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

Sheer Idiocy, European (and American) Style

It’s rare to see theft described so directly:

Proposals made in July by the Basel Committee on Banking Supervision should be redrafted to allow banks to use so-called contingent capital to meet the obligations, the European Banking Federation said in a letter seen by Bloomberg News. They should also be changed so lenders that can’t meet the requirements don’t immediately face restrictions on their ability to pay dividends and bonuses, the EBF said.

Stringing up a few EBF bankers is seeming more and more like a calm, rational approach to solving their issues. Especially when even investors are calling out their lies:

“European banks are in the deepest hole of all. Over the past five years, the European financial sector has shed 900 billion euros in capitalisation and two thirds of its value,” said Jacques Chahine, chairman of European investment firm J.Chahine Capital.

“Although the sector has raised 450 billion euros in capital over the same period, this has clearly been inadequate to cover increased risk on sovereign debt. We believe banks will have to be recapitalised by an additional 450 billion euros to cover that risk,” he said.

The response from the European Banking Authority is less than encouraging:

“The stress test recently conducted by the EBA showed that EU banks have significantly strengthened their capital positions and are able to withstand adverse macroeconomic scenarios, a view not changed by the additional disclosure of sovereign exposures,” it said….

“The main EU banks have significantly strengthened their liquidity buffers, lengthened the maturity profile of their liabilities and covered most of their funding needs for 2011. However, going forward it will be important that normal access to medium and long-term funding markets is restored,” the EBA said. [emphasis mine]

Well, so long as it’s not an immediate crisis, everything is hunky-dory. Ignore that woman running the IMF.

Lest you think I’m only bashing Europeans—a role usually left to Rebecca, who uses their data, not their words—let’s also look at the glories of U.S. corporations. I’m taking the more delicate quotes here, just so you don’t think I’ve gone all Mish:

Central bank and Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP. That’s a postwar record. In 1945, it was just 20%. Even at the credit-bubble peaks in the late 1980s and 2005-06, it was only around 45%.

The Fed data “underline the poor state of the U.S. private sector’s balance sheets,” reports financial analyst Andrew Smithers, who’s also the author of “Wall Street Revalued: Imperfect Markets and Inept Central Bankers,” and chairman of Smithers & Co. in London.

“While this is generally recognized for households,” he said, “it is often denied with regard to corporations. These denials are without merit and depend on looking at cash assets and ignoring liabilities. Cash assets have risen recently, in response to the fall in inventories, but nonfinancials’ corporate debt, whether measured gross or after netting off bank deposits and other interest-bearing assets, is at peak levels.”

By Smithers’ analysis, net leverage is nearly 50% of corporate net worth, a modern record. [emphasis mine]

This should come as no surprise. The lie coming out of KocherlakotaLand in early 2008 was that since companies drawing down on previously-unneeded-and-therefore-unused lines of credit was evidence that we were not in a recession [warning: PDF the reading of which will damage your brain; superstitious Christians should note the Working Paper Number].

Now, those same borrowings, along with capital market moves, are being used to show that companies have “record cash holdings.”

Borrowing money without having a use for it is good in two circumstances: (1) if you are paying down higher-cost debt [oops, that’s a use] and (2) if the carry is positive (that is, if you can earn more than you are being charged in interest–oops, that’s a use, too).

If families worked like European banks, we would all be taking vacations and spending like there is no tomorrow. If they worked like American corporations, they would be borrowing money and boasting about how much cash they have on hand.

Can we now stuff the sh*t about how “governments have to work like families”? Corporations—and most especially financial services intermediaries—certainly do not.

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Weak consumer confidence and real wage growth portend weak consumer spending

Yesterday the Conference Board released its measure of consumer confidence, which dropped to 44.5 in August. This brings the Conference Board measure of confidence in line with the Reuters/University of Michigan measure of consumer sentiment. Bloomberg summarizes the Conference Board results.

Confidence is important, since consumer spending accounts for the lion’s-share of aggregate spending. Consumer confidence measures are highly correlated with the annual growth in real personal consumption expenditures – the correlation coefficients are 75% and 67% for the University of Michigan Sentiment index and the Conference Board’s Confidence index, respectively.

(Chart axis identifcation amended…rdan)

Ultimately, though, it’s all about jobs and personal incomes.


To date, while July real wages and salaries (deflated using the CPI) fell on the month, the 3-month average continues its ascent. Clearly the sluggish climb in real wages and salaries is not enough to spark a surge in confidence and spending. Neither will consumers draw down saving, as was the case over the last decade amid debt-financed consumption. In fact, saving is more likely to rise as a share of income than fall as the balance sheet repair process furthers.

Jobs and incomes will drive consumption.

To be sure, measures of confidence are “better” predictors of economic activity when the economy is fragile. We know that the economy is now much more fragile than previously thought. Weak confidence plus meager real wage and salary growth is, unfortunately, a harbinger of further ‘weak’ economic activity.

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Topical thread….Irene and people

Since Sunday noon till about Tuesday 6 pm had no power. The live high voltage wire downed along with two trees prevented cars coming or going for the duration of days, so helped spur reflection on neighbors, basic water needs and food stuffs, and in some cases emergencies (not our area). Still, fire and ambulance vehicle access was blocked because going around was not possible.

You would be amazed that people’s catchphrases for home wifi are forgotten, including where the printed version was hidden. Even the local starbucks and wifi was down. Ken could fill us in the the lack of running water I believe.

How about you?

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The Effect of Individual Income Tax Rates on the Economy, Part 3: WW2 and the Immediate Post-War Recovery

by Mike Kimel

This post is the third in a series that looks at the relationship between real economic growth and the top individual marginal tax rate. The first looked at the period from 1901 to 1928, the second from 1929 to 1940. This one will look at the period from 1940 to 1950.

Before I begin, a quick recap… both the 1901 – 1928 period and the 1929 – 1940 [link fixed] failed to show the textbook relationship between taxes and growth. In fact, it seems that for both those periods, there was at least a bit of support for the notion that growth was faster in periods of rising tax rates than in periods when tax rates were coming down. There were also a few other findings that might be surprising – the so-called Roaring 20s were a period in which the economy was often in recession. The New Deal era, on the other hand, coincided with some of the fastest economic growth rates this country has seen since reliable data has been kept. As we will see in this post, the period from 1940 to 1950, encompassing WW2 as well as the immediate post-war recovery, also is subject to a lot of popular misconceptions.

Real GDP figures used in this post come from Bureau of Economic Analysis. Top individual marginal tax rate figures used in this post come from the IRS. As in previous posts, I’m using growth rate from one year to the next (e.g., the 1980 figure shows growth from 1980 to 1981) to avoid “what leads what” questions. If there is a causal relationship between the tax rate and the growth rate, the growth rate from 1980 to 1981 cannot be causing the 1980 tax rate.

The following graph shows the growth rate in real GDP from one year to the next (black line) and the top marginal tax rate (gray bars) for the period from 1940 to 1950.

Finally, in the fourth decade we looked at in this series so far, we see a graph that doesn’t contradict textbook economics: growth seems to slow down as tax rates rise, reaching its lowest point (on the graph) when tax rates peaked. Then, after tax rates begin to fall, growth picks up again. So why do we see this negative correlation between tax rates and subsequent growth rates during the 1940 to 1950 period when we saw the opposite in the previous periods?

Well, as I’ve pointed out many times in the past, there is a quadratic relationship between tax rates and subsequent growth rates (kind of like the Laffer curve, but with real GDP growth taking the place of tax collections), and the fastest growth tends to occur when the top marginal rate is somewhere around 65%. (At this juncture I have to point out things can be true whether we like them or not. If you’re looking for a micro-foundations reason why raising tax rates can create faster economic growth, try this.)

In any case, tax rates in 1940 were at 79%, and they reached a high of 94% in 1944 and 1945. Clearly, at 79% the top marginal tax rates were already above optimum, and raising them simply moved them even farther away from the optimum growth rate. Conversely, cutting tax rates down to the low 80% following the end of WW2 moved tax rates closer to optimum.

But growth does not live by tax rates alone and the graph above hints at a few other misconceptions. Let’s start with a big one shared by folks on the left and the right, namely that World War 2 led to faster economic growth. In fact, many folks go so far as to say the economy suffered very slow growth until the outbreak of WW2, which as we saw in the last post in the series, is a comical claim. The graph below shows growth rates from 1938 to 1944. (Remember – for our purposes, growth is from t to t+1… thus, growth in 1938 is the percentage change between the 1938 real GDP and the 1939 real GDP.) As with Figure 2 in the previous post, the best ever year of the Reagan administration is also included for comparison purposes.

Notice… growth was already fairly quick from 1938 to 1939, and from 1939 to 1940… and then it really jumped from 1940 to 1941. Pearl Harbor was December 7, 1941, so most of that latter jump came before the American entry into the war. Now, one might say that somewhere around 1938 was the beginning of US involvement in WW2, what with Liberty Ships and the Arsenal of Democracy and all. Put another way, that big jump in growth came before the US was in the war, but as an administration whose policies had already generated several years of very rapid growth since 1933 took an increasing role in the economy. Apparently the economic policies followed were good enough to overcome even tax rates that were significantly above optimum.

Growth peaked between 1941 and 1942 and then began to shrink. In part, as we saw, that was because tax rates got too far above optimum. In part, on the other hand, it is because too much of the country’s labor pool was shipped abroad to fight in the war. But regardless… if the war had been a catalyst for jumpstarting the economy, the peak would not have occurred when it did… and growth would not have started accelerating so many years before the country’s entry into the war..

There’s one more myth that is worth tackling. That myth is that there was some sort of stupendous economic boom following WW2. And it only makes sense that there would be such a boom – the GIs came home, tax rates were cut in 1946 and again in 1948, government spending dropped, and rationing and price controls went by the wayside. And as Figure 1 shows, real GDP had a post-war nadir (I always wanted to use that word!!!) in 1947, and recovered after that. But it is important to put that recovery into context.

The graph below shows the rate of growth from 1947 (the bottom) to 1950 – the post-war miracle, as it were – and it compares it to the rate of growth from 1933 (the bottom of the Great Depression) to 1936, the heart of the New Deal.

As Figure 3 shows, there really is no comparison between the two recoveries. Whereas during the post war recovery, the economy grew almost 13% over three years following the bottom, it grew almost three times faster following the bottom in 1933. And from the previous post, we saw what happened during the rest of the 1930s. We’ll see what followed the post-War recovery in the next post on this series.

As always, if you want my spreadsheets, drop me a line. I’m at my first name which is mike and a period and my last name which is kimel at gmail period com.

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The Monetary Policy Debates

This article by David Leonhardt in the New York Times is getting a lot of attention.

Leonhardt argues that there is an active debate in the economics profession between inflation hawks, moderates and doves and that only the position of hawks and moderates are represented on the Fed open market committee (FOMC). He guesses that Perry’s equating dovishness with treason (now for monetary policy too) might be part of the problem.

I personally have a strong objection to Leonhardt’s article. He lumps together people who think that the Fed should not cause higher inflation with people who think that the Fed can’t cause higher inflation.

IF you were to conduct a survey of the country’s top economists, you would find a fair number who did not believe that the Federal Reserve should be taking more aggressive steps to help the economy. Some would worry that injecting more money into the economy might unnerve global investors or set off uncontrollable inflation. Others would wonder whether, with interest rates already so low, the Fed even had much power to lift economic growth.

But you would also find a sizable group of economists who thought the Fed could and should do far more than it was doing. This group, known as doves, tilts liberal, though it includes conservatives as well. If anything, it can probably claim a larger number of big-name economists — J. Bradford DeLong, Paul Krugman (an Op-Ed columnist for The New York Times), Christina D. Romer, Scott Sumner and Mark Thoma, among others — than the camp that believes the Fed has done too much.

Note that the group that think that the Fed doesn’t have much power to lift economic growth are lost somewhere between the two paragraphs. Leonhardt goes on to present the debate between DeLong et al on one side and FOMC hawks “Richard W. Fisher of Dallas, Narayana R. Kocherlakota of Minneapolis and Charles I. Plosser of Philadelphia.” with the moderates such as Bernanke in the mushy middle.

The hawks and those who doubt that the Fed can cause higher inflation absolutely disagree. The hawks say there is a risk of higher inflation. DeLong says higher inflation is possible and would be good. They agree on the first question and then disagree about the effects of inflation and the relative importance of economic catastrophe and whatever costs 4% inflation would have (small to minimal according to top conservative academics like uh Kocherlakota).

It is just not true that no prominent FOMC nominee Nobel Laureate has expressed doubt as to whether the Fed can cause higher inflation. Leonhardt seems to have decided that Peter Diamond just doesn’t exist (or to agree with Sen Shelby that he doesn’t know about money — I might add that top academic N. Kocherlakota’s research on money is all based on Peter Diamond’s search model).

I don’t have the sense that Romer and Krugman firmly disagree with those who think the Fed can’t do much more. They call for more more more, but don’t IIRC express confidence that anything the Fed might do would have a really big effect. Conflating the questions of should the Fed try to cause higher inflation and can the Fed achieve it makes them definitely doves. That’s why I object to the conflation.

Before the jump I note (again) that I think the Fed could do more which would be useful — buy risky assets (via Maiden Lane III if necessary). But that means I absolutely don’t agree with people who call for QEIII and look at the quantity and not the quality or who think that saying more inflation would be nice would have much effect or who call for targeting nominal GDP (why not jut “target” real GDP and cut out the middle man ?).

By the way Leonhardt forgets about Diamond also when making the obligatory claim that both parties share blame “The Obama administration has also been slow to fill some Fed openings. At least one of the 12 seats has been vacant since Mr. Obama took office, and two are now.” as Leonhardt knows perfectly well, the Obama administration can’t fill Fed openings if Republican senators filibuster votes on nominees. Obama is not the reason that there are two vacancies, Shelby is. Hat tip Tom Levenson

On the other hand the article does contain news for anyone who thinks that Scott Sumner is reality based.

Mr. Sumner has become so dispirited by the Fed that, before leaving on a trip for Italy last week, he left a post on his well-read blog, The Money Illusion, under the headline, “Not enough.” The headline, he wrote, “refers to my reaction if the Fed does something while I’m gone.”

Sumner just wrote that he doesn’t bother to wait to learn the facts, because he already knows the answer. I knew that was true of him (in general) but you aren’t supposed to say so.

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Cowen and truck driving jobs in North Dakota

by Mike Kimel

Tyler Cowen has a post on truck driving jobs in North Dakota:

My poking around showed that some of them start at 75k a year, though with raises for good performance.

The implication, of course – why don’t unemployed people move to North Dakota and drive trucks for good wages rather than stick around and collect unemployment?

I’ve got a theory:

Figure 1

Screenshot from Job Service North Dakota, run by the State Gov’t of North Dakota.

Advertised wages for light truck drivers are quite a bit lower ($21,736 for entry level).

More generally, I imagine there is a reason why unemployed relatively unskilled people, in, say, Lincoln, Nebraska don’t go through the expense of moving their families to Bismark and taking the coursework needed to get certified in order to get a job paying $32K a year or to do the equivalent to become a roughneck at a gas boomtown, even ignoring the fact that the jobs pay less than outsiders believe and the costs of taking them are greater. See… we’ve been through this before many times.

The boom in the new skillset often ends before the new entrants can recoup their investment in gaining the skillset. And not just for the unskilled. Ask the folks who flocked to Silicon Valley in the 1990s for those great jobs as programmers. I’m sure you can find someone who drove out to Palo Alto in 1996 who is still programming and making north of $175K to boot but I’m guessing those people are huge outliers, not the trendline.

Disclosure. I’m now currently looking for a full time job. Given the severance package I accepted from my previous employer and since I have some consulting work to do, I’m pretty sure I’m neither eligible for unemployment benefits nor able to move to North Dakota to train for an exciting new career hauling cargo.

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Health Care Thoughts: Regulations Gone Wild

As Rusty presents his short ‘thoughts’ on the administrative end of the national healthcare reform process, I noticed some readers have taken the problems he notes as indicative that the whole process is flawed and destructive. I do believe that is a wrong tack to take and will not serve to learn more of what is happening in the process. The US public has only begun to take note of the growing necessity of deciding not only public spending but the huge costs to the current private system. Changes are happening in that area as well.

The steadily increasing complexity of insurance billing and particular contracts with groups is simply bypassed in macro discussions but has profound effects on delivery of services and costs. We glibly point to general ‘benefits’ sections of insurance as the ‘worth’ of plans and that justify the ‘premium’ schedules….not the real contracts on the other side of service delivery. Many general public discussions ignore the trends in the private sector. The overall costs of the system itself as the ‘cost curve’ bends downward without much general scrutiny will impact more than the handy medicaid and elderly targets in the political discourse..

Health Care Thoughts: Regulations Gone Wild

My favorite nurse has been attending in-services and doing some computer seminars on long-term care nursing. She is not happy.

She sat down the other evening and put together a list of 15 major regulatory driven changes in procedures and/or documentation. In reviewing the list, she determined that 2 or maybe 3 of the changes will improve the quality of care or the safety of residents.

So what about the rest?

She doubts that changing a 16 step process for administering sterile eye drops to an 18 step process will have much value. If she uses the 16 step process in the presence of a state or federal surveyor the facility would be cited for inadequate care, even though the care is perfect.

And the triplicate procedures for verifying narcotics are ever expanding into four and five step processes repeated multiple times each day (the DEA, having won the war on drugs, has been hounding nursing homes on paperwork).

Keep in mind a nursing home has much more extensive documentation rules that even an acute care hospital, with less staff.

When business and professional people complain about federal regulations, many academics and left leaning politicians pooh-pooh them as greedy whiners, but in the real world there are real impacts of regulations, not all positive.

Tom aka Rusty Rustbelt

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Did Scott Keyes Just Save the World ?

I don’t want to be hyperbolic, but I think that Rick Perry’s chances of being elected President just declined significantly

KEYES: But should states-rights supporters be worried that, as governor you said that Social Security is not something that falls in the purview of the federal government, but in your campaign, have backed off that?

PERRY: I haven’t backed off anything in my book. Read the book again, get it right. Next question.

Keyes explains

In Perry’s book, released just nine months ago, he writes on page 48 that Social Security is “by far the best example” of a program “violently tossing aside any respect for our founding principles.” On page 50, he goes on to say that we have Social Security “at the expense of respect for the Constitution and limited government.”

Update: The next post at think progress

Asked by a woman in the crowd about Social Security being viewed as an entitlement program, Perry reiterated the suggestion in his anti-Washington book, Fed Up!, that the program amounts to a Ponzi scheme.

“It is a Ponzi scheme for these young people. The idea that they’re working and paying into Social Security today, that the current program is going to be there for them, is a lie,” Perry said. “It is a monstrous lie on this generation, and we can’t do that to them.”

I don’t make predictions, but i wonder when was the last time that someone who called Social Security a “monstrous lie” was elected President ?

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I Do Not Think "Capricious" Means What You Think It Does

Let the Waves of Pity Begin:

More than 80 percent said they don’t believe that their compensation is mainly predicated on performance. Instead, [Capstone managing partner Rik] Kopelan said, young investment bankers worry that it’s “based on the profitability of the firm, based on how powerful the group heads were, based on capricious things.” [emphases mine]

Gosh, really? That would never happen in the real world.

So why are they so saddened?

One investment banker who participated in the survey described a breach of the “tacit understanding” that he or she would be well compensated.

I don’t know about anyone else, but if you try to use the phrase “tacit understanding” to get something valuable from an Investment Banking client, you will quickly find that you no longer have a client.

But the pain…

Considering “the sacrifice I make in my personal life (100-hour work weeks, canceled vacations, etc.), this business has to be more rewarding,” the person said, according to Capstone.

You hear a lot about people working 100-hour weeks. Some of it is true. The part that is left out is that those weeks are also filled with a company car home (and often to), meals provided on the expense account, and a guaranteed base salary with a bonus that (for those 100-hour a week jobs) generally runs north of 100% of salary. And that’s ignoring signing bonuses.

Note, by the way, that having a guaranteed salary does not make you an entrepreneur. Or a farmer. Or a store owner. Or a restauranteur of any type, from Tom’s Diner to The Quilted Giraffe. All of whom are also likely to be working 14+ x 7 without pulling what some glibly compare to McDonald’s wages.

What it does do is gives you an opportunity to move up in an organization, to develop your career, to peak out at compensation of, say, almost 3/4 of $1,000,000,000 in a year.

Not exactly on par with what a bodega owner or a farmer has a chance to make.

And, yes, comp may have dropped a bit since 2007. (I wonder why?) But starting comp is still rather high (PDF; keep in mind that the numbers shown are in Pounds, not Dollars; multiple by about 1.6).

The good news:

“Fewer and fewer plan on making it a career, because they’re working these long hours and not getting paid as well as they were.”

Gosh, what will we do with fewer people in Securities and Investment jobs?

Come to think of it, how popular is “intermediation” as a career choice since the End of the Reagan Era?

The punchline:

Last year, according to New York State Comptroller Thomas DiNapoli, Wall Street paid out $20.8 billion in cash bonuses, instead of the $22.5 billion a year earlier.

A mere $25-27,000 per person, sort of. But that’s cash alone—stock and stock options, for instance, are not included.

Don’t worry, though. I’m certain everyone who says “Do you want fries with that?” is also in line for $25,000 or so in bonus every year. That’s why everyone knows the phrase, eh?

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Federal emergency Aid and no borrowing of funds for relief efforts

If these words translate to actions in the Congress on emergency aid, I believe it is a significant departure from past policies. And Virginia, Cantor’s home state, is predicted to be impacted. We will know soon enough if political capital is spent on this idea.

A spokesperson for House Majority Leader Eric Cantor (R-VA) said that if there is any damage caused by Hurricane Irene requiring federal disaster funding, the money would have to be balanced out by spending cuts elsewhere in government.

“We aren’t going to speculate on damage before it happens, period,” his spokesperson Laena Fallon told TalkingPointsMemo. “But, as you know, Eric has consistently said that additional funds for federal disaster relief ought to be offset with spending cuts.”

Read more at Business insider

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