America’s Three Deficits

Laura Tyson


BERKELEY – This year began with a series of reports providing tantalizing evidence that economic recovery in the United States is strengthening. The pace of job creation has increased, indicators for manufacturing and services have improved, and consumption spending has been stronger than anticipated. But it is too early to celebrate.

Output growth in the US remains anemic, and the economy continues to face three significant deficits: a jobs deficit, an investment deficit, and a long-run fiscal deficit, none of which is likely to be addressed in an election year.

Although output is now higher than it was in the fourth quarter of 2007, it remains far below what could be produced if labor and capacity were fully utilized. That gap – between actual and potential output – is estimated at more than 7% of GDP (more than $1 trillion).

The output gap reflects a deficit of more than 12 million jobs – the number of jobs needed to return to the economy’s peak 2007 employment level and absorb the 125,000 people who enter the labor force each month. Even if the economy grows at 2.5% in 2012, as most forecasts anticipate, the jobs deficit will remain – and will not be closed until 2024.

America’s jobs deficit is primarily the result of inadequate aggregate demand. Consumption, which accounts for about 70% of total spending, is constrained by high unemployment, weak wage gains, and a steep decline in home values and consumer wealth. The uptick in consumption in the last months of 2011 was financed by a decline in the household saving rate and a large increase in consumer credit. Neither of these trends is healthy or sustainable.

With an unemployment rate of 8.5%, a labor-force participation rate of only 64%, and stagnant real wages, labor income has fallen to an historic low of 44% of national income. And labor income is the most important component of household earnings, the major driver of consumption spending.

Even before the Great Recession, American workers and households were in trouble. The rate of job growth between 2000 and 2007 slowed to only half its level in the three preceding decades.
Productivity growth was strong, but far outpaced wage growth, and workers’ real hourly compensation declined, on average, even for those with a university education.

Indeed, the 2002-2007 period was the only recovery on record during which the median family’s real income declined. Moreover, job opportunities continued to polarize, with employment growing in high-wage professional, technical, and managerial occupations, as well as in low-wage food-service, personal-care, and protective-service occupations.

By contrast, employment in middle-skill, white-collar, and blue-collar occupations fell, particularly in manufacturing. Hard-pressed American households slashed their savings rates, borrowed against their home equity, and increased their debt to maintain consumption, contributing to the housing and credit bubbles that burst in 2008, requiring painful deleveraging ever since.

Three forces have driven the US labor market’s adverse structural changes:

· Skill-biased technological change, which has automated routine work while boosting demand for highly educated workers with at least a college degree.

· Global competition and the integration of labor markets through trade and outsourcing, which have eliminated jobs and depressed wages.

· America’s declining competitiveness as an attractive place to locate production and employment.

Technological change and globalization have created similar labor-market challenges in other developed countries. But US policy choices are responsible for the erosion of America’s competitiveness.

In particular, the US is underinvesting in three major areas that help countries to create and retain high-wage jobs: skills and training, infrastructure, and research and development. Spending in these areas accounts for less than 10% of US government spending, and this share has been declining over time. The federal government can currently borrow at record-low interest rates, and there are many projects in education, infrastructure, and research that would earn a higher return, create jobs now, and bolster US competitiveness in attracting high-wage jobs.

President Barack Obama has offered numerous proposals to invest in the foundations of national competitiveness, but Congressional Republicans have rebuffed them, claiming that the US faces an impending fiscal crisis. In fact, the federal deficit as a share of GDP will shrink significantly over the next several years, even without further deficit-reduction measures, before rising to unsustainable levels by 2030.

The US does indeed face a long-run fiscal deficit, largely the result of rising health-care costs and an aging population. But the current fiscal deficit mainly reflects weak tax revenues, owing to slow growth and high unemployment, and temporary stimulus measures that are fading away at a time when aggregate demand remains weak and additional fiscal stimulus is warranted.

At the very least, to keep the economy on course for 2.5% growth this year, the payroll tax cut and unemployment benefits proposed by Obama should be extended through the end of the year. These measures would provide insurance to the fragile recovery and add nothing to the long-run fiscal gap.

So, how should the US economy’s jobs deficit, investment deficit, and long-run fiscal deficit be addressed?

Policymakers should pair fiscal measures to ameliorate the jobs and investment deficits now with a multi-year plan to reduce the long-run fiscal deficit gradually. This long-run plan should increase spending on education, infrastructure, and research, while curbing future growth in health-care spending through the cost-containment mechanisms contained in Obama’s health-reform legislation.

Approving a long-run deficit-reduction plan now but deferring its starting date until the economy is near full employment would prevent premature fiscal contraction from tipping the economy back into recession. Indeed, enactment of such a package could bolster output and employment growth by easing investor concerns about future deficits and strengthening consumer and business confidence.

Painful choices about how to close the long-run fiscal gap should be decided now and implemented promptly once the economy has recovered. But, for the next few years, the priorities of fiscal policy should be jobs, investment, and growth.

Laura Tyson, a former chair of the US President's Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley.

.Copyright: Project Syndicate, 2012.

Jesse's Café Américain
03 February 2012

The Non-Farm Payrolls Report: Air Brushing History - Nominal Work Force for Nominal GDP


Back in Stalinist Russia, they had whole departments of people that were responsible for rewriting history and documents in order to support the latest Party lines.

When a particular person fell out of favor, for example, they not only altered the documents, but even went so far as to air brush them out of important historical photographs.

Today the US reported a remarkably high Non-Farm Payrolls number, well in excess of even the most optimistic estimates. 243,000 jobs added, and unemployment has dropped to only 8.3 percent. Isn't that good news indeed.

If one tracks the data closely, and keeps their own copies of the records, what we see instead are revisions, sometimes going back as far as ten years, that most greatly affect the 'seasonally adjusted' numbers, but also affect the raw numbers as well.

The Obama Administration, as well as the previous Administration, have been going back and tinkering with history, rewriting the numbers here and there, in most cases 'rolling jobs forward' to the current months to make the current headlines look better.

The BLS keeps the digital copies of this and they are duly adjusted of course. But what was surprising in this latest round is that for the first time in my memory they went back and adjusted the Birth-Deal Model, which are imaginary jobs in the first place! And on the web site that I usually check they have stopped providing all the historical data, limiting it to what looks like a year or two of data.

What can one do when the statistics are questionable like this? One common touchstone for those who rely on data is to compare one set of numbers with another, or even with 'real things.' If the sales numbers look great, but unsold inventory is piling up, chances are pretty good that somewhere those sales reports might be disconnected from reality.

One real check I prefer is the Labor Participation Rate. The Census is pretty good about counting the number of people and estimating their growth within some reasonable statistical error. And people do not tend to disappear in large numbers, at least not yet.

Labor Participation is simply the number of people who are working or are unemployed as a percentage of the civilian non-institutionalized population over the age of 16, or simply number of people of working age who are not in prison, etc.

So if the number of people working is increasing and the number of unemployed are decreasing the participation rate *should be increasing* one would think, given the relatively stable growth of the population.

But we instead see that the Labor Participation Rate continues to decline. I am sure the spokesmodels will find some way to try to gloss over this.

Note: The spokemodels and the uninformed parrots quite predictably are tut-tutting this using misdirection by saying that the most recent drop for January alone is attributable to a revision in the Labor Force, the denominator in this case, by the Census Bureau. And I accept that. No problem. But my point again is not to look at a single month, but at the trend, even for this. And from a technical standpoint, the trend here undeniably 'blows.'

If the Fed can target a Nominal GDP, that is, economic growth targets that do not care how much is real and how much is paper manipulation, then I am sure it is only fair for the government to target a Nominal Work Force.

As you know, I do not like to look at these monthly numbers in the first, place, but they are integral to the Wall Street shell game, and the politicians love to play it for the headlines as well.

A more rational approach is to watch the trending average over some reasonable period of time, and to look at multiple sources of data, given the propensity for politicians to stick their fingers in the process.

The problem I have with painting the tape, accounting fraud, and the statistical manipulation of the numbers is that these numbers are the foundation for serious policy decisions. Making January 'look good' is going to make it all the more difficult to take the appropriate political steps to reform the economy and get it working again.

But the Yanks are notoriously short term oriented in their thinking. And this is an election year, and emotions are running high.

I cannot help but think that if the government is finally able to fully digitize money and other assets, all this airbrushing can become so much more simple. Just ask the customers of MF Global. One day you own Treasuries, and even solid bars of gold and silver in your own name, and the next day, poof, they're vaporized.

Sorry don't know where they went. Go stand over there in line by the Lost and Found and see what happens.

And so I think we are not in Kansas anymore, Toto. It is looking more like Moscow on the Potomac every day.

Here is a comparison of the Seasonally Adjusted Jobs Numbers before and after the Revisions. Keep in mind that each square represents 100,000 jobs, so even slight changes make a big difference in the headline number which just shows the month over month change.

Again, the point is not that there is some conspiracy, which is how many easily dismiss this, especially the uninformed who want to appear to be 'sophisticates.' Rather it is mean to show that one months data is relatively useless and often misleading, and subject to significant revisions sometimes much later. It is the TREND that matters.

February 2, 2012 8:20 pm

End this masochism in economic policymaking

Herbert Hoover, you were right. That is the consensus of all right-thinking people on UK fiscal policy. This view, as my colleague, Chris Giles notes, has even become a much admired British intellectual export.

Interestingly, the Institute of Fiscal Studies, which is as right-thinking as can be, proffered an admittedly lukewarm version of the opposing view in its Green Budget this week. It states that “the case for a short-term fiscal stimulus package to boost the economy is stronger now than it was a year ago. Decisions made in the Autumn Statement are likely to have had a small but positive impact on growth. The case for taking this further is not clear-cut: ongoing uncertainty over the future fiscal situation and the importance of credibility argue against it, but the continued weakness of the economy and the low chance of monetary tightening offsetting it make a loosening look more attractive than a year ago. The case would be strengthened significantly were the outlook for the UK economy to deteriorate sharply”.

My only difference from this analysis is that economic performance is already dismal. It does not need to deteriorate further. How masochistic does one need to be? The task is to devise action that is effective and preserves credibility.

Fact one: in the fourth quarter of 2011, UK gross domestic product was 3.8 per cent lower than at the pre-crisis peak in the first quarter of 2008. Fact two: the economy is now stagnant, with output in the last quarter of 2011 a mere 0.3 per cent above its level in the third quarter of 2010. Fact three: as Jonathan Portes of the National Institute of Economic and Social Research notes, the UKdepression” – the period during which output is below its pre-crisis peak – is now longer than the Great Depression, let alone subsequent recessions. Fact four: it could be many years before this slump ends.

Ignore, for the moment, who bears responsibility for the disaster. Put to one side the question of whether external shocks were responsible for the weakness since the autumn of 2010. The question is whether anything should, or can, be done. My answer remains a definite yes.

Something should be done, because prolonged stagnation and high unemployment will permanently lower the economy’s potential, quite apart from the social costs they impose. Some believe the UK economy has little spare capacity. I find this too pessimistic.

Goldman Sachs has estimated the slack at between 4 and 5 per cent of GDP. That is quite a bit to play with.

The question, then, is about the “can”. Opponents of fiscal action would argue that monetary policy is effective on its own, that fiscal action would be disastrous, or both. The argument that monetary policy is effective on its own is at the very least unproven when interest rates are already so low. So far, the unconventional monetary policy chosen by the Bank of Englandpurchases of UK government bonds – does not look highly effective. I suspect that lower long-term rates, even if achievable, would amount to “pushing on a string”. Yet, with broad money and bank lending shrinking, the case for the Bank to do even more is also very strong.

This leaves fiscal action. The big argument against it is that it would destroy credibility and so lead to a Greek-style crisis.

Never say never. But this argument looks quite weak. First, it looks increasingly clear that sub-sovereign eurozone borrowers are in a different position from a sovereign country, such as the UK.

Second, a primary determinant of the ultimate debt position is how fast an economy recovers. Thus, the aim must be to adopt fiscal measures that are credibly temporary and promote additional demand, in the short run, and additional supply in the long run.

This is not impossible. It just takes some imagination.

The starting point must be to stick to the announced cuts in current spending. If that is brought down to sustainable levels, even relative to a pessimistic view of potential output, credibility should be ensured. But temporary tax cuts could promote spending: national insurance charges and value added taxes are obvious candidates. This should be combined with long-term structural and fiscal reforms, with a view to creating a more dynamic economy, in addition to promoting spending on infrastructure.

When the government can borrow at real interest rates of below zero, good, time-limited investment projects must make sense. Finally, co-ordinate with the Bank to make use of its willingness to create money, or “zero-interest, perpetual public debt”, to finance the temporary rises in deficits.

I do not expect any of this to happen. But it should. Of course, stagnation might be the best policymakers can do. But one has to be certain of this, given the evident costs. A little flexibility might make all the difference. Start now.

Copyright The Financial Times Limited 2012.

Coronary Capitalism

Kenneth Rogoff


FRANKFURT – A systematic and broad failure of regulation is the elephant in the room when it comes to reforming today’s Western capitalism. Yes, much has been said about the unhealthy political-regulatory-financial dynamic that led to the global economy’s heart attack in 2008 (initiating what Carmen Reinhart and I call “The Second Great Contraction”). But is the problem unique to the financial industry, or does it exemplify a deeper flaw in Western capitalism?

Consider the food industry, particularly its sometimes-malign influence on nutrition and health. Obesity rates are soaring around the entire world, though, among large countries, the problem is perhaps most severe in the United States. According the US Centers for Disease Control and Prevention, roughly one-third of US adults are obese (indicated by a body mass index above 30). Even more shockingly, more than one in six children and adolescents are obese, a rate that has tripled since 1980. (Full disclosure: my spouse produces a television and Web show, called, aimed at combating childhood obesity.)

Of course, the problems of the food industry have been vigorously highlighted by experts on nutrition and health, including Michael Pollan and David Katz, and certainly by many economists as well. And there are numerous other examples, across a wide variety of goods and services, where one could find similar issues. Here, though, I want to focus on the food industry’s link to broader problems with contemporary capitalism (which has certainly facilitated the worldwide obesity explosion), and on why the US political system has devoted remarkably little attention to the issue (though First Lady Michelle Obama has made important efforts to raise awareness).

Obesity affects life expectancy in numerous ways, ranging from cardiovascular disease to some types of cancer. Moreover, obesity – certainly in its morbid manifestations – can affect quality of life. The costs are borne not only by the individual, but also by societydirectly, through the health-care system, and indirectly, through lost productivity, for example, and higher transport costs (more jet fuel, larger seats, etc.).

But the obesity epidemic hardly looks like a growth killer. Highly processed corn-based food products, with lots of chemical additives, are well known to be a major driver of weight gain, but, from a conventional growth-accounting perspective, they are great stuff. Big agriculture gets paid for growing the corn (often subsidized by the government), and the food processors get paid for adding tons of chemicals to create a habit-forming – and thus irresistibleproduct. Along the way, scientists get paid for finding just the right mix of salt, sugar, and chemicals to make the latest instant food maximally addictive; advertisers get paid for peddling it; and, in the end, the health-care industry makes a fortune treating the disease that inevitably results.

Coronary capitalism is fantastic for the stock market, which includes companies in all of these industries. Highly processed food is also good for jobs, including high-end employment in research, advertising, and health care.

So, who could complain? Certainly not politicians, who get re-elected when jobs are plentiful and stock prices are up – and get donations from all of the industries that participate in the production of processed food. Indeed, in the US, politicians who dared to talk about the health, environmental, or sustainability implications of processed food would in many cases find themselves starved of campaign funds.

True, market forces have spurred innovation, which has continually driven down the price of processed food, even as the price of plain old fruits and vegetables has gone up. That is a fair point, but it overlooks the huge market failure here.

Consumers are provided with precious little information through schools, libraries, or health campaigns; instead, they are swamped with disinformation through advertising. Conditions for children are particularly alarming. With few resources for high-quality public television in most countries, children are co-opted by channels paid for by advertisements, including by food industry.

Beyond disinformation, producers have few incentives to internalize the costs of the environmental damage that they cause. Likewise, consumers have little incentive to internalize the health-care costs of their food choices.

If our only problems were the food industry causing physical heart attacks and the financial industry facilitating their economic equivalent, that would be bad enough. But the pathological regulatory-political-economic dynamic that characterizes these industries is far broader. We need to develop new and much better institutions to protect society’s long-run interests.

Of course, the balance between consumer sovereignty and paternalism is always delicate. But we could certainly begin to strike a healthier balance than the one we have by giving the public far better information across a range of platforms, so that people could begin to make more informed consumption choices and political decisions.

Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF.

Copyright: Project Syndicate, 2012.


FEBRUARY 3, 2012

Swiss Bank Wegelin Indicted on U.S. Tax Charges


U.S. prosecutors filed criminal charges against Switzerland's oldest bank, alleging it helped wealthy Americans hide more than $1.2 billion in secret accounts abroad, the latest move in an ongoing crackdown on overseas tax evasion.

The indictment of Swiss private bank Wegelin & Co., founded in 1741, marks the first time U.S. authorities have charged a bank rather than individuals with helping Americans evade taxes.

U.S. authorities said they also seized more than $16 million from an account Wegelin has with Swiss bank UBS AG in Stamford, Conn.

"Wegelin Bank aided and abetted U.S. taxpayers who were in flagrant violation of the tax code," said Preet Bharara, the U.S. attorney in Manhattan. "And they were undeterred by the crystal-clear warning they got when they learned that UBS was under investigation for the identical practices."

Richard Strassberg, a lawyer for Wegelin, declined to comment.

Wegelin had about $25 billion in assets under management as of December 2010. The bank has been under pressure since U.S. authorities brought criminal charges Jan. 3 against three Wegelin bankers for allegedly helping U.S. taxpayers hide Swiss bank accounts from U.S. tax authorities between 2002 and 2011. Wegelin also allegedly tried to capture business lost by UBS and another Swiss bank after those banks came under U.S. investigation in 2008 and in 2009, prosecutors said.

UBS and the other bank have since stopped servicing undeclared Swiss accounts.
Getty Images
Wegelin & Co., Switzerland's oldest bank, allegedly pursued business lines vacated by UBS and another bank.

"As managing partners with unlimited liability, we will fulfill our responsibilities and stand by Wegelin's obligations," Wegelin Managing Partner Konrad Hummler told Dow Jones Newswires last week. "We are determined to see the legal negotiations through to the end."
In 2009, UBS admitted to conspiring to defraud the U.S. government of billions of dollars in taxes by helping wealthy Americans hide assets. As part of an agreement to avoid criminal charges, the Swiss bank turned over the names of more than 4,000 U.S. account holders and paid a $780 million fine.
The Wegelin indictment, which was returned by a U.S. grand jury in New York and unsealed Thursday, "shows the U.S. is willing to go after Swiss banks themselves if they don't turn over names of U.S. taxpayers who are account holders," said Bryan Skarlatos, an attorney with Kostelanetz & Fink in New York, who has handled hundreds of confessions by U.S. taxpayers declaring secret accounts.
The indictment also puts pressure on the Swiss government to conclude a sweeping settlement with U.S. authorities involving all Swiss banks, said Mr. Skarlatos. Discussions have been continuing for months. U.S. authorities want the names of U.S. taxpayers with secret Swiss accounts.
The latest indictment offers a rare glimpse into the secretive realm of Swiss private banking. U.S. prosecutors alleged that Wegelin "deliberately set out" to capture the illegal U.S. cross-border banking business lost by UBS, according to the criminal complaint.
Prosecutors alleged that bankers and others acting on the bank's behalf told U.S. clients that their undeclared accounts wouldn't be disclosed to U.S. authorities because of the bank's long tradition of secrecy.
The indictment offers vivid details of the relationship between Wegelin and about three dozen U.S. clients. It includes amounts of money not declared to U.S. authorities and details meant to illustrate the lengths both bankers and clients went to in order to hide banking transactions.
One unnamed client traveling to Africa on safari allegedly sent an envelope with a single piece of paper on which the client had written only the amount of money needed pay for the safari, approximately $37,000, according to the complaint.

The indictment alleges that Wegelin decided it "could charge high fees to its new U.S. taxpayer-clients because the clients were afraid of criminal prosecution" in the U.S.

The bankers allegedly persuaded them to transfer assets from UBS by emphasizing the bank, which is based in St. Gallen, Switzerland, had no offices outside of Switzerland and was less vulnerable to U.S. law enforcement pressure, prosecutors said.
As part of the conspiracy, U.S. authorities allege the bankers opened accounts in the name of offshore sham corporations and foundations in order to avoid detection, including entities formed under the laws of Liechtenstein, Panama and Hong Kong.

They also allowed some U.S. clients to open accounts using code names or numbers in order to minimize references to their real names, prosecutors said.

Between 2005 and 2009, Wegelin allegedly solicited new business from U.S. clients through the website, which was operated by a third party, according to the indictment.

The bankers also sometimes communicated with U.S. taxpayers using their personal email accounts in order to avoid detection, prosecutors said. They avoided mailing account statements and other documents to taxpayers in the U.S., prosecutors said.

Wegelin split and sold its non-U.S. operations to retail bank Raiffeisen in late January in a bid to protect its assets from charges it had helped U.S. clients avoid paying taxes. Under the deal, Raiffeisen acquired the majority of the bank's business. Wegelin's half-dozen managing partners will remain with the bank.

—Brent Kendall and Goran Mijuk contributed to this article.
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