Business : The Atlantic

Occupy Kindergarten: The Rich-Poor Divide Starts With Education

2012-02-11T09:00:00-05:00

New research shows that a family's money matters ever more when it comes to their childrens' education

Reuters

Economic class is increasingly becoming the great dividing line of American education.

The New York Times has published a roundup of recent research showing the growing academic achievement gap between rich and poor students. It prominently features a paper by Stanford sociologist Sean F. Reardon, which found that, since the 1960s, the difference in test scores between affluent and underprivileged students has grown 40%, and is now double gap between black and white students. (Graph courtesy of the Times.)

The children of the wealthy are pulling away from their lower-class peers -- the same way their parents are pulling away from their peers' parents. When it comes to college completion rates, the rich-poor gulf has grown by 50% since the 1980s. Upper income families are also spending vastly more on their children compared to the poor than they did 40 years ago, and spending more time as parents cultivating their intellectual development.

It may not simply be a matter of the rich getting richer, and the poor getting poorer -- although that certainly is a part of it. The growing differences in student achievement don't strictly mimic the way income inequality has skyrocketed since the middle of the 20th century. It's actually worse than that. Today, there's a much stronger connection between income and a child's academic success than in the past. Having money is simply more important than it used to be when it comes to getting a good education. Or, as Reardon puts it, "a dollar of income...appears to buy more academic achievement than it did several decades a ago."

Even more discouraging: The differences start early in a child's life, then linger. Reardon notes another study which found that the rich-poor achievement gap between students is already big when they start kindergarten, and doesn't change much over time. His own analysis shows a similar pattern.

How come money is so much more important now than before, and so early in a child's development? Thank your local alpha-mom (or dad).

We don't have definitive evidence that can tell us why income matters so much more to a child's education now than it did four decades years ago. But like many other writers, including The Atlantic's own Megan McArdle, Reardon suggests it involves a complicated interplay between wealth and culture. Well-off parents today are more able and likely to invest in their child's early education. Like I mentioned, studies show wealthy parents are spending more on their young children and paying more attention to their academic development. One paper found that by the time an upper-income kid starts school, they've spent 400 more hours on "literacy activities" than their less fortunate peers.

We can also look at the way America now segregates itself by education. The greatest predictor of a child's academic success, even more than economic class, is still their parents' education level. But among adults, education and income are becoming more and more intertwined. College graduates couple off and use their resources to raise children who will also go on to succeed academically. When he ran the numbers, Reardon actually found that parental education couldn't explain the entire growth the academic gap between classes. But that doesn't mean it's not a factor.

Even if we still have to tease out the reasons why, we appear to have reached a point where the children of the rich end up better educated, and more likely to succeed, simply because they're children of the rich.

What Happened at MF Global?

2012-02-10T15:37:18-05:00

We still don't really know what happened at MF Global, but Reuters is reporting that--much to the surprise of many involved--there is so far not much evidence of criminality.

Lawyers and people familiar with the MF Global investigation of the firm that was run by former Goldman Sachs head Jon Corzine say that even though the hunt is still on to find out whether or not officials at MF Global intended to pilfer customer money in a desperate bid to keep the brokerage from failing, the trail at this point is growing cold.

To date, scant evidence of criminal intent has emerged in company emails, no former or current employees have sought to cut a deal to provide testimony about potential wrongdoing and seasoned defense lawyers say they are not seeing the tell-tale signs of a hot criminal investigation.

A source familiar with the work of Louis Freeh, trustee for the MF Global holding company that filed for Chapter 11 bankruptcy protection, says investigators have yet to find evidence of fraud in the multi-faceted and complex investigation.

The source, who declined to be identified because Freeh's office is still conducting its inquiry, says there was plenty of "chaos" at MF Global in its waning days, but "no evidence of fraud." Freeh is a former Director of the Federal Bureau of Investigation.

I don't understand how this could be true. To be clear, I am not saying that it couldn't be true--only that I don't understand how such a thing could have happened. There is more than a billion dollars missing from supposedly segregated client accounts. I understand that it was chaotic, but what kind of chaos causes you to accidentally move money out of money that any moderately sophisticated compliance system should have automatically flagged for approval?

U.S. Taxes Really Are Unusually Progressive

2012-02-10T13:03:02-05:00

If you ask me, Jonathan Chait, a writer I respect, has made an ass of himself in a fight he picked with Veronique de Rugy over taxes and progressivity. She offended him by saying that America's income taxes are more progressive than those of other rich countries. Chait assailed her "completely idiotic" reasoning, called her an "inequality denier", "a ubiquitous right-wing misinformation recirculator" and asked if it was really any wonder he cast insults now and then at such "lesser lights of the intellectual world". (Paul Krugman said he sympathises. With Chait, obviously. The only danger here is in being too forgiving, Krugman advises. Chait may think the de Rugys of this world are only lazy and incompetent, but we know them to be liars as well.)

Just one problem. On the topic in question, De Rugy is right and Chait is wrong.

Income taxes in America are more progressive than in other rich countries--according to an authoritiative official study which, to my knowledge, has not been contradicted. The OECD's report "Growing Unequal", on poverty and inequality in industrial countries, includes a table that provides two measures of income tax progressivity in 2005. This is evidently the source of de Rugy's numbers. Here they are in an excel file. According to one measure, America's income taxes were the most progressive of the 24 countries in the sample, except for Ireland. According to the other, they were the most progressive full stop. (A more recent OECD report, "Divided We Stand", uses different data, a smaller sample of countries and a different measure of progressivity: the results are similar.)

Before you ask, this ranking takes account of employee-side payroll tax as well as the federal income tax.

Chait first objected to de Rugy's claim about progressivity because he thought she was inferring it from the fact that the US collects the biggest share of income taxes--45 percent of the total, col B1 in the table--from the top income decile. That would be a false inference, as Chait says, because it could be true of a country with a very unequal income distribution even if its taxes were not especially progressive. But look at the table. There was no need for de Rugy to draw any such inference, let alone try to mislead readers. All she needed to do--and all, I'm sure, she did--was glance over to the last column, which actually gives the measure of progressivity, showing the US to have the highest score.

The measure of progressivity is hard to explain, so I can see why de Rugy quoted the tax share instead. But she could have chosen a much more dramatic number if she was seeking merely to bamboozle her readers. Exclude payroll tax, and the top 1 percent of taxpayers, not the top 10 percent, have lately accounted for nearly 40 percent of income tax receipts, the top 5 percent for nearly 60 percent, and the top decile for roughly 70 percent. (Here are the IRS data, excel file.)

For the reason I just gave, this does not prove that the US tax system is more progressive than anybody else's--but it surely has some relevance to the question, "Are the rich paying their fair share of income tax?" If this isn't fair, what would be?

When Chait, with all the authority of a leading light of the intellectual world, says "Rich Americans pay a bigger share of the tax burden because they earn a bigger share of the income, not because the U.S. tax code is more progressive," he is making the same kind of sloppy bias-driven error he falsely accuses de Rugy of making. (I'll refrain from wondering whether he made the mistake deliberately.) According to the OECD, rich Americans bear a bigger share of the tax burden because they earn a bigger share of the income and because the US income tax system is more progressive.

There's a lot more to say on this subject.

Is measuring progressivity straightforward? No. It's difficult, because the underlying data are very complicated and hard to compare across countries. Another problem: expressing progressivity across the whole income range as a single number, so that one can say A is more or less progressive than B, can be misleading. Unfortunately, we all want to be able to say, A is more or less progressive than B.

Why, according to the OECD, is the US system so progressive? Not because the rich face unusually high average tax rates, but because middle-income US households face unusually low tax rates--an important point which de Rugy mentions and Chait ignores.

How does the picture change if you take indirect taxation into account? That would make the US system look even more progressive, because the US doesn't rely on a flat consumption tax like most other governments.

What does the tax-rate schedule tell you about progressivity? Very little, until you factor in deductions, thresholds and opportunities for avoidance. High top rates are meaningless if nobody is paying them.

What happens to tax progressivity at the very top of the US income distribution--inside the top one percent, or 0.1 or 0.01 percent? Good question. When it comes to international comparisons, I don't know of any good answers. But note that the US isn't the only country to tax capital at preferential rates.

Should the US system be even more progressive than it already is, bearing in mind the skewness of the pre-tax distribution, especially at the very top? Maybe it should--but a steeper tax-band schedule is a dumb way to improve fairness and raise more revenue.

I'll take some of these questions up in a bit more detail later. To be getting on with, here's a column I did that touches on the subject.

For Chait at his excellent best, try this. Meanwhile, I'd say he owes de Rugy an apology.

Who Are the Real 'Freeloaders': The Poor or the Old?

2012-02-10T11:47:48-05:00

The safety net, the entitlement state, and the true beneficiaries of the "freeloader revolution"

Reuters

During a 1992 campaign stop, George H.W. Bush entered the lore of classic campaign blunders by reading the stage directions on his cue cards. ("Message: I care," he declared.)

Mitt Romney did something similar in his instantly celebrated interview last week with CNN's Soledad O'Brien, when he said, "I'm not concerned about the very poor" because "they have a safety net," and that he was likewise not worried about "the very rich" because "they're doing just fine." Romney insisted that his focus would be on the sandwiched middle class.

The Jobs University: How to Turn Our Schools Into Engines of Innovation

2012-02-10T11:10:03-05:00

Should the role of college change? Holden Thorp, chancellor of the University of North Carolina, thinks so. That's why he's dedicated to transforming his school into a laboratory for entrepreneurs.

UNC/Reuters

CHAPEL HILL, NORTH CAROLINA -- At the age of 17, Holden Thorp placed fifth in a nationally televised Rubik's cube competition on the ABC show That's Incredible! At 24, he received a doctorate in chemistry from the California Institute of Technology after studying for three years instead of five. And at 43, he was named chancellor of the University of North Carolina, becoming one of the country's youngest university presidents.

Today, Thorp is trying to turn this 29,000-student public university into an engine of economic innovation. A business owner who has twice launched $25 million pharmaceutical startups, Thorp has streamlined the process for faculty members to turn their discoveries into private companies. He has made "entrepreneurship" a minor for all undergraduate students.

And Thorp has co-written a book, Engines of Innovation: The Entrepreneurial University in the 21st Century, with the university's "entrepreneur in residence" -- a former venture capital banker. It calls for the top 125 U.S. research universities to revitalize the American economy.

"The jobs of the near and distant future," he told me, "are going to be for those who create them for themselves."

As high-paying jobs have flowed overseas, American universities are being increasingly seen as economic engines for states, regions and the country as a whole. Across the U.S., communities with universities and colleges fared better economically during the recession than those without, according to the Wall Street Journal. And as other employers have disappeared, universities and colleges are increasingly considered sources of economic -- as well as intellectual -activity.

Here in Chapel Hill, UNC spends $2.4 billion a year and employs 12,000 faculty and staff. Together with nearby Duke and North Carolina State, UNC completes "The Research Triangle," a hub of universities, research parks and 30,000 small businesses that have helped make Raleigh-Durham the fastest-growing metropolitan area in the United States, increasing in population by 40 percent between 2000 and 2009. One business magazine predicted Raleigh-Durham will be the country's fastest-growing metropolitan area through 2025.

Beneath the positive regional trend runs a grim truth. Thorp's efforts to reimagine UNC are being driven by staggering funding cuts. Since 2008, UNC has lost $230 million in state aid, cut $50 million in costs, increased class size and frozen faculty pay. One reason for making it easier for professors to start businesses is to slow the number of faculty leaving UNC, often for better-paying private universities with multibillion-dollar endowments. As in other parts of American society, academia is splitting into the flourishing haves and the struggling have-nots.

Most troubling of all, UNC, long a model of affordability and excellence, has sharply increased tuition over the last decade. Since 2000, tuition and fees have risen by 150 percent for students across North Carolina's university system. And despite protests from students, parents and fomer trustees, UNC's board is expected to approve another tuition increase tomorrow. The situation is not unusual. Across the country, the state university funding model is collapsing.

Thorp argues that UNC and other state universities play a vital role in preserving the American middle class. For the 11th consecutive year, Kiplinger's recently ranked UNC as the best-value public university in the United States. Its $7,009-a-year in-state tuition is the second lowest of leading state universities. Only 35 percent of its students take student loans. And the average post-graduation student debt burden is $15,500. UNC is an engine of social mobility, Thorp argues, that helps prevent the middle class from splitting.

"You stop it through access to education," he said. "We've got the best financial aid profile in America."

After providing billions of dollars in research grants to universities, members of Congress, foundations and taxpayers are demanding that academics do more to address real-world problems. Economists argue that the United States must combine its two strongest remaining economic assets -- the world's best research universities and venture capital system -- to reinvent the American economy.

"The bill has come due," said Buck Goldstein, Thorp's co-author and the UNC's "entrepreneur in residence." "All of the stakeholders are demanding more impact." (A business Goldstein founded was later purchased by Thomson, the parent company of Reuters.)

Some academics deride the approach. They say that encouraging professors to create "spin-off" companies is the latest example of a gluttonous private sector devouring public resources. Business pursuits divert resources from pure scientific research, graduate students are used to help professors start businesses and researchers distort studies involving subjects where they have a financial interest.

Thorp and Goldstein insist they are not backing the commercialization of academia. Their definition of entrepreneurship is a broad one, they say, that includes social entrepreneurship.

"It's not Donald Trump," Goldstein said.

Former Harvard University President Derek Bok, whose book Universities in the Marketplace: the Commercialization of Higher Education, looked at the phenomenon, said those abuses have so far occurred only on a small scale. He called for strict vigilance of faculty business ventures -- but also for a lowering of expectations. Bok cautioned that universities are not "some kind of magic bullet that is going to do a whole lot for America's competitive position" in the world economy.

Private companies started by professors and researchers fail at the same rate as other firms, according to Bok. Universities receive royalties for intellectual property developed by their staff, but aside from MIT and Stanford, the payments total only a few million dollars a year. Thorp's first $25 million startup, in fact, went out of business.

A handful of academic blockbusters do exist. The top earner is an anti-AIDS drug developed by professors at Emory University. Second is Gatorade, a drink developed by professors at the University of Florida to hydrate its football players.

Thorp cited UNC chemistry professor Joe DeSimone as a best-case scenario. Last year, a private company DeSimone founded with the help of his university research received a $10 million investment from the Bill and Melinda Gates Foundation. The funding will help the company, Liquidia Technologies, develop new vaccines for malaria and other diseases. The startup also works with Procter & Gamble and other multinationals.

A visit to the company's gleaming, new high-tech offices provides a glimpse of the potential of UNC's model. Ben Maynor, a 37-year-old North Carolina native with a Harvard undergraduate degree and a doctorate from Duke in chemistry, said he assumed he would have to move to Boston or Silicon Valley to find work. Instead, Liquidia allowed him to stay home. The company employs 50 people and hopes to expand in North Carolina, not overseas.

"We have a new social contract with society," said DeSimone, referring to the federal research grants universities receive. "Those dollars are precious. We've got to funnel them into solving some of the world's biggest problems."

Thorp is right. Universities must change. We can no longer afford to have our greatest thinkers enjoy the "life of the mind" in isolation. The question is whether their gifts can meet the needs of a beleaguered society.

This article also appeared on Reuters.com, an Atlantic partner site.

The Truth About Income Inequality in America

2012-02-10T10:40:58-05:00

Of course the rich are getting richer. But the divergence between Main Street and America's elites begins with two of our most cherished institutions: college and marriage.

Gina Sanders/Shutterstock

In the early 1990s, Bill Gates was asked what competitor worried him the most. Goldman Sachs, Gates answered. He explained: "Software is an IQ business. Microsoft must win the IQ war, or we won't have a future. I don't worry about Lotus or IBM, because the smartest guys would rather come to work for Microsoft. Our competitors for IQ are investment banks such as Goldman Sachs and Morgan Stanley." Gates's comment reflected a reality that has driven the formation of the new upper class: Over the last century, brains became much more valuable in the marketplace.

First, the higher-tech the economy, the more it relies on people who can improve and exploit the technology, which creates many openings for people whose main asset is their exceptional cognitive ability.

Second, the more complex business decisions become, the more businesses rely on people who can navigate through labyrinths that require advanced cognitive ability. Consider the prospects for a lawyer. A hundred years ago, lawyers mostly practiced law for individual clients and made the amounts of money that individuals could afford to pay. As the size of business deals grew and regulatory law became more complex, the need for lawyers who never see the inside of a courtroom increased. Today, if a first-rate attorney can add 10 percent to the probability of getting a favorable decision on a regulatory ruling worth hundreds of millions of dollars, he is worth his many-hundreds-of-dollars-per-hour rate.

Third, the bigger the stakes, the greater the value of marginal increments in skills. The corporation ranked 500 in 2010 was about eight times larger than the 500th-ranked corporation in 1960, in constant dollars. The value of a manager who could increase his division's profitability by 10 percent instead of 5 percent escalated accordingly.

Given that backdrop, it is no surprise that the people working in managerial occupations and the professions made a lot more money in 2010 than they had made in 1960. Real income for the bottom quartile of American families fell after 1970 (the growth of in-kind benefits and earned-income tax credits more than made up the drop in pretax cash income-- but they didn't improve their position much either). Real family income for families in the middle was flat. Just about all of the benefits of economic growth from 1970 to 2010 went to people in the upper half of the income distribution.

COLLEGE, MARRIAGE, AND THE SORTING OF WEALTH

The initial mechanism whereby people with distinctive tastes and preferences are brought together is the college sorting machine. In 1997, just 10 schools took 20 percent of all the students in the United States who scored in the top five centiles on the SAT or ACT. Forty-one schools accounted for half of them.

The reason that upper-middle-class children dominate the population of elite schools is that the parents of the upper-middle class now produce a disproportionate number of the smartest children. Among college-bound seniors who took the SAT in 2010, 87 percent of the students with 700-plus scores in the math and verbal tests had at least one parent with a college degree. Fifty-six percent of them had a parent with a graduate degree. The children of the well educated and affluent get most of the top scores because they constitute most of the smartest kids. They are smart in large part because their parents are smart.

That brings us to the role of homogamy -- interbreeding of individuals with like characteristics. Drawing on the extensive technical literature and the CPS, sociologists Christine Schwartz and Robert Mare examined trends in "assortative marriage," as it is known in the jargon, from 1940 to 2003. They found that homogamy has increased at both ends of the educational scale -- college graduates grew more likely to marry college graduates and high school dropouts grew more likely to marry other high school dropouts. In 1960, just 3 percent of American couples both had a college degree. By 2010, that proportion stood at 25 percent.

It's not just that college graduates are likely to marry college graduates, but that graduates from elite colleges are likely to marry other graduates from elite colleges. Increased educational homogamy inevitably means increased cognitive homogamy. On average, children are neither as smart nor as dumb as their parents. They are closer to the middle. This tendency is called regression to the mean. In 2010, 87 percent of the students with 700-plus scores in Critical Reading or Mathematics had a parent with a college degree, and 57 percent had a parent with a graduate degree. Those percentages could have been predicted pretty closely just by knowing the facts about the IQs associated with different educational levels and the correlation between parental and child IQ.

The bottom line is not subject to refutation: Highly disproportionate numbers of exceptionally able children in the next generation will come from parents in the upper-middle class, and more specifically from parents who are already part of the broad elite.

Reprinted from the book Coming Apart by Charles Murray. Published by Crown Forum, a division of Random House, Inc.

The Amazing Swing State Recovery and Why It (Probably) Doesn't Matter

2012-02-09T18:05:31-05:00

Knock on wood, the labor market is moving into full-on recovery speed. The national unemployment rate has fallen to 8.3 percent, and initial jobless claims continue to press below the bright white line of 400,000. Things aren't simply getting better. They're getting better faster.

The Economist's Ryan Avent produces this chart (right) on unemployment change in the swing states and finds that almost all the key states are either improving faster than the national average or else have lower unemployment rates than the national mean.

Should we care? Maybe not. State data is of limited use to forecasters. "People's assessments of the national economy are more strongly related to their vote than are their assessments of their own personal finances," John Sides wrote in a post at The Monkey Cage. National fundamentals drive national elections:

Voters believe the president has little effect on their local economy, and they do not form their evaluation of the national economy based on surrounding conditions. This finding suggests that people form their opinions of the national economy based on non-local factors, such as the national media.

"Fundamentals drive elections" is something people like me like to say. It's short for: "Political maneuvering is exhausting, the message war is endless, and the Faster Feiler Effect makes momentum a meaningless concept, so if you're pressed for time but want an accurate-ish forecast for November, just look at the economic fundamentals."

But which fundamentals? That's the million-dollar question. According to political scientists, unemployment rates don't matter as much as income growth and GDP expansion just before the election. The upshot is that the health of the economy isn't as important as the rate of improvement in the economy just before the election. This isn't so surprising. Unemployment under Bush never came close to 7%, and he fell behind Kerry in some polls in 2004. If unemployment dropped to 7% in September 2012, it would be the result of a spectacular economic turnaround that would make this election a very boring runaway victory for President Obama.

If you want a better idea of whether Obama has an advantage in the fall, wait a few months. Confidently forecasting the 2012 election in the second week of February is like confidently predicting November's snowfall. The relevant weather patterns have hardly formed yet.

The Postal Service Just Lost $3.3 Billion: Blame Congress

2012-02-09T17:00:00-05:00

Yet again, Washington's inability to compromise has real-world consequences worth billions of dollars

The slow disintegration of the U.S. Postal Service might be the single most embarrassing sign of how dysfunctional our federal government has become.

If not, it's got to at least be in the top five.

Today, the USPS announced a $3.3 billion quarterly loss. This wasn't a total surprise. Even though the holiday shopping season usually buoys its revenue, USPS has been losing money for five years. By now, we all know the post office is officially on fire. And, as you probably guessed, the House and Senate can't reach an agreement on how to save it.

As I've previously written, USPS, which receives no taxpayer funding, is suffering a death by a thousand paper cuts. The internet is killing first class mail, the service's traditional cash cow. It has enormous legacy labor costs. It's required to deliver mail to every far-flung corner of the country, no matter how insanely unprofitable it is. It also has to deliver mail on Saturdays, no matter how insanely unprofitable it is. Meanwhile, a law from 2006 is forcing it to pre-pay about $5.5 billion dollars every year to cover health benefits for future retirees. Of its losses in the past three months, $3.1 billion were due to the pre-payment requirement. Note: That's not all of its losses. Just most of them.

These are not simple problems to fix. Turning USPS into a profitable, self-sustaining entity will be a years-long task that will take some serious business vision. I don't claim to know the solution. Not even close. But there are obvious places to start. For one, you could let it stop pre-paying for its retiree obligations, so it doesn't collapse under their weight now. You could also allow it to close a few post-offices and let go of a few workers in the process (Harsh? Yes. Necessary? Even more so.).

Right now, there are two main pieces of legislation sitting in Congress that would help achieve these things, but neither accomplishes all of them. A bipartisan Senate bill would return billions of dollars USPS has overpaid to cover its pension obligations, and use it to fund buyout packages to encourage retirements. It would also let the service pre-pay its retiree health benefits over 40 years instead of the 10 years required under current law. That way, it wouldn't be staring down an annual $5.5 billion bill. But the legislation isn't very aggressive about slimming down services. A Republican-backed House bill sponsored by Rep. Darrell Issa would create a committee to slash billions in spending on post offices and processing facilities while making it easier to lay off workers. But it doesn't do much to ease the impact of those healthcare payments.*

Predictably, there's no sign of compromise. Instead, Issa and the Senate bill's backers issued dueling statements pushing their versions of the legislation. In it's report today, The Hill notes that USPS could run up against its debt ceiling in the fall, which might force action from Congress.

Then again, we all remember the last time there was a debt ceiling debate. That was pretty embarrassing too.

_____________________

*An earlier version of this article mischaracterized some of the differences between the two bills regarding the treatment of pension payments.

A 'Central Bank' for Budget Policy

2012-02-09T16:59:55-05:00

Institutional or constitutional fixes for broken US fiscal policy are ever on the agenda: Gramm-Rudman-like fiscal rules, PAYGO schemes, balanced-budget amendments, and so on. In Europe "fiscal councils"--appointed, purportedly apolitical bodies to oversee budget policy--have been catching on, and they've had some success. The US has flirted with this idea too. The Bowles-Simpson commission was a kind of fiscal council, though its fast-track legislative powers were never activated. Italy, you could say, now has an unelected fiscal council in place of its entire government.

Dealing with fiscal emergencies is one thing, but should technocrats or balanced-budget rules have a more permanent role? Advocates draw a parallel with central-bank independence. Politicized monetary policy has a pro-inflation bias. Politicized fiscal policy has a pro-deficit bias. In each case, it's argued, we're better off if governments somehow bind themselves to do the right thing.

I start out skeptical. Forget simple balanced-budget rules. They're just bad economics. Sometimes, like now, countercyclical fiscal policy is a vital tool. Complex rules (eg, balance the budget over the course of the cycle) are better because they can allow more flexibility, but they're also easier to subvert.

What about "independent" fiscal councils? I've doubts about the central-banking parallel. As I've previously mentioned, the standard case for central-bank independence needs to be revisited. (Central banks have lately gone way beyond monetary policy as previously understood.) Also, there's a subtle but important difference between the two cases. Although inflation is always tempting, low inflation here and now is often good politics. Central-bank independence makes low inflation easier to deliver, so there's a quick pay-off for the government of the day in surrendering some power. In contrast, balancing the budget here and now is unavoidably painful. If the job can be passed along to the next administration, that's better for the team currently in charge. So you'd expect politicians to be much less likely to surrender fiscal powers than monetary powers.

Nonetheless they keep talking about it and now and then even do it.

In a new column I mention an approach that I think might make a lot of sense: a fiscal council equipped with (1) a narrow remit and, more adventurously, (2) a tax instrument.

Imagine an independent agency whose mandate is fiscal stability. It would be the fiscal equivalent of the central bank. Suppose that agency had one, and only one, sufficiently powerful and flexible instrument: a national sales tax, say. It could cut this tax in recessions to provide short-term stimulus, and at other times would set it at whatever rate it judged necessary to stabilize long-term debt. That would be its dual mandate: short-term stability and long-term fiscal solvency.

This Fiscal Stability Board would not be deciding which districts get bridges or defense installations, when people should retire, what medical treatments should attract public subsidy, or how mildly to tax manufacturers and private-equity partners. Above all, it would not be deciding what share of national income the government should spend. All that would fall to elected politicians.

In the U.S., Congress could carry on doing what it loves best: showering favors on its preferred constituencies. But once the legislature had made its choices, the Fiscal Stability Board would decide whether the fiscal balance looked right, short-term and long-term. Much as a central bank sets an interest rate and gives an expected path of future rates, the FSB would then set the sales tax.

Perhaps the chances of this happening are close to zero. But just suppose. Would it be a good idea?

The point to notice is that this would not be taking the politics out of fiscal policy. In emergencies, doing that (or trying to) might be the lesser evil, but as a permanent regime it stinks. If democracy isn't about taxes and government spending, what is it about? Elected politicians should set national priorities, write the budget and decide who pays. But I'm claiming that control of deficits and management of public debt--the macro rather than micro aspects of fiscal policy, where politics encounters the constraints of arithmetic and solvency--fall into a different category. Sure, polarized politics can annex almost any issue and recast it in left v. right terms, but disagreements over the pace of fiscal adjustment ought to be technical more than ideological.

I look at it this way. With its remit confined to deficits and debt, a fiscal council with a blunt tax power would ask us to yield only a little democratic control in exchange for a really big improvement in fiscal stability.

Worth thinking about.

Today's $25 Billion Mortgage Deal Will Barely Cover Moving Costs

2012-02-09T14:59:19-05:00

The $25 billion mortgage settlement between the government and the banks over alleged fraudulent mortgage practices is finally here, but some claim the deal has emerged from the oven a little undercooked.

Yes, this is the most significant settlement state and federal governments have reached with the banks to shake money loose for homeowners who are "underwater," meaning their owed-mortgage is worth more than their home. But this is not some mortgage bazooka that will rescue millions of homeowners at the expense of the banks. In fact, it'll barely cover moving costs for those who have already lost, or will soon lose, their home, according to some critics.

A huge mortgage relief settlement between state and federal governments and mortgage providers will pay just a few thousand dollars to those that lost their homes to foreclosure since 2008. The settlement announced Thursday with Bank of America, JP Morgan Chase, Ally Financial, Citigroup, and Wells Fargo, valued at $26 billion overall, provides $17 billion in mortgage relief for people who are underwater on their homes. But 750,000 people who actually lost homes to foreclosure between 2008 and the end of 2011 get a one-time payout of $1,500 to $2,000, which for many will barely cover the cost of moving.

One helpful proviso, however: Those who receive payouts don't forego the right to sue, as they often do in class-action settlements.

Read the full story at The Atlantic Wire.

The Myth of Energy Independence: Why We Can't Drill Our Way to Oil Autonomy

2012-02-09T14:40:00-05:00

The United States and Canada are awash in new oil and gas resources. That doesn't mean we're about to break our foreign-energy habit.

Reuters

American energy independence makes for great political rhetoric. And not much else.

We can thank President Nixon for the term. During the dark days of the 1973 Arab oil embargo, he publicly vowed to wean the United States off foreign energy sources by the end of the decade, an initiative he dubbed "Project Independence." While things didn't quite pan out the way he imagined, the dream he conjured has lived on with presidents from both parties ever since.

These days, though, it's not just politicians who are dreaming. Over the last year, it's become respectable -- even chic, in a geeky, Washington think-tank sort of way -- to suggest that the United States might indeed be close to kicking its foreign energy habit. Take this Bloomberg headline from Monday: "America Gaining Energy Independence." Or this Financial Times article from October: "Pendulum Swings On American Oil Independence." Daniel Yergin, the renowned oil analyst and Pulitzer Prize winner, now argues that the center of world oil production may be moving from the Middle East to the Western hemisphere.

There are plenty of good reasons for the optimism. With the development of its massive shale deposits, the United States has become the world's single largest producer of natural gas. We're so awash in it that domestic prices have plummeted to historic lows. Advances in drilling technology have also made it possible to access hard-to-tap "tight" oil reserves in states such as North Dakota. Analysts believe those fresh crude sources could yield 2.9 million barrels of oil a day by 2020, up from 900,000 today. Meanwhile, cars are getting more efficient, and fuel use has dropped after soaring during the last decade, which frees up more energy production for export. According to Bloomberg, the U.S. is already getting 81% of its energy from domestic sources, the largest share since 1992, and up 10 percentage points since 2005.

Then, there's Canada, which now claims the world's third largest oil reserves thanks to Alberta's petroleum rich tar sands. That's important because Canada and the U.S. are family when it comes to global trade. They're currently our single largest oil supplier. We sell them 75% of their imports and buy 75% of their exports. The National Petroleum Council, which advises the White House on energy issues, believes that by 2035, the two countries combined could more than double their oil production to 22.5 million barrels a day, enough to satisfy their current total consumption.

If you're not too concerned about how much carbon gets pumped into the atmosphere over the next few decades, these are all great developments. (If you do care about global warming, these are all reasons to have a stiff drink, and perhaps consider moving far from the coasts). But even if we're approaching energy independence, the chances of ever actually getting there are rather slim, especially if our economy is still running on oil in 20 years.

MANAGE YOUR EXPECTATIONS

It may theoretically be possible for the U.S. and Canada to more than double our oil output, as the NPC suggests. To put that in perspective, we'd be adding the rough equivalent of another Saudi Arabia to the world oil market. But to do it, the countries would have to pretty much tap every resource they have, both onshore and off. Obviously, the old "drill baby drill" crowd would love that approach. But it's' still controversial in coastal swing states like Florida. Beyond that, accessing some of the resources would require technology we don't have yet.

In the most likely scenarios, North American oil production will get a big boost in the coming years. It just won't be enough for us to start waving goodbye to OPEC. The U.S. Energy Information Administration forecasts that the American oil production will reach 6.7 million barrels a day by 2020, up from 5.5 million in 2010, then drop back to 6.1 million by 2035. Canada's National Energy Board foresees future production doubling to 6.0 million barrels per day by that year. So we'd end up with about 12.1 million barrels a day, a bit more than half of what the United States currently chugs through on its own.

But let's not be realistic for a moment. Let's assume the U.S. and Canada did manage to drill enough oil that we could tell Saudi Arabia to take it's light sweet crude and shove it. What then? Well, we'd still be exposed to all the ugliness of the global oil market. American and Candadian crude would be priced just like everywhere else -- based on what the world's highest bidders are willing to pay for it. Americans would continue to pain at the pump whenever there was another war in the Middle East or African militants blew up a pipeline.

WHAT WE CAN EXPECT

This isn't to say there wouldn't be benefits to greater energy independence. Because natural gas is so difficult to ship, it's not sold on a truly global market, so a big supply at home means cheaper prices. Our abundance of gas has already started luring manufacturers back to the United States in industries, such as chemicals, that rely on it for production. Domestic oil supplies would also help our trade balance. Crude imports account for 44% of the U.S. current account deficit, and buying oil from North Dakota instead of, say, Nigeria would obviously shrink that figure.

But it would still be wise to moderate our hopes, both about North America's ability to drill its way to energy independence, and about what that would even accomplish. Perhaps we can cut down on what we buy from the Middle East. Perhaps we can cut it down significantly. But believing that will save us from the world's problems? That's still just a dream.

Will Inequality Keep Getting Worse?

2012-02-09T14:28:55-05:00

Last October, after a conversation with Chicago Booth professor Steve Kaplan, I posted this graph showing that the share of national income going to the top 1% had fallen dramatically.

This confirmed what I had expected--the taxable income of the wealthy generally tends to fall in recessions. But since earlier census data had seemingly contradicted that expectation, I thought it was worth blogging. As I explained:

The larger question is "how much does it matter"? I doubt Occupy Wall Street will be assuaged by learning that the top 0.1% now only receive 8% of the income earned in the US, even if that number is the lowest it's been since 2003.

But I think it does matter. If we think there's a real problem, we need the best possible data so that we can understand its contours. Income inequality has been rising for so long that people have started to assume that it has just kept rising, even when the data show otherwise. We don't want to spend years focused on income inequality, only to learn that the financial crisis fixed it for us.

Tim Noah, who I believe is working on a book about the growing problem of inequality, shot back:

No, we don't. Nor do we want to spend years trying to cure cancer, only to learn that the financial crisis fixed it for us. The likelihood of that happening would be roughly the same.

. . . Barring major changes in government policy (changes I would welcome even at the expense of book sales!) I see no reason to believe that the 32-year trend in income inequality will end anytime soon, and every reason to believe the precise opposite: It will get worse.

It was a witty enough retort to something I hadn't really said (he clipped the first paragraph). I never got around to responding, though I meant to, and there, I guess I just did.

But the reason I bring it up now is that it did get me thinking: how likely is inequality to simply keep getting worse? It's a question that came back to mind when I saw this post from the Tax Foundation showing that inequality is now back to roughly where it stood at the beginning of Clinton's second term (via TaxProf):

But as I mentioned in this post (and the original), this may well only be temporary. The financial crisis destroyed a lot of wealth. Maybe we're just in another cyclical downturn that will, as Noah thinks, soon give way to the inexorable underlying trend.

What are the reasons to think that we might actually be witnessing a permanent change--a flattening of the trend, or even a reversal? Some possibilities:

If something can't go on forever, it won't. Trends like this come to seem inevitable because they have been going on for a long time--but since inequality cannot actually rise until the 1% own everything in the world while the rest of us suck on wood chips, the longer inequality has been growing, the closer that trend must be to slowing, or reversing. So the more you feel that inequality growth is a state of nature, the less likely this is to actually be true. And even very smart, knowledgeable people who have read a lot have an abysmal record at forecasting these things. Look at Karl Marx, the intellectual grandfather of mindless trend extrapolation bolstered by entirely plausible theoretical mechanisms.

2008 was a major discontinuous event. Earlier recessions wiped out a sizeable chunk of income potential that later recovered, but they didn't fundamentally reorganize markets and institutions the way that 2008 did. The last time that happened was 1929, which was followed by decades of declining income inequality.

Of course, that doesn't mean that 1929 predicts our future, either; the Great Depression was worse and deeper than what we're going through, the regulatory response was more sweeping, and of course, there was that little spot of bother in Europe during the 1940s. The point is only that 1929 is probably a better parallel for comparison than 1987 . . . which really just means that we're in uncharted territory.

Both regulatory and public opinion has turned on the banking industry. No, we didn't gut the bankers and hang their heads on pikes outside the offices of the SEC. But the new regulatory environment, with less leverage and more poking around in the company books, is going to make it harder to make money for many financial types. Even if you think that it should be made harder still, I think you have to acknowledge that things like Dodd-Frank should put some downward pressure on future bank profits.

Markets are getting more efficient all the time By this, I don't mean that they approach some platonically true price. I mean that they trade away relatively "free" opportunities to make money, by say, exploiting differences in the price of the same asset in different markets. A few years ago, when I went to Warren Buffett's annual meeting, I talked with a lot of value investors who said that the proliferation of stock screening tools had made it much harder to find the sort of stock bargains that had driven Buffett's early success; if anything was conspicuously undervalued, other investors quickly found it and drove the price up. That means you have to work harder (and pay more) to make wealth multiply itself.

The long secular rise in asset prices is over. A number of factors have been driving up asset prices over (broadly) the last thirty years. Baby boomers poured more of their savings into the stock market than their parents, aided by looser regulation and cheap mutual funds. Falling inflation, and then falling interest rates, boosted the price of bonds, meaning that bondholders got to enjoy healthy capital appreciation along with their coupon payments. Foreign capital poured into US markets looking for high and stable returns. All these things inflated asset prices, which now have nowhere to go but flat or down. Ordinary savers are seeing virtually zero returns, and it's not all that much better for rich people. Ultimately, asset growth cannot permanently outstrip the growth in the underlying cash flows. Just look at the P/E ratio of the S&P--still near the high end of its historical average, even after the greatest financial crisis since the Great Depression. That's not because corporate profits are growing so fast--corporate profits are the denominator. It's because people are paying a high price for securities.
Globalization faces a lot of challenges. China's having some growing pains, protectionism has grown noticeably over the last decade, and institutions like the EU are in near-meltdown. I have a lot of issues with the "trade immiserates the poor" story, but globalization has certainly helped boost the income of the small cosmopolitan class that is well positioned to take advantage of its opportunities.

Many of the other stomping grounds of the 1% are also changing. Doctors are under reimbursement pressure from both private insurance, and governments. Firms are looking for ways to replace those armies of expensive lawyers that help boost partner salaries. Professional athletes (and sports teams) got an enormous income boost from the proliferation of national broadcasting, but that trend is mostly played out. Real estate development--well, 'nuf said. How many Facebook IPOs would it take to replace a permanent decline in surgery reimbursements?

Of course, we should also consider the reasons the trend might continue. Globalization is still expanding. The new economy still delivers a wage premium to people who are good at gathering and analyzing information, which is not everyone's strength. Prolonged unemployment destroys human capital, and has been most prevalent at the bottom. If you believe that rich people have wormed their way into the political system and used it to redirect wealth to themselves . . . well, I haven't noticed any deworming.

And there's the simple fact that, in the short term, mindless trend extrapolation is a pretty good predictive model--assuming that growth, inflation, unemployment, etc will look about the same next quarter as they do this quarter is as good a forecasting method as anything else.

Of course, right now, that would lead us to predict that inequality would keep falling. Maybe. There's a lag in the data, so we don't actually know what it looks like now, only two years ago.

I think the answer at the moment is that we simply don't know--I'm not sure there's empirical reason to prefer one story or the other. I do think that we should be wary of confident extrapolations in either direction.

Special Taxes for Special Wealth: Why Is Investment Income Different?

2012-02-09T14:00:30-05:00

Mitt Romney and Mark Zuckerberg's income is impressive and uncommon. But it doesn't necessarily deserve such uncommon treatment in our tax code.

Reuters

When Facebook goes public, Mark Zuckerberg will become one of the richest people in America, with shares that will probably be worth more than $20 billion. When he eventually sells those shares, his federal tax bill will only be 15 percent of the cash he receives.*

Zuckerberg and Mitt Romney (who, as everyone knows, paid a 13.9 percent tax rate for 2010) both benefit from tax preferences on investment income -- in this case, the 15 percent tax rate on capital gains.** Zuckerberg founded a company, so he's owned shares in that company since day one, which counts as an investment. Romney benefits from the carried interest provision, which says that even though the managers of private equity funds, venture capital funds, and hedge funds are investing other people's money, most of their fees are taxed as if they were investing their own money.

The carried interest provision is utter nonsense. If you are being paid to invest other people's money, you are working, and that's income from labor. It is a pure giveaway to small group of rich people who give huge amounts of money to politicians. For example, six of the ten millionaire donors to Mitt Romney's super PAC are from hedge funds or other investment firms. The bigger and more debatable issue is whether income from investments should be taxed at a lower rate than income from labor.

The short answer is that there is no perfect solution. There are valid theoretical reasons to give tax preferences to investment income and equally valid theoretical reasons not to.

THE CASE FOR SPECIAL TREATMENT

The conservative, supply-side argument for a tax break on investments is that we want people to save their money and invest it, so we shouldn't tax them for doing so. But we also want people to work, so it isn't obvious that investments should be taxed at a lower rate than labor.

There are more technical arguments against taxing capital gains (profits from selling an asset for more than you paid for it). One is that if you tax people when they sell assets, they will hold onto them longer than they would otherwise, which distorts their investment choices. The solution to this would be taxing people on the increase in value of their assets every year, but that might force them to sell assets simply because they need cash to pay their taxes. Another argument is that if you hold an asset for a long time, some of your profits are really just due to inflation. The solution there is inflation-adjusting your taxable profits, which is trivial in the computer age.

The argument against taxing dividends -- profits paid by corporations directly to their shareholders -- is that those corporations have already paid tax on those profits (assuming they pay corporate taxes, which can be a pretty flimsy assumption these days); this gives companies an incentive to issue debt instead of equity, increasing leverage. But there are better ways to solve that problem, like giving investors a credit for corporate taxes that have already been paid on their dividends.

THE CASE AGAINST SPECIAL TREATMENT

There are also technical arguments against tax preferences for investment income. The most important is that anytime you have two different income tax rates for the same person, she has an incentive to re-characterize income from one category (labor) to the other (investments). As a simple example, if you own a small business and receive income from it, you are better off calling it "dividends" as opposed to "salary" because they are taxed at different rates. In more complicated forms, this is one of the basic principles behind many tax shelters, which distort behavior and drain money out of productive uses and into the hands of accountants and lawyers who do nothing but design those shelters.

Throughout the campaign, you will no doubt hear one set of these arguments or the other, depending on which side is talking. But from a theoretical perspective, there is no ideal way to tax investment income.

NO PREFERENCE

Instead, we should look at the practical consequences of these tax preferences. What do we really care about? We want people to save money; we want the economy to grow; and we want to raise enough tax revenues to pay for the government's spending commitments (Social Security, Medicare, national defense, and all those other things that overwhelming majorities of Americans support).

Looking at the evidence, whether empirical studies or detailed macroeconomic simulations, the case for tax preferences is weak. Changes in capital gains tax rates have no real impact on savings and investment; instead, they affect when people sell their assets and how hard they work at avoiding taxes. (See Burman, The Labyrinth of Capital Gains Tax Policy, pp. 55-63. The same is true of changes in income tax rates in general; see Saez, Slemrod, and Giertz.)

At a high level, there is no correlation between capital gains tax rates and economic growth. Since 1947, in years when the capital gains tax rate was 25 percent or higher, real GDP growth has averaged 3.4 percent per year; in years when the rate was below 25 percent, annual growth has averaged 2.7 percent, or 3.2 percent if you exclude the recent recession. (Lower tax rates do not increase growth with a lag, either; see Burman, p. 81.)

It is true that, through most of the history of the income tax, we have had lower tax rates for capital gains. The exception is a brief period between the Reagan tax reform of 1986 and the Bush tax increase of 1990. Why? As in a stereotypical murder mystery, you have to follow the money. Of the total dollar value of tax preferences on investment income, 96 percent goes to households making more than $100,000 per year and 67 percent to households making more than $1 million.*** This shouldn't be surprising, since only the well-off have any taxable investments, and only the super-rich have a lot of taxable investments.****

If lower taxes on investment income don't increase savings and don't increase economic growth, then we're left with a purely distributional issue. Given the large deficits and growing national debt that politicians and ordinary people say they care about, does it make sense to have a special tax break for the rich that will cost the Treasury Department more than $50 billion next year? ($43 billion under 1997 law, another $13 billion if the Bush tax cuts are extended.) Obviously Mitt Romney and his hedge fund donors think it does.

________

* Zuckerberg will pay a higher rate for exercising options that he received in 2005, but those are a small proportion of his total holdings.

** I benefit from this provision as well, although on a much, much smaller scale. [I'm never sure if this kind of disclosure is necessary, since I'm arguing for a policy change that would hurt me, not one that would help me.]

***These figures are somewhat skewed by the fact that realizing capital gains in a given year makes you richer in that year. Even when you rank households by average income over a ten-year period, however, the majority of capital gains--and hence the majority of the benefits of lower capital gains tax rates--go to the richest households. (See CBO, p. 16.)

**** Profits from home sales are effectively tax-exempt for most households.

Manufacturing Is Special: Why America Needs Its Makers

2012-02-09T10:30:21-05:00

Manufacturers are more innovative and pay better wages than other businesses. If we don't support them, the United States could end up with a gaping hole in its economy.

Reuters

There's a common refrain among mainstream economists that, when it comes to America's long-term growth, it doesn't matter whether the country has a strong manufacturing base. Nor, they say, does having a healthy industrial structure create greater income equality. If we want growth and fairness, the thinking goes, we shouldn't focus on specific industries. We should pursue broad policies, such as investment in education and progressive income taxation. 

Earlier this week, former Council of Economic Advisers Chair Christina Romer argued that there was nothing special about manufacturing that would justify public policies aimed at supporting it.

But manufacturing is special. It's more innovative and pays better wages than the rest of the U.S. economy. Those facts aren't accidents of history. There are reasons behind them that are likely to persist for the foreseeable future. If we want more rapid economic growth and a more equal distribution of income, we can't be indifferent to whether the United States has a healthy manufacturing sector.

WHY MANUFACTURING IS DIFFERENT

Let's start with innovation, which is the force that powers long-term improvements in our standard of living. Here, manufacturing strongly outperforms the rest of the U.S. economy. Manufacturers are responsible for more than two thirds of all company-performed domestic research and development spending, even though they only generate about 11 percent of America's GDP. More than a third of all U.S. engineers work in manufacturing. And about 22 percent of all manufacturers introduced a new product or service between 2006 and 2008, compared to 8 percent of non-manufacturing firms.

Why is manufacturing more innovative compared to other businesses? The sector has long benefited from the relentless application of technical knowledge and skill. Every year, production workers, engineers, and managers find better ways to solve the technical problems of production. As a result, production becomes more efficient and, from time to time, the production process gets reorganized.

That recipe for innovation doesn't work as well in the rest of the economy. In the service sector, only a few production processes, such as filling orders for fast-food meals or scheduling hospital patients, rely heavily on solving technical problems, often through the use of better information technology. But when it comes to most services, the "product" isn't as clearly predefined as in manufacturing, so it's hard to make it more efficiently. What counts as good service -- be it a clean hotel room or a healthy patient -- is often a matter of opinion, and the process of production is frequently inseparable from the service itself. Take the restaurant business. It's pretty hard to make waiters serve meals faster.

Because so much less is known about how to innovate in the services sector, an economy that loses its manufacturing base ends up sacrificing much of its ability to innovate at all. The consequence is slower growth in living standards.

Manufacturing also pays more than other industries. A forthcoming Brookings report by Susan Helper and myself shows that even after taking into account the characteristics of workers and jobs that influence wages (such as education, occupation, union status, geographic location, and demographics), manufacturing workers earn about 8 percent more per week than employees in other industries. Lower-wage workers especially benefit, earning about 11 percent more than their peers in other businesses, while high-wage workers earn just 4 percent more.

Although manufacturing's wage advantage may have shrunk after decades of offshoring and union decline, there are reasons why it still exists and will likely continue. Because manufacturing is more capital-intensive than the rest of the economy, downtime is more costly than in other industries. Manufacturers pay a premium to attract and retain workers who are skilled and motivated to keep the machines running. Factories are also typically larger than other business establishments, so it is more difficult for managers to control the production process in manufacturing. That means production workers have to take greater responsibility than in other industries, and manufacturers pay more to find the employees who can handle it.

On average, manufacturers are likely to continue to have greater need for skilled, motivated production workers than other companies. As long as they do, they will continue to pay more than other companies. And as long as that happens, the loss of manufacturing jobs will depress American wages, especially for workers at the lowest rungs of the economic ladder.

MANUFACTURING JOBS ARE WORTH MAKING

Manufacturing matters for innovation and income distribution, but it's not the only thing that matters. Industry-neutral policies as well as industry-specific ones are appropriate and necessary. Moreover, there are some parts of the non-manufacturing economy, such as computer software, that have some of the same advantages (though not the size) of manufacturing. Likewise, not all manufacturing firms or industries are equally innovative or high-paying. Public policy should be sensitive to these differences.

While America's manufacturing sector no longer lords over our economy as in the past, it's still a crucial force. It is more innovative and pays higher wages than other industries. Because that's likely to be the case for the foreseeable future, public policy should support a healthy manufacturing sector.

iPhone City: The 25 Metros With the Highest Share of Apple Phone Sales

2012-02-09T09:43:26-05:00

Also, we found the only place in the U.S. where more than 20 percent of all phone sales were for BlackBerry devices

Reuters

Would it be silly to figure out which cities in America are filled with rabid Apple fanboys, BlackBerry addicts, or Android fanatics? Yes, but we did it anyways!

We examine our data on used cell phone markets to see where these various phone platforms are most popular. We would expect that regions with a high affinity for a particular type of phone should have that type of phone dominate the listings in their marketplace on a percentage basis.

Notably, the places dominating the CrackBerry Index [the places with the highest BlackBerry use] brought us The Financial Crisis, The Jersey Shore, carried interest tax exemptions, and parties where everyone wears white pants. It could be worse, in London BlackBerry users started a huge riot! At least in America BlackBerry use just goes hand in hand with self-indulgence and financial malfeasance.

The most iPhone fanatic city in America is ... Santa Barbara, CA! Coming in as a close second is Anchorage, Alaska and of course San Francisco cracked the top 10. The least iPhone Fanboy city in America is Kansas City, Kansas. Perhaps the people of the city are still resentful their hometown carrier (Sprint) was last to get the iPhone.

You can see the list of the most Android fanatical cities, as well as the full rankings for BlackBerrys and iPhones here.

This article is an excerpt from a post that originally appeared on Priceonomics.

Battle Over California Medicaid Reimbursement Is a Preview of Our Future

2012-02-09T09:09:01-05:00

Adventures in health care reform, via the Angry Pharmacist, who is very angry, and a wee bit profane:

Usual reimbursement from MediCal is our drug cost (give or take a few percent to account for wholesaler markups, etc) plus a dispensing fee of a single digit number (less than 10 bucks for those drunk at home). If I dispense, say, Fukitol, with a ballpark (yet entirely reasonable) price of $200, I can expect to make about $210 bucks. Those slow out there may be saying "HOLY SHIT, YOU GOT $210 BUCKS FOR THAT PRESCRIPTION! PHARMACY IS A GOLD MINE!" For those who think this, go work for the State of California, because you are a fucking retard. Yes, we did get reimbursed by the state a whopping $210 dollars, but unless I can wave a magic wand and make drugs out of thin air, my wholesaler wants $200 out of that $210 so he can pay HIS bills. So I get $10, which really is fucking good.

So California; despite having Silicon Valley, Google, dot.millionaire companies, San Francisco and LA (that combined pay more taxes in one second than we will all make in a lifetime) is broke. Go fucking figure. They decide to whack the MediCal reimbursement for drugs by 10% to stem the bleeding of throwing the baby out with the bath water. This first was voted into effect on June 1st. Us pharmacy and medicine peeps said "HOLY SHIT, YOU CANT DO THIS" and did what Americans typically do, tie it up in the courts (read on and you'll see why). Well, recently they lost the injunction, so the cuts happened.

Now you may be thinking "gee TAP, 10% cut in your fee isn't so bad, thats only like a buck". Therein lies the problem. MediCal didn't cut our dispensing fee, they cut THE WHOLE FUCKING REIMBURSEMENT.

Quick and Dirty:

Drug costs 200 bucks. We get paid 210 bucks. Take 10% off of that 210 bucks and you're left with 190 bucks. The drug still fucking costs the pharmacy 200 bucks. We make a whopping -10 dollars. Thats right, the pharmacy LOSES 10 dollars (in this case) with EACH FUCKING HIGH DOLLAR TRADE NAME FILL. Throw in some chemo drugs like Xeloda that costs the pharmacy THOUSANDS or HIV drugs at 600 bucks each, and you have yourself a closed pharmacy.

It is, of course, absolutely true that you can save a great deal of money by forcing providers to sell things below their cost of goods. It is not necessarily true that this is a sustainable long-term strategy.

The cuts have been temporarily blocked by a federal judge on the grounds that they endanger access to care.

I hardly need to point out that we can expect a lot more stories like this one in the future. Reimbursements currently have some give in them, which allows the highest-cost providers to operate, and the lowest-cost providers to make some profit. The natural political tendency is to squeeze reimbursements to the level where the lowest-cost providers are pinched--or even beyond. And the best-case result of this is that in the long-run, the lowest-cost providers get bigger, while in the short term, the disruptions among the higher-cost providers compromise at least some patients' access to care.

Are we willing to put up with that short term disruption? Not so far, unless the service exclusively benefits the very poor. Maybe we'll get more willing as the tax bite goes deeper. But either way, with a dramatic Medicaid expansion on its way, and more and more of the rest of the health care system under the control of the government, the fights are going to get uglier.

Rick Santorum Is Right: Gas Prices Caused the Great Recession

2012-02-08T15:05:02-05:00

... but it was one of many factors!

Reuters

"We went into a recession in 2008. People forget why," Rick Santorum told an audience recently. "They thought it was a housing bubble. The housing bubble was caused because of a dramatic spike in energy prices that caused the housing bubble to burst ... People had to pay so much money to air condition and heat their homes or pay for gasoline that they couldn't pay their mortgage."

This sounds stupid to some writers. (Most of these writers were more likely to find Santorum stupid before he made that comment.) But it's not very stupid, at all.

In 2009, economist James Hamilton published a paper that retroactively forecast what an oil shock, like the one we experienced in 2007-08, would do to GDP. And guess what? His model accurately predicated much of the collapse in GDP that resulted from the Great Recession -- as if there had been no housing bubble or financial crisis! The oil spike was that bad.

Still, there was a housing bubble. And there was a financial crisis. How do we account for them and still hold onto the gas story? Here's a one-paragraph theory of the Great Recession that begins with gasoline. Cheap gas ruled in the 1990s. This encouraged families to settle down farther from the cities where they worked. In the 2000s, super-low interest rates, declining lending standards, and an appetite for mortgages on Wall Street (among other factors) further encouraged sprawl and residential development in the 'burbs. As the price of gas went up, families stopped buying homes 30 minutes from the city. For folks shacking up in the exurbs, higher gas bills ate into mortgage money. For companies, higher energy bills shocked productivity. Classic oil-shock + housing development arrested + financial crisis = Great Recession.

There appears to be pretty strong correlation (if not causation) between national gas prices, which accelerated after 2005, and housing starts, which declined after 2005. Here's a graph of gas prices and housing starts indexed in the year 2000 (I've pulled back the lens to 1990).

Santorum's mistake isn't in thinking higher gas prices mattered. Of course energy prices matter. Low energy prices contributed to the housing boom, just as $4 gas probably pricked the housing bubble. But his mistake is in thinking it was the only factor.

Making Money Stretch: The Semi-Renovation

2012-02-08T14:14:59-05:00

Last year, we bought a house for two main reasons: we were sick of moving, and I wanted a better kitchen. We were living in a flip house that had been designed by a contractor with a rather spotty work ethic, and some very strange ideas about what makes for gracious living. (Wine fridge in the kitchen--and less than three feet of total counter space. Two jacuzzi tubs--and a hot water heater the size of a thimble. Frightful things going on in the walls, which were revealed when the house flooded, and we had to move out.)

Any long time reader knows that for me, a good kitchen is important. And while we'd reached a sort of uneasy truce with the flip house, by dint of purchasing a kitchen cart and an island to supplement its storage, our wedding basically shattered that fragile peace. Even before we'd sent out the invitations, casseroles and platters were pouring through the breach in our defensive lines and setting up forward positions on the book shelf that divided the dining area from the living room. By the time of our wedding, the entire downstairs had been overrun, and it seemed to me that the soup bowls were eyeing the stairway with a thoughtful air.

So we started looking at row houses. The husband wanted central air and habitability. I wanted something as lightly renovated as possible; I had no intention of paying for some contractor's builder-grade kluges, and then ripping them out when they broke. Three weeks after we got married, and one week before we were flooded out of the flip house, we found the house we wanted to buy. It had central air. It did not have four feet of ikea cabinets and cheap stainless steel fixtures. It had gorgeous ten foot ceilings. And . . . well, a very odd mix of other improvements.

It transpired that the previous owners had purchased a wreck, and then begun renovating it, only to be transferred overseas in mid-renovation. Their taste ran to very dark walls and very lazy contractors (though to be fair, they may not have been here when much of it happened). Paint was slopped all over the trim, which was itself shoddily applied--when we finally painted the cave-like grey hallway, the painter's tape took the single layer of white paint off the doorjambs in large chunks.

Thankfully, our inspector assured us that aside from one bright laddie who'd decided to cut a 4 inch chunk out of one of our floor joists in order to run some wires through, the basic work like plumbing and heating was in pretty good shape. But the rest ran from "adequate" to "hot mess".

There were some semi-high end fixtures, like a higher end washer/dryer combo, a decent gas stove, and a claw-foot tub. There was some remarkably low-quality work: the aforementioned paint; vents without covers, a toilet in the half bath that wasn't really attached to anything.

There was the stuff that hadn't been worked on at all: a front yard with a crooked fence and about 70 pounds of lava rock; a back yard that is better not spoken of, except to say that the only thing wanting to complete the look is a rusted-out pickup truck on blocks.

And there was the stuff that had clearly been slapped in at the last minute when they figured out that they were moving: a few scrawny kitchen cabinets, a foot or so worth of laminate countertops that were already peeling, one miserly drawer too small for a full-sized cutlery organizer, and a refrigerator just a half-step up from the ones we used to keep in dorm rooms. It barely came up to my chest.

We--okay, well, I--longed for one of those lovely kitchens you see on television or in nicer homes--acres of cabinetry and counter, broom closets and drawers and six-burner stoves with hoods that actually vent smoke, rather than swirling it more briskly around the kitchen. However, being journalists and newlyweds, rather than 55-year old hedge fund managers, we were not exactly overburdened with the necessary.

And really, it wasn't the worst kitchen in the world. There are starving people in Africa, and for that matter, affluent people in Peoria, making do with less space and storage.

So we coped with the shortcomings. The day we moved in, friends helped us install Ikea Grundtal shelves and rails, which double as potracks. We also installed our assortment of extra kitchen islands.

Over the next few months, we did a few things that we (almost) had to do--the dishwasher broke the day we moved in, and since the appliance store offered us a decent discount, we replaced the too-tiny fridge as well. But mostly, we ignored the shortcomings. The only sizeable change we made was when our contractor came to reinforce those improperly cut joists; while he was there, we had him move the laundry downstairs, and rip out the sloppily-built laundry-cave that had been installed just off the kitchen. This didn't look very good--naturally, they'd installed the washer-dryer first, and painted only up to the edge. But with a couple of bookshelves added, it at least gave us some extra storage. And the change alleviated the funereal effect of a dark grey wall jutting out into our hallway, blocking off a great deal of light.

We also had him run a water line for our fancy new fridge. For the first time in my life, I enjoyed the convenience and ease of Door Ice.

But after that, I declared that I was done. Unless something broke, we would put no more money into the kitchen until that distant day when we had actually saved enough money to renovate. That's where we stood in January of this year. Then our dishwasher tried to kill me, and I decided that maybe we should Do Something about the kitchen after all.

It was the day after New Year's, and the dishwasher was very full. Also, my arm was very sore, due to some unspecific, slow-healing rotator cuff injury that had been exacerbated in the frenzy of getting ready for the previous night's dinner party. I sleepily stumbled into the kitchen and opened the dishwasher so that I could unload it and put the rest of the dishes in.

Unfortunately, as they'd informed us when they installed the dishwasher, our counters weren't level, which meant that one screw holding in the appliance was under more strain than the other. Sometime in the winter of 2011, it had ripped out of the cheap laminate, at which point its colleague decided to go on strike too. Every time we opened the dishwasher, it tilted towards you, and the racks slid forward.

Perhaps sensing my languor, on New Year's Day 2012, the racks decided that the time had come to finally make their break for freedom. Just in time, I threw my aching left arm in front of the drawers, and stopped them from leaping across the floor with all our good china inside.

I also nearly stopped my heart--I haven't felt such a sharp burst of pain since I ripped up a bunch of ligaments getting thrown into a fence by a horse. I must have emitted some interesting noises, since my husband, normally a late sleeper, came trotting downstairs.

"[Expletive deleted]" I said calmly. "We're replacing this [bleeping] counter or I will [censored]."

But replacing the counter had Implications. If we were taking it out, we might as well replace the annoying black sink that was impossible to clean, and put in a backsplash so that I didn't have to spend so many happy weekend hours furiously rubbing our walls with a Mr. Clean Magic Eraser. And since we didn't want to install anything fancy in a kitchen that we eventually want to get rid of--I adhere to the principle that one should either buy expensive things that will be loved forever, or cheap things you won't feel bad about throwing away--the counters we could afford probably wouldn't match the cabinets, which meant they might have to be painted.

However, my steely resolve did not extend to tapping our emergency fund, or borrowing money. And even if it had . . . well, the Official Blog Husband is himself a man of formidable will. Which left us a quandary: how to do a minimalist kitchen renovation that would give us more storage, without costing more than we could cash flow?

The answer, for those of you who are interested, is below the jump: how to do a semi-renovation for a few thousand dollars that adds space and makes the thing look sort of all right. It wasn't exactly cheap, but it wasn't entirely out of reach of the average family, either.

I don't want to overpromise. This is not one of those $2,000 HGTV specials where, by the magic of not paying for labor, a couple gets a new-looking kitchen for practically no money. No one is going to walk into our kitchen and ask for the name of our designer. But it's functional enough to contain me, my mother, and my sister all cooking at the same time, without bumping into each other, or piling every flat surface high with used bowls and pans. We have enough storage for everything. And it looks . . . basically okay. Intentional, even.

If you're still interested, read on . . .

To start with, you'll want to know what our kitchen looked like. Unfortunately, I didn't think to write this blog post until we'd already started the renovation, and the people who sold our house quite wisely did not include photos of the kitchen in the listing. To the right is the only photo of the area they did include, of our dark grey laundry cave. I assure you, it was even darker looking when you were actually standing in front of it.

Note the quality paint job ending just where the washer-dryer start. And yes, before you ask, there's still a little paint on the washer-dryer.

However, just after they took off the cabinet doors, I got into a discussion with a commenter about renovations, and I remembered that some of my readers really like kitchen posts. So I hastened to the kitchen and took a few pictures before they went any further. Below, what our kitchen basically looked like, except with some of the doors removed.

This is also essentially what the kitchen looked like when we moved in, except, as I mentioned, with doors on the cabinets. And the dishwasher that we had to replace because it leaked all over the kitchen the first time we used it.

This is the view from the other direction. Unfortunately, you cannot see the edges peeling off the laminate, but you can see where the improperly attached filler panel next to the stove came off, leaving us with a darling hole:

On the other side of the kitchen, there was nothing but the tiny refrigerator, which the husband and I referred to as the "My First Fridge". Oh, and a garbage can. We kept the garbage can. The refrigerator had to go . . . although, before it went, it did give us hours of enjoyment arguing whether it was the largest dorm fridge on the market, or the absolute smallest regular model.

By the time we decided to semi-renovate, we'd already ripped out the laundry cave and stuck some mismatched bookshelves in that area. And on the empty side of the kitchen, we'd put in our carts: a large island from Target, an unfinished Catskill Craftsman kitchen cart, and a little unfinished cart from Ikea were all there when the above picture was taken. It was eventually supplemented with some plastic drawers that we'd had in the old house. The plastic drawers stuck, and looked awful. I'm not very sorry that I don't have any pictures of them.

A few months after we moved in, the new fridge arrived. This is how things stood until the semi-renovation.

As with so many things in modern homemaking, our semi-renovation started with a trip to Ikea. We investigated fixed cabinets for the laundry area, which would have been nice, but cost at least $2000, including installation. My heart said yes, yes. The little personal finance guru who lives in my head reluctantly vetoed the expenditure. Husband quite sensibly sided with the personal finance guru.

Instead, we bought paint for the hallway, a freestanding cabinet, and shelves to make a sort of butler's pantry. We also bought yet another unfinished kitchen island/counter, and a $99 set of silver-and-plastic drawers to replace the sticky plastic set next to the refrigerator.

While we were there, we priced sinks and countertops. We easily agreed on wood counters, both because we like them, and because our handyman could cut and install them himself. But we didn't buy until he could come by and give us an estimate.

Meanwhile, we painted the hallway and spent about seventy hours building our drawers, and our freestanding cabinet. The result was not perfect--the drawers are not quite flush. But it looks much nicer than the laundry cave.

We put all the serving dishes that we use every day out here, as well as our "set and forget" appliances. The prep areas are in the kitchen.

Then we got the greenlight from the handyman for the larger project. Back to Ikea we went!

We had decided on birch counters, to match all our unfinished wood. Bad news: lots of people are apparently attracted to the low cost and convenience of Ikea wood counters; almost everything was backordered. They only had oak, and only in one length: enormous. We had to purchase $350 worth of counters, instead of the $200 we'd been expecting. Also, the oak was going to look decidedly weird with our maple cabinets, so we'd have to paint the cabinets white.

The sink also added unexpected expense. We decided on a nice white farmhouse model that was wide and long, but there was a little problem--it only had one hole, and you couldn't drill another. We either needed a new faucet that combined taps and sprayer, or we had to give up the sprayer. Luckily, the husband found a nice model on deep discount--chrome apparently having gone out of fashion, they were selling it for a fraction of the price of the same model in brushed steel.

We chose subway tile for the backsplash, not even because it's cheap, but because that's what I grew up with. But happily, it's also quite cheap.

When our handyman removed the counter, we got a big surprise. Now we found out why the counters weren't level: whoever did our kitchen had used a wall cabinet on the floor. It was substantially shorter than the sink cabinet, so the counter sloped. It wasn't even attached to anything.

I assume they bought these surplus. I'd love to see the kitchen someone was remodeling with two corner wall cabinets, and only two floor cabinets.

Our handyman shimmed up the cabinet to level with the others, and built a sort of bracket to attach it to the wall. And he put in a brace for the dishwasher to attach to, pictured below.

After that he installed the counters, the sink, and the backsplash, and painted the cabinets. We stained the counters ourselves, since that's about the only thing I know how to do around the house, besides assemble Ikea furniture. We chose a darker oil-based stain that complemented the oak nicely, and finished with high gloss polyurethane--about 70 coats, if I recall correctly. It's easy to keep clean, and I can always slap another coat on from time to time.

Here's what it looked like when we finished the last layer of poly:

And here it is in working order. The whole kitchen seems much brighter with white cabinets, an effect I had not anticipated.

Another effect I wasn't anticipating was how this would make the other side of the kitchen look. We had four islands, made of different woods: the cart was birch, the two Ikea pieces were unfinished pine, and the Target island was some sort of eco-friendly tropical wood that was solidly finished. The collection looked even more motley next to this. We tried putting a left-over length of counter atop the Target island, but it didn't help much.

The solution was obvious: sand and stain. But sanding and staining a bunch of furniture is a very different job from doing a flat countertop; it's time-consuming, fiddly, and tedious. We dithered. I averted my eyes from the sight. Then we bit the bullet, with a small compromise: we let the finished piece alone, and just left the extra counter on top. Since we're both tall, the extra height was actually a plus. Added bonus: the extra length covered our previously exposed garbage can.

Do you own a detail sander? Because we own a little detail sander, and I'd never realized before this how much I love that thing. I'm not saying I'd leave my husband for a detail sander, or anything. I'm just saying that I'm very glad I don't have to choose.

Because the wood of the cabinets was lighter than the oak, we had to do a pre-stain with something close to the oak before we layered the color ("English Chestnut") on top. I knew it wouldn't be perfect--and it was even more imperfect than I expected, as I discovered that the body of our kitchen cart was an undistinguished pine. This was a fun opportunity for me to learn what happens to pine when you don't use a filler before you apply the stain.

I'm telling people that it's a tiger stripe pattern, and implying that it was deliberate. The whole thing has a sort of rustic air, if "rustic" is a code word for "people who aren't very good at applying stain."

Nonetheless, it does look more pulled together, even as if someone might have almost planned it that way. Here's the final result, as best as I can photograph in a relatively constrained space:

I spent about ten minutes the first night just opening and closing the dishwasher door, and relishing the way it did not tip forward and try to kill me.

The coffee maker moved to the left of the fridge. As you can see, our kitchen is optimized for tall people; my husband and I, both 6'2, can just reach to get stuff on and off that top shelf. My mother has to use a step stool.

We have our glasses in the top drawer of that drawer unit. Door ice has never been more convenient!

The other side of the fridge. The toaster oven has moved to replace the coffee maker Yes, I have a lot of pans:

It doesn't pay to look out the window. We haven't gotten around to the yard yet. And since broken glass is still working its way out of the ground after a year and a half of conscientious removal efforts, we probably won't get around to the yard until we can get someone to bring a backhoe--or at least a bobcat--in to dig out forty years and several college students worth of neglect.

Like I say, it will never be on HGTV. But we're very fond.

Overall, we saved hundreds of dollars by doing the work that we could ourselves. But we saved even more by compromising, and accepting that it was not going to look like a showplace. Open shelving instead of cabinets; a lot of stuff that doesn't quite match, and an aesthetic that leans towards functional rather than elegant.

That's not for everyone. I like having things in the open where I can reach them, but it takes a lot of work to keep it looking neat--work which, as you can see from my jumble of pans, we have not entirely completed. Finished wood surfaces do not stand abuse as well as granite, or even Corian. (Though I'll put them up against porous stone like Carrara marble any day). And we're well aware that the paint on the cabinets will probably scratch, and need to be touched up.

But lots of people could do some variant of this: upgrading or installing a few items, rather than re-doing the whole thing. The kind of kitchen renovation we would still frankly love to have would have cost us tens of thousands of dollars and involved moving our badly-placed and too-large half-bath. Not including the appliances, which we would have had to replace anyway, this cost us a few thousand dollars, even with labor included, and I expect to be happy with it for years. And if we needed to sell for any reason, I'm confident that we'll more than recover the money we spent. (I mean, after we move out my crazy array of appliances and pots and kitchen islands. I'm well aware that my taste in such things is somewhat, um, singular.)

Unfortunately, they never show you things like this on television. Instead they show you what you can get with $2,000 if someone throws in tens of thousands of dollars worth of contractor labor for free. I suppose that's fine if you're a swell all-purpose handyman, but most of us aren't. Nor, in this fast-paced world, can we necessarily learn in time to corral our rebel appliances and save our walls.

So I thought it was worth offering this as an alternative to house-porn. Call it house-PG-13: something that should be accessible to most people, provided they are properly chaperoned by a good handyman. No one is going to catch their breath in admiration when they walk into a kitchen like this. But hopefully, that will just leave more admiration available for the food you produce in it.

The Amazing High-Speed Rise of the App Economy

2012-02-08T14:07:05-05:00

In 2006, the term "App" as we know it did not exist. Today, the App Economy accounts for $20 billion in annual revenue, and it's responsible for about 466,000 jobs in the US, according to a new study, "Where the Jobs Are: The App Economy," which was just released by Technet.

What's an app job, exactly? Atlantic contributor Michael Mandel explained:

The total includes jobs at 'pure' app firms such as Zynga, a San Francisco-based maker of Facebook game apps that went public in December 2011. App Economy employment also includes app-related jobs at large companies such as Electronic Arts, Amazon, and AT&T, as well as app 'infrastructure' jobs at core firms such as Google, Apple, and Facebook. In additional, the App Economy total includes employment spillovers to the rest of the economy.

There are 155,000 pure tech app jobs in the country, Mandel calculated. But companies cannot live by computer engineers alone. As a firm expands, it adds sales and marketing and HR jobs that keep the company humming while the techies are coding. Adding these positions, he puts App Economy workers at 311,000. Multiplier effects bring the total above 400,000. The top city for app economy workers is New York, which accounts for 9% of the app jobs. Another 15% are in San Francisco (8.5%) and San Jose (6.3%).

Is 311,000 jobs a lot? Well, it's bigger than the online journalism industry, or the software publishing sector, Mandel says, producing the following chart:

A third of a million jobs is nothing to scoff at, but it only represents 0.2% of all workers. It certainly leaves a lot of room for growth. Fully 44% of Americans own a smart phone according to polling by Nielsen in December 2011, which is summed up in the infochart below. Among those between 25 and 34, smartphone penetration is 63%, more than twice the share from 2009.

As smartphone penetration rises, app-economy revenue will grow, which will encourage more venture capitalists to back app economy entrepreneurs, which will in turn encourage more entrepreneurs to move into the app economy. All this is to be expected, and it's all good news.

But the real breakthroughs in app innovation will probably come from the unexpected. We're only beginning to scratch the implications of a GPS-powered super-computer in our pocket. One can imagine, for example, a breakthrough innovation in personal-health monitoring, where our smart phones act like a pocket-nurse, periodically checking our vitals, reminding us to exercise and to take our medicine, and alerting doctors when something is wrong. It's this sort of Black Swan breakthrough, where investments in the App Economy feed into investments from the medical and biotech economy, that has the potential to take off in ways that will make today's apps look like they were developed in the stone age of smart phones.

Annoying Arguments About Fiscal Stimulus

2012-02-07T17:22:09-05:00

Advocates like myself of renewed fiscal stimulus for the US, Germany and some other EU countries have to answer a lot of weak arguments. One that especially riles Paul Krugman's cult-followers is the idea that balancing a nation's budget is exactly like balancing a household's budget. Well, they're right about that: it isn't, for the reasons Krugman tirelessly points out.

One qualification: when a nation's budget deficit does have to be curbed, the prudent household story is not a bad political tool to use. Margaret Thatcher deployed it to good effect when it mattered. Meryl Streep has a little speech on the subject in The Iron Lady. My inner pragmatist says politicians shouldn't be too squeamish about using bad economics in a good economic cause.

Still and all, it's annoying. Simon Wren-Lewis points to two more species of annoying anti-stimulus arguments. (1) Arguments that ignore the zero lower bound for interest rates, and (2) arguments that say fiscal stimulus is Econ 101, and the profession has moved on. I've nothing to add to Wren-Lewis's critque of that pair. When you're right, you're right.

But I noticed that one of Wren-Lewis's commenters said we should also acknowledge, for the sake of balance, a few annoying pro-stimulus arguments. (1) Arguments that invoke the ZLB but ignore inflation. (2) Arguments that ignore the possibility that temporary fiscal stimulus might lead to a permanent increase in government spending. "There's nothing so permanent as a temporary government program"--Milton Friedman. (3) Pro-stimulus arguments that ignore the possibility of tax cuts.

I don't quite follow (1). If the risk of inflation argues against further stimulus (monetary or fiscal) then you shouldn't be at the ZLB in the first place. But I think (2) and (3), folded together as they probably should be, are indeed annoying: Arguments that regard the size of government as a non-issue. Maybe, as another of Wren-Lewis's commenters says, this is a political judgement more than an economic one, but let's not disdain political economy. Advocates of strong stimulus in the US undermined their case in 2009 by arguing so strongly in favor of spending increases over tax cuts.

I'd like to nominate three more annoying pro-stimulus arguments. (4) Arguments failing to acknowledge that some level of debt is too much. What's the limit to further fiscal expansion? (5) Arguments that assume the bond market won't abruptly change its mind about the US cost of borrowing. I find it very annoying when liberals, of all people, tell me that the bond market is a wise forecaster. (6) Arguments that dismiss the tax consequences of ever-mounting debt. Yes, we will owe it mainly to ourselves, but eventually somebody's taxes will still have to rise to service the payments.

On a rough count, I'm thinking, the pro-stimulus camp's annoying arguments may outnumber the other side's. Could that be where we've gone wrong? We're still right, but we haven't made the best possible case.

A Recovery, if We Can Keep It

2012-02-07T17:08:23-05:00

The evidence is mounting that the U.S. recovery is really, truly gathering momentum. Let's just hope Europe and Washington do their jobs.

Reuters

When the January unemployment report showed job creation accelerating and the unemployment rate dropping, I declared it a turn-the-corner moment for the recovery.

The evidence is mounting that the recovery is on -- really, truly on -- as Tuesday delivered four pieces of good news that touch all corners of the improving economy. First, the Dow just hit its highest closing level since May 2008. Second, the number of unemployed people per job opening* fell below 4.0 (from a high of nearly 7.0) for the first time since the end of 2008. Third, consumer borrowing rose by far more than analysts expected in December, we learned this afternoon, which suggests that consumers are rediscovering their appetite for debt. Fourth, Fed Chairman Ben Bernanke testified today that the falling unemployment rate probably understates the weakness of the job market. That sounds like bad news for the job market -- and the job market is indeed rife with bad news -- but it bodes well for advocates of monetary support for the economy. The worse Bernanke thinks the economy is, the more likely the Federal Reserve will consider extraordinary means to keep pushing the recovery into overdrive.

The good news stretches beyond Tuesday's economic reports and testimonies. Joe Weisenthal points out, in a wonderful laconic post, that housing starts (the red graph) and light vehicle sales (the blue graph) are also ticking up. This matters a lot, because big item purchases like homes and cars are coincident indicators that families are confident enough to put a little extra on the credit card. There can't be a true recovery until borrowing becomes (moderately) cool, again. Just as importantly, these figures reflect big fat exchanges of money.

As the graphs unequivocally show, the hole was very deep. But this is a real recovery. If we can keep it.

There are some things that could mess with our good vibrations that we can't control. If Europe falls apart and spooks markets, we'll feel the impact stateside. If there's a war with Iran and oil prices shoot through the roof, we'll feel that one, too. On the other hand, it's possible that neither of these things will happen. And one positive externality of Europe muddling through the first half of the year is that lower energy demands from Europe could keep a lid on global oil prices.

If nothing overseas goes dreadfully wrong, our worst enemies could only be ourselves. Another ridiculous government showdown over something like the payroll tax extension could only give people pause about spending money they're no longer sure they'll have. But as long as the Fed stays pessimistic about the recovery, and electeds in Washington avoid drawing too much attention to themselves, there is a real chance that the winter recovery will be a keeper.
___

*Edited.

No Business Like Snow Business: The Economics of Big Ski Resorts

2012-02-07T15:12:02-05:00

Don't be confused by the soft powder. Ski-nomics at Vail and Whistler/Blackcomb is a hardened and savvy industry. Meet the mile-high strategies that keep America's largest ski resorts in the black.

Vail

The view is best from the top. It's the moment you disembark from the chair lift that's borne you over the boulevards of snow carved with "S"-shaped grooves. Some skiers cherish the first morning vista, in the thin and freezing air, before they tighten their boots and point their twin sheaths of metal down a vertical field of white. I prefer the last run, wobbly and a little reckless, down the peak's backside at three o'clock, toward the room with a fire, a hot mug, and a bag of ice. These moments, and the many between them, inspire 60 million cumulative ski- and snowboard-days, adding up to a $3 billion businesses in the U.S.

To those millions of skiers, Robert A. Katz would like to say, Thank you. And also: You're welcome. Katz is the CEO of Vail Resorts, the largest ski resort company in the United States and the proud owner of America's most popular mountain, Vail.

When I called Katz in January, the conditions on the slopes were dire. Vail Mountain was suffering its driest winter in 30 years, and, for the first time in more than a century, there was no snow in Tahoe, a California peak also owned by Vail Resorts.

Snowfall had declined more than 80 percent, but visits were down only 15 percent. Even more surprising, annual revenue hadn't declined at all, even though Vail got an all-time record of 525 inches of snow in 2011. (The day I called, Vail's count had barely hit 100.) How, I asked, do you build a stable business around something as unpredictable as snowfall?

His answer: Make your business about much more than snowfall.

SKI-NOMICS 101

To understand the new economics of the ski and snowboard industry, start with the two behemoths. First, there's Vail Resorts, the king of U.S. skiing. To find the second, trace the Rocky Mountains north and hitch a left at the Canadian border.

There is only one ski resort in North America larger than Vail Mountain. Eighty miles north of Vancouver, tucked in the British Columbia Coastal Mountains, the Whistler/Blackcomb resort is the colossus of ski destinations. Across the two peaks -- Whistler and Blackcomb are separate mountains connected by a gondola -- the park has more skiable area, more average snowfall, more trails, more lifts, and a higher vertical drop than any other mountain on the continent.

What Vail and Whistler have discovered is that lift-tickets -- that is, passes to ride the chairs up the mountain -- will always provide the foundation of ski-nomics. But a resort that offers only skiing is a terribly risky business model -- like a snow farmer whose yearly harvest is only as good as the snow crop.

Instead, both Vail and Whistler have devised and refined a business that keeps income as constant as the weather is variable. It comes down to two smart hedging strategies. Strategy One: Own the skiers. Strategy Two: Own the mountain.

Vail and Whistler hedge against bad snow by turning skiers into members. "Just under 40 percent of our lift tickets come from season passes sold before the ski season begins," Katz told me. For just under $700, skiers can buy the Vail Epic Pass, which offers total access to all six Vail Resort mountains.

"Some people think we're crazy," Katz said. "After all, one day's lift ticket is $100, and some of these people will ski 30 days, or 40 days." Why would Vail give its most die-hard skiers a 90% discount?

Because, they own the mountain. Vail and Whistler make half their money from lodging, rentals, snow school, and food (see charts). Even when die-hard skiers and snowboarders get a free pass to the mountain, they're still sleeping in Vail's beds and eating Vail's food.

"Creating packages is fundamental to our business," said Kevin Smith, executive vice president and CFO of Whistler/Blackcomb. "Especially if families pre-commit to a package that includes lift tickets, lodging, and ski school, we lock up that business before the snow falls."

Vail and Whistler are considerably more profitable than large ski resorts in Europe precisely because they've embraced mountain monopolies. In Europe, the mountain is like a strip mall, with restaurants, rental shops, and service centers mostly owned by different companies renting space. At Whistler and Vail, the mountain is more like a cruise or amusement park, where vertical integration means vertical integration. From village to peak, Vail and Whistler own all the key businesses -- equipment rentals, food and beverage, and snow school.

Maybe the best analogy to ski resorts is the casino. There's a core gambler like there's a core skier. Some people hate gambling, like some just want to keep their boots on. The job of the casino or ski resort to give these people a reason to come, anyway. The same way casino designers are meticulous about designing a floor plan that is more likely to get patrons gambling, mountain planning requires a specialized understanding of the the ski experience and how the guests will experience a terrain. It means moving traffic away from environmentally sensitive areas and toward lifts. It means clearing space for wide-open vistas and putting challenging runs near cruisers, so families with varying skill levels can follow their paths of choice and arrive at the same place for lunch.

"With the right design, skiers come down the mountain like water," Katz said.

WARNING: AREA CLOSED

In 1980, something strange and unique happened. A ski resort opened. Beaver Creek, near Vail Mountain, powered up its chair lifts after three decades of planning in the '80-'81 season. That was the last major ski resort to open in the United States.

Environmental regulations now pose a huge barrier to building new ski resorts in North America, according to multiple ski resort insiders, some of whom declined to speak on the record. The biggest ski areas are on U.S. Forest Service land, which makes them subject to strict regulations governing commercial development. As a result, most investors looking to start a ski resort from scratch are looking abroad to China, Japan, and South America.

"It's pretty much impossible to open a new major ski resort now on account of it cannot be in conflict with the environment. It also takes a long time to build community support. Once you get to that point, it's still takes decades to design the ski experience and build the resort," said Katz, who stressed that he supports the spirit of the environmental rules.

Even without environmental regulations, it's not clear who in their right mind would try to build a new resort from scratch. "You have to spend $150 million before you get the first toilet to flush, let alone the lift infrastructure," Kevin Smith said.

From a ski-nomics perspective, less competition insulates a stable and growing industry. As skier visits rise annually, Whistler and Vail can afford to raise ticket prices by a tick above inflation knowing that there's no chance of disruptive competition from a new entrant.
The most surprising aspect of of ski-nomics might be its dependability. A ski mountain is beset by the most capricious of variables, as cloud drift, precipitation levels, and temperature must coordinate for skiiers to get their precious powder. But Vail and Whistler/Blackcomb's business isn't beset by anything like the variability of mountain weather. That makes their fortunes less like the iffy snowfall and more like a seasoned double-black pro flying down the open boulevards of snow -- seemingly on the edge of his skis, and somehow always upright, all the way down the mountain.

America's 10 Fastest-Growing (and Fastest-Shrinking) Jobs

2012-02-07T14:13:00-05:00

The government predicts that healthcare occupations will be booming, while postal service jobs will disappear

Reuters

If you're looking for guaranteed employment during the next eight years, become a nurse. Really. It's that simple.

Recently, the Bureau of Labor Statistics' released its list of the thirty occupations where it expects the greatest net-job growth through 2020, and registered nurses are the very top. Over the course of this decade, the government expects an additional 711,900 will be hired to help care for the ballooning medical needs of America's aging population -- a 26% increase from 2010. Best yet, the BLS says many parts of the country are experiencing a nurse shortage, meaning talent will come at a premium.

As you probably expected, the nursing boom is just one piece of a larger trend: The rise of the healthcare sector. Overall, eight of the 30 top-growing occupations are connected with medicine and personal care. From richly paid surgeons to low-wage home health aides, those eight occupations are expected to add more than 3 million jobs The BLS projrects the United States to gain 20.4 million new jobs overall by 2020.

Beyond healthcare, the BLS expects that service industries will continue to add workers at a healthy clip. The biggest trend is that employers will add jobs they can't outsource or hand over to a computer. There will be plenty of opportunities for college graduates in education, accounting, and corporate sales. On the low end of the pay-scale, there will be jobs for retail workers, waiters and waitresses, and janitors.

Who should be bracing for layoffs? Postal workers, for one. The BLS also releases a list of the top 30 shrinking occupations, and it's largely split into two categories. On one hand, there are occupations that are becoming irrelevant thanks to advances in technology. The death of paper mail means less need for mail sorters, carriers, and clerks. Office workers such as typists, switchboard operators, and file clerks are becoming redundant. And advances in farm productivity mean we won't need as many agricultural workers. On the other hand, manufacturing jobs will disappear in industries facing competition from cheap labor overseas, such as apparel, semiconductors, paper goods, and electronics.

For the most part, the list of occupations expected to see the biggest employment declines is populated by jobs that require a high school diploma or less. But one occupation dominated by college grads does make it on there. That would be reporting. Maybe there'll be a few PR gigs open at all those hospitals.

Will the Government Put Money Market Funds Out of Business?

2012-02-07T13:44:00-05:00

Immediately after Lehman Brothers failed, a money market mutual fund called Reserve Primary "broke the buck"--it did not have enough money in its coffers to pay the shareholders what they'd had. Since money market funds are essentially used as bank accounts, this was a big problem--and it triggered a bank run on the money markets, which ended only when the government stepped in and said it would backstop these funds.

Despite their major role in the financial crisis, these funds haven't attracted nearly as much attention in the press, or the wonk-world, as more theatrical financial instruments like synthetic CDOs. Not many financial journalists own synthetic CDOs. Most of us probably have money market accounts.

At last, the government is proposing new rules, which are supposed to make MMFs less risky. The funds would have to raise new capital, and some minor withdrawal limitations would be imposed on customers. They would also have to offer a floating net asset value instead of the current "guarantee" that if you deposit a dollar, you'll always get at least that dollar back.

The last is all by itself disastrous for these funds, whose main attraction is that they act like bank accounts. As for the rest, in a normal interest rate environment, this would be onerous. But with interest rates as low as they are, there's no way for MMFs to absorb the hit by offering a lower return; it looks to me as if the interest rate would probably have to be negative. Which is to say, your MMF would actually be charging you for the privilege of giving you their money.

If passed as proposed, the rules would seemingly put the MMFs out of business. And perhaps that's the point--Paul Volcker, for one, has been an outspoken critic of money market funds, which originated as a way to dodge the interest rate caps on bank accounts during the inflationary 1970s.

Though the SEC has tightened up the rules on what sort of assets the funds can hold, my understanding is that there are large gaps in the way we regulate these funds--as I understand it, in 2010 congress effectively made it illegal to bail out the funds again, but was less explicit about how to keep these funds from starting another run. These rules are an attempt to close that gap--and for sure, if we don't have any MMFs, we won't have any darn runs on them.

But it doesn't actually seem likely that these rules will go into effect as proposed. This is the opening bid in a long negotiation. With another crisis looming in Europe, let's hope it isn't too long.

This post has been updated to clarify the state of rule-making.

2020 Forecast: The Biggest Winners and Losers in Job Creation This Decade

2012-02-07T10:35:30-05:00

The Washington, D.C., area has a lot to crow about in the Bureau of Labor Statistics' latest forecasts for job creation in the next ten years. The District, its Maryland suburb of Bethesda, and nearby Baltimore are among the ten cities with the highest-projected job growth by 2020, as shown by the graph above.

Atlantic Cities author Jed Kolko takes the BLS data and mixes it with some other ingredients -- including climate and density, which he expects will drive population growth and job creation in addition to secular industry growth (the bread and butter of BLS forecasts). His top-ten and bottom-ten lists look like this:

Southwestern metros now dominate the fastest-growth list, led by Phoenix, Tucson, and El Paso. The slow-growth club is all Northeast and Midwest, plus Los Angeles. Mild climate and low density mean that southern metros like Greensboro, North Carolina and Columbia, South Carolina, should grow faster than their unfavorable industry mix suggests, so they're off the bottom-10 list when all factors are included.

The map below shows that employment growth will be fastest in the Southwest, Texas and parts of Florida and California. The South looks more blue than before, while the Northeast and Midwest are pretty solidly light and dark red. Turns out, metros with good climate, higher education and lower density tend, on average, to have a more favorable industry mix to begin with. But some metros blessed with industries that are likely to grow - like New York and Boston - will be held back by harsher weather and a higher cost of living. Other metros - like Phoenix and Las Vegas - should grow fast despite having concentrations of industries projected to grow more slowly.

Read the full story at The Atlantic Cities.