4th quarter U.S. GDP advance estimate up 3.2 %

U.S. GDP according to advance estimates by the Bureau of Economic Analysis grew by 3.2 % over the previous quarter. This is a clear sign that the recovery in growth is continuing, albeit at a slower pace than hoped. Personal consumption and private non residential business investment led the way. Imports declined thereby improving the trade balance contribution to growth. There was a fall in private inventory investment, as well as in federal government spending. Auto production also fell compared 

to the previous quarter. We shall see what the  revisions reveal when they are announced at the end of February. The news is positive but not 

yet good enough to make a major dent in the rate of unemployment. The declining  

contribution of federal government spending is also another reason to bring forward more spending and somehow   overcome the Republican opposition to necessary stimulus and investment in infrastructure.

U.S. Deficits and Debt Facts versus Hysteria

It never ceases to amaze me how often I need to repeat certain statistical facts about the state of deficits and debt in the U.S. and elsewhere because of the headline hysteria in the press(even the quality financial press) about the supposed disasterous state of U.S. finances. So here goes again.

Facts: the American deficit as a percentage of the GDP 0.6 % of the GDP in 1930. It then rose steadily until it reached 5.9 % of the GDP in 1934. In 1935 it was 4 %;

1936 5.5 %;
1937 2.5 %;
1938 0.1 %;
1939 3.2 %
1940 3.0 %
1941 4.3 %

1942 14.2 %
1943  30.3 %
1944  22.7 %
1945  21.5 %
1946   7.2 %

1947    (1.7 %) a surplus and in surplus  until 1950.(All the data is from the Historical tables of the U.S.budget for the fiscal year 2008).


Now the hysteria: the deficit has risen because of the financial crisis, the huge rise in unemployment and possibly also because of certain tax expenditures such as cutting the taxes of the wealthiest taxpayers. It reached 10 % of the GDP in 2009; 8.9 % in 2010 and is projected to hit 9.8 %in 2011.

The U.S. in 1943 was a much poorer country in terms of real GDP per capita than now and yet it sustained a deficit that was in terms of percentage of the GDP more than three times as large. In fact, once full employment was restored the U.S .economy underwent a prolonged period of growth and prosperity that followed the end of the war.

 The debt to GDP ratio that is gross debt  as a percentage of the size of the GDP peaked during the last century in 1946 at 108.6 % of the GDP. Net debt held by the public , as opposed to U.S.government accounts was smaller in 1946 at 97.9 % of the GDP. (Source of data see above)

The current level of U.S. gross debt in relation to the GDP for 2010 was 62.1 %.

 It is projected to rise to 69.4 % by the end of 2011.

Perhaps room for some concern mostly because of the high unemployment but definitely not the hysteria shown by some.

U.S. Financial crisis Inquiry commission reports Thursday:Blame widespread

The American financial crisis inquiry commission will issue its nearly 600 page report Thursday and according to preliminary reports in the New York Times, it blames officials in the Clinton administration and in the Bush administration for inadequate regulation of the industry which permitted reckless and greedy risk taking by the investment banks, the mortgage industry and others for the debacle that almost destroyed the American and global economy. It apparently argues that Tim Geithner must share in some part of the blame for the mess while he served as head of the New York Fed and for being asleep at the switch when it came to the need for adequate oversight and regulation of two of the Investment banks. It faults Alan Greenspan for favouring deregulation and for having underestimated the toxicity of the home mortgage market. But it absolves him, in my view correctly, of the claim that his low interest rate policy was to blame. It also faults Ben Bernanke for initially underestimating the scope of the problem.

It also partly  blames Henry Paulson, the former U.S. treasury secretary for underestimating the scope of the housing problem. It blames the Bush administration for mishandling the bankruptcy of Lehman brothers. It also blames the Clinton administration for exempting over the counter financial derivatives from regulation.It also faults the Securities and Exchange Commission for failing to require the banks to hold adequate capital reserves to cover their risky bets.

The Commission apparently believes the collapse could have been prevented had proper regulatory oversight been exercised and faults many players for greed, incompetence and excessive risk taking citing AIG executives for not knowing that their credit default swaps subjected the firm to enormous risks and Merrill Lynch banking executives for not understanding how their mortgage products might fail. The commission also points out that the industry essentially captured the regulators through huge amounts spent on lobbying and campaign contributions.

In the light of these findings it is incredible that the banking industry is once again lobbying fiercely to exempt its industry from regulation or supporting policies that come from the discredited laissez-faire 'let the market do it, it knows best' school of thought. Can memories be this short ? The chutzpah is monumental.

Hyman Minsky and Maynard Keynes should be compulsory reading for every bank executive, every federal banking regulator and every member of congress who wants to understand the nature of risk and role of the financial markets.

U.K. economy shrinks by 0.5 % 4th quarter 2010

The latest GDP growth data for Britain shows that the economy actually contracted by 0.5 % in the final quarter of 2010. Despite this clear evidence of continuing weakness, the Chancellor obstinately proclaims the wisdom of his austerity policy which can only reinforce the contractionary trend now underway. With many more cuts in government spending and programme employment to come it is not possible for the British economy to grow in the way that George Osborne and the coalition government claim that it will. People in Britain will have to batten down the hatches for the economic storm that awaits them until the government sees the light and changes course. It is critical that the Bank of England keep interest rates as low as possible in order to offset some of the contractionary impulses coming from fiscal policy based on the false gods of deficit reduction through austerity as opposed to unemployment reduction through stimulus. Gavyn Davies in the F.T. argues that the data is based on skewed data from the last quarter affected by the heavy snowfall in Britain which interfered with people getting to work and therefore production. But even if this were totally true overall growth was still 0, hardly a basis for optimism for the coming months of cuts.

Irish government falls:New elections to be called.

Just as many predicted last November the European debt crisis has claimed another victim in Ireland. The Greens as they promised they would have quit the governing coalition with Fianna Fail and the governing party government has fallen apart.

New elections are to be held in late February which will surely result in a new and different co-alition coming to power from Labour and Fine Gael who perhaps during the campaign will be persuaded by the appeal of some of the other opposition politicians to renegotiate some of the more onerous terms of the austerity imposed on Ireland in return for help dealing with their financial crisis. The crisis was  brought on by the government's comittment to bail out the banks after the crash and the refusal of the European union to develop a Euro bond to help out their more vulnerable members in raising funds. Austerity is no solution and will bring great deprivation to the Irish economy and its people.

 Jonathon Swift, onetime Dean of St. Patrick's cathedral in Dublin would surely not have approved of punishing the poor for the sins of the wealthy. Hopefully , the new Irish government will agree.

Trichet warns of inflation:Its time for a discussion of the inflationary process

The head of the European Central Bank , Jean Claude Trichet is once again sounding hawkish about the risk of inflation, the need for ''fiscal discipline" and the likelihood of the Bank raising interest rates in the near future.

The problem with this sort of rhetoric is that it is based on a misconception of the inflationary process. Inflation like unemployment is actually quite a complex phenomenon. It is not simply and everywhere the result of an excessive growth in the money supply. This is particularly true during the recovery phase of what has turned out to be the worst slump and financial panic since the great depression.

 The global and European economies are subject to cartel driven price shocks , speculative pressures that emerge from the buying and selling of derivatives in the commodities futures markets as well as the pressures that emanate from the rapidly growing economies of China , India and Brazil. The European economy like other leading capitalist economies is a diverse , sectorially variegated and complex input output economy.

 Some sectors are strongly and immediately affected by cartel price pressures and because of their oligopolistic nature and the presence of strong trade unions they are susceptible to cost push price pressures.

 Others are much more competitive in nature and can operate very close to their capacity operating rates without experiencing inflationary price rise. So the picture is not black and white. Furthermore, the rate of operating capacity in most of the European economy is nowhere near the full capacity utilization rate.

Unemployment remains very high in many parts of the economy and capacity utilization still rather low.

Washing a wave of money supply across such a structure does not necessarily lead to true inflation that is properly managed by increases in interest rates. In addition, since the source of a substantial portion of whatever inflation is appearing is cartel driven, it is rather damaging and loaded with negative externalities to attack the problem by deliberately slowing the overall economy with increases in the rate of interest that will be premature.

The participants at Davos need to rethink their assessment of the inflation risks in recovery and come down on the side of the millions who will benefit from a more prolonged and robust recovery before central banks become obsessed over inflation as opposed to unemployment.

Premier Jean Charest of Québec Vindicated by Bastarache report.

The Bastarache commission led by former Supreme Court Justice Michel Bastarache has released its report on the appointment of judges in Québec. It conducted a thorough inquiry and heard the testimony of numerous witnesses concerning the allegations of the former Québec minister of Justice, Marc Bellemare who had claimed he had been subject to political pressure to appoint judges favoured by the fund raisers for the governing Liberal party. Judge Bastarache after hearing all the testimony , weighing the evidence in a meticulous fashion has concluded that the claims are unfounded and that M.Bellemare made his judicial appointments by his own free will, The report is about 300 pages long and weighs each allegation and the evidence very carefully.  M.Charest is vindicated. It will take some time but hopefully the court of public opinion will follow the lead of Bastarache's conclusions.

Judge Bastarache also has included 46 recommendations for improving the process by which judicial appointments are made to ensure greater transparency, greater diversity of candidates and greater involvement of members of the public in the selection process. The recommendations are very constructive and well thought out and hopefully most of them will be implemented by the government.

British unemployment rises to 7.9 %

The latest data from the labour force survey conducted by the British Office of National Statistics reveals that the unemployment rate for the three months ending November, 2010 has risen from 7.7 % to 7.9 %. This substantial rise in unemployment brings the total number of workers unemployed to 2.5 million. Youth unemployment also rose to about 1 million workers between the ages of 16 to 24 . The rate of unemployment for this group is now a record 20.3 %. Conditions are very likely to worsen over the coming months as the coalition government implements its ill conceived  austerity plans. Unemployment rose even in areas that used to be well known for their lower unemployment rate like London. Its unemployment rate rose to 9.2 %.

Jan.23,2010

The Labour party front bench has changed its shadow cabinet . Ed Balls who has a good appreciation of a more Keynesian approach to economic policy and how best to promote both lower deficits and fuller employment has taken over from the former shadow Chancellor, Alan Johnson, who has stepped down for personal reasons. During the race for the leadership, Balls did a good job of presenting the more Keynesian position, his position having progressed somewhat from what he had backed during the more conservative days of the Brown chancellorship, and he should be an excellent critic of the Osborne fiscal conservative ,austerity come hell or high water , position that the Cameron Clegg government has been pushing. His voice and that of his wife Yvette Cooper on these key issues will be welcome additions to the debate.

Inflation rises in U.K. largely because of rising oil prices

There has been a significant spike in the CPI in Britain. It looks at first glance that the culprit is rising oil and fuel prices which have fed through to increase transportation costs. The Government has worsened the problem by increasing a variety of fees and the V.A.T. tax to 20 %. It would be a mistake at the current level of unemployment in Britain and in the face of the proposed cuts and layoffs that the Government is announcing to add to the misery by raising interest rates. This is not the time to do this. We shall see if the Bank of England acts wisely under the circumstances and holds off raising the rates for a period of time.

Barney Panofsky's screen double Paul Giamatti wins Golden Globe -Richler would be pleased

In Los Angeles geographically distant but emotionally closer in some ways to Montreal than many realize, the Hollywood Foreign press association 's Golden Globes awarded their prize for best actor in a comedy or musical to Paul Giamatti for his portrayal of Barney Panofsky, the composite very personal character of Mordecai Richler's novel Barney's Version. Giamatti thanked Richler's family and warmly praised Montréal as a beautiful city that he still dreams about. Richler would have been very pleased.

Richler aspired to and achieved an international reputation for his art and for the city which he loved and knew very deeply. He was at home in London, New York and Paris but he was a product of Montreal and it was this city and its complex paradoxical history that shaped his work. But lest we Canadians celebrate too heartily despite Giamatti's positive comments, the L.A. Times in its coverage of the event called Giamatti's selection an upset and  Barney's Version ''the little seen Canadian film''.

Oh well, Richler would have laughed at this parochialism and so should we.

Data on unemployment selected countries

Scroll down quite some way to see the data. All data courtesy of the U.S. Bureau of Labour Statistics.If the data does not display click on "read more"

Table 1-1. Unemployment (in thousands)

An American tragedy in Arizona

Like millions of Americans and millions of people world wide, Canadians like myself are shocked and horrified by the terrible senseless violence that resulted in the death of six people, including a nine year old girl, a federal judge, a young idealistic political aide, three senior citizens and  the serious wounding of 14 others including the attempted assassination of one of America's most promising young politicians, Arizona Congresswoman Gabrielle Giffords by a deranged gunman in Tucson. My deepest condolences to all of those affected by this horrible event and I pray for a rapid recovery for those who have been wounded.

For all of us who remember the terrible years of political assassination in the 1960s this event evokes awful memories. I pray and hope that all Americans can draw from this event and transcend the passions of political difference,replacing them with the healing sentiments of shared discourse and values  and  the resolve to restore civility to public life.

Establishing monthly employment targets would be a good idea.

The table derived from the Bureau of Labour statistics(see the previous post) which shows the monthly changes in the number of non farm employees in the U.S. clearly reveals the extent of the damage inflicted by the recession and the necessity of increasing by several hundred thousand the number of new jobs created monthly  in order to substantially lower the rate of unemployment over the next two years. Since the recession began there has been a net reduction in employment of over 8 million. The labour market participation rate has also fallen, reflecting the rise in discouraged workers who have given up searching for work because of the high jobless rate. The U.S.job creation machine needs revving up and the private sector needs to start doing its part by hiring workers, with the help of government where necessary. Corporations have plenty of money sitting on the sidelines to do this with. It is time that they began to spend it.

The public sector which has already done a fair bit through stimulus and public private partnerships (though the stimulus packages were unfortunately too small given the enormous size of the collapse) but now its time for the two sectors to work together to restore prosperity. State and local governments who lack the funds to hire and maintain employment should be helped by the federal government since it makes little sense, if the positive work done at the federal level is undone by layoffs at the state and local level.

But the idea of publicly announced targets is to create a climate and a strategic plan that can be acted upon and help deliver the results that are needed. It also will help analysts better explore and understand the inter industry connections that generate employment and how they can be better assisted  in their performance. The U.S.needs a minimum of 250-300,000 new jobs each month plus the elimination of as many job cuts as possible to achieve a substantial reduction in the rate of unemployment over the next two years. Even more per month, say 350,000 would be a good target to aim for.

One of the ways of helping people at very low income levels is to develop programs that are locally and community based that emphasize the arts, community assistance, helping the elderly, single parents and other in need of aid . The programs could be jointly sponsored by corporations, charitable foundations, and governments, paying stipends to individuals for periods of months to help them do good works and invigorate popular culture and the arts and to boost morale while the recovery grows. Artists and voluntary simplicity people who know how to thrive on low incomes should be brought in as advisors and organizers of such local programs.  Residential rehabilitation construction projects that paid small grants to home owners to repair their homes, improve insulation, install solar panels and so on  would also be helpful in improving conditions in the construction area.

Overcoming a slump is like fighting a war. It requires courage,energy, organization, commitment, good intelligence , good policy,logistics,  and a morale boosting vision. All of this is needed at the decision making centre.

U.S. unemployment falls to 9.4 % in December

8:32 -8:45 a.m.

The American unemployment rate has fallen to 9.4 % from its previous level of 9.8 %. U6 the broader measure of unemployment has also fallen from 17 %  to 16.7 %. This is  definitely positive news. The labour participation rate has also fallen by 0.2 percentage points as more former active participants left the work force as discouraged workers than in previous months or simply retired.As the economy gradually recovers and unemployment falls, more of these discouraged workers will re-enter the labour market thereby slowing the rate of drop in the unemployment rate. There were some 103,000 additional new jobs in the non farm sector principally in the leisure industries, arts and entertainment and other services. The federal government gained 10,000 employees but state and local governments lost a total of 20,000 jobs so the net impact from the government sector was negative.Not what is needed and the product of fiscal conservatism and limited resources at the state and local level. Overall manufacturing employment remained stable.Construction stagnant.

Some analysts had predicted a larger gain in new employment but the gain that has occurred is welcome news nonetheless. As the new stimulus makes its way through the economy and animal spirits among employers and investors improves the rate should continue to drop by small amounts with occasional setbacks so long as the fiscal conservatives in  Congress are held in check.

In Canada despite a small rise in the number of people employed the headline unemployment rate remained at 7.6% for December.

The table below is reproduced courtesy of the U.S. Bureau of Labour statistics. Its shows quite clearly the size of the task ahead. We can easily compare the recovery phase of the 1981-83 recession and the 1990-92 recession with current circumstances. In the 1980s recession, recovery in the employment markets only began in January of 1983 when for the first time in 17 months there was an actual rise in employment as opposed to a fall in the numbers. In that month there were 225,000 additional new employees compared to the previous month. The next month, February the employment numbers reverted to a reduction of 78,000 but for every month thereafter with the exception of August of 1983 and  June 1986 the numbers were all positive until the next recession was underway in August of 1990. Also note the size of the monthly additions at the beginning of the recovery typically in the 200,000 plus range.

After recovery was well established and the unemployment rate had dropped substantially the size of the monthly additions diminished from time to time to substantially lower levels but the numbers remained positive all the way through to the summer of 1990 when the new recession was underway.In the recovery phase of the 1990s recession however the positive numbers began appearing in the summer of 1991 and for the next 15 months they were very modest indeed, averaging less than 100,000 per month.
The unemployment rate  dropped only modestly over that time period. But during  the next twelve months the additions to the ranks of the employed were between 161,000 and  173,000 per month in two of the months and were in excess of 240,000 in nine of the months. It may well be that this recovery is closer to that of 1992-95 than the recession in the early 1980s.

MONTHLY ADDITION TO U.S. NON FARM EMPLOYMENT (1000s)

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	Annual
1980	131	79	112	-145	-431	-320	-263	260	113	280	256	195
1981	95	67	104	74	10	196	112	-36	-87	-100	-209	-278
1982	-327	-6	-129	-281	-45	-243	-343	-158	-181	-277	-124	-14
1983	225	-78	173	276	277	378	418	-308	1114	271	352	356
1984	447	479	275	363	308	379	312	241	311	286	349	127
1985	266	124	346	195	274	145	189	193	204	187	209	168
1986	123	107	93	188	125	-93	318	113	346	187	186	204
1987	171	232	249	338	227	171	346	170	229	492	231	294
1988	94	452	276	245	227	363	223	121	340	268	339	289
1989	262	258	192	173	118	117	39	47	249	111	277	95
1990	342	245	215	40	149	17	-42	-208	-82	-161	-144	-60
1991	-119	-306	-160	-211	-128	87	-47	15	35	12	-58	23
1992	49	-66	50	158	126	60	71	141	35	177	140	211
1993	310	242	-51	309	265	173	295	161	241	277	261	308
1994	268	201	462	353	331	315	363	300	354	207	423	274
1995	321	209	222	162	-16	231	79	271	245	147	148	131
1996	-19	434	263	161	323	278	232	196	220	243	296	167
1997	230	301	312	291	256	253	283	-18	508	339	303	299
1998	270	189	144	277	401	212	119	352	218	193	284	342
1999	121	410	106	376	213	266	291	192	202	408	294	294
2000	249	121	472	286	225	-46	163	3	122	-11	231	138
2001	-16	61	-30	-281	-44	-128	-125	-160	-244	-325	-292	-178
2002	-132	-147	-24	-85	-7	45	-97	-16	-55	126	8	-156
2003	83	-158	-212	-49	-6	-2	25	-42	103	203	18	124
2004	150	43	338	250	310	81	47	121	160	351	64	132
2005	136	240	142	360	169	246	369	195	63	84	334	158
2006	262	326	304	174	31	69	232	141	100	43	201	177
2007	194	104	239	92	149	55	-20	-71	52	86	128	70
2008	-10	-50	-33	-149	-231	-193	-210	-334	-458	-554	-728	-673
2009	-779	-726	-753	-528(C)	-387(C)	-515(C)	-346(C)	-212(C)	-225	-224	64	-109
2010	14	39	208	313	432	-175	-66	-1	-24	210	71(P)	103(P)
C : corrected P : prelimi