Jay Hancock's blog

JPMorgan Chase: Recession has just begun

Mon, 12 May 2008 17:07:55 -0500

Here's JPMorgan Chase's Jamie Dimon, speaking at a conference today:

JPMorgan Chase & Co.'s chief executive said Monday that while the crisis in the credit markets appears to be three-quarters over, he believes a U.S. recession is just beginning.
"Even if the capital markets crisis resolves, it does not mean that this country will not go into a bad recession," said CEO James Dimon, whose bank saw its first-quarter profit fall by half due to the recent collapse of the U.S. mortgage market. "The recession just started."

"We don't know if it's going to be mild or severe," he continued, speaking at a conference in New York hosted by Swiss bank UBS AG. "We're thinking there's a third of a chance that it's going to be pretty bad ... closer to the 1982 recession than the very mild recessions we had in 2001 and 1990."

Dear Mr. Dimon: If the recession gets as bad as the 1982 downturn, the problems in the credit markets will not turn out to have been three-quarters over.

In favor of $200 oil and high gas taxes

Mon, 12 May 2008 16:27:35 -0500

This is the latest from Richard Posner, the distinguished federal appeals judge and noted (often described as conservative) economic thinker:

Why We Should Be Rooting for $200 per Barrel of Oil
Were the world price of oil to rise to a level close to $200, both demand and (with a lag) supply would respond. Oil trapped in sand and shale--a potentially very large supply--would become economical. In the longer run, very high oil prices will further stimulate the development of alternative fuels.

And:

I would like to see the price of oil rise to $200, despite the worldwide recession that would probably result, provided that it rises as a result of heavy taxes on oil or (better) carbon emissions. The taxes would jump start the development of clean fuels, and the financial impact on consumers could be buffered by returning a portion of the tax revenues in the form of income tax credits. That would not reduce the effect of the taxes on the demand for oil or the incentives to develop alternative fuels, because the marginal cost (the production and distribution cost plus the tax) of oil to consumers would not be affected.
Higher oil prices are necessary to check global warming, reduce traffic congestion, and reduce dependence on foreign oil, so much of which is produced by countries that are either unstable or hostile to the United States. Heavy taxes on oil would reduce not only the amount of oil we import but also the revenue per barrel of the oil exporting nations, so there would be a double negative effect on those countries' oil revenues: they would sell less oil and earn less per unit sold.

McCain's economic plan: What about war & Medicare?

Mon, 12 May 2008 12:34:04 -0500

This is making the rounds today, via Tyler Cowen, It's a statement of support for John McCain's economic plan by a couple dozen economists known for championing free markets and low taxes. But they left some stuff out. Here is the intro:

We enthusiastically support John McCain's economic plan. It is a comprehensive, pro-growth, reform agenda. The reform focuses on the real economic problems Americans face today and will face in the future. And it builds on the core economic principles that have made America great.
His plan would control government spending by vetoing every bill with earmarks, implementing a constitutionally valid line-item veto, pausing non-military discretionary government spending programs for one year to stop their explosive growth and place accountability on federal government agencies.

His plan would keep taxes from rising, because higher tax rates are exactly the wrong policy to restore economic growth, especially at this time.

You can read the rest below. First, there is no mention of the Iraq war. Here is what the (conservative) Hoover Institution's David R. Henderson wrote a month ago when somebody asked him to sign the petition:

There’s nothing in there I disagree with. [I later found a few things but I agreed with the vast majority.] The problem is that it leaves out a huge part of his economic policy that will make it virtually impossible to achieve what’s in the statement. That huge part is his policy on war–with Iraq and maybe with Iran. War is very expensive and is part of an economic policy. So by signing the statement, I would be helping Senator McCain maintain the fiction that there’s no connection between war and economic policy. I’m unwilling to do that.

The other lacunae concern Medicare and Social Security. Oh, they're in there. But as an afterthought.

The above actions, as well as plans to address entitlement programs--especially Social Security, Medicare and other government health care programs... constitute a broad and powerful economic agenda.

This blog post, as well as my plans for a blockbuster investigative series a year or two from now that I haven't really thought about yet, will win me the Pulitzer prize and make me rich and famous.

My date with a movie star

Fri, 09 May 2008 16:21:31 -0500

I interviewed David Walker, star of I.O.U.S.A., the new docu-drama on America's debt crisis, along with director Patrick Creadon and executive producer Addison Wiggin, at the premier party last week. Walker is the U.S. comptroller general who went on a tirade over this country's impending commitments and its inability to meet them on their current course. He led the "Fiscal Wake Up Tour" from state to state to try to draw attention to the issue, and the I.O.U.S.A. film crew followed along for the film's core narrative.

The film debuted at Sundance earlier this year and got screened multiple times last weekend at the Maryland Film Festival at the Charles. Here is my column on the movie and Andrew Yarrow's new book on the same theme, Forgive Us Our Debts.

Walker recently became CEO of the Peter G. Peterson Foundation in New York, where he intends to continue his work. Part of the Peterson agenda is Phase II of the Fiscal Wake Up Tour. For the next few months the Tour will focus on what Walker calls "Purple States" -- swing states, neither Red nor Blue, in the upcoming election. That's where the most political traction can be had.

The Peterson Foundation is "trying to engage young people in particular," Walker said, because they're the ones with the most at stake. They'll have to pay the bill with higher taxes and other, subtler costs for the nation's trillions in debt and future liabilities. "We're looking to try to get [I.O.U.S.A.] into high schools and colleges and, eventually, on YouTube. The key is, How can we maximize the visibility of this film?"

They're thinking about producing another film -- "what would things look like in 2040?" if the debt bomb isn't defused. The foundation wants to focus on financial literacy, making grants etc. to organizations that promote it. But mainly the group wants to push support for fiscal sanity at a grassroots level and turn it into change in Washington.

Movie trivia: The crew wanted to use Steppenwolf's "Born to Be Wild," as soundtrack for the Wake Up Tour, but it was too expensive. So they used a lesser-known version.
They've tweaked the film since it appeared at Sundance and seem to be still doing so. Walker, an accountant by training, is especially keen on presenting viewers with certain statistics, which the Hollywood folks may have mixed emotions about. "We've got to include that graphic of the debt to GDP ratio since the 1700s," Walker told Creadon. "It's in there! It's in there!" the director said.

How to negotiate your taxes lower

Fri, 09 May 2008 13:54:12 -0500

The most-read article from the Web site of Area Development magazine. Inside tips on how companies can play states off one another to cut their taxes and win taxpayer grants. It's a perennial outrage that violates promises of equal treatment under the law. Company A pays "X" taxes, but company B in the same industry negotiates a lower rate. And no, it's not "pro-business" to allow this. When one taxpayer pays less, its business competitors have to pay more and compete with it for workers to boot.

If you want to cut taxes, cut them for everybody or nobody.

HOW TO PLAY THE INCENTIVES GAME
Many state and local governments are eager to negotiate incentives with companies that might revitalize the area’s economy....

Negotiation is an art, and the negotiation of incentives should not be taken lightly. States can be quite competitive with each other in the race to recruit major employers, and the ability to negotiate effectively with the different players is essential.

In one recent case, five states were vying to land a major manufacturing facility. The initial incentive offers ranged from $7 million to about $30 million. By the time negotiations had concluded, the final package had climbed to approximately $80 million.

It’s important to know which resources the various contenders bring to the table. For example, some states can tap the 1998 multistate tobacco settlement as a source for discretionary incentives. While much of the nearly $250 billion that states will receive from tobacco companies over the first 25 years has been earmarked for public-health expenditures, a substantial amount remains available for other purposes — including economic development....

The competition among jurisdictions for corporate expansion and relocation is intense. Savvy companies that know how to play the incentives game can gain a valuable strategic advantage.

And it's all done beyond the knowledge of the taxpayers footing the bill:

Maintain confidentiality. To maintain negotiating leverage, companies should refrain from making any public announcement of plans for expansion or relocation until the incentives package has been finalized and comprehensive due diligence has been performed.

An oil bubble to rival the Internet boom?

Fri, 09 May 2008 12:03:13 -0500

From Factset. Read the whole thing here. HT Big Picture.

This week we take a close look at what look very much like bubbles in the US energy sector and in raw materials in Europe. In real terms, oil prices are nudging their all-time highs, which date back to the end of 1979 and the Islamic revolution in Iran. Brief though it was, that peak was enough to trigger severe recessions in 1980 and 1982...
Unquestionably, there is a bubble in oil company profits, although masked by what look like low PERs. EPS have risen 8.7 times over since 1994, and this is another record. The sector’s share prices have risen ‘only’ 512% over the same period, but are extremely vulnerable to a change in the economic situation. No satisfactory solution to the energy crisis has yet been found, with most initiatives aimed at boosting supply remaining marginal relative to real requirements. This means that the only way out is a serious slowdown in consumption arising in a context of recession. All the oil shocks of the past ended in this way....
Technically speaking, the energy sector could outperform further in the months ahead, but the correction could be brutal, as is the case with cyclicals. We recommend neutrality on the sector, and sales in line with bad news on the economy.

Health-plan extension to age 25 doesn't cover most Marylanders

Fri, 09 May 2008 10:40:43 -0500

A new law requires Maryland health insurers to cover dependent college graduates up to age 25. The idea behind yet another “mandate” for Maryland insurers was to build a bridge for young adults moving from university to the work force.

But the law doesn’t apply to most Maryland families. It doesn’t cover small group policies. So if you work for a company with fewer than 50 employees, there is no requirement to insure dependents until they are 25. Likewise for insurance offered to federal employees, says Karen Barrow, spokeswoman for the Maryland Insurance Administration. Likewise for people working for big, out-of-state corporations that bought coverage in their home states.

And self-insured employers don’t have to cover college grads, either. Almost 1.7 million Marylanders were covered under self-insured plans last year, according to the insurance administration. Only 1.2 million people were covered by plans in which insurers bore the risk – the state’s definition of an insurance company.

Don’t necessarily be reassured if your card bears the name of CareFirst or some other well-known insurer. A huge part of CareFirst’s business is administering claims for self-insured employers.

Nothing prohibits self-insured or small employers from increasing coverage to age 25, but most probably haven’t. (State employees will be able to choose such a benefit, Barrow said.) You need to ask your company’s human resources department.

“The Class of 2008 can search for that first job without worrying that a car accident, unplanned pregnancy or sudden illness will bury them in medical debt instead of job offers,” Del. Heather R. Mizeur told The Sun.

Well, a few of them, anyway.

Fill out a living will today

Fri, 09 May 2008 10:18:26 -0500

Today's column.

Sure, fill out a living will because it might let you and your loved ones avoid heartache and agony at the end of your life. But here's another reason: It'll potentially save your heirs and society tens of thousands of dollars.
Especially in Maryland, which is one of the most expensive places in the country to become terminally ill, according to newly published research.

Only 34 percent of Marylanders have living wills, says Dan Morhaim, a physician and Baltimore County delegate. He and Johns Hopkins public health professor Keshia Pollack just did a survey that he says will be the first study of its kind when they publish.

That means two out of three Maryland adults haven't issued legally binding medical instructions in case they can't make decisions.

Two out of three patients risk being kept alive by well-meaning doctors and family when, in fact, their lives are over.

And two out of three risk triggering enormous financial costs that deliver only miserable dividends.

Read the whole thing here. Read the Maryland attorney general's information sheet about living wills here. Fill out a wallet card telling medical professionals you have a living will here. Get Maryland's advance directive form (the legal name for a living will) here.

A boomer objects (vociferously) to my boomer column

Fri, 09 May 2008 09:10:04 -0500

A boomer objects to my "Boomers Planting a Debt Bomb" column.

Let's see...if the fathers of the Boomers had not fought in WWII or the Korean War, you probably wouldn't have this "problem". And if the "Boomers" hadn't fought in Vietnam, we would have been as complacent as the "young people", who have no idea what the word "protest"means. It's really sad that someone would write this crap knowing that the "Boomers" are also the ones who have worked and paid for any forward motion in this country. So go change your diaper and blow you snotty nose, you lazy, spoiled brat! OH..and get a REAL job, for God's sake.

Sempra pulls plug on badly needed electric plant

Thu, 08 May 2008 11:04:23 -0500

Here is another reason electricity re-regulation is coming to Maryland. Sempra Energy was one of the few electricity-generation companies to have planned a plant in Maryland, which badly needs the juice. Sempra's Catoctin Power project would have supplied new megawatts to central Maryland, where BGE and other utilities now import lots of power at expensive rates from out of state.

Not any more. In news first reported by Power Market Today, Sempra is pulling the plug on the plant for now because federal regulators rejected a pricing scheme Sempra says was necessary to make the generator profitable. Here is Sempra CEO Donald Felsinger on a conference call with Wall Street analysts last week.

JOHN KIANI: Can we assume that at least at this point you're not going to build [Catoctin] and PJM since FERC did not pass the cone increase?
DON FELSINGER: I think it's safe to say from our perspective that the economics that currently exist don't warrant us making an entry at this point in time.

And:

PAUL PATTERSON: I apologize if you've already gone over this. The Catoctin Power Plant, with the new cone and heat rate situation at PJM, any additional thoughts on that.
DON FELSINGER: I did answer this earlier. That is, as the new cone was published and as the process at PJM and submitting their new cone to the FERC didn't get approved for procedural reasons, we've decided not to enter the market based upon capacity prices. Now, that does not mean that we're not out shopping with utilities for a contract. But currently the economics in that region don't support us going forward with a new build without a contract or a higher cone.

"CONE" stands for cost of new entry, a pricing protocol on PJM Interconnection, the wholesale grid for the Mid-Atlantic region. Sempra and other generators wanted to crank up the Cone, which would have increased their profits. Everybody else fought the higher Cone. A few weeks ago FERC rejected it, and now Sempra is (at least temporarily) taking away its marbles. Look for Sempra to sign a contract with BGE or somebody else in which utility ratepayers will underwrite at least part of the cost of construction.

Stamp prices to rise, must stay within inflation rate

Thu, 08 May 2008 09:59:40 -0500

Stamp prices go to 42 cents Monday. Here is something I did not know about stamps and the Post Office, from a PR pitch from the Lexington Institute and their economist, Charles Guy:

Thanks to reform legislation passed in 2006, USPS must keep future rate increases within the official rate of inflation. The legislation also requires the Postal Service to provide $50 billion to fund its pension obligations over the next decade.
"With stamp prices tied to the Consumer Price Index, the Postal Service can't just raise prices to meet its pension-funding requirements. That leaves it only two ways to cover costs: lowering the amount spent on labor or introducing new products that will increase revenue," explained Guy.

Monday's rate hike represents the fifth price increase since 2001. Stamp prices have gone up nearly 24 percent during that time.

Obviously pension costs aren't the only pressure the USPS is facing. Its transportation costs are rising much faster than the consumer price index, thanks to $3.70 gas.

Why have oil and gold prices diverged?

Wed, 07 May 2008 18:14:42 -0500

Oil hit $123 a barrel today. Gold fell to $869 an ounce. Since the Bear Stearns crisis on the Ides of March, oil has risen by about 12 percent. Gold has fallen by about 12 percent. Somewhat strange. On March 15, as the financial system collapsed, shorting gold and going long oil would not have been my first investment move.

Martin Feldstein: The recession began in February

Wed, 07 May 2008 16:46:51 -0500

From the Financial Times:

Monthly data since January indicate that economic activity and GDP have been declining since the start of this year.
Private sector payroll employment peaked last November and has fallen five months in a row, shedding more than 300,000 jobs. Industrial production was lower in March than in December and January. Real personal income net of taxes and transfers is also lower than in January. Real retail sales have fallen since the start of the year. Private housing starts are down 13 per cent in just the two months since January and 36 per cent from a year ago.

About those H-1B visas, your majesty

Wed, 07 May 2008 13:00:51 -0500

Government deficits and foreign laborers have always been political problems. Here is how the King of Naples addressed them 191 years ago, according to the Jan. 25, 1817, edition of The Scotsman newspaper of Edinburgh, which I stumbled across (don't ask) on the Web.

Today's best news

Wed, 07 May 2008 12:29:00 -0500

From AP:

Worker productivity rose by a better-than-expected amount in the first three months of the year while labor cost pressures eased.
The Labor Department reported Wednesday that productivity, the amount of output per hour of work, increased at an annual rate of 2.2 percent in the first quarter. That was slightly higher than the 1.5 percent increase which had been expected.

In a sign that inflation could be easing, labor cost pressures slowed a bit. Unit labor costs rose at an annual rate of 2.2 percent, down from a 2.8 percent rise in the final three months of last year.

While rising wages and benefits are good for employees, those increases can lead to higher inflation if businesses are forced forced to boost the cost of their products to cover the higher payroll costs.

However, if productivity is increasing it allows businesses to finance higher wages out of the increased output.