What are the forces moving the Minnesota economy? Adam Belz tries to identify the trends and show the connections between Minnesota and the larger U.S. and global economies. You can connect with him on Twitter: @adambelz
Cybersecurity mistakes kept secret by banks, retailers – StarTribune
Income inequality has grown rapidly in Milwaukee, report says – Journal Sentinel
Advocates for MN minimum wage increase point to gender pay gap – MinnPost
At 3M, contract workers have value but little job security – Pioneer Press
Contractors are flocking to North Dakota – Fargo Forum
$1 billion withdrawn in run on Thai bank – WSJ
Surowiecki takes a glass-half-empy look at social mobility – New Yorker
The UAW wants a do-over vote at Volkswagen in Chattanooga – Washington Post
Probably the best lede written so far in 2014, by Caitlin Flanagan – Atlantic
Rahm Emanuel and Chicago’s perilous status as a world-class city – Esquire
Another helpful piece on the UAW defeat in Chattanooga – Economist
Why Facebook’s acquisition strategy is so smart – Felix Salmon
Stolen Target data losing value on black market – Brian Krebs
Minnesota has fewer, but bigger, farms – StarTribune
Broken families are among biggest killers of American Dream – Slate
Grocery store congratulates Jordan on HOF induction, gets sued, loses – ESPN
FOMC minutes show interest rate hike edging onto radar – WSJ
There’s apparently a national clown shortage – NPR
Poll: Nearly half in MN favor controversial copper mine – StarTribune
How Applebaum interviewed one economist for that Kocherlakota story – Stephen Williamson
Reggae’s chop on the upbeat – where did that come from? – Oxford American
There's lots to digest from the not-released-until-this-morning transcripts of Federal Reserve meetings and conference calls in 2008. The transcripts give us an inside look at the thinking of America's top central bankers when the financial crisis hit. (Binyamin Appelbaum for the NYT has a good story here.)
Below I've excerpted comments from Ben Bernanke on Oct. 7, 2008, pgs. 12-15. I picked this passage out of many because it shows how the Open Market Committee was thinking at a really key moment.
The Dow was on a 25 percent one-month crash as the Federal Reserve's Open Market Committee deliberated. The bankruptcy a month earlier of Lehman Bros., a major Wall Street firm, had shown everybody the problems in the financial markets were grave.
Bernanke and several other Fed officials were on a confernce call trying to decide whether to cut interset rates in concert with several other central banks around the world. Not everyone (St. Lous Fed representative Robert Rasche, for instance) agreed this was a good idea, and Bernanke tried to make the case.
Here's what he said. I hope to annotate this as the day goes by. I underlined some key parts, and then bracketed and bolded my notes.
CHAIRMAN BERNANKE. Thank you. Other questions? All right. If not, let me just say a few words. I will be brief. It’s more than obvious that we have an extraordinary situation. It is not a single market. It’s not like the 1987 stock market crash or the 1970 commercial paper crisis. Virtually all the markets—particularly the credit markets—are not functioning or are in extreme stress. It’s really an extraordinary situation, and I think everyone can agree that it’s creating enormous risks for the global economy.
What to do about it? The exchange we just had suggests that we may have disagreements about the benefits of liquidity provision. I personally think that it has been helpful. [Not 100% sure what "liquidity provision" means here, but I think it refers to the then small level of Fed purchases of mortgage-backed securities to keep the market liquid.] But I think we can agree that it is obviously not a panacea because, as the Vice Chairman points out, it doesn’t address the underlying capital issues. That suggests that the right solutions probably have a significant fiscal element to them. However, one feature of the last few days is how striking, how uncoordinated, and how erratic some of the fiscal approaches have been—particularly in Europe, where there has been a remarkable lack of coordination in the European Union. So the fiscal solutions are coming, but they’re not there yet, and it is going to be a while. We need greater clarity on those issues. We had a meeting today on the Treasury’s authority [to create TARP, the $700 billion financial industry rescue fund], and they are hoping in the next few weeks to begin to provide greater clarity, which will be very helpful. But I think that, if we can find some kind of bridge, it would be helpful, and that’s what this meeting is about.
Although the financial markets are the dramatic element of the situation, I think we can make a case for easing policy today on the macro outlook, as given by Larry and Nathan. I won’t go into detail. I think it’s fairly clear. You look first at inflation, and you see the remarkable decline in commodity prices, the appreciation of the dollar, and the decline in breakevens. The 10-year breakeven this morning was about 1.35. Of course, that could be a noisy indicator, but certainly it’s quite low. I would say that, in terms of activity and the relation to inflation, we don’t have to rely on any flat Phillips curves here. [A flat Phillips curve would show that the relationship between inflation and aggressive monetary stimulus is muted, which was an argument against the hawkish view that extremely low interest rates could quickly lead to inflation. Inflation was a big fear on the Fed's Open Market Committee then, bigger probably than now. Bernanke is arguing here that the Fed could and should make interest rates even lower, and shouldn't worry about inflation unless it started to rear its head.] We have a global slowdown, and the implications for commodity prices are first order for our inflation forecast. It is never safe to declare inflation under complete control, and I certainly don’t claim that no risks are there; but clearly the outlook for inflation is not looking nearly so threatening as it may have in the past. [He continues to be right about this. Inflation is still at historically low levels.]
On the economic growth side, what is particularly worrisome to me is that, before this latest upsurge in financial stress, we had already seen deceleration in growth, including the declines, for example, in consumer spending. Everyone I know who has looked at it—outside forecasters and the Greenbook producers here at the Board—believes that the financial stress we are seeing now is going to have a significant additional effect on growth. Larry gave some estimates of unemployment above 7 percent for a couple of years. [Conservative estimate, it turns out. Unemployment hit 10 percent.] So even putting aside the extraordinary conditions in financial markets, I think the macro outlook [the overall economic outlook, he means] has shifted decisively toward output risks [the risks of a slowing or contracting economy] and away from inflation risks, and on that basis, I think that a policy move [to further lower interest rates] is justified.
I should say that this comes as a surprise to me. I very much expected that we could stay at 2 percent for a long time, and then when the economy began to recover, we could begin to normalize interest rates. [The 2 percent here is the interbank interest rate. It was 1.81 percent in September 2008. After the Oct. 7 meeting it dropped to under 1 percent, and then fell to under a quarter of a percent and has stayed that low ever since.] But clearly things have gone off in a direction that is quite worrisome. One could legitimately ask questions about the transmission mechanism under these conditions, and I think those are good questions. [Not sure what the transmission mechanism refers to, but maybe it's just the nuts and bolts of doing monetary stimulus? If anybody knows, let me know.] But first it seems to me that we can, to some extent, offset costs of credit through our actions, even if spreads are wide. Second, to the extent that the global coordination creates some more optimism about the future of the global economy, we may see some improvements in credit spreads. We may not, but it seems to me that this is the right direction in which to go. [This is the basic argument that also drives quantitative easing, that if the Fed can push lending rates down further, it will to some extent stimulate economic activity.]
Despite everything that’s happening, I might not be bringing this to you at this point, except that we have the opportunity to move jointly with five other major central banks, and I think the coordination and cooperation is a very important element of this proposal. First of all, again, I mentioned before the lurching and the lack of coordination among fiscal authorities and other governments. I think it would be extraordinarily helpful to confidence to show that the world central banks are working closely together, have a similar view of global economic conditions, and are willing to take strong actions to address those conditions. I think that there is a multiplier effect, if you will. Our move, along with these other moves, will have a stronger effect on the global economy and on the U.S. economy than our acting alone. Moving together has other benefits. Just to note one, we can have less concern about the dollar if we’re all moving together and less concern about inflation expectations given that all the banks are moving and all see the same problem.
There is a tactical issue. I think the real key to this is actually the European Central Bank. They have had some difficulty coming to the realization that Europe would be under a great deal of stress and was not going to be decoupled from the United States. They made an important rhetorical step at their last meeting to open the way for a potential cut, but I think that this coordinated action gives them an opportunity to get out of the corner into which they are somewhat painted and their move will have a big impact on global expectations about policy responsiveness. So, again, I think the coordination is a very important part of this.
I want to say once again that I don’t think that monetary policy is going to solve this problem. I don’t think liquidity policy is going to solve this problem. I think the only way out of this is fiscal and perhaps some regulatory and other related policies. But we don’t have that yet. We’re working toward that. We are in a very serious situation. So it seems to me that there is a case for moving now in an attempt to provide some reassurance—it may or may not do so—but in any case, to try to do what we can to make a bridge toward the broader approach to the crisis.
So that’s my recommendation, that we join the other central banks in a 50 basis point move before markets open tomorrow morning. [50 basis points is half a percent. A basis point is 1/100th of a percent.] If we proceed in that direction, there are, as I mentioned, two statements. Brian, do the Presidents have the joint statement?
You can read the whole transcript of the conference call here, and you can look at the minutes from Sept. 18, 2008, here. I hope to eventually have another blog post on then Minneapolis Fed Chairman Gary Stern's comments at that meeting.
(AP photo from Dec. 4, 2008, when Bernanke used to let his beard run more wild)
Doug Elmendorf, the head of the Congressional Budget Office, came to Minneapolis to speak to the Economic Club of Minnesota on Thursday. He was armed with slides and data, and his message was that the federal budget, thanks mostly to growing spending on older citizens, is on an unsustainable path.
No big surprise, right? We know that. The national debt is $16 trillion and growing.
But the clear nature of the problem is what might surprise you: The nation's budget problems are exclusively about old people, health care, and paying interest on the national debt.
The amount of government spending is actually projected to shrink in coming decades as a percent of GDP, with the exception of three categories, and they completely tip the balance: health care spending, interest payments on the debt, and Social Security.
The growth in health care spending is happening, by the way, with or without Obamacare.
As John Spry pointed out to me, the long-term outlook is even scarier, and the problem clearly becomes health care spending and net interest payments. By 2090, the two categories together will equal nearly 30 percent of GDP annually:
And solving this impending crisis is going to require some hard choices.
“The nation has not made the fundamental choices about the federal budget that it needs to make,” Elmendorf told the Economic Club of Minnesota on Thursday. “Sometimes we talk about the lawmakers not making choices, but more fundamentally we as citizens have not made these choices. And because these choices have not been made, the federal debt remains on an unsustainable path.”
Either younger and middle-aged people are going to pay way higher taxes, the government must cut programs that are already shrinking as a percent of GDP, or older people are going to see their benefits cut. Or it's going to be some combination of the three. As you can see, even now, older Americans are making out like bandits in the federal government sweepstakes of winners and losers.
That phenomenon, of younger households carrying the load for older households, will only increasingly be the case over the rest of the century.
The other big problem, besides paying for health care for older people, is net interest payments, as you can see in the first and second charts. That's because when you have a $16 trillion debt, a tiny increase in interest rates will translate into a huge increase in interest payments.
Since interest rates are at historic lows, the American people are getting a good deal on paying to service their debt. When interest rates start to rise, whap, those payments are going to get steeper very quickly, as you can see in the second chart.
Elmendorf pointed out that in 25 years, in order to keep the debt-to-GDP ratio about what it is today, which I don't think many people would see as a victory, the government would have to cut its deficit by $2 trillion. In order to drop the debt-to-GDP ratio to its 40-year average, probably considered by most as a move in the right direction, the government would have to cut its deficit by $4 trillion in this decade.
And, uh, here's how we could get to that:
Yikes. A one-tenth increase in taxes or a one-fifth increase in transfer payments to old people. Somebody's going to feel the pain, eventually.
You can see all of Elmendorf's slides here:
Minnesota graduation rates rose to 10-yr-high in 2013 – StarTribune
The false promise of eds and meds, as opposed to manufacturing – Midwesterner
Americans ramp up borrowing – WSJ
Why Facebook had to buy WhatsApp – Buzzfeed
The billionaire who wants to block the Keystone pipeline – Men’s Journal
Labor regroups after losing vote at VW vote in Chattanooga – NY Times
UAW simply failed to make its case in Chattanooga – Detroit Free Press
Duluth-based Cirrus posts 9% increase in plane sales – News Tribune
Poll: Minnesota shoppers stick with Target despite data breach – StarTribune