Relevant and even prescient commentary on news, politics and the economy.


I’ll be travelling the next few days and so will have sporadic at best internet access. But I’m sure Kash and PGL (and Karsten on Fridays) will keep the content coming.


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Executive Compensation

The non-profit group United for a Fair Economy has just released the results of their annual survey of CEO compensation. The finding that surprised me the most was that CEOs of the 50 companies that have done the most offshore outsourcing have seen their pay rise considerably faster than the average CEO; their pay was up by almost 50% last year, versus an average increase of 9% for all CEOs.

Why? That’s an interesting question, worth some thought (especially for you IO types out there). I don’t have an immediate answer, though a couple of theories have crossed my mind. I haven’t looked in detail at the study yet, so there may be clues or other tidbits of interest in the report. You can access the report here.


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Pat Buchanan’s defense of Swifties hoist on its own petard

Bob Somerby has been having a field day with the “clownishly unprepared” cable reporters on the Swift Boat smears. This coverage of Hardball’s August 26 show had Pat Buchanan saying that the Swift Boats were not damaged on the day that rescued Jim Rassmann from the water. This is the day that Robert Lambert rescued Swiftie Lawrence Thurlow. It is true that John O’Neill made a similar claim, but that claim had already been refuted – a fact that Chris Matthews seemed not to be aware of.

But let’s give Matthews some credit for catching Buchanan in one of his many lies. From the transcript, we see the following:

MATTHEWS: So the main accuser of John Kerry was taken out of the water in an award-winning act of courage by this guy, Lambert.

BARRY: By his chief petty officer.

MATTHEWS: And his write-up, his citation said?

BARRY: He was under fire. They were under fire the whole time.

MATTHEWS: How do you—I mean, studying these things—we‘ve got now report of Jim Rassmann, who was fished out of the water by John Kerry. He said he was under enemy fire.

BUCHANAN: Chris, hold it. The captains of the three other boats, the people who rescued those guys, you‘ve got Pees, you‘ve got Chenoweth, and you‘ve got Thurlow. And you‘ve got O‘Dell on that side of the river. They say we did a good thing. We fired into the bank, but nobody was firing at us… But you have got to believe if Thurlow is pulling a guy off a boat, he knows whether he‘s under fire.

OK, let me get Pat’s argument straight here. If I’m standing over the edge of the boat pulling you out of the water, then I can’t be sure if I’m being fired upon but you can. I guess this is how he dismisses Lambert’s statement and accepts Thurlow’s. Fine – so Kerry was pulling Rassmann out of the water and maybe he’s as confused as Lambert if you believe Buchanan’s bizarre theory.

MATTHEWS: Well, why does Rassmann say—why does the guy whose life was saved by John Kerry. Because he was under water. He‘s coming up…and says he was under enemy fire? Why would he make it up?

BUCHANAN: He‘s not making it up. He‘s telling the truth.

Rassman is telling the truth and he should know whether he was being fired upon. But Kerry must be lying? Buchanan hung on his own petard!

OK, time to move away from these insults and talk about issues – right?

Confession: Original title had “hung” and not “hoist” so thanks to the alert reader who finally defined for me what petard meant in the first place. I always did find this an odd expression.

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A Problem with Pension Insurance and Certain Social Security Privatization Proposals

Via Daniel Drezner’s Headlines from the Future last Wednesday – Richard Ippolito’s How to Reduce the Cost of Federal Pension Insurance (Cato Policy Analysis No. 523).

Dan thinks the PBGC is an arcane policy and Ippolito’s discussion of why there is an increasing likelihood that taxpayers “will eventually be called upon to provide a bailout” is certainly worth reading. In light of some GOP Social Security proposals to let individuals choose the upside potential of stocks, while having the Social Security be the ultimate guarantor, the following from Ippolito’s analysis is on target:

First, because the PBGC stands as the ultimate guarantor of companies’ pension liabilities, plan sponsors have an incentive to invest their assets in equities rather than fixed-income securities of the same duration as the liabilities.

What causes this incentive? Later, Ippolito explains:

the incentives companies have to engage in moral hazard behavior… Firms hope that the average return on stock they hold will over time exceed bond returns, in which case they can get away with contributing less to their pension funds. On average, that reasoning is correct. But it adds considerable exposure to the PBGC.

In other words, some of the GOP Social Security privatization proposals, like the current structure of PBGC, would give private agents an option where they capture the upside potential of higher risk-taking with the government bearing the downside risk. Now if one is wondering if this sounds like the mistake we made with FSLIC insurance, an oldie but a goldie from the Cato Institute by Andrew Biggs agrees.

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Consumers Apparently Reading Angry Bear

Maybe people reading my bearish post from last week was the cause of this:

NEW YORK (CNN/Money) – Consumer confidence plunged in August, hurt by worries about jobs, a research group said Tuesday, in a report that fell far below forecasts by private economists. The Conference Board, a business research group, said its confidence index sank to 98.2 from a reading of 105.7 in July. Economists surveyed by forecast that the index would slip to only 103.4.

On the other hand, maybe this decline in consumer sentiment is simply due to the reality that the job market is just not doing very well right now. And that the Bush administration can’t provide any economic leadership to speak of.


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The Latest WTO Case

The WTO has just ruled in favor of the EU and against the US in a WTO dipute. The case involves the “Byrd Amendment,” otherwise known as the Continued Dumping and Subsidy Offset Act of 2000. This law directed the US government to distribute any tariff revenues received from anti-dumping duties to the most affected US firms. So for example, in the case of anti-dumping tariffs in steel, the tariff revenues are collected by the US government and then passed on to US steel firms.

The Byrd amendment was a triumph of good politics over bad economics, for several reasons. It gives an additional incentive for US firms to file or support anti-dumping cases, increasing the wasteful expenditure of resources attacking and defending firms’ pricing behavior. It helps to keep inefficient firms that should be driven out of business from being replaced by more efficient producers. Also, many WTO cases are typically settled without any tariffs being levied (for example because an offending country simply agrees to change its behavior), but the Byrd amendment discourages this and encourages a no-compromise resort to tariffs. See this CBO report for more details about the economic effects of the Byrd amendment.

The WTO ruled that this scheme was illegal back in January of 2003, because such redistribution of tariff revenues to domestic firms essentially amounts to an additional subsidy to domestic firms over and above WTO-sanctioned tariffs on foreign firms. The US was given 11 months to repeal the Byrd amendment, but the Congress took no action to eliminate what is actually a fairly popular provision in US trade laws. Today’s action by the WTO therefore legally permits the EU to retaliate by levying tariffs on US exports to the EU totalling 72% of the amount of money distributed to US firms by the Byrd amendment. Several other complainant countries joined the EU in this suit, and were also given permission to start levying tariffs on US goods.

What does this mean? Possibly nothing; the EU (and the other countries) may just use this “permission to tariff” as an added bit of leverage in their ongoing negotiations with the US. However, if they do start levying this tariff, then this means that the more tariffs that the US raises on EU goods, the more that the EU will levy on US goods. Sounds like the Byrd amendment is on its way to encouraging a good old fashioned trade war.


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Personal Income

The BEA released brand new figures on personal income and spending in July this morning. They show that income growth nearly stopped in July, after a slow June. This is consistent with the other signs that we have of a summer slowdown in the economy. The graph below shows the 12-month percent change in disposable personal income since January of 2002.

The BEA report notes that personal spending continued to grow at a fast pace in July, however, primarily driven by auto sales. Together the income and spending data conspired to drive US households’ savings rate to one of its lowest levels of all time, as shown on the graph above. Consumers simply can not increase spending further without increased income. And for that we need the job market to improve.


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Mr. Speaker

Here’s Speaker of the House Dennis Hastert, speaking on Fox News Sunday:

Speaker of the House Dennis Hastert – having already enraged some New Yorkers with his remarks about local office-holders’ “unseemly scramble” for federal money after 9/11 – yesterday opened a second front. On “Fox News Sunday,” the Illinois Republican insinuated that billionaire financier George Soros, who’s funding an independent media campaign to dislodge President Bush, is getting his big bucks from shady sources. “You know, I don’t know where George Soros gets his money. I don’t know where – if it comes overseas or from drug groups or where it comes from,” Hastert mused. An astonished Chris Wallace asked: “Excuse me?” The Speaker went on: “Well, that’s what he’s been for a number years – George Soros has been for legalizing drugs in this country. So, I mean, he’s got a lot of ancillary interests out there.” Wallace: “You think he may be getting money from the drug cartel?” Hastert: “I’m saying I don’t know where groups – could be people who support this type of thing. I’m saying we don’t know.”

Via Marshall.


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Angry Bear Reader in BusinessWeek

… though it’s surely for reasons other than reading and commenting here. In any case, Barry R. was interviewed by Business Week on the subject of markets and the election:

Q: Who do you think will win the election?

A: I’m a numbers geek at heart, so I watch four quantitative factors that have had a strong historical correlation with incumbent electoral victory, regardless of party. The first is job creation, second is Presidential approval rating, third is percentage saying the country is going in the right or wrong direction, and the fourth is the Dow Jones industrial average performance in the first half of the election year.

The polls are saying this is a very close race, but all four of the above data points suggest the incumbent is in deep trouble.


Q: So you think Kerry will win?

A: Here’s where things get tricky: Once all the quantitative data is in — and assuming there’s no “October Surprise” — I look for an analogy with another, historically similar period. This includes economic data — interest rates, taxes, unemployment, inflation — as well as geopolitics.

What makes the 2004 election such a challenge to forecast is that we have never seen a Presidential term with a burst market bubble, a recession, a major terrorist attack on U.S. soil, a big tax cut, and not one, but two, wars. So without an analogous comparable, making a prediction with a high degree of confidence becomes quite problematic — it’s just a crapshoot.

Read the rest. I think Barry’s basically right: every objective measure suggests that Bush will lose in November, yet it’s still — amazingly — not a remotely sure thing.


P.S. Next time, don’t forget to plug the blog!

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