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

Felix Salmon comments on media bias

Felix Salmon comments on media bias at Seeking Alpha:

But let’s not kid ourselves that there’s any particular reason why global stocks are falling. And especially, let’s not try to invent some spurious reason for the fall, be it broad and inchoate (“global economy fears”) or weirdly specific (“Federal Reserve pessimism”).

As a general rule, if you see “fears” or “pessimism” in a market-report headline, that’s code for “the market fell and we don’t know why”, or alternatively “the market is volatile and yet we feel the need to impose some spurious causality onto it”.

This kind of thing matters — because when news organizations run enormous headlines about intraday movements in the stock market, that’s likely to panic the population as a whole. They think that they should care about such things because if it wasn’t important, the media wouldn’t be shouting about it so loudly. And they internalize other fallacious bits of journalistic laziness as well: like the idea that the direction of the stock market is a good proxy for the future health of the economy, or the idea that rising stocks are always a good thing and falling stocks are always a bad thing.

Or, most invidiously, the idea that the most interesting and important time period when looking at the stock market is one day…

I’m not going to try to read any great narrative into this chart. But if you want to explain stocks to the broad population, this is the sort of thing you should be showing them. Rather than useless and irrelevant news about what happened to stock prices this morning.

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The AMT: why we should retain it with minor reforms to protect the true middle class

by Linda Beale

The AMT: why we should retain it with minor reforms to protect the true middle class

A commenter on an earlier thread complained about the Alternative Minimum Tax (AMT), saying it should be abolished. He seemed somewhat misinformed, suggesting that the alternative to the AMT is better enforcement.It seems that it might be timely to remind readers about the purpose of the AMT, its advantages as well as its flaws, and the way that reform could reasonably be undertaken to better accomplish its purposes. The following is an edited excerpt of my response to that reader on this issue.

The purpose of the AMT is to limit the advantage from aggregating deductions and exclusions and other provisions that are of particular benefit to those with high incomes.

For background, readers may want to read my extensive article on the AMT, available on SSRN at Or you can skim through the more accessible (and less dense) series of blogposts on the AMT based on the ideas and information in the article, titled “What Should Congress Do about the AMT?:

Part 1, available at,

Part 2, available at;

Part 3, available at;

Part 4, available at;

Part 5, available at; and

Part 6, available at

The AMT operates (admittedly imperfectly) to reduce the tremendous advantage that the highest-income Americans in the top 20% of the income distribution enjoy from the many deductions, exclusions and outright subsidies built into the tax Code. Many of those deductions and exclusions make some sense if provided to those who otherwise would pay too high a rate of tax—i.e., the personal exemption, the medical expense deduction–or if the intent of a transaction would be somewhat undone by taxation–i.e., the gift exclusion. But many of them don’t make much sense at all (e.g., the charitable contribution deduction at face value rather than at investment amount; the mortgage interest deduction) and certainly don’t make sense as a regressive item that provides the greatest benefit to the highest income recipients. The AMT operates to reduce that unmerited advantage by measuring (again, imperfectly) the cumulative effect of preferences that reduce taxes. As tax policy, it has the disadvantage of adding complication and creating some confusion, but the clear advantage of providing another way of ensuring that those with high incomes pay some tax.

Congress should quit its annual extension of stupid giveaways like the R&D credit, and it should quit its senseless annual extension of the AMT “patch”. Instead, it should reform the AMT along the lines that I suggested in the article and series of postings–by treating the capital gains preferential rate as an AMT preference item (which was done earlier in our more sensible history), by indexing the AMT exemption amount to inflation at an amount that would correspond, in the context of the AMT, to similar protection offered by the regular tax for those in the bottom 60% of the income distribution. The latter step would prevent the problem of the AMT reaching ever lower into the income distribution and thus protect the middle class, while permitting the AMT to operate as it should on the top two income quintiles.

originally published at ataxingmatter

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LBO:Private Equity::HFT:Algorithmic Trading?

The High-Frequency Traders who have been distorting the U.S. stock market and raising the costs for everyone else have had their pride wounded. After starting with a straightforward definition:

High frequency trading — the use of computer-driven, algorithmic-based techniques to execute trades in a matter of microseconds — is drawing scrutiny, but Wall Street argues regulators may be focusing on the wrong issues.

we quickly get the we-don’t-like-our-name crowd:

“The term is widely used. Yet you never find a definition for it,” said Chris Concannon, partner at Virtu Financial. “People have stats based on a term that has not been defined. How do you know that HFT volume in the US moved up to 63% without knowing what that term even means?” he asked.

Rarely do journalists make people stupider so quickly, outside of political reporting.

It gets worse:

Virtu Financial is often referred to a high frequency trading firm. But Concannon says he struggles with the definition. “The brand we like to fit under is electronic market making,” he said. “we need to craft better terms,” he added.

Other panelists also seemed reluctant to define themselves as high frequency traders. Adam Nunes of Hudson River Trading, said his firm, founded by mathematicians, considered itself a “quantitative trading” outfit….

It was a theme echoed later in the day by NYSE Euronext(NYX) COO Larry Leibowitz. “We have lumped anyone who does algorithmic trading into high frequency because so much of what algorithm trading does is high frequency,” he said.

Gosh, the poor, suffering HFT traders who desperately want another name. But at least we know that Regulatory Capture is still enforced:

Gregg Berman, senior advisor to the director of the SEC’s Division of Trading and Markets, said there was no “clear, identifiable” link between high-frequency trading and the volatility that was experienced in the global market in August. He called the debate over HFT’s role, “high frequency theorizing”, the Wall Street Journal reported.

Yep, it’s all just theory (last link h/t Barry Ritholtz).

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Hostages to Fortune ?

Brad DeLong and Matthew Yglesias report that operation Twist worked, because 30 year bond yields have declined since it was announced.

Brad “30y Treasury yield down 13 bps, 2y yield up 5bps. Exactly what you would expect with announcement of twist operation.” So Brad why were you so sure that the 30y yield would not decrease by 12 or 14 bps ? Do you use “exactly” exactly according to the exact dictionary definition ?

Matt Yglesias also reports that it works. He didn’t type “exactly” and showed a bar graph.

The latest from Bloomberg shows change from last close of +0.03% not -0.13 %

I actually don’t know if this means -0.1 from the announcement or +0.03 from the announcement. I don’t really care. 0.1 % one way or not will make almost no difference.

The answer to the question is no. Yglesias and DeLong did not give a hostage to fortune, because making a big deal about -0.13% is silly no matter what happens later.

OK Brad did say the FOMC did 10% of what it should have done. That is giving a hostage to fortune. – 1.3 % sure isn’t enough but it is significant. +0.35 % not so good. So that is a hostage to fortune hanging from a linear extrapolation.

Possibly irrelvant figure on certainly tiny changes after the jump.

update: The figure shows the 2 days after compared to the day after. So the 30 year yield is lower than it was at the time of announcement. I have trouble with time zones. As I typed before when I didn’t know for sure what day it is. Who cares ?

update II: Good thing I didn’t give any hostages to fortune. The change in the 30 year Treasury bond yield Sep 20 to latest is now -0.4% which sure isn’t negligible.

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CGI2011: Women’s Rights: What’s In It for Men?

As regular—well, obsessive–readers know, I’m stealing a title from the sainthood-destined Michèle Tertilt.  But it seems appropriate—and a better title than “Engaging Boys and Men as Allies for Long-term Change”—for today’s Plenary hosted by Former Chilean President Michelle Bachelet.

We got a taste of this yesterday, on the panel hosted by Robin Roberts (now a host at Good Morning, America, apparently; I stopped paying attention to her career after she left ESPN, around the time I stopped paying attention to ESPN), when Dikembe Mutombo declared that having daughters had changed his worldview, no to mention a CGI member from the floor who reminded anyone who had forgotten that the doors that opened for Roberts herself were largely driven by the opportunities created by Title IX, If you treat half of the population as if it only consume and can never produce, you lose opportunities. When you stop doing it, opportunities open and the pie gets larger.

Gary Thomas Barker, the International Director of Instituto Promundo, notes that two-thirds of the men in the world don’t abuse women, and that we need to move closer to 100%, since abuse reduces chances of economic development (no matter how self-delusional the U.S. Supreme Court may have been), even if there were an excuse for it.

UPDATE: Market share corrected in the following paragraph; with thanks to Maggie Edinger at Hill & Knowlton for the correction and a link to this Reuters article discussing the company’s plans in Afghanistan for this year.

Karim Khoja, Chief Executive Officer of mobile phone provider Roshan runs the largest telephone company in Afghanistan—with 6% 35% of the market—and notes that 55% of the people in Afghanistan (his potential customers) are women. But Roshan knew when going into the country that the financial decisions for the household are controlled by the men, so direct targeting of women would not work—until very recently.  The initial pitch was “know where your wife is.”  Three years later, there are women buying their own mobiles—with, presumably, the full knowledge and blessing of men who have seen and understood the advantage to themselves of having them doing so.

Khoja also noted that, while women spend about 20% less than men on their mobile services, they are more loyal to the company—and are, therefore, the more profitable customers to have.

Most interesting is Khoja explaining the hoops the company had to go through to hire their first woman: direct family discussion, including driving her to and from the office, ensuring an appropriately courteous work atmosphere (White House employees need not apply), and that it took nearly a year before the company reached critical mass.  At this point, he essentially had noted that he was discussing a chicken-egg cycle where women could not get jobs or start businesses without having access to funding, and couldn’t get access to funding without getting a job or starting a business.

Muhammad Yunus of the Yunus Center then took over, explaining the details of the early days of Grameen: how their making loans to worthy business ideas—which largely came from and were to women—led to having to explain to men the advantages that come from having a two-income family.  This was followed by discussions with the women, who were then alert to (and, of course, able to address) the issues raised by their husbands. The initial result is that everyone became comfortable with the new situation; the collateral effect—which should be to no one’s great surprise—was that many of the women’s businesses improved even more after familial buy-in was achieved.  By the third year, the villages have a strong base of working women’s businesses and the model expands itself.  Generations of progress were made in the space of a few years, and Yunus and Grameen have never had to look back from that model.

President Bachelet notes that she probably would not have been President if she had not first been Minister of Defense—not, conspicuously, Minister of Health.

Muhammad Yunus notes that we have to move to the next step: it’s no longer just about making money, it’s also about problem-solving. “Social business” produces more loyal employees and a better chance at successful innovation. From the floor, a leader of Coca-Cola notes that they have been expanding their small business efforts with female leaders, which has given them better work.  (Also notes that the sponsored a “water-harvesting project” for every goal scored in the 2010 World Cup—which resulted in 520 projects being initiated.)

Another commenter from the floor notes that, fifteen years ago, 75% of the new AIDS cases in Africa were girls under the age of fifteen. It’s difficult to educate, let alone turn into a businesswoman, someone who is dying and/or pregnant.

Republic of Rwanda President Paul Kagame closed by noting that this entire panel has been “common sense.”  The scariest part of it is that these things keep needing to be said.

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Basic Macroeconomics

by Mike Kimel

Recently I had the opportunity to speak to Professor David Cohen’s class on the US Presidency in the Political Science department at the University of Akron.

My talk was structured around three questions involving some extremely simple recent economic history. None of the questions were trick questions.

The questions appear below.

Question 1. From 1980 to 1992, the top marginal tax income tax rate was:
-70% in 1980
-69.125% in 1981
-50% from 1982 – 1986
-38.25% in 1987
-28% from 1988 – 1990
-31% in 1991 and 1992

Given this pattern, which of the two graphs that follows do you expect shows the growth rate in real GDP over that period?

Figure 1 Option A

Option A: A few years after the first tax cuts, there was one year of unusually strong growth. Subsequent growth slowed a lot, and continued slowing as tax rates fell further.


Figure 1 Option B

Option B: The more tax rates were cut, the faster the economy grew. And then Bush I broke his “read my lips, no new taxes” promise and the economy slowed again.

Question 2.
The following is the list of eight year administrations since 1929:
-FDR (1933 – 1941)
-Truman (1945 – 1953)
-Ike (1953 – 1961)
-JFK/LBJ (1961 – 1969)
-Nixon/Ford (1969 – 1977)
-Reagan (1981 – 1989)
-Clinton (1993 – 2001)
-Bush 2 (2001 – 2009)
(FDR’s first 8 years are included, but the War years are left out. Also, Truman took over a few months into the term.)

It turns out that the degree to which each administration cut the tax burden (i.e., current tax receipts/GDP) during its first two years in office seems to strongly affect the growth rate in real GDP in the subsequent six years in office. (E.g., the amount by which Reagan cut the tax burden from 1980, Carter’s last year in office, to 1982 seems to strongly affect the annualized growth rate in real GDP from 1982 to 1988.)

Which of the following two graphs do you think best explains the relationship that was observed between the change in the tax burden in the first two years of the administration and the subsequent growth in real GDP over the remaining six years?

Figure 2 Option A

Option A: Administrations which reduced tax burdens early on enjoyed rapid growth later. Administrations which increased tax burdens early had poor growth later.


Figure 2 Option B

Option B: Administrations which lowered tax burdens early on suffered through poor growth later. Administrations which raised tax burdens early had strong growth later.

Question 3
Reaganomics involved cutting taxes and reducing regulation. The New Deal (for our purposes, not including World War 2 years) involved tax hikes and increased government control over the economy. Which of the following two graphs shows the growth rate in Real GDP over the Reagan and FDR years?

Figure 3 Option A.

Option A. Growth was faster under Reagan than under FDR.

Figure 3 Option B.

Option B. Growth was faster under FDR than under Reagan


The answers…
1. Option A: A few years after the first tax cuts, there was one year of unusually strong growth. Subsequent growth slowed a lot, and continued slowing as tax rates fell further.
2. Option B: Administrations which lowered tax burdens early on suffered through poor growth later. Administrations which raised tax burdens early had strong growth later.
3. Option B. Growth was faster under FDR than under Reagan. Quite a bit faster, in fact.

By the way… in each of the questions, the data for both options A and B was “real.” Its just the wrong answer, in each case, the growth rates did not match the taxes for any given year, but rather were sorted in order to fit the story line that everyone seems to believe. Also, for Question 2, I could have used the first year, the first three years, the first four years, the first six years, or the first seven years rather than the first two years of the administration v. the remaining years of growth and gotten similar graphs. Using the tax change for the first five years v. the annualized change in growth fro the subsequent three years shows almost no correlation whatsoever. My guess is that’s the outlier, given every other combination shows a recognizable story.

Its also worth noting… the three questions I picked are not “gotcha” questions or special cases. They’re central to the macroeconomic theory that has prevailed in the United States for the past few decades, and which American economists have managed to sell to the rest of the developed world since about 1990. The Reagan tax cuts are usually presented as exhibit A that tax cuts “work.” But I could have used Exhibit B (the so-called Kennedy tax cuts) instead. It wouldn’t have made a difference. The second question is an attempt to show how policies affect the economy the entire time they are in effect. Essentially, all the data available since the BEA began computing GDP is there, except the Hoover years, the Bush 1 years, the Carter years, and WW2. The third question compares what are often referred to as the worst economic policies this country enacted in the past 100 years to what are often referred as the paragon of economic policies in the same period.

I’m sad to say I’m confident most economics professors in the United States would get the three questions wrong. I’m also sad to say, I think it is no more possible to explain the US economy without knowing these facts than it is to produce a useful theory of the solar system assuming turtles all the way down.

And since most economics professors wouldn’t get it right, that’s what they’ve been teaching. I would venture to guess, in fact, that a student at, say U of Chicago or George Mason University (to use the flagships for two of the more popular “schools of thought”) is more likely to get these questions wrong after taking an economics course than before. And now, after a few decades, its now popular wisdom and the foundation of our economy. If you’ve been wondering what caused The Great Stagnation and the mess we’re in now, look no farther.

As always, if anyone wants my spreadsheets, drop me a line. I’m at my first name (mike) period my last name (kimel – one m only!!) at

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