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Thank G-d for House Republicans

Dr. Black hits the latest good news from Capitol Hill:

The House has signaled that it isn’t going to play ball today

And I am no longer the only economist noting that the House–not for the first time–is forcing the Administration to do what it should have been ready to do all along. In fact, Brad DeLong cites Tim Noah,* Scott Lemieux and Jon Chait(!), Aging Ezra, and Paul Krugman and Noam Schreiber,** while Jared Bernstein, last seen being willing to further reduce Senior Purchasing Power for a pair of dirty socks, puts it directly:

The thing that worried me most in the endgame is that the [White House] would be so intent on a deal that they’d lock in too few revenues with no path back to the revenue well, and that they’d leave the debt ceiling hanging out there…. Those fears will be realized unless the President really and truly refuses to negotiate on the debt ceiling and is willing to blow past those who would stage a strategic default. If he is not, and if this cliff deal passes, then I fear the WH may have squandered its hard won leverage.

That last is apparently politico-speak for “look who just s*at the bed.” Thank G-d for House Republicans. Otherwise, this Administration would have killed itself long ago.

*Wherein I mix Hebrew and Yiddish in comments. This could become DeLong’s first entirely non-English comments thread… **Sadly, I take this as more evidence that Slouching Toward Prosperity will not be published in my lifetime.

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Dr. Black Did It as a Shorter; Here’s the Data

The problem with waiting overnight to post is that other people figure out the same thing:

If the true CPI-E increases faster than CPI, then chained-CPI is worse, not better.

It’s actually worse than that.  The measure by which Social Security is raised turns out not to be what we usually call CPI (Consumer Price Index for All Urban Consumers), but CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers):


What George W. Bush referred to as “the miracle of compound interest” works both ways.  Seniors see their Purchasing Power decline every year.  So when Jared Bernstein, Sensible Centrist, says:

I support the change [to Chained CPI]—it’s a more accurate measure of price growth (though a chained index for the elderly would be better), and I’m sure it’s coming, so I want to get something for it.  That ‘something’ is an offset from the benefit cut for poor, old elderly.

It would be nice to think he was Ernest Lee Sincere.  But we know Jared Bernstein is not innumerate, so we have to assume he’s acting from malice aforethought, since this took me less than 20 minutes to put together from scratch, including the normalization:


The reason it took me twenty minutes: ten of those were spent trying—unsuccessfully—to find post-2007 CPI-E data.  But unless Mister Bernstein and his cohorts are declaring that costs for the Elderly were actually deflationary from 2008 forward (at which point they would be correctly laughed out of polite society and relegated to Beltway Conversations…oh, wait…), note that CPI-W (the green line and, as noted above, the current, already substandard, measure) is below (that is, less than) the CPI-E line and above (that is, greater than) the Chained CPI line.

It takes three years–until 2010—for CPI-W to reach the 2007 actual CPI-E level.  It takes four years, to 2011, for Chained CPI—the “more accurate measure,” per Mr. Bernstein’s blog post—to get to that level.

The man who says he “I want to get…an offset from the benefit cut for poor, old elderly” in exchange for going to the malicious Chained CPI is basically saying, “I’m going to create a larger and larger group of poor, old elderly in the future in exchange for a couple bowls of gruel now.”

We’ve seen other people make this mistake (most notably Victor Matheson—who, G-d help us, teaches economics at Holy Cross—in comments chez DeLong), but rarely are we so clearly reminded that not only is Barack Obama a poor negotiator, but (again: see Summers, Geithner) the people he had and has negotiating for him are venal.

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Notes Toward Economics at (or, more accurately, approaching) the Eschaton

No, not Dr. Black’s blog.  The real eschaton: the end of everything.  Or, in this case, its economics equivalent: the point at which almost all human work is no longer necessary but human beings still exist.

The scenario is a simple one.  There are x humans on Earth (x>>1).  Self-repairing, recycling machines can provide all the needs and wants of those x people and then some.*  There is only one job humans need to do: every day, one person needs to press one button once–during a specific time period—to start the self-rebuilding and repairing of the machines.

Applying basic micro and macro economic theories, and assuming a money-using society, we can come to several stylized facts:

  1. This is the true case where Chamley (1995, 1996) applies.  The only capital created is exactly that that replaces current capital.  With no new capital, the effective tax rate on capital should be 0%.**
  2. The requirement that someone presses the button has two aspects:
    1. It is not required to be skilled labor
    2. It is, however, essential labor
  3. In standard economic theory, the laborer is paid hisser Marginal Product
    1. The pressing of the button provides all of the goods to everyone for that day; since there is no MPK in this scenario, the MPL should equal the net profits from that day.
    2. Pressing the button requires the laborer to choose to do the job instead of something more pleasant; therefore, they must be compensated to provide at least as much Utility as not pushing the button would provide them
    3. For a sufficiently large population x, there may well be people who will not press the button in their lifetimes.  For even relatively large x, there will be people who will press the button less frequently than they will need to buy goods.
      1. In either of those scenarios—unless we consider Malthusian constraints necessary in a time of abundant plenty—any equilibrium condition will require that each person and any of hisser dependents be supported s.t. AD does not decline.

The natural scenario for button-pushing selection is by lottery, which would also minimize the substitution effect. Some constraints would be required: may not repeat for at least z days, cannot sell/buyout of doing the job (though some intraweek switching possible), backup available in case of illness,*** etc.

What is interesting is the tax rate t required.  It is fairly easy to show that for even moderate populations, t must approach 100% if the laborer is indeed receiving the day’s MPL.****  This is in part because, since no new capital is being created, tax revenues from capital must approach 0%.

The problem then becomes one of Game Theory.  We know what the Final State must be if all activity leading up to it is rational.  The next question is how we get there.  But that will have to be deferred to my next post.

Enjoy the Holiday.


*Excess capacity needs to be assumed if you assume humans are still breeding; that is, an additional y babies (y<

**It is caddish of me to note that Chamley’s brilliant realization that has been the underpinning of several decades of freshwater economic theory is, of course, completely reflected in the U.S. tax code, where investment is offset directly by depreciation.

***Anyone who designs a non-redundant system with a Single Point of Failure should be shot. The applicability of this to economic models, and most especially microeconomic models, is left as an exercise to the reader.

****It is also intuitive that a large consumption tax would not be a reasonable substitute for such an income tax; even a “luxury tax” presents significant timing issues for even a small population.

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Why We Use Statistics, NFL Example Edition

We are now mostly through Week 10 of the NFL season, which means most teams have played nine games. Unless Kansas City manages to beat Pittsburgh by more than 36 points on Monday*—not, to be gracious about it, the Way to Bet—there will be four teams in the NFL that have give up between 10 and 20 points more than the have scored.

You would naturally assume that those teams would have losing records, either 4-5 or even, the closer you get to –20, 3-6. But certainly it depends on the distribution of your wins and losses. But, just for fun, let’s look at the four teams:




Point Differential

















This, not to put too fine a point on it, is why we apply statistical analysis. A couple of blowouts (both New Jersey teams lost today by three touchdowns, though the Jets—Jersey/B, as Gregg Easterbrook’s sole viable contribution to popular culture named them—gave up extra points as well) may skew the record—if every other game is close.  If I tell 100 people who know the rules of football but not the way the season has gone, “The Colts have given up 15 more points than they have scored through nine games,”  chances are that 80-90 of them would guess the team was 4-5 or even 3-6.  Some small number might guess 5-4, and an even smaller one will guess 6-3.

But then add information. For instance I say, “They lost their first game of the season by 20 points.”  At this point, those will at least moderate math skills realize that the Colts are +5 over 8 games; 5-3 is not out of the question, though 4-4 remains the Way to Bet—by a much smaller margin.

Now I add, “Coming into this week, they had only won one game by more than three points.”  Suddenly, that +5 looks strong; there is a shift of some set of the 4-5 people (who know the first week was a loss) to 5-4 (5-3 plus that loss).

The more information you get—“they were blown out by Jersey/B as well”—the more likely you are to guess that they might be 6-3.  But the odds still don’t favor that.  Indeed, the Dolphins have been blown out twice (-20, –34), but they have also won two blowouts (+22, +21). (The Bengals are 1-1 in blowouts; the Cowboys, like the Colts, are 1-2.)

So if we’re just looking at the raw data and the predictions of the people, we would see the Informed Voters hanging around 5-4 or even 6-3, the Paying Attention group splitting between 4-5 and 5-4, and some Randomly-Asked-Questions people guessing 3-6 or 4-5 (with a few clever enough to say 5-4 just because they know someone thought the question was interesting).

Any parallels to those complaining that Nate Silver was estimating percentages to four significant digits are left as an exercise to the reader.

*Or there is a blowout of epic proportion tonight between two teams that are both at least +100 through eight games.

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It’s Them, and Maybe You – A Tale of Two Cities

Here in suburban New Jersey, we are just now getting power back throughout town. (As of yesterday—remember, remember, the Fifth of November—we were the town in Essex County that had the least restored houses.) A lot of progress today, with teams from Texas and Florida among those called in (which presumably left the NJ teams to deal with the major issues down by the shore).

By a fluke of (mis)transcription, my work number is getting calls from the Huntington (NY) School District.  Huntington is (per Google Maps) fifty-six (56) miles away, around the middle of Lon Gisland.

One of the things that has been happening is that the towns are in parallel: my childrens’s schools have both been closed since last Monday.  So has the Huntington School District. For the past two days, on two separate telephones, I have gotten a call saying, in short, “We have no power. No school tomorrow.”

Today, the calls were different.

For here, the grade school is open tomorrow.  For the middle school, power is still not restored, but alternatives have been found.

For Huntington, the message went roughly like this:

Power has now been restored to the school.  However, we are now anticipating that the high winds from tomorrow’s Nor’easter will reach our area before the scheduled dismissal time tomorrow.  Given the danger from trees and power lines that have not yet been repaired from Sandy, we are going to remain closed tomorrow.

Jersey Jazzman asked if his annual evaluation would include a “Sandy variable.”  All the talk from Lon Gislanders has been about how Sandy impacted the South Shore and how tomorrow’s Nor’easter will impact the North Shore.

Some areas of the Northeast were less affected.  Some are recovering.  And some—such as the middle of Lon Gisland—are getting the worst of both worlds.

Just to relate this to finance:  I really wouldn’t go long any insurance companies (or even reinsurance companies) just yet.

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Are Refis Contractionary?

Update: David Rosnick of CEPR questions this analysis. Update to come when I have Internet access again–which probably will be Saturday at the earliest.

Brad DeLong got me thinking a few days ago, and not in a good way, when he quoted the brilliantly (and brilliantly-named) Cardiff Garcia:

Thus far the surging mortgage origination business at banks has been concentrated in refinancing rather than purchases. The refi boom is great but can only last so long, as Dudley writes, and from a macroeconomic perspective has less of an impact than a housing purchase and construction rebound…

I’m thinking that rather understates the case.

There are at least two of us on this blog who have benefitted from recent refis. (I won’t out the other one, save to say they got better terms than I did.)  In my case, the net savings in payments was about $700/month—not exactly chump change, unless you’re Tagg Romney.

But let’s follow the flows here, pretending that all transactions are with two banks for reasons that will be clear.  My refinancing means that Bank A receives a lump-sum payout of the balance of my mortgage. But then they have to put that money to work—and they are not going to receive my old interest rate on those replacement loans (if any).

Bank B is receiving current market rates on the refi. So it’s new lending to them. But that’s neutralized on the supply, replaced by Bank A having “freed up” my old loan. 

Similarly, on the demand side, my demand is satisfied—and my demand now is $700/month less than it was before.

So the S-D lines are stable for the assets—or even reduced due to the decline in demand.  Meanwhile, the flows into financial institutions (assets to them) are reduced.

So if A = L + E and A is reduced, what happens to Liabilities?

If you assume standard economic theory, I save that $700.  (Realistically, I spend it and someone else saves it, but the net savings in the economy still goes up $700.)  That savings is a Liability, let us say to the Bank A.

Bank A’s Balance Sheet is now:  Assets down $700/month, Liabilities up $700/months.  To balance that equation, Equity has to go down $1,400/month.

Bank B has Assets up $700/month, Liabilities unchanged, and therefore Equity up $700/month.

Net for the system is that Assets are unchanged, Liabilities are up $700/month and Equity is down $700/month.

Ceteris paribus, refinancing reduces the inefficiencies in the banking system (the above-market asset valuation is replaced by an at-market asset). In doing so, it reduces Bank Equity and increases Bank Liabilities.

Unless lending to other sectors of the economy increases, refinancings that do not take cash (“equity”) out of the property appear to be contractionary.

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It’s a Good Day

The Big C finally got rid of the inept hedge fund “manager” who finished destroying their franchise.

Of course, maybe this time they will replace him with Timmeh, instead of just pretending they will so he swallows more and harder.  Just in case Orszag isn’t enough.

Still not buying, but I would seriously consider closing a short position.

Update: Ben Walsh chez Felix says everything I tried to imply, except the one thing that has been outstanding for years: WTF took the Board so long?

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