Angry Bear

Post-traumatic stress disorder (PTSD) responses

2012-01-28T05:00:00.000-05:00

Past Angry Bear posts started in 2007, but here are four later posts 2008 and 2009:

Brain injury awareness
Pattern of misconduct
PTSD and our military response
What are we going to do now is your choice

GAO report 12-154 addresses the notion that this sort of thing is being taken care of. There are about 80 projects now ongoing to determine best practice within the military culture and organization, which is of course very different than civilian demands placed on personnel. :

Post-traumatic stress disorder (PTSD), which falls into the broader field of psychological health (PH), and traumatic brain injury (TBI) are recognized as the signature wounds of the wars in Afghanistan and Iraq. In two reports issued in 2011 (GAO-11-219 and GAO-11-611), GAO cited numerous management weaknesses at the Defense Center of Excellence for PH and TBI (DCOE). For the present report, GAO reviewed (1) funding for DOD's PH and TBI activities in fiscal years 2007 through 2010 and the accuracy of its reporting on these activities to Congress and (2) DOD's ability to coordinate its PH and TBI activities to help ensure that funds are used to support programs of the most benefit to service- members. GAO interviewed DOD officials, reviewed legislation and DOD’s annual reports, and obtained relevant documentation.

…
From fiscal year 2007 through fiscal year 2010, DOD activities for the treatment and research of PH and TBI received more than $2.7 billion. In fiscal year 2007, funding for these activities totaled $900 million; in fiscal year 2008, it was $573.8 million; in fiscal year 2009, $395 million; and in fiscal year 2010, $838.6 million. GAO found, however, that the reports DOD provided to Congress on these activities did not include expenditures, as required by law, and that the obligations data they contained were unreliable. Governmentwide policies call for agencies to have effective internal controls to assure accurate reporting of obligations and expenditures.

However, the Office of the Assistant Secretary of Defense for Health Affairs has not developed quality control mechanisms to help ensure that data on PH and TBI activities are complete and accurate. Further, although DOD listed patient care among reported costs, it did not specify what those costs included, making it difficult for decisionmakers and Congress to fully understand the costs.
No one organization coordinates DOD’s PH and TBI activities.

Why This Time Is Different

2012-01-27T22:20:00.000-05:00

A while back I pointed to (and demonstrated with not very pretty pictures) Randall Wray’s rather stunning observation: every depression in American history was preceded by a large decline in nominal federal debt.

And I puzzled about why this wasn’t true of our latest little…event:

We saw a decline leading up to 2000, but federal debt was on the rise when the big bang hit. If that 90s decline was the necessary (if not sufficient) cause of the crash, why was there an eight-year delay, unlike all the other depressions in our history?

Various have suggested in various ways what I’ve also presumed: that private debt carried us this time. For a while.

I think this chart may make that point better than any I’ve seen (click for source):

Those earlier depressions weren’t blessed with a mortgage industry engineered to pump newly-created bank cash to anyone who asked through home- and home-equity loans (or corrupt ratings agencies that were the crux enablers of that dynamic.) The false GDP from that new private debt issuance — new money flooding the system — floated us through those years. (This is just a variation of what Steve Keen's been saying all along.)

We’ve been in this woulda-been-a-depression since 2001. We just didn’t know it.

So it seems that Wray’s pattern holds, except — to quote dear Ophelia just before she drowned her sorry self — we wear our rue with a difference.

Cross-posted at Asymptosis.

Wealth and Income Appendix

2012-01-27T15:47:00.001-05:00

In this post, earlier today, I forgot to link to this article over at Naked Capitalism.

The salient point is, that specifically for investors, spending is related exclusively to income, never to wealth.

It goes on to posit that QE and monetary policy are killing demand.

As Steve would say, "Go read it."

Remembering Howard Zinn

2012-01-27T15:37:00.000-05:00

Noam Chomsky writes on the anniversary of Howard Zinn's death:

Howard's remarkable life and work are summarised best in his own words. His primary concern, he explained, was "the countless small actions of unknown people" that lie at the roots of "those great moments" that enter the historical record - a record that will be profoundly misleading, and seriously disempowering, if it is torn from these roots as it passes through the filters of doctrine and dogma. His life was always closely intertwined with his writings and innumerable talks and interviews

...

In those same years, Howard also became one of the most prominent supporters of the resistance movement that was then developing. He was one of the early signers of the Call to Resist Illegitimate Authority and was so close to the activities of Resist that he was practically one of the organisers. He also took part at once in the sanctuary actions that had a remarkable impact in galvanising anti-war protest. Whatever was needed - talks, participation in civil disobedience, support for resisters, testimony at trials - Howard was always there.

...

Even more influential in the long run than Howard's anti-war writings and actions was his enduring masterpiece, A People's History of the United States, a book that literally changed the consciousness of a generation. Here he developed with care, lucidity and comprehensive sweep his fundamental message about the crucial role of the people who remain unknown in carrying forward the endless struggle for peace and justice, and about the victims of the systems of power that create their own versions of history and seek to impose it. Later, his "Voices" from the People's History, now an acclaimed theatrical and television production, has brought to many the actual words of those forgotten or ignored people who have played such a valuable role in creating a better world.

Economies Need a Gardener’s Invisible Hand

2012-01-27T14:42:00.000-05:00

I haven’t posted on Nick Hanauer and Eric Liu’s stuff, and I should have, long ago. Nick, along with Bill Gates Senior, was one of the big proponents of the Washington State high-earner income tax initiative a while back (which failed utterly, I’m sad to say). As was I, in my little way.

I think this new Bloomberg piece says what they’re trying to say better than I could, so I’ll just say “go read it.” It’s short.

Economies Need a Gardener’s Invisible Hand: Hanauer and Liu – Bloomberg

Cross-posted at Asymptosis.

Machines Replacing Humans: They Shoot Horses, Don't They?

2012-01-27T12:45:00.000-05:00

Eric Brynjolfsson and Andrew McAffee have a new Kindle instant book out, Race Against the Machine, that very nicely describes the issues related to technological unemployment. It’s well-written, content-packed, cogently argued, usefully hyperlinked, and well worth the $3.99 they’re asking.
But I think there’s one crucial topic they don’t address, highlighted by the following.
They deliver a quotation from Gregory Clark’s 2007 Farewell to Alms, speaking of the decline in employment of horses in England in the 19th and 20th centuries. The quotation concludes:

There was always a wage at which all of those horses could have remained employed. But that wage was so low that it did not pay for their feed.

The question that B&M fail to ask or answer: Why couldn’t those horses continue working for a living wage?
Answer: because they couldn’t upgrade their skills (to drive trains and tractors, or whatever). They were biologically incapable of “improving” themselves in such a way that they and the new machines were “complements.” So the machines replaced them instead of complementing them.
Imagine that those horses had been free to mate and have offspring at will (as opposed to the PRC-style, top-down population control imposed by breeders). They couldn’t work (nobody would hire them because their marginal productivity relative to machines was so low), so they couldn’t make any economic claim to a share of the (massively increasing) pie of production and prosperity.
They would have faced an unequivocally Malthusian situation: large numbers of horses would have starved.

Now suppose that the population-control option was … not an option. And that laissez faire – letting them just live (and die) with their subsistence or sub-subsistence incomes — was also not an option. The only solution would be to subsidize their lives, transferring money from those who own and profit from the machines to those who can’t benefit economically from using those machines.
You know where I’m going. (I’ve taken you there before.) Human capacity has limits. By definition, 50% of people have an IQ below 100. The prescription we so often hear — that those folks should train to operate computer-driven lathes, and to perform in the sophisticated, information-driven organizational structures associated with that kind of equipment — is … less than realistic.
Rapidly accelerating machine capabilities can result an economy in which those people’s marginal productivity drops to near zero, or even negative — so no matter how hard they work or train, their contributions aren’t great enough for them to “deserve” a decent share of the pie. (Define “decent” as you will; for me in our wildly prosperous society it extends to a good chunk of leisure/recreation time with friends and family, taking family vacations now and then, such like that. Let’s hear it for “family values.”)
If you’re reading this, then like me you probably can’t even imagine what it would be like to have really low intelligence (or other below-average capacities) — how desperately hard it would be to make a go of things, to raise a family and give them a good life, in the country we live in today. Imagine just trying to get through high school.
Some people may get unsavory feelings from this thinking, so (to quote BHO), let me be perfectly clear: I’m not saying that less-capable people are horses. Quite the contrary. They’re people. So yes, I’ll say it: at least if they’re willing to work (or are unable to do so), they deserve a decent share of the pie. They shouldn’t be driven to the bottom while the machine owners wallow in luxury, just because the technological economy they happen to have been born into doesn’t value them any more.
In wonk-speak: income and purchasing power must be decoupled from human participation in production. Not completely, of course — requiring participation in the work force is necessary to solve the free-rider problem. But in an economy that’s bursting with surplus, we can be better off overall if individual incomes (at least at the low end) are not rigidly associated with individual capabilities.
Which brings me back, yet again (getting practical here), to a greatly expanded Earned Income Tax Credit — encouraging both work and hiring — with benefit levels indexed to some measure of unemployment. This would require, of course, that we implement a tax system that actually is progressive, to pay for the increased EITC.
Imagine a post-scarcity future (or … present?) in which high productivity (think: Star-Trek-style replicators) means there’s plenty for all, with little work required. My utopian image is of something like an Athenian Agora — people of all types gathering in public spaces, meeting their friends, and exchanging their wares and their news — instead of constantly scrambling to make a buck and collapsing in their homes when they’re done.
In fact, it looks a whole lot like the zillions of public squares you find throughout Europe — surrounded by residences, and cafés and such where people mingle and spend time with their friends — the kind of environment that pretty much doesn’t exist in America.
And I haven’t even touched here on the idea that this redistribution may be economically efficient, even necessary, to maintain aggregate demand and support productive enterprises, keeping the log that is our economy, rolling.

Wealth vs Income

2012-01-27T11:29:00.002-05:00

Usually my articles present facts and data and try to drive down to a conclusion. This time, I'm going to drive down to a couple of questions.

Recently, Noah Smith had a post on the subject of economic models titled Filling a hole or priming the pump? It did quite a bit to restore my lack of faith in the pseudoscience of Economics, but that is more or less beside the point. Roger Farmer, cited in the post, left a long comment that Noah hoisted up the main page. Farmer concludes:

My reading of the evidence is that consumption depends primarily on wealth rather than income. That was the lesson of work by Ando and Modigliani, Modigliani, and Friedman in the 1950s. It is for that reason that I support interventions in the asset markets that try to jump-start the economy and reduce unemployment by boosting private wealth. That, in my view, is what quantitative easing has done.

Ok - I'm taking on decades of economic research here, but my first question relates to: "My reading of the evidence is that consumption depends primarily on wealth rather than income."

First, let's remember that wealth distribution is on the order of the top 1% owning 40% of the wealth, and the bottom 80% owning 7% of the wealth. And that 7% is not evenly distributed. There are significant fractions of the population who have a) no wealth at all, or b) negative net worth. Either way, they are living hand to mouth. This suggests that 1) they have unmet needs, and 2) will spend the next available dollar trying to satisfy one of them.

So far, this is just a thought experiment. Let's take a look at how personal consumption expenditures track disposable income. Here is percent change from previous year:

Both in the grand sweep and in the year-to-year detail, the curves are pretty much in lock-step.

Here is the data on a Log Scale:

That's coordination about as close as you could ever hope to see in real world data.

And if wealth - or it's perception - were the determinant, wouldn't you expect some sort of a consumption bump during the housing bubble, when people felt wealthier than their incomes justified? Let's look at consumption expenditures per capita.

Here, there is a slope increase, mid last decade, but it's not great, and it's no greater than the slope of the late 90's. I suppose the tech boom must have had some people feeling wealthy then, as well. But they weren't that bottom 80%. Note that the first graph indicates the personal disposable income was up in those periods as well. In fact, they were the only up periods since about 1980.

There was also relatively low unemployment in those times, and thus more people with incomes.

Also, it just seems counter-intuitive in a world where, if real people think about money at all, it's in a personal cash flow context, not in terms of wealth aggregates. Consuption decision reasoning, to the the extent that it even occurs, is along the lines of: "If I buy this thing, can I still afford to feed my cat?"

So, here is question number 1:

Since to most people "wealth" is miniscule, non-existant, or worse, and given empirical data that closely links consumption to income, how can consumption depend "primarily on wealth rather than income?"

Now let's look at Excess Reserves of Depository Institutions.

There's 1.6 trillion QE dollars. Any left-overs have gone to leveraged speculation causing commodity inflation.

But Farmer says: "I support interventions in the asset markets that try to jump-start the economy and reduce unemployment by boosting private wealth. That, in my view, is what quantitative easing has done."

If any wealth has been boosted here, it is in the upper reaches of the already wealthy, not among the working stiffs who are highly inclined to spend the next dollar rather than hide it away in Luxombourg or the Cayman Islands.

So, here is question number 2:

How can QE money help the economy when it is either sitting idle or inflating commodity prices?

I have nothing in particular against Roger Farmer, about whom I know nothing, but I am also prompted to ask economists in general:

What in the hell is the matter with you?

So maybe my lack of faith in Economics is the point, after all.

Cross-posted at Retirement Blues.

Class warfare or fairness…or what?

2012-01-27T09:52:00.001-05:00

But Gingrich seems to have noticed that the key to his South Carolina landslide last weekend was overwhelming support from blue-collar and middle-class Republican voters. With those making between $30,000 and $50,000 a year, Gingrich crushed Romney by 20 points. With those making between $50,000 and $70,000, the margin was 16. But at the top end of the scale, it was a completely different story: Romney won by 15 points with voters making more than $200,000.
As I noted the other day, this same basic dynamic was evident in New Hampshire and Iowa, where exit polls found a direct relationship between enthusiasm for Romney and income level.
via Salon.

European Daily Catch: Know Your Consumers

2012-01-27T09:41:00.001-05:00

by Rebecca Wilder

European Daily Catch: Know Your Consumers Today’s European Daily Catch compares the aggregate implications of the reported January 1-point rise in French household confidence to the reported January stabilization of Italian consumer confidence. Specifically, French consumers could be ‘happier’ but that doesn’t necessarily mean they’re spending more, while Italian household confidence translates rather directly to aggregate spending patterns.

Domestic demand is a large contributor to GDP growth in both Italy and France. Therefore, inferring patterns of aggregate consumption from higher frequency leading indicators, such as confidence, is important. Confidence measures lead real retail sales numbers, and real retail sales lead the quarterly real consumption patterns. Annual real retail sales growth has a reasonably high correlation with aggregate consumption (the ‘C’ of Y=C+I+G+NX) in both Italy and France, 69%; so gauging real retail sales from consumer confidence could potentially be useful.

Consumer confidence could be a useful tool for predicting consumption, hence GDP, in France and Italy…

…but it’s not in France. See, with a correlation of just 38%, household confidence is a terrible coincident indicator of real retail sales and adds practically no predictive value for aggregate consumption or GDP forecasting. French consumers could be just miserable and still post relatively healthy retail sales and aggregate consumption numbers.

…and it is in Italy. When Italians are depressed (not confident), they spend less. And boy are Italians depressed. The same series, consumer confidence and annual real retail sales growth, has a very high correlation in Italy, 76%. The implication is, that with confidence running 12.5 points below its 2000-2012 average I do not expect real retail sales to rise above the current 4.9% annual decline in November (CPI-adjusted).
Given the recent downtrend in Italian consumer confidence, the likelihood of a December decline in real retail sales is high. But even if it did stabilize at current levels, Q4 real retail sales are running 2.5% below Q3 sales. Therefore, household consumption is likely to decline in Q4, and quicker than its 0.2% drop in Q3.

So the moral of today’s European Daily Catch is when it comes to confidence indicators, know your consumers. Unhappy Italian consumers make poor spenders, while unhappy French households may very well hit the shops. Domestic demand in Italy is shaping up poorly.

SOCIAL SECURITY… How They Lie To Us

2012-01-27T06:00:00.000-05:00

by Dale Coberly

SOCIAL SECURITY
How They Lie To Us

The Wall Street Journal in the article Newtitlement State is unhappy with Newt Gingrich’s plan to privatize Social Security. Not only does it know that “privatization” failed when Bush offered it to the country, but they understand that most elected Republicans have distanced themselves from private-account carveouts as well. Rather than embracing them, Florida Sen. Marco Rubio, whose election was one of the Tea Party's biggest victories in 2010, said during his campaign.

“Privatization of the accounts has come and gone. There are other alternatives, such as [raising] the retirement age, how you adjust payments in the future, 'need' measures, et cetera.

What this means is that “privatization” was never more than a political strategy to kill Social Security. It failed, and now we have a better plan to kill Social Security that won’t cost so much.

Here's what the Journal said about Gingrich's plan

The irony of Social Security is that its slow-motion solvency crisis is relatively easy to resolve—and the political system is moving toward consensus, if haltingly.... Personal Social Security accounts are desirable, but that doesn't mean it makes sense to reject compromises that reduce future liabilities. Yet Mr. Gingrich proposes no such changes in his plan, perhaps because they are politically unpopular. But such an abdication opens him up to charges that he's not serious about reform and that he has no plan to pay for the transition costs of going to personal accounts (that is, when younger workers put their money in their own accounts, rather than funding current retirees).

This is so subtle and so dishonest that I thought it would be worth the time to deconstruct it.

"Its slow-motion solvency crisis" ... note that this assumes there is a solvency crisis. In fact there is not one. Social Security is not insolvent and can never be insolvent. With no changes whatsoever it can pay future benefits that are adequate by today’s standards, benefits which will be in fact greater in real value than today’s benefits.

One danger here is that even the defenders of Social Security have got into the habit of pointing to the 2036 DEATH OF THE TRUST FUND as “not a crisis... it’s 25 years away.”

Well 25 years is coming soon enough that folks are starting to notice that it will happen before or during their own retirement. The defenders of SS need to learn that 2036 is not a crisis, not because it is so far away, but because it never meant anything in the first place.

At about that time the Trust Fund will have done its job: helped pay for the boomer retirement, and will run out of money just the way your Christmas Fund runs out of money on or about December 25. After that Social Security goes back to regular old pay as you go financing, the way it was designed to work.

Because IN THE MEANWHILE life expectancy has been increasing, the disappearance of the Trust Fund will not cause, but will unmask, the need to increase the tax rate to pay for that increased life expectancy IF the workers of that time want to keep a replacement rate that reflects the INCREASE in their standard of living since the last time the tax rate was set. If they decide they will want to do this, the easiest and fairest way to accomplish it would be to start this year with a raise of forty cents per week, and to increase the tax another forty cents per week each year... while their wages will be increasing about eight dollars per week each year.

“is relatively easy to resolve.” Yes, of course it is. A tiny increase in the tax rate would do it. An increase so small no one would even notice it. But that’s not what the Journal means. They mean it would be relatively easy to cut benefits, or raise the retirement age, or “means test”. All of these would destroy Social Security and cause misery to hundreds of millions of people over time, but they would be “relatively easy” to enact.

“the political system is moving toward consensus,” With a billion dollars of Peterson money behind the “consensus” the political system is indeed moving. But this does not mean that “consensus” means either that honest people are realizing this is the best way, or that the people... as opposed to the politicians... are in favor of this. But, as the Journal knows, slip in the word “consensus” and readers will feel, if not think, that “everyone knows...and so it must be so.”

“Personal Social Security accounts are desirable,” This is almost “subliminally” slipped in. You won’t remember where you heard it, but “personal accounts are desirable” will stick in your brain unexamined. ARE personal (not private, of course, personal) accounts desirable? Well no. But you aren’t going to get to see an honest debate about that. You will just “believe “ it when the time comes. Personal accounts are not INSURANCE, which is what Social Security is. A personal account is exactly what the people had before the great depression taught them a lesson that no one alive now remembers very well. The depression taught people that some kind of retirement insurance was necessary to prevent very widespread poverty among people too old to work, or too old to be hired. With a personal account you might get a little richer than you will from the same money put into Social Security, or you might get a lot poorer. There is no reason you can’t have a personal account in addition to your Social Security insurance... but they don’t want you to think that.

“that doesn't mean it makes sense to reject compromises that reduce future liabilities.” But “future liabilities” means “future benefits.” And just what is being compromised? You are saving yourself a forty cent tax increase for the “compromise” of getting benefits cut about 200 dollars a month at a time in your life when that will really hurt, or having two years added to the time you HAVE to work for the boss, even though you paid, or could have paid, for your own retirement. Note that no one is stopping you from working extra years if you want to. SS is insurance. It’s there in case you can’t work longer. Or don’t want to work longer.... remember, you paid for it.

“ Yet Mr. Gingrich proposes no such changes in his plan, “ Note that “compromises” has become “changes.” Benefit cuts. means testing. work, if you can find work, until you drop.

“ perhaps because they are politically unpopular.”. Yes, it would be a shame if the people were to be allowed to have their opinion heard. Much less be informed about what their choices are. You see, the only way we can save the country is to lie to the people and take away their right to save for their own retirement.

“such an abdication opens him up to charges that he's not serious about reform and that he has no plan to pay for the transition costs of going to personal accounts “ Ah, there’s the rub. After the failure of he Bush “personal accounts” plan, the enemies realized they could could kill Social Security without incurring the “costs of transition.” Simply cut benefits, raise the retirement age, impose means testing... so that the program will no longer work as insurance sufficient to allow people to retire. This would force them to try to beat inflation and the markets on their own... without "the government" incurring any transition cost. A win win... for the people who hate Social Security.

“that is, when younger workers put their money in their own accounts, rather than funding current retirees.” And here is the father of lies. With Social Security workers already “put their money in their own accounts.” It happens that “pay as you go” DIRECTLY funds “current retirees.” But that doesn’t mean the workers are paying for someone else’s greedy granny. They are paying for their own retirement. Workers who “invest” in stocks and bonds are “funding current retirees”... who live off stock and bond returns. The only difference is that with Social Security the workers are guaranteed that their own retirement will be paid for when they need it.

The United States of America has more assets than any stock or bond can claim to have. In the case of Social Security the "asset" is an infinite supply of new workers who need to save for their own retirement in the only plan that protects their savings from inflation and market losses, and certain kinds of personal misfortune. They no more..or less... "pay for" current retirees than an unending supply of new customers "pay for" the retirements of those who own the stocks and bonds issued by a corporatioin.

But you need to think. With SS you pay your insurance premium and a record of that payment is recorded in your name. When you come to retirement, the total of your contributions is automatically adjusted to equal the average growth in the economy, which includes both inflation and real growth in wages. Your benefit is calculated based on your adjusted contribution. It is “paid for” (directly) by the contributions of those still working... who will get the same good deal you are getting. But while they are “funding” the system, they are not “paying for” current retirees. The current retirees already paid for themselves. Current workers are paying for themselves.

Or they were until the enemies of Social Security came up with the truly brilliant plan of killing Social Security simply by giving the workers their savings back to fritter away. They promise to make up for your lost savings by borrowing the money and taxing the rich... turning Social Security into welfare as we knew it. Welfare is something they already know how to kill in the dark.

Does Government Debt Impose a Burden on Future Generations/Periods/People? #12,143

2012-01-26T11:11:00.000-05:00

I think (after a lot of effort) that I’ve internalized Nick Rowe’s modeling of this question (follow links from here) pretty well conceptually. His answer is Yes.

There have been thousands of posts and comments across the blogosphere since Nick took Krugman to task on the issue a couple of weeks ago, and Nick has been remarkably generous with his time in helping people understand his thinking. (A kudos also to Bob Murphy.) And it’s worth pointing out that Krugman hasn’t really responded to the core argument head-on. Feel free to follow the threads.

Here’s Nick’s model in brief, in my words:

Government borrowing/bond issuance today — considering only its costs, not the potential up/downsides of the associated spending — propagates incentives into the future, like waves are propagated when you throw a rock in a pool. Those incentives cause the old people in every period to consume more than the young people. In each future period, parents will eat some of their kids’ lunch.

Each generation consumes the same amount as they would have otherwise (because first you’re young, then you’re old, first you’re a child, then you’re a parent). But if government eventually has to tax to pay back the debt, the young people in that period are forced to consume less over their lifetimes, because they don’t get to eat their kids’ lunch.

(Nick acknowledges the point that Jamie Galbraith and others have been making for years: if the future GDP growth rate is higher than the interest rate, on average, the taxation never needs to happen, so the burden is never imposed.)

Here’s why I haven’t updated my priors much based on this thinking:

1. The wave model of propagated old/young bond-buying/spending patterns, extending to eternity, doesn’t seem plausible to me intuitively. It seems like the rock-in-the-pool ripples would probably flatten as they spread through time — maybe (?), as discussed in various posts and comment threads, because over the generations a certain percentage of parents bequeath their bonds to their children. That leaves us with “we’ll have to tax to pay for it eventually, so somebody will have to consume less,” which is pretty much where we started.

2. I wonder whether a real agent-based dynamic simulation modeling of Nick’s scenario, with continuous time and using differential equations, would give the same results. I’m not enough of a mathie to even guess, but I wouldn’t be surprised to see very different patterns and/or results.

3. The huge majority of government bonds are bought and traded not by people but by institutions (many of which — this seems significant — are licensed to create credit money and associated debt ex nihilo, and use government bonds as debt collateral in that process). Those institutions don’t have generations — birth/death, parents/children — and they don’t consume real goods (much). Again, my intuition tells me that these facts would bring complex dynamic interaction effects into play. While it might suffice to simplify by modeling things “as if” children were buying bonds from their parents, I don’t feel confident that that’s true.

4. The question Krugman was really asking, underlying his “is debt a future burden” locution, was: A. should we be taxing more or less? and B. should we be spending more or less? (Hence, should we be borrowing more or less?) Since I’d expect to see complex interaction effects from any of the four sources/uses choice combinations, isolating the question in this way seems like a questionable analytical technique. It’s kind of (not wanting to offend, can’t resist the word) petifogging. I’m not at all sure it provides useful information when divorced from the relevant context.

5. Semantics: assuming the model’s right, that we’re forcing a future generation of people to pay for their parents’ (our?) extra consumption — but not changing the amount that all future people will consume in toto — should we call that “a burden on future generations”? I’ll leave that to the philosophers.

I may (still) be displaying an inadequate understanding of the model in some points here, but I think there’s enough of merit above to discourage certainty — to question the ultimate utility of the model.

In short, if I was running a business of any size (yes: I have done so), with any decent amount of money on the line, I would 1. not give a huge amount of weight to the results of this model, and/or 2. be asking for a much more sophisticated analysis.

Which (#2) leaves us again where we were, wrestling with many/most of the big questions of growth macro.

So when Nick says “I thought we all had this debt burden stuff sorted out 30 years ago,” I agree. The answer was “maybe.” (Especially given the long-term historical reality of the Galbraithian scenario described above.) And in my mind it still is — with a little more weight on the “burden” side.

Dahlia Lithwick looks at the judiciary system

2012-01-26T11:00:00.000-05:00

Dahlia Lithwick writes about the masterful attention Republicans have given to the judicial system in The Washington Monthly:

For anyone considering the 2012 election’s importance to the future of the American judiciary, one fact stands out: next November, Ruth Bader Ginsburg will be seventy-nine years old. If a Republican wins the presidential election, he or she may have an opportunity to seat Ginsburg’s successor, replacing the Supreme Court’s most reliably liberal jurist with a conservative. That would mean that the Court—currently balanced almost elegantly between four liberals, four conservatives, and the moderate conservative Anthony Kennedy—would finally tilt decisively to the right...Kennedy, who is ranked tenth in that study, will be seventy- six next November.
...
But it’s not just the Supreme Court that would tilt further right. The high court only hears seventy-some cases each year. The vast majority of disputes are resolved by the federal appellate courts, which are the last stop for almost every federal litigant in the country. And the one legacy of which George W. Bush can be most proud is his fundamental transformation of the lower federal judiciary—a change that happened almost completely undetected by the left

Beverly Mann responds in an e-mail back to me after I sent her the link:

I love this article. My favorite paragraph is:

Why have the Republicans been so much more effective at dragging the judicial branch rightward than Democrats have been in yanking it back? Focus, mainly. Since the Meese revolution of the mid-1980s, the GOP has been better at constitutional messaging, better at mobilizing the electorate, and better at laying out a judicial vision than liberals, who still seem to believe that unless the Supreme Court overturns Roe v. Wade (or perhaps the Affordable Care Act), judges are not really a voting issue.

It’s dismayed and enraged me for years—at this point, decades—that most of the vocal left (the people who gain media attention) act as if the only legal issue of real importance is abortion rights. Okay, now some of them have added torture and Gitmo as issues important enough to mention, but that’s pretty much it. But actually, it would be hard at this point to even explain how deeply, how profoundly, how thoroughly, these judges and justices have changed the very system of law in this country, largely by simply routinely, categorically denying access to federal court, by erecting ever more unattainable, ridiculous, and complex procedural requirements to have a federal court decide a case "on the merits" rather than on a procedural issue—or by quietly denying meaningful court review if access is granted, by pretending to have granted it but by issuing a formulaic ruling making clear that what happened was that the outcome was never really at issue and that the excuses for it were filled in later.

More Caution and Skepticism About Federal Mortgage “Investigation”

2012-01-26T10:42:00.001-05:00

Yves Smith continues to follow the progress of investigations in More Caution and Skepticism About Federal Mortgage “Investigation”

While a large number of “liberal” groups, ranging from the official Democratic party outlets (the Center for American Progress) to ones that sometimes cross swords with the Administration (MoveOn, the Working Families Party) praised the Tuesday evening announcement of mortgage “investigations” with Schneiderman co-chairing the effort, others who have been watching the mortgage legal fight closely were far more ambivalent about the creation of a new unit in an initiative …which has done pretty much nothing since its creation in 2009 (boldface mine):

Attorney General Eric Holder, Treasury Secretary Tim Geithner, Housing and Urban Development (HUD) Secretary Shaun Donovan, and Securities and Exchange Commission (SEC) Chairwoman Mary Schapiro today announced that President Barack Obama has established by Executive Order an interagency Financial Fraud Enforcement Task Force to strengthen efforts to combat financial crime. The Department of Justice will lead the task force and the Department of Treasury, HUD and the SEC will serve on the steering committee. The task force’s leadership, along with representatives from a broad range of federal agencies, regulatory authorities and inspectors general, will work with state and local partners to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, address discrimination in the lending and financial markets and recover proceeds for victims.
…
The Times identified the two red flags. First, why are the settlement talks still proceeding? This is ridiculous if the plan is to do investigations. The fact that they have not been halted calls this exercise into question. Second, if this is supposed to be a heavyweight investigation, why hasn’t Obama set up an independent prosecutor, a role much more likely to attract the sort of kick-ass litigator that the Times correctly thinks is necessary for the job?

Twitter as the platform for elections

2012-01-26T08:23:00.001-05:00

I want to point to John Cassidy's notion in the New Yorker that Twitter could serve as an adequate platform for electioneering candidates...

...What if, rather than presenting a long and tedious speech that would constantly be interrupted by senators and congressmen mugging for the cameras, the President sat in the Oval Office, or anywhere, actually, and tapped out what he had to say in a hundred and forty characters?

Obviously tongue in cheek because twitter doesn't include pictures and facial expressions...like watching John Boehner's face behind the President.

Obama's State of the Union vs Romney's Tax Returns

2012-01-25T20:06:00.000-05:00

by Linda Beale

Obama's State of the Union vs Romney's Tax Returns

Obama took the high ground in his state of the union address, where he pointedly noted the importance of applying fair tax rules to ensure that millionaires pay taxes at rates more similar to those paid by secretaries and firefighters. He wants a 30% rate on those with incomes of a million or more.

We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by,” Obama said in his address to a joint session of Congress. “Or we can restore an economy where everyone gets a fair shot, everyone does their fair share and everyone plays by the same set of rules.” STeven Sloan, Obama Says High-Earners Should Pay at least 30% of Income as Tax, Bloomberg.com, Jan 24, 2011.

That would mean that Romney wouldn't enjoy the exceptionally low rate of tax he had in 2010 after Congress enacted Obama's suggested reforms. Romney released his tax returns on Tuesday. See this handy link on the New York Times at which the 2010 and 2011 returns and accompanying documents are available, including links showing where Romney earned his $528,871 in speaking fees, etc.. Romney paid only 13.9% on $21.6 million of income, benefitting enormously from the low preferential capital gains rate of 15% that he paid on his returns from his investment of capital. Romney benefitted, too, from investments in the Cayman Islands, a well-known tax haven. And he is still earning "carried interest" from Bain Capital to the tune of multiple millions a year--that's a share of the profits of a partnership he managed, treated as though it were a return on an investment of capital though it is paid for services. Romney is most definitely one of the 1%--actually in an even more rarefied class cluster of the top 0.006% of multimillionaires with lots of very low taxed income. See Kevin McCoy, Romney tax returns show he's no average multipmillionaire, USA Today (Jan. 24, 2011) (noting that only 8274 returns out of 140 million filed had income of $10 million or more in 2009); Lori Montgomery et al, Mitt Romney's Tax Returns shed some light on his investment wealth, Washington Post (Jan. 24, 2012); Nicholas Confessore, Romney's Tax Returns Show $21.6 Million Income in '10, New York Times (Jan. 24, 2012).

As the Times story puts it:

What Mr. Romney’s returns illustrated, instead, was the array of perfectly ordinary ways in which the United States tax code confers advantages on the rich, allowing Mr. Romney to amass wealth under rules very different from those faced by most Americans who take home a paycheck.

Obama's proposals sound reasonable. But I'd extend the basic concepts to the corporate tax. Every corporation that is making book profits of more than some amount ($5 million? $10 million) ought to be held to a similar minimum tax rate on those book profits.

Funny, that is what the original Alternative Minimum Tax (for individuals, and one for corporations) was supposed to achieve--to ensure that everybody paid at least a reasonable rate on their income, even if they could cumulate lots of preferences like mortgage interest deductions, state income taxes, property taxes, and similar deductions. Over time, the AMT has eroded--too many exceptions made, too many taxpayer friendly amendments, and then the Bush tax cut bills that lowered rates so that the AMT rates aren't really working well as a "broader base but lower rate" tax that ensures that even high-flying income recipients pay a more reasonable tax rate on their income.
http://ataxingmatter.blogs.com/tax/2012/01/obamas-state-of-the-union-vs-romneys-tax-returns.htm

Japan’s Lopsided Financial Balances

2012-01-25T06:51:00.000-05:00

by Rebecca Wilder

Japan’s Lopsided Financial Balances

Tim Duy and Paul Krugman discuss the merits and failures of Japanese policy. The sectoral snapshot of the economic financial balances shows that Japanese policy was indeed a success but also a failure.

First, policy was a success, given the private sector was recuperating from the bursting of a credit and investment bubble.

The chart below illustrates the 3-sector financial balances model – read Scott Fullwiler on New Economic Perspectives for a detailed description of the 3-sector financial balances model. According to this identity, the capital account plus government net saving plus private net saving must equal zero. For a given level of the capital account (Japan’s capital account has been quite stable over the years), when the private sector increases net saving, aggregate demand declines and government net saving declines.

In the early 1990s, all sectors were roughly in balance. However, since then government debt surged in response to a like rise in the private sector desire to save. One could argue that the government deficits and accumulated debts were indeed required, hailing the government’s actions a policy success. However, I contend that this has been a missed policy opportunity rather than overall succes
es.

The second chart illustrates the same financial balances model, but broken down into 4 sectors: the capital account plus government net saving plus household net saving plus corporate net saving must equal zero – household plus corporate net saving equals private net saving in the chart above.
Household net saving has steadily declined with the ageing population. But the corporate saving rate has been positive every year since 1996, offsetting the stimulating effect an ageing population could have on domestic demand. So here’s the policy failure: the government missed the opportunity for structural reform targeted at the corporate saving rate.

Had the government created incentives for a reduction in the corporate saving rate, the returns could have/would have been filtered back into the domestic economy. Now they’re in a state of panic, watching the European debt crisis with an anxious eye. Why else would Noda be pushing so hard for a new tax?

Martin Wolf commented on this one year ago:

Japan’s aim now must be to achieve domestically driven growth. The most important requirement is a big reduction in corporate saving. Mr Smithers argues that this will happen naturally, since savings are largely capital consumption, itself the product of the history of excessive investment. I would add that if ever an economy needed a market in corporate control, to shift cash out of the hands of sleepy managements, Japan is it. Not being beholden to Japan’s corporate establishment, the new government should adopt policies that would change corporate behaviour, at last.

As with all credit cycles, the burden of debt falls on the government as the private sector recoups. However, in Japan’s case the government missed a great opportunity for structural reform before the crash associated with credit cycles in other major developed economies (the USA).

originally published at The Wilder View...Economonitors

Gingrich's 2010 Tax Return: what it does (and doesn't) tell us

2012-01-25T06:30:00.001-05:00

by Linda Beale

Gingrich's 2010 Tax Return: what it does (and doesn't) tell us

In last Thursday's debate, Newt Gingrich released his 2010 Gingrich Foundation tax return and the Gingrich Joint Tax return. See Kim Dixon & Marcus Stern, Gingrich tax return out, but much remains unseen, Reuters (Jan. 20, 2012); Paul West, Gingrich tax return details sources of income, alimony payment, L.A. Times (Jan. 19, 2012); Jon Ward, Newt Gingrich Releases His Tax Returns, Huffington Post (Jan. 19, 2012; updated Jan. 20, 2012) (the Gingrich press release, with links to both returns, is also accessible from a link at bottom of this brief article).

The private foundation's return lists Callista Gingrich (presumably in her role as President) as having custody of the books at the Foundation's address in Washington. It lists Newt Gingrich as the only manager who contributed more than 2% of the contributions received during the year, and another form (Schedule B) lists Gingrich Holdings as the contributor of $152,609. Callista Gingrich is listed as the president (with zero compensation) and Newt Gingrich as a board member (with no compensation). A treasurer is listed with $1800 of compensation, a secretary with no compensation, and two other uncompensated board memberes.

The Foundation supported the following organizations with a total of $120,000: Mount Vernon Association, Basilica of the National Shrine, Shiloh Point Elementary in Cumming GA, Amerivan Museum of Natural History in New York, The Washington Opera, The Atlanta Ballet, A Learning Foundation inAtlanta, the Arthritis Foundation, Mount Paran Christian School in Kennesaw GA, the Walker School in Marietta GA, Luther College in Decorah IA, Susan Chambers Dance in Sugar Hill GA, Breast Cancer Research in New York, and Alzheimer's Association in Washington.
The joint tax return shows income in 2010 of more than $3 million, with about $450,000 in compensation income and about $2.5 million of Schedule E income through his S corporations Gingrich Holdings inc and Lubbers Agency Inc. and partnerships Draper Fisher Jurvetson Fund VIII and FLC XXXII Partnership LP. (He apparently restructured these businesses before entering into the Republican nomination contest, perhaps foreseeing better than Mitt Romney did that voters might react to the very idea of a giant holding company through which one receives one wealth.) The Salaries and Wages report shows that $450,000 in compensation income arising as follows: 252,500 in wages to Newt from Gingrich Holdings, Inc., and to Callista 5918 from National Shrine and 191,827 from Gingrich Productions, Inc. According to the Reuters story, Gingrich's earlier disclosure said the Gingrich Holding income was mostly a distributive share (the tax term for a pass-through payment from an entity taxed as a partnership) from Gingrich Productions. His Schedule SE shows only 847 of self-employment taxes in connection with the various schedule C, K-1 etc. income, while Callista's shows 268.

Also revealed on the tax return are the following: $41,625 in speaking and board of director fees (showed as business income on line 12), $6,853 in rental income, $26,655 in taxable interest, $11,892 in ordinary dividends (not eligible for the 15% net capital gain rate), $5,990 in qualified dividends (eligible for the 15% net capital gain rate), $4,184 in net short-term capital gains and $32,133 net long term capital losses and $33,124 of taxable refunds, credits or offsets for state and local income taxes The couple claimed a total itemized deduction of $215,095. They made $81,133 in contributions to various charities and paid $122,844 in state and local income taxes, $11,656 in real property taxes, and $2,422 in personal property taxes, as well as 8505 in tax preparation fees. They also enjoyed $10,754 of tax-exempt interest (not part of their taxable income). The Gingrich couple paid almost a million in taxes, giving them an effective tax rate on the 3.1 million of income of around 31%.

Re those net short term capital gains: Gingrich bought and sold shares in Campbell Soup in 2010 (losing 74), bought shares in Celgene Corp in 2009 and sold them in 2010 (making 2591), sold in 2010 shares in American Funds Capital bought at various times, for a 346 gain, and similarly sold shares in Nuveen High Yield fo a 1225 gain.
Re those net long term capital losses: Gingrich sold shares bought at various times of Martek Bioscience, American Funds capital, Ishares Trust s&P smallcap 600 and Ishares Trust Russell 1000 Value, which combined with the long-term totals from Schedule D-1 of 1.023 million (from sales of various funds and closing out of $600,000 worth of CDs) yielded an aggregate of 1.257 million with a claimed loss of $35,636. Using his capital gain distribution from Schedule D-1 of 1018, that left a net LTCL of 32,541.

There are several things worth noting about Gingrich's release of the couple's tax information.
1) this is only a single year's return--2010. George Romney, Mitt's father, famously began the more transparent information sharing about presidential candidates by releasing 12 years' of his own tax returns. Gingrich should follow that example, even if Mitt isn't sure he will. Multi-year returns are necessary for tax experts to even begin to pierce the veil of tax secrecy by seeing trends and patterns in types of income. One year of returns tells you very little. Gingrich should release returns back to his volatile period in Congress and his scuffle with the ethics inquiry, and should release returns relating to the period when he earned what he calls "consulting" fees based on his being a "historian" for Freddie Mac (see item 3).

2) we don't have tax returns for Gingrich Holdings or Gingrich Productions, or even the informative financial statements that publicly traded companies are required to provide. Those privately held corporations are therefore able to function as "blockers" to maintain a good deal of secrecy about Gingrich's own income even with the release of his return. Back before Nixon, corporate tax returns were public information and were not kept secret by the Service. We should go back to that, because corporations, whether publicly traded or held privately, are benefitting from the public trust and the state's willingness to allow them to form. There seems to be little justification for maintaining any business entity returns as confidential documents, with some redaction allowed to maintain trade secrets. But until we do, we won't know anything more than what Gingrich tells us (or reporters can get "deep throat" sources to divulge).

3) Gingrich's return labels him a "consultant" but we know very little about his client list or his activities for his clients. We know he worked for Freddie Mac: he claims he wasn't a lobbyist but that is a hard one to swallow whole. It is difficult to imagine Freddie Mac paying the consummate politician as though he were a mere historian doing historical research but it is very easy to imagine Freddie Mac paying a well-connected lobbyist, shoes that Gingrich's role as House Speaker ensures that he would have fit into easily. We know that he worked as a "consultant" during the passage of the Medicare Part D prescription drug provision. Again, that sounds more like lobbying than "consulting". The problem is that Washington has written weasel rules for lawmakers who "consult" so that they can claim they are not "technically" a lobbyist, as Gingrich is doing. But voters should want to see what kinds of reports he provided on the Medicare and Freddie Mac issues, as Romney is insisting. Otherwise, he is just hiding behind the very thin curtain of the fuzzy line between obvious lobbying and "not required to register-wink/wink lobbying".

4) Congressmen pay themselves nice little pensions even while the GOP is making an ideology out of its desire to cut private pension benefits for unionized workers (in the name of 'saving' business but really in the name of passing along even higher profits to managers and owners) and its intention of "reforming" Social Security (meaning leaving beneficiaries who depend on this system that they've paid into all their lives with less money than they should be able to have). Gingrich's return reports more than $76,000 in 2010 from his Congressional pension.

originally published at ataxingmatter

Financial Markets Are the Real Barter Economy

2012-01-24T10:28:00.000-05:00

As (mis)conceived by most economists, money (which they confute here with currency) emerged as a solution to the time problem of barter economies: my spinach is ready now, but your apples won’t be ripe for months. How can we trade? Answer: you give me money for my spinach, and I give it back to you later for your apples.

That armchair-sourced fairy tale has been resoundingly debunked — that’s not how money (or even currency) emerged, and the Adam Smithian butcher/baker barter-exchange economy has never existed. Credit money — first embodied in tally marks on clay tablets — emerged and was in widespread use a couple of thousand years before coinage was invented (the latter largely to pay soldiers, whose itinerancy makes other methods problematic).
But the notion of barter economies lives on.

The whole system of national accounts (the NIPAs), in fact, was constructed by Simon Kuznets and company in the 30s as if we lived in a barter economy — with money being merely a time-shifting convenience, and with no accounting for financial assets at all. That accounting was only added a decade or so later, with publication of the Fed Flow of Funds accounts.

I’d like to suggest that this barter model for the real economy results in a great deal of confusion — including (especially?) among economists — largely because the NIPAs don’t usefully model the distinction between saving wheat (which can be consumed) and “saving” money (which can’t). By “useful” I mean “conceptually tractable, subject to consideration without logical error.”
I’m asserting that the barter model of the real economy results in lots of confusion and logical error. Viz: careful economic thinkers like Nick Rowe, Scott Sumner, and Andy Harless feeling the need/inclination to write lengthy think-pieces on that nature of “S.” Or the widespread misconception that “saving” (by whatever definition) “creates” “loanable funds.”

I’d even go so far as to say that those barter-model-induced logical errors pervade most thinking about economies and economics, both among economists and among the laity.
However: If you want to see a market that does operate as a barter economy, look no further than the market for financial assets. In this market, you trade your checking-account or money-market deposits for shares of Apple stock. Somebody else makes the opposite trade. The transaction is mutual and (effectively) instantaneous and simultaneous. It’s a barter.

In a very real and very counterintuitive sense, there is no money exchange in the financial markets. There are just barter swaps of financial assets.

A proleptic response to inevitable objections, and a definition of terms:
1. By “financial asset” I mean something that has exchange value — somebody will give you something in exchange for it — but that cannot be consumed (directly or through use or time/natural decay/obsolescence), providing actual human value — “utility” — in the process. (Things that can be so consumed, and do provide human utility — and derive their perceived value from that utility — are real goods/assets.)

2. “Money,” then, would be that exchange value as embodied (or metaphorically “stored”) in financial assets. Money cannot, in fact, even exist except as it is so embodied. Financial assets are money’s sines qua non – the things without which it does not exist.
Those financial assets (and the money they embody) can be tallied — represented — on clay tablets or in electronic accounting systems, in mental accounting ledgers (“You owe me”), or in physically exchangeable representations of those ledger tallies, such as dollar bills or stock certificates.
By this definition, a dollar bill or a deposit in a checking account is a financial asset, just as much as a share of stock or a government bond is. Which means that all exchanges of financial assets are swaps. Trades. Barters.

Exchanges for real goods, however, are different. When you buy or sell a real good, money (embodied in a financial asset) moves from one account to another, and — this is key — doesn’t disappear. It keeps getting passed on, exchanged. Real goods move the other way, and do disappear. You’re trading something that only has exchange value for something that can — will – be consumed. Conceptually: Financial assets travel in circles. Real goods travel in one direction only: from birth to death, production to consumption.

A physical metaphor may help: think of the financial system (including physical currency transactions) as a giant wheel, pushing along a conveyor belt of real goods.
But economists try to think about/model these very different situations as identical — as if “money” were being exchanged for bonds (and implicitly, as if those bonds will eventually be “consumed”). Since (mental) models for barter economies must be structured very differently from models for monetary economies,* modeling both of these as the same is problematic, confusing, and productive of logical errors — and perhaps even just plain wrong.

The gist of this thinking is not new — much of it reflects ideas floated long ago by circuitists, chartalists, modern monetary theorists, and other such (g)ists. But I’m hoping the formulation as presented here may be useful to others, as it is to me, in 1. forming mental/conceptual models of how economies work, and 2. evaluating the models bruited by others — notably the inherent validity of their underlying and often unstated assumptions.

I would point out in particular that as with my discussion here, the accounting-based modeling approach of Wynne Godley (and his predecessors, successors, collaborators, and parallel travelers) begins not where Kuznets did — with the interchange of real goods and services — but with the nuts and bolts of financial accounting. This approach imposes logical constraints on economists’ reasoning, constraints that seem sadly lacking in much barter-economy thinking.
As Godley says in the conclusion to his seminal paper:

In contrast to the standard textbook methodology, which starts by making very strong behavioural assumptions based on no empirical evidence at all (for example regarding the shape and role of an aggregate neo-classical production function), [this methodology suggests that] a different paradigm is indicated in which knowledge is gradually built up by empirical study, within the formidable constraints imposed by double entry accounting.

I’m not saying it’s impossible to think logically and coherently using the NIPA/Flow of Funds economic model, with the (confusing) barter and savings models embodied in the NIPAs. I’m saying it’s very difficult — especially since economists aren’t trained in financial accounting — and that as a result logical failures are widespread.

* Nick Rowe quoting Clower: “Hang on. In a Walrasian economy there is one big market where all n goods are exchanged; in a barter economy there are (n-1)n/2 markets where 2 goods are exchanged; and in a monetary economy there are (n-1) markets where 2 goods are exchanged, one of which is money.”
Cross-posted at Asymptosis.

Where Has All The Money Gone, Part II - Finance Sector

2012-01-24T08:41:00.000-05:00

In Part I we saw that labor's earnings have lagged far behind GDP growth. (More on earnings stagnation here) Meanwhile, corporate profits have grown at a rate that, until recently, increased over time, and they are now at a historically high fraction of GDP.
Here is a specific look at the Finance Sector. The graph shows finance sector profits as a percentage of total corporate profits - all after tax.

That's a pretty impressive sweep up over time. I threw some best fit curves through the whole data set, and also though the peaks and valleys. Curves through the extremes are exponential.

Along with the increased percentage we get a dramatic increase in the data spread.

When lines jump around a lot, you can sometimes get clarification by looking at a long average. I tried that here with a 13 year average.

A long average filters out the hash, and reveals the underlying trend. Or, I should say, trends, since there are two, with a sharp break at the beginning of 1986. A best-fit least squares trend line on the data through '85 is a near-perfect match to the average line, which barely even wiggles. We see a bit more action in the post-85 segment, but the new trend is still very clear, indeed. The earlier trend line in green is now the lower channel support line.

The finance sector has captured an increasing fraction of corporate profits, which have been growing at an increasing rate since WWII. And the growth rates are greatest when the economy is doing the worst. Take another look at the first graph. The correlation of finance sector profit peaks with recessions is close to perfect. Peaks are in Q2-1949, Q3-1952, Q4-1953, Q1-1958, Q1-1961, Q4-1970, Q1-1986, Q1-1991, Q4-2001. The peak in 1986 is the only one that does not correspond to a recession.

The finance sector provides a vital function. It is there to facilitate and enable the wheels of industry to turn. But policy matters. What has happened in the age of deregulation and lax taxation is that the finance sector has come to dominate the economy. This is madness. And here is your Great Stagnation, folks.

Beyond the point of supplying necessary financing for businesses and mortgages, financial manoeuvrings - speculation in particular, and most especially so with sophisticated derivatives that nobody knows how to rationally evaluate - become rent seeking. This is a massive misallocation of resources, diverting capital from real investment into totally non-value-added financial tail chasing.

And I'm not the only who thinks so. Here, Paul Krugman calling the whole operation A Giant Scam, quotes Andrew Haldane, Executive Director, Financial Stability, Bank of England:

In fact, high pre-crisis returns to banking had a much more mundane explanation. They reflected simply increased risk-taking across the sector. This was not an outward shift in the portfolio possibility set of finance. Instead, it was a traverse up the high-wire of risk and return. This hire-wire act involved, on the asset side, rapid credit expansion, often through the development of poorly understood financial instruments. On the liability side, this ballooning balance sheet was financed using risky leverage, often at short maturities.

In what sense is increased risk-taking by banks a value-added service for the economy at large? In short, it is not.

Haldane's article was reposted at Naked Capitalism. What he is getting at is the derivatives market, the unregulated darling of the World of High Finance. Estimates vary, since there is no good way to get a handle on it, but the highly leveraged derivatives market has a notional value somewhere between 10 and 25 times the aggregate value of global GDP. In the wake of Phil Graham's undoing of Glass-Steagal came a sea change in the way the Finance Sector does business, and along with this came a shift from risk management to risk-making. As Haldane put it: "If risk-making were a value-adding activity, Russian roulette players would contribute disproportionately to global welfare."

Since none of this activity does anything to create real wealth, it is nothing but rent-seeking. That is bad, in and of itself. Worse, still, in Krugman's words: "Wall Street and the City were con artists extracting huge rents from an unwary public (and eventually dumping much of the cost, when things went bad, on taxpayers)." What is perhaps worst of all is that the money locked up in these ventures is diverted from real investment.

So, here is the picture. While the average earnings of working stiffs has been stagnant, at best, corporate profits have grown at an increasing rate. Further, the percentage of those profits going to the Finance sector has also grown at an increasing rate. Total profit growth is above exponential, and Finance Sector profit growth is super-exponential.

To summarize:
1) Over the last 30 years banking has devolved from a necessary financial function involved in the allocation of resources and management of risk to essentially non-value-added rent-seeking activities implemented through high risk practices.
2) When the whole house of cards came tumbling down, the losses were socialized, while the criminals who perpetrated the underlying fraud walked off not only scot-free, but with huge bonuses.

There might be some way to justify this if it were leading to greater GDP growth or a rising tide that lifted all the boats. But the opposite has happened. GDP growth has been in decline for decades, and the tsunami of profits floating the yachts in the Finance Sector has swamped all the dinghies.

13.9% Just Under 15% ?

2012-01-24T01:08:00.000-05:00

What is a small amount of money ? The extremely excellent Josh Marshall typed

We’ve got the first report about Romney’s 2010 taxes. His effective tax rate was 13.9%, just below the 15% he estimated last week. More shortly.

44 minutes ago (eek I just typed "just typed" then noticed the irony).

The tiny difference between the taxes Romney publicly guessed he roughly paid and the taxes he paid is over $450,000. One of Romney's many gaffes is saying his taxes were around 15% because, although he had earned money for speaches, he didn't earn much. Indeed he earned less than 450,000 that way. But it is a huge amount of money to earn with so little sweat.

Similarly the difference between 13.9% and 15% is more than seven times median family income.

Of course, Romney's income isn't close to a rounding error in the Federal Budget.

I think that getting the rate under 15% requires considerable effort. As a businessman consulting with his lawyers and accountants, Romney doesn't leave money on the table (it's not the money it's the principle that it's all about the money). As a candidate, I'm sure he really really wishes he had found a way to send a million more over to the IRS.

Romney to release tax returns Tuesday (finally)

2012-01-23T10:59:00.000-05:00

by Linda Beale

Romney to release tax returns Tuesday (finally)

Romney's bitter loss to Newt Gingrich in the Republican primary in South Carolina demonstrated that playing the patrician elite above the fray has its limits as a campaign strategy. Romney's strategists had apparently thought that they could get away with not releasing tax returns--at least not any except his 2011 ones (maybe) when filed--but they hadn't counted on vicious attacks from the GOP right that questions his vulture capital millions and his top1% effective tax rate.

That's what happens when there is a campaigner who thinks that earning $370,000 from speeches given to meaningless conventions of some trade or another is "just a little money", while admitting that the money he still earns from the vulture fund where he oversaw takeovers of companies (and layoffs of employees and offshoring of work) manages to be taxed at a preferential rate of merely 15%.

So after the loss to Gingrich (an odd man to try to claim a populist mantle when he had a $500,000 line of credit at Tiffany's and disposes of old wives the way most people dispose of old socks), Romney has now announced that he will release returns plus an estimate of his 2011 taxes due. See Michael Shear, Romney to Release Tax Returns on Tuesday, The Caucus, New York Times (Jan. 22, 2012).

One does wonder why it will be Tuesday when they are released. Why not today? or six months ago? Will they be redacted? Will the accompanying schedules that show his income coming through tax haven "companies" located in the law offices that house 18,000 others in the Caymans be there? Questions that we will have fun examining on Tuesday, anyway.

Oh, and Mitch Daniels, current governor of Indiana and Bush assistant who helped preside over the real growth of the federal deficit as Bush pushed through huge tax cuts while increasing federal spending (especially on preemptive wars), will give the GOP response to the State of the Union message. The Tea Party has picked Herman CAin--the author of the infamous 9-9-9 plan who wanted to shift the tax burden brutally onto the backs of the working poor. The GOP seems to have tax cuts for the rich accompanied by increasing burdens for the poor in its blood, doesn't it
.
originally published at ataxingmatter

Health Care Thoughts: Evidence Based Medicine

2012-01-22T21:30:00.003-05:00

by Tom aka Rusty Rustbelt

Health Care Thoughts: Evidence Based Medicine

Evidence based medicine is one of the center pieces of PPACA (Obamacare) and is generally viewed as THE enlightened way to practice medicine and to direct dollars more effectively. Problem is, there is a "whose ox just got gored" issue.

The American Psychiatric Association is currently revising guidelines for autism spectrum diagnoses, and early research indicates some high cognition youngsters may have their diagnosis dropped or altered. This could result in an alteration or loss of services (caveat: it is very early in the process).

It has been suggested over the past couple of decades the diagnosis was expanded, perhaps past the bounds of science, as parents scrambled and pleaded for help. Parents and educators are concerned. What parent can blame them?
In 2009 new recommendations were published for breast cancer treatment and there was a firestorm of criticism. Breast cancer is an emotional topic (justifiably so).

We tend to associate less treatment with neglect or negligence.

But, if we are to follow evidence based medicine then we have to go with evidence. Right? Many difficult decisions lie ahead. (My own physician has cut back testing at my annual physical based on new guidelines, so I have a personal stake in this.)

PS: New guidelines on bone densiometry (osteoporosis test) are coming soon and will probably indicate less testing for women once a baseline is established.

The Rulers Cannot Take Responsibility

2012-01-22T15:02:00.004-05:00

op-ed by Noni Mausa


The Rulers Cannot Take Responsibility

At least, not in the sense of crime and punishment. Only in  immediate, short term and small decisions can political rulers be  unambiguously judged right or wrong, and adequately punished. There is no punishment, however severe, that can adequately balance the potential harm done by one man or a small group to an entire nation. Even in ordinary people, the threat of reprisals is unevenly effective in preventing crimes. And nobody thinks such threats can prevent  stupidity, misjudgment and decisions made on incomplete data. The scope for such poor decisions is magnified thousandfold in the public arena.

In government the scale of possible harm is so disproportionate to what a bad ruler can suffer or repay, that for all practical purposes they wield power without responsibility.

Even the most earnest and caring leader, the cleverest, the strongest,  cannot “take responsibility.” They can do much good and much harm, but  they personally can’t be held accountable in any way that mends the broken crockery of the nation.

The whole purpose of government is to make decisions for the common  good across time. Longer than a term of office or even a lifetime, the work of government requires planning and caution. It is
inherently conservative in the original sense of the word. The only way rulers can “take responsibility” is to realize this and  to make decisions and support social structures that are cautious and  conscious.

They need to build and maintain excess capacity. They must conserve  resources that might be useful or more valuable in the future. They  need to nurture relationships with other nations and peoples. They need to sponsor or at least tolerate a myriad of niches of knowledge,  skills and unique obsessions. We can’t know when we will need them. A high-functioning nation is the opposite of a high-functioning  business. Efficiency for its own sake is dangerous. Demanding
immediate profits, or any profits at all, can reduce the effectiveness  of a government. Messyculture, not monoculture, is more valuable over time. (Taxol, anyone?) And a large, durable bureaucracy acts as a keel and ballast together, steadying and orienting the nation. Even in non-democratic countries, a series of captains (kings, tyrants, revolutionaries) take the wheel and steer for a little time, only to
be replaced.

When you’re sleeping on a mountain ledge in the fog and can’t see the dropoff, it makes sense to sleep right up against the stone wall.  In effective government, red tape and a habit of caution are kept in place to prevent us rolling over the edge.

Are there any conservatives in the US today? Maybe the Greens, and  some of the Democrats. Perhaps some of the quieter, older Republicans. But it’s almost certain that there is no-one high in the  big US parties today who is conservative enough to keep us off the rocks. This leaves informed voters with nothing but distasteful choices. The best we can do is look for candidates who are least
likely to cut the safety tape, and most likely to send out scouts to monitor the crumbling cliff’s edge.

The Beginning of the End of Citizens United?

2012-01-22T14:46:00.001-05:00

I sent a link to Beverly to this article which stated Citizen United was not so much about corporate personhood. Here is her response, and in addition in a later e-mail Beverly makes this key point (intro amended for readability):

...that no constitutional amendment is necessary in order to nullify Citizens United, because Citizens United actually was decided on the basis of a purported issue of fact that was unsupported by any evidence and that can be refuted by actual clear evidence--and that that's really the point that the Montana Supreme Court justices were making.

and actually much more....

by Beverly Mann

The Beginning of the End of Citizens United

The article makes the important point that Citizens United and Bellotti, the 1978 opinion that Citizens United uses as its justification, focus mainly on the listeners’ right to hear political speech rather than on the speaker’s right to speak, and so it is not corporate personhood but instead the money-is-speech Supreme Court tenet that is the operative precept in Citizens United. But then the authors claim that, because no listener was a plaintiff challenging the constitutionality of the statute, the Court had no authority to decide the issue on the basis of the supposed interests of listener members of the public. That’s ridiculous, and they themselves effectively refute it. They say:

For their traditional First Amendment balancing, on one side of the scale, courts have categorized the speech as either a kind that communicates an idea, opinion, demand, information relevant to democratic debate, etcetera, or a kind that better fits the category of being merely an instrumentality of transactional conduct. (The speech can also fall in the middle between these two categories). The more communicative and the less transactional, the more weight the courts have recognized on this side of the scale. On the other side of the scale is weighed the amount of harm done by allowing the speech. Speech that merely facilitates the conduct of transactions, such as fraud, conspiracy, insider trading tips, pimping and so forth may properly be criminalized and regulated without much regard for the fact that the means for carrying out the transactions may be entirely speech. Money in politics falls within the category of transactional speech, and it also causes severe harm to the democratic form of government. It may, therefore, be regulated and criminalized.

One reason why speech that communicates political argument, ideas, opinions, information relevant to democratic debate, is more protected under the First Amendment than commercial or transactional speech is that the public has a stronger interest in hearing, and therefore a stronger right to hear, political argument, ideas, information, etc., than it does transactional speech. A big part of the balancing in First Amendment speech cases concerns the interest of the listener.

Also, their statement that “[m]oney in politics falls within the category of transactional speech” is clearly wrong. It seems to me that money in politics isn’t speech at all. But it’s certainly not transactional speech. Transactional speech is the speech intended to induce the payment of money—speech intended to induce the purchase, or whatever. It’s not the payment of the money.

It’s also wrong to conclude that corporate personhood played no role at all in the outcome of Citizens United. The majority talked about the First Amendment right of corporations, unions, nonprofits, to have their message heard through mass media—and that therefore they themselves (the corporations, unions , nonprofits), like listeners of speech, have a First Amendment right to have their message heard only because they are deemed “persons.” The First Amendment gives rights only to persons or “persons”. So in this case, it was both the supposed rights of the human listeners and, separately, the supposed rights of the speaker “persons” that the Court found that the statute violated. But either one alone would have been enough, in the opinion of the Court’s bare majority, in this case.

Then there’s this paragraph, which makes no sense at all:

First, the Roberts 5 stepped outside the court's constitutional authority by taking up and deciding cases concerning election integrity. Maintaining the integrity of elections was a political question of such importance to the founding fathers who wrote the Constitution that in Article I, Sections 4 and 5, they specifically consigned to the elected Congress both regulation and judging of the manner of holding elections. The founders rightly understood that Congress would be far more subject to popular pressure to maintain election integrity than would the appointed-for-life members of the court. Taking up a case and overturning a law that provides for election integrity infringes a power specifically assigned to Congress, thereby undermining the separation of powers. This also violates the court's own well-established precedent of refusing jurisdiction concerning political questions. The court followed this traditional rule defining the boundary between judicial and legislative issues from the 1803 decision in Marbury v. Madison until the Buckley decision in 1976.

Huh? Of course the Court has the constitutional authority to take up and decide cases concerning election integrity. Yes, Article I, Sections 4 and 5, specifically consign to the elected Congress both regulation and judging of the manner of holding elections. Other sections of Article I, and other parts of the Constitution, consign to Congress the writing of other types of statutes. And under Marbury v. Madison, the Court has the authority to decide the constitutionality of those statutes.
They are right that the court improperly “overruled a fully supported legislative finding that private money in elections causes sufficient harm to justify its regulation.” In the Montana case discussed in the article, in which the Montana Supreme Court on Dec. 31 issued an opinion upholding the constitutionality of a longtime Montana statute limiting campaign contributions and (I believe) campaign expenditures supposedly independent of specific candidates’ campaigns, despite Citizens United, there was specific, strong evidence both of actual corruption before the enactment of the legislation, and of a strong public belief that unlimited contributions and independent expenditures by corporate interests (or by very wealthy individuals) undermines the integrity of the legislative process.

The Montana Supreme Court opinion details this. In Citizens United, the majority said they concluded that neither of these existed. But in light of the detailed examples of that type of corruption, and the statement of six of the seven Montana Supreme Court justices that they themselves believe that unlimited contributions and independent expenditures directly corrupts the legislative process, it will be a lot of fun to watch the Supreme Court majority reiterate that they “find” that there is no such corruption and no public perception that that kind of money undermines the integrity of the legislative process.

The Citizens United majority’s purported finding was intended as a finding of fact, not a statement of law—a very big difference, and the reason that, as you know, Dan, I disagree with the legal pundits who have said they expect that the Supreme Court will overrule the Montana Supreme Court.
In Citizens United, the Supreme Court simply decided on its own to address this issue and the constitutionality of the part of the McCain-Feingold law that this supposed finding of fact concerned. There was no evidentiary hearing in the trial court concerning either actual corruption or the public perception of it, related to unlimited campaign contributions and unlimited independent campaign expenditures by corporations. The Court’s majority simply pronounced their finding of fact based upon nothing more than their personal views, their own ideology, as if ideology and the personal opinions of five justices is evidence.

In my opinion, under the ruling in Citizens United, which actually is a fact-based ruling rather than a categorical statement of constitutional law, Congress could re-enact a statute similar to that part of McCain-Feingold, and as the law stands now, under Citizens United, defend its constitutionality in court. When the statute’s constitutionality is challenged, the government, in defending in the lawsuit, could parade huge numbers of people—some of them very high-profile. NY Times columnist, Thomas Friedman, for example, has called the system of campaign contributions legalized bribery authorized by the Supreme Court), some of them just ordinary folks from, say, Montana—to refute the unsupported , out-of-the-blue, findings of fact in Citizens United.

Unless, of course, the Supreme Court, in, say, the Montana case suddenly changes the stated justification for its Citizens United ruling, from a supposedly fact-based one to a categorical ruling of law that the First Amendment bars any such statutory restrictions irrespective of facts, and therefore overtly removes this area of First Amendment law from the usual balancing-of-interests analysis. Most people think that’s what they did in Citizens United. But it’s not. The Montana Supreme Court justices recognized this, and it was the basis for their ruling.

And once the Montana case gets to the Supreme Court, and gets the national publicity it will get if (almost certainly, when) the Supreme Court agrees to hear it, the public will learn this. I think the Court will be treading quite close to losing the confidence of a vast majority of the public if it reiterates its own claimed finding of fact from Citizens United, in the face of the extensive evidence in that case (again, including the view of six of the seven Montana Supreme Court justices) that vast majorities of the public do, as a matter of fact, perceive that unlimited campaign contributions and veneer-thinly-independent electioneering expenditures compromise the integrity of the legislative system. And I think the justices will recognize that.

Which will leave them with the choice between categorically rewriting a significant part of First Amendment law, which they superficially nodded to in Citizens United and circumvented there via their spontaneous finding of fact, or instead once again overtly supersede clear fact with their own Mad Hatter view of it. Sit tight.

Beverly

Educating Dean Baker

2012-01-22T10:44:00.000-05:00

I never expected to type that. I have great respect for Dean Baker who, among other things, convinced Paul Krugman we were in a housing bubble. He is very smart and writes about important issues. But he has recently written two posts which contain the same elementary error.

I don't want to be rude, but the posts make me think of Robert Lucas's tirade against Christy Romer.
Baker wrote

Steven Rattner remains convinced that handing future generations trillions of dollars of government bonds imposes a burden on them and is very unhappy that I don't see things that way. Let's try this one more time.

[skip]

At some future point, everyone who owns this debt today will be dead. They will have no choice but to hand this debt on to members of the next generation, either their own heirs or someone else's.

Baker asserts that if someone owns something, he must keep it till he dies then leave it to his heirs. In fact, it is also possible to sell it and consume the proceeds. My objection to Baker's post really is just that elementary.

I suppose one might argue that I have missed something. I don't think I have and explain at gruesome length after the jump.

First I stress that Baker didn't just assert that something will happen, he claimed that something must happen "have no choice." That means his claim is a mathematical claim which can be refuted by an example. The example is presented in

Diamond Peter (1965) "National Debt in a Neoclassical Growth Model" AER LV December 1965 pp 1126-1150.

The way in which national debt can fail to crowd out capital formation is that the current generation can (and will) choose to leave bequests. If they do this for purely altruistic reasons and if they have rational expectations, then public debt can affect the economy only due to distortions from the taxes needed to service this.

Note that, if Baker is right, then tax cuts do not stimulate aggregate demand. If he is right that, if there were non-distortionary taxation,, deficits would do no harm when the economy is not in a liquidity trap, they would do no good when the economy is in a liquidity trap (although public spending would stimulate).
OK now I will address the argument. I will always discuss what the current generation can do. In particular I will ask what happens if we all decide that those yet to be born will get no financial assets except as wages for work performed (to add a hint of realism I assume that they will be given milk and such when they are newborn but no cash no bonds and no stocks). I don't think we are going to suddenly turn that selfish. I am asking whether we have that choice or if we have n o choice but o leave bequests.

As always I start from a very simple model with very extreme assumptions.

The extreme assumptions are that our days are numbered and that we know the number. That is people know exactly when they will die. Such people can arrange to have zero wealth when they die. They can sell bonds to other people who will live longer and use the money to buy and consume goods and services. If people know when they are going to die, they just don't have to leave bequests. Aggregating, the current generation sells the bonds to future generations and consumes more than it would if there were no such bonds. This is mathematically possible and would happen under the extreme assumptions (which are basically the assumptions Diamond made).
OK now assume that death is unpredictable except also assume that there will be plenty of not yet born people working before the currently alive die (still extreme). Those who don't want to leave a bequest can sell their bonds to the young and buy annuities. These are really existing financial instruments which pay a stream of income so long as the owner is alive and then are worthless. The market for annuities is tiny, because people with assets want to leave bequests not because the have no choice.

Well that is still unrealistic. Death can come at any time. But if this generation is nasty enough, we can name an heir in this generation. That way money only passes to those not yet born when the very last person no alive dies. Long before that, the now living people can sell bonds to the not yet born and buy annuities.

It is absolutely possible for us to make public debt a burden on future generations. The math works fine. There have long been models in the literature (most with the super strong assumption) which have the property that public debt makes future generations poorer. The distinction between models with infinitely lived agents and models with overlapping generations is fundamental in the macroeconomic theory literature.

Theory might be pointless but not because we can tell that something is logically impossible even though it would occur if a formal mathematical model were reality. Baker is claiming we know something from logic alone (always wrong) when, in fact, we can tell from logic alone that his claim is false.

OK no one will read this far so I can be as rude as I want. Baker's two recent posts remind me of Cochrane and Lucas. The funny thing is that the concept of Ricardian equivalence is involved in both huge errors. In his diatribe against Romer, Lucas made the exact same error Baker made asserting that we know that there is Ricardian equivalence. That it is not an implausible theoretical possibility but a necessary truth. The similarity is that in all three cases, economists who have done good work made elementary errors. All three asserted that economists know something to be true, when elementary lectures are devoting to proving that it is false.

(Dan here....some minor formatting was done for easier reading)