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

Keynes not considered a Prophet in the land of his birth

Robert Waldmann

Krugman not considered a competent data downloader in the Newspaper which employees him.

Writing about the new slashed budget proposed in the UK, Landon Thomas Jr sees invisible bond vigilantes

” bond market demands to follow through on promised austerity plans.” If this means anything it means that, before the announcement of the austerity bond prices were unusually low and/or falling sharply. In fact, bond prices were extraordinarily high.

“If you look at the real yields available in index linked gilts, even out to 2017 – seven years time – the real yield available on a index linked gilt is close to zero. That is telling you that rates are going to stay very low,” he claims.

“When people are using an historic onset to base where 10 year gilts should be, the zero real yield is a very unusual situation, it would typically be closer to 2.5 per cent. Unless you are willing to say that the real yield is wrong and, as such, argue that the BoE are about to start hiking rates, I don’t think you can say that gilts are inevitably going to give you a poor return.”

Looking ahead, Mr Apel

Most bond traders might be claiming they are worried about the deficit, but, if so, they are lying. The bond market says that the default risk is miniscule.

I propose we take up a collection to buy Mr Thomas a subscription to the New York Times.

bonus link to Peter Dorman Via Mark Thoma

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Main Street America and getting to be middle class

By Daniel Becker

We all know the arguments about the loss of good jobs. Automation, competition, outsourcing. We’ve been told that America was striking out to raise it’s status when it came to jobs. Don’t lament the loss of those blue collar manufacturing jobs to cheap labor. They aren’t worth it. Step up. The new jobs will pay more if you get educated. Well, an entire generation got educated, and they are now looking for a job that will just keep them at their status quo.

We seem fixated on just this singular aspect of the decline of the middle class. Well, there is an entire sector of our economy that was and is just as important to growing and keeping a middle class: Retail.

The entire economic focus on finance to the point of believing that all that is important to having a successful economy is to keep improving the efficiency of money has not only generated a formula for making money from money (CDO, CDS, ABS, subprime, leasing, arbitrage, shorting, longing, etc, etc, etc) it has also convinced us and made us act on the idea that consolidation is efficient and that efficiency is growth. The old “economies of scale” thingy.

Well, here from my friend is what he recalls of main street in Central Fall, RI. This is what we lost as a pathway into middle class for the sake of “efficiency”.

“When I was younger, Dexter Street was alive with activity. Anything you needed you could purchase on Dexter Street. There was a shoe store, two hardware stores, a jeweler, two bakeries, three or four restaurants, about 5 bars, a military store, two pharmacies, three barber shops, two liquor stores, about four of five variety stores, two meat markets and a fish store. They are all gone.”

It’s is not just the loss of the mills. Central Falls et al could have survived at a much greater level of prosperity if the people had not lost the only path to actually receiving benefit from outsourcing. But, with outsourcing came consolidation in not just manufacturing, but also in the end point distribution of all that consolidated manufacturing: Retail. The efficiency gained of the dollar producing a product outside the USA was consolidated by the move to consolidate the retail part (and wholesale too). The lack of share of productivity gains to the masses is not just do to the loss of manufacturing. It is also do to the loss of access to retailing.

Sure, we all thought it was grand buying something for much less than what Dexter Street Hardware USA could sell it for.  We had more money in our pockets after the purchase.  How’s your community doing now?

It’s not just industrial New England that lost retail as represented in the loss of “Main Street USA”, you know we are hearing of the destruction of the “heartland America” main street. I’m not talking about the loss of the cultural experience that “Main Street USA” represented, though there is that. We closed down for the sake of money efficiency, the other primary path to become middle class. In doing so, we also reduced the movement and thus booking of dollars within the local community. One dollar on Dexter Street, Central Falls, RI could potentially be booked in 31 businesses just by the owner of the business. Even if with that one dollar divided among the employees, that dollar still for the most part stayed in the community to be booked potentially 30 times. One dollar in Big Box Mall USA is divided up such that only a few cents per employee gets booked in the local community with the rest going up line to the few.

No, the trades related to construction can not make up for the loss of independent retail.  Retail was a major cylinder in the small business engine of our economy.  It was also a major path to political reality and activism.

It’s time we start broadening the discussion to beyond just money efficiency. Just as with the concept of the “free lunch” tax cut, that is, that there is no free lunch to growth via tax cuts so is it true with efficiency based on the slogan of “economies of scale” when talking about money’s roll in the entirety of society. That we can buy stuff from overseas cheaper at Big Box Mall USA is not enough of an answer to accepting this paradigm. 

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Thinking about Research

Chris Blattman highlights the latest version of Janet Currie and Reed Walker’s research on a positive externality of the shift to E-Z Pass (PDF link). From the Abstract:

We find that reductions in traffic congestion generated by E-ZPass reduced the incidence of prematurity and low birth weight among mothers within 2km of a toll plaza by 6.7-9.1% and 8.5-11.3% respectively, with larger effects for African-Americans, smokers, and those very close to toll plazas. There were no immediate changes in the characteristics of mothers or in housing prices in the vicinity of toll plazas that could explain these changes, and the results are robust to many changes in specification. The results suggest that traffic congestion is a significant contributor to poor health in affected infants. Estimates of the costs of traffic congestion should account for these important health externalities.

The interesting thing is that I read this paper a while ago—earlier this year, or even late last.  Well, maybe not this version of  the paper, but an earlier version of it which also showed significant positive results.  And it gets me thinking about how we deal with research.

Because the past six months or so—since the previous version—are six months in which this information apparently didn’t get disseminated to the Chris Blattmans and Kevin Drums of this world, six months during which uninformed people have bought houses near non-EZ-Pass toll plazas, six months during which every Republican candidate for the House or Senate not named Mark Kirk has spoken as if since climate change is not real, and therefore there are no possible reasons to reduce emissions. (As an aside, that the glorious liberal days of IN-9 are when Lee Hamilton seat for as long as he wanted it is an indicator of discourse shift, as this blog’s pretense to being “left of center” makes clear.)

In a limited sense, that’s probably as it should be.  People who knew about the paper read it, sent comments to the authors, asked questions, suggested changes and the refinements.  I’m certain the current version is a better paper than the one I read, with better details.

But there is likely someone who, in the past six months, bought a house near a toll plaza that doesn’t have E-Z Pass exits, thinking she was going to raise her soon-to-be-born child in a better environment than an apartment who would have liked to have known about this study, instead of ending up with “Buyer’s Remorse” in a real—not just an economic or psychological—sense.

As long as research is delayed by details and false narratives remain information-free, markets will remain inefficient. And people will have what economists gracefully call “suboptimal outcomes.”  Such as “prematurity and low birth weight,” neither of which is a positive indicator for future success and earnings.

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First Amendment pronouncement by O’Donnell…

by Beverly Mann
crossposted note from Annarborist

The National Review: Christine O’Donnell Wants the Koran Taught in the Public Schools

“O’Donnell stressed that preventing schools from the possibility of teaching intelligent design would violate the First Amendment clause that Congress could not prohibit ‘the free exercise thereof’ of religion. ‘He [Coons] forgot to quote [that] part,” she said.”

—The National Review, today

So Christine O’Donnell thinks that the Constitution requires that public schools teach religious beliefs and represent those beliefs as science. That, presumably, means that public schools are required to teach, say, the contents of the Koran as fact, too. Unless, of course, she thinks the First Amendment guarantees only Christians the right of free exercise of religion. In which case she forgot to quote that part of the First Amendment.

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Health Care thought: book recommendation

Tom aka Rusty Rustbelt

Health Care: book recommendation

Overtreated: Why Too Much Medicine is Making Us Sicker and Poorer by Shannon Brownlee

I was able to spend some time with Ms. Brownlee recently. She is a scientist turned journalist. I do not agree with everything she says be she is most thought provoking and we had quite interesting conversations..

Amazon link:

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Tax Shelter Pleas Still Being Entered–Erwin Mayer

Tax Shelter Pleas Still Being Entered–Erwin Mayer

by Linda Beale

Erwin Mayer is one of the attorneys at the former firm of Jenkins & Gilcrhist.  The law firm, with accounting firms and financial institutions, helped wealthy clients evade tax “through deceit and trickery” (quoting the U.S. Attorney’s Office for the Southern District of New York in its Oct. 19, 2010 press release about Erwin Mayer: Download Erwin Mayer Press Release).  Mayer pled guilty to conspiracy and tax evasion “stemming from his work in the design, marketing, implementation, and defense of fraudulent tax shelters, which resulted in the generation of billions of dollars of fraudulent tax losses claimed by tax shelter clients.”

Mayer worked on tax shelterse at Jenkins & Gilchrist between 1996 and 2004, on shelters such as “short sales”, “short options strategy” and “swaps”.  The Short Sale shelter was marketed to at least 290 wealthy individuals, generating at least $2.6 billion in tax losses.   The law firm got a fee based on the tax loss generated for clients, and assisted with implementation at every stage of the shelter, providing a “more likely than not” opinion.  But Mayer admitted that he knew the shelters had no reasonable possibility of a profit because the costs exceeded the (non-tax) profit potential.  He’ll face a maximum sentence of 5 years on conspiracy and 5 years on tax evasion and will forfeit his two residences and various accounts, worth more than $10 million.

Too bad the Feds haven’t pursued the banksters that profited from their frauds on customers as aggressively.  Wouldn’t we all–left-wingers and Tea Partiers alike–like to see the CEOs of Goldman Sachs and other investment banks suffer some real personal inconvenience and real financial losses out of the mess that they stuck on the rest of us with their securitization “get rich quick” schemes?

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China’s competitive devaluation

China took the world by surprise on Tuesday by raising bank lending and deposit rates for the first time since 2007. The story is, that restrictive monetary policy (i.e., raising rates) is needed to curb excessive lending, with an eye on mitigating inflation pressures. See this Bloomberg article to the point.

While restrictive monetary policy is needed, raising rates is not the only tool available to policy makers: China could allow their currency (CNY) to appreciate. With support from the fiscal sector, a broad CNY appreciation would improve prospects for global growth ex China via import demand. Instead, the higher domestic rates may crimp domestic demand, perhaps reducing inflation, but contemporaneously lowering import demand.

In my view, China’s move yesterday should be viewed as competitive devaluation: reducing domestic prices in order to capture a competive edge. The currency war, as so-called by Brazil’s finance minister, Guido Mantega, is afoot; and China just confirmed its participation.

Textbook economics says that a central bank cannot have it all: independent monetary policy, a fixed exchange rate, and open financial markets (the impossible trinity). China has a fixed exchange rate (currently, it’s effectively pegged to the USD, see chart below) with tightly monitored capital markets. This means that the Chinese economy effectively matches the “easy monetary conditions” of its counterpart, the US. Monetary policy in China is too loose.

Going forward, further accommodative monetary policy in the US will likewise loosen policy further in China; inflation pressures will be even more robust. But, large-scale asset purchases on the part of the Fed will likewise weaken the USD, which is positive for US exports and negative for US import demand.

All in all, policy makers in China are looking at the USD move with tunnel vision. If the CNY maintians its current trajectory (effectively flat), then any shift in relative prices based on the recent (or future) rate hikes will reduce the CNY real exchange rate (all else equal, of course) – that’s competitive domestic devaluation.

The table has already been set.

Chinese policy makers have slowed the nominal appreciation. Think about what could be if the CNY had maintained its 2005-2008 trajectory, where the CNY appreciated against the USD nearly 20%. Using the compounded annual growth rate (CAGR) over the same period, where the CNY gained 0.5% on a monthly basis against the USD, the month-end September CNY would be valued 11% higher against the USD than it is now.

They slowed real appreciation, too. The real appreciation of the CNY against its trading partners – the real exchange rate accounts for both nominal appreciation and price differentials across countries – slowed from an average 0.4% monthly gain spanning the period 2005-2008, as measured by the CAGR, to just 0.05% since then. (I use the JPMorgan real exchange rate index, but the BIS makes similar data available free of charge.)

The Chinese authorities are fully aware of the economic value of external demand (exports). The media will say that China’s trying to “cool” domestic inflation by raising domestic bank rates; but that’s not the full story. In my view, what they’re really trying to do is to “cool” domestic inflation in order to shift relative prices and depreciate the real exchange rate, all to gain a competitive advantage in global goods markets.

Rebecca Wilder

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Repurchasing bond packages

Hat tip Atrios for the link to Bloomberg for another link to add to this chain of title in the
Bloomberg news

Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit, people familiar with the matter said.

and Cedric Regula for this news.

Update: Of course, go out to do family things and news pops up…New fronts in foreclosure crisis at Naked Capitalism.

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