Restaurant Traffic Declines Worldwide

Restaurant traffic and spending are down not just in the U.S. but worldwide, according to a survey released Tuesday from research company NPD Group

The U.K. and Spain suffered the biggest declines in restaurant traffic in the first quarter of 2009 compared to a year ago, while Spain and Japan saw the biggest drop-off in average spending. In the U.S., traffic fell 1.5%, though spending rose 2% from a year ago.

The data show how the recession has prompted consumers around the globe to cut back on small luxuries such as restaurant meals, a disturbing trend for restaurants particularly if the “new frugality” sticks around even after growth has returned.

NPD’s survey measured restaurant traffic and spending during the first quarter of 2009 in eight countries: The U.S. Canada, France, Germany, Italy, Japan, Spain and United Kingdom. Traffic fell everywhere but Canada (where it was essentially flat).

Spending fared somewhat better: the average spent per check declined in Japan, the U.K., Italy and Spain, but rose slightly in the U.S., Canada, France and Germany.

In dollar terms, the average check remains highest in France, at $8.11, followed by Japan at $7.87 and Germany at $7.55. Diners spent the least per meal on average in Italy, just $5.56. The U.S. fell roughly in the middle, with a $6.51 average check.

The restaurant industry has suffered deep cuts amidt consumer pullbacks. In the U.S., restaurant traffic fell at the steepest pace since 1981 in the spring quarter ended May 2009, according to NPD.

In response, many restaurants have been slashing prices in a bid to lure diners through the door - a strategy that has eaten into profits while not drawing as many customers as restaurants hoped.

Temp Firms Say Demand Up in August

Demand for temporary and contract employees increased “markedly” this month, according to the American Staffing Association, a potential augur of improvement in the overall jobs picture.

The group’s Staffing Index rose to 75 in the two weeks ending Aug. 16, from 71 in early July, outpacing gains in the same period last year. The index, which measures demand for temporary workers among ASA member firms on a 100-point scale, has been hovering between 71 and 73 since hitting an all-time low of 69 at the end of December. The ASA says its members generate 85% of sales in the U.S. temporary-staffing industry.

A sustained rebound in temporary staffing levels could bode well for the overall labor market. Temp staffing is often a leading indicator of overall employment because cautious employers are more likely to add temporary workers before hiring full-time staff following a recession.

The rebound hasn’t shown up in data from the Labor Department’s Bureau of Labor Statistics, which lags the Staffing Index. Employment in temporary help services edged down by less than 1% to 1.74 million jobs in July, according to the BLS. The industry has shed 844,000 jobs since the recession began, but “the declines have lessened substantially over the past 3 months,” the BLS said in its latest employment report. Overall job loss in the U.S. slowed in July as the economy shed 247,000 jobs, and the unemployment rate fell slightly to 9.4 percent.

State Budget Impasse Squeezes Local Economies

The stock market may be ticking upward but local economies are set for a struggle as state budget gridlocks are halting payments to basic human services and causing thousands of homeless shelters, food pantries and senior centers to cut staff, reduce services or shut their doors.

Pennsylvania is the latest in a string of states, including Rhode Island and Connecticut, that have not yet adopted a 2010 budget due to declining revenue and economic pressures, halting payments to thousands of nonprofits the states contract with to operate so-called safety net services.

Other states, including California, New York and Colorado, have instituted budgets awarding significantly less money to nonprofits that are expected to continue to perform the same services for less - or nothing at all - due to budget shortfalls. Across all states for fiscal year 2010, budget shortfalls total $165 billion, according to the Center on Budget and Policy Priorities.

Social services providers say unless they address the problems now, communities will see these problems show up in the criminal justice system or reflected in healthcare costs.

“The economic impact of this is akin to what happens when you let a cavity go too long before going to see the dentist, eventually it becomes a systemic infection that’s a bigger problem and way more expensive to fix down the road,” said David Ross, public policy officer for the Pennsylvania Association of Nonprofit Organizations.

Budget cuts dole a double economic blow to local communities that depend on nonprofits, which act as both service providers and as employers of more than 14 million people, or almost 10% of the U.S. workforce. This comes at a time when nonprofits are already struggling to meet increased demands for help amid declining donations from individuals and foundations stung by last year’s market downturn.

Collectively, state governments owe these nonprofits more than $15 billion in backlogged payments, according to Independent Sector, a coalition of 600 nonprofit groups and foundations.

To cover the shortfalls, the coalition has petitioned the Treasury for funds from the Troubled Asset Relief Program, or TARP, to bypass state governments and go directly to nonprofits.

Their thinking goes, if the government can bail out big banks and auto companies, why not the nonprofits that prop up the neediest individuals in every city?

A Treasury spokesman said the department receives many petitions and could not comment on a particular request.

Secondary Sources: Is the Fed Already Tightening?

A [belated, apologies! -Ed.] roundup of economic news from around the web.

Early Withdrawal: Irwin Kellner, chief economist for Marketwatch, writes today that the Federal Reserve “has not only stopped depositing copious amounts of liquidity into the economy — it now appears to be in the process of making a sizable withdrawal.” Mr. Kellner says that gauges of the money supply and other “aggregate measures” of the monetary base “stopped rising several months ago and have since declined,” according to data provided by the Federal Reserve Bank of St. Louis. “This will mark the beginning of what could be a rather aggressive tightening of monetary policy,” he writes. “The Fed can’t wait for all the stars to align…it must act long before if it is to prevent another burst of inflation.”

Were the Bailouts a Good Idea? Tyler Cowen, an economics professor at George Mason University and a self-described “small ‘l’ libertarian,” sticks his neck out today on his Marginal Revolution blog, writing that “it is worth revisiting this question…. If we stop and click pause and evaluate the policy today – the answer to my question is ‘yes, the bailouts were a good idea’.”

What Happened to Chicago’s “Life of the Mind”?

Via email:

For someone with close ties to the place, the changes in the economics department at the University of Chicago are incredibly sad.

Steve Levitt, the future of the Friedman/Stigler/Becker tradition of microeconomics is turning his Freakonomics blog in to a carny side-show, most recently with a smirking post about breast implants and a gruesome murder. Meanwhile, Richard Posner tries to make a principled stand in favor of serious intellectual discourse on macroeconomic policy, but is so out of touch that he ends up channeling Steven Colbert. It's hard to recall any instance in which an author so publicly and completely undercut his own argument.

Milton Friedman used to speak with nostalgia about the things that made Chicago unique. When he arrived, it was far away from both the corridors of power and from the east-coast bastions of accepted wisdom. It was the kind of place where as a young academic he could make claims that no one else believed: The data from the great depression actually showed that monetary policy was extraordinarily powerful. Exchange rates trade in open market; traders at the commodities exchanges could even write futures contracts on exchange rates. The government could finance public education without being the provider.

These ideas, all widely accepted now, were heresy when Friedman proposed them. But Chicago was the kind of place where you could take an unusual stand. Your colleagues would take your ideas seriously, challenge them, probe them, help you decide if they were right. 

Over time, the willingness to challenge the prevailing consensus that characterized the Chicago School has devolved into smug willingness to shock. Friedman's colleagues held him accountable. Where are the colleagues who could keep Levitt and Posner from flying off the rails? The debates that the department was once so proud of, the ones that constituted "the life of the mind," have been replaced by blog posts. 

Posner, of course, made his career by pushing the limits, famously with his 1978 paper on adoption. In retrospect, the tone then had already begun to change. He had a serious point to make, but he was just a little bit too eager to be the bad boy and get attention. Friedman could have given the same analysis, but is hard to believe that he would casually dropped in a reference to the "the baby market."

Steve's post about the brutal murder of the young woman certainly got attention, including a comment that starts, "He he." What his point could possibly be, other than getting attention, is hard to imagine. Read the post and the comments that follow if you ever have trouble remembering why so many people hate economists.

In truth, Friedman did also pioneer the role of economist as celebrity. He balanced the conflicts this raises remarkably well, but in the end it is not a healthy mix. If Levitt and Posner are the role models that the next generation at Chicago look up to, the future is grim.

Economists React: Will Rebound in Confidence Be Sustained?

Economists offer their interpretation of the August rebound in consumer confidence.

Consumer confidence bounced back sharply in August, with overall confidence moving back up to near the recent May upward spike of 54.8.  While the bounce back in August consumer sentiment is good news, it is not likely that we will see a sustained improvement in September. The “cash for clunkers” program has ended, and this will take some of the wind out of the sails of auto buying intentions. More likely we will continue to see a jagged pattern with a very gradual upward trend over the next several months. We are not looking for the consumer sector to be much of a driver of the recovery beyond the third quarter, when auto sales are expected to spike in response to the temporary “cash for clunkers” program. –Brian Bethune, IHS Global Insight

A 10-point increase in the expectations index was the main source of strength in the Conference Board report, and the 46 point increase in expectations over the last six months looks consistent with an economy that has emerged from recession. The labor market details of the report also suggest that the unemployment rate increased at most a small amount in August. On the more negative side of things, confidence is still lower than it was back in May, when the index was 54.8. –Abiel Reinhart, economist at J.P Morgan

We see mixed results in the Conference Board’s survey itself with consumer perceptions of the present situation still on the down side and future expectations jumping to their pre-recession levels. The Conference Board’s measure surprised the markets on the upside in August rising 6.7 points from an upwardly revised reading in July [but] Consumers’ perceptions of the present situation remained depressed at 24.9, increasing by a mere 1.6 points from the previous month’s reading. The low in March (21.9) was the worst since the early 1980s. – Yelena Shulyatyeva, BNP Paribas

Economists React: “Breadth of Gains Was Impressive”

Economists weigh in on the June improvement in the S&P/Case-Shiller index of home sales.

Not only are housing prices stabilizing, they are starting to grow. The three most widely used yardsticks for measuring housing prices (The National Association of Realtor’s median price, the Federal Housing Finance Agency (FHFA) price indexes and the Case-Shiller prices indexes) are telling a similar story…First, it will help banks holding toxic assets: With house prices stabilizing, these assets will regain some of their lost value. Second, the market for selling homes will get a short-term shot in the arm from the so-called “fence-sitters” who have been waiting for prices to fall even more before buying a home. Third, rising prices will help consumer spending through the wealth effect. –Patrick Newport, economist at IHS Global Insight

The breadth of gains across cities was impressive, with eighteen out of twenty cities recording increases, some of them very strong. Cleveland rose 4.2% after rising 4.1% last month, so its yearly rate is now down only 3%. …Some have argued that the recent improvement is simply a seasonal effect. That is playing some role, but seasonally adjusted, prices were flat in May and up 0.8% in June, suggesting that some underlying improvement is occurring…. Overall, this appears like a genuine turn. –Ian Morris, HSBC’s head of U.S. economics

Will the bottom hold? The main concern here is that various foreclosure moratoria temporarily limited the downward pressure from distressed properties and as foreclosures pick up again, prices will head lower. This is certainly possible, but it feels like the firming in demand for homes will be sufficient to counteract the downward influence from the ongoing foreclosure wave…While it would be nice (not least as a homeowner myself) to think that home prices are going to quickly recover a chunk of the ground lost over the past 2 or 3 years, we are simply not that optimistic. –Stephen Stanley, RBS Securities

The Deficit: Just as Bad under McCain?

Bruce Bartlett, a supply-side economist who worked in the Reagan Treasury, says the budget deficit if Republican candidate John McCain were elected would have been nearly as big as the one the Obama White House is projecting for the current fiscal year. 

Back in January, before Obama took office, the Congressional Budget Office projected a budget deficit of $1.186 trillion for 2009. It now projects a deficit of $1.587 trillion this year, a $401 billion increase.

In an email this morning, Mr. Bartlett points out that “If one goes through the March update (pp. 6-7) and the August update (pp. 52-53) and adds up all the changes to the January estimate, you find that the deficit increase since January consists of $46 billion in lower than expected revenues due to the economy (11.5%), $129 billion in higher spending due to technical re-estimates (32.2%), and $226 billion due to legislative changes to both spending and revenues (56.3%).

“This suggests that we would have had a deficit of at least $1,361 billion this year even if McCain had won (January deficit plus lower revenues and technical changes and no legislative changes),” he writes - and, “that’s assuming no stimulus and that the economy would have performed as well without it. 

“That’s only 14% less than the deficit currently projected,” said Mr. Bartlett. Plus, ”some of the legislative changes are due to higher defense spending and other non-stimulus related programs,” he said.

Mr. Bartlett said Mr. McCain “undoubtedly would have supported some sort of fiscal stimulus,” but “It might have been more tax- than spending-oriented, [which] would have increased the deficit nevertheless. 

“If we assume that McCain’s stimulus would have been half the size of Obama’s that leaves us with an estimated deficit of $1,474 billion under McCain—only 7% less than the deficit now estimated,” he concludes.

Mr. Bartlett has been loudly warning for some time that – like it or not – tax increases are inevitable, given the dimensions of the federal deficit and the bipartisan affection for government spending.

He also is the author of a forthcoming book called The New American Economy: The Failure of Reaganomics and a New Way Forward.

A Look at Case-Shiller, by Metro Area (August Update)

The S&P/Case-Shiller home-price indexes, a closely watched gauge of U.S. home prices, rose 1.4% in June from May. The annual decline in the 20-city index slowed to 15.4%.

  • See the full S&P/Case-Shiller report.
  • Below, see data from the 20 metro areas Case-Shiller tracks, sortable by name, level, and year-over-year change — just click the column headers to re-sort.

    (About the numbers: The Case Shiller indices have a base value of 100 in January 2000. So a current index value of 150 translates to a 50% appreciation rate since January 2000 for a typical home located within the metro market.)

    Home Prices, by Metro Area

    Metro Area June 2009 Change from May Year-over-year change
    Atlanta 107.52 1.5% -13.7%
    Boston 152.71 2.6% -5.9%
    Charlotte 120.66 0.7% -9.6%
    Chicago 124.99 1.1% -16.7%
    Cleveland 106.38 4.2% -3.0%
    Dallas 119.68 2.7% -2.2%
    Denver 126.92 2.5% -3.6%
    Detroit 69.49 -0.8% -25.0%
    Las Vegas 107.31 -2.0% -32.4%
    Los Angeles 160.90 1.1% -17.8%
    Miami 145.37 0.5% -23.4%
    Minneapolis 113.48 3.1% -19.8%
    New York 171.49 0.4% -11.9%
    Phoenix 104.73 1.1% -31.6%
    Portland 148.47 1.0% -15.2%
    San Diego 147.31 1.6% -16.0%
    San Francisco 124.70 3.8% -22.0%
    Seattle 149.53 0.4% -16.1%
    Tampa 140.90 0.4% -19.5%
    Washington 174.32 2.8% -11.8%

    Source: Standard & Poor’s and FiservData

    View data from the July report.

Bernanke on His Renomination

Here, the full text of Ben Bernanke’s prepared remarks.

Thank you, Mr. President.

I would like to express my gratitude to President Obama for the confidence he has shown in me with this nomination and for his unwavering support for a strong and independent Federal Reserve.

It has been a particular privilege for me to serve with extraordinary colleagues throughout the Federal Reserve System. They have demonstrated remarkable resourcefulness, dedication, and stamina under trying conditions. Through the long nights and weekends and the time away from their families, they have never lost sight of the critical importance of the work of the Fed for the economic well-being of all Americans. I am deeply grateful for their efforts.

I especially want to thank my own family — my wife Anna and our children, Joel and Alyssa. Without their support and sacrifice I could not undertake this task.

The Federal Reserve, like other economic policy makers, has been challenged by the unprecedented events of the past few years. We have been bold or deliberate as circumstances demanded, but our objective remains constant: to restore a more stable economic and financial environment in which opportunity can again flourish, and in which Americans’ hard work and creativity can receive their proper rewards.

Mr. President, I commit today to you and to the American people that, if confirmed by the Senate, I will work to the utmost of my abilities — with my colleagues at the Federal Reserve and alongside the Congress and the Administration — to help provide a solid foundation for growth and prosperity in an environment of price stability.

Thank you.

See the full text of President Obama’s prepared remarks.

Source: The Federal Reserve

Geithner Fields Questions from Digg Users

In an interview, Treasury Secretary Timothy Geithner responded to questions submitted and voted on by Digg users in partnership with The Wall Street Journal. Among the topics in the taped discussion:

Federal Reserve auditing: “You want to keep politics out of monetary policy. … The Fed actually is subject to very comprehensive oversight by the Congress, by a series of external auditors.”

Goldman Sachs’ Ties to Government: “We would never, ever have people in these jobs who would do anything for the benefit of an individual company or individual firm. That is a very important obligation that all of us have.”

Geithner’s Tax History: “A great strength of our system is all of that information was put in the public domain. The Congress of the United States had the opportunity to go through it over a prolonged period of time. … They had a chance to make a judgment.”

The Rising Debt: “We inherited and started in office with a deep financial crisis. … When we get growth back on track, we need to bring those deficits down to a sustainable level. We are completely committed to do that.”

Visit the Journal Community at to join a discussion with other users, or use the Comments field here.

links for 2009-08-25

Evidence that the College Chase Is Crazier in the Northeast

The intensifying competition to get into high-prestige private college colleges, particularly among upscale parents in the Boston to Washington corridor, is well explored — and familiar to anyone whose kids have gone through the college-application process in the past several years. Here come a trio of economists who have put some numbers on it. They say it *is* worse in the Northeast.

In a paper distributed by the National Bureau of Economic Research, John Bound and Brad Hershbein of the University of Michigan and Bridget Terry Long of Harvard calculate a “composite index of competitive pressure” and find the competition particularly intense in six places  — in order of intensity — New Jersey, Rhode Island, District of Columbia, Connecticut, Massachusetts and New York. Their index reflects the fraction of high schools students taking the PSAT, taking an AP exam, spending 10 or more hours a week on homework, using private test prep services and applying to five or more colleges.  The states ranked seventh and eighth (Delaware and Virginia) are significantly below the top six in the index. (The authors note that four-year institutions in New England and the mid-Atlantic states tend to accept the smaller percentage of applicants compared to colleges in other regions, in part because the most selective, prestigious schools are in those states. Competition for slots in college has intensified every where in recent years, but more so in the Northeast and in California, they say.)

All this competition to get into the right school might be socially productive if it caused high school kids to study and learn more, the economists say. Unfortunately, looking at several indicators that might suggest more of those goods things, they’re not convinced that’s the case. “The increased competition that currently exists for admission to a more selective college might have real benefit it it were to increase learning amongst high school students,” they write. “However, our analysis suggests there are reasons to be suspicious that this congenial outcome might not hold true.”

Another NBER paper, by economists Garey and Valerie Ramey of the University of California at San Diego, suggests that competition to get into a good college is changing the way ambitious parents spend their time. Noting that the amount of time that college-educated parents devote to taking care of their children began to rise sharply in the mid-1990s, they hypothesize that this reflects increased competition for desirable college slots. To improve their kids’ chances of success in the college sweepstakes, they argue, parents are spending more time with their children. They call it “The Rug Rat Race.”

Economists React: Bernanke Reappointment Is ‘Good News’

Economists, lawmakers, bloggers and others weigh in on President Obama’s decision to reappoint Fed Chairman Ben Bernanke.

  • While I have had serious differences with the Federal Reserve over the past few years, I think reappointing Chairman Bernanke is probably the right choice. Chairman Bernanke was too slow to act during the early stages of the foreclosure crisis, but he ultimately demonstrated effective leadership and his reappointment sends the right signal to the markets. –Sen. Chris Dodd, (D., Conn.), Chairman Senate Banking Committee
  • [Ben Bernanke]

  • The experience that Bernanke has acquired will be invaluable. I don’t mean this to sound like a back-handed compliment, but Bernanke is not the same person today as the one who made the decisions that his critics object to. –Louis Crandall, Wrightson ICAP
  • I think it’s good news for the Federal Reserve. It’s good news for the country. It’s a great choice. Chairman Bernanke has done a terrific job in bringing openness to the Fed. He has been bold and creative in dealing with the financial crisis… It was not clear to most people that the crisis was going to be as broad-based, and that the excesses in the financial markets and in lending were as broadly based as they turned out to be. Even at the start, he was willing to consider all options to deal with what appeared to be more a liquidity than a solvency crisis. As it began to become more clear that it was a crisis of solvency and leverage and a classic credit crunch, he didn’t flinch in bringing enormous creativity to bear in mitigating the problem –Richard Berner, Morgan Stanley
  • Having a new chairman come in at this late date would put the Fed engineered solution to both the recovery and the exit strategy at risk. The Federal Reserve made a hasty exit from easy money stimulus in the 1930s and we know how that worked out… Mistakes have been made at many regulatory institutions during this crisis, but all the Fed’s mistakes would have been made by any man according to the prudent man rule. Bernanke is a true prudent man who calls them as he sees them, and knows the ins and outs of policymaking… If he can pull off this recovery that still needs nurturing, he could well go down as one of the greatest Fed Chairmen in history. –Christopher Rupkey, an economist with Bank of Tokyo-Mitsubishi
  • History shows that uncertainty is the enemy of markets. Much speculation about Bernanke and a possible Summers succession has swirled in market analysis circles. That is over… We wish the reappointed chairman success. Meanwhile we remain vigilant and recognize that, in a globally linked world, financial integration means that no single central bank and no one chairman of it has ultimate and dominant power. Bernanke needs to find a path for coordinated action when the time to remove the stimulus is at hand. –David R. Kotok, Cumberland Advisors
  • As Fed Governor Bernanke supported the flawed policies of Alan Greenspan — he never recognized the housing bubble or the lack of oversight — and there is no question, as Fed Chairman, Bernanke was slow to understand the credit and housing problems. And I’d prefer someone with better forecasting skills. However once Bernanke started to understand the problem, he was very effective at providing liquidity for the markets. The financial system faced both a liquidity and a solvency crisis, and it is the Fed’s role to provide appropriate liquidity. Bernanke met that challenge, and I think he is a solid choice for a 2nd term (not my first choice, but solid). Calculated Risk
  • Maybe Obama realizes that the really hard part is only just beginning. Unwinding the vast expansion of the Fed’s balance sheet and figuring out how to tighten the screws on the money supply without plunging the country into an another economic contraction will be a tremendous challenge. Why saddle that grief on some up-and-coming Democratic economist? It’s Bernanke’s mess. Let him clean it up. –Andrew Leonard,
  • [A] benefit of continuity is that it buys you room to maneuver. During the last several months, the Fed has massively expanded its role in the economy to keep credit flowing and prevent the financial system from seizing up. This is unquestionably a good thing… But one side effect has been to create a vocal reaction among bond traders (and their economist-sympathizers), who fear the moves will be inflationary and are constantly pressuring Bernanke to unwind these policies as soon as possible. Alas, doing so while the economy and financial system are so weak would be a horrible, self-defeating mistake–something Bernanke understands. But without Bernanke’s track record and credibility, a new chairman might have to start unwinding the Fed’s balance sheet much sooner to establish his/her anti-inflation bona fides. (Or, put differently, bond investors might actually start bidding up interest rates rather than just kvetching about inflation unless a new chairman sent a hawkish signal out of the gate.) Suffice it to say, the White House has very good reasons for wanting to avoid this outcome. –Noam Scheiber, The New Republic
  • Excellent decision. P.S. Don’t let this good news distract you from the much-less-good economic news on Tuesday: CBO and OMB are releasing new budget projections that will show trillions upon trillions of coming deficits. Donald Marron
  • Game theory would have it this is the safe pick, the one that you cannot get into trouble for, even if things go bad later. A new Fed Chair, in the event something went awry down the road would lead bame back to the White House. –Barry Ritholtz, Fusion IQ

Compiled by Phil Izzo

Offer your reactions in the comments section.

Dig into an interactive summary of economists’ forecasts for the coming year from the latest survey.

Bernanke Reappointment Early, but Not Unprecedented

President Barack Obama is expected to announce the reappointment of Ben Bernanke as chairman of the Federal Reserve on Tuesday, more than five months before the expiration of his first term. The move may seem early, but it isn’t unprecedented, especially amid continued uncertainty in the economy.

Bernanke still has to face the Senate again before he takes a second term. (Associated Press)

When former President George W. Bush chose Bernanke to succeed Alan Greenspan, the announcement was made more than three months before Greenspan’s term was set to expire in January 2006. But that was a closely watched changing of the guard amid the departure of the man dubbed “the Maestro,” at the time revered by most market participants. (In the 2000 Republican primary debates, Sen. John McCain joked about Greenspan: “Not only would I reappoint him, but if he died we’d prop him up and put sunglasses on him as they did in the movie Weekend at Bernie’s.”) By contrast, Greenspan’s initial appointment to succeed Paul Volcker came barely two months before Volcker’s term was set to expire on Aug. 6, 1983.

Greenspan was reappointed four times as Fed chairman, and three of those announcements came just about a month before his term was set to expire. The exception came in 2000. Then-President Bill Clinton nominated Greenspan to his fourth term in January, six months before the Fed chairman’s time in office was set to expire. At the time, a contentious presidential election was gearing up, and the early move was aimed at keeping politics out of monetary policy.

President Obama’s decision to move quickly on Bernanke’s reappointment may have the same effect. The economy has shown tentative signs of recovery, but the trajectory of the next few months remain uncertain, as most forecasts call for unemployment to continue to drift up even as growth is expected to return. The Fed must contemplate its exit strategy from a variety of emergency programs and historic low rates amid this clouded backdrop. Clarifying Bernanke’s position could ease some of the political pressures.

Obama’s announcement isn’t the end of the story, though. A Fed chairman, who must be a member of the board of governors, can be renominated by the president to four-year terms for as long as the 14-year term as governor runs (in Bernanke’s case until 2020). The nomination must be confirmed by the Senate. Banking Committee Chairman Chris Dodd (D., Conn.) and ranking member Sen. Richard Shelby (R., Ala.) have expressed support for Bernanke, but the road to reappointment could still prove rocky if the economy takes an unexpected turn for the worse.

White House Expects ‘Gradual’ Growth Offset from Clunkers Program

The “cash for clunkers” program that concluded Monday will boost economic growth in the third quarter and create or save 21,000 jobs in 2009, the White House said.

The gross domestic product in the third quarter will be 0.3 to 0.4 percentage points higher at an annual rate than it would have been without the car trade-in program, according to a preliminary analysis by the White House Council of Economic Advisers.

“Because of increased auto production to replace depleted inventories, this increase in the level of GDP will be sustained in the fourth quarter,” the White House said in a statement. It said that any “offsetting effect on GDP in future years is expected to be gradual.”

The CEA acknowledged auto sales “will fall back after the program winds down, eventually converging to a more sustainable level, but most analysts think that the program will have pulled a substantial amount of demand from future years to the present.”

The White House also said that the program’s direct and indirect impact on auto sales and production will “generate employment that is equivalent to 21,000 full-time year-round jobs.”

“The employment benefits from the program will extend well after today’s deadline for filing claims, as automakers sustain production increases into the fourth quarter to replenish depleted inventories,” the statement said, pointing to planned production increases in the third and fourth quarters by General Motors Co. and Ford Motor Co.

In an interview, Brian Deese, a White House adviser who worked with President Barack Obama’s auto-industry task force, dismissed criticism that the program’s economic impact would be negligible because it was simply “pulling forward” auto sales that would have occurred in future years.

Deese said that was one of the program’s very strengths: It condensed hundreds of thousands of auto sales that would have occurred over several years into a four-week period at a time when the economy needed it more critically.

The government is “inducing (consumers) to buy at a point when output is low and the economy is not at full employment,” said Deese. “So there’s an economic logic to that.”

“The real question is not, ‘Are these purchases that would have occurred at some point in the next five years?’” Deese said. “The real question is, ‘Have you induced a meaningful amount of demand that would not have occurred within the window when, for macroeconomic purposes, more demand was really important?’”

He said the “offsetting effect” on auto sales in future quarters would be “negligible.”

A senior administration official conceded that a natural concern arising from stimulus programs such as clunkers is that the government would incentivize consumers to take on more debt at a time when many Americans are already strapped and unemployment is high.

But the official said such concerns are minimal for clunkers, given that credit markets remain tight and many auto-financing firms continue to be selective about who they extend loans to.

Hughes Appointment Shines Light on Century-Old Rules

The Federal Reserve Board’s decision today to elevate Denis Hughes, a New York labor union leader, to the role of chairman of the board of the Federal Reserve Bank of New York is an unusual choice, and also shines a light on a sometimes cumbersome law overseeing the governance of the Federal Reserve.

The Federal Reserve Act (section 4, paragraph 20) says that chairmen of boards overseeing regional Fed banks need to have “tested banking experience.” Mr. Hughes, who is head of the New York branch of the AFL-CIO labor union, doesn’t seem to have that kind of banking experience on his resume. He’s spent most of his professional life as an electrician and union leader.

The law, written in 1913, puts the Fed in a difficult position, because it also dictates (section 4, paragraph 15) that a chairman of a district bank can’t be an officer, director, employee or shareholder in a private bank, a hurdle Mr. Hughes easily clears.

The century-old rules, in other words, say chairmen of regional Fed banks have to have banking experience, but can’t have anything to do with banks – a pretzel of a provision which ties one hand behind the Fed’s back, and the other hand in front.

One solution to the problem would be to rewrite the law. But you’re highly unlikely to hear a Fed official utter those words. If Congress gets started on that, who knows what else it will change?

A little background on how the regional Fed banks works: The Federal Reserve system includes 12 regional banks that dot the nation’s landscape in places like St. Louis, Atlanta, and of course New York. The district Fed banks help to supervise private banks. Their presidents have a say in interest-rate decisions made by the Federal Open Market Committee in Washington. The boards of these banks are made up of directors who represent the private sector and they also give the Fed input on the economy from the trenches. The New York Fed, with a market desk that regularly deals with Wall Street, is unusually powerful in the system.

Regional Fed banks have traditionally managed the poorly written rules on district board chairmanship by asking local business executives to chair their boards. CEOs of firms like Anadarko Petroleum Corp. and United Parcel Service run the boards of regional Fed banks in Dallas and Atlanta,  respectively. Sometimes academics come in handy   – the Boston Fed is chaired by Lisa Lynch, a Brandeis University dean.

The New York Fed has turned to academics before to chair its board — such as John Sexton, president of New York University. But it’s typically turned to masters of Wall Street who don’t work directly for banks  – people like Pete Peterson, retired chairman of the Blackstone Group or Stephen Friedman, retired chairman of Goldman Sachs.

That’s harder to do now. In the wake of the crisis, critics say the New York Fed is too cozy with Wall Street. The New York Fed’s job of selecting board members is further complicated by Mr. Friedman. A controversy erupted earlier this year over his decision to buy Goldman Sachs stock while serving at the New York Fed, and he stepped down.

Mr. Hughes is the anti-Friedman. And having served as a director at the New York Fed now for more than three years, one could argue he’s gotten his share of on-the-job training when it comes to tested banking experience.

Mr. Hughes declined to comment.  “His long service on the board of directors has given him an intimate and rather sophisticated understanding of the operations of the Federal Reserve and of the banking system,” said Calvin Mitchell, a spokesman for the Federal Reserve Bank of New York.

“Why This New Crisis Needs a New Paradigm of Economic Thought”

[More Side of the road blogging - stopped for a moment at the Great Salt Lake.] When I talked to the senate's COP panel, one of many things that I emphasized was the need to develop plans in advance to deal with various contingencies. Without such plans policy actions - even justifiable ones - appear ad hoc and also face resistance that delays their implementation or prevents them from being put into place altogether.

For example, we need a plan on the shelf and ready to go for dismantling large banks that have failed, something that has received a lot of attention. It has received much less attention, but I also think we need a plan for disposing troubled financial assets when the need arises. I still believe that the crisis would have been much less severe if very early, prior to Lehman for sure, the government had moved aggressively to buy bad assets from bank balance sheets. it took far too long, and when they finally decided to do this (i.e. the original Paulson plan), they had no idea how to value the assets, there was considerable political resistance because nobody knew how the program would work (allowing lots of false information to enter the debate), and so on, and this program never really got off the ground. The assets are still there waiting for the miracle of rising asset prices to restore their value.

Having a plan ready in advance that specifies how assets will be valued, how taxpayers will be protected if the government overpays (overpaying can help with recapitalization, but it shouldn't be a gift), and so on, a plan that has been approved in advance by legislators (at least implicitly) so as to reduce political resistance, will overcome many of the technical problems and objections that prevented the bad asset removal programs from being used effectively in this crisis.

Keiichiro Kobayashi believes these toxic assets, many of which are still hidden on bank balance sheets, are still a problem and could result in a Japan style lost decade if the government does not remove them, and he calls for a new macroeconomic paradigm that puts these issues front and center (On his main point about whether financial sector recovery is necessary before the real economy can recover, I think we will recover either way, but agree that recovery would be faster if these assets were removed once and for all - but I should get back on the road...):

Why this new crisis needs a new paradigm of economic thought, by Keiichiro Kobayashi, Commentary, Vox EU: The policies being debated in the US and Europe today are almost identical to those that played out in Japan a decade or so ago. Japan experienced the collapse of its colossal property bubble in 1990 and then a series of crises as major banks and securities companies were overwhelmed by rapidly rising non-performing debts. The conventional wisdom among economists and politicians throughout the 1990s was that massive public expenditure and extraordinary monetary easing would give the necessary boost to market sentiments and prompt an economic recovery. Public opinion in the US and Europe today seems to be the same.

And indeed, throughout the 1990s, Japan did introduce major public works projects and tax cuts, yet the economy failed to stabilise, asset prices continued to fall, and the volume of non-performing debts continued to climb. Far from being dispelled, the sense of insecurity that had permeated the markets actually increased throughout the 1990s, ultimately leading to the collapse of several major financial institutions in 1997 and sparking an outbreak of panic.

Even after this, recovery efforts continued to be channelled through large-scale public expenditure, while the disposal of non-performing debts became bogged down. Only around 2001 did Japanese public opinion finally turn away from the belief that reductions in bad debt and financial system stability would follow an economy recovery. The public came to understand that the financial system had to be stabilised and market insecurity dispelled before any recovery could occur. Special inspections were conducted repeatedly by financial regulators and Japanese megabanks were forced to accept massive capital increases and a new round of mergers. Meanwhile, the Resolution and Collection Corporation and the Industrial Revitalisation Corporation of Japan restructured companies that had collapsed under enormous debt burdens and finally broke the back of the non-performing debt problem. This sparked a recovery of market confidence, and Japan enjoyed a period of economic expansion from 2002 to 2007.

Japan redux?

Mainstream opinion in the US and other countries today appears to be similar to the thinking that dominated Japan during the 1990s. The general public, for the most part, have not bought into the theory that stabilising the financial system through means such as temporarily nationalising banks and rehabilitating debt-ridden borrowers is a necessary prerequisite for achieving an economic recovery. In a VoxEU column published on 1 April, I emphasised that there is a danger in expecting too much from fiscal policy. Rehabilitating the US financial system through the disposal of non-performing assets is essential for a global economic recovery. Princeton University Professor Paul Krugman commented on my column at his New York Times blog, claiming that the belief that stabilising the financial system is a necessary precondition for economic recovery is questionable. He said that if bank reform were the major factor in Japan’s economic recovery, capital investment should have increased, yet the Japanese data shows no increase in capital investment during the recovery period. My response is that stabilising the financial system alleviated the funding constraints that were making it difficult for companies to meet their working capital needs. As several recent studies show (see, for example, Chari, Kehoe and McGrattan 2007), loosening financial constraints on working capital causes productivity to rise and enables an increase in output and employment, but it does not necessarily result in higher capital investment. There is no contradiction between the Japanese data showing non-increasing capital investment and the hypothesis that stabilising the financial system was a factor behind Japan's economic recovery.

The challenge for macroeconomics

The essence of the debate is whether economic recovery and stabilisation of the financial system are two distinct and unconnected events. The prevailing view is something like – the framework within which we need to engineer a global economic recovery is macroeconomics. Since current macroeconomic theory deals only with Keynesian policy (fiscal and monetary policy), the only tools we have are fiscal and monetary expansion. The disposal of non-performing assets and injection of capital are necessary steps in stabilising the financial system, but to the best of our knowledge there is no clear link between this and a macroeconomic recovery. However, if we achieve an economic recovery through fiscal and monetary policy, the volume of non-performing assets will ease, eliminating the need for policies specifically designed to dispose of bad assets.

The experience of Japan in the 1990s would seem to indicate that these expectations are misplaced. Further evidence is provided by Sweden, which experienced its own asset bubble collapse around the same time that Japan did, but recovered much more quickly after Swedish policymakers designed a surgical bad-asset restructuring.

Signs of economic recovery are now emerging and fears of the crisis overwhelming the world economy are starting to fade. Yet if the policy responses of US and European governments toward the disposal of non-performing assets begin to falter, the financial systems of Europe and the US will once again be vulnerable to recurring financial crises, which Japan experienced repeatedly in the 1990s.

There have been those who have recognised that cleaning up banks’ balance sheets and rehabilitating debtors are necessary preconditions for an economic recovery, but this recognition has been based purely on empirical principles. The existing theoretical structure of macroeconomics is incapable of addressing macroeconomic performance and the stability of the financial system in an integrated context. For example, in the standard New Keynesian or Neoclassical macroeconomic models, the economic agents are the household, corporate, and government sectors, and the financial sector is simply treated as an innocuous veil between these three sectors. The issue of non-performing assets is invariably viewed as a microeconomic issue related to the banking industry.

In fact, the crisis we are currently experiencing may call for a change in the theoretical structure of macroeconomics. In my view, a macroeconomic approach that encompasses financial intermediaries and places them at the centre of its models is necessary. The new approach should satisfy three requirements:

  • The focus should be on the function of financial institutions as media of exchange and the conditions that might cause payment intermediation to malfunction. Perhaps this kind of macro model can be built on the framework of the monetary theory of Lagos and Wright (2005), which explicitly considers the role of money as a medium of exchange.

  • The new macroeconomic approach should provide a unified framework for discussing the cost and effectiveness of various policy responses to the current global crisis in an integrated context, in which fiscal policy, monetary policy, and bad asset disposal can be compared and relative weightings can be given to all three.

  • To provide a unified framework for policy analysis, the new approach should make it easy to embed a model of financial crises into the standard business cycle models (i.e., the dynamic stochastic general equilibrium models).

I have elsewhere attempted to construct a theoretical model that satisfies these requirements, in which I assume that assets such as real estate now function as media of exchange given the development of liquid asset markets but are unable to fulfil this function during a financial crisis (see Kobayashi 2009a). With a model like this, we can regard a financial crisis as the disappearance of media of exchange, which triggers a sharp fall in aggregate demand. In this case, both macroeconomic policy (fiscal and monetary policy) and bad asset disposals can be understood as responses targeting the same goal – restoring the amounts of media of exchange (inside and outside monies). Thus we can compare and analyse these policies in an integrated context.

Bad asset disposal should not be left to financial community insiders

If macroeconomic policy and financial stabilisation through bad asset disposals are designed to eradicate the same externality, financial stabilisation is not just a problem for the financial community – it is crucial for the recovery of the overall economy. Therefore, the design and execution of policies capable of disposing of non-performing assets are not tasks that should be left to financial community insiders. We need to openly discuss what financial stabilisation policies should look like (for practical lessons on the policy package from Japan’s experience, see Kobayashi 2008, 2009b). Bad asset disposals including capital injections for financial institutions (or temporary nationalisation) and the rehabilitation of debt-ridden borrowers must be considered alongside fiscal stimuli and monetary easing, with a new awareness that they also constitute macroeconomic policies. Perhaps, we need to adopt a new paradigm of economic thought.


Chari, V. V., P. J. Kehoe, and E. R. McGrattan (2007). "Business Cycle Accounting," Econometrica, vol. 75(3), pages 781-836, 05.
Kobayashi, K. (2008). “Financial Crisis Management: Lesson from Japan’s Failure.”, 27 October 2008.
Kobayashi, K. (2009a). “Financial Crises and Assets as Media of Exchange.” Mimeo.
Kobayashi, K. (2009b). “Some Reasons Why a New Crisis Needs a New Paradigm of Economic Thought.” RIETI Report No.108 July 31, 2009
Lagos, R., and R. Wright (2005). “A unified framework for monetary theory and policy analysis.” Journal of Political Economy 113 (3): 463–484.

Union Workers Hit Harder By High State Taxes, Study Finds

Union employees bear more of the burden of high state corporate taxes than non-union employees, according to a new study distributed by the National Bureau of Economic Research.

That suggests that in high-tax states like Pennsylvania and New Jersey, taxes take a bigger bite out of pay for union members than non-union workers in similar circumstances. Conversely, union workers may have more to gain from low taxes in places like Texas or Wyoming than non-union employees.

The study by R. Alison Felix, an economist at the Federal Reserve Bank of Kansas City, and James R. Hines Jr., a University of Michigan professor, looks at “union wage premiums,” or the average amount by which union hourly wages exceed non-union hourly wages. It analyzes how various levels of state tax affect those premiums.

In states with corporate tax rates of 9% or greater, union workers made an average of $1.30 per hour more than their non-union counterparts. But that union wage premium jumped to an average of $3.73 in states with corporate tax rates below 4%, according to the study.

Since lower taxes allow firms to keep more profits, and unions have power to negotiate a greater share of those profits, it is not surprising that high taxes cut into union wages to a greater degree than non-union wages, Hines said in an interview.

The study provides more evidence that while income taxes tax corporations, it is the stakeholders, including employees, who bear the burden of those taxes, he said.

In a theoretical example of a firm that was 100% unionized, roughly 54% of the cost of higher tax rates would be borne by union wages, the study said.

High state taxes have even more of a negative impact in capital-intensive industries, which are more sensitive to corporate income taxes, the paper said.

In one departure from the general thrust of the study, the union wage premium was greater in high-tax states than it was in low-tax states, among states with right-to-work laws.

The study used data from the 2000 U.S. Census Current Population Survey.

Israel Central Bank Becomes First To Raise Rates

By Paul Hannon

Israel’s central bank Monday raised its key interest rate to 0.75% from 0.5%, responding to signs the economy has started growing and to fears that the inflation rate may pick up quickly.

In doing so, the Bank of Israel became the first central bank to raise its key interest rate in response to indications that the global economy is emerging from its most severe downturn since the Great Depression.

How Israel fares in the wake of a hike may affect the timing of rate increases elsewhere, with a string of central banks including those of Australia, Norway, South Korea, India and the Czech Republic poised to tighten monetary policy in the coming quarters.

The Bank of Israel has been as quick to respond to signs of a recovery as it was to respond to the threat of a deep recession following the intensification of the global financial crisis in the third quarter of last year.

“The most recent data on real activity in Israel strengthen the assessment that there has been a turnaround, although there is great uncertainty regarding the expected rate of growth,” the central bank said.

According to figures released earlier this month, Israel’s gross domestic product grew at an annualized rate of 1% in the three months from April to June, having contracted by 3.2% in the first quarter of 2009 and by 1.4% in the fourth quarter of 2008.

The central bank said that, while other central banks were likely to leave their key rates unchanged until the middle of 2010, they weren’t faced with an inflation rate that was already high.

“In this situation, the Bank of Israel’s decision to increase the interest rate for September by a quarter of a percentage point strikes a balance between the need to moderate inflation and the need to continue to support the recent recovery in economic activity,” the central bank said.

Partly as a consequence of the brevity and shallowness of its economic contraction, prices have been rising more rapidly than in many developed economies, and now threaten the Bank of Israel’s inflation target.

The last several months have seen annual inflation rates above the government’s target range of between 1% and 3%. In July, the annual rate of inflation was 3.5%.

The world’s major central banks are unlikely to follow the bank of Israel in hiking their key interest rates soon.  “The Bank of Israel’s decision…will inevitably raise speculation that other perhaps more important central banks will soon follow,” said Capital Economics in a note. “However, Israeli inflation is high…while the real economy is already recovering at a satisfactory pace. The financial system is also in relatively good shape and household debt is low. The major economies are still a long way from this position.”

The rate hike is the latest step in the central bank’s normalization of monetary policy.  From 4.25% in September 2008, the Bank of Israel cut its key rate to an all-time low of 0.5% in April 2009. It also opened less conventional channels for the provision of stimulus, buying government bonds and $100 million a day in foreign currency.

Beginning in late July, the central bank halted its unconventional measures, first announcing it would no longer buy government bonds, then reverting to occasional interventions in the foreign-exchange market to prevent a sharp appreciation of the shekel.

Economists expect the Bank of Israel to hike again in coming months, with Goldman Sachs predicting that they key interest rate will hit 3% by the third quarter of 2010.

The pace of tightening is likely to depend on the rapidity with which the global economy recovers, and the shekel’s performance on the foreign-exchange markets. Too rapid an appreciation would damage exports, which are key to Israel’s prospects.


Too Early to Declare Crisis Over, Bank of Israel’s Fischer Says

New Topic for Bankers: Rate Increases