Mohammed El-Arian, the CEO of bond giant PIMCO takes to the pages of the Washington Post to make a plea for I’m not sure exactly what:

Policymakers must break this active inertia by implementing a structural vision to accompany their current cyclical focus. Measures are needed to address key issues, which include the change in drivers of growth and employment creation; the high risk of skill erosion and lost labor productivity; financial deleveraging in the private sector; debt overhangs; the uncertain regulatory environment; and the unacceptably high risks facing the most vulnerable segments of society.

Specific measures would include pro-growth tax reform, housing finance reform, increased infrastructure investments, greater support for education and research, job retraining programs, removal of outdated interstate competition barriers and stronger social safety nets.

along with skepticism about the effectiveness of additional monetary or fiscal stimulus. Matthew Yglesias quickly erects a straw man to attack:

After all, if there’s a clash between what policies would be good for PIMCO’s investment positions and what policies would be good for the global economy, El-Erian has a responsibility to push for policies that would be good for PIMCO’s investment positions. Is there such a clash? Well, readers of The Washington Post op-ed page have no way of knowing. So what’s the point of publishing it?

which Felix Salmon sets fire to with equal promptness:

The oversimple answer to the question is that El-Erian controls over $1 trillion in assets: if you wanted to put a face to the famous bond vigilantes, it would probably feature that famous moustache. If you care what the bond vigilantes might be thinking, then you can probably get a pretty good sense of it by reading El-Erian’s frequent op-eds.

A better answer is that there simply isn’t a clash between what’s good for the global economy and what’s good for Pimco, which is overwhelmingly a long-only investment house. Pimco’s long-term health is a function of there being a strong global economy which generates lots of savings for Pimco to manage. If you’re running a few million or even a few billion dollars, then you can significantly grow your assets under management by taking bold bets which pay off. If you’re running a trillion dollars, that’s no longer the case. At that point, your assets under management are much more a function of the global savings rate than they are of your own expertise as a fund manager.

I saw the op-ed as a plea to abandon parochial and partisan interests, high-minded but unlikely. Additionally, I think his prescriptions betray a fundamental lack of understanding of the problems we face. Take education, for example. We already spend a trillion dollars a year out of the public purse, most of the spending coming from state and local governments. As with defense, healthcare, and any number of other critical areas, we not only spend more than any other single country on education, we very nearly spend more than all the rest of the countries of the world put together. Far from not spending enough in these areas we’re spending far too much. We’re just not getting a good enough return on our investments.

Our problem is that our spending on defense, healthcare, and education remains targeted in inefficient and ineffectual ways, is unsustainable, and diverts resources from other potentially more productive economic sectors which have far greater potential for producing increased employment. We have already engaged in what is laughingly called healthcare and financial reform, in each case woefully inadequate and more likely to exacerbate the problems we face than solve them. The other countries of the world are focused on their own problems. Don’t expect Germany, China, or Japan to suddenly become good global citizens and become willing to take one for the team. They have their own problems and their own political imperatives.

Brad DeLong, Megan McArdle, and Tyler Cowen are all confessing policy issues on which they’ve been wrong. Fair is fair so I’ll confess a public affairs issue on which I’ve been wrong.

I didn’t recognize just how callow Barack Obama is or, possibly, how stubborn he is. Oh, I believed him when he said he’d devote more resources to Afghanistan. I just thought he’d catch on sooner to what a losing proposition trying to create a 16th century state there is let alone a 21st century one. I’d’ve voted for him anyway. I didn’t have the choice between him and the Perfect Presidential Candidate I had the choice between him and John McCain. Sen. McCain has nearly all of the problems that President Obama has and then some.

However, unlike Megan I was right on invading Iraq, unlike Dr. DeLong I’ve never believed you can fine-tune the economy or that the members of the Federal Reserve Board or federal regulators were capable of doing it, and unlike Dr. Cowen I’ve always recognized that median income was growing too slowly. I’d seen too much going on around me, with my family, and with myself to believe otherwise.

I still think I’m right about what’s wrong with the economy: too many bad policy decisions over too long a period and too great an ability of people in sectors in which we’re enormously over-invested to dragoon the federal government to their aid to prevent the necessary and inevitable realignment.

I honestly don’t know whether I’m right about the role that demographics is playing in the current economic troubles. It would certainly be nice if I were wrong. If I’m right we’re in terrible, terrible trouble.

Remember how I’ve been saying that I didn’t know what the Fed was smoking in predicting an annual 3% or better GDP growth for 2010? Turns that the Bureau of Economic Analysis now says that having my ear to the ground put me closer to the truth than the Fed’s models put them:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.6 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the “second” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent.

The GDP estimates released today are based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 2.4 percent (see “Revisions” on page 3).

The increase in real GDP in the second quarter primarily reflected positive contributions from nonresidential fixed investment, personal consumption expenditures, exports, federal government spending, private inventory investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the second quarter primarily reflected a sharp acceleration in imports and a sharp deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending.

As I pointed out yesterday, supporting consumer spending means that imports are going to increase.

A couple of things in this report pop out at me. First, that’s quite a revision. A difference of a third. I’ll refrain from expressing my emotional reactions to that. Second, note that government consumption and gross investment declined from the advance estimate. Doesn’t that mean that the CBO will need to revise their projections of the effect of fiscal stimulus downward, too? After all they’re measuring inputs rather than outputs and if the inputs weren’t as large as they presumably thought shouldn’t the outputs be lower?

Whatever else there is a shortage of there’s certainly no shortage of advice on what President Obama should do next. This morning there’s contradictory advice from two top Democratic operatives. Marshal Foch Bob Shrum advises President Obama to get on the attack:

First, Obama and Democrats have to redraw the battle lines for the midterms. Don’t cast the campaign merely—and too cautiously—as a choice between the Bush collapse and an Obama turnaround that a majority of Americans don’t yet believe in. They are already rid of Bush; their anger at the status quo drives them toward the GOP—a reversal of the dynamic that swept in Democrats in 2006 and propelled the improbable Obama in 2008.

What’s called for is a starker choice rooted in progressive conviction. September is the time and tax cuts are the cause—if the President and his party are bold enough to break with the conventional wisdom that this issue invariably favors Republicans, and wage the battle not in the arcane interstices of the legislative process, but in the glare of the national spotlight.

while Doug Schoen recommends that he dash for the center:

I first met with Mr. Clinton privately in early 1995, after the Republicans gained control of Congress for the first time since 1954. I warned him that he could not be re-elected in 1996 unless he turned around his administration’s reputation: from one of big-spending liberalism (represented by his attempt to massively overhaul the health-care system) to one of fiscal discipline and economic growth.

Mr. Clinton did just that, and now Mr. Obama must do the same—and quickly. Yet the White House seems to believe its approach should be to blame George W. Bush for everything. Polls suggest that this approach is likely to have only the most limited success.

I have little doubt that Mr. Schoen will be castigated as a DINO for his advice but it probably needs to be remembered that Bill Clinton won re-election in 1996; Bob Shrum has been a top advisor for nearly every failing Democratic presidential run in recent memory.

The problem this time around is that there’s very little center to run to. I think that fiscal discipline and economic growth are always good advice. The paths that actually produce those things are far from clear.

Mr. Shrum’s advice is presumably intended to buck up the base but it will do so at the expense of, well, everybody else and the reality with which progressives much come to terms is that while President Obama may not be able to win without them he can’t win with their support alone.

When I re-read the column by Simon Johnson that I quoted yesterday, the paragraphs before the one I quoted jumped out at me:

Excessive consumer debt is an outcome of prolonged inequality – in trying to remain middle class, too many people borrowed too much, while unscrupulous lenders were only too willing to take advantage of such people.

Raghu Rajan, the former chief economist at the International Monetary Fund, and Robert Reich, the former Labor Secretary, also have new books with related themes that link persistent inequality of income to the onset of financial crisis through various mechanisms. Mr. Rajan’s “Fault Lines” is more about the global economy (and overspending at the level of the American economy); Mr. Reich’s “Aftershock” focuses on the social and political impact of the crisis (and why, without addressing inequality, our financial problems will recur).

The distribution of income in the United States is undoubtedly becoming more unequal. Specifically, over recent decades, it has become harder for people with only a high-school education to build a secure middle-class future for their families.

There’s something in this statement that I wonder if Dr. Johnson appreciates. When you strip out the qualifiers and subordinate clauses, he’s attributing the financial crisis to immigration.

That may seem like a stretch but here’s how the chain of reasoning works. Income inequality induced people to borrow too much. Lack of education is a driver of income inequality. An astonishing proportion of those with high-school educations only (or less) are immigrants. If, by waving a magic wand, you could remove immigrants with high-school education only or less from the equation, whatever problem lack of higher education causes would be cut nearly in half. More, since although the effects of immigrants on wages are ambiguous, the effects of immigrants on wages in the lowest income quintile is indisputable. The reasonable conclusion then is that the financial crisis was caused by immigration.

To be honest I think a lot of that reasoning is actually inside out. [I just chopped out an expansion on this thought I spent an hour on as unintelligible.] Rather than wander off into the weeds let me leave you with a link on public sector educational attainment levels and point out that

• By law GS workers must be American citizens.
• According to all resources I’ve been able to identify a minority of immigrants are legal permanent residents.
• The naturalization rate among LPRs is around 50%.

Based on that, I suspect that a lot of native-born Americans who have high-school only are working for the government at one level or another. Here in Chicago, for example, a lot of police officers and firefighters have high-school only. That may skew the results a bit.

Via Mike Shedlock, Daily Finance is reporting that ten large retail chains have decided to close stores:

Both Saks (SKS) and Abercrombie & Fitch (ANF) said they were closing stores in several parts of the country. Meanwhile, other stores like the struggling Blockbuster video rental chain, continue to slash stores by the dozens. American Apparel (APP), which is close to defaulting on its loans, just may be next.

Consumers just aren’t shopping the way they used to. Even Wal-Mart Stores (WMT), which typically fares well during tough economic times, is worried. “The slow economic recovery will continue to affect our customers, and we expect they will remain cautious about spending,” said president and CEO Mike Duke in a statement that was released during the company’s second quarter earnings report.

With the prospects for economic recovery iffy at best and consumer spending still moving at a snail’s pace, it’s little wonder that retailers are sussing out their weakest stores and closing them in order to protect profits. Retailers say they are positioning themselves to play where they can be strongest and avoid burning resources in places that won’t produce the results they want.

The article points to at least 1,000 stores being closed. I’m honestly surprised we haven’t seen a lot more of this sooner. A lot of the stores to close appear to be on the West Coast but that may just be an illusion. How many of these closings are structural, how many are related to the economic downturn, and how many are strategic? I’m guessing that many are structural. Certainly Blockbuster’s are. Their business model has collapsed.

Mike also makes a valuable point:

Please keep those store closings when retail sales numbers are reported.

The numbers are typically reported as percentage increases and decreases of “same store sales”. If retailers all close weak stores, reported “same store sales” go up. However, total aggregate sales don’t.

Moreover, one also needs to factor in store closings. From the Toledo article “Several large signature properties – the closed Circuit City store and former Lone Star Steakhouse on Monroe, and the Smokey Bones Barbeque and Grill on Talmadge – have remained closed for more than 18 months.”

Some of those sales vanished into thin air, some of it went to other stores exaggerating “same store sales”.

This is the reason one must analyze sales tax revenue instead of relying on “same store sales” for consumer spending estimates.

I’ve asked this question before: where do we expect economic growth to materialize from? Clearly, it’s not coming from either retail or housing construction.

There’s an interesting post from Gregory White over at Business Insider which proposes an interesting question. What if investors (i.e. people who buy Treasury notes) aren’t interested in net worth (GDP) but are interested in income (revenue)?

It is, in many ways, no different than looking at a company. Recall Q2 earnings. Investors were not that concerned about surging profits, made through companies cutting spending, but rather the decline in revenues.

And while current bond yields or CDS pricing do not reflect that position in terms of U.S. sovereign debt, maybe there is an implied market assumption that the U.S. government could take in more revenue relative to its GDP, by either expanding revenues through economic growth or increasing taxes.

The debt to revenue ratio in the United States is 358%. That’s higher than Greece’s.

Recently, a number of people, e.g. Arnold Kling, have been wondering how much we can borrow without people starting to balk. Let’s try a little thought experiment. Let’s assume that neither GDP nor net revenue were important in keeping the spigots of lending open. Wouldn’t that mean that the only alternatives were robust growth or higher taxes? Right now we’re rather clearly on the side of the Laffer Curve at which higher marginal rates produces more revenues so more revenue is possible.

However, higher revenue will impose a cost in terms of lower growth. Might the only alternative be robust growth? Not a happy prospect for a mature economy.

There’s a kernel of good sense in Richard Florida’s observations about the perverse effects of federal housing policy:

The old government-backed system had a rationale of sorts in the old industrial order, providing a “geographic Keynesianism” which spurred consumption of durable goods coming off of U.S. assembly lines – everything from cars to refrigerators, washer-dryers, air-conditioners, and TVs. But little of that is produced in the U.S. anymore – it’s now a subsidy to offshore manufacturers. And the economy is far less manufacturing-intensive and far more knowledge-driven.

but IMO it’s vastly over-stated and over-stated in a way that obscures the real conundrum that faces us. It’s simply untrue that we don’t produce refrigerators, washing machines, and so on in the United States. We produce billions of dollars of them. Sub-Zero refrigerators and Wolf ranges, for example, are made in the U. S. A.

But we don’t produce commodity-priced products. We produce the high-end stuff, we do so without employing nearly as many people in manufacturing as we did a generation ago, and there’s a good reason for it. It’s very difficult for American manufacturers to compete with overseas competitors who have something approaching a zero cost of labor. The functions of many of these devices have been well-established and fixed for decades, they require a certain amount of material, the material is traded in a world market.

Strengthening unions and raising wage rates won’t solve this problem as intimated by Simon Johnson:

We can argue about proximate causes, including the relative roles of new technology and globalization, but there is no question that unionized jobs, well-paying assembly line work and prosperous small-business niches have all tended to disappear.

Quite true. But the converse isn’t true. The only way we could have more highly unionized jobs that provided well-paying assembling line work would be to start putting up barriers to the products of countries that had lower costs of production than ours or, like the Germans and Japanese, show marked preference for products made here. That might result in more Americans having high-paying manufacturing jobs but it would also result in fewer Americans having refrigerators, televisions, and cellphones. It’s hard for me to imagine a president going before a joint session of Congress and pitching that.

Given the rhetoric of the last couple of decades it’s also hard for me to imagine a president proposing policies that would encourage the sale of stuff that we do manufacture here: the target market is the rich.

Simply put we can have policies that benefit American consumers in an egalitarian fashion or we can have policies that help American workers. Having both would be pretty darned hard.

There’s a graphic making the rounds of real housing prices in the United States 1890 to the present that I don’t see any of those who link to it seeing some of the fairly obvious relationships.

Yes, housing prices have increased enormously over the last ten years. Yes, there’s been a bubble.

However, from the mid-1970s on whether you measure peak-to-peak or trough-to-trough housing prices have been going up. That may reflect the old wisecrack that land is something they’re not making any more of. I also think as I suggested earlier this morning that this chart conceals more than it reveals. Remember that the Case-Shiller index is not housing prices but rather an index derived from housing prices. This graph may only show an artifact of the index.

I’d be more interested in seeing a chart for, say, LA County only, Cook County only, and so on. The chart may only be saying that investing in “housing” is as dumb as investing in “the stock market#148;. Unless you were very, very lucky if you bought stock in 1890 and held it you probably wouldn’t be a gazillionaire. You’d have lost your shirt. The DOW goes up because it’s a composite whose composition varies over time and it’s supposed to go up.