News: Real Estate, Risk, Economics. Sept. 6, 2014

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Table of Contents
(Click to sections below.)

1) Charlotte seeing its homes sell quickly

2) Rural towns starved of funds to fight rising seas | Business Insurance

3) Two days after the magnitude 6.0 earthquake in Northern California, AIR engineers Ivan Gomez and Aaron Michel surveyed the damage

4) Online list IDs water wells harmed by drilling – Washington Times

5) ‘Worst Case’ BP Ruling on Gulf Spill Means Billions More in Penalties – Bloomberg

6) Washington (DC) Apartment Glut: It’s a Renter’s Market – Businessweek

7) City Council lease proposal will hurt landlords and city | New York Post

8) How Taxpayers Subsidize Freddie Mac – Real Time Economics – WSJ

9) CRE Lending by Banks Surpasses Pre-Recession Levels – CoStar Group

10) The US economy performs better under Democratic presidents. Why? | vox

11) The United States Leads in Low-Wage Work and the Lowest Wages for Low-Wage Workers | Economic Policy Institute

12) So is this (finally) QE from the ECB? | Gavyn Davies

13) Financial reform: Call to arms – FT com

14) Worthwhile Canadian Initiative: How to destroy the “neoliberal consensus”

15) Chinese Real Estate Price Drop May Be Great News For New York Homeowners

16) Banking and real estate industries back in public’s good graces – Washington Times

17) Fed Says Growth Lifts the Affluent, Leaving Behind Everyone Else – NYTimes com

18) Not Good!: The Employment Situation — August 2014 | US Bureau of Labor Statistics

19) City Insurance Company Rejects Claims from Storm, Sewer Backup

20) Earthquake study drifts as scientists seek money – Inside Bay Area

21) 7 plead guilty in fire; destroyed vacant mansion | Latest State headlines from AP | News…

22) Intense August hailstorm caused $450M in damages in southern Alberta

23) In the Pipeline: Senior Housing Construction Projects (9/4/14) – Senior Housing News

24) State laws pose challenges for homeowners, builders – BizWest

25) Interest rates remain at record low | This is Money

26) ECB: Introductory statement to the press conference (with Q&A)

27) Pace of Job Growth Slows Further in August | Jobs Bytes

28) Investing for Europe’s future | vox

  1.    Charlotte seeing its homes sell quickly

    Charlotte had been a target of large-scale investors in single-family rental homes, but that demand is easing, especially as home prices rise. Investors need to get bargain-priced homes in order to make the investment work, and there are fewer and fewer distressed homes coming onto the market. There is also more competition in the market.

    “There are fewer investors mainly because they’re building so many apartments,” noted Papandrea. “We still see rental demand.”

    Add your comment.

  2.    Rural towns starved of funds to fight rising seas | Business Insurance

    The article says that smaller communities often can’t compete for the necessary funding to defend or adapt.

    Coastal engineers say communities have three options for dealing with rising water levels and increased flooding: defend the shoreline with natural or man-made barriers; adapt, such as by raising roads and buildings; or retreat.

    Add your comment.

  3.    Two days after the magnitude 6.0 earthquake in Northern California, AIR engineers Ivan Gomez and Aaron Michel surveyed the damage.

    In general, the observed ground motions were below design code levels extant in California today. Not surprisingly, therefore, the most significant damage that the AIR damage survey team observed was to older unreinforced masonry (URM) buildings—specifically to their walls, chimneys, parapets, and foundations. Structural damage to newer construction was generally limited. Most of the damage and losses will be driven by commercial properties and contents.

    The AIR damage survey team observed that a recently built (circa 2008) structure (commercial bank, apparent steel frame and cold form steel construction) suffered significant damage from a southwest-facing wall that detached from the primary structural system and bowed out over the adjacent structure.

    Wood framing did the best.

    Add your comment.

  4.    Online list IDs water wells harmed by drilling – Washington Times

    Six years into a natural gas boom, Pennsylvania has for the first time released details of 243 cases in which companies prospecting for oil or gas were found by state regulators to have contaminated private drinking water wells.

    Add your comment.

  5.    ‘Worst Case’ BP Ruling on Gulf Spill Means Billions More in Penalties – Bloomberg

    BP Plc acted with gross negligence in setting off the biggest offshore oil spill in U.S. history, a federal judge ruled, handing down a long-awaited decision that may force the energy company to pay billions of dollars more for the 2010 Gulf of Mexico disaster.

    U.S. District Judge Carl Barbier held a trial without a jury over who was at fault for the catastrophe, which killed 11 people and spewed oil for almost three months into waters that touch the shores of five states.

    “BP has long maintained that it was merely negligent,” said David Uhlmann, former head of the Justice Department’s environmental crimes division. He said Barbier “soundly rejected” BP’s arguments that others were equally responsible, holding “that its employees took risks that led to the largest environmental disaster in U.S. history.”

    Related: BP Negligence Ruling to Force Billions More in Payouts

    The case also included Transocean Ltd. (RIG) and Halliburton Co. (HAL), though the judge didn’t find them as responsible for the spill as BP. Barbier wrote in his decision today in New Orleans federal court that BP was “reckless,” ….

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  6.    Washington (D.C.) Apartment Glut: It’s a Renter’s Market – Businessweek

    Haendel St. Juste, a Morgan Stanley (MS) analyst, calls Washington “the weakest apartment market in the country right now.” About three years ago the metro area had one of the lowest vacancy rates in the nation, at 3.4 percent for Class A, or high-end, apartments; the rate stood at 4.1 percent at midyear.

    Rents in the D.C. metro area, which includes the Maryland and Virginia suburbs, fell 0.1 percent in the second quarter of 2014, compared with an average increase of 3.3 percent nationwide, according to apartment research company Axiometrics. That follows a big jump in inventory, with 14,840 newly built apartments coming to market this year, an 86 percent increase from 2013, data from the Dallas-based firm show.

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  7.    City Council lease proposal will hurt landlords and city | New York Post

    Lois Weiss:

    Today’s “progressive” City Council is now coming up with proposals to protect retailers and commercial tenants from paying higher rents and getting booted from their spaces at the end of their leases.

    What’s the proper balance within our mixed economic system? Is this going too far? Can such a top-down idea help or hurt?

    Add your comment.

  8.    How Taxpayers Subsidize Freddie Mac – Real Time Economics – WSJ

    Securities backed by Freddie Mac-guaranteed loans account for only about 37% of the total, government-sponsored-enterprise market. That, along with other factors, makes them slightly harder to sell than securities backed by Fannie Mae and causes them to trade at a discount. All else being equal, mortgage lenders would thus typically do their business with Fannie Mae. So to protect their market share, Freddie Mac gives lenders a discount on the fees it charges to guarantee the mortgages. That comes out of Freddie’s profits. Because Fannie and Freddie are under government control and most of their profits get paid to the U.S. Treasury, the discounts in effect mean that taxpayers don’t get as much money and increase the likelihood that Freddie could need to draw money from the Treasury if the economy turned south.

    Today’s Urban report estimates that the subsidy right now falls somewhere between $400 million and $600 million annually, depending on how active the mortgage market is in a given year.

    In a statement made after FHFA proposed the new security’s structure in August, Dave Lowman, executive vice president of the single family business for Freddie Mac, called the request for input “a milestone on the path towards a more competitive and resilient housing finance system. We share FHFA’s vision of a more liquid and transparent single security that can make the secondary market even more efficient.”

    We are in favor of the merger.

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  9.    CRE Lending by Banks Surpasses Pre-Recession Levels – CoStar Group

    U.S. bank lending on commercial real estate has now rebounded to levels not seen since before the Great Recession, but loans from those heady days of 2007 are still acting as a drag on bank coffers, though much less of one.

    The article shows that there’s a long way to go yet.

    Add your comment.

  10.    The US economy performs better under Democratic presidents. Why? | vox

    Since World War II, economic growth has been faster in the US under Democratic presidents than under Republican ones. This column documents that which party controls Congress does not matter for growth, that the Democratic growth advantage is concentrated in the first two years of a presidency, and that presidential party affiliation Granger-causes growth. Neither fiscal nor monetary policy can account for this gap. Instead, the factors that have explanatory promise are: shocks to oil prices, total factor productivity, European growth, and consumer expectations of future economic conditions.

    This will be interesting to watch develop.

    We think this is the content with the meat to varying degrees for the different possible factors mentioned:

    As we peruse the list of explanatory variables, the first (oil shocks) looks to be mainly good luck, although US foreign policy (rather than economic policy) certainly played a role. (Think about George W Bush’s invasion of Iraq, for example.) The second variable (TFP) should in principle measure improvements in technology — and so be mostly driven by luck. But a wide variety of economic policies, ranging from R&D spending to regulation and much else, might influence TFP in multiple, subtle ways. And TFP shocks affect the economy with long lags, so that a portion of the TFP-induced strong growth for Democrats was inherited from previous administrations.

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  11.    The United States Leads in Low-Wage Work and the Lowest Wages for Low-Wage Workers | Economic Policy Institute

    That’s the US bringing up the bottom the chart to the right. The other dark bar above the US several places is the average.

    It’s why they rent cheap places if they can even afford them.

    In the United States, according to the OECD, 25.3 percent of workers had “low-pay”—earning less than two-thirds of the median wage—which was the highest incidence of low-pay work among the twenty-six countries surveyed and far higher than the OECD average of 16.3 percent.

    Exactly why is it that the US can’t do as well as Sweden? Are we dumber? Can we not share the productivity as well? Are our rich simply greedier, less compassionate, what?

    We certainly can create enough funding to put everyone to work at high wages and full time. It would be great for real-estate investors, that’s for sure.

    Add your comment.

  12.    So is this (finally) QE from the ECB? | Gavyn Davies

    The Governing Council of the ECB has announced an important package of new measures, including cuts of around 0.1 per cent in policy rates, and an asset purchase programme of unknown size, confined to private sector assets, with no sovereign bond purchases. The immediate question that investors are asking is whether this is, at last, a programme of quantitative easing by the most reluctant of all quantitative easers, the ECB.

    My instant answer is yes, this is indeed QE, and in significant scale.

    It will be interesting to read how Frances Coppola reads this action in light of her earlier statement that Draghi wasn’t planning QE, per se.

    See: Draghi’s Jackson Hole Speech Has Been Misunderstood

    Add your comment.

  13.    Financial reform: Call to arms –

    It is gratifying to see that the mainstream is beginning to discuss what we’ve been advocating for years. Martin Wolf:

    The need to shift away from reliance on highly-leveraged intermediaries fits with another and still more radical option: a move towards 100 per cent reserve banking, with financial intermediation occurring outside the banking system. Many have proposed variants of this radical reform, on the left and the right of the political spectrum. It makes a great deal of sense.

    If people think the money they have in banks is safe, while the latter lend it out freely to risky borrowers, crises are inevitable. Worse, under current arrangements, banking institutions create the vast bulk of the money in our economy as a byproduct of often irresponsible risky lending. Since people view money as the one safe asset, this has to be a fundamentally crisis-prone system. It could be replaced, at least in theory, by returning the ability to create money to the state.

    . . .

    Such proposals are unavoidably controversial. The transitions would certainly be demanding. But the advantages could be large, provided it was possible to police the borderline between the new narrow forms of banking and the rest of the financial system at least reasonably effectively.

    Moreover, even if one did not go that far, one could recognise that the current experiments with quantitative easing represent a limited step in this direction. It would be possible to raise reserve requirements to today’s higher levels right now, so moving to permanently higher proportions of government-backed money.

    It would also be possible to use the ability to create money not just to manipulate asset prices, as in QE today, but to fund government directly. The direct monetary funding of public spending, particularly higher investment, or tax cuts would be a debt -free and highly effective way to generate additional demand. This idea, which the late Milton Friedman called “helicopter money”, remains relevant.

    Such radical proposals carry risks. But, provided the decision on how much money to create was left to central banks, those could be managed. Not least, the distributional consequences would be more desirable than using the central bank’s capacity to create money merely to raise the prices of assets owned by the rich.

    Our idea is a combination of the following:

    1) The NEED Act (National Emergency Employment Defense Act)

    2) Public Banking but with only one bank (the US Treasury)

    3) Greenbacks (debt-free, interest-free United States Notes) but in cyber form

    4) A new monetary authority being the real-time measurement of all transactions feeding back to the single public bank to increase or decrease the money supply, avoiding inflation/deflation, while still meeting all the needs of the real, growing, productive economy, and

    5) All of the foregoing controlled via bottom-up democracy.

    Add your comment.

  14.    Worthwhile Canadian Initiative: How to destroy the “neoliberal consensus”

    The following is from a comment on the linked post.

    [Quoting a bit of the linked post:] “How many times have I heard the lefty argument that it was “Keynesian policies” (understood very loosely, the way the PoliSci (mis)understand that term) that saved capitalism from itself?”

    The Keynesian mixed-market system is in the center of the left-right economic spectrum. (100% left is full government control over the economy; 100% right is no government interference in the economy – libertarianism.)

    During the Keynesian era (1945-1980) even Republicans and Conservatives were centrists. (Now Democrats and Liberals largely embrace neo-liberalism despite the financial meltdown caused by neo-liberal ideology.)

    The Keynesian model is to use government policy — fiscal, monetary and regulatory — countercyclical to the business cycle. Today, we use monetary policy alone which is controlled by central banks. Clearly it is not enough to produce an adequate recovery.

    The Keynesian model, despite its inefficiencies, was enormously successful: high GDP and productivity growth, low inequality, declining debt/GDP, etc. The two free-market eras on either side of it were colossal failures by comparison. The last caused skyrocketing inequality and debt (private and public); sharp decline in GDP growth; economic instability. Both periods culminated in global economic meltdowns (1929 and 2008.)

    We agree with that comment.

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  15.    Chinese Real Estate Price Drop May Be Great News For New York Homeowners

    This goes into some easy-reading detail.

    China’s real estate sector, despite recent government attempts to spur it, continues to struggle: Two private surveys revealed that housing prices across the country fell 0.3 percent in August, and while nationwide housing prices remain up 4 percent year-on-year, it was the fifth consecutive month that prices have dropped.

    In recent years, economists have worried that a sustained fall in China’s housing market would pose a grave threat to the Chinese economy as a whole. But an additional concern is that, in a world where an increasing number of Chinese citizens purchase property in foreign markets, a collapse in the real estate sector in their country may result in a flood of money leaving China and making housing even more expensive in markets as far-flung as Vancouver, New York and Sydney.

    Some people, such as Larry Roberts (Irvine Renter), think that a Chinese housing crash would cause Chinese to sell US holdings to try to pay debts in China.

    Add your comment.

  16.    Banking and real estate industries back in public’s good graces – Washington Times

    Americans have a positive image of banking industry for the first time since 2007 and a positive view of the real estate industry for the first time since 2006, proving each sector is recovering from the doldrums of a financial recession precipitated in large part by a mortgage-linked housing bubble, according to a new survey.

    We think new regulations have a great deal to do with it.

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  17.    Fed Says Growth Lifts the Affluent, Leaving Behind Everyone Else –

    The concentration of wealth continued without interruption, albeit at a slower pace during the recession. The Fed said that the top 3 percent of families held 44.8 percent of wealth in 1989, then 51.8 percent in 2007 and 54.4 percent in 2013.

    In a more positive trend, debt burdens also fell. The debts of the average American family continued to exceed its annual income, but the ratio declined to 105 percent of income in 2013 from 125 percent of annual income in 2010. Importantly, the share of Americans probably struggling to pay those debts has also declined. Just 8.2 percent of households devoted more than 40 percent of income to debt payments in 2013, the lowest rate since the 1990s.

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  18.    Not Good!: The Employment Situation — August 2014 | U.S. Bureau of Labor Statistics

    The numbers for August are bad.

    Total nonfarm payroll employment increased by 142,000 in August, compared with an average monthly gain of 212,000 over the prior 12 months. …

    The change in total nonfarm payroll employment for June was revised from +298,000 to +267,000, and the change for July was revised from +209,000 to +212,000. With these revisions, employment gains in June and July combined were 28,000 less than previously reported.

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  19.    City Insurance Company Rejects Claims from Storm, Sewer Backup

    The city of Twin Falls’ insurance company has said it won’t pay the people seeking reimbursement for the damage created when city sewers backed up into their homes during Aug. 6’s heavy rains.

    The Idaho Counties Risk Management Program sent identical letters a couple of weeks ago to the 11 residents and property owners who had filed tort claims, saying the rain and not any negligence by the city was to blame.

    “The City drainage systems and sewer lines simply could not maintain or drain the amount of water that fell in such a short time,” the letters read. “This incident would be considered an act of nature.”

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  20.    Earthquake study drifts as scientists seek money – Inside Bay Area

    The $25 million drilling of the famed borehole in the mid-2000s was applauded as a great success. It yielded 1 ton of 4-inch-diameter rock cores, which were distributed to labs around the world, and identified a water-saturated clay as key to understanding how the San Andreas sometimes just creeps, rather than ruptures.

    But the second half of the project — installing a permanent observatory inside the borehole, then drilling a second hole — failed due to a shortage of money and time. They encountered a tough engineering problem: how to keep sensitive equipment intact deep inside the Earth.

    Initial instrumentation failed, then money ran out.

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  21.    7 plead guilty in fire; destroyed vacant mansion | Latest State headlines from AP | News…

    Seven men have pleaded guilty to arson or trespassing in a fire that destroyed the vacant LeBeau Plantation mansion in Louisiana’s St. Bernard Parish last November. The sheriff said when they were arrested that the men told investigators they were smoking marijuana and trying to summon ghosts.

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  22.    Intense August hailstorm caused $450M in damages in southern Alberta

    Bill Adams, western vice-president of the Insurance Bureau of Canada, says the recent storm that damaged tens of thousands of cars and homes is part of a trend toward more severe weather that climatologists predict is here to stay.

    “People need to wake up to the new reality that this is Mother Nature in Alberta and not just a one-off,” Adams said.

    Add your comment.

  23.    In the Pipeline: Senior Housing Construction Projects (9/4/14) – Senior Housing News

    There are a number of interesting projects.

    Add your comment.

  24.    State laws pose challenges for homeowners, builders – BizWest

    Multiple online sources indicate that builders of condo developments containing 100 or more units get sued, rightly or wrongly, at least 80 percent of the time, that builders’ insurance costs for multi-family condos are three to four times as expensive as insurance costs for multi-family apartments, and the number of available insurance carriers for Colorado condo builders has dwindled from twenty in 2008 to five or six now.

    Add your comment.

  25.    Interest rates remain at record low | This is Money

    Interest rates were kept at their historic low of 0.5 per cent today amid concerns over low wage growth and signs that the housing market recovery is losing steam.

    The Bank of England’s Monetary Policy Committee voted to keep rates on hold, where they have been since March 2009, despite recent first signs that members see a case for higher interests rates. The £375billion quantitative easing scheme remained unchanged.

    At the last Bank’s Policy Monetary Committee meeting in August, two members – Ian McCafferty and Martin Weale — voted to raise interest rates to 0.75 per cent. Minutes of this month’s meeting, due next week, will confirm if any more have been persuaded.

    Ho9wever, recent weakness in economic data has actually pushed back estimates on when rates will rise. The market consensus is now that a majority of the nine MPC members will not vote for a rate rise until the early months of 2015.

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  26.    ECB: Introductory statement to the press conference (with Q&A)

    Our chosen highlights for you: Mario Draghi:

    Based on our regular economic and monetary analyses, the Governing Council decided today to lower the interest rate on the main refinancing operations of the Eurosystem by 10 basis points to 0.05% and the rate on the marginal lending facility by 10 basis points to 0.30%. The rate on the deposit facility was lowered by 10 basis points to -0.20%. In addition, the Governing Council decided to start purchasing non-financial private sector assets. The Eurosystem will purchase a broad portfolio of simple and transparent asset-backed securities (ABSs) with underlying assets consisting of claims against the euro area non-financial private sector under an ABS purchase programme (ABSPP). This reflects the role of the ABS market in facilitating new credit flows to the economy and follows the intensification of preparatory work on this matter, as decided by the Governing Council in June. In parallel, the Eurosystem will also purchase a broad portfolio of euro-denominated covered bonds issued by MFIs domiciled in the euro area under a new covered bond purchase programme (CBPP3). Interventions under these programmes will start in October 2014. The detailed modalities of these programmes will be announced after the Governing Council meeting of 2 October 2014. The newly decided measures, together with the targeted longer-term refinancing operations which will be conducted in two weeks, will have a sizeable impact on our balance sheet.

    … I have a second question. Before meeting President Hollande this summer you also met with the Italian prime minister. As you know, Italy is a country under deflation at this moment with a difficult growth situation, and the government is trying to undertake also an important path of reform. So can I ask a little bit of the content of your meeting with Mr Renzi as well, and if you also touched on the reform that he has to do in the future.

    Draghi: The answer to the second ques tion is easy. Our conversation remains confidential, so I have nothing to add to that. On the first point it’s actually an important question. Structural reforms have a cost, and many costs as a matter of fact. But isn’t lack of growth a cost in itself? And that’s what we’ve been seeing now. We’ve seen high unemployment, in some countries the highest in history, low growth for many years, a level of growth and production which is, in some countries, distant from what it was in 2007. In some countries the real wages of new entrants in the labour market are at the levels seen at the end of the 80s, previous century 80s. So isn’t this a cost too? I think that’s the first part of the answer.

    The second part is as a matter of fact kind of touching a chord that I touched upon in the past, saying: wouldn’t it be better to carry this, to have this area of structural reforms under the same sort of, similar – it’s very different of course – but under a similar sort of framework we have for the budgetary discipline. And this has several advantages. First of all, I didn’t want to imply that countries should lose sovereignty, but they should share sovereignty, very much like they did with monetary policy. Previous to having the euro, many central banks, perhaps all of them with the exception of one, had lost completely national sovereignty. The creation of the ECB and the euro gave a framework where all these countries could actually share sovereignty in crafting the monetary policy of the euro area. And in a sense it’s very much the same thing with the process that we are discussing.

    So it’s not a loss in national sovereignty, which doesn’t exist to begin with, or is very limited now, but it’s actually a sharing together of common rules. And this would have several, in my view, benefits: first of all a political process that is perhaps easier than it would be if only at national level. But also, second, to have common rules would also mean to have one market which would in a sense increase the opportunities, f or example for workers mobility to go and choose the place where to go and work, and so on. I think one can construct many examples of why this sharing of sovereignty could improve the prospects.

    Question: Mr Draghi, isn’t there a risk that with the ECB emphasising so much the risk of low inflation that this itself could trigger a de-anchoring of expectations?

    Draghi: Well, you see, this question is actually a question we also asked ourselves. But the answer to this question is: would the truth be a risk? In other words, do we really think that telling people things other than the truth would affect their behaviour? And the answer is no. We think that we ought to state things as they are. We don’t see deflation. We have seen, as a matter of fact, low inflation for a long time. As I’ve said several times, the longer the period of low inflation the higher the risks of de-anchoring.

    There is also another aspect here. The great part of the decline in inflation that I mentioned before, from 3% at the end of 2011 to now 0.3%, – the greatest part – is due to declining energy, food prices in the first part, and appreciation of the exchange rate in the second part. Then we asked ourselves the question, clearly there had been several forecast errors in this. Were these forecast errors based on errors made in assessing the impact of energy prices and food prices? And the answer is by and large yes, for quite a period of time.

    But of late, the forecast errors still depend on food and energy errors, but also depend on other factors. And amongst these factors the economic slack and unemployment are playing an increasing role, a more significant role. So in this sense the risks that we want to react to now do depend on factors that are not exogenous to the euro area economy. And in this sense it’s quite important that we state things as they are.

    We see Frances Coppola’s emphasis upon unemployment there.

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  27.    Pace of Job Growth Slows Further in August | Jobs Bytes

    Dean Baker:

    While the slower pace of job growth in this report is a surprise to many analysts, the stronger rate in the first half of this year really was not consistent with the rate of GDP growth that we have seen recently or is generally forecast for the near future. If the economy is growing in a 2.5 percent range, then we should expect to see job growth of around 1.0 percent, or 1.4 million a year. Unless the economy grows far more rapidly than is generally expected, we should expect to see job growth well under 200,000 a month.

    The remarkably weak GDP growth in this recovery is consistent with the extraordinarily weak job growth. While many have tried to explain the weakness on demographics, even if we restrict the focus to prime age men, employment is performing far worse than in prior recoveries.

    What this also means is that Janet Yellen was right about labor slack and that the hawks need to cool their jets.

    Of course, August’s numbers could be revised later too, up or down.

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  28.    Investing for Europe’s future | vox

    Mateusz Szczurek, Minister of Finance of Poland:

    The radical parties are gaining strength, and as Europeans we should never forget that it was depression and deflation, and not hyperinflation, that brought to power the totalitarian regime that devastated our continent through the World War and unspeakable atrocities 75 years ago.

    Europe needs concerted and decisive action

    Europe is not doomed, but we do need concerted and decisive actions at both the national and European levels to close the output gap, create jobs and strengthen the long-term growth potential, all the while ensuring the sustainability of public finance and the stability of the financial sector.

    Quantifying the Macroeconomic Impact of the European Fund for Investments

    Analytical Note to accompany Minister Mateusz Szczurek’s keynote address at the Bruegel Institute’s 2014 Annual Meeting.

    September 4th, 2014
    Introduction: The European Fund for Investments

    In his keynote address at the 2014 Bruegel Institute annual dinner, Poland’s Minister of Finance Mr. Mateusz Szczurek laid out a proposal for jumpstarting the EU economy, avoiding a prolonged stagnation and building solid foundations for long run growth. This proposal is based on a European-level program of scaling up public investment by around 5.5% of European Union GDP or 700 billion euros within the next 5 years. The capital spending would start at 0.5% of European GDP in 2015, peak at 2% in 2017, and be gradually phased out afterwards (Figure 1). The gradual path reflects the nature of large-scale public investment projects and gives policymakers time to react and adjust the size of the program to changing economic conditions. In order to mobilize such considerable investments, a European Fund for Investments (EFI) would be established. A gradual injection of paid-in capital and guarantees by all EU Member States would be leveraged by borrowing in the financial market. The Fund capital would be directly invested in selected infrastructure projects, with a particular focus on energy, transportation and ICT.

    We think the plan is grossly undersized and that borrowing to fund it would be a huge error. Double it at least, and pay for it with Euros, not bonds or any other form of borrowing.

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