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Home Work, GDP, and Family Values: It’s Nice to be Validated

A while back I put together a rough calc estimating what our country’s “home-work” is worth as a share of GDP, based on the idea that such work is production, and that it has every bit as much value to our lives as work that we get paid for.

By that estimate (based on the BLS American Time Use Survey), adding the value of home work performed at the median wage would increase our measured GDP by 33%.

It turns out that that estimate was pretty good. Nancy Folbre points to an article in this month’s Survey of Current Business (PDF) that comes to quite similar conclusions:

inclusion raises the level of G.D.P. 39 percent in 1965 and 25.7 percent in 2010.

I also surmised that since Europeans work less hours than Americans (we work four more weeks every year than they do), they would have more time for unpaid work, so the contribution of such work to GDP would be higher in EU countries. Following the data trail back from the SCB piece led me to Cooking, Caring and Volunteering: Unpaid Work Around the World by Veerle Miranda, based on the Multinational Time Use Study. We find therein:

With the exception of Norway (where total GDP is greatly reliant on oil revenues), the European countries do indeed range well up the scale from the U.S.

As I said in that previous post:

If you truly believe in family values, those are some numbers worth pondering.

Cross-posted at Asymptosis.

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Calculating the Cost of Bailouts

by Linda Beale

Calculating the Cost of Bailouts

A recent New York Times includes a piece on the Treasury’s study of the various bailouts or “rescues” of distressed financial and other institutions. Gretchen Morgenson, Seeing Bailouts Through Rose-Colored Glasses, New York Times (May 19, 2012).

The Treasury study, The Financial Crisis Response–in charts (April 13, 2012), is positive about the way that government handled the bailouts.

Collectively, these programs –carried out by both a Republican and a Democratic administration–were effective in preventing the collapse of the financial system, in restarting economic growth, and in restoring access to credit and capital. They were well-designed and carefully managed. Because of this, we were able to limit the broader economic and financial damage. Although this crisis was caused by a shock larger than that which caused the Great Depression, we were able to put out the financial fires at much lower cost and with much less overall economic damage than occurred during a broad mix of financial crises over the last few decades.

Reading that, one might conclude that everybody now is sitting fairly pretty, and that it was all done in a very upfront, fair and damage-free way. That ignores the fact that the bank bailouts treated the banksters with kid gloves–letting managers continue to receive their customary overcompensation and allowing banks generally to continue their predatory practices even while the taxpayers were providing them extraordinarily low-cost financing with practically no strings attached. Meanwhile, ordinary Americans–especially those in the lower half of the income distribution–suffered enormously. Congress–at the behest of the banksters–refused to enact mortgage clawback provisions in bankruptcy, the one law that would have done wonders at saving families and neighborhoods from unprecedented deterioration and blight.

To be fair, the report does include a bevy of charts that attempt to show how the crisis played out for the banks, the economy in general, and ordinary Americans (unemployment, depressed home sales market, etc.). But then the Treasury goes on to claim the following:

[T]he latest available estimates indicate the financial stability programs are likely to result in an overall positive financial return for taxpayers in terms of direct fiscal cost. These estimates are based on gains already realized and on a range of different measures of cost and return for the remaining investments outstanding. These estimates do not include the full impact of the crisis on our fiscal position. And they do not include the cost of the tax cuts and the emergency spending programs passed by Congress.

Now, it is good to know that at least the “direct fiscal cost” of the bailouts is likely to be positive. But note the gaping hole between that amount and the overall true cost of the bailouts–the “impact of the crisis on our fiscal position” and “the cost of the tax cuts” and “the emergency spending programs.” Now, at least the emergency spending programs generated economic activity and made real differences for individual people a good number of whom one can assume weren’t in the top 1%.

The tax cuts are a big cost item and one that may well not have had the benefits assumed, except for those that went to the lower and lower-middle income working classes (such as the payroll tax relief). And the impact on our fiscal position is ongoing and still strongly felt, as we struggle to rebalance an economy that already consumed too much from outside and produced too little here at home. So how much comfort can we take from the idea that the direct fiscal cost may be significantly less than some had initially expected it to be?

Here’s where the Times story comes in. Morgenson notes that “As the battles over financial regulation rage in Washington, it’s crucial that American taxpayers understand the costs associated with rescuing behemoth institutions.” We cannot take wise action for or against reduction in size of banks or other issues unless we are dealing with full information about the crisis and its aftermath. That won’t be easy in the politicized environment in which the Obama administration understandably wants to showcase how its efforts have helped the economy and the GOP seens intent on a “my way or the highway” approach to governance that cares more about winning a race than about doing what’s good for the people.

Morgenson reports on an interview with Edward Kane, Boston College finance professor and economist, who thinks that the public needs to see a more thorough cost-benefit analysis of the TARP and other expenditures. Kane calls the analysis “deficient” (one might even say misleading) for counting as gains the interest income the Fed made from holding Treasuries (this is like money passed from mom to dad to put in the allowance jar for the kids–in other words, Treasury interest is paid by the US fisc to the Fed, and the Fed’s profits are paid into the US fisc, so it’s all the same pot). But the bigger deal is a genuine evaluation of the opportunity cost of the subsidy provided to bailout recipients.

The programs provided enormous amounts of money at below-market terms for extended periods, he said. Had those guarantees been priced at their true market value — what a private investor would have charged to lend during those dire days — taxpayers should have received far higher returns. Morgenson, Seeing Bailouts Through Rose-Colored Glasses

Charles Calomaris, a Colombia Business School prof and NBER research associate who worked with Kane on the study, noted the cost-benefit concern.

“We are not saying that the benefits weren’t there,” Mr. Calomiris said. “We’re not saying that it wasn’t worthwhile to create these programs. Maybe it was, maybe it wasn’t. But it requires a fuller analysis of what the benefits were.” Morgenson, Seeing Bailouts Through Rose-Colored Glasses

crossposted with ataxingmatter

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Looking Back: The Seven Top IPOs of 2010

I’m not usually one to defend Facebook. Yes, I “use” it—it has more of my high school classmates as members than Classmates does—but it’s getting increasingly difficult to block Games from feeds, the adverts are cluttered, and the view doesn’t seem to optimise based on the screen I use. In short, it’s not trying too hard to keep me as an on-site consumer, and I’m not having a crisis reading it with TweetDeck. But the suggestion that the IPO is in some way an indicator of the Coming Apocalypse of the Internet or somesuch is absurd. So when Brad DeLong caught Ross Douthat being an idiot about the FB IPO (in other news, the Sun appeared to rise in the East today), I felt the need to defend the stock market in comments:

If you price an IPO properly for everyone, and everyone is working with clean hands and composure, there should be no “pop” at all. Since that will never happen, a pop of 5-10% on the first day is good, and anything 20% or under is a fine accomplishment. In the pre-InternetIPO days (Boston Chicken forward, if you want to quibble—though the really Stupid Investing 101 cases such as VA Linux or are all tech-related), you rarely heard of companies doubling or trebling their IPO levels on the first day. Even during that time, most of the IPOs—Visteon, anyone?—didn’t “pop.”

If the Internet is understood as a mature industry, we shouldn’t expect to see “pops” as a rule. Too many people know too much. Just for fun, I googled “IPOs in the 2010s.” The third hit produced a link to a article on “The Top 7 IPOs in 2010,” or at least the Q4 review of same. So I took those seven Ticker Symbols and put them into Yahoo! Finance (which is still easier to use than the Google version).

There are a couple of things to note here. First is that we’re working with the winners of the winners here; the firms that, with less than two months to go in the year, were the “winners.” With that in mind, look at the first-day changes (third to the last column). Five of the seven were priced within 10% of their first-day close. Only two “popped,” and one of those (QLIK) closed below its Opening Price on the exchange. The other (MMYT) was up slightly more than 20% from its Opening Price. Conclusion: The best of the best get priced rather fairly; a “pop” on the IPO is the exception, not the rule. Second is that the Exchange doesn’t necessarily help. The worst performer (JKS) was issued on NYSE. The best—and also the second worse, not to mention two of the three losers—are on NASDAQ. And third is that, even of the Successful IPOs in any given year, more than half of them (four of the seven) have returns that are lower than that of the inflation rate. As I said chez DeLong, referring to a couple of 2010 IPOs that were on no one’s Winner’s List:

If you take just Investopedia’s two “loser IPOs” from 2010, NKBP (Chinese) is down just under 50%—[which is due to a] major recovery recently—from its IPO price, while DVOX (market similar to FB’s) is down around 90%, trading as a “penny stock.”

Short version: Whether or not Facebook will be a winner as a company in the long-term has very little to do with the performance of its IPO. People who confuse the latter for the former—such as Ross Douthat—should not be paid to write about investing. (cross-posted from Skippy the Bush Kangaroo)

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The Fed Faces the End Game — And Blinks?

If you’ve ever been involved in a legal contention, like a business or personal dispute or a contested divorce, you know that the whole game pivots, ultimately, on the potential end game: what would happen if the thing went to court — even if (even because) everyone involved knows that it never will. The fact that it could, and the expected results if push did come to shove, determine the terrain of the playing field and the positions of the players, and all the ploys and counterploys played out on that field.

Ryan Avent brings that principle to bear in one of the nicest pieces I’ve seen laying out the game theory of monetary policy over the next couple of years. For my purposes, starting with the end game (my bold):

At one extreme, we can imagine a situation in which America’s government has entirely lost market confidence and is unable to sell its debt. In that case, the central bank, as lender of last resort, would be unable to avoid stepping in to buy that debt, in the process transferring control over inflation to the fiscal authorities.

Voilá: MMT World, where Treasury is simply spending newly-created money into existence, at the behest of the legislative and executive branches, by depositing it in recipients’ bank accounts. Bond/debt issuance is immaterial, because the Fed has no choice but to buy all the new bonds for “cash.” (Yes, the Fed is actually “printing” the money, but effectively the Treasury is doing so.) There is no Fed “independence.”

This is the scenario that would result if the Republicans were foolish and feckless enough to take their chicken game to the limit and let the head-on collision actually occur, with a default on U.S. debt. It’s the expected (inevitable) result if they “take it to court” — at least if they leave it that way for any period. (Has anybody mentioned the irony of the Republicans’ claim to be creating “confidence”? And, do you think they’d like the MMT World that they’re unwittingly trying to create? They really should, given how much they dislike the “unelected” Fed making decisions…)

Now moving one step back from that end game, Ryan looks at three “fiscal cliff” scenarios as projected (PDF) by the Congressional Budget Office (using a graphic from Brian Beutler at Talking Points Memo):

Just to multiply this out for you, one-year growth under the three scenarios (Q4/12–Q4/13) would be circa 0%, 2%, and 4%.

These scenarios all assume that the Fed does “nothing” in response — which I’ll define as keeping their balance sheet the same size, with no big (net) bond/asset purchases or sales, and making no announcements that that will change.

Which means we need to take another step away from the end game. Here looking at the righthand scenario:

Except, of course, that the economy will almost certainly not grow at a 5.3% rate no matter what Congress does. Arguments to the contrary are subject to what econ bloggers have come to call the Sumner Critique… Growth that rapid would … [prompt] steps to tighten monetary policy.

In Sumner’s words, the Fed — as the last player in every round of the game — would “sabotage” any growth that rapid (especially, I would add, if it saw any traces of that terrifying bogeyman, “wage inflation”).

All the players know that the Fed can do this by simply selling bonds (something they have no shortage of). Bond prices drop, yields and market rates rise, people borrow and spend less, confidence drops, stocks decline, people feel less wealthy, unemployment rises, inflation (and growth) are held in check. As they are at pains to remind us, the Fed has spent decades building this inflation- (and, collaterally, wage- and employment-)quashing credibility.

Nor does anyone doubt that they will do it. They always do, have done since Volcker.

But what about the other push-comes-to-shove scenario — the “fiscal cliff” on the left?

The Fed could therefore proclaim to the world that will maintain aggregate demand growth (in the form of, say, nominal income growth) at all costs, and that it would by no means allow the fiscal cliff to knock the economy off its preferred path. It could explain in great detail what specific steps it would be willing to take to achieve this goal, so as to boost its credibility. And if demand expectations as reflected in equity or bond prices showed signs of weakening ahead of the cliff, the Fed could preemptively swing into the action to establish the credibility of its purpose.

The Fed will almost certainly not do this.

And everybody knows this. After three decades of taking away the (wage- and employment-)growth punchbowl when the party starts getting (“too”) hot, and after four years of subordinating their employment mandate to their cherished inflation-control credibility, the Fed has a serious shortage of “growth credibility.”

Which means that the Fed has created a game that is asymmetrical. It has great power to quash growth through open-mouth operations; we know they’ll sell bonds if they promise and need to, and that doing so will dampen inflation (and growth).

But on the expansionist side, we can’t believe their promises. They would need to make actual bond purchases to spur growth. And even if they do both promise and live up to the promise, we (with the exception of [market] monetarists, few of whom are running large businesses or managing large amounts of money) don’t have great or certain expectations for the results.

“Show me QE3, and show me the results; I’ll believe it when I see it.”

But: Why won’t the Fed adopt policy that delivers strong GDP growth?

There’s the runaway inflation/loss-of-credibility explanation, of course. But the Fed isn’t run by adolescent freshman Republicans who think that 3 or 4 percent inflation is the slippery slope to ZimbabWeimar. They know that if they promise to let inflation rise then fall over a few years, then do exactly that, it would greatly stengthen their inflation-control reputation and credibility.

And there’s my theory: it would transfer hundreds of billions of dollars in real buying power per year from creditors to debtors, and the Fed is run by creditors. (Depression is a choice.)

Ryan has a different theory:

…moral hazard… if [the Fed] promises to protect the economy against reckless fiscal policy Congress will have no incentive to avoid reckless fiscal policy. … lay out a plan for medium-term fiscal consolidation but keep short-term cuts small and manageable.

Now you gotta ask whether manipulating the legislative and executive branches into being “responsible” by setting their expectations is any part of the Fed’s mandate. Talk about a nanny state.

But that aside: this is exactly what the Fed is doing, and has done for thirty years with its inflation-fighting moxie — (promising to) “protect the economy against [so-called] reckless fiscal policy” by reining in inflation (and wage and employment growth). It’s called The Great Moderation. (So by Ryan’s reasoning, the Fed has spent three decades encouraging “reckless fiscal policy.”)

Ryan thinks that the Fed’s afraid that it:

…will need to roll out dramatic, unconventional actions—the fear being, of course, that such actions would leave it hopelessly politicised and powerless to fight inflation. … [They’re] fighting to maintain their vulnerable independence.

Translation: They’re fighting to avoid the MMT-World end game, where the Fed becomes an irrelevant mechanical actor.

And one price of that fight may be the need to occasionally allow fiscal policy to matter—as unfortunate Americans may soon learn.

Why “unfortunate”? Where did that come from?

Is the prospect unfortunate because runaway inflation will result? You can count our problematic inflation periods from the past century on two fingers. Now count the recessions.

Or is it because higher government debt will be a drag on growth? Vague and poorly reasoned concerns based on a few here-and-there sample points nothwithstanding, we’d be well advised to look to our last bout of serious public debt increase: the one that ended in 1947, and was followed by the fastest decades of economic growth in living memory.

Cross-posted at Asymptosis.

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Guest post: Poll on Jamie Dimon and follow up

by Kenneth Thomas

The poll results are in on whether Jamie Dimon will resign from the board of the New York Federal Reserve Bank. By a 53%-40% majority, with 7% unsure, readers thought that Dimon would not step down in the wake of the huge supervision failure at JP Morgan, which led to its $3 billion and counting loss.

Meanwhile, the pressure is building for him to resign. Simon Johnson, whose article I first cited on this issue, has written new articles calling for an investigation into JP Morgan, calling for Dimon’s resignation, and taking on arguments defending Dimon. Johnson has also started an online petition calling for Dimon’s resignation or ouster.
Johnson is hardly alone, however. In recent days, others who have called for Dimon’s resignation include former Wall Street prosecutor and New York Governor Eliot Spitzer, Nobel Prize-winning economist Paul Krugman, Massachusetts Senatorial candidate Elizabeth Warren, and today, Kansas City Fed President Esther George said that Fed directors who don’t meet high standards should resign, which Johnson tweeted was “huge.”

I was one who voted “no” on the poll, but the recent activity makes me think the odds must be increasing. And yes, I signed Johnson’s petition.

crossposted with Middle Class Political Economist

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Event Studies and Efficient Markets

I do not find event studies interesting or convincing. I consider them an example of Schizzo-finance in which the efficient markets hypothesis is switched on and off. The field embraced that hypothesis for a while and I don’t think people understand how often they rely on it.

In an event study, the effect of a change on asset fundamental values is assessed by measuring the change in asset prices at the moment news of the change becomes publicly available. By fundamental value I mean the hold to maturity value of assets (or hold forever for assets like stock which last indefinitely. By the efficient markets hypothesis, I mean the semi strong version such that publicly available information can’t be used to get extraordinary risk adjusted returns. Ordinary risk adjusted returns are the returns one would get under rational expectations, that is, if everyone understood the economy (although the efficient markets hypothesis is always stated as a claim that asset prices act as if everyone had rational expectations not the claim that everyone does).

The fundamental role of the assumption that markets are semi-strong efficient in the approach is that it is assumed that perceived fundamental value can only change due to news. If agents must learn the relationship between events and, say, future dividends, interest payments, principal repayments and proceeds from bankruptcy procedures, then the price will not immediately correspond to the change in the distributions of these future variables.

This means that the hypothesis that something will substantially affect asset fundamental values is only refuted by event studies only if almost no one believes the hypothesis. If some believe it, their beliefs will cause asset prices to jump on the news. If they all learn they were wrong, the econometrician who relies on event studies will be the very last to learn, since the old miss-perceptions affect his final calculation via the assumption that asset prices are and always have been exactly what they would be if everyone understood everything.

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Third party efficacy

Yves Smith posted a call to action.

If you want this country to be different, you can’t just wish for it or expect voting to effect change. You need to be part of making it happen. And that was perhaps the greatest of Obama’s deceptions, that by listening to his seductive rhetoric, your passivity made you part of something greater and was tantamount to supporting change. That’s true only in the spiritual realm, not in the imperfect arena of here and now. Glenn Greenwald warned (emphasis his):

Obama is still a highly effective politician capable of this level of exploitation: exploiting people’s hopes and desires. When you combine that with the desire to believe — to feel once again that he will uplift people’s lives and that the hope one placed in him was justified and not misguided: nobody wants to feel like they were successfully defrauded — it’s an easy trick to repeat…that it’s a grand Manichean battle between Our Great Leader and Their Evil Villain — and there will be plenty of endorphins pumping through people’s brains. There will be enough to drown a large country.

Groups that have has a lasting impact on the social order – the Populists, the original Progressives, suffragettes, labor, blacks –organized outside the party system; indeed, when they were brought in the tent, they became less effective. The public has been told, again and again, the only choice is to hold your nose and select one of the two parties. It’s time we recognize that that myth no longer serves us.

Those of us who care about decency, the rule of law, constraints on corporate power, civil rights, and economic protections for the downtrodden have become complacent, and we are now reaping the bitter harvest of our neglect. Many of these protections seemed so fundamental that there has been a tremendous amount of denial over the speed at which they are being stripped from us. But these gains were not granted freely or easily by those in authority. They came about as a result of long, persistent, difficult campaigns. If we want to preserve the rights previous generations fought hard to win, we have to make this battle our own.

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EITC: Mulligan (economic theory) vs. Seto (empirical evidence)

by Linda Beale
EITC: Mulligan (economic theory) vs. Seto (empirical evidence)

TaxProf today noted the article in the New York Times about the EITC: Casey Mulligan, Do Tax Credits Encourage Work? New York Times ( 2012). Mulligan, an econ prof at the University of Chicago (home, of course, to Milt Friedman’s “free” market theories) noted that the EITC “could” discourage work.

The earned-income tax credit is often said to encourage work, but it may do just the opposite. …
The chart below shows the credit’s schedules for the 2011 tax year as a function of annual earned income for a given family situation (other family situations have the same basic shape). The schedule shown illustrates [a] mountain-plateau pattern … an increasing portion for the lowest incomes, a flat portion, a decreasing portion and then finally a flat portion of zero.

… For the same reasons that the credit encourages more work among people who might otherwise earn close to zero during a year, it can also influence some people to work less — those with earnings at or slightly above the downward-sloping or “phase-out” portion of the schedule, where people lose about 20 cents of their credit for every additional dollar earned during a year. In other words, for households on the downward-sloping portion of the earned-income tax credit schedule, the credit acts as an extra 20% tax on the income they earn in that range. The work-encouraging potential of the credit occurs only on the upward-sloping portion. … [emphasis added]

Now, Mulligan surely knows that this theory about whether the credit encourages or discourages work is just that–a theory. Much of the assumptions about when people will stop working and substitute leisure don’t seem to hold up in practice, partly because there are so many other factors at work besides the rather simplistic assumptions in freshwater economics (such as the joy of working, status of work, self-esteem of work, etc.). Nonetheless, Mulligan can’t help adding another line that makes the overall comment suggest that he thinks the EITC will on the whole discourage work.
[I]t is more common for families to be on the part of the earned-income tax credit where it acts as a tax, rather than a reward to additional work.

Of course, when economists talk, policy makers often listen. This is a good example of when they should say–huh? and get a second opinion. What we should care about as a tax policy matter–which, I remind you, is distinct from what we might care about purely as a question of economic “efficiency”–is whether the EITC will generally work to encourage those who otherwise have tended to be left out of the work force but should be in it and whether the potential negative effect at the drop-off would be likely to be genuinely detrimental to that group or rather impact groups for whom the difference may not matter so much.
Ted Seto, a fellow tax prof in sunny California, commented on the Tax Prof item to point out the important empirical evidence that the EITC is mostly working as we want it to.
For a useful summary of recent empirical work, see Nada Eissa & Hilary W. Hoynes, Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply, published in 2006 by NBER…

“The overwhelming finding of the empirical literature is that EITC has been especially successful at encouraging the employment of single parents, especially mothers. There is little evidence, however, that the EITC has reduced the hours worked by those already in the labor force. The empirical literature on married women is somewhat smaller but again consistent in its findings. The studies show that the EITC leads to modest reductions in the employment and hours worked of married women.”

The latter problem — the one area identified in which the EITC does seem to have a negative effect on paid work — is not an EITC problem at all. It’s the same secondary worker problem Ed McCaffery has written about, (Taxation and the Family: A Fresh Look at Behavioral Gender Bias in the Code, 41 UCLA LAW REVIEW 983 (1993)), and it affects secondary workers up and down the income range.

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Health Care Thoughts: Notes from the Conference World

by Tom aka Rusty Rustbelt

Health Care Thoughts: Notes from the Conference World

So in the past 10 days I have spoken to and with health care executives from 40 + states about their current view of the health care world. A few observations:

Accountable Care Organizations (ACOs), a keystone of Obamacare, are being viewed with great skepticism and are generally being avoided, especially by physician groups.

Hospitals and physicians are talking more, within Stark limits, about cooperative ventures without going all the way to an ACO format.

Private insurers feel empowered by the feds to ratchet down rates.

Older physicians are watching retirement funding very closely (shock fact: 1/3 of Michigan physicians are 60 years or older).

The complexity of managing any sort of health care facility is going from severe to insane. Regulatory overload and revenue cycle problems are prominently mentioned.

It is a happy time for lawyers specializing in health care transactions and regulations.

The words “under siege” are used frequently.

(Damn: just got an letter that my eye doctor is retiring.)

Stay tuned, it is getting interesting.

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