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


guest post by coberly


I use rounded numbers below. The point will not change if someone wants to use the precise numbers.

It has been argued that by the time the Trust Fund runs out of money, Social Security can continue to pay benefits without a tax raise because even the reduced benefits would be more in “real value” than today’s: “Projected benefits will be 40% higher in real value; after a 25% cut caused by the projected shortfall, they would still be more in real value than today’s.” Let us see what this means.

Today the average income is 3000 dollars per month. . In 2040 average income is predicted to be about 4300 dollars per month… a 40% increase in real income.

Current Social Security tax is 6% (rounded remember?) for about 180 dollars per month. In 2040 this would be 6% of 4300, or about 260 dollars without a tax raise.

Current Social Security benefits are targeted to replace 40% of lifetime real average income. So an “average” worker today would expect to get 40% of 3000, or 1200 per month.

In 2040, if nothing changed, he would expect to get 40% of 4300, or 1720 per month. But something will have changed: that worker in 2040 is expected to live about 33% longer than the worker today… from fifteen years in retirement to twenty. In order to make his contribution to Social Security last for his whole expected retirement, the monthly benefit has to be cut by 25% to 1290.

Aha, they say, 1290 is more than 1200, so the retired worker in 2040 is “better off” than the retired worker today. So there is no need to raise the tax. And we all know that how well off a person is has nothing to do with the standards of the people around him.

But consider, if we were to raise the tax by 2% to about 8%, or a tax increase of about 86 dollars per month, we would also increase the money available for benefits by 33%, raising that 1290 back up to 1720 per month. So that is the trade off, give up 86 dollars a month when you are making 4300, or give up 430 per month when you are retired, and try to live on 1290 when you could have had 1720.

Now those were for the “average” worker. For a low income worker, consider:

Let our low income worker go from 7 dollars per hour today to about 10 dollars per hour in 2040, or say from 14000 per year to 20,000, or from 1200 per month to 1700 per month. Today that low income worker pays 72 dollars per month payroll tax. In 2040 they would pay 100 dollars per month with no change in the tax rate.

Now the expected retirement benefit for that low income worker would be about 600 plus .3 times (1200 – 600) or 780 dollars per month today, or about 930 dollars per month in 2040 (600 plus .3 times (1700 minus 600)). Notice this is not the 40% increase expected, because the payroll benefit rate is progressive and our poor person has gone from a 65% replacement rate to a 54% replacement rate. And since our lower income worker is expected to live about 33% longer than today, his benefit would have to be cut 25% per month in order to stretch to cover his life expectancy. So he could only get about 700 per month in benefits (75% of 930). This is in fact less in real value than the lower income worker gets today.

Okay, well, ahem, lets rejigger the benefit formula and pretend that the worker will get that 40% real increase and go from a 780 per month benefit today to a 1092 benefit before we adjust for life expectancy by cutting it 25% to 819 dollars per month… more in real value than the worker today. (I hope you have noticed the increase in real value of pensions is a function of the increase in real value of wages.)

But wait, he could have kept the 1092 just by paying an extra 2% tax. That would be an extra 34 dollars per month or about 8 dollars per week. So we see that the low income worker can save himself 8 dollars per week at the cost of 273 dollars per month when he is retired, lowering his retirement income from 1092 a month to 819 a month.

And we know there is no way that a lower income person could ever get another 8 dollars per week, by a raise, say, of 20 cents per hour, or an extra 8 dollars in food stamps.. or get by on 1666 per month when he was used to living on 1200.

So that, essentially, is the trade off. In order to avoid noticing that we have come around to agreeing with the bad guys that Social Security should be indexed to the CPI, we can hang on to our notions of diverting 300 dollars a month from the elderly poor and use the money to pay for universal health care… because, of course there is no other way to pay for universal health care.

Only we better not tell that working poor person that we are not going to even give him the chance to decide if he would rather give up 8 dollars a week today in order to have 273 dollars more per month when he is old and trying to live on 800 dollars a month. After all, we have our principles to think of.
by coberly

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Still KISSING income inequality

by divorced one like Bush

Let’s talk jazz: Still cashing the income inequality
berries, clams, dough, heavy sugar, jack, kale, mazuma, rubes, simoelan, voot. It’s all money.

I started this series to develop a simple model of income inequality so that I wouldn’t sound like I was chewing gum and people wouldn’t get all balled up on the heavy sugar.

The first one presented the model. 100 people, $1000 of total income. 1976: 8.7% of the dough to the One, all the rest of the jack to the Many. 2005: 23% of the sugar to the One, the rest of the voot to the Many. Basically, it showed why income inequality ain’t allowing the Many to by orchids. Also, maybe it’ll help you know one’s onions.

The second post addressed the concerns that the model was to simple. The sugar was heavier, the times were percolating I’m told. Except that the only real issue for my model was that the population would have to increase against the 1000 clams for the model to reflect the coffee made. There was less mazuma for everyone. Oh, and the total dollars to be made up with a tax cut to duplicate the take of 1976 is $1.4 trillion dollars.

In the end, none of this bodes well for the concern about multiplier effects and money velocity. Yet here we are all these plans being put into action to get people spending ’cause that’s the problem and the issue still gets no respect. We want to get more kale into the hands of the many, but we aren’t taking about anything related to increasing the share of income to the many (which would include the trade issue as Stormy has been hammering it).

HELLO! The reason people have no money is not because their taxes are too high, their health care is too high, their interest rates are too high; THEY NEVER HAD IT TO BEGIN WITH!

So, let’s see how much the 99 people of the Many would need in 2005 to have stayed even with their position in 1976.

First here is what the $1000 should be in 2005:
$3,429.93 using the Consumer Price Index
$2,811.66 using the GDP deflator
$3,891.74 using the value of consumer bundle
$3,296.90 using the unskilled wage
$5,013.86 using the nominal GDP per capita
$6,805.40 using the relative share of GDP
My model using actual income data came up with $6940 total, but based on per capita, it was only $5130.

Each of the 99 people had $9.22. In 2005 they would need the following:
$31.62 using the Consumer Price Index
$25.92 using the GDP deflator
$35.88 using the value of consumer bundle
$30.40 using the unskilled wage
$46.23 using the nominal GDP per capita
$62.75 using the relative share of GDP
My model, using per capita income resulted in $39.90.

Interesting No? The total personal income in the model comes out to be pretty close to the GDP per capita and relative share. So, the percolating of the economy did result in the same economic coffee in 2005 as in 1976. Unfortunately for the Many, the semoelan handled is less than the per capita and relative share of GDP. Can you say SCREWED?

My model also resulted in the number of $47.31 for each of the 99. That is the number to make up for the share of income lost to the One. It is essentially the number calculated based on nominal GDP per capita. Or, the unscewed number.

But, these numbers just show that using the percentage split, the One stayed even with the percolating economy and the Many dropped down to something less. It does not show the loss of purchasing. For that, we need to reverse calculate.
For the Many, they have $39.90 each in 2005. In 1976 it looks like this:
$11.63 using the Consumer Price Index
$14.19 using the GDP deflator
$10.25 using the value of consumer bundle
$12.10 using the unskilled wage
$7.96 using the nominal GDP per capita
$5.86 using the relative share of GDP

I think what we are seeing here by looking forward and then backward, is that the Many are earning more for their labor (wage went up), but they are not earning wages comparable to the contribution made to the rising GDP by their laboring. Who knew, Slave Wages is a real wage!

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Budget 2010 is telling?


NYT reports on the thinking of the Obama team on our budget deficit concerns.

The budget will provide the first clues to how Mr. Obama will reassert fiscal discipline after signing into law a $787 billion economic recovery plan. As difficult as cutting the deficits will be, much of the reduction by the end of his term will simply reflect an end to spending from the two-year stimulus package and — assuming the economy recovers — higher tax revenues and lower expenditures for safety-net programs like unemployment compensation.

Mr. Obama will propose cutting a variety of programs, including the Medicare Advantage subsidies for insurance companies that cover seniors who can otherwise acquire health coverage directly from the government. Another target is spending on private contractors, especially for defense, which spiked during the Bush administration. And he will scale back some promises, including his proposal to double money for foreign aid.

The budget on Thursday will come amid a week of reminders of the nation’s fiscal plight. On Monday Mr. Obama will hold a “fiscal responsibility summit” at the White House with members of Congress from both parties, economists, union leaders and business representatives. On Tuesday he will make a televised address to a joint session of Congress — the equivalent of a State of the Union speech for a new president — that advisers said would focus on the economy. Meanwhile, Congress will debate $410 billion in overdue appropriations for this fiscal year.

Yet Mr. Obama will inflate his challenge by forsaking several gimmicks that President Bush used to make deficits look smaller. He will include war costs in the budget; Mr. Bush did not, and instead sought supplemental money from Congress each year. Mr. Obama also will not count savings from laws that establish lower Medicare payments for doctors and expand the alternative minimum tax to hit more taxpayers — both of which Mr. Bush and Congress routinely took credit for, while knowing they would later waive the laws to raise doctors’ payments and limit the reach of the tax.

Full details of Mr. Obama’s budget for the 2010 fiscal year will be released in April. The outline on Thursday will make clear that he intends to push ahead on promises to contain health care costs and expand insurance coverage, and to move toward an energy cap-and-trade system for controlling emissions of gases blamed for climate change.

(italics mine)

Getting the yearly deficit back to $533 billion for the year 2013 is difficult to imagine as possible.

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Paul Volcker Feb.20


No fat tail. Nor black swan. Nor once every 100 year occurrence.

(Hat tip reader CMike) Forbes has Volcker’s complete remarks below the fold, lifted directly from Forbes and brought here:

Paul Volcker: It’s clear to everyone that we are in the midst of a massive economic and financial crisis. It’s big in the United States, but it is characterized by being very international, and we’re going to hear the reverberations about this for a long time. I do not agree with those–this is part of the 20% I don’t agree with–that somehow [believe] we may get through this crisis, it will be forgotten about and revert to the same financial system we had before the crisis. I don’t think that’s going to happen–too many weaknesses and flaws have been exposed.

I do think it’s appropriate, I’ve never quite known what the center of capitalism and society was about, but I now realize there are challenges to capitalism and society, and I want it known that I think capitalism will survive this crisis, in most respects.

This isn’t any ordinary crisis. One of the things that kind of shocked me–“shocked” me is the right word–is the extent to which it’s become international. We could sit here, we sat here a year ago, I would have made a few comments that this is a pretty bad crisis, maybe the mother of all financial crises in the U.S., but the rest of the world is doing pretty well, and so long as the rest of the world holds up, for various reasons, including great growth of American exports, maybe we’ll get through this without too much damage.

Well that may have been correct if the rest of the world held up. The rest of the world has not held up, as you well know.

Amazing to look at some of the figures. Industrial production in most countries is going down faster than in the United States–and it’s been going down very fast in the United States in recent months, down 10% or more. The world in the last six months–I don’t remember any time, maybe even the Great Depression, when things went down quite so fast, quite so uniformly around the world. Obviously [we’re at] a level way above where we were in the 1930s.

We’ve reached the point where one aspect of capitalism, which I will call relatively unbridled financial markets operating on a global basis, has broken down. And it has broken down in [such a] way that I don’t think it can be replicated in the form that it took earlier. It’s broken down right in the face of almost all policy and intellectual analysis.

Now I hear and you hear that this is, well, kind of dismissed: This is a terrible thing that happens every once, every hundred years–or it’s a Black Swan or Fat Tail. For reasons maybe I don’t want to go into, the description of fat tail reflects the kind of analysis that isn’t appropriate. They think that financial markets follow natural distributions, and, I won’t go into this forever, but one remark I will leave with you is the financial world follows a normal distribution pattern. If you think that you’re a financial engineer, you’re not a very good financial analyst.

It’s not like earlier crises. Earlier crises were all invented by the Federal Reserve. The Federal Reserve tightened money, the economy went down, and they ease money [and] the economy goes up. I don’t know– the implication is the Federal Reserve is some kind of serial killer. I mean it’s a psychopath. You would have thought business cycles never existed before there was a Federal Reserve or a central bank.

Let me just say, for the record: Business cycles reflect imbalances in the economy, and as time passes it takes different forms. It used to be inventory excesses, equipment excesses, sometimes housing excesses, sometimes all of them. Money got tight because of the imbalances of the economy and implications of that for the future, and if you didn’t do something to deal with it, you’d have a worse recession.

That brings me back to the present. Nobody did anything about imbalances. The U.S. spent too much–5% or more than we were producing. China exported too much; they sent the money back here. It was all kind of nice–we got cheap goods, kept the inflation rate down, production up–but it was [an] unsustainable phenomenon [and] nobody wanted to do anything about it.

You could even rationalize it. You could talk about monetary policy, or, likely, you talk about fiscal policy. We were over-spending all this time, what about exchange-rate policy, what about Chinese policy? They’re all kinds of contributors to the problem.

We poured out so many financial engineers that succeeded in obscuring the weakness in the credits that the crisis went on for some years longer than it had to go on. You know the circumstances.

This is one recession that cannot–a very serious one that cannot–be traced to tight money. The ready availability of money, low interest rates, the imbalance, confidence in price stability, confidence in a strong dollar–all that contributed to the excesses and the imbalances to set the stage for these unfortunate events.

Now what are we going to do about it in terms of financial reform? As I suggested, I think the very rapid and sweeping changes we’ve had in financial markets in recent decades helped prolong the imbalances in the real economy but in a very overall way. In the past 20 to 30 years, banks have gone from the major suppliers of credit at the heart of the financial system to just another supplier of credit, maybe accounting for a quarter to 20% instead of 60% or 70%.

The open market, however you define that, with a lot of securitization, supplied the rest, and this really went forward with enormous rapidity. The whole of subprime mortgages–what do I know, I’m just sitting there reading the newspaper–but subprime mortgages went from virtually nothing to close to a trillion and a half dollars in the space of maybe two and a half years. What an enormously rapid change–just reflecting the change in general developments in the market toward reliance on open market securitization and all the rest.

Statistically you can measure that. I think there’s also a behavioral personality kind of aspect which should not be overlooked. We went from banks to the open market, and in the process we went from a financial system that was largely, not entirely, devoted to what might be called relationships.

It was important to a bank to make a loan to a customer, and he had other interests in that customer, other than lending money typically. He may lend money because he had other interests. You went to a very impersonal kind of market where there was no real customer relationship–everything was a deal. It was a deal maybe several times a day in a foreign-exchange market, or a deal in [mergers and acquisitions] or some other bigger-sized transaction, but they were arms-length transactions without any continuing customer interest. Maybe a bit, but not too much. I think that has added to the problems in the market that we have.

In this environment, regulation and supervision didn’t quite wither away, but it’s fair to say they lost support and lost potency, partly as a matter of ideology but partly because the banks that were the most heavily regulated lost relative importance in the market so there was overall less regulation. Now we have the crisis, we have the breakdown; a lot of rethinking is in order.

The first priority is to restore some semblance of stability and order in the market and restore the flow of credit. I’m not going to talk about that. I haven’t got–if I had the answer I might talk about it, but I’m not sure I have it, so I think we’ll neglect that for the moment.

And then we’ll be faced–if we get through this crisis–with how we undo the type of emergency actions that have been taken in a way that doesn’t leave us with another problem. In particular one that people worry about is the resurgence of inflation, but there are other aftermaths that we have to worry about. What I want to talk about is the kind of financial system that we want to have in the future when we get through this.

I guess I’m in the “George Soros School” of saying I’m not so sure how fast we want to go in instituting actual changes until we have a better sense of where we want to go and how this crisis is going to work its way out. But I don’t think that’s inconsistent with saying [that] the more international agreement we have on where we want to get to, the better off we’ll be.

Now let me just lay out one possible vision for the future, which by some odd coincidence will be what was incorporated in the G30 report recently that I had something to do with. I will just describe what I take as the philosophy behind that report, because I certainly share it. I’ll talk about the vision rather than the detail.

The basic point of departure, the foundation of the approach taken in that report, is that inevitably the banking system in general is going to be protected. That is nothing new, but there will be some very sizable, systemically important banking institutions that will certainly be protected by all governments in all circumstances, and with that must go a certain extra attention to the supervision of those institutions.

All banks must be supervised and regulated, but those of systemic significance around the world, which, almost inevitably, not every case but most, those institutions are international, they’re not just national, will be subject to a particular layer of supervision.

In this vision, those banks will be the heart of the system. I think they become more important in the provision of credit rather than less in the future. It’s the reverse of what’s happened recently. I think of those as relationship-oriented, service-oriented institutions. Their function is to deal with individuals, businesses, nonprofits, universities, whatever provides certain necessary services. They provide a depository on the one side for savings, on the one side, of course, they provide stability for your funds, and they provide credit on the other side, and they provide a lot of ancillary services. That can be done without enormous risk, but there are risks.

I at least would prohibit those institutions from sponsoring hedge funds and equity funds and from engaging in a great volume of proprietary trading–those things that their management has loved to do in recent years. And it got them in trouble.

Because they involve great risk, those managements got enormous reward for these innovative activities. All those innovative activities over time produce losses rather than gains, but the incentives were not well-designed, so let’s have some stable, strong banking institutions responsible for the backbone of the infrastructure, the payment system, clearing arrangements, [those kinds] of things. Let’s prohibit them from really high-risk activity.

The old investment banks, when they existed as free-standing institutions, could engage in no activity that didn’t present a conflict with other customer interests. That is a very difficult thing to manage.

Now we do worry about innovation and flexibility. Maybe innovation is a little overrated. I find little correlation between the sophistication of the banking system and the rate of the productivity growth. I think the whole [gross national product] was inflated because bankers got paid so much: You measured GNP and value added by their incomes, and while their incomes went up the more the GNP went up. But it was not exactly something that penetrated down to the ordinary person.

When it comes to innovation I’ll raise a question with you: What is the most important financial innovation in the past 20 or 30 years for the average person? I think it’s the automatic teller machine. It’s not any high-class financial operation, it’s a technical improvement, which sure has changed banking. I have more connection with my automatic teller machine that any other part of the financial market.

So you have a two-tier financial system, and then you have a series of issues that I would put in a general label of market infrastructure–and this includes some really difficult issues: Accounting is a matter of great controversy. The credit rating agencies–how you deal with those, and is there any substitute? Clearing and settlement arrangements. A particularly important one now is credit-default swaps. And there are other elements of infrastructure that need attention.

If there is ever an opportunity to get a more uniform approach internationally on some critical issues or regulation and supervision, it is now, in the aftermath of this crisis. And I don’t think the crisis will be forgotten quickly. It is just so overwhelmingly apparent, in a world [where] the large international financial systems are themselves international–and that the scope of international regulation and national assistance–when they go bad just demands closer international coordination. And I think we’ll get it.

There is a lot of progress towards international consistency. It’s now, in fact, under a degree of attack because of the complaints about mark-to-market accounting. I think we have to get through that, and there’s legitimate questions there, but the overwhelming need is not to have different accounting systems in Europe and the U.S. and Japan and wherever. And I think we can see our way through that.

It’s only touched upon lightly in the G30 report, but it is evident that in the U.S. the central bank is taking on a role that is way beyond any traditional conception of what a central bank should be doing.

We have to stop quoting Walter Badget on what a central bank does–so far from the reality of what the central bank is doing today that it raises a question about the very name central bank. I was visiting with a Chinese friend at breakfast this morning–I said in a way you know the Chinese have moved from state-control to credit to private banks. We’re moving from private banks to state control of credit, where we meet in the middle someplace.

The explanation for this expansion of the central bank is obvious: Faced with crisis in concerns in the market and the economy, they felt they had to do what they could do (not just central bank but the Treasury as well, to take action to stop deterioration and promote stability). But … is that a permanent change in the role of the central banks in the future? And if not, how do we roll back the calendar and deal with the expectation that whatever we say, if we did it once and it was successful, that we’ll do it again?

I don’t know fully the answer to that question, but I think it’s something we ought to worry about. Which in turn raises the question that many of us think is rather basic in terms of future economic instability, and that is about the independence of the central bank. Because it’s a little hard to make the usual grounds for central bank independence when they are actively intervening so heavily in particular sectors.

As for the outcome of this crisis, we will come out with a feeling that maybe a little inflation isn’t so bad, I think a little inflation is bad, because I think a little inflation leads to more inflation, and I don’t think there is any argument for a little inflation solving our problems in any realistic sense, so I don’t want to lose what I think has been an accomplishment of the last 30 years of the central importance of price stability and the central bank role–the role of an independent central bank in maintaining their price stability. So I just would leave you with that thought and the hope and expectation that that kind of question will be front and center in thinking as we do redesign the financial system as we should.

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More on Industrial Production

By Spencer,

Earlier I showed how the sharp drop in industrial production compared to other cycles, but did not point out that the factory operating rate moved down 1.7 percentage points, to 68.0 percent, the lowest rate of utilization since this series began in 1948.

Normally, capacity utilization leads inflation and this implies we
should see more disinflation or even deflation.

One other thing you can do with the industrial production data is combine it with the hours worked data released in the BLS employment report to generate a rough estimate of monthly manufacturing productivity. This calculation implies that the sharp drop in manufacturing productivity late last year is continuing and that the originally reported drop in fourth quarter manufacturing productivity should be revised down.

The falling productivity is reflected in the Conference Board’s estimate of Manufacturing Unit Labor Cost included in the Lagging Index. It shows that manufacturing unit labor cost is rising at almost a 10% rate while the PPI for Finished Goods is 1% below its year ago level.

This combination of rising unit labor cost and falling PPI generates the largest spread on record between these two variables. But this spread is the dominant factor driving manufacturing profit margins and together with falling output implies that manufacturing profits are under severe downward pressure. So it is not just financial write offs that are causing estimates of S&P 500 earnings to be revised down sharply and firms are implementing widespread layoffs to bring costs and prices back into line and restore profit margins.

This severe pressure on profits implies that the economic bottom is not on the immediate horizon.

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Gap Between Consumer & Financial Service Executive Perceptions


The item below was sent to me to consider. I was unsure what to do about it, as it is done by a banking PR firm. However, as a springboard to conversation, it can be useful. The post itself can start a conversation, and I will save my thoughts for the conversation.

Gap Between Consumer & Financial Service Executive Perceptions Threatens Industry’s Future

New Survey Shows Financial Service Industry is More Optimistic About the Economy while Consumers are Overwhelming Pessimistic

New York – February 10, 2009 – Most top financial service executives are worried about their companies’ reputations, but are failing to make changes consumers want to increase public trust in the organizations. The first study to compare attitudes of consumers and financial service employees, conducted by the global communications company Cohn & Wolfe, shows a big gap between consumer expectations and the behaviors of financial service companies.

The study of more than 1,000 U.S. consumers and more than 200 financial service employees showed dramatic disagreement between the two groups about the economic forecast, the services these companies should of fer to help their customers and what financial service companies should do to restore consumer trust.

When asked to characterize their financial outlook for 2009, 64.2 percent of consumers said they were pessimistic. Conversely, a majority of financial service employees are optimistic about the economy. Meanwhile, only 20 percent of financial service respondents said their companies have made significant business strategy changes to reflect the economic downturn. And almost 60 percent of financial service employees said their companies have done nothing formal or systematic to explain their strategic approach during the recession.

“The financial industry is in crisis and consumers don’t understand why it doesn’t behave like it’s under the same pressures as the rest of the country,” said Matt Wolfrom, head of Cohn & Wolfe’s Corporate Practice. “Financial service companies must change the way they act and communicate during these challenging=2 0times of crisis, to explain to their customers what these businesses are doing to protect their interests. Crisis situations offer enormous opportunities to strengthen stakeholder relationships, but they require companies to communicate much more aggressively and to create communications that reflect conditions confronting the audiences.”

For example, nearly 65 percent of consumers said they have not been contacted by their financial services providers to offer help in surviving the recession, though most financial service employees indicate their companies have attempted to communicate – largely through traditional channels, such as newsletters.

One striking disparity identified by the survey was the difference between consumers and industry employees on what must be done to restore trust in financial service companies:

• Consumers say companies must stop excessive bonuses (51.9 percent), pass along savings from lowered interest rates (44.72 percent), increase transparency (29.9 percent) and abolish charges (20.2 percent).

• Financial service executives say they must improve customer service (64.4 percent), increase transparency (41.6 percent), provide better access to financial planning (21.8 percent) and make senior management more visible (20.8 percent).

And the study shows that consumers (29.9 percent) are nearly twice as likely as financial service employees (16.3 percent) to believe that increased regulation will be the significant driver of change.

The striking divergence between financial service industry employees and consumers fuels a growing distrust of these companies:

• Four out of ten consumers (39.2 percent) say they do not believe their bank is looking out for their best interest, and only 6 in 10 consumers say banks are the most trustworthy financial service.

• Less than two in 10 consumers (18.4 percent) say financial advisors are most trustworthy.

• Approximately one in 10 consumers (11 percent) say insurers are most trustworthy.

“In crisis situations like this, over-communication to consumers and key stakeholders is critical,” said Wolfrom. “A successful approach starts with executives and flows through the workforce directly to consumers. Communication tools take many forms, including digital outreach and grassroots campaigns. In these trying times the industry has an opportunity to strengthen and personalize relationships that will translate into renewed trust and ultimately more business.”

Currently, relationships are being frayed as consumer trust in financial service companies erodes. Four in 10 consumers (41.1 percent) reported their trust in financial institutions had declined in the last 18 months. And when asked which words best describe their perceptions of their financial institution, consumers said “greedy” (33.2 percent), “impersonal’ (30.7 percent) and “opportunistic” (26.6 percent). Positive descriptions like “ethical” (6.5 percent), “transparent0 (3.8 percent) and “sympathetic” (3.4 percent) were much less frequently cited.

Research was conducted by Lightspeed, using an online methodology. 1204 respondents were polled: 1002 consumers and 202 from the financial sector. The sample is nationally representative of the United States. Cohn and Wolf is an established player…Rdan

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Trade and Jobs Are Not Simple

By Stormy

Trade is never simple; never straightforward. Countries use whatever means they can to keep critical commodities for themselves and they use whatever means they can to build export platforms to reap the rewards of trade.

Trade surpluses are always a measure of national wealth, despite how that wealth is shared, or not shared, among the citizens of a country. For the purposes of this post, I want to examine two taxation devices that are used to build trade surpluses. Rarely do you ever hear an economist discuss the details of the latest round of trade talks. Knee-jerk responses demand that they approve whatever agreement is on the table–all in the name of “free” trade, of course.

But with the present Depression moving like a hungry wolf around the planet, the U.S. must address the issue of jobs. No longer can it be content merely priming aggregate demand; anyone with half a brain has to understand that supply is the other half of that equation. But even half-brains have been in short supply these last few years. Trade has been on the back burner; monetary policy has been everything. No one gave a thought to job creation as long as easy credit kept the party going.

If this Long or Second Great Depression is going to be with us for a few years, as many now believe, then we must give some thought not only to the engine of our recovery but also to the shape of a new world order that is certain to arise.

Export taxes and Export Tax Rebates

Export taxes: Some countries employ them to reduce exports of key commodities. For example, China raised export taxes from 34% to 135% on urea, an important fertilizer; thus, driving the world price of fertilizer up in 2007. Russia has export taxes on petroleum; Malaysia on palm oil. The U.S. does not use export taxes; they are unconstitutional, apparently.

Export tax rebates: In a VAT tax system, export tax rebates are used to increase trade in given commodities or items. Increasing the rebate makes the good cheaper to export.

What few U.S. economists will acknowledge:

“China’s foreign trade imbalance is driven by brisk global demand for China-made products and the ongoing migration of industries from developed to developing nations,” said Mei Xinyu of the Trade Research Institute of the Ministry of Commerce.
In the 1980s and 1990s, attracted by cheap labor costs, multinational companies began shifting their manufacturing to China, opening factories in East China to process materials and export the processed products.
“The fact is most exports by these multinationals have been included in China’s trade figures, and China’s trade surplus mainly comes from processing trade. A high proportion of export profits in fact stay in the pockets of multinationals,” said Mei Xinyu.

(The entire above article is well-worth reading.)

Between export taxes and export tax rebates on VAT taxation, China can easily fine-tune what products it wishes to export and what products it wants for home use. Export taxes can easily create world shortages of a given commodity; thus driving prices higher. Export tax rebates can easily act as subsidies, creating an unfair advantage for corporations within a country using them.

WTO position

How does the WTO treat the issue of export taxes? They are not prohibited per se–many countries use them, with the exception of the U.S.
How does the WTO treat the issue of export tax rebates? In 2006,

the WTO Secretariat, in the Trade Policy Review for China, directly criticized China’s use of export tax rebates as an industrial policy tool, arguing that this was an implicit subsidy.

Despite the Secretariat’s protestations that export tax rebates are an implicit export subsidy, the problem remains unresolved–and rarely do esteem American economist ever raise the issue.

Export tax rebates remain an essential part of China’s 2008-2009 mercantile strategy:

BEIJING, Nov 12 (Reuters) – China moved on Wednesday to boost its export sector by increasing tax refunds applicable to more than 3,700 items as from next month.

The announcement, carried by the official Xinhua news agency, did not say what sectors or product lines would benefit.

The decision was taken by the State Council, China’s cabinet.

China announced an increase in rebates of value added tax for more than a quarter of tariff lines on Oct. 21.

The government had already increased export tax breaks for the garment sector in July.

U.S. Confused Response

Right now the U.S. is struggling with the issue of trade.

President Obama’s “Made in America” backfired.

Robert Reich correctly observes that it is a question of American jobs not the nationality of the company creating those jobs. For the moment, Robert has ridden to the rescue.

But, alas, Robert’s neat verbal twist does not begin to unravel the issue of jobs, especially those jobs that produce goods and services that are indeed tradable. The reason is simple: U.S. mainstream economists simply are not interested in trade details.

The U.S. is constitutionally prohibited from export taxation. What if we had a shortage of a key material? Would we trade that material away if another country could pay a better price? What tax mechanism does the U.S. have to improve its own trade advantage? How do we compete with cheap labor buoyed by export tax rebates? How can it support its own industries, industries that are here on its own shores, not those that have already fled to Asia and elsewhere?

Let’s take Robert’s observation one step further. Granted it is a question of American jobs, not the nationality of the company. Now consider: Why would any company come to the U.S. to create American jobs when choicer locations lie elsewhere? What inducements are we going to offer? Tax advantages? Lower wages? Are we going to argue that Americans must now compete with impoverished Asians for jobs? I think so. We can build all the infrastructure we want; Japan did that in its lost decade. Finally, we must be making stuff that we want to buy. Robert’s piece sounds nice, but it lacks details.

Beginnings of an Appropriate Response

Already, each country is struggling with the issue of jobs–and when they talk of jobs, they mean trade. The question is: How do we create those jobs while still bringing impoverished nations into the fold? How do we make globalization work for everyone?

I suggest that each country has the right to exercise financial and tax oversight of its corporations, corporations it nourished, even if those companies fled elsewhere.

Being a command economy and owning its important corporations, China has a distinct advantage. For the U.S. the problem is more difficult.

I am not suggesting ownership–although I do think a national bank is in order.

It goes without saying that any help a corporation gets from the U.S. government must be tied to creating jobs here in the states. I would extend a form of that principal to American companies using cheap labor or subsidies elsewhere to re-export goods or services back to the U.S. We may not be able to retrieve the jobs; we can retrieve some of the wealth they are creating for themselves while at the same time rectifying some of the global imbalances that have grown direfully dangerous.

Place a tax on goods or services our companies re-export to the states. Doing so does not in any way disadvantage real foreign competition, competition from firms of other countries, China included. All we are doing is penalizing flight elsewhere if that flight is used for re-export. We are, in effect, asserting that our corporations have U.S. responsibilities. While that responsibility may be a startling assertion to some, I find it quite a reasonable position.

I hear already the cries of “Impossible! Too hard to administer! Protectionist!” Hard to administer? I think not. Protectionist? Not really. The tax can be adjusted so that it does not entirely disadvantage cheaper locales. In short, as impoverished countries climb the consumer ladder, such taxation can be slowly relaxed. The world needs a way to grow in a balanced way, not this misshapen monstrosity that stands in the way of any reasonable development.

If my approach seems too bizarre, too other-worldy, then I put it to all those clamoring for American jobs: How are you going to create lasting jobs? What industries are you going to create that cannot be done cheaper elsewhere?

How are you going to keep them “down on the farm” when they love to sing Beijing?

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Why I Can’t Read Ta-Nehisi Coates

In the past two minutes of checking out Coates’s latest—well worth reading, otherwise—there have been banner and frame adverts for:

  1. The Atlantic Business, edited by Megan McArdle, “Decoding the Mysteries of Today’s Economic Order” or McMegan Explains Modern Business Models (a.k.a. “Built to Flip”) All to You and
  2. “Need Advice? Ask Jeffrey Goldberg

Sorry, but from now on, I’ll depend on Brad DeLong to do the heavy lifting.

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Inflate it Away ?

Robert Waldmann

Michael Kinsley suspects that the US government might decide to inflate its debt away.

“Just three or four years of currency erosion at, say, 10 percent a year would slice the real value of our debt — public and private, U.S. bonds and jumbo mortgages — in half.”

Notice how “log(2)/log(1.1) = 7.25 becomes “three or four”. To cut real debt in half the price level has to double not increase by 50%. OK maybe he meant the real value would be multiplied by 0.9 in a year (not the price level multiplied by 1.1) then the calculation is “log(0.5)/log(0.9) = 6.58 years.

Kevin Drum wonders if this is possible as expected inflation should be incorporated in interest rates.

It depends on the date of maturity of outstanding debt.

An increase in interest rates is a decline in the price of bonds, including those that have already been sold. The rest of the world would lose massively if the US inflated. The point is that the price of outstanding bonds is a problem for their owners not for the treasury. The amount that can be effectively defaulted via inflation depends on the maturity of the outstanding debt. If all US debt were 1 month t-bills only inflation over one month would necessarily be a problem for holders of current debt. Kinsley’s calculation implicitly assumes that no debt will mature in the next “three or four” or 7.25 years. That is very far from true.

Some details after the jump.
update: absolutely humiliating innumeracy after the jump corrected thanks to anonymous in comments.

As of January the US Treasury owed $ 1,792,889 million on T-bills which, when issued mature within a year. There are also $ 516,209 million in inflation protected securities. The only way to default on them is to default openly or to fiddle with the price indices (nella gloriosa tradizione italiana non attuale). There are also $ 2,825,174 million in Treasury notes (mature 2 to 10 years after issue) some of which are nearing maturity. The holders of Treasury bonds (10 or 30 years) are trusting the treasury with a mere $ 591,890 million.

There is much detail on outstanding by maturity date. For those willing to do some calculations, the data are also available in excel format.

My calculations (don’t trust them) are that there are 591,833 million in notes payable in 5 or more years sum(r199..r218) plus $ 594,641 million of Treasury bonds which won’t mature within 5 years (means I don’t understand how they code as they seem to rename bonds payable in less than 5 years notes or something). So little more than a mere trillion vulnerable to Kinsley’s scheme.

However 10% inflation is for pikers. We collectively owe $ 2,145,201 thousands maturing in more than 2 years. Now that is tempting.

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