April 2009 Archives

Some of the best charts on the markets long-term performance is at dshort.com. I learned about this valuable website from the Calculated Risk blog.

Here's a new chart well worth studying at a time when we're all wondering if the stock market has hit bottom, or is just having a classic bear market bounce.

Is the global economic recession starting to bottom out? One indication that activity is slowly picking up is the Baltic Dry Index. In a recent interview with Kai Ryssdal on Marketplace, economist Susan Lee explained why she follows the Baltic Dry:

Essentially the Baltic Dry tracks the average daily price for shipping dry bulk like coal, iron ore, wheat and soybeans. There are three things that make it such a good leading indicator. One, the index looks at raw materials, so it captures activity at the very beginning of the production process. Two, it looks at ocean shipping, so it reveals what's happening to international trade -- the critical driver of global growth. And, three, the shipping business depends heavily on credit, so the Baltic Dry indicates whether credit is tight or loose.

The price of gold has also been strong with the global economic crisis. But now gold is off it peak. Thanks to the website investmenttools.com, here is a chart of the Baltic Dry Index and the price of gold.

It's still too early to say, of course, and the BDI has taken a slight turn down. But these are two indices worth following, and it's intriguing that the message in the chart seems to be the same message in the U.S. stock market: There is a slight improvement, but it's fragile.

The economic logic of nationalization to solve the banking crisis is compelling, but I'm increasingly convinced that the Geithner plan has a good chance of succeeding on its merits. It does appear that he managed take the deeply flawed Paulson Plan and turn it into a workable solution. inelegant, but workable.

This post by The Incidental Economist adds an important element: He notes how critical economist Paul Krugman has been of the Administration's solution. And, even though Krugman has been spot on for years, I think he's being too critical of Geithner and the President this time around: TIE makes a good case that the politics of the Geithner plan are better than the politics of nationalization.

As the liberal economist of record, Krugman's critique of PPIP received a lot of press much of it uncritical. I think a little more critical reading is warranted, that his cry for nationalization now misses something crucial. Namely, he has a blind spot for the political and implementation risks and challenges. As John Heilemann wrote in New York Magazine, "Getting the economics right may be devilishly difficult--but the politics are even trickier, and just as crucial."

According to Obama aides, "Krugman's suggestion that the government could take over the banking system is deeply impractical." (Newsweek) Impractical politically but also because nationalization would require expertise and staff the Treasury Department does not yet possess. Therefore, like it or not, Geithner needs the banking industry's cooperation to increase lending. He nearly lost it during the uproar over the AIG bonuses. He'd lose it for sure with a nationalization plan.

President Obama is acting more like FDR than Keynes.
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Here's the number to focus on: When you add together the traditionally counted unemployed plus marginally attached and involuntary part-time workers, the unemployment rate hits 15.6%. That's more tha n 6 percentage points higher than the same period a year ago.

The Center for American Progress has a detailed of the latest unemployment numbers on its website. You can read it here

This chart from the report says a lot.

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But it's these sentences that stood out.

The share of the U.S. population with a job is now at 59.9 percent, which is lower than any time since 1985. This is especially striking since so many women have entered the labor market since then. The fall off in the employment rate has been larger among men than women, and there are fewer men at work than at any point since the BLS began tabulating this data after World War II: 68.2 percent of U.S. men age 20 and over had a job in March, down 4.1 percentage points from a year ago.

The manufacturing and construction depressions are hitting male employment hard.

I keep reading and hearing about the risk of soaring inflation and even hyperinflation with the Fed's quantatative easing campaign. Now, there's isn't much question that inflationary pressures will emerge when the economy regains its footing. It's a safe forecast that the Fed will confront a tricky monetary policy act when it starts tightening. I'm sure we'll go through some inflation scares.

But high and rising inflation or hyperinflation? I don't see it. For instance, investors that are snapping up Treasury Inflation Protected Securities, better known as TIPS, are forecasting that inflation will average about 1.4% over the next decade. That's far from hyperinflation, and below the Fed's CPI target range of about 2%. You would think investors would demand more of an inflation hedge if the threat of hyperinflation was real.

I still think the long term trend is toward disinflation or even deflation in an increasingly integrated world economy. Plus, central bankers have a pretty good intellectual tool kit when it comes to bringing inflation under control. What central bankers don't really understand, what they disagree on is how to handle bubbles, market booms and market busts.

An update on the Baltic Dry Index, from economist Ed Yardeni:

Has the Baltic Dry Index (BDI) hit rock bottom yet? Probably, though it has suffered a setback. The BDI plunged 93% to a new record low late last year, rebounding 247% by early March. It fell to its lowest level in more than two months yesterday on speculation Chinese demand for iron ore is fading. It tends to coincide with the trend and volatility of commodity prices. The CRB raw industrials spot price index is also higher this year, after plunging 40% from mid-May's record high through early December. Upswing in CRB, however, has stalled with the index moving sideways recently. In the past, BDI also coincided with Chinese imports plus exports of iron and steel which has dropped 51% in the three months ending February from its September peak. The two series have diverged significantly recently.

J. Ezra Merkin the famed money manager and philanthropist, has been charged with betraying "hundreds of investors." The allegation by the New York State Attorney General is that Merkin told investors he was managing the money himself, but it's alleged that he simply turned the money over to Madoff. Merkin is a long-time pillar of the New York financial community, a trusted money manager and philanthropist.

He is also one of the famous commentators enlisted for the 6th edition of the investment bible, Security Analysis by Benjamin Graham and David Dodd. It's a terrific book on its own, and the commentaries are wonderful.

Yet there is something fitting about the title to Merkin's essay: "Blood and Judgment." It's about investing in bankrupt companies. He ends the essay with a quote from Hamlet: "As long as the human tendency to march in herds persists, there will be opportunities for contrarians who are unafraid to stand alone. Think of Graham and Dodd as embodying the spirit of Hamlet, Prince of Denmark, who declared:

Blest are those
Whose blood and judgmwent are so well commingled
That they are not a pipe for Fortune's finger
To sound what stop she pleases."

But instead of concluding with Hamlet, perhaps his last lines should have come from Shakepeare's Julius Caesar, and among the most famous lines of betrayal:

CINNA
O Caesar,--

CAESAR
Hence! wilt thou lift up Olympus?

DECIUS BRUTUS
Great Caesar,--

CAESAR
Doth not Brutus bootless kneel?

CASCA
Speak, hands for me!

CASCA first, then the other Conspirators and BRUTUS stab CAESAR

CAESAR
Et tu, Brute! Then fall, Caesar.

Isn't that how his investors must feel? Madoff was bad enough. Et tu Merkin?

I hope not.

I am a fan of Henry "Bud" Hebeler, the former president of Boeing Aerospace and now financial advisor to future retirees. Check out his website at Analyzenow.com if you haven't already. It has some of the better financial planning calculators on the web, especially on the issue of when to tap into Social Security.

Anyway, this story he relayed the other day is a nice reminder to all parents that despite your best planning you never really know what your kids will take away from growing up with you.

My grandfather was a union organizer and lived in a Newark tenement. My father and his brother heard so many things about the high wages earned by capitalists that they decided being a capitalist must be better than being in a union employee. They left home to start their own business with very little money. They slept in the same bed in a boarding house for a couple of years to save the necessary funds. And they succeeded wonderfully.

The recession is hitting the poor. One indicator is that low-income employees are being handed pink slips at a rapid pace. The unemployment rate of workers age 25 and older without a high school diploma was 13.3% in March, up from 9.5% a year ago. The unemployment rate of less educated workers is significantly higher than the overall unemployment rate of 8.5%. The unemployment rate for workers age 25 and older with a B.A or higher is 4.3%.

The Sunday New York Times had a story about state and local governments cutting back on services to the vulnerable and poor. The budget cuts were being made even if the spending reductions made no fiscal sense long-term. It isn't right that the bottom third of the income spectrum takes a disproportionate hit when state and localties slash their budegts in recessions. The Obama Administration's fiscal stimulus package should ameliorate some of the damage, but not enough.

Late last year, the Center on Budget and Policy Priorities tried to guesstimate how much the current downturn would impact the poor. They assumed that the relationaship between unemployment rate and the poverty rate of the past three recessions will remain the same during this downturn. They ran three scenarios: An unemployment rate of 8%, 8.5% and 9%. The number of poor Americans could increase by 7.5 million to 10.3 million, the number of children in poverty could rise by 2.6 million to 3.3 million, and the children in deep poverty--living below half the official poverty line--could jump between 1.5 million and 2 million. Here's a chart of those figures.

Problem is, even the worst case scenario is probably optimistic. The unemployment rate is already at 8.5%, and there are more job losses to come. It's extremely likely that the jobless figure will breach 9% and a 10% unemployment rate is surely possible. As Business Week economist James Cooper points out, the downturn in the labor market is fast becoming the worst since the 1930s. "Of the 5.1 million jobs lost since December 2007, 72% have disappeared in only the past six months, with more losses to come," he writes in the latest issue of the magazine.

The Consumer Price index fell by 0.1% in March. Consumer prices dropped by 0.4% year over year, the first annual decline since August 1955.

The deflation we're seeing largely reflects the Great Recession. But it's more than that. It is a fundamental shift in the economy from a bias toward inflation to a bias toward deflation. It's the ecomomic way of the world.

Tom Herman has covered the tax beat for the Wall Street Journal since 1993, and he's done a terrific job, a true professional. I have been an avid reader of his stories, and I learned a lot from him. He's now leaving the Wall Street Journal, the newspaper he's worked at since 1968. Good for him. Bad for us.

His last column is well worth reading. A highlight:

But I also leave with a growing sense that our tax system is in shaky condition and needs a major overhaul. We need a system that is much simpler and less burdensome. That won't happen with mere tinkering around the edges. Many people who have held top jobs at the IRS and Treasury agree. Our federal tax system is "so shot through with deductions, credits, exclusions, loopholes and outright noncompliance that it fails in its essential job of raising revenues efficiently," says Charles Rossotti, a former IRS Commissioner. "The complexity and instability of the tax system also leads people to believe that the average person always gets stuck, while the big hitters find ways to avoid paying, regardless of the advertised tax rates."

As Will Rogers once observed about tax forms: "Even when you make one out on the level, you don't know when it's through if you are a crook or a martyr."

Reform the tax code--now.

April is called the cruelest month. But why? Spring is here, the days are getting longer, the sun feels warmer and, even as far north as the Minnesota tundra, plants are trying to bloom. But today is April 15th, tax day.

We all grouse about taxes. It's also true that our tax dollars do a lot of good. The money finances roads, supports schools, builds libraries, and backs criminal justice.

But now for my annual harangue against the federal tax code. Like Tom Herman of the Wall Street Journal said in his column today the tax code it's too complex and byzantine, riddled with too many deductions, credits, exemptions, exclusions, and odd little rules that trip up the unwary. The system is too expensive, too.

I am deeply skeptical about the merits of the more radical tax reform proposals, such as a flat tax or a national sales tax. These plans typically overstate the economic gains and deeply underestimate the risks. The modest size of the long-term payoff doesn't justify the enormous disruption and turmoil to the economy.

Instead, lets embrace tax simplification. In the Wealth of Nations, Adam Smith proposed four maxims with regard to taxes in general. They are equality, certainty, convenience, and economy. Specifically:

1) The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities....

4) Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state...

Paul Volcker is head of President Obama's tax reform panel. He should go through the current tax code with Adam Smith as its guide. Streamline the tax code. Flatten out the rate structure. Broaden the tax base. Get rid of the difference between ordinary income and capital gains 9which will eliminate most tax abuses right there). Keep the only the most cherished deductions, such as the deduction for charitable giving.

And Congress should focus on what is good for the average taxpayer rather than the interests of the well-heeled K-Street lobbying gang. Republican President Reagan and Democrat Dan Rostenkowski, head of the House Ways & Means Committee, showed that genuine bi-partisanship can overcome the money lavished by Gucci Gulch on Congress.

Then we could all enjoy the beginning of spring.

The bursting of the railroad financing bubble in the 1870s led to the depression of 1873 to 1879, the longest in the nation's history. The economy continued to sink back into recessions until the turn of the century.

A financial panic swept Wall Street. Jay Cooke, the most famous banker in the country, went out of business. The New York Stock Exchange closed for 10 days. "It is sellers' panics that have so often marked the start of depressions, as people rush to unload stocks and bonds at any price and to take their money out of banks they see as unsafe," writes historian John Steele Gordon in An Empire of Wealth.

Little wonder historians have been raising the question whether the more apt historical analogy--and the lessons to takeaway--is the long depression of the 1870s and not the Great Depression of the 1930s.

That's why I found this such a fascinating passage about the long depression. It's from Robert Wiebe's The Search for Order 1977-1920. He writes:

Yet in other respects it was a strange depression. The longest in the nation's history, in human terms it proved one of the mildest. The same falling prices that deterred investors facilitated commerce, as migrants filled the land along the new railroad lines and enterprising businessmen, adequately supplied with those short-term credits which had lured Cooke into disaster, rushed to exploit the new possibilities in trade. While overbuilding the railroads brought depression, it had created a commercial reservoir which for years afterward sustained much of the economy.... Because industrialists cut prices much more often than they did production, employment in most sectors of the economy remained reasonably high, and because prices dropped so markedly, real income rose over 60% between 1869 and 1879.

Today, the Great Contraction is accelerating the shift to an economy dominated by the human capital industries, especially health care and education. Employment is holding up in those sectors, too.Real wages are up too, at least recently. I wonder if we'll see the emergence of price cutting in the health care and education sectors of the economy, too.

IProfessor Laurance Kotlikoff of Boston University has wide-ranging interests, studying a number of topics over the years, especially fiscal policy. He's also head of Economic Security Planning, inc, which has a detailed personal finance software package, ESPlanner. The personal finance tool developed by a group of economists is highly influenced by economic theory. No surprise there.

In essence, economists believe in the concept of life-cycle smoothing. The idea is to figure out the highest possible standard of living you can maintain over a lifetime. For instance, with this kind of approach savings isn't an end in itself. What matters is spending, and saving is important as it helps smooth out your living standard over time. "To economists, spending is the main event, not an afterthought," wrote Peter Coy of Business Week in an early review of the product.

The firm has now come out with a simplified, free online version. It's worth checking out at www.esplanner.com/basic.

A fun and important video by professor Zvi Bodie of Boston University. He's on a crusade against financial illiteracy. His target this time: The SEC for promoting financial illiteracy under the guise of financial literacy.

Watch it and enjoy.

The latest cover of Fortune:

2008 WAS THE WORST YEAR EVER FOR AMERICA'S 500 LARGEST CORPORATIONS --Last year was the worst economic performance in the 55-year history of the FORTUNE 500 list of America's biggest 500 companies. Earnings dropped 84.7% from the previous year, from $645 billion to $98.9 billion, marking the largest one-year decline ever. (A larger percentage drop in 1992 was attributable in large part to an accounting-law change). For every dollar in profits the 500 garnered in 2006, its members made 13¢ in 2008.

Our image of retirement is still shaped by the early decades after World War II. The elderly poverty rate plunged thanks to Social Security. Older Americans gained universal health-care coverage with Medicare in 1965. Large corporations offered their workers defined-benefit pension plans based on a salary and years-of-service formula. It was in these years that retirees developed a distinct lifestyle captured by the mass migration to Sunbelt communities, traveling in RVs and bus tours, spending long mornings on the golf course, and other recreational pursuits. The postwar retirement system is one of the great social achievements of the 20th century.

Once again, the underlying economics of retirement are changing and the core difference between the old and new retirement revolves around work. The message in the Great Recession: Most of us will end up working well into our Golden years.

But the work-longer-into-old-age "retirement" strategy involves more than putting in more years on the job. It has implications for saving and work. It won't simply change the way we think about retirement. It will change the way we think about work. That's where the real revolutionary change lies.

In the new way of thinking about retirement, savings are a way to gain the flexibility to eventually reshape your career--it's what funds career shifts throughout life.

Here's a story i did that tries to get at this.

Against the backdrop of longer lifespans and a premium on brains over brawn, more employees are realizing that, in the long run, moving from a high-paying job they don't like to a lower-paying job they enjoy may entail less of a financial hit than they thought. The key is that the lower-paying job may allow you to work longer than if you'd stayed in the more lucrative career, so over time the blow to earnings lessens. And those "extra" years of income allow a portfolio to compound much longer before it's tapped. Says Ross Levin, a certified financial planner and head of Accredited Investors in Edina, Minn.: "You don't need to save as much, and you don't have to live off your portfolio for so long."

It looks like House Speaker Nancy Pelosi wants to push for a comprehensive investigation of the financial crisis. If so, the hearings could be reminiscent to the Pecora Commission, which looked into the abuses that led up to the stock market crash of 1929 and the Great Depression.

Here's how a Time Magazine story described the hearings when it was the turn for the House of Morgan to be grilled:

Ferdinand Pecora, onetime Sicilian immigrant, now a grey-haired, swarthy Manhattan lawyer, was cicerone--paid $255 a month for the job. A handful of U. S. Senators were official sightseers. The world trooped in after them. After that visit, men could make out a fairly complete picture of the business of Morgan:

Here is a Time Magazine cover of Pecora:

Pecora found out that Morgan had paid no personal income tax in 1930, 1931, and 1932.

But such pleasantries were soon over, when Mr. Pecora, abetted by Michigan's Senator Couzens brought the question around to income taxes and the $21,000,000 loss of 1930-1931. At no time did Lawyer Pecora openly point to any impropriety in the action of Banker Morgan or his partners but evidently aware of the impression the questions & answers would make on the courtroom crowd and in next days' headlines, he assumed his best prosecuting attorney manner.

The crowd loved it, loved the whole Big Show

The hearings were held from 1932 to 1934. According to a brief summary by the Federal Reserve, the hearings investigated stock exchange practices and their effect on American commerce, the national banking system, and the government securities market. They also addressed issues of tax evasion and avoidance. The record of the hearings includes more than 12,000 printed pages with more than 1,000 exhibits received in evidence. The work of this committee set the stage for the Banking Act of 1933, the Securities Act of 1933, and the Securities Exchange Act of 1934.

Economist Ed Yardeni points out that you can read the transcripts here.

One of the revelations during the Pecora hearings that upset ordinary people is that the wealthy didn't pay income taxes. I think executive pay is the equivalent flashpoint issue for today.

The Wall Street Journal has a good enterprise story on boards of directors cutting back or even eliminating the senior management benefit of paying the taxes on perks.

The change comes amid increased investor criticism of the "gross-up" payments, which cover the tax bite for a variety of perks, including club memberships and personal use of corporate jets, as well as "golden parachutes" following takeovers....

Some governance experts believe the gross-up retreat will spread. Many boards view the present turmoil as a "once-in-a-lifetime opportunity" to remove abusive compensation practices, says Patrick McGurn, special counsel for proxy adviser RiskMetrics Group Inc., which recently added gross-ups to its list of poor executive-pay practices. It has advised against the reelection of certain directors at several companies this year because of reimbursement payments.

Richard Posner has written a book on the current depression--his term. Posner is a polymath, a judge, a brilliant conservative scholar associated with the University of Chicago school of economics, and an independent thinker. For instance, I got a lot out of his book Aging and Old Age

Nobel Laurate Robert Solow reviews Posner's A Failure of Capitalism: The Crisis of '08 and the Descent into Depression in the latest issue of the New York Review of Books. Solow highlights this passage:

Some conservatives believe that the depression is the result of unwise government policies. I believe it is a market failure. The government's myopia, passivity, and blunders played a critical role in allowing the recession to balloon into a depression, and so have several fortuitous factors. But without any government regulation of the financial industry, the economy would still, in all likelihood, be in a depression; what we have learned from the depression has shown that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails. The movement to deregulate the financial industry went too far by exaggerating the resilience--the self-healing powers--of laissez-faire capitalism.

This is a stunning paragraph for a University of Chicago thinker to write. It emphasizes how dramatic is the current crisis, and how it is forcing thoughtful scholars to rethink their assumptions. The Solow review is well worth reading in its entirety.

At Minnesota Public Radio, I participated in a panel discussion on everyday life during the Great Depression. It was hosted by American RadioWorks executive editor Stephen Smith. In "Hard Times and Pastimes" we talked about William Crapo Durant, the entrepreneurial founder of General Motors, the CCC and American Indians, the evolution of marathon dancing from fun in the 1920s to a brutal sport in the 1930s, and the entertainer Will Rogers.

The event was fun. Have a listen.

The Economic Policy Institute highlights a worrisome trend. "Fifteen months into a deep recession, college-educated white workers still had a relatively low unemployment rate of 3.8% in March of this year," writes Algernon Austin of the EPI. "The same could not be said for African Americans with four-year degrees." African Americans with a college diploma have essentially double the unemployment rate of their white peers. They are also worse off than similarly educated Hispanics and Asians.

Here's the chart:

The economic rewards to higher education are disproportionately low for African Americans.

The fear that inflation lies around the corner seems exaggerated to me. Nevertheless, many people are worried that the Fed's quantitative easing will end in a bout of high and rising inflation. Mark Kritzman, head of Windham Capital Management and a teacher in financial engineering at MIT, recently an intriguing article about constructing inflation resistant portfolios. (He did it in the latest newsletter by Peter Bernstein, the dean of financial economists.)

What's the best portfolio to protect your savings from inflation? To answer that question Kritzman looked at the performance of 9 different assets: U.S. stocks, non-U.S. stocks, corporate bonds, government bonds, Treasury bills, commodities, gold, Treasury Inflation Protected Securities (TIPS), and real estate.

In essence, a portfolio made up of 98.77% in Treasury bills and 0.52% in commodities does an excellent job of keeping pace with inflation, he says. However, the price for that inflation hedge is no growth or no earnings premium over inflation. Most of us would like to make some money on our money.

So, Kritzman runs through different portfolios, some for conservative investors and some for more aggressive investors. What I noticed is that the key investment product is TIPS. Everything is built on top of a foundation of TIPS. For instance, for a conservative investor wanting to maximize her real returns during inflationary times about 42% of the portfolio should be in TIPS, 39% in bills, 6% in gold and 13% in real estate (I'm rounding the numbers). An aggressive investor? She'll go for 52% in TIPS, 15% in gold and 33% in real estate.

He concludes with a single portfolio that attempts to maximize growth while containing large losses. In that portfolio, 90% is in TIPS, 4% in real estate and 6% in non-U.S. stocks. TIPS are key to any of these portfolio options. The difference between an aggressive investor and a conservative one is that the former adds stock and the latter T-bills.

This chart from the consulting firm McKinsey & Co. is intriguing. The firm notes that computers, data storage, and communications devices are behind a rapid rise in greenhouse gas emissions. It estimates these information technologies could generate as much as 3% of the world's greenhouse gas emissions by 2020. Yetovre the same time period the efficincies gained from using information and communications technologies could eliminate five times the greenhouse gases emitted. Technology as problem and solution.

This chart illustrates the potential trade-off:

The experts are trying to figure out how severe is the risk of a global swine flu epidemic. So far, there isn't a lot of information and it is far from clear how much of a worry is it. But the cocerns are already hitting an economy that is still on a downward tragectory. It's bad news from an economic point of view.

In 2006, the Congressional Budget Office briefly looked into the economic impact on the U.S. economy of a pandemic.

The economic effect of a mild pandemic was fairly small. For instance, the CBO ran some numbers assuming the attack rate would be 25% (except in the farm sector, where it was assumed to be 5%), the fatality rate would be just over 0.1%, and the time out of work would average about 4 days.

Under those assumptions, GDP would decline by about 1/2 percent (about $70 billion in 2004) as a result of supply-side factors. For the demand-side effects, CBO assumed that the declines in each industry would be one-quarter of the declines under the severe scenario, which amounted to 1/2 percent of GDP (about $60 billion in 2004). In total, the decline in output amounts to about 1 percent of GDP, relative to what would have happened in the absence of a pandemic. Compared to the long-run growth trend, a mild influenza pandemic would cause growth to slow, but would probably not cause real GDP to fall (or cause a recession).

The worry is that this relatively optimistic economic scenario from a mild pandemic now looks very optmistic since the global economy is in recession. The U.S. economy has probably lost another 630,000-650,000 job in April.

What would be the impact of a severe pandemic?

That scenario suggests that a severe influenza pandemic would have an impact on the U.S. economy that was slightly larger than the typical recession experienced during the period since World War II. On average, real (inflation-adjusted) GDP declined by 0.6 percent during the four quarters following each of the 10 business cycle peaks between 1947 and 2005. Those declines indicate that the average postwar recession lowered real GDP by about 4.1 percent, relative to a baseline in which output continued to grow according to its long-run trend of 3.5 percent. In addition, the estimated effect on real GDP in the severe scenario exceeds the impact of every postwar recession except the one following the 1981 peak, which pushed real GDP more than 7 percent below trend in 1982.

Another twist on Social Security...

According to a recent brief by the Center for Retirement Research at Boston College
"Strange But True: Claim Social Security Now, Claim More Later":

1) One member of a two-earner couple can claim a Social Security spousal benefit at age 66 and then claim a higher retired worker benefit later.

2) The most likely person to use this strategy is the higher-earning spouse, who can receive benefits while working without losing the gains of claiming later.

3) If this strategy were widely adopted, it would cost Social Security about $10 billion per year.

You can read the full report here.

Three things to emphasize out of the real gross domestic product (GDP) decline at an annual rate of 6.1% in the first quarter of 2009. It was a bigger-than-forecast number by a significant margin.

First, most of the drop stems from a plunge in investment spending. Real nonresidential fixed investment fell by 37.9% in the first quarter.... Nonresidential structures decreased 44.2%... Equipment and software decreased 33.8%... Real residential fixed investment decreased 38%....

Second, inflation is not a concern. The price index for gross domestic purchases, which measures prices paid by U.S. residents, decreased 1.0%.... Excluding food and energy prices, the price index for gross domestic purchases increased 1.4%....

Third, it's increasingly likely that the unemployment rate will breach 10%....

Right now, the economic downturn is decelerating. It doesn't mean the unemployment rate won't go higher--it will--but despite today's GDP number a number of indicators suggest the worst is behind us. Maybe.

Here's the rub. The economy appeared to be doing better in the weeks leading up to the Lehman failure. Then Lehman went under, the global capital markets froze, and the domestic and international economies resumed their downward momentum.

Is the swine flu potential pandemic the global equivalent of a Lehman failure? The answer is not yet, but it could be. If it's contained then the U.S. economy should continue to do slightly less worse in the months ahead. And in the current context that's good news. But if the pandemic gets worse the global economy will take another drop down.

Last night at Minnesota Public Radio Jeff Horwich moderated a discussion the impact of the recession on individual lives. I participated in the talk, along with Louis Johnston, Professor of Economics at St. John's University and the College of St. Benedict. Take a listen.

I find these numbers stunning. They're from a paper by Elizabeth Brainerd of Williams College and Mark Singer of California State University.

The 1918-19 influenza epidemic killed at least 40 million people worldwide and 675,000 people in the United States, far exceeding the combat deaths experienced by the US in the two World Wars, Korea, and Vietnam combined. Besides its extraordinary virulence, the 1918-19 epidemic was also unique in that a disproportionate number of its victims were men and women aged 15 to 44, giving the age profile of mortality a distinct 'W' shape rather than the customary 'U' shape, and leading to extremely high death rates in the prime working ages.

This brief historic background puts the influenza epidemic in context.

Only three epidemics in world history resulted in mortality approaching or exceeding the mortality caused by the 1918 influenza epidemic: the Plague of Justinian in the sixth century (100 million lives lost over 50 years), the Black Death of 1348-1351 (62 million), and the current AIDS epidemic (25 million)

You can read the "The Economic Effects of the 1918 Influenza Epidemic" here .