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

What’s behind the subprime consumer loan implosion

Via Naked Capitalism  comes an explanation of what income inequality looks like in the US.  It stands in contrast to the Bloomberg article pointed to by Yves in her introduction.  I pulled the quotes with a non-economic person in mind.

THE WOLF STREET REPORT    transcript of podcast by Wolf Richter.

Subprime doesn’t mean poor or uneducated. Subprime means having a credit score below 620…
(Dan here) For example:
Aggressive subprime lending went into overdrive starting in 2014, and private equity firms piled into it, and smaller banks went after it, and it’s now coming home to roost  . . .
This includes healthcare costs, and it includes food costs, and apartment rentals, and cars have gotten a lot more expensive, and the like. But cars and apartments and cellphones have gotten a lot better too, and these quality improvements are added to the price. Think of the move over the years from a four-speed automatic transmission to an eight-speed automatic, or from two airbags to 10 airbags, or from a basic cellphone to a smartphone . . .
But for figuring the inflation measure of the Consumer Price Index, the costs of these quality improvements are removed from the index. This is the principle of hedonic quality adjustments . . .

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The Current State of the U.S. Dairy Industry

The Current State of the U.S. Dairy Industry

 I had to endure a discussion of the plight of American dairy farmers where Trump’s trade policies were somehow to blame. Stephanie Mercier confirmed some of the facts:

According to data reported by the National Farmers Union (NFU), the average dairy farm has shown a positive net income only once in the last decade, in 2014. In 2018, the average value of production exceeded the total cost of producing each hundredweight of milk in only one state, California, and nationwide, dairy farmers lost an average of $3.21 per hundredweight of milk produced. For 2019, total dairy production is expected to increase modestly over 2018, by less than 0.3 percent, and the average all-milk price is expected to increase as well, from $16.26/cwt in 2018 to $18.40/cwt. While the projected 13 percent increase in price for this year is welcome news for U.S. dairy farmers, that level still falls below the average total cost of production for farmers in most of the country.

But she had a very different take on the international issues involved:

This situation is largely a result of a persistent mismatch between the supply of dairy products and the demand for them, and is not isolated to the U.S. domestic market. Within the European Union, low dairy prices prompted some Italian, German, and Belgian producers to dump their product in protest during the summer of 2019. The combination of low prices and a severe drought in 2018 has pushed many Australian dairy operations to the brink of collapse. The farmer-owned Fonterra dairy cooperative, serving both Australia and New Zealand farmers, has seen its share values decline by about 50 percent since the beginning of 2018.

Look – we can criticize Trump’s stupid trade war for a lot of things but low milk prices are being driven by other factors:

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Bicycles and Wine Tariffs

Bicycles and Wine Tariffs

Jeffrey Frankel has a must read blog over at Econbrowser:

The “bicycle theory” used to be a metaphor for international trade policy. Just as standing still on a bicycle is not an option — one has to keep moving forward or else the bike will fall over – so it was said that international trade negotiators must continue to engage in successive rounds of liberalization, or else the open global trading system would be pulled down by protectionist interests. I don’t know if the theory was ever right. (And, to be honest, I don’t entirely understand why forward movement keeps a bicycle from falling over.) But if we had stood still on trade policy over the last three years we would be a lot better off than where we are now.

It may be cold in New York City but after all that Thanksgiving wine, maybe a bicycle ride is in order. Just after that infamous phone call with the President of Ukraine, Trump opined on trade policy regarding wine:

Mr Trump, who is teetotal, said: “I’ve always liked American wines better than French wines. Even though I don’t drink wine. I just like the way they look.” The US is the world’s largest consumer of wine and the largest import market, with France consistently among the top origin countries for imported wine.

He was angry over something called the digital sales tax but here is a more related reason for this weird tweet:

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A few thoughts while you are digesting Thanksgiving dinner

A few thoughts while you are digesting Thanksgiving dinner

There was a bunch of data released Wednesday, while yours truly was on the road along with everybody else. So here are a couple of thoughts for you as you sit there with your loosened belt figuring out what leftovers you’re going to be eating for the next few days . . .

Initial jobless claims declined back to their recent baseline last week, so the four week average declined slightly, further back into its normal range. The YoY% change averaged monthly also is lower:

And the four week average of continuing claims, while slightly higher YoY, is also well below the point where it would be a serious concern:

Bottom line: the economy is simply not going to be in recession this quarter.

Corporate profits for the third quarter were also released as part of the second estimate of Q3 GDP. Depending on whether you include inventories and capital consumption or not, they either slightly increased or decreased:

Adjusted by unit labor costs, they are either slightly (-3.3%) or significantly (-13.8%) below their peak for this expansion:

Before the last producer-led recession in 2001, both were off more than -15%:

This is a mixed signal for the economy in the second half of next year.

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Real decentralization is radical

by David Zetland  (originally published at One handed economist)

Real decentralization is radical

Visionaries, consultants and public speakers love to explain how they are embracing distribution over decentralization over centralization, using an image like this:

Figure 1

What drives me crazy about this image is that it actually undersells true decentralization, i.e., when everyone is connected to everyone:

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Plastic: Part of the Problem . . . Part of the Solution – Part 4: Efficient Use of Recyclates

The problem of plastic waste seems insurmountable. The good news is plastic recycling is on the rise and that is good for the circular economy. In parts 1, 2 and 3, we delved into the role of the waste management and recycling industry and how material sorting technologies can help. Part 4 is all about the increased use of recyclates as an essential part of properly closing the plastic cycle.

The plastics industry is facing a great many challenges. Harvesting recyclates from waste is only worthwhile if the plastic has been properly sorted and does not contain any metal, and if the products made from the secondary raw material are similar in quality to those made from new plastic.

Manufacturing recyclates from plastic waste is the first step. But in order to fully close the plastic cycle, more recyclates need to be used in the manufacturing of new products. This is a lucrative business for plastics processors, as recyclates are cheaper than new materials.

With material costs in the plastics industry accounting for 40% to 80% of total expense, depending on the segment, using recycled materials can significantly increase profitability. In addition, the secondary raw material in its ultra-pure state has practically the same characteristics as new plastic.

Yet there are still a number reservations in the industry when it comes to recyclates. The quality of the input material is particularly important in this regard. Recyclates must be free from any contamination to protect processes and machines from damage and ensure that the final products meet high standards of quality.

Survey on the Use of Recyclates by Processers on the Leap

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Russ Roberts and The Rat Hole Fallacy

by Eric Kramer

Russ Roberts and The Rat Hole Fallacy

Liberals believe that unregulated markets do not adequately supply public goods like roads, parks, and scientific research, and that government should use its taxing and spending powers to provide these goods.  Conservatives agree that markets fail to provide ideal quantities of public goods, but they emphasize that government spending is often wasteful and inefficient, and they argue that waste and inefficiency justifies limiting government spending.  Market failure is real a problem, but so is government failure, and nothing is gained by shoveling tax dollars down a rat hole.

The belief that government inefficiency justifies reducing the size of government is one of the most common and influential arguments for limited government.  Here is a version of this argument being made by Russ Roberts in a recent episode of his EconTalk podcast:

I have no problem with government taxing at relatively high rates if I thought they would spend the money well . . . I oppose high tax rates not because of market inefficiencies or slowing of rates of growth. Because I don’t think that government allocates that money well. And I think that argument–again, it’s not much of a winner [politically] –but that’s the right way, I think, to think about those things.

The point Roberts is making is intuitively plausible.  The idea that government waste justifies spending cuts is also emotionally appealing, because people deeply resent the idea that their tax money is misspent by incompetent or corrupt public officials.  Not surprisingly, the belief that government is wasteful reduces public support for government programs.  But the claim that government inefficiency justifies limited government is a fallacy.  We can call it the Rat Hole Fallacy.

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Wealth Taxes

There is an interesting discussion among smart, expert, thorough economists about wealth taxation. It is clearly stimulated by Warren’s proposal to tax wealth. Gabriel Zucman, Roger Farmer, and the much less famous but also super smart Noah Smith are debating the issues. I’m sure AngryBear readers can benefit from their discussion (to which I don’t link cause I just saw one tweet).

I am also sure that it will be a waste of time to click “more” and read my thoughts on the topic. Caveat lector.

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Plastic: Part of the Problem . . . Part of the Solution – Part 2: the European Union’s Solution

As you can read for yourself, this is the second part  of the series. This part will introduce the EU’s proposed solution to plastic waste material of which Sesotec is to be a part of the solution. Since I am using Sesotec’s information, I will be stating their name as owner’s of this information from time to time.

Some 70 years after the first plastic products hit the market, a world without plastic waste still appears far off. We need a different approach to dealing with what many consider to be rubbish – and we need it fast. In this multi-part series, we will take a look at the role that the waste management and recycling industry can play in the process. Part I took us to China. Now it is time to take a look at Europe.

China is no longer taking on the world’s plastic waste, and our oceans could soon be home to more pieces of plastic than fish. The time to act is now.

There are many ways to reduce plastic waste. Banning their use is one of them. A great deal of plastic packaging is, in fact, unnecessary. Yet it also offers benefits in certain areas, such a hygiene and shelf life, making a complete ban rather unrealistic.

Another approach is to avoid plastic in many situations and to practise “plastic fasting”. Still, even that will not work everywhere, especially in the industrial sector. It is therefore essential to find an alternative solution – one that is also reflected in the EU’s plastics strategy: a circular economy.

The European Union presented its plastics strategy on 16 January 2018. Under the strategy, all plastic packaging must be either reusable or recyclable at low cost by 2030. One of the EU’s goals in its plastics strategy is to stop marine litter. The long-term goal must be to avoid marine plastic waste entirely. However, creating a circular economy and recognising the value of a material that is widely considered to be refuse will be essential to achieving this aim.

The overall EU strategy is based specifically on four basic tenets:

  • manufacturing recyclable products
  • optimising the separation and collection of plastic waste
  • increasing recycling capacities
  • reusing recyclates in production

Past the leap, the EU’s Commitment

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SECURE Act Up for Consideration in the Senate – A Rehash

I covered the House SECURE Act and the Senate RESA version last July. The House RESA Act is up for consideration in the Senate now. It does not look like it is going to make it due to the impeachment process going on and a potential trial in the Senate. There is also a small matter of a budget needing to be passed. It was to be considered under an unanimous consent vote; however, three Republican Senators (Mike Lee of Utah [unidentified reason], Ted Cruz of Texas (529 Accounts), and Pat Toomey of Pennsylvania [Gold Star tax exemption]) put holds on the bill (reasons in parenthesis). Then there is McConnell, who will not bring it to the floor for a vote.

Congress has been working on a much-needed improvement for “Middle Class” savings and growth over the span of employment in order  to boost retirement resource for citizens who can afford to save. Both the Senate and the House versions have been sitting since July. Whata surprise, heh?

Dueling bills to restructure IRAs and 401ks appear to be redundant; but, there are differences.  Better known as the “Setting Every Community Up for Retirement Act” (SECURE Act) H.R.1994 and the Senate has the “Retirement Enhancements and Savings Act” S.792 (RESA) version. Both bills were passed with bipartisan support. Both bills for the Middle Class had pluses and rather big negatives also. It appears the House RESA Act is going forward for a vote.

The RESA Act is mostly for the masses who may be able to save some money for retirement in spite of stagnant wages. No worries for the for the rich in income (unless something has changed since I last looked at this).  A major outcome of the Trump tax bill were tax breaks for the wealthy and corporations. Besides much of the resulting income increases going to 1% of the household taxpayers, the same 1% were given the ability to shelter large amounts of income in gifts to their heirs. It is a great time to be rich in income and have the ability to shelter it by making gifts of it to your heirs’ tax free! Keep in mind, seven or so years out and those income tax cuts will disappear for the middle income brackets. Somebody has to pay for the overall breaks otherwise their tax relief will sunset as they were passed under reconciliation in the Senate.

A little history (past the leap) on why Congress did something which will help those who can afford to save presently, penalize those bequeathed whatever is left over after death, and pay for the IRA and 401k break.

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