough jobs to ensure a low unemployment rate. Here is their assessment in 1994:

For there is no doubt that we have yet to feel the long-term effects on American living standards that will result from the elimination of well-paid professional, technical, and production jobs. At the same time, nearly everyone admits that many of these jobs are gone forever. (xi)

The central structural factors they identified in 1994 are still key parts of our economic environment today: technology innovation replacing labor, rising productivity producing persistently flat labor demand, shifts in the structure of the economy towards finance and service sectors, and internationalization of production. [More gloomy pondering]

I cannot see why our profession will be exempt. In fact, only land ownership seems to be a guarantee against displacement: when your buy a farm, you buy the right to name the farmer.

We are currently in the process of attracting many young and youngish farmer aspirants back to rural America. More than a few I suspect are doing so because of lack of alternatives such as mentioned above. Like professions such as law, medicine, administration, management, etc. demand for workers in our industry - regardless of how highly trained - will be limited.

We know what happens when labor demand falters. It can be seen in history books in examples as diverse as Middle Age economies (guilds) to the USSR (an economy based on who you knew). Jobs will be THE commodity of the future, I'm afraid. And the social and economic gaps between those who do and do not have one will widen and worsen.

College doesn't pay...  

For some - it just costs.  College is no longer the guarantee of a good or even adequate job. Especially considering the enormous increase in the cost.

Yes, the college grad will spend years paying off her loans. But eventually her earnings net of loan payments will pull ahead of the high school graduate's. So, case closed. It may hurt to write the checks, or borrow, but college pays.
Well, maybe not.
According to the College Board, it takes 14 long years before the four-year college grad's income, net of loan payments, starts to beat what the high school grad earns. During all those 14 years, college doesn't pay. High school pays. [More]

Recently there has been a vigorous debate about the how much choosing the wrong degree is contributing to this problem. Ryan Avent has the best answer to this criticism, I think.

Personally, I think this kind of blog post—Mr Cowen's—goes a long way toward explaining the current job market malaise for the young. It is remarkable to me how readily old, successful professionals dismiss the labour-market difficulties of young adults as the product of their poorly-chosen majors and general lack of ambition, and on what flimsy evidence they're prepared to base these views. There are now 3.3m unemployed workers between the ages of 25 and 34. That's more than twice the level in 2007. There are over 2m unemployed college graduates of all ages; nearly three times the level of 2007. There are many millions more that are underemployed—unwillingly working less than full-time or unwillingly working in a job outside their field which pays less than jobs in their field. As far as I know, the distribution of college majors didn't swing dramatically from quantitative fields to art history over the past half decade.
Meanwhile, the Wall Street Journal provides us with a handy interactive graphic examining unemployment rates by major according to the 2010 Census. Coming in toward the top of the list and ahead of "art history and criticism" are the sorts of degrees you'd expect, like those falling into "miscellaneous fine arts", but also "computer administration management and security", "engineering and industrial management", "international business", "electrical and mechanic repairs and technologies", "materials engineering and materials science", "genetics", "neuroscience", "biochemical sciences", and "computer engineering". I bet those graduates are all trying to break into puppetry!
I am sure that many young graduates feel entitled to better work than they've managed to find, and some of them probably chose poorly when it came time to matriculate. But I see little evidence that high unemployment is due to the shiftlessness of youths and far more evidence that high youth unemployment is due to systematic weakness in labour markets associated with a shortfall in aggregate demand. [More worth reading]

While I agree there seems to be no evidence students are flocking to dubious majors more so than before, it seems obvious the demands of a thin job market accentuates discriminates against them more. Now add in the the decline in public employment (teachers, administrators, government workers, etc.) which was often the employer of last resort for such degrees and you have the "Dustin" phenomenon.

Trying to laugh at this problem is probably healthy, but there is growing concern among economists - not to mention parents - that the economy is trending away from a solution to this problem.

And the idea of forcing everyone to become engineers or doctors isn't working either. For one thing, there is a huge attrition rate is those fields.

Politicians and educators have been wringing their hands for years over test scores showing American students falling behind their counterparts in Slovenia and Singapore. How will the United States stack up against global rivals in innovation? The president and industry groups have called on colleges to graduate 10,000 more engineers a year and 100,000 new teachers with majors in STEM — science, technology, engineering and math. All the Sputnik-like urgency has put classrooms from kindergarten through 12th grade — the pipeline, as they call it — under a microscope. And there are encouraging signs, with surveys showing the number of college freshmen interested in majoring in a STEM field on the rise.

But, it turns out, middle and high school students are having most of the fun, building their erector sets and dropping eggs into water to test the first law of motion. The excitement quickly fades as students brush up against the reality of what David E. Goldberg, an emeritus engineering professor, calls “the math-science death march.” Freshmen in college wade through a blizzard of calculus, physics and chemistry in lecture halls with hundreds of other students. And then many wash out.

Studies have found that roughly 40 percent of students planning engineering and science majors end up switching to other subjects or failing to get any degree. That increases to as much as 60 percent when pre-medical students, who typically have the strongest SAT scores and high school science preparation, are included, according to new data from the University of California at Los Angeles. That is twice the combined attrition rate of all other majors.

For educators, the big question is how to keep the momentum being built in the lower grades from dissipating once the students get to college. [More]

I also wonder that an oversupply of engineers, etc. might not soon remove these last "safe" degrees, reducing job searches to more a matter of luck and connections than merit.

What I do know is this. I don't recall clearly my sons' graduation ceremonies, but I have a clear recollection of the days they accepted job offers.

At any rate, employing all who want to work is our largest economic problem, IMHO. If others disagree, it may be because their kids are too young or non-existent.