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

Blast from the past for Millienials

Big tobacco companies and the medical establishments:


Today, Big Tobacco is chasing a new revenue stream: e-cigarettes. They appeal to 20-somethings-and the lack of health studies about the side effects give the old merchants of death an unhealthy horizon for false advertising and profits that come at a cost of misery. And lawsuits…but not for a few years.

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So what about Detroit? (and water)

David Zetland has a post from last year at Aguanomics that should stir some thoughts in What about Detroit.  Still relevant.

I have followed Detroit’s fall with interest, mostly because I am hoping that an entrepreneurial government will allow a thousand flowers to bloom in the hollowed-out city(population has dropped by 60 percent; 200,000 properties are vacant). That process will take time, even if it’s going in the right direction.

In the meantime, the city is bankrupt, and one-third of its debt ($5 billion) is linked to the Detroit Water and Sewerage Department (DWSD), which is trying to collect $175 million in past-due debt from its customers.

This action is sensible but controversial in two ways. First, DWSD is cutting service to customers who do not pay their bills. Second — and far worse — DWSD is going after debts of as little as $150 from 150,000 residential customers even as it waits for repayment from 11,000 larger customers who owe half the total.
These actions have led to a petition from the human-right-to-water crowd, asking the President to declare a human health crisis, i.e., to prevent DWSD from charging customers. That’s a terrible idea because it undermines the utility’s finances now AND later. Why would anyone pay for water they can get for free?

My opposition to the petition does not mean I oppose financial help for the poor or their continued access to drinking water. Here’s how I’d handle the situation:

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GDP and beginners

Financial Times  Has GDP outgrown its use? By David Pilling has an excellent beginners article on the make up and use of GDP that poses questions:

Simon Kuznets, the Belarusian-American economist often credited with inventing GDP in the 1930s, had severe reservations about the concept right from the start. Coyle told me, “He did a lot of the spade work. But conceptually he wanted something different.” Kuznets had been asked by US president Franklin Delano Roosevelt to come up with an accurate picture of a post-crash America that was trapped in seemingly interminable recession. Roosevelt wanted to boost the economy through spending on public works. To justify his actions, he needed more than just snippets of information: freight-car loadings or the length of soup-kitchen lines. Kuznets’ calculations indicated that the economy had halved in size from 1929 to 1932. It was a far more solid basis on which to act.

When it came to data, Kuznets was meticulous. But what, precisely, should be measured? He was inclined to include only activities he believed contributed to society’s wellbeing. Why count things like spending on armaments, he reasoned, when war clearly detracted from human welfare? He also wanted to subtract advertising (useless), financial and speculative activities (dangerous) and government spending (tautological, since it was just recycled taxes). Presumably he wouldn’t have been thrilled with the idea that the more heroin consumed and prostitutes visited, the healthier an economy.

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Labor Market Flows and Extended Unemployment Insurance II

This is my FRED graph of the day post. Recently I was almost semi convinced by the Conservative argument that recent unusually rapid growth of employment fit what they said would happen if the extended unemployment insurance program ended. Then I glanced at the data on flows from unemployment to employment and noted that there was no anomaly January 2014 when the program suddenly ended.

This is just a follow up which I meant to post days ago. Here I post seasonally adjusted flows from the Current Population Survey


The figure shows almost no sign of effects of cutting off unemployment insurance for about 1.3 million unemployed workers. The conservative safety net as hammock theory suggests that the blue curve showing flows from unemployment to employment should have spiked –it didn’t. The progressive alsternative suggests that the green line showith the flow from unemployment to not in the labor force should have spiked — it didn’t either.

Instead the spike is in the flow from not in the labor force to employed. This should not have been affected by the policy shift. I think the spike is a coincidence with general economic improvement happening to happen at the same time as the cutoff. Now to be sure, unemployment insurance goes to people who claim at the employment office that they are looking for a job, while the CPS is a confidential household survey. Telling the CPS canvesser that you haven’t looked for a job for a month does not affect benefits. But that can’t really be a huge issue.

Now another way to look at labor demand vs labor supply. The USA is not Germany, so partial unemployment insurance for people who are involuntarily working part time is very rare (although programs do exist). This means that the number of people involuntarily working part time should not be affected noticeably by changes in unemployment insurance and should serve as an idicator of labor demand.


The number of people working part time for economic reasons was stable at around 8 million throughout 2013 then fell markedly in 2014. In contrast the number unemployed was almost exactly the same in June 2014 and December 2013. Finally, the number unemployed 26 weeks or more fell smoothly through the huge shift in their treatment by unemployment insurance.

The aggregate data could hardly be less kind to the safety net as hammock hypothesis.

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The Palpable Ugliness of the Predominant Culture of the American South [updated]

Update appended.


You may have seen this photo before. It was taken last August at the scene of a dog fighting raid, and it has been used in ASPCA advertisements all around the Internet and on TV. It can be hard to look at—a small, vulnerable puppy tied to a heavy chain, alone and cowering in fear. With just the quick snap of a camera, this single moment captured so much about the fatal sport of dog fighting, and this puppy became the face of abused animals everywhere.

That puppy’s name is Timmy, and he was one of 367 dogs rescued from a multi-state dog fighting ring that spanned Alabama, Mississippi, Georgia and Texas. After the raid, Timmy and the other dogs were taken to a temporary shelter where ASPCA responders gave them medical examinations, behavioral assessments, and the care and love they had previously been denied.

But Timmy’s story doesn’t end there. This sweet puppy was placed in foster homes that helped train him to become a well-adjusted pet. His final foster parents, Brian and Nadine DeCicco, just couldn’t give the little pup up and adopted him this past May. “We didn’t have any concerns about bringing a dog who had been associated with fighting into our home,” says Brian. “We’ve both had dogs our whole lives and know that they can reflect the way they are treated. Both of our previous dogs were pit mixes and they are just so unbelievably affectionate.”

The Face of Dog Fighting Gets the Life He Deserves, ASPCA website, Jul. 24

The article goes on to describe Timmy’s idyllic life with the DeCiccos, who live in Maryland.

Which brings me to the reason for this post, which is to ask rhetorically: Why, so very, very, very often, are news stories about brutality toward animals about incidents in a Southern state or in Texas?

Not all are, of course.  And certainly the Southern states have no American monopoly on brutality, including by local or state government employees; institutional brutality by state, local and federal officials (including, most certainly, judges) and rank-and-file employees who play some role in the criminal or civil justice system is a deeply institutionalized American characteristic—one that distinguishes (so to speak) this country from most other Western societies.

But I don’t think it’s possible to deny in good faith the predominance—the almost thorough permeation—of a culture of abiding meanness and overt brutality in so much of the South and Southwest. And although it has spread now well beyond those regions, courtesy of the Conservative Movement in general and the Conservative Legal Movement in particular, there is still a difference in breadth if not in kind.


*UPDATE: I posted the following comment—the 35th comment in the thread—in response to the varied opinions expressed by the commenters:

I don’t think it’s genetic or, for that matter, ethnic–other than that British and Scottish ethnics have never been a disfavored ethnic minority in this country, which I think may play a psychological/political/cultural role.  I think that, at its essence, the brutal aspect evident in much of the American South’s predominant culture is a result of the centuries’-long, deep ideological belief that is at the heart of the “states’ rights” mantra: that the states are entitled to create and protect the right of individual members of favored groups, and of state and local governments themselves, to do, really, anything, however horrible, to non-members of the favored groups.  The centuries’-long defense of slavery in the guise of “states’ rights” is at the core of the brutality, and also is the theoretical root of the current Conservative Legal Movement’s neo-federalism.

That was my intended point in this can-of-worms post.

Yes, freedom! Liberty!

7/27 at 5:47 p.m.

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IMF suggests improving skills of youth & lower pay?… Keynes rolls over

Here is a video from the IMF…

At the 4 minute point, the representative talks about youth unemployment in Europe and recommends two things…

  1. training to appropriate skills which would make someone more valuable.
  2. bringing down costs of employment.

Oh, how wonderful!… Make your skills more valuable only to meet wage suppression. They just do not understand that people need to be paid more.

Keynes wrote…

“The insufficiency of effective demand will inhibit the process of production in spite of the fact that the marginal product of labour still exceeds in value the marginal disutility of employment.”

In other words… It is pointless to increase the marginal product of labor when you are faced with insufficient effective demand.

Every country has a self-interest to compete by lowering labor costs. In effect, the advanced world is continually sinking into a secular stagnation. The key is for an organization like the IMF to step in and recommend a coordinated effort among countries to raise labor income, not decrease it, and thus increase effective demand for production. That will create investment.

Just pay labor more!

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Fun and games with transfer pricing

ProGrowthLiberal in his comments on my last post and in his own post at EconoSpeak highlights the fact that drug-maker AbbVie already makes most of its profits outside the United States, about 87% in fact over 2011-2013 by his calculation. For PGL, then, AbbVie is not the best example of an inversion because the horse is already out of the barn in terms of escaped profits.

I see things a little differently on this, but the case is also highly illustrative of a principle we have discussed before, transfer pricing. Let’s take a look at AbbVie’s Form 10-K Annual Report, downloadable here, to see what I mean.

Pre-tax profits ($millions)    2013    2012    2011    3-year total

U.S.                                           -581      625     626     670

Foreign                                    5913    5100    3042     14,055

Total                                        5332    5725    3668     14,725

Source: AbbVie Annual Report, p. 92

I actually calculate the foreign percentage for these three years as 95%, given that AbbVie claims to have lost money in the United States in 2013. In any event, this is a very strange division of the company’s profits given where its sales were made.

Net sales ($billions)    2013    2012    2011

U.S.                                 10.2     10.4     9.7

Foreign                             8.6       7.9     7.7

Total                               18.8     18.4    17.4

Source: AbbVie Annual Report, p. 40. Totals may not sum due to rounding.

As you can see, in each of the three years, over half of the company’s sales were made in United States, but the company reports that only 5% of its profits are in this country. This is pretty funny math, if you like dark humor. Especially since Humira, AbbVie’s biggest-selling drug by far, was developed in the United States. So with the patents in the U.S., and most of the sales in the U.S., the profits have to be in the U.S., right?

In reality, of course they are, but not in the Alice’s Wonderland world of transfer pricing. In this byzantine world, the patent for Humira is almost certainly owned by a subsidiary in Ireland, where royalty payments are tax-free. How else could the company show a loss in the United States in 2013 when 54% of its sales are here? Despite this, the company reports paying about 39% of its worldwide income taxes ($226 million of $580 million worldwide, see p. 92), although we have seen that what companies report in taxes on their 10-K annual report is largely fiction

So what can we do? The answers remain simple, though as politically difficult as ever. First, require companies to publish what they pay, country-by-country. No more hiding behind consolidated accounts. Second, enact unitary taxation, using apportionment formulas to make transfer pricing irrelevant. Third, end the deferral of U.S. corporate income tax on foreign profits. Finally, despite what “everyone,” including the President, says, don’t reduce the corporate income tax rate. We’ve gone long enough with tax policies that exacerbate inequality; there’s no reason to continue down that road when we have the world’s largest economy.

Oh, and my tiny disagreement with ProGrowthLiberal: It seems to me that if a company is already draining giant chunks of its profits abroad, then allowing an inversion ratifies losing a bigger amount of tax money than it would for a company like Walgreen’s that has not moved its profits offshore yet. But I imagine the IRS could still go after AbbVie post-inversion if it wanted to question its pre-inversion transfer prices, so this is a minor point indeed.

Cross-posted from Middle Class Political Economist.

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More On Consumers’ Inflation Forecasts

My has received more attention than I would have guessed. This should be a semi-serious post on the topic.

The puzzling fact is the persistently too high forecasts of next years consumer price index inflation reported in the University of Michigan Thomson Reuters Survey of Consumer Sentiment. The median forecast has consistently been over 2.9% in the most recent three years available to non-paying customers so through December 2013. Actual CPI inflation for the periods being forecast has been quite a bit lower CPI inflation over the preceeding 12 months has been 2.1% or lower for the periods of the forecasts.

This is anomalous. The median response in the U Michigan survey of lots of ordinary people has historically been a remarkably good forecast comparing favorably with the median response in the Livingston Survey of Experts which I have discussed a lot.

It is very easy to forecast the median Michigan forecast of next years CPI inflation. The figure (to which I linked before but now include) shows an eyeball guess. The blue line is the median forecast from the Michigan survey. The red line is just 0.75% + 0.7 times CPI inflation in the twelve months prior to the survey

 photo michigan_zpsa3a3ebdd.jpg

Just looking at that graph you can see some systematic differences between the red line (my forecast of the median forecast) and the median forecast. These occur when the price of petroleum suddenly dropped causing extremely low CPI inflation. The median U Michigan respondent predicted that normal inflation on the order of 2.5% would resume. There are two roughly equivalent ways to improve on the red line. One is to say the forecast for future inflation depends on the greater of CPI inflation and the increase in the CPI excluding food and energy, another is to say that the forecast is the greater of the red line and 2.5%.

In any case there is clear evidence that a sudden drop in the price of petroleum does not cause respondents to forecast extremely low inflation in the future. In constrast sudden increases in the price of petroleum correspond to unusually high forecast inflation.

Also note the extremely low inflation forecast in the few months following 9/11/2001.

OK now I zoom in on recent years. I have added CPI inflation in the 12 months before the survey (the green curve). This is to remind myself that the red line is a forecast based on lagged inflation and not lagged inflation itself.

 photo michigan2_zps93542e6d.jpg

The striking anomaly is that while actual inflation has fallen, the median U Michigan forecast remains around 3%. There is the usual petroleum pattern with the spike in prices in early 2006 associated with extremely high forecast inflation reaching 5.2% in May 2008. Then when world demand and the price of petroleum collapsed, the negative lagged CPI inflation did not cause extremely low forecast inflation — as in the past increases in petroleum prices are forecast to continue while declines are treated as temporary.

Only later and less dramatically is there the genuinely puzzling anomaly. Median forecast inflation was consistently higher than lagged inflation for the past two and a half years. This is suprising.

During the period since January 2010, there was another garden variety petroleum peak. From May 2010 to May 2011 the price of petroleum increased about 50%. This corresponds to the extremely high median forecast in March and April 2011. Since then the price has oscilated between about $80 a barrel and $110 a barrel (I’m always looking at West Texas Intermediate at Cushing Oklahoma). FRED’s estimate of the price of regular gasoline peaked at $4 May 16 2011. It has since declined.

A standard explanation of why perceived inflation is higher than official BLS CPI inflation is that people pay a lot of attention to the price of gasoline. This does not explain the strangely high forecasts in the past two years.

I do some regressions and present some vague thoughts after the jump.

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Transfer pricing and inversions

Yves Smith at Naked Capitalism adds an additional look at the ‘inversion’ process and rationale:

Kenneth Thomas has been on this beat at Angry Bear. Here’s a short overview of how inversion deals work earlier this week,,,


David Cay Johnston emailed me that there were errors in Forbes contributor Tim Worstall’s recent criticisms of the linked article. Indeed there are, but the biggest one (or at least the funniest one) isn’t the one Johnston pointed me to.

Worstall writes that AbbVie’s pending inversion will not, by itself, reduce the taxes the company owes on its U.S. operations, though it could be a preparatory move to drain profits from the United States. I’ll come back to that point, but Worstall then gives the example of how AbbVie might sell its patents to a foreign subsidiary and pay royalties to that unit, thereby draining U.S.-generated profits to a tax haven subsidiary, for instance Bermuda (though Ireland is more germane in the real world for intellectual property). But then comes the zinger:

However, do note something else that has to happen with that tactic. That Bermudan company must pay full market value for those patents when they are transferred. Meaning that the US part of the company would make a large profit of course: thus accelerating their payment of tax to Uncle Sam. This tax dodging stuff is rather harder than it sometimes looks: if you’re going to place IP offshore you can do that, certainly, but you’ve got to do it before it becomes valuable, not afterwards. [link in original]

“Must pay full market value”? I’m falling off my chair! It’s like Worstall doesn’t think transfer pricing abuse exists,

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Example of not understanding Effective Demand


The Economist online magazine has an article called, Jobs are not Enough, where they show a poor understanding of effective demand.

“Economic growth over the business cycle is driven mostly by swings in demand, and in recent years demand has been held back: households have been repaying their debts; the government has restrained its spending and raised taxes; and interest rates, having reached zero, are unable to fall further”

OK, demand drives the business cycle.

“Over the long run, however, a country’s potential growth depends on supply: how many workers it has and how productive they are. The recent divergence between America’s employment and output suggests the country faces not just deficient demand but also enfeebled supply, as more people working without more output means lower productivity. That is bad news for all Americans since their standard of living depends on productivity.”

Then they drop demand from the equation and say that potential growth depends on supply. What happened to demand which was driving the business cycle? For me, they simply do not understand the concept of effective demand, which is the demand measurement for determining the limits of potential output.

They take this error in understanding to the next level… by saying that supply is the problem for high unemployment and low output. They specifically point to productivity, which is actually constrained by effective demand. And the current poorer standard of living is caused not by supply problems, but by demand problems… namely, low labor share. They are not making the proper connections between effective demand, productivity, output and unemployment.

Like Keynes said, until people understand effective demand, “all discussions concerning the volume of aggregate employment are futile.” (link)

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