Friday, July 31, 2009

US economy appears poised to start growing again

In US economy appears poised to start growing again, Associated Press economics writer Jeannine Aversa reports:
WASHINGTON – At long last, the worst recession since World War II appears on the verge of ending.

The economy dipped only slightly in the second quarter of this year — falling at a 1 percent annual pace, better than expected. And many analysts think the economy is starting to grow again in the current quarter, setting up a long-awaited recovery.

Still, any rebound is likely to be restrained by consumers' reluctance to spend. Stressed by rising unemployment, smaller paychecks and shrunken nest eggs, Americans spent less in the second quarter. Without the full strength of consumer spending, which supplies more than two-thirds of U.S. economic activity, businesses would need to deliver more of the firepower for sustained growth.

Economists say they are hopeful that consumers, aided by the "cash for clunkers" program to boost car sales, eventually will nudge up spending. Over time, that would help stem a still-heavy wave of job losses and stimulate hiring.
"We won't have a recovery as long as we keep losing jobs," President Barack Obama acknowledged Friday.

He added: "Eventually, businesses will start growing again and will start hiring again, and that's when it will truly feel like a recovery to the American people."

The small drop in gross domestic product for the April-to-June period, reported Friday by the Commerce Department, followed a dizzying free fall in the first three months of this year. The economy plunged at an annual rate of 6.4 percent in the first quarter, the worst in nearly three decades.

Including the April-to-June period, the economy has now contracted for a record four straight quarters, for the first time on record dating to 1947. Over that period, companies and ordinary Americans have suffered a painful toll, with job losses still exceeding a net total of 400,000 each month.

Many economists had predicted a slightly worse 1.5 percent annualized contraction in second-quarter GDP, which is considered the best gauge of U.S. economic health. GDP measures the value of all goods and services — everything from cars, clothes and computers to makeup, manicures and machinery — produced in the United States.

"The recession seems to be largely over with at this point," said economist Joel Naroff, president of Naroff Economic Advisors. "We still have a long way to go to get back to full health."

Behind the better second-quarter performance were other signs of a fading recession: less drastic spending cuts by businesses, a resumption of federal and local government spending and an improved trade picture.

Businesses did end up cutting their stockpiles of goods at a record pace in the second quarter, but that carries a silver lining. With their inventories at rock-bottom, businesses will likely need to ramp up production to meet customer demand. That would stimulate the economy starting in the current quarter.

Some economists think growth in the July-to-September quarter could be more vigorous than previously forecast — possibly 3 percent annual growth or higher.

Obama's stimulus package of tax cuts and increased government spending provided some support to the economy in the second quarter. But it will have more impact in the second half of this year as it extends its reach, economists said.
In the meantime, the damage caused by this recession runs deep.

The figures released Friday provide the most compelling evidence to date that the current recession has been the worst since the Great Depression. It has taken a 3.9 percent bite out of economic activity so far, said Mark Zandi, chief economist at Moody's Before this downturn, the most painful hit came in the 1957-58 recession, when GDP fell 3.8 percent, he said.

And in revisions to GDP figures that stretch back to the Great Depression, the Commerce Department now estimates the economy grew just 0.4 percent in 2008. That's much weaker than the 1.1 percent growth the government had earlier estimated.

Even if the recession ends later this year, the job market will remain weak. Companies are expected to keep cutting payroll through the rest of this year.

The Fed says unemployment — now at a 26-year high of 9.5 percent — will top 10 percent at the end of this year. Businesses won't likely boost hiring until they're certain the recovery has staying power.

In the second quarter, businesses — including home builders — continued to cut spending, though not nearly as much as they had earlier. That's one reason the economy didn't contract as much as feared.

Consumers retreated en masse. They sliced spending at a rate of 1.2 percent in the second quarter, after having nudged up purchases at a 0.6 percent pace in the first quarter. In large part, that's because wages and salaries have fallen for the past three quarters.

With people spending less, Americans' savings rate rose sharply — to 5.2 percent in the second quarter, the highest since 1998.

As important as savings is, many economists wish that consumers would save less and spend more right now to help propel the recovery.

"I'm praying, 'God, please don't encourage American households to save a lot more just yet,'" said Nariman Behravesh, chief economist at IHS Global Insight.

Recession eases; GDP dip smaller than expected

"A new government report shows the economy sank at a pace of just 1 percent in the second quarter of the year. It was a better-than-expected showing that provided the strongest signal yet that the longest recession since World War II is finally winding down." According to the July 31, 2009 article "Recession eases; GDP dip smaller than expected" by Associated Press economics writer Jeannine Aversa, the U.S. economy is still in recession, but the decline is slowing:
WASHINGTON – The economy sank at a pace of just 1 percent in the second quarter of the year, a new government report shows. It was a better-than-expected showing that provided the strongest signal yet that the longest recession since World War II is finally winding down.

The dip in gross domestic product for the April-to-June period, reported by the Commerce Department on Friday, comes after the economy was in a free fall, tumbling at an annual rate of 6.4 percent in the first three months of this year. That was the sharpest downhill slide in nearly three decades.

The economy has now contracted for a record four straight quarters for the first time on records dating to 1947. That underscores the grim toll of the recession on consumers and companies.

Many economists were predicting a slightly bigger 1.5 percent annualized contraction in second-quarter GDP. It's the total value of all goods and services — such as cars and clothes and makeup and machinery — produced within the United States and is the best barometer of the country's economic health.

"The recession looks to have largely bottomed in the spring," said Joel Naroff, president of Naroff Economic Advisors. "Businesses have made most of the adjustments they needed to make, and that will set up the economy to resume growing in the summer," he predicted.

Less drastic spending cuts by businesses, a resumption of spending by federal and local governments and an improved trade picture were key forces behind the better performance. Consumers, though, pulled back a bit. Rising unemployment, shrunken nest eggs and lower home values have weighed down their spending.

A key area where businesses ended up cutting more deeply in the spring was inventories. They slashed spending at a record pace of $141.1 billion. There was a silver lining to that, though: With inventories at rock-bottom, businesses may need to ramp up production to satisfy customer demand. That would give a boost to the economy in the current quarter.

The Commerce Department also reported Friday that the recession inflicted even more damage on the economy last year than the government had previously thought. In revisions that date back to the Great Depression, it now estimates that the economy grew just 0.4 percent in 2008. That's much weaker than the 1.1 percent growth the government had earlier calculated.

Also Friday, the government reported that employment compensation for U.S. workers has grown over the past 12 months by the lowest amount on record, reflecting the severe recession that has gripped the country.

Federal Reserve Chairman Ben Bernanke has said he thinks the recession will end later this year. And many analysts think the economy will start to grow again — perhaps at around a 1.5 percent pace — in the July-to-September quarter. That would be anemic growth by historical measures, but it would signal that the downturn has ended.

Naroff said he now thinks growth in the third quarter could turn out to be much stronger because companies will need to replenish bare-bone stockpiles of goods.

"You could get a huge swing in inventories that could create a much bigger growth rate than anybody expects," he said.
If that were to happen, it's possible the economy's growth could clock in around 4 percent in the current quarter, he said.
Obama's stimulus package of tax cuts and increased government spending provided some support to second-quarter economic activity. But it will have more impact through the second half of this year and will carry a bigger punch in 2010, economists said.

Even if the recession ends later this year, the job market will remain weak. Companies are expected to keep cutting payroll through the rest of this year, but analysts say monthly job losses likely will continue to narrow.

Still, unemployment — now at a 26-year high of 9.5 percent — will keep rising. The Fed says it will top 10 percent at the end of this year. Businesses will be unlikely to boost hiring until they're certain the recovery has staying power.

In the second quarter, businesses continued to cut all kinds of spending, but not nearly as much as they had been, one of the reasons the economy didn't contract as much.

For instance, they trimmed spending on equipment and software at a 9 percent pace in the second quarter, compared with an annualized drop of 36.4 percent in the first quarter. Similarly, they cut spending on plants, office buildings and other commercial construction at a rate of 8.9 percent, an improvement from the annualized drop of 43.6 percent in the first quarter.

Housing — which led the country into recession — continued to be a drag on the economy. Builders cut spending at a rate of 29.3 percent, also an improvement from the 38.2 percent annualized drop reported in the first quarter.
Consumers, meanwhile, did a slight retreat in the spring.

They sliced spending at a rate of 1.2 percent in the second quarter, after nudging up purchases at a 0.6 percent pace in the first quarter. It turns out that consumers didn't nearly have the appetite to spend in the first quarter as the government previously thought, according to revisions released Friday.

With consumers spending less on everything from cars to clothes, Americans' savings rate rose sharply — to 5.2 percent in the second quarter, the highest since 1998.

A return to spending by governments helped economic activity in the spring. The federal government boosted spending at pace of 10.9 percent, the most since the third quarter of 2008. And state and local governments increased spending at a pace of 2.4 percent, the most since the second quarter of 2007.

An improved trade picture also added to economic activity in the spring. Although exports fell, imports fell more, narrowing the trade gap. That added 1.38 percentage points to second-quarter GDP.

The convergence of a collapse in the housing market, a near shutdown of credit and a financial crisis created what Bernanke and others have called a perfect storm for the economy. Those negative forces — the scale of which hasn't been seen since the 1930s — plunged the country into a recession in December 2007. It is the longest since World War II.

Bad bridges passed up for stimulus cash

According to the July 31, 2009 article "Bad bridges passed up for stimulus cash" by Associated Press writers Brett J. Blackledge and Matt Apuzzo illustrates the conflict inherent is stimulus spending. If the goal is to improve the economy quickly, then the government should increase purchases of newly produced goods and services as soon as possible. Deserving long-term projects may not be funded because their primary economic benefits occur in the future:
WASHINGTON – Tens of thousands of unsafe or decaying bridges carrying 100 million drivers a day must wait for repairs because states are spending stimulus money on spans that are already in good shape or on easier projects like repaving roads, an Associated Press analysis shows.

President Barack Obama urged Congress last winter to pass his $787 billion stimulus package so some of the economic recovery money could be used to rebuild what he called America's "crumbling bridges." Lawmakers said it was a historic chance to chip away at the $65 billion backlog of deficient structures, often neglected until a catastrophe like the Minneapolis bridge that collapsed two years ago this Saturday.

States, however, have other plans. Of the 2,476 bridges scheduled to receive stimulus money so far, nearly half have passed inspections with high marks, according to federal data. Those 1,123 sound bridges received such high inspection ratings that they normally would not qualify for federal bridge money, yet they will share in more than $1.2 billion in stimulus money.

The wooden bridge built in 1900 carrying Harlan Springs Road in Berkeley County, W.Va., is one of the nation's unsafe structures not being repaired. About 2,700 cars cross it every day. But with holes in the wooden deck and corroded railings and missing steel poles, only one car at a time can travel the 300-foot rickety span.

The bridge is an example of how Obama's call to spend recovery money quickly — on "shovel ready" projects to get people back to work — has clashed with other goals of the stimulus, such as targeting high-unemployment areas and rebuilding the nation's infrastructure. State transportation officials say the need for speed makes it hard to funnel money into needy counties or to take on extensive bridge repairs that can involve years of planning and construction.

Repaving or widening roads requires less planning and can be done quickly, which is why such projects account for 70 percent of the $17 billion in transportation stimulus money approved so far. Bridge projects represent 12 percent.
The spending decisions by states are OK with the Obama administration.

Ed Deseve, the president's chief executive of the stimulus, said the administration understands the desire to tackle "longer-term, gleam-in-the-eye projects" but told states "please, give us your shovel-ready projects."

The idea, he said, was to provide an immediate jolt to the nation's economy.

"We're delighted states are able to move quickly," Deseve said.

A few states, such as Virginia and South Carolina, are targeting their troubled bridges. In all, 1,286 deficient or obsolete bridges are expected to share $2.2 billion in stimulus money for repairs, the AP analysis shows.

But that's less than 1 percent of the more than 150,000 bridges nationwide that engineers have labeled deficient or obsolete. Of those, more than 39,000 are considered the worst, rated poor in at least one structural component and eligible to be replaced with federal money.

William Stubblefield, a Berkeley County, W.Va., commissioner, said he's confident state transportation officials are monitoring bridge safety and money will come soon for his county's bridges. The wooden bridge in Berkeley County is among more than a third of the state's 7,064 bridges deemed deficient or obsolete by inspectors.

Safety problems are so obvious on some spans, like the Harlan Springs bridge, that engineers have restricted traffic.
"If we're seeing some obvious deterioration, that's too late," Stubblefield said.

For its analysis, the AP asked each state and the District of Columbia to identify every bridge on which it planned some work using stimulus money. In some states that represented a final list. In others, new projects could be added. Most states provided project costs, but some did not. Some states included in their costs other road work related to the bridge project, like paving or widening nearby roads.

The AP then researched each bridge using the latest inspection data available from the Transportation Department.

This analysis found that:
• Many states did not make bridge work a priority in stimulus spending. More than half plan work on fewer than two dozen bridges and 18 states plan fewer than 10 projects.
• In 24 states, at least half of the bridges being worked on with stimulus money were not deficient.
• In 15 states, at least two-thirds of the bridges receiving stimulus money are not deficient.

Transportation officials said the stimulus program's mandates — shovel-ready projects that can be finished in three years and create jobs quickly — made it nearly impossible to focus on bad bridges that weren't already scheduled for repairs.

"The feds had their own priorities, and their big priority was jobs and the economy. As a result, we had to move things quickly. I don't fault that," said John Zicconi, spokesman for the Vermont Agency of Transportation. "Nobody put the stimulus together as an answer to all our bridge issues. It was about putting people to work."

That's not exactly how it was billed. Obama pointed to the construction of the Golden Gate Bridge during the Great Depression as an example of how transportation money in the new stimulus law could "remake the face of the nation."

"It's what we're doing once more, by building a 21st century infrastructure that will make America's economy stronger and America's people safer," Obama said in March.

While the stimulus will pay for a few such projects, like the massive new Cleveland Innerbelt Bridge, for the most part the money will not build a 21st century transportation system. It will repave the 20th century system.

Democrats helping Obama campaign for the stimulus program singled out bridge repairs when promoting the bill. In a conference call with reporters before passage, Rhode Island Sen. Jack Reed said a bridge in Providence would benefit from the recovery program.

"If we fix that bridge, we're not only putting people to work, but we're going to speed, literally speed our economic activity," Reed said.

The Pawtucket River Bridge may have helped Reed make his point, but it was already on track to be repaired and is not part of the state's stimulus plan. Rhode Island, the state with the nation's highest percentage, 52 percent, of bad bridges, so far plans to use stimulus money to work on only six of its 397 deficient or obsolete structures.

After the stimulus bill was passed in February, Massachusetts Gov. Deval Patrick was asked on National Public Radio to list projects the stimulus would fund.

"I can tell you that, for example, we have some prominent bridges that are structurally deficient that we want to get to as soon as possible for reasons of safety," Patrick said.

But Patrick knew that months earlier he and state legislators had passed a $3 billion bridge program that didn't rely on stimulus money. Massachusetts, a state with more than half of its 5,063 bridges deemed deficient or obsolete by inspectors, so far is spending recovery money on only one bridge.

Some states did decide early to target bad bridges with economic recovery money.

In Virginia, state bridge engineer Kendal Walus recalled bosses telling him last fall, as talk of a stimulus was just beginning, that the state would probably make bridges a priority.

"They said, get as many bridge projects as I could get and they'd be willing to entertain it," Walus said.

With more than 1,200 deficient bridges in the state and an estimated $3.7 billion needed to repair or replace them, there were lots of choices. Engineers selected small bridges that could be fixed without the long engineering process and environmental permitting normally required for larger structures. Walus said engineers worked long hours this winter tying up loose ends to get those projects ready to go.

As a result, 69 of the 73 Virginia bridges receiving stimulus money are either deficient or obsolete, according to inspection records.

But targeting deficient bridges with new federal money isn't as easy as it sounds, officials in other states said.

Washington state, for example, struggled with a plea from King County officials to help pay for the replacement of the 75-year-old drawbridge that serves as a major corridor in Seattle and connects two of the city's industrial areas. The bridge's cracked concrete foundations, widespread corrosion in steel beams and deteriorating moveable spans make it one of the nation's worst still in daily operation — scoring a 3 out of 100 for structural sufficiency.

State officials couldn't commit stimulus money to the project, which already was getting local and state funds, said Paula Hammond, the state's transportation secretary. The South Park bridge was not a state priority, and officials needed to focus on projects that could be completed quickly, Hammond said.

"Every state is going through this because speed was a major, major factor for us," she said.

More than a quarter of Washington's 7,763 bridges are either deficient or obsolete, inspection records show.

With $27 billion in highway and bridge money, the stimulus provided an important stopgap but is too little to remake the U.S. transportation infrastructure, she added.

"If you wanted that to happen," Hammond said, "you'd probably have to multiply that number by 10."

Thursday, July 30, 2009

Tax sodapop to fight fat, US health officials say

Economic policy in two sentences: (1) If you want more of something, subsidize it. (2) If you want less of something, tax it. The July 30, 2009 article "Tax sodapop to fight fat, US health officials say" by Karin Zeitvogel discusses a proposal to tax soda to discourage its consumption:
WASHINGTON (AFP) – US health sheriffs want to ride the sugary drinks that are helping to make Americans fat out of town, or at least off Americans' menu of choice, and one way they suggest going about it is by taxing sodapop.

"The average American consumes roughly 250 calories more today than they did two or three decades ago, the head of the Centers for Disease Control and Prevention (CDC), Thomas Frieden, said at the "Weight of the Nation" conference on obesity held in Washington this week.

"And of that, about 120 calories is in the form of sodas and other sugared food and beverages," he said.

The average daily recommended caloric intake for adults is about 2,000 calories per day, a number that varies depending on a person's sex, height, weight and rate of activity.

Two-thirds of American adults are obese or overweight -- or shaped more like the bulbous Orangina bottle than the hourglass classic Coca-Cola bottle -- and obesity-related illnesses cost the United States nearly 150 billion dollars a year, health officials at the conference were told.

A soda tax would not only help Americans to slim down but could raise revenues that would help to offset the rising sums spent to treat preventable health conditions caused by obesity.

"The estimates we've seen suggest that a one-penny-per-ounce tax nationally would raise something in the order of 100 to 200 billion dollars over a 10-year time frame, as well as significantly reducing caloric intake -- at least from soda and sugar-sweetened beverages," Frieden said.

According to Julie Greenstein of the Center for Science in the Public Interest (CSPI), around 40 of the 50 US states already have soft drink or junk food taxes, but they are usually too low to have an effect on consumption.

The CSPI, which has advocated for health, nutrition and food safety in the United States since 1971, says a soft drink tax would "be a great way to pay for health reform and expansion" and wants to see such a tax imposed nationally.

A tax on soft drinks was included as a possible option in the health reform bill drafted by the Senate finance committee, said Greenstein, although she was unsure if the proposed levy would make it through to the final version of the proposed health care legislation.

"The soft drink industry has a very powerful lobby," she said.

Last week, the Coca Cola Corporation was quoted in the Financial Times as saying that "the consumer in this environment is not ready for a tax on a basic staple like non-alcoholic beverages."

Frieden has based his call for a soda tax on the campaign he instigated in New York City, where he was health commissioner for seven years, which practically ran the Marlboro man out of town.

A year after he became health commissioner of New York in 2002, Frieden started raising taxes on cigarettes to the point where if you buy a packet of 20 in the Big Apple today, you don't get much change from 10 dollars.

He reasoned that people would kick their cigarette habit if it cost too much. And he was right.

"We reduced adult smoking by 25 percent and teen smoking by 50 percent in six years. About half of that reduction was the result of taxation," Frieden said.

A similar tactic applied to sodas could help to cut consumption of the sugary drinks, he reasoned, but added that the decision to impose a national soda tax was one for the politicians, not health officials.

"Whether it gets done is a political question, but what we can say as the nation's prevention agency is that obesity is an enormous problem, and price interventions are likely to be effective," he said.

The Reemergence of Barter

One of the primary functions of money is to facilitate trade. Yet, in the modern economy, some businesses are returning to barter - trade without money. The Internet facilitates the exchange of information and has made barter feasible in some instances.

A few companies have emerged to facilitate barter in the modern economy:

ITEX is "A nationwide community of small businesses trading for what their businesses need and their families want...without spending cash."

International Monetary Systems (IMS) is "the largest full-service, membership-based trading network in the United States. We started from our home office in New Berlin, Wisconsin in 1985. Since then, we have steadily and carefully cultivated the most respected trade dollar in circulation today and have grown the most comprehensive trading network of business people in the history of barter trade."

Deficit: What caused it, why it matters

In the July 30, 2009 CNNMoney article, "Deficit: What caused it, why it matters," Alan J. Auerbach and William G. Gale report that "the government is spending more than it's bringing in. A lot more. The result is a deficit. Here's why that gap must be brought under control."
WASHINGTON ( -- When George Bush took office at the beginning of 2001, the federal government was running a substantial budget surplus and projected rising surpluses "as far as the eye could see." Now, the United States is facing massive current deficits -- as a share of the economy, the largest since World War II -- and an increasingly dire and unsustainable outlook over the next 10 years and beyond.

How did we get into this fiscal mess? To quote a character in Ernest Hemingway's classic novel, "The Sun Also Rises," when asked by another how he lost his wealth, "Two ways. Gradually and then suddenly."

The gradual part was a series of policy actions adopted during the Bush administration. In 2001, the Congressional Budget Office projected that the 2008 budget would show a surplus equal to 4.5% of gross domestic product. The actual 2008 budget ran a deficit of 3.2% of GDP. Almost all of the reversal was the result of policy changes -- tax cuts and spending increases.

Then, in 2009, the bottom fell out.

Financial markets collapsed and the economy went into a free fall.
While the economy is beginning to show signs of stabilizing, the deficit has deepened and is on course to be roughly 13% of GDP this year. About two-thirds of the swing is due to the troubled economy and the other third due to policy responses to the downturn.

During a strong cyclical downturn, big deficits are not just a necessary evil but can actually do a fair amount of good. So, while the current deficit is striking, it is not a problem in and of itself, especially if it falls to more typical levels in the next few years.

Looking into the future, it ain't pretty

The real problem is the medium- and long-term outlook.

Analysts have long emphasized that the country faces a long-term budget problem as a consequence of our rapidly growing old-age entitlement programs.

But now even the 10-year outlook is unsustainable. By 2019, even if everything goes the way the Obama administration wants, and the economy recovers and grows steadily over the next decade, the deficit will be 5.5% of GDP, an extremely high figure in good times, and the debt-to-GDP ratio will hit 82%, its highest level since just after World War II, and will keep rising.

And things aren't as likely to go as well as President Obama hopes. The economy has already performed worse than was assumed in the budget projections, and the projections are based on heroically optimistic assumptions about the political discipline Congress will impose on itself. And, of course, the problem will deepen, continually and inexorably, after 2019, as spending on Medicare, Medicaid and Social Security will grow rapidly.

Large chronic deficits are a serious economic problem. While much attention is given to the effect of deficits on interest rates, that effect is a symptom of a problem, not the problem itself.

If they are financed domestically, deficits will gradually divert capital from productive domestic uses, through a rise in interest rates. This diversion reduces the amount of capital available to U.S. workers, lowering their wages and hence their living standards. If our deficits are financed from abroad, interest rates may not rise as much, but interest payments on these deficits will flow back abroad.

In either case, the future national income of the United States and its citizens is reduced, businesses will find it harder to expand and homeowners will find it tougher to get credit.

Deficits can also affect the economy more suddenly. The prospect of large or out-of-control deficits can spark investors' fears and cause a run on the dollar and a sharp rise in interest rates.

Time to act, but it won't be easy

President Obama and Congress need to address these looming fiscal shortfalls. But it's not that simple. The economy's health must be their primary concern, particularly with most projections seemingly pointing toward a slow, muted recovery after the current recession ends.

And this continuing economic weakness creates a difficult balancing act. Fiscal stimulus can help the economy in the short run, but fiscal discipline is needed in the long run.

So when should policymakers make the switch?

Imposing fiscal discipline too late risks precipitating a crisis in financial markets. Imposing fiscal discipline too soon risks weakening the recovery or worsening the recession, as actually happened in the United States in the 1930s.

The Great Depression actually consisted of two severe downturns, the second starting in 1937 when the federal government imposed fiscal restraint.

Policymakers can thread this needle by committing now to future spending cuts and tax increases, while at the same time being careful not to undo the current stimulus or hurt economic prospects right now. Getting this mix right will require luck, discipline, imagination and leadership.

Alan J. Auerbach is a professor of economics and law and director of the Burch Center for Tax Policy and Public Finance at the University of California, Berkeley. William G. Gale is vice president of the Brookings Institution and co-director of the Urban Institute-Brookings Institution Tax Policy Center, a nonpartisan organization that aims to educate and inform tax and fiscal issues for policy makers and the public.

Looking for someone to blame for U.S. dependence on foreign oil? How about Ronald Reagan?

"Had Reagan left those CAFE standards in place, and the US had continued to conserve oil at the same rate as it had from 1979-85, the US today would be importing not a single drop of oil from the Persian Gulf." - Paul Abrams in his September 3, 2008 article "There is a 'Villain' In Our Dependence on Foreign Oil and His Name is Ronald Reagan." The article says:
Republicans in Minnesota have become born-again alternative-energy zealots, not to save the planet from global warming (their VP candidate does not believe that man's activities contribute to the problem), but for another laudable goal, eliminating our dependence on foreign sources of energy. At least they get that part of it.

At the same time, in nearly every other phrase, the Republicans will praise Ronald Reagan in worshipful terms. They will attempt to be courteous to the 2 George Bushes, but will immediately cover themselves by referencing Reagan. Indeed, as soon as George W finished his speech yesterday praising John McCain, the convention cut to a picture of Reagan. God is alive and well in St. Paul.

Yet, if there were a single major villain responsible for our dependence on foreign oil it is Ronald Reagan himself.

During the rise in the oil prices following the Iranian revolution, President Jimmy Carter announced policies that would prevent the US from ever importing a single drop of oil more per year than in 1979. The program included subsidies for alternative energies and serial increases in the efficiency (C.A.F.E. = corporate average fuel economy) standards for automobiles

Carter called it, presciently, "the moral equivalent of war". Anyone today doubting Carter's insight? Any takers at the Republican National Convention?

Regrettably, a Republican PR operation realized that the acronym spelled out "m.e.o.w", and they pounced on the program using "meow" to ridicule it. Ronald Reagan then convinced the American people that conservation was beneath them, and he not only cut the subsidies, he also phased out the CAFE standards.

It may bear repeating the obvious: every gallon of oil saved by efficiency is a gift that keeps on giving, year-after-year another gallon is not burned. By contrast every gallon produced is used once, and is then gone forever. Of course, oil companies do not make money when you do not burn that gallon every year.

And, now, the tragic truth: had Reagan left those CAFE standards in place, and the US had continued to conserve oil at the same rate as it had from 1979-85, the US today would be importing not a single drop of oil from the Persian Gulf. Not one. Zilch. Zorch. Nada. (See, e.g., Amory Lovins, "Energy Security Facts", Rocky Mountain Institute).

Imagine what benefits there would have been had Reagan not used the Iranian situation for partisan political gain. Start with Detroit. Instead of being far behind the efficiency curve, and losing out to foreign competitors (from countries where the price of gasoline was higher, and thus were producing higher efficiency engines), US automakers would be healthy, and right in the thick of it. Employment levels would be up in Michigan, and high wage jobs would be growing not shrinking. Add to that US ingenuity, and we may well have been the leaders in the world in fuel-efficient and/or alternative energy using automobiles.

Jump now to our foreign debt. Instead of being beholden to close allies like China to hold (and not demand payment) of our debt, our balance of payments would be, if not positive, at least not nearly so negative. The dollar would be higher, as countries would have more confidence in the greenback's value.

Consider our foreign policy. We would no longer be at the mercy of rogue nations, and those countries would not have the resources to support their terrorist activities and their pursuit of weapons of mass destruction. To be sure, North Korea and Pakistan, and even Israel, have shown that even poor nations can develop nuclear weapons, but North Korea has done so in part because they believe there is a potential market for their technology among the oil-producing states and Pakistan was likely funded by Libya and other oil-producers. Israel was aided by France. Without dealing in absolutes, we can confidently assert that the world would have been a far less dangerous place.

Consider health. Our air would be cleaner. Asthma rates in children have doubled almost every decade, and asthmatic attacks have become a major cause of absences among schoolchildren. Large populations of young children chronically inhale steroids to prevent such asthmatic attacks.

Oh yes, what about the small matter of global warming? Let us just say that our challenges in preventing future catastrophe would be far less daunting. To warm the cockles of Republicans' hearts, Al Gore may never have won the Nobel Prize.

Ronald Reagan does not deserve all the blame. Having outflanked the Democrats politically on both energy and tax policy, the progressive impulse among the opposition vanished with Reagan's landslide victory in 1984. Bush, always trying to ape Reagan to outdo his father, managed to cancel the remaining tax-credits for purchasing hybrid cars, weakened efficiency standards for nearly everything, provided enormous tax breaks for Hummers and other gas-guzzlers.

Outside the Republican convention, however, that victory rings very hollow 25 years, two World Trade Center towers and two Persian Gulf Wars later.

The next time you fork out $50 to fill your tank with gas, or send your son or daughter off to Iraq, thank Ronald Reagan (with a tip of the hat to George W Bush).

A similar account of this story occurs on pages 14-16 of Thomas L. Friedman's Hot, Flat, and Crowded.

Wednesday, July 29, 2009

American Voters To Congress: Reduce The Deficit, Don’t Raise Taxes, And Don’t Cut Services

In the July 29, 2009 CBS News article "Poll: Americans Want Deficit Reduced," Brian Montopoli reports that U.S. citizens say they want the federal government budget deficits reduced, yet they are unwilling to make the necessary sacrifices or higher taxes or reduced government services:
A majority of Americans believe that the federal government should focus on reducing the budget deficit rather than spending to stimulate the economy, a new CBS News/New York Times poll finds.

Asked whether the government should focus on deficit reduction or stimulus spending, 58 percent of those surveyed cited deficit reduction. Thirty-five percent, meanwhile, said the government should spend more to stimulate the economy.

Republicans and independents were more likely than Democrats to favor deficit reduction. Seventy-nine percent of Republicans and 59 percent of independents preferred that the government focus on reducing the deficit, while nearly half of Democrats cited a preference for more stimulus spending.

While Americans overall favor deficit reduction, however, a majority are not willing to pay more in taxes or give up services in areas such as health care, education, and defense spending to do so.

Read The Complete Poll (pdf)
Only 31 percent said they supported a cut in services to lower the deficit, while 53 percent opposed it. And while 41 percent said they would be willing to pay higher taxes to reduce the deficit, 56 percent said they would not.

Blogger Doug Mataconis responded by saying:
This is exactly what’s wrong with American politics, and it’s exactly what got us into the mess that we’re in today.
Americans like to tell themselves that they believe in limited government and don’t like the massive deficits and national debt that we’ve run up over the past several decades. The dirty little secret, though, is that most of us are lying to ourselves. We like the government subsidies — and, yes, things like the home mortgage interest deduction and the charitable contribution tax deduction are subsidies — and we like the government programs. And, of course, we all hate paying higher taxes. So, when push comes to shove, nobody wants to do the hard things that will be necessary to return the nation to fiscal sanity.
As these poll internals reveal, it’s something that cuts across party lines:

Saying that you want to see the budget deficit reduced, but being against the only two methods of doing so is nothing more than phony political posturing. Which is apparently what America is reduced to these days.

Tuesday, July 28, 2009

Coin tosses my not be a 50-50 chance.

According to David E. Adler's July 28, 2009 article Flipping Out, based on his book Snap Judgement "Think a coin toss has a 50-50 chance? Think again." Adler claims:
Coin tosses are a classic metaphor in economics for randomness. For instance, in his book about market efficiency, A Random Walk Down Wall Street [4], economist Burton Malkiel compares the price movements of the stock market to the random outcome of a flipped coin: "[S]ometimes one gets positive price changes for several days in a row; but sometimes when you are flipping a coin you also get a long string of ‘heads' in a row." According to Malkiel, mathematicians' terms for the sequences of numbers produced by any random process—in this case a coin flip—is known as a random walk. To him, this is exactly what stock price movements look like; hence the title of his book.

Similarly, Nassim Taleb, in Fooled by Randomness [5], points out that the seemingly amazing success of money managers at beating the market is often best explained by pure chance. Randomness alone could easily explain why any one manager could do well for several years in a row. Instead, people misperceive patterns in what are, in fact, purely random sequences, akin to the outcomes of a coin flip. And as everyone knows, coin flips produce "heads and tails with 50% odds each."

Lately, the idea of randomness in stock market prices has come under attack; prices for individual stocks (but not the market on the whole) often show small momentum effects: Stocks that go up tend to keep going up, and stocks that are going down tend to keep going down. But the metaphor of a coin flip for randomness remains unquestioned. We use coin tosses to settle disputes and decide outcomes because we believe they are unbiased with 50-50 odds.

Yet recent research into coin flips has discovered that the laws of mechanics determine the outcome of coin tosses: The startling finding is they aren't random. Instead, for natural flips, the chance of a coin coming up on the same side as it started is about 51 percent. Heads facing up predicts heads; tails facing up predicts tails.

Three academics—Persi Diaconis, Susan Holmes, and Richard Montgomery—through vigorous analysis made an interesting discovery at Stanford University. As they note in their published results, "Dynamical Bias in the Coin Toss [6]," laws of mechanics govern coin flips, meaning, "their flight is determined by their initial conditions."

The physics—and math—behind this discovery are very complex. But some of the basic ideas are simple: If the force of the flip is the same, the outcome is the same. To understand more about flips, the academics built a coin-tossing machine and filmed it using a slow-motion camera. This confirmed that the outcome of flips isn't random. The machine could make the toss come out heads every time.

When people, rather than a machine, flipped the coin, results were less predictable, but there was still a slight physical bias favoring the position the coin started in. If the coin started heads up, then it would land heads up 51 percent of the time. Part of the reason real flips are less certain isn't just that the force of the flip can vary; it's that coins flipped by humans tend to rotate around several axes at once. Flipped coins tumble over and over, but they also spin around and around, like pizza dough being twirled. This spinning around is technically known as "precession." The greater the precession in a flip, the more unpredictable the outcome.

I spoke to Holmes, a statistician at Stanford, about her research. She told me that when most people hear about this weird finding, they think it has something to do with the density of the coin, but she was able to disprove this by constructing a coin made out of balsa wood on one face and metal on the other. This made no difference to the flips. The dynamics of the coin flip, and its outcome, aren't determined by the lack of balance in the coin but instead by the physics of spinning and flipping.

The true laws of coin tosses show yet again the inadequacy of our intuition (as well as the flawed metaphors favored by economists). We are indeed fooled by randomness. But we are also fooled by nearly random processes that look random, even if they aren't, because the differences are too subtle for us to notice. And hence we continue to use coin flips as a figure of speech but also in real life, particularly in gambling and professional sports.

I asked Holmes if coin flips used for, say, football, should be eliminated because they are biased. She pointed out that there is no reason to change the way the coin flip is done, as long as the person calling the flip doesn't know how the coin is going to start out. In football, the tosser is never the caller; the tosser is supposed to be a referee. But if you are both the caller and the tosser ... well, that changes things. Knowing about the bias in coin tosses give you an edge, albeit a tiny one.

Holmes admits she still uses the metaphor of a coin toss in her statistics class at Stanford all the time—after all, the randomness in a coin toss is off only very, very slightly, with odds being 51-49. But certain people, when they flip a coin, can make it come out heads (or tails) 100 percent of the time. Diaconis, Holmes' co-author and husband, is one of the people with this amazing talent. Before becoming a mathematician, he was a professional magician. Among his proofs is that it requires a full seven shuffles to truly randomize a deck of cards [7]. He was admitted to graduate school at Harvard University after two of his card tricks were published in Scientific American.

So how exactly is Diaconis able to make a coin toss come out a certain way? Susan Holmes won't tell me: "It comes from his previous career-it's magic."

Monday, July 27, 2009

Supply and Demand


Calvin's perspectives on supply and demand

(Click to enlarge.)

Is the Recession Nearing an End?

In the July 27, 2009 editorial "GDP: Don't believe the hype," CNNMoney editor Paul R. LaMonica cautions:
Even if the government reports a surprise boost to second quarter GDP, few economists are predicting a massive recovery just yet.

This question seemed unthinkable to ask just a few months ago, but here goes: Did the economy actually grow during the past three months?

A few brave economists actually think it did. But we'll find out for certain on Friday when the government unveils its first take on gross domestic product (GDP) for the second quarter. Still, even the average forecast is for a drop of just 1.5%, significantly better than the previous two quarters.

GDP plunged 6% in the fourth quarter of 2008 and 5.5% in this year's first quarter.

"The pace of decline has slowed way down and we are seeing signs of stability. I expect a negative number in the second quarter but maybe zero growth or better for the third quarter," said Chris Probyn, chief economist with State Street Global Advisors in Boston.

Probyn argues that the recent improvement in home sales, consumer spending and exports is evidence that the recession may soon be nearing an end.

Talk back: Do you believe that the economy is really stabilizing or do you think the numbers don't tell the true story of the economy? Leave your comments at the bottom of this story.

Zach Pandl, an economist with Nomura Securities in New York, also thinks that the second quarter GDP report will reflect a stabilization in the economy and early stages of a recovery.

"The big story in terms of the second quarter is that contraction is getting close to zero. I wouldn't rule out a positive number," Pandl said. He said the primary reasons that the economy is getting closer to actually resuming growth are that businesses are finally showing a greater degree of confidence that the worst may be over.

Pandl expects a smaller decline in business investment during the quarter as well as a slower level of inventory reduction as companies begin to realize that economic conditions are slowly returning to normal after last fall's credit crunch paralyzed the financial markets.

"Companies are going through an adjustment from the shocks hitting the economy late last year," Pandl said.

Not everyone shares such a rosy view though.

"There has been an abatement of bad news rather than emergence of good news," said Diane Swonk, chief economist with Mesirow Financial, a diversified financial services firm based in Chicago. "Stabilization in a deep hole is not something to pop champagne corks over."

Swonk said she remains concerned about the effect that lingering job losses and high unemployment could have on consumers.

A weak labor market, coupled with banks continuing to tighten credit standards, could mean that even if the economy technically emerges from recession this year, a recovery could be dampened by anemic consumer spending.

Kurt Karl, chief U.S. economist with Swiss Re, agreed that consumers may still be a little cautious and that until consumers turn the corner, it's tough to imagine how the economy can show overall growth.

Karl said that there isn't likely to be as much of a boost to consumer spending from tax breaks in this year's stimulus package as there was from tax rebates a year ago.

Last year, the economy grew at a nearly 3% annual rate in the second quarter, but that turned out to be a short-term sugar rush.

"Stimulus didn't dribble out much as it did last year and some of that money was saved," he said, adding that he believes personal spending dipped slightly in the second quarter and that GDP fell at a 1.8% rate.

Finally, both Pandl and Probyn noted that the second quarter report may need to be looked at a lot more closely than most. That's because the Commerce Department will be including so-called benchmark revisions to much of the data used to calculate GDP, particularly to the savings rate and personal income.

This revision is the first since the end of 2003 and the changes could very well wind up showing that the economy was in worse shape a year ago than originally reported.

"The comprehensive revisions are going to be a bit of a wild card since it could change our view of recent history," Probyn said. "The changes will affect every quarter, and I bet that the gains in the second quarter of last year will be revised away."

While it may seem that changing the numbers from prior quarters is something that only matters to academics, that's not the case.

If it turns out, for example, that the savings rate is higher than once thought, that could be further proof that consumers are really changing their behavior. And even though that's good news for the long-term, it could make it tougher for the economy to grow at a robust pace over the next year or so.

Talkback: Do you believe that the economy is really stabilizing or do you think the numbers don't tell the true story of the economy?

Price Floor

A price floor sets a minimum price that can be legally charged in a market. It is binding if the price floor is above the equilibrium price in the market. Minimum wage laws are an example of a price floor.

See "Price as a Rationer."

The Leaner Baby Boomer Economy

The July 23, 2009 cover story "The Leaner Baby Boomer Economy" in BusinessWeek magazine emphasizes the importance of consumption (C) in overall spending on newly produced goods and services, which economists call aggregate demand (AD). The recession which began in late 2007 was caused by a decrease in aggregate demand as a result of the collapse of housing prices and insufficient regulation of financial markets that reduced loans.

The Leaner Baby Boomer Economy
The downturn is putting a crimp on baby boomers' free-spending ways, and the likes of Mercedes and Starwood Hotels are scrambling to keep up

By David Welch

Mercedes is the quintessential boomer brand. Drive down an American highway, and odds are good that the person piloting the Benz in the next lane was born between 1946 and 1962. And Mercedes-Benz (DAI) has prospered right along with America's huge postwar generation. Back in 1986, when the first baby boomers turned 40, Mercedes sold 99,000 cars in the U.S. In 2006, when those boomers hit 60, the automaker moved almost 250,000 vehicles, a fifth of its global total.

This year, Mercedes will sell a third fewer cars in America. In Montvale, N.J., Kristi Steinberg, who runs Benz's North American market research operation, has a nagging fear: that sales won't recover for a long time because boomers, history's wealthiest generation, are tapped out. "I don't know if anyone knows yet if this is a blip," she says, "or a defining moment like the Great Depression."

Executives such as Steinberg always knew boomers would curb their free-spending ways as they approached retirement. But not in their most nightmarish imaginings could they have predicted that an economic maelstrom would cripple the customers they have courted and counted on for 30 years.

When 79 million people—nearly a third of Americans—start spending less and saving more, you know it won't be pretty. According to consulting firm McKinsey, boomers' conversion to thrift could stifle the economy's hoped-for rebound and knock U.S. growth down from the 3.2% it has averaged since 1965 to 2.4% over the next 30 years. "We would have gotten here in 5 or 10 years as boomers retire, but we pushed it up," says Michael Sinoway, managing director of consulting firm AlixPartners. "Now [companies] are scared things won't come back." And that's why everyone from Mercedes to Nordstrom (JWN) to designer Vera Wang are scrambling to remake themselves for the Incredible Shrinking Boomer Economy.

Not so long ago, boomers were never going to die. Filled with a self-confidence born of unprecedented prosperity, many thought rising markets would assure their future. If the economy faltered, well, it would rebound more strongly than ever, as it had so many times before. And so boomers spent—and borrowed—as if there were no tomorrow.

Meet Tim Woodhouse, 56. He owns Hood Sailmakers in Middletown, R.I., a business that helped finance a plush life. Woodhouse owns a boat, five Ducati motorcycles, and every few years treated himself to a new Porsche 911. He figured he'd retire when he felt like it. Then the markets crashed, the economy tanked, and suddenly Woodhouse felt a lot poorer. In April, with business slowing and his real estate holdings leaking value, Woodhouse hit the brakes. "I was scared," he says. "My net worth took a real hit." Woodhouse sold the Porsche and bought a Mini Cooper. The boat spends more time tied up these days than out on the water. He and his wife dine out less often, and they don't entertain at home much either.

Woodhouse and millions of boomers like him are doing what people normally do when they near retirement: They're living more frugally. Companies have long factored in this actuarial reality, gradually tweaking their products and marketing to appeal to the next generation. With boomers, however, many companies became complacent. It wasn't that they ignored younger consumers but that they counted on boomers to keep spending longer. And why not? Until recently boomers typically reached their spending peak at age 54, according to McKinsey. Contrast that with the previous generation—a thriftier bunch whose consumption typically peaked at 47.

Now many companies are scrambling to appeal to Generations X and Y. You can already see this thrust in the stores. Clothing designer Vera Wang is selling a casual line called Lavender aimed at twenty- and thirtysomethings. It's fashion, but not the pricey garments the company typically has sold. Meanwhile, says Wang, her namesake brand needs to get a lot less expensive. In one instance, Wang made a high-end dress using fabric that costs $5 a yard instead of $12 but used the fabric in several layers to give the garment a richer look. As a boomer herself, Wang, 60, feels her generation's pain. You don't have 30 years to reinvent yourself," she says.

Even as Mercedes continues to target boomers, it has quietly recruited 500 people aged 20 to 32 for a focus group it calls Generation Benz. Mercedes researchers are seeking their views on the economy, car ads, model designs, and more. The automaker sent 20 Generation Benzers into dealerships wearing flip-flops and other casual attire to see how much attention they received. Four of the 20 were ignored. The results, says Steve Cannon, vice-president for marketing, served as a wake-up call to Mercedes dealers "that we have to start paying a lot more attention to tomorrow's customers, especially if tomorrow is coming faster than we thought."

Can younger consumers pick up the slack? Consider the demographics. Generation X, Americans born between 1964 and 1980, is generally estimated to be about two-thirds the size of the boomer cohort. And with boomers working longer, especially since the crash wiped out many retirement funds, it may take longer for Xers to move into their prime earning (and spending) years. And what about Generation Y, the 81 million-strong group born between 1981 and 1994? Right now, 14% are unemployed and will have their own hole to claw out of when the economy revives, according to Edward F. Stuart, who teaches economics at Northeastern Illinois University. In other words, companies will need boomers for years to come.

The trick will be finding a way to fulfill the needs and wants of a generation that is used to being catered to—but is now on a budget. Timothy Malefyt, an anthropologist who studies consumer trends for the ad agency BBDO New York (OMC), argues that boomers, having ridden a wave of technological change, are highly adaptable and well versed in problem-solving. (Or at least they see themselves as such.) Already, he says, they are making a virtue of value shopping, once viewed by this group as hopelessly déclassé. For many boomers it's no longer about keeping up with the Joneses, it's about outthinking them. "If you make boomers feel they've failed, you'll lose them," Malefyt says. "They want to feel they've outsmarted the system or their circumstances."

That's why some companies are coalescing around "cheap chic," a marketing conceit that has become synonymous with Target (TGT) but also has been tried by the likes of JetBlue, Ikea, and Mini. The latter is owned by BMW, another classic boomer brand. BMW didn't plan it this way, but the Mini is one solution for a company whose cars are becoming too pricey for many boomers. A fully loaded BMW 3 Series costs $40,000 plus change; a comparably equipped Mini: $25,000. The Mini, while a feat of engineering and retro style, can't compete with a BMW, which the company bills as "the ultimate driving machine." But the Mini possesses cheap chic in spades. In recent months, says BMW, fiftysomethings have been trading in their Bimmers and other luxury brands for Minis.

Starwood Hotels & Resorts Worldwide (HOT) has embarked on a crash course in cheap chic—or what it prefers to call "style at a steal." The chain has long appealed to the boomer yen for luxury and pampering. Its high-end W, Sheraton, and Westin hotels offer spacious rooms, well-staffed front desks, valets, and extensive room service menus. So the polyester sheets and small-bar soap that typify the value hotel experience wouldn't do. Starwood's 40-year-old chief of specialty brands, Brian McGuinness, also knew boomers grew up challenging convention and still like to feel that they're on the cutting edge. But they also demand creature comforts. "They once drove Beetles and ended up in Bimmers," McGuinness says. "We wanted to strike that balance." Plus, don't tell them but boomers are getting older and presumably creakier. So edgy can't equal bare-bones minimalism.

After six months of research and brainstorming, Starwood came up with two cheap chic hotel chains: Aloft, named to echo the "urban cool" of loft apartments, and Element, a low-cost option aimed at people who prefer suites with every "element" of their daily lives—including spa-like bathrooms. Early last year the team mocked up an Aloft prototype and invited some boomer-age guests to stay. The mock hotel had an aggressive neon color palette, piped-in scents reminiscent of an Indian spice market, and garage band tunes on the sound system. To help bring the room rate down to the $150-to-$170 range, they cut out full-service restaurants, room service, and valets. The test subjects were fine with parking their own cars, and most said they'd rather explore and find their own restaurants than eat in their rooms. The garage music? Not so much. Starwood replaced it with contemporary rock and international music. The neon palette gave way to muted tones, and a mild citrus replaced the spice.

Starwood has opened 25 Aloft hotels so far, and McGuinness says occupancy rates meet or exceed the average in most metro markets. Starwood won't say if the downturn prompted it to accelerate the rollout of its new hotel brands. But the company is opening two Aloft hotels each month, the fastest rate the industry has seen. David Loeb, a Robert W. Baird analyst who has been covering the hotel industry for years, says Aloft's ambience may be too hip and jarring for fiftysomethings. But he says if the chain finds the right balance, it might appeal to boomers and Generations X and Y. Starwood is advertising the new chains heavily online. "Boomers and Gen Y congregate in the same places on the Web," McGuinness says.

Starwood started changing its approach to boomers before the economy went south. Other companies are adjusting on the fly. OSI Restaurant Partners has watched its eateries lose boomer customers, whether middle-class types who frequented the company's Outback Steakhouse and Bonefish Grill restaurants or wealthier people who once dined on filet mignon at the more upscale Fleming's Prime Steakhouse & Wine Bar. OSI's chief operating officer, Paul E. Avery, reduced menu prices and offered smaller cuts of beef at Outback to maintain margins before retiring in early July. The company has gone on an ad blitz pushing the more modest portions for $9.99. This is obviously a tricky balancing act at Outback, where a big slab of meat was the chain's main attraction.

The good news, says Chief Branding Officer Jody Bilney, is that people who order the less expensive entrées typically end up buying dessert or more alcohol, so the average ticket is still about $19 per person. At Fleming's, OSI is offering more wines under $10 a glass and a fixed-price menu that caps everything but drinks as low as $36 a person. Before the downturn diners typically spent $60 apiece. OSI is responding to a recession but is prepared to run its business this way if boomers remain frugal over the long run. "If anyone tells you they know that the impact of the last 12 months is permanent or temporary, they're blowing smoke," Bilney says.

Nordstrom isn't waiting to find out. The purveyor of affordable fashion believes that its customers—many of them boomers—will be under pressure for years to come. So even as it starts building fewer full-price department stores, Nordstrom has tripled the pace for opening lower-priced Nordstrom Rack stores. It will open 13 in 2009 and nine next year. Rack stores offer Nordstrom's usual name brands but for 30% to 70% less than they fetch in the main stores. Nordstrom figures boomers still want fashion, but at a discount.

What many companies are attempting to do now has worked in the past. After the crash of 1929 few people could afford a Cadillac, so General Motors (GM) created a budget model to keep its luxury sales going. The 1934 LaSalle had art deco touches, including chrome portholes along the hood. To cut costs, GM stuck the car on an Oldsmobile chassis and gave it a smaller engine. The LaSalle's cheap chic was a hit with Depression-era drivers, and when the economy recovered, Cadillac again became a totem of material success. Of course, America was about to experience the greatest boom in history. That's unlikely to happen this time.

With David Kiley

Sunday, July 26, 2009

US hopes China talks spur economy, job creation

According to US hopes China talks spur economy, job creation, a July 26, 2009 story by Associated Press economics writer Martin Crutsinger, the United States hopes negotiations with China will result in policies more beneficial to the U.S. economy:
WASHINGTON – With the global economy mired in recession, the United States and China begin talks Monday to seek a solution together despite tensions over currencies, the U.S. budget deficit and the huge U.S. trade gap with China.
Ultimately, how well the U.S. efforts succeed could help determine how fast the economy recovers and how many U.S. jobs might be created once it does.

Other issues, such as climate control and North Korean nuclear ambitions, also will command attention. Few expect the talks to bridge the sharp differences between Beijing and Washington. But both governments want to use the occasion to help build a less confrontational relationship.

Secretary of State Hillary Rodham Clinton, who along with Treasury Secretary Timothy Geithner will be leading the U.S. delegation, praised China for being "extremely positive and productive" in pressuring North Korea to abandon its nuclear program.

"On North Korea, we've been extremely gratified by their forward-leaning commitment to sanctions and the private messages that they have conveyed to the North Koreans," Clinton said Sunday on NBC's "Meet the Press."

Three years ago, Henry Paulson, then Treasury secretary, used the U.S.-China talks to press Beijing to let its currency, the yuan, rise in value against the dollar, to make it cheaper for Chinese to buy U.S. goods. U.S. manufacturers blame an undervalued yuan for record U.S. trade deficits with China — and, in part, for a decline in U.S. jobs.

The U.S. efforts have yielded only mixed results. The yuan, after rising in value about 22 percent since 2005, has scarcely budged in the past year. Beijing had begun to fear that a stronger yuan could threaten its exports. Chinese exports already were under pressure from the global recession.

But the Obama administration intends to remain focused on the trade gap. It plans to stress at the talks Monday and Tuesday that China can't rely on U.S. consumers to pull the global economy out of recession this time. In part, that's because U.S. household savings rates are rising, shrinking consumer spending in this country.

"Perhaps the most important message we are going to have for the Chinese is that there has been a fundamental change in the U.S. economy," said a senior administration official, who briefed reporters on the meetings under rules that did not permit use of his name. "The U.S. economy is going to recover, but it is going to be a different type of recovery than what the Chinese have seen in the past."

That change will mean that the Chinese won't be able to rely on booming U.S. demand for Chinese goods to lift their economy. Instead, they will have to shift from an export-led economy to growth that's fueled in large part by rising Chinese spending.
For the United States, suffering from a 9.5 percent unemployment rate, the ultimate goal is to help put more Americans to work.

"All of this ultimately gets back to jobs in the United States," the U.S. official said. "If the Chinese can increase their domestic consumption and reduce their trade surplus, that will mean more U.S. jobs."

The official said the United States also will seek assurances that Beijing won't resort to what Washington considers protectionist trade steps. Some in Congress want to punish China for what they see as unfair trade practices that have cost Americans manufacturing jobs.

The Obama administration has filed its first unfair-trade case against China over its restrictions on exports that U.S. manufacturers need to produce steel and other products. U.S. officials said they also will raise complaints about how China handles its government contracts, a process that U.S. manufacturers say discriminates against them.

The U.S. trade deficit with China has narrowed slightly this year. The main reason is thought to be the weak U.S. economy, which has cut consumers' demand for Chinese goods.

The United States wants to reduce the gap further, with fewer Chinese trade restrictions on U.S.-made imports. Some lawmakers are pressing for a law to impose sanctions on China unless it does more to let its currency rise.

The latest round of talks will have a different look. The Obama administration has decided to expand the focus this time beyond economics. It will include foreign policy issues, including the need for China's cooperation in imposing sanctions on North Korea over its nuclear program.

Geithner and Clinton will be co-leaders of the U.S. delegation, joined by their Chinese counterparts, Vice Premier Wang Qishan and State Councilor Dai Bingguo.

The meeting will include officials from various departments. On the U.S. side, Energy Secretary Steven Chu will be part of a team of officials from the Environmental Protection Agency, the White House and the State Department involved in the global climate discussions.

The Chinese are bringing a delegation of 150 officials, one of the largest ever to visit the United States. Highlighting the importance of the meetings, President Barack Obama will address the opening session.

Chinese officials are making clear they want further explanations of what the administration plans to do about the soaring U.S. budget deficits. China, the largest foreign holder of U.S. Treasury debt — $801.5 billion — wants to know that those holdings are safe and won't be jeopardized in case of future inflation.

"The Chinese delegation, especially Vice Premier Wang, will make the request that the U.S. side should adopt responsible policies to ensure the basic stability of the exchange rate of the U.S. dollar and protect the safety of Chinese assets in the United States," Zhu Guangyao, an assistant Chinese finance minister, told reporters in Beijing.

The Chinese are likely to hear a repeat of the assurances Geithner gave them when he visited China last month. He said then that the administration is committed to cutting the U.S. budget deficit — expected to hit $1.84 trillion this year — in half once the emergency spending to ease the recession and the financial crisis are no longer needed.

So what's likely to emerge from two days of talks?

Both the U.S. and Chinese sides are playing down expectations for any major breakthroughs. But outside observers say that doesn't mean the meetings won't serve a useful purpose.

"Our economies are very intertwined, and we both have a huge impact on the global economy," said Frank Vargo, vice president for international affairs at the National Association of Manufacturers.

Economists Apologize to the Queen

Unfortunately, wishful thinking and hubris are far too common in global economic policy makers. According to "UK Economists Apologize To Queen About Crisis":
LONDON -- Sorry Ma'am -- we just didn't see it coming.

A British newspaper reported Sunday that a group of eminent economists have apologized to Queen Elizabeth II for failing to predict the financial crisis.

The Observer newspaper reported that a letter has been sent to the Queen after she demanded, during a visit to the London School of Economics last November, to know why nobody had anticipated the credit crunch.

According to the newspaper, the letter says that says "financial wizards" who believed that their plans to manage risky debts and protect the financial system were infallible were guilty of "wishful thinking combined with hubris."

Signatories to the three-page letter include Tim Besley, a member of the Bank of England's monetary policy committee and historian Peter Hennessy.

The newspaper said the content was discussed during a seminar with a group of leading economists in June, including Nick MacPherson, a permanent secretary at Britain's Treasury, and Goldman Sachs chief economist Jim O'Neill.

"In summary, your majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole," the newspaper quoted the letter as saying.

Buckingham Palace declined to comment on the correspondence, but said the Queen often discusses current issues with experts. In March, Mervyn King became the first Bank of England governor to be invited for private talks at the palace.

"The Queen always displays an interest in current issues and is kept abreast of current issues. Obviously the recession is very topical," Buckingham Palace said in a statement.

Luis Garicano, a professor at the London School of Economics, said he had discussed the origins of the crisis with the Queen during her visit. He said she had asked: "Why did nobody notice it?"

The London School of Economics was not immediately available for comment, or to provide a copy of the letter.

Price Controls

Price as a Rationer

Saturday, July 25, 2009

The Recession is Over - Now what we need is a new kind of recovery.

The Recession is Over - Now what we need is a new kind of recovery.
By Daniel Gross | NEWSWEEK
Published Jul 25, 2009
From the magazine issue dated Aug 3, 2009

In Westport, Mass., about 60 miles southwest of Boston, traffic crawls along Route 6 as drivers make their way to the nearby Atlantic beaches like Horseneck or Baker's. A 10-worker crew pouring and raking asphalt onto the road slows their progress. It's the kind of small annoyance drivers nationwide face each summer. It's also one small manifestation of President Barack Obama's ambitious strategy for jump-starting the economy.

In April, the P.J. Keating Co., a construction firm based in Lunenburg, Mass., bid on about a dozen stimulus projects funded through the U.S. Transportation Department. It won two contracts, including this $4.06 million job, rescuing what would have been a dismal year for P.J. Keating, says David Baker, 36, a manager of construction operations. As business dwindled over the past two years, the firm laid off about a dozen people. "We definitely would have been faced with another half-dozen layoffs had we not gotten these stimulus projects," Baker says. Instead, the company kept all its remaining 300 employees, and hired five new ones. Ordinarily, a few -government-funded jobs, like traffic on Route 6, wouldn't be noteworthy. But the tableau neatly encapsulates the promise—and pitfalls—of an economy at an inflection point.

The Great Recession, which rolled over our financial lives like one of P.J. Keating's giant pavers, is most likely over. Home sales, while still far below the levels of a year ago, have risen for three straight months—a first since 2004. The stock market has rallied 44 percent since March, thanks to renewed optimism and improving earnings from big companies like Goldman Sachs and Apple. In June, seven of the 10 indicators in the Conference Board Leading Economic Index pointed upward, including manufacturing hours worked and unemployment claims. Macroeconomic Advisers, the St. Louis–based consulting firm, says the economy is expanding at a 2.5 percent annual rate in the current quarter. Economic activity "will increase slightly over the remainder of 2009," Federal Reserve chairman Ben Bernanke told Congress.

Irrational exuberance, it's not. But even stagnation would be an improvement over recent history. The U.S. economy shrank at nearly a 6 percent annualized rate between September 2008 and March 2009, a shocking slowdown that pitched the global economy into recession for the first time since World War II. "This looks an awful lot like the beginning of a second Great Depression," Nobel laureate Paul Krugman said in January. Catastrophe may have been averted. But when economists proclaim a recession over, they're celebrating a technicality: they mean economic output has stopped contracting. And while that is good news, you might wait a while before adding Judy Garland's rendition of "Happy Days Are Here Again" to your iPod. GDP growth alone can't feed a family, or pay a mortgage. Cursed with a high national debt load and blessed with a dynamic, growing workforce, the U.S. economy needs annual growth of at least 1.5 percent just to feel like we're standing still.
Worse, the data point that means the most to our psychological well-being—unemployment—is likely to keep climbing. The loss of 6.5 million jobs since December 2007 has spurred the sharpest rise in the unemployment rate since the 1930s. As manufacturing jobs move overseas and companies struggle to further reduce costs, unemployment—which stands at 9.5 percent—is likely to rise above 10 percent. "There's a difference between having an expansion and an economy that has recovered," says Lawrence Summers, Obama's chief economic adviser.

Having survived a near-death economic experience, Americans now need to focus on surviving what's likely to be a pokey, painful recovery. "I see 1 percent growth in the economy in the next few years," says New York University economist Nouriel Roubini. "It's going to feel like a recession, even when it ends." Shifting our unwieldy $14 trillion economy from rapid reverse into neutral took heroic efforts from the Federal Reserve, the Treasury Department (in two administrations), two sessions of Congress, and, of course, the taxpayers. But the greater challenge may be getting the economy to start growing at a pace that creates jobs, boosts incomes, and raises corporate profits—all without triggering inflation.

A year ago, NEWSWEEK dubbed this a new kind of recession—one caused by turmoil in housing and finance rather than manufacturing or weak consumer spending. Now that it's over, we'll need a new kind of recovery. For 60 years, policymakers have relied on a series of simple tools for combating slowdowns and promoting growth: the Fed cuts interest rates, government slashes taxes, and a deregulated Wall Street provides easy money. All of which spurs debt-fueled consumption and the movement of goods and services around the globe.

No more. The Fed literally can't cut interest rates further—the overnight interest rate it controls is at zero. Given the deficits and Democratic control of Washington, the prospect of broad-based tax cuts are slim. Americans are still stuffing cash under the mattress. "The last several recoveries were not sustained because they were based on bubbles, they were led by consumption, and they enhanced inequality," says Summers. "The president's emphasis is on having a different kind of expansion."

The Obama administration's strategy rests on what some might call industrial policy or excessive government intervention—or even creeping socialism. I call it "the smart economy." It means eschewing the blunt economic instruments we've always used and focusing resources and rhetoric on strategic sectors: renewable energy/green technology, infrastructure, broadband, and health care. It means making investments to run vital systems more intelligently and efficiently, thus creating a new infrastructure on which the private sector can work its magic. This philosophy, legislated in the $787 billion American Recovery and Reinvestment Act, holds that a mixture of targeted investments, tax credits, subsidies, reforms, and direct purchases can preserve or create jobs in the short term, improve America's economic competitiveness in the long term, and catalyze private-sector investment.

It's too soon to judge whether this enormous fiscal and political gamble will work. But as was the case the last time the financial sector destroyed itself—the early 1930s—it will be up to Washington to lead the way. We're witnessing an immense and aggressive substitution of public capital for private capital—and it is probably essential to our recovery. But the best-laid plans of Ivy League academics and charismatic young presidents frequently go awry (see: Vietnam). The stimulus package will work its way into the economy very slowly and, by itself, isn't nearly large enough to make up for all the wealth and jobs lost in the past two years. And there's great uncertainty as to how one of the most crucial components of the smart economy—health care—will be affected.

Those on the right say the Obama plan can't work simply because it's directed by government. (Every Republican in the House voted against the stimulus plan.) But even some on the left say it's aimed disproportionately at industry. In an economy in which consumers account for 70 percent of activity, "what we need is more demand for goods and services," says Lawrence Mishel, president of the Washington, D.C.–based Economic Policy Institute. "The missing pillar in Obama's articulation is really making sure that people's wages rise in tandem with productivity." Critics and allies alike fret about the pace of aid.
In his first hundred days, Franklin D. Roosevelt said he wanted 250,000 young men working in the forests for a dollar a day. Despite the howls of organized labor, a quarter of a million men were toiling in the Civilian Conservation Corps by the summer of 1933. They planted 3 billion trees, built 800 state parks, and saved the nation's topsoil. Larger public-works programs like the Civil Works Administration swiftly put millions of people to work erecting bridges and building dams.

Things aren't going quite as swiftly in New Deal 2.0. So far, only a fraction of the stimulus funding has entered the economy via tax cuts ($43 billion), and another chunk via aid to state and local governments ($64 billion). Much of that, however, was used to avert cuts rather than to create jobs. New York City, for example, was able to avoid laying off 14,000 teachers. And because the contracting process is more complicated than it was in the 1930s, the investment component will take more time. So far, only about $120 billion in new spending has been promised to specific programs. Using a rough guide that $92,000 of government spending creates a job, the White House assumes the stimulus will preserve or create 1.5 million jobs by the fourth quarter of 2009 and another 3.5 million by the fourth quarter of next year. But the White House says less than 10 percent of the employment impact from the stimulus will take place during 2009.

Several months pass before money from Washington arrives in paychecks in places like Westport, Mass. The Department of Transportation, which received $26.6 billion for highway projects, has approved 5,777 projects and promised $16.9 billion in spending. "It generally takes six to eight weeks to get a project advertised and approved, and then a notice to start," says Joel Szabat, deputy assistant secretary for transportation policy. By the end of May, transportation projects had already directly created between 6,000 and 7,000 jobs. That's encouraging, but still a drop in the bucket—especially given the demand for work. In March, Lew Wood, superintendent of Amtrak's maintenance facility in Bear, Dela., received the go-ahead to hire 55 workers to help carry out a $58.5 million stimulus-funded project to repair 60 passenger rail cars. "When we advertised the 55 jobs, we got 6,000 applicants," many of whom were former General Motors and Chrysler employees, Wood says.

The benefits of resurfacing roads and improving train service—fixing existing infrastructure and stimulating existing industries—are obvious and easy to gauge. But a significant chunk of the smart--economy program entails efforts to create new commercial infrastructure and new industries, which are more abstract and whose success is difficult to measure. That's especially true for the alternative-energy and clean-technology sectors, which received lots of goodies in the stimulus package: a $6 billion loan-guarantee program for alternative-energy investments, a $4.5 billion federal green-building-conversion effort, $5 billion in funds to weatherize low-income homes, and cash to promote smart-grid technologies.
Anthony Costa, acting commissioner of the General Service Administration's Public Buildings Service, says his agency has awarded 80 projects worth $375 million (out of a total of $5.5 billion granted in the stimulus bill) to upgrade federal buildings. The Blue-Green Alliance, a joint venture of unions and environmentalists, says 850,000 manufacturing jobs in existing plants could be converted to green jobs—building new products with the same equipment and employing skills of current workers. New Flyer, a Canada-based company that makes hybrid buses in St. Cloud, Minn., has received $213 million in orders for new hybrid buses from agencies in Philadelphia, Chicago, Milwaukee, and Rochester, N.Y., and that are funded wholly or in part by the stimulus bill—a sum equal to roughly one quarter of its annual revenue.

These initiatives are a boon for the minority of businesses whose core operations can be easily adapted to smart-economy projects. But in order for this effort to succeed, the impact has to be deeper. Creating entirely new types of businesses involves the government placing bets on specific technology sectors—and on specific technologies within those sectors. "We invested in the interstate highway system in the 1950s for reasons of national security, but it had tremendous economic benefits that nobody could have anticipated," says Mark Zandi of Moody's The smart minds behind the smart economy, by contrast, believe they know the precise positive outcomes to be generated by investments in renewable energy. Energy Secretary Steven Chu may be a Nobel Prize–winning physicist. But as his department sifts through loan applications for different types of alternative-energy projects, will he prove to be a good venture capitalist? Should loan guarantees go to projects that use traditional solar panels or thin-film solar that can be stamped onto building materials?

And while they do create jobs, many alternative-energy projects aren't particularly labor-intensive. Wind farms don't require armies of workers to maintain them. In Colorado, government officials and executives have been talking up what Gov. Bill Ritter calls a "new energy economy." The Denver region can boast thousands of new jobs connected to solar research and wind-turbine manufacturers, but they don't come close to making up for the 50,000-plus jobs lost in the area since the recession began. By 2018 investments in renewable power generation and transportation fuels, retrofitting buildings, and research could lead those sectors to employ 2.54 million jobs, according to the consulting firm Global Insight. That's nice, but hardly the difference between muddling through and a supercharged recovery.

The U.S. government does have a pretty good long-term record of midwifing new industries, and creating new commercial infrastructure that spurred massive private--sector investments. The state-funded Erie Canal, which led to massive growth in upstate New York and the upper Midwest, was followed by privately backed waterways. Congress built the first telegraph line from Baltimore to Washington in 1844 before entrepreneurs were struck by "lightning," as the telegraph was called. The first transcontinental railroad was heavily financed and subsidized by Congress in the 1860s—and helped trigger a half-dozen copycat lines.

There are signs that public investment in green technology is already catalyzing some private investment. These are dust-bowl days for venture capital. But on July 22, eMeter Inc., a San Mateo, Calif.–based startup that makes smart-grid management software, says it raised $32 million in new venture-capital funding. The company, which has 160 employees, is betting its business will grow as some of the $4.5 billion earmarked for smart-grid technology flows to utilities. "We're prepared to hire people rapidly once the stimulus action real-ly starts," says eMeter CEO Cree Edwards.

When the private sector creates new infrastructure—with or without government help—all sorts of good things can happen. That was the case in the 1990s with the Internet. Seeking a repeat, the stimulus package allots $7.2 billion for expanding the nation's broadband infrastructure into mostly rural areas. (Only 63 percent of Americans subscribe to broadband at home.) What does stringing high-speed fiber into the hamlets and hollows of Appalachia have to do with job creation? Plenty, says Wally Bowen, founder and executive director of the Mountain Area Information Network (MAIN), a nonprofit wireless-Internet provider in western North Carolina. "Many people who got on the Internet in the mid-'90s had real progress in their lives in these remote rural areas, managing their health conditions or a home business," only to be left behind when broadband passed them by, says Bowen. He cites an octogenarian widow in the small town of Murphy who has been supplementing her income with eBay, but has lately been having difficulty with dial-up. MAIN is part of a consortium of local businesses and public-private partnerships seeking $50 million in broadband stimulus money to lay new fiber and erect wireless towers. A study by Columbia University professor Raul Katz estimates that as many as 128,000 jobs could be gained over four years just in the construction of new networks.

The benefits from more investment in broadband and communications could extend far beyond elderly eBay sellers. As MIT researcher William Lehr says, "Broadband is a key ingredient to make the rest of this smorgasbord of projects work." For example, the stimulus package included $19 billion to computerize health information, which would allow doctors, patients, and insurers to share -data easily. The move, intended to save billions of dollars, has already spurred private--sector investments. In July, the networking gi-ant Cisco and the huge insurer UnitedHealth announced plans to build a technology network for health providers, with the help of stimulus funds.

Digitizing health records is the ultimate no-brainer—the typical doctor's office is far lower-tech than the typical grocery store. But that may prove to be the easiest task in bringing the tenets of the smart economy to the vital health-care industry. The stimulus package contained plenty of cash for the sector, one of the few areas in which employment held up during the recession: $10 billion for the National Institutes of Health, and $24.7 billion in subsidies to help people who have lost their jobs to purchase coverage. But that's only the down payment. The case the Obama administration makes for its expensive, ambitious health-care-reform program is as much about economics as it is about social justice. Health care, 16 percent of the economy, is inefficient. The lack of affordable health insurance is a barrier to hiring and entrepreneurship. And a failure to control the cost of Medicare and Medicaid will crowd out other investments and make it more difficult to sustain consumption. "If we do not control these costs, we will not be able to control our deficit," President Obama said in his occasionally combative July 22 press conference.

True. And that points out one of the challenges in relying on smarter health care to contribute meaningfully to economic growth. The reform envisions large new expenditures and investments: Congressional Budget Office estimates of major provisions yield a sticker price of $1 trillion over 10 years. But it's also supposed to generate huge cost savings through the application of technology, efficiencies, and negotiating power. A July report by the White House's Council of Economic Advisers states that "health care is forecasted to remain a large source of job growth in the labor market," especially for positions like registered nurses and physical therapists. Yet the gale of productivity enhancement, reform, and cost control the Obama administration wants to unleash on the sector is likely to result in the reduction or elimination of many existing health-care jobs. The debate about the impact of health-care reform will continue to rage even if legislation is passed this year. And the plan that ultimately emerges—if one emerges—will likely be influenced more by interest-group and partisan politics than by smart-economy thinking. Audible in Washington last week: the sound of expectations being ratcheted down.

To a large degree, the U.S. economy must now cope with an era of lower expectations. Road building isn't a recipe for full employment, green technology won't displace fossil fuels in this decade, the benefits of universal broadband may be overblown, and the dysfunctional health-care system won't shift overnight from a headwind to a tailwind. The recession may be over, but there's likely to be plenty of tough slogging ahead.

Does that mean the smart economy is a waste? Absolutely not. Declaring the stimulus a failure five months after its passage is a little like calling the results of a marathon at the second-mile marker. Virtually all these investments are necessary. They will make the economy and specific industries smarter. They are intelligent economic and political strategies. But they're not sufficient. Large as it is, the stimulus can't fill the hole we've created or bring a series of large industries into the 21st century. Each imperative requires investments far in advance of what even the most free-spending liberal could imagine. Transforming the nation's energy--production-and-transmission system "will take an investment of trillions of dollars over decades," says Dan Arvizu, director of the National Renewable Energy Laboratory in Golden, Colo. "The private sector has to make this happen."

Historically, the economy has kicked into higher gear when a development comes along that can touch every part of the economy, not just particular sectors: the steam engine, electricity, the computer chip, globalization, the Internet, cheap money. By definition, it's almost impossible to know what the next disruptive, discontinuous great leap forward is going to be. On several occasions, Lawrence Summers has remarked that when he was involved in the big economic summit Bill Clinton held after winning the 1992 election, he didn't recall hearing many mentions of the words "the Internet."

"Past performance is no guide to future returns." That's the disclaimer that every investment manager provides clients. And it's true in economic terms, as well. The U.S. has historically responded with resilience and flexibility to periods of economic distress. Despite the army of authors dedicated to the proposition that the New Deal was an unadulterated failure, FDR's efforts averted disaster, ended the nation's worst economic downturn, and created lasting infrastructure that has paid economic dividends for decades—from the Hoover Dam to the Appalachian Trail (the real one, not Mark Sanford's fictional one). History suggests, but doesn't guarantee, that the U.S. is likely to do so again.

Until the next big thing comes along, consumers and businesses will continue to do what they've been doing for the last several months: pay down debt, restructure, and focus on survival. Using federal resources as a lever and crutch, we'll have to take satisfaction in small, incremental gains. It'll be grueling work—much like repaving roads in Westport, Mass., in the middle of August.

With Nick Summers and Jessica Ramirez in New York, and Eve Conant and Daniel Stone in Washington

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