"Ten years ago today, Enron Corp. filed for bankruptcy. Today, with all of its dealings with banks, it would probably have been deemed “too big to fail.”
But luckily, this was before Hank Paulson and Tim Geithner occupied the Treasury Department. Enron was allowed to fail, and its executives were punished for fraud under decades-old securities laws.
While there was certainly damage to employees and, temporarily, to surrounding businesses in Houston, the bankruptcy barely caused a blip to the larger economy. The economy, already reeling because of the 9/11 attacks three months earlier, soon had a remarkable recovery.
Rather, the most damaging action of the Enron affair occurred in the aftermath of post-Enron reform. This would be the Sarbanes-Oxley Act of 2002. Ten years later, even the Obama administration agrees that Sarbox’s crushing burden of accounting mandates is holding back economic growth.
And Sarbox has little to show in results for investors, having failed to stop Lehman Brothers, Countrywide and now MF Global, which was run into the ground by a former politician who had championed the 2002 law. Jon Corzine’s bio on the website BigThink.com states glowingly, “As a member of the United States Senate, Corzine co-authored the Sarbanes-Oxley Act, a piece of legislation designed to crack down on corporate malfeasance crafted in the wake of accounting scandals surrounding Enron, Tyco, WorldCom, and other major corporations.”
Yes, it turns out Corzine may have been more of an expert than we thought on alleged “corporate malfeasance.” And as noted in the October report of President Obama’s Council on Jobs and Competitiveness, Sarbox has crushed the dreams of thousands of honest entrepreneurs for every scandal it may have stopped (and I don’t know that it has stopped any.)
Pointing out that “the data clearly shows that job growth accelerates when companies go public,” the Obama jobs council noted with dismay that there were fewer U.S. venture-backed initial public offerings (IPOs) in 2008 and 2009 than in any year since 1985. As I have noted previously, the data also show that even the recession years of the early ’90s had more IPOs than any year since Sarbox went into effect.
Obama’s council blamed, among other things, “unintended consequences stemming from . . . Sarbanes-Oxley regulations.” It then amazingly called for exemptions from many provisions of Sarbox for companies with up to $1 billion in market capitalization.
Yet just as amazingly, exemptions that did not go as far as the Obama jobs council recommended were killed this week by three GOP House members who seemed to be in the grip of the powerful accounting industry, which gets rich off the mandates that are so costly to entrepreneurs and the economy as a whole.
This Wednesday, the House Financial Services Committee was scheduled to vote on H.R. 3213, a bill by Rep. Stephen Fincher that would exempt firms with market cap of $350 million and below from the “internal control” mandates of Section 404. This was a far lower figure than the $1 billion put forward by Obama’s council and applied to just one section — albeit the most costly section – of the law.
Yet as I reported Tuesday in National Review and The Wall Street Journal writes up in an editorial today, GOP Rep. John Campbell (R-Calif.) and Steve Pearce (R-N.M.) had actively worked against the bill. House sources also told me that Rep. Jim Renacci (R-Ohio) was leaning no, and his office did not return my query to confirm or deny.
And, as noted by the WSJ and Ben Smith’s column in Politico, committee member Michele Bachmann apparently would not return from her presidential campaign to break the tie, even though she — like fellow candidates Newt Gingrich, Ron Paul, and Jon Huntsman — has called for repeal of Sarbox. Smith notes that in contrast, Paul, also a committee member, was ready to return. So the Fincher bill granting modest Sarbox relief had to be yanked.
As I noted in NR:A claim made by … Pearce, Campbell, and the accounting lobby is that internal-control audits are essential for fraud detection. Yet financial analysts looking at the subprime scandals in Sarbox’s wake have come to the almost opposite conclusion. By requiring resources to be spent on auditing “internal controls” that were trivial for shareholders yet lucrative for auditors — such as employee passwords and possession of office keys – Sarbox Section 404 actually diverted attention away from ensuring accurate reporting of a company’s financial condition.
Commenting on corporate misstatements during the mortgage bubble, respected analyst Janet Tavakoli had this to say on Sarbox to housing journalist Robert Stowe England in his new book Black Box Casino: “Sarbanes-Oxley did nothing. It didn’t work. It was a total waste.”
But who knows? Maybe Sarbox is doing exactly what its champion Jon Corzine wanted it to do!"
Sunday, December 4, 2011
"Call it the China Syndrome. An American visits Rising China and is immediately gobsmacked by the place. Giant airport terminals, speedy bullet trains, ubiquitous construction cranes, the Shanghai skyline. Everywhere you look, Stuff is Happening. And it’s all shiny new. Compared to China and its seemingly perpetual 10-percent annual growth rate, New Normal America just doesn’t rate. Then the gobsmacked American comes to a realization: America Must Become More Like China. Free-market capitalism is out, state-managed capitalism in. I have seen the future and it works!
I give you Andy Stern, former president of the Service Employees International Union (via the WSJ):
The conservative-preferred, free-market fundamentalist, shareholder-only model—so successful in the 20th century—is being thrown onto the trash heap of history in the 21st century. In an era when countries need to become economic teams, Team USA’s results—a jobless decade, 30 years of flat median wages, a trade deficit, a shrinking middle class and phenomenal gains in wealth but only for the top 1%—are pathetic. …
While we debate, Team China rolls on. Our delegation witnessed China’s people-oriented development in Chongqing, a city of 32 million in Western China, which is led by an aggressive and popular Communist Party leader—Bo Xilai. A skyline of cranes are building roughly 1.5 million square feet of usable floor space daily—including, our delegation was told, 700,000 units of public housing annually.
1. Last time, I checked, the U.S. is 6-10 times as wealthy as China on a per capita GDP basis. On a purchasing power parity basis, China sits between Bosnia and Herzegovina and Albania.
2. Playing economic catch up from a low level is a lot easier than leading the pack. Indeed, developing nations often never close the gap with advanced economies, especially those with a rapidly aging population, low levels of consumption, and undervalued currency — like China.
3. Building infrastructure is easy and doesn’t take brilliant bureaucrats to do. Innovating is hard, and something government has shown precious little ability to do. How’s industrial policy working for the EU?
4. Stern wants government to intervene more in the market. Yet America’s problem in the 2000s was government interfering in the market and creating incentives that favored a chosen industry, housing. What America needs is more Schumpeterian, creative destruction sans government’s thumb on the scale.
5. As Warren Buffett puts it, ”It’s only when the tide goes out that you know who’s been swimming naked.” When China does slow, we’ll see just how efficient a capital allocator Beijing has been. The Chinese Miracle is stuffed to the gill with bad loans. State capitalism is really Crony Capitalism.
6. Maybe we need more “economic teams” like, say, public employee unions and government. American students are sure benefiting from such teamwork.
7. I think what folks like Stern really envy is the lack of democracy and accountability where technocratic elites can make all the decisions without pesky tea parties sticking their nose in."
Saturday, December 3, 2011
"But this hyperbolic rhetoric ignores a decades-long growth of public employment that has left many municipal governments with nearly historic high levels of government workers relative to the population—even after the cutbacks of the last few years. Hiring increases have so rapidly outpaced the growth in the population that retrenchment is inevitable.
Take local education workers. Hiring has far outpaced the growth in student enrollment, driving down the number of students per teacher in American public schools to 15.6 in 2010 from 26.9 in 1955, according to the National Center for Education Statistics. Robust hiring has continued even during periods of enrollment declines, including from 1971 through 1984, when the number of public-school students fell virtually every year, declining in total by 15%, while the ranks of teachers grew by 7%."
"local education employment is back to about where it was in 2006 after recent cutbacks. Sound terrible? Maybe not so much when you consider that public-school enrollment has been stagnant since 2006."
"In 1955, teachers constituted about 65% of local education workers; today, despite years of rapid gains in teacher ranks, they amount to only about 40% of the eight million local education workers.
Per-pupil spending in public schools has grown to $10,500 today from $2,831 (in 2010 dollars) in 1961, according to the National Center for Education Statistics. Has the spending paid off? Mean scores on the SAT's reading test are down 7% since 1966, while reading scores for 17-year-olds on the National Assessment of Educational Progress test, administered since 1971, are flat over that time."
"Starting in the early 1990s, when America's crime rate peaked at 758 violent crimes per 100,000 people, police departments started hiring rapidly. From 1992 through 2008, according to the Department of Justice's Census of State and Local Law Enforcement Agencies, the ranks of state and local cops and other law-enforcement personnel soared by one-third, to more than 1.1 million. That growth far outpaced the country's population increase in the period, driving up the percentage of law-enforcement personnel relative to the general population by 12%.
Results? Violent crime is down by 47% since 1992. The property-crime rate has fallen by 75%."
"New York City's experience is illuminating. Gotham made a big commitment to expand its police force as murders hit an all-time high in 1990. An income-tax surcharge provided the resources to boost police hiring by about 15%, or 5,000 officers, to nearly 40,000 over the next several years. The city's crime rate then plunged, falling 70% in the 1990s."
"Elsewhere the ranks of police officers have fallen by less than 1% after rising by 9% since 2000 alone."
"In the U.S., this shock came when the 10-year housing bubble deflated and U.S. financial institutions were weakened by a sudden loss in value of the mortgage-backed securities (MBS) they were holding, especially those based on subprime mortgages. Mark-to-market accounting did the rest, requiring banks to write down the value of their MBS assets until they appeared unstable or insolvent.
In Europe, the problem is similar and so is its source. Europe's banks, like those in the U.S. and other developed countries, function under a global regulatory regime known as the Basel bank capital standards."
"the Basel rules require commercial banks to hold a specified amount of capital against certain kinds of assets."
"Under these rules, banks and investment banks were required to hold 8% capital against corporate loans, 4% against mortgages and 1.6% against mortgage-backed securities."
"these rules are intended to match capital requirements with the risk associated with each of these asset types, the match is very rough. Thus, financial institutions subject to the rules had substantially lower capital requirements for holding mortgage-backed securities than for holding corporate debt, even though we now know that the risks of MBS were greater, in some cases, than loans to companies. In other words, the U.S. financial crisis was made substantially worse because banks and other financial institutions were encouraged by the Basel rules to hold the very assets—mortgage-backed securities—that collapsed in value when the U.S. housing bubble deflated in 2007."
"Today's European crisis illustrates the problem even more dramatically. Under the Basel rules, sovereign debt—even the debt of countries with weak economies such as Greece and Italy—is accorded a zero risk-weight."
"In the U.S. and Europe, governments and bank supervisors are reluctant to acknowledge that their political decisions—such as mandating a zero risk-weight for all sovereign debt, or favoring mortgages and mortgage-backed securities over corporate debt—have created the conditions for common shocks.
But that is not all that can be laid at the door of regulators. Examiners and supervisors operating "by the book" tend to disregard the judgments of bank managements in favor of regulator-approved methods of assessing credits and carrying reserves. As banks begin to conform to regulator preferences, natural diversification declines and all banks start to look pretty much alike. Then, like genetically altered plants, they are vulnerable to a pathogen—like MBS backed by subprime mortgages—that sweeps through the population."
Friday, December 2, 2011
This first one shows that the U.S. is right on the trend line when how much a country spends on health care is a function of its income or GDP. It is a non-linear relationship. The r-squared is higher .926 than in a linear regression (.846).
This next one shows that cancer survival rates are higher in the U.S.
This next one shows how well the U.S. does on life expectancy once violent deaths are taken out (something doctors can't control).
"When I catch myself thinking along these lines, I try to stop and ask a simple question: "If everyone else is such an idiot, how come I'm not rich?"
If you see a person--or a company--doing something that seems completely and inexplicably boneheaded, then it's unwise to assume that the reason must be that everyone but you is a complete idiot who is blind to fairly trivial insights such as "people desire inexpensive and conveniently available movie services, and will resist having those services made more expensive, or less convenient". While it's certainly true that people do idiotic things, it's also true that a lot of those "idiotic" things turn out to have perfectly reasonable explanations.
And in fact, if management of all these large public companies really were the staggeringly malevolent yet totally hapless lackwits that so many seem to believe, it should be really, really easy to get rich by outwitting them. Oh, sure, they'd probably get all their rich friends in Congress and Kiwanis to gang up on you, but since, according to the internet, almost all those people are also too dumb to come in out of the rain, you should be able to defeat them with a couple of well-placed banana peels.
If you've found it maybe not quite that easy to make a pile of money by outguessing all these benighted fools, then perhaps you should consider the possibility that they aren't quite as stupid as you are making them sound when you sniffily ask "Why don't they just . . . ?
Quite often, the answer to that exasperated "why don't they just . . . ?" is green, and it folds."
"Doctors had to work faster to move cases. Instead of earning $90 an hour, as they had previously, they would receive about $80 per case"
"it no longer mattered if doctors strayed far from their areas of expertise when taking a case."
""The implication there was that you really didn't have to be that careful and study the whole thing," said Rodrigo Toro, a neurologist who analyzed cases for the Social Security Administration for more than 10 years."
"Several doctors said medical opinions were now prone to inaccuracy since many specialists don't have the backgrounds to make decisions outside their areas of expertise. The new policy could make doctors more likely to award benefits to those who don't qualify and deny benefits to those who are entitled,"
"an eye doctor was assigned back-pain cases, several doctors said. A dermatologist reviewed the files of someone who had a stroke. A gastroenterologist reviewed the case of someone with partial deafness,"
"many of the doctors haven't practiced outside their specialty in decades,"
""People who shouldn't be getting [disability] are getting it, and people who should be getting it aren't getting it," said Neil Novin, former chief of surgery at Baltimore's Harbor Hospital,"
"Dr. Novin said, he was pressured by a supervisor to change his medical opinion and award benefits to someone he didn't believe had disabilities that would prevent the person from working.
"I will not sign my name, MD, on this," Dr. Novin recalled telling the official. He said he was cited for being "offensive and intimidating" and fired. Dr. Novin can't recall details of the case, he said, but it was outside his area of specialization."
"Supervisors told them that certain ailments should be considered "severe," even if the doctors disagreed."
"some doctors have complained to the Social Security inspector general that they have been pressured to change their medical opinions to conform to targets or goals set by SSA officials"
"a doctor in the Alabama disability determination office who approved between 80 and 100 decisions a day. Another Alabama doctor signed off on 30 cases an hour after performing only a "cursory review of each case." The investigation said several doctors complained of pressure from superiors to approve a higher number of applications to meet statistical goals."
"The Social Security Disability Insurance program paid $124 billion in benefits in 2010, up from $55 billion in 2001."
The CPI was up only 23% in this time. The SSDI was up 125%. The CPI increased 2.35% compounded annually while SSDI increased 9.45%. It increased at 4 times the rate of inflation.
Thursday, December 1, 2011
How Terrible: Walmart Plans to "Dump" Six Stores, 1,600 Jobs and $21 Million in Charity on Wash. D.C.
"Washington, D.C.'s unemployment rate has been rising over the last year, and at 11.1% in September was more than two percent above the 9% jobless rate for the country (which has been falling, see chart above). Further, more people in the District are now unemployed - 37,034 - than at any other time in the city's history. So you would think that if an employer promised to bring 1,600 permanent jobs and 600 construction jobs to the city, and also pledged $21 million in charitable donations over the next seven years, that District residents would be thankful, grateful and appreciative, and would welcome that employer with open arms.
Well, think again if that employer is Walmart, and if the District resident is Washington Examiner columnist Jonetta Rose Barras who editorialized yesterday in a column titled "Occupied by Walmart":"It was bad enough that District elected officials, particularly Mayor Vincent C. Gray, stood by as Walmart announced its intention to dump six stores into neighborhood commercial corridors, creating an environment ripe for the retail behemoth to bully small businesses. The executive exacerbated that short-sighted economic development strategy by signing the "Community Partnership Initiative."Despite the peacocking by Gray and others after the agreement was signed, the District is receiving mostly crumbs. Walmart has committed to providing $21 million in charitable donations over the next seven years, an average of $3 million a year. That's a pittance."
MP: So instead of gratitude for the thousands of new jobs and millions of dollars of charity Walmart will bring to the District, Ms. Barras ungratefully describes that as "mostly crumbs" and is outraged because Walmart is "dumping six stores" into the District and giving "only" $21 million in charity to the city??
I'm pretty sure that most District residents view this differently, and are grateful that Walmart is "dumping" six stores, 1,600 permanent jobs, 600 construction jobs and $21 million on the District. Especially the 37,000 residents who are unemployed.
Update in response to some of the comments:
A few years ago, when Walmart opened a store on Chicago's west side it created more than 400 good-paying jobs, made the neighborhood safer and helped to revitalize and stabilize the area, which then attracted new stores including a Menards, a CVS pharmacy, two new banks and an Aldi Grocery Store. Local Chicago alderwomen Emma Mitts credited Walmart for attracting many new stores to the neighborhood, and says that "traffic is so heavy on the weekends that it's hard to get up and down the strip, and that's a good thing and I'm so grateful for it."
Although Walmart frequently gets blamed for putting local merchants out of business when it opens a new store, this story provides some evidence to the contrary - by stabilizing a rough area on Chicago's West Side and attracting thousand of customers for "everyday low prices," Walmart actually helped to attract new businesses to this Chicago neighborhood, including direct competitors like Menards, CVS and Aldi.
In other words, Walmart provides many significantly "positive externalities" and "spillover benefits" to the communities in which it operates, even though it frequently gets more attention for some of the "negative externalities" and "spillover costs" it might impose. For neighborhoods like the west side of Chicago, it sure looks like the positive externalities (jobs, tax revenues, great safety, more commercial activity, etc.) far outweigh any negative externalities."
Wednesday, November 30, 2011
Collective Bargaining Weakens Cities: Public unions on the local level have too much power—even deep blue Massachusetts is starting to rein them in
"After a seven-year effort dating to the Romney administration, the Democratic-controlled legislature finally passed a law aimed at bringing local costs in line with state costs—and it was signed by Gov. Deval Patrick. Previously, localities could not change the copayment, deductible or any details of any bargaining unit's health plan without the approval of every local union. As a result localities were paying, on average, 37% more for health insurance than state and private employers."
"In Cleveland, for example, the collectively bargained contribution by teachers is $75 per month for family health coverage, a fraction of a state employee's $205 monthly contribution. Ohio state employees face an out-of-pocket maximum of $3,000 per family for in-network coverage, including a deductible of $400 and a co-insurance rate of 20%. For Cleveland teachers, the out-of-pocket maximum is zero—there's no deductible and no co-insurance. These provisions are written into Cleveland's union contract. They will be very difficult to remove."
"Aaron Belz ("How Calvinists Spread Thanksgiving Cheer," op-ed, Nov. 18) describes a Santa Monica, Calif., church distributing holiday food baskets. But the truth is, Wal-Mart and its counterparts spread far more holiday-food cheer than do churches and public-service groups.
Scholars estimate that the presence of Wal-Mart in a community reduces food prices somewhere between 10% and 15%. That's equivalent to shoppers receiving an additional 5.2 to 7.8 weeks of "free" food shopping. That Wal-Mart's customer base is skewed toward lower-income shoppers reinforces the beneficent consequences of its price effect.
Telling of the good that big-box retailers do for their customers doesn't pack the same "feel good" punch as Mr. Belz's account of a California church. Hey, the idea that one can do good while doing well in the marketplace has always been a tough sell.
Lest you think me a curmudgeon putting down church efforts, let me say that I contribute to my church's food and winter coat drives. And my church is part of the same denomination as the church Mr. Belz describes (Presbyterian Church in America). That I also believe that my local Wal-Mart does far more than my church to assist needy people often causes me to feel like the odd man out.
T. Norman Van Cott
Department of Economics
Ball State University
"This issue first bubbled up last year when the mobile phone company Sony Ericsson contracted with an Orlando-based job recruiter to hire employees for its new Atlanta headquarters. The recruiting firm added a caveat to one of the job posts: "No unemployed candidates will be considered at all."
After a series of news stories, a Sony Ericsson spokeswoman described the language in the job post as a "mistake" on the recruiter's part. The company wasn't trying to exclude the currently unemployed, she explained; rather, having already received an overwhelming number of applications from this group via its website, it was trying to expand the applicant pool to people who currently had a job."
"Missing from advocates' vague discussions of "numerous instances" and "emerging trends" was hard evidence to support the claim that the unemployed are being discriminated against. The closest thing to a data point came in a report released this summer by NELP, which identified 150 "exclusionary" ads during a one-month review of major job-search websites."
"NELP's sample, in other words, represents 0.005% of one month's job postings. Monster.com found a similar result, announcing this summer that "less than one one-hundredth of one percent of the postings on Monster had any language excluding the unemployed.""
"The lack of evidence for a nationwide epidemic is compounded by the fact that the NELP report took words out of context. For example, national recruiter Kelly Services placed the following ad in the St. Louis area: "Currently employed but lacking growth in terms of responsibilities and technical proficiencies? If so, Kelly IT Resources-St. Louis wants to talk to you!" NELP zeroed in on "currently employed," counted it as discriminatory, and ignored the rest of the posting."
"Common sense dictates that marketing to the currently employed looking to advance does not signal a rejection of the unemployed."
Tuesday, November 29, 2011
"Probably the most controversial claim of the book will prove to be our suggestion that the behavior of bankers before the crisis was actually risk averse, at least in the aggregate. (A key point of Chapter 4, however, is that there was considerable heterogeneity underneath these aggregates.)
The risk-aversion claim rests on two facts: the much-higher-than-legally required capital ratios of commercial banks and savings and loans before the crisis; and the fact that commercial banks and S&Ls overwhelmingly bought the least lucrative and supposedly “safest” mortgage-backed securities: those implicitly guaranteed by the federal government through Fannie and Freddie’s congressional charters; and those rated AAA vs. those rated AA or lower.
Lower-paying bonds pay higher yields than higher-rated bonds, which in turn pay higher yields than “agency” (Fannie/Freddie) bonds. Reckless, greedy bankers should not have bought agencies or AAA bonds; they should have bought BB or BBB bonds.
In Table 2.2 of the book, we claim that banks bought more than twice the quantity of agency bonds as AAA mortgage bonds, and four times the quantity of AAA mortgage bonds as AAA CDOs. CDOs usually tranched mezzanine (sub-AAA) tranches of “regular” mortgage bonds, i.e., private-label mortgage-backed securities (PLMBS), so AAA CDOs were objectively riskier than AAA PLMBS. Thus, one way to view the collective risk profile of U.S. banks and savings and loans is to recognize that the following list shows the least risky and least lucrative of their mortgage bond holdings first, with the riskiest and most lucrative last:
$852 billion in agency bonds
$383 billion in AAA private-label mortgage-backed securities
$90 billion in AAA CDOs
Those are the figures on which row 1 of our Table 2.2 are based. However, none of our tables show bank holdings of actual AA, A, BBB, or BB tranches of PLMBS. This is because our data on the distribution of the various types of mortgage bond in banks’ portfolios came from a famous Lehman Brothers study dated April 11, 2008: “Residential Credit Losses—Going into Extra Innings?” (We discuss this study in end note 1 to the conclusion of the book.) The Lehman figures assign PLMBS and CDO holdings by various types of investor (commercial banks and S&Ls, investment banks, hedge funds, etc.) by billions of dollars. But the 2008 Lehman table says that commercial banks held no PLMBS or CDOs rated lower than AAA. That seems implausible, unless the authors of the report could not find holdings totaling more than $500 million, so the figure got rounded down to zero billions of dollars. (We attempted to contact the authors of the report, but they all now work for hedge funds and are barred from communicating with members of the public.)
The Lehman figures have been widely cited by others (e.g., Arvind Krishnamurthy, “The Financial Meltdown: Data and Diagnoses”--download PDF--Table 1 [November 2008]; Viral Acharya and Matthew Richardson, Restoring Financial Stability: How to Repair a Failed System , Table 5). They are more comprehensive and newer than the only comparable data source, a 2007 Lehman Brothers report entitled “Who Owns Residential Credit Risk” (cited by the Financial Crisis Inquiry Commission, “Preliminary Staff Report: Securitization and the Mortgage Crisis” [April 2010], Table 1). However, we wish there were a better source. Unfortunately, as of November 2010, when our book was completed, we knew of no other data. Now (ht Viral Acharya) we do—although this source, too, has limitations.
In August 2011, Isil Erel, Taylor D. Nadauld, and René M. Stulz released an NBER working paper, “Why Did U.S. Banks Invest in Highly Rated Securitization Tranches?” Erel et. al found a way to use regulatory filings from bank holding companies to “back out” their mortgage-bond holdings.
The key data source, Schedule HC-R of form FR Y-9C, groups assets by risk bucket: 0%, 20%, 50%, 100%. This means that AAA and AA PLMBS, which were both risk weighted at 20%, are grouped together. And the 100% category contains so many different types of securities, such as corporate bonds and equities, that we cannot back out mortgage bonds in that category, namely those rated BBB or BB. Using Erel et al.’s method, however, we are able to provide the following results for the four biggest bank holding companies as of the end of 2006:
$70 billion in agency bonds
$28 billion in AAA/AA mortgage bonds
$10 billion in A-rated mortgage bonds
Bank of America:
$157 billion in agency bonds
$4 billion in AAA/AA mortgage bonds
$2 billion in A-rated mortgage bonds
$75 billion in agency bonds
$1 billion in AAA/AA mortgage bonds
$0 billion ($351 million) in A-rated mortgage bonds
$27 billion in agency bonds
$27 billion in AAA/AA mortgage bonds
$1 billion in A-rated mortgage bonds
$329 billion in agency bonds
$60 billion in AAA/AA mortgage bonds
$14 billion in A-rated mortgage bonds
In short, the Big Four invested in the safest two classes of mortgage securities, agencies and AAA/AA, at a ratio of 28:1 compared to the riskiest, most lucrative category for which we have figures: A-rated bonds. One should keep in mind that, for example, in mid-2006, agencies paid a 9-bps spread over Treasuries, AAAs paid 18 bps, AAs paid 32 bps, and As paid 54 bps. Reckless, greedy bankers should have bought As--or lower-rated mortgage bonds (BBBs paid 154 bps, and BBB- paid 267 bps) every time--never agencies, AAAs, or AAs.
However, do the new data mean that the Lehman figures on which we relied are wrong, for showing zero (or less than $500 million) in sub-AAA mortgage-bond holdings among commercial banks and savings and loans? Not necessarily. The figures above are from the consolidated regulatory filings of bank holding companies, which include investment-banking arms. The Lehman figures do show $24 billion in sub-AAA bonds among investment banks.
As for the data, then, we conclude that the full story remains to be told, but that our basic point stands: the bankers—even at Citigroup, which had the riskiest portfolio—were not behaving in patterns we would expect from reckless greedheads."
"I haven't wanted to interrupt all of these kind words, but thank you, Pete and everyone else.
Engineering the Financial Crisis was indeed inspired by what I take to be the core Austrian insight: the ubiquity of human ignorance. Popper makes a very similar point: the ubiquity of human error.
To me, Austrian economics is distinctive because it opens the door to saying, as Mises did in the socialist calculation debate: People may err because they don't know what they should know. Speaking for myself, not Wladimir Kraus, I’m not so sure about the rest of Austrian economics, but then, I am not an economist of any kind.
I agree that it's kind of absurd to have to *theorize* ignorance-based error, as Anthony Evans and I do in our recent “Critical Review” paper, but mainstream economists really do seem to have trouble with the concept, and it was this trouble that also led Wlad and me to write “Engineering the Financial Crisis.” For example, the book notes that Stiglitz asserts repeatedly that the crisis was *not* the result of anyone's errors. But we also note, following Pete Boettke's 1997 “Critical Review” article, “Where Did Economics Go Wrong?” that whether it's Stiglitz on the left or Stigler on the right, such assertions are commonplace among mainstream economists, clearing the way for them to claim that incentives, as opposed to ignorance, explain (or rather explain away) errors.
The Evans and Friedman paper linked to above suggests that Austrians seize the moment to criticize that tendency among mainstream economists. Austrians might be able to reform their discipline in this golden moment of opportunity if they show that an ignorance-based economics has a much firmer purchase on the empirical realities of the crisis than the evidence-free assertions of Stiglitz and virtually all other economists who have written about the disaster. That's what Engineering the Financial Crisis” tries to do.
The book is also an exercise in “Austrian political science.” Just as Mises asked how central planners would know what they'd need to know if they were to avoid errors, an Austrian political theory would ask how political actors are to know what they need to know, and an Austrian political science would examine political actors' actual sources of information, the gaps therein, and the theoretical and ideological biases therein.
Thus, Wlad and I find that banking regulators were in the grip of the same economistic ideology gripping Stigler and Stiglitz. They thought that deposit insurance created misaligned incentives for bankers (a moral hazard), such that bankers would now want to take wild bets. Therefore capital cushions had to be mandated by law, and the details of those mandates incentivized bankers to pile into what regulators thought were "safe" securities: those rated AAA. (Incidentally, the regulations provided an even greater incentive to pile into sovereign debt.)
Similarly, the accounting regulators thought corporate executives faced the moral hazard of profiting by hiding losses from shareholders. So they mandated mark-to-market accounting on the grounds that market prices "tell the truth" by "aggregating information" (. . . even Hayek was fallible . . .), rather than aggregating the fallible decisions of buyers and sellers. Mark-to-market accounting therefore writes down corporate assets that are experiencing an ignorance-based market panic, which happened to AAA mortgage bonds in 2007 and 2008, and this directly translates into dollar for dollar reductions in capital. If the corporation is a bank, this dramatically shrinks lending power, and thus may have transformed the financial-market panic into the Great Recession.
The "information," ideas, theories, and ideologies that prompt political action have long been studied in political science, so those who study it face none of the high hurdles to career success that face Austrian economists. The Critical Review Foundation has been running occasional seminars since 1995 to encourage young scholars of Austrian bent to go into political science. Two of those young scholars are now tenure-track political scientists at Yale. If you may be interested in this career path, please contact me through the Critical Review website, http://www.criticalreview.com/crf/
Finally, Wlad and I have a blog where we've posted updated data on the actually risk averse (but regulation-following) behavior of bankers prior to the crisis: http://causesofthecrisis.blogspot.com/2011/10/new-data-on-bankers-risk-aversion.html We'd be happy to debate the theses of the book there."
In 2000 $s, per capita consumption in the US was about $11,000 per year in 1970, taking health care out. By 2005 it was about $22,000.
Literacy rates are rising. From UNESCO.
"At the global level, the adult literacy rate increased throughout the post-1950 period: from 56% in 1950 to 70% in 1980, and to 82% in the most recent period (2000-04)."
Violence is trending down, accoring to Steven Pinker
"The criminologist Manuel Eisner has assembled hundreds of homicide estimates from Western European localities that kept records at some point between 1200 and the mid-1990s. In every country he analyzed, murder rates declined steeply—for example, from 24 homicides per 100,000 Englishmen in the fourteenth century to 0.6 per 100,000 by the early 1960s."
"At the widest-angle view, one can see a whopping difference across the millennia that separate us from our pre-state ancestors. Contra leftist anthropologists who celebrate the noble savage, quantitative body-counts—such as the proportion of prehistoric skeletons with axemarks and embedded arrowheads or the proportion of men in a contemporary foraging tribe who die at the hands of other men—suggest that pre-state societies were far more violent than our own. It is true that raids and battles killed a tiny percentage of the numbers that die in modern warfare. But, in tribal violence, the clashes are more frequent, the percentage of men in the population who fight is greater, and the rates of death per battle are higher. According to anthropologists like Lawrence Keeley, Stephen LeBlanc, Phillip Walker, and Bruce Knauft, these factors combine to yield population-wide rates of death in tribal warfare that dwarf those of modern times. If the wars of the twentieth century had killed the same proportion of the population that die in the wars of a typical tribal society, there would have been two billion deaths, not 100 million."
At this link you can see the gini calculated after taxes and transfers and, it seems, is adjusted for household size. For all people in the mid 2000s, the US has .38 and the OECD average is .31
"The latest Fortune magazine contains a page on “The Growing Wealth Gap.” The author, Doris Burke, says, “here are some of the facts.” But they aren’t facts, or even official estimates.
The opening line is, “The top 1% owns 36% of all wealth” as of 2009. Yet the latest figure was 33.8 percent in the Arthur Kennickell’s report on the Federal Reserve’s triennial Survey of Consumer Finances (SCF) and that was for 2007, not 2009. There will never be an estimate for 2009 (the next one is for 2010), so something is obviously fishy.
Using actual SCF estimates instead of Fortune’s made-up numbers, the first column in my table shows that the top 1 percent’s share of household net worth briefly spurted to 34.6 percent in 1995, but subsequently stabilized at 33.9% in 1998, 32.7% in 2001, 33.4% in 2004 and 33.8% in 2007.
An alternative source − a study of estate tax data in June 2004 The National Tax Journal by Wojciech Kopczuk of Columbia University and Emmanuel Saez at UC Berkeley − found the top 1 percent’s wealth share has fallen over the years from 26 percent in 1939 to 24.4 percent in 1962, 22% in 1989 to 20.8% in 2000 (shown in the table as 2001). The press repeatedly cites Saez’s estimates of the top 1 percent’s average income up until 2007 (since top incomes fell by 19.7 percent in 2008 and by a similar amount in 2009), but nobody ever mentions Saez’s estimates about the top 1 percent’s share of wealth.
So where did Fortune’s estimate of 36% (actually 35.6%) come from? The author cites the left-of-center Economic Policy Institute (EPI), which turns out to mean a paper by Sylvia Allegretto. (Fortune’s more amateurish sources include Deloitte and somebody named Mark Kroll). The EPI estimates, shown in the second column of the table, purport to be from the SCF but are simply mysterious. The dates were supposedly “chosen based on the data available,” but there is no data for 2009 while there is data for the strangely missing years of 1992 and 1995. Ironically, these enigmatic EPI estimates show the top 1 percent’s share of wealth declining since 1989 or 1998, which is not the impression that the EPI or Fortune hope to convey.
To fabricate a number for 2009, Ms. Allegretto relies on her own “author’s analysis” of an “unpublished analysis” by Ed Wolff “prepared for” the EPI but not on the website of Wolff or the EPI. Allegretto’s inexplicable analysis of Wolff’’s invisible analysis supposedly “updates” the official figures “based on changes in asset prices between 2007 and 2009 using Federal Reserve Flow of Funds data.” But changes in the flow of funds estimates are also rough and incomparable with the SCF, partly because they combine households with nonprofit organizations and unincorporated businesses.
Financial assets of households and nonprofits were worth $78.6 trillion at the end of 2007, according to the flow of funds, while homes were worth only $20.9 trillion and half of that was mortgaged. Allegretto implies that the top 1 percent’s share rose in 2009 because the flow of funds’ estimated 18 percent drop in the value of homes from 2007 to 2009 supposedly exceeded the drop in the value of assets that dominate the top 1 percent’s assets in 2007 – such as unincorporated business (whose value fell by 28.7 percent) and stocks (down 23.5 percent). Even if the flow of funds data confirmed the allegedly greater drop in home values than in, say, stocks, Allegretto’s own figures (her Table 6) show that stocks accounted for 30.8 percent of the wealth of the bottom 95 percent, but only 19.2 percent for the top 1 percent. In any case, home equity is too modest fraction of total wealth to drive the top 1 percent’s share upward at a time when stocks and small businesses were crashing. There is ample evidence (e.g., my forthcoming Wall Street Journal article updating the “new” CBO estimates to 2009) that recessions always drive down the top 1 percent’s share of both wealth and income. For those who obsess over the top 1 percent’s share, including the CBO and the Occupy Wall Street crowd, deep recessions should properly be celebrated as a wonderful decline in “inequality” by their twisted definition.
Fortune does not know what the top 1 percent’s share of wealth was in 2009, and it never will (because the next SCF survey will be for 2010). When the 2010 results are released, however, the top 1 percent’s wealth share will surely be lower than it was in 2007, not higher."
Friday, November 25, 2011
Below is an email I sent to Ana Polanco in response to her email. I think many governments around the world make it very hard for people to start a business and that this contributes to poverty. Perhaps this is a human rights violation. I think that entrepreneurship is a human right. What do you think? Maybe you have a committee or some experts who study this issue that you can pass this along to.
I received an email about this topic and I admit that it could be a concern. Corporations don't necessarily put human rights first. But when it comes to economic issues and their relationship to human rights, I also believe that governments do many things which prevent people from starting and running businesses that help get them out of poverty. Governments often set things up so that you have to have a connection to or be a friend of some official to get you business started. Or there is an enormous amount of paper work and regulations that have to be complied with to start a business. This makes things hard for the poor and those with little formal education. I have provided some links to articles on this topic. I wish that AI would look into this issue to see if it is worth publicizing and acting on. I believe that entrepreneurship is a human right. Thank you for your time.
Here is an article in the New Yorker by James Surowiecki called The Tyrant Tax
The Tyrant Tax
Here is Nobel Prize winning economist Gary Becker on the upheaval in the Middle East
Here is an article by economist HERNANDO DE SOTO in The Wall Street Journal called "Egypt's Economic Apartheid"
Egypt's Economic Apartheid
"Just a few medicines are responsible for a majority of the emergency hospitalizations for bad events related to medication use in older U.S. adults, according to new research.
Each year in the U.S., there are nearly 100,000 emergency hospitalizations for adverse drug events in adults 65 and older, says researcher Daniel S. Budnitz, MD, MPH, director of the CDC's Medication Safety Program.
"The most significant finding of this study was [that] of the thousands of medicines available to older adults, it's really a small group ... that causes two-thirds of the hospitalizations," he tells WebMD.
The blood thinner warfarin, insulin, oral anti-platelets such as aspirin, and oral diabetes drugs led the list.
"Both blood thinners and diabetes medicines are critical drugs that can be lifesaving," Budnitz says. However, he says that ''these are medications that you do need to pay attention to," being sure the dose and timing are correct, among other measures.
High-risk medications, such as narcotics, only accounted for about 1% of the hospitalizations, the researchers found.
The study is published in The New England Journal of Medicine.
Tracking Bad Events From Drugs
The researchers used data collected between 2007 and 2009 from 58 hospitals around the country. The facilities participate in the CDC's drug event surveillance project.
The researchers looked at how often an adult 65 or older was hospitalized after emergency department visits for adverse drug events.
The researchers estimated that 265,802 visits to emergency departments for adverse drug events occurred from 2007 to 2009 for adults 65 or older.
Over a third of these visits, or nearly 100,000, required hospitalization. About half of the patients hospitalized were age 80 or older.
Unintentional overdose of medication was the most common reason, accounting for nearly two-thirds of hospitalizations."
But what if we assume a monopsony model, where only one firm hires labor. In that case, a minimum wage can increase the number of workers hired, if it is not raised too high (above a certain level, the number of workers hired will fall).
But if the affected firms can stay in business with this increased cost of labor, it means that before the minimum wage was imposed they were making above normal profit. Because if they had been making just normal or zero profit, the increased costs would put them below normal profit and they will not stay in business in the long-run, leading to job losses.
Now if they were making above normal profit in the first place, what prevented other firms from entering and driving profit back down to normal? There would have to be barriers to entry. But it seems like the barriers to entry are not that high in industries affected by the minimum wage like retail and restaurants.
Also, if new firms entered these industries, the demand for labor would increase, thus raising the wage rates. This eliminates the need for a minimum wage law.
But in any case, minimum wage advocates have to show that the industries affected have significant barriers to entry. I am not aware that this case has ever been made.
But what if there is monopsony power (or temporary monopsonies as Card and Krueger suggest)? How does the government know the degree of monopsony power each firm has? A single minimum wage imposed on all firms might be sub-optimal. It might be too high for some firms and too low for others (I'm assuming that the wage that would exist under competition would be optimal). As Milton Friedman said, you replace market failure with government failure because government often faces the same lack of information that the private sector faces. And Hayek might say something similar, that there is a knowledge problem. The government does not have enough information to set the right wage for each firm.
I have also never seen any minimum wage advocate say what wage would actually start to decrease the number of workers hired. Again, even in the monopsony model, this will happen if it were too high.
A minimum wage advocate could argue that it makes businesses more efficient and productive because it cuts down on worker turnover which reduces hiring and training costs. But why would businesses have to wait for the government to impose a minimum wage to do that? They can do that on their own. Now maybe the first time this happened, firms were presently surprised by the beneficial effect of the minimum wage. But now that this knowledge is out there, we don't have to keep raising the minimum wage to make this happen. And, as always, how would the government know how high to set the minimum wage so that its negative effects don't outweigh this positive effect? There is no guarantee that they do.
Finally, if the minimum wage law is used as an anti-poverty policy, then the burden of this policy is placed on those who have hired the poor workers. The businesses will have to pay and they may pass some of the cost along to the customers. So anyone who does not patronize, say, fast food restaurants, and does not own any stock in them, does have to pay for this anti-poverty program. It has to be paid for by those who were responsible for the poor having those jobs in the first place: the owners and customers. Is it fair to push this cost on them while everyone else pays nothing? Maybe expanding the Earned Income Tax Credit would be more equitable since it spreads the burden over everyone in society, not just a small minority.
"Imagine three of the top scientific agencies in the U.S. working with the one of the nation’s top research laboratories try to find out how much BPA you are exposed to when you eat a lot of canned food over 24-hours. Imagine they continuously measure blood and urine to create a picture of human metabolism, a “Where’s Waldo” of chemical absorption and diffusion. Imagine they find that BPA rises in the urine after a meal of canned food as the chemical is rapidly metabolized and excreted and – even more surprising – they effectively fail to find any active BPA in human blood (it’s below the level of detection using the most advanced techniques for detection).
Imagine, also, that one of the world’s top endocrinologists, who specializes in looking at the potential risks of tiny amounts of chemicals to humans, calls the study “majestic,” for the way it was carried out, and says its conclusion effectively rules out the possibility that rodent experiments, where the chemical caused adverse effects, have any relevance for humans.
Well, such a study exists – but it might as well be a dream or a work of fiction, because the mainstream media just couldn’t be bothered to report it, despite publishing hundreds upon hundreds of stories about the alleged dangers of BPA in the past six years.
But what makes this particular omission particularly ironic, is that lo, a letter cometh out of Harvard and the Journal of the American Medical Association in which the best and the brightest students were fed canned soup, and behold, they haveth BPA in their urine. Cut to journo-evangelist, Anahad O’Connor, in the New York Times.““The new study is the first to measure the amounts that are ingested when people eat food that comes directly out of a can, in this case soup.”
Well, um, no. The aforementioned study by the Centers for Disease Control, Food and Drug Administration, and Battelle researchers at the Pacific Northwest National Laboratory (Teeguarden et al.), which was funded by the Environmental Protection Agency, fed humans a diet almost entirely composed of canned food, which included chicken noodle soup and clam chowder. Perhaps Professor Michels and the New York Times weren’t aware of this?“The spike in BPA levels that the researchers recorded is one of the highest seen in any study. ‘We cannot say from our research what the consequences are,” said Karin Michels, an associate professor of epidemiology at Harvard Medical School and an author of the study. “But the very high levels that we found are very surprising. We would have never expected a thousand-percent increase in their levels of BPA.’”
Actually, it’s not surprising at all. Why? Because the FDA has studied the concentrations of BPA in canned food and it published the results last July in the Journal of Agricultural Food Chemistry. BPA levels varied widely in canned food (note this point, because we’ll come back to why it is highly significant later) and in terms of soup, levels of BPA were up to 100 parts per billion (ppb) or nanograms per gram.
So, work out the dose for a 70 kilo person ingesting 12oz of soup at the highest level, and you end up with 0.5 ug/kg bw – which is ten times higher than the mean daily intake of BPA for the general population as calculated from the NHANES database (Lakind and Naiman, Journal of Exposure Science and Environmental Epidemiology, 2010). This comports with the levels found by Michels.
And wait – remember the Teeguarden study that no one in the media thought was worth reporting? Yes – that too shows similar levels of BPA in urine to Michels (and in some cases higher) after certain meals, with the added bonus that it demonstrated the levels did not translate into active BPA in the blood, which is the only thing we should be concerned about when it comes to this chemical.
But here’s where the New York Times allows Professor Michels to spin the most:“Dr. Michels said that the increases in BPA were most likely temporary and would go down after hours or days. ‘We don’t know what health effects these transient increases in BPA may have,’ she added.”
We know exactly the metabolic profile of BPA, and not just from Teeguarden et al. There is almost 100 percent elimination in 24 hours. Active BPA is below the level of detection. Inactive BPA cannot, by virtue of basic chemistry, mimic estrogen.“But she also pointed out that the findings were probably applicable to other canned goods, including soda and juices. ‘The sodas are concerning, because some people have a habit of consuming a lot of them throughout the day,’ she said. ‘My guess is that with other canned foods, you would see similar increases in bisphenol-A. But we only tested soups, so we wouldn’t be able to predict the absolute size of the increase.” (emphasis added)
Why bother with guessing when we have extensive knowledge of BPA levels in canned goods thanks to the FDA? We know there is such wide variance that we cannot make any assumption that the level of BPA in one product is “probably” the same in another. More to the point, Health Canada, has done extensive testing on canned soda and other drinks, and the results are nowhere close to Professor Michel’s soup cans. (By the way, this takes very little specialist knowledge to work this out: Google “BPA migration soda can” and you can find the Health Canada data).
But then Professor Michel’s study was in part funded by the National Institute of Environmental Health Sciences, which has a truly remarkable track record of funding almost all the scare studies on BPA – and then later (sotto voce, of course) admitting that many of them can’t really tell us anything about human risk, and should have really be conducted in a manner similar to studies funded by the FDA and EPA – and their overseas equivalents.
Unfortunately, if journalists don’t bother to wrestle with the regulatory science, they’ll never know whether they are being spun or whether, in this case, Professor Michels is not as familiar with the research literature on BPA as a professor with two Ph.Ds should be."
Thursday, November 24, 2011
"Class warfare thrives on ignorance about the sources of income. Listening to some of the talk about income differences, one would think that there's a pile of money meant to be shared equally among Americans. Rich people got to the pile first and greedily took an unfair share. Justice requires that they "give back." Or, some people talk about unequal income distribution as if there were a dealer of dollars. The reason some people have millions or billions of dollars while others have very few is the dollar dealer is a racist, sexist, a multinationalist or just plain mean. Economic justice requires a re-dealing of the dollars, income redistribution or spreading the wealth, where the ill-gotten gains of the few are returned to their rightful owners.
In a free society, for the most part, people with high incomes have demonstrated extraordinary ability to produce valuable services for -- and therefore please -- their fellow man. People voluntarily took money out of their pockets to purchase the products of Gates, Pfizer or IBM. High incomes reflect the democracy of the marketplace. The reason Gates is very wealthy is millions upon millions of people voluntarily reached into their pockets and handed over $300 or $400 for a Microsoft product. Those who think he has too much money are really registering disagreement with decisions made by millions of their fellow men."
"What do the companies in these three groups have in common?
Group A. American Motors, Studebaker, Detroit Steel, Maytag and National Sugar Refining.
Group B. Boeing, Campbell Soup, Deere, IBM and Whirlpool.
Group C. Cisco, eBay, McDonald's, Microsoft and Yahoo.
All the companies in Group A were in the Fortune 500 in 1955, but not in 2011.
All the companies in Group B were in the Fortune 500 in both 1955 and 2011.
All the companies in Group C were in the Fortune 500 in 2011, but not 1955.
Comparing the Fortune 500 companies in 1955 and 2011, there are only 67 companies that appear in both lists. In other words, only 13.4% of the Fortune 500 companies in 1955 were still on the list 56 years later in 2011, and almost 87% of the companies have either gone bankrupt, merged, gone private, or still exist but have fallen from the top Fortune 500 companies (ranked by gross revenue). Most of the companies on the list in 1955 are unrecognizable, forgotten companies today. That's a lot of churning and creative destruction, and it's probably safe to say that many of today's Fortune 500 companies will be replaced by new companies in new industries over the next 56 years.
Update: Here's a related article from Steve Denning in Forbes, featuring some insights from Steve Jobs about what causes great companies to decline (power gradually shifts from engineers and designers to the sales staff) and how the life expectancy of firms in the Fortune 500 and S&P500 has been declining over time."
"Fierce Healthcare -- "With retail clinics increasing ten-fold, more health systems and hospitals are capitalizing on the trend and getting in on the retail movement. Between 2007 and 2009, retail medical clinics at pharmacies and other retail settings have risen from a monthly tally of 0.6 visits per 1,000 enrollees in January 2007, to 6.5 visits per 1,000 enrollees in December 2009, according to a new study by RAND Corporation, published in the American Journal of Managed Care (study abstract here).
Surprisingly, the availability of primary care physicians didn't affect use of retail clinics. The strongest predictor was proximity.
"It appears that those with a higher income place more value on their time, and will use clinics for convenience if they have a simple health issue such as a sore throat or earache," senior study author Dr. Ateev Mehrotra, investigator at RAND and the University of Pittsburgh, said in a RAND press release.
This week's announcement that Emory Healthcare, Georgia's largest hospital system is partnering with CVS MinuteClinic may demonstrate a broader trend of traditional hospital systems aligning with convenient clinics. Earlier this year, Mayo Clinic announced it moved into the Mall of America in what it calls the "Create Your Mayo Clinic Health Experience" center, a 2,500-square-foot space of high-tech interaction. And Walmart recently declared it wanted to be the nation's biggest primary care provider with its entrance into the retail care market."
MP: At the same time that the pending implementation of Obamacare threatens a government takeover of health care and medicine in America that will stifle competition and raise prices, the market continues to offer many new, innovative, alternative solutions to health care that are competitive, affordable and convenient. The ten-fold increase in the use of retail health clinics in just two years demonstrates that consumers appreciate the market-based, consumer-driven convenience of affordable, no-wait service at retail health clinics, and they'll be pretty disappointed if that changes to long-wait, inconvenient health care under Obamacare."
Tuesday, November 22, 2011
"After three years and $4 trillion in combined deficit spending, unemployment remains stubbornly high and the economy sluggish. That people are still asking what the government can do to stimulate the economy is mind-boggling.
That the Keynesian-inspired deficit spending binge did create jobs isn’t in question. The real question is whether it created any net jobs after all the negative effects of the spending and debt are taken into account. How many private-sector jobs were lost or not created in the first place because of the resources diverted to the government for its job creation? How many jobs are being lost or not created because of increased uncertainty in the business community over future tax increases and other detrimental government policies?
Don’t expect the disciples of interventionist government to attempt an answer to those questions any time soon. It has simply become gospel in some quarters that massive deficit spending is necessary to get the economy back on its feet.
The idea that government spending can “make up for” a slow-down in private economic activity has already been discredited by the historical record—including the Great Depression and Japan’s recent “lost decade.”
Our own history offers evidence that reducing the government’s footprint on the private sector is the better way to get the economy going.
Take for example, the “Not-So-Great Depression” of 1920-21. Cato Institute scholar Jim Powell notes that President Warren G. Harding inherited from his predecessor Woodrow Wilson “a post-World War I depression that was almost as severe, from peak to trough, as the Great Contraction from 1929 to 1933 that FDR would later inherit.” Instead of resorting to deficit spending to “stimulate” the economy, taxes and government spending were cut. The economy took off.
Similarly, fears at the end of World War II that demobilization would result in double-digit unemployment when the troops returned home were unrealized. Instead, spending was dramatically reduced, economic controls were lifted, and the returning troops were successfully reintegrated into the economy.
Therefore, the focus of policymakers in Washington should be on fostering long-term economic growth instead of futilely trying to jump-start the economy with costly short-term government spending sprees. In order to reignite economic growth and job creation, the federal government should enact dramatic cuts in government spending, eliminate burdensome regulations, and scuttle restrictions on foreign trade.
The budgetary reality is that policymakers today have no choice but to drastically reduce spending if we are to head off the looming fiscal train wreck. Stimulus proponents generally recognize that our fiscal path is unsustainable, but they argue that the current debt binge is nonetheless critical to an economic recovery.
There’s no more evidence for this belief than there is for the existence of the tooth fairy.
Not only has Washington’s profligacy left us worse off, our children now face the prospect of reduced living standards and crushing debt."
"Christina Romer gave a speech at Hamilton College earlier this month which criticizes my findings that recent temporary tax rebates had little or no effect on aggregate consumption. Romer claims that in analyzing this “relationship between two variables” I did not consider the impact of third variables “influencing both of them.”
Romer’s claim is wrong. In fact, in my paper which Romer cites (first presented on January 4, 2009 at the AEA meetings and published in the American Economic Review), I explicitly state that one must take account of other variables. Here is a quote from that paper: “policy evaluation requires going beyond graphs and testing for the impact of the rebates on aggregate consumption using more formal regression techniques….an advantage of using regressions is that one can include other factors that affect consumption.” In that investigation, which focused on the 2001 and 2008 rebates, I used monthly data and included in the regressions monthly data on oil prices, which rose dramatically in the first half of 2008 and which would be expected to reduce consumption around the time of the rebates. Indeed, oil prices had a highly significant coefficient in the regressions, and yet I found no significant effect of the rebates as shown in Table 2 of the paper. In another paper published in the Journal of Economic Literature, (discussed in the blogosphere here and here) I used quarterly data to investigate the 2001 and 2008 stimulus packages and also the 2009 stimulus. With quarterly data, I also included a household net worth variable from the Fed’s flow of funds accounts, along with the quarterly average of oil prices. The net worth variable had a significant effect, and yet I still found no statistically significant impact of the temporary payments as shown in Table 1 of the JEL paper.
In sum, my research does consider the impact of third variables, contrary to what Romer claimed. And the results I reported are robust to adding such variables, contrary to what Romer conjectured."
"Will the “Occupy” movement develop into a significant political force? I am doubtful: the movement is already losing supporters in most places where it has been active. Cold weather will accelerate the decline. The movement is losing ground not because the issues it raises are unimportant, but rather because the great majority of Americans and those in other countries with Occupy groups do not sympathize with most of the people doing the occupying.
We discussed the unemployment situation in the US last week, and reform of banks in several previous posts, so I concentrate my comments on the inequality issues raised by occupiers. American inequality in the distribution of incomes, and inequality in many other Western nations, has grown a lot since the late 1970s. This growth can be separated into the growth in earnings inequality across education and other skill classes, and the growth in income at the very top of the income distribution. I start with the inequality by skill since that is what most closely affects the vast majority of people.
Many of the Occupy Wall Street participants are college students- it is easy to miss classes at most colleges for a few days and even much longer- and other young persons who had gone to college. They have complained about the ”high” unemployment of college-educated persons, and also about the burden of college loans. Yet the large increase in earnings inequality during past 30 years has mainly taken the form of a growth in the earnings of college graduates and that of others with high levels of skills relative to earnings of high school dropouts, high school graduates, and others with lower skills. Although unemployment grows for all education groups grow during recessions, it has not grown any faster during the Great Recession for college-educated persons than for persons without college, and is still much lower for the college educated. For example, in October of 2011 the unemployment rate for college graduates was under 5% compared to an unemployment rate of almost 14% for high school dropouts.
Nor are the complaints by occupiers about the burden of student loans much better founded for the great majority of graduates. The typical rate of return to a college graduate, especially those with post-graduate degrees, has risen greatly since the late 1970s, certainly high enough to support even sizable student loans with interest payments that are heavily subsidized by the federal government. The real ones with a gripe are high school dropouts who not only have high unemployment rates, but also low real earnings that may have fallen for dropouts during past 30 years, poorer health than others, bad marital prospects, and weak access to home ownership and other consumer luxuries.
The Occupy Movement and everyone else worried about earnings inequality should be emphasizing the need to find ways to encourage more high school dropouts and high school graduates to get the required background and study habits so that they can, and want to, continue on for a college education. A daunting task, but a necessary one in order to respond in an effective way to the anatomy of the large growth in earnings inequality.
The income share of the top 1% in the United States has declined a lot since the onset of the Great Recession, but it is still much higher than it was in the 1970s. Earnings are also an important component of these very high incomes, but these are earnings of top management and executives, including the top earners in banking, and in hedge funds and other managers of money, and including also the top earners in medicine, law, consulting, and some other fields. According to a November 2010 study by Bakija, Cole, and Heim (I am indebted to Steve Kaplan for referring me to this study), more than 60% of the persons in the top 1% of the income distribution in 2005 consisted of (non-finance) executives, managers, and supervisors, medical personnel, lawyers, and non-finance persons doing computing, math, or engineering.
Although, on the whole, I believe that most members of the top 1% provide useful services to society, I share the concern of “occupiers” and Tea Party members about many of the bailouts. The rich bankers and others who took large risks should have taken much larger haircuts. I have also supported from the beginning of the recession higher capital requirements for banks, especially for the large “too big to fail banks” that will be bailed out if they get into financial difficulties.
Nevertheless, the overall earnings inequality has far greater relevance for the vast majority of occupiers and Tea Party supporters than do the earnings of men and women at the very top of the financial sector. The most effective way for the US to reduce overall inequality that will help the largest number of young persons is by finding ways to bring American high school and college graduation rates up to the levels achieved by the other nations, such as South Korea and some European nations, that have replace the US as worldwide leaders in education achievements."
Sunday, November 20, 2011
"Several people have asked me to comment on nominal GDP targeting, as recently proposed by Scott Sumner, Christina Romer and Paul Krugman. I did research on nominal GDP targeting many years ago and found that such targeting proposals had a number of problems, which I summarized in the paper “What Would Nominal GNP Targeting Do to the Business Cycle?” Carnegie-Rochester Series on Public Policy, 1985. Although much has changed in the past quarter century I find many of the same problems with the recent proposals.
One change is that, in comparison with earlier proposals, the recent proposals tend to focus more on the level of NGDP rather than its growth rate. This removes some of the instability of NGDP growth rate targeting caused by the fact that NGDP growth should be higher than its long run target during the catch up period following a recession. But it introduces another problem: if an inflation shock takes the price level and thus NGDP above the target NGDP path, then the Fed will have to take sharp tightening action which would cause real GDP to fall much more than with inflation targetting and most likely result in abandoning the NGDP target.
A more fundamental problem is that, as I said in 1985, “The actual instrument adjustments necessary to make a nominal GNP rule operational are not usually specified in the various proposals for nominal GNP targeting. This lack of specification makes the policies difficult to evaluate because the instrument adjustments affect the dynamics and thereby the influence of a nominal GNP rule on business-cycle fluctuations.” The same lack of specificity is found in recent proposals. It may be why those who propose the idea have been reluctant to show how it actually would work over a range of empirical models of the economy as I have been urging here. Christina Romer’s article, for instance, leaves the instrument decision completely unspecified, in a do-whatever-it-takes approach. More quantitative easing, promising low rates for longer periods, and depreciating the dollar are all on her list. NGDP targeting may seem like a policy rule, but it does not give much quantitative operational guidance about what the central bank should do with the instruments. It is highly discretionary. Like the wolf dressed up as a sheep, it is discretion in rules clothing.
For this reason, as Amity Shlaes argues in her recent Bloomberg piece, NGDP targeting is not the kind of policy that Milton Friedman would advocate. In Capitalism and Freedom, he argued that this type of targeting procedure is stated in terms of “objectives that the monetary authorities do not have the clear and direct power to achieve by their own actions.” That is why he preferred instrument rules like keeping constant the growth rate of the money supply. It is also why I have preferred instrument rules, either for the money supply, or for the short term interest rate.
Rules for the instruments are what monetary policy needs, not excuses for discretionary actions. I welcome more research looking for better instrument rules which are explicit and operational enough to be evaluated with empirical economic models. Even an historical comparison of different rules would be welcome, and Allan Meltzer's monumental History of the Federal Reserve would be a good foundation to build on. As he summarized in a speech this week, “Economists and central bankers have discussed monetary rules for decades. A common response of those who oppose a rule, or rule-like behavior, is that a central banker’s judgment is better than any rule. The evidence we have disposes of that claim. The longest period of low inflation and relatively stable growth that the Fed has achieved was the 1985-2003 period when it followed a Taylor rule. Discretionary judgments, on the other hand, brought the Great Depression, the Great Inflation, numerous inflations and recessions. The Fed contributed to the current crisis by keeping interest rates too low for too long.”"
Adam Smith: The evils of unrestrained selfishness might be better that the evils of incompetent and corrupt government
… is from the great Jacob Viner’s classic 1928 article “Adam Smith and Laissez Faire”; here, specifically, from page 142 of the 1966 A.M. Kelley reprint of the 1928 volume Adam Smith: 1776-1926:
Even when Smith was prepared to admit that the system of natural liberty would not serve the public welfare with optimal effectiveness, he did not feel driven necessarily to the conclusion that government intervention was preferable to laissez faire. The evils of unrestrained selfishness might be better that the evils of incompetent and corrupt government.
I add only that nothing removes the restraints on selfishness more readily and surely than does access to government power.
"How did protesters manage to take over Zuccotti Park, a half-acre plot a few blocks from Wall Street? It turns out that this land grab is not due to the power of social media. Instead, the main force letting protesters stay in the park is old-fashioned crony capitalism."
" Zuccotti is not a city park, where sleeping overnight is prohibited. Instead, it is one of some 500 "privately owned public spaces" that New York City officials created as part of zoning deals with real estate developers.
In the case of Zuccotti Park, the crony capitalism goes back to the 1970s, when U.S. Steel built the One Liberty Plaza office tower. In exchange for adding nine stories, city officials extracted an agreement that U.S. Steel would fund a 24-hour-a-day park across the street.
These quasipublic spaces are notorious for leaving unclear who's responsible for what."
"Even if this were a public park, Supreme Court cases on the "time, place and manner" for demonstrations would clearly allow officials to stop a month-long sleepover.
Occupy Wall Street leadership and lawyers picked Zuccotti Park knowing the split responsibility for privately owned public spaces would give them a better chance to stay than in a public park. The absence of quasipublic parks explains why similar Occupy efforts failed in Washington, Chicago and Trenton, N.J., where police quickly removed protesters camping out in parks."
"Last week, Brookfield finally asked the New York police commissioner for help. "The manner in which the protesters are occupying the park violates the law, violates the rules of the park, deprives the community of its rights of quiet enjoyment to the park, and creates health and public safety issues that need to be addressed immediately," its letter to the police reads."
""Brookfield got lots of calls from many elected officials threatening them and saying, 'If you don't stop this, we'll make your life more difficult,'" Mayor Bloomberg said on his radio show on Friday."
Thursday, November 17, 2011
"In the United States, where the 1984 National Organ Transplantation Act prohibits compensation for organ donating, there are only about 20,000 kidneys every year for the approximately 80,000 patients on the waiting list. In 2008, nearly 5,000 died waiting.
A global perspective shows how big the problem is. "Millions of people suffer from kidney disease, but in 2007 there were just 64,606 kidney-transplant operations in the entire world," according to George Mason University professor and Independent Institute research director Alexander Tabarrok, writing in the Wall Street Journal.
Almost every other country has prohibitions like America's. In Iran, however, selling one's kidney for profit is legal. There are no patients anguishing on the waiting list. The Iranians have solved their kidney shortage by legalizing sales.
Many will protest that an organ market will lead to exploitation and unfair advantages for the rich and powerful. But these are the characteristics of the current illicit organ trade. Moreover, as with drug prohibition today and alcohol prohibition in the 1920s, pushing a market underground is the way to make it rife with violence and criminality.
In Japan, for the right price, you can buy livers and kidneys harvested from executed Chinese prisoners. Three years ago in India, police broke up an organ ring that had taken as many as 500 kidneys from poor laborers. The World Health Organization estimates that the black market accounts for 20 percent of kidney transplants worldwide. Everywhere from Latin America to the former Soviet Republics, from the Philippines to South Africa, a huge network has emerged typified by threats, coercion, intimidation, extortion, and shoddy surgeries."
"Several years ago, transplant surgeon Nadley Hakim at St. Mary's Hospital in London pointed out that "this trade is going on anyway, why not have a controlled trade where if someone wants to donate a kidney for a particular price, that would be acceptable? If it is done safely, the donor will not suffer.""
""The Material Well-Being of the Poor and the Middle Class Since 1980" is a research paper by professor Bruce D. Meyer of the University of Chicago and the National Bureau of Economic Research and professor James X. Sullivan of the University of Notre Dame.
In it, they report: "Our results show evidence of considerable improvement in material well-being for both the middle class and the poor over the past three decades. Median income and consumption both rose by more than 50 percent in real terms between 1980 and 2009.
"In addition, the middle 20 percent of the income distribution experienced noticeable improvements in housing characteristics: living units became bigger and much more likely to have air conditioning and other features.
"The quality of the cars these families own also improved considerably. Similarly, we find strong evidence of improvement in the material well-being of poor families.""
"Income measures fail to capture important components of economic well-being, such as wealth and the ownership of durables, e.g., houses and cars. For example, official measures would consider a retired couple who owned their car and mortgage-free $700,000 home and lived on $20,000 savings to be poor. Clearly, their income does not reflect their material well-being.
"Income Mobility in the U.S. from 1996 to 2005" is a report by the U.S. Department of the Treasury that shows considerable income mobility of individuals in the U.S. economy.
"Roughly half of taxpayers who began in the bottom income quintile in 1996 moved up to a higher income group by 2005. Among those with the very highest incomes in 1996 -- the top 1/100 of 1 percent -- only 25 percent remained in this group in 2005. Moreover, the median real income of these top taxpayers declined over the study period."
These findings confirm previous studies dating back to the 1960s reaching the same conclusion, namely: At different periods of time, different people occupy different income groups, but the overall trend is upward.
What about the concentration of wealth? In 1918, John D. Rockefeller's fortune accounted for more than half of 1 percent of total private wealth. To compile the same half of 1 percent of the total private wealth in the United States today, you'd have to combine the fortunes of Microsoft's Bill Gates ($59 billion) and New York Mayor Michael Bloomberg ($19 billion), but with 10 other multibillionaires in between."