Hollande Drives His Car Into Reality And Gets Totalled

“President Francois Hollande is banking on a turnaround in French unemployment by the end of the year. Not only that, he has upped the stakes by making it the top political priority of his Socialist government. "I will be judged on it," he told the nation in a Bastille Day television interview last month. ‘Politics is not magic,’ Hollande told the Bastille Day television cameras. ‘It is will.’”

--Reuters, Aug. 5, 2013

Francois Hollande is a well-meaning politician trying to create employment growth without an understanding of capitalism. His thinking proceeds from the socialist idea: the size of the economic pie is stagnant, but income and wealth redistribution can create jobs.

Hollande and his economics team believe that they can grow employment while cutting the government budget in the face of negligible growth. "Unemployment can start to ease by itself at a growth rate of around one percent," said Reuters' "government source".

Their plan: to create jobs by increasing the number of unproductive state employees and by “retraining” people who are lucky if they can read and write.

Reuters: “When French children return to school in September, they will be welcomed by an army of 30,000 new classroom minders and playground assistants in many cases taken straight from the dole queues. Such public sector posts are a category of jobs whose average duration will be doubled to 12 months. Add to these the so-called "jobs of the future" which the government will fund to help unqualified youths aged between 16 and 25 take up jobs in the health, charitable and other non-commercial sectors.”

That’s his plan. How is he planning to pay for this new serving  of government largesse? France has no fiscal room to increase spending, so this program will have to be paid for with new taxes or with magic. Most likely magic (or, should I say, “will”).

What is Hollande’s vision of the future for France? A society of classroom minders and playground assistants, plus subsidized jobs for the unqualified in the health, charitable and other non-commercial sectors. France will be a nation of social workers and the clients of social workers. The “engine of growth” will be ever-higher taxes on the rich.

What this man needs is an economic advisor who never studied economics at a European university, and who can explain the quantity theory to him in words that he can understand: “Mr. President, we surrendered our money policy to Germany fourteen years ago, and it is urgent that we get it back. Zero growth is killing our economy.”

Failing that, Hollande should read Irving Fisher:

“Unless some counteracting cause comes along to prevent the fall in the price level, a depression tends to continue, going deeper in a vicious spiral for many years. There is no tendency of the boat to stop tipping until it has capsized. Only after almost universal bankruptcy will the indebtedness cease to grow. This is the so-called ‘natural’ way out of a depression, via needless and cruel bankruptcy, unemployment, and starvation.”

Price Stability Is Killing Europe

“The ECB has the clear legal mandate to safeguard price stability. If the central bank were to print money in order to finance the budgets of countries in crisis, it would be unable to fulfil this mandate in the long term. This is because, in the longer term, using the printing press to finance governments leads to higher inflation. Such a monetary financing of governments in the euro area would inevitably jeopardise the euro as a stable currency.”

--Deutsche Bundesbank, “Questions about the sovereign debt crisis”, undated.

“The ECB lacks a coherent strategy for creating the monetary base required to sustain the money creation necessary for a growing economy. The ECB needs to overcome resistance to money creation caused by the link to the debt extinction of governments. The ECB needs to recognize that Europe’s problems are more than structural. It needs to stop using monetary policy as a lever for achieving structural changes and to end its contractionary policy.”

--Robert L. Hetzell,  senior economist, FRB of Richmond, “ECB Monetary Policy in the Recession”, July 2013

“The importance of technical competence in monetary policy has been proved repeatedly by central banks around the world. The quality of monetary policy depends critically on whether central bankers have a clear and nuanced understanding of policy making and inflation. Rather than worrying about inflation, central bankers should focus on reflating the economy.”

--Kenneth S. Rogoff, Harvard University, “The Federal Reserve in a Time For Doves”, August 2013

The ECB has a single mandate, price stability, which is tragic because price stability is killing Europe. Europe needs sustained 4-5% inflation if it is to recover from its five-year depression and reverse its rising debt ratios. But the ECB has defined price stability as inflation of less than 2%. And in addition, the ECB has ruled that a program of QE would violate the prohibition of “monetary financing”, i.e., deficit monetization. This suggests that the central bank can only buy the bonds of governments when they are running budget surpluses!

Achieving 4-5% inflation would require the ECB to buy something (the policy instrument). The normal policy instrument is government debt. Unfortunately, Brussels issues no debt for the ECB to buy. So the ECB is forced to use the bonds of eurozone governments as its policy instrument. But the ECB has defined the purchase of government bonds by the ECB as “monetary financing”. If buying eurozone government bonds is verboten, then the ECB has no policy instrument, as Hetzel points out.

The fact of the matter is that “monetary financing” is a legitimate monetary policy instrument in the pursuit of economic growth and full employment--even if the government in question is running a deficit, indeed, especially if the government is running a deficit, because inadequate growth causes deficits (and rising debt ratios).

So Europe has thrown up two roadblocks to European recovery: (1) zero inflation; and (2) no QE. Europe lacks a coherent monetary strategy, as Hetzel says.

ECB Announces Schedule For Next Banking Crisis

“The ECB will complete an assessment of top banks' assets early next year, a source familiar with the matter told Reuters on Thursday. The ECB is due to become the single supervisor for eurozone banks and before it takes up the task it plans to conduct an asset quality review as part of a broader balance sheet review of the region's largest banks.”

--Reuters, Aug. 1st, 2013

Europe plans to form a Eurozone Banking Union (EBU) next year. The plan provides for a Single Supervisor for big banks (the ECB), and for a Single Resolution Mechanism that would be able offer ESM assistance in failed bank resolutions. The ECB agreed to take on this thankless task on one condition: that sick banks must be resolved prior to EBU. In order to fulfill that condition, the ECB will supervise comprehensive portfolio reviews for the big banks. Unlike prior reviews which were macro and top-down, these reviews will be loan-by-loan, and will utilize third party professionals uncontaminated by local political pressures.

This situation is analogous to the nursing home agreeing to admit Grandma, so long as she can run a few laps around the track. The purpose of EBU is to break the credit linkage between Club Med governments and banks. The idea is that, once EBU is up and running, banks will be much less of a contingent liability for the governments and their debt ratios. But the plan assumes that the bad banks will be resolved now, before the linkage is broken.

There are two reasons why this plan won’t work:

1. If the reviews are honest, the recap bill will be in the hundreds of billions. By honest, I mean marking bond portfolios to market or assigning loss reserves against them. Plus the big real estate cover-up will have to end: no more refinancing with new money; no more accrual of unpaid interest; no more sanitizing toxic exposures by converting them into covered bonds. So, if the reviews are honest, and the price tags are dumped on the governments (or bondholders) the crisis will resume.

2. Even after EBU, the government credit linkage will remain because (1) the governments will still be expected to contribute in future resolutions; (2) the ESM is tiny in relation to the scale of the system; and (3) the SRM is predicated on depositor bail-ins which will destroy the banking systems, as it has in Cyprus.

Draghi is acutely aware of this problem, and he wants to know who is going to pay the big bill and how. Reuters:

“ECB President Mario Draghi has stressed several times that political leaders need to come up with a sufficient backstop before the ECB can embark on its asset quality review in order to cover potential capital shortfalls. So far, this issue is still not entirely solved.”

Not entirely solved? How about, entirely not solved.

Translating Draghi's Press Conference Into Truthspeak

I have read the transcript of Mario Draghi’s monthly press conference so you don’t have to. He made no big news, but there is always information. I enjoy reading the remarks of spokespeople for disastrous failures. I like to see how they phrase the fact that the wheels have come off the bus: “Your company had a tough time in 2012, and we expect another challenging year in 2013.”

Do you remember “Baghdad Bob”, the Iraqi minister of information during the American invasion? No matter how dire things got--such as having his ministry blown to bits--he was always upbeat and confident of victory. That’s who Mario Draghi is these days, "Frankfurt Fred".

Draghi is required to begin his pressers with a review of the telemetry on the eurozone’s economic and financial performance. Thus he has no choice but to concede that all of the dials are on zero, although that’s not how he says it. He never lies outright, but he plays games with words in a Clintonesque fashion. One must always remember that he is the smartest man in Europe.  He is very deft. This is what Draghi said today (brutally abridged, with my parenthetic translations into truth):

“Following a six-quarter economic contraction in the euro area,

[six quarters into the current depression]

recent confidence indicators based on survey data have shown some further improvement from low levels and tentatively confirm the expectation of a stabilisation in economic activity at low levels.

[The data suggest that the level of economic growth will rise from contraction to stagnation.]

At the same time, labour market conditions remain weak.

[At the same time, unemployment remains at crisis levels in the southern region of our country.]

The remaining necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity.

[The catastrophic deleveraging in the public and private sectors will continue.]

Taking the appropriate medium-term perspective, underlying price pressures are expected to remain subdued, reflecting the broad-based weakness in aggregate demand and the modest pace of the recovery.

[Deflation will continue due to unexplained solar phenomena.]

Turning to the monetary analysis, underlying money and, in particular, credit growth remained subdued in June. Annual growth in broad money (M3) decreased in June to 2.3%, from 2.9% in May.

[The last thing that the eurozone needs right now is monetary stimulus.]

The annual rate of change of loans to the private sector weakened further. Weak loan dynamics continue to reflect primarily the current stage of the business cycle, heightened credit risk and the ongoing adjustment of financial and nonfinancial sector balance sheets.

[Credit contraction is continuing due to unexplained solar phenomena.]

In order to ensure an adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets declines further and that the resilience of banks is strengthened where needed.

[This whole euro thing is off unless someone can fix the Club Med banks PDQ.]

On credit growth, we have to acknowledge that underlying loan growth has remained subdued over recent quarters, and that this has been true for quite a time. We know that there are several reasons for this: first and foremost, weak economic demand, second, heightened credit risk and, third, continued deleveraging by households and enterprises.

[Credit contraction is understandable given the current level of solar activity.]

We are not at all oblivious to the fact that inflation in the medium term undershoots our objective of inflation that is close to, but below, 2%. The justification for this is the broad-based weakness in the economy and the subdued monetary and credit dynamics.

[Inflation is always low during depressions.]

If one accepts that the sole purpose of the ECB is price stability, and that widespread human misery is irrelevant to the workings of the ECB, and if one really believes that in his heart, then one can sleep at night. It’s kind of like being a crew member on the Enola Gay.

The FOMC Votes For Recession

The FOMC issued its monthly statement today. It reads a lot like the ECB’s monthly statements: it begins with the admission that the economy is still stuck in a ditch, and then says that it will continue to do what it has been doing for the past five years. The committee has its foot way down on that gas pedal, but the speedometer still reads zero.

Here is the latest telemetry:

Nominal growth: 2.9%

Real growth: 1.4%

Unemployed: 7.6%

Underemployed: 14%

Core inflation: 1.1%

M2 growth: 6.8%

Divisia M4 growth: 2.3%

10-year yield: 2.5%

(Growth rates are percent change from year ago, not annualized quarterly rates.)

The US economy is running at stall speed. Historically, nominal growth below 3% has led to negative real growth. The Federal Reserve’s monetary stance is contractionary, despite whatever Bernanke says. Inflation at 1.1%  is 30% lower than when Bernanke was sounding the deflation alarm* a decade ago. (http://research.stlouisfed.org/fred2/graph/?graph_id=131193&category_id=0)

This is what Bernanke said about the BoJ in 1999 (I have bolded the good stuff):

“I will argue here that, to the contrary, there is much that the Bank of Japan, in cooperation with other government agencies, could do to help promote economic recovery in Japan. Most of my arguments will not be new to the policy board and staff of the BOJ, which of course has discussed these questions extensively. However, their responses, when not confused or inconsistent, have generally relied on various technical or legal objections—-objections which, I will argue, could be overcome if the will to do so existed. My objective here is not to score academic debating points. Rather it is to try in a straightforward way to make the case that, far from being powerless, the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism...There is compelling evidence that the Japanese economy is suffering from an aggregate demand deficiency. If monetary policy could deliver increased nominal spending, some of the difficult structural problems that Japan faces would no longer seem so difficult.”**

I hope that Janet Yellen hasn't been drinking Kool-Aid from the same defeatist fountain as Ben Bernanke. The unemployed can't take another five years of complacent nonfeasance. As Bernanke taught us, the only way to stimulate aggregate demand at the zero-bound is with inflation. What this country needs is 4% inflation.

Now, for an insight into the Alice-in-Wonderland mentality of the FOMC hawks, here is Governor George’s dissent from today’s statement:

Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

George is the president of the KC Fed:

"Ms. George joined the Bank in 1982 and served as a commissioned bank examiner until 1995, when she was named to the Bank's official staff. She has held numerous leadership positions at the Bank within its research support, public affairs, and human resources functions. She served as first vice president of the Bank from August 2009 until her appointment as president."

________________________________________________________

*Bernanke: “Deflation:Making Sure It Doesn’t Happen Here”, http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

**Bernanke: “Japanese Monetary Policy: A Case Of Self-Induced Paralysis?”.

http://www.princeton.edu/~pkrugman/bernanke_paralysis.pdf

The Eurozone Crisis Through The Eyes Of Hyman Minsky

“Over a period in which the econ­omy does well, views about accept­able debt struc­ture change.  In the deal-making that goes on between banks, invest­ment bankers, and busi­ness­men, the accept­able amount of debt to use in financ­ing var­i­ous types of activ­ity and posi­tions increases. This increase in the weight of debt financ­ing raises the mar­ket price of capital-assets and increases invest­ment. As this con­tin­ues, the econ­omy is trans­formed into a boom econ­omy.  The ten­dency to trans­form doing well into a spec­u­la­tive investment boom is the basic insta­bil­ity in a cap­i­tal­ist econ­omy.

“Each new instru­ment and expanded use of old instru­ments increases the amount of financ­ing that is avail­able and that can be used for financ­ing activ­ity. Increased avail­abil­ity of finance bids up the prices of assets and this leads to increases in invest­ment.

“Units which engage in spec­u­la­tive finance depend upon the nor­mal func­tion­ing of finan­cial mar­kets. In par­tic­u­lar, spec­u­la­tive units must con­tin­u­ously refi­nance their posi­tions.

“The views as to accept­able lia­bil­ity struc­tures are sub­jec­tive, and a short­fall of cash receipts rel­a­tive to cash pay­ment com­mit­ments any­where in the econ­omy can lead to quick and wide reval­u­a­tions of desired and accept­able finan­cial struc­tures. Whereas exper­i­men­ta­tion with extend­ing debt struc­tures can go on for years and is a process of grad­ual test­ing of the lim­its of the mar­ket, the reval­u­a­tion of accept­able debt struc­tures, when any­thing goes wrong, can be quite sud­den and quick.

“In addi­tion to hedge and spec­u­la­tive finance we can dis­tin­guish Ponzi finance—a sit­u­a­tion in which cash pay­ments com­mit­ments on debt are met by increas­ing the amount of debt out­stand­ing. High and ris­ing inter­est rates can force hedge financ­ing units into spec­u­la­tive financ­ing and spec­u­la­tive financing units into Ponzi financ­ing. Ponzi financ­ing units can­not carry on too long.

“Feed­backs from revealed finan­cial weak­ness of some units affects the will­ing­ness of bankers and busi­ness­men to debt finance a wide vari­ety of orga­ni­za­tions. Unless off­set by gov­ern­ment spend­ing, the decline in invest­ment that fol­lows from a reluc­tance to finance leads to a decline in prof­its and in the abil­ity to sus­tain debt. Quite sud­denly a panic can develop as pres­sure to lower debt ratios increases.”

--Excerpts from Minsky’s “The Finan­cial Insta­bil­ity Hypoth­e­sis: An Inter­pre­ta­tion of Keynes and an Alter­na­tive to Stan­dard The­ory”, Chal­lenge, March-April 1977, pp. 20–27. [source: Steve Keen’s DebtWatch].

Minsky’s model for the economy was informed by Irving Fisher’s Debt-Deflation Theory. They both offered models of the economy in which finance plays a dominant role (as opposed to, say, fiscal or monetary policy). In explaining crises and depressions, monetarists point to the money supply, Keynesians point to the government’s fiscal stance, and Fisher/Minsky point to the credit markets.

I don’t think that is necessary or correct to take an exclusivist stance in this debate. There is plenty of room for each of these theories to contribute to our understanding of economic cycles. Only angry academic economists feel constrained to argue for exclusive theoretic supremacy.

The eurozone debt crisis is a modern phenomenon in which all three theories contribute explanatory power: (1) fiscal: the Troika’s austerity program is depressing aggregate demand; (2) monetary: the ECB’s deflation policy has ensured that neither NGDP nor RGDP can grow, and that the real value of debt rises; and (3) credit: the steady withdrawal of credit from the private sector has thrown an anchor around the peripheral’s necks. Indebtedness grows while the economy shrinks. The harder they try to balance the budget, the higher the level of unemployment, misery and debt. Debt rises while NGDP declines (the “denominator problem”).

Back story: The eurozone periphery experienced a period of high confidence and low credit spreads following the introduction of monetary union. The bankable investment horizon was now much bigger; lending opportunities abounded. Cross-border lending was now domestic lending. Emerging economies became developed economies overnight. The opportunities to lend and invest were almost limitless. All bets were winning bets.

Euro euphoria permitted higher leverage for banks, companies and governments than prior to EMU. Higher leverage bid up asset values: an asset is worth what a bank will lend against it. Stocks, property, bonds: all rose on the tidal wave of rising debt. As Minsky would say, finance in peripheral Europe went from being self-liquidating, to being speculative, to being ponzied. Principal could be rolled over again and again, while interest was paid with new borrowing. Trichet declared that EMU was raising living standards; the euro project was a success; convergence would continue on the path to “ever deeper union”.

This revery ended in the fall of 2009, when Greece revealed that it had been cooking its books for years. Market psychology changed overnight: credits that had appeared eminently bankable and marketable were now suspect. “The reval­u­a­tion of accept­able debt struc­tures, when any­thing goes wrong, can be quite sud­den.” Government, corporate and bank credit ratios that had looked OK now looked toxic. The debt markets began to look for other dodgy credits, and discovered the PIIGS.  It was discovered that these countries were running big deficits, were piling up debt, and had bloated, unwieldy and opaque banking systems. Most of them had one or more big banks that no one wanted any exposure to. They looked scary.

In a monetary union, capital movement is unconstrained. It may take years to flow in, but it can leave in a couple of weeks. Capital movements are electronic; capital flight requires a key-stroke, or a committee meeting followed by a keystroke. Overnight, the whole world lowered its concentration limits for peripheral Europe: “Let’s take our clients’ exposure down from 30% to 10%; give the traders a few months to bring it down, but I want it brought down this year. The clients are nervous, especially about X, Y and Z.” Asset managers assured their clients and banks assured their boards that they were reducing their exposure to the PIIGS.

When your nation’s entire balance sheet is funded in foreign currency, capital outflow and the closing of the debt market are hard constraints. Whining won’t help. The only way to obtain wiggle-room is to beg from Germany, which is what Greece, Ireland and Portugal have had to do. Spain is next, but the Germans have bailout fatigue.

And that has led to the strange world into which the eurozone is heading today: a world where no sovereign or bank, no matter how big, is too big to fail. There will no safety net for bondholders, creditors or depositors. Governments are free to repudiate their debts, and banks to repudiate their deposits.

Ponzi schemes never end well. The eurozone’s ponzi scheme has ended. There is no more money flowing in, while debts continue to mature, interest has to be paid, deposits have to be redeemed, and pensions need to be paid--in euros, not funny money.

Germany has solved this problem by saying that everyone who participated in the eurozone ponzi scheme should have known better and should now “contribute” to the resolution. Debt is not debt; it’s a risk asset. Creditors are now expected to become willing or unwilling participants in a “fair and just” resolution of their debtor’s debts.

Trichet’s statement that default by a eurozone sovereign was “unthinkable” and “not under discussion” was rendered inoperable, as Ron Zeigler used to say. Now, it is not only “thinkable”, it is official policy. Sophisticated investors  should have known that, when Trichet said that it was “unthinkable”, his fingers were crossed. That’s the kind of thing that sophisticated investors should know: when the president of the ECB makes a policy statement, just insert “not”, or “I’m kidding, of course”.

So, now,  the flood waters are beginning to inundate the PIIGS. Their banks have started to fail, and their governments have begun to engage in “PSI” which means “repudiation” in Eurospeak. What’s going to happen to all those bloated and insolvent banks that dot the Mediterranean landscape? Who is going to write those checks?

Germany believes that it has established the Siegfried Line on its southern borders. The colonies can be sacrificed without endangering the Homeland. Germany should read a book*: I mean really, a virus which can kill your neighbors can kill you too. Once the word gets out that German banks are stuffed to the gills with all sorts of foreign and domestic dreck, and that they too may default on their bonds and deposits, the German banks may experience their very own Minsky Moment. I ask you, is there one solvent bank in Germany, or France? Which one? They disclose very little, and previous stress tests have been shown to be cheap lipstick. How can any counterparty really know anything about Commerz or Deustche? They certainly didn’t know much about Depfa or Hypo or WestLB.

People shouldn’t light fires in their own neighborhoods. Does anyone in Germany remember Danatbank**? Schadenfreude is not the best policy for financial stability.

__________________________________________________________

*“Can It Happen Again?”, Hyman Minsky, 1982. The hardcover sells for $1,400 on Amazon.

**The collapse of Danatbank on July 13, 1931, triggered a loss of confidence in the German banking system, and produced  a wave of withdrawals from all other German banks, beginning the German Banking Crisis, which led to deflation, depression and political chaos.

A Look Inside Obama's "Better Bargain For The Middle Class"

The president has announced that, for the remainder of his presidency, he will focus on the economy in general, and the middle class in particular. He announced his new economic plan, “A Better Bargain For The Middle Class”, in a speech last week. His plan is the banner story on the White House website.

I would like to analyze the president’s plan. I’d like to boil it down to a series of explicit policy proposals that we can discuss from the perspective of economics.

So what is the plan?  From what I could find on the WH’s Better Bargain website (http://www.whitehouse.gov/a-better-bargain), there is no document aside from the transcripts of his recent speeches. Everything on the Better Bargain website is a video, with the exception of the speech transcripts. There is no policy document that you can click on and download.

It would appear that the president is devoting a considerable portion of his energy to pushing a plan which has not yet been written down, even as a one-page term-sheet. Presumably he will dribble out further details as time passes. The only mention of the Better Bargain on the House Minority Leader’s website is a blurb endorsing it, with no details or legislation mentioned. There is no mention of it at all on the website of the House Democratic Caucus. They evidently haven’t gotten the memo about the president’s plan for the rest of his presidency.

So, it appears that  the content of the president’s economic plan is available only from the text of his speeches, which I have now dutifully read and which is not an enjoyable way to spend a morning. An informed citizen of a free republic shouldn’t have to do this. I shouldn’t have had to spend an entire morning making notes on the transcripts of the president’s speeches in order to find out what his showcased economic plan consists of. We'll have to pass it to find out what's in it.

The president can devote the rest of his term to the advancement of his plan, but he can’t spend a couple of days writing it down on a piece of paper so citizens (and  legislators) might discuss it. His “communications strategy” does not seem to include communication. It isn’t as if economic growth and unemployment are minor issues in a country where 14% of the labor force is unemployed or underemployed. A little seriousness is required on this subject.

As an aside, I would observe that the White House website is remarkably content-free, and is more like the website for a consumer products company: lots of pictures, videos, and slogans, but no text. Take a look for yourself: http://www.whitehouse.gov.

Is it just that the White House’s communications strategy is content-free, or is it that the White House policy operation is content-free?

So now to the “plan”. The president begins by describing the problem that his plan is intended to solve:

"Trends that have been eroding middle-class security for decades – technology that makes some jobs obsolete, global competition that makes others moveable, growing inequality and the policies that perpetuate it – all these things still exist, and in some ways, the recession made them worse. Reversing these trends must be Washington’s highest priority." 

The president’s plan to reverse these secular trends consists of ten points (as best as I could tell):

1. Jobs.

2. Education

3. Homeownership

4. Health care

5. Retirement.

6. Urban renewal

7. Minimum wage

8. Fiscal policy

9. Tax reform

10. Immigration

Is this the correct list? Have I left anything out? If I have, maybe the White House policy staff will publish a correct list.

Below are the plan’s details, as outlined by the president in Galesburg and on the radio:

1. Jobs

"We’re going to create strategies to make sure that good jobs in wind and solar and natural gas that are lowering costs and, at the same time, reducing dangerous carbon pollution happen right here in the United States."

"I’m going to push new initiatives to help more manufacturers bring more jobs back to the United States." 

"We’re going to continue to focus on strategies to make sure our tax code rewards companies that are not shipping jobs overseas, but creating jobs right here in the United States of America.

"I’m going to be pushing to open more manufacturing innovation institutes that turn regions left behind by global competition into global centers of cutting-edge jobs.

2. Education

I’m going to keep pushing to make high-quality preschool available for every 4-year-old in America.  

We’ve already begun meeting with business leaders and tech entrepreneurs and innovative educators to identify the best ideas for redesigning our high schools so that they teach the skills required for a high-tech economy.  

I’ve asked Congress to start a Community College to Career initiative, so that workers can earn the skills that high-tech jobs demand without leaving their hometown.  

I’m going to use the power of my office over the next few months to highlight a topic that’s straining the budgets of just about every American family -- and that’s the soaring cost of higher education.  I will lay out an aggressive strategy to shake up the system, tackle rising costs, and improve value for middle-class students and their families.  

3. Home Ownership

I’ve asked Congress to pass a really good, bipartisan idea: to give every homeowner the chance to refinance their mortgage while rates are still low.

4. Health Care

I'm going to keep focusing on health care because middle-class families and small business owners deserve the security of knowing that neither an accident or an illness is going to threaten the dreams that you’ve worked a lifetime to build.

If you’re one of the 85 percent of Americans who already have health insurance, you have new benefits and better protections than you did before:  free checkups, mammograms, discounted medicines if you're on Medicare; no lifetime limits; insurance companies will have to cover you and charge you the same rates as everybody else, even if you have a preexisting condition.

5. Retirement

So as we work to reform our tax code, we should find new ways to make it easier for workers to put away money, and free middle-class families from the fear that they won't be able to retire.  

6. Urban Renewal

We need a new push to rebuild rundown neighborhoods.  We need new partnerships with some of the hardest-hit towns in America to get them back on their feet.  

7. Minimum Wage

Because no one who works full-time in America should have to live in poverty, I am going to keep making the case that we need to raise the minimum wage.

8.Fiscal Policy

Repealing Obamacare and cutting spending is not an economic plan.

9.Tax Reform

If you’re interested in tax reform that closes corporate loopholes and gives working families a better deal, I’m ready to work.

10. Immigration Reform

Economists show that immigration reform makes undocumented workers pay their full share of taxes, and that actually shores up the Social Security system for years.  So we should get that done.

I can’t resist asking: did someone at the White House find a file called Postwar Democratic Party Slogans? Good jobs, better education, home ownership, affordable health care, a secure retirement, urban renewal, higher minimum wage, a fairer tax system...Who made up this list? More likely an historian or a focus-group guru than an economist. I can assure you that if Larry Summers or Christina Romer or Austin Goolsbee had been asked to design this plan, it would have been much more credible and actionable, and more consistent with the laws of economics.

A real economist (as opposed to Gene Sperling) would say that the best way to strengthen the middle class would be a plan to increase real per-capita disposable income, which after four years of recovery, is growing at 0.0%.

A long term plan to increase household income would be achieved by:

1.  Supply-side reforms such as lower taxes and a lower regulatory burden on employers.

2. Demand management via stimulative monetary policy, such as nominal targeting.

3. A plan to force the education unions to ensure that all kids graduate from high school, and that all high school graduates can read, write, balance a checkbook and and complete a tax return.

4. A plan to reduce the cost of healthcare by allowing the healthcare business to operate as a free market in which doctors and hospitals compete on price.

5. A plan to reduce the cost of unskilled labor (e.g., the minimum wage, the employer mandate, the payroll tax) in order to allow the unskilled to be able to compete in the labor market. Right now, the full price of an unskilled worker is significantly higher than his productivity. McDonald’s has already begun automating its restaurants.

6. A plan to reduce the bloated cost structure of the higher education industry and make it possible for a middle-income parent to be able to send her kids to college without going broke.

7. A tax code that rewards work and thrift, which which does not penalize success, and which does not discourage investment.

8. A plan to increase credit creation by ending the War On Banks, such that instead of paying billion-dollar fines for crimes real or imagined, banks can rebuild their balance sheets and start to make more loans to households and businesses. Economic growth cannot occur without credit growth, and credit growth cannot occur without bank profitability. You can't eat your bankers and have them too.

Everything that I have proposed above is a non-starter at the House Democratic Caucus. (Here is their economic plan: http://www.dems.gov/issues/economy). No one on the left is serious about growth or unemployment. And no one on the right understand these issues either.

Detroit And The Rule Of Empathy

Investors and borrowers were rankled that Thursday's bankruptcy filing was expected to hit bondholders of some of the city's general-obligation debt following a proposal by Detroit's emergency manager, Kevyn Orr, to rank these bonds alongside other unsecured debt. Some investors expressed surprise that the city could slash the general-obligation bonds' value, as they are backed by Detroit tax revenue and payments are guaranteed by the Michigan Constitution. "I understand the strategy of trying to break out from the [unsecured creditor] herd and say, 'I'm different,' " Mr. Orr said. "But, from our perspective, unsecured creditors share in the unsecured creditor pool." Michigan Gov. Rick Snyder also said that these bondholders should have recognized the risks they were taking when they bought the bonds. "These are sophisticated buyers….This is not your couple living out in the Midwest going through the mortgage crisis," he said.

--WSJ, July 26, 2013

Michigan governor Rick Snyder believes that Detroit’s bondholders should have recognized the risk that, in banana republics, contractual obligations are unenforceable. He also believes that sophisticated investors should be subordinated because, well, because they’re sophisticated, and probably rich as well. If Mom and Dad owned the bonds, that would be different because Mom and Dad didn’t know that they were living in a banana republic when they bought the bonds. And Mom and dad aren’t rich.

Of course, Michiganders already know how worthless bond indentures can be: they are not enforceable if the company in question employs a lot of Democratic autoworkers. Employees come before bondholders, everyone knows that. We’ve already seen this movie in California, where the public sector unions have trumped GO bondholders in Stockton and elsewhere. Pensions are sacred, while bond indentures are so yesterday. And anyway, bondholders are rich.

You may recall that the incumbent president once said that, in choosing a Supreme Court justice, he wanted a judge with empathy. Not a commitment to the rule of law, but empathy. An empathetic judge will always rule on behalf of the weaker party, irrespective of the facts in the case. An empathetic judge will put his finger on the scales of justice in favor of the poor, the sick and the elderly. In other words, an empathetic judge is not blind like the famous statue, but rather has big open eyes and stares empathetically at the plaintiff or the defendant or the pensioner.

There is nothing inherently wrong with replacing the Rule of Law with the Rule of Empathy. France did that a long time ago, and they’re still chugging along. But it does require that, going forward, bond investors must appreciate that they have no contractual rights, and that they shouldn’t waste their time reading the covenants. In America today, a GO bond is just as good as a Czarist war bond.