Tuesday, December 28, 2010
Saturday, December 18, 2010
Thursday, November 18, 2010
Once approved by the City Planning Commission, these guidelines will become an appendix to the General Plan Framework Element, the backbone of the Los Angeles General Plan. These guidelines are not binding, but would be advisory for discretionary actions (e.g., plan amendments, zone changes) for which there are no approved or adopted design guidelines otherwise available to decision makers.
Full copies of these guidelines, including background information, can found at City Planning’s web-site:
As I explain below, the preparation and on-going public information campaign to promote these Design Guidelines is baffling for at least three reasons, and I have little doubt that readers will find additional wrinkles regarding the preparation or use of these guidelines.
WHY THE PROPOSED DESIGN GUIDELINES ARE SO BAFFLING
Baffling Reason #1: The main problems of the General Plan Framework Element have absolutely nothing to do with the presence or absence of advisory urban design guidelines for residential, commercial, and industrial land uses. Therefore, why allocate so much time and energy to their development, promotion, and adoption?
The most serious problem of the General Plan Framework is that it has reached the end of its intended life span. This plan was based on 1990 census data, was prepared by the Department of City Planning in the early 1990’s, and was adopted by the Los Angeles City Council in 1995. Its horizon year is 2010, which means that 2010 is the final date for which the plan’s demographic estimates, infrastructure data, goals and policies, and implementation programs.
According to my calendar, it will soon be 2011, and by the General Plan Framework’s own internal logic it should now be sent to the City’s archives at Piper Tech. It should be immediately replaced by a new General Plan element, one which is based on 2010 census data and which has 2030 or a later date for its horizon year.
Furthermore, because California State law (Government Code 65040.2), the City of Los Angeles Charter (Sections 554-558), and Los Angeles Municipal Code (Section 11.5.6) all require the City to have a current and accurate General Plan, and because the General Plan Framework Element is the heart of the Los Angeles General Plan, it is now crunch time. This is not a discretional project; it is a legal requirement!
The process of replacing the Framework with an updated General Plan document should have begun several years to assure that the new General Plan Framework Element would be adopted as soon as the old plan expires at the end of December 2010. This update would have, however, only assured formal compliance with state and local legal requirements because professional city planning practice calls for municipal general plans to be updated on a 10 year cycle, not the 20 year plus cycle which is the default practice of Los Angeles.
In the meantime, however, despite the imminent end of the General Plan Framework’s intended use, and the City’s failure to update the plan, the Department of City Planning has undertaken a series of Community Plan updates apparently based on the rapidly expiring 1995 document. At this point, both Hollywood and Granada Hills are in the pipe-line and could be soon released.
So, instead of waiting until an updated General Plan Framework document, which will be based on 2010 census data and its 20 year extrapolation to a 2030 horizon year, the outdated 1995 General Plan Framework is driving the update of local Community Plans.
In effect, this means that the original data base for the General Plan Framework, 1990 census data, will be extrapolated 40 years into the future to determine the growth trends, infrastructure needs, and implementation programs required in such dynamic Los Angeles communities as Hollywood.
The chance that a 40 year extrapolation of 1990 data could be accurate and a reliable basis for an extensive General Plan implementation program, including proposals to increase the density of zones and plan designations in Hollywood, is nil. In fact, the Planning Department’s own data, for example, already indicates that the General Plan Framework was wildly inaccurate for Hollywood. It predicted Hollywood would grow by 43,000 people between 1990 and 2010, but by 2008 City Planning’s own data revealed that Hollywood’s population had only increased by 12,700 people. 30,000 predicted people never materialized.
Similarly, the General Plan Framework had predicted that there would be 17,610 new housing units constructed in Hollywood between 1990 and 2010, but by 2008 the number had only reached 2,686, despite the active intervention of the Community Redevelopment Agency and numerous discretionary planning and zoning actions approved by the City of Los Angeles.
Furthermore, if the amount of affordable housing removed to make way for new construction in Hollywood had been factored into the analysis, the net housing gain in Hollywood would have been even smaller, and the Framework’s 2010 projections would have been even more inaccurate.
Conclusion: The resources used to develop these optional design guidelines should have been spent on remedying the Framework’s main problem: it is an out-of-date General Plan document in urgent need of replacement.
Baffling Reason # 2: To assure that the General Plan Framework Element remained accurate during its intended life 1995-2010 lifetime, it underlying statistics regarding growth and infrastructure, as well as its track record of successfully implementing required policies and programs, were to be monitored through an annual report prepared by the Department of City Planning.
The need for this annual report, the legal obligation to prepare it, and the report’s components, are all spelled out in detail in the General Plan Framework, as well as the Framework’s extensive Final Environmental Impact Report (FEIR). To assure the Plan’s relevance and accuracy, the annual reports were to include both raw data and analysis of the following:
- Los Angeles’s growth trends, including those for the city’s 35 Community Plan areas, such as Hollywood and Grenada Hills, where local Community Plans are now being updated.
- Infrastructure construction, changes in user demand for infrastructure and municipal services, and the availability of sufficient infrastructure capacity to absorb actual and anticipated user demand through the year plan’s 2010 horizon year.
- Extent to which the General Plan Framework’s implementation program has been funded, rolled out, and met the goals of the General Plan Framework.
- Overall analysis of the General Plan Framework’s accuracy and effectiveness. Since the General Plan Framework is a growth neutral document, this means that all discretionary actions by the Department of City Planning or City Council to increase density (e.g., zone changes and variances) must be based on hard data demonstrating that the Framework’s projections had been exceeded and that it policies and implementation programs were no longer capable of meeting the needs of the city’s residents.
So far so good, except for one minor glitch. The Department of City Planning never monitored the implementation of the General Plan Framework, and it stopped any monitoring of the Framework’s underlying growth and infrastructure data over 10 years ago.
In other words, the City of Los Angeles has been flying blind since the year 2000 because its General Plan has not been monitored. There is no way to know if the city’s underlying growth and infrastructure data are accurate or if its policies and programs are effective. For that matter, we don’t even know which implementation programs were rolled out, and if any of them worked as they were intended. To say the least, this is a serious planning problem, and it is wholly oblique to the preparation and approval of supplementary design guidelines which will become nonbinding appendices to an outdated General Plan.
This failure to either update or monitor the General Plan Framework may have slipped under the radar at City Hall, but some local planning activists noticed this lapse. As a result two law suits have been filed against the City of Los Angeles. Through a trial or appeal, it is likely that the City will be forced to resume and expand General Plan monitoring, which means collecting, analyzing, and applying current growth and infrastructure data. Furthermore, the City could also be required to prepare 10 years of missing reports, from 2000 to 2010. Finally, if the trial or appeal judge develops an understanding of California State planning laws, he or she should also require the City of Los Angeles to quickly and fully update its General Plan. This means that the judge would conclude that rigorous monitoring of an expired plan was not sufficient, and that the new 2010 data must be used to develop a new general plan, including all legally required elements, such as transportation.
If the City were to immediately address these serious problems, or if it finally acts in response to a court order, it will quickly discover that the proposed supplemental design guidelines are not helpful. At that point the public might wonder why so much time and energy had been devoted to such secondary activities, especially when it could have been devoted to the formidable tasks or monitoring and/or updating the General Plan Framework.
They might even wonder why such obvious tasks were neglected to the point that the public had to sue the city to force it to comply with own laws, as well as to pursue what every city planning student is taught by the time they graduate: maintain your city’s general plan.
Baffling Reason #3: The three sets of supplemental design guidelines intended to become an appendix to the General Plan Framework do not appear to have any connection to the Plan’s actual chapters, including their policies and programs. For example, the Framework’s Chapter 5, Urban Form and Neighborhood Design, offers 17 pages of detailed design goals, objectives, and policies, all of which are then linked to the Framework’s Chapter 10, Implementation Programs.
These design guidelines were part of the original Framework document adopted 15 years ago by the City Council. Since then they have quietly rested on a shelf somewhere at City Hall. In fact, their profile was so low that apparently the proposed design appendices do not even reference the Framework’s own legally adopted design guidelines. While this is a baffling, the situation is actually more bizarre because in 2009 the Department of City Planning presented detailed amendments to the Framework’s adopted design guidelines. These amendments and an accompanying staff report were presented to the City Planning Commission June of 2010. The curious can listen to the full discussion on the City Planning Commission’s web-site. When they do, they will learn that the City Planning Commission endorsed the proposed General Plan amendments, including the accompanying staff report.
At this point, however, the trail inexplicably goes cold. Despite the action of the City Planning Commission, the proposed General Plan amendments never made it to the next stage, consideration by the City Council’s Planning and Land Use Committee, prior to adoption by the full City Council.
So for over a year these amendments and the staff report have languished at City Hall, while advisory design guidelines were prepared which do not appear to make any references to the Framework’s Chapter 5 on neighborhood design or the Planning Department’s proposed 2009 amendments to the same Framework chapter.
Baffling Reason #4: The Framework’s existing design guidelines in its Chapter 5 could have been used, as these appendices are intended to be used, to impose design conditions on any of the thousands of discretionary actions which moved through the City’s bureaucracy between 1995 to date. Yet, they never were. (If any readers of this column have information to the contrary, they should share it.)
That’s right. From the date the Framework was adopted in 1995 to the present any decision maker could have invoked 17 pages of existing urban design guidelines to condition design changes for any building in any discretionary action. So, the obvious question is: if the existing urban design guidelines were never followed by decision makers, even though they were fully part of the adopted General Plan, why should appendices only adopted as advisory design guidelines be utilized. If quasi-judicial zoning administrators, city planning staff acting on behalf of the Director of Planning, the City Planning Commission, the Council’s Planning and Land Use Committee, or the full City Council never found the time or necessity to utilize the Framework’s Chapter 5 for the thousands of land use decisions they made over the past 15 years, why will they now turn to these appendices?
BUT, ARE THE ADVISORY DESIGN GUIDELINES BAD?
Considering that the General Plan’s existing design principles and guidelines have been a shelf document since they were formally adopted 15 years ago, it is certainly likely than non-binding design guidelines only approved by the City Planning Commission, not the City Council, and which will become appendices, instead of adopted policies, will have little impact. Does this, therefore, mean that such potentially innocuous documents lay below the threshold of being either good or bad?
Not necessarily. There always is the possibility that the public outreach efforts campaign regarding the proposed appendices will be a catalyst for City Planning and/or City Hall decision makers to utilize the new design guidelines for discretionary actions. If this happens and the design guidelines are actually used, they could improve the appearance of some projects. This would be a positive outcome.
But, the guidelines might also add a design patina to real estate projects which could not otherwise be built according to the Los Angeles Municipal Code (LAMC). This means that projects requiring zone changes, plan amendments, variances, or other special approvals to circumvent the LAMC’s zoning restrictions, could be made more appealable through design enhancements. Based on current practices, it is also likely that contentious projects will make amends toward critics by changing their external appearance – while holding fast to the zone changes and related actions they are requesting.
This means that, in effect, the design guidelines would function quite differently than those now attached to Specific Plans or Historical Preservation Overlay Districts. In those cases the overlay ordinances ensure that projects are not only built below existing zoning limitations, but that the same projects at then given an additional review regarding their design. In effect, under Specific Plans a good (i.e., undersized) project becomes better, while, in contrast, a bad (over-sized) project approved through a discretionary action becomes more acceptable through a design “make-over.”
If this happens, then the extensive efforts by the City of Los Angeles to reduce barriers to real estate speculation will have been supplemented through the use of non-binding urban design guidelines for a wide range of discretionary actions.
Tuesday, November 9, 2010
Wednesday, September 15, 2010
|By Paul Weber, LA Daily News, August 29, 2010|
RECENTLY many opportunistic politicians around the state have been on rant against public employee pensions and calling for draconian "reform." A more accurate description of would be: "It's about time public employees joined the race to the bottom."
While many of the people, including the Daily News, calling for reform are acknowledging that private-sector workers have lost tremendous value on their retirement plans, incredibly they present that as a model for public-sector employees! Very rarely do those calling for change take the time to honestly discuss how a 401(k)-style plan would provide for a secure and dignified retirement for employees. That is not a surprise; the 401(k) approach to retirement savings is, and will continue to be, an absolute disaster for this country - leaving the workers who retire under its auspices with the choice of being penniless in retirement or working until they die.
Some politicians have been lining up to support the elimination of defined pension plans for new employees and force them into 401(k) plans. Strikingly, the reason is never given that the plan is better for the participant. Instead, the argument is that pension plans are unaffordable, and eliminating them will save the employer money.
The 401(k) program piecemealed into existence over the past 25 years has failed to provide retirement security for American workers. The past years have shown the fragility of the 401(k) scheme for funding retirements. While public pension plans have also taken severe hits, they have a long-term investment outlook, and their obligations aren't due in full in the next five, 10 or even 20 years. By contrast, people who are within five to 10 years of retirement will have great difficulty recovering the value of their accounts without greatly stretching their working lifetimes. Many who have recently retired under a 401(k) account will be forced back to work. Is this really the example that we want the public sector to follow?
The real crisis in this country is not largely self-supporting pensions, but reliance on the 401(k) plans for retirement that most private sector companies have set up for their employees. Tried-and-true pension plans for LAPD officers have been around since June 7, 1899. The Los Angeles Fire and Police Pension system, even after the economic downturn, is currently 96.2 percent funded. Members contribute up to 9 percent of their pay biweekly, which adds $120,287,911 for the 2010-2011 fiscal years. Even with this sizable amount, the majority of the money needed to fund the pension systems comes from their investments, not contributions by the city or police officers.
Politicians opposed to pension plans are fond of citing figures that show a tremendous rise in contribution rates to plans such as CalPERS. The most commonly cited and deliberately misleading trick is to claim that the state's contribution has risen 2,000 percent since 2001. This claim uses as its starting point the year that required the lowest amount of contributions to CalPERS in decades - the end of a four-year period where the employers took a contribution "holiday," adding little or nothing to the pension system. (In 1996, the state contribution was $1.2 billion; by 2001, it dropped to $156 million.) During those years, the pension reformers of today remained silent as the government shirked its pension obligation, helping to create the situation we see today.
The call for future employees to rely on Social Security in lieu of pensions in retirement income is strange, considering that the Social Security system faces a $5.7 trillion shortfall over the next decades. Given the logic of the latest calls for change, can we expect future pundits to proclaim the fix to Social Security funding is to not let any future workers enroll in the system?
It is vitally important to look at our city's long-term viability, which is dependent upon a stable, well-trained and fairly compensated public work force. In good economic times, public employment offers lower salaries, no bonuses, no stock options and no similar perks common in the private sector. The trade-off for being a police officer, firefighter or teacher has always been the security of a retirement after a lifetime of public service.
If that trade-off is taken away, who is going to devote their working career to public service and guarantee themselves inadequate resources for retirement? Anyone with common sense should wonder why the solution to issues facing public pensions would be to switch employees to a retirement system that is a demonstrated failure.
After devoting their careers to protecting the public, with all the accompanying physical and emotional turmoil, our future police officers and firefighters shouldn't retire penniless. In fact, no one should.
Responsible leaders in our state shouldn't be advocating for a system for public employees - or anyone - that has already failed millions of hardworking Americans.
Friday, September 10, 2010
First, the Framework already has a design chapter, Chapter 5, which is quite good. If these three sets of design guidelines are to augment and update the Framework as appendices, then why is there is no effort to connect these new guidelines with the existing, adopted guidelines? There are obviously many points of connection, yet at no point is there any effort to amend the existing document's design section.
Second, I cannot think of any situations since 1995 where the Framework's Chapter 5 was ever used or invoked to modify a project's design or to make legal findings. So, why should the Framework now be implicitly updated, if it design role has been continually ignored?
Third, just as the original design chapter was flushed down the memory hole, I would expect the same for these three new appendices. The guidelines can't be used for most buildings because they are built by right and only require LADBS-issued building permits. In those cases all the LADBS plan checkers do is review projects for compliance with the LAMC's Building Code and the Zoning Code.
Plus, the appendices can't be used for Specific Plan and CDO projects because these ordinances already have their own Design Guidelines, and there is no legal or administrative procedure to supersede those with these three design documents.
Furthermore, they can't be used for Plan Amendments and Zone Changes because those only relate to use, not the structures built on the modified use.
So, even if the three sets of design guidelines were better linked to the existing General Plan Framework, I can't think of many discretionary actions where a Zoning Administrator or Planner would be able to use these design guidelines to modify a proposed project.
Fourth, the problems of the Framework are not addressed by new Design Guidelines. The Framework is the heart of the city's General Plan, yet its horizon year of 2010 is nearly over, with no known efforts to update it or even resume monitoring the General Plan after a hiatus over 10 years. Instead a few Community Plans are being updated to elaborate an outdated planning document. Design Guidelines, such as these, are totally oblique and peripheral to what is truly needed, and, in effect, are little more than a distraction from the serious planning work which Los Angeles so desperately needs.
Fifth, we need to remember that design review, even if well done, can never substitute for good planning and good zoning. Though good design obviously is desirable, for the most part it is a distraction to avoid attention of the major planning and zoning issues facing a community. Instead, activists get caught up in secondary questions about window treatments, step backs, and colors.
Tuesday, July 27, 2010
Although it is hard for the general public to fathom what takes place at City Hall, we know this much about recent changes imposed on LA’s Department of City Planning. Gail Goldberg, the Director of Planning, recently quit her job. One week after her last day at work, the Mayor nominated the Chief Zoning Administrator, Michael LoGrande, to become the new Director of Planning.
Many others have written about this management change, with plenty of ink and tears spilled over the new Planning Director’s level of knowledge, seniority, and servility to real estate developers. But, I don’t think the real question is the new planning director's history and style, but why the Mayor and his consigliere, Austin Beutner, decided they wanted a City Hall backroom player to take over the Planning Department.
Some turn to personal scheming for an explanation, but I think the deeper answer is the poor state of the local, regional, and national economies. As they continue to decline, the pols and the investors they enable increasingly turn to short-term real estate speculation, not long term business or city planning, as their preferred investment strategy. Despite the Great Recession, with its unemployment, foreclosures, bank failures, and declining stock markets, the large investment houses and corporations are awash with cash, but with few ways to profitably invest it.
Old fashioned options, such as taxing some of this money so the government can use it for planned infrastructure improvements, no longer compute. Such a public approach is too iffy, and it takes too long for a new subway or remodeled airport to produce a better business environment. Since major investors can’t make money like they used to, by investing in public infrastructure and actually making and selling things for a profit, they have turned to increasingly risky financialization.
In a nutshell, more and more of their business models consist of buying and selling financial instruments, most of which are based on real estate speculation. This desperation by large investors previously led to the Savings and Loan crisis of the 1980s, when over half of this country’s S and L’s failed in a giant real estate bubble. It also produced the bank meltdowns of 2008-9, when many a house of cards collapsed because borrowers could no longer repay mortgages on their real houses. In both cases losses at the top were covered by the Federal government.
The process which led to those speculative collapses is still alive and well in Los Angeles and much of the United States. Never mind that the crises of the 1980s and then twenty years later in the first decade of the 21st century showed the folly of such a high risk investment strategy. Never mind that it will not work again. After all, there simply is not enough demand to profitably fill new condos and shopping centers, especially in Los Angeles. The specter of empty buildings, just like the S and L crisis, is again at hand, except this time the Federal Government is broke.
Even those real estate investors who have no intention to build anything, whose investment strategy is to collect building entitlements so they can flip properties and make some quick money, will be blind-sided when they, too, run out of buyers and bailouts. Meanwhile, with public services cut and infrastructure underfunded, Los Angeles has become a less inviting place to live, to work, or to run businesses. Voila, a downward spiral appears in which each short term City Hall maneuver, like furloughs and layoffs, begets further urban decline.
Who wants to live or do business in a rundown city, like Los Angeles is becoming, if they have a choice?
As part of this pitiful race to the bottom, each “planning” decision is short term and designed to facilitate risky real estate speculation at the expense of adopted city plans and zoning. More to the point, why go through the pretense of maintaining plans or having a planning director who can talk the profession's talk, when you can quickly bring in a replacement from the dugout who claims he can walk their walk. Why should plans and zones get in the way of quick entitlements allowing commercial real estate to be flipped?
But, sooner or later, the truth will come out. Quick entitlements might produce a few small fortunes or even a modest building boom, an echo of the 1980s, but they will not revive Los Angeles. When the dust settles and the quick buck artists have moved on -- most of them avoiding a stint at “Club Fed” -- Los Angeles will need even better urban planning than it has occasionally had in the past and could still have and desperately needs in the present.
* Dick Platkin is a Los Angeles based city planning consultant. He invites comments on this article at firstname.lastname@example.org
Tuesday, July 6, 2010
More Red Flags for the Economy
By Mike Whitney
http://www.informat ionclearinghouse .info/article258 79.htm
July 05, 2010 "Information Clearing House" -- Bonds are signaling that the recovery is in trouble. The yield on the 10-year Treasury (2.97 percent) has fallen to levels not seen since the peak of the crisis while the yield on the two-year note has dropped to historic lows. This is a sign of extreme pessimism. Investors are scared and moving into liquid assets. Their long-term expectations have grown dimmer while their confidence has begun to wane. Economist John Maynard Keynes examined the issue of confidence in his masterpiece "The General Theory of Employment, Interest and Money". He says:
"The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention.
The state of long-term expectation, upon which our decisions are based, does not solely depend, therefore, on the most probable forecast we can make. It also depends on the confidence with which we make this forecast — on how highly we rate the likelihood of our best forecast turning out quite wrong."
Volatility, high unemployment, and a collapsing housing market are eroding investor confidence and adding to the gloominess. Economists who make their projections on the data alone, should revisit Keynes. Businesses and households have started to hoard and the cycle of deleveraging is still in its early stages. The winding down of the Fed's liquidity programs comes at the same time as Obama's fiscal stimulus begins to run out. Bank reserves are not getting into the hands of the people who will spend them and increase economic activity. These things all indicate a generalized tightening in the money supply. Soon, incomes will begin to contract and the CPI will turn from disinflation to deflation. Aggregate demand will weaken as households and consumers hunker down and increase personal savings. The financial crisis may be over, but the Depression has just begun. Here's how Nobel prize winner Paul Krugman sums it up:
"We are now, I fear, in the early stages of a third depression.. ..And this third depression will be primarily a failure of policy. Around the world ... governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending. ... After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.
I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times." ("The Third Depression", Paul Krugman, New York Times)
More than 8 million jobs have been lost since the beginning of the crisis, and yet, President Barack Obama has made no attempt to initiate a second stimulus. Government spending must increase to make up for the slack in demand and to increase capacity. That means larger budget deficits until households have patched their balance sheets and can again spend at pre-crisis levels. Belt-tightening should wait until the economy is stronger. Withdrawing stimulus now, while the economy is still weak, will crimp spending, collapse state tax revenues and increase unemployment. Here's an excerpt from an article by James K. Galbraith which helps to explain what's needed to get back on track:
"The only way to reduce a deficit caused by unemployment is to reduce unemployment. And this must be done with a substantial component of private financing, which is to say by bank credit, if the public deficit is going to be reduced. This is a fact of accounting. It is not a matter of theory or ideology; it is merely a fact. The only way to grow out of our deficit is to cure the financial crisis.
To cure the financial crisis would require two comprehensive measures. The first is debt restructuring for the entire household sector, to restore private borrowing power. The second is a reconstruction of the banking system, effectively purging the toxic assets from bank balance sheets and also reforming the bank personnel and compensation and other practices that produced the financial crisis in the first place. To repeat: this is the only way to generate deficit-reducing, privately-funded growth and employment.
To be clear: unemployment can be cured without private-sector financing, if public deficits are large enough — as was done during World War II. But if the objective is to reduce public deficits, for whatever reason, then a large contribution from private credit is essential.
One more time: without private credit, deficit reduction plans through fiscal austerity, now or in the future, will fail. They cannot succeed." (James K. Galbraith, "Why the Fiscal Commission does not serve the American People", New Deal 2.0)
The economy cannot grow without private sector credit expansion. But the banks are constrained by toxic assets and a lack of creditworthy applicants. On the other hand, deleveraging households and consumers are less willing to borrow at any rate. Retirement age "boomers" have lost nearly $12 trillion in net wealth since the crisis began and must hunker-down and save for the years ahead. They are no longer in a position to spend freely anticipating their home equity will rise 10% or 15% per year creating a cushion for the future. In fact, bond yields indicate that retail investors have lost faith in both the housing and equities markets. These people have moved their savings into low-yielding, risk adverse assets-- US Treasuries. Here's what Keynes said on the topic:
"Our desire to hold Money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future.... The significance of this characteristic of money has usually been overlooked; and in so far as it has been noticed, the essential nature of the phenomenon has been misdescribed. For what has attracted attention has been the quantity of money which has been hoarded... supposed to have a direct proportionate effect on the price level through affecting the velocity of circulation. But the quantity of hoards can only be altered either if the total quantity of money is changed or if the quantity of current money income (I speak broadly) is changed; whereas fluctuations in the degree of confidence are capable of... modifying... the premium which has to be offered to induce people not to hoard. And changes in... liquidity preference.. . affect, not [consumer] prices, but the rate of interest.... " (John Maynard Keyne, "1937 Quarterly Journal of Economics")
So, hoarding reduces spending which leads to economic contraction. But behavior can be altered by changing incentives, raising incomes or restoring confidence. Keynes was less sanguine about merely increasing the money supply which he compared to "trying to get fat by buying a larger belt". The point is to increase consumption, which means that money has to get in the hands of the people who will spend it to grow the economy. Bank reserves alone won't do the trick.
Presently--accordin g to data collected by the Federal Reserve-- companies are hoarding capital due to the lack of investment opportunities. High unemployment has led to falling demand which is stifling investment. As households continue to deleverage, many companies will opt to pay down debt rather than seek new investments (as they did in Japan) This will further reduce economic activity and deepen the slump. The government must increase the deficits to offset cuts in state and private sector spending and to avoid another excruciating cycle of debt deflation.
The economy is at a tipping point. CPI is is slipping from disinflation to outright deflation. Unemployment has flattened out at 9.5%, but 650,000 discouraged workers have stopped looking for work altogether which will add to the slowdown. The cash-strapped states are laying off workers in droves. The rate of underemployment has soared to 16.5%. There are 6 applicants for every new job created. Conservatives believe that the ongoing crisis creates a unique opportunity to crush the labor movement and to force down wages. GOP senators and congressmen have quashed a bill that would extend unemployment benefits to over a million workers. Apart from the gratuitous cruelty of the action, their obstructionism only adds to deflationary pressures.
Nomura economist David Resler says that congress's action will have an immediate and damaging effect on the economy and could trim GDP by 0.2 percentage point this quarter and by 0.4 point in the period from July through September. (Bloomberg) Republicans are precipitating a crisis to garner support in the upcoming midterm elections, but they may not fully grasp the knock-on effects of their vote on their constituents. Here's a clip from economist Steven Keen on Naked Capitalism:
"The final debt-driven collapse, in which both wages and profitability plunge, gives the lie to the neoclassical perception that crises are caused by wages being too high, and the solution to the crisis is to reduce wages.
What their blinkered ignorance of the role of the finance sector obscures is that the essential class conflict in financial capitalism is not between workers and capitalists, but between financial and industrial capital. The rising level of debt directly leads to a falling worker share of GDP, while leaving industrial capital’s share unaffected until the final collapse drives it too into oblivion." (Steve Keen's Scary Minsky Model, Yves Smith, Naked Capitalism)
The FOMC's June statement was a real stunner. The economy is losing-ground in nearly every area. Household spending, business spending, bank lending and housing are all either beginning to slow or falling sharply. The Commerce Dept. revised its first quarter estimate of GDP from 3.0% to 2.7% due to lower than expected consumer spending. The recovery is largely a mirage created by inventory adjustments and fiscal stimulus. 46 of the 50 states are mired in huge deficits that will require substantial cuts to balance.That will be a drag on activity going forward. This is from Bloomberg News:
"States face a cumulative budget gap of $127.4 billion as 46 prepare for the start of their fiscal year on July 1, according to a report this month by the National Governors Association and the National Association of State Budget Officers. They will have to fill that hole largely on their own, as aid from the federal government under programs including President Barack Obama’s $787 billion stimulus package starts to wind down.
State and local governments will have to dismiss 162,000 workers if Congress fails to extend about $24 billion of Medicaid payments, Lawrence Mishel, president of the Economic Policy Institute in Washington, said during the governors’ call. Payrolls have already registered 11 straight months of year- over-year declines, the longest stretch of continuous drops since 1983, based on Labor Department data." (Bloomberg)
State budget cutting will swell the unemployment lines and slow consumer spending. With fiscal stimulus quickly running out and the deficit hawks pushing for greater austerity, the Fed will be forced to intervene in the 4th quarter resuming its quantitative easing bond purchasing program to pump more liquidity into the financial system. The recovery is not self sustaining.
In Europe, the scenario is much the same only worse. ECB head Jean-Claude Trichet has been preaching austerity while conducting a massive stealth bank bailout, providing limitless funds in exchange for dodgy collateral, overnight deposits for wary banks that no longer trust the repo market, and bond purchases of sovereign debt that is vastly overpriced given the fiscal position of the issuers. Germany is calling for additional belt tightening across the eurozone as a hedge against fictitious inflation. German policymakers don't see that their trade surpluses translate into deficits in the Club Med states, or that their solutions will only exacerbate existing imbalances, increase the deficits, and put the EU on course for another contraction. Here's an excerpt from the Wall Street Journal:
"Germany’s unwillingness to accept higher domestic levels of inflation in order to alleviate the burden of debt elsewhere in the euro zone ultimately constrains the European Central Bank in how much it can do on the monetary side....
... governments already nursing fragile financial sectors are being forced into some of the most severe austerity programs ever planned in modern developed economies at a time of rigid monetary policy.
If policy goes through as planned, a severe depression is almost certain to follow across peripheral euro-zone countries and a significant downturn elsewhere across the continent. Even European countries with power over their own monetary policy are bound to suffer from a euro-zone slump." ("Euro-Zone Policy Sets Stage for Depression", Allen Mattick, Wall Street Journal)
After Lehman Bros. collapsed in September 2008, the world was pulled back from the brink of depression by an activist Federal Reserve that (arbitrarily) assumed the authority of congress and conducted a massive rescue operation that provided unlimited liquidity and government support for teetering financial institutions. And, while the Fed's uneven treatment of Wall Street has been widely criticized, (the banks have been allowed to carry on much as they had before) the precipitous slide into the abyss was halted. Now, the congress seems eager to reverse that achievement for fleeting political gain.
It's important to understand the process so we can settle on a remedy. Economist Bradford DeLong explains what's going on with the economy and why it would be a mistake to count on the so-called "self correcting" powers of the market rather than government intervention. (additional fiscal stimulus) Here's an excerpt from DeLong's blog "Grasping Reality With Both Hands":
In our normal, microeconomic world it is not a big deal when excess demand emerges in one market and excess supply emerges in another..... But in macroeconomics things are different. The excess supply is economy-wide- -throughout all commodity markets, producing supply in excess of demand for goods, services, labor, and capacity. Producers and entrepreneurs respond to an aggregate demand shortfall just as individual producers respond to a particular shortfall of demand for their products: they hold sales to liquidate inventories, they cut prices, they cut wages to try to preserve margins, they fire workers.
Thus workers fall into unemployment from the excess supply in the goods and services industries.. ..
Wages should then fall. And when wages fall higher profits should induce employers to expand production even without any increase in spending. Eventually wages should fall low enough that the economy returns to full employment and to normal levels of production and capacity utilization even without any increase in asset supplies. Or will it? Falling wages means that households have even less money. Some of them will default on their loans. Some banks will find that their reserves are no longer large enough to provide an ample cushion because of these loan defaults.... ....
Relying on nominal deflation of wages to restore full employment runs the risk of creating yet another shock of excess demand in finance and excess supply in goods and services to deepen the depression. The hoped-for cure's first effect is to worsen the disease.
We trust the market to take care of a microeconomic excess-demand excess-supply situation in a few industries in a productive way in a short period of time. Do we trust the market to do the same way to a macroeconomic imbalance, to quickly resolve a depression in a productive way without help? No, we do not. Rather than relying on economy-wide deflation to eventually restore balance, we should pursue other alternatives. " ("Microeconomic and Macroeconomic Excess Supply", J. Bradford DeLong, Grasping Reality With Both Hands)
True, in some perverse sense, the market is "self correcting", but in this case, it would take years if not decades of high unemployment, overcapacity, dwindling investment and social unrest. Are we ready for that? The preferable solution is to plug the regulatory holes that allow financial institutions to speculate in massively- leveraged instruments that have implicit government guarantees (CDS, MBS, CDO), and to promote income growth so the supply/demand balance that is essential to economic growth is restored. The way out of this mess is more jobs and higher pay. And that will take public mobilization and whopping big deficits.