NDN Blog

Please join NDN and its affiliate, the New Policy Institute, today at noon for the kick-off a new series of events discussing the challenges facing the American and global economies. The series, coming months after policymakers confronted the most serious global economic crisis of the modern era, will examine domestic and international economic issues with the ultimate aim of envisioning a new economic strategy for the age of globalization. This event comes at a particularly important moment in this conversation as America and an increasingly important group of the world's leading economic powers prepare for the G-20 meeting in Pittsburgh later this month. 

Joining us today will be leading international economist Dr. Jagdish Bhagwati, Senior Fellow for International Economics at the Council on Foreign Relations, the University Professor at Columbia University, special adviser to the UN and the World Trade Organization, and author of In Defense of Globalization and Termites in the Trading System. He, along with NDN Globalization Initiative Chair Dr. Robert Shapiro, will discuss the impact of the Great Recession on international trade and the trading system, the danger of protectionism, and the path forward on the Doha Development Round. Shapiro will open the event with brief remarks and moderate a question and answer period. Both speakers will take questions from the live audience and those watching online.

Tuesday, September 8; light lunch served at 12:00pm
NDN: 729 15th St. NW, First Floor
A live webcast will begin at 12:15 p.m. ET
RSVP | Watch webcast

To learn more about the work of NDN's Globalization Initiative, which seeks to create a 21st century economic strategy for America, visit www.ndn.org. For more on NDN's affiliate, the New Policy Institute, visit www.newpolicyinstitute.org.

For some background material prior to the event, please take a look at:

• The Key to the Fall Debate: Staying Focused on the Economy by Simon Rosenberg, Huffington Post, September 3, 2009.
• Noticing and Solving the Problems with Jobs and Wages by Robert Shapiro, July 23, 2009
• Legal Trade Barriers Must Be Kept in Checkby Jagdish Bhagwati and Arvind Panagariya, Financial Times, June 12, 2009
• The G-20 Summit and Beyond (video) Robert Shapiro, April 3, 2009
• Check It by Jagdish Bhagwati, The New Republic, April 1, 2009
• President Obama and Trade Policy (speech) Jagdish Bhagwati, February 19, 2009
• The Fallout of the Great Recession for Tradeby Robert Shapiro, February 11, 2009

With the G-20 in Pittsburgh just three weeks away and India hosting the world's trade ministers in Delhi, attention has again turned to the Doha Development Round. The New York Times brings good, if not a little skeptical news about the "a breakthrough" and resumption of Doha negotiations:

Trade ministers from around the world said Friday that they would resume negotiations on a stalled free-trade agreement even as it became clear that developing countries and the United States remain far apart on critical issues.

After two days of meetings in the Indian capital about how to restart the trade talks known as the Doha Development Round next year, trade ministers said they were committed to reaching a deal in 2010. But the tenor and substance of their comments suggested that few are willing to soften their stances.

The global economic downturn, which analysts say has led to increased protectionism around the world, was a strong undercurrent to the meeting. While all the delegates said the downturn made reaching a deal imperative, some bluntly said it would be harder now to sell any trade deal back home because political leaders are especially concerned about protecting domestic farmers and businesses.

On the Doha front, the Economist opens fire on bilateral trade agreements, a hallmark of the Bush Administration's approach to trade, and one that is now pervading Asia, as being detrimental to the goal of completing important, multilateral agreements:

Some claim that the tricky issues that stand in the way of a multilateral deal can be more easily resolved when only two countries are sitting at the table. That rarely happens: in the rush to conclude an agreement, such issues are often shelved. India’s deal with ASEAN last year, for instance, put aside the poisonous question of farm trade, which was one of the deal-breakers in the Doha talks last July.

Bilateral agreements, thus, do not, on the whole, serve as stepping stones to a comprehensive global deal. On the contrary, they both distract governments from the multilateral process and offer cover for politicians’ failure to advance it. Moreover, the fear of losing favourable treatment in a bilateral agreement can deter governments from talking tough in multilateral negotiations.

If this topic even vaguely interests you, I'd recommend joining NDN this coming Tuesday as NDN Globalization Initiative Chair Dr. Robert Shapiro hosts a conversation with Professor Jagdish Bhagwati, Senior Fellow for International Economics at the Center on Foreign Relations and economics professor at Columbia University. The two will discuss the impact of the Great Recession on international trade and the trading system, the danger of protection, and the path forward for the Doha Development Round. For more on the event, and to RSVP, click here. 

Nonsensical conservative criticism aside, it's clear to rational observers that the stimulus is working quite well. Vice President Joe Biden reports today in a speech at Brookings that the administration is ahead of schedule and has met or exceeded 10 out of 10 targets. From the administration's release: 

Vice President Biden first presented the Roadmap to Recovery, a plan for ten major projects that would help define the Recovery Act over its second 100 days and speed implementation, to President Obama at the beginning of the summer. The Roadmap set key targets for these projects to meet over the second 100 days. As of today, every target that the President and Vice President requested has been met or exceeded, including:

• Commitment: Enable 1,129 Health Centers in 50 States and 8 Territories to Provide Expanded Service to Approximately 300,000 Patients
  • Result: The Department of Health and Human Services exceeded this goal, providing expanded service at 1,129 Health Centers in 50 states and 8 territories, and providing that expanded service to approximately 500,000 patients.
• Commitment: Begin Work on Rehabilitation and Improvement Projects at 98 Airports and Over 1,500 Highway Locations Throughout the Country
  • Result: The Department of Transportation exceeded this goal, beginning rehabilitation and improvement projects at 192 airports and on over 2,200 highways.
• Commitment: Begin Work on 107 National Parks
  • Result: The Department of the Interior exceeded this commitment with work underway at 138 national parks.

To view the Administration’s full progress with the Roadmap to Recovery, click HERE.

Already, many economists say that the stimulus has created or saved half a million to a million jobs. The stimulus should be a political gift that just keeps on giving, especially as people see the impact in their communities from infrastructure projects.

Is it just me, or does this column from today's FT by former House Speaker Newt Gingrich sound an awful lot like the one written a month ago by New York Times conservative columnist Ross Douthat?

Gingrich, like Douthat, uses California as a model for how states shouldn't manage their finances, and, like Douthat, uses Texas as a model for economic and budgeting brilliance. The only difference is that Gingrich avoids the explicit liberal and conservative name-calling that is a hallmark of Douthat's column, but even a cursory read uncovers the implicit partisanship.

Gingrich:

California, like so many other states facing budget shortfalls, is a victim of decades of reckless spending and unsustainable budgets. It was not always like this. The Golden State’s government services and public institutions – including its prisons – were models for the country in the 1960s and 1970s. But Californian policymakers stopped planning for the future. The state’s population ballooned from 23m in 1980 to 36m in 2008, and demographics shifted dramatically due to immigration. Roads, schools and prisons built with 1975 in mind are now crumbling and overcrowded.

The narrative that Gingrich again tries to push, that always blue California is about to fall into the Pacific because it loves lefty agendas that offer profligate spending, is historically illiterate. The "Californian policymakers" about which Gingrich writes, who took the top notch services and schools California had in the 1970s and ruined them, were the conservatives who started the Reagan Revolution and the national tax revolt. They passed Proposition 13, essentially destroying the California property tax base.

I'm not going to go into the conservative destruction of California too much more; I wrote plenty about this ridiculous meme when Douthat published a column from the same set of talking points. On a serious policy note, let's just say that I agree with Gingrich that California "needs to rethink its long-term budgeting strategies," but that starts with a sensible tax code that generates the kind of revenue Californians demand, not by messing with the extremely flawed Texas model.

Please join NDN and its affiliate, the New Policy Institute, next Tuesday, September 8 at noon for the kick-off a new series of events discussing the challenges facing the American and global economies. The series, coming months after policymakers confronted the most serious global economic crisis of the modern era, will examine domestic and international economic issues with the ultimate aim of envisioning a new economic strategy for the age of globalization. This event comes at a particularly important moment in this conversation as America and the world's leading economic powers prepare for the G-20 meeting in Pittsburgh later this month. 

Joining us next week will be leading international economist Dr. Jagdish Bhagwati, Senior Fellow for International Economics at the Council on Foreign Relations, the University Professor at Columbia University, special adviser to the UN and the World Trade Organization, and author of In Defense of Globalization and Termites in the Trading System. He, along with NDN Globalization Initiative Chair Dr. Robert Shapiro, will discuss America's international economic policy, the upcoming G-20 Summit, and the future of global economic liberalization. Shapiro will open the event with brief remarks and moderate a question and answer period. Both speakers will take questions both from the live audience and those watching online.

Tuesday, September 8; light lunch served at 12:00pm
NDN: 729 15th St. NW, First Floor
A live webcast will begin at 12:15 p.m. ET
RSVP  |  Watch webcast

Background from Bhagwati and Shapiro:

• Noticing and Solving the Problems with Jobs and Wages by Robert Shapiro, July 23, 2009
• Legal Trade Barriers Must Be Kept in Check by Jagdish Bhagwati and Arvind Panagariya, Financial Times, June 12, 2009
• The G-20 Summit and Beyond (video) Robert Shapiro, April 3, 2009
• Check It by Jagdish Bhagwati, The New Republic, April 1, 2009
• President Obama and Trade Policy (speech) Jagdish Bhagwati, February 19, 2009
• The Fallout of the Great Recession for Trade by Robert Shapiro, February 11, 2009

There are few better ways to sink one's hopes about the future than to read pessimistic economists. In that spirit, Nouriel Roubini in the Financial Times and Paul Krugman in his New York Times blog write yesterday and today, respectively, about the likelihood that the Great Recession is U shaped or even (in Roubini's case) W shaped. Both see a U shaped recession as probable, and Krugman shows, with this chart, what a U shaped recession looks like and why that means a jobless recovery - aka "purgatory" -

Furthermore, Roubini sees a very real possibility of this recession being W-shaped, which would be very bad news indeed:

There are also now two reasons why there is a rising risk of a double-dip W-shaped recession. For a start, there are risks associated with exit strategies from the massive monetary and fiscal easing: policymakers are damned if they do and damned if they don’t. If they take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation (recession and deflation).

But if they maintain large budget deficits, bond market vigilantes will punish policymakers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation.

Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel.

In summary, the recovery is likely to be anaemic and below trend in advanced economies and there is a big risk of a double-dip recession.

From the Financial Times, the slumping economy is causing more trouble for the housing market:

More than one in every eight homeowners with a mortgage was behind on home loan payments or in some stage of foreclosure at the end of the second quarter, as mounting unemployment aggravated the housing crisis, the Mortgage Bankers Association said on Thursday.

The percentage of loans that were in foreclosure or at least one payment past due rose to 13.16 per cent, the highest increase since the MBA began keeping records in 1972 and a jump of more than a percentage point since the first quarter.

Jay Brinkmann, chief economist at the MBA, said signs were growing that mortgage performance is being affected more by unemployment than by the structure of risky home loans, indicating a new stage in the foreclosure crisis that may not be easily addressed by government loan modification programmes.

While the proportion of foreclosures started on borrowers with subprime adjustable-rate mortgages fell dramatically in the second quarter, foreclosure starts on traditional prime fixed-rate loans saw a dramatic increase. Prime fixed-rate loans accounted for one in three foreclosure starts at the end of the second quarter. A year ago they accounted for one in five.

"There has been a shift in the problem from one driven by the types of loans to one driven by macro problems in the economy and drops in house prices," said Mr Brinkmann.

It seems like we still must, as NDN has argued since last September, do more to keep people in their homes.

The Washington Post's Ticker blog reports on new jobless claims:

New jobless claims last week jumped to 576,000, a figure higher than economists expected, the Labor Department reported moments ago.

The new jobless claims number was up 15,000 from the previous week's revised numbers. Economists expected a drop of about 11,000 last week.

The figure wiped out stock futures gains that had been promising a higher market opening today.

It also suggests more job losses to come this month. The official national unemployment rate stands at 9.4 percent, but most economists -- and the White House -- expect the figure to peak at more than 10 percent.

Analysts suggest that the economy needs to see fewer than 500,000 new jobless claims per week for several weeks in a row before an unemployment bottom can be called.

More data suggesting that the underlying economic situation is less sound than many believe. The economy didn't fall off the cliff, but it seems like we're still sliding down that mountain. Also, Nouriel Roubini wants us to stop asking when the recession will end.

John Plender in the Financial Times says that the way global finances look now certainly isn't it:

To escape from the global imbalances that are at the root of this financially induced recession, creditor countries need to stimulate their economies while the mainly Anglophone debtor countries moderate their excesses.

Japan, China and Germany, the biggest surplus countries, have, in the event, embarked on greater domestic stimulus than some had expected. Yet the US stimulus remains disproportionately large, while investors are looking to the already heavily indebted American consumer to do more to drag the world out of recession.

This does not amount to a sustainable exit strategy and in policy terms looks curiously like a re-run of the early 1930s in reverse. Then, countries that adhered to the Gold Bloc matched deflation in the US with their own deflationary response. Today, an exchange rate regime where many Asian currencies are pegged to the dollar means that asset price inflation in the US is being matched by asset price inflation in Asia.
…

There is an echo here of the debate at Bretton Woods, where the postwar international financial architecture was thrashed out in 1944. In the negotiations, John Maynard Keynes for the UK tried to secure an international adjustment mechanism that was as tough on countries that ran persistent surpluses as on countries that ran persistent deficits. Such was the weakness of the UK's economic position that Harry Dexter White, the US Treasury secretary, prevailed.

The US was the world’s biggest surplus country and expected to continue that way. So the Bretton Woods agreement incorporated no sanctions on surplus countries and no real incentives for adjustment by countries that persistently piled up reserves. Bretton Woods did not last very long. Current exchange rate regimes look no more durable. Meantime, the risk that mercantilist exchange rate policies will prompt trade retaliation remains high, as does the risk of investor disappointment if US consumers choose to continue to rebuild their savings. They have no obligation, after all, to embark on a further binge purely to justify share prices that have run ahead of events.

The issue of how American consumers were going to act following the Great Recession is one we at NDN have written about quite a bit. For more, take a look at:

• The Housing Crisis and Our National Attititudes Toward Saving by Dr. Robert Shapiro, 4/17/2009 – Shapiro observes that, as a result of the burst of the housing bubble, the Millennial generation will likely be more interested in saving than investing in homes.

• Spend? Save? The debate continues by Simon Rosenberg, 2/11/2009 - Building on a previous post, Rosenberg follows the growing debate about whether American families should be focusing on saving.

Some not so great economic news on producer prices and housing, courtesy of today's New York Times:

New figures showing a decline in wholesale prices and a drop in new-home construction highlighted how weak the economy remains, even as some optimists declare the recession to be over.

Producer prices fell more than expected in July as the costs of food and energy slipped, the Labor Department reported on Tuesday. The 0.9 percent monthly decline came after three months of increases, and suggested that demand was weak up and down the ladder of production, from consumer goods to intermediate goods like chemicals and rubber to raw materials.

Producer prices declined a record 6.8 percent from last July, when crude oil prices soared above $145 a barrel and pushed the costs of fuels, food and other products sharply higher, before they fell back amid the global financial crisis. The decline in the last 12 months is the largest drop in 60 years, since the government starting keeping such records.

So-called core prices excluding food and energy costs fell 0.1 percent, their second monthly decline of the year.

...

Despite several glimmers of rising prices and increased activity in the housing market, the Commerce Department’s report on housing starts and building permits showed that the market for new homes remained weak with building loans tight and so many foreclosures on the market.

New-home construction fell a seasonally adjusted 1 percent in July from a month earlier, to an annual rate of 581,000, the government said, and building permits were down 1.8 percent from June. Housing completions also dropped, falling 0.9 percent for the month.

The housing piece is not particularly surprising, as that market remains weak overall. At a time when unemployment is so high and houses so diminished in value, now seems an unlikely time for people to sell their homes to move for a new job and therefore have a house built.

While the economy seems to be getting worse more slowly, it is still getting worse and remains incredibly unstable. The one element able to raise producer prices most quickly, a rise in energy prices, could be disastrous.

Tremendous excess capacity remains in the economy, and many of the pieces of the stimulus that have yet to come online, namely infrastructure spending, are needed in the coming months (despite what we may hear on conservative cable networks). These projects will be noticed and helpful, both to the economy and the politicians who made them happen.