The Department of Labor has released its estimate of weekly jobless claims:

In the week ending Oct. 2, the advance figure for seasonally adjusted initial claims was 445,000, a decrease of 11,000 from the previous week’s revised figure of 456,000. The 4-week moving average was 455,750, a decrease of 3,000 from the previous week’s revised average of 458,750.

The advance seasonally adjusted insured unemployment rate was 3.5 percent for the week ending Sept. 25, a decrease of 0.1 percentage point from the prior week’s revised rate of 3.6 percent.

The advance number for seasonally adjusted insured unemployment during the week ending Sept. 25 was 4,462,000, a decrease of 48,000 from the preceding week’s revised level of 4,510,000. The 4-week moving average was 4,510,750, a decrease of 27,750 from the preceding week’s revised average of 4,538,500.

I think there are several things to keep in mind when considering this information. First, the estimate of claims has been revised upwards in 23 of the last 24 reports. As a commenter at Zero Hedge pointed out, the binomial probability of an unbiased jobless claims estimate being revised upward 23 out of 24 times is 0.00000143%.

Second, the moving average of the number of claims is essentially unchanged. 3,000 of 455,750 is a change of .66%. I find any notion that the margin of error is lower than this fantasy at best.

Third, as Tyler pointed out in the post linked above no matter how they cook the data they’re still reporting that continuing claims are increasing upwards. I can’t see good news in that.

But he’s not bad:

That’s my nephew, Dan.

As I have said before on this subject, I remain sympathetic to the idea that income inequality in the United States constitutes a problem. The degree of inequality seen now certainly doesn’t comport with my ideal version of the country, something approximating a 21st century version of Jefferson’s nation of yeoman farmers. Further, the direction in which I see the country moving, a slow but certain transition into a country of padrones and peones, the padrones largely native-born and government employees or working in industries enjoying the favor of the government, the peones a combination of immigrants and poor, frequently rural native-born, with a struggling, shrinking middle class in between is not the country in which I was born. It is a Third World parody of the United States.

However, the attempts I’ve seen at demonstrating that income inequality does, indeed, constitute a problem have been pretty feeble, relying mostly on slippery slope arguments. The proposed solutions have been laughable, in my view most likely to have the effect of creating the very conditions they’re presumably intended to prevent.

This morning Steven Pearlstein, writing in the Washington Post, considers the case that income inequality constitutes a problem:

There are moral and political reasons for caring about this dramatic skewing of income, which in the real world leads to a similar skewing of opportunity, social standing and political power. But there is also an important economic reason: Too much inequality, just like too little, appears to reduce global competitiveness and long-term growth, at least in developed countries like ours.

We know from recent experience, for example, that financial bubbles reduce equality by siphoning off a disproportionate share of national income to Wall Street’s highly-paid bankers and traders. What may be less obvious, but not less important, is that the causality also works the other way: Too much inequality can lead to financial bubbles.

The liberal version of this argument comes from former Labor secretary Robert Reich in his new book, “Aftershock.” Because so much of the nation’s income is siphoned off to the super-rich, Reich says, a struggling middle class trying to maintain its standard of living had no choice but to take on more and more debt. I have some problem with the argument that the middle class had no choice, but it’s certainly true that the middle class and the economy as a whole would be in better shape today if households weren’t burdened with so much debt.

The more conservative version of this argument comes from University of Chicago economist Raghuram Rajan. In his new book, “Fault Lines,” Rajan argues that in order to respond to the stagnant incomes of their constituents, politicians took a number of steps to keep the “American Dream” within reach, including subsidization of home mortgages and college loans. He might have added that politicians also were quick to cut taxes for the middle class even when it meant running up the national debt to pay for popular entitlement programs and government services.

I note that he makes no moral case, merely assumes that it is so. What moral case he makes relies on innuendo rather than argument. So, for example, “the nation’s income is siphoned off to the super-rich” and “the rich have used their winnings to bid up the prices of artwork and fancy cars, the tuition at prestigious private schools and universities, the services of celebrity hairdressers and interior decorators, and real estate in fashionable enclaves from Park City to Park Avenue”. This is worse than buying television sets, non-fancy cars, getting your hair done by non-celebrity hairdressers, and renting apartments how? The issues he’s worried about are only concerning if you want to buy artwork and fancy cars, send your kids to prestigious private schools and universities, employ the services of celebrity hairdressers and interior decorators, and buy real estate in fashionable enclaves. They are not the concerns of the poor.

There is an assumption there that the incomes of the ultra-rich have risen at the expense of the rest of us. That may or may not be true I think it’s far truer of the rapid rise in incomes of those with post-graduate degrees relative to those with college only or without degrees who, as I have previously documented, have seen earnings rise in greater amounts than the incomes of the ultra-rich albeit at lower rates. When you remove barriers to foreign goods while retaining them on services via credentialing, certification, and so on you convey benefits to those who provide the privileged services at the expense of everybody else, particularly those who make things and are, consequently, subject to overseas competition. That they have secured those privileges via rent-seeking is IMO a legitimate concern.

Mr. Pearlstein’s column falls short, as so many treatments of the subject of income inequality do, in proposing solutions. I look forward to his proposals.

One final word on morality. In the United States those defined as poor can make over $20,000 per year, about $70 dollars per day. In India or China the poor can make as little as $1 per day. Said another way, the gap between the poor in India or China and the poor in the United States is greater than the gap between the rich and poor in the United States. Doesn’t that mean that there is a stronger moral argument for solutions that improve the lot of the poor in India or China than for narrowing the gap between rich and poor within the United States? Let alone narrowing the gap between the ultra-rich in the United States and the rich in the United States, which is what most of the proposals for addressing income inequality I’ve seen to date accomplish.

I’m finding a common thread in many of the major stories and major issues of the day: there’s a genuine problem but either the proposed solutions have little to do with the problem or none of the solutions are remotely palatable. Not to mention that the solutions are frequently unimaginable under any reasonable theory of law. Take the case of the cartoonist, Molly Norris, for example.

As you may be aware Ms. Norris was a cartoonist for the Seattle Times. She was the person who first advocated an “Everybody Draw Mohammed Day”. I’m not sure whether she was being waggish, thought the idea was a good way of demonstrating that freedom of speech means the freedom to criticize, or merely thought of it as a Purloined Letter-style ploy. How better to insulate a few voices speaking out against repression than by surrounding them with millions of other voices.

I thought the idea was rude and uncaring but I completely accept how others might differ in their views.

As a consequence of her suggestion—not her actions since she promptly withdrew her proposal—the death threats she has received, credible enough to cause the FBI to warn her, have driven her from her work, her home, and her name. As the paper put it she has “gone ghost”, abandoning the life she had known.

I agree with Clifford May that this is a terribly sad and dangerous situation:

Where does this leave us? Significantly less free than we used to be. One may satirize, criticize, and even demonize Christians and Jews. Such speech remains protected byAmerica ‘s Constitution. But when it comes to Islam and the sensibilities of overly sensitive Muslims, constitutional protections are no longer to be taken seriously. To even discuss these matters, as I am now doing, risks – nay, ensures – being castigated as an Islamophobe.

But the alternative is to watch Molly Norris “go ghost” and pretend that no historic changes are occurring. It is not just Molly but America and the West that are moving, changing, “essentially wiping away” our identity. Are we still the “land of the free and the home of the brave”?

The question that strikes me is what is to be done? None of the alternatives that occur to me is appealing:

• Self-censorship. This delegates the setting of the agenda to those willing to exercise or threaten the most violence. Does that sound like a better world? Not to me.
• More acts of defiance. That’s precisely what put poor Molly Norris in the fix she’s in. I’m rather concerned that the approach does not take religious fanaticism seriously. Who is more likely to tire? Those mocking Islam or those who think they are defending it?
• Molly Norris and the future Molly Norrises could receive round-the-clocck FBI protection for the rest of their lives. Heckuva way to live your life.
• Following Mr. May’s implied suggestion political leaders, elite journalists, celebrities, and human rights organizations could condemn the situation. What would that accomplish?
• All religious institutions could be monitored to insure they’re not preaching hatred or violence. They could be audited to ensure they’re not being supported from abroad. Cost considerations aside, First Amendment considerations, anyone? Who gets to decide what “hatred” is? Violence?
• Muslim religious institutions could be monitored to insure they’re not preaching hatred or violence. They could be audited to ensure they’re not being supported from abroad. Equal protection?
• Islam could be banned in the United States. Again, First Amendment?
• Immigrants from designated countries could be banned from the United States. Those already here and non-citizens could be ejected.

Other suggestions? Do any of those sound as though they will make the world a better place? Let alone accomplish the objective?

There’s an idea that’s been going around lately that the left vs. right dichotomy which, after all, was first used to describe the Estates-General in the aftermath of the French Revolution more than 200 years ago, is obsolete and that the real battle is corporatist vs. individualist. Is today’s New York Times editorial on the Supreme Court another instance of that claim?

The Roberts court has championed corporations. The cases it has chosen for review this term suggest it will continue that trend. Of the 51 it has so far decided to hear, over 40 percent have a corporation on one side. The most far-reaching example of the Roberts court’s pro-business bias was Citizens United v. Federal Election Commission. By a 5-to-4 vote, the conservative justices overturned a century of precedent to give corporations, along with labor unions, an unlimited right to spend money in politics.

If the choice is between corporatist and collectivist, I can’t say I relish either alternative. Rather like being given the choice between being shot or hanged.

I think think the real conflict is between large and small. Big Government, Big Business, Big Labor, Big Pharma, etc. are natural allies.

Let’s engage in a little speculative exercise, building on the groundwork laid by my earlier post this morning. Let’s assume arguendo that Republicans take control of both houses of Congress by narrow margins, a fairly likely outcome as things stand today. How will President Obama react? How will his strategies change?

That’s the subject of a New York Times article from last Friday. The authors consider two alternatives:

Much will depend on the election results, and advisers to Mr. Obama insist that for now at least, they are singularly focused on keeping Democrats in the majority. But there are two basic outcomes for Mr. Obama if Republicans gain a majority in one or both chambers.

The first is legislative gridlock. Mr. Obama is already having trouble ending tax cuts for the wealthy, and that is with Democrats still in charge. If Republicans take control and try to undo his health care bill, or start peppering the White House with subpoenas, the president might well dig in his heels, and the partisan warfare will only worsen.

Alternatively, the capital could see legislative compromise. The second half of Mr. Obama’s first term could look much like the second half of President Bill Clinton’s first term, when Mr. Clinton separated himself from Congressional Democrats while moving toward the center in search of compromise with Republicans. While some Democrats scoff at this idea, the so-called triangulation strategy, and insist Republicans will not cooperate, others say the notion is not so far-fetched.

If Republicans gain control of both houses of Congress, will President Obama triangulate?

In my view that is extremely unlikely. To date the president’s approach has routinely been one of “doubling down”, essentially the diametric opposite of a major course correction. Unless I am very much mistaken during his political career he has never been confronted with the situation in which he was a member of the minority party. My guess is that he’s going to keep doing what’s been working for him and continue to act as though his party still held its majority.

I note, too, that those coming into the White House (e.g. Elizabeth Warren) are more progressive in their views than those leaving or rumored to be leaving (e.g. Peter Orszag, Larry Summers, James L. Jones).

Fasten your seatbelts. We may be in for a bumpy ride.

What say ye?

There has been quite a bit of speculation about the results of the November midterm elections, now just a month away. Dick Morris is predicting a Republican landslide, an overturning of control in both houses of Congress with historic gains:

Thanks to the leadership of President Obama, Speaker Pelosi and Majority Leader Reid, the Democratic Party is facing the biggest defeat in midterm elections in the past 110 years, perhaps surpassing the modern record of a 74-seat gain set in 1922. They will also lose control of the Senate.

Republicans are now leading in 54 Democratic House districts. In 19 more, the incumbent congressman is under 50 percent and his GOP challenger is within five points. That makes 73 seats where victory is within easy grasp for the Republican Party. The only reason the list is not longer is that there are 160 Democratic House districts that were considered so strongly blue that there is no recent polling available.

Nate Silver presents a more sober evaluation of the prospects for November:

The most likely number of Republican pickups is in the range of about 45 seats — although significantly larger or smaller gains remain possible. The model does not expect a clean sweep: Democrats are favorites in 4 seats currently held by Republicans. But Republicans are favorites in exactly 50 Democratic-held seats, according to the model, which would be enough to give them control of the House.

and here:

Republican chances of taking over the Senate have improved again in this week’s forecast. They are now 22 percent — up from 18 percent last week and 15 percent two weeks ago. Republican chances are now approaching the point where they stood before the Delaware primary, when they had peaked at 26 percent before Christine O’Donnell’s victory.

That comports reasonably well with my intuition on what’s likely to happen: the most that Republicans are likely to take control of is one house of Congress, not two, and that by a fairly narrow margin.

Last week via Jonathan Chait I encountered a study that breaks with the prevailing wisdom:

Using current and historical seat rankings by the Cook and Rothenberg Political Reports as of September 28, I project that the Democrats will retain control of the House of Representatives, albeit with a considerably smaller margin than that enjoyed in the current Congress.

Clearly, the outcome won’t have been written on the election until after the last vote is cast (and, possibly, for weeks or months after as we saw in the Minnesota election for the U. S. Senate). The only thing that would genuinely surprise me is sweeping change. My view of the system as it stands today is that it’s largely designed to preclude that.

Via John Taylor, a recent study has found empirical evidence that a “lax monetary policy” is correlated with an increased appetite for risk-taking. From the study’s abstract:

We document a strong co-movement between the VIX, the stock market option-based implied volatility, and monetary policy. We decompose the VIX into two components, a proxy for risk aversion and expected stock market volatility (“uncertainty”), and analyze their dynamic interactions with monetary policy in a structural vector autoregressive framework. A lax monetary policy decreases risk aversion after about five months. Monetary authorities react to periods of high uncertainty by easing monetary policy. These results are robust to controlling for business cycle movements. We further investigate channels through which monetary policy may affect risk aversion, e.g., through its effects on broad liquidity measures and credit.

to which Dr. Taylor adds:

The bottom line of this empirical research, as the authors put it, is that “lax monetary policy increases risk appetite (decreases risk aversion) in the future, with the effect lasting for about two years and starting to be significant after five months.” Their result is important to the policy debate because such monetary policy has been “cited as one of the contributing factors to the build up of a speculative bubble prior to the 2007-09 financial crisis.”

Here’s an exercise for you. Let’s assume that the findings of the study are true. Is the current policy of the Fed sufficiently lax that it would provoke the response found in the study? If not, why not? If it would, what would the likely outcome be?

I invite you to read the comments to this post at Outside the Beltway. One thing struck me about the comments. All of the commenters seem to accept that a) the program was necessary to save the financial sector and b) that it was successful in saving the financial sector.

It seems to me that the actual evidence is pretty meager on both counts. Obviously, it’s pretty hard to prove a counter-factual so we’ll never really know whether action by the federal government was necessary to prevent a meltdown or what did occur would have occurred regardless of what the federal government did.

The evidence that TARP worked is even more meager. That’s an assertion about the future: it claims that, as a consequence of TARP (or its successors), the banking system has returned to health and stability. Is that really the case? Or are things merely in a state of suspended animation?

There is a somewhat weaker claim: that TARP was psychologically necessary, either to the financial sector or to the country at large and that has worked. I’m even less sure of that one. It seems to me that the country at large is pretty shaky and the financial sector has taken away a lesson we’d just as soon they not have them believe, that there’s nothing they can do that’s so stupid that they’ll be allowed to experience the consequences of their folly.

Update

John Hussman remarks:

…the U.S. financial system appears to be a nicely painted dam, behind which a massive pool of delinquent debt is obscured. A significant correction in valuations and resolution of the growing backlog of delinquent debt may finally restore strong “investment merit” to the U.S. stock market, but only after a greater amount of pain and adjustment than most investors seem to anticipate.

Yves Smith plaints:

Moreover, the tacit assumption in the Geither comment, and other Administration defenses of its bank-friendly actions, is that the choice was the program that the Administration implemented or no intervention at all. But that is bunk. There were plenty of other options for shoring up the battered financial firms; giving them generous support with virtually no strings attached, and in particular, no changes in management, was unheard of, at least outside of kleptocracies. Various forms of resolution, in particular the Nordic model, were widely discussed early in the Obama Administration and pointedly ignored. The Obama crowd took a tough line with the auto companies, dispatching its top brass, forcing the recipients to produce long term plans, forcing bondholders and union members to take haircuts. Why did the banksters get kid glove treatment? The answer is all too obvious: financiers are one of the biggest sources of campaign contributions.

The TARP was created by the Bush regime; why not distance yourself from it or deploy it differently? This Administration has chosen to make the TARP its own and has no one but itself to blame for the consequences.