All Blog Posts from Econwatch

Before the U.S. Senate votes to extend the "cash for clunkers" program, let's examine this question, which seems like a reasonable one to ask: What has it done to reduce carbon emissions?

This was, after all, one of the primary justifications that the Obama administration offered for the program. "This gives consumers a break, reduces dangerous carbon pollution and our dependence on foreign oil, and strengthens the American auto industry," President Obama said last month.

Other Democrats have touted the idea as a way to reduce CO2 emissions. Rep. John Dingell of Michigan predicted in June that the legislation "will result in meaningful reductions in vehicle fleet carbon emissions and fuel consumption." And to Rep. John Olver from Massachusetts, cash-for-clunkers will "pave the way toward a lower-carbon future." Time magazine already is calling the program a "green success."

That argument has a visceral appeal: Let's take the cash for our old cars and trucks, get new ones with Bluetooth and iPod connections, and help out the environment in the process. But a closer look at the existing $1 billion cash-for-clunkers program shows that the rhetoric of Washington politicians doesn't match reality.

Some simple calculations suggest that the existing program will save only about 365,000 metric tons of CO2 a year. Compare that to 29,028,000,000 tons of CO2 emitted worldwide every year, according to U.S. government estimates.

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In the last week, a slew of economic reports and news articles have suggested that the U.S. housing market has bottomed out.

Don't believe it. More pricey areas, often in large metro areas, still have plenty of room to fall.

You wouldn't know it from Tuesday's release of the National Association of Realtors' index, which showed that nationally pending home sales had increased from the levels of one month ago.

Also on Tuesday, homebuilder D.R. Horton reported smaller losses, a day after Pulte Homes Inc. and Centex Corp. said that orders for new homes had been increasing.

And there was plenty of excitement last week after the S&P Case Shiller index seemed to show a mild rise in month-over-month prices for existing single family homes.

Well, not so fast. In reality, the seasonally-adjusted version of the Case Shiller index – which came out later in the day, after the initial headlines had been written -- reveals a continued month-to-month decline from April to May. And the year-over-year decline remains around 17 percent.

The reason to expect further declines in some areas is that the U.S. housing market has now bifurcated. It's true that some areas with lofty rises (and subsequent severe falls) may have stabilized.

Not so some of the more expensive areas, especially those in metro areas with houses that are over $750,000, which also experienced skyrocketing prices (a two- or three-fold increase since 2000 wasn't unusual) but are taking much longer to revert to normal.

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Federal Reserve Chairman Ben Bernanke is strongly opposing a proposal in Congress, which enjoys the support of over half of the U.S. House of Representatives, to audit the Fed.

During an appearance on PBS's NewsHour, which will be aired this week on local PBS stations, Bernanke said the proposed legislation would interfere with the central bank's independence. "I don't think the American people want Congress running monetary policy," he said. "And I think that's very very critical for people to understand." (See transcript below.)

This is an odd claim. If you read the bill (H.R.1207), it simply amends existing law to say "under regulations of the Comptroller General, the Comptroller General shall audit" the Federal Reserve Board and its member banks.

The Comptroller General is a Senate-confirmed official who's also the Government Accountability Office (GAO), a legislative branch agency organized under the U.S. Congress. In other words, we're not talking about a political bomb-thrower, but a veteran civil servant tasked with important oversight responsibilities.

The argument for an audit has become stronger in the wake of the extraordinary and unprecedented steps the Federal Reserve has taken in response to the market turmoil that began two years ago. Among them: the Fed has printed hundreds of billions of dollars to purchase what are delicately called "troubled assets"; it has created mammoth Wall Street bailout funds with acronyms like CPFF and TALF; and it has done all of this without prior approval by the U.S. Congress.

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The U.S. unemployment rate has reached 9.5 percent, according to the government's figures. Which bring us to today's EconWatch question: Will increasing the minimum wage during a deep recession help -- or hurt -- unemployment?

We're about to live through that experiment in applied economics. On Friday, the U.S. minimum wage is set to increase from $6.55 an hour to $7.25 an hour. That makes it 11 percent more expensive for businesses to employ a minimum-wage worker.

(The last time the minimum wage was increased was July 2008 as part of the second-to-last step in a series of increases required by a law enacted the year before. This week's increase is the last.)

As anyone paying even scant attention to the news in the last year knows, economists often disagree more than they agree. Some economists, including Nobel laureates, say the spending package known as the "stimulus" bill was a great idea. Others, including Nobel laureates, think it wasn't. More generally, business cycle theory and Keynesian economics are points of sharp disagreement.

The effects of a minimum wage on unemployment are an exception to that rule. Perhaps it's because the economic laws at issue are straightforward, but economists generally agree that increasing the minimum wage also decreases employment; workers who aren't worth $7.25 an hour to their employer won't have a job.

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Is the worst of the economic storm behind us?

Consider the evidence: the Dow Jones Industrial Average leapt about 7.3 percent this week to its biggest weekly gain since March. Positive earnings or upbeat remarks from Intel, Goldman Sachs, and JPMorgan Chase have contributed to the optimism. During the past five days, stock market bears have been roasted alive.

Yet. And but. There is another side to the story, which is the lackluster state of much of the rest of the economy. Heavy consumer debt loads have not vanished. Neither have the housing market's woes, and still-to-come price declines in many areas. CIT Group's potential demise -- for once, a Wall Street firm that didn't get a bailout -- is further evidence that the plague of financial contagion has not run its course.

On the earnings front, the Wall Street Journal reminds us that analysts predict all 10 of the major industry groups represented in the Standard & Poor's 500-stock index will experience a second-quarter decline in profitability from 2008 to 2009.

A Goldman Sachs report says: "We find that under reasonable parameters of supply and demand growth, it will take at least two years, and probably more like three to five years, to eliminate spare capacity in the manufacturing sector... In the labor market, the unemployment rate is likely to remain above the current concept of 'normal' for an even longer period."

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After Lehman Brothers collapsed last fall, it seemed as though the Feds were unwilling to let any reasonably-sized financial institution fail.

No longer. The federal government has rebuffed pleas from CIT Group, which lends to small and midsized companies, for more bailout cash.

The result has been a scramble for dollars on the part of CIT's clients and reports of a possible bankruptcy filing as early as Friday. CIT recently hired the Skadden Arps law firm, which is known for its work on mergers and bankruptcies.

CIT already received $2.33 billion in tax dollars as part of a bailout in December. It's not clear if that money will ever be repaid. (Meanwhile, CIT shares fell 75 percent on Thursday.)

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In the first few weeks of the then-new Obama administration, Treasury Secretary Timothy Geithner announced a sweeping but vague overhaul of the U.S. financial system. The stock market showed what it thought of that idea by tumbling nearly 400 points.

Don't expect a repeat of that exercise when Geithner and President Obama announce another regulatory revamp on Wednesday: their aides have tried to avoid the possibility of surprising the market by assiduously leaking details. After a week of disclosures, bit by bit, the broad outlines of tomorrow's news may turn out to be the least-surprising White House announcement this summer.

In Wednesday's announcement, Geithner and Obama are expected to outline another reshaping of the financial system -- scaled back from earlier drafts -- that would put the Federal Reserve in charge of overseeing companies so large or significant that their collapse would lead to market turmoil. But a bigger consolidation into one uber-regulator is unlikely.

The administration believes the change is necessary because of the crop of regulatory agencies, with acronyms including SEC, FDIC, FINRA, OCC, NCUA, FFIEC, OTS, FHRA, and the FRB, that grown like weeds in the nation's capital. One possibility is the elimination of the Office of Thrift Supervision, which is tasked with the job of maintaining the soundness of savings banks and savings and loans, with poor results.

"Our framework for financial regulation is riddled with gaps, weaknesses and jurisdictional overlaps, and suffers from an outdated conception of financial risk. In recent years, the pace of innovation in the financial sector has outstripped the pace of regulatory modernization, leaving entire markets and market participants largely unregulated," Geithner and National Economic Council director Lawrence Summers wrote in an opinion article this week in the Washington Post.

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The plan dreamed up by the Obama administration and the Federal Reserve for an economic recovery included a big bet: that interest rates would remain extremely low. That would, they hoped, spur borrowing and lending, encourage mortgage refinancing, and even lend support to housing prices.

We're already seeing signs that this bet may not pay off. One came on Wednesday, when long-term interest rates hit a high for the year when investors forced the Treasury Department to offer higher interest rates. Another may come on Thursday afternoon if investors remain leery of the Treasury's attempt to auction 30-year bonds.

Fixed-rate mortgages are becoming more expensive. A 30-year fixed-rate mortgage is now 6.1 percent, according to financial data firm HSH Associates, up about a full percentage point from a few weeks ago. (This means far fewer people will refinance -- one estimate puts it at 50 percent fewer -- and housing prices in the most bubbly areas may fall even faster than before.)

The reason for the interest rate hikes? Increased fears that the U.S. government is borrowing so much it won't be able to pay it back without printing money. The greater the perceived political and currency risks, the higher the interest rates demanded by investors will be, and the more likely it is that any economic recovery will be stalled.

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Microsoft CEO Steven Ballmer offered an unwelcome economics lesson to the Obama administration this week: Higher taxes have consequences that Washington policy-makers may not especially like.

Ballmer said on Wednesday that if Congress enacts President Obama's plans to impose higher corporate taxes, it makes sense for Microsoft to move jobs offshore.

"It makes U.S. jobs more expensive," Ballmer said, according to Bloomberg News. "We're better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S."

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Fed Chairman Ben Bernanke told CBS News in March that he saw "green shoots" of economic recovery beginning to sprout, including in mortgages and business lending.

Now it seems like those "green shoots" that were beginning to appear may have been rooted in inflation.

Thanks to a combination of influences, including increased jitters on the part of investors and the Fed's decision to print large quantities of money, there's more reason than there was a few months ago to worry about a spate of inflation.

The U.S. dollar has fallen 10 percent since reaching a three-year high in March. Gold is up, commodities are up, and crude oil prices have roughly doubled this year. And the possibility of a debt downgrade for Britain, one of the few nations with a triple-A credit rating -- has shown that no currency is invulnerable.

Bill Gross, co-chief investment officer of Pacific Investment Management Co. in Newport Beach, California, said on Thursday that the United States' own triple-A credit rating will "eventually" be lost as well. "The markets are beginning to anticipate the possibility of" a downgrade, Gross said, according to Bloomberg News.

If this sounds obscure, especially when most of the recent talk has been about deflation, you're not alone. But let's walk through some of the implications...

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