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


By Spencer.

I recently ran across an interesting example of how looking at an economic series from different perspectives creates very different conclusions.

The original demand collapse at the start of this recession created an inventory problem across virtually all sectors of the goods economy. We now seen to be in a position where the inventory problem has quit getting worse and one of the big questions in the economic outlook is how long it will take various industries to resolve their inventory problems.

One example of the inventory problem is the information technology (IT) industries like computers, communication equipment and semiconductors. If you look at the first chart it gives the impression that the problem is not all that severe and that the I/S ratio appears to be peaking.

If you look at other data you find that for example the semiconductor industry is operating at 54.7% of capacity, a new all time low at compared to the previous low of 61.9% in May, 1975.
So obviously IT industries are slashing production and imports to deal with their inventory problems.

The apparent peaking of the I/S ratio should be saying that the worse is now behind us and
that industries like semiconductors will soon be able to expand output. Much of the expectations that growth will resume in the second half is based on this type of analysis.

But, if you look at the I/S ratio in a little different perspective it tells a very different story.
The second chart shows that the I/S ratio is over 200% of its long term trend. This suggest that the inventory problem is much more severe than the first chart implies and that it will be some time before IT output will bottom. This calls into question the second half recovery scenario
and the recent rally in IT stocks.

OK, there are a couple of questions about the second chart. The first is a question of distortions from using percent ratios. Assume that inventories are 5 points above shipments. If inventories are 105 and shipments are 100 that generates a ratio of 105%. This does not seem bad. But if inventories are 15 and shipments are 10 — the same 5 point difference — this generates a ratio
of 150%. So the point that the i/s ratio is much lower now than it was 20 years ago causes percent ratios like the second chart to show much more severe problems.

Second is the issue of whether or not the old trend line is still valid. If you look at the I/S ratio one can make the argument that the old trend changed around 2000 and that the new norm is the light solid line on the chart below rather than the dotted line. If this is the case than the percent ratio is about where it was in the 2000 recession — still bad, but not nearly as severe as the chart implies.

I just though I would present this case as an interesting diversion from our usual political discussion and issues.

But even with the questions about the desired I/S ratio, this analysis still calls into question one of the major basic premises behind the assumption that the economy will snap back in the second half.

Hopefully this will generate some interesting discussions.

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Square footage per capita per house is a useful metric?


Square footage or even volume Per Capita/house is a measurement of what?

Taking part in the comment conversation on a couple of posts I have written led me to consider the way we think about home size. Typically, as one reader complained, homes are merely judged by their square footage and disregard the number of occupants. Meaning, that the owner of a large home with a big family might be criticized by small home proponents, while at the same time small homes are shunned for offering too little space for a family. Perhaps, instead of thinking of how large a house should or should not be, we should consider how much space each individual needs, a sort of square feet per capita idea.

The best way to start is by gaining a little historical perspective. The average American home in 1950 was 983 square feet (source) and, according to Census data (PDF), the average American household size was 3.37 people. This means that in 1950 the average American had 292 sfpp (square feet per person).

In the years that followed home size gradually grew and household size gradually fell until, in 2006, the average American household of 2.61 (source) shared a house of 2,349 square feet (source). So, in 2006, the average American had 900 sfpp, and that number has certainly grown in the last two years. I have heard average home size numbers approaching 2,800 square feet for 2008, but I couldn’t find a reliable source to quote.

So, seeing this wide range, the question remains . . . how much space do we need? Has the increase in sfpp seen a correlating increase in the quality of life? Are we three times more comfortable than we were in 1950? Are we three times happier? Could we, perhaps, manage to live in slightly smaller spaces than those with which we have become accustomed, particularly if it proves to have a positive impact on our environment, traffic congestion and other quality of life issues?

Obviously, there are a variety of factors that effect our need for space, and I’m sure many of these will come up in the comments. However, I would argue that, overall, our needs have become somewhat inflated. I would even say that in many cases we have taken our need for square footage into the realm of the absurd, and this does not simply apply to luxury home buyers. Our 1,200 square foot 100k House offers, to the average 2.6 person household, 462 sfpp (significantly more than was enjoyed in 1950), and yet we are constantly met with opposition based solely on size. Our entire housing industry, from building, to furnishing, to financing, is bent in the direction of more, but is it necessary? Does it help us actually live better lives?

Let’s talk it out in the comments. How many square feet does the average person need, and how should that be reflected in the types of homes we build?

Of course, what the house comes equipped with makes a big statement too.

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Privitized war continues…when will Micrsoft not need the US?


Micahel Winship in Perspective asks:

And remember Halliburton, the international energy services company of which Cheney used to be the CEO? After the fall of Baghdad, Halliburton and its then-subsidiary KBR were the happy recipients of billions of dollars in outside contracts to take care of the military and rebuild Iraq’s petroleum industry. Waste, shoddy workmanship (like faulty wiring that caused fatal electric shocks) and corruption ran wild, Pentagon investigators allege, even as Vice President Cheney was still receiving deferred compensation and stock options.

Reporting for, Pratap Chatterjee, author of the book “Halliburton’s Army,” writes, “In early May, at a hearing on Capitol Hill, DCAA [Defense Contract Audit Agency] director April G. Stephenson told the independent, bipartisan, congressionally mandated Commission on Wartime Contracting in Iraq and Afghanistan that, since 2004, her staff had sent 32 cases of suspected overbilling, bribery and other possible violations of the law to the Pentagon inspector general. The ‘vast majority’ of these cases, she testified, were linked to KBR, which accounts for a staggering 43 percent of the dollars the Pentagon has spent in Iraq.”

In one instance, KBR was charging an average $38,000 apiece for “prefabricated living units” on bases in Iraq; another contractor offered to provide them for $18,000. But, of a questionable $553 million in payments to KBR that the DCAA blocked or suspended, the Pentagon has gone ahead and agreed to pay $439 million, accepting KBR’s explanations.

KBR, Halliburton and the private security firm Blackwater have come to symbolize the excesses of outsourcing warfare. So you’d think that with a new sheriff like Barack Obama in town, such practices would be on the “Things Not to Do” list. Not so.

According to new Pentagon statistics, in the second quarter of this year there has been a 23 percent increase in the number of private security contractors working for the Pentagon in Iraq, and a 29 percent hike in Afghanistan. In fact, outside contractors now make up approximately half of our forces fighting in the two countries. “This means,” according to Jeremy Scahill, author of the book “Blackwater: The Rise of the World’s Most Powerful Mercenary Army,” “there are a whopping 242,647 contractors working on these two US wars.”

Scahill, who runs an excellent new website called Rebel Reports, spoke with my colleague Bill Moyers on the current edition of Bill Moyers Journal on PBS. “What we have seen happen, as a result of this incredible reliance on private military contractors, is that the United States has created a new system for waging war,” he said. By hiring foreign nationals as mercenaries “You turn the entire world into your recruiting ground. You intricately link corporate profits to an escalation of warfare and make it profitable for companies to participate in your wars.

“In the process of doing that you undermine US democratic policies. And you also violate the sovereignty of other nations, because you’re making their citizens combatants in a war to which their country is not a party.

“I feel that the end game of all of this could well be the disintegration of the nation-state apparatus in the world. And it could be replaced by a scenario where you have corporations with their own private armies. To me, that would be a devastating development. But it’s happening on a micro level. And I fear it will start to happen on a much bigger scale.”

Going global has new meanings for us. We just do not understand emotionally the impact of more fugible labor, but the transition will be a whopper.

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Buyers and Salespeople

lifted from comments, written by reader Jack

Tom said: “Some of the reported sales methods sound like they’re somewhere between ‘bullshit promises’ and mild deception. Then again, it’s car dealers on the other end of the transactions.”

“I probably shouldn’t underestimate Congress’s inclination to protect those undeserving of protection, but remember these are car salesmen, fer goodness sakes.”

Jack replies: Having been on the seller’s side of the table for a while now I have a different perspective. It is good that we have lawyers and Larry Summers to provide us with foils for favorable comparison. And for self-service at the expense of whole populations, car sales staff can’t hold a candle to Uncle Milton and his acolytes at the Chicago School.

But I digress. It is true that sales of expensive property has its pit falls and the buyer should certainy beware. My studies opinion, however, would suggest that the buyers with the able assistance of the manufacturers have laid the ground rules and set the stage for the battle. In the business there is a popular phrase, “Buyers are liars.” Not B.S. promises, but out right lies. The typical buyer takes the bull shit promises of one salesman and cures it to the level of a mountain of crap when looking for the “deal” with another sales man. Think of it this way, in the turbulent seas of the car sales showrooms, only the shark survives.

Buyers like most of all to believe in the biggest lie they may be told. It’s the only time a car salesman’s word is taken as golden. When it is being presented to the next salesman as the price to beat to earn the business. If car dealers did what the customer wants to earn his business they would all be broke. Retail goods typically have a one or two hundred percent mark up. The left over goods may be marked down as much as 50-60%. Cars are in the area of 13% with occassional cash back to the dealer that may be worth another 2 or 3 percent. Buyers like those impossible 20% discounts, but they are impossible.

No, don’t cry for any car dealers or their sales staff. They choose to do what they do and often they can make a decent living doing it. It’s a job that often has long and unfruitful hours. We get used to being lied to and having much of our time wasted while having to never assume that someone isn’t a qualified buyer. We regale each other with the stories of our most difficult or most absurd customers and shoppers. Then we have a whole other chapter of the story about the manufacturers and their so-called partnership with the dealer network. That’s a partner from hell.
lifted from comments by reader Jack

Rdan…who drives who in that market?

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star war fantasy drill

by reader ilsm

A lot of debate going on about the 2010 defense budget in general and the national missile defense programs in specific. The administration is cutting the star war fantasy drill by $1.6B from what some think was needed.

I found a quote Center for Defense information from a Lt Gen Campbell:

“On having 30 GMD interceptors fielded in California and Alaska vs. the planned 44, Lt. Gen. Campbell stated: “That number makes sense to us as we look at the threat and where the threat is going and how quickly we think the threat can get there.” He said the 30 interceptors was “capable of doing what we need it to do against the threat we designed it against; that threat, of course, was North Korea.”[12]

Threat indeed. North Korea poses mainly aggressive pronouncements and has yet to demonstrate a successful launch of a multi stage missile. They have no ICBM’s and the 30 interceptors have not shown any better success than the North Korean missiles.
The US could have whittled beaks and been as capable of doing what is needed against the threat.

Update: Blogrunner includes quite a list of arguing blog sites, often without explanation of the hardware, the risk factors, and efficacy factors. Most rely on political factors. Palin refuses some money (stimulus) but advocates for other like star wars.

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The Egalitarian U.S. Health Care System?

by Tom Bozzo

Tyler Cowen writes:

Since old, high-bank-account white males have lots of social status and power, [believers in egalitarianism] cannot bring themselves to regard those males as holding very poor overall endowments.

Cowen claims that the poor old rich white guys’ supposedly “poor overall endowments” arise from the impairment of their human capital at the more-or-less imminent end of life. There might be half of an argument here if human capital were the only component of individual wealth. Instead, we have Shorter [*] Tyler Cowen: The rich actually aren’t so rich if you don’t count their money. Whether and to what extent marrying Neutron Jack increased Mrs. Suzy Welch’s human capital as distinct from social and financial capital is left as an exercise for the reader.

So it’s pretty easy to construct an exception to Cowen’s claim that

The “poorest” people are not those with low incomes but rather those with low human capital endowments.”

Take a suitably dimwitted heir to a sufficiently large fortune and I will show you someone not only a lot richer than a comparably bright person who picked his or her parents badly, but in fact just about everyone else.

Now Cowen actually is right to point out that the U.S. health care system provides plenty of care to seniors at the end of life despite what I will agree are often modest endowments of wealth (including, but not necessarily limited to, human capital). The inference that this makes the U.S. health care system more egalitarian than European systems, however, is highly questionable to say the least. First of all, health care for the elderly is the most European part of the U.S. system: more-or-less universal, more-or-less socialized medicine. Second, to the extent European systems spend (relatively) less money on the elderly, they don’t have obviously worse outcomes (shorter lives, etc.) to show for it.

Subject the elderly to the more-or-less private sector part of the U.S. system and those financial endowments are likelier to drive allocations of health care resources. And indeed it tends to be individuals with high human capital endowments who get the jobs with benefits that provide decent health care. Certainly the state of the U.S. health care system isn’t going to make me, whether egalitarian-minded or acting on pure self-interest, more inclined on the margin to switch places with the middle-aged immigrant behind the McDonald’s counter next door to the office. A leveling possibility in the U.S. system is that a bout of unemployment coinciding with an unlucky draw from the distribution of health outcomes can leave a middle-aged economics PhD approximately as screwed as the guy at McDonald’s, but reasonable people can reject race-to-the-bottom egalitarianism. I’ll wager the lower-endowment exceptions with decent health insurance are disproportionately public-sector employees (where a common complaint from conservatives and libertarians is that they have it too good relative to their private-sector counterparts; see e.g. U.S. Postal Service, bargaining-unit employees of) and other unionized workers.

The egalitarian reformer of the U.S. may reasonably conclude that fairness is best served by making the U.S. system more like the Europeans, or by promoting public plans over private ones.

[*] *‘Shorter’ concept created by Daniel Davies and perfected by Elton Beard.

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Healthcare debate begins nationally


Bears will be tackling different aspects of the debate, one of which is the Mass Health Plan (watching Kennedy’s office) and other states. Basic plans and costs, decreasing the numbers of uninsured, dealing with the cost structures and power centers in the state, quality of care and such will be examined.

Below is one take on the notions introduced by the President.

Health Beat Blog Maggie Mahar posts on Obama’s opening statement on health care:

President Obama: “I strongly believe that Americans should have the choice of a public health insurance option”
In a letter to Senators Ted Kennedy and Max Baucus that the White House just released this afternoon, President Obama spelled out his vision for health care reform, making it clear that he wants a public sector alternative to private insurance: “operating alongside private plans. This will give them a better range of choices, make the health care market more competitive, and keep insurance companies honest.” (Hat Tip to Jonathan Cohn, over at The Treatment for calling attention to this letter.

So much for speculation that the administration would back down on this issue.

The President also is “putting another $200 to $300 billion on the table,” Cohn notes, “proposing to extract that money from savings in Medicare and Medicaid.” He pairs the offer with a proposal he talked about yesterday that would give the Medicare Payment Advisory Commission (MedPac) the power to implement its recommendations for Medicare reform. (MedPac is an independent panel that advises Congress on Medicare Spending and under legislation sponsored by Senator Jay Rockefeller, MedPac would have authority to set fee schedules for both hospitals and doctors.)

I have written extensively about MedPac’s recommendations on HealthBeat and I’m now writing a post fleshing our precisely how MedPac would squeeze waste out of Medicare spending, while lifting the quality of care. )

In his letter, the President also stressed that “reform cannot mean focusing on expanded coverage alone. Indeed, without a serious, sustained effort to reduce the growth rate of health care costs, affordable health care coverage will remain out of reach. So we must attack the root causes of the inflation in health care.” He then points to the large multi-specialty medical centers, where doctors work on salary, that HealthBeat has pointed to as models for learning how to provide more effective care at a lower cost: “ That means promoting the best practices, not simply the most expensive. We should ask why places like the Mayo Clinic in Minnesota, the Cleveland Clinic in Ohio, and other institutions can offer the highest quality care at costs well below the national norm.

June4, 2009
MedPac would have clout and has argued for this approach, using research from Dartmouth as a springboard to control costs.

Now, a new White House is taking MedPac’s recommendations to heart. And Congressional leaders also seem to recognize the link between Medicare reform and national healthcare reform. In April, HealthBeat reported that Senate Finance Chairman Max Baucus had declared that Medicare would become “the big driver” behind national health reform. Now, it’s becoming clear what Baucus meant.

Now, a new White House is taking MedPac’s recommendations to heart. And Congressional leaders also seem to recognize the link between Medicare reform and national healthcare reform. In April, HealthBeat reported that Senate Finance Chairman Max Baucus had declared that Medicare would become “the big driver” behind national health reform. Now, it’s becoming clear what Baucus meant.

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Watch What I Do…..

This is my first official posting on Angry Bear. Let me start with a “thanks and delighted to be here.” I look forward to a productive interchange and expansion of the work I have been doing through ataxingmatter, my blog on tax and economic issues. I will continue to maintain the tax blog, and post here about once a week (usually with simultaneous posting on ataxingmatter).

There has been quite a bit said about Obama’s proposals for international taxation. If you read ataxingmatter, you know that I think the proposals to tighten up the way the rules work to prevent abuses are important starts in the right direction. Not surprisingly, multinational corporations have suggested that any change to the international regime that increases their taxes will make them even less competitive internationally (implying that they already have too little money to compete well) and ultimately, even quickly, lead to the demise of U.S. jobs. See, e.g., Donmoyer, Ballmer Says Tax Would Move Microsoft Jobs Offshore,, June 3, 2009.

One would think from such talk that US multinationals are just hanging on by the sheerest strings, unable to reduce costs further, leaving very small profits (if any) for their shareholders, and barely managing to pay their managers enough to keep decent talent aboard. But is that what Ballmer really means? Isn’t it more likely that it is a question of Microsoft hoping to retain all that money for its managers and owners rather than see a penny of it go to government purposes (like education, basic research)? How do we get any idea about what differences taxes make to companies when what managers say can’t really be trusted to shed much light on actual plans for the future?

Well, there is some real data on this issue that comes from the 2004 tax legislation–the corporate pay-back bill that was sold to the public with the same old claim that tax cuts would create millions of new jobs. The 2001-2003 tax bills cut revenues, but primarily lowered tax liabilities for individual taxpayers. (As I recall, Bush himself saw about a $37,000 tax cut from the 2001 legislation and Cheney more than double that.) Corporate lobbyists had agreed to this plan–ram the individual tax cuts through first and then pass a big bill fulfilling the multinationals’ wish list. The Bush administration and Congress came through in blazing colors for the corporate lobbyists, passing a host of corporate-friendly provisions under the guise of “job creation tax incentives for manufacturers, small businesses, and farmers.” (That’s the heading for Title II of the so-called American Jobs Creation Act of 2004. Even the names of the various bills ultimately passed in 2004 represent a veritable smorgasbord of propaganda–the “Homeland Investment Act”, the “American Jobs Creation Act”, and, the same year, the “Working Families Tax Relief Act”. )

The Jobs Act provisions included a host of bad policy choices all in the name of freeing up investment cash so that corporations could invest more in the good ol’ USA: even more section 179 expensing; even more accelerated depreciation for leaseholds, restaurants, aircraft, and syndication property; S corporation expansion; AMT breaks; more cross-crediting of foreign tax credits; more tax expenditures for the Big Oil, Big Timber and Big Pharm. And there was one other tax expenditure that was heavily lobbied for on behalf of multinational enterprises–a (purportedly one-time) provision for very low taxed repatriation of foreign earnings, in new section 965 of the Code. The MNEs claimed that the break would permit them to create thousands of new US jobs by reinvesting tax savings in their US businesses–investments that just couldn’t be managed under the constraints on the current tax burdens on repatriated cash. Repatriation, on the other hand, was supposed to lead to an increase in capital spending in the range of 2-3% over two years (see NBER paper, below, noting J.P. Morgan Securities’ estimate) and firms stated both confidentially and publicly that they planned to use repatriated funds for business purposes like acquisitions, capital spending, R&D, debt repayments rather than to pay out profits to shareholders.

The express purpose of the repatriation tax cut was to increase investment and viability of U.S. operations. Hiring new employees, conducting R&D, increasing capital investment in the US were all good uses, and Treasury guidelines indicated that use to pay executive compensation, dividends or stock redemptions would disqualify the repatriations from the tax benefit.

Did the corporate giants deliver? An NBER working paper by Dhammika Dharmapala, Fritz Foley and Kristin Forbes concludes that they did not. Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act, NBER Working Paper No. 15023, June 2009. Here’s the conclusion, as stated in the abstract.

Repatriations did not lead to an increase in domestic investment, employment or R&D—even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained. Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders. These results suggest that the domestic operations of U.S. multinationals were not financially constrained and that these firms were reasonably well-governed.

Furthermore, money is fungible. The paper concludes that firms “were able to reallocate funds internally to bypass the publicly stated goals of the Act.” Id. at 5. So of the $299 billion that companies brought back from foreign subsidiaries (about 5 times the normally repatriated amount), about 92 percent of it went to shareholders in share buybacks and increased dividends. And interestingly, the firms that brought back the most money under the repatriation scheme were the firms that tended to “shield[] foreign income from U.S. taxation by using tax haven affiliates or holding companies.” The study also found that “[f]irms that increased parent equity provisions around the time of the tax holiday … had significantly higher levels of repatriations. This pattern suggests that the domestic operations of U.S. MNEs were not capital constrained and were instead providing liquidity to affiliates. These firms seem to have taken advantage of the HIA by ’roundtripping,’ that is, by replacing retained earnings that would be subject to high repatriation taxes if there were no tax holiday with new paid-in capital.” In fact, the paper includes a comparison of MNE and nonmultinationals on financial constraint indicators, showing that the MNEs are less constrained than nonmultinationals under each of the three important indicators.

At least one result was that good guys–the MNEs that didn’t use as many tax shelters to shield their foreign income and who regularly repatriated it and paid taxes on it–didn’t get nearly as much benefit from this bill as the bad guys–the MNEs that shielded their foreign income as much as they could and held it abroad until they could get this repatriation measure passed through their intensive lobbying pressure. And the bad guys didn’t do much of anything in the way of job creation, the political calling card they used to get their special tax break passed.

Seems to me we ought to at least keep this Jobs Act history in mind in the discussion of President Obama’s efforts to tighten international taxation rules and the already begun whining by MNEs that they are having such a difficult time competing that any further taxation will force them to move out of the US completely.

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It Looks Like a Great House. Why Does the Basement Always Flood?

Come on, guys, somebody take it to the Next Step.

Matt Y comes closer than anyone else to getting to the truth of the problem with Macroeconomics. Following Justin FoxSteven Levitt’s summary, Matt asks the next question:

So why should it be that “in the current regime, if [macro models] are not meticulously constructed from ‘micro foundations,’ they aren’t allowed to be considered”?

There’s a hint in the title of this post.

Edited to fix attribution.

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