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

Not-So-Select Short Subjects

Now that I know we’re just members of the “Peanut Gallery,”* let this random links post work as a placeholder for longer posts as we prepare for the “holiday”:

Shorter Mark Thoma at Marketwatch: If you can’t build a better model, best to reappoint a man who doesn’t think he has to do half of his job. (UPDATE: Or even less than that. [h/t Linda Beale])

Shorter Mark Thoma at his own blog: All of our current models prefer people to starve and die.

A fun graphic (h/t Abnormal Returns)

Think the Health Insurance “Reform” Bill will “bend the cost curve”? Think again.

*That the “Periodic Table” pretends to be about Finance Bloggers and yet categorizes DeLong, Thoma, and Mankiw, to name three, as “Rocket Scien[tists]” instead of Economists should in no way be seen to impune the quality of the analysis, of course.

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US Flow of Funds: wealth recovery fully underway, China?

by Rebecca Wilder
(crossposted with Newsneconomics)

This week the Federal Reserve reported the Q3 2009 Flow of Funds accounts. The headline indicators show household net worth improving and private debt burden falling.

The private sector – households and firms – is dropping leverage.

Update: This chart has been modified slightly – the leverage level data (highlighted in blue, red, and green) has been updated.
Either by default or by growing saving, the private sector is de-leveraging. According to the D.1 table, households and nonfinancial businesses dropped debt a further 2.6% q/q annualized, while financial sector debt fell another 9.3%. However, total debt (of the domestic nonfinancial sector) grew 2.8%, as the federal and state and local governments grew debt 20.1% and 5.1%, respectively.

Household wealth grew $2.7 billion trillion for a cumulative gain of $4.9 billion trillion since wealth hit a cyclical low in Q1 2009. To put this gain in perspective, household net-worth dropped $17.5 billion trillion from Q3 2007 to Q1 2009, 3.5 x the recent gain. Wealth to disposable income, a statistically significant factor of the personal saving rate, rests right around it long-term (1952-1007) average, 4.9.

The chart illustrates the wealth-effect as the ratio of net-worth to disposable income. The direct and adverse impact of the wealth loss on consumption probably peaked last quarter; however, the lagged effects are ongoing.

Notice that the ratio shifted discretely in the 1990’s, not coincidentally when China’s current account surplus took off.

Most likely, the wealth to personal income ratio has mean-reverted, and will not rise back to its 5.7 1997-2007 average. A necessary condition is that global portfolio flows rebalance – i.e., China saves less and the US saves more. However, this will not happen tomorrow – de-leveraging is a process that takes years. The increase in international saving (i.e., falling current account deficits) will take some time, and by definition includes the general government eventually dropping its debt burden. Not to mention the political rhetoric and growing trade barriers suggest that a long-term economic shift is a ways off.

Rebecca Wilder

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Comparing Presidents, Real GDP per capita…All the Lags

by cactus

Comparing Presidents, Real GDP per capita, All the Lags You Can Eat Three Ways From Thursday

I didn’t really wanna write this post, but I keep getting told that when you look at how Preznits did on the economy, lags, lags, and more lags are what matters. I’d like to move on to more useful stuff (i.e., back to how taxes, oil prices, etc. affect growth) so I’m going to bite the bullet and try to cover everything lag related here and now.

Now, before I start, every single bit of information in this post comes from the BEA’s NIPA Table 7.1, line 10. The data and the analysis are also shown here.

To recap the last few episodes, data goes back to 1929, and we looked at the growth rate from the full year before a President took office to his last full year in office… that is to say, the baseline from which he was measured was the period before he took office. For Presidents who left office early due to death or excessive Nixonizing… if they lasted into the second half of the year, I considered that a “full year.” That leaves this as the recurring, somewhat inconvenient character with halitosis and a big ol head of lettuce in his teeth:

Graph 1: Annualized Growth in Real GDP per capita

Perhaps the worst offense in that graph is the FDR performance, and over the past few weeks I tried a number of things to tone that sucker down… but even if you stick to the period up to the ’38 recession he still outshines everyone. So I’m going to pick a period where FDR is safely out of the picture – I’m going to leave out his term, as well as that of his illustrious predecessor and his successor. (I should note – reader Cantab has noted that if you make FDR responsible for only the recessions that occurred during Ike’s administration, FDR no longer looks so good. (Thanks for the tip Cantab!) That also has the advantage of focusing on a period of relative stability with no direct superpower v. superpower global wars or Great Depressions.

Now, to lags… lags are one way to assume that a President’s policies don’t have an immediate effect. But lagging by a year, say, assigns to one President some of the growth which depends on his successor’s behavior. For example, if you lag Carter’s term by one year, you get Reagan’s first year, a year in which Reagan’s long pre-advertised tax cuts came along. Ditto Clinton and GW. Which would mean that you essentially mean that Reagan’s first year in office owes more to the policies of a man that was no longer in office than to the policies that everyone knew Reagan was going to put in place at least since the previous November. For that reason, I prefer to simply leave out the first year of a President’s term to putting in lags, but no matter…. below are graphs showing the real GDP per capita by President, in one case leaving out each one’s first year in office, in the other lagging by one year:

I gotta say, either way, Ford is looking like he’s hoppin’ but the Dems still outperform the Reps, by either measure.

Now, say you want to assume that it takes a full 2 years before a President’s policies have any effect. Thus, if one fine November some slick dude like Clinton tells folks their tax rates are going to be a-rising in the following year, not only will that have no discernible effect when he raises taxes, it won’t have any effect two years later. Put another way… you’re assuming the American public is incredibly dense, because people catch on awfully slow. Now, if that’s your assumption, here’s what it looks like:

Ford no longer looks all that hot in the top graph… because he’s no longer there – the man only served two years, after all, so leaving out his first two years drops him out completely. And Dems still look better than Reps. But in the bottom graph, where we’re talking true lags, Reps marginally outperform Dems and Ford is the best performing of all the Republican Presidents.

Now let’s get more extreme… say we’re going three years before a President’s policies have an effect. Below are graphs for annualized growth in real GDP per capita when the first years of the President’s term are left off, and for annualized growth in real GDP per capita with three year lags:

Well, this kinda gives us mixed results. We’re finally showing what everyone knows is true, namely that Reagan is the bestest Preznit evah in the top half, but it shows Dems outperforming Reps. The second graph – the lag version – no longer has Reps outperforming Dems, but its close. Ford remains the best performing Republican President.

Let’s go with four years:

I’m not going to comment much about this, except to note that the top graph obviously shows the Presidents who served at least one full term plus one year. Also, there’s no point in dragging this charade forward any more since its obvious where things are going.

So let me close this off with a comment… anyone who wants to argue that the data (cherry-picked to leave out FDR) shows that Republican Presidents follow better economic policies than their Democratic counterparts had better understand that there’s only graph in this post that allows you to tell a story that is even almost-kinda-sorta compatible with that point of view. Which means that you had better be familiar with the implications of that graph. That is to say, if you are going to insist that Republican Presidents are more growth-oriented than Democrats, be prepared to:

1. explain why no President has an effect on the economy for his first two years in office
2. say it loud and proud: Gerald Ford is the guy all Republicans should seek to emulate

A reminder… the data comes from the BEA’s NIPA Table 7.1, line 10. The data and the analysis are also shown here.

Now if we can put this lags thing to bed, maybe we can go back to trying to figuring out the why of all of this. Underperforming someone as hapless as the typical Democrat occupying the Oval Office should not, frankly, be difficult, and the failure to do so speaks of some seriously deluded policy and implementation.

by cactus

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Health Care Reading Assignment, & Link Request

by Bruce Webb

CBO Director’s Blog Manager’s Amendment to the Patient Protection and Affordable Care Act

CBO Analysis/Score Senate Health Care bill Manager’s Amendment

Also I would like some links to current and historical numbers on Medical Loss Ratios. I found some claims from a commenter at Dean Baker’s Meet the Press (and past commenter here) that CMS (Medicare) numbers showed a MLR ratio for private insurance right at 88% and holding over the last few years. A little work on my own showed that MLR for for-profit private insurance ranged between 76% and 84% at around the same time. The difference can not be accounted for by profit alone, that would only explain about half of the difference. Unless of course those who were claiming ‘average’ 3% profit margins were also including non-profits in the calculations. So lets have links aplenty in comments, with some commentary making clear whether those figures include non-profits in the calculation.

Best links & commentary will be lifted and put under the fold. Plus when I find one a link to the current bill text (or commenters can help there as well).


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In Which I Disagree with Paul Krugman about the Minimum Wage

I winced typing that title, since it is not wise to disagree with Paul Krugman and since I am going to argue that cutting the minimum wage can cause increased employment. Before going on, I stress that I oppose cutting the minimum wage as the logic of my argument suggests making the tax code more progressive. I think what we need right now is a more progressive tax code. That’s what I always think.

OK so first Krugman argues that, when in a liquidity trap cutting all wages equally will not cause increased employment. Only here does he respond to the obvious criticism.

1. Why did I go from minimum wages to overall wages? Clearly, a cut in minimum wages –which only apply to some workers — can raise the employment of those workers at the expense of other workers. But the advocates of a cut are claiming that they can raise overall employment. The only way that can happen is if a reduction in average wages raises employment.

I assert it depends on how you measure employment. Krugman is appealing to standard macro models in which employment is measured in “efficiency units” and the wage level (“wage unit” to Keynes) is the wage per efficiency unit.

The standard assumption is that labor is uniform and can be measured by a number. The plain fact that some people are paid more than others is handled by assuming that they are more able in every way so their wage per efficiency unit of labor is the same. Thus consider able Andy who has twice the wage of luckless Larry and of bad Brad so he is paid as much as the two of them. It is assumed that he can do everything just as quickly as the two of them working together.
This is clearly absurd and is not to be taken literally.

As Krugman does.

Worse than that, once you define labor in efficiency units, you define employment as the number of efficiency units of labor employed.

The public policy concern is about how many people are employed. These can’t be the same. Measuring labor in efficiency units might be an OK approximation if we cared about GNP, but if we care about employment and unemployment (as Krugman regularly insists we should) we have to think about people not units of efficient labor.

For the sake of argument let’s stick with the efficient labor assumption. Oh and assume wages are sticky (we need some nominal stickiness to avoid the price level falling a few hundred fold in a second making the real balances effect a real factor). Now assume 2 types of workers able and not so able (90% are able 10% not so able) . An able worker produces just as much as two not so able workers.

Back in 2007 all workers were employed, not so able workers were paid the minimum wag and able workers twice as much. Now the market clearing real wage is lower, able workers are paid 1.99 times the minimum wage. Not so able workers are all unemployed so the unemployment rate is 10%

What happens if the minimum wage is cut 1% ? Suddenly all the not so able workers are hired. For each two that are hired one able worker is fired. Now the unemployment rate is 5%.

See simple. The reduction of the minimum can “raise the employment of those workers at the expense of other workers.” Under standard assumptions such a shift in relative demand for different types of workers “can raise overall employment.” so long as employment is counted you know by counting how many people are employed.

The absurd “efficiency units of labor” assumption implies that this effect is huge. Able and not so able workers are perfect substitutes so the elasticity of substitution of not so able for able workers is infinite.

In the real world the effect would be much smaller. It might be smaller than the damage to employment caused by the reduced expected inflation and therefore increased real interest rates noted by Krugman.

I oppose cutting the minimum wage, because I support cutting payroll taxes on low wage workers and making up the money by raising the FICA ceiling. I think payroll income above a floor should be taxed, not payroll income up to a ceiling.

According to Krugman’s argument this wouldn’t cause increased employment.

To put it another way, he is arguing that the increase in taxes on the rich and of the EITC enacted in 1993 had nothing to do with the huge puzzling increase in employment (without accelerating inflation) of the 90s.

OK now that I have argued with Krugman what about Card and Krueger. Empirical estimates of the effect of the minimum wage on employment suggest that the effect is very small. One famous study by Card and Krueger showed a positive effect of an increase in the minimum wage. The logic used by Card and Krueger to understand how this could happen suggests that things are different now.

Their logic is basically that firms can choose to pay a low wage and have a high quit rate and take a long time to fill vacancies or pay a high wage and have fewer quits and fill vacancies more quickly. If they are forced to pay the higher wage, their desired level of employment will be lower, but that level is the sum of employment plus vacant jobs. A binding minimum wage can reduce the number of vacant jobs by more than it reduces the sum of employment plus vacant jobs. Thus more employment.

I think this is not relevant to the current situation. There are very few vacant jobs. Quit rates are low. According to their logic, the effect of the minimum wage on employment depends on the unemployment rate. The evidence of a small effect is almost all from periods of unemployment far below 10%. I don’t think it is relevant to the current situation.

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CBO says specifying MLR makes the budget go boom

by divorced one like Bush

I just listened to the conference call with Gov. Dean and Wendall Potter.
Toward the very end of the call, the issue of medical loss ratio regulation came up. Seems like a reasonable thing to regulate especially if we are going to get Chicago School of Economics style health care reform implemented via the Shock Doctrine method. (Yes, I’ve finally started that book and I’ve got to say, what is happening here with health care reform reads all too familiar.)

Unfortunately, according to Gov. Dean, the CBO keeps scoring MLR regulation as a hit (as in mafia take down) to the budget. Seem from CBO’s perspective, if you regulate that the MLR can be no less than somewhere around 90%, such a number placed on profit ability makes all of the nation’s health care a government budget item. Thus, something like $2.5 trillion gets added to the budget numbers.

Funny thing this CBO view. Basically this means that I (We the People) can mandate that I buy insurance, that I can only buy it from the private market, that I can write the rules of the market that I buy into, but I can’t tell a corporation that is granted a privilege by me to spend it’s money on the product it has been granted a privilege to provide? 

Maybe the CBO figures because I decided to help some people in buying the mandated insurance, that by regulating the MLR, I’m making that money a greater expense on the budget because now 90% is going to health care services and not 70%? I really can’t figure this one. Is the CBO really saying that I (and you) the government, can not assure that I’m going to get my money’s worth? How come this issue does not come up when the government negotiates drug prices for the VA?

I really think, after watching our congress deal with health care, finance reform, military, that we have a bigger problem in this nation regarding economics and who is the boss here than we are willing to admit. Hint: It’s We the People who is the government.  It just seems that we have definitely, completely entered the realm of reality where “the market” is the purpose and not the means.  We have been turned to existing to serve “the market”.  We have put “the market” before all our needs and desires for us as people.  This is primitive idolizing behavior.  This is sick.

I have to go plow now.

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High Heels and X-Ray Eyes

First, you hear the high heels. These are not the pretty heels of Ginger Rogers, floating in ostrich plumes for some impromptu dance across a marble floor.

No no, these are the no-nonsense high heels whose rhythmic ticktock, louder and louder, signify the approach of authority – firm, fair and with eyes that see through every excuse. It’s Dr. Warren, and she’s ticked.

Elizabeth Warren, head C.O.P. over at the Congressional Oversight Panel which is “charged with the job of reviewing the state of the markets, current regulatory system, and the Treasury Department’s management of the Troubled Asset Relief Program [and] required to report their findings to Congress every 30 days.” She is a longtime researcher of bankruptcy and professor of bankruptcy law, and she saw the crash of the middle class coming from miles away.

In videos like “The Coming Collapse of the Middle Class” (early 2008) and her various net-based reports, TV appearances, and appearances before Congress, she combines absolute clarity of message with a mildness that tempers that message, often dismaying in its implications, enough so it can be heard and digested.

Messages like this graph. And those numbers are from 2001.

She’s just been named the ‘Bostonian of the Year‘ by the Boston Globe, complete with an interesting video that catches her offstage persona. It’s a lot like her camera persona, but madder. Worth watching, if only to see her berating Timothy Geithner, (about 3.02) whose smirking response should infuriate anyone who sees it. Read the accompanying article, too.

A few Elizabeth-quotes from the Globe video:

“The mortgage lenders have behaved abominably.”

“It seems to me that far to often women are the people who do what needs to be done. It’s about how the old boys club who brought us not just to the brink of ruin, but beyond that, they still want to play the same way. And, well, somebody’s got to say no. If all the old boys want to roll their eyes over it, well then let them roll their eyes over it.”

“AIG was not a bank!”

“Here we are in the middle of a financial crisis. The market is broken. We have a system where very large financial institutions systematically take advantage of hardworking American families. The role of government is just to level that playing field a little bit, and the financial institutions are fighting that tooth and nail. They’re willing to spend hundreds of millions of dollars to block that kind of legislation, and I’ll just tell you, I find that deeply and profoundly shocking.”

“I am not looking for jobs with these guys. My job is not to get out there and kowtow to these guys so they’ll be nice to me. I figure this is the one time I will have a true public-service job. I’m going to do everything I can to execute this job the way it ought to be done. If there’s some politician, Republican or Democrat, who has a problem with that, I just don’t care.”

Every couple of weeks I scan the internet looking for new reports and video from our COP on the beat. So should we all.

Bravo, Dr. Warren.

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This week’s Greek tragedy

This week, the single most important event in global bond markets was the S&P downgrade of Greece’s long-term debt obligations, A- to BBB+. Moody’s is the last of the major rating agencies to hold Greek debt in the A-category of investment grade (currently at A1); but a major decision from Moody’s could come within weeks. This would make Greece the lowest-rated country in the Eurozone, and the only one with 6-B status.

Since the beginning of the month, the Greek 5-Yr government bond jumped over 1% to 5% by Friday.

The chart illustrates comparable 5-yr government bonds across the Eurozone. Interestingly, the region (ex Greece) remained rather resilient to the news. However, Greece is not alone; and its growing government financing problems are in good Eurozone company.

According to the European Commission’s autumn 2009 Economic Forecast, only 5 of the 16 Eurozone countries are expected to remain below the 60% debt limits of the Treaty on European Union in 2010, while just 3 will satisfy the 3% deficit limits.The most imminent issue for Greece, with its new BBB+ status, is eligibility for ECB’s collateralized loans. In October 2008, the ECB dropped the minimum credit rating for eligible collateral on its credit facilities from A- to BBB-. However, Greece’s downgrade to the next tier of investment grade status (BBB+ by S&P) now makes it ineligible for the ECB’s credit programs if the temporary measure is repealed. Obviously, this is a problem for Greece; but it is a growing problem for the ECB as well.

I see two problems forming. First, the pressure to drop deficits and leverage will be overbearing in Europe, especially in the UK. Dropping debt levels will be important after the recovery is well underway; but before that, and a fledgling economic recovery may be cut short. Second, if investors do start to question the ability of governments to service debt (recently in Greece), financing costs in other struggling countries, like Spain, Portugal, or Italy (and some of the others circled above), could rise swiftly and pressure budgets further.

The Wall Street Journal wrote a nifty little article about the time spent trying to regain a higher rating after a downgrade occurred:

Sovereign upgrades, meanwhile, can take a long time: Greece’s rating took nine years to move one notch upward to triple-B in the 1990s; Australia lost its triple-A rating in 1986 and saw 17 years pass before it was restored.

Years, that’s how long it will likely take Greece to “implement a credible medium-term fiscal consolidation programme”. And it is very possible that Greece will see further downgrades before upgrades.

This is a problem for the ECB – it will be interesting to see the ECB push a credible exit with Greece’s credit rating squelching the expiration of the temporary collateral requirements. Fun times ahead!

Rebecca Wilder

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