iCount

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.

by Tom Bozzo (noreply@blogger.com) on May 09, 2008 05:56 PM

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.

by Bruce Webb (noreply@blogger.com) on May 09, 2008 03:27 PM

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.

by rdan (noreply@blogger.com) on May 09, 2008 02:00 PM

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?

by rdan (noreply@blogger.com) on May 09, 2008 01:43 PM

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.

by Tom Bozzo (noreply@blogger.com) on May 09, 2008 12:57 PM

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!

by tgirsch on May 08, 2008 06:55 PM

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:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.]
8. 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.
9. 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.

by KTK on May 08, 2008 06:52 PM

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.

by spencer (noreply@blogger.com) on May 08, 2008 06:29 PM

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.

by Bruce Webb (noreply@blogger.com) on May 08, 2008 05:55 PM

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.

by rdan (noreply@blogger.com) on May 08, 2008 03:14 PM

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:

1. 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.
   
   
2. 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.

by Ken Houghton (noreply@blogger.com) on May 08, 2008 02:14 PM

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.

by rdan (noreply@blogger.com) on May 08, 2008 12:17 PM

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.

by PGL (noreply@blogger.com) on May 08, 2008 09:12 AM

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

1. knocking on doors, interrupting people (including some who have no capability themselves; there are many more than 15 apartments in the building),
   
   
2. having discussions with some people who might have non-economic reasons not to agree to permit me access (including FUD),
   
   
3. (c) finding people who really do use all of their capacity,****
   
   
4. finding people who could provide access but with whom I cannot agree on a clearing price, and
   
   
5. 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.

by Ken Houghton (noreply@blogger.com) on May 07, 2008 08:27 PM

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.

by PGL (noreply@blogger.com) on May 07, 2008 08:06 PM

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).

by Ken Houghton (noreply@blogger.com) on May 07, 2008 05:33 PM

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!

by Tom Bozzo (noreply@blogger.com) on May 07, 2008 03:55 PM

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

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]

by Bruce Webb (noreply@blogger.com) on May 07, 2008 03:51 PM

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.

by PGL (noreply@blogger.com) on May 07, 2008 03:22 PM

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.

by Tom Bozzo (noreply@blogger.com) on May 07, 2008 02:59 PM

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?

by rdan (noreply@blogger.com) on May 07, 2008 02:50 PM

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?

by rdan (noreply@blogger.com) on May 07, 2008 02:31 PM

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.

by PGL (noreply@blogger.com) on May 07, 2008 09:55 AM

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...

by PGL (noreply@blogger.com) on May 07, 2008 09:33 AM

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).

by Bruce Webb (noreply@blogger.com) on May 06, 2008 07:26 PM

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.

by Divorced one like Bush (noreply@blogger.com) on May 06, 2008 05:09 PM

k harris comment lifted directly from comments cactus style:

Moody's has cut Fannies financial strength rating to B from B+, but affirmed its debt rating at Aaa. Rationale? Fannie is at considerable risk of needing help in avoiding default, but the help is going to come, just going to, so that the risk of actual default is too low to contemplate.



Moody's is implying that moral hazard is part of Fannie's business plan and that we (as either stock holders, tax payers, or both) are on the hook for the risk.

by rdan (noreply@blogger.com) on May 06, 2008 04:56 PM

Ilsm writes:



One of the repeated objectives of the highest managers of the military industrial complex is:



"Reliable and cost effective industrial capabilities sufficient to meet strategic objectives".



Former DoD management objectives had the "health" of the defense industry as a goal. Political appointees, summer help that they are, refer to the military industrial complex as “partners” and “team members”. This is done to confuse people and hide the waste and fraud going on with conflating profit with the "security" of the country.



Partners and team members should not make more money than their value to other “partners”. Unfortunately, the partnership does not extend to the soldiers, citizens or the payers of the social security surplus the DoD 'partners' and 'team members' use to make the profits for only a small part of the team at the expense of better uses for the money the vast majority of the citizens.



Faulty decision making, fear mongering and continuing waste are the hallmark of this select team that devotes itself to profiting from unnecessary continuous mobilization against some “broad spectrum” bogey men out loose in the dangerous world.



They never broach the question of whether there are better uses of the scarce resource.



They have built a trough filled with gold and the “partners’ and “team members” feed at the trough as “reliable and cost effective industrial capabilities” are mirages.



Their trough is the ends, not any real national security for the taxpayer.



Might as well whittle beaks to defend against the bogey men as rely on the “reliable and cost effective” war profiteering “team members”.

-------------------



This one by ilsm

by rdan (noreply@blogger.com) on May 06, 2008 12:55 PM

What is it like to sit on a land mine? That is precisely the feeling that I have had of late. For the past half-year, we have been walking through land mines.



Two recent events combined to make an ominous click:

1. The Fed is now accepting wider collateral: Bonds backed by auto loans and credit cards (cf Rdan's piece below)
   
   
2. Fannie Mae and Freddie Mac are playing hardball with regulators

   The companies, which were created by Congress but are owned by investors, suffered more than $9 billion in mortgage-related losses last year, and analysts expect those losses to grow this year. Fannie Mae is to release its latest financial results on Tuesday and Freddie Mac is to report earnings next week.
   
   The companies are sitting on as much as $19 billion in additional losses that they have not yet fully acknowledged, analysts say. If either company stumbled, the mortgage business could lose its only lubricant, potentially causing the housing market to plummet and the credit markets to freeze up completely.
   
   And if Fannie or Freddie fail, taxpayers would probably have to bail them out at a staggering cost.

   
   
   

The problem with the last is that Fannie's and Freddie's financial "cushion may be too thin." Additionally, the interests of those running them may not coincide with national interests:

Moreover, the companies are using their newfound clout to push Congress and their regulator to roll back the limits that were imposed after recent scandals over accounting and executive pay, according to participants in those conversations.

...

Because of the widespread perception that the government would intervene if either company failed, they can borrow money at lower interest rates than their competitors. As a result, they have earned enormous profits that have enriched shareholders and managers alike: from 1990 to 2000, each company’s stock grew more than 500 percent and top executives were paid tens of millions of dollars.

...

In a March meeting, Freddie Mac’s chairman, Richard F. Syron, bolstered those fears by saying the company would put shareholders’ interests first.

Maybe it is just me, but I am having a harder and harder time reading the news. I just don't want to look...or hear an ominous click, click. Wake me when it is over, please.

by Stormy (noreply@blogger.com) on May 06, 2008 10:44 AM

Market Watch reports important news on needing more liquidity. Probably worth several posts. Hat tip to stormy.

The Federal Reserve, along with other central banks, said Friday that it was increasing the funding it is providing to banks and announced that, for the first time, it was willing to accept bonds backed by auto loans and credit cards.

"In view of the persistent liquidity pressures in some term funding markets, the European Central Bank, the Federal Reserve and the Swiss National Bank are announcing an expansion of their liquidity measures," the Fed said in a statement.



The Fed took the move in an attempt to flood the market with supply and lower short-term lending rates, such as the London interbank offered rate, or Libor.

The U.S. central bank announced an increase, to $75 billion from $50 billion, in the amounts auctioned to eligible depository institutions under its biweekly Term Auction Facility, beginning with the auction on May 5.



This increase will bring the amounts outstanding under the TAF to $150 billion.

The move to expand the TAF was widely anticipated because of strong demand for loans through the program. See full story.



"The program is now reaching a magnitude where it can play a significant role in plugging the gap between the remaining demand for unsecured term funding in the bank market and the latest decline in supply following the run on Bear Stearns," wrote Lou Crandall, chief economist for Wrightson ICAP.

The expansion was "probably marginally disappointing because there was a widespread expectation ... that the Fed would extend the term of at least some TAF auctions to three months," wrote Stephen Stanley, chief economist for RBS Greenwich Capital.



The TAF, announced on Dec. 12, was followed in March by the creation of several other Fed lending programs targeted at different sectors of the credit markets.

All told, the Fed has now offered to lend up to $462 billion in cash and Treasurys to the markets, in addition to the nearly unlimited funds available through the discount window and the primary credit dealer facility.

The three-month Libor rate -- a benchmark for lending between banks -- was 2.78% on Thursday, well above the 2% federal funds rate. Crandall said extra supply from the Fed in the next three weeks should tighten the spread between the Libor and fed funds rates.



Deeper cooperation



The Federal Open Market Committee also has authorized further increases in its existing temporary currency-swap arrangements with the European Central Bank and the Swiss National Bank.

These arrangements will now provide dollars in amounts of up to $50 billion and $12 billion to the European Central Bank and the Swiss National Bank, respectively, representing increases of $20 billion and $6 billion.

The FOMC also authorized an expansion of the collateral that can be pledged by bond dealers in the Fed's Schedule 2 Term Securities Lending Facility auctions of Treasurys.



Primary dealers may now pledge AAA/Aaa-rated asset-backed securities, in addition to already eligible residential- and commercial-mortgage-backed securities and agency collateralized mortgage obligations.

Accepting asset-backed paper could help provide money to the student-loan market, Crandall noted.

by rdan (noreply@blogger.com) on May 06, 2008 04:03 AM

Thanks to Rdan for the welcome.



I'm with Barry Ritholtz in admiring the NYT's interactive consumer price inflation mosaic, which the print edition didn't do justice to. As someone who occasionally gets a bee in the bonnet over the successes and failures of economic measurement methods, the graphic also helps illustrate a couple ways in which CPI can be unfairly maligned. As I read it, the graphic deals best with one class of arguments for why CPI is screwed up:



ZOMG the price of [CPI component in the news] is skyrocketing! Lo, prices of goods that headlines would lead you to believe should be measured as skyrocketing by-and-large are — +26% for gasoline, +48% for heating oil, etc. Gasoline is even a big enough component of average expenditures for the price increases to be legitimately painful for anyone without good substitution opportunities. But it's still only so much of a representative budget; cheese, bread, and eggs are much less so. And ample sums are spent on other things where there isn't much or even any inflation at all. (How these all should be treated for any given policy purpose is a separate issue.) Meanwhile, the gorilla in the room is housing, as housing rentals and equivalents account for 30% of expenditures.



However, that leads to a second bad argument:



ZOMG the biggest component of CPI is imputed! Indeed, Brad DeLong recently observed Michael Mandel suggesting that personal consumption expenditures be calculated ex-imputations — of which owner-occupied housing is the biggest. That wasn't the sharpest thing that'll appear in BusinessWeek this year. Catch is, it's not like homeowners don't (a) consume housing services and (b) incur opportunity costs doing so whether or not they (like my family among other leveraged real estate investment partnerships) actually shell out a lot of cash for house payments. We consume non-marketed goods and services all the time. Missing markets in almost everything, I like to say.



The details of the imputation of housing expenditures for owners certainly aren't sacred. For one thing, in much of the country, the rental and owner-occupied housing stocks resemble each other very little. For another, I'd like to hear why it would be unreasonable to calculate the imputed rent at a 'rational' rate given what the owners paid, which goes to the issue of whether housing expenditures above imputed market rents should be treated as consumption or investment. Anyway, between vacancies and the supply of foreclosed properties, I doubt shelter inflation will be a big problem in the near future.



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). Employment and the distribution of such growth as we have had is another matter.

by Tom Bozzo (noreply@blogger.com) on May 06, 2008 02:54 AM

Title: Would Oil Suppliers keep a "gas tax holiday" as profit?



Let's look at some real numbers. The following table is excepted from Exxon-Mobil (as a proxy for Oil Supplier) financial statements 2003-2007.



2003 2004 2005 2006 2007



Revenue $246.7B $291.3 $370.7 $377.6 $404.6



Excise Taxes $(61.5) $(68.2) $(72.3) $(69.6) $(72.7)



Operating Profit $32.0 $41.2 $59.4 $67.4 $70.5



Op Margin 13% 14% 16% 18% 17%



So for the last 5 years the margin has been in a range of 13% to 18% Why? Because if Exxon-Mobil were to raise prices for a higher profit margin, say 20%, they would could not sell much oil, as their competitors Chevron, Shell, BP etc. would have lower prices. They are profit maximizers.



Going back to the table, out of the "Revenue" line, XOM remits "Excise taxes" to the government. Let's just say at the beginning of 2007, the winner of the pander sweepstakes had passed an "Excise gas tax holiday!" so that Exxon-Mobil did not have to forward the $72.7B in excise taxes.



Which of the following would you expect?



1) Price competition causes Exxon to maintain an operating margin around the 13-18% average of the past 5 years.



2) Exxon keeps the $72.7B as profit, resulting in $143.3 B operating profit ( $72.7 + $70.5),or operating margins to double to 35%



If you picked option 1, then you believe tax relief will accrue to the retail customer. If you picked option 2, or "the economist option," then you believe gas tax relief will accrue to the supplier (and that the management of Exxon-Mobil should be summarily fired for leaving so much money on the table over the last 5 years).



Of course you might say "it's somewhere in between, say 20% ops margin" ........(inferred ops profit of $80B...in which case the customer would have only kept around 85% of the tax relief).



_______________________



This one by sammy.

by rdan (noreply@blogger.com) on May 05, 2008 08:02 PM

Andrew Samwick notes:

That we are not in a recession, based on weak GDP growth and a host of other macroeconomic indicators that have been flat since last summer, is quite remarkable ... Note that the fall in residential investment has been just as large and even steeper than the decline in equipment and software investment that was the driver of the last recession. Equipment and software investment fell to and has hovered around the share of GDP that it was in 1993. Residential investment has fallen to that level. It's not clear when the fall will stop.

Our graph shows total fixed investment as a share of GDP as well as its components including residential investment, investment in equipment and software, and investment in non-residential structures. Total fixed investment boomed in the 1990’s but collapsed from 2001 to early 2003 when it bottomed out at 14.8% of GDP. By 2006QI, it had recovered to 16.8% of GDP by 2006QI. Last quarter, however, it had fallen to less than 14.5% of GDP.



During the investment collapsed from 2001 to 2003, the residential investment boom partially offset the collapse or investment in equipment and software. Investment in equipment and software is still weak and residential investment has itself collapsed. It would seem that the alleged Bush investment boom never exactly got roaring and now is sort of dead. But you’d never know this if you listened to this clown.

by PGL (noreply@blogger.com) on May 05, 2008 06:35 PM

AP reports that President Bush argues that there is no quick fix for the problem of high gasoline prices:

President Bush said Monday that he's troubled by rising gas prices and will take a look at proposals to relieve the crisis but warned that there is no quick fix. "It's been a while in the making and it's going to be a while that we solve the problem," Bush said in an interview on ABC's "Good Morning America." "We're too dependent on foreign oil and we need to be exploring more at home." Bush said the rising cost of gas "troubles me a lot" because it is "like a tax on the working people."

This leaves me wondering why Bush has not jumped on the McCain-Clinton gas tax holiday bandwagon – but hopefully he’ll resist such pandering THIS TIME. AP mentions that proposal as well as the windfall profits tax – which I bet Bush will not consider. AP also mentions a few that I’m sure Bush is itching to push forward:

new refineries, nuclear power plants and drilling in the Alaska wilderness, supported by Bush. "We'll analyze some of these suggestions, but the key is that we think long-term for America, that we diversify away from oil and we're wise and build new refineries and increase supply for the American consumers," Bush said in the interview on the White House grounds with his wife, Laura.

Did I say I was wondering if Bush might consider the McCain-Clinton quick fix and perhaps a few of his own?

The federal tax rebate on the way to taxpayers will help, he said. "One way to help solve it, of course, is by sending some of the money back. That's what's happening now as we speak. There's a rebate going back to the American people, which should help," Bush said. He reiterated his call for Congress to make permanent the tax cuts enacted during his administration.

Yep – it’s time for some more Spend&Spend and Borrow&Borrow! What do we tell the children?

by PGL (noreply@blogger.com) on May 05, 2008 05:50 PM

A lot of ink is being spilled over the inventory numbers in the gdp report.



So I though I would just post on one of the available monthly data series on inventories.

This shows that the real I/S ratio fell sharply in March. But the gdp report includes no

data on March inventories. This implies that the next revision of real GDP will be down,

but that there is little reason to expect a rebuilding of inventories in the future to boost growth.

It is part of the great moderation that in todays world firms do not allow inventories to get way out of line and this sharply reduces the odds of a recession. We could still have a recession, but it

will not be a classic inventory cycle.

by spencer (noreply@blogger.com) on May 05, 2008 02:17 PM

In the next few weeks four excellent and dynamic writers will begin posting at Angry Bear on a soon to be determined but regular basis. Many already know the quality of thought and expertise each offers, so it is with great pleasure that we welcome them into the fold of Angry Bear contributors.



Bruce Webb has offered his expertise on Social Security and other topics on many sites. He has agreed to write on Social Security at levels that go beyond Soc Sec 101 to allow us deeper thinking on this important topic. I am hoping he gives a few history lessons along the way.



Tom Bozzo, an economist, publishes at Marginal Utility on a variety of issues.



Ken Houghton, an economist, also posts at Marginal Utility and Economic Question of the Day and has commented often at Angry Bear.



Afferent input is a newcomer who at the moment takes a chart and macro line of posting, and weaves a good narrative.







Angry Bear is an economic blog that includes professional economists, knowledgeable insiders in various positions of business and/or government, and interested amateurs to keep them honest, and as group contributors bring a wealth of expertise, knowledge, experience, and variety of interests to the postings.



While left of center in spirit, we provide at least three ideas somewhat unique to econoblogging in my experience:



First, guest posts are a common feature here, and are accepted from people of all walks of life if well thought out and honest in intent.



Second, some regular contributors have admitted to being Independent or even Republican, but posts are designed to be informative first and partisanship is made clear if they happen to be part of the post. Partisanship is not the same as 'strong point of view'.



Third, so far we have been able to maintain open comments, because commentors who might have started as 'snarkers' have upgraded their comments to take a useful stand. How cool is that!?



I am excited about the direction these new contributors can take us in addition to our excellent current team.



Welcome.

by rdan (noreply@blogger.com) on May 05, 2008 12:19 PM

Robert Reich is not happy with Senator Clinton on this gasoline tax holiday:

When asked this morning by ABC News' George Stephanopoulos if she could name a single economist who backs her call for a gas tax holiday this summer, HRC said "I'm not going to put my lot in with economists.” I know several of the economists who have been advising Senator Clinton, so I phoned them right after I heard this. I reached two of them. One hadn’t heard her remark and said he couldn’t believe she’d say it. The other had heard it and shrugged it off as “politics as usual.” That’s the problem: Politics as usual ... In case you’ve missed it, we now have a president who doesn’t care what most economists think. George W. Bush doesn’t even care what scientists think. He rejects all experts who disagree with his politics. This has led to some extraordinarily stupid policies. I’m not saying HRC is George Bush. And I'm not suggesting economists have all the answers. But when economists tell a president or a presidential candidate that his or her idea is dumb – and when all respectable economists around America agree that it’s a dumb idea – it’s probably wise for the president or presidential candidate to listen. When the president or candidate doesn’t, and proudly defends the policy by saying she's "not going to put my lot in with economists,” we’ve got a problem, folks. Even though the summer gas tax holiday is pure hokum, it polls well, which is why HRC and John McCain are pushing it. That Barack Obama is not in favor of it despite its positive polling numbers speaks volumes about the kind of president he’ll be – and the kind of president we’d otherwise get from McCain and HRC. Haven’t we had enough of politicians who reject facts in favor of short-term poll-driven politics?

Greg Sargent saw the same ABC interview:

Hillary Clinton has just started doing an Indiana town-hall meeting being broadcast on ABC, and George Stephanopoulos asked her a direct question: Could she name a single economist who agrees with her support for the gas tax holiday? Hillary sidestepped the question, and tried to use the complete dearth of expert support for the idea to her advantage, pointing to it as proof that she's on the side of ordinary folks against "elite opinion" -- a phrase she used twice. "I think we've been for the last seven years seeing a tremendous amount of government power and elite opinion behind policies that haven't worked well for hard working Americans," she said. A bit later she added: "It's really odd to me that arguing to give relief to a vast majority of Americans creates this incredible pushback...Elite opinion is always on the side of doing things that don't benefit" the vast majority of the American people. An ordinary voter begged to differ, however. Stephanopoulos turned the mike over to a woman who said she supported Obama and said she makes less than $25,000 a year. "I do feel pandered to when you talk about suspending the gas tax," the woman said, adding: "Call me crazy but I actually listen to economists because I think they know what they've studied."