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

Social Security: Michael Tanner v. Mark Thoma

Mark Thoma links to a story from the Poughkeepsie Journal where apparently the Poughkeepsie crowd was more impressed by Paul Krugman than Michael Tanner – despite Tanner’s usual spin:

Tanner called for allowing workers to invest their share of the annual Social Security payroll tax surplus, which, he said, would put an end to the federal government borrowing and spending that money. “That surplus is being spent on everything the government does from rutabaga research to the war in Iraq,” Tanner said. “If Congress is going to spend like a drunken sailor, take the bottle away from them.” Krugman, however, said the surplus is needed to offset a decline in federal revenues augmented by the Bush tax cuts. “Those tax cuts, rather than the spending binge, are the primary cause of the (federal) deficit,” Krugman said.

In truth, the massive General Fund deficits are in small part due to Bush’s refusal to say no to any spending increase and in large part due to his willingness to cut current taxes. I want to say that Tanner has confused the General Fund issue with the Social Security issue. I want to say that the DeMint proposal does nothing to address the General Fund issue. But then Mark Thoma has already said it for me:

The whole idea that personal accounts are needed because of the inability of congress to act in their constituents best interest, because congress is morally bankrupt, always rings hollow to me. Don’t change the system, change congress. If congress is going to “spend like a drunken sailor” then throw them out of the House. If they thought you’d actually vote them out for this stuff, they’d behave differently, but they don’t think you will. Why is that?

As to Mark’s “why is that” – maybe it is because there are so many Bush supporters such as Tanner who are willing to lie about these issues. The good news is that the crowd in Poughkeepsie was not buying Mr. Tanner’s spin.

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Declare Victory and Come Home

Robin Wright and Ellen Knickmeyer entitled their article U.S. Lowers Sights On What Can Be Achieved in Iraq:

The Bush administration is significantly lowering expectations of what can be achieved in Iraq, recognizing that the United States will have to settle for far less progress than originally envisioned during the transition due to end in four months, according to U.S. officials in Washington and Baghdad. The United States no longer expects to see a model new democracy, a self-supporting oil industry or a society in which the majority of people are free from serious security or economic challenges, U.S. officials say. “What we expected to achieve was never realistic given the timetable or what unfolded on the ground,” said a senior official involved in policy since the 2003 invasion. “We are in a process of absorbing the factors of the situation we’re in and shedding the unreality that dominated at the beginning.”

As I read this article, I cannot help but think of the disaster we Americans created during the Vietnam War. Don’t get me wrong. While I marched in support of bringing our brave soldiers home during the early 1970’s, I’m sort of a Howard Dean type on the Iraq disaster. Before the stupid, stupid, stupid decision on March 19, 2003 – I was very opposed to invading Iraq as I listened to our generals who were trying to convince President Bush that invading Iraq was a gift to bin Laden.

Since the fall of the tyrant known as Saddam Hussein (who had zip to do with 9/11), Howard Dean has argued we must finish what we started – or else give a bigger gift to bin Laden. President Bush done in Crawford seemed to be saying he agreed with this sentiment. But Bush has two habits: (1) say one thing and then another; and (2) do whatever is politically expedient at the time regardless of the horrific long-term consequences to the interests of the American people.

“Declare Victory and Come Home” was one of my favorite blurbs some 35 years ago. Today, it would be an incredibly stupid thing to do – unless your only agenda was a Rovian GOP victory in 2006. Why do I sense that our worst nightmare is being designed right now in the White House?

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Able Danger: NRO Evidence from the Grave

The wingnuts have tried to pin the blame on 9/11 on Bill Clinton – with the latest phony tale being “Able Danger” ala Curt Weldon. Kevin Drum links to a few of these wingnuts over at the National Review’s The Corner. John Podhoretz claims he did not believe Weldon’s tale until he read this AP story. Odd – there is nothing in this story that confirms what Weldon is claiming.

Michael Ledeen apparently has more definitive evidence from James Jesus Angleton – former head of CIA counterintelligence. Odd – Angleton died in 1987. Next, we’ll see Lawrence Kudlow and John Tamny interviewing Adam Smith on the repeal of the law of scarcity.

Update: John Podhoretz is all over the map on this one. In one post, he writes:

Able Danger is the military-intelligence operation that evidently specifically identified the ringleader of the 9/11 attacks, Mohammed Atta, in 2000.

In this August 13 post, Podhoretz attacked the 9/11 commission for not taking Weldon’s allegation seriously. Next he apologized to the 9/11 commission and has decided maybe Weldon’s claim is not credible. Maybe he should have the August 12 memo from the 9/11 commission.

If there is any evidence to take Weldon’s allegation seriously, I have not seen it. But there is ample evidence to suggest we never should take Podhoretz seriously.

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Hey, Angry Bear…

…where have you been? Why aren’t you posting anymore?

Well, like Kash, I’m enjoying the summer while also trying to get a lot of work and reseach done. Also, I’ve been on about a six week pool bender, as I try to get ready for a big tournament that starts soon. And finally, it seems the muse has left me for a bit, though I expect she’ll return in the fall.

But as long as I’m posting, here’s some food for thought: Is Roberts really such a bad nominee? His record of arguing before the USSC, plus a bit of time as an appelate court judge, seem to make him well-qualified. And at least by Owen and Rogers-Brown standards, he’s not a giant nutbag. In fact, a few weeks ago I heard a 1997 Q&A he did with Georgetown law students (presumably in 1997, he had no thoughts of being nominated for a judgeship and so was relatively candid) and he seemed both intelligent and thoughtful, and his conservativeness didn’t show at all. Plus, there’s also this. And before you think I’ve lost my mind, note that I’m not claiming that Roberts is a great nominee in an absolute sense, but that for someone the current administration would nominate, he may not be so bad.

AB

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Tamny’s Triple Threat to Understanding Basic Economics

Brad DeLong reads John Tamny and somehow retains the clarity of thought to realize something Ben Bernanke picked up on that we also discussed:

Bernanke’s point is that in the second quarter households, the government, and investing businesses bought one-half percent more goods and services than U.S. producers made and U.S. businesses (net) imported. Thus inventories are now below levels that businesses think they need to run their operations efficiently. In the next several quarters, therefore, businesses are going to ramp up production in order to build their inventories back to a comfortable level. This is an important thing to notice.

Credit also goes to Mark Thoma for pointing out something Tamny and Lawrence Kudlow never understood – that the law of scarcity applies to macroeconomics as well in the form of a full employment constraint.

Since Brad and Mark have so ably corrected the two most egregious problems with Tamny’s most recent demonstration of his complete lack of understanding of economists, it’s left to this Angrybear to pick up on the remaining morsel:

Indeed, a major reason why our economy continues to outperform those of other countries has to do with the fact that just as our companies don’t limit themselves to the “available” U.S.-based labor force, they similarly are not hamstrung by the “output gap” beliefs held by Bernanke – beliefs that assume growth is limited to static estimates about our domestic production capacity. In truth, as commentators like Lou Dobbs continuously remind us, U.S. companies regularly source jobs and manufacturing outside the United States.

Even though I’ve already left this comment over at Mark’s blog, permit me to repeat myself. Tamny seems a little confused as to national income accounting. Let’s suppose IBM outsources tasks to an Indian subsidiary that hires Indian workers. The employment income received by those workers is not part of U.S. national income. And let’s suppose the subsidiary’s assets are financed by a combination of loans from Indian banks and equity issuance to Indian shareholders. Much of the operating profits would be recorded as Indian income. And yet Tamny thinks Indian generated income is part of U.S. GDP?

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Glassman on Price-Earnings Ratios


Brad DeLong catches James “DOW 36000” Glassman complaining about Paul Krugman being a stalker:

“By the way, none of the tumultuous events of the past six years has changed our minds about our thesis. In fact, despite terrorist attacks and a recession, price-to-earnings ratios have remained high, in historic terms, just as we predicted…” We all know that Dow 36000 predicted not that price-earnings ratios would remain at their ca. 1999 levels, but would triple over the next three to five years–i.e., by 2002-2004.

Were Hassett & Glassman claiming that the price-earnings ratio would triple so that it would be near 100 or were they trying to claim that earnings would triple with an unchanged price-earnings ratio?

Glassman wrote:

Krugman has consistently misrepresented (i.e., lied about) the basic argument of the book – the notion that investors are solving what economists have long called the “equity premium puzzle” – the mystery of why stocks return so much more than bonds even though both are roughly equal in risk over long periods of time. By the way, none of the tumultuous events of the past six years has changed our minds about our thesis. In fact, despite terrorist attacks and a recession, price-to-earnings ratios have remained high, in historic terms, just as we predicted. I’ve gotten used to the misrepresentations of “Dow 36,000.” It was, I admit, a flamboyant title for a book with a fairly conservative proposition, and perhaps Kevin and I invited criticism from folks who either read no more than the title and formed their own conclusions or who read the whole book but decided to willfully ignore what it said. (Kevin once jokingly suggested that we call the book, “A Treatise on the Declining Equity Risk Premium.” Not a bad idea, perhaps.)

I hope the following does not misrepresent what Glassman was trying to say. If earnings had tripled and the price-earnings ratio had stayed constant, then perhaps a prediction that the DOW would reach 36000 might make sense from a pure simple multiplication perspective. But one would have to make two questionable assumptions: (1) that earnings were expected to rise by 25% per year for five years; and (2) that one’s valuation model would somehow predict that the price-earnings ratio would somehow remain near 33 by the end of this five-year period.

In thinking about this issue, I consulted the webpage of Aswath Damodaran to find his excel file labeled “Implied Equity Risk Premiums – United States”. The purpose of Damodaran’s analysis of stock market data was to provide an estimate of the equity risk premium provided by the relationship between stock valuations, earnings, and expected earnings growth. While he does not provide the price-earnings ratio over time, the following diagram does – using his data. Earnings in 2004 were about 48% greater than they were in 1999 and yet the value of the S&P has declined by 17.5%. Simply put, the price to earnings ratio in 2004 is far below what it was in 1999.

Would one have expected this ratio to decline as much it did over the past five years? While interest rates on Federal bonds (one measure of the risk-free rate) have declined, Damodaran is suggesting that the overall cost of capital has not changed as his estimate of the risk premium has actually increased. Of course, his estimate depends in part on the assumed expected earnings growth rate. Notice that in 1999, market participants were already forecasting significant medium term earnings growth, which is one explanation of the high price to earnings ratio in 1999.

Now one might wish to suggest that Damodaran’s estimate of the risk premium is not quite right and that it has not increased since 1999. But this challenge would be based on the premise that his estimate of current expected earnings growth is too aggressive. In other words, one would have to suggest that the decline in expected earnings growth has been more than Damodaran suggests. But shouldn’t that also tell Glassman that his presumption of a constant price to earnings ratio is even more flawed?

Unless Glassman wants us to believe that the steady-state growth rate is that high, it’s not clear why he expected the price to earnings ratio to remain constant. But even if he did believe high earnings growth would persist, he has a wee bit of a problem. Rapid earnings growth would require investment in new tangible assets reducing the dividend payout ratio. But then I’m only rehashing Andrew Samwick’s contribution to that old Baker-DeLong-Krugman discussion. Alas, Glassman must not have paid very careful attention to the debate and its implications for stock valuations.

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Low Interest Rate: Savings, Monetary Policy, and the IS-LM Model

Via Mark Thoma comes an interesting discussion from The Economist as to why interest rates are low:

The most popular explanation is that there is a global glut of savings, which has driven yields down … If desired saving increases relative to investment (ie, there is excess saving), the IS curve shifts to the left to IS2. Interest rates fall (to r2), and so also will output (to Y2). This does not fit the current facts: last year the world economy grew at its fastest pace for almost three decades, and this year remains well above its long-term average growth rate.

The Economist dismisses this explanation, which represents an inward shift of the IS curve and argues that low interest rates are due to an expansionary monetary policy, which Mark notes is an outward shift of the LM curve. While recent output growth may be high for nations such as the U.S., it still seems plausible that many nations (such as the U.S.) are below full employment given the investment-led recession a few years ago.

In other words – could the lower interest rates be due to both an inward shift of the IS curve and an outward shift of the LM curve? For the U.S. economy, national savings have declined which by itself would tend to shift the IS curve outward – but we witnesses a significant decline in investment and exports during the 2001 to 2003 period. Therefore – the fact that U.S. national savings has declined is not inconsistent with the premise that the IS curve has shifted inward.

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Jobs, Jobs, Jobs

Jobs, Jobs, Jobs was the title of an op-ed by Robert Barro just before the 1992 election. While Barro was not about to endorse either Clinton or Perot, he opened his op-ed by blasting President George H. W. Bush for suggesting increasing Federal spending was necessary to create new jobs. It seems that the current President Bush is trying to rationalize the pork-filled highway bill.

When Barro criticized Bush41, the unemployment rate was over 7%. Currently, it is only 5%. Now I’m not saying we are at full employment, but I thought this Administration has been making this claim.

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Things an Economist Cannot Say in Crawford

Mark Thoma focuses on what Ben Bernanke has been saying recently, while Brad DeLong noted what he did not say:

He apparently failed to stress two important things:

Bush administration fiscal policy is way out of balance in the long run, and this is a very serious problem: if the government doesn’t balance its budget (in the sense of keeping real debt growing no faster than real GDP), then the market will balance the budget for it in ways that nobody will like.

Bush administration international economic policy is way out of balance as well: the administration should be doing much more than it is doing–i.e., nothing–to try to minimize the size of the financial crisis should foreigners suddenly decide to dump their dollar assets on a large scale.

Let me start by noting a couple of things that Bernanke briefly mentioned that the average Joe might understand. As I drove into the office today, I noticed that $30 barely put 11 gallons into my gasoline tank – so high energy prices are on the minds of most people. Alas, Bernanke was likely not permitted to say that the energy bill his boss just signed does nothing to change this reality but does add the government deficit. The average Joe likely also appreciates the mention of rising health care costs, but notice that Bernanke is not allowed to say the this Administration’s policies have likely increased the cost of providing health care. Now you might say that the Prescription Drug Benefit lowered a few people’s out of pocket expenses for pharmaceuticals but only by shifting this expense onto taxpayers in the future. But can we really expect an Administration economist to admit to the government budget balance problems?

Bernanke’s review of the U.S. economy touts the recent output growth and increases in employment. Non-farm payroll employment was 133.786 million as of July 2005, which compares to 132.015 million as of July 2000. In other words, employment growth has averaged less than 30 thousand new jobs per month over the past five years. It is true that employment has been growing at a fairly nice clip as of late but the employment to population ratio is still below 63%, whereas it was about 64% in 2000. Real GDP in the second quarter of 2005 was only 12.6% higher than it was in the second quarter of 2000. In other words, real GDP growth over the past five years has averaged only 2.4% per year.

I guess it would be asking too much for an economist to enjoy Texas barbeque at Bush’s Crawford ranch – and then say what he really thinks about the current economic situation or fiscal policy.

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The U.S. Economy, Fiscal Policy, and Coyote Ugly

The only things that I remember about the movie Coyote Ugly are: (1) it was an awful movie; (2) it featured some rather attractive young women; and (3) one of them loved to scream “at least it doesn’t suck”. Max Sawicky seems to say the same thing about the U.S. economy:

Whatever its merits, the elimination of the public debt that was in sight in 2000 has been dashed. But how bad off are we? I think the liberal case for hysteria weakens every day. It’s not because the economy is doing especially well. Now there are some good signs and bad ones. I would summarize by saying although the record for the past four years is awful, the current macro situation does not suck, relatively speaking. (Next week we’ll talk about an entirely different way of thinking about the labor market.) I would say the same about the deficit. There is no deficit or debt crisis.

Max has it about right as far as the state of the economy but the main theme of his post is whether we have a fiscal crisis. OK, fiscal policy does not suck to the point that markets are spooked that the Federal government is about to default on its obligations. And I agree with Max’s premise:

More important is Redistribution in Everything, including tomorrow’s tax system. Underlying the attack on economic equality is the most fundamental question — the ability of the working class to distance itself from subsistance levels of consumption.

So should we not worry about the continuing large Federal deficits? I liken the deficits to having an embezzler in a bank. Yes, the vaults will not be empty in the morning but to allow the embezzler to continue makes the owner of the bank poorer every day.

Then again, those of us that are 50 years or older are not the ones that will pay the price for Bush’s fiscal irresponsibility. It’s those young Republicans (and yes Democrats) that will foot the bill for the rich old crowd getting current tax breaks. And yet, Bush keeps selling his embezzlement schemes are reforms designed to help the youngsters. The next time you see a young Republican – just think “you can fool some of the people all of the time”.

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