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

Volkswagen Followup, DMCA, and Two Cassandras

“’Intelligent public policy, as we all have learned since the early 20th century, is to require elevators to be inspectable, and to require manufacturers of elevators to build them so they can be inspected,’” said Dr. Eben Moglen of the Columbia University School of Law.

Yves at Naked Capitalism provided this NYT article in her Links and it is a good read detailing what is wrong with today’s policy. Big business has again exhibited its irrational exuberance with a “trust me” approach to secrecy while it rakes in $billions. The deliberate failure of Volkswagen to follow the nation’s, and for that matter the world’s, rule of law is another stunning example of business placing itself above the law. While “poisoning your customers may well land you in jail,”; we have yet to see the government take a hard stance with those such as Volkswagen and TBTF’s deliberate and planned fraud neither of which were mistakes. To some degree, GM’s ignition switch was deliberate malfeasance as management also failed to take action on a safety issue. The time for fines is long past as these business giants pay their fines and then go on to commit another crime in the name of “it’s just business.”

“Proprietary software is an unsafe building material,” Dr. Eben Moglen had said five years ago before this discovery of fraud. “You can’t inspect it.” The same as relying upon TBTF/investment firms and the peanut butter manufacturer to do their own policing, the EPA relied upon Volkswagen to do its own testing of its product. In each case, the market failed to police itself.

Again Dr Mogen; “’If Volkswagen knew that every customer who buys a vehicle would have a right to read the source code of all the software in the vehicle, they would never even consider the cheat, because the certainty of getting caught would terrify them.’” Except Congress by passing the DMCA and the agencies in place to monitor the activities of business have blocked the efforts of independent researchers and simple consumers.

Instead of years going by since the 1998 Digital Millennium Copyright Act was signed into law by President Clinton, independent researchers and even consumers could have uncovered the Volkswagen emissions cheat much sooner if they were allowed to “understand how the device or software works and whether it is trustworthy.” However, the law specifically states independent researchers must obtain the permission of the automaker or manufacturer before they can research the device and in this case they were blocked from doing so. Alarmingly, the EPA and government supports such a stance by the industry even with instances involving safety and security. The Toyota acceleration and the hacking into vehicles and stopping them come to mind. Volkswagen was aided by the EPA in its emission fraud.

Kit Walsh of the Electronics Frontier Foundation writes “the EPA wrote to the Copyright Office to oppose the exemptions we’re (EFF) seeking. In doing this, the EPA is asking the Copyright Office to leave copyright law in place as a barrier to a wide range of activities that are perfectly legal under environmental regulations: ecomodding that actually improves emissions and fuel economy, modification of vehicles for off-road racing, or activities that have nothing to do with pollution.” The EPA’s response was to the Librarian of Congress in an effort to block the Electronics Frontier Foundation efforts to conduct independent research.

Kit adds “we’ve now learned that, according to the Environmental Protection Agency, Volkswagen had already programmed an entire fleet of vehicles to conceal how much pollution they generated, resulting in a real, quantifiable impact on the environment and human health.” This is no longer an ~500,000 vehicles involved in the earlier recall, it has growth 20 fold to be millions of vehicles polluting.


“Researchers Could Have Uncovered Volkswagen’s Emissions Cheat If Not Hindered by the DMCA” Kit Walsh, Electronics Frontier Foundation; Sepember 21, 2015

Volkswagen’s Diesel Fraud Makes Critic of Secret Code a Prophet, Jim Dwyer, NYT

Naked Capitalism Links, Yves Smith, September 27, 2015

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Target Obama: Cantor and Boehner Collateral Damage

I don’t know what to say here. Me I am on the other side of the same movement, in the US I am “feeling the Bern” as a Sanders guy and as an observer on the UK side chanting “Jez We Can!” for Jeremy Corbyn. That is I am totally down for a Renaissance of the New Deal and Old Labour. But I never expected that the post-Reagan consensus that come what may we have to massage the feelings of Wall Street bankers would come unstuck. By an all out assault from the Right.

The Center is on siege. At least as the Center is defined in Beltway terms. Populism is on the Move. Which isn’t always a good thing. Because Populism as it manifested from 1898 to 1932 and was pushed back by Imperialism/Fascism unleashed all too much.

Hyperbole? Yeah I do that. Hook for an Open Thread? I do that too. Take it from here.

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Reality of Potential GDP Sinking In

A new paper came out this month from the Board of Governors of the Federal Reserve System talking about how Potential Output is lowered after recessions. (link) They make a case that potential output is lower than people think and that the economy adjusts too slowly to that reality.

At the end of the paper, they call out to economists to figure out how this happens.

“As a profession, we may need to rethink how we adjust potential output and growth forecasts around recessions.”

Keep in mind that potential GDP is critical to having a correct monetary policy. This is an important topic.

Even Paul Krugman wrote an article for the IMF, Increasing Demand

“First, we don’t really know how far below capacity we are operating… Nobody knows—”

Maybe I do… Two and a half years ago I wrote that potential output had fallen to a new lower trend level, much lower than the CBO was projecting. (link) I based this view on my model of effective demand. That post was linked from Mark Thoma’s economistsview blog. Some commenters at his blog thought I was crazy and asked Mark to never link to me again.

In the post I wrote…

“What does it mean that potential real GDP could fall so harshly? Many economists can’t fathom a fall in potential real GDP. They think that it represents the natural potential of the economy using its full resources of labor and capital. They think that the economy will simply return to that level as labor and capital are re-utilized. But this is where the principles of Effective Demand come in and explain the situation. A lower effective labor share has locked the utilization rates of labor and capital into lower levels. The economy won’t be able to utilize labor and capital to the extent that it needs to in order to return to the historic potential trend.”

I posted another article about potential output one year ago. (link) In the post, I compared the changes to potential output around 3 recessions. I showed how potential GDP did not change much after the Volcker recession. I showed how potential output around the 2001 recession was different from what the CBO was projecting. I again showed how potential output had fallen after the 2008 recession. Thus, my model was able to discern how potential output changed around different recessions.

This ability to discern changes in potential output has apparently eluded economists, but my model can discern those changes.

I concluded that article by saying…

“the Fed and major economists have been hugely misled for 5 years by a CBO projection of potential that is much too high… Years from now, macroeconomics will look back and recognize this great error.”

Now just a year later, the Board of Governors of the Federal Reserve System have a new paper where they at least recognize that potential GDP can significantly change around a recession. Yet, apparently they still don’t have a model to discern those changes.  Well, I have one to offer…

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Is a Recession Forming in the US?

Stocks continue downward.. China is struggling… Commodity exporting countries are in trouble… industrial production is projected to be weak in September as it was in August… Could the US economy be forming a recession?

First, I have had the opinion that there are hidden weaknesses in the economy partly due to the strange monetary policy since the last recession. Some marginally-profitable firms were nurtured along by the banking system and policies. Also investment in productive activities has been weak. Productivity is stagnant. Labor income is not rising with strength.

I sense that hidden weaknesses are coming into the light, because of the struggles in China, Brazil and the oil industry… and now we can add the auto industry. (Let me note that the struggles in China should allow for more investment to come back to the US and for labor share to start rising again… a view I share with Noah Smith. So the stock market troubles could be short-term effects before the benefits appear in the US. Yet, a recession may have to come first.)

In my view, the economy hit the effective demand limit last year. As seen in the following graph where the plot reached zero.

update UT index

Angry Bear’s own Steve Roth once rightly commented that after the economy hits the effective demand limit, it can jiggle and jog thereabouts for many quarters before a recession starts. (I do not have the direct link to where he said that, but I remember.) And we are seeing this jiggling and jogging again over the past year. The graph is showing us that the economy hit its natural effective demand limit and would be in this process of jiggling around trying to keep going.

I was thinking that the economy might bounce twice upon the limit like it did before the last two recessions. But maybe not so this time… Maybe the economy will head straight for a recession after hitting just once on the effective demand limit.

So is a recession currently forming in the US economy? I have my yellow flag up. I want to see numbers from the 3rd quarter and then I want to see some numbers for October, like capacity utilization. But hidden weaknesses of the economy seem to be coming into the light. And I know that Bill McBride from Calculated Risk has shades on because he sees a bright future ahead. The hidden weaknesses in the economy may need those shades as they come out into the light from the hidden shadows.


The St. Louis Fed Financial Stress Index over at FRED (link) jumped up in the last month showing an increase in financial stress.

update financial stress fred

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Quote of the Day Last Thirty Years of Economics

From, naturally, Robert Waldmann, chez DeLong, pointing out that the Emperor not only has no clothes, but has been deliberately strutting his lack of stuff since the late 1970s:

Oh another thing — [the problem with economic modeling] isn’t [limited to] new classical macroeconomics. The same criticisms apply to new Keynesian DSGE models. Adding totally unexplained Calvo alarm clocks doesn’t liberate the model from the implausible assumption that there is a representative agent. In fact, the current standard NK model (Eichenbaum, Christiano, Evans, Smets, Wouters) has to add implausible Calvo alarm clock conditional markets to reconcile the assumptions that there is a representative consumer and that there are different types of labor with variable relative wages.

The effort to reconcile DSGE with reality is based on doing whatever it takes to make a DSGE model behave like an old Keynesian model (that is fit the data as old Keynesian models do). Academic macoreconomists ignore the proposal to cut out the middle man who transforms assumptions we don’t believe to implications which we know are valid from empirical research, because we are the middle men and the sensible short cut from what we know to what we know would achieve greater efficiency by eliminating our jobs.

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No COLA for Social Security Recipients in 2016

Or that is what is being thought by the Social Security Administration as we round out 2015 and head into 2016. And the culprit? “Persistently Low Inflation.” How could that be, didn’t the Fed just meet and there were concerns of looming inflation? Apparently not enough inflation to rock the CPI-W.

The SS COLAs are determined in a different manner using the CPI-W which is the consumer price index for all urban wage earners and “clerical workers” as compared to the more commonly know CPI-U for all urban consumers. Ending the 12 months in August, the CPI-W has been trending downwards(?) at 3 tenths of 1%. It kind of makes sense as we are now talking about the upper 10 of the income brackets starting at ~$110,000. Going into the future, Social Security trustees suggest COLAs will average 2.7%. And banks, the Fed, and Congress continues to worry about inflation.

This will be the 3rd year after 2010 and 2011, a COLA has not be given to Social Security recipients.

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Mass Incarceration and Racism

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Having visited several prisons in my state over the last 12 years, bought books and bibles, talked with inmates and one in particular, chased a case up to SCOTUS, I believe I can talk on this topic rather well. One of the issues which bothers me is the amount of justice applied through plea bargaining. It is a fast and easy way to minimize court loads and maintain a flow of live ones into the system. It is efficient and at the same time applies the law with a minimum amount of Justice (if it ever sneaks through). There is more to this and I will talk about it if you are interested. Atlantic Monthly has a good read on this topic which I would recommend.

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Interesting letter from the California EPA (CARB) to Volkswagen covering the Nitrogen Oxide being emitted by its vehicles during normal driving conditions on the road. What is “really” interesting about this is VW put into play software which detects when the vehicle is being tested causing the vehicle to pass testing. Hat Tip to Bear Poster Tom Bozzo.


At the end of the first page and the beginning of the second page to Volkswagen, CARB Chief of Emissions Compliance for Automotive Ms. Annette Herbert makes the CARB’s case. “concerns of elevated oxides of nitrogen emissions in ‘real world’ driving.” Ms. Herbert goes on stating, “This prompted CARB to initiate an investigation and discussions with the Volkswagen of America Group as to the reasons for the high Nitrogen Oxides emissions from their 2.0 liter engine observed during real world driving.” In this 2nd paragraph, Volkswagen admits in September of this year to having employed a mechanism since 2009 to “circumvent CARB and EPA test procedures.”


The rest of the 2nd page gets interesting as this is not the first time CARB called Volkswagen attention to the Nitrogen Oxide emissions. In the later part of 2014, Volkswagen recalled ~500,000 in the US from 2009-2014 with Gen1 and Gen2 technology. The recall was to have fixed the Nitrogen Oxide emissions. While it did lower the emissions somewhat, the emission rate was still higher than CARB and EPA standards. Beginning at the end of the 2nd page and the beginning of the 3rd page, Volkswagen admits during a September 3rd meeting, the vehicles were designed and manufactured with a defeat mechanism to over ride the emissions system. The mechanism was in place to “bypass, defeat, or render inoperative elements of the vehicles emission control system.” Oh, to be a bug on the wall during this meeting! I can not imagine the stunned silence. Having worked in automotive doe decades, this type of flaw happens through mistake, carelessness, or age. It is rare to see a failure of pollution or safety systems by design-intent or at least I have not seen it.


On the last page near the end, CARB states it will “initiate an enforcement investigation of Volkswagen regarding all 2009-2015 vehicles equipped with 2.0 liter engines.” Since the US does not jail bankers, it will probably not jail Volkswagen executives. Look to huge fines.

Matthew Daly of Talking Points News appears to have been one of the first to break this story on Friday, September 18, 2015. Matthew states Volkswagen faces ~$38,000 in fines per vehicle (2009-2015 Jetta, Beetle, Passat, Audi, and Golf) for the ~500,000 vehicles having this technology and defeat mechanism installed in them. The fines equate to ~$18 billion.

References: “EPA Orders Volkswagen Recall Nearly 500K Cars That Dodge Emission Rules” TPM, Matthew Daly, September 18, 2015

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