Author: WSJ.com: Real Time Economics

The global financial crisis has once again put the International Monetary Fund at the center of news and — once again — eclipsed the World Bank. That’s natural given the job of the IMF, which is to douse financial flames with a blanket of money. The World Bank is the business of long-term development.

But an analysis by the World Bank’s Independent Evaluation Group, an in-house watchdog, says it’s the World Bank that’s really providing the bulk of the cash. While the IMF committed about $170 billion to fighting the global financial crisis between July 2008 and December 2009 through loans to troubled countries — about twice the total of the World Bank — the World Bank has actually spent more money.

According to the IEG, the Bank actually disbursed $59.9 billion in loans, while the IMF disbursed $50.7 billion. One reason for the discrepancy may be that some IMF commitments were for lines of credit to Poland, Colombia and Mexico, which those countries never tapped.

“These data highlight the rise in (World Bank Group) financial flows…relative to the past and relative to other” international financial institutions, said the IEG.

The ranks of the young unemployed have swelled.

The March employment report showed that American workers aged 16-24 had an unemployment rate of 18.8%, nearly double the 9.7% unemployment rate for the population at large. Even though these young workers represent only about an eighth of the work force, they account for a quarter of America’s unemployed.

But rising youth unemployment is not just an American problem, points out a report from the Organization for Economic Cooperation and Development. Across the 30 OECD countries, there are nearly 15 million unemployed workers aged 15-24 — four million more than at the end of 2007. In France and Italy, one in four young workers are unemployed; in Spain, 40% are jobless.

The currently high levels of youth unemployment could have negative long-term consequences, the report’s authors say.

“For disadvantaged youth lacking basic education, failure to find a first job or keep it for long can have negative long-term consequences on their career prospects that some experts refer to as ‘scarring’.,” they write. “Beyond the negative effects on future wages and employability, long spells of unemployment while young often create permanent scars through the harmful effects on a number of other outcomes, including happiness, job satisfaction and health, many years later.”

One solution, they say, would be to expand apprenticeship programs, which allow young workers to acquire skills and work experience. It seems to be working in Germany, where the ratio of youth unemployment to adult unemployment is 1.5 to 1, compared to 2.8 to 1 across the OECD area.

For more news and data about jobs:

Government debt in the euro zone may top 100% of gross domestic product in the next few years, and high public-sector borrowing could have “severe consequences” for growth and stability, a key member of the European Central Bank Executive Board warned.

“The euro-area government debt-to-GDP ratio could increase to 100% in the next years–and in some euro-area countries well above that level–if governments do not take strong corrective action,” Juergen Stark said in a research article published Wednesday.

The region’s debt in 2008 stood at almost 70% of GDP, and the ratio could surge to around 88% in 2011, ECB staff projected.

“These fiscal developments are all the more worrying in view of the projected ageing-related spending increases, which constitute a medium to long-term fiscal burden,” Stark wrote in the preface of an ECB Occasional Paper on fiscal policies.

He reiterated that governments in the 16-nation euro bloc must pursue rigorous fiscal consolidation to restore people’s trust in public finances.

“A continuation of high public-sector borrowing without the credible prospect of a return to sustainable public finances could have severe consequences for long-term interest rates, for economic growth, for the stability of the euro area and, therefore, not least for the monetary policy of the European Central Bank,” Stark said.

In an effort to support the struggling banking sector, governments have assumed significant fiscal risks and ECB researchers warned that this could threaten fiscal solvency in the medium-to-long-term.

“The major sources of fiscal risks are possible further capital injections, guarantees to the banking sector which may be called and the increase in the size of governments’ balance sheets,” ECB economist Maria Grazia Attinasi said. “The risk of the government debt ratio rising further cannot be ruled out.”

The decision by governments to support the banking sector has also affected investors’ perception of countries’ creditworthiness.

Attinisi said: “Increased risk aversion toward governments may reduce investors’ willingness to provide long-term funding to sovereign borrowers.”

“This would adversely affect governments’ capacity to issue long-term debt and may impair the sustainability of public finances by way of higher debt servicing costs,” she added.

The U.S. should continue to press China on its foreign exchange policy, Federal Reserve Board Chairman Ben Bernanke said Wednesday, agreeing with a top Democratic senator that the level of the yuan was one of the causes of the global recession.

Bernanke agreed with Democratic Sen. Charles Schumer (D., N.Y.) that China’s currency exchange policy was a major cause of “harmful of global imbalances.”

He said China would benefit from a more flexible yuan. Combined with other steps by the Chinese government, Bernanke said a rising yuan would encourage the development of domestic consumption in China.

But Bernanke declined to agree with Schumer that Congress should pursue a legislative solution that would compel the Obama administration to take action on the matter.

Bernanke said that the U.S. relationship with China is a complicated one. He said there were a variety of “economic and political rationales” within China that led to its exchange rate policy.

This morning, the International Monetary Fund advised China and other countries with big trade surpluses that they can slash those surpluses without sacrificing economic growth by adopting a toolkit of measures including revaluing their currencies, shifting policies toward domestic consumption and pursuing more sophisticated markets. The IMF report, part of its semi-annual World Economic Outlook, frequently cites the work of Harvard economist Dani Rodrik in reaching its conclusion.

Here’s Mr. Rodrik’s thoughts, e-mailed to the Wall Street Journal’s Bob Davis:

The honest conclusion from this chapter, which is a useful exercise, is not that currency appreciation will not have adverse effects on growth, but that it will not necessarily have adverse effects. Furthermore, many of the findings in the chapter would be cause for concern for China: a negative growth effect is more likely the faster the initial growth, the larger the initial current account surplus, and the higher the initial saving rate. China is an outlier in all these respects.

In addition, the chapter largely overlooks another important determinant of the appreciation’s impact. The poorer the economy, the more detrimental is a real appreciation likely to be. Almost all of the comparison economies considered here were significantly richer than China at the time of their currency adjustment. The poorest economy in the case studies (Korea in 1989) was between twice and three times richer than China is at present (depending on whether you compare them in regular dollars or PPP dollars).

This matters because China still has a huge surplus of labor that needs to be absorbed into its modern, mostly tradable, sectors. As the authors document, the tradable sector tends to grow significantly less rapidly following appreciation. This is not good news for an economy at China’s level of development.

In my own work, which they cite, I actually find that the sensitivity of China’s growth to its exchange rate is quite a bit higher than for other countries at similar income levels. This is possibly because China is so huge and with so much labor still in extremely low productivity activities.

So the bottom line from this analysis should be “not full speed ahead,” but “caution is warranted.”

Economists and others weigh in on the jump in U.S. retail sales.

The continuing improvement in consumer spending no longer catches us off guard, having observed the improvement despite income stagnation. As the labor market continues to turn, growth in incomes should put a floor under consumption patterns and while consumption is not likely to grow as robustly as the decline might suggest and still remain below the previous peak and trend line, it is growing more than we originally anticipated. This is a fact that cannot be ignored. –Dan Greenhaus, Miller Tabak

The consumer is back. Overall, this was a positive report signaling that consumers are increasing expenditures amid positive stock market wealth effects and the early gains in labor income. The pick-up in consumer spending is crucial for creating positive momentum in the economy and making it a sustained recovery. –Michelle Meyer, Barclays Capital

Every major category was up with the exception of gasoline (-0.4%) and electronics/appliances (-1.3%) — the latter was up a ton the prior two months, so a reversal is not a huge surprise. Among the highlights – general merchandise sales rose 0.6%, apparel rose 2.3%, home improvement up 3.1%, restaurants rose 0.3%, furniture +1.5%. –Jay Feldman, Credit Suisse

There were a number of surprises in the March results which tilted to the downside. In particular, the home electronics category posted a sharp drop on the heels of a couple of very strong months (the intro of the iPad may provide a boost for this category in April). Also, the general merchandise category was not nearly as strong in March as implied by the chain store results. On the other hand, apparel sales were quite a bit better than implied by company results. –David Greenlaw, Morgan Stanley

March results were certainly boosted by the effect of a very early Easter, and April will suffer accordingly, so the two months should be looked at as a package when the April figures are released next month. Still, there is no denying that consumer spending has perked up considerably in recent months. –Joshua Shapiro, MFR Inc.

Consumers spent freely in March. Toyota’s incentive blitz spurred vehicle sales, while much better weather, and an earlier Easter than in 2009, helped weather-sensitive items like clothing and building materials. But there is clearly an underlying pick-up in consumer spending that goes far beyond the weather. –Nigel Gault, IHS Global Insight

Overall recent retail sales reports indicate the U.S. consumer may have emerged from the financial crisis with fewer scars than we had feared. While we are not revising our medium-term consumption forecasts at this time, we would certainly acknowledge that the latest data point to upside risks. –Zach Pandl, Nomura Global Economics

With the upward revision to February and the gain in March, control retail sales are finally back above the previous peak hit in July 2008 — in nominal terms. A passing that underscores that the economy is recovering, but consumers to date are only proving they will buy when necessary, such as for holidays. –Steven Blitz, Majestic Research

What we are seeing in these data is a clear rebound in activity following a quite severe recession. The new inference to be drawn is that the rebound appears to be faster than what was earlier on track, an upside surprise. –Stone & McCarthy

Despite a slump in housing sales in the early part of 2010, retail construction material sales expanded 3.1%, the biggest increase in roughly three years.–Guy LeBas, Janney Montgomery Scott

Additional meaningful and sustained growth in the U.S. labour market and an associated improvement in consumer credit will be necessary for this positive momentum in consumer spending to be sustained. –Millan L. B. Mulraine, TD Securities

Compiled by Phil Izzo

Here are some key phrases from Federal Reserve Chairman Ben Bernanke’s congressional testimony and how to read them:

1) HE SAYS: “Financial markets have improved considerably since I last testified before this Committee in May of last year.”

READ: Our programs worked so stop giving us grief for what we did to prevent a Great Depression.

2) HE SAYS: “Although sizable deficits are unavoidable in the near term, maintaining the confidence of the public and financial markets requires that policymakers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance.”

READ: Hey Congress, we’ve been talking for a year about our exit strategy for monetary policy, where’s yours for fiscal?

3) HE SAYS: “For the three months ended in February, prices for personal consumption expenditures rose at an annual rate of 1.25% despite a further steep run-up in energy prices; core inflation, which excludes prices of food and energy, slowed to an annual rate of 0.5%. The moderation in inflation has been broadly based, affecting most categories of goods and services with the principal exception of some globally traded commodities and materials, including crude oil.”

READ: Bernanke is with FOMC members who believe the inflation slowdown is real. Some Fed officials believe inflation numbers have been slowing solely because of housing’s problems. They haven’t convinced the Fed chairman.

4) HE SAYS: “Long-run inflation expectations appear stable; for example, expected inflation over the next 5 to 10 years, as measured by the Thomson Reuters/University of Michigan Surveys of Consumers was 2.75% in March, which is at the lower end of the narrow range that has prevailed for the past few years.”

READ: There is no reason to signal a move toward tightening monetary policy. All of that talk in markets Tuesday about the Fed signaling a move toward raising interest rates was noise.

5) HE SAYS: “To be sure, significant restraints on the pace of the recovery remain, including weakness in both residential and nonresidential construction and the poor fiscal condition of many state and local governments.”

READ: The Fed believes the recovery is real, but Bernanke is worried about the headwinds.

6) HE SAYS: “If the pace of recovery is moderate, as I expect, a significant amount of time will be required to restore the 8.5 million jobs that were lost during the past two years.”

READ: See #4. There is no reason to signal a move toward tightening soon.

A roundup of economic news from around the Web.

Taxes: David Leonhardt looks into the statement that 47% of Americans pay no income tax. “The 47 percent number is not wrong. The stimulus programs of the last two years — the first one signed by President George W. Bush, the second and larger one by President Obama — have increased the number of households that receive enough of a tax credit to wipe out their federal income tax liability. But the modifiers here — federal and income — are important. Income taxes aren’t the only kind of federal taxes that people pay. There are also payroll taxes and capital gains taxes, among others. And, of course, people pay state and local taxes, too. Even if the discussion is restricted to federal taxes (for which the statistics are better), a vast majority of households end up paying federal taxes. Congressional Budget Office data suggests that, at most, about 10 percent of all households pay no net federal taxes. The number 10 is obviously a lot smaller than 47. The reason is that poor families generally pay more in payroll taxes than they receive through benefits like the Earned Income Tax Credit. It’s not just poor families for whom the payroll tax is a big deal, either. About three-quarters of all American households pay more in payroll taxes, which go toward Medicare and Social Security, than in income taxes.”

Government Debt: Antonio Fatás looks at what needs to be done to get government debt under control.”So can we hope for a nice, painless, expansionary fiscal consolidation over the next decades? Not obvious. There are several reasons why those experiences might not be easily replicated this time: – In some countries, government spending levels have come down relative to where they were in the 80s or 90s. It is not easy to produce a significant decrease in government spending without affecting some basic services provided by the government. More so in the US where government spending is low relative to other (European) advanced economies. – Some of the expansionary fiscal consolidations benefited from falling interest rates. As an example, Belgium reduced government debt by close to 40 percentage points in between 1996 and 2006 but most if not all of the decrease was linked to falling interest rates on government debt. Currently, there is no room for interest rates to go down. If any, they might go up. – This time, the consolidation needs to take care of the past (the accumulated level of debt) and the future (the fact that projected deficits given current policies will be very large). The adjustment is larger than what was needed in some of those previous expansion.”

Regional Fed Banks: Heidi Moore looks at the dangers of marginalizing the regional Fed banks. “In the end, however, the regional presidents are likely to lose their power to the FDIC or the central Fed, which is evolving into a political entity replete with the savvy maneuverer Ben Bernanke at its helm. “I feel sorry for the bank presidents,” said Chris Whalen, co-founder of consulting firm Institutional Risk Analytics. “They are in a traditional sense raising the right issues, but we’ve gone so beyond that in the Fed’s capture by both banks and Congress that the whole thing’s politicized now.” The only power the regional presidents have is to bang some drums. But even that could make a difference to debate—in an era when secretive bailouts can be designed by a few power brokers with access to the money of millions of taxpayers.”

Compiled by Phil Izzo

A dozen business groups are urging lawmakers to vote down corporate governance changes included in the Senate financial regulation bill, one day after an Obama administration official threw his weight behind the measure.

The U.S. Chamber of Commerce, National Association of Manufacturers, and Financial Services Roundtable were among the 12 organizations that sent a letter to lawmakers saying “various academic analyses of the financial crisis have found that it was not caused, in whole or in part, as a result of the failure of existing corporate governance structures.”

The Senate bill would give the Securities and Exchange Commission explicit authority to write rules that give shareholders a way to directly nominate board members on the corporate ballot. Shareholder groups have lobbied the SEC on this issue for years and business groups have strongly opposed it, saying it could allow special interests to hijack the boardroom.

The bill would also give shareholders an annual nonbinding vote on executive pay packages and require companies to have policies in place outlining how they would claw back pay from executives. The SEC has proposed a so-called proxy access rule, but it hasn’t been finalized.

Monday at the Council of Institutional Investors annual meeting, Deputy Treasury Secretary Neal Wolin told the crowd the administration supports all the governance measures calling them “a significant enhancement” that could be used to “rein in the irresponsible pay practices that led so many firms to act against the interests of their shareholders.”

While the Senate bill passed through the Banking Committee without any amendments or Republican support, Republican Senators have echoed concerns of big business and suggested they will offer amendments to strip out some of these measures.

The Federal Reserve Bank of Dallas was in favor of raising the rate charged to banks on emergency loans last month, but it found little support from others in the U.S. central bank.

Minutes of the latest discount rate meetings, released Tuesday, showed that the Fed board members in Washington on March 15 were all in favor of keeping the discount rate at 0.75%. The board, which includes Chairman Ben Bernanke, has the final word on the rate.

“The directors of the Federal Reserve Bank of Dallas had voted on March 11 to establish a rate of one percent,” the minutes from the March meetings showed. However, the other 11 Fed district banks were in favor of maintaining the rate at 0.75%.

As an incremental step away from its emergency-lending efforts, the Fed raised the discount rate by a quarter point to 0.75% on Feb. 18.

The rate had been lowered aggressively early in the financial crisis to give commercial banks added incentive to come to the Fed for money. After the move, the Fed stressed it didn’t mean that broader loans to companies and households were also about to increase.

With the crisis still unfolding, Dallas Fed President Richard Fisher tried to lobby the Fed to push interest rates higher to combat inflation. However, in a recent interview with the Wall Street Journal, he said inflation was now low on his list of worries.

Economists and others weigh in on the expansion in the U.S. trade deficit.

The trade deficit widened in February, as imports bounced up more than exports after the decline in trade activity in January. As U.S. producers and retailers seek to re-stock inventories, they will pull in more imports. This is a natural part of the recovery process. But special factors, including unusually low aircraft exports and NBC’s payment for Olympic broadcasting rights, exaggerated this month’s widening in the trade gap. –Nigel Gault, IHS Global Insight

Exports have flattened out the past couple months after surging 28% in the in the initial recovery during the last eight months of 2009. Price related weakness restrained industrial materials and food. Overall capital goods exports showed only a modest gain, but only because of a big pullback in aircraft Ex aircraft capital goods exports surged, indicating that most of the upside in core capital goods shipments in February went overseas instead of into domestic investment. A good portion of the gain in imports was attributable to $0.8 billion payment for Olympic broadcast rights that temporarily boosted services but will be unwound next month. Petroleum products also saw a modest gain, as a gain in volumes more than offset lower prices. Core capital goods imports excluding were down slightly, however, a negative indication for domestic investment. –Ted Wieseman, Morgan Stanley

The U.S. trade deficit expanded due to an increased appetite on the part of American consumers for imported goods reflecting the gradual improvement in the overall economic outlook. After a sizeable reduction in inventories, the increase in sales has stimulated a need to replenish inventories strongly suggests that demand for goods produced abroad should continue in coming months. This is consistent with a broadening out of the economic recovery. –Joseph Brusuelas, Brusuelas Analytics

Despite the ongoing recovery, export growth is not keeping pace with domestic demand for imports in the U.S. A major drag on exports for February was civilian aircraft, which dropped more than 25% on the month. Still, outside of motor vehicles and aircraft, exports of capital goods grew by $1.2 billion. –Tim Quinlan, Wells Fargo

Higher oil prices and a slowly improving economy are leading to more and more money flowing out of the U.S. economy into other countries. –Naroff Economic Advisors

The underlying components of the report did not indicate that the weaker-than-expected export volumes resulted from one-time factors. Consumer goods exports excluding autos declined by 1.8% month-on-month after rising by 1.3% in January. In contrast, capital goods exports rose by 1.1% after dropping by 2.9% last month, and automotive exports rose by 2.3% after dropped by 5.7%. On the imports side, most of the strong gain resulted from a rebound in consumer goods imports. –Zach Pandl, Nomura Global Economics

A stable to moderately wider net export deficit in coming quarters would make sense in cyclical terms. With most businesses looking to stabilize or modestly boost inventories, underlying demand for imports has picked up substantially. At the same time, exports will continue to be supported by better economic conditions abroad. The net effect should be a reasonable stable level for the real net export deficit in the GDP accounts, which would contrast sharply with the enormous declines in the deficit that occurred during the height of the recession. –Joshua Shapiro, MFR Inc.

Compiled by Phil Izzo

In February, the International Monetary Fund, which had long opposed controls on capital inflows, published a surprising paper that reversed course.

For countries facing a big inflow of capital — with the attendant risks of asset bubbles — the use of capital controls “is justified as part of the policy toolkit to manage inflows,” the IMF paper wrote. Even if investors figure out ways around the controls, the restrictions still can be useful, the IMF said because “the cost of circumvention acts as ‘sands in the wheels’” and slows down investment.

The change in advice won applause from IMF critics, especially on the left, who have long believed that the Fund was too wedded to free flow of capital even if unhindered flows could inflate asset bubbles.

Today, the IMF came close to changing its mind again. “Even if capital controls prove useful for individual countries in dealing with capital inflow surges,” the IMF wrote its semi-annual Global Financial Stability Report, “they may lead to adverse multilateral effects… A widespread reliance on capital controls may delay necessary macroeconomic adjustments in individual countries and, in the current environment, prevent the global rebalancing of demand and thus hinder the recovery of global growth.”

So, should a country use restrictions on capital — which can be in the form of a tax or increased reserve requirements — or not?

The IMF isn’t clear. It seems to back them as a short-term measure, but not a long-term one, but doesn’t give specific advice how to tell one situation from another. Here’s the IMF’s best shot: “Since the use of capital controls is advisable only to deal with temporary inflows… they can be useful even if their effectiveness diminishes over time,” the GFS report suggests. “However the decision to implement capital controls should consider their distortionary effects” too.

Effie Psalida, an IMF economist, says the two papers on capital control “complement” each other.

Maybe. Or maybe they confuse each other. For policy makers in developing countries: Good luck making the call.

Donald Marron, who worked in the George W. Bush White House, will become the director of the Tax Policy Center, an eight-year-old joint venture of the Urban Institute and Brookings Institution think tanks that produces widely used analysis of tax trends, data and policy options.

Marron was a member of the Council of Economic Advisers in the closing years of the Bush administration, and earlier was deputy director (2005–2007) and acting director (2006) of the nonpartisan Congressional Budget Office

Marron succeeds Rosanne Altshuler, who will be returning to Rutgers University after nearly two years with the Tax Policy Center. The center’s leadership includes two co-directors, William Gale of Brookings and Eric Toder of the Urban Institute. Marron takes up his duties in mid-May.

“Understanding and helping address the nation’s revenue problems require imaginative scholarship, crisp communication skills, and an insider’s knowledge about how good public policy can be made. Donald brings that and much more to the Tax Policy Center,” said Robert Reischauer, president of the Urban Institute.

Since leaving his White House post, Marron has been a visiting professor of public policy at Georgetown University and an economic consultant. He was a senior economic adviser and consultant to the Council of Economic Advisers (2007–08) and its chief economist (2004–05). He was on the staff of Congress’s Joint Economic Committee from 2002 to 2004. He was an assistant professor of economics at the University of Chicago’s Graduate School of Business from 1994 to 1998. He also blogs at http://dmarron.com/.

Marron holds a Ph.D. in economics from the Massachusetts Institute of Technology. His father is the former chief executive of Paine Webber.

A roundup of economic news from around the Web.

Recession Dating: NBER recession-dating panel member Jeffrey Frankel offers a little more background on the decision to delay the recession’s end date. “Q: But there is a glaring difference between your views, particularly as expressed in your blogpost of April 5, which was widely reported, and the Committee’s public statement that it was too soon to call an end to the recession. Obviously there is a big gap between you and the majority of the Committee. A: I can see how it looks that way, but there is not necessarily a gap anywhere near as large as you think. The decision is a matter of probabilities. There is, as always, a chance – greater than 1% – that the economy could go into a steep nose dive tomorrow. In that hypothetical and unlikely event, the Committee would have to decide whether the new downturn counted as a second recession, or whether it should be considered part of the recession of 2007-09. In the latter case, we would have made a mistake if we had already declared a trough in 2009. We would have to retract the trough statement. This is an excellent argument for waiting until we can answer that hypothetical question more definitively. It is an argument I am comfortable with.”

Recovery Risks: Tim Duy looks at things that could derail the recovery. “I don’t consider myself particularly optimistic; the forecast of persistent high unemployment rates leaves me feeling pessimistic. But even a subpar outcome (one that argues for more policy action, not less) could be consistent with sustainable growth. To undermine sustainability, it is not enough to focus on factors already weighing on the economy- weak lending, fiscal stimulus waning, crippled housing sector, etc. We already know those factors are preventing a rapid return to past trends. Instead, look for factors that are not already baked into the forecast. Most likely, wait for ongoing growth to create an environment that makes the current dynamic untenable for policymakers — in other words, wait for central bankers to start tightening policy aggressively. We just are not there yet.”

Cap and Trade: Robert W Hahn and Robert N. Stavins look at the political appeal of cap and trade. ” Are cap-and-trade schemes working? This column presents a summary of eight existing schemes arguing that half meet the independence property whereby the initial allocation of property rights does not affect the environmental or social outcome and the scheme is cost-effective. This success is a contrast with other policy proposals where political bargaining reduces the effectiveness and drives up cost.”

Compiled by Phil Izzo

Originally posted on Washington Wire.

The Obama administration is intensifying its push on new financial rules, and Treasury Secretary Timothy Geithner penned an editorial in the Washington Post Tuesday to try and drive home his argument.

Here are some quotes from the op-ed followed by Washwire analysis in parentheses:

1. “America is close to turning the page on this economic crisis…It is simply unacceptable to walk away from this recession without fixing the system’s basic flaws that helped to create it.” (Geithner is saying fixes must be made before everyone forgets about what happened).

2. “Signs of bipartisan support for action seem to be emerging in Washington, including for an independent consumer financial-protection agency.” (Many Republicans would question whether “bipartisan support” is in fact emerging, but its clear Democrats think they have splintered the Republicans. Unclear if this passage is meant as a poke in the eye to Republicans or as a clear indication that the White House has this bill right where it wants it — or both.)

3. “The best way to protect American families who take out a mortgage or a car loan or who save to put their kids through college is through an independent, accountable agency that can set and enforce clear rules of the road across the financial marketplace.” (This is important, as there’s a clash over whether auto loans should be covered by the new consumer-protection rules. Here Geithner is saying they will absolutely be covered. Republican Sen. Sam Brownback of Kansas is working on an amendment to carve them out, so expect a fight on that).

4. “Major global financial institutions — whether they look like Goldman Sachs, Citigroup or AIG — will be required to operate with less leverage and less risk-taking.” (This is Geithner trying to counter a criticism from some lawmakers that the bill won’t stop banks from becoming too big to fail. He’s essentially saying, “No more bad old days,” and he’s including a swath of U.S. companies to ensure folks that no one will be immune.)

5. “Transparency will lower costs for users of derivatives, such as industrial or agriculture companies, allowing them to more effectively manage their risk. It will enable regulators to more effectively monitor risks of all significant derivatives players and financial institutions, and prevent fraud, manipulation and abuse. And by bringing standardized derivatives into central clearing houses and trading facilities, the Senate bill would reduce the risk that the derivatives market will again threaten the entire financial system.” (This is an important section of his editorial. Many U.S. companies argue that the White House’s plan to regulate derivatives will cost them money and could end up forcing them to cut jobs. Geithner is saying the transparency will help industrial and agricultural companies manage risk. What he doesn’t do, though, is define who these “significant derivatives player” are that will be subject to tougher standards).

6. “The best strategy for stability is to force the financial system to operate with clear rules that set unambiguous limits on leverage and risk. We need that to happen here and around the world. Importantly, with the Senate bill, the United States would have a strong hand in negotiating a global agreement on new capital requirements by the end of the year. Such an agreement would establish a level playing field with minimum requirements for capital, and compliance would be open to scrutiny by regulators and the markets.” (Geithner is putting his cards on the table here. He’s essentially saying, “If we want to be taken seriously by our foreign counterparts — who, incidentally, are all here in Washington today — we need to get this done.” This will give Geithner more leverage — pardon the pun – to negotiate with other countries about how their banks should be regulated.)

Economists may be debating when the recession ended, but small business owners report little pick up in their sales or confidence in March, according to a report released Tuesday. The weak readings explain why small businesses remain reluctant to hire.

The Small Business Optimism Index lost 1.2 points to 86.8 in March, said the National Federation of Independent Business.

The NFIB noted that nine of the 10 components declined or failed to contribute to an increase in the top-line index. The lone improvement came in the subindex covering expected business conditions. It rose 1 percentage point to -8%.

The report said 34% of respondents said “weak sales” were their top business problem. The subindex on earnings trends fell 4 points to 43%, and sales expectations subindex dropped 3 points to -3% in March.

The lack of revenue may be holding back job growth. The March employment index fell 1 point to -2%. The NFIB said businesses may be finished with layoffs, but companies will only add workers if owners think “new hires can generate enough additional business to pay their way.”

Earlier in April, payroll giant ADP reported that its jobs survey showed small businesses — with 49 or fewer employees — cut 12,000 jobs in March.

Weak sales are also leading to inventory reductions. The inventory index was flat at -7%, and the NFIB said more firms cut stockpiles than added to them in March.

Inflationary pressures were nearly nonexistent last month. Seasonally adjusted, the net percentage of owners raising prices was -20%, up one point from February.

The drop in confidence among small business owners comes as economists are debating when the recession ended. The National Bureau of Economic Research said Monday it was still “premature” to set a date for the economy’s trough. The NFIB reports suggest that while the overall economy is growing, pockets of pessimism remain.

Robert J. Gordon of Northwestern University is a member of the National Bureau of Economic Research’s Business Cycle Dating Committee, which declined to declare an end date for the recession this morning. Gordon disagreed with the delay and explains why he thinks the downturn has ended.

It is obvious that the recession is over. Real GDP has recovered strongly from a trough in 2009:Q2 and by 2010:Q2 (the current quarter) will have reached (or be very close to) its value reached in the peak NBER quarter of 2007:Q4, according to forecasts of private organizations that so far have proved to be remarkably accurate in forecasting real GDP changes a quarter or two in advance..

The committee also considers real GDI (the income-side measure of real GDP). For reference, this appears in the NIPA tables as Table 1.7.6 line 11. Most macroeconomists think that the BEA should feature this measure more strongly. Real GDI was at essentially the same level in 2009:Q2 and 2009:Q3, and then rose strongly in 2009:Q4 as did real GDP. The issue of whether the economy troughed in 2009:Q2 or 2009:Q3 is settled by the average of real GDP and real GDI, which reached its trough in 2009:Q2.

Real GDI is an important variable. It reached its peak in 2007:Q4 which ratifies the BCDC decision about the date of the peak. While it did not rise from 2009:Q2 to 2009:Q3, it rose strongly in 2009:Q4 and will presumably rise strongly in the first half of 2010.

Those who doubt the sustained momentum of the current recovery fail to appreciate the inherently temporary nature of the recession itself. There was a powerful economic downdraft that started with the failure of Lehman in September 2008 and extended into the winter and spring of 2009. Everybody panicked. Firms laid off employees by the millions, and real gross private domestic investment declined between 2008:Q3 and 2009:Q2 at an unprecedented annual rate of -41.6 percent, even faster than at any time during the Great Depression.

Numerous measures demonstrate that the panic phase was over long ago. Libor spreads declined from abnormal to normal in the winter of 2009. Junk bonds experienced a renewed wave of confidence and indeed were the best place to hold your money between December 2008 and March 2009. Then the revival of the stock market after March 9, 2009, ratified the end of the panic period. The first sign of the end of the recession on Main Street was the peak in weekly new claims for unemployment insurance (4-week moving average), which occurred in the week ending April 4, 2009. Historically, that measure is a reliable forecaster that the end of the recession was in sight, perhaps within weeks or or several months.

A useful way to characterize the end of the 2007-09 U. S. recession is the boomerang effect, also called the “rubber band effect” or in recent writing the “reverse gravity effect.” The harder you fall, the faster you bounce back. This idea, which some have traced back to Milton Friedman, suggests that the unprecedented downward force of a negative shock in 2008 and early 2009 automatically puts in place the forces that propel the current recovery. There are no plausible shocks that would suddenly push real GDP below its trough value of 2009:Q2 in the next year or two. If another cyclical downturn were to occur after a year or two, the NBER committee would treat this as a new recession, just as the 1981-82 recession in the current official record is regarded as a separate recession from the downturn that occurred between January and July of 1980.

Thus the American economy is enjoying strong upward momentum that is evident every day in the announcements of retail sales, service sector production, and almost everything else. There are no negatives in the actual data, but rather the negatives reside in doomsayer worries that consumers are too weak to spend or that the economy will collapse after the Obama stimulus dollars have been spent. Yes, consumers are saving and repaying debt, but nevertheless they are boosting retail sales from 2009 to 2010 by amounts that essentially cancel out the panic period. The slow but steady recovery of consumer spending will be fueled throughout this year and next by growth of employment. While the payroll survey measure of employment only began to increase in March 2010, the household survey measure increased by a strong 1.1 million (an annual rate of 3.2 percent) in the three months since its trough in December 2009. The lag of recovery in the payroll survey behind the household survey also occurred in the 2001-03 recovery, when the household survey proved to be a more accurate indicator of economic activity. When households say that they are finding jobs, those jobs give households income that can be spent on consumption goods and services.

The Date of the Trough

The committee decided not to declare that the recession was over and thus did not devote serious attention to determining the trough month. However, the data are clear, once we focus on measures of production rather than measures of employment, which historically have lagged the recovery of production. The lag of employment and aggregate hours behind production was particularly long in the most recent previous recoveries of 1991-92 and 2001-03.

The traditional measure of production used by the committee is the Federal Reserve Board Index of Industrial Production (IIP), which reached a well-defined trough in June 2009. For those who object that the IIP refers only to about 15 percent of the economy, the broader monthly measure real manufacturing and trade sales also reached its trough in June 2009. The private firm Macro Advisers has constructed a measure of monthly GDP that is available back to 1992, and this also indicates a cyclical trough in June 2009. While real GDI is flat across 2009:Q2 and 2009:Q3, quarterly real GDP reaches its trough in 2009:Q2, as does the average of quarterly real GDP and real GDI. Thus we have three monthly measures that reach a trough in June, the average of two measures of aggregate economic activity which reach their trough in 2009:Q2, and no clearly defined troughs occurring later than that in any series other than the traditional lagging data on aggregate hours of work and total employment.

The Committee’s Verdict

I am allowed to characterize the committee’s verdict in general terms without attributing any views to other members of the committee.

The reason that the committee was unwilling to declare that the recession was over had nothing to do with the belief of any individual committee member that the recession is not over. Rather, the reason for the verdict was different.

The committee viewed the likelihood of a double dip that would take the level of real GDP back below its previous trough of 2009:Q2 as extremely unlikely. However, the committee thought that, even if that probability was extremely small, it would be very costly to the committee to be proved wrong after the fact. Thus the committee was swayed by the view that the low probability of a double-dip multiplied by the high cost of being wrong in declaring the recession prematurely still amounted to a significant potential cost.

I disagreed with the committee’s verdict for three reasons:

(1) A double dip, i.e., two quarters with negative real GDP growth, is extremely implausible at any time over the next year.

(2) Because real GDP is on track to reach a value in 2010:Q2 roughly equal to its value in the previous NBER peak quarter of 2007:Q4, marking a full recovery, any subsequent “double dip” would be treated by the committee as a new recession rather than the continuation of the past recession. The precedent for declaring a second recession was established by the experience of 1980-81, when real GDP substantially exceeded its previous peak value in early 1981 before turning down in the second half of 1981.

(3) Even if there is a double dip, with a quarter or two of negative real GDP growth, that decline would have to be implausibly large to bring the level of real GDP down below its trough value of 2009:Q2. For instance, for real GDP in 2010:Q3 to decline below its previous trough value from the widely forecast levels likely to be reached in 2010:Q2 would require a 15% annual rate of decline in 2010:Q3. For a two-quarter dip in the second half of this year to bring real GDP below its previous trough by 2010:Q4 would require a 7.5% annual rate of decline for two straight quarters, a faster rate of decline than in the panic quarters of late 2008 and early 2009. If any such double dip were to happen after 2010:Q4, say at some point in 2011, by then the upward pace of real GDP growth would have brought the level of real GDP far above its value in the peak quarter of 2007:Q4, thus again requiring the committee to declare a new recession rather than the continuation of the recession that began in December, 2007.

In summary, a double dip is implausible, if it were to occur in the future it would be classified as a new recession rather than a continuation of the 2007-09 recession, and any hypothetical double dip would have to be more severe in magnitude than the late 2008 panic period to bring the level of real GDP down below its trough level of 2009:Q2.

This morning the National Bureau of Economic Research’s Business Cycle Dating Committee released a statement, which said that it’s premature to declare the recession that started in December 2007 is over, but that doesn’t mean we’re still in a recession.

First a little background: the committee is considered the official arbiter of when U.S. recessions begin and end. Currently, there are seven economists who serve on the nonpartisan, nonprofit group, which was formed in 1978, though the NBER has been dating recessions since 1929. The NBER doesn’t define a recession in terms of two consecutive quarters of decline in real GDP, a definition that is often cited as a rule of thumb. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Since the definition of recession takes so many factors into account, the committee often takes its time to determine the end date. It didn’t officially declare until July 2003 that the 2001 recession, which ran from March to November of that year, was over.

The committee’s dating procedure is basically an academic exercise and it is more concerned with accuracy than speed. Though signs are looking up for the economy and most economists think the recession ended sometime in the middle of last year, broad risks remain. GDP began to grow again in the middle of last year, but fourth quarter GDP was still 2% below the peak it registered in 2008, adjusting for inflation. Meanwhile, last month the economy posted a big gain in jobs, but those numbers remain preliminary and could be revised.

Think of the committee as an oncologist treating a cancer patient. The preliminary tests may look good, but until the final results of the MRI come in, you don’t want to declare that the cancer has been totally eliminated.

Even though the Obama administration is trying to sell idea that the era of “too big to fail” is over, some in the market still aren’t buying it.

Case in point: Citigroup Inc.

Moody’s on Monday said in its “Weekly Credit Outlook” that the Treasury Department’s planned sale of its 7.7 billion shares of Citigroup this year doesn’t mean the government would remove its implicit support of the company if Citigroup were to fall into trouble again.

“The likelihood of government support remains very high because of Citigroup’s systemic importance to the U.S. and global financial system as a major counterparty, payments and clearing agent, deposit taker, and provider of credit,” Moody’s said. This is important, because Moody’s said it doesn’t see any “”rating implications from the disposition of the government’s 27% stake in the company.” In other words, Citigroup can still continue issuing debt at levels that assume a type of government support.

“Permanent government ownership of shares can be an important factor to consider when evaluating the probability of government support for a bank,” Moody’s said. “However, in our analysis we never assumed that the U.S. government’s stake in Citigroup was permanent. Instead, as noted above, our support assumptions are very high because of Citigroup’s interconnectedness in the global financial system and its systemic importance.”

Moody’s goes on to say that the “greatest threat” to “continued government support for Citigroup and other major U.S. banks is from pending legislative proposals that would allow the government to resolve failing but systemically important financial institutions in a way that imposed losses on bondholders while still minimizing systemic risk.”

This is the bill passed the House of Representatives in December and could soon advance to the Senate floor.

A roundup of economic news from around the Web.

Rising Oil Prices: Jim Hamilton looks at whether rising oil prices threaten the recovery. “Americans buy a little less than 12 billion gallons of gasoline in a typical month. With gas prices now about a dollar per gallon higher than they were a year ago, that leaves consumers with $12 billion less to spend each month on other things than they had in January of 2009. On the other hand, the U.S. average gas price is still more than a dollar below its peak in July of 2008. Changes of this size can certainly provide a measurable drag or boost to consumer spending, but are not enough by themselves to cause a recession.” Separately, Econompic makes some interesting charts that follow the same idea.

Recovery Risks: Kevin Drum looks at some of the downside risks facing the recovery. “1. This is a balance sheet recession, not a Fed-induced recession. Paul Volcker caused the 1981 recession by jacking up interest rates and he ended it by lowering them. That’s not going to happen this time. 2. In fact, there won’t be any further stimulus from lower interest rates. They’re already at zero, and Ben Bernanke has made it clear that he doesn’t plan to effectively lower them further by setting a higher inflation target. 3. Consumer debt is still way too high. There’s more deleveraging on the horizon, and that’s going to make consumer-led growth difficult. 4. The financial sector remains fragile and there could still be another serious shock somewhere in the world. 5. There are strong political pressures to reduce the budget deficit. That makes further fiscal stimulus unlikely. 6. Housing prices are still too high. They’re bound to fall further, especially given rising interest rates combined with the end of government support programs. 7. Our current account balance remains pretty far out of whack. Fixing this in the short term will hinder growth, while leaving it to the long term just kicks the can down the road. 8. The Fed still has to unwind its balance sheet. That has the potential to stall growth. 9. Oil prices are rising. This not only causes problems of its own, but also makes #7 worse. 10. Unemployment and long-term unemployment continue to look terrible. Yes, these are lagging indicators, but still.”

Industrial Policy: Dani Rodrik looks at the return of industrial policy. “The shift toward embracing industrial policy is therefore a welcome acknowledgement of what sensible analysts of economic growth have always known: developing new industries often requires a nudge from government. The nudge can take the form of subsidies, loans, infrastructure, and other kinds of support. But scratch the surface of any new successful industry anywhere, and more likely than not you will find government assistance lurking beneath. The real question about industrial policy is not whether it should be practiced, but how.”

Compiled by Phil Izzo