Author: R.A. | WASHINGTON

Back in February, the Census Bureau reported that America’s trade deficit continued to grow with recovery. I pointed out at the time that this wasn’t due to an increasing American deficit with China. American exports to China have actually been quite strong. Opinionators banging the drum for renminbi appreciation against the dollar, and calling the currency peg protectionist, should take note.

Meanwhile, it seems that the peg hasn’t prevented China from beginning to rebalance its economy, either.

Top Chinese officials said the nation’s trade surplus is shrinking and urged caution in exiting crisis policies, suggesting that the yuan may not appreciate soon against the dollar.

The surplus slid 50.2 percent in January and February combined from a year earlier, Commerce Minister Chen Deming said at a press briefing in Beijing on March 6…

The figure disclosed by Chen suggests that February’s trade surplus was about $8 billion, compared with about $14 billion in January and about $44 billion in the two months a year earlier.

The Bloomberg piece says the shrinking surplus suggests that RMB appreciation isn’t likely to happen any time soon. But appreciation is clearly in the offing. China central bank governor Zhou Xiaochuan noted:

We don’t rule out that during some special periods–such as the Asian Financial crisis and the global financial crisis this time–we adopted special policies, including a special exchange rate mechanism…

Sooner or later, we will exit the policies…

And Bloomberg points out that Chinese currency futures rose on his comments. As always, the point is not that there is no effect of the RMB-dollar peg worth noting. It’s that the peg is just a small part of the imbalance question (again, look at America’s massive petroleum deficit), that the Chinese peg was part of an aggressive Chinese stimulus programme that America could easily have followed on its own, and that the intense focus on the peg as a protectionist policy is likely to be unhelpful to recovery or to liberalisation (or to RMB appreciation, given China’s domestic politics).

SO FAR, the Obama adminstration’s foreclosure prevention policies have been extremely disappointing. The Making Home Affordable programme (abbreviated HAMP, presumably because MHAP is hard to pronounce), which offered financial institutions cash incentives to modify delinquent loans and additional money each year borrowers kept up on modified loan, has failed to have anything like the expected effect. The administration had hoped to keep some 4 million troubled borrowers in their homes via HAMP. As of February, just over 100,000 borrowers had received permanent loan modifications.

There are a couple of significant problems with the policy. One is that many current delinquencies are due to a combination of negative equity and job loss. Modifications are unlikely to help households in which breadwinners have been without work for months. Another is that banks often have little to gain from modifications, incentives or no. Nearly a third of delinquent borrowers will catch up on their loans without any help, according to research out of the Boston Fed. As many or more delinquent loans will wind up in default even with a modification. In other words, in most cases a modification will not achieve the desired result—keeping a borrower who would otherwise default out of foreclosure. Meanwhile, many economists have questioned whether keeping delinquent homeowners in their homes is a worthwhile goal in the first place, based on the economic costs of reduced mobility.

But no foreclosure policy at all seems like as bad an option, given the effect of runaway defaults on financial institutions, housing markets, and hard-hit neighbourhoods. So the Obama administration has gone back to the drawing board:

In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.

This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions…

Taking effect on April 5, the program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed…

Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in “relocation assistance.”

Short-sales should be preferable to foreclosures, as the sale is more orderly and circumvents the general process of homeowner vandalism, extended bank ownership of vacant property, and super cheap sale at auction. But where HAMP often struggled to get financial institutions to the table, this programme may have a difficult time getting borrowers to the table. Delinquent borrowers can live rent free in their current homes for months or years at a time, while the foreclosure process proceeds. Borrowers signing up for short sales are given $1,500 and sent out into the world to find a new place. It’s not clear that many troubled borrowers will find this an appealing option. Other difficults loom as well, including properties with two or three or four liens.

Certainly, some homeowners will benefit from the programme, but the broader foreclosure crisis won’t be much affected, in all likelihood. For that to happen, a more aggressive housing approach, like an own-to-rent programme, would be necessary. Or, most effective of all, the economy would need to begin creating jobs again.

A FEW days ago, Paul Krugman posted a “toy model” (PDF) of carbon pricing, in an attempt to clarify for himself and others a key debate in the world of climate policy: how to impose limits on carbon. The difficult question isn’t, as you might imagine, whether to opt for a carbon tax or cap-and-trade. Rather, it is whether, in either of those systems, the carbon price should be ramped up quickly or slowly.

The standard economic view is that global warming is a cumulative process. Emissions in any one year won’t make or break the climate; it’s the additive effect of a century of heavy emissions that imperils humanity. The main thing, then, is to limit long-run carbon output. Because one year’s emissions (or ten-years’) aren’t that important, it’s acceptable to introduce a carbon price in the way that’s least economically disruptive, by setting the initial price at a low level and then ramping it upward. Demand for carbon-intensive activities (like driving or burning coal for power) is initially pretty inelastic—if you increase the cost of petrol by a lot right away, consumers have little choice but to pay the higher price or seriously disrupt their normal behaviour, which is costly. But a low initial price isn’t too burdensome, and it creates an incentive to develop substitutes for carbon-intensive activities. Then later, when the price goes up, consumers can shift more easily to those alternatives, and the higher price is far less disruptive.

This is the approach favoured by most economists, but there is another line of argument developing. There is a chance, it goes, that likely temperature increases could be far more destructive than anticipated. Ecosystems could prove more vulnerable than models indicate, or thresholds could be reached beyond which feedback effects turn climate change into a runaway process. If those tail events are costly enough, then even if they occur with relatively low probability, it may be worth adopting more costly measures now. Painful limits to carbon in the present serve as a sort of insurance payment against extreme and devastating outcomes. About this, Mr Krugman says:

Lately, climate models have begun suggesting a lot more sensitivity to concentration, with a number of groups doubling their predicted temperature rise. As for the welfare sensitivity: Marty Weitzman has managed to scare me, by pointing out that there’s a pretty plausible case that a rise of 5 degrees C – which is no longer an outlandish prediction – would be utterly catastrophic. You don’t have to be sure about this; just a significant probability is enough.

For more fun, have a look at this new research on oceanic methane stores. Scary!

But here’s the rub. So far, governments have proven themselves unable to impose prices on carbon high enough to meet the recommendations of the ramp-up supporters, to say nothing of those urging drastic action. The idea that those same governments might somehow be able to adopt far more painful measures in order to forestall catastrophe is absurd. The public won’t stand for it. And that’s part of the political challenge of climate change—by the time the public is able to observe the catastrophic effects of warming in ways that might steel them to accept painful emissions reduction measures, it’s too late to do anything about the problem.

What this suggests, then, is that while pursuit of a carbon price is a worthwhile goal, it can’t be the end of the policy response. A carbon price, even one insufficiently small, would create some incentive to change behaviour and innovate. But what’s also needed is a set of technological leaps sufficient to quickly and drastically increase the elasticity of demand for carbon. And that militates in favour of large-scale investment in green infrastructure and a broad push to encourage research into alternatives to carbon-intense activities. These activities wouldn’t be cheap, but they’d be easier to bear than an immediate price of $200 per tonne of carbon. And politically, such measures should go down easier, given that they entail the doling out of government resources rather than the imposition of a tax on a negative externality.

Of course, there will be costs to moving away from a purely market-driven approach to climate policy. Non-Pigouvian taxes to fund the above measures will generate bigger economic distortions, and targeted government spending is likely to breed some inefficiencies and opportunities for rent-seeking. Politics being politics, it’s also possible that some counter-productive steps are taken—the example of ethanol subsidies looms large in these discussions. But for some expected cost and likelihood of tail climate impacts, these downsides become acceptable.

THE Bureau of Labour Statistics just released its employment report for the month of February, and labour markets continue to hover in no-growth limbo.

Non-farm payroll employment declined by 36,000 last month, slightly worse than January’s revised loss of 26,000, and slightly worse than the February ADP report, which showed a decline in payrolls of 20,000. Nasty winter weather is assumed to have affected the data somewhat, but the BLS noted that “it is not possible to quantify precisely the net impact of the winter storms on these measures.”. The bureau did point out that “workers who received pay for any part of the reference pay period, even one hour, are counted,” and some snow-related job additions may have partially offset snow-related undercounting.

Snow aside, the over-arching theme of the report was a sideways movement in labour markets. The unemployment held steady at 9.7%. The number of unemployed, long-term unemployed, and the employment-population ratio were little changed. Meanwhile, workweeks actually declined (though this could be snow related).

At any rate, a sideways movement in labour markets is a setback at this point. The economy must create over 100,000 jobs per month just to keep up with population growth, and it should be averaging monthly payroll increases of over 250,000 to reduce the unemployment rate at the same pace as in the first year of the 1983 recovery. Clearly, we’re not seeing anything like that just yet.

On the bright side, high unemployment likely reduced the severity of the winter flu season. So, you know, it wasn’t a total loss.

GERMANY’S interwar experience with hyperinflation famously created a political climate amenable to rise of Adolph Hitler and generated sufficient national trauma that the German central bank (and its descendent, the ECB) has ever since focused first, second, and last on keeping inflation well in check. As it happens, it seems that it doesn’t take hyperinflation to scare a country straight where inflation is concerned:

Japan suffered a very high inflation rate in 1973-74. The CPI inflation rate rose to near 30% in 1974, the highest rate in the postwar Japanese history after the chaotic hyperinflation following the end of the Second World War. Traditionally, the oil crisis is blamed for the 1973-74 high inflation. However, due to monetary policy decisions in 1972-73, the inflation rate had already exceeded 10% before the onset of the oil crisis in October 1973. These decisions include the interest rate cut of June 1972 and the interest rate hike of April 1973, which in retrospect proved too small. Concern about the rapid yen appreciation produced political pressure on the Bank of Japan to continue easing. The Bank of Japan came out of the Great Inflation of 1973 with a stronger voice. The Bank successfully argued that its recommendation to tighten monetary policy should not be overruled or the high inflation would be repeated. By this logic, the Bank of Japan obtained /de facto/ independence after 1975. When faced with the next economic recovery in 1979, again accompanied by oil price increases, the Bank of Japan was able to tighten monetary policy and to contain the inflation rate under 10 percent. The interest rate in the 1972-75 period was well below, by as much as 25 percentage points in 1973, the interest rate suggested by a modified monthly Taylor rule regression.

The pain of inflation empowered the Japanese central bank, which has since proved more able (and extremely willing) to fight inflation. This, even though the 30% annual rate of price increase was well, well below the extreme rates of inflation seen in Germany. And clearly, this inflation hawkery has persisted to today, despite what is now two decades of economic stagnation. It’s interesting that economic weakness doesn’t seem to have the same scarring effect. Or, it seems not to have it in a way that reduces the inflation-fighting commitment (or the influence) of the central bank.

RECESSIONS are hard on everyone, even Hollywood megastars. The New York Times peers inside the paycheques of the movie business’ top actors during this time of tightened belts:

When the estimated salaries of all 10 of the top acting nominees are combined, the total is only a little larger than the $20 million that went to Julia Roberts for her appearance in “Erin Brockovich,” a best-picture nominee in 2001, or to Russell Crowe for “Master and Commander,” nominated in 2004.

Maths whizzes will note that that comes to around $2 million per actor, but the money isn’t evenly distributed. Stars of some major pictures, including the leads in the billion dollar movie “Avatar”, apparently worked for salaries at or near guild minimums, though the story mentions that actors often benefit from large bonuses earned from successful pictures. About those guild minimums, we learn:

For the most part guild minimums are set in a provision of the Screen Actors Guild contract that Hollywood cognoscenti refer to as Schedule F. It requires than an actor receive at least $65,000 for work in a feature film. Overtime is negotiable. The actor must be fed and, at some point, allowed to rest.

At some point, preferably after the movie is finished.

GREECE, you may recall, faces a March deadline (of sorts) to convince European finance ministers that its budget plans will be sufficient to cut its deficit this year by about 4% of GDP. Earlier this week, the Greek government announced a series of measures designed to do just that:

[Previously announced] measures include freezing civil-service wages, cutting public-sector entitlements by 10% on average, increasing fuel taxes, and closing dozens of tax loopholes for certain professions—including some civil servants—who now pay less than their fair share of taxes.

Greece’s European partners aren’t persuaded. Since the EU issued its rhetorical support for Greece Feb. 12, EU members such as Germany and France, as well as others, have demanded that Greece take further steps to close its budget gap before they would commit to any specific financial support for the country.

According to one official, the new package is likely to include an increase in the current value-added tax rate of 19% by two percentage points, more cuts in civil-service entitlements, a freeze in pensions and higher duties on luxury items, such as boats and expensive cars.

Quick on the heels of the new plan’s release, Greece conducted a debt sale of some €5 billion in 10-year bonds, which turned out to be significantly oversubscribed. That suggests that markets haven’t tired of Greek debt just yet (though a high interest rate—roughly twice that on similar German debt—were necessary to bring the buyers in).

But now comes the crucial test: can the austerity plan stick?

Greek demonstrators took over the Finance Ministry building in central Athens, blocking streets in the city center…as unions stepped up protests against government deficit cuts.

In Athens, about 200 members of the PAME union group, aligned with the Communist Party of Greece, occupied the six- story ministry building today while protesters took over the nearby General Accounting Office, according to a police spokeswoman. Another group blocked a central road in downtown Athens, snarling traffic.

Ultimately, the Greek government answers not to European leaders but to Greek voters. Greek officials are pleading with Europe (the Germans especially) to go ahead and announce a financial aid package in response to austerity steps, but so far there is no help on the horizon. Can Greek leaders keep domestic anger over the budget cuts in check until European aid arrives, or will popular unrest blow up the austerity package before the Germans can be sold? Tune in next week to find out.

For more on the brewing battles over who should bear the brunt of the deficit reduction pain, check out this week’s Leader on the subject, now up.

IN RECENT weeks, a lot of ink has been spilled investigating the state of the Obama presidency and asking why the president has had such trouble moving on big issues, like health care and climate change. I suppose it is a credit to Mr Obama, in a way, that such expectations were in place, given that big health and energy reforms eluded his predecessors, going back decades. Still, it is taken as a sign of significant missteps in the White House (and especially of some imagined leftward lunge) that major agenda items have failed to reach Mr Obama’s desk.

I’d respond to this argument with two charts. This:

And this:

I think there is a strong desire among journalists to tell a compelling story about political battles being fought, hubristic decisions made, and the rise and fall of leaders. But to a large extent, the current state of affairs was pre-ordained. Republicans have the numbers, the will, and the ability to block Mr Obama’s agenda. And the incentive, given that the president’s failures will redound to the GOP’s benefit in November.

Institutions matter. Quite a bit actually.

TO SPEND just a bit more time exploring how persistent high unemployment could pose a threat to recovery consider this nice chart from Calculated Risk:

What you’ve got here is a positive relationship between the unemployment rate and delinquencies and foreclosures. Causation runs both ways here—states with larger housing crashes will, other things equal, have higher rates of unemployment—but one part of the relationship is particularly clear. Homeowners with negative equity who find themselves out of a job are at a high risk of default, as they may no longer be able to pay the mortgage and can’t sell their home for enough to cover their loan.

And foreclosures create a raft of other economic troubles, from continued difficulties for banks to increased housing inventory for sale (which depresses prices and construction employment). Recoveries in different sectors are interdependent, but in all of them renewed health comes back to increased employment. The longer the economy expands without boosting payrolls, the less likely that expansion is to be sustained.

HERE’S a nice videographic on Asia’s changing share of global output:

One thousand years ago, Asia was responsible for about 70% of world output, while lowly Europe was stuck at around 10%. By last century, less than 20% of global output was produced in Asia. Europe and America combined for a share of around 50%. Commentators like to focus on the recent rise in Asia’s share of world output (it’s back above 20% now) as a strange departure from the norm, but the above videographic should make clear that the real divergence occurred during the Industrial Revolution, and the difficult question is why it has taken so long for Asia to successfully transform its economy and take its rightful place (given its population) as dominant economic power.

And a quick side note: I appreciate the way that the above video puts Asia’s currency reserve holdings into perspective.

EZRA KLEIN links to a few sources on the state of the United States Postal Service and offers good comments:

[W]henever I mail something, the prices seem competitive and the speed borders on the obscene. Frankly, I still find the existence of rapid and reliable mail delivery to be baffling and an inarguable rejoinder to those who say the government can’t run complicated services efficiently.

What does seem to be happening is that the Postal Service is in a dying industry, and no one quite knows how to manage the decline. E-mail has made mail (which is different than shipping) obsolete. But lots of people — particularly older people — still use the mail. And we as a country appear to still believe that people in rural areas should be able to get their mail. So the Postal Service has to maintain a vast mail-delivery infrastructure even as the volume business that supported that infrastructure is collapsing. Within that context, the Postal Service seems to be operating pretty efficiently, but it’s trapped providing a level of service to a breadth of people that can’t possibly be profitable. The result will be taxpayer-funded losses and a declining level of service that will make the Postal Service look bad even as it’s not doing anything wrong, or inefficiently.

Indeed, mail delivery in America is remarkably good, and as Matt Yglesias notes here, the USPS’ operating losses aren’t nearly as bad as they seem, as the organisation faces some unusual accounting requirements. On the other hand, the signal to noise ratio in daily mail deliveries is getting entirely out of hand. For every piece of legitimate post I receive, my mailbox is filled with a good five or so pieces of junk mail. It’s a nuisance I’d pay to avoid. And I’d agree with Mr Klein’s follow-up post, as well. There’s no good reason to try and save an obsolete organisation by allowing it to move into new businesses.

The problem is that there are many stakeholders willing to defend the system (including postal workers). But I’m not sure why equal lobbying force isn’t applied by companies that compete against the mail in its current or potential future incarnation. You’d think that Google, UPS, and FedEx could mount a campaign against junk mail as a stalking horse for the ultimate winding up of the USPS.

IT HAS been a fairly good week, on the whole, for American economic indicators. The Institute for Supply Management released its monthly reports on manufacturing and service sector activity, and they look all right. Manufacturing activity continued to expand in February for a seventh consecutive month, though at a slightly slower pace than in January. Employment growth in manufacturing also increased. In the much larger service sector, activity expanded much more rapidly in February than in January and at the fastest pace since October of 2007.

But while the employment picture in the service sector improved over January, the index of employment activity remained in contractionary territory. And today, ADP provided the first glimpse of the overall employment picture for the month of February, which showed a decline in employment of 20,000. Many economists may rely more heavily on the ADP numbers for February, as its data collection procedures were likely less affected by the heavy winter storms that impacted the country last month than the Labour Department’s. Which means that the American economy is one step closer to experiencing yet another quarter of declining employment.

There are a lot of reasons to fret about this state of affairs, but the biggest is that the longer the jobless recovery remains jobless, the less likely is the recovery to be sustainable. Other data out this week, on vehicle sales, personal income, and mortgage applications, indicate an American economy that’s largely moving sideways. Activity remains depressed, and while it’s not, for the most part, declining any longer, neither is a significant move back to trend under way. And meanwhile, government supports are or soon will be phasing out (and large new interventions are impossible to imagine, given that Republicans now appear willing to stonewall basic extensions on things like unemployment benefits).

If sustained increases in employment don’t develop soon, it is difficult to see how the American economy avoids slipping back into contraction.

LET’S revisit the story of crisis along Europe’s southern periphery, as told by Paul Krugman:

[L]ack of fiscal discipline isn’t the whole, or even the main, source of Europe’s troubles — not even in Greece, whose government was indeed irresponsible (and hid its irresponsibility with creative accounting).

No, the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites — specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment.

Consider the case of Spain, which on the eve of the crisis appeared to be a model fiscal citizen. Its debts were low — 43 percent of G.D.P. in 2007, compared with 66 percent in Germany. It was running budget surpluses. And it had exemplary bank regulation.

But with its warm weather and beaches, Spain was also the Florida of Europe — and like Florida, it experienced a huge housing boom. The financing for this boom came largely from outside the country: there were giant inflows of capital from the rest of Europe, Germany in particular.

The result was rapid growth combined with significant inflation: between 2000 and 2008, the prices of goods and services produced in Spain rose by 35 percent, compared with a rise of only 10 percent in Germany. Thanks to rising costs, Spanish exports became increasingly uncompetitive, but job growth stayed strong thanks to the housing boom.

Then the bubble burst. Spanish unemployment soared, and the budget went into deep deficit. But the flood of red ink — which was caused partly by the way the slump depressed revenues and partly by emergency spending to limit the slump’s human costs — was a result, not a cause, of Spain’s problems.

And there’s not much that Spain’s government can do to make things better. The nation’s core economic problem is that costs and prices have gotten out of line with those in the rest of Europe. If Spain still had its old currency, the peseta, it could remedy that problem quickly through devaluation — by, say, reducing the value of a peseta by 20 percent against other European currencies. But Spain no longer has its own money, which means that it can regain competitiveness only through a slow, grinding process of deflation.

Now read The Economist‘s description of Britain:

For the past year, Britain has stood out for all the wrong fiscal reasons. This year’s deficit is forecast by the IMF to be 13.2% of GDP, the highest among the G20 economies. The build-up of government debt will be second only to Japan’s between 2007 and 2014.

Despite these ugly trends, investors were forbearing because Britain still had some things going for it. The starting-point for public debt-44% of GDP in 2007-was low compared with other big economies. And the average maturity of gilts is exceptionally long (14 years), which means that the government has to repay (and thus refinance) much less of its outstanding debt each year than other countries with shorter maturities.

Britain’s outstanding debt in 2007 was almost identical to that of Spain’s. Like Spain, Britain has experienced a significant fiscal deterioration, thanks to declining government revenues and spending on measures to rescue the financial system and shore up the economy. The difference is that Britain still has its own currency. And sterling has been in decline against the dollar and the euro, more or less, since 2007. The currency’s decline has been particularly sharp over the past month.

Now, a disorderly decline in sterling leading to capital flight and crisis would not be a particularly desirable outcome. But otherwise, these movements are quite beneficial for the British economy. Producers of goods for sale in the British market face reduced competition from exports, and British exporters enjoy an increasing cost advantage over producers on the continent and across the Atlantic. This is especially significant given that America and the European Union are Britain’s top trading partners.

And so we have a fairly decent little experiment set up. Britain can do what euro critics have all said that Greece, Ireland, Italy, and Spain (and the Baltics) needed to do—devalue. Will we now observe the expected outcome?

HERE is some food for thought, via Tyler Cowen:

This note shows that the aggregate fiscal expenditure stimulus in the United States, properly adjusted for the declining fiscal expenditure of the fifty states, was close to zero in 2009. While the Federal government stimulus prevented a net decline in aggregate fiscal expenditure, it did not stimulate the aggregate expenditure above its predicted mean.

There are a lot of interesting issues to explore here. Was monetary policy running even tighter than expected, as the Fed partially offset a fiscal stimulus that wasn’t, in fact, there? What does this say about the state of fiscal federalism in America? And why isn’t federal aid to states more popular, and popular enough to get through Congress, given that nearly every American lives in one?

While the baby sleeps, the blogger blogs…

ON FRIDAY, the Bureau of Economic Analysis revised its estimate of fourth quarter output. The initial number, a 5.7% annual rate of expansion, was actually moved upward to 5.9%. But a closer look at the changes within the categories of growth revealed a more complicated and downbeat picture. Here‘s a nice chart summarising the information, from Calculated Risk:

The upward revision was driven by a significant increase in the growth attributable to private inventory changes. But the share of growth from personal consumption and from residential investment was actually nudged downward. The headline output figure looks better now, but the share of growth representing underlying, as opposed to temporary, improvement looks worse. And here, via Mark Thoma, is where the economy continues to find itself:

That is, about a trillion dollars short of potential output. Recall, then, that the change in the red line from its 1999 level to its 2009 level (about $2 trillion in real GDP) generated a net change in employment of appoximately zero, and you get a sense of the distress in American labour markets.

READERS, The Economist family has just grown by one, and so I’ll be taking a bit of paternity leave. Other correspondents will be contributing this week, but blogging may be a little lighter than normal. Cheers, and wish me luck.

THE crisis in the euro zone continues, as European nations, EU institutions, world markets, and other players (among them the IMF) play an elaborate and dangerous game of financial chicken. The potential for a damaging default (or defaults) and significant stresses on the single currency is real, but as yet, no widely acceptable solution has come to the fore. The lack of consensus is particularly unfortunate given that many saw the possibility of this sort of crisis long ago, at the very inception of the euro area.

In this week’s print edition, we publish a guest Economics focus by Daniel Gros of the Centre for European Policy Studies (pictured left) and Thomas Mayer of Deutsche Bank. The give their interpretation of the challenges posed by the current situation and they offer a novel solution:

The difficulties facing Greece and other European borrowers expose two big failures of discipline at the heart of the euro zone. The first is a failure to encourage member governments to maintain control of their finances. The second, and more overlooked, is a failure to allow for an orderly sovereign default. To address these issues, we propose a new euro-area institution, which we dub the European Monetary Fund (EMF). Although the EMF could not be set up overnight, it is not too late to do so. Past experience (with Argentina, for instance) suggests that the road to eventual sovereign insolvency is a long one.

The EMF could be run along similar governance lines to the IMF, by having a professional staff remote from direct political influence and a board with representatives from euro-area countries. Just as the existing fund does, the EMF would conduct regular and broad economic surveillance of member countries. But its main role would be to design, monitor and fund assistance programmes for euro-area countries in difficulties, just as the IMF does on a global scale…

Beginning today and running through the weekend, Free Exchange will be hosting a roundtable discussion of the piece, featuring contributions from experts on global finance. We hope you’ll follow along and add your own thoughts in comments.

IN THIS week’s print paper, I have a piece on the mess that has become of the Senate’s effort to produce a jobs bill. It reads in part:

But since the release of the budget things have quickly come apart, wrecked on the treacherous shoals of the Senate. On February 11th Max Baucus and Chuck Grassley unveiled their own $85 billion jobs bill with bipartisan backing, and to much fanfare. Within hours, the White House voiced its support for the senators’ bill. But later that day Harry Reid, the majority leader, scrapped the plan, declaring that the measure would do too little to create jobs. He had a point. Nearly half of the bill’s value came from routine tax-policy extensions. It also contained a grab-bag of tax benefits for corporate interests (chicken producers and catfish farmers among them), designed more to attract Republican votes than to boost employment.

In the bill’s place Mr Reid has proposed a more targeted “jobs agenda”, made up of a series of pieces of legislation. The first instalment is to be a $15 billion package mostly comprising an employment-tax proposal considerably weaker than the one touted by the president…

Other instalments should follow. Mr Reid’s office is hinting that the collection will have a total value close to $80 billion. But other Democrats are concerned that by breaking up the bills, Mr Reid has increased the chance that other important items, like topping up aid to the states and unemployment benefits, may go down to defeat. The president has provided little direction, and seems to have been caught wrong-footed by Mr Reid’s abrupt change of plan.

That leaves nothing much on the table except for the Senate tax measure…

Are you ready for the punch line? Here‘s the latest news from the Hill:

Senate Majority Leader Harry Reid (D-Nev.) lacks the votes to begin debating his targeted jobs bill, according to sources monitoring the legislation.

Sigh.

IT’S not particularly pleasant to think about the fact that for the first third of this new decade, American unemployment rates will likely be above their “normal” or full-employment level. High unemployment means slack labour markets which means slow wage growth. This is especially nasty when one considers that unemployment, and therefore low wage growth, will be concentrated among the relatively unskilled, who just got out of a pretty terrible decade. Total employment in America was basically flat from 1999 to 2009, during which period the population grew by some 30 million people. Not surprisingly, then, real personal income growth had its worst decadal performance since the 1930s.

But the pain of slow income growth was not evenly distributed:

The average income reported by the 400 highest-earning U.S. households grew to almost $345 million in 2007, up 31 percent from a year earlier, Internal Revenue Service statistics show.

The figures for 2007, the last year of an economic expansion, show that average income reported by the top 400 earners more than doubled from $131.1 million in 2001. That year, Congress adopted tax cuts urged by then-President George W. Bush that Democrats say disproportionately benefits the wealthy.

Each household in the top 400 of earners paid an average tax rate of 16.6 percent, the lowest since the agency began tracking the data in 1992, the statistics show. Their average effective tax rate was about half the 29.4 percent in 1993, the first year of President Bill Clinton’s administration, when taxes were increased.

The last paragraph there is particularly remarkable. Even as income among the richest was rapidly growing while income growth for much of the population stagnated, average tax rates for the rich fell. And meanwhile the deficit exploded. And now many of the same people who voted for the tax cuts are insisting that additional stimulus, which would help reduce unemployment, which overwhelmingly affects workers in low-wage occupations, is a bad idea, because deficits are out of control and government “needs to tighten its belt”.

I don’t know how people think that this is politically sustainable. It’s a massive populist backlash waiting to explode.

THE darnedest thing about the continuing weakness in the labour market is that other economic indicators continue to pour in showing a strengthening American recovery. Just to take this week, for example, we have the Philadelphia Fed index:

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of 15.2 in January to 17.6 this month. The index has now remained positive for six consecutive months…There was a notable increase in the current new orders index suggesting an improvement in demand for manufactured goods — the new orders index increased 20 points. The current shipments index increased 9 points. The current inventory index increased 5 points, to its first positive reading since September 2007.

We have the Fed’s report on industrial production:

Industrial production increased 0.9 percent in January following a gain of 0.7 percent in December. Manufacturing production rose 1.0 percent in January, with increases for most of its major components, while the indexes for both utilities and mining advanced 0.7 percent. At 101.1 percent of its 2002 average, output in January was 0.9 percent above its year-earlier level. The capacity utilization rate for total industry rose 0.7 percentage point to 72.6 percent, a rate 8.0 percentage points below its average from 1972 to 2009.

And we have the New York Fed’s manufacturing survey:

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved at a healthy pace in February. The general business conditions index climbed 9 points, to 24.9. The new orders index fell, though it remained positive, and the shipments index inched downward as well. The inventories index rose sharply, to 0.0, its highest reading in considerably more than a year.

And this:

The index of U.S. leading indicators rose in January for a 10th straight month, pointing to an economy that will keep expanding through the first half of this year.

The New York-based Conference Board’s measure of the outlook for three to six months increased 0.3 percent, less than anticipated, after a revised 1.2 percent rise in December that was higher than previously estimated. The series of gains in the index is the longest since 2004.

The news isn’t blockbuster, but it’s consistently positive and improving. And yet even as these numbers roll in, hiring continues to lag. Perhaps the economy is approaching a point at which employers suddenly conclude that the recovery is for real and start hiring, generating new momentum for the expansion. But it is strange to see recovery this persistent and this strong, with so little new job creation. Keep in mind this chart, from the Economic Report of the President:

This is an atypical recession, in terms of the relationship between labour markets and output. It will be interesting to see how long this persists (and increasingly painful the longer that it does).