From the Krugman Blog

clipped from krugman.blogs.nytimes.com Failing to Pass the Laffer Test The revenue boom of the last few years, which mainly depended on booming corporate profits, is over. Here’s a chart from the Congressional Budget Office: And a further slowdown is visible within the fiscal 2007 data: revenue in September was up only 2 percent from the previous year. To put this in perspective, here’s revenue as a percent of GDP since Clinton took office: So everything you’ve heard about how revenues have boomed since the Bush tax cuts is wrong. What really happened was that revenue plunged, as a percent of GDP, in the early Bush years, then staged a partial, but only partial, recovery. And that recovery seems to have run its course.

Housing Boom Has Limited Effect on Growth

clipped from blogs.wsj.com Frank Smets and Marek Jarocinski, economists at the European Central Bank, focus their new paper on the run-up in house prices from 2000 to 2006 and note that it can’t be explained by GDP growth over that period. Real housing prices grew at rates above 5% after the U.S. economy slowed in 2000 and 2001, and about 10% in 2004 and 2005, far above GDP growth during the period. “We find that both housing market and monetary policy shocks explain a significant fraction of the construction and house price boom, but their effects on overall GDP growth and inflation are relatively contained,” they write in the study presented at a conference hosted by the Federal Reserve Bank of St. Louis.

Greenspan Warns Of Risks With ‘Super SIV’ Fund

clipped from www.emergingmarkets.org Greenspan delivers sharp warning on superfund Former Fed chairman points to more market anguish ahead as US economy teeters on brink of recession Former Federal Reserve chairman Alan Greenspan has warned that plans announced this week to launch a so-called “super fund” – a dramatic attempt by major investment banks to ease the crisis facing credit markets – could have dire repercussions. In an exclusive interview with Emerging Markets, Greenspan said that the $75 billion so-called Master Liquidity Enhancement Conduit (MLEC) – proposed by Citigroup, Bank of America, JPMorgan and Wachovia to take on the assets of troubled investments – runs the risk of further undermining already brittle confidence in besieged markets. More...

Do Politicians Lie?

clipped from online.wsj.com In recent weeks, Ron Paul overstated the U.S. death toll in Iraq and Afghanistan, Rudy Giuliani overstated the impact on national crime rates of declining New York rates during his mayoral tenure, Barack Obama overstated the potential impact of an increase in voter turnout among black voters in the South, and John Edwards chose the higher of two government estimates of the number of Americans without bank accounts to emphasize a point. Those statistical stretches were identified and corrected by a pair of Web sites aiming to keep close tabs on the factual claims of the 2008 candidates. FactCheck.org, a project of the Annenberg Public Policy Center of the University of Pennsylvania, monitored the last presidential race as well. It was joined two weeks ago by PolitiFact, a joint venture of the St. Petersburg Times and the Congressional Quarterly that rates candidates' claims on a so-called Truth-O-Meter, which has six settings ranging from "True" to "Pants on Fire."

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The real economic crisis

All the bad news about the bursting of the US housing bubble and the related meltdown in US share markets has deflected the world's attention from what is arguably an even more fundamental problem facing the US economy: the sharp deceleration in productivity growth since the middle of 2004.

Source Guardian Unlimited

John Schmitt and Dean Baker

For Americans, the long-run implications of this little-discussed slowdown, if sustained, are actually more important to future living standards than any of the other events currently worrying world markets. For Europeans, long-encouraged to see the United States as the flexible economic ideal, the productivity slowdown sounds another note of caution about the US model. Europeans already know that the US economy generates substantial inequality. The last three years of slow productivity growth now suggest that all that inequality apparently doesn't even guarantee faster growth.

Economists define "productivity" as the value of goods and services produced per hour by an economy's average worker, and agree that the growth rate of productivity is the single most important determinant of the long-run prospects for a country's standard of living.

The deceleration in US productivity growth since the second half of 2004 is striking by historical standards. Between 1947 and 1973, the golden age of postwar capitalism, productivity growth averaged about 2.8% per year in the United States. At that pace, the output of the average worker was set to double about every 25 years, allowing roughly comparable increases in national living standards. From 1973 through 1995, however, productivity growth took a nosedive, with the average rate dropping to just 1.4%. At this lower rate, average worker output would take about 50 years to double, implying far slower progress in living standards.

From the mid-1990s on, however, official productivity growth again accelerated rapidly, returning to a 2.9% rate reminiscent of the golden age. Quite suddenly, though, in the second half of 2004, productivity growth dropped sharply. From the third quarter of 2004, productivity growth rate, at 1.3% per year, has not even managed to match the 1.4% growth rate of the productivity bust of 1973-1995.

Some productivity optimists argue that the downturn is a blip. But, this is a blip that just turned three years old - fully one-third the length of the nine-year 1996-2004 boom that the optimists champion.

Other optimists dismiss recent performance as cyclical - related to the downturn in the US economy. Productivity does tend to decline in recessions, but few would argue that the United States, which has grown 8.5% since the second quarter of 2004, has been in a recession all this time. (Of course, plenty of evidence is accumulating to suggest that the United States may be entering a recession now.)

The productivity numbers are likely even worse than they look. The most important reason is that the official productivity figures don't handle the rapid depreciation of new technology very well. Productivity gauges average output per hour worked - including what workers produce simply to replace obsolete machinery. But, the portion of output that workers produce just to replace worn-out machinery does not actually improve our standard of living. If we are interested in the impact of productivity growth on living standards, we're better off adjusting productivity growth to reflect only output that makes us better off.

In the earlier postwar period, when machinery depreciated fairly slowly, ignoring this depreciation effect on productivity growth didn't matter much. The driving force behind the 1996-2004 productivity acceleration, however, was massive investment in computers, software and related high-tech machinery, all of which become obsolete much faster than earlier generations of capital goods. (Try running Windows Vista on the computer you bought just a couple of years ago.) Since 1995, however, the depreciation effect is large - almost 0.2 percentage points per year. After we make this adjustment, productivity growth since the middle of 2004 falls from an already disappointing 1.3% per year to a mere 1.1%, below the similarly adjusted 1.2% rate of the 1973-1995 productivity bust. Such a severe deceleration in productivity growth constitutes a serious long-term threat to US living standards.

Meanwhile, how has Europe been faring? According to internationally comparable data from the Groningen Growth and Development Centre, between 1995 and 2004, the United States outperformed most of Europe, with productivity growing about 2.5% per year in the United States, compared to 1.7% in Germany, 2.0% in France, and 2.2% in the United Kingdom.

Between 2004 and 2006, however, the US lead all but evaporated. The US rate fell to 1.7%, not much different from the rates in Germany (1.7%), France (1.4%), and the United Kingdom (1.4%). If current trends continue, US growth rates may soon be trailing those of Europe (as was the case for almost the entire postwar period before 1995).

Europeans who want their countries to adopt economic policies that are more like those in the United States should consider these data carefully. There is an argument for adopting policies that lead to more inequality and less economic security when the result is more rapid economic growth. There is no obvious argument for more inequality and less security when the result is the same or even slower economic growth.


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crisis, Dean Baker, economic, John Schmitt, productivity

The Evolution of Home Ownership

Forty-three percent of housholds aged 20-34 already own a home. Nationally about 70 percent of households now own a home. With a return to more normal lending practices and higher interest rates it is likely that the back log of homes already being built and homes from foreclosures will cause a long term hangover in the housing market.

These numbers indicate that housing is a big long term problem for the economy. This problem is not likely to resolve in a couple or few years. It seems that houses are over owned at this point in time. Demogrpahics already in place favor downsizing (retirement) and shrinkage in the pool of available new buyers. This indicates a long term, possibly a decade, hangover in the housing market. That is much longer then anything now being anticipated in the market place.

It is likely that we will see significant mark downs in prices in the years ahead in the formerly hot areas like New York, California, and Florida.

More details on next page.


Get the detailed paper from the Atlanta Fed

Source Atlanta Fed: Mortgage Innovation Boosted Home Ownership

After holding steady for three decades, the share of U.S. households owning their own home jumped from 64% in 1994 to 69% in 2005. The primary cause, argues a new staff study from the Federal Reserve Bank of Atlanta, was the introduction of new mortgage products that reduced the initial down payment needed by a home buyer.

The paper, by Matthew Chambers, Carlos Garriga, and Don E. Schlagenhauf, examines changes in home ownership by age cohort. The U.S. population aged in the last decade, boosting the share of the population in age cohorts that are more likely to own a home. But the authors conclude this explains just 16% to 31% of the rise in total home ownership. The introduction of new mortgage products, in particular those that allowed little or no down payment, accounts for 56% to 70% of the increase. Such “loans tend to be the contract of choice for younger cohorts which explains an important part of the increase in the aggregate homeownership rate observed since 1994,” they say. Indeed, while the homeownership rate rose for all age groups in that period, it rose most for households under age 35: it jumped to 43% from 37.3%

Global warming sparks polysilicon crunch

My energy guru Scott tells me it is very difficult to buy solar panels. To me this says "chicken on the hill for investors (money)". The article on the next page highlights the problem and the opportunity. If you have additional ideas or would care to promote a stock hit the comments button and "sound off".

Go to The Robert T DeMarco Weblog to read the entire article and to comment.

Case-Shiller Home Price Index

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