Wonkbook: A 'mistake' Europe would be wise to make

at 08:09 AM ET, 05/01/2012

The U.K. is in a double-dip recession. Spain has fallen into a recession. Belgium, Greece, Ireland, Italy, the Netherlands, Portugal and Slovenia are in recession. Perhaps this might mean a bit of a rethink in the euro zone? Nah.


Unemployed Italian railways former workers, are seen at a train station in Italy April 2. Unemployment in the countries that use the euro has hit its highest level since the currency was introduced back in 1999. (Luca Bruno - AP)
“The first precondition in order to have sustainable growth everywhere in Europe is fiscal consolidation,” said Wolfgang Schäuble, Germany's finance minister, at a press conference with Spanish finance minister Luis de Guindos. “If now we talk about growth, it shouldn’t be understood as a change of direction. That would be a mistake.”

The problem is that though we're seeing a lot of fiscal consolidation in Europe -- "fiscal consolidation," by the way, is a fancy term of deficit reduction -- we're not seeing much sustainable growth. In fact, it's not even clear how much sustainable fiscal consolidation we're seeing. Recessions increase deficits, and the prospect of continued austerity without near-term growth is leading to the ouster of incumbent governments in France and Greece.

The classic model of recessions goes something like this: It's hard to get workers to take pay cuts. Really hard, actually. And recessions are, in no small part, the lag time between when workers need to take pay cuts and when they do take pay cuts. Once you get worker pay down where you need it to be, the economy can start growing again.

That's basically the German view of what needs to happen in Europe. "Fiscal consolidation" is, in no small part, cuts to worker pay and benefits from bloated governments. And, in the long run, the Germans are right: that does need to happen in Europe. But to paraphrase Keynes, in the long-run, the euro zone might be dead.

As Steve Randy Waldman points out in the case of the United Kingdom, worker pay has fallen by a lot, and it doesn't appear to be helping much. The problem, he goes on to say, is that Europe isn't in a classical recession. It's not about how much workers are getting paid. It's about how willing creditors are to continue carrying debt. "In this story, reducing real wages is not a solution. Real wage reductions might mitigate unemployment temporarily, but they also engender financial distress. Financial distress then causes agents to redouble their efforts to satisfy debts, reducing aggregate income and requiring further reductions in real wages ad infinitum. The only way out of a post-Keynesian depression is to increase real wages relative to the real burden of debt."

In other words, if you're trying to persuade the people lending to you that your currency union has a future, and that that future includes having the money and the will to pay creditors back, throwing a third of the countries into recession, creating a ton of social unrest that leads to electoral instability, and lacking any serious plan for growth does not inspire much confidence. If all the market wanted to see was a willingness to inflict pain on the European periphery, this crisis would long since be over.

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RCP Obama vs. Romney: Obama +3.1%.

RCP Obama approval: 47.6%.

Top stories

1) The GOP can't agree on how to replace Obamacare. "Even after three years of railing against Obama’s plan, Republicans have coalesced around only a few basic tenets of health policy -- let alone a full replacement plan...They are even divided over whether some of the popular pieces of Obama’s health law are a good idea. For example, most Republicans support the health law’s requirement that insurance companies accept all applicants -- but the replacement plan put forward by the most prominent Republican ignores that idea...The plan that’s likely to get the closest look from Republicans is sponsored by Price, an orthopedic surgeon and one of the House’s leading voices on health care...His plan would provide tax credits -- on a sliding scale, based on income -- to help Americans buy insurance premiums and extend a tax deduction to people who buy coverage on the individual market." Jennifer Haberkorn in Politico.

2) Middle class wage losses haven't slowed under Obama. "Barack Obama campaigned four years ago assailing President George W. Bush for wage losses suffered by the middle class. More than three years into Obama’s own presidency, those declines have only deepened...As a candidate in 2008, Obama blamed the reversals largely on the policies of Bush and other Republicans. He cited census figures showing that median income for working-age households -- those headed by someone younger than 65 -- had dropped more than $2,000 after inflation during the first seven years of Bush’s time in office. Yet real median household income in March was down $4,300 since Obama took office in January 2009 and down $2,900 since the June 2009 start of the economic recovery, according to an analysis of census data by Sentier Research, an economic- consulting firm in Annapolis, Maryland." Mike Dorning in Bloomberg.

3) Spain has slipped into recession. "Spain has joined seven other euro-zone nations in recession, according to data released Monday, providing new evidence that austerity policies are failing to spark confidence in the region's economies ahead of a week of expected anti-austerity protests and a string of important national elections. Almost every piece of new economic data in recent weeks has reinforced the impression that swaths of the European economy are contracting...A growing number of politicians, led by François Hollande, the Socialist candidate in the French presidential ballot, and by Italian Prime Minister Mario Monti, have called for a shift in the focus of policies toward growth and away from austerity...Among the 17 euro-zone nations, Spain joined Belgium, Greece, Ireland, Italy, the Netherlands, Portugal and Slovenia in recession. Outside the bloc, the U.K., Denmark and the Czech Republic are also in recession." David Roman and Stephen Fidler in The Wall Street Journal.

Chaser: "Advocates of delaying tough deficit-reduction targets could be aided by new economic projections due from the European Commission later this month. The figures are expected to show sharp downward revisions in economic growth in several eurozone countries." Peter Spiegel and Quentin Peel in the FT .

4) The homeownership rate hit a 15-year low. "The homeownership rate fell in the first quarter to the lowest level in 15 years as more Americans lost homes to foreclosure and shifted to renting amid the weak economic recovery. Economists say the rate could slip further. While low mortgage-interest rates and falling home prices have made homes more affordable than at any time in the past decade, mortgage-lending standards remain tight. Also, more Americans may feel less confident about property ownership after the steep price declines of the past six years. The Census Bureau said Monday that the homeownership rate fell to 65.4% at the end of March, the same level as in early 1997...The homeownership rate rose sharply during the past decade, to a peak of 69.2% at the end of 2004. It has fallen steadily since housing prices began dropping in 2006."

But keep an eye on this trend: "Rental properties, meanwhile, benefited from the drop in homeownership. Only 8.8% were vacant in the first quarter, the lowest level since the second quarter of 2002." Alan Zibel and Nick Timiraos in The Wall Street Journal.

Top op-eds

1) KLEIN: Mitt Romney offers a return to George Bush's economic policy. "I’m old enough to remember when George W. Bush was president. It was, after all, only four short years ago. And it didn’t go so well. The Bush economy is one of the worst on record. Median wages dropped. Poverty worsened. Inequality increased. Surpluses turned into deficits. Monthly job growth was weaker than it had been in any expansion since 1954. Economic growth was sluggish. And that’s before you count the financial crisis that unfurled on his watch. Add the collapse to the equation, and Bush’s record goes from 'not so good' to 'I can’t bear to look.' Was all that his fault? Of course not. No economy is entirely under the president’s control. He didn’t create the tech bubble or 9/11. His responsibility for the financial crisis is, at best, partial. But Bush’s economic policies, including massive, deficit-financed tax cuts, and his reappointing of Alan Greenspan to lead the Federal Reserve mattered." Ezra Klein in The Washington Post.

2) STEVENSON AND WOLFERS: Work sharing could blunt the impact of recessions. "No one likes to fire people, and no one likes to be fired. So it’s odd and unfortunate that U.S. employers do it much more than they need to. Even when business is slack, there’s an alternative to cutting jobs: Companies could reduce hours, spreading the pain across all their employees. Too often they don’t, because an anomaly in the country’s arcane unemployment-insurance system supports firing people. Here’s the problem: If you cut 10 percent of your workers, they qualify for unemployment insurance, but if you keep all your workers and cut their hours by 10 percent, there’s no parallel insurance. By treating the two actions differently, the government tilts the playing field toward cutting people rather than hours. A little-noticed provision in the Middle Class Tax Relief and Job Creation Act, which President Barack Obama signed into law in February, aims to change the situation." Betsey Stevenson and Justin Wolfers in Bloomberg.

3) MILBANK: Obama is campaigning too much, too early. "In a political culture that long ago surrendered to the permanent campaign, Obama has managed to take things to a whole new level. According to statistics compiled for a book to be published this summer, the president has already set a record for total first-term fundraisers — 191 — and that’s only through March 6. Measured in terms of events that benefit his reelection bid, Obama’s total (inflated in part by relaxed fundraising rules) exceeds the combined total of George W. Bush, Bill Clinton, George H.W. Bush, Ronald Reagan and Jimmy Carter." Dana Milbank in The Wshington Post.

4) GERSON: Give Paul Ryan's conservatism a chance. "In a recent column, I described two forms of conservatism that coalesced in opposition to President Obama’s polarizing expansion in the size and role of government. Rejectionist Conservatism, which comes in tea party and libertarian variants, would use current political controversies to fundamentally reorder the role of the federal government. At least in theory, it would repeal not just Obamaism but also the Great Society, the New Deal and much else in pursuit of a minimal state. Reform Conservatism, in contrast, would seek to achieve federal goals in modern, market-oriented ways. It is less concerned about re-founding the country than making Medicare work. Its chief practitioner is Rep. Paul Ryan (R-Wis.), supported by a few policy experts of disproportionate creativity and influence...Obama has offered a ploy, and he vilifies those who offer a plan. It is a stunning act of irresponsibility -- and the main reason that Reform Conservatism deserves a chance to govern." Michael Gerson in The Washington Post.

5) RACHMAN: There's no alternative to austerity in Europe. "Mr Hollande says that he will replace austerity with growth. Why didn’t anybody think of that before? Unfortunately, a vacuous slogan is underpinned by ineffectual proposals. Mr Hollande’s programme stresses small, badly-targeted boosts to public spending, while virtually ignoring the structural reforms that are the only route to sustainable growth. Spending on infrastructure – “shovel-ready” projects, as President Barack Obama has called them – is, of course, a standard Keynesian solution for an economy that is caught in a downward recessionary spiral. Under normal circumstances, such spending might be a great idea. In Europe, however, there are plenty of reasons to be sceptical. If building great roads and trains were the route to lasting prosperity, Greece and Spain would be booming.
" Gideon Rachman in The Financial Times.

Swedish pop interlude: Miike Snow plays "Paddling Out" live on the Late Show with David Letterman.

Got tips, additions, or comments? E-mail me.

Still to come: Treasury weighs floating-rate debt; states struggle to cooperate on Obamacare; VAWA may be expanded; new fracking rules could allow delayed disclosure; and a dog that's better than any bike lock.

Economy

Banks made it slightly easier to get loans. "Consumers found it easier to get credit cards and auto loans in the first quarter of 2012, but standards for home and business loans remained tight, the Federal Reserve said Monday. The central bank's quarterly survey of senior loan officers at American banks and foreign ones with U.S. operations also showed lending demand grew across the board as banks moderately loosened credit standards for the first three months of 2012, compared with the previous quarter...In a special set of questions on residential real-estate lending, about a third of the banks surveyed said they were participating in the Obama administration's Home Affordable Refinance Program, or HARP, and 'were satisfying most demand.' About half, however, said they had 'very little participation' in the program, the Fed said...Easier credit standards can help the economy, which is showing signs of improvement but remains fragile." Alan Zibel and Jeffrey Sparshott in The Wall Street Journal.

@NickTimiraos: Fed sr loan survey: About one-third of banks are actively soliciting HARP 2.0. Half say very little participation. Putback worries prevail.

Consumer spending growth slowed. "Americans spent a little more cautiously last month, suggesting consumer spending is providing less of a boost to the economy than it did at the start of the year. Personal spending rose 0.3% in March, slowing from an upwardly revised 0.9% pace the previous month, which was the biggest gain in over two and half years, the Commerce Department said Monday. Incomes rose a better-than-expected 0.4%, providing some hope that spending could pick up in coming months...Consumption was one of the few bright spots in the Friday's disappointing initial estimate of first-quarter economic growth. While the overall economy slowed to a 2.2% growth rate from 3.0% in the final quarter of 2011, the 2.9% gain in consumer spending was the biggest in five quarters...Monday's report showed that when adjusted for inflation, spending went up 0.1% in May." Tom Barkley and Jamila Trindle in The Wall Street Journal.

@crampell: inflation-adjusted consumer spending rose just 0.1% in March from February. not a good sign for consumption going forward.

The slowdown in household formation is hampering the recovery. "The recession reduced the rate at which Americans set up new homes or apartments by at least half. Although the number of new households has begun to recover over the past year, its growth rate continues to lag behind its historic pace, according to Census Bureau statistics. More than one in five adults between ages 25 and 34 live with their parents or in other 'multi-generational' living arrangements, the highest level since the 1950s, according to the Pew Research Center. Analysts estimate that there are more than 2 million fewer occupied homes than there would have been had Americans continued moving into new homes and apartments at the rate they did before the recession...The slowdown has broad implications for the economy. It has trimmed demand for housing, even as the economy struggles to absorb the oversupply of new homes that came with the housing bubble and the millions of foreclosures that continue to weigh on the market." Michael Fletcher in The Washington Post.

Top Fed officials doubt the need for further easing. "Two top Federal Reserve officials - one with a dovish, employment-focused bent, and the other a self-avowed inflation hawk - on Monday both said they see no need for the central bank to ease monetary policy any further. But the comments, from San Francisco Fed President John Williams and Dallas Fed President Richard Fisher, do not mean they believe the central bank should quickly move to raise rates, which it has kept near zero for more than three years...Fisher said he would oppose the extension of Operation Twist, the Fed bond-buying program that is set to end in June, but stopped short of calling for outright monetary tightening. Speaking to the German financial daily Handelsblatt, San Francisco Fed's Williams suggested the Fed might need to push rates still lower if the U.S. unemployment rose substantially and growth slowed...'So far there is no need for further monetary measures,' he said, pointing to an improvement in U.S. consumption and available income." Ann Saphir in Reuters.

@binarybits: I have yet to see a convincing explanation from the hawks of why we haven't gotten significant inflation since 2008.

The Treasury Department is weighing issuing floating-rate debt. "As borrowers around the U.S. rush to lock in near-record-low interest rates on everything from mortgages to corporate bonds, the Treasury Department soon might embark on a program that seemingly does just the opposite. After a series of meetings early this week, Treasury officials will decide whether to start issuing floating-rate debt for the first time ever. Instead of the interest rate being fixed throughout the life of the notes, the rate would move up and down as overall rates move higher and lower. The change would be the first new addition to the Treasury's arsenal of debt products in 15 years. Analysts are widely expecting Treasury officials to sign off on the program...It is not certain that the Treasury will go ahead with the plan. The government considered the possibility of issuing floating-rate Treasury securities in the 1990s and ultimately it decided not to go forward with the program." Matt Phillips in The Wall Street Journal.

Physics interlude: NASA astronaut Don Pettit demonstrates antibubbles.

Health Care

Massachusetts is at the forefront of healthcare reform again. "In 2006, under Gov. Mitt Romney, Massachusetts became the first state to extend insurance coverage to all its residents. Now it’s looking to slow the growth of its health-care costs in equally groundbreaking ways. In the next few months, Massachusetts is expected to take up legislation that would overhaul how doctors, hospitals and other providers are paid. The forthcoming payment-reform bill is expected to include many incentives for hospitals to accept 'global payments,' or a flat fee for all the care delivered for a specific person or group of people. The hope is to take away the financial incentives to provide more care when less might be equally effective...So far, Massachusetts businesses have proved amenable to such payment changes. In many ways, they’ve moved in that direction without any direction from the government." Sarah Kliff in The Washington Post.

States face partisan struggles over Obamacare. "With zeal, excitement and a meticulous attention to detail, the administration of Gov. Mark Dayton is trying to expand health insurance coverage and remake Minnesota’s insurance market along the lines envisioned by President Obama. In setting up a marketplace where people can shop for insurance, the state has sought advice from consumer groups, labor unions, doctors and hospitals, employers, insurance companies, agents and brokers, and American Indian tribes. But one notable group has been missing from the process: Republicans, who control both houses of the State Legislature...A similar confrontation has stalled action in New Hampshire. In New York, Gov. Andrew M. Cuomo, a Democrat, recently established an insurance exchange by executive order after Republicans in the State Senate blocked legislation." Robert Pear in The New York Times.

Domestic Policy

The Violence Against Women Act may be expanded. "Some members of Congress are trying to expand the scope of the Violence Against Women’s Act -- which first passed in 1994 -- to include greater support for LGBT victims, immigrants, and Native American women. They’re three groups that VAWA has traditionally underserved, according to the National Task Force to End Sexual and Domestic Violence Against Women, a coalition of advocates who’ve convened upon the issue. The rate of domestic violence among LGBT couples is about the same as for heterosexual ones -- an estimated 25 to 33 percent experience abuse in their lifetimes, according to National Coalition of Anti-Violence Programs. But LGBT victims are significantly less likely to seek out help: 45 percent of them have been turned away from domestic violence shelters, and only 7 percent call the police after an incident of domestic violence. LGBT women are particularly at risk: they’re victims of the majority of murders related to domestic violence in the gay community." Suzy Khimm in The Washington Post.

Adorable animals being protective interlude: A dog guards a bike.

Energy

Utilities are ditching coal. "U.S. electric utilities are renegotiating coal contracts and finding other ways to reduce coal deliveries as a mild winter and competition from less-expensive natural gas combine to weaken demand for power plants' longtime staple fuel. Coal consumption by power generators fell 18.8% in the fourth quarter from the preceding quarter and 9.4% from the fourth quarter of 2010, the Energy Information Administration said last week. The agency hasn't calculated first-quarter coal use yet. But utilities have indicated that they are shifting power production to natural gas, the price of which recently dipped below $2 per million British thermal units, roughly half what it was a year ago. Xcel Energy Inc, which owns utilities in eight states, typically entered into advance coal contracts sufficient to meet the company's entire annual need. Now, 'we're keeping a more open position' because Xcel is using less coal and more natural gas, said Susan Arigoni, the company's vice president of fuels." Rebecca Smith in The Wall Street Journal.

New fracking rules may allow companies to wait to disclose chemicals. "Natural-gas companies drilling on U.S. land would be permitted to wait until after hydraulic fracturing is completed to disclose what chemicals they used, under a draft rule being considered by the U.S. Interior Department. A version in February required companies to file a complete chemical makeup at least 30 days before work began, something energy trade groups, including Washington-based American Exploration and Production Council, complained about. They said it could slow energy production on federal lands...Requiring disclosure of chemicals 'would only be required after the fracturing operation has taken place,' according to the draft, obtained by Bloomberg News...The Obama administration plans to post the fracking information on a public website, possibly on FracFocus.org, according to the draft. FracFocus is managed by the Ground Water Protection Council and Interstate Oil and Gas Compact Commission." Katarzyna Klimasinska in Bloomberg.

@grossdm: compared with a year ago, gas prices are: (a) lower; (b) higher; (c) the same ?


@grossdm: The answer is. . . . . (a) lower.

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

 
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