My Amazon Book Review of Christopher Clark's, "The Sleepwalkers: How Europe Went to War in 1914"

Sleepwalkers is about how, not why, Europe fell into the abyss of war in 1914. It is a terrific work of history, but for the lay reader, it is way too long and gets too bogged down in minutia. Hence four stars instead of five. What makes this book different from the volumes I have read on the origins of World War One is that is puts the emphasis on where it started, the Balkans. After reading the early chapters of the book, Clark proves, intentionally or not, the Bismark aphorism, that the Balkans were not worth the bones of a single Pomeranian grenadier.

For someone like myself schooled in the works of Tuchman (chaotic and inept decision making theory) and Fischer (Germany wanted a war from the get go) Clark's book is an eye opener. First it makes all of the players seem rational and second it puts far more emphasis on the role of France and Russia in starting the war. Both France and Russian planning was based on a "Balkan inception" scenario; something that was given to them on silver platter by the assasination of Archduke Ferdinand in Sarajevo on June 28. Within five weeks Europe was at war. As an aside the fear of growing Russian power not only motivates Germany, but also France in that France feared that in only a few years Russia would no longer need an alliance with them.

Although Clark convincingly covers the intrigues of Belgrade, Venice, St. Petersberg, Paris and London; he does not spend sufficient time on Berlin. I know that might be more of a "why" question than a "how" question, it is necessary for the story. It speaks the need to understand whether Austria-Hungary was an independent actor or a pawn of Berlin.

These quibbles aside there is so much to learn here and there are lessons for today. Afterall the Sarajevo trigger was an act of state-sponsored terrorism.

My Amazon Book Review on Ira Katznelson's, "Fear Itself: The New Deal and the Origins of Our Time"

There have been thousands of books written on Franklin D. Roosevelt and the New Deal. Instead of focusing on the executive branch, Katznelson shifts the focus to the Congress, particularly the southern Democrats who dominated the caucus and chaired the major committees. The author convincingly demonstrates that when the southerners were with him, Presidents Roosevelt and Truman got what they wanted. Conversely when the southerners opposed the Adminstration, the New and Fair Deals floundered. It is here where Katznelson makes an important contribution to our understanding of the New Deal and the early postwar era.

With respect to domestic policy, Katznelson views the approach the southerner took through the prism of race. Specifically where the southerners feared the underpinnings of the Jim Crow south were under attackl they backed away from Roosevelt. Although I largely agree with that thesis, the major failing of the book in my opinion, is that Katznelson ignored the Jacksonian roots of the southern Democrats then sitting in Congress. At its founding the Jacksonian Democrats were both racist domestically and hawkish with respect to foreign policy. Thus while the southerners, opposed Roosevelt dometically after 1938, they stood by him and later Truman in supporting the foreign and defense polcies of the emerging national security state.

I would recommend "Fear Itself..." to both serious students of American history and the casual reader interested in how much the the institutions we now take for granted came into being.

Slowly Ramping Up, UCLA Anderson Forecast, March 2013

 

 

After enduring the slowest postwar recovery on record, the economy is slowly beginning to ramp up. To be sure the acceleration will be more of a 2014 event, but the seeds are being sewn for real GDP growth to rise from the tepid 2% we have been used to to something more on the order of 3%. But this is still below the 4% - 6% growth rates associated with prior recoveries. Specifically, after growing at 2.2% in 2012, we are forecasting real GDP to advance 1.9% in 2013 and 2.8% and 3.1% in 2014 and 2015, respectively. (See Figure 1) Indeed, we anticipate the economy to achieve a sustained 3% growth rate starting in the second quarter of 2014. Along with the higher growth path we are also forecasting inflation in excess of 2% in 2014 and 2015 as the Fed’s extraordinary monetary policies catch up to a slow productivity growth economy.

Nevertheless, before we get to the accelerated growth we are forecasting, the economy has to overcome the headwinds coming from the $85 billion sequester in Federal spending over the next seven months ($1.2 trillion over 10 years), a recession in Europe, the impact of higher payroll taxes and higher taxes on upper income households and the payroll adjustments that business firms will make associated with the implementation of the Affordable Care Act. Because of the way the Affordable Care Act is structured, firms have incentives to convert full-time work to part-time work and for small firms to limit their headcount to 50 full time employees. As a result of these impediments, 2013 will represent the fourth year in a row of less than optimal 2% growth.

We assume the sequester issue will be resolved by another typical Washington compromise. Congress will likely respond to the near-term pain caused by the very quick and very arbitrary cuts in Federal programs that were passed by Congress and signed into law by the President in 2011 by coming up with a combination consisting of mostly long-term spending cuts in entitlements and some tax increases that will take effect in 2014. As a result of the sequester, growth will remain a slow 1.9% in the second quarter which temporarily spikes to 3.4% in the third quarter before dropping back to 2.5% in the fourth quarter. We fully realize this forecast outcome it too cute for our tastes, but that is the way it models out.

The recent revisions in the employment data highlighted the fact that the job situation was better than what we had thought. The economy gained an average 181,000 jobs a month in 2012 and we expect an equivalent gain in 2013 and acceleration to 200,000 jobs a month in 2014 and 220,000 in 2015. (See Figure 2) In this environment the demand we are forecasting the 

unemployment rate will gradually decline from the current 7.9% to 7.6% by yearend to 7.1% at the end of 2014 and to around 6.5% at the end of 2015. (See Figure3)

HOUSING AND CARS LEADING THE PARADE

Growth will be buoyed by a rapidly recovering housing market and continued strength in light vehicle sales. Housing led the downturn; it is now leading the upturn. Housing starts totaled 781,000 units in 2012 up from 612,000 units in 2011. Because housing remains extremely affordable (low prices and low mortgage rates) for those who can obtain credit coupled with substantial pent-up demand, we are forecasting starts to exceed one million units this year and foresee further advances to 1.35 million units and 1.56 million units in 2014 and 2015, respectively. (See Figure 4) Although we are above consensus we do not view our forecast to be overly optimistic. After all, our 1.56 million unit forecast for 2015 is consistent with the historic 20-year average and with long run demographic demand. Where we differ with other forecasters is that we expect housing starts to normalize in 2015, they look for normalization in 2016.

Similarly, the recent strength in automobile sales is expected to continue. The fleet, on average, is 11 years old and onsumer balance sheets have been at least partially

repaired by the modest rebound in home prices and the surging stock market. Practically all of the household wealth destroyed during The Great Recession has been recouped. Light vehicle sales rebounded to 14.4 million units in 2012 up from 12.7 million units in 2011. We expect a further increase to 15.2 million units in 2013 and can easily visualize a 16 million unit year in 2015. (See Figure 5) Remember that will still be below the 16.1 million units sold in 2007.

THE NEAR-TERM ANCHORS: EXPORTS AND BUSINESS STRUCTURES

Simply put, it is hard to export when your trading partners are in recession. Eurozone output shrank at a 2.4% annual rate in the fourth quarter of 2012. Japan contracted as well, albeit at a smaller 0.4% annual rate. With most forecasters looking for a very sluggish Europe in 2013, it is hard to visualize a rebound in U.S. export growth until 2014. Export growth rebounded a stunning 11.1% in 2010, but since then the growth rate has been on a decidedly downward track, dropping to a mere 2.5% in 2012. Although still positive, we forecast export growth to be a very low 1.5% in 2013 before rebounding to 5.3% and 5.8% in 2014 and 2015, respectively. (See Figure 6)

Adding additional risk to the forecast is the abrupt shift in Japanese monetary policy designed to end that country’s 20 year deflation. Concomitant with the change in policy, whether by design or not, has been a substantial decline in the exchange rate of the Yen. Since last fall

the Yen has been effectively devalued by 17%, thereby making Japanese goods far more competitive in global markets. Clearly this abrupt change in the exchange value of the Yen introduces a negative factor for the prospects for U.S. exports.

Another source of sluggishness in 2013 is the stalling in the investment in nonresidential structures. Specifically, the drop in natural gas prices lowered the investment in new wells and the completion of several major utility projects will cause growth in this sector to drop to essentially zero in 2013. However, a rebound in energy activity along with a marked increase in commercial construction will cause this sector to increase at 9.8% and 11.4% in 2014 and 2015 respectively. (See Figure 8)

THE FISCAL TRAIN WRECK

To be sure, Federal purchases, thanks to significant declines in defense spending and more modest declines for civilian spending coming off the stimulus highs of 2010, are heading lower. (See Figure 9) Those reductions along with higher tax revenues coming in from the recent tax increases will cause the federal deficit to decline from $1.1 trillion in fiscal 2012 to about $860 billion in fiscal 2013 with further declines extending throughout the near-term forecast horizon. (See Figure 10)

However over the long-run, the scale of the Federal deficit is not a result of the federal purchases which fund defense, the FBI, the national parks, and the FDA, for example. And it is not the result of insufficient tax revenues because we forecast a return to a somewhat above average 19% share of GDP allocated to federal taxation.

Indeed, in the very long-run, according to the Congressional budget Office, by 2037 Medicare, Medicaid (including the Children’s Health Insurance Program) and Social Security will account for 16.6% of GDP swallowing over 80% of revenues. Of course, given our aging popula

tion a 20% share going forward maybe more appropriate. The real reason why the projected deficit starts expanding from $640 billion in 2019 and rises to $800 billion dollars in 2022 is entitlement spending and until that is controlled, no nominal deficit reduction package will work. Of course this and most all deficit projections naively assume no recession over the next decade.

INFLATION AND THE FED

Although inflation has remained quiescent we believe the economy is about to deliver more inflation than what policy makers now expect. To be sure, headline inflation will remain low for most of 2013, but core inflation will soon be running at a 2% annual rate and be well on the path to 3% in 2015. (See Figure 11) Why? We believe that the extraordinary monetary policy of the Federal Reserve is about to translate into higher prices as spot shortages of skilled labor put upward pressure on wages in an economy suffering from less than 1% a year productivity growth. (See Figure 12) Furthermore, inflation will be in part driven by the welcome rebound in housing prices as the owners’ equivalent rent calculation drives the consumer price index higher. We note that apartment rents reported by the publicly traded apartment Real Estate Investment Trusts are now increasing at a 4% pace and that rate of gain will soon find its way into the official price indices.

Fed policy has been nothing but extraordinary since the financial crisis began in August 2007. The Fed’s balance sheet has nearly quadrupled to over $3 trillion and it is on the road to $4 trillion if, and according to the minutes of the January Fed policy meeting that has become a bigger if, the $85 billion a month in asset purchases announced last fall continue throughout 2013. (See Figure 13) Although this policy has yet to show up as price inflation, the monetary kindling is certainly there to be ignited. We note that the potential for inflation is a new concern for us because until very recently we have been forecasting inflation to stay well within the bounds of the Fed’s target.

Along with massive asset purchases the Fed has targeted a zero interest rate policy since late 2008. We like others expect that policy to continue well into 2014. (See Figure 14) Unlike others and the official statements of the Fed we believe that policy will end in late 2014, and not continue on well into 2015. Simply put, the inflation we are envisioning will first show up in the long-term bond market and that will put pressure on the Fed to act sooner than what is now contemplated. Instead of waiting for the unemployment rate to drop to 6.5% before acting, we believe that as the unemployment rate approaches 7% with inflation rising, the Fed will begin to move away from its extraordinary monetary policy.

CONCLUSION

After overcoming a host of near-term hurdles coming from the sequester, recession in Europe, higher taxes and transition issues associated with the implementation of the Affordable Care Act, we believe that the economy is setting the stage to break out of the 2% growth path of the past four years and ramp up to a 3% growth pace in 2014. By the end of 2015, the unemployment rate will approximate 6.5%. The growth will come from the gradual removal and/or adjustment to the negative factors and continued strength in housing and automobile sales along with renewed growth in business construction and exports. Along the way inflation will pick up and that will challenge the Federal Reserve to rethink its zero interest rate policy in late 2014.

 

My Letter to Barron's on MLPs, March 11

To the Editor:
I was disappointed in the cover story on "The New MLP Landscape" (Feb. 25) because it failed to discuss the most fundamental risk facing the sector. Practically, the sole reason that master limited partnerships exist is to game the tax code. Thus, any serious policy discussion involving business tax reform would have to include the role of MLPs, real-estate investment trusts, and large-scale limited liability corporations and partnerships. If corporate tax rates are to be lowered as they should be, the lost revenue will have to made up from somewhere.

Prudent MLP investors should keep a close eye on the congressional tax-writing committees.

My latest USNews Blog, "Obama's Liberal Vision is not Economically Viable," January 23, 2013

For the full article see the url below:

http://www.usnews.com/opinion/blogs/economic-intelligence/2013/01/23/obamas-liberal-vision-is-not-economically-viable

Post Mortem on the Tax Deal

After nearly two months of needless skirmishing the Congress and President Obama finally agreed on a tax compromise that could have been done at the outset. The final accord was pretty much along the lines of my November 7 post with called for tax increases for families making over $400,000 a year($450,000 enacted), a 20% dividend tax rate (enacted), elimination of all deductions save for charitable contributions for those earning over one million dollar a year (gradual phase out of exemptions and deductions for families making over $300,000 a year enacted) and a top rate of 37.5% (39.6% enacted). Why it took so long is a tribute to the dysfunction in the Capitol.

Of course nothing was done to solve the real fiscal issue facing our country which is runaway entitlement spending. The fundamentalists in the Democratic Party held the line here even unwilling to go along with a modest change in the indexing formula for social security. Just remember that that the Democratic Party's lack of interest in entitlement reform does not mean that entitlement reform is not interested in them. It will come and the longer we wait the more severe it will be.

Meantime I would note that there were a few adults in the room. Credit for the passage of the compromise should go to the much maligned House Speaker John Boehner, Senate Republican Leader Mitch McConnell, Vice President Joe Biden, and as much as I hate to admit it, House Minority Leader Nancy Pelosi. The cry babies in the room were House Republican Leader Eric Cantor and his acolytes who almost torpedoed the final deal and thereby prevented the Republican for taking credit for at least common sense partial compromise. Simply put, Cantor, doesn't know how to say "Yes". On Democratic side the cry baby was Sentate Majority Leader Harry Reid who simply refused to do what senators do, cut a deal.

"An Uneasy Look at Office Space Demand," UCLA Economic Letter, December 17, 2012

For the complete article see the URL below:

http://www.anderson.ucla.edu/Documents/areas/ctr/ziman/UCLA%20Economic%20Letter_Shulman_12-17-12.pdf