Planet iCount

Angry Bear: Stephen Moore Looks at Mississippi

Mon, 12 May 2008 11:33:54 +0000

cactus sends a note from the WSJ commentaries:

Stephen Moore Looks at Mississippi

The seasonally adjusted unemployment rate in Mississippi in January of 2004, the month Haley Barbour became governor of the state, was 5.7%. A year later, it was 6.9%. The latest figures (March 2003) showed a seasonally adjusted figure of 6.0%. Now consider the following sentence:

Thanks to Mr. Barbour, the state's unemployment rate is down to about 6% from nearly 9%.

Given the facts, would you be embarrassed to write that sentence? I imagine most people would. Let's look at at a few more facts. This BEA

news release provides a list of the states with the fastest and slowest per capita income growth rates from 2006 to 2007. The top three are:1. Louisiana, growth rate = 9.2%2. New York, growth rate = 7.6%3. Mississippi, growth rate = 6.7%Most people would look at this and and suspect that a certain August 2005 event might have something to do with the growth rate in Louisiana and Mississippi. Rebuilding after a devastating hurricane will lead to rapid growth in per capita income. Thus, most people would not think to write this:

Last year, Mississippi's per capita income growth was 6.7%, third highest of the 50 states and well above the national average of 5.2%. Mississippi tort reform is making the poor richer, and the rich lawyers less fabulously rich.

Most people would have avoided writing this article. Kudos to Stephen Moore, senior economics writer for The Wall Street Journal editorial page, who most definitely is not most people.

This one by cactus

Angry Bear: Two Posts Everyone Needs to Read

Sun, 11 May 2008 23:54:14 +0000

There are things that economists "know" that (let us be nice; economists, sometimes understandably, have delicate sensibilities) are not demonstrably true, and other things that economists Of A Certain Age may be motivated to believe, even if they are demonstrably untrue.

Angry Bear: Dave Johnson at Seeing the Forest Gives the Lie to the "Hillary is destroying the party" meme

Sun, 11 May 2008 22:02:16 +0000

He's more of an optimist than I am—but that isn't difficult.

Then again, he is also well aware that, were Hillary to drop out today, it wouldn't be all peaches and cream from now until after the nominations are in place.

People are saying that Hillary is "race-baiting" because she mentioned "blue-collar whites." Save the racist accusations for what's coming -- because it surely IS coming....

It is the old way, and it worked for a long time, and it stopped working and the 50-state strategy is what we need now. But is isn't racist and isn't intended to divide us. Is going after "soccer moms" or "NASCAR dads" as a demographic voting block a sexist tactic? Yes and no, but it isn't intended to divide. She is just saying that voting patterns show that she is bringing in more of certain groups -- and confirming her unfortunate entrenchment in the old-style "big state" view.

Let's talk about real racism. Look at what has already started from the right. We already have seen them using "boy" and "darkest Africa." As November approaches you will be hearing about "our women." There will be stuff about how Obama wants the While House so he can lure in white wives of important Senators, etc. There will be a lot of "us" vs "them." And much, much worse. Believe me, much, MUCH worse. THAT is when you want to talk about people using racism as a campaign tactic. And when that happens you really don't want the right saying "well that's what you said about Hillary, too." [boldface and italics his]

As I noted at Thomas Palley's blog a few days ago, "If Obama can’t take punches from the HRC campaign, he’s got no chance of doing so against the professionals of Ari Fleis[c]her and the RNC." And while many appear to believe that the Dems could run anyone with a personality this side of Harry Reid after eight years of Bush-league rule, it's a long way to November. And the more Hillary-punches Obama can take, the better off he'll be when the real goons, not just Rocky Balboa, start swinging.

Angry Bear: Can we trust climate models?

Sun, 11 May 2008 22:01:46 +0000

Reader Andrew sent this link on statistics and climate modeling:

Can we trust climate models makes a stab at figuring out what is valuable with the models and what is not. It also points out the fact the the commonality in models of the impact of "greenhouse" gases, and why these appear important.

Perhaps an AB or reader could devlop a post on models. It is interesting to read.

Angry Bear: Coberly replies:

Sun, 11 May 2008 16:03:38 +0000

absolutely right.

no one ought to try to live on SS who isn't already pretty good at living on nothing.

but that's pretty much the point: SS is insurance... you set aside the least amount of money you can in order to guarantee at least the lowest possible standard of living you can stand "if all else fails."

and it turns out that for a lot of people who never thought it would happen to them, all else does fail.

as for the greater returns from equities etc. yep.

that's the risk premium. i encourage people to invest and not rely on SS. but keep that old SS anyway. Just in case.

And I am still not sure that a "no SS, EVERYONE invested in the stock market" could work as well as "every worker has SS, those who can afford the risk invest in stocks." this has something to do with the fallacy of composition. is there really some place to put all that money that will generate real "growth" or will future profits on your investments come out of lower wages and higher prices...?

By the way, I never missed my SS "tax." I think you have to be a specially ..uh..money oriented kind of person to notice the payroll tax.. or to have been whipped up into hysteria by people claiming it is being stolen from you.

Angry Bear: Vtcodger says Soc Sec fuss is...

Sun, 11 May 2008 15:07:05 +0000

Lifted directly from comments cactus style:

Vtcodger says:

1. Social Security is adequate only if you plan to spend your golden years in a poorly heated hovel dining on macaroni and cheese. I'd be OK with that myself, but a lot of folks wouldn't. Most people need additional savings. That's where 401K, IRA, et al come in.
2. Some advocates of privatization are not motivated by ideology or greed. They perceive that there will be better long term returns from stocks than from treasury bills -- which is basically where any investment component of SS is stashed. (more below).
3. Countries that have privatized retirement (Chile, the UK) may not be doing all that well with it. Transaction costs and administrative fees are said to be disturbingly high. It's not clear that their plans won't eventually require a massive government bail out.==

Equities (stocks) do indeed seem to have a better long term return than bonds. At least US stocks do. And that's true even if you substantially discount current US equity prices which seem to be rather high and to be based on dubious earnings reports. I'll skip the numbers because everyone's numbers are different, but the difference does appear to be significant. A couple of percentage points. Which is a lot of money compounded over a lifetime of savings.
Two points:
T1. There was a discussion over at Brad DeLong's blog a number of months ago about whether countries other than the US have a similar differential long term in stock and bond yields. The conclusions was -- quite possibly not -- at least not all of them. That is to say that "Equities have better long term yields than stocks" may not be a universal law. If it isn't, then how do we know that privatized retirement won't yield worse results than the current plan?
2. Although overall returns from stocks in the US have been excellent, there have been long dry spells. The assertion that there has been no decade where stocks haven't made money is simply wrong -- at least in inflation adjusted terms. My concern is whether a privatized retirement system could weather two decades like 1965-1985 where the real return on equities netted out to about zero.
This comment by Vtcodger

Angry Bear: TO MOM

Sun, 11 May 2008 10:32:00 +0000

May you have a very happy day!

Angry Bear: Sorting it out in Iraq

Sat, 10 May 2008 20:59:36 +0000

McClatchy Washington Bureau reports a possible agreement between the militias, and with the Iraqi government:

Followers of rebel cleric Muqtada al Sadr agreed late Friday to allow Iraqi security forces to enter all of Baghdad's Sadr City and to arrest anyone found with heavy weapons in a surprising capitulation that seemed likely to be hailed as a major victory for Iraqi Prime Minister Nouri al Maliki.

In return, Sadr's Mahdi Army supporters won the Iraqi government's agreement not to arrest Mahdi Army members without warrants, unless they were in possession of "medium and heavy weaponry."

The agreement would end six weeks of fighting in the vast Shiite Muslim area that's home to more than 2 million residents and would mark the first time that the area would be under government control since Saddam Hussein was toppled in 2003. On Friday, 15 people were killed and 112 were injured in fighting, officials at the neighborhoods two major hospitals said.

.....

Members of Maliki's Dawa Party and the powerful Islamic Supreme Council of Iraq met with Sadr officials on Thursday and Friday to come up with a 14-point agreement to end the weeks of fighting, which has hindered the flow of food and water into Sadr City. The agreement was then passed to Sadr and Maliki for final approval, said Baha al Araji, a Sadrist legislator.

Hundreds of people have been killed and hundreds have been wounded in the fighting, which included frequent U.S. airstrikes. At least 8,500 people have been driven from their homes, and thousands of others have been forced to stay inside, too frightened to flee.

....

Sadr supporter Araji, however, said the agreement specifically barred American forces from entering Sadr City.

The agreement probably will not be released for awhile as appears to happen most often. But the jockying of military and political forces in a 'soft' sort of skirmish campaign will probably be the order of the day if all are lucky.

Angry Bear: BW on Soc Sec V: What does Lenin have to do with this?

Sat, 10 May 2008 20:41:24 +0000

Cosi made some excellent analysis of the budget implications in the last comment thread, then raised only to drop the issue of motive for privatizers. So I want to try a crack at it here.

It is clear to me that most of the people who are pushing privatization are fundamentally opposed to Social Democratic solutions generally. There is a large group of people who never liked the New Deal, continue to argue against historical evidence that it was a fundamental failure, they hated Social Security from the start, and indeed ran against it as their central platform plank in the election of 1936. They expected it would fail, they see the various rounds of tax increases over the years as proof that it will fail. The 1983 reform was particularly bitter to them, to the point that they gathered all the anti-Social Security folk to a conference in DC organized by Cato. The results of that conference were published in the Fall 1983 issue of Cato Journal under the title Social Security: Continuing Crisis or Real Reform but which might as well been called "Never again! We'll get you next time FDR!"

You can get a flavor of this by reading through the introduction. There is zero interest expressed in the idea that worker retirement be in any sense a social responsibility long term, instead Social Security is described entirely in terms of diluting investment and retirement planning and of increasing the ratio of labor costs to capital. Most telling is point 2 of their 8 point conclusion:

"2. Social Security is ultimately a manifestation of the welfare state. Real reform, therefore, may require constitutional change that effectively limits the taxing and spending powers of government."

The Cato types see it as welfare, they disagree with government welfare programs in general, and would like to see all of them vanish over time. To use the words of Newt Gingrich to see them "wither on the vine"

Now in reading this from 1983 you can see that these people, while a little bitter at missing their shot in 1982 when Social Security crisis hit, were convinced they would get another shot at some point. But they also saw they needed more than hope. They needed an alternative vehicle and they needed a plan. They had the alternative vehicle, the IRA-the Individual Retirement Account, and they got busy pushing those. But they also understood they needed to win the message war, and so they turned to strategy crafted by Stuart Germanis and Peter Butler. The answer to the question posed in the post is under the fold.

On the title page of the journal the article title was softened somewhat by prefacing it with 'Social Security Reform: but the article itself's title page was more blunt Achieving a "Leninist" Strategy. While they had the minimal grace to put Leninist in scare quotes a reading of the whole article revels that they meant it. At a certain risk to free use doctrine I am going to quote at some length.

Marx believed that capitalism was doomed by its inherent contradictions, and that it would inevitably collapse—to he replaced by the next stage on the ladder leading to the socialist Utopia.

Lenin also believed that capitalism was doomed by its inherent contradictions, and would inevitably collapse. But just to be on the safe side, he sought to mobilize the working class, in alliance with other key elements in political society, both to hasten the collapse and to ensure that the result conformed with his interpretation of the proletarian state. Unlike many other socialists at the time, Lenin recognized that fundamental change is contingent both upon a movement’s ability to create a focused political coalition and upon its success in isolating and weakening its opponents.

As we contemplate basic reform of the Social Security system, we would do well to draw a few lessons from the Leninist strategy. Many critics of the present system believe, as Marx and Lenin did of capitalism, that the system’s days are numbered because of its contra dictory objectives of attempting to provide both welfare and insureance. All that really needs to be done, they contend, is to point out these inherent flaws to the taxpayers and to show them that Social Security would be vastly improved if it were restructured into a predominantly private system. Convinced by the undeniable facts

and logic, individuals supposedly would then rise up and demand that their representatives make the appropriate reforms.

While this may indeed happen, the public’s reaction last year against politicians who simply noted the deep problems of the system, and the absence of even a recognition of the underlying problems during this spring’s Social Security “reform,” suggest that it will be a long time before citizen indignation will cause radical change to take place. Therefore, if we are to achieve basic changes in the system, we must first prepare the political ground so that the

fiasco of the last 18 months is not repeated.

1. Create a political movement

2. Weaken and isolate your opponents

3. Prepare the public ground

Oh and make it clear that the 1983 Reform was in fact from your perspective a "fiasco"

I would urge anyone really interested in Social Security to read the plan in full. Because you will see that the Economic Right followed it to the hilt, for example you hear clear echoes of Butler and Germanis in every speech Bush has made on this. I am not sure that everyone that draws from the messaging plan created at that 1983 conference is as directly and openly cynical about means and motives as these two. Operationally it doesn't matter much. Butler and Germanis' is a hugely successful marketing scheme and it worked. Brilliantly. The old were reassured, the economic stakeholders were drawn on board, the young were convinced that Social Security just wouldn't be there for them, and all blame conveniently placed on the Boomers. Evil genius to be sure, but marketing genius none the less.

Angry Bear: Fragile...

Sat, 10 May 2008 12:54:26 +0000

Some readers resented The Washington Post for publishing an Associated Press photograph of a critically wounded Iraqi child being lifted from the rubble of his home in Baghdad’s Sadr City “after a U.S. airstrike.”

Two-year-old Ali Hussein later died in a hospital.

As the saying goes, the picture was worth a thousand words because it showed the true horrors of this war.

Neither side is immune from the killing of Iraqi civilians. But Americans should be aware of their own responsibility for inflicting death and pain on the innocent.

The Post’s ombudsman, Deborah Howell, said about 20 readers complained about the photo, while a few readers praised the Post for publishing the stark picture on page one.

Some mothers said they were offended that their children might see the picture, though one wonders whether their youngsters watch television and play with violent videos in a pretend world.

From the start of the unprovoked U.S. “shock and awe” invasion of Iraq on March 20, 2003, the government tried to bar the news media from photographing flag-draped coffins of American soldiers returning from Iraq. A Freedom of Information lawsuit forced the government to release pictures of returning coffins.

Howell said some readers felt the photo of the Iraqi boy was “an anti-war statement; some thought it was in poor taste.” Well, so is war.

Howell said her boss, Executive Editor Len Downie, “is cautious about such photos.”

“We have seldom been able to show the human impact of the fighting on Iraqis,” Downie was quoted as saying. “We decided this was a rare instance in which we had a powerful image with which to do so.”

It’s unclear to me why this was deemed to be “rare.” After five years of war, there is finally one photo that is supposed to say it all?

There is a cost to staying disconnected from acknowledging and even embracing pain and one's role in the causing of it. We are paying that price as a people and a nation.

In Fanueil Hall in Boston is a mural depicting the signing of the Declaration of Independence, where all the signers gathered in concert to free our country from tryanny. John Adams late in his life (he lived to 90), who lived in Braintree, upon seeing it, said we have lost the history of our nation already.

To speak of these things on a regular basis is not something I see as pessimisism and brooding, or denial of my success in life and the blessings I have. The pain in life happens, and cannot be denied in the long run, actually. Allow it to numb you and you lose the happiness as well.

Angry Bear: Dep't of Who'd'a Thunk: Interests of Social Security Retirees and High-Bracket Taxpayers Align?

Fri, 09 May 2008 22:01:18 +0000

Both would benefit from a higher inflation index than CPI. AEI hack (and former Social Security Administration commissioner!) Andrew Biggs redefines bracket creep (*) for the W$J op-ed page:

Tax revenues would skyrocket if the tax cuts expire, due to "bracket creep." Average incomes are higher today than in the 1990s, but income-tax brackets aren't adjusted for the growth of earnings. As a result, Americans will shift into higher tax brackets and pay a greater share of their incomes in taxes. [emphasis added]

Via Greg Mankiw, who for inscrutable reasons calls this "reporting."

Of course, tax brackets (with the notable exception of those of the Alternative Minimum Tax) now are indexed for growth in prices, at least to the extent that's measured by CPI. Really, this is part of a broader attack on progressive taxation, as you can see from an earlier effort along these lines by AEI über-hack Kevin Hassett of Dow 36,000 fame. Though I suppose there may be some positive side effects for society if the AEI's paymasters had to allow enough trickle-down to keep average wage growth ahead of CPI.

Angry Bear: Open thread on Friday

Fri, 09 May 2008 21:26:08 +0000

Angry Bear: At Least They're Consistent

Fri, 09 May 2008 17:56:45 +0000

Just the other day, I wrote:

So, I don't go to bed worrying about inflation, or that we've been in an especially protracted recession for years and apparently don't know it (an implication of claims you can find out there that CPI and like measures understate "true" inflation by very large amounts).

Now, Barry Ritholtz pulls the alternative GDP series from Shadow Government Statistics, a/k/a CPI-understates-inflation HQ, and sure enough, it says that we had essentially zero GDP growth through the Clinton years, and a lot less than that since.

My short response: Bullshit.

Pardon my language.

Added: In an addendum to his post, Barry says that he thinks the most recent economic cycle wasn't all it was cracked up to be. I strongly agree. However, I think it's important to be clear as to what the real problems are. Barry mentions a big one, which is the sustainability of economic activity that's driven by easy money. Another issue is the increasing income and wealth inequality that creates disconnections between aggregate economic growth and experiences (wage growth, wealth, debt) at or near (or even not so near) the median. The latter, in particular, has implications that even the center-left a la the Democratic presidential contenders is loath to take on non-rhetorically.

Angry Bear: BW on Soc Sec IV: A History Lesson

Fri, 09 May 2008 15:27:21 +0000

A blast from the past. The first Report I downloaded was the 1997. It didn't report on Productivity, instead the lead number was Real GDP. So we will run with that. What were the numbers under Intermediate Cost?:

1997: 2.5%

1998-2006 2.0%

2010 1.8%

2020 1.3%

Hecuva job! A median prediction of a permanent 48% slowdown in growth rate by 2020. Not exactly a confidence vote in America. What happens if we turn to Low Cost?

1997: 3.2%

1998-2001: 2.7%

2002-2003: 2.6%

2004-2006: 2.5%

2010: 2.3%

2020: 1.8%

Ultimate: 2.2%

These are optimistic numbers?

Because this is coming off a data series as follows:

1991: -1.0%

1992: 2.7%

1993: 2.3%

1994: 3.5%

1995: 2.0%

1996: 2.5%

So we have a supposedly median projection that suggested a rapid and permanent dropoff to 2.0% in the very next year (1998), or a 20% decline and a supposedly optimistic projection suggesting that a 10% dropoff from the proven 1994 result was the best possible result for the current year of 1997, and a 19% drop for 1998 and following was too. You didn't have to be Rebecca of Sunnybrook Farm to think that maybe the outlook wasn't quite so bleak as these guys suggested. 1996's 2.5% was considered a pretty good number but it was hard to think that it had established some sort of ceiling. If you just extended that 2.5% through the future most of the gap would be closed. Because then as in all years to 2007 Low Cost produced a fully funded Social Security system with flat Trust Fund ratio (see comment for 2008). (Figure I.H3, page 26 of above link).

Okay what were the actual numbers and the new projections from the 2008 Report: Table V.B2?

1997: 4.5%

1998: 4.2%

1999: 4.4%

2000: 3.7%

At which point I was pretty God damn confident we would pull this off. But along came Bush.

2001: .8%

2002: 1.6%

2003: 2.5%

2004: 3.6%

2005: 3.1%

2006: 2.9%

2007: 2.2%

But still on balance smashing 1997 Low Cost. And what do we need from Low Cost going forward?

2008: 3.4%

2009: 3.5%

2010: 3.5%

2011: 3.3%

2012: 3.1%

2013: 2.9%

2014: 2.7%

Ultimate: 2.9%

Few people would probably predict 3.4% for this year. On the other hand who really believes that 2004 numbers will never, ever be repeated? In your optimistic model? Discuss. And don't forget to show your work.

Angry Bear: Swiss Bank UBS settles losses to towns

Fri, 09 May 2008 14:00:08 +0000

The Dailey New Transcript reports:

Dedham Town administrator William Keegan says a $120,000 settlement Dedham will receive from Swiss bank UBS for an investment that failed will cover the town's costs in that deal, but no more.

Nineteen Massachusetts municipal governments and public agencies will recover more than $35 million from UBS in the settlement over risky investments that turned sour instead of generating cash for municipal budgets.

"We were part of an investment that all of these towns participated in. It was a triple-A-rated investment," Keegan said. "It was something that failed along the way."

Yesterday's agreement came three months after the state began investigating whether the Switzerland-based investment bank misled the governments into believing that their investments were sufficiently low-risk to make them permissible for cities and towns under state law.

State Attorney General Martha Coakley, who announced the settlement with two units of parent firm UBS AG, said her office was still reviewing whether to propose additional penalties against the company under the state's False Claims Act.

A New York-based spokeswoman for UBS, Karina Byrne, said the firm agreed that the municipalities' investments in so-called auction-rate securities weren't allowed under state law.

Byrne said UBS was pleased with the settlement, in which the company agreed to reimburse more than $35 million, representing the principal payments the municipalities initially made.

At issue are investments the municipalities made through UBS in short-term bonds known as auction-rate securities, which were once considered safe. But starting in February, weekly and monthly auctions at which investors normally purchase the securities failed to yield buyers, as investors sought to avoid risk amid turmoil in credit markets.

Many local governments invested in the more than $300 billion auction-rate securities market to build up their operations budgets or help finance everything from water projects to road work and hospital expansions. But governments have recently found their cash frozen as buyers dried up.

While local governments in other states have ended up in similar trouble, UBS' Byrne said, "The reasons supporting this (Massachusetts) agreement apply only to the circumstances of this specific case under Massachusetts law."

Massachusetts towns due to receive cash under the settlement are Andover, Barnstable, Belchertown, Boylston, Dedham, East Longmeadow, Hudson, Mattapoisett, Needham, Warren, Wayland, Westborough, Whitman and Winchester. Also due to recover money are the cities of Chicopee and Holyoke; the City of Holyoke Contributory Retirement System; Town of Merrimac Light; and the Massachusetts Turnpike Authority.

The town of Springfield MA had $14 million returned by another firm. The contracts contained mandated statements of investment risk level permitted.

Angry Bear: Not sure of this cartoon either...

Fri, 09 May 2008 13:43:17 +0000

Is he talking CPI substitution and quality of goods, or just the difference in work ethic, or elimination of jobs by technology? Or is this BW explaining the intricacy of modern economic forcasting with Social Security? Or a Vermont economist passing down wisdom?

Angry Bear: McArdle vs. Warren, Round 1: Are We Saving Enough?

Fri, 09 May 2008 12:57:13 +0000

Megan McArdle's taken up the task of trying to prove that the middle class actually isn't stressed to the breaking point, apparently as part of a project to teach Elizabeth Warren a lesson in good reserach practices or something. Part the first claims that observed low savings rates are, contra Warren et al., nothing to worry about:

But Warren, like many commentators, implies that this is because families are too strapped to save. In fact, it's because of the two successive bubbles in the stock and housing markets. Families responded to the run up in their net worth by saving less.

Now, you could argue that this was foolish, and I in fact agree with you... The asset model is a standard explanation that pretty much any economist in the country could give you... Even if you think this explanation is wrong, I think you need to explain why your model is a better fit.

I'm a little surprised that she even admitted that the behavior was "foolish." She might have pulled out this [pdf] paper (*) from the JPE which claims to predict optimal wealth targets and concludes most of us are doing quite well, if anything tending to oversave. (If you believe that, then please allow me to sell you this optimally structured debt-backed security!)

The gut-check on the notion that we're saving superoptimally, as I see it, is this: what middle-aged person among us wakes up, slaps self on the forehead, and exclaims, "Dang, if only I drank another beer back in college, I could have $10 less in my savings today!"

In fact, a CBO study McArdle links in the post already has some mixed news for her in the details. Even the studies that are generally sanguine about retirement savings adequacy find that savings inadequacy is not independent of class considerations. Shockingly, factors including lower income and lower education have systematic relationships with savings inadequacy. Savings inadequacy tends towards the norm for the lower-middle class and below.

The story that savings rates have rationally declined in response to asset price growth also begs some features of the savings rate data. Specifically, the story ought to be reversible: if everyone was happily booking their home equity inflation in lieu of savings and not overly stressed, financially, then the lower returns on the household portfolios ought to spark a round of catch-up savings. Look at the recent history of the NIPA savings rate, though:

The savings rate collapses to zero, and basically has stayed there, even as the collapse of the RE bubble has been vigorously marking down the value of the middle-class family's biggest asset. For that matter, the savings rate is no higher in 2002 (after the gyrations of the last recession and late-2001), with the stock market busted and the real estate bubble well under way but a fair amount of kool-aid not yet drunk than it was in early 2000 (and 1999, not shown) when housing and the stock market should have both contributed positively to household balance sheets.

So with the housing market now long past peak, and the stock market lackluster, where's the pop in savings? Either people rationally want to be poorer in the future (doubtful!) or they ain't got the money.

Other affiliated observations, like the substitution of credit cards for decreasingly available home-equity loans and increasing credit card delinquency, don't help McArdle's case. The sociologists — they study class for a living, the the wacko elitist liberals (**) — have plenty to say on the subject, and that picture isn't pretty either.

This points to our next installment: are our debt loads really so bad? Stay tuned!

(*) John Karl Scholz, Ananth Seshadri and Surachai Khitatrakun, "Are Americans Saving 'Optimally' for Retirement?" Journal of Political Economy, 114(4), August 2006, 607-643.

(**) Kidding about the wacko elitist part.

BTW, my dismissal of models that purport to compare observed savings behavior with results from intertemporally optimal behavior isn't just that I think the results are obviously at variance with reality. I have a theory for why they're wrong (and, in a way, a "neoclassical" theory of why paternalistic policy interventions of the sort coming out of the behavioral economics programs can work). The gut check bit isn't entirely an attempted joke: as I like to think of it, our future selves can't freely "contract" with our current selves not to do things that we'll regret ex post. What would you expect our current selves, other than maybe to the extent we try to be H. economicus, to do with that "market power"? The unwary rationalist could confuse the results with a high rate of time preference. So we might be made better off by mechanisms that effectively force us to take the longer view now.

Lean Left: NHL Conference Finals

Thu, 08 May 2008 18:55:08 +0000

I got the conference semis all right (Kevin can’t say the same), even if I missed the number of games. Time to put my good streak on the line with the conference finals.

Flyers vs. Penguins: This is a tough series to call, because brawn usually beats finesse in the playoffs, but I think Pittsburgh (the finesse team) is a much better team than Philadelphia. So I’m going with Penguins in 7

Stars vs. Red Wings: It’s always hard to pick these, especially when I despise both teams involved. The Red Wings are looking like the team to beat this year, and with two quality netminders, I don’t think the Stars have quite enough to take them, even though Turco’s playing about as well as he ever has in net for Dallas. Red Wings in 6

P.S. Sorry, Ang. Being a Sharks fan has to be a tough life!

Lean Left: Hillary’s Grand Exit

Thu, 08 May 2008 18:52:22 +0000

Josh Marshall offers a standard on-the-one-hand, on-the-other analysis of the question whether Hillary would or should accept an offer of the VP slot on the Democratic ticket: she’d have to wait 8 long years, and be 69 years old, before she could run for Pres. again, and she may have more influence in the Senate; but it would be an unprecedented achievement and a chance to be right at the center of power once more. He concludes she’d be better off in the Senate, where the Democrats are likely to be the majority and she’ll accrue enough seniority to really get things done.

Most people who accept the vice presidency do so either because they believe it will line them up to succeed to the presidency or because it brings them to a level of power and honor their careers held little prospect of bringing them otherwise. But neither applies to Hillary Clinton. She’s already of the stature and standing to run for president. She’s a genuinely historic figure. And she’s already been heavily involved in a successful two term administration.

Remember too that the recent trend for greater vice presidential involvement in key administration decision-making has brought with it a flat requirement that vice presidents be strictly loyal and politically subservient to the president. Quite simply, the vice presidency is beneath Hillary’s stature. It’s not clear to me why Hillary would want to spend four or eight years in a position that I think would actually diminish her stature for the possibility of running for president again almost a decade from now.

As it goes, it’s not an unreasonable analysis. And, as he notes, there is a serious question whether Obama can overcome the bitterness of the campaign to trust her as VP, or even see her as the best choice. But I think there is a way to swing the deal that would work tremendous benefits for both of them and the country.

In a purely selfless act of patriotism, then, I give you The Dream Team Playbook:

Obama offers Hillary the VP slot; Hillary congratulates him on a long and successful campaign, then announces she is resigning her campaign immediately and throwing in with Obama.
Both candidates gracefully agree that the apparent sexist and racist elbow-jabbing during the campaign was just an illusion - the product of hard campaigning and honest discussions during a race that inevitably had racial and gender overtones just because of who they are.
Both candidates publicly express their respect for each other and strongly urge their supporters to adopt the other candidate as part of the ticket; both call on all their supporters not to abandon the cause because the disfavored candidate is on board, but to adopt their candidate’s own respect and affection for the other and work even harder for the Dream Team.
Obama privately pledges not to humiliate Hillary and to credit her for substantive contributions on the campaign trail and in office; Hillary privately pledges not to undermine Obama and not to imply there is a “co-presidency”. Both of them believe these pledges because they are both, at bottom, decent people, and in particular Hillary has a long history of working effectively in subsidiary roles.
Hillary whips Bill into shape, and delivers his agreement to (a) stump hard for the Obama/Hillary ticket, (b) not put his wife forward in contrast to Obama, (c) not put himself forward in contrast to anybody, and (d) remain in touch as the Democratic eminence grise without always hanging around the White House attracting attention.
Hillary stumps like a fiend for Obama’s platform, making sure that its content and vision are always identified as the ones Obama has been pushing from the beginning. She explicitly adopts the “vision for change” mantra and casts her policy discussions - which are her strength - in the rhetoric of change.
Obama grants Hillary primary responsibility - not just in the campaign but in the White House - for several major policy initiatives that she particularly values; she endorses his plans and leadership in all other areas. Specifically, Obama publicly adopts Hillary’s healthcare plan a month or so after she becomes the VP candidate, saying that after close discussion with her he sees that it is better in some ways than his and he respects her career-long leadership in that area. He also puts her in charge of military rebuilding and training - but not combat operations - after the Iraq fiasco is resolved. And he upgrades her VP role from merely attending foreign ceremonies to substantive engagement in foreign policy, maybe negotiating with leaders or leading regional initiatives. He makes sure it is known she is in charge of these areas, with his approval, and she makes it known she supports his leadership in those and all other areas. [This has several advantages: it gets Obama gracefully out from under his own flawed healthcare plan; it leverages Hillary’s expertise and experience in areas - healthcare and military planning - where she is well respected and he is not; it creates “zones of influence” that allow Obama to be in overall charge while Hillary also gets recognition for her own leadership, preparatory to 2016.]
In 2012, Hillary becomes Obama’s #1 fan; the campaign platform is all Obama, all the time, and everything the administration has achieved is credited to him. She just can’t believe how much better a President he has been than anybody even imagined in 2008.
In 2016, Obama becomes Hillary’s #2 fan (I assume Bill’s still in the picture). She designs her own campaign platform, but Obama supports it unquestioningly, and specifically credits her with the post-Iraq military overhaul, the new national healthcare plan that everybody loves so much, and some foreign-policy initiatives - making it clear that he had delegated authority on those issues and she is the one who brought them all home. Hillary sails to victory in 2016 with two ex-presidents by her side, both extolling her experience and wisdom.

The point to the plan is that neither is humiliated or undermined by the other. The reason that’s a concern - aside from bad feelings resulting from the campaign - is that you have two strong candidates, either of whom could be President, locked in a race one will eventually lose, almost certainly, by less than 2%. But that is the reason they’re the Dream Team: not only could either of them be president, but both of them will have come within 2% of doing so. In the general election, that’s a recipe for a crippled administration, but in the primaries, with the candidates combining forces, that’s unbeatable. And it only gets better as they continue to leverage their relative strengths in office. The only issue is that Obama has got to keep from looking like he’s being overshadowed, which means Hillary has got to play a somewhat subtle game to keep from doing that and also make her own mark. And unfortunately, both of them can be quick to take a slight, and Hillary is not known for lack of ambition. But they can pull it off with effective communication; as I noted above also, Hillary has done it before.

So there you have it, purely in the spirit of the public good. Of course, if the Dream Team wishes to hire me as policy analyst or White House advisor, I could probably make time in my schedule.

Angry Bear: Oil Price Controls

Thu, 08 May 2008 18:29:37 +0000

All the discussion about a holiday from the federal tax on gasoline this summer has brought all kinds of comments out of the woodwork about how government interference in markets, and especially the 1970s oil price controls and windfall profit tax prevented private companies from investing. Such comments seem to start out with some sort of comment about how politicians are stupid and do not know what they are doing. What I find especially amusing about these comments is that they almost always seems to come from the same people who carry on about how large corporations capture the various regulatory authorities and use their influence in Congress to stifle competition. They seem to want it both ways. But in the case of oil the point that the oil companies capture the system and get Washington to further their interest appears to be more the case. For example, if you look at drilling and exploration by the oil companies it clearly seems to be largely a function of current and lagged oil prices -- see chart. This strongly implies that the oil companies and Congress acted in concert to prevent the price controls and windfall profits taxes in the 1970s from influencing oil exploration and production. Actually, the one important point this model makes is that the oil companies do not seem to be drilling as much now as the historic relationship suggest they should. Maybe the complaint that the oil companies executives have decided that there is not much future in the oil business and are returning their profits to shareholders in the form of high dividends so that the shareholders

can find more attractive investment alternatives has a certain validity.

Angry Bear: BW on Soc Sec III: The Numbers of Intermediate Cost

Thu, 08 May 2008 17:55:48 +0000

For today let's have less meta and more data.

The key economic and demographic tables are V.A1 'Principal Demographic Assumptions', V.B1 'Principal Economic Assumptions' and V.B2 'Additional Economic Factors' all of which are available in the 2008 Social Security Report's List of Tables as are the tables showing numeric outcomes in both inflation adjusted Constant dollars in VI.F7 and unadjusted Current dollars in VI.F8. In each case you get projected numbers for each of the next ten years and then for each five year interval to 2085 for each of the three models Low Cost, Intermediate Cost, and High Cost. In each case the models settle out to a steady state 'Ultimate' number in about 2014 and stay more or less steady through the rest of the 75 year window.

So we are faced with two different questions. First of all nobody has a crystal ball, economists are disputing what is happening this quarter, in fact there is not consensus on what happened last quarter, the idea that we can pin down Real GDP and Real Wages for any particular future year is in some respects nonsense. But what we can do is come to some sort of conclusion about where the economy is likely to go over the next ten years and what the long term potential will be. So question one is 'How likely are we to end up in 2012 with the numbers we see?' and two 'What is America's fundamental bottom line going forward?' Or more polemically 'Is America's future bleaker than its past, or are the best days yet to come?'

So I would urge everyone interested in this topic to add the List of Tables to your Favorites or Bookmarks and visit the numbers early and often. As a teaser lets take some selected numbers for 2008, 2012, and 2016 from the standard Intermediate Cost alternative.

Productivity 1.9%, 1.8%, 1.7%

Real Wage Differential 1.3%, 1.2%, 1.0%

Real GDP 2.3%, 2.5%, 2.3%. Note here that they are figuring in some period of slow growth near term. If we took the series 2009, 2013, 2017 we see 2.8%, 2.5%, 2.3%

Unemployment 4.8%, 5.3%, 5.4%

This pattern has been seen in Intermediate cost for a decade, the official projection is that across the board over what can only be seen as the short term that the median outcome is a pretty sharp decline, and more importantly a permanent one, the future will never be better than 2006. No one I think would claim these outcomes are not possible, but are they really the median? As a bonus question, if they do represent a median under status quo economic policy, what could we do to boost them towards Low Cost? Over to you.

Angry Bear: Not sure what the cartoon is about...

Thu, 08 May 2008 15:14:01 +0000

Is this about devaluation and inflation of the US dollar? Or is it about gas prices and robbers? Or just commodities as the new medium of exchange (slosh is the technical term I believe) of value?

As if life is not hard enough to interpret.

Update: Just a little bit of rhetorical fluff on my part.

Angry Bear: Two Things Someone Else Needs to Discuss

Thu, 08 May 2008 14:14:07 +0000

Since I'm trying to cut a 24-page paper down closer to 15 today, I'll leave the Heavy Lifting to other. But two things probably should be discussed (or at least noted) here:

Brad DeLong appears (to me) to confuse perceiving a move from Democratic Republic to Empire—and therefore away from any Competitive Advantage for the past 100-ish years—with conspiracy theory. But I may just be reacting to his headline.
Tim Duy (at Mark Thoma's place) refuses to jump into the briar patch:

Increasingly, society views the purchase of a home as primarily an investment, not for the service it provides (don’t even get me started on this topic).

Someone needs to get him started. Or continue from Tom's previous AB post.

Angry Bear: Baghdad cleansing?

Thu, 08 May 2008 12:17:22 +0000

The BBC reports:

Baghdad - The authorities in Baghdad say they are preparing for an exodus of thousands of people from eastern parts of the city.

Fighting between government and US troops on one side, and Shia militia on the other, has intensified recently.

Two football stadiums are on stand-by to receive residents from two neighbourhoods in the Sadr City area.

The government has warned of an imminent push to clear the areas of members of the Mehdi Army, loyal to the anti-American cleric, Moqtada Sadr.

In the last seven weeks around 1,000 people have died, and more than 2,500 others have been injured, most of them civilians.

The fighting so far in Sadr City has been fierce - street to street, and house to house.

Iraqi Prime Minister Nouri Maliki is showing a determination to disarm the country's Shia militia groups - particularly the Mehdi Army - that he has never displayed before.

However, Iraqi army operations, backed by US ground and air support, have so far failed to overwhelm the Shia militiamen, who are still responding with roadside bombs, sniper fire, mortars and rockets.

The government has distributed leaflets in two key districts of Sadr City, warning people to leave.

The speculation is that government forces are preparing for a big push into eastern Baghdad to end the current fighting once and for all.

Shortages of water and medical supplies have already made life inside Sadr City extremely difficult.

The urban renewal program might have a second phase starting with this push.

Angry Bear: Colbert for President: Free Gas

Thu, 08 May 2008 09:12:52 +0000

Who knew? Greg Mankiw is also a Stephen Colbert fan. Colbert makes his case for free gas. If he runs for President – will he select Greg as his economic advisor? This is definitely worth the look as it is a hoot.

Angry Bear: Price Discovery (First of a Series)

Wed, 07 May 2008 20:27:03 +0000

I want to talk about something of which I know nothing: Wireless Internet Access.

We spent the weekend in pgl-land (NYC), at a friend's apartment. Since he's a rather prominent computer graphics designer, I assumed, incorrectly, that he would have some form of Internet access at home.*

So I did what I always do: opened the laptop and searched for an available wireless access point.

At no time were there less than 15 indicated. And while most of these were "Security-Enabled," I get the impression that either (1) that has become the default setting for service in the past few years or (2) enough people have been persuaded by the FUD campaigns of MSFT and others that they read that part of the instruction manual.**

I had kids to distract, so access to barbie.com or dailynoggin was important. That is, I would have been willing to pay a few dollars for a weekend's worth of access, or some equivalent thereof. If there were a market available.

And, probably, at least a few of those 15 or so router-owners—badger or linksys or 5AMews—would have been willing to make a few dollars providing some of their excess capacity to my 54.0Mbps laptop. If there were a market available.

But there wasn't.

Or, more likely, there was, but the effort wasn't worth it. One of the key aspects of economic analysis is the assumption that markets (1) clear [both buyer and seller voluntarily agree on a price] and (2) are efficient [everyone involved in the market has all the information they need to make a rational decision on what the clearing price is/will be].

In the real world, investment banks spend millions of dollars to attain that "efficiency."*** Nor is anyone of the illusion that the terms of all transactions are completely voluntary on both sides. But those are variations on the model, and the markets created from or supported by them, while not an economic ideal, can be analyzed as variations.

What happens when there just is not a market?

In the case here, I have no way of knowing who the local providers are or, more importantly, where they are. Badger could be my next-door neighbor, or two floors away and at the other end of the building. So I would have to spend time

knocking on doors, interrupting people (including some who have no capability themselves; there are many more than 15 apartments in the building),
having discussions with some people who might have non-economic reasons not to agree to permit me access (including FUD),
(c) finding people who really do use all of their capacity,****
finding people who could provide access but with whom I cannot agree on a clearing price, and
either
1. finally, finding someone with whom I can come to a market agreement or
2. giving up and depending either on unguarded WAPs or finding an alternative.

In all scenarios, even 5(2), I have spent some portion of time, possibly significant, that must be included in the Full Cost of the Search.

Which is probably why there is not an active secondary market in Wireless Internet Access in the United States.

The consequences of this specific example are left as an exercise. The consequences of the problems with Price Discovery are To Be Continued.

UPDATE: Felix Salmon wonders about the need for price discovery in commercial WiFi:

If I'm looking for a wi-fi network, it's easy to see which ones are encrypted and which are open. But of the open networks, it's impossible to see which ones are genuinely open and which ones will take you only to a sign-on page which asks for a credit card number and which often doesn't work....A network which purports to offer free wi-fi should do just that: firewalled wi-fi should look different somehow.

*No DVD player, VCR, or television, either; not a keeping-the-kids-busy-without-touching-things place.

**I am convinced that it's not out of actual knowledge because several of the "secure" networks were still named linksys, Apple Network ######, or similar. It may not be true, but it is the way to bet.

***As cactus noted, the EMH is of dubious value if there is a significant disconnect between the alignments of the financial markets and those of "main street." But let's pretend it works for the normal "markets" model.

****Highly unlikely, for reasons to be discussed in another post.

Angry Bear: FuzzCharts: Is the US Now Just a Service Economy?

Wed, 07 May 2008 20:06:15 +0000

Jerry Bowyer mocks the recessionistas:

Monday’s data from the Institute for Supply Management is our first real glimpse at the second quarter of 2008 — you know, the one we’re in now. The above chart shows that the service sector — which is by far a better guide to the ebbs and flows of our economy than the manufacturing one — bottomed in January and has been recovering steadily ever since. It is now at an expansionary 52 percent. (Anything above 50 is positive growth territory.) When you hear a recessionista say, “Yes, we grew in the first quarter, but since then . . . blah, blah, blah,” show them this ISM report. The service sector has only gotten stronger since the first quarter ended. The recession that never was seems to be over.

I’m not sure I qualify as a recessionistas and quite frankly I’m not sure anyone does. But I certainly have not been saying we were about to head for a recession for all of the past five years. But it is true that the service sector enjoyed an increase in employment equal to 90 thousand last month according to this source. But then the manufacturing sector suffered an employment reduction equal to 110 thousand. But hey – why work in a factory jump if you can flip hamburgers for Burger King?

Look, I realize that the National Review staff thinks that its readers are really stupid. But c’mon, the garbage put out by Mr. Bowyer is so dumb that it has to been insulting to the dumbest of their readers.

Angry Bear: A Quick One: Inflationary Credit Recession Strategies

Wed, 07 May 2008 17:33:51 +0000

Tom's doing some heavy lifting, PGL is in form, Bruce has started SocSec 101, and the entire economics blogsphere is having so many conniptions over Hillary that you'd think the CEA was actually the Shadow Government.

So I just want start easy, and take a look at three easy-to-compare data points:

First, the Federal Funds target rate since 2007 (I include the last change in 2006 since it was the rate for the first 8.5 months of 2007):

If you make money easier to get, standard theory says that people will get it. While this raises the "threat" of inflation, it makes credit easier to get as well. So the theory goes.

Steven J. Balassi (h/t Aaron Schiff for bringing his blog to my attention) notes that this isn't happening. Pull quote:

Friends in the mortgage industry are telling me you have to be "rich" just to get a home loan now.

Even granting I have a vested interest right now in peole being able to get mortgages, this is keeping the market from clearing and expanding the housing crisis. Again, contrary to the theory that easier money means, well, easier to get money.

So we have easier money and tighter credit. The implication is that the banks are keeping that money, no circulating it. No wonder they want to be paid interest on reserve requirements.*

But what about the inflation fears of easier money? Surely, if the money is not circulating, that shouldn't be a fear?

Not so fast, says Kansas City Fed President Thomas Hoenig (h/t Mark Thoma):

Hoenig said rising inflationary pressures are "troublesome" and a "serious" matter. "The bigger concern is that these increases are beginning to generate an inflation psychology to an extent that I have not seen since the 1970s and early 1980s," he said. Hoenig added that "there is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it." He tied rising prices primarily to overseas factors, including a "sizable decline" in the U.S. dollar’s value.

Welcome to the Global Economy. But Hoenig is sanguine about the Fed Funds rate, even if he is willing to use the R word:

Hoenig’s views on the economy were relatively upbeat, even as he described the nation as being "at the brink of a recession." He suggested interest rates were close to where they needed to be.

"The current accommodative stance should be sufficient to cushion the economy

from a deeper slowdown and the risks that financial disruptions could spill over to the broader economy," he said. As the economy and markets improve "it will be necessary for the Federal Reserve to remove the policy accommodation in a timely manner."

Citing "room for optimism," Hoenig said "financial markets appear to have stabilized somewhat, and the economy should pick up in the second half of the year as fiscal and monetary stimulus take hold." The official said he believe markets’ role in the current turmoil has been overstated, and that higher energy prices and housing woes have exacted the greater toll. He also said he believes the "credit crunch" hasn’t proved as damaging as some had feared.

So there we have it. We have inflation, but cutting rates was the right thing. And the credit crunch isn't too bad, even if only the rich can buy a house. And that 325 basis points of easing in the past eight months just hasn't gotten into the economy yet; give the banks another six months or so.

I feel better; how about you?

*Meanwhile, I am reliably informed that Bank of America just cut the rates on their (currently in place) contracts with consultants by 5-15%, depending on length of service (greater for longer).

Angry Bear: Palley on Tax Preferences for Homeownership and the Bubble

Wed, 07 May 2008 15:55:08 +0000

Mark Thoma points to Thomas Palley playing lightning rod with "Tax Policy and the House Price Bubble." With a title like that, you might expect a prima facie case for a causal link between tax preferences for homeownership and the bubble, but Palley's lede is deeply buried and there turns out not to be a lot of there there. The central issue is that there's no obvious variation in tax policy that is associated with the bubble. More after the jump.

Plenty of Sensible Economists have sniped at the mortgage interest deduction among other favorable tax treatments for homeownership. Reforming, though not eliminating, the mortgage interest deduction also was a recommendation of the Tax Reform Panel whose report was broadly ignored after its 2005 publication gave some of us in the econoblogiverse plenty of material (for anyone interested, my contemporary blogging on the subject is linked here). Palley recites the traditional indictment: the tax policies are expensive (*), pay the middle- to upper-middle classes to do something they'd do anyway (**), are unfair to low-income taxpayers who don't itemize or otherwise get a smaller deduction (***), and by increasing house prices work somewhat at cross purposes to the notional intent of making housing more affordable. Fair enough.

Thing is, as far as the housing bubble is concerned, none of this is new. The deduction was distorting the housing market well into pre-bubble history. Indeed, the reductions in marginal tax rates affecting most middle- and upper-income taxpayers ought, in principle, to have reduced the distortion on the margin. Here, for instance, is the CPI-adjusted OFHEO house price index against the marginal tax rate applicable to a family with a constant-dollar income somewhat north of mine (****):

Correlation is not causality, of course, but the simple correlation here is negative (-0.55). Moreover, there isn't any clear connection between the major changes in tax policy over the period and bubbly prices, unless someone can account for the rather variable lag structures. The 1986 tax reform eliminated the deductibility of non-mortgage interest, which in particular made home-equity credit relatively attractive; in 1997, the capital-gains treatment for owner-occupied housing changed. In both cases, at least using the CPI adjustment, prices had started recovering from their local troughs before enactment of the changes.

The '97 change — which replaced a tax deferral for homeownership capital gains rolled into another residence with a flat exemption of $250,000 for an individual (twice that for joint filers) — is tricky. It does favor owner-occupied housing as an asset class by making something of a Roth IRA out of one's house. However, the benefits relative to previous law only assert themselves upon exit of the owner-occupied housing market, and the complete tax deferral of rolled-over equity may have been worth more in the short run to movers up or down in areas with high nominal appreciation. Also, this was enacted against the backdrop of a right-of-center program to reduce taxation of capital income; I tend to the view that there's not a lot of distortion between a zero capital gains tax rate and the low rates that currently prevail for other long-term gains.

So Palley is left with a rather tenuous assertion connecting the bubble and tax policy:

The tax system has helped create a cult of home ownership, and that cult appears to have been an ingredient in the recent house price bubble.

I don't think the tax preferences exactly hurt the cult's marketing, but let's face facts: to explain the bubble, it's necessary to find factors associated more-or-less with the bubble era, and from that perspective it should be amply clear that the irrational exuberance came roaring out of the financial world. The cult part was all the spinning of tales for why houses were just like stocks in the late-90s except for the crashing back to earth part, combined with the deployment of financial technologies which, while not necessarily dangerous per se (*****), certainly bore risks of unintended consequences that were broadly ignored. So now we have a socialized financial system (at least on the downside), woohoo!

Meanwhile, I'm skeptical to say the very least regarding claims that we'd be living in a paradise of economic dynamism if only we were all unencumbered by our illiquid and inconvenient owned housing. Long-term wage stagnation is a huge problem, but one that can't fairly be placed at homeownership above other causes.

So Palley has some reasonably sensible reform plans that someone might phase in, but I'm not going to tell anyone that a bit of political capital ought to be spent on them that might otherwise be spent extracting us from George and Dick's Excellent Adventure or breaking our addictions to oil and/or GHG emissions — both of which are far more difficult and urgent.

(*) $80 billion is a lot of money, but at ~3% of the federal budget, not the biggest boondoggle in annual expenditures.

(**) Distastefully inefficient to the extent it's true.

(***) Also true in large part, though non-itemizers do have the standard deduction.

(****) This is based on a constant-dollar income putting a 2007 taxpayer in the 28-percent bracket, not adjusted for other tax-law changes. Historical tax rates via the Urban Institute/Brookings Tax Policy Center.

(*****) If you think there's something magical about 20%-down financing, go read the Irvine Housing Blog's archives, handy link in the sidebar!

Angry Bear: BW on Soc Sec II: The Shape of Low Cost

Wed, 07 May 2008 15:51:47 +0000

This figure shows in graphic form the outcomes of Intermediate Cost (II) vs High Cost (III) vs Low Cost (I)

Outcome II shows the standard narrative. A Trust Fund Ratio rising to a peak in 2017 then a more or less rapid falloff to zero as the first the interest is tapped and then the principal is redeemed with the result of total Trust Fund Depletion in 2041.

Outcome III or High Cost shows the same process only accelerated.

But Outcome I or Low Cost shows a much different picture. The Trust Fund ratio peaks at about 450 about 2020 then dips to 390 by around 2040 as a portion of the interest is tapped but after a period of plateau sharply increases through the remainder of the 75 year actuarial window. This is quite literally the picture of a potentially overfunded Social Security system. Is a Low Cost outcome guaranteed? Well no. Is it possible? Certainly the numbers are not at all outlandish and perfectly in line with economic performance over the last fifteen years.

Can we at least talk about the implications of this?

Well I just copied this over from the Bruce Web in response to a comment from Jim A on the previous post. Some explanation of terminology is in order here. First the three curves represent the three different alternatives supplied by the Trustees. The only one generally reported in outcome II or Intermediate Cost, with the other two (High Cost and Low Cost) supposedly representing the outward bounds. In point of fact for the years 1997 to 2004 the deviation from Intermediate Cost was always in the direction of Low Cost and often exceeded its numbers.

Social Security solvency is measured in two ways. One is by payroll gap which is to say the amount that the payroll tax would have to be raised immediately or contrawise at Trust Fund Depletion to fully fund the current schedule of benefits. Per the 2008 Report those figures are 1.7% and 3.54% respectively, numbers that have trended down significantly since the 1997 Report. The second measure is Trust Fund Ratio which is to say Trust Fund assets measured as a function of time with 1 year = 100. Under current law (or perhaps simply practice) Actuarial Balance is defined as having a Trust Fund Ratio of 100 for each of the next 10 years (Short Term Actuarial Balance) or the next 75 years (Long Term Actuarial Balance). In 2003 a new measure was added which would have us evaluate actuarial balance over the 'Infinite Future Horizon'. This was in my opinion a simple gimmick to allow opponents of Social Security to use really scary numbers rather than focus on the traditional and reasonable 75 year planning window, a window that pretty much covers the interests of most peoples children and grandchildren.

Now in examining the graph we can see Low Cost (outcome I) we see a sharp acceleration of the TF Ratio after 2060 with it exiting the 75 year window at 650. This is dangerously high, that is if we consider the Trust Fund and more significantly the interest it earns as being a real asset. And we should because otherwise we would be arguing for what pgl calls a backdoor employment tax that called on one sub-set of Americans to subsidize General Fund spending. And theoretically there is an argument to be had there but it sure puts 'paid' to the 'poor people don't pay taxes' narrative the Right is so fond of. But in point of fact flattening the tail down to where the Trust Fund is at its nominal target of 100 is difficult, the only way of doing that is to starve the beast by cutting payroll tax rates and using General Fund dollars now rather than later to pay down the Trust Fund. Because the longer you wait the higher the proportion of Cost has to be born by the General Fund as opposed to FICA to keep interest on interest from bloating the TF. This is incidentally why cutting benefits or increasing revenues by such measures as raising the cap are counterproductive, they simply increase the amount of accrued interest without actually benefitting anyone today.

Of course this whole discussion is moot if we actually get outcome II or Intermediate Cost. Our choice of policy going forward is entirely dependent on whether future outcomes are closer to II or I which in turn requires an examination of the assumptions underlying Intermediate Cost and Low Cost in light of the fact that most of the bias over the last 12 years has been strongly to the upside. Yet all of the policy discussion to date simply clings to Intermediate Cost assumptions and considers the problem to be one of deficit in 2041 when it is not clear that is at all the most likely outcome.

Next post or so we'll stick in some actual projected growth numbers. In the meanwhile you can ponder the implications of a $117 trillion Trust Fund in 2085 (Low Cost projection) Table VI.F8.—Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2008-85 [In billions]

Angry Bear: Worker Productivity Up: Good or Bad News

Wed, 07 May 2008 15:22:27 +0000

Martin Crutsinger reports – and opines:

The Labor Department reported Wednesday that productivity, the amount of output per hour of work, increased at an annual rate of 2.2 percent in the first quarter. That was slightly higher than the 1.5 percent increase which had been expected. In a sign that inflation could be easing, labor cost pressures slowed a bit. Unit labor costs rose at an annual rate of 2.2 percent, down from a 2.8 percent rise in the final three months of last year. While rising wages and benefits are good for employees, those increases can lead to higher inflation if businesses are forced to boost the cost of their products to cover the higher payroll costs. However, if productivity is increasing it allows businesses to finance higher wages out of the increased output.

He is assuming that the higher productivity is attributable to strong real GDP growth but real GDP growth has been quite weak for the past two quarters. Could it be that the ratio of output to labor hours rose because fewer people have jobs? Perhaps as his report later notes:

Private economists believe the weakening economy will dampen inflation pressures. However, the sharp economic slowdown is occurring at the same time that energy and food prices have continued to rise. Many analysts think that the country has already toppled into a recession. But overall economic growth, as measured by the gross domestic product, eked out a tiny 0.6 percent rate of increase in the first three months of the year, the same anemic pace as the final three months of last year. The rise in productivity in the first three months of the year occurred as the number of hours worked declined at an annual rate of 1.8 percent.

Let me also object to his concern that nominal wages were rising too quickly. If nominal wages fail to keep pace with rising consumer prices, we see reduced real wages. As our graph of the real wage for nonsupervisory workers show, real wages for some have not increased that much over the past five years.

Angry Bear: Fuel Price Hedging for Cars

Wed, 07 May 2008 14:59:42 +0000

Chrysler LLC has stood out among the Detroit Three in being able to sell neither its trucks nor its cars in the slumping auto market. Cue the latest in marketing innovations! Via AutoWeek, Chrysler's latest sales promo offers buyers three years of (currently) subvented gas (at $2.99 for regular, $3.29 for premium). The deal's revenue-leakage-limiting limitations make this something on the order of $1,000 on the hood at today's gas prices. That's not an earthshaking amount by the standards of Domestic Three incentives, though it does go to show that if you're not constrained by the public good, or not doing stupid things like subsidizing gas for everyone, and have some tolerance for going broke, you can do more than a few pennies a gallon.

Were this another blog, I might call this a Markets in More Things story, since it effectively extends to the consumer market hedging techniques that large fuel users such as airlines have deployed for years. For instance, the NYT notes this morning that Southwest managed to arrange for 70 percent of its 2008 fuel bill at $51/barrel. (Are the counterparties on suicide watch?) Here, Chrysler is acting as a fleet buyer for its customers, working with a startup that has a bunch of business-method patent applications pending on a system of at-the-pump fixed pricing for fleets.

Even the diminished Chrysler's monthly sales would make for a pretty big fleet, so I'm curious as to how the risk is divided up here, and for that matter to what extent Chrysler is hedged. Until the Energy Independence and Security Act of 2007 raised future fuel economy standards, the Domestic Three's product planning looked like they thought high oil prices were a fad, so who knows. I probably wouldn't want to bet against Cerberus's recent anti-Midas touch, though.

Angry Bear: Green Zone development project

Wed, 07 May 2008 14:50:31 +0000

The Boston Herald reports:

BAGHDAD - Forget rocket attacks, concrete blast walls and no sewer system and try picturing luxury hotels, a shopping center and even condos in the heart of Baghdad.

It’s all part of an ambitious five-year development “dream list” to transform the U.S.-protected Green Zone from a walled fortress into a gleaming centerpiece for Baghdad’s future.

The $5 billion plan has Pentagon backing and apparently the interest of leading hotel developers, said Navy Capt. Thomas Karnowski, who led the team that created the development plan.

Washington wants to create a “zone of influence” around the new $700 million U.S. Embassy to serve as a high-end buffer for the compound, whose total price tag will reach about $1 billion after all the workers and offices are relocated over the next year.

“When you have $1 billion hanging out there and 1,000 employees lying around, you kind of want to know who your neighbors are. You want to influence what happens in your neighborhood over time,” said Karnowski.

Karnowski said a deal was already completed for Marriott International Inc. to build a hotel in the Green Zone.

He also said a possible $1 billion investment could come from MBI International, a conglomerate that....

Well, there you go. Are they planning on a drawing down of US troops?

Angry Bear: Remembering what we worship

Wed, 07 May 2008 14:31:07 +0000

The church currently leases space in the steeple for the antennas of two wireless phone companies, AT&T and T-Mobile. The rent from these leases currently provides almost $70,000 of annual income to the church. Up until last year, the church leased space to three wireless companies. Because of industry consolidation, we lost one of these leases and the rent that it provided in June 2007.

We have been approached over the past several years by firms interested in purchasing our remaining two cell leases. These inquiries have been getting more and more attractive and the Board decided to fully investigate the possibility of selling our remaining two cell leases. We decided to hire an independent consultant to review the current proposals and to assist us in determining whether selling the two leases would be in the best long term interest of the Church. That consultant has completed his report and has concluded that it is financially beneficial to accept one of these offers at this time. Their report indicates that our offers are at the very top of the range for similar cell lease buyouts, and that market valuations are currently at a peak.

We will be taking this to the Congregational Meeting on May 18 for a presentation and vote, but our thorough analysis has revealed that there are several compelling reasons for selling our cell leases at this time, including: (1) obtaining a substantial sum of money ($$$,000) that can be used to significantly increase our endowment. This will enhance the financial stewardship of the church well into the future, and it will also have the added benefit of substantially increasing the annual distribution that the church receives each year from the trust, thereby helping to support our growth; and (2) eliminating the risk of losing one or both of our remaining cell leases and the significant negative impact this would have on our operating budget since each lease currently provides $35,000, approximately 10% of our annual budget. We already lost one of the original three leases due to industry consolidation, resulting in a loss of annual income of approximately $32,000 this year, and the remaining two have a right to terminate at any time with 90 days notice.

I received the following note today, and it reminded me of cactus's thoughts on the tax free status of churches, charitable deductions, and how money is used to qualify for 'tax free' status of one kind or another. Sammy also challenged who gave more, conservatives or liberals, based on income and percentage claimed.

He used basketball courts as an example, but I also thought of Hagee, Wright, and others in the spotlight. It was also a couple weeks ago that about 30 teens and chaperons from this church went to New Orleans to help re-build a church and a house in the ninth ward of New Orleans, now a twice a year event.

It is worth exploring again the rules of what is worth worshipping, and how. Each kind of giving has its own worth, but how does one measure worth without the use of money on a blog like this?

Angry Bear: Newt Gingrich’s Nine Point Plan

Wed, 07 May 2008 09:55:03 +0000

Newt has a nine-point plan for “real change” leading with:

Repeal the gas tax for the summer, and pay for the repeal by cutting domestic discretionary spending so that the transportation infrastructure trust fund would not be hurt.

Ok – stop laughing at this one as Daniel Larison has so much more:

Newt Gingrich is back to haunt us again, this time offering up nine panderific ideas that reek of the desperation of a party with no ideas–and he’s supposed to be one of the idea men of this gang! My favourite has to be this one:

Introduce a “more energy at lower cost with less environmental damage and greater national security bill” as a replacement for the Warner-Lieberman “tax and trade” bill…

This will also be known as the No Trade-Offs/Free Lunch Act of 2008. Gingrich forgot to mention introducing the bill to protect endangered unicorns. Gingrich supplements this with such proposals as, I kid you not, an earmark moratorium (take on those tough issues, Newt!), a gas tax holiday that will allegedly be paid for by “cutting domestic discretionary spending,” using the Strategic Petroleum Reserve to manipulate oil prices (very slightly), tackling all of the outrageous waste at the Census Bureau (?), and, naturally, banging the drum about the judiciary.

Angry Bear: Gasoline Tax: Robert Menendez Must Not Read This Blog

Wed, 07 May 2008 09:33:38 +0000

David Kurtz catches this remark from Senator Menendez:

Thank God that we don't have economists making necessarily public policy

Wow – Menendez must love how the Bush White House makes public policy! But then let’s check out his clarification:

the point I was making was that the everyday pains that average Americans are feeling aren't always taken into account by an economist sitting behind a desk looking at numbers.

I’m sorry but this is a really stupid statement. We at the blog like most economists do take into account the impact of higher prices on individual households. Maybe some conservatives think we spend too much time on distributional effects but to say we just look at the aggregate numbers is one of the dumbest things I’ve heard in a long time.

Update: Courtesy of AB reader Brooks, the comments by Greg Mankiw are a must read. Greg is arguing that when Paul Krugman says this gas tax holiday is small potatoes, the following must be also said:

Paul is right that the issue is, quantitatively, small potatoes, but I am nonetheless pleased to see it get so much attention. This issue is like the canary in the coal mine: No one really cares about the canary, but its condition tells us about deeper problems that lie below.

Brad DeLong agrees with Greg:

it is important that presidential candidates fear economists even in the campaign. If they don't fear their economists, then we get campaign promises of really lousy economic policy, some of which will then make it into post-election real policy, and then we are in trouble. Republican politicians have not feared their economists since... the Eisenhower administration, I think, and so Republican economic policy is overwhelmingly lousy. Democratic politicians have in the past and still today fear the bad headlines that are generated if their own economic advisers say that they are full of it. And so their campaign rhetoric is less out-to-lunch. And their post-election policies are better. For Paul to take steps to diminish Democratic politicians' fear of economists... Well, it's contrary to guild rules. Just saying...

Angry Bear: Bruce Webb's Take on Social Security: I

Tue, 06 May 2008 19:26:50 +0000

Well Reader Dan invited me to submit some posts on Social Security and so here I am. Depending on reader interest this is the first in a series trying to get us to a deeper understanding of what Social Security actually is and where it is likely heading. And that may be a much different place than most people currently think.

Social Security finance is a really odd beast, it has a strong up is down quality that tends to baffle people. For example I will be making the case in a later post that cutting Social Security benefits actually harms the long range financial stability of the system. Why this seeming paradox holds requires us to examine some mechanical peculiarities of a PayGo system given the details of the current state of its financing. But before diving into the deep end I want to establish a conceptual framework, that is to show you Social Security through my eyes.

First it all starts, and mostly stops, with the Trustees' Reports, more formally known as the 'ANNUAL REPORT OF THE BOARD OF TRUSTEES OF THE FEDERAL OLD-AGE AND SURVIVORS INSURANCE AND FEDERAL DISABILITY INSURANCE TRUST FUNDS'. Almost every fact, factoid and date cited in this debate comes directly or indirectly from this Report. (Certainly CBO has a slightly different interpretation but they don't really challenge the fundamental assumptions of the Trustees). For the most part in this game all of the players are playing out of the same playbook and more importantly out of a particular subset of that book. More on that point later. The first lesson people need to learn is that 'It is already built into the model'. This is particularly important in relation to the demographics, because the first response from those hearing that Social Security is not particularly in crisis is: 'What about the Boomer Retirement?' 'More retirees, less workers, what don't you get about that?' or 'People are living longer!" Well I know all those things mainly because the demographers working in the Office of the Chief Actuary know them full well and have already accounted for them in their models. Which are published in the Report. Which I read.

Second point. Social Security really and truly is Insurance. Endless efforts have been made to blur this fact, and I expect/hope to see some in comments, but they all fail in the face of the actual operation of the system. Social Security collects premiums from all wage workers up to a determined wage level and disperses benefits to qualified beneficiaries. Which is pretty much the same as what New York Life does, cash flows in one door and out the other. That varying things happen with excess cash in between are not really the concern of the buyer and future beneficiary of the policy, as long as they get the promised benefits when the time comes then all's fair. That is there is no functional distinction between drawing a benefit dollar from the existing investment pool as opposed to simply paying it out of current premiums, PayGo does not equate to Ponzi. Banks and Insurance Companies don't have current cash reserves equivalent to all of their obligations, instead that money is locked up in what may be long term investments, instead they rely on current cash flow to carry the load. Of course banks are required to hold some cash reserves with the Federal Reserve and Insurance companies themselves carry reinsurance, you can't get too close to the edge. And this is where Social Security Insurance departs from New York Life, instead of reinsurance it has Trust Funds.

Which gets us to the third point. Social Security is not the Trust Funds anymore than New York Life is its reinsurance policy. The Trust Funds are simply the numeric measure of how much Social Security has in long term reserves. This amount can over any given year or series of years trend up or down without directly effecting benefit payments. In an up year Income Excluding Interest exceeds Cost and so surpluses flow to the Trust Fund, in a down year Income Excluding Interest lags Cost and the Trust Fund has to be drawn down, but typically not by much, current income is always carrying much of the load and would even if the Trust Fund went to zero.

Last points for today. Trust Fund 'crisis' is normally set at two possible points. One is crisis at Shortfall, that point where Current Income is projected to fall behind Cost for an extended period. This would require a sustained drawdown on the Trust Fund as more and more interest is diverted to pay current benefits. Whether this really equates to 'crisis' requires an analysis of the actual dollars in context. That rarely happens, instead people jump right to 'Raise taxes to unendurable levels! or Slash benefits to the bone! We got to act now!!' Well this hysteria whether real or fake (and much of it is fake) is simply that. Absent an examination of the numbers it is simply as Shakespeare put it 'A tale told by an idiot, full of sound and fury, signifying nothing', In this particular case if you can't say it in numbers you really shouldn't be saying it at all.

The second 'crisis' point, and the more traditional one, is crisis at Depletion, that point where the Trust Fund has been drawn down to nothing. Once again the temptation is to jump to "Oh My God we'll have to raise taxes' or worse 'Its bankrupt!! Dead broke!!! Checks will stop!!' Well that too is mostly nonsense, by law we need do nothing at Trust Fund Depletion, instead benefits would simply be reduced to whatever level was supported by current income. Whether that adds up to 'crisis' is once again a matter of comparing the numbers to the actual schedule of benefits while comparing it to benefit levels today. In the event the relevent equation from the 2008 Report is 78% of 160% = 120%. More on that later.

So lessons attempted here?

1. Numbers matter and they are to be found in the Reports. Including all the relevant demographic ones.

2. Social Security is in fact a Pay as you Go Insurance plan with a certain level of reserves. It is not a Ponzi scheme.

3. That reserve is called the Trust Fund, but is not itself the whole of Social Security any more than your bank account is the whole of your finances.

4. No one likes to draw down their reserves as we would at Shortfall, but you have to put that in context of your entire financial position. Which means looking at the numbers, see point 1

5. You plan for your retirement and ideally meet 100% or more of your goal. Hitting 78% may or may not be some sort of crisis, it might just mean buying a smaller boat. We need to examine Depletion in the context of both absolute level of benefit cuts and probability that the current projection will come to be.

I'll be glad to answer questions and meet challenges in comments. In future posts I will be explaining some of the odd terminology used: Low Cost alternative, Trust Fund Ratio, Covered Worker Ratio etc. For those who just can't stand to wait you might want to browse the Nov. 2004 archives of the Bruce Web (bruceweb.blogspot.com).

Angry Bear: Best use of the rebate check is...

Tue, 06 May 2008 17:09:24 +0000

How to use Your IRS Rebate check...

As you may have heard, each of us will be getting

a tax rebate check to stimulate the economy.

If we spend that money at Wal-Mart, all the money will go to China .

If we spend it on gasoline it will go to the Arabs.

If we purchase a computer it will go to India

If we purchase fruits and vegetables it will go to Honduras & Guatemala.

If we purchase a good car it will go to Japan.

If we purchase useless stuff it will also go to China.

And none of it will help the American economy.

We need to keep that money here in America .

The only way to keep that money here at home is to spend it at

Yard Sales , since those are the only businesses left owned by Americans !!

There is another version suggesting one use it to indulge their risque side. With that, is there some truth to this suggestion? Is the spending of the money in some place other than a small business like my flower shop, or a yard sale just making the rebate another channel for money to move out of the government (us) and into the hands of the few leaving us to also pay the taxes...some day?

If anything, buying used or at a yard sale will reduce the consumption of more resources. I mean, I love Craigslist.