NDN Blog

How Greece Could Short-Circuit the U.S. Expansion

 In chaos theory, the flutter of a butterfly’s wing can ultimately cause a typhoon halfway around the world.  This week, Greece, a nation with a GDP smaller than the Philippines, became that butterfly – and its ongoing economic struggles could cause storms that would upend the financial stability of Europe and wreak serious collateral damage on our own economy. 

Greece has flirted with sovereign debt default for more than three years.  The latest talks for another bailout from the European Union and the IMF broke down this week, with Greek Prime Minister Alexis Tsipras calling the EU proposal “humiliating and the IMF’s conduct “criminal.”  Normally, the debt troubles of a country with an economy barely one percent the size of our own wouldn’t matter much to us.  But as a member of the EU and the Eurozone monetary union, Greece’s problems can reverberate deeply throughout Europe.  Global investors already are nervous that the EU and IMF may be unable to head off Greece’s looming insolvency.  If the worst happens, Greece’s default could trigger runs on government bond markets in other Eurozone countries seen at risk, including Italy and Spain.  Since Europe’s large financial institutions hold more than $1 trillion worth of those bonds, a Greek default could spark a financial meltdown rivalling even the 2008-2009 crisis,    

This crisis has unfolded in fits and starts for a long time, and the EU and the European Central Bank (ECB) have spent hundreds of billions of Euros trying to support those bond markets and strengthen the banking system.  No one knows if it will be enough to stave off the worst-case scenario.  But if a genuine crisis unfolds over the next month or so, everyone does know that European voters will never accept another bank bailout.  And if Europe’s economy falls into a tailspin, the ECB will have little room to support and stabilize it by cutting interest rates.

Greece’s default also would trigger its exit from the EU and the Eurozone.  No country has ever done so before, so no one knows precisely what would happen next.  Inevitably, the consequences would be destructive.  To begin, if Greece has to abandon the Euro and revive the drachma, its economy would come to a halt.  The government could not pay its employees, vendors or issue pension checks; and untold thousands of Euro-based contracts across Greece and between Greek and foreign concerns would have to be renegotiated.  So, on top of an unfolding financial crisis, the balance sheets of those foreign firms would suffer further, and a rapidly-deepening recession would spread across much of Europe.

These prospects explain why President Obama made the Greek crisis a top priority in his talks at the recent G-7 summit.  The EU is America’s largest trading partner; and perilous times there would quickly affect U.S. jobs and investment – and those costs would increase as the fast-falling value of the Euro would drive up the foreign prices of U.S. exports.  Even more serious, our financial institutions and multinational companies have thousands of deals involving European banks.  In a crisis, that becomes bad news for U.S. stocks: If cascading events threaten the solvency of those banks, many of those deals will become problematic, depressing the value of our own banks and companies.  The results here at home could be a credit crunch, falling employment, and a new recession – and this time, the Federal Reserve could do little to help.

The United States needs a prosperous Europe for not only the obvious economic reasons, but also as our geopolitical partner from the Middle East to the Korean peninsula and the South China Sea.  A weakened Europe, consumed by recession and facing the possible unraveling of a half-century of economic union and political collaboration, won’t be there for us the next time a U.S. president needs support to advance American and western interests and influence. 

What are the odds?  A scenario in which everyone loses usually inspires steps to head off the terrible reckoning.  Yet, events in coming weeks may demonstrate how domestic politics in Greece and across much of Europe put the two sides at such cross purposes that everyone will needlessly suffer.  At this point, calming this butterfly’s wings will require uncommon statesmanship and a real willingness by leaders in Greece, the EU and Washington to take measures that will cost them popular support.  So far, we’ve managed to side-step a serious crisis, and we could see another deal that papers over the problems for a while.  But if Greece and the EU do run out of options this time, your retirement accounts could lose a third of their value over the next year.

This post was originally published on Dr. Shapiro's blog

Report: Income Growth/Decline Under Recent U.S. Presidents

The condition of most American households, and of the country as a whole, is set largely by people’s income – both the levels, and the income progress that people make as they age from their 20’s to their 30’s, 40’s and 50’s.  For generations, most Americans have believed that if they work hard, they’ll have real opportunities to earn steadily rising incomes.  Such broad based upward mobility is one of the reasons that Americans have been generally optimistic and willing to extend opportunity to successive minority groups.  But is that the way America really works?  One common view argues that wages have stagnated and most Americans have made, at best, modest income progress since the 1970s.  This view is based on a time series of a single statistic, “aggregate median household income.”  In fact, the true picture is more complex.

 Today, the Brookings Institution issues a new report which I worked on for the past year.  Using new Census Bureau data, I analyze household incomes by age cohort – say, people age 25 in 1980 or in 1990 –and then follow those age cohorts as they age.  The results revise what we thought we knew about incomes.  The data show that broad, strong income gains were hallmarks of the 1980s and 1990s.  Moreover, the steady progress of the Reagan and Clinton years covered just about everybody -- households headed by men and by women; by whites, blacks and Hispanics; and by those with college degrees, high school diplomas, and no degrees at all.  This broad upward mobility, however, simply stopped under Bush and has not recovered under Obama. Moreover, this dramatic turnaround, including declining incomes from 2002 to 2013 for a majority of American households, affects every demographic group.

I’ll be writing more about what’s really happened to income, why, and what we can do about in coming weeks and months.  If you want to read the report for yourself, click here.

This post was originally published on Dr. Shapiro's blog.

The Peculiar Economics of Falling Oil Prices

The sharp fall in worldwide oil prices is a silver lining with a silver lining, even if the linings are a bit tarnished.  The price of the world’s most widely-used commodity has fallen sharply over the last five months, from a spot market price of $115 per-barrel in late June to $77 last week.  For consumers everywhere, that means major savings that will mainly go to purchase other goods and services; and those boosts in demand should spur more business investment.  So, if low prices hold for another six months, analysts figure that growth in most oil-consuming and oil-importing countries could be one-half to a full percentage-point higher than forecast, including here in the U.S. and in the EU, China and Japan.  It’s a blow to the big oil-producing and oil-exporting nations; but the global economy will come out ahead.  After all, the U.S., EU, China and Japan account for more than 65 percent of worldwide GDP, while the top ten oil exporting countries, led by Saudi Arabia and Russia, make up just over 6 percent.

The hitch for this rosy scenario is that much of the revenues that OPEC countries now won’t see would have gone into financial and direct investments in the U.S. and EU.  That means that new investments in American and European stocks and bonds could be reduced by some $300 billion per-year.  The upshot may be slightly higher interest rates and slightly lower equity prices, which would dampen the growth benefits of lower oil prices. 
 
 The lower prices are driven mainly by supply and demand, but market expectations and some strategic maneuvering by Saudi Arabia play a role, too.  Yes, worldwide oil supplies are up with rising production from U.S. and Canadian tar sands and shale deposits, and Libya’s fields are fully back online.   Moreover, these supply effects are amplified by softness in demand for oil, coming from economic stagnation in much of Europe and Japan, China’s slower growth, and our own increasing use of natural gas.  Oil prices also are influenced, however, by the prices that buyers and sellers expect to prevail months or years from now.  Last week, when the “spot price” of crude oil was about $77 per-barrel, the price for oil to be delivered next month was almost $10 lower.  In fact, the world’s big oil traders see crude prices continuing to decline not simply into 2015, but for a long time:  The price for oil to be delivered in mid-2016 is less than $72 per-barrel and, according to these futures prices, not expected to reach even $80 per-barrel until 2023. 
           
Don’t count on a decade of cheap oil.  Yes, technological advances have brought down the cost of extracting oil from tar sands, shale and deep water deposits, as well as the cost of producing and transporting natural gas.  But the economics of these new energy sources work best at prices higher than those prevailing today.  A long period of low oil prices would slow the growth of supply from those sources -- and so drive oil prices back up.  The Saudis are counting on it.  They’ve refrained from cutting their own production, which could restore higher prices, in hopes that another year of low prices will slow down investments in all of those alternatives sources.
 
The truth is, oil prices will rise again whether the Saudis’ tactic works or not.  While the outlook for much stronger growth remains slim for Japan and much of Europe, an extended spell of lower energy prices will support higher growth here, in China, and across many of the non-oil producing countries in Asia, Latin America and Africa.   Stronger growth and energy demand will bring on line more alternative sources of energy -- so long as oil prices are high enough for the alternatives to be competitive.
 
This is an old story.  Oil prices fell, and as sharply as they did this year, in 1985 and 1986, in 1997 and 1998, and in the aftermath of the 2008-2009 financial upheavals.  Each time, oil prices marched up again after one, two, or at most three-to-four years.  Of course, that volatility also makes some people billionaires.  To join them, what you’ll need is patience and a hedge fund’s access to credit.  With that, all you do is go out and purchase a few billion dollars in contracts to take delivery of crude in 2018 or 2020 at today’s futures prices, and then dump the contracts when oil prices once again head north of $100 per-barrel.
 
This post was originally published on Dr. Shapiro's blog

The Jobs Report is All Silver Lining

Today’s jobs report shows, at long last, what employment growth looks like in a balanced economic expansion.

Total employment not only grew by a net 248,000 positions in September; the jobs data for July and August also were revised upward by an additional 69,000 positions, for jobs gains in those months of 243,000 and 180,000, respectively.   Further, the number of people who lost their jobs in September also fell pretty sharply, by 306,000.  To be sure, the gains in September were uneven demographically, because the labor market does not provide an even playing field for everyone: So unemployment fell among men, whites and Hispanics, but remained unchanged for women, blacks and teenagers. 

Looking across industries, the biggest job gains occurred in health care, retail trade, and professional and business services.  The expansion of insurance coverage under Obamacare helps explain the job growth in health care, while the job gains in retail trade reflect rising consumer spending, and the gains in professional and business services go hand-in-hand with the recent strong growth of business investment.  Moreover, information services, mining, leisure and hospitality businesses, and finance all posted decent job growth.  Finally, the construction industry added jobs, too, which hopefully signals a continuing housing recovery that could ultimately strengthen the expansion. 

Are Financial Crises the New Normal?

                 The policy-making committee of the Federal Reserve Board meets again tomorrow, and the news won’t be encouraging.   The one-percent decline in GDP in the first quarter disposed of the Fed’s forecast for 2.9 percent growth this year, and they have to lower it to the range of 2.0 percent to 2.5 percent.   That’s just what the IMF did yesterday, forecasting as well that the United States won’t reach full employment again until 2017.  So the Fed will leave interest rates at rock-bottom levels through at least next year.  But Fed chair Janet Yellen will also continue to wind-down the quantitative easing program, because doing otherwise would signal big troubles ahead for the U.S. economy and scare the daylights out of the markets.   In short, happy days are still out of reach, and there’s little the Fed can do about it.

            We know it could be a lot worse, since it was much worse not very long ago.  And it is much worse in other places.  Consider Argentina:  On Monday, the Supreme Court refused to let the Argentine government arbitrarily void its contracts with selected American lenders.  So, now Argentina – with admittedly the world’s most irrepressibly, irresponsible, freely-elected government – may face another sovereign debt default by the end of the month.   And according to the ratings agencies, the place next in line for a debt default is Puerto Rico.  If it happens, the Obama administration will have to swallow hard and bail out our island Commonwealth – or risk economic chaos there and new problems for important banks here and in Puerto Rico.
 
            Across the pond, Yellen’s counterpart at the European Central Bank (ECB), Mario Draghi, continues to work overtime to stave off a European financial crisis.  Two years ago, Greece, Spain, Portugal and Italy were all teetering towards sovereign debt crises, until Draghi stepped in and pledged that the ECB would purchase as many of their bonds as it took to support their debt markets.  Two years later, those debts continue to rise, though not as fast as before.  But their economies are still not productive enough to attract the foreign investors they need to support their large public debt burdens.   And the large European banks which hold more of those bonds than anyone except the ECB are still unprepared to weather a serious crisis.  Yet, you wouldn’t know it from official pronouncements:  Wolfgang Munchau reported this week in the Financial Times that the “adverse scenario” designed by the ECB to stress-test those banks’ ability to weather a big shock is, in certain respects, more optimistic than the ECB’s own forecast. 
 
            Finally, while China blusters that its renminbi should be an exchangeable, global currency on par with the dollar, the flood of credit it unleashed to maintain high growth in recent years has left much of its banking system technically insolvent.  And its “shadow banking system” – the network of arrangements that many Chinese municipalities and businesses use to borrow funds outside the regular banking system – is in equally precarious shape.  The only things protecting China from its own financial crisis are strict credit controls and the fact that the renminbi is not an exchangeable currency, which insulate it from the judgments of global capital markets.
 
            The fact is, financial crises have become as common as they were in the 19th century before the rise of central banking.  This new cycle started in Latin America in 1985-1986, followed by Spain, Japan and Sweden in 1990-1991, moved on to Mexico in 1995 and East Asia in 1997-1998, and then to the United States in 2008-2009.  The European Union has barely skirted its own crisis for the last three years, and the strains are intensifying in China.  In ways that no one understands, the ultimate source of these cascading crises almost certainly lies in the globalization of capital markets.  Until we figure out how and why this is happening, everyone’s prosperity will be hostage to upheavals that governments cannot control and can only barely manage.
 
This post was originally published on Dr. Shapiro's blog

World Bank Shocker – China’s GDP to Top the U.S. in 2014 – Means Little

The World Bank shook up a lot of people this week with its declaration that by a new accounting, China’s GDP will top America’s this year.  But the meaning and significance of that accounting remain at best elusive.   Last year, the World Bank reported that using prevailing exchange rates, China’s GDP in 2012 was barely half that of America ($8.2 trillion versus $16.2 trillion).  The new report   draws on a statistical adjustment called “purchasing power parity” or PPP, often used to compare GDP in two or more countries when exchange rates fluctuate widely.  In analytic shorthand, PPP calculates GDP by looking at what it costs households in one country to feed, house, educate and otherwise take care of itself – including the costs of doing business and maintaining government –compared to households in another country.

            Setting aside the fact that U.S.-China exchange rates have been pretty stable, here’s how PPP works.  You start with a basket of personal and business goods and services in each country, taking account of habits, tastes and preferences.  So, the Chinese basket will be different from its American counterpart because, for example, Americans eat potatoes and subscribe to premium cable stations while Chinese eat rice and go to outdoor cinemas.  Since a serving of potatoes in America costs more than a serving of rice in China, China’s GDP is adjusted (upward) to take that into account.  These comparisons also require adjustments for quality.  Americans pay much more for health care and housing than Chinese – but the quality and quantity per-household of these services and goods as Americans consume them is much higher and larger than Chinese enjoy.  So, World Bank statisticians have to not only observe prices and levels of consumption, but also come up with adjustment factors for differences in quality for each country.  The truth is, nobody knows how to do that for countless goods and services, including the Bank’s PPP experts. 
 
            The United States is the baseline for PPP calculations.  So if China’s basket of goods and services takes half as much income to buy there as the American basket does in the United States, after accounting for quality differences, China’s GDP is adjusted up by that increment.  I should also mention that PPP analysis can produce a range of results based not only on all of the adjustments, but also on which of four distinct and accepted ways of calculating PPP the analyst uses.  This week’s announcement of PPP-based GDP came after the World Bank applied a new weighting regimen to one of the four methods.  What it means, then, depends on all of those assumptions and calculations, which makes any conclusions based on that accounting problematic, at best. As the Bank itself noted, “Because of the complexity of the process used to collect the data and calculate the PPPs, it is not possible to directly estimate their margins of error.
 
            By any accounting, China’s GDP has been growing very rapidly for several decades.  The reasons are pretty basic.  They start with the world’s largest workforce producing Chinese goods and services.  And thanks to the foreign direct investments of advanced technologies and business methods, much of it from America, Western multinationals have given China the means to make all those workers more productive.  Yet, the lives led by China’s people remain a world away from the lives of Americans.  Even using the World Bank’s PPP calculations, per-capita GDP in China is just $9,844, compared to $53,101 in the United States.  
 
            One more caveat: China’s PPP-adjusted GDP may be said to statistically rival America’s – whatever that means – only because U.S. growth has been unusually slow for more than a decade.  If the American economy had continued to expand since 2001 at the rate it grew in the 1990s, our GDP would still be more than 20 percent bigger than China’s even using the World Bank’s new adjustments and accounting.  For that, we have no one to blame but our policymakers and ourselves.  
 
This post was originally published on Dr. Shapiro's blog

Republicans Maintain Hard Opposition to Obamacare at Their Own Political Peril

 The political struggle over Obamacare has reached a critical inflection point as real events have overtaken its opponents’ basic arguments.  That opposition has always drawn on, and encouraged, doubts about the public’s real interest in a federal guarantee to health insurance and their tolerance for a mandate to enforce it.  After the program’s fitful start, it is now clear that large numbers of Americans are prepared to spend the considerable time and money required to sign on. The Rand Corporation estimates that 9.5 million people who had no coverage a month or a year ago now do, thanks to the Affordable Care Act (ACA).  I also analyzed the data and found that the newly-insured number at least 7.8 million and as many as 10.9 million.  And if the governors and legislatures in 24 states had not inexplicably turned down the ACA’s Medicaid expansion – a decision three of those states are reconsidering -- the total number of newly-insured today would range from 11 million to 14 million.

            These numbers create a political inflection point, because the program’s demonstrated appeal renders it virtually impossible to repeal.  Arguing against a new federal benefit is an easy political challenge for conservatives.  By contrast, withdrawing a benefit that millions already depend on is, at best, a herculean task.  Just try to imagine any future Congress or President actually withdrawing practical access to medical coverage from millions of moderate-income families, millions of young adults covered by their parents’ policies, and millions of more people with preexisting medical conditions. 

            This political inflection point will strengthen not only as more people enroll, but also, and even more important politically, as Obamacare generates benefits for everyone else.  To begin, surveys show that several million people would like to change jobs but stay where they are, out of concerns about losing their healthcare coverage.  Now, they can do as they like – and the enhanced labor mobility should help the economy.

            More important, by enrolling large numbers of previously-uninsured people, Obamacare should slow increases in everyone’s insurance premiums -- or even lower premiums.  As countless studies have shown, most people without coverage get their medical care in emergency rooms.  Since they usually cannot pay the bills for that care, hospitals pass along those costs through higher charges on everyone else, which in turn leads to higher insurance premiums.  The ACA will not only relieve some of those direct pressures on premiums; its mandated coverage also will generate more income for insurers, further easing upward pressures on premiums.

            This would be very good news for the American economy.  Over the last decade, healthcare coverage has been the single, fastest-rising cost for most U.S employers.  But as globalization intensifies competition, many of those employers find themselves unable to pass along their higher healthcare costs by simply raising their prices.  Their only recourse, as I have written many times, has been to cut other costs – beginning with jobs and wages.  In the end, therefore, the ACA could contribute to broader gains in employment and incomes – and that could produce a political inflection point that could support political realignment.

This post was originally published on Dr. Shapiro's blog  

 

Beyond the Sabre Rattling, Will Russia or the West Bail Out Ukraine?

The crisis over Ukraine is quickly becoming a geostrategic conflict. As Vladimir Putin maneuvers to restore Russia’s right to behave with a superpower’s impunity, particularly in its own backyard, the West pushes back. But economic forces also have shaped this confrontation, especially Ukraine’s record as the world’s worst-performing industrial economy over the last twenty years. It was popular discontent with this disastrous performance that drove the recent dissent, which in turn triggered such a bloody response from Viktor Yanukovych — and that response consolidated the opposition and cost Yanukovych his job. Beyond this week’s political and military maneuvers, the outstanding question is, who will bail out the Ukrainian economy — Russia, or the EU and the United States — as the price of drawing the country into its trading system?

Stated simply, Ukraine is the economic equivalent of a failed state. After gaining independence in 1991, the country moved briefly to liberalize its economy along the same lines as most of Eastern and Central Europe. But Ukraine soon jettisoned its reforms in favor of the state-oligarch model also evolving in Russia. Some twenty years later, Ukraine’s GDP has shrunk 30 percent.  Even Russia’s sorry economy is 20 percent bigger than it was in 1991 — and Poland’s economy, which looked much like Ukraine’s in 1991, grew 130 percent over the same period. Ukraine’s economic performance has been so terrible, for so long, that its sovereign debts are now considered the equivalent of junk bonds. Even before the crisis, Ukraine’s credit rating was worse than Greece’s — no small feat — and no better than that of Argentina, a global financial pariah for its mismanaged debt defaults and summary expropriations of foreign-owned companies.
 
Ukraine’s debts soon come due, with some $15 billion in sovereign bonds maturing this year and another $15 billion in 2015. With a current account deficit equal to 8 percent of its GDP, Ukraine cannot pay off and refinance those debts without large-scale aid — some $20 billion to $25 billion — and affiliating itself with a larger trading system. An economic and trade alliance with Russia would deliver the bailout, but with little prospects of improving the underlying economy. The EU and the United States (through the IMF) also are prepared to provide the bailout, if the Ukrainian government will accept far-reaching economic reforms. The EU-US/IMF reforms should lead to better economic times down the road. But they also would mean more short-term hardships for ordinary Ukrainians. That’s why Yanukovych sided with Putin: He feared that he could lose his grip on power if times got even worse — and yet, of course, he lost power anyway.
 
With a new, pro-Western government in charge in Kiev, Ukraine’s fate may well lie in the hands of Europe and the United States. Their choice is simple to state, if difficult to execute — namely, do they put sufficient economic and diplomatic pressure on Putin, to convince him to pocket his own bailout and let the West pick up the pieces.
 
This post was originally published on Dr. Shapiro's blog

U.S. Workers Could Be Big Winners in the Current Trade Talks

President Obama’s drive to complete new open trade agreements with the European Union and 11 Pacific Rim nations are the most critical economic initiatives of his second term.  Their importance reflects the basic patterns of economic growth across the world.  After a decade of unusually weak growth, job creation and income gains, America’s prospects for rising wages and employment are increasingly linked to how successfully American businesses can tap into foreign demand.  Beyond the big demand issues, the two agreements also should subtly affect the tradeoffs that American multinationals face between exporting goods and services produced here, versus expanding their European and Asian operations.  And those more subtle effects could produce large long-term benefits for American workers. 

The Transatlantic Trade and Investment Partnership (TTIP) talks would end most tariffs and reduce countless other barriers to open trade between the United States and the 27 countries of the European Union, with their combined GDP of some $17 trillion.  Not only would the agreement give American businesses and investors nearly as much access to European consumers and businesses as Germany or France, including the fast-growing emerging economies of Central and Eastern Europe.  Equally important, such an agreement would recalibrate the choices that U.S. companies face today between exporting to Europe and increasing their foreign direct investments there.  For the first time, America’s multinationals could enjoy nearly unfettered access to the European market without setting up more operations there. 
 
The second proposed agreement, the Trans-Pacific Partnership (TPP), also would reduce tariffs and other barriers between and among ourselves and Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.  Not counting ourselves and our NAFTA partners Mexico and Canada, where we already enjoy open trade, the other TPP countries represent nearly $9 trillion of potential demand for our goods and services.  And much like the proposed EU-US partnership, the Pacific agreement would, at once, lower barriers to U.S. exports to those countries and change the calculus of foreign direct investment (FDI) versus exports in ways that would tilt more towards exports.  If 10 percent of our current FDI flows to countries involved in the two agreements shifts to domestic investments or simply higher profits, it could boost U.S. employment by as much as 450,000 jobs.

These initiatives present a singular opportunity to open up markets that represent nearly half of all non-U.S. global GDP.  As the world’s most comprehensive and productive economy, the United States will be well positioned to use this enhanced access to increase our global market shares in countless advanced goods and services.  And by reducing the costs of exporting into foreign markets, as compared to setting up more new factories and offices inside those markets, these agreements could be the first new trade pacts for a global economy that genuinely favor U.S. workers.

This post was originally published on Dr. Shapiro's blog.

"Layoffs Sharply Lower" - Dr. Rob Shapiro on New Jobs Report

 "The jobless rate fell sharply again – from 7.0 percent to 6.7 percent – but the reason wasn’t a burst of new job creation.  In fact, total employment was up by just 74,000.  What changed in December was that new layoffs fell sharply, which we usually see in the first two years of an expansion.  It’s some two year behind schedule, but the number of newly unemployed people was down by 365,000 in December.  The rest of it was mainly demographics, not economics.  Yes, the labor participation rate fell 0.2 percentage points – but it had risen by as much the month before.  Moreover, the number of “discouraged workers” (those no longer looking for work) and those “marginally attached” to the labor force (who haven’t tried to get hired for a month) did not go up.  What continues to rise are the numbers of baby boomers retiring, because the numbers of boomers reaching ages 60, 62 or 65 continues to accelerate."

 

Syndicate content