Wednesday, April 17, 2013 - Austerity Oops

Austerity Oops

by Sinclair Noe

DOW – 138 = 14, 618
SPX – 22 = 1552
NAS – 59 = 3204
10 YR YLD - .01 = 1.70%
OIL – 2.35 = 86.37
GOLD + 8.20 = 1378.50
SILV - .03 = 23.41

The Federal Reserve released its Beige Book this morning. The Beige Book is just a survey of the 12 Fed Districts and the name is due to the fact that it has a beige cover. The survey covers the time from late February to early April. The info is more anecdotal than precise measurements. Of the Fed’s 12 districts, five reported “moderate” growth, five reported “modest” growth, and New York and Dallas reported slight accelerations.

“Particular strength” was seen in residential construction and automobiles, which confirms the report on Monday dealing with industrial output. Consumer spending grew modestly, with higher gasoline prices, the expiration of the payroll tax cut and winter weather restraining growth. Lat week, the Commerce Department reported that retail sales were at a 9 month low. The sequester has rattled the defense industry with the automatic budget cuts; no surprise there. Overall, the Fed remains optimistic, but still concerned about fiscal policy.

On the fiscal policy front, one of the main arguments for budget cuts and austerity comes from a 2010 study by two Harvard economists, Ken Rogoff and Carmen Reinhart. The study concluded that when a nation's debt grows too big, it can slow growth. The idea is that when the debt to GDP ratio hits 90%, the result is that growth will drop to 0.1%. So, the conventional wisdom, based upon the study, was that too much debt would make a country's economy grind to a halt. And the response was budget cutting and austerity programs from the European Union to the fiscal cliff and sequestration that came out of Washington.

Well now another set of academics at University of Massachusetts at Amherst have replicated the study. They discovered that the Harvard professors made a couple of errors in their research. The new review of the study shows the original study used a debatable method to weight the countries in their research and selectively excluded years of high debt and average growth, and they uncovered a code problem with the Excel spreadsheet.

Ooops.

I seem to recall that an Excel spreadsheet coding error was blamed in the collapse of the London Whale. Somebody really needs to come up with a foolproof spreadsheet.

Anyway, when the data is corrected, that 90% debt to GDP ratio isn't really the threshold that results in slower economic growth. It doesn't mean that high levels of debt should be considered as a positive, just that there is some wiggle room, and the appropriate levels of debt are a little different depending upon the situation, and it isn't set in stone, and maybe all this austerity isn't really the solution for everything right here, right now. And the new data shows that countries can have very high levels of debt and can have good strong growth.

Now in fact there is a reason to be concerned about the artificially low interest rates the Fed has and is certain to continue to engineer. They are a massive transfer from savers to the financial system and to speculators on asset prices. But the solution is more demand and more investment, and if the private sector won’t provide it, government needs to step in. The evidence, as even the IMF has been forced to acknowledge, is that government spending is stimulative, and with a fiscal multiplier over 1 (which is also what the IMF found is operative in low growth economies), spending makes the denominator of the debt/GDP grow faster than the numerator, reducing rather than increasing debt ratios.

Of course, it will be much harder to defend budget cuts and austerity, now that the data has been debunked, but the damage is already done. Science advances one funeral at a time.

The Senate failed to muster sufficient support Wednesday for a gun-buyer background check bill, voting the measure down in a procedural vote that likely dooms any major legislation to curb gun violence. The amendment failed 54 to 46, falling short of the 60-vote threshold needed to break a filibuster of the measure, even as victims of the Sandy Hook shootings and other shooting watched from the Senate gallery and activists at a vigil outside the Capitol read the names of people slain since then, hoping to prompt action.

"Shame on you!" shouted two women in the gallery after the vote. One was Patricia Maisch, who grabbed the third clip from the gunman who opened fired at then-Rep. Gabby Giffords in the Tuscon., Ariz., shooting in 2011. The other was Lori Hass, whose daughter was injured in the Virginia Tech shootings six years ago.

Passage of the background check amendment had been seen as key because it represented a bipartisan agreement in a highly polarized debate. It also would have preserved a major part of the overall bill that many advocates against gun violence saw as a minimum step toward stemming gun massacres.

Who says nothing ever gets done in Washington? Swiftly and without fanfare, Congress and President Obama have made it easier for top federal employees to trade on inside information.

On Monday, Obama signed into a law a change in the Stop Trading On Congressional Knowledge, or STOCK Act, which was passed in 2012. The change, which was approved unanimously by Congress last week, means that top federal employees, including staffers on Capital Hill and in the White House, will not have to publicly disclose their financial holdings online. That requirement was part of the original STOCK Act, but its implementation had been delayed again and again by Congress. And now it's dead.

A Pennsylvania judge has issued what might be considered a precedent-setting decision holding that there is no corporate right to privacy under that state's constitution. The ruling comes in an ongoing case where several newspapers sued to unseal a confidential settlement where major fracking corporations paid $750,000 to a family that claimed the gas drilling had contaminated their water and harmed their health. The Court ordered that settlement unsealed, enabling the papers, environmentalists and community rights advocates to examine the health issues and causes. The Court's ruling is significant because the fracking companies have relied on secrecy agreements with landowners to hide the environmental and health impacts of gas drilling.

Where the ruling is likely to make the biggest waves is in the corporate personhood debate. The Judge spent more than a third of her 32-page decision saying why corporations and business entities were not the same as people under Pennsylvania's constitution, and why, for the purposes of doing business in the state, that federal court rulings that blur the rights of people and businesses do not apply.

The Court wrote, "Nothing in that jurisprudence indicates that that right [of privacy] is available to business entities... There are no men or woman defendants in the instant case; they are various business entities," it wrote, saying business entities are created by the state and subject to laws, unlike people with natural rights. "In the absence of state law, business entities are nothing." If businesses had natural rights like people, "the chattel would become the co-equal to its owners, the servant on par with its masters, the agent the peer of its principles, and the legal fabrication superior to the law that created and sustains it."

The judge said the U.S. Constitution's 14th Amendment "use of the word 'person' that makes its protections applicable to business entities" does not apply to Pennsylvania's constitution. "The exact opposite is derived from plan language of Article X of the Constitution of the Commonwealth of Pennsylvania." And the Judge added, "Not only did our framers know how to employ the names of business entities when and where they wanted them… they used those words to subjugate business entities to the constitution."