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

Personal Income Growth

Despite the point that the first data reported in the monthly personal income report is nominal personal income, it does not get much attention in the press and by bloggers. We
are starting to see a rebound in nominal personal income growth even though it is still quite low by historic norms. The current smoothed growth rate is 2.8% and the earlier signs that growth is accelerating have faded. This is why it is important to monitor the growth in weekly average earnings in the employment report.

The way to look at nominal income growth is that it is a necessary condition but not a sufficient condition for economic growth to become self-sustaining. Moreover, this cycle, for the first time in the post WW II era nominal growth must be sufficient to accommodate both inflation and rising personal savings before real income growth can strengthen. In previous cycles rising personal savings was not a major factor dampening growth and/or creating a wedge between nominal income growth and real personal spending..

But if nominal income growth does continue to improve — a heroic assumption — it would raise serious questions about fed policy. As the chart below shows, personal income growth is an important leading-concurrent indicator of fed policy. Rising personal income growth implies that the fed would not need to continue pumping additional liquidity into the system
and call into question the need for QE 2 that the consensus now seems to be expecting and
the stock market appears to be discounting.


Moreover, personal income growth is one of the best leading indicators of the S&P 500 PE. It actually has a stronger correlation with the market PE than bond yields. Moreover, it is even better at forecasting the market PE three months into the future than it is at explaining the current PE.


PS. the PE in the chart is not updated for September.

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McD and medical plans

by Dan Crawford

There has been a little ruckus from the WSJ reporting on McDonald’s health insurance plans and applications for waivers from the 80% medical loss ratio requirement. Try to use that for a headline.

The medical loss ratio at 80% was one measure for evaluating whether enough % dollars of premium was actually going to medical expenses as opposed to salaries, advertising and marketing, and other non-medical expenses. I believe mini-med policies are far removed from plans offered that people associate with the term ‘health plan’.

Reuters reports:

McDonald’s had about 14,000 U.S. restaurants in 2009. Most of the company’s franchisees offer a limited-benefit plan and nearly 30,000 employees have chosen to be covered by the “mini-med” policies, Russell said.

Employees pay around $14 per week for a plan capping annual benefits at $2,000 per year, or a similar plan in which they pay $32 per week and annual benefits are capped at $10,000, according to the Wall Street Journal report.

Restaurants and retailers are more likely to offer such bare-boned plans because they have a high percentage of part-time and temporary workers and higher employee turnover than private sector employers overall.

The total market for limited benefit plans is about 1.4 million people, with Aetna Inc (AET.N) and Cigna Corp (CI.N) among the health insurers with the biggest presence, Wells Fargo analyst Peter Costa said in a research note.

Aetna’s largest limited benefit customer is retailer Home Depot Inc (HD.N) with 24,000 of those members, said Costa, adding that limited benefit plans account for a small portion of the overall health insurance market.


Another item that popped up is that Principlal Financial Group Inc. is a coincidental withdrawing from the medical insurance business, claiming inablity to see enough profit in the coverage it provides due to a vague ‘less profitablility’. However per their announcement:

CHANGING COVERAGE: Principal Financial Group Inc. will stop selling health insurance, and customers, as policies come up for renewal, will transfer to UnitedHealthcare. The phase-out of all policies is expected to take about three years.

WHY LEAVE BUSINESS: Principal has seen its asset management and 401(k) retirement businesses grow and become more profitable while its health insurance segment has shrunk, requiring more investment to remain competitive.

And per United Healthcare:

UnitedHealthcare today announced it has entered into an agreement to renew medical insurance coverage for The Principal Financial Group’s (The Principal®) medical plan customers as The Principal completes its plans to exit the medical insurance business. The Principal will continue to offer life insurance, dental, disability, vision and wellness programs.

The Principal selected UnitedHealthcare to provide an easy and attractive transition option for its customers to renew their health plans. The Principal currently covers customers in 31 markets nationwide, predominantly throughout the Central United States, where UnitedHealthcare offers an extensive network of physicians, hospitals and other health care providers.

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Social Security: Full Glass vs Honest Pint

by Bruce Webb

In the past I have travelled or lived in most parts of the U.S. and in visiting the local tavern, bar or lounge am offered some choices in types and serving sizes of beer. Most places by answering ‘bottle’ to the question ‘bottle or draft’ you are locked into a measured 12″ serving, no more no less, which is why in most places outside Texas and maybe Colorado you can’t go too wrong ordering ‘a bottle of Bud’ (though you might get some dirty looks by asking for a cold glass). But if you chose ‘draft’ you can be in uncertain territory. Most places will give you some choice between small, large and pitcher where the small is somewhat smaller than the 12 ounces you get in a bottle and the large is modeled on the English pint. But as experienced travelers/drinkers understand all too well ‘pint’ in too many places has little relation to its standard definition of ’16 ounces’, in fact in a lot of places if you order a 12 ounce bottle and a cold ‘pint’ glass the resultant pour gets you suspiciously close to the rim. Which is why in my own State of Washington you never encounter ‘pints’ outside an Irish Bar or brew pub, instead we drink ‘pounders’. Now since a standard pint of water weighs exactly a pound the implication is that your ‘pounder’ actually contains sixteen ounces, but it is not like this is an actual violation of truth in advertising laws, most people know the score, you are lucky to get 14 ounces in a pounder and 42 ounces in a pitcher.

What does this have to do with Social Security? Well it offers a different way of examining what ‘solvency’ means in relation to SS: should we be worried how close the pour is to the rim? Or to the actual contents of the serving? And the answer to that question ends up having some surprising constraints on your policy options. Actual Social Security discussion under the fold.

Social Security solvency is mostly reckoned in terms of income to cost ratio and presented as either a percentage of projected payroll or GDP over the given projection period. But neither that projected income or projected cost is fixed, each instead is the product of a formula or formulae whose factors are determined by actual economic and demographic outcomes compared to the baseline assumptions. And it is in my view the failure among most commentators to fully grasp that variability that distorts the policy decision field.

Starting at the cost end we have this CBO study from 2003: The Future Growth of Social Security: It’s Not Just Society’s Aging. If we examine its figures and tables we can see that fully 45% of the projected growth in Social Security over the 75 year projection period is due to improvements in real benefits delivered compared to today, in terms of our metaphor the Trustees are promising us that if all things go right our ‘pint’ will actually have more content ounces going forward than today and cumulatively a lot more, at the end of the day we are drinking something closer to those beer steins you see at Munich’s Oktoberfest. Prost! But a look at the revenue end gives us some more sobering news, while Social Security left unchanged can deliver 100% of scheduled benefits right up to 2037, in our metaphor a pour right up to the rim, after that projected revenues only deliver a 78% pour. Hmm, downer. But how down should we actually be? This graph from Dean Baker at CEPR (though designed to illustrate a different point) is instructive: Social Security and the Washington Post: Who Is Going Down First?. What the graph shows is a fairly dramatic cutback in benefits at Trust Fund depletion, in numeric terms 22%. But note that the resulting beer stein STILL holds more ounces of beer than the one retirees get today, indeed about 20% more ounces. Moreover the pour starts improving in short order and by mid-century is as big as it ever was and then stein and pour continue to grow throughout the projection period. Now if we take the 2010 to 2037 line and extend it we see that our retiree/drinker of 2085 coulda/woulda been drinking from a full stein some 25% bigger than the one he ends up with. But still his daily beer ration remains more than double of what it is today.

Most policy discussions today hyperfocus on ways to get the stein and the pour into perfect alignment. Social Security ‘reformers’ tend to focus on ways to shrink the stein to meet the projected pour, preferably without a sudden transition that will upset the customers. Veteran beer drinkers will recognize this approach, typically bartenders wanting to skimp on beer serving sizes simply swap out their ‘pints’ with ones with gradually thicker sides and bottoms, the result looks the same and feels the same in your hand, but over time just doesn’t deliver the same zip. On the other hand supporters of traditional Social Security like Angry Bear’s Dale Coberly focus on ways to keep the pour right up to the rim of the growing stein, in Dale’s case by pointing out that the cost to the customer for that brimful of beer is just pennies per week. But I suggest what is important is not the alignment of brim and pour but the actual amount of the pour.

This post was inspired by an exchange between Dean and Henry Aaron of Brookings that I was privy to in which Aaron made the following observation in relation to the effect of higher real wages or an adjustment in the payroll cap adding to the total Social Security wage base:

A larger tax base has some effect on benefits. Since 1972, the system gains only very little, because a higher wage base raises taxes today and benefits later on; the system makes money on the time-value of money, but nothing else (in the pre-indexing days, the story is more complex).

And if you define a balanced ‘system’ with a perfect alignment between brim and pour this is quite true. But if you focus on actual pour size that ‘nothing else’ becomes something pretty significant. If we turn again to Dean’s figure and plug in higher real wages and a larger wage base oveall the effect is to drive the dark blue benefit line into a steeper rise. This does not necessarily delay the time of Trust Fund Depletion or the percentage of reset but it does or should change the resultant pour, from the perspective of the worker the same percentage cut from a higher baseline means more beer today and more beer than projected in the long term.

Some beer drinkers feel cheated if their ‘pint’ is not filled to the point that it overflows onto the serving tray as it is being brought to the table. Me I’ll just take that honest pint. Now looking forwards I would want as big a pour as I could get in my growing stein but my concern would be measuring from the bottom of the stein to the top of the pour and not the top of the pour to the rim of the stein, in the end I am a beer drinker wanting my fair serving whatever the variations in the glassware.

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Arctic temperatures and sea ice…

NSCID pictures:

These images, derived from passive microwave satellite data, depict the most recent daily sea ice conditions. Along with current and median total extent, the daily extent graph also includes the extent during 2007, the year of the record low minimum extent (dashed green line). Note that during the transition across the calendar year, data from 2006 or 2008 is included for continuity of the plot with the 2007 record year. This comparison shows the substantial recent change observed in Northern Hemisphere sea ice.



NSCID press release:

What the researchers found was a scientific story more in line with what people were witnessing on the ground. Weather along the Arctic latitudes was behaving more unpredictably than in other parts of the world. “That’s an incredibly important parameter to care about, incredibly important,” said Weatherhead. “The way I try to describe it to some people, if we get an inch of rain out at my house in the month of July, I don’t need to turn on the sprinklers. But if we get an inch of rain on July 1, and no rain after that, my lawn is dead.”

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