Author: WSJ.com: Real Time Economics

Many large retailers reported their December sales numbers this week, with most of them coming out the morning of Thursday, Jan. 7. Following an announcement in May, Wal-Mart and its units no longer publish monthly sales figures. Updates to come as more retailers report sales. (Last updated Jan. 7, 2009)

Sort the chart below by company name, category, change in total or same-store sales, and total sales. Also, see November’s chart.

An index that tracks a broad swath of medium-sized companies shows that that business profits are rising with the improving economy.

The index is distributed by Fifth Street Finance Corp., a publicly traded lender, and tracks a collection of 30 or so companies that it either lends to or owns a stake in. Companies include everything from Best Vinyl, a Utah- based vinyl fence installer, to Boot Barn, a California-based boot retailer and Filet of Chicken, a Georgia chicken processor.

Fifth’s Street index was at 782 in October, the third consecutive monthly increase, and up from 781 and 778 the previous two months. The index showed precipitous decline from it’s July 2008 peak of 1,021 through July of last year, as consumers retrenched and businesses cut back production.

The index tracks the companies Ebitda, a painful acronym that stands for earnings before interest, taxes, depreciation and amortization. Ebitda tracks cash going in and out of a company, and thus can be a useful measure of how the underlying business is performing.

The measure is often misused by companies seeking to put a positive spin on their deteriorating finances, but Fifth Street’s index tends to be a stricter measure of Ebitda because it uses the figure to monitor the financial covenants of companies in the index (meaning they can call a company’s loan if the Ebitda measure falls below a certain number).

There was carnage in virtually every industry tracked in the index, though health care, which tends to resist recessions, was relatively stable, according to Leonard Tannenbaum, Fifth Street’s chief executive.

The recent improvement “says to use that small company health has stabilized,” says Mr. Tannenbaum.

There were a few interesting tidbits from the Fed’s December 15-16 meeting minutes, beyond the now-widely-covered details about its improving economic outlook and divisions among officials about whether to keep buying mortgage backed securities.

1) As Stephen Stanley, from RBS, points out in a research note, some of the mortgage backed securities and Treasurys that the Fed has purchased in the past year have begun to mature or get prepaid. For now, the markets group at the New York Fed has marching orders to let these securities mature without reinvesting the cash proceeds it gets in return. That’s interesting. Some Fed officials are arguing that the Fed should consider buying more mortgage backed securities. However, the default position for now at least is to let the program run off. As the minutes note, Fed officials will be revisiting that issue in the months ahead, as they come up with a broader strategy for this mortgage backed securities program. This shows that Fed officials have a very complex set of choices to make in the months ahead about their mortgage portfolio. It’s not just about whether to keep buying. They also need to come up with a plan for handling the securities they’ve already got and there are many debates to come about how to do that.

2) The New York Fed is still a ways off from being ready to use its mortgage backed securities portfolio in “reverse repo” operations, in which it uses the securities as collateral for cash loans. The Fed has been experimenting with this repo program for months. It is one of many ways the Fed has to drain cash from the financial system. (In a reverse repo, it’s a borrower instead of a lender, and thus it is taking cash out of the system.) The minutes noted that Fed staff won’t be ready to use their biggest asset class — mortgage backed securities — in reverse repos until the spring. Another reason not to expect a quick change in Fed policy.

3) Fed staff gave officials several presentations on what determines inflation — a source of much internal debate in the past year. One issue is whether lots of slack in the economy — like high unemployment and low factory utilization — can be expected to drive down inflation. The more you believe in slack as the key inflation driver, the longer you’d like to keep interest rates near zero and ramp up other stimulative programs like mortgage backed securities purchases. Here’s one interesting takeaway from the staff reports: “The anchoring of inflation expectations in recent years likely had damped somewhat the response of actual inflation to the recent economic downturn and to fluctuations in the prices of energy and other commodities.” Put another way: Inflation hasn’t moved down as much as one might have expected given all of the slack in the economy, in part because inflation has a lot of inertia. People and businesses have been conditioned to expect inflation won’t change much, and that expectation has helped to keep it in place in the face of a terrible shock. It supports the idea that the Fed can’t rely on slack alone to decide where to put interest rates and is a little helpful to hawks.

The new year brings a new set of voters to the Federal Open Market Committee, but the tilt of the committee won’t change much as hawks are replaced by other hawks and doves by other doves.

The Federal Reserve’s interest-rate-setting body will spend much of the year weighing whether to tighten policy — as futures markets expect — while the economy recovers. But the new voting lineup probably won’t tilt the balance much from the 2009 FOMC.

The four presidents of regional Fed banks joining the rotation this year are James Bullard of St. Louis, Thomas Hoenig of Kansas City, Sandra Pianalto of Cleveland and Eric Rosengren of Boston. They’ll join the eight permanent voters on the FOMC — seven governors of the Federal Reserve Board (two of those positions are now vacant) and the New York Fed president. Every Fed policymaker, including presidents who are not voting this year, gets a voice at the table. But regional bank presidents tend to draw a bit more attention when they’re voters.

In the 2010 lineup, which takes effect at the January 26-27 meeting, Hoenig is likely to be the most hawkish voice on the spectrum, perhaps even dissenting as Jeffrey Lacker of Richmond did last year. As the dovish Janet Yellen of San Francisco moves off the voting slate, Rosengren steps in. (He dissented in late 2007, seeking a deeper rate cut than the rest of the FOMC backed.) The other 2009 voters coming off the rotation, Charles Evans of Chicago and Dennis Lockhart of Atlanta, consistently represented the center of the FOMC behind Fed Chairman Ben Bernanke. On the 2010 rotation, Pianalto is likely to line up with the FOMC’s center. Bullard, who will vote for the first time as a regional bank president, views himself as hawkish — though some economists don’t necessarily describe him that way anymore.

Some recent commentary on the economy and policy from the incoming voters:

St. Louis’s Bullard: He doesn’t see the Fed raising short-term interest rates in 2010, but he wants to consider other steps to tighten policy — such selling mortgage backed securities — if the economy heats up. “I started out saying I was a hawk and I very much see myself in that role. Inflation is very costly for the economy so I’d be very reluctant to let inflation get out of control or do anything that would jeopardize our low and stable inflation rate.”

Kansas City’s Hoenig: “I would not support a tight monetary policy in the current environment, but my experience tells me that we will need to remove our very accommodative policy sooner rather than later,” he said in October. “Even if we were to start immediately, much time would pass before incremental increases could be considered tight or even neutral policy.”

Cleveland’s Pianalto: “We have lived through a brutal recession that is only just starting to lose its grip on the economy, and I do not expect to see a quick turnaround. Our economy must contend with a fragile financial system, a consumer sector that is more inclined to save than to spend, a labor market weakened by a lack of business confidence, and the removal of many governmental supports for the economy. I expect to see a gradual and bumpy recovery as our economy addresses these challenges. Still, despite some concerns that inflation will be unleashed from its anchors, I believe there is enough slack in the economy to keep inflation subdued for some time.”

Boston’s Rosengren: The Fed needs to eventually ease its accommodative fiscal policy as well, but “first we have to get the economy in recovery mode and get us closer to full employment,” he said in October. He talked about the importance of returning to full employment without households becoming over-leveraged in the process. “The goal is not to get leverage back to where it was before. The goal is to get the economy back.” Rosengren added that one of his top concerns as the economy recovers is capital losses in commercial real estate that could hamper the financial sector.

By Brian Blackstone and Nina Koeppen

The EU’s Committee on Economic and Monetary Affairs is due to question the three official candidates for ECB vice president at a nonpublic hearing on Jan. 14, Dow Jones Newswires reported Wednesday. European finance ministers will discuss the nominations informally at their next meeting on Jan. 19, with a formal proposal due in mid-February. The candidate must then be approved by EU heads of state.

The candidates to fill the slot currently held by Lucas Papademos of Greece (whose eight-year term expires in May) are Portugese central bank governor Vitor Constancio; Luxembourg’s central bank head Yves Mersch and Peter Praet, who is a director at the National Bank of Belgium.

Of course, the ECB’s number two doesn’t carry nearly the weight in financial markets as ECB president, which has been held since 2003 by Frenchman Jean-Claude Trichet.

But this month’s discussions are effectively a starting gun to a more than 18-month process that will culminate with a replacement to Trichet, whose eight-year term expires in October 2011.

European posts, including those at the ECB, are often subject to considerations over how the region’s large and small economies are represented. The euro zone’s four largest economies – Germany, France, Italy and Spain – have a big voice on the ECB’s governing council with each having a Frankfurt-based executive board member in addition to their national central bank governors.

Based on the 3 candidates, the VP slot will stay with one of the smaller countries. Germany’s Axel Weber and Italy’s Mario Draghi are thought to be leading contenders for the top post. And whoever gets the number-two job, it will inevitably be scrutinized for implications regarding the presidency.

Markets are shrugging off the ADP jobs report showing that private-sector payrolls fell by 84,000 in December, and no wonder.

J.P. Morgan economists point out that over the past year, the number the ADP has reported has been on average 62,000 below Labor Department’s initial private payrolls number, undershooting it 10 of 12 months. In November, ADP first reported a private payrolls loss of 169,000 (revised today to 145,000 private jobs lost), which compared to a loss of just 18,000 in the Labor Department report.

Economists are looking for a loss of 10,000 jobs in Friday’s employment report, but some traders are apparently taking the ADP’s tendency to undershoot as a strong signal that the number could be positive.

ADP doesn’t include government jobs, which are counted in the official tally and could offset private-sector losses. The ADP report also posted the first increase in jobs in the services industry since March 2008, further boosting chances of a positive print in the government data.

A roundup of economic news from around the Web.

• Natural Unemployment: Writing for voxeu, Roger Farmer provides an interesting video graphic and analysis of the idea of a natural rate of unemployment. “Most policymakers subscribe to the existence of a natural rate of unemployment. This column provides a visual history of unemployment, vacancies, and inflation in the U.S. and says there is no natural rate. It suggests the economy can rest in any equilibrium on the Beveridge curve, as decided by the confidence of households and firms that pins down asset values.”
• Fed and Bubbles: David Leonhardt of the New York Times argues that the Fed’s history spotting bubbles makes it difficult for the central bank to seek more authority. “What’s missing from the debate over financial re-regulation is a serious discussion of how to reduce the odds that the Fed — however much authority it has — will listen to the echo chamber when the next bubble comes along. A simple first step would be for Mr. Bernanke to discuss the Fed’s recent failures, in detail. If he doesn’t volunteer such an accounting, Congress could request one. In the future, a review process like this could become a standard response to a financial crisis. Andrew Lo, an M.I.T. economist, has proposed a financial version of the National Transportation Safety Board — an independent body to issue a fact-finding report after a crash or a bust. If such a board had existed after the savings and loan crisis, notes Paul Romer, the Stanford economist and expert on economic growth, it might have done some good.”
• Stimulus Clouds: On his Fed Watch blog, Tim Duy wonders what will happen to the economy as monetary and fiscal stimulus fades. “The economy is gathering steam. Can’t deny it. But the clear path to sustained recovery remains clouded by government stimulus, both in the US and abroad. Few policymakers are confident that economic activity can stand on its own as stimulus fades, leaving the Fed disinclined to rush for the exits given existing forecasts. Indeed, there is reason to believe based on Taylor Rules that interest rates should be held at the zero bound through 2010 and beyond. But policy mistakes happen. And FOMC worries about the timing of withdrawal could be the basis for such a mistake if near term activity accelerates rapidly and inflation expectations gain. The focus on the Fed may be misplaced; he FOMC is not the only policymaker that might upset the apple cart. The next negative shock might come from abroad.”

Compiled by Phil Izzo

Managing to avoid the unemployment line isn’t enough to keep Americans who still have jobs happy at work.

A Conference Board survey of 5,000 U.S. households showed just 45% of respondents say they are satisfied with their jobs, down from 61% in 1987, the first year in which the survey was conducted.

The drop in job satisfaction between 1987 and 2009 covers all categories in the survey, from interest in work (down 18.9 percentage points) to job security (down 17.5 percentage points) and crosses all four of the key drivers of employee engagement: job design, organizational health, managerial quality, and extrinsic rewards.

The decline also spans all age groups. “These numbers do not bode well given the multigenerational dynamics of the labor force,” says Linda Barrington, a managing director at the Conference Board. “The newest federal statistics show that Baby Boomers will compose a quarter of the U.S. work force in eight years, and since 1987 we’ve watched them increasingly losing faith in the workplace.” Twenty years ago, some 60% of Baby Boomers was satisfied with their jobs. Today, that figure is roughly 46%.

Lower job satisfaction over the past 20 years has come as more companies have dropped or cut pension benefits and asked employees to contribute more to health care. Meanwhile, wage growth has been relatively stagnant. Ironically, the two-decade decline in happiness has coincided with substantial increases in worker productivity. Gains in the tech sector have ensured that even as workers become more unhappy, they have become more productive.

It’s still hard to say whether a warming climate will hurt the world’s economy. But if history is any guide, it’s likely to increase the gap between rich and poor.

In a paper presented at the annual meeting of the American Economic Association, Ben Olken of MIT and Ben Jones of Northwestern University make an important discovery: In poor countries, a temperature increase of only one degree Celsius reduces annual export growth by as much as 5.7 percentage points. The decline occurs in a wide variety of products, ranging from footwear to firearms. In rich countries, by contrast, Messrs. Olken and Jones find no effect.

That’s troubling, given the fact that scientists expect the global climate to warm by two to five degrees Celsius over the next 90 years. “To the extent that the historical impact is a reasonable predictor of the future impact, we should be particularly concerned about the effect of warming on poor countries,” says Mr. Olken.

The new results support previous research done by Messrs. Olken and Jones together with Melissa Dell of MIT. That research found that in poor countries, a one-degree-Celsius temperature rise was associated with a drop in annual economic growth of one to two percentage points. Again, they found no effect in rich countries.

Why poor countries? Mr. Olken says it’s hard to know. One possibility is that poor countries are more vulnerable because they’re more dependent on agriculture, though the export data suggest that’s not the whole story. Another is that poorer countries have less access to air conditioning. Finding an explanation is “an important area for further research,” says Mr. Olken.

A top U.S. Federal Reserve official said Tuesday it’s necessary to consider how banks considered too big to fail can be broken up so they no longer pose a systemic risk to the U.S. economy.

Hoenig

“Beginning to break them, to dismember them, is a fair thing to consider,” Federal Reserve Bank of Kansas City President Thomas Hoenig told a panel at the annual meeting of the American Economics Association.

An initial way to define too big to fail banks could be to take firms that have $50 billion or more in assets or have $100 billion or more in assets under management, the Fed official said.

The U.S. economy could face a similar financial crisis to the one it’s emerging from now if the government doesn’t tackle the problem of some banks remaining too big to fail, several top economists have said at the AEA meeting.

“We’ve got to start somewhere — and size matters,” Hoening said, calling for rules to address the problem that are simple and easy to enforce.

To prevent a repeat of the crisis, the U.S. Congress is considering an overhaul of the financial sector that includes new rules to shut down failing firms in an orderly way.

“We’ve got to strike while the iron is hot … but we must also do it right,” Hoenig said, adding there was a “chance” that new rules could be passed this year.

Big banks posing a systemic risk to the U.S. economy need to be identified in advance so that the right steps can be taken when they’re at risk, Hoenig said.

In a separate panel Monday, Simon Johnson, economist at the Massachusetts Institute of Technology, identified six banks as posing a risk: Bank of America Corp., Citigroup Inc., Goldman Sachs, J.P. Morgan Chase, Morgan Stanley and Wells Fargo & Co.

Hoenig also said he shared former Fed Chairman Paul Volcker’s view that commercial banking activities should be separated from investment banking ones. Volcker heads President Barack Obama’s Economic Recovery Advisory Board.

“We do need to consider some activities that are in these largest institutions that probably should not be: trading for their account, gambling. That portion … does need to be separated out ” the Fed official said.

As economists begin to tweak their models and paradigm to account for the surprising virulence of the recent financial crisis, Harvard University’s Andrei Shleifer is offering an justification for what Federal Reserve Chairman Ben Bernanke calls “credit easing” — the Fed’s purchase of trillions of dollars worth of Treasury debt and mortgage-backed securities. It is, Shleifer argued at a presentation at the American Economic Association in Atlanta, the best way to get banks to resume lending.

In a crisis, the price of securities — mortgate-backed, Treasury debt, packages of loans, etc. — fall to fire sale prices, well below fundamental values, he says. Banks with the wherewithal to make new loans or buy securities that prefer to buy securities because the opportunity for profit is so tempting. (See Goldman Sachs and J.P. Morgan Chase profits from securities trading in the recent quarter.) “Because asset prices are out of whack,” he said, “injecting capital into banks doesn’t restart lending.” Banks simply use the money “to buy underpriced securities… to speculate.”

“Financing of new investment by banks [via lending to business] is always competing with speculation. If speculation is more attractive, it is going to draw the attention of banks,” he argued.

The solution: The Fed or the government should buy a lot of securities, so many of them that the price rises and the banks no longer find them attractive for speculation and lend instead. (Of course, those banks who hold securities before the Fed or government intervene will benefit from rising prices.) Shleifer said massive purchases of securities by the Fed isn’t targeted on an individual institution — a plus, he says — and he said the purchases work best if they are highly rated securities rather than removing toxic assets from the banks’ books, as the Bush Treasury initially proposed.

Gary Gorton, a Yale University economist, criticized the Shleifer argument, observing, among other things, that there are many reasons that banks, particularly big wholesale banks in the securitization business, would rather buy assets than make loans. He said it wasn’t plausible that banks would raise equity capital — including that provided by the government — for the purpose of buying more securities. Moreover, he said, the Fed and Treasury purchases, large as they were, probably weren’t large enough to get the banks to sell all the securities that they wanted to sell.

The Shleifer presentation drew on a paper he and the University of Chicago’s Robert W. Vishny wrote last year titled “Unstable Banking.”

A roundup of economic news from around the Web.

• Triple Bubble: C. Eugene Steuerle of the Urban Institute worries about a double bubble becoming a triple. “I suppose that the U.S. (and world) economy could settle down to a new level of valuation of net worth relative to income… That could happen, for instance, if the U.S. and world economy became more stable, worldwide saving rates increased, and investments in total became less risky. But the two financial bubbles so far tell us a different story: worldwide government efforts to control economies, combined with the creation of large subsidized opportunities, have been inadequate to deal with, and perhaps even helped create, destabilizing arbitrage opportunities that are brought back into balance by a collapse. My bottom-line bet: Bernanke’s double bubble bind tends toward trouble if triplicated.”
• Yuan Rebalancing: In the Financial Times, the ECB’s Lorenzo Bini Smaghi calls for China to let its currency appreciate. “If a gradual appreciation of Asian currencies, in particular the renminbi, is in the interests of those countries and of the world economy as a whole, one may wonder why a decision of this kind has not been taken yet. The answer has much to do with political economy. In the midst of a global crisis, the benefits of the status quo seem to be more visible than the potential advantages of a change in policy, especially in emerging economies that have been able to grow at a sustained pace in 2009.”
• Chastened Capitalist: Ed Andrews, formerly of the New York Times, begins blogging on Capital Gains & Games today. “When I was in journalism school many years ago, a professor remarked that business reporters often go through three phases of maturation. At the start, the callous young reporter assumes that all business executives are rich crooks who need to be exposed. As the reporter enters the second phase, he gains access to top executives and discovers that they are much more open, hard-working and smart than they had seemed. In the final phase, the fully-seasoned journalist breaks through to the highest level of awareness: it turns out, there really are a lot of crooks out there.That’s the feeling I have now.”
• Sovereign Debt: Paul Kedrosky runs a great chart of current and forecast soveriegn debt as a percentage of GDP on his Infectious Greed blog. “The Japanese continue to really ring the bell in this particular contest, but the U.S. looks set to give Italy a rival for second spot.”

Compiled by Phil Izzo

Before the housing bust, Americans tended to think their homes were their best and most important investments –- a view promoted by Washington policy makers who made home ownership a top priority. Karen Pence, who runs the Federal Reserve’s household and real estate finance research group, argues at the American Economic Association’s meetings this week that homes are actually a terrible investment.

Putting aside the fact that home prices have fallen dramatically, she says several factors make homes a lousy investments:

1. It is an indivisible asset. If you own stocks and bonds and suddenly need a little cash, you can sell some of your stocks or bonds but not all. With a home, on the other hand, “you can’t just slice off your bathroom and sell it on the market.”
2. It is undiversified. You can buy stocks or bonds in industries or countries all over the world. A home is a bet on one single neighborhood.
3. Transaction costs are very high when you buy or sell a home because of real estate agent fees, mortgage fees and moving costs.
4. It is asymmetrically liquid, meaning it’s easy to get money out when home prices are going up. (You just take out a bigger mortgage.) But it’s hard to take money out when prices are going down because refinancing becomes more difficult. Put another way, the leverage that you have in your house with a large mortgage means your investment does well in good times but could be lousy in bad times.
5. It is highly correlated to the job market, meaning that home prices in a neighborhood tend to rise when the job market is improving in the area and fall when the job market is worsening. This means that your main financial asset provides the smallest cushion to you when you might need it most.

Maybe Washington policy makers shouldn’t work so hard to promote ownership with mortgage interest deductions and other federal subsidies to homeowners. Ms. Pence has been a Washington renter for many years. Ironically, though, she says she’s considering buying a house herself. The reason: Her husband wants a dog and wants to start gardening. That means moving out of the apartment.

Ms. Pence emphasized that she was speaking on her own behalf, and not for the Fed.

The American Economic Association’s annual conference was held in Atlanta over the last few days. Some of the top economists in the country were in attendance. Here are some of their predictions for 2010:

Robert Shiller, Yale University:
“Strategic default on mortgages will grow substantially over the next year, among prime borrowers, and become identified as a serious problem. The sense that ‘everyone is doing it’ is already growing, and will continue to grow, to the detriment of mortgage holders. It will grow because of a building backlash against the financial sector, growing populist rhetoric and a declining sense of community with the business world. Some people will take another look at their mortgage contract, and note that nowhere did they swear on the bible that they would repay.”

Edward Glaeser, Harvard University:
“Construction levels will stay low and my best guess is that housing prices — the 20 city Case-Shiller average — will be within 5% of current level, one side or the other.”

Alan Blinder, Princeton University:
“U.S. interest rates will go up across the board. Probably more at the long end than the short end.”

Michael Feroli, J.P. Morgan Chase:
“We’ll have above-trend growth, low inflation, and the fed on hold through 2010″

Don Ratajczak, Morgan Keegan:
“The odds of a double dip have gone from 1-in-3 to 1-in-5.”

Anil Kashyap, University of Chicago:
“The Democratic Party of Japan will be in a shambles. The economic program in Japan will be a complete mess by December.”

Raghuram Rajan, University of Chicago:
“There’s going to be a lot more noise made about China and its exchange rate. I won’t stick my neck out farther than that.”

Princeton University economist and Nobel laureate Paul Krugman made his bones as a scholar of international trade issues.

Unfortunately, what he has gleaned from the interactions of currencies and international capital flows makes him decidedly pessimistic about what lies ahead for the U.S. economy. Against a climate where most expect a recovery and where policy makers are laying the groundwork for an eventual unwind of the unprecedented stimulus of the last two years, Krugman reckons the odds are good that years of moribund activity lie ahead for the U.S.

“I’m deeply worried about what comes from here,” Krugman said, speaking at the American Economic Association’s annual conference in Atlanta Monday. Recoveries caused by an unwinding of excessive financial sector borrowing are typically “slow and painful” but they also usually are joined by a currency devaluation that helps drive up exports.

In this experience, the U.S. is also facing a deleveraging crisis. While the dollar has been under pressure, it has done so in an environment of weak global growth. As a result, Krugman said, the U.S. is unlikely to get the sort of export growth that traditionally is the engine of recovery. That’s true even with a currency under pressure, he said.

Looking across financial history, Krugman said, “we don’t really have a lot of role models” for a positive outcome. One can look to Japan, which is not a heart-warming story, he said, adding “the only other role model is the Great Depression, which was ended by a very large fiscal stimulus project called World War II.”

Krugman’s pessimism is further rooted in what he believes was an insufficient government reaction to the crisis. The economist said “radical” spending action beyond 2009’s $800 billion fiscal stimulus was needed. He said some of the banks saved by government capital injections should likely have been nationalized and forced to lend to businesses at higher levels.

Krugman also said the Federal Reserve should have been even more aggressive with its asset purchases, especially since interest rate policy has largely become ineffective. The asset-buying effort is set to wind down in the first quarter of this year, and many in markets are worried about rising mortgage rates once there is an exit by the central bank, currently the largest buyer in this hard-hit sector. Krugman said the Fed should also be willing to tolerate a higher level of inflation.

What’s more, Krugman said, a further drop in the dollar would be a good thing, and he even welcomed China selling the currency, all as a way to help rebalance and stimulate the economy.

Krugman’s views count as particularly grim amid a community of economists who generally expect some sort of growth this year. While many of the most well-known economists attending the AEA meeting this year were gloomy — Harvard University’s Martin Feldstein worried about a drop back into recession — most forecasts see growth moving along at a modestly positive course over this year and next.

Krugman’s warnings came on a day where a key report on factory activity in December expanded at its fastest pace in more than three years. Hiring data for the last month of the year comes on Friday, and many are expecting a further moderation in job losses, which is itself welcome relative to the huge job declines seen over most of last year.

Time will tell if Krugman or the consensus view of forecasters prevails. But if the Princeton economist is right, 2010 will be a tough year, and the Fed will be forced to abandon the start of a normalization of policy that officials have been laying the ground work for over recent months. And that will be a tough thing for financial markets.

To all the reasons to worry about the rapid rise in government debt in the wake of the financial crisis, add another: It’ll stunt our growth.

In a new paper presented Monday at the annual meeting of the American Economic Association, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard study the link between different levels of debt and countries’ economic growth over the last two centuries. One finding: Countries with a gross public debt debt exceeding about 90% of annual economic output tended to grow a lot more slowly. For advanced countries above the 90% threshold, average annual growth was about two percentage points lower than for countries with public debt of less than 30% of GDP.

The results are particularly relevant at a time when debt levels in the U.S. and other countries at the center of the financial crisis are rapidly approaching the 90% threshold. Gross government debt in the U.S., for example, stood at 85% of GDP in 2009 and will reach 108% of GDP by 2014, according to IMF projections. The U.K.’s gross government debt stood at 69% of GDP in 2009 and is expected to reach 98% of GDP by 2013.

“If history is any guide,” the rising government debt “is very troubling for the U.S. and other advanced economies,” says Ms. Reinhart.

The relationship between government debt burdens and growth is even stronger for emerging-market economies, Ms. Reinhart and Mr. Rogoff find. For countries above the 90% threshold, average annual growth was about three percentage points lower than for countries with public debt of less than 30% of GDP. The countries above the threshold also experienced much higher inflation: prices rose more than twice as fast as in countries with small debt burdens.

How the U.S. economy will fare over the next few years will depend on the outcome of a likely power struggle between politics and finance, an outspoken economist said Monday.

The U.S. economy could face a similar financial crisis to the one it’s emerging from unless the government tackles the problem that some banks remain too big to fail, Simon Johnson, economist at the MIT, told a panel at the American Economic Association.

The U.S. Congress has proposed legislation to drastically overhaul financial sector regulation, including measures to seize control of troubled big banks and to cut the powers of the Federal Reserve, the U.S. central bank.

The crisis that ended in 2009 has only exacerbated the problem because of the resulting financial sector consolidation, Johnson said. There are now six big banks that could soon engage in the sort of excessive risk-taking that led to the recent crisis because of a belief that the government would bail them out if they’re in trouble.

“Goldman Sachs has become the world’s largest hedge fund underwritten by the U.S. government,” the MIT economist said. The other five banks he mentioned as posing system risks to the economy are Bank of America, Citibank, J.P. Morgan Chase, Morgan Stanley and Wells Fargo.

It will be harder to deal with any new crisis because the U.S. Federal Reserve has likely exhausted its ammunition to counter a financial meltdown after it cut rates close to zero and took other emergency lending steps, Johnson warned.

“A crisis strengthens the oligarchs who survive,” Johnson said.

Why are there so many women veterinarians? In part because educated women are drawn to professions that are providing flexibility to combine work and careers,  Harvard University economist Claudia Goldin said in a lecture at the American Economic Association in Atlanta.

Veterinary medicine provides flexibility that women crave. (Bloomberg News)

The increase of women in various professions since 1970 has been spectacular. But why do highly educated women enter some professions and fields more than others?  “Women are 77% of all newly minted veterinarians, but they were a trivial fraction 30 years ago,” she noted. Women are 25% of all recent MBAs from the University of Chicago but are 8% of those who work in venture capital. Among young medical doctors, 41% are female, but the fraction in public health, pediatrics, dermatology, psychiatry, immunology and obstetrics and gynecology is far higher than in surgical specialties and cardiology.

Some of this has nothing to do with hours and workloads, said Goldin (who hasn’t had any children). Women are more likely, for instance, to be labor economists than macroeconomists. “But in other cases the decision is largely governed by a desire for career and family and involves a trade-off between earnings and aspects of the job such as work flexibility over the year, week and day.” Women are trading pay to get workplace flexibility, she suggests, and are drawn to professions where it’s relatively easier to do that.

“The goal of ‘career and family’ for college women is a relatively new one historically,” she said. “Only with cohorts born since circa. 1950 and graduating college in the early 1970s could many college graduate women have even considered having a career and family.”  For previous generations, there was a choice –sometimes career OR family, sometimes family THEN career.

Drawing from data on Harvard graduates and on University of Chicago MBA grads, Goldin contrasted MBAs to veterinarians. Fifteen years after college, among those women who have kids, 23% of MBAs weren’t working, versus 3% of MDs and 14% of lawyers. “The MBA lure for women is large; incomes are substantial even though they are lower than those of their male peers. But some women with children find the inflexibility of work insurmountable and leave or become self employed,” she said.

“If women are ‘fleeing’ the corporate and financial sectors, they have been flocking to professions in the health field, particularly veterinary medicine,” she said. “Why? The demands of professional training have not changed. But the practice setting has. Small animal clinics open from 9 a.m. to 6 p.m., six days a week, with no evening and no emergency hours have proliferated. Being a veterinarian has prestige, equivalent to that of a physician. Like some physicians there is considerable room for part-time and flexible work. The training period is less than that for doctors. Veterinarians work lower hours than MBAs and engage in more part-time work sooner in their professional lives.”

And vets earn a lot less money than MBAs, and thus give us a lot less money if they work part-time. “The vets win the horse race but they lose the rat race,” she said.

A roundup of economic news from around the Web.

• Stat of the Decade: Mike Mandel offers four candidates for statistic of the decade. ” 1) The boom and bust in housing prices clearly epitomizes the decade. What’s more, in 2000 nobody in their right mind would have predicted that the boom lasted as long as it did. Downside: The gyrations in the housing market may be a symptom of deeper problems, much like a fever is a symptom rather than a disease in its own right. 2) Globalization has been one of the main themes of this decade–and nothing illustrates globalization more than the rise in exports as a share of global GDP. In 1999, global exports were about 22.7% of global GDP, as measured by the International Monetary Fund. By 2008, that number was 32. 3% before plummeting in 2009. Downside: There may be systematic double-counting, as companies break up production into smaller and smaller pieces. 3) Chinese economic growth would have been one of the runner-ups for the Economic Statistics of the Decade for the 1990s. Chinese economy growth averaged an astounding 10% peryear in that decade, and looks like it’s going to get to the same level again in this decade. Downside: No one is really sure whether to trust the Chinese economic statistics or not. 4) Finally, we come to U.S. household borrowing, which probably is the clearest reflection of the financial crisis. In this decade the U.S. household sector amped up its borrowing from $500 billion in 1999 to $1.2 trillion in 2006, before dramatically cutting debt in 2009. Downside: This number from the Federal Reserve includes domestic hedge funds and nonprofit organizations, making it a bit tough to interpret.”
• Beware of Blips: Writing for the New York Times, Paul Krugman worries that signs of life in the economy may be fleeting. “As you read the economic news, it will be important to remember, first of all, that blips — occasional good numbers, signifying nothing — are common even when the economy is, in fact, mired in a prolonged slump. In early 2002, for example, initial reports showed the economy growing at a 5.8 percent annual rate. But the unemployment rate kept rising for another year. And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent, leading to triumphant proclamations that “the economy has finally entered a phase of self-propelled recovery.” In fact, Japan was only halfway through its lost decade. Such blips are often, in part, statistical illusions.”
• Pessimism Dangers: On Slate, Dan Gross says people need to embrace an economic upturn.”There’s a large population of non-ideologues who may not fully embrace the narrative of economic recovery because they don’t feel it yet in their paychecks, portfolios, or home values. Try telling a laid-off autoworker in Michigan or a laid-off magazine editor in Brooklyn that things are better. But they may soon be in for pleasant surprises, too. For all the advances of information technology, big economic turns always take us unawares. In 2007, all indicators flashed green—until the bottom suddenly fell out. In this environment, things can look awful, until a new order unexpectedly comes in or a few deals break in your firm’s favor. All of a sudden, things seem much better. We’re in a Missouri economy now, one in which recovery has to be shown, not told. Economic conditions may be improving, but it still may take more than a few quarters of growth before people fully commit to recovery, both financially and psychologically. If credit means belief, since the credit crisis began two years ago, belief has been in short supply. Maybe it’s time for a little blind faith.”

Compiled by Phil Izzo

The U.S. economy is this decade likely to perform as poorly as the one that just ended due to higher savings by more cautious Americans and a less qualified labor force, several top economists said Sunday.

The world’s largest economy is expected to see between 2009 and 2019 growth in gross domestic product – a broad measure of economic activity – close to the annual average of 1.9% seen between 1999 and 2009, economists said. That marked the worst performance since the 1930s, the decade of the U.S. Great Depression.

The economic recovery seen from the second half of 2009 has been driven by a government stimulus that will be fading in 2010, warned Martin Feldstein, a Harvard University economist and former Reagan administration economist.

“It’s easy to be dismal about the U.S. economy,” said Dale Jorgenson, an expert on productivity who sees a deterioration in the quality of the labor force causing productivity growth to fall to 1.5% a year this decade from 2% a year in the last 10 years.

Following a financial crisis that was partly a result of Americans spending beyond their means, Nobel-laureate economist Joseph Stiglitz said the U.S. savings rate could go markedly higher in the coming years.

“We’re not likely to have robust growth any time soon,” Stiglitz told a panel at the annual meeting of the American Economic Association entitled “Growth or Stagnation After The Recession.”

Both Stiglitz and Kenneth Rogoff, a Harvard University economist, warned the large debt accumulated to counter the crisis will be a major headache for the U.S. economy. They also cautioned there could be a new crisis down the road unless the U.S. regulatory system is improved.

On a more optimistic note, economists said China and India should continue to propel the world economy forward, which in turn would help the U.S.

Feldstein said there could be a substantial improvement in net exports out of the U.S. “That’s where we could see a shift in aggregate demand, which could bring us back to full employment.”