Angry Bear

Open thread July 17, 2009 (no GW)

2009-07-17T17:06:00.000-04:00

Update: Real world business

2009-07-17T14:56:00.005-04:00

by divorced one like Bush

Time for an update on real world business. I posted back in 12/08 about the costs of a flower shop being in a wire service. The costs should matter, as it is what happens when one buys on line from a non-real florist. It is also a lesson as to what a real small business is dealing with. Sales are off 25% for the year on top of 8% for last year.

This morning my sweetie stated that "they" are screwing up health care for us. Her concern was that we would now have to be offering insurance for our employees. I informed her that the cut off was 25 employees. We are safe regarding this issue. Unfortunately, nothing proposed will help with our health care costs (currently $7800for insurance and $4028 out of pocket with an additional $3500 still owed to the hospital and the need for cataract surgery and about $1500 in dental for the daughter).

So, here is what has happened regarding the wire service aspect of our business.
June's Teleflora statement.
Total value of in and out orders: $974.78

Processing costs (membership, Dove, Quality program, Sending fee): $301.15
Advertising (directory, Co-op): $206.00
Publications: $3.75
Commissions due (orders in 27%, orders out 80%): $455.46
Total paid to Teleflora: $966.36

Balance of order value - costs: $8.42

Total value of orders to be filled: $614.78 That is, I had $8.42 to work with to fill orders that valued $614.78. In a nutshell, this is how it is that bigger business have via financialization, sucked money up hill from the smaller business.

Percent of order value out to orders in 59% June 09. (Year to date: 50%, Last year to date: 60%)
Compared last year to date incoming value down 14%, outgoing value down 42%.

I can't convince the sweetie to drop at least one of the wire services as she sees it as work and thus a cash flow perspective verses an accrual. Overall regarding our net profit as of the end of the first half of the year, (you know, money in the pocket) on a cash flow basis, we are off 43.9% on an accrual basis we are off 88.1. Far cry from Goldman Sachs No?

And, we are now in the slow period of the flower business cycle.

Partisan is as partisan does - reflections on writing a book

2009-07-17T07:32:00.003-04:00

by cactus

The other day I had a post about a book I'm co-authoring; the book is slated to come out in the spring. As I noted then, the book looks at

at how a large number of variables - everything from abortion rates to economic growth, evolved over the length of each presidential administration beginning with Ike and running through GW.

We do that by looking at how each of these issues - say, real GDP per capita as an example - changed over the length of each administration, from right before an administration took office to right before it left office. We note the results graphically, and then try to understand why we saw the results we did. Many of the chapters parallel posts that were written for Angry Bear; the posts in Angry Bear were, in fact, a dry run for some of the later versions of many chapters. Kind of like making notes for a speech, then giving that speech a few times at Toastmasters, learning what works and doesn't, and then rewriting the speech before standing up in front of a larger, potentially less forgiving crowd. The Ex-GF is a member of Toastmasters, and I've seen her do just that.

In comments a few people indicated the book is going to be biased. These are mostly long-time readers who've seen the posts I wrote on the results on economic growth... and don't like them. I put up a response in comments, but I'd like to expand on that response a bit below. So here goes...

Say I told you I was co-authoring a book about Switzerland, in particular how Swiss Chancellors had performed on a wide range of issues from abortions to crime to the economy. The goal would be not just to see how these chancellors did on each of those issues, but to see if there were lessons that could be learned. Now, say, further, that:

1. the book would look at how each issue evolved over the length of each chancellor's stay in power
2. the book would treat the growth rate of each issue the same - namely from right before each chancellor took office to right before he left office
3. the book would present all the results graphically and try to explain any patterns that arose
4. the data used would come from an unimpeachable source - official Swiss government statistics

A book that did that would be lauded as attempting to be unbiased by most people who came across it. And if it turned out that chancellors from one party or another tended to do worse than chancellors from other parties on, say, economic issues, you might conclude that perhaps something was wrong with the policies they pursued. Now say the book then considered the objections that thoughtful people might bring up (e.g., noting how results change or don't leaving out the first year of each chancellor's term, considering the effect of the Swiss central bank's actions or the make-up of the various Houses of the Legislature, etc.), and found that a) the difference between the parties remained and b) there was a specific set of policies that was followed by chancellors from the party that underperformed, and the other parties always followed the opposite set of policies. Most Americans who read such a book would conclude that

a. the authors had specifically sought out the approach to writing the book that was least likely to impose their biases on the outcomes
b. the policies followed by the economic underperformers should, at a minimum, be handled with care, if not avoided altogether in Switzerland

The only Americans who would conclude that the book was not written in a way as to be unpartisan as possible would be folks who either had some prior biases about Switzerland and its politics, or found some sort of analogy between the not-very-successful policies in Switzerland and policies they happen to like here in the US.

Furthermore, they would have to be the sort of people who would not abandon their prior beliefs just because it was contradicted by data. Put another way - there is no way to satisfy those who are truly partisan except by also being partisan.
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by cactus

National manufacturing policy

2009-07-16T12:25:00.001-04:00

rdan

WASHINGTON, D.C. – U.S. Sen. Sherrod Brown (D-OH), chairman of the U.S. Senate Banking Subcommittee on Economic Policy, will conduct a hearing tomorrow on how best to establish a national manufacturing policy. Brown is a leading advocate in Congress for a manufacturing policy to strengthen the industry and ensure its future global competitiveness. Brown’s hearing, entitled “The U.S. as Global Competitor"...

Progress Report on my book

2009-07-16T08:53:00.003-04:00

by cactus

Progress Report, and a Plea For Help

Regular readers may recall that together with a co-author, I've been writing a book. The topic should be familiar to the coterie of merry madmen/madwoman who lurk at the blog as writers or readers or both: we look at how a large number of variables - everything from abortion rates to economic growth, evolved over the length of each presidential administration beginning with Ike and running through GW.

I thought I'd share a bit of information about the process of getting a book "out there" given that we've recently crossed a milestone, namely the receiving and cashing of an advance check. Until this process began, I knew absolutely nothing about the process of writing and publishing a book, so its been very interesting. We (my currently still nameless co-author and I) have been extremely lucky, but I think the path we followed may be somewhat representative of that you might go down should you have the same delusions of literary grandeur that got us started.

So here's the process, summarized:

1. Have vague but exciting idea for book.
2. Flesh out the idea - in our case, with data as well as some early drafts.
3. Realize that the drafts suck. Rewrite multiple times. I've heard it said that "writing is rewriting." This saying should be amended to "writing is rewriting way more times than you would expect."
4. Find an agent. This process for us involved writing letters to different agents who represented authors who wrote books that could conceivably be considered in the same space as ours.
5. A good agent - and I believe we were very lucky - has a good idea of what publishers are after and is willing to tell you straight out where your book deviates from that model. Our agent read a few chapters, told us the concept was good but the execution sucked. He made us rewrite the first few chapters multiple tmes. Eventually he was happy, and he told us to rewrite the rest of the book the same way.
6. The agent begins shopping the book around. Interestingly enough, we caught a break here too. The Ex-GF had just reconnected with a former high school classmate on FaceBook who was the editor at a publishing company. They had a book on US presidents in their portfolio, and were looking for another one. Anyway, the Ex-GF and her classmates somehow began discussing the book... which led to files being sent back and forth, and a request that our agent negotate a contract.
7. The contracts generally stipulate some sort of an advance. If you're famous or have a history with the publishing company, the advance can be huge and I guess requires merely signing on the dotted line. In our case, we got the advance after turning in something that qualified as a rough draft.
8. At this point, we're waiting for comments back from the editor. Once they come back, we're going to have a week or two to tighten everything up and the book will be out of our hands to some extent somewhere in August.
9. Meanwhile, we've been getting first looks at some of the art work that the illustrator is doing for the book. All of the graphs we made for the book were in Excel, and looked the part. The illustrator is a real artist who works well with data, and he is redoing all the graphs.
10. Meanwhile 2, the sales staff at the publishing house has been prepped. They vetoed the title we had for the book (more on that later). Sometime soon they start talking to bookstores; it seems that many bookstores line up their shelf space to some extent nine months or so in advance.

It should be noted that the process is lengthier than it looks, or at least it was for this book. The first genesis of the book, the first attemnpt to write anything down, came (and I remember this specificially) when Bill Simon was running for governor of CA. That would be 2003. Something Simon said (and sadly I cannot remember what, except that it involved taxes and economic growth and Ronald Reagan) sounded so absolutely implausible to me that I had to check the data. After running down the data and concluding to my satisfaction that Simon was dead wrong, I thought to myself, "someone should write a book."

Then I thought about making it about Presidents and scrawled out some notes. Those first attempts were as mediocre as it seemed to me Bill Simon would have been as governor, so I put them aside. But I kept pulling them out and again every so often.

Another comment... family and friends are always telling me I don't toot my own horn enough, so I'll say this... I'm really proud and pleased with the book. After a zillion re-writes, going back and re-reading pieces of it now, I'm amazed at how much is covered in the book. Not just in terms of topics, but also (when it comes to economic issues) the reasons and the excuses that would otherwise be put forward by those who don't like the outcomes, and why those excuses don't fly.

I've had friends of mine give random chapters of the book to people who don't normally read anything that resembles economics or contemporary American politics or anything with numbers in it. (Having third parties who don't know us at all read a piece is an easy way to get something resembling an unbiased comments, I hope.) The comments that typically came back generally were of this nature: "X wouldn't buy a book like this if he/she passed it in the bookstore, but he/she read the chapter and said he/she would enjoy reading more of it. Got any more chapters to share?"

I think we managed that without watering it down so it loses its value to folks who do have an economic background. Lord knows, making the book accessible was the single most difficult thing about the whole process.

Here's the current outline of the book:

Chapter 1. Real GDP per Capita
Introduction to GDP, What the Data Says, Excuses and Explanations

Chapter 2. Fiscal ResponsibilityGovernment Spending, Tax Receipts, The Deficit (or if We’re Lucky, the Surplus!)

Chapter 3. The National Debt and the Real Real GDP per CapitaWhat Real GDP per capita leaves out, The National Debt, Net Real GDP per capita

Chapter 4. Employment Issues
Employment, The Employment to Population Ratio, Real Wages, Employment Related Health Insurance

Chapter 5. Income and Wealth
Real Median Income, Net Real Disposable Income, Real Net Worth, Homeownership, Owner’s Equity

Chapter 6. Traditional Republican IssuesNational Defense, The Size of Government, Taxes, Washington v. the States, The National Endowment for the Arts,
Welfare

Interlude: What Is the Effect of Taxes On Growth?

Chapter 7. Traditional Democratic Issues
Social Issues, Poverty, Income Inequality, Tax Progressivity, Protecting The Environment
Democratic Issues Conclusion

Chapter 8. HealthcareHealthcare Costs, Infant Mortality, Health Insurance

Chapter 9. Crime
Spending on the Administration of Justice, Murder, An Interlude: Explaining the Murder Rate, Public Corruption

Chapter 10. The Public Mood
Consumer Confidence, Suicide, The Stock Market, The Value of the Dollar

Chapter 11. Family Values
Abortions, Marriages and Divorce, Unwed Mothers

Chapter 12. Investing in the Future
Education, Research and Development, Building Infrastructure, Energy Independence

Conclusion. Ranking the Presidents, and What We Can Learn

Bonus Chapter 1: Is it Congress?
(I really like this one a lot. I think we came up with a very simple and elegant way to look at the question of whether the President is really causing these changes by looking at an alternative, namely that Congress is doing it. Our approach quickly shows that Congress is not generally in the driver's seat. In so doing, it also provides readers an easy contrast between what is having a minimal effect and what the President is doing.)

Bonus Chapter 2. Explaining Economic Growth
(Megan McArdle is going to be very critical!)

Bonus Chapter 3. The Office of the President

Bonus Chapter 4. Please Try This at Home!!!!

So that's roughly what it looks like. Now, a few issues. The first is that we haven't entirely satifactorilly come up with a title. The topic is a hard one on which to pin a name. We've got it tentatively down to:

RANKING THE PRESIDENTS
A Statistical Look at How Recent Presidents Really Performed on the Issues that Matter Most

and

The Best President
A Statistical Look at How Recent Presidents Really Performed on the Issues that Matter Most

Any thoughts on the titles? Any better ideas?

We've also got one more issue.... the publisher has put a lot of time and effort and resources into the book, and the next step is to corral some luminaries into reading the manuscript and ideally write up a positive blurb to put on the jacket or someplace. Ideally, one of them could be coerced into writing a forward. While the publisher has some ideas, I was wondering if you have any... not just of the people we should try to hunt down (particularly for the forward), but how to reach them. I'm thinking the ideal folks are prominent economists in the public sphere (e.g., Krugman) or journalists who the public associates with gravitas (e.g., Tom Brokaw). Names like that are probably overly ambitious to unknowns like my co-author and I, but since this whole process has required a degree of chutzpah, plus I've been worked into the tooting my own horn frame of mind, so what the heck?

Questions? Comments? Thoughts?
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by cactus

The Critique of the Golgotha Program

2009-07-15T18:46:00.007-04:00

Robert Waldmann

on Karl Marx, Arthur Laffer and Simon Peter.

Which one here is not like the others, because he was a lunatic extremist egalitarian not an ambitious sophist ?

Marx famously declared "From each according to his ability, to each according to his needs." This is quite probably the grossest distortion of a quote by removal of context in human history. The words are (a translation from German) of two prepositional phrases from a sentence from The Critique of the Gotha program (the absence of a verb is a hint that maybe some relevant context may have been removed). The grossest possible distortion based on removal of context is removal of the word "not" and, lo and behold, it appears in the (English translation of the sentence). A more accurate but still partial quotation (of a translation) is

"not ... inscribe on our banner "from each according to his ability to each according to his needs")". I mean there ought to be an absolute rule that, while many words can be decently elided we can all agree that "not" is not one of them (or to repeat with a minor edit "while many words can be decently elided, we can all agree that not is ... one of them).

more antiquarian exegesis and atheist theology after the jump.

The full (translation of) the quote is IIRC "It is not until work ceases to be a burden on life and becomes it's chief joy and purpose that we can inscribe on our banner "from each according to his ability, to each according to his need." Which I, quite honestly, interpret as meaning "from each according to his ability, to each according to his needs from the first of never and not before."

Marx believed that "from each according to his ability, to each according to his needs" to the same extent that he was an anarchist -- that he wanted to eliminate the state, that is, rather less than not at all. IIRC Marx wished for the state to seize ownership and control of the means of production, rather a huge expansion of the power of the state than an elimination of same.

To make an analogy, I think that Marx considered it a good proposal to eliminate the state *and* give to each according to his abilities to exactly the same extent that Arthur Laffer aims to increase the amount of money the federal government has to spend. Marx said expand the power of the state and it will disappear, Laffer said cut taxes and revenues will increase. I think Marx was devoted to the reduction of the power of the state to exactly the same extent that Arthur Laffer is devoted to expanding the federal budget.

Over at the first international, Marx had a problem called Bakunin. The guy promised people no capitalists, no private property and no state. Marx claimed that you could get everything Bakunin was promising from Marx, because in the long long long run the state would wither away. So,. sure it looks like communism implies a huge expansion of the power of the state but nope that's just socialism which will lead to the communist utopia of now bosses neither capitalists nor bureaucrats -- just trust me.

Later Marx had this problem that his few German followers (the Eisenachers) decided to join with the Social Democrats who had the inexcusable fault of being led by Ferdinand Lassale not Karl Marx. Hence the Gotha program and its only lasting fruit "The critique of the Gotha program." The phrase was torn from the context of the proposal that all workers be paid the same equal wage. Marx said that was nonsense. He made an argument which was a bit ahead of his time asking if this mean all workers get the same wage so single workers are rich and large families supporterd by one worker are poor ? Makes no sense (he actually didn't even mention compensating differentials so he was ahead of his time but behind Smith who was way ahead of his time and, come to think of it, ours). So he was arguing *against* equal wages. He said no way so long as we need wages to convince people to work. Only when (not if -- when) people just work out of public spirit and joy in labor can we even think about demanding perfect equality (and then we will have to find someone whose love of labor is extreme insane and humanly impossible enough that he or she will calculate equivalence scales without being paid to do so).

Please please please follow this rule "Do not elide the word 'not'" that is "Do ... elide the word 'not.'"

I don't believe Marx's promises about the withering away of the state and the joy of work (comparing our work efforts one can at least understand how Karl and I have very different views about work). I therefore interpret the Critique of the Gotha Program as implying, in practice,
"from each according to his ability, to each according to his needs, starting on the first of never."

OK so what about those apostles. Fact is that The Gotha Program is extreme but that Marx is deliberately conflating it with a much much more egalitarian and extreme program as a rhetorical trick (so if he were to complain as I do about the elision of "Not" one might reply that what goes around comes around and chi lo fa l'aspetta). Basically the man was trying to insult the united Social Democrats and Eisenachers by conflating them with a bunch of lunatic extremists -- the Christians.

update: Chapter and verse references added plus when looking for chapter and verse for "to each according to his need" I found "from each according to his ability too."

The phrases which can be translated (from Greek not German) as "from each according to his ability" and "to each according to his need" and fairly quoted without distortion due to removal of context comes neither from "The Critique of the Gotha Program" nor from "The Gotha Program" (as quoted in the critique) but from the Bible and, in particular from "The Acts of the Apostles" which, quite frankly, makes "The Communist Manifesto" look like the McCain platform (with all due respect for McCain, Marx and the Apostles).

The Bible, New King James Version

Acts Chapter 4 Verse 35
"...; and they distributed to each as anyone had need."

Acts Chapter 11 verse 29
"Then the apostles, each according to his ability, determined to send relief to the brethren dwelling in Judea."

OK so history is a prankster and karma is a bitch. Driven by envy and ambition, Marx decided to claim that, when it came to wages, Ferdinand Lasale was an impractical impossiblist extremist just like Simon Peter. As a result, many people have decided that Karl Marx was an impractical impossiblist extremist egalitarian just like Simon Peter. This is crazy. Not quite as crazy as the idea that one can be both a Christian and a crusader or both a Christian and a Republican, but crazy.

In closing, I note that I am both an atheist and a reasonable moderate, so I agree with Karl Marx and, like Marx, reject the impractical dreams of St Peter (at least for the foreseeable future).

Medical Innovation in the USA

2009-07-15T07:13:00.003-04:00

Robert Waldmann

Kevin Drum writes

Conor Friedersdorf has three reasons he doesn't think he'll be able to support any of the progressive healthcare reforms currently on tap.

Argument #3:

I keep seeing the argument that America is the leading health care innovator, and that if our system looks more like what Europe has, there won't be anyone left making strides in research and development. I haven't seen a convincing rebuttal, though there may well be one. Links?

NIH is a 3 letter response to argument number 3. The USA does not just spend huge amounts on health care, it also spends huge amounts on investigator initiated peer reviewed grants.

The budget of the National Institutes of Health is similar to the combined R&D budgets of all pharmaceutical companies in the USA. The US public sector spends huge amounts of money funding medical research.

The NIH budget is just gigantic compared to all other sources of funding for independent scientific research (except maybe the DARPA budget which is spent on top secret research & development so I don't have much to transmit about its contribution to total research along the internet AKA grandson of ARPAnet). It dwarfs the NSF budget (much of which goes to biology too) and makes researchers around the world drool with envy.

Claiming that US leadership medical innovation proves the superiority of the private sector to the public sector is like claiming that US leadership in flights to the moon shows the superiority of the private sector to the public sector.

House Tri-Committee Health Care Bill w/CBO Prelim Analysis

2009-07-14T16:13:00.004-04:00

by Bruce Webb

House Education and Labor:: America's Affordable Health Choices Act all links from the Committee web page.

Summary

Bill Text (1.7 MB PDF)

CBO-Preliminary Analysis: Tri-Committee Health Care Bill

Compare to the tables scoring the Senate HELP Bill Kennedy-Dodd Bill with CBO Scoring

House Tri-Committee: Ten year addition to budget $1.082 trillion. Total coverage non-elderly: 94%. Coverage for legal non-elderly: 97%
Senate HELP: Ten year addition to deficit: $597 billion. Total coverage non-elderly 88%. Coverage for legal non-elderly 90%.

Over to you.

DeLong, Thoma, Rodrik et al. Do Good

2009-07-14T14:39:00.004-04:00

To often, we talk about models as if they are reality, instead of reflecting a reality that was approximated. At least forty economists, including at least three 'Nobel' Prize winners, know that:

A rising tide lifts all boats only when labor and management bargain on relatively equal terms.

CIA, TIA & RBC: Who was watching?

2009-07-14T09:04:00.007-04:00

by Bruce Webb

The MSM and the blogosphere alike are ablaze with speculation about exactly what secret program the CIA kept concealed for eight years. Assasination squad targetted at al-Qaeda? Well since we have been firing Hellfire missiles from Predators whenever we suspect the presense of high level al-Qaeda for years now that news would not have shocked anyone, still less people like Peter Hoekstra. Domestic surveillance? Well the Patriot Act already authorized cetain types of secret searches and we have spent the last couple of years debating domestic wiretapping. That would not have shocked Congress on either side of the aisle. No it had to be something pretty shocking, and I am suggesting it may be as easy as transforming the CIA into USA-TIA at the behest of one Richard Bruce Cheney.

The graphic attached to this post drew some ridicule at the time but it really was the official logo of the proposed Information Awareness Office. Its projected task:

The Information Awareness Office (IAO) was established by the Defense Advanced Research Projects Agency (DARPA) in January 2002 to bring together several DARPA projects focused on applying information technology to counter asymmetric threats to national security. The IAO mission was to "imagine, develop, apply, integrate, demonstrate and transition information technologies, components and prototype, closed-loop, information systems that will counter asymmetric threats by achieving total information awareness".
Following public criticism that the development and deployment of these technologies could potentially lead to a mass surveillance system, the IAO was defunded by Congress in 2003, although several of the projects run under IAO have continued under different funding.

The version of TIA revealed to the public was limited to overseas targets but even so drew much critical attention and attempts by Congress to impose strict limits on it, and ultimately it was largely defunded.

On January 16, 2003, Senator Russ Feingold introduced legislation to suspend the activity of the IAO and the Total Information Awareness program pending a Congressional review of privacy issues involved.[4] A similar measure introduced by Senator Ron Wyden would have prohibited the IAO from operating within the United States unless specifically authorized to do so by Congress, and would have shut the IAO down entirely 60 days after passage unless either the Pentagon prepared a report to Congress assessing the impact of IAO activities on individual privacy and civil liberties or the President certified the program's research as vital to national security interests. In February 2003, Congress passed legislation suspending activities of the IAO pending a Congressional report of the office's activities (Consolidated Appropriations Resolution, 2003, No.108–7, Division M, §111(b) [signed Feb. 20, 2003]).

. We KNOW that the Bush/Cheney Administration wanted this capability developed. That was public. We also KNOW that the Bush/Cheney Administration claimed the ability to do warrantless domestic wiretaps. It is not a huge step to add one plus one and speculate that Richard Bruce Cheney wanted to transform a portion of the CIA into a domestic USA-TIA organization that would gather all information on everybody in the country and have it available under the sole control of the one office in government that was neither part of the Executive Branch nor part of Congress and as such categorically exempt from Congressional oversight, i.e. the 'Fourth Branch' OVP.

Which is to say the CIA turned into an electronic version of the STASI and reporting only to Cheney and Addington (with legal advice from John Yoo.) Sure it sounds crazy, but it is consistent with every bit of public information we have about the past Administration's policies and desires.

'Scientia est potentia': Knowledge is Power. Why yes it is, and a handy way to deliver an Arbitrary Executive with a Permanent Majority.

Putting the 'no' in innovation?

2009-07-14T06:52:00.004-04:00

by cactus

The inimitable TBogg sums up one of the big arguments against having the gubmint involved in healthcare:

Because, when it's on the governments tab, innovation dries up, which might explain why our military men and women are currently fighting in Iraq and Afghanistan with pointy sticks and small but sharp-edged pebbles.

A few years ago I had a similar post, noting that when push comes to shove, such as when we have to deal with a formidable threat such as Nazi Germany, the Empire of Japan, the USSR, the People's Republic of China, or even Grenada (for crying out loud), we don't mess around and stick the gubmint, and in particular, perhaps the most socialist organization in the entire gov't (the US Military), in charge of the whole shebang. Funny that.

Back to TBogg's post... One of TBogg's readers, AirportCat, in comments, adds this quote from a Pew Research piece:

There also is common ground between the public and scientists regarding the pivotal role of government in funding scientific research. Government institutions and agencies are the dominant funders of research, according to scientists: 84% list a government entity as an important source of funding for their specialty, with nearly half specifically citing the National Institutes of Health (49%) or the National Science Foundation (47%). Half of the scientists (50%) cite non-government funding sources as among the most important in their field.

AirportCat goes on:

So all that government-funded medical science will just evaporate if … what? huh?

One more of his readers, jenniebee has this:

As a matter of fact, the only innovations I can think of that the insurance industry has come up with are in creative accounting, PR, & marketing. Gotta give it to them though, that rescission idea? That was pure genius.

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by cactus

Justin Fox's new book: 'Myth of the Rational Market'

2009-07-13T12:33:00.004-04:00

by Bruce Webb

Over at TPM Justin Fox is launching a discussion of his new book The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street which feeds right into some discussions we have had here at Angry Bear. So I propose to give his set-up here and then suggest people comment in either or both places.

(But) a couple of seeming certainties that emerged from academic economics and finance in the 1960s and 1970s have been showed by experience to be mighty uncertain. One was the contention that financial market prices were in some fundamental sense correct, or at least fluctuated in a reasonably narrow band around their fundamental values. The other--and the two don't have to be linked, although they often were--was that it was relatively easy to model the movements of markets and manage the risks thereof.

If you believed these two things, then the spectacular growth in power of financial markets (at the expense of government, of corporations, of commercial banks) over the past three or four decades was great news. I'm pretty sure, in fact, that rational-market economic theories fueled this rise--although it's awfully difficult to sort out cause and effect.

Now that this financialized economy has proved to be extremely fragile, we're due for an extended period of rethinking--of financial economics, of regulation, of taxes, of how we think about economic growth (clearly, growth fueled purely by rising asset prices isn't such a great thing). I'm of the opinion that it's not as simple as, say, putting the regulators back in charge, given that there's no reason to think financial regulators are more likely to be rational and right than financial markets are. But clearly we can do better. Got any ideas?

(My TPM Cafe comment is reproduced under the fold.)

My take:
Well we might start by recognizing that market participants are intent on maximizing their own interest and where possible will exploit asymmetrical information to achieve that end. Moreover unless restrained they will also exploit power imbalances.

I think we would all be well served by having all economists study the way markets actually operated back in the Gilded Age. What happens to a market when insider trading is not only not illegal but valued as a best business practice? The old adage "What the market will bear" implies a lot more than a simple affair of supply and demand setting price, not when the vendor has the ability to control supply and influence demand.

And then after mastering the methods of Cornelius Vanderbilt they could move on back and study the history of wage setting in industrializing England from 1790 to say 1848. I am currently re-reading E.P. Thompson's 'Making of the English Working Class' and can say that the reality of the wage market in those years bears no resemblance to the sanitized market models found in text books. The notion that some Invisible Hand was busy adjusting compensation to marginal productivity is belied by facts on the ground, wage suppression was a national policy backed as necessary by the use of State force (see Peterloo Massacre).

I firmly believe that much of the problem with the classical liberal economic model is that it was formalized in a time and a place where political democracy based on universal suffrage was not only not the norm but conceived to be a positive danger to society at large. Give all workers and (shudder) women the vote and who knows what might happen. Well now we know, it gave Britain the Labour Party and the U.S. the New Deal and with them reverberations that shook old ideas about how markets should work to the core.

Caplan's book 'Myth of the Rational Voter' whose title I assume is at least an ironic inspiration to that of the book under discussion is I think at root the product of frustration. Don't the proles understand that everything was better back when the world was run by J.P. Morgan and a handful of associates?

It is no wonder that both the political and economic right look back at the McKinley Era for their ideal. No income tax, no universal suffrage in England, no popular election of Senators in the U.S., no insider trading rules, no restrictions on wage suppression. Now that is freedom!!

Prof. Thoma told me a few years ago that "Economics does not handle equity well". And after giving that some long thought I figured out why. Because classical economics does not handle popular democracy well. That is for some people in England everything was downhill after the Reform Act of 1832 with ultimate disaster delivered with Representation of the People Act of 1918, while in the U.S. it was the changes introduced with the 16th, 17th and 19th Amendments.

Damn democracy! Always screwing with this nicely designed business plan!

Second Best Second Stimulus

2009-07-13T09:30:00.003-04:00

Robert Waldmann

It sure looks like the US economy would benefit from a second stimulus. However, it also looks clear that congress will not pass an optimal second stimulus. Getting my thoughts on economics and politics from a philosophy major, I note that Matthew Yglesias notes that it would be very hard for congress to say no to a tax cut only second stimulus.

So would a tax cut only second stimulus be better or worse than no second stimulus ?

Seymour Martin Hersh

2009-07-13T08:18:00.002-04:00

Robert Waldmann

There is something which I genuinely don't understand about US journalism. Why don't US journalists cite Seymour Hersh more ? I have never heard anyone rank him as an investigative journalist lower than number one, yet his stories vanish for months or years until someone else reports them.

For example, yesterday the Wall Street Journal reported on page 1 that Cheney ordered the CIA to set up an assassination team to kill top al Qaeda leaders. This is sortof a scoop as people have been wondering what super secret program was hidden until late June not only from congress but from Leon Panetta, the director of the CIA.

Except for the fact that Hersh described this program months ago. The fact that he knew about a CIA program months before the director of the CIA tends to support his number 1 ranking of course.

But why didn't people including, say, Leon Panetta, pay more attention to Hersh.
Has he made inaccurate claims in the past ? His articles report claims by anonymous sources and are not supported by official documents. One might assume that, given that sort of evidence, he is often wrong. I can't recall a case in which he was wrong. I am almost forced to conclude that reliable investigative reporting is possible if one demands confirmation from multiple sources.

I am also forced to conclude that the very strong evidence about Mr Hersh based on his track record is being ignored by other reporters. This isn't really surprising, since admitting that Hersh reports at a level above everyone else is humiliating, but reporters shouldn't allow their pride to keep them from informing the public.

The Fed and pumping money into the economy

2009-07-13T07:44:00.006-04:00

by cactus

We all know the Fed has been pumping money galore into the economy lately. It makes sense, after all – the economy sucks right now and will for the foreseeable near future. Even if the NBER concludes in a few months that the Great Recession ended in the first half of the year, we aren’t about to see a booming economy in the near future.

Another reason for the Fed to pump money into the system is the CPI – right now, deflation seems to be a bit more of a risk than inflation.

There’s also one very bad reason for the Fed to keep shoveling money out of the helicopter door: the mistaken but widely held belief that the system is suffering from a lack of liquidity. (The lack of liquidity belief is clearly false - as it happens – as Dean Baker has noted a zillion times, that lousy business models can’t get funding any more speaks to the demise of a particular widespread delusion rather than a lack of liquidity).

But here’s the problem. As is often the case, what we all know is false. Wrong. Bull$#%&. The Fed has not been pumping money into the economy lately, at least if you define lately as being “since December” and going through May, the last date for which data is publicly available in FRED, the Federal Reserve Economic Database maintained by the St. Louis Fed. Check out the following graph from FRED, which shows M1, the narrowest of the monetary aggregates, and the one most perfectly controlled by the Fed:

Regardless, the peak in the graph came in December. Its not unusual for the Fed to prime the pump in December – that’s the Christmas shopping season, after all... but the timing seems awful this year, what with the fact that the Fed only seemed to realize the economy was in major doo-doo toward the end of last year.

So during one of the lowest points for the US economy in decades, only the North Korean counterfeiting machine was doing anything to keep the money supply loose. I don’t have a copy of Bernanke’s textbook handy, but I’m pretty sure I’d remember if “let Kim Jong Il handle it” was the recommended prescription for dealing with a recession. It makes me wonder what other ~~stupidity~~ surprises Bernanke has in mind.
__________________________________
by cactus

Battle of the (Senate) Titans

2009-07-11T07:47:00.002-04:00

by Tom aka Rusty Rustbelt

Battle of the (Senate) Titans

Senators Kennedy (Chairman of the Senate Health, Education, Labor and Pensions Committee) and Senator Dodd (Kennedy’s wingman while he fights cancer) are seemingly lined up as opposition forces to Senator Baucus (Chairman, Senate Finance Committee ) on some aspects of health care reform legislation. Various theories are evolving:

1) this is a real dispute
2) this is a clever ruse to allow a compromise that gives political cover to all types of Democrats
3) this is just some foreplay designed to allow Kennedy to be a hero one more time, while providing some serious cred to Baucus, a rising Senate power
4) some combination of #1 - #3

Any thoughts from my Democrat friends?

Kennedy and Dodd’s latest here.

2009-07-10T16:06:00.005-04:00

by Linda Beale

This is one of those weeks when almost everything has a tax angle. Let's survey.

Michael Jackson's funeral

Should taxpayers have to foot the bill for the extra security surrounding celebrity memorial services? Does an estate get to deduct the costs of gala receptions connected with a memorial as part of the funeral?

International relations and UBS

The Swiss have announced that they may seize the 52,000 account records that UBS holds in Switzerland for what are likely many American tax cheats if the federal court in Florida orders the bank to turn them over in response to the government summons. I've already written about that on A Taxing Matter, here. This is a game of chicken, where either the US or UBS/Swizterland will blink. UBS has substantial assets in this country in connection with its banking license here. The US has jurisdiction over UBS for various reasons and UBS has already admitted to criminal violations and given up about 250 names. Looks like UBS clearly violated its qualified intermediary agreement with the US. If I were betting, I'd bet that the Swiss will be the ones to blink, if the US only has the backbone to stand firm.

Health Care Reform

Democrats are wrangling over how to pay for much needed health care reform. On the Senate side, they are apparently taking very seriously the proposal by Citizens for Tax Justice that the Medicare tax be extended to all types of unearned income, not just compensation. (This proposal, of course, has been around, and I've made it quite often myself. CTJ has a specific version, and provides state-by-state figures on what it would mean.) Obviously, since the top quintiles own most of the capital assets, this would be primarily a tax increase on them (resulting in a slight increase to the capital gains rate from 15% max for most types of gains to 16.45%).

Defense of Marriage Act

Back in the 1990s, Congress caved to the "values" lobby (i.e., the group that wants to impose its "values" on all the rest of us, and whines about having others' values imposed on it if it thinks anybody wants to do anything differently from the way it thinks they ought to want to do it) and passed the so-called "defense of marriage act" (DOMA). DOMA says the terms "spouse" and "married" in federal law can only refer to legal ties between a man and a woman --i.e., "traditional" marriage. Of course, there are lots of references to spouses and marriage in the Internal Revenue Code--spouses can transfer property to one another without tax. Spouses can receive alimony when they divorce. Spouses can file joint returns. Spouses can exclude medical benefits from their spouse's medical insurance. And etc. When DOMA was passed, no state permitted gay marriage. Now, several states do. And finally, one of them is challenging the law as unconstitutional (which, you won't be surprised, in my view it clearly is) because it "interferes with the Commonwealth's sovereign authority to define and regulate marriage" and "constitutes an overreaching and discriminatory federal law." See complaint; A G files first suit challenging DOMA, Mass. Lawyers Weekly, July 13, 2009. Good for Massachusetts.

Developers and tax-exempt bonds

A retirement community in Central Florida may owe millions in back taxes. The Villages is made up of "community development districts" that have been used to pay for roads, sewers and water lines that are essential to the developers' being able to sell their developments. The IRS examiner has concluded that $64 million of bonds issued in 2003 shouldn't have been entitled to tax exemption because the board members were all affiliated in one way or another with the developer, and the developer (an ardent Republican, natch) had gotten about $60 million from the district for golf courses and small parks that cost the developer less than $8 million to build. A pretty solid return, in a period of not so solid returns for people conducting their business without the aid of the US government. Other bonds are also being investigated. See Fineout, Florida Communities Pay Attention to a Tax Case, NY Times, July 10, 2009.

Banks, TARP purchases of toxic waste, derivatives regulation (or not)?

Obviously, the entire economy is impacted by the credit crunch and the huge amounts of money the federal government has put on the line for banks, including its plans for "partnerships" with private equity to buy up toxic waste, with the government standing to get a pittance of the up side (if there is any) but to lose most of the downside (which there will likely be a good deal of). Meanwhile, proposals for regulation of derivatives are tepid at best. "Standard" derivatives would be sort of regulated, but "exotic" ones (the ones, by the way, that have been customized to use in tax shelter deals, or to fool accounting regulators) won't be. You can create a customized derivative to do anything the standard one would do, so who would do a standard derivative if both options exist? (nobody) And why do banks need to be doing exotic derivatives in the first place? (they don't). Derivatives have been just one other way to manipulate tax burdens and get the right bundle of features at the right point to claim the right application of a particular part of the Code. Swap away the taxes. But here we are, letting banks continue without restructuring, aiding them with more US dollars on the line, and doing it in a way that allows big aid recipients in the bailout (like GE) to get bigger on more bailout-related dollars from the government, while continuing to engage in the same behavior as before. What part of this makes sense?

More tax shelter enablers biting the dust

This week, another of the BDO Seidman "tax solutions group" (that ended up being a euphemism for tax fraud promotional group) pled guilty to various charges in connection with the son of boss type deals done with defunct law firm Jenkins & Gilchrist. You can read all about that on A Taxing Matter here and more about the shelters and other cases, here and here. Will these guilty pleas help put a stop to the overzealous "tax minimization" norm. For a little while, I suspect. And then the race will be off again in a new cycle of tax shelters.

And being in Michigan, I can't leave out Ave Maria (hat tip to Paul Caron at Tax Prof)

Ave Maria Law School, a Catholic school founded and funded by Tom Monaghan (of Domino's Pizza wealth), is being moved lock, stock, barrel and faculty to a new city and campus in Florida. A number of tenured faculty objected to the apparent high-handed way in which Mr. Monaghan was able to control the school's decision making on the matter. They are no longer at the school and are contesting their termination. Monaghan claims that they are Catholic ministers and therefore the school is exempt from suit in civil court under the First Amendment religious protections. See Baldas, Ave Maria claims 'ecclesiastical abstention' over termination of three law professors, National Law Journal, July 9, 2009. As one commenter on the Tax Prof posting on this noted--so do the faculty take the ministerial housing allowance exclusion?

Enjoy, and have a great weekend.....

Nails: The 2012 Republican candidate for President?

2009-07-09T16:09:00.006-04:00

From Lenny Dyksytra's letter to friends about his bankruptcy filing yesterday:

William McKinley filed for protection while serving as Ohio's governor in 1893. He was in debt to the tune of $130,000 (an insurmountable sum in those days!) before some friends eventually helped to bail him out. Three years later, he occupied a desk in the Oval Office. [emphasis mine]

That seems much clearer than declaring you're "not a quitter" while wearing hip-waders while your lawyer claims your multimillion dollar book deal (and private fortune) aren't enough to deal with the cost of ethics charges against you.

Also, Jim Cramer may want to avoid Lenny for a while:

Ulysses S. Grant went bankrupt after leaving office when a partner in an investment-banking venture swindled him. (I can certainly identify with this one.) [emphasis mine]

Good thing Dykstra doesn't pretend to be an investment advisor.

Oh. Well, at least no one ever sang his praises in the mass media, right?

Oops.

Dykstra in 2012, on a platform of Fiscal Responsibility. "Returning to the Glory of the McKinley Era."

Seems as likely to work as anything else.

Reversed Psychology: Tax Cuts and Work

2009-07-09T12:45:00.005-04:00

by Bruce Webb

In comments to his last post A Response to Megan McArdle, Again Cactus put the following up as a summary of the Economic Right's approach to tax cuts:
1. tax cuts mean people are encouraged to work harder
2. people work harder
3, growth

Another version of this was posted, without apparent irony, on a MY post on the soda tax. How to Think about Public Health Taxes (bolding mine but actually echoed when MY later quoted himself)

Think about the case for taxing income, via the income tax and FICA. Why do it? Well, to get the money. That’s how we finance Social Security, the Department of Defense, Medicare, interest payments on the national debt, Medicaid, federal aid to schools, veterans’ health care and benefits, the FBI, etc. Now what’s the case against taxing people’s income? Well, it’s that it discourages work and it discourages investment. And that’s bad for the economy. Now we go back and forth over whether any given expenditure has a value that outweighs the economic costs. Liberals, like me, tend to think that a relatively high level of expenditure is justified whereas folks on the right tend to disagree.

But that simply shows, and not for the first time that some of our progressive wunderkinden have simply internalized the central tenet of supply side voodoo, the idea that income taxes are a tax on work and capital gains taxes are a tax on investment, and that like proposed taxes on soda or existing taxes on liquor and gasoline the more you tax something the less people are inclined to expose themselves to that tax.

This I think is a profound misunderstanding of the psychology of work and investment. Those who care about why I would think that and those who are just dying to mock the whole idea can follow me below the fold.

Now there are some people who work just for the sake of work itself. In fact a lot of people will spend many hours on work that comes with no monetary compensation at all. We call these people 'hobbyists' and 'unpaid volunteers'. And I suppose if you taxed these people directly on their time there would be some tendency to reduce that time, or at least the time reported to the tax man. But most people do not approach work as some sort of dispensable hobby, instead work is the means to some other desired end whether that end be subsistance, or fame, or fortune with its attendant material objects, or in some cases simple sociality (e.g. some people live to organize office birthday parties). Mostly though people are one way or another working for the paycheck.

But even the paycheck amount is not an end in itself, at least not for everybody, and particularly not for those people who work outside the hyper-competitive world of Wall Street, not every clerk dreams of being office supervisor, not every framer dreams of being site superintendent. some times what you have is good enough.

And when we examine history we can see that in most times and most places this is the norm, sure there are always strivers and always some measure of economic mobility but particularly in largely pre-industrialized societies people tend to end up at some equilibrium. And that equilibrium point is mostly established by a desired level of consumption.

I first came across a formalized version of this in Chayanov's The Theory of Peasant Economy. I just now ran across a pretty good version of Chayanov's overall thesis here Russian History Encyclopedia: Peasant Economy

Perhaps the greatest theorist of the peasant economy was a Russian economist named Alexander Chayanov, who lived from 1888 to 1939. Chayanov published a book entitled Peasant Farm Organization, which postulated a theory of peasant economy with application for peasant economies beyond Russia. He argued that the laws of classical economics do not fit the peasant economy; in other words, production in a household was not based upon the profit motive or the ownership of the means of production, but rather by calculations made by households as consumers and workers. In modern terminology, the family satisfied rather than maximized profit.

According to Chayanov, the basic principle for understanding the peasant economy was the balance between the household member as a laborer and as a consumer. Peasant households and their members could either increase the number of hours they worked, or work more intensively, or sometimes both. The calculation made by households whether to work more or not was subjective, based upon an estimate of how much production was needed for survival (consumption) and how much was desired for investment to increase the family's productive potential. Those estimates were balanced against the unattractiveness of agricultural labor. Households sought to reach an equilibrium between production increases and the disutility of increased labor. In short, households increased their production as long as production gains outweighed the negative aspects of increased labor. This principle of labor production in the peasant economy led Chayanov to argue that the optimal size of the agricultural production unit varied according to the sector of production at a time the official policy of the Communist Party of the Soviet Union was pushing for large collective farms. As a result of this disagreement with Marxist economists and the Party line, Chayanov was arrested in 1930 and executed in 1939.

Chayanov came to his understanding not from a position of armchair theorist but by doing some serious data analysis of the surprisingly (to us) abundant documentation of peasant work life in Czarist Russia. And the result was that he found some very large divergences in work effort over the course of the standard peasant work-life with the peasant couple stepping up their work hours during some periods (for example while children are small and when setting up children with their own holdings) and then dialing it back.

Now even in the Peasant Economy there are strivers who undertake to raise their equilibrium point, your German 'kleinbauer' maybe wanting to rise to the status of 'bauer' and your 'bauer' to 'grossbauer', but equally the shift could go the other direction in any given generation, but the whole effort was not particularly driven by the profit motive but instead by the desired outcome.

Which is where supply siders get their psychology reversed. They see the income tax as a tax on work and as such a disincentive to work itself. Just as they see a tax on capital gains as a tax on capital and so a disincentive to invest. The historical reality generally shows the exact opposite, the higher the tax the more you have to work to achieve your desired consumption outcome, and similarly the same is true for investment, more tax means more intensification of investment activity. Now certainly there are limits to how far this process can go, if you tax labor output down to subsistence and sub-subsistence levels you risk your serfs and/or wage employees simply running away, and contrawise if you tax capital at rates up to 98% it is no wonder that the Beatles ran away from England as well. But there is no evidence that current levels of taxation are actually above the sweet spot where taxes mean more work and more capital investment rather than less.

Meaning we need to redraw that Laffer curve to include consumption equilbrium points for various income levels. If a person's current income is above his own personal equilibrium point he might well react to a tax cut by reducing his hours of work. If instead a tax increase takes him from above equilibrium to below he might react by increasing hours. And the same is true for the investor. If as a group a society's top 5% or top 1% are living large at current returns and rates, a tax cut might just lead to them commissioning artists or patronizing writers and scholars. Traditionally aristocracies have sought to reduce or eliminate their overall tax burdens, and it was not because they had a burning desire to spend every day working their fingers to the bone. Instead that tax exemption enabled them to maintain or even expand their consumption.

Supply side psychology treats 'work' and 'investment' as ends subject to direct incentives or disincentives from taxes. But historical reality shows they the are instead means to other ends that include such things as consumption and display. Calculating the impact on any given tax change on any given group requires some deeper understanding of the sociology involved among that group. History is full of instances where people scraped and scrapped behind the scenes simply to maintain appearances at Court or its socio-economic equivalent (think 'Sunday Go to Meeting Clothes' among the working classes).

How hard are you willing to work to keep that Bass Boat and the Lake Cabin even as the taxes on them are "killing you"? Are you really going to cut back your overtime in response to a tax increase if it means giving up your Season Ski Pass?

Morgan Stanley Plans to Turn Downgraded Loan CDO Into AAA Bonds

2009-07-09T12:28:00.003-04:00

by divorced one like Bush

Well, well, well, seems our Robert will have some more thinking to do. Via C & L to Radamisto who want's to know if we have ADD or what comes the Bloomberg story that the money from money machine is being restarted.

Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.

Gee, Morgan Stanley, Goldman Sachs? Two totally separate companies, just happen to be mentioned together implimenting the same strategic plans.

8/18/08 Morgan Stanley, Goldman link lending to their own creditworthiness

The Financial Times is reporting that Morgan Stanley is implementing systems that tie the prices of credit insurance on their own debt to their commitment to provide financing to their hedge fund clients. The shift would allow the bank to pull out from its funding commitments should it run into a crisis of confidence like that which wiped out Bear Stearns in only a matter of days. Goldman uses a similar arrangement that ties its lending commitments to the firm's own bond prices.

9/21/08
WASHINGTON (Associated Press) -

The Federal Reserve said Sunday it had granted a request by the country's last two major investment banks - Goldman Sachs and Morgan Stanley - to change their status to bank holding companies.
The decision means that the Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed's emergency loan program.

3/9/09 UPDATE 2-Barclays cuts price targets on Goldman, Morgan Stanley

March 9 (Reuters) - Barclays Capital cut its price targets on Goldman Sachs (GS.N: Quote, Profile, Research) and Morgan Stanley (MS.N: Quote, Profile, Research) and said it expects the former investment-banking giants to post losses for December, mostly due to asset markdowns, investment losses and "very subdued" core earnings.

5/19/09
Goldman Sachs and Morgan Stanley have formally asked the Federal Reserve for permission to repay a combined $20 billion in federal bailout money.

6/17/09 JPMorgan Chase, Morgan Stanley cut ties with government

In separate statements, Morgan Stanley and JPMorgan Chase said they will not issue bonds backed by the Federal Deposit Insurance Corp. The banks are striving to show they can raise funds without help from the government. Goldman Sachs and other financial institutions might follow suit.

Continuing the July 8, 2009 Bloomberg article:

A lot of banks and insurers “cannot buy anything but AAA,” said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” which is due to be published in November by Oxford University Press. “You’re manufacturing AAA out of not AAA, therefore allowing those people who have AAA written on their forehead to buy.”

While the Morgan Stanley deal is the first to involve CDOs of loans, banks have been doing the same with commercial mortgage-backed securities in recent weeks.

Jennifer Sala, a spokeswoman for Morgan Stanley, and Gregory Mount, a Greywolf partner, declined to comment.

Banks are using re-REMICs to protect against losses on residential-mortgage securities during the worst housing slump since the Great Depression...Re-REMIC stands for “resecuritizations of real estate mortgage investment conduits,” the formal name of mortgage bonds.

Nice to know We the People have their backs huh?

A Response to Megan McArdle, Again (by cactus)

2009-07-08T18:01:00.004-04:00

by cactus

Megan McArdle responds to a post I wrote:

So Obama doesn't count because he's not really a Democrat. But Bill Clinton was. But Richard Nixon--the chap who implemented price controls and massively expanded Social Security and Medicare--was definitely a Republican. Jimmy Carter, who deregulated like mad: definitely a Democrat.

What are these policies that neatly define Democrats to exclude only the ones who happen to have crappy growth? On what metric does Barack Obama register as farther to the right than Bill Clinton? Because from what I remember of the 1990s, I spent most of the decade listening to my genuinely left-wing friends weep that he'd betrayed them. Remember Edelman's resigning in protest of welfare reform?

I thought it was unnecessary at this point to explain the one thing I've pointed out time and again differentiates Republicans from Democrats. I think the first time was here. (I tend not to break out JFK from LBJ, or Nixon from Ford because JFK and Ford only served a short time, but the post that is attached is illustrative of behavior, not performance.)

The difference is the tax burden - that is, the percentage of people's income that gets collected in taxes. Not the marginal rate - the amount people actually pay divided by the amount they make. And there is a difference, a big difference. As an example: George Herbert Walker Bush famously raised marginal rates. It might have cost him an election. But GHW Bush also quietly lowered the tax burden. He did it through the people he appointed to the IRS, through the degree of compliance he sought, through the way his IRS interpreted existing rules and regulations and through how the body of tax rules and regulations changed while he was in office.

Going back to 1952 at least, every Democrat, every single one, has increased the tax burden. Every single Republican ~~raised~~ lowered [h/t Bruce Webb] them. The data in the attached post is from the IRS and goes back only to 1952, but one can wander over to the BEA's NIPA Table 2.1 and compute the tax burden ourselves with National Income data going back to 1929, and whaddaya know, the rule also works for Hoover, FDR, and Truman. Just barely for Truman... but then he is the exception on performance too, right?

Now, I doubt you could find a single person on the right of the political spectrum who would tell you that taxes don't affect economic growth. They all believe taxes affect growth. Of course, the story they tell is that cutting taxes produces faster economic growth. The fact is, however, the Presidents who cut tax burdens tended to produce slower economic growth than those who raised taxes. (I've discussed why in a number of other posts, and I don't feel like rehashing or looking for those posts now. I also note this isn't just true of Presidents. My fellow Angry Bear, Spencer, once pointed out that there are a lot of people out there who seem to think we'd all be better off if the country was Alabama than if it was Massachussetts.)

Unfortunately, tax burden data, like any other bit of real world data, fluctuates somewhat from year to year, so its really going to be a while before we know what direction they're really headed over O's administration. As in, several years. And most of us are impatient. So we'd like to have some leading indicators, so to speak, of what Obama is going to do, of where he's going to fall on the one R v. D divide that really matters. And right now, he's behaving like the folks who have cut tax burdens in the past. He's also talking like them. His bail-out is identical to GW's, and when he talks about taxes, it doesn't sound like Clinton, it sounds like GW. So its reasonable to wonder whether he's going to stick to the R v. D rule. And the next test coming up is healthcare; a D would be putting his political capital on the public option right now. An R wouldn't. What's it gonna be, we'll soon see.

More below the fold.

Now, in Megan's post, she refers to "Cactus and his merry band of madmen." I'm not sure the merry band of madmen over here truly have a leader, much less that I'm the one (Dan is the official grand poobah in charge of the blog, after all!!) but I'm guessing you aren't a part of that merry band of madmen if any of the following apply to you:

You do not believe that since 1929 at least, every single D has increased the tax burden and every single R has decreased the tax burden, despite the fact that the data shows precisely this, and despite the fact that it fits the caricature of Ds and Rs to a T, so to speak.
You do not believe that since 1929, Ds have generally outperformed Rs when it comes to real economic growth, despite the fact that the data shows precisely this.
You do not believe that administrations that cut the tax burden have also generally been the administrations that grew more rapidly, despite 1. and 2.
You do not believe that the tax burden could possibly have anything to do with growth.

If you do believe these things, if you believe what the data shows , I'm sorry to say but you're one of us, one of the merry band of madmen. On the other hand, if you fit these rules, there are a whole lot of folks out there, Megan McArdle included, who would consider you sane.

Swimming in the Shallow Part of the Gene Pool

2009-07-08T18:00:00.000-04:00

Curv3ball at The Poor Man warms the cockles of this Northeast Philadelphia native's heart.

Go Read the Whole Thing.

Gary Becker must be rolling over in his grave.

Who are You and What Have You done with Kevin Drum ?

2009-07-08T09:22:00.002-04:00

Robert Waldmann

The absolutely brilliant and almost reliably reasonable Kevin Drum quotes the very smart and usually reasonable Dan Drezner and writes

In a speech today in Russia, Barack Obama said that "the pursuit of power is no longer a zero-sum game." Dan Drezner isn't so sure:

If he had said, "The pursuit of prosperity is no longer a zero-sum game," I'd be fine with the passage. I still think power is a zero-sum concept, however. The two ideas are linked but hardly the same.

I suppose that's true. Even in a Thomas Barnett-ish world where all the big players gang up to police the world, it's prosperity and security that are positive sum, not raw power. Anyone care to try and come up with a counterexample?

Power is not at all a zero sum game. If different powers are united in one pair of hands, there isn't the same total power. Instead there is much more power.

Consider an obvious mild example. If there is a competitive market no one has power over me. If you refuse to sell to me, I just buy from someone else at the same price.
But if you are a monopolist I just can't get the product if you refuse to sell to me. If you have a monopoly on, say, water, I must beg you on bended knee or die of thirst. The total amount of power in the world is completely different if many many people have water or if only one does.

More generally the whole point of, say, the US constitution is to reduce total political power by dividing it. If the President, congress, the supreme court and the armed forces worked together, then together they would have absolute unlimited power. The US goverment had much more power over people in the US in 2006 than in 1996. That was what was so terrible about 2006.

If we take Obama literally, he is saying that he will cooperate with Putin to dominate the world which would be relatively free if they didn't cooperate. I trust he was lying. I really have no choice. If the quest for power ceases to be played as a roughly zero sum game, we will all be slaves.

What the hell is going on ? I think that Drezner and Drum are using "zero sum" to mean harsh, red in tooth and claw, not suited to utopian dreams. Their view is that cooperation can't make the outcome of the power game better for everyone. That doesn't mean that it can't make things worse for almost everyone.

Worse even than disagreeing with Drum, my argument is a clumsy verbose attempt to paraphrase an argument made by Hayek. Pro Hayek, contra Drum -- what is happening to me ?

Oil Price Speculation

2009-07-08T08:58:00.003-04:00

Robert Waldmann

I almost feel I might disagree with Paul Krugman about international economics with imperfect competition. In particular Krugman confidently asserts that the wild swings in the the price of petroleum are the result of simple supply and demand curves (which are both extremely price inelastic so almost vertical) and not of speculation. He argues that speculation can only affect the spot market price via hoarding. Given supply and demand curves, the only way to affect the spot price is to take product off the market. This didn't happen during the period of increasing petroleum prices so it was peak oil not speculation.

Given supply and demand curves.

So what do we have to assume to get supply and demand curves ? After the jump I wonder.

update: Well that was quick. Rule number 1 never debate Paul Krugman. Rule number 2 when Krugman seems to be wrong, look at rule number 1.

Krugman has a new post on oil prices and speculation. He notes that this time the price increase is clearly being caused by speculation (which might be perfectly rational) as is shown by the build up of inventories of stored oil above the ground. This means that my theory (after the jump) about how speculation can affect oil prices without causing large inventories of oil above the ground is false unless I can explain what is different now compared to a year ago. This is possible (spare oil tankers not required for shipping are being used for storage) but does sound like special pleading.

To have supply and demand curves it is sufficient (but not necessary) that there be perfect competition. The fact is that some economists tend to accidentally assume perfect competition without thinking. Paul Krugman is not one of those economists and, besides, competition in the market for petroleum is very famously not perfect (remember OPEC ?).

It is also possible to derive a supply curve for a monopolist or for a Cournot oligopoly. To get a supply curve from a cartel one has to consider game theory, but I'd say OPEC can be considered to be Saudi Arabia plus free riders.

However, and crucially, the derivation assumes that the suppliers maximize the present value of revenues. Perfect competition is not needed, but rationality is.

Clearly the fact that Saudi Arabia has oil and wants other things can't imply anything including a supply curve. If they are total crazy fools they might do anything.

Also, importantly, under imperfect competition the cost of a small deviation from the optimal present value of revenue maximizing price is small squared. The cost of huge pricing errors is huge squared, but after decades of near price stability a boundedly rational non fool might have little idea about pricing as the costs of mistakes are tiny even calculated with the benefit of hind sight.

So how about this model. Saudi Arabia charges a spot price which is a simple function of the futures price and pumps enough to meet demand. They follow this rule unless they are pumping at capacity, in which case they charge a higher price, or less than half of capacity, in which case they charge a lower price.

The futures price would then feed right into the spot price so long as Saudi Arabia is pumping between half and full capacity.

The hoarding of oil is all under the Saudi desert.

The only difference between my model and Krugman's is that Krugman believes that Saudi Arabia has long been pumping all it can. True Saudi pumping capacity is, in fact, an unobservable variable. One can't tell if futures market speculation controls the spot price of petroleum without knowing how much oil Saudi Arabia can pump. They are telling us a number, but they are presumably lying so we just don't know.

Megan McArdle Has a Question

2009-07-08T05:00:00.000-04:00

by cactus

Megan McArdle Has a Question

Megan McArdle has a question:

What happens to the cottage industry among Democratic-leaning armchair economists grinding out analyses proving that Democratic presidents are, like, totally awesome for the economy? Presuming that we're stuck--as seem very likely--in at least a couple of years of really grinding low-to-no growth, Obama is going to destroy their figures. Are we in for a resurgence of belief in exogenous growth factors?

Given my co-author and I will have a book out next year that McArdle and her readers would consider "analyses proving that Democratic presidents are, like, totally awesome for the economy" I figure I'm qualified to respond. (BTW - regular readers of this blog know how hard I have tried to get across the not so subtle and one would think completely obvious point that if one band of sorry oafchucks is less bad for the economy than the other band of sorry oafchucks, that doesn't in any way imply that the less sorry oafchucks "are, like, totally awesome.")

So here's my response: it depends on the motivations of those Democratic-leaning armchair economists, doesn't it? The right is not the only side with its Mankiws and its Sowells. There are plenty of those on the left too, and they're no different than their right wing counterparts. They believe that a (D) following some politician's name is short-hand for "that human being is somehow laudable."

But there are others who believe that a (D) is short-hand for something else, namely that the politician generally hews a bit more closely to a particular set of policies that have worked a little better than the policies adhered to by people who have an (R) after their name. Its not a guarantee of performance.

I have noticed that many people who take the second approach have been criticizing Obama's approach even before he took office. I for one have posted (over and over and over) on the folly of bailing out the financial institutions that have caused this mess (since when is taking from the poor and middle class and sending to the fabulously wealthy compatible with the policies that generally define Democrats?), and I've had a few posts noting that Christina Romer was a very poor choice for CEA chair (Mankiw's endorsement alone should have been a tip-off even to someone who never read her "narrative economic history" paper).

Sure, exogenous factors do matter. Truman was a Democrat, but the economy was awful for the first few years of his administration; transitioning from WW2 to a peacetime economy ain't easy. And it sucked in 1933 too, which was FDR's first year. This despite the fact that annualized, real GDP per capita grew much faster under FDR than any other President over the time period for which the BEA computed GDP, even leaving out the War years. Which also indicates something else - the economy might still turn out alright despite the many Obama mis-steps. Time will tell.

But there are a few other things - for one, you don't have only one (R) or (D) administration to look at. You have probability and statistics. (And to forestall the point that inevitably gets brought up again and again and again and again, that's what degrees of freedom are for.)

And while no theory is perfect, the better ones require fewer exceptions. If Obama starts acting like a Democrat and the economy still sucks by the end of his term, that means Democrats have to explain away Obama and Truman. Republicans still have to explain why Republicans generally do so much worse when it comes to real GDP per capita growth rates. The BEA has only been calculating real GDP per capita since 1929, and yet the best performing Republican, Reagan, is beat out by four Democrats, and all but one of the entire bottom half of the sample is taken up by Republicans. Tip to Megan McArdle: nobody can tell you for sure who's going to win next year's World Cup in South Africa, but betting on Grenada to pull it off is a bad idea.

And then there's the question that McArdle herself keeps bringing up - the mechanism. The mechanism doesn't apply if you don't have the right inputs. As I noted above, Obama has not yet behaved like a Democrat; his policies on the bail-out have been essentially the same as those of his predecessor who most certainly was no Democrat.

So in the end, here's what I say to Megan McArdle: ask your question again when Obama starts doing things a Democrat would do. Pushing through the "public option" on a healthcare would be a start.