May 2008 ~ Angry Bear

Saturday, May 31, 2008

Traumatic Brain Injury: responses by DOD

GAO has a point of information. Pre-screening is essential for any medical diagnosis of "subtle" damage. Imaging pictures would make for a real comparison...external costs will be high. The late start up dates are a cause for sadness(inertia from various quarters), but the newness of this field of medicine is one mitigating factor.

In response to the 2007 NDAA, DOD added TBI screening questions to the PDHA in January 2008 and plans in July 2008 to begin screening all service members prior to deployment. Prior to these TBI screening efforts required by DOD, several installations had already implemented efforts to screen servicemembers before or after their deployments. To help health care providers screen servicemembers for mild TBI and issue referrals, DOD has issued guidance and provided various forms of training.

In response to the 2007 NDAA requirement for pre-and post-deployment screening for TBI, DOD has added TBI screening questions to the PDHA, and plans to require screening of all servicemembers beginning in July 2008 for mild TBI prior to deployment. These screening questions are similar to the screening questions on the PDHA. The questions are included in a cognitive assessment tool that will provide a baseline of cognitive function in areas such as memory and reaction time. In January 2008, DOD released a new version of the post-deployment health...

Real GNP Growth

Greg Mankiw provides a chart of real GNP growth since 1998:

With revised GDP data released today, I thought it might be worth taking another look at recent history.

Whoops – GNP and GDP are not precisely the same thing but the growth in GNP and the growth in GDP have been very similar (the difference between these two series is net foreign income from abroad). I suspect Greg’s point is that real GNP is still growing but notice what BEA said:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 0.9 percent in the first quarter of 2008, according to preliminary estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.6 percent … Real gross national product -- the goods and services produced by the labor and property supplied by U.S. residents -- increased 1.1 percent in the first quarter, compared with an increase of 1.9 percent in the fourth. GNP includes, and GDP excludes, net receipts of income from the rest of the world, which increased $5.3 billion in the first quarter after increasing $37.6 billion in the fourth; in the first quarter, receipts decreased $48.1 billion, and payments decreased $53.4 billion.

The rise in net income from abroad means that GNP rose faster than GDP over the past two quarters. And if one is wondering how Greg’s graph differs from the BEA text – notice the graph is comparing the current quarter to the quarter a year ago.

But let’s focus on something else – growth ever since late 2000. Its average has been rather dreadful. Now some rightwing pundits want to talk about some alleged Bush boom but the data shows that real income growth was quite weak except for the period from late 2003 through 2005.

Labor Shortage in Iowa: Market Solution or Is This a Case of Monopsony Power?

John Leland has Dean Baker needing a vacation. Leland channels the frustrations of businessmen in Des Moines, Iowa:

As rising unemployment and layoffs beset workers around the country, Iowa faces a different problem: a surplus of jobs. Or to put it another way: a shortage of workers. A survey of companies by Iowa Workforce Development, a state agency, found as many as 48,000 job vacancies, in industries including financial services — Des Moines trails only Hartford as the nation’s insurance capital — health care and skilled manufacturing. One estimate projects the job surplus to reach 198,000 by 2014, with vacancies increasingly in professional positions. Greater Des Moines alone faces a shortfall of 60,000 workers in the next decade. The state provides a small, advance view of what some economists predict will be a broader shortage of skilled workers in the next 20 or 30 years, as tens of millions of baby boomers retire from the workplace, and the economy produces more new jobs than workers. Potential consequences include slower economic growth and competitiveness, as well as higher wages for skilled workers and greater inequality ... Remedies are not simple. Companies want to be in Iowa because wages are lower than elsewhere in the nation or region, except South Dakota. But low wages also drive young college graduates out of the state, especially as student debt loads have risen, and they discourage workers from other states from moving to Iowa. Some, like Mr. Tew, accept relatively low wages in exchange for Iowa’s low cost of living. Companies compete on amenities and benefits more than salary, said Craig Jackman, president of Paragon IT Professionals, a recruiter and consultant firm.

Dean notes:

Arghhhhhhhhhhhh! There is a labor shortage in Iowa. Wages are the second lowest in the country. Come on folks, the NYT is supposed to be a serious newspaper. I need a vacation.

Dean’s assumption that there is a competitive market for labor certainly is a valid one for the nation’s future labor market. Leland is claiming that slower growth of the national labor force will lead to labor shortages. That’s just stupid unless one assumes there is some force that will prevent increases in real wages. OK, some rightwing idiots (e.g., those clowns who write for the National Review) think that increases in real wages is un-American or something but that’s how competitive markets respond to situations where the demand for labor rises relative to the supply of labor.

But could it be that there is some simple explanation why the quantity of labor supplied and the real wage are both low in Des Moines? This sounds like a movement along the supply curve, which just might be generated by a group of employees at least trying to exercise monopsony power. OK, Des Moines isn’t the classic example of a one company town but if there were a monopsonistic cartel, businessmen would certainly bitch if somehow their cartel was being eroded by other local businesses acting in a manner consistent with competitive behavior. Those of who actually celebrate market place solutions, however, should cheer rather than call this a problem.

Friday, May 30, 2008

Week end open thread

$10,000 limit. Can't fill the tank

Seems another sign of the new era of banking fraud awareness comes from the price of gasoline/fuel. You can't pump more than $75 worth.

The $75 limit "ensures merchants and customers are protected from fraud," says MasterCard spokesman Tristan Jordan.

Visa and Mastercard are worried about you and the station getting ripped off. Really? Interesting though how the station owners say it is the policy of the card companies but Visa said it's the fault of the owner.

Visa and MasterCard have no immediate plans to go higher. "It's something we always look at," Wilke says.
Visa raised its pump limit from $50 in April, but $75 isn't keeping up with gas prices. At $4 a gallon, $75 buys 18 3/4 gallons. A 2008 Toyota Sequoia SUV's tank holds more than 26 gallons, a Chevy Avalanche sport pickup totes up to 31 1/2 gallons, and a 33-foot or longer Winnebago Adventurer RV hauls 75 gallons.

Of course there is a solution. Swipe it twice, or in the case of the RV, 4 times. Too much? Then they offer that you can run your card inside. Frankly, I'm not sure what difference there is in protection if you swipe the card inside. The card company is still going to be on the hook if the cashier doesn't ask for ID.

Where are you goin to
What are you gonna do
Do you think that it will be easy
Do you think that it will be pleasin, hey

Stand back, whatd you say
Stand back, I wont pay
Stand back, Id rather play
Stand back

Real GDP growth this cycle

With the latest real GDP release it might be of interest to look at the comparison of this cycle to other long cycles. You can see for yourself the great success of the Bush trickle down economics.

What Happened: Jonah Goldberg’s Review Sine Reading a Single Word

Jonan Goldberg must be omniscient as he pens a stinging review of Scott McClellan’s What Happened even though:

I have not read the book. I will once I finish eating the contents of my sock drawer (which ranks slightly higher on my to-do list).

Now if you think the second sentence in this quote is juvenile – don’t bother reading the rest of Goldberg’s rant. OK, I lied. It is not a stinging review. In fact, it is about as idiotic as anything from this worthless pundit. But please consider this:

McClellan’s only legitimate beef seems to be his unjust treatment during the Valerie Plame investigation.

Really? The book has no other legitimate complaints? How on earth would Jonah know if he hasn’t even bothered to read anything? I guess his mommy told him so. Incidentally, NRO has other attacks on McClellan’s writing, which are also just as worthless.

Soc Sec XV: Why do they care?

Properly speaking this is not an economics post. So most of it is below the fold.

I started a Social Security blog in Nov. 2004 in the wake of Bush's announcement that he would expend his new political capital on Social Security 'reform'. At that point in time I had been looking at these numbers for about seven years and had largely formed the conclusions I have been laying out in this series. In blunt terms I knew that 'crisis' was in context bullshit, and I also knew along side Dean Baker that this was "well known to those who have looked at the numbers". So this post is an attempt to answer two questions: one, 'why do they persist anyway?' and two, a question I posed in one of my first posts 'Who the hell am I to be lecturing economists on Social Security?'

As most readers know I am not an economist, I never took even an Intro course in Economics and the closest I got to the tools of the trade was Statistics 20, Introduction to Statistics for Non-Majors, and that 33 years ago. So who am I to take this subject on? Well the answer is that Social Security 'crisis' is not at bottom an economic question to start with. Certainly all of the surface action suggests that the issue is retirement security and that the question revolves around whether or not that will be economically sustainable at some future point. But having poked around in the numbers for years I knew that really wasn't the core issue, the results under Intermediate Cost were certainly acceptable, while results closer to Low Cost were at least plausible. Which raised the question 'Why do they care?'. After all these people have no problem cutting heating oil subsidies for today's seniors, with requiring kids to remain uninsured for a full year before they can transfer from a private plan to a new government alternative. Many of the same people who want to privatize Social Security to 'save' it simultaneously advocate for abolishing the Department of Education. These are the farthest thing from bleeding heart liberals, yet they profess to be deeply concerned about retirement security for future generations, aye verily even unto the Infinite Future Horizon. But why? And just as importantly 'Why now?'

Well I explored the question in a July 2005 post Social Security: is it about Solvency or about Ayn Rand?. And the conclusion I came to was this:

The numbers are important, if you are going to participate in the debate over the future of Social Security you need to understand them, you need to understand their implications, you need to be able to measure them against the numbers you read in the paper every day. Because oddly enough this debate is not about numbers and in most respects it never has been.

The oppostion to Social Security has always been driven by the ideology, and that ideology can only be understood in historical perspective, and particularly in the millennia long struggle between the powerful and the people over the distribution of production. Which is where I come in, I was in fact a trained historian with a speciality in Medieval Europe but substantial side work in Classical Greece and Ancient Rome. And over the course of that study I learned a couple of fundamental truths, one the issues hadn't changed much between the time of the Gracchi brothers (133 BC) and the Cato Institute of today, and two the historiography is almost always charged with the class struggle of the time. The modern study of Rome can hardly be separated from the economic ideology of those first historians. That is we see the Gracchi brothers and later Caesar through a historical lens fundamentally hostile to what were considered dangerous democratic and even socialistic impulses. It is worth noting the Cato the Censor, after whom the Cato Institute is named, was the sworn enemy of the Gracchi brothers' grandfather Scipio Africanus, and for same reasons, although Africanus like Caesar was the ultimate son of privilege, achieving all the highest offices, he dared to suggest that the interest of the people at large be considered.

Who knew that proposals for land distribution in 2nd century BC Rome or the history of the Statute of Laborers (1351) and successor acts in England would be relevant to the Social Security debate today? Well that is why we are here.

The powerful have always been alarmed and often to the point of physical violence at any scheme that remotely smacks of being redistribution and this impulse historically preceded by centuries the development of classical economic theory. If you examine the actual economic history that paralleled the development of the new theory you can clearly see that the former infused the latter, there is only one degree of separation between a nineteenth century liberal economist and a nineteenth century liberal manufacturer. When examined in the historical perspective of the centuries before and close to two centuries after you see an academic discipline shaped by the political class struggle of the day, although admittedly perhaps largely invisible to the actual theorists involved.

A successful Social Security system is a threat to the powerful in much the same way that the throughly aristocratic Gracchi brothers land distribution plans were. Because once you let the camel of 'greatest good for greatest number' get its nose under the tent who knows where it will stop. Which of course was Hayek's premise in Road to Serfdom, admit that government planning works in some cases, next thing you know you are in the gulag. (For those who think this too strong, try reading the authorized 18 panel cartoon version of The Road to Serfdom (hosted on Marek's mothership mises.org).

The question of 'Why now?' is itself explained by this 1998 article from our friends at Cato The Myth of the 2.2% Solution. On my reading they had simply panicked, people like Baker and well, Webb were pointing out some inconvenient numbers, which led the Cato folk to assert the following:

The 2.2 percent figure assumes that the reform would take effect at the beginning of calendar year 1998. Thus it is already out of date. Each year Congress waits, the magnitude of the tax hike required to balance the Social Security trust funds rises.

The solution is not permanent. In fact, an additional tax hike would be required every year to keep the trust funds in balance over a full 75 years.

The 2.2 percent solution is based on the Social Security trustees’ "intermediate" projection. If we accept the trustees’ "high-cost" projection, whose key economic and demographic assumptions more closely reflect historical experience, the necessary tax hikes would be at least twice as large.

The 2.2 percent solution focuses only on the program’s solvency. But simply raising taxes (or cutting benefits), while it may balance the Social Security trust funds, does nothing to redress the program’s other underlying problems, most notably the declining rate of return for young workers.

Only problem none of these are factually true. In fact in the years since the magnitude of the tax hike needed has gone down, the solution is permanent and requires no additonal tax hikes during the 75 year window, the high-cost projection doesn't remotely reflect historical experience, and at best the declining rate of return is dubious, indeed the 78% of 160% = 125% equation suggests just the obvious.

In short they were and are panicking, the debate was slipping out of their control, and their only response was half-truths and lies to disquise their actual, ideological committment to the principles of Cato the Elder. Social Security is thus not an economic question at all, instead it is a case study in the centuries long struggle between democracy and reaction.

Oil and oil addictions

The Economist poses some conjectures for oil and Iraq:

...Things may be changing. Iraq's deputy prime minister, Barham Salih, said in April that Iraq's total reserves, could be as high as 350bn barrels, triple the 115bn that has been its officially stated level for many years. The figure is aspirational and should be treated carefully but, given that there has been barely any new exploration of Iraq's promising geology in 30 years, an upward revision of the official reserves figure seems long overdue. This underlines Iraq's uniquely large reserves-to-production (RP) ratio, which was already the world's highest and, based on Mr Salih's estimate and at the expected production level of 2.3m b/d in 2008, would stand at a remarkable 415 years (compared with a world average of about 40 years). If Iraq were able to achieve the average Middle East RP-ratio of 80 years then it would be pumping 4m b/d based on the current reserves, and 12m b/d based on Salih's aspirational estimate. Getting there would take some time, around five years for 4m b/d and probably more than 20 years for the most optimistic level. It would also require Iraq to achieve a sufficient degree of stability. However, if there are promising signs of progress over the next 18 months, then it might be enough to mitigate fears of shortages next decade and dampen the futures market.

...

Although there is some way to go, 2008 may be seen as the year in which Iraq's oil industry began to recover and, when the markets recognise this, it may take some of the edge off the oil price. However, given Iraq's history of dashed expectations, it would be unwise to factor major production increases into oil supply projections until Iraq has passed a series of important tests. One of these is whether the Iraqi army will be able to maintain security as the US draws down its troops. Another is whether the rival Shia movements led by Muqtada al-Sadr and Abdel-Aziz al Hakim can make the transition from street fighting to purely political competition—an issue that will probably not be resolved until the next general election in December 2009. Finally, the KRG and the rest of Iraq will need to conclude that it is worth reaching a compromise on Kirkuk (the disputed northern province that contains Iraq's largest oilfield) and regional autonomy in order to share in the benefits that a major expansion in the oil industry will bring.

Hakim is replacing Iraqi troops specifically with his followers, so some of the Army and Badre Brigade overlap. The next question might be whether Maliki can ever defy Hakim if ever he even desires it, or how it plays out in 2009 elections by province. And to see how the Awakening Council holds together and participates.

In addition, Conoco Phillips Oil points to a US based dilemma-access to supplies is dwindling in testimony to Congress.

I cannot over-emphasize the access issue. Access to resources is severely restricted in the United States and abroad, and the American oil industry must compete with national oil companies, who are often much larger and have the support of their governments. We can only compete directly for 7% of the world’s available reserves, while about 75% is completely controlled by national oil companies, and are not accessible.

Thursday, May 29, 2008

Neurologica blog

Neurologica blog is a link stolen from Afferent Inputs original site. Way cool and thoughtful. Thanks. No royalties being forwarded.

Noncurrent loans increase

The most recent Quarterly Banking Profile details the continued woes facing America's banking institution. CalculatedRisk has highlighted the deterioration of the "coverage ratio", which is "loss reserves as a percentage of nonperforming loans" is now at it's lowest level since 1993.

I wanted to highlight this figure from page 7, which I found particularly striking:

From the report on noncurrent loans:

Noncurrent Loan Growth Remains High
Even with the heightened level of charge-offs, the amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) rose by $26.0 billion (23.6 percent) in the first quarter, following a $27.0-billion increase in the fourth quarter of 2007. Loans secured by real estate accounted for close to 90 percent of the total increase, but almost all major loan categories registered higher noncurrent levels. The amount of real estate construction and development loans that were noncurrent increased by $9.5 billion (47.2 percent) during the quarter, while noncurrent loans secured by 1-4 family residential properties other than home equity lines of credit increased by $9.3 billion (20.2 percent). Noncurrent real estate loans secured by nonfarm nonresidential properties increased by $2.2 billion (28.5 percent), and noncurrent home equity lines of credit rose by $1.5 billion (29.5 percent). Noncurrent C&I loans increased by $2.4 billion (24.9 percent). During the quarter, the percentage of total loans and leases that were noncurrent rose from 1.39 percent to 1.71 percent, the highest noncurrent rate for the industry since the first quarter of 1994. At institutions with assets greater than $1 billion, the average noncurrent rate at the end of the quarter was 1.74 percent. At smaller institutions, the average rate was 1.52 percent. More than half of all insured institutions -- 52.2 percent -- saw their noncurrent rates rise during the first quarter. Restructured loans and leases (which are current under modified terms) increased by $4.0 billion (57.6 percent) during the quarter, but almost half of the increase was caused by banks including restructured 1-4 family residential real estate loans for the first time. These restructured loans added $1.8 billion to the total amount of restructured loans at the end of the first quarter. [emphasis added]

As CalculatedRisk has been saying for some time, the wave of bank failures is coming. The FDIC isn't on a hiring spree just to beef up their softball team with professional MLB ringers a la Mr Burns from the Simpson's...

UPDATE: Commenter Michael McKinlay points to this figure at istockanalyst.com. The figure was put out by Credit Suisse last summer I believe. I've heard it referred to several times as the "Reset Tsunami". And Michael McKinlay is right; there is a lot more ugly to come, and a lot of it has to do with the mortgage mess.

Also, I believe this reset schedule has been revised since Credit Suisse put this one together. If anyone knows where there is a more recent schedule, I'll update the post with a link.

A Quick One on Externalities of Foreign Trade

I won't pretend this is part of the Vladimir Masch discussion, or one of the traditional thorough-analysis Angry Bear posts. Just a data point on which we may need to work later, and a report that will be of interest to many who read here.

UPDATE: As rdan notes in comments, this "links to testing for mad [cow disease, or BSE] as well." And since I'm a week or so behind in my blog-reading, I'll just refer everyone to this U.S. Food Policy post, which used economic reasoning to come to a depressing but clear conclusion.***

One of the ways in which externalities are created is with differing regulations on what should be the same product. The quality of the Grade-A beef you buy that was raised in Texas should be the same as the Grade-A beef that was raised in Mexico and imported. If the inspection processes are not the same, though, the chance of contamination is raised.

I hasten to note that the probability of contamination in both cases is rather low, if you assume that the firm is an ongoing concern that plans to do business with you again.*

But what is the effect of contaminated meat slipping through?

I'm glad you asked, and so is the USDA.

Economic Impacts of Foreign Animal Disease seeks to address the question. Though it deals specifically with foot-and-mouth disease, the report:

presents a quarterly livestock and crop modeling framework in which epidemiological model results are integrated with an economic model of the U.S. agricultural sector to estimate the economic impacts of outbreaks of foreign-source livestock diseases. The framework can be applied to many livestock diseases[.]

To what I trust is no one's great surprise, the model predicts larger losses than just the animals slaughtered:

Model results show large trade-related losses for beef, beef cattle, hogs, and pork, even though relatively few animals are destroyed.

Even the bromide at the end ("The best control strategies prove to be those that reduce the duration of the outbreak." Really??) doesn't change the economic reality: the best way to ensure the highest return is to spend money on inspection.

Anyone who has ever used the financial markets for hedging purposes could tell you that. It's good to see that the USDA has done the analysis to justify a uniform process of inspection of foreign meats; the only question is whether they realise that is what they have done.**

*It is, for instance, common knowledge in some parts of Eastern Europe that, if you are offered lumber at a lower-than-market price, it probably comes from the Chernobyl area.

**This appears to be noting new: here's a 1906 NYTimes article (PDF) dealing with jurisdiction over testing meats. (That was, of course, the year after The Jungle was published. Even then, loopholes were the rule, not long-term sustainability.)

***"Instead, the officials' actions seem to me most consistent with believing there are a handful of real cases of BSE out there in the beef cattle population, and that these cases will naturally die out without infecting new cattle over the next several years. Of course, if this were true, a handful of people would be subjected to risk of the deadly disease years after eating a cow whose infection was never discovered."

Soc Sec XIV: Why benefit cuts and cap increases backfire

I know I promised to back off the pace but yesterday's comment thread got temporarily derailed before the point could be made. In yesterday's post I highlighted the cash flow in and out of the General Fund to redeem the Trust Fund 'Crisis' at Shortfall in an effort to show that in inflation adjusted dollars the payback was no big deal. Well wouldn't benefit cuts or a cap increase make the problem even smaller? Well no, you just end up taking the problem out in time by a year or so and make the ultimate cost bigger. Take the numeric series from yesterday for Intermediate Cost or here today for Low Cost and apply the effects of either benefit cuts or tax increase. Once again the left column represents total surplus and so the increase in Trust Fund balance, while the right column represents current year cash flow to or from the General Fund (in constant 2008 dollars). Either a benefit cut or a tax increase will increase the dollars in both columns. A good thing? Well not really. Because the real dollars in the right column from either benefits not being paid in full or more revenue coming are just spent in the current year. If this actually reduced current year borrowing dollar for dollar it would be one thing, but there is no real world evidence that this actually happens. So boom that extra cash is spent. And the left column properly considered is actually an increase in interest earning debt. You are not doing your kids any favors by starving gramma, not if the result is extra payments in the form of future interest on an even bigger interim Trust Fund. The net effect is to move the date of Intermediate Cost shortfall out a bit, and depletion out maybe quite a bit all at the cost of larger needs for future General Fund transfers to pay for that compounding interest. So that is Intermediate Cost. What happens with Low Cost? Well first the numbers, discussion under the fold.

Low Cost Surpluses and Cash Flow to/from the General Fund
2010 $236, $106
2015 $267, $78
2020 $250, $8
2025 $217, -$68
2030 $170, -$122
2035 $169, -$160
2040 $205, -$143
2045 $273, -$104
2050 $358, -$66
2055 $455, -$40
2060 $567, $17
2065 $715, $18
2070 $801, $58

What is with the negative numbers? I thought Bruce was always telling us that Low Cost meant fully funded?

Well it does, if you use the Trustees' definitions of Income and Cost. For the Trustees, who as the name assume have to act as if the Trust Fund is real (after all they are the guardians), Income includes Interest. But if you step back and look at this in the total budget perspective you see that Interest is suddenly transformed from a source of Income to an open obligation on the General Fund. With the results you see above, starting in about 2023 a portion of the interest earned needs to be tapped to pay benefits. But whereas under IC this portion rapidly increases after 2017 and takes in all interest by 2023, under Low Cost the effect always remains partial. In the 2007 Report the result was a system in equilibrium, with approximately 25% of all cost being paid by transfers from the General Fund. Which raises our first problem, in last years Report this subsidy goes on forever, while the utility of the actual dollars borrowed fades as the decades go by. That is not really a good outcome. In the 2008 Report the effect is only worse. Because while the needed transfers grow until about 2035 (though never as high as IC) they start shrinking until in around 2056 the need vanishes completely as Income excluding Interest once again exceeds Cost.

Well the problem is that you now are stuck with a near useless $12 trillion Trust Fund merrily compounding away. But you can't just abrogate it by explaining that almost all of it what just the effect of interest on interest and so in some sense disconnected from the real economy. Because the worker of 2056 is going to look at that string of negative numbers from 2023 to 2055 and likely think 'Hell they were real enough when my income tax dollar was being tapped to pay some of that interest'. But redeeming the now useless Trust Fund to eliminate the future effects of those compound interest dollars requires lowering FICA taxes by enough to offset the total accrued interest plus some extra reductions in rates to allow some gradual paydown on principle. Which means you would have to boost your transfers from 2055's $40 billion to at least $470 billion in 2056 simply to keep you in the same place financially. So instead of having to pick up 25% of the tab for a time limited span of 2017 to 2053, here you pay varying portions of the tab through 2055 ramping down to 1% and then get a sharp jump back to 25%, more if you want to take any serious crack at paying down the principle. In effect Low Cost either requires your grandkids simply to accept that they were taxed extra all those years, that now that we didn't need the extra income they should just get over it. Or tell them yeah the money is real and we want $470 billion a year forever out of income tax. Just to add some spice to the soup the end result is that Low Income workers who pay little or no income tax get a huge tax cut. Because the only way to make the books balance is to cut FICA back dollar for dollar in relation to that General Fund transfer.

Put this in a matrix with lifetime Low, Medium and High Income Worker on one axis, and Entry age, Median age, and New retiree then start examining where the incidences hit. And who woulda thunk it, the people who get crushed are people earning around the payroll cap.

Okay in this scenario what is the effect of either a benefit cut or a cap increase? Well once again it keeps the numbers in both columns more positive for a longer period of time, that is instead of a negative number from 2023 to 2055 you get a smaller transfer for a shorter period of time. But all that means is an even bigger Trust Fund and more accrued interest at the point of crossover and so an even HIGHER need for General Fund transfers to keep the beast of Interest on Interest from eating you up.

In the cold light of day the 'right' answer is to take it as you would if you found out that your insurance company made record profits because of lower than expected claims. As long as all your claims were honored, who cares? I'll be 99 in 2056. But I have some nieces, nephews and great nieces who will be rapidly approaching retirement at that point. I don't see how screwing over Great Gramma Alice and Great Uncle Bruce on their retirement bought them anything more than a huge political mess. That is why benefit cuts and cap increases backfire.

Singapore and healthcare

Reader Whatever sends along an article on the health system in Singapore written in The American:

The People’s Action Party has ruled Singapore since the British left, and is led today by Prime Minister Lee Hsien Loong, the son of founder Lee Kuan Yew. It calls the health system it has put in place the “3M” framework: Medisave, Medishield, and Medifund.

Medisave, which covers about 85 percent of all Singaporeans, is a component of a mandatory pension program. Employees typically pay 20 percent of their wages into the Central Provident Fund (CPF), while employers pay 13 percent. (Since 1992, the self-employed have also participated.) At the beginning of 2007, CPF had over $1 billion in surpluses.

In Singapore’s system, the primary role of government is to require people to save in order to meet medical expenses they don’t expect.
Medisave accounts can be used to pay directly for hospital expenses incurred by an individual or his immediate family. Limits are in place on the extent of Medisave funds that can be used for daily hospital charges, physicians’ fees, and surgical fees. The idea is to cover fully the bills of most patients in state-subsidized wards of public hospitals. Beyond that, individuals dip into their own pockets or use benefits from insurance plans (see more on this below). Medisave can also be used for expensive outpatient treatments such as chemotherapy, renal dialysis, or HIV drugs.

Medishield, the second part of the program, is a national insurance plan that covers the higher cost of especially serious illness or accident, which in Singapore’s system is described as “catastrophic.” Singaporeans can choose Medishield or several private alternatives, some offered by firms listed on the Singaporean stock exchange. Premiums for the insurance plans, including Medishield, can be paid using Medisave accounts.

Medifund, the third part, was established by the government for the roughly 10 percent of Singaporeans who don’t have the means to pay for their medical needs, despite the government’s subsidy of hospital and outpatient costs. The fund was set up in 1993 with $150 million, with the budget surplus providing additional contributions since then. Only interest income, not capital, may be disbursed.

Finally, there’s Eldershield, an addition to the 3M structure that offers private insurance for disability as a result of old age. It pays a monthly cash allowance to those unable to perform three or more basic activities of daily living.

Nearly all Singaporeans contribute directly toward each treatment, including prescription drugs, through patient co-payments of 20 percent for amounts above deductible levels. The money to meet deductibles and co-payments can come out of a person’s Medisave account.

Additional material and comments are below the fold:

In Singapore’s system, the primary role of government is to require people to save in order to meet medical expenses they don’t expect. While the Singaporean government does regulate prices and services, its hand is nowhere near as heavy as that of governments with extensive nationalized healthcare, such as the United Kingdom or Germany.

John Tucci, head of general insurance consulting for North Asia for Watson Wyatt Insurance Consulting, says, “The use of compulsory savings has been very successful as the main source of private funding for hospital expenses.

“Another key focus of the government has been to ensure that overall health expenditure does not fall victim to the significant inflationary pressures that have been evident throughout the world. This has been achieved by regulating the supply and prices of healthcare services in the country.” Even the United States rations treatments and sets prices both through government regulation and purchasing and through private insurance rules.

The United States spends 15.4 percent of its GDP on healthcare, while Singapore spends just 3.7 percent.
Tucci warns that it may be hard to replicate Singapore’s system in the United States. After all, Singapore has a small, concentrated population, with a “backdrop of political stability, enabling successive governments [all of the same party] to introduce consistent measures relating to individual responsibility, compulsory savings, and regulatory control of healthcare services and costs.”

The public healthcare facilities in Singapore have been clustered, since 2002, into two integrated networks, each government-owned and managed as nonprofits: the National Healthcare Group (NHG) on the western side of the city-state, and Singapore Health Services (SingHealth) on the eastern side. Each provides a full range of services, running the public hospitals and specialty centers as private companies.

The Health Ministry says that these clusters “provide cooperation amongst the institutions within the cluster, foster vertical integration of services, and enhance synergy and economies of scale. The friendly competition between the two clusters spurs them to innovate and improve the quality of care while ensuring that medical costs remain affordable.”

Each of the networks also benchmarks against international standards and publishes exhaustive performance figures. In its 2007 report, NHG says its vision is “adding years of healthy life.” The goal, the report says, “departs from merely healing the sick to the more difficult but infinitely more rewarding task of preventing illness and preserving health and quality of life.”

Meanwhile, 80 percent of primary healthcare needs are met by private general practitioners and 20 percent by public outpatient “polyclinics” of hospitals, chiefly those run by the two clusters, NHG and SingHealth. Within the private general practitioner sector, a significant proportion of patients—about 12 percent of them—consult traditional Chinese practitioners.

Phua Kai Hong, associate professor of health policy and management at the Lee Kuan Yew School of Public Policy at the National University of Singapore, describes the crucial social setting that enabled the country to create its remarkably successful health system: a dynamic economy (with 7.5 percent GDP growth in 2007 and an average income per person of about $34,000, or three-quarters that of the United States), strong family ties and social support systems, a high propensity to save and invest, a rapidly aging and affluent population, and an absence of socialized models of social security, social insurance, or healthcare.

He lists five core prerequisites for countries that may want to emulate Singapore’s system: a willingness and ability to save; high participation in formal employment; effective payroll collection with efficient fund management and claims processing; a well-developed information system with strong security and accounting controls; and effective public education in the proper use of medical accounts.

Within the private-public mix, he says, most people lean toward the private system for primary care and the public system for hospital care. There are 13 public-sector specialty centers and hospitals in Singapore and 16 private-sector hospitals. But 74 percent of the beds are within the public sector. The government has also introduced low-cost community hospitals for intermediate healthcare for the convalescent and aged.

Why does Singapore’s system work? Phua cites these principles: “the creation of incentives for responsible behavior and the efficient delivery of services; the discouragement of overconsumption through cost-sharing; the regulation of hospital beds, doctors, and the use of high-cost medical technology; the promotion of personal responsibility; targeted government subsidies; and the injection of competition through a mix of public- and private-sector providers.”

Medical savings, he says, are now being accumulated to ensure that the Singaporean society of the future will be able to look after its own health needs even with a steady rise in the population of elderly people.

But, he adds, there remains room for further evaluation of clinical quality and outcomes as the system continues to evolve.

Rdan here: The article reads like a sales pitch, but perhaps adds to the debate on what is possible for 'savings' to happen concerning healthcare costs.

1. If Social Security creates a huge fuss at 6+% collection rates in the US, can you imagine a proposal for 20% (consumers) and 13% (employers)collections even if it saved money.
2. Singapore has a history of what we would consider draconian solutions. In this case the governments mandates private savings accounts in a public-private mix. Does anyone have additional information?

Update: A factual description of the MSA in Singapore is here.

Wednesday, May 28, 2008

Cocktail Hour at the Conference on Postal and Delivery Economics

Thrilling, I know, but here's the fact pattern that drove the discussion anyway:

1. The U.S. government, or organs thereof, commonly preaches free and open markets to the rest of the world.

2. The U.S. market for the delivery of "letter" mail (i.e. excluding packages) is subject to statutory monopolies both for delivery of certain types of mail and for access to consumer mailboxes, though there is considerable private provision of mailing services upstream of the delivery function.

3. U.S. postal regulation also until recently involved cost-of-service regulation that Some regarded as highly litigious.

4. The U.S. Postal Service provides its letter mail services at low cost and/or low price compared to nearly every other world postal administration. (Possible exception regarding the latter, IIRC, the New Zealand post.)

Discuss?

McCain’s League of Democracies and the Washington Bubble

Thomas Carothers reminds us that:

Proponents of a league only rarely mention the Community of Democracies, created by the United States in 2000, even though it closely parallels the proposed League of Democracies. They don't speak of it because the community has been a serious disappointment, producing much talk but little action. Its weak record is not, as some suggest, due to the fact that a few autocratic governments are included. Rather, it reflects the reality that most democracies are unwilling to follow the United States in challenging national sovereignty when it comes to pushing for democracy.

Carothers notes this in light of a larger problem with recent U.S. foreign policy:

A punishing side effect of Bush's policies abroad has been the despoilment of democracy promotion. Abuses of prisoners and detainees at U.S.-run facilities in Iraq, Afghanistan, Guantanamo Bay and elsewhere have undercut America's standing as a defender of human rights. The constant identification of democracy promotion with the Iraq intervention and other regime-change policies has besmirched the very concept in the eyes of many people around the world. As a result, the last thing people in other countries are seeking from the next administration is a high-profile initiative tying democracy promotion to the global U.S. security agenda. The almost complete absence of any welcoming responses from outside the United States to the calls for a league underscores this fact. The idea of a league of democracies rests on the belief that democracies, by virtue of being democracies, have such common interests and perspectives that they will be able to act in unison on global problems. Yet most countries do not base their foreign policy primarily on the orientation of their political system. Instead, their actions reflect a constellation of diverse factors including regional identity, economic needs, historical traditions and religious outlook. Consequently, democracies can and do disagree seriously on basic matters. The United States does not, as Jackson Diehl suggested [op-ed, May 19], meet resistance at the United Nations to its policy initiatives only from nondemocratic states such as Russia and China. Most major developing-country democracies, such as Argentina, Brazil, India, Mexico and South Africa, differ deeply with United States, for example, on the question of interventionism as well as on trade policy, the war on terrorism and much else. Attempting to bind them together into a league with the United States would not change that. Yet excluding these countries from a league would render it a hollow, hypocritical institution. Also, if memory serves, wasn't it some of Europe's most established democracies that opposed the United States on Iraq? Would they, too, be left out in the interest of a league amenable to approving future U.S. interventions?

McCain’s utterances on foreign policy strike me as too similar to the disastrous policies pursued by the current Administration. His call for a League of Democracies should by itself disqualify him for serious consideration as the next President of the United States.

Soc Sec XIII: 'Crisis' at Shortfall; or Show me the Money

Social Security 'crisis' is normally discussed in terms of Trust Fund Depletion. But given that this event has been pushed back to at least 2041 and boils down to a benefit in real terms 25% better than the one my Mom gets today (78% of 160% = 125%), and that some awareness of this leaked out during the 'There is no crisis' campaign of 2005, opponents of Social Security had to retool and redefine crisis at Shortfall, which is to say the time that receipts from taxation fall behind Social Security cost and so require the General Fund to start paying back the money it borrowed. Since no serious argument can be made that the debt is not real, because after all they continue to borrow the current surplus presumedly in good faith, instead they pivot to 'explain' that paying it back will put some intolerable strain on the overall budget and so require massive spending cuts or ruinous taxation increases. But as almost always they never actually put a price tag on this. So lets price Shortfall in inflation adjusted Constant Dollars. Source data here: Table VI.F7.—Operations of the Combined OASI and DI Trust Funds, in Constant 2008 Dollars, Calendar Years 2008-85" [In billions]

Now generally when people talk about the Social Security surplus they include the accrued interest and talk about the General Fund borrowing $200 billion a year. And viewed from the standpoint of legacy debt this is fair enough, they are assuming future obligations for that amount. But that interest is not in fact financed, the only real cash extracted from the economy and so the only real dollars that can be used to pay for real current spending are the actual excess tax dollars over current costs. Lots and lots of nummy numbers below the fold.

Between 2008 and 2017 the system is projected to run surpluses, but how much of that is actually cash? In this case the first column represents total surplus, the second cash flow (all under Intermediate Cost assumptions, dollars in billions)
2008 $196 $79
2009 $208 $86
2010 $214 $84
2011 $216 $76
2012 $214 $66
2013 $209 $52
2014 $200 $35
2015 $190 $18
2016 $180 $2
2017 $164 -$19 {oops, had to edit from -$21, which is the net change from 2016 and not the actual transfer for 2017}
In light of this we can see how misplaced the hysteria really is. These are not particularly big dollars to start with and over the next ten years the General Fund will be gently weaned off what is in context a pretty meager flow, the idea that a transition from a $2 billion cash surplus in 2016 to a $19 billion dollar cash deficit in 2017 roiling the world credit markets or demanding huge slashes in spending or ruinous tax increase is in numeric context simple nonsense, particularly as here if you adjust the numbers for inflation. But doesn't it just get worse going forwards? Well lets see. At this point the table shifts to five year periods meaning we have to interpolate for 2023, the date the total surplus is being tapped and principal has to be repaid. These figures represent total transfers from the General Fund, once again adjusted for inflation. {Oops had to edit, got 2017 and 2023 mixed up the first time around}.

2017 $19
2020 $77
2023 ~$150
2025 $172
2030 $258
2035 $313
2040 $335
2042 $0

In short financing Social Security through 2041 means deficits in real terms less than the typical ones run by this Bush Administration and in context much smaller than those run in Reagan/Bush I days. If we exercise even a little restraint on the General Fund side this gap is easily digestible, especially if we note that it is in principle temporary, there is no positive legal obligation for the General Fund to backfill any income/cost gap after 2041. Once you put the numbers in context any real content to 'crisis' simply melts away. Which is why privatizers never put the numbers in context.

The Problems of Free Trade and Vladimir Masch

Vladimir Masch has offered some radical solutions to the problems of globalization. In terms of the U.S., here is how he describes the problem:

The US is currently in a precarious position, one of the most dangerous in its history. In addition to geopolitical threats, we face a severe economic shock. The enormous wealth of this country is transferred abroad at a high and accelerating rate. To finance our voracious consumption, we borrow from potential adversaries. We lose important industries and millions of middle-class jobs. With the industrial base being destroyed, our security is compromised. The country has lost every important economic weapon that can be used in thorny geopolitical situations, which will prevail in this century.

At the heart of the problem is the problem of trade, a problem that few economists have addressed. Instead, we have a "relentless propaganda" machine, headed by economists on both the right and on the left--Krugman and Mankiw are examples--that globalization as practiced will bring benefits to all. Free Trade is the mantra. And here are the results.

In 2006, its current account deficit will probably reach about $900B, or almost 7% of GDP, with its rise accelerating. In just one year, the deficit exceeded more than twice our expense on the Iraq war for four years. The notorious "bridge to nowhere" costs $222 million; in foreign trade, we lose that amount every two and a half hours. In 6 to 8 years, just our return payments on foreign holdings on US securities may reach half a trillion dollars a year. A large part of that debt is borrowed from China, our potential adversary; it holds now more than one trillion dollars of currency reserves, predominantly in the US debt securities, and expects to double that amount in four years. This is an ever-growing mortgage on our country, and the situation is unsustainable. Even President Bush, a religious devotee of free trade, says so.

The just completed draft of the Horizon Project, which is intended to be a Marshall type Plan for America and has been authored by eleven eminent CEOs and policy
innovators, comes to basically the same conclusions. The Horizon Project talks about "a hollowing out of American productive and services capacity," about "the US international trade position … being in free fall," about "many U.S. multinational corporations which … seem tempted to off shore almost everything but consumption." Consequently, "The traditional U.S. trade surplus in agricultural products is nearing zero, in high-technology products it has turned negative, and in trade services it is small and declining as a proportion of total trade." Moreover, it considers emigration of such industries as chip manufacturing to China, Taiwan and South Korea as "very unwise," as these areas are threatened by potential geopolitical disturbance in the region that might "greatly diminish U.S. armed forces operations and effectiveness."

The present relatively low rates of inflation and unemployment and satisfactory rates of growth were bought at an enormous price of transferring our wealth and labor force abroad.

Vladimir addresses the so-called law of "comparative advantage", which assumes that every country will specialize in what it does best. While theoretically, the law seems elegant and incontrovertible, it ignores important externalities such as adjustment costs--re-training, etc.

Outsource everything--full speed ahead. Damn the costs. And, if the money has flowed abroad or into CEO and corporate coffers, who is to pick up the tab? How are we to adjust? How do we pay for re-training? And in what?

We are not talking here about a few people; we are talking about millions of people and uncountable industries. And then, of course, we have to wait--painfully--while wages equalize...if they ever do. And what has been the result: Enormous polarity in the distribution of wealth. So many problems; so little thought has been given to them.

No economist gave any thought to wage disparity; it simply became tucked into the law of comparative advantage.

No economist ever gave thought to labor rights as essential for sound trade. Again, labor rights became a mere externality--an uncomfortable side issue that deflates the bottom line.

Should the WTO have insisted that China protect labor rights prior to WTO entry? Of course it should have.

Right wingers love to tell us how much better off the poor peasant is in his sweat shop. Does the right winger care about sweatshop labor conditions? Of course not. Meanwhile, the rich get richer. And meanwhile, the U.S. is headed down the tubes.

And while we are at it, let me suggest another difficulty: Specialization has its own difficulties, as I pointed out in this piece: Local or Global .

Specialization puts any country at risk, especially in key commodities. And if big players with deep pockets can quickly shift money to exploit the problems, what then? According to one wag, 60% of the cost of oil is a result of one such shift. (While I do not agree with this figure, many here apparently do. And if they do, what say they then about free trade?)

Vladimir has described the problem, at least for the U.S. And what is his answer: Trade balances must be controlled. He suggests the following:

Congress sets annual limits (upper bounds) on the overall U.S. trade deficit in consumer goods and undesirable capital goods (oil and gas excluded)
The President of the U.S. allocates the allowed deficit for each of our trading counterparts—countries or groups of countries
A country may exceed the limit if its government pays the U.S. Treasury a stipulated percentage (up to the full amount) of the excess deficit, also approved for each country by the President of the U.S. These payments may be capped
To raise the money for excess deficit payments, our trading counterparts may either use export taxes and export certificate auctions or pay from their currency reserves

Interesting, but I think unworkable.

Imagine telling China that it must compensate us for its trade surplus! And what do we say to poor Mexico? Or to Canada? Send us our monthly check, please.

My own solution is three-fold and it is based on the following--over 60% of China's exports are from foreign companies inside of China. Unless we address that uncomfortable fact--almost 80% in IT--, our goose is cooked.

Insist that all countries protect labor rights. No more fast track trade deals that are merely grease for our companies to find cheap labor.
Reform the WTO or withdraw from it. The WTO should immediately start a process whereby all WTO countries move towards an acceptable standard for the protection of labor. Better late then never.
Tax goods that U.S. companies make with cheap overseas labor. Put a price on outsourcing and offshoring. Hey, Intel and Apple, no more free rides. Hey, Walmart, your prices are going up. Time to compete fairly.

(Albufeira, Portugal) Congestion Pricing at Work?

Yesterday afternoon, a trio of fellow Conference on Postal and Delivery Economics attendees and I were marveling at the emptiness of the A2 motorway connecting the southern exburbs of Lisbon and the Algarve region. Certainly, there is not a whole lot of stuff en route, but you could say the same thing about a lot of points 250 km apart along the Interstate highway system west of the Mississippi River; those are not that lightly-traveled.

There are income and substitution effects to consider: Portugal's per-capita GDP is 75% of the EU average (or less than 2/3ds that of Rich Europe), and fuel was dear at around €1.50/liter — though the preponderance of small diesel-powered cars implies a much smaller difference in per-km costs versus the U.S. than you'd get from the pump price. But one of the bigger hits was the toll of almost €19. A 150-km ride on the Pennsylvania Turnpike a couple weeks ago for another conference was $4; the Illinois Northwest Tollway, highly congested in the Chicago suburbs and exurbs, only hits you up for $2 between the Wisconsin state line and the toll-free city Chicago expressways if you use the system enough to shell out for an I-Pass transponder (they price-discriminate by charging twice the I-Pass toll for cash, which for all I know may be going on here, too).

This makes me think that the main concern for the privatization of tollways is less the outsourcing of toll-raising dirty work to the private sector so much as whether the states are adequately compensated for such right to raise the tolls as they sell. (*)

* To possibly forestall certain lines of comments, I don't actually support government eating-of-capital as a politically expedient alternative to raising other taxes.

Reader FS and the farm bill

Lifted from comments cactus style, Reader FS fills in some of the info on the farm bill:

Here are CBO figures on the new farm bill.

Total expenditures, 2008 through 2012: $301.382 Billion (B), or about $60 billion per year.

CBO computes changes in expenditures relative to its March 2008 budget baseline. The total changes over the 2008-2012 period are:

Commodity program -1.875 billion (B)

Conservation: 2.845 B

Trade: 0.161 B

Nutrition (i.e., Food Stamps) 3.111 B
(for the 10 year period of 2008-2017, this jumps to 9.669 B)

Credit program: -0.396 B

Rural development: 0.122 B

Research: 0.031 B

Forestry: 0.038 B

Energy: 0.615 B

Horticulture & Organic Ag: 0.402 B

Livestock: 0.001 B

Crop Insurance: -4.517 B

Commodity futures: 0.000 B

Misc: 0.190 B

Trade & Tax provisions: 4.930 B

Total change: 5.659 B

I don't know for certain, but I'd guess that the ACRE program is part of the 4.930 B.

----

Here's a quick explanation of why these changes are taking place.

The ACRE program now being introduced is designed to be a permanent disaster assistance program. It's intended to replace ad-hoc disaster assistance that Congress provides on a frequent basis - particularly in election years.

From a broad perspective, disaster assistance should be understood as being free crop insurance. Farmers recover their losses once under their crop insurance policies and then a second time via disaster aid. What could be sweeter? However, to reach an agreement on this bill, Congress was forced to take money out of the crop insurance program in order to fund the ACRE program. This was done by reducing the overlap in payments between the two programs.

Of course, major legislative changes like this don't just happen by accident. The concept of a permanent disaster aid program (though not necessarily the ACRE program itself) was being pushed by a number of the farm commodity groups, which wanted greater assurance that money would be available on a timely basis. Also, certain commodity groups were due to lose a large portion of their government commodity program payments due to high crop prices. By proposing a new federal program, the commodity groups were able to establish a much higher price support guarantee than farmers would have received if the existing programs had simply been extended. Voila! The money will still be headed their way.

This doesn't mean that the ACRE program is all bad. Considering how much money Congress has been providing in ad-hoc disaster aid recently, it's possible that total expenditures may actually go down under the ACRE program. Of course, this assumes that Congress will finally stop passing ad-hoc disaster assistance legislation.

Let me just say that my experiences during the past several months remind me of the old saying that you never want to watch sausages or legislation being made.

This one by reader FS

Free Trade in Health Care

Via Greg Mankiw, Jagdish Bhagwati and Sandip Madan propose free trade and greater competition among U.S. doctors:

But the importation of doctors is even more critical in meeting supply needs than in providing lower costs. According to the 2005 Census, the U.S. had an estimated availability of 2.4 doctors per 1,000 population (the number was 3.3 in leading developed countries tracked by the OECD). Comprehensive coverage of the over 45 million uninsured today will require that they can access doctors and related medical personnel. An IOU that cannot be cashed in is worthless. Massachusetts ran into this problem: Few doctors wanted (or were able, given widespread shortages in many specialties) to treat many of the patients qualifying under the program. The solution lies in allowing imports of medical personnel tied into tending to the newly insured. This is what the Great Society program did in the 1960s, with imports of doctors whose visas tied them, for specific periods, to serving remote, rural areas. U.S.-trained physicians practicing for a specified period in an "underserved" area were not required to return home. It is time to expand such programs – for instance, by making physicians trained at accredited foreign institutions eligible for such entry into the U.S. But in order to do this, both Democratic candidates will first need to abandon their party's antipathy to foreign trade.

The late Milton Friedman would likely be impressed. Not only was he a proponent of free trade, his diagnosis of the health care issue was often that we needed more competition among doctors. This plea also reminds me of what Dean Baker has often argued.

But I must protest the last line in this oped. Some liberal Democrats (e.g., yours truly) do not have an antipathy to the free mobility of workers. Bhagwati and Madan have an excellent proposal that I hope Barack Obama decides to adopt.

Tuesday, May 27, 2008

Recommends 'If only we could' assassinations

Fox news and Obama. Is this a criminal statement?

First telecoms collect, now credit card companies for government use

Because we can?

In an effort to track down unreported small business income, the U.S. Treasury is calling on Congress to create a sweeping new program that would require all credit card companies to report the income of all merchants to the Internal Revenue Service.

The proposal, raised in President Bush's FY2009 budget, would require credit card companies to report the aggregate transactions of all of their merchants (that is, all the businesses that have merchant accounts with the card companies and to whom credit card payments are made). The reports to the IRS would have to be tied to the Taxpayer Identification Number (TIN) of the merchant. Many small businesses use their owners' Social Security Numbers as their TIN. A similar program aimed at Internet "brokers," including eBay and Amazon, which raised privacy concerns last year, seems to have been dropped from this year's budget proposal.

...

The credit card reporting proposal is another example of efforts to require businesses to retain records of their customers for government purposes. Last year, the Treasury Department suggested data retention rules for Internet "brokers" such as Amazon and eBay, and the Justice Department has been calling for federal legislation that would require Internet service providers to retain information about their customers for months or even years at a time.

...

In May 2007, the Office of Management and Budget called on government agencies to report on and cut down on the use of Social Security Numbers and to look into using alternatives to the numbers for internal identification. The reason for this policy is that widespread collection and storage of SSNs and TINs creates a risk of identity theft and fraud.

The OMB action followed the April 2007 Justice Department and FTC plan to combat identity theft, which called on government agencies to reduce unnecessary use of SSNs. The logic of reducing use of SSN use is obvious. SSNs are an essential element of many types of ID theft and often one of the main targets of serious data breaches. Until we can limit the frequency of data breaches, we can at least limit the negative exposure caused by breaches by limiting the number of places we store SSNs.

The underlying finding of the DOJ-FTC report — that SSNs are a prime target for identity thieves and that their use should be limited — is difficult to reconcile with a plan that calls for massive new collection and storage of TINs.

Although the DOJ-FTC report implies that the IRS is an appropriate agency to collect TINs, forcing credit card companies to maintain the data on all merchants creates a major new risk for those taxpayers who have done nothing wrong.

Several things:
1. Income from small businesses is a great unknown to some and needs investigating, but the same are content with minimal enforcement of shelters and such of larger corporations and investors.
2. Since when has paying a fair share been important to this adminisration?
3. This appears to be another extension of total awareness programing mentality. 'What's in your wallet' becomes the business of someone somewhere for possible criminal proceedings, not just marketing.
4. Will 'cash' become obsolete in the mainstream?

Monday, May 26, 2008

GI Bill and Retention

John McCain loves to say he has had more experience at war than Barack Obama when he explains his opposition to the legislation that would provide additional college financial aid to veterans, which passed overwhelmingly in the Senate. There’s a problem with this boosting – the author of the bill was James Webb who also served in Vietnam and also served as Secretary of the Navy under President Reagan. But then McCain also made the following claim:

McCain said he opposed Webb's measure because it would give the same benefit to everyone regardless of how many times he or she has enlisted. He said he feared that would depress reenlistments by those wanting to attend college after only a few years in uniform. McCain said the bill he favored would have increased scholarships based on length of service.

Originally, the story we linked to had the following claim from McCain:

The most important difference between our two approaches is that Senator Webb offers veterans who served one enlistment the same benefits as those offered veterans who have re-enlisted several times. Our bill has a sliding scale that offers generous benefits to all veterans, but increases those benefits according to the veteran's length of service. I think it is important to do that because, otherwise, we will encourage more people to leave the military after they have completed one enlistment. At a time when the United States military is fighting in two wars, and as we finally are beginning the long overdue and very urgent necessity of increasing the size of the Army and Marine Corps, one study estimates that Senator Webb's bill will reduce retention rates by 16%.

One study? What study? Political hacks love to do this – claim some un-cited study supports their spin? Rather than pull the quote from this press story, the press should insist that McCain provide us with his supposed evidence so we can review it for ourselves.

Update: Faiz had already pointed to a CBO analysis of the Webb-Hagel proposal. Note what CBO really said about the recruitment and retention effects:

Educational benefits have been shown to raise the number of military recruits. Based on an analysis of the existing literature, CBO estimates that a 10 percent increase in educational benefits would result in an increase of about 1 percent in high-quality recruits. On that basis, CBO calculates that raising the educational benefits as proposed in S. 22 would result in a 16 percent increase in recruits. Literature on the effects of educational benefits on retention suggest that every $10,000 increase in educational benefits yields a reduction in retention of slightly more than 1 percentage point. CBO estimates that S. 22 (as modified) would more than double the present value of educational benefits for service members at the first reenlistment point — from about $40,000 to over $90,000 — implying a 16 percent decline in the reenlistment rate, from about 42 percent to about 36 percent.

By looking at only retention and ignoring recruitment, McCain is effectively telling us another one of his great big fibs. I guess the AP pulled McCain’s comment about one study – lest he be shown to be a liar again. But isn’t pointing out when politicians lie to us the job of the press?

Update II: Mark Thoma offered a few sage thoughts on this retention and recruitment issue. Mark – thanks for the comment reminding us! Maybe McCain wants more retention and less recruitment as he thinks the army like the Presidency should have elder members.

Fewer US soldiers die...a good thing

CoRev sends this note and picture. It is a good thing to see. We can argue what the meaning is on a different day.

Memory and memorials

Celebrated in a variety of ways, as a day to acknowledge sacrifice by soldiers who went to war, I have always felt conflicted about what to do on this day. It is a day to honor the dead and a day to count your blessings. It is a day to mourn remembered family and a day to tell a story of some kind of historical narrative.

Perhaps it also can be a day for those who fought to recount and record their experience on this day, and then tuck away the memories rarely shared to instruct another day.

Fiscal Policy – When Alice Rivlin Speaks, Just Listen

Alice Rivlin teams with Michael O’Hanlon to write:

In 1992, with his squeaky voice and endless charts, Perot focused attention on the rising federal deficit. His warnings helped keep the major-party candidates from talking budgetary nonsense ... Federal debt, which fell to 57 percent of gross domestic product during the Clinton administration, is back up to about 68 percent, the highest percentage since the 1950s. Interest on the federal debt tops $200 billion a year, so we have to move quickly to avoid losing ground. Moreover, deficits are increasingly being financed by other countries, making us increasingly vulnerable to their agendas. All the candidates claim that their initiatives would not make future deficits bigger, but many of these claims are shaky at best ... With his bold tax cuts and increases in defense spending, John McCain looks likely to do the most fiscal damage, but the Democrats are not far behind.

I’m not about to endorse Ross Perot but Alice Rivlin certainly deserves a seat near the next President of the United States.

Sunday, May 25, 2008

BW on Soc Sec Index: the Baker's Dozen

By semi-popular demand (or maybe to satisfy my monomania) I created a links list to my thirteen recent posts at my site under the title (BW's) Social Security Posts on Angry Bear. This is more or less a convenience for me, allowing me to see at a glance what I have covered, but it might be useful for those who came along about installment X.

Unless I get some specific requests or questions, I expect to pull back some on this, and go back to a more bloggy thing of monitoring what people like Andrew Samwick and Andrew Biggs are saying and then as appropriate post on it here. But if you just have to have more of me I am sure the siteowners will forward on any and all story suggestions.

The Food Chain...research.

The NYT reports:

LOS BAÑOS, Philippines — The brown plant hopper, an insect no bigger than a gnat, is multiplying by the billions and chewing through rice paddies in East Asia, threatening the diets of many poor people.

Luis Liwanag for The New York Times
Because subsidized rice is limited, people must take numbers when they line up to buy it in Los Baños in the Philippines.

The damage to rice crops, occurring at a time of scarcity and high prices, could have been prevented. Researchers at the International Rice Research Institute here say that they know how to create rice varieties resistant to the insects but that budget cuts have prevented them from doing so.

This is a stark example of the many problems that are coming to light in the world’s agricultural system. Experts say that during the food surpluses of recent decades, governments and development agencies lost focus on the importance of helping poor countries improve their agriculture.

The budgets of institutions that delivered the world from famine in the 1970s, including the rice institute, have stagnated or fallen, even as the problems they were trying to solve became harder.

“People felt that the world food crisis was solved, that food security was no longer an issue, and it really fell off the agenda,” said Robert S. Zeigler, the director general of the rice institute.

Vital research programs have been slashed. At the rice institute, scientists have identified 14 genetic traits that could help rice plants survive the plant hopper, which sucks the juices out of young plants while infecting them with viruses. But the scientists have had no money to breed these traits into the world’s most widely used rice varieties.

The institute is the world’s main repository of rice seeds as well as genetic and other information about rice, the crop that feeds nearly half the world’s people.

But nowadays at the International Rice Research Institute, greenhouses have peeling paint and holes in their screens and walls. Hallways are dotted with empty offices. In the 1980s, the institute employed five entomologists, or insect experts, overseeing a staff of 200. Now it has one entomologist with a staff of eight.

“We’ve had an exodus here,” said Yvette Naredo, an assistant geneticist.

Similar troubles plague other centers in Asia, Africa and Latin America that work on crop productivity in poor countries. Agricultural experts have complained about the flagging efforts for years and warned of the risks.

“Nobody was listening,” said Thomas Lumpkin, director general of the International Maize and Wheat Improvement Center in Mexico.

Now, a reckoning is at hand. Growth of the global food supply has slowed even as the population has continued to increase, and as economic growth is giving millions of poor people the money to buy more food.

One has to connect some other dots as well. For instance, genetically modified rice has been demonstrated to produce LESS rice per acreage than improved varieties made more traditionally. Monsanto has been so aggressive in its IP protection that even contamination of a neighboring farm with its product is grounds for lawsuits claiming damage for the company. This cannot be good for competition, and tends to increase the "drain" part of farming in that new seed must be purchased each year.

Global warming has produced hotter night time temperatures that also reduce production, and in the short run of decades might produce profound changes in rice production patterns away from the tropics.

Index and futures markets appear to be de-coupling actual supply and demand factors from market behavior we count on to price, so greater variability is headed our way than even scarcity might indicate.

This affects distribution dramatically.

Andrew Biggs answers Bruce Webb

Andrew Biggs responds to Bruce Webb regarding Arne's seven questions on social security. The site is worth visiting. Thanks Andrew.

The Free Trade Benefits Everyone Canard Again

The latest version is courtesy of James Surowiecki. When I try to make the Stolper-Samuelson argument that wages in the apparel sector fall by more than apparel prices fell, James insists that Christian Broda and John Romalis addressed that in Inequality and Prices: Does China Benefit the Poor in America?:

The debate on trade and wages in the U.S. has entirely focused on the impact that trade with developing countries has on the wages of the unskilled in America. This debate has overlooked the impact that trade has on prices of the goods consumed by different income groups. In particular, since developing countries typically produce low quality goods that are disproportionately consumed by the poor in America, this implies that inequality measures that do not correct for differences in the basket of goods consumed by rich and poor neglect this “price” effect of trade.

While I concede we should look at both the price effect and the wage effect, doesn’t the Stolper-Samuelson effect consider both? James did offer this comment:

As for quoting Stolper-Samuelson, there are fewer than 900,000 apparel workers left in the U.S. There are 30 million+ low-income American consumers, the vast majority of whom don't now and in fact never did work in industries that compete with China, who reap sizeable benefits -- as Broda and Romalis document -- from the lower prices that free trade with China has empirically brought. If you want to make the case that the costs to those apparel workers today (and to those who used to work in the apparel industry)outweigh the benefits to the consumers, then do it empirically, documenting the costs and benefits. Merely citing S+S doesn't help you.

Well, it is true that BLS cites that there were only 540,000 workers as of April 2008 in the following sectors: textile mills, textile mill products, apparel, and leather and allied products. This is down from 1,822,000 as of January 1990 as our apparel sector has laid off many workers who likely found employment elsewhere but often at even lower wages. As Paul Krugman noted:

In 1995 I also believed that the effects of trade on inequality would eventually hit a limit, because at a certain point advanced economies would run out of labour-intensive industries to lose – more formally, that we’d reach a point of complete specialisation, beyond which further growth in trade would have no further effects on wages. What has happened instead is that the limit keeps being pushed out, as trade creates “new” labour-intensive industries through the fragmentation of production. For example, the manufacture of microprocessors for personal computers is clearly a highly sensitive, skill-intensive process. Intel’s microprocessor production, however, now takes place in two stages: the “fabs,” which print the circuits on disks of silicon, are all located in high-wage advanced countries, but the assembly and testing, in which those disks are cut into individual chips and tested to be sure that they work, is conducted in China, Malaysia, and the Philippines. Outsourcing of services, in both directions, adds to the possibilities of unequalising trade. The skill-intensive pieces of production processes that mainly take place in the third world are often now located in the OECD – for example, Lenovo, the Chinese computer company, has its executive headquarters in North Carolina. What all this comes down to is that it’s no longer safe to assert, as we could a dozen years ago, that the effects of trade on income distribution in wealthy countries are fairly minor. There’s now a good case that they are quite big, and getting bigger.

Simply put – focusing on those 540,000 apparel workers to access the impact on wages is incomplete and highly misleading.

Saturday, May 24, 2008

Soc Sec XII: LMS, Solvency and 'Crisis'

LMS is shorthand for the Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan one of any number of Social Security plans out there but noteable because of its authorship. Maya MacGuineas currently head of CRFB was previously 'Social Security advisor to the McCain presidential campaign', Jeffrey Liebman served on Bill Clinton's Social Security team and is now one of Obama's top economic advisors, while Andrew Samwick was (from LMS) "Chief Economist on the staff of President Bush’s Council of Economic Advisers, where his responsibilities included Social Security" as well as being a prominant econoblogger. That is we are not talking about three random academics writing some paper, instead these are policy players working at the highest levels, no matter who wins this fall one or more of them will be sitting at the table when Social Security policy is hammered out. So LMS matters. A lot.

But first lets define some terms and lay out some baseline numbers. Social Security 'crisis' is normally associated with Trust Fund Depletion which is currently projected for 2041. Although people tend to refer to this event with reckless language like 'broke', 'bankrupt' or 'dead broke' which leads others to conclusions that 'Social Security will not be there for me' or 'no check', ten seconds of informed thought tells us this is nonsense. As long at the payroll tax exists some level of benefits can be paid out and the Trustees tell us each year what that level is. With the 2008 Report the Trustees tell us that under Intermediate Cost assumptions that the benefit check will be cut sometime in 2041 to 78% of the scheduled benefit. Now given that the scheduled benefit would be 160% in real terms relative to the one a similarly situated retiree gets today and that 78% of 160% = 125% or a check 25% better in real terms than the one my Mom gets today some might question the whole notion of 'crisis'. A topic that can be discussed in comments. But for now lets run with the number.

Okay so 'crisis' is defined as 78%. What would a 'fix' be. Well I am going to keep running with the Trustees here, they would define this is terms of Short Term and Long Term Actuarial Balance, meaning Social Security projected to end each year of the next ten or alternatively seventy-five years with a one year reserve. Which translates to 100% of the schedule. Moreover they tell us exactly what the cost of that fix would be if we chose to take a tax only approach. Per the 2008 Report that fix would require an immediate increase in the payroll tax of 1.7% which would take the FICA rate to 14.1%. We should note that when LMS was drafted the gap was 1.92%.

So now to LMS and Table 1 above, especially columns two and four where you have both halves of a couple surviving. One thing strikes you right away, LMS doesn't actually promise you a fix as defined particularly for low earners, it only partially fills the gap. While some might be tempted to say 'better something than nothing', the devil is always in the details. A cost/benefit analysis of LMS lies below the fold.

Which takes us to Table 2 which scores the impact of LMS on the Trust Fund but which doesn't tell the whole story. LMS at its core relies on PRAs (Personal Retirement Accounts) which are essentially government run IRAs that are considered to be outside the Trust Fund itself. If we take the totality of LMS what are the tax and benefit implications?

First LMS proposes a 1.5% across the board increase in payroll tax all of which gets put into the PRA. Additionally it proposes a partial lifting of the payroll cap for an additional 1.0% payroll equivalent. Which is to say that it proposes a 2.5% tax solution to a problem that had been scored at 1.92% and now is down to 1.7%. Given that we could achieve a 'fix' as defined above for less than LMS it is clear that for the authors their 'Reform' does not equate to our 'fix'. But it gets even more interesting on the benefit side.

Along with the 2.5% total increase in payroll tax LMS also proposes a cut in the benefit from traditional Social Security benefit formula of 2.08% along with an increase in retirement age for an additional .68% for a total benefit cut of 2.7% once again much more than what we have described as 'crisis' to begin with. So what we have is a tax increase that would more than 'fix' 'crisis' as we have defined these terms along with benefit cuts that would fix 'crisis' in place. Which puts in place the dual questions 'What does LMS actually accomplish?' and 'Why should wage workers fund it to the equivalent of 5.2% of payroll (2.5% in taxes and 2.7% in cuts)?'

At this point serious students might want to follow the link and read the plan which is only nine pages. The first six and a half pages contain the pain. The putative gains start on page seven.

"Sustainable solvency is achieved'. The net result from LMS would be to put Social Security into a .22% payroll surplus when examined from the Social Security and hence General Fund side of the equation. That this comes at a cost of 5.2% total to workers when they could get a better outcome at 1.92% (then) or 1.7% (now) is apparently just the burden we owe to future generations. Because on examination it is clear that the authors of LMS have a quite different definition of 'solvency' than say Coberly or I do. We like the fact that Social Security is a PayGo insurance plan with an intergenerational bargain of 'you paid for my parents, I'll pay for you, your kids can pay for me, and all with better real results as time goes on'. For the authors this situation is intolerable. Why? Well a fine topic for discussion in comments.

"Fiscally responsible plan" Here I think the authors let the cat out of the bag, note how they word the issue (bolding mine):

The plan puts great emphasis on fiscal responsibility – borrowing less from general revenues than any other plan that has been scored by the Social Security actuaries in recent years. Table 3 compares the LMS plan with other recent Social Security reform plan. The first column compares general fund transfers to the OASDI Trust Funds. This is one measure of how much a plan relies upon unspecified resources from outside of Social Security to bring the system into balance. The LMS plan does not rely at all on general fund transfers, and instead uses changes to
benefits and revenues to bring Social Security into balance.

. This is rather odd. Under current law there is no question of Social Security borrowing anything from the General Fund, the obligation is the other direction in the form of repaying the money borrowed from current Social Security surpluses. The LMS formulation builds in a tricky duality. First it asserts that the unfunded liability beyond 2041 is real enough that the government would fill compelled to backfill it with 'borrowing, then it writes it off anyway by proposing even bigger cuts sooner. To me that seems special pleading.

"Many practical reforms are included". All these reforms relate to administration of the plan and none actually to the issue of retirement security itself.

"Economically beneficial" On my reading of the text on page nine this translates to 'exercising fiscal restraint on Congress', a good idea in itself but one that is difficult to justify by placing the entire cost on wage workers.

"Balanced compromise". I am not sure how a 5.2% bill for a problem scored at 1.92% is either balanced or any kind of a compromise, not at least from the perspective of workers. To me the whole thing looks like just trying to find the easiest path to screw over any concept of Social Democracy in favor for a everyman for himself philosophy typical of the Economic Right. In context 'bi-partisan' here is defined as compromise between the conservatives and the DLC/centrist wing of the Democratic Party, the concept that the New Dealers should have some voice is dismissed out of hand.

Defense Department, Iraq War, and the Demand for Oil

In honor of Greg Mankiw, maybe Yochi Dreazen should have called this Cross-Price Elasticity of Demand VI:

With fuel prices soaring, the U.S. military, the country's largest single consumer of oil, is turning into an alternative-fuels pioneer. In March, Air Force Capt. Rick Fournier flew a B-1 stealth bomber code-named Dark 33 across this sprawling proving ground, to confirm for the first time that a plane could break the sound barrier using synthetic jet fuel. A similar formula -- a blend of half-synthetic and half-conventional petroleum -- has been used in some South African commercial airliners for years, but never in a jet going so fast … With oil's multiyear ascent showing no signs of stopping -- crude futures set another record Tuesday, closing at $129.07 a barrel in New York trading -- energy security has emerged as a major concern for the Pentagon. The U.S. military consumes 340,000 barrels of oil a day, or 1.5% of all of the oil used in the country. The Defense Department's overall energy bill was $13.6 billion in 2006, the latest figure available -- almost 25% higher than the year before. The Air Force's bill for jet fuel alone has tripled in the past four years. When the White House submitted its latest budget request for the wars in Iraq and Afghanistan, it tacked on a $2 billion surcharge for rising fuel costs. Synthetic fuel, which can be made from coal or natural gas, is expensive now, but could cost far less than the current price of oil if it's mass-produced. Just as important, the military is increasingly concerned that its dependence on oil represents a strategic threat. U.S. forces in Iraq alone consume 40,000 barrels of oil a day trucked in from neighboring countries, and would be paralyzed without it. Energy-security advocates warn that terrorist attacks on oil refineries or tankers could cripple military operations around the world. "The endgame is to wean the dependence on foreign oil," says Air Force Assistant Secretary William Anderson.

Michael Perelman has another take on the fact that the Iraq campaign is consuming so much oil:

I suspect that these figures would be what uniformed personnel consumed. Maybe somebody here knows, but I feel fairly confident that contractors in Iraq -- even contractors carrying out military missions -- consume oil that escapes these estimates. Wasting oil is nothing compared to wasting lives, but even so I can think of better uses for 340,000 barrels of oil a day.

This war not only disrupted Iraqi oil supplies, it has also increased the demand for oil. Isn’t it time to end this idiotic adventure before Grand Ayatollah Ali al-Sistani succumbs to pressures to declare a fatwa on our troops:

Iraq's most influential Shiite cleric has been quietly issuing religious edicts declaring that armed resistance against U.S.-led foreign troops is permissible — a potentially significant shift by a key supporter of the Washington-backed government in Baghdad.The edicts, or fatwas, by Grand Ayatollah Ali al-Sistani suggest he seeks to sharpen his long-held opposition to American troops and counter the populist appeal of his main rivals, firebrand Shiite cleric Muqtada al-Sadr and his Mahdi Army militia.

Friday, May 23, 2008

Gas mileage and driving

I keep hearing on CNBC and reading at some blogs that if cars get better mileage that people will drive more by enough to offset the improved mileage.

I can see that people could drive more because of the savings. But to argue that reducing mileage by 20%, for example will lead to people increasing their driving by more then 20% seems like a very questionable conclusion. I'm willing to listen to an argument that increasing gas mileage would be partially offset by increased driving, but not that the responses would be more than 100%.

Does anyone have any idea of the original source or research of this belief by so many Republicans, Conservatives and Libertarians?

Is it just another Wall Street Journal editorial page finding that is too good to be true?

Mundane product, juicy returns

Information Clearinghouse gets a h/t for this article in LA Times -- - May 9, 2008:

In 1961, Dwight D. Eisenhower, in his famous farewell address as president, warned of the "acquisition of unwarranted influence" by what he called the "military-industrial complex" in the United States. Today, however, the "large arms industry" of Eisenhower's day is only part of a complex equation. Civilian firms such as PepsiCo and IBM form the backbone of what more accurately can be described as a "military-corporate complex." These businesses allow the Pentagon to function, to make war and to carry out foreign occupations.

For example, in 2006 (the last year for which official figures are available), PepsiCo and IBM ranked among the Pentagon's top 100 contractors, taking in $286,696,943 and $291,825,309, respectively. This was no aberration. The previous year, they received $233,053,993 and $382,408,117 each, according to Department of Defense documents. In fact, both companies have been defense contractors every year since at least 2000. And there isn't anything special or odd about PepsiCo or IBM, when it comes to the Pentagon.

Almost a decade after Eisenhower's farewell address, there were still only 22,000 prime contractors doing business with the Department of Defense. Today, that number tops 47,000. While the well-known giant arms makers -- Lockheed Martin, Boeing, Northrop Grumman and General Dynamics -- remain the largest contractors, they are dwarfed by the sheer number of fellow contractors from all imaginable economic sectors.

These stretch from coast to coast and around the globe, from entertainment giants such as Columbia TriStar and Twentieth Century Fox to auto-making titans Ford and General Motors to Big Pharma power players such as Pfizer. Even the Krispy Kreme Doughnuts chain took in almost $500,000 from the Pentagon in 2006, while Coca-Cola cleaned up with more than $100 million in taxpayer dollars.

In 2006, the Pentagon's list of its top 100 suppliers also included such well-known civilian firms as Tyson Foods ($335,239,095), Goodrich Corp. ($344,091,017), Procter & Gamble ($362,461,808), Kraft Foods ($500,799,104), Dell ($636,343,593), ExxonMobil ($1,176,354,936), FedEx ($1,303,032,027) and General Electric ($2,327,705,161). Also on the Pentagon's 2006 payroll were such often-ignored defense contractors as the animated mouse-house, the Walt Disney Co.; iPod-maker Apple; sunglasses purveyor Oakley; cocoa giant Nestle; ketchup producer Heinz; and chocolate bar maker Hershey.

These are, in fact, today's "typical defense contractors." They are the companies that regularly take in tax-funded payouts from the Pentagon for services and goods (chiefly for the more than 1.3 million active members of the armed services). Few realize the actual look and shape of the new "militarized" U.S. economy. It's not just the classic "permanent armaments industry" -- it's civilian and it's widespread.

Such large sums of money through privatizing supply makes for interesting connections with products of everyday civilian life. What I have not been able to find are data on the weight of soldiers just prior to going on tour to the weight of soldiers just after finishing their tours...whoppers and pepsi rations in between.

Presidential Race: Cranky Old Man

Kevin Drum spots an easy way to defeat John McCain:

I think Barack Obama has accidentally discovered the easiest way to defeat John McCain this November: make him mad. We've all heard the stories about McCain's legendarily cranky temper, and he sure showed where those stories came from on Thursday when he erupted after Obama had the temerity to disagree with him about Jim Webb's GI Bill extension. Get a grip, Senator.

Mark Kleiman has the details. But I guess screwing veterans is fiscally necessary if one is adamant about paying for those tax cuts. After all – the GOP mantra in late 2001 when they were pushing for more tax cuts for the rich was “do it for the troops”.

Thursday, May 22, 2008

Fleecers and the Fleeced: Citigroup, Wachovia, Fifth Third

Mirror mirror on the wall, how can a bank can make easy money for all? Step forward Citigroup and its stalwart Falcon hedge fund.

Banks take out life insurance policies on its employees. When the employee dies, the bank collects--tax free. BOLI accounts, they are called (Bank Owed Life Insurance).

And how does this little gimmick generate cash? Hedge fund operators, using the hedge fund as the support vehicle, garner, I am sure, very nice bonuses. The banks, of course, now have a tax dodge.

Additionally

...many banks have grown aggressive with their BOLI programs, putting premiums into investment vehicles that let the banks record quarterly profits -- or losses.

Smiles and high fives all around, I am sure.

Of course, when Falcon stumbled, so did the banks, Wachovia and Fifth Third among them.

Falcon began stumbling last ... autumn and by March 31 was valued at 20 per cent of the original value, according to Citigroup documents.

Fifth Third, which reaped $US238 million in gains on its BOLI portfolio in a three-year period, suffered a BOLI-related loss of $US177 million in the fourth quarter and $US152 million loss in 2008's first quarter.

At Wachovia, Falcon's woes caused the bank's first-quarter loss to widen to $US708 million from its previously announced $US393 million loss.
In its lawsuit, Fifth Third alleges that Transamerica Life Insurance and Clark Consulting, both units of Dutch insurer Aegon, "utterly failed to properly manage and monitor" premiums that were invested in Falcon. Citigroup is not named as a defendant. A Fifth Third spokeswoman declined to comment.

We live, apparently, in a financial sewer, with rats and other vermin looking for tasty meals. Occasionally, they gnaw on one another. Yet we celebrate the massive bonuses that all this innovation brings. Money is being made. This is what a bank does.

I remember that marvelous Smith Barney ad: "We make money the old-fashion way: We earn it." Smith Barney is, of course, "the global private wealth management unit of Citigroup." In an age of gloss and glamour, the moral compass spins wildly.

Personally, I would not trust these rascals with my grandchildren's piggy banks. I think it is time to flush the sewers and start fresh. It is time to pull the plug on these financial geniuses and the climate of greed that has spawned them.

Medicare carnival posts are up

The Medicare Carnival at Facing Up has been posted. Ken Houghton and coberly are in the big tent!

Soc Sec XI: Seven good questions by Reader Arne

Reader Arne, a long time and well informed commenter submitted to Tuesday's Social Security post a list of seven deceptively simple in form questions to get my take on them. Which I gave in comments. Unfortunately what HaloScan gives it can take away and a time this morning both his questions and my answers had vanished. Well they came back and I thought it useful to front page them and invite readers either to attempt their own answers or comment on mine.

Remember the rules. Anyone can ask for a response to a question or argument. No one has the right to demand one. Silence in this case does not equate to consent.That said what is on your mind? Anything related to Social Security is fair game. But first over to Arne.

Here are some questions I think are interesting, but I would prefer to see Bruce post them with his thoughts and for others to try to stay tightly on-topic.

1) What should we do if the SSA intermedicate forecast is right? When and how would we change?
2) Which is really more important, productivity or demographics?
3) Given that the TF lasts at least 20 more years, is moving (some of) it from US Treasuries to equities a good idea? How does that change with LC instead of IC?
4) Is solvency relevent? {mild edit to remove a side irrelevant side issue}
5) Are the stochastic projections (Appendix E) meaningful?
6) What do the 1984 and 1985 reports show us about intent?
7) Why did the TF ratio outperform expectations in the late 90's? Can it do so again?

1. Well there are two answers to that. One would rely on what I call Rosser's Equation and point out that 'crisis' means a 78% result of a benefit scheduled at 160% relative to what similarly situated retirees get today. Since 78% of 160% = 125% and the event if and when will come after I am gone, I don't see why I should get exercised about this one way or another. Particularly if the plan to avoid sticker shock is just to phase it in faster. So one perfectly good response is Nothing.

The second answer would be to point out with Coberly that a tax based solution is in fact pretty cheap. The current payroll gap is down to 1.7% of payroll which for a household of $50,000 would require an $850 a year fix, or half that if you examine that from an employer/employee split. But as I argue in Cost of Inactivity the trend short term is good and mathematically calculates out to Nothing for now as well.

The legal answer is to wait until the Social Security system falls out of Short Term Actuarial Balance. Under Intermediate Cost assumptions the TF ratio falls below 100 in around 2036, meaning the system would fail the test some nine years earlier or in 2027 which would leave 14 years to 2041 to come to a policy decision, which would be plenty of time and a much more informed information environment. Of course if depletion continues to move out in time then so would this decision point. So once again the answer to your question in the here and now is Nothing. Ask me again in 2027.

2. For decision making? Productivity. Because the Demographics are already built into the model and do not vary much over the short term that will be determinative, which is to say the 2009 to 2012 time period. Fluctuations in fertility obviously only manifest themselves 21 years or so out of phase. Whereas year over year productivity can vary greatly.

3. Diversification of the Trust Fund is in my view a good thing, though equities would not be my choice of asset class. The question is to some degree moot under IC. Surpluses start shrinking after 2017 and vanish after 2023. Given that fairly short investment window the difference in yield probably wouldn't offset the risk of markets crashing at just the wrong time. We would be a little embarrassed if the Great Crash of 2023 wiped out most of our portfolio just as we needed to cash parts of it in. Under LC I would argue that diversification is almost an absolute necessity in that it avoids the Interest on Interest problem. If we assume Low Cost and took the current surplus and invested it in outside assets and then reinvested the earnings we would have a chance to really build a portfolio. Under Low Cost the time to tap the Trust Fund portfolio does not start until 2023 and at a much lower rate amounting to 25% of the interest accrued from a portfolio of Special Treasuries, presumedly something less with better yielding outside assets. You can do quite a bit with a reinvestment rate of say 80% of earnings. As to asset class I would pick school and transportation bonds which would serve to create jobs, lower borrowing costs to states and local jurisdictions, yet maintain the predictability of Treasuries.

4. Solvency is relevant because opponents of Social Security have framed the argument in those terms. They chose not to fight this out on straight out ideological, pro market terms. Instead they sold the message of 'bankrupt'. I can only fight on the battlefield in play and for the most part that is one of Solvency.

5. I don't find the Stochastic Projections compelling. I am even less a statistician than I am an economist but the following passage was troubling. Perhaps you could explain it:

"Each time-series equation is designed such that, in the absence of random variation, the value of the variable would equal the value assumed under the intermediate set of assumptions."

The language in Appendix E is rather opaque, perhaps deliberately so, but it seems to build in the assumption that is actually in challenge, that Intermediate Cost is overall a reasonable median. But really the question of the Stochastics are above my pay grade.

6. Well the unkind answer would be to say 'Look' and link to http://www.ssa.gov/OACT/TR/index.html but I went ahead and checked the 1985 Summary. They essentially gave the system a clean bill of health with the actuarial deficit of Intermediate II-B only being .41% while the 1985 definition of 'close actuarial balance' was 'estimated average annual income rate between 95% and 105% of the average cost rate'. So I would sum their intent as 'maybe we fixed it, but lets keep a close eye on it'. Because they were only .09% of payroll of falling outside their preferred band.
http://www.ssa.gov/history/pdf/1985.pdf

7. Well that one is easy. Whether you take as your key variable Real GDP, Real Wage, population in employment all were way ahead of expectations. Whether the late nineties could happen again depends of what you think caused it to happen in the first place, a question which has economists of all ideological types coming up with different answers. Personally I am a little more optimistic that those times could come again. Then again they are not needed to achieve Low Cost results. Low Cost only assumes 2.8% ultimate GDP and 2.0% productivity both well below the rates we were seeing in the late 90s. Which is probably the least understood thing about Low Cost. In historical context its numbers seem to be pretty low hanging fruit. To me anyway, I am still waiting for someone to explain why no year in the future could possibly be as good as 2006. I don't need to appeal back to 1999.

Fire away.

Credit is scarce but not capital

Bloomberg carries an article noting that credit was tight but there appeared to be plenty of money for commodities. Here is another piece of the action.

Credit is scarce but not capital. Mortgage-ravaged banks and Wall Street firms often have to borrow from the Federal Reserve, as lender of last resort, to meet current bills. They have no problem at all raising big sums from investors for future use.
In recent months, these financial companies have sold $262 billion in new securities -- much of it common and preferred stock -- according to Bloomberg data. This gives them capital they need to offset losses from subprime mortgages that now total $343 billion.

Investors obviously don't see this as throwing good money after bad: They eagerly buy more shares than the companies initially planned to sell.

Late last month, Citigroup Inc., the biggest U.S. bank by assets, planned to sell $3 billion in common stock. Investor demand boosted the total by 50 percent to $4.5 billion. People bought without assurance that the bank's need for capital was sated.

Citigroup so far is the champion capital-raiser, refurbishing its balance sheet with $44 billion in new money. There's symmetry here. Citigroup's subprime-related losses are also the highest, at $41 billion.

American International Group Inc., the biggest insurance company by assets, got stuck in the subprime mire too, by guaranteeing payment on loans. The company had a first-quarter net loss of $7.8 billion. Still, last week AIG said it had raised more than the $12.5 billion in new capital it had planned.

Stocks and Bonds

The company said it sold $11.9 billion in common shares and units that can be converted into common and might offer more of both to meet investors' demand. AIG also sold $4 billion in bonds. AIG's loss and new capital figures aren't included in the Bloomberg data cited above.

Though others damaged by subprime losses have cut their dividends to conserve cash, AIG on May 8 raised its quarterly dividend to 22 cents a share from 20 cents. The company is in effect raising money from new investors to pay off old stockholders -- a modern-day Ponzi scheme.

Wachovia Corp., the fourth-largest U.S. bank, was able to sell $8 billion in common and preferred stock last month, $1 billion more than planned. No matter that the bank was absorbing losses from once-popular mortgages that allowed homeowners to skip some interest payments and add the amount to principal.

Washington Mutual Inc., the biggest U.S. savings and loan, with subprime losses so far of $8.3 billion, sold $7 billion in common and convertible preferred shares in April to investors led by David Bonderman's TPG Inc. The company has raised a total of $10 billion in new capital.

Real Money

UBS AG, Switzerland's biggest bank, has reported $38 billion in write-offs and other losses from mortgages. It has raised $28 billion in capital. Merrill Lynch & Co., the third- biggest U.S. securities firm, has brought in $18 billion in new money against its subprime-related losses of $32 billion.

The parade will continue. Freddie Mac, which supports the U.S. mortgage market by purchasing loans from lenders, said last week it plans to sell $5.5 billion of common and preferred shares soon.

Freddie Mac and its sister government-sponsored company Fannie Mae may be in the market for money repeatedly in the months ahead as the U.S. government looks to them to keep the mortgage market liquid.

Investors may feel they can't lose by putting money into financial companies. The Federal Reserve -- by engineering the takeover of Bear Stearns Cos. by JPMorgan Chase & Co. in March - - showed that no company big enough to have a major impact on the banking system will be allowed to fail.

What's more, both Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson have urged banks and investment firms to raise more capital so that they can lend more and boost the economy. People also may be intrigued by their ability to buy stock at a haircut from the market price.

Still, when they buy common shares and preferred stock convertible into common, they dilute the earnings potential of all stockholders. And when the companies have to sell more shares in the future, that process starts all over again.

(David Pauly is a columnist for Bloomberg. Opinions expressed are his.)

Department of Education becomes major lender to students

The Washington Post reports:

With scores of lenders unable to come up with money to provide student loans, the Department of Education is preparing to exercise broad new powers in the coming weeks that could fundamentally recast how millions of students pay for college.

This initiative could transform the federal government from a guarantor of student loans into the dominant provider, replacing the outside lenders to whom students and their families have long turned. Though the Education Department has been making a portion of these federally backed loans, it is now aiming to dramatically expand its role as a direct lender to fill the void created by an exodus of private-sector lenders, due primarily to the credit crisis.

...

Traditionally, there have been two primary sources of student loans guaranteed by the federal government. About a fifth have come from the Education Department itself. Outside lenders have represented a far larger share of the market. But now, as the mortgage crisis has crippled the broader credit markets, many firms are exiting the student loan business, saying it's no longer profitable. The expanded role of the Education Department -- both as a direct lender and a source of capital to other lenders -- is just one of the fundamental changes sweeping through the student loan industry. According to FinAid, 88 lenders, including 25 of the largest firms, have announced they will no longer offer federally guaranteed loans, citing their difficulty in getting financing from the troubled credit markets.
...

Now, the department is being asked to issue far more loans this year than it ever has in the past. Last year, the department provided $14 billion in federally guaranteed loans directly to students. This summer, during the peak of the student-lending season, that share is expected to more than double and possibly reach $35 billion, or about half the market, according to FinAid and other analysts.

In addition, the department will likely have to take over the market that consolidates federally guaranteed loans for post-graduates. This is a $37 billion business that allows these borrowers to combine all of their student loans into one package with a single, relatively low rate. Already, lenders representing 77 percent of the consolidation market have dropped out since the start of the credit crisis. Department officials said they are prepared to hire contractors to handle this burden.

Edward M. Kennedy (D-Mass.), who chairs the Senate Health, Education, Labor and Pensions Committee, recently sent a letter to the presidents of all the nation's universities, urging them to join the direct-lending program as soon as possible. He is concerned that a flood of requests to switch to the direct-loan program will come late in the summer and overwhelm the department, aides said. Since the beginning of March, nearly 300 universities and colleges have applied to make their students eligible for direct loans from the government.

Some leading Democrats in Congress have urged the government to take responsibility for providing all federally guaranteed loans. Sens. Hillary Rodham Clinton (D-N.Y.) and Barack Obama (D-Ill.) have both said that, as president, they would hand the entire market to the Department of Education.

At the same time that the department is expanding its direct loan program, its officials are also working with financial experts from several federal agencies, including the Treasury, the Council of Economic Advisers, and the Office of Management and Budget, to plan for purchasing loans from other lenders. Officials familiar with the plan, which is likely to involve money from the Treasury, said it may take weeks to release details.

Kennedy and Rep. George Miller (D-Calif.), who chairs the House Education and Labor Committee, are also preparing a letter that asks the Government Accountability Office to keep a close eye on how the measure is carried out because the department is required to buy student loans in a way that does not result in a loss for taxpayers.

Wednesday, May 21, 2008

STOCK MARKET VALUATION

A few days ago in a post on Greg Mankiw we got into a discussion of stock market valuation where vtcouger wondered about using 10 year trailing earnings to evaluate stocks. vtcouger wondered why Benjamin Graham recommended using 10 year trailing earnings rather then one year trailing earnings. Remember, Benjamin Graham was writing in the 1930s when earnings volatility was much greater then since WW II. Moreover, earnings growth was much weaker
As the chart shows, from 19871 to 1940 EPS growth was only 2% and the volatility was much greater. It was so great that if you used trailing one year earning growth to estimate stock market valuation it could generate major problems. For example, the day FDR was elected president was one of the best time ever to buy stocks. But based on trailing one year earnings the market PE was 25,which said the market was massively overvalued. To get around that problem Graham and Dodd advocated using trailing 10 year earnings. This measure of EPS would include both peak earning and trough earnings and so generate an estimate of normalized or trend earnings so that investors would not be mislead by using peak or trough earnings to calculate stock valuations.

Just as an aside, note that from 1875 to 1900 EPS did not grow. But we see many people talking about that as a great era of prosperity and deflation. I wonder how many of those who thing the late 1800s was so great would really be happy with decades of falling earnings or profits.

Since WW II earnings growth has become much more stable and market valuation has come to depend on future earnings growth rather than dividends.
Corporation now retain a much larger share of earnings and investors buy stocks much more on the basis of expected future growth from these retained earnings rather than current dividends that were so important to Graham and Dodd. Note, when they wrote in the 1930s expected earnings growth was 2% and now it is 7% and in the late 1990s bubble it was even higher.

But investors still have the problem that basing valuation of peak earnings or trough earnings can distort valuations even though EPS growth is now much more stable then it was before WW II. For the market as a whole you can use the Graham and Dodd practice of using trailing 10 year EPS that includes both peak and trough EPS. Another way to do it is to use trend EPS growth. If you look at the above chart on EPS since 1960 you see the dotted 7% EPS growth trend. So rather than using actual trailing EPS, or forecast EPS, use this trend line to estimate market valuation. This chart does just that.

In addition I have shown my estimate of what the PE should be given current interest rates. The estimate is based on the actual relationship between 1960 and 1996 before the late 1990s bubble so it excludes the bubble from the regression results.

I hope this explains things to your satisfaction vtcouger.

Note: my EPS data is reported EPS until 1989 and since 1989 it is operating EPS.

Note: read Brad Delong at http://delong.typepad.com/sdj/

Unused oil drilling permits: 9300

Watching Cspan at lunch of the House debt on taxes and energy Rep Emanual stated there are currently 9300 unused oil drilling permits in the US. The counter to the statement was from Rep McCrery: There must be a reason for them being unused.

Yes, obviously if they are unused there is a reason. Any guess? Of course, that they are unused McCrery noted is the reason why we need to drill in ANWR and all 3 coasts; East, West, Gulf. Rep

McCrery seems to imply here that the permits are unusable. Well, if they are unusable, then why are they still open? Why have they not been returned as unusable and thus the ares of permit removed from the list of viable drilling property.

Fascinating. Being that we are not opening up any new refineries which is blamed on all sorts of things (usually those tree hugger types) where would all this oil, whether from the republican wish list of holes in the ground or the current 9300 ok'd potential holes in the ground be refined? If not here, then we are exporting crude. Will that offset our import costs?

Average Crop Revenue Election (ACRE): Market Based Reform or Boondoggle?

The American Farmland Trust argues for the provision in the new farm bill that is being called ACRE:

A genuine government safety net should protect farmers against unexpected losses in revenue (price multiplied by yield) based on actual market conditions, rather than pay farmers based on historical production or when prices fall below artificial targets set by Congress.

Dan Morgan notes a potential problem with ACRE:

A major new program in the recently enacted farm bill could increase taxpayer-financed payments to farmers by billions of dollars if high commodity prices decline to more typical levels, administration and congressional budget officials said yesterday ... The voluntary program guarantees farmers a subsidy if they suffer losses because of low prices or poor crops. Since the amount of the subsidy for 2009 is tied to recent record prices, farmers could reap a windfall if prices drop suddenly ... A blog item posted Monday by the agricultural magazine Pro Farmer described the new program, known as Average Crop Revenue Election (ACRE), as "lucrative beyond expectations," and said it is a "no brainer" for farmers to sign up for it. The Agriculture Department estimates that subsidy payments to corn farmers alone could reach $10 billion a year if prices - which have been $5 to $6 a bushel - were to drop to $3.25 a bushel, a level seen as recently as last year ... Currently, corn farmers receive a government subsidy when prices drop below $2.63 a bushel. But critics say that subsidy does not protect farmers who bring in low yields in a year when prices are high ... But as the farm bill moved through Congress, lawmakers sweetened the subsidy provisions, in part to encourage more farmers to sign up. The final version of the program is more generous than ones proposed earlier by the House and the Bush administration. The new program insures a farmer's revenue at close to the current high prices. USDA estimates that a farmer could draw a payment even with corn prices at $4.39 a bushel. "They have taken a good idea and gone to an extreme in terms of creating an opportunity for revenue flows at the highest possible level," Conner said.

President Bush wants to veto this bill. On this one – I think he’s right!

How to Devalue Your Brand, Greg Mankiw Version

Greg Mankiw, clearly distracted by his former collaborator's wife having been denied a tenured position at Harvard, quotes Fred Bergsten in the WSJ, Instapundit-style:

By effectively killing "fast track" procedures that guarantee a yes-or-no vote on trade agreements within 90 days, lawmakers in Washington, led by House Speaker Nancy Pelosi, have destroyed the credibility of the U.S. as a reliable negotiating partner.

Which leads to the obvious conclusion: Republicans "destroyed the credibility of the U.S. in 1998 when they did the same thing to President Clinton.

Strangely, Greg Mankiw (Fortune, January 12, 1998) "knew better."

Policy and politics diverged again in the fast-track debate. Clinton was asking Congress for something all recent Presidents have had--the authority to negotiate trade deals that Congress would consider without amendment. This power is crucial if the President is to continue the multilateral process that over the past half-century has moved the world toward freer trade and greater prosperity.

Although economists are united in support of free trade, opinion polls show the American public is more skeptical. The public's view is partly based on the false analogy that trade is like war--some countries must lose for others to win....

Because of the public's ambivalence--and the opposition of interest groups that fear foreign competition--fast track went down to defeat. This may put an end to the multilateral approach to opening up world trade. But it need not mean an end to the free-trade movement.*

Got it? If it's a Democratic Congress, then Pelosi is a "problem." If it's a Republican Congress doing the same thing, it's Through No Fault of Their Own.

And by not pointing out that he himself used to know better, Greg Mankiw destroys not Fred Bergsten's credibility, but his own.

Cross-posted from Marginal Utility.

(See also Dani Rodrik, who gives the lie to the whole line of "reasoning.")

*Yes, I omitted Mankiw's framing issue (tomatoes), but if he really wants to claim George W. "Steel Tariffs" Bush was different, the only possible response is "Bring it on."

Tomorrow's Misguided Infrastructure Investments Today

Micheline Maynard's story today on airline route cutbacks leads with small cities losing air service entirely, but arguably the more important information is in the accompanying table. The combined flight cutbacks at the 10 largest airports losing service (~1,500 monthly flights) add up to just about half the reduction in flights at Chicago O'Hare alone between January '07 and January '08.

Now, blowing $61 million on an enlarged runway at Hagerstown, Maryland is undoubtedly a big deal for Hagerstown. At ORD, they're in the midst of blowing as much as $20 billion on a program to rearrange the airport in the modern fashion with multiple well-spaced parallel runways. Some of this may be justifiable in reducing operational issues in bad weather for the inframarginal flights, but a major justification was accommodating anticipated essentially unlimited growth in flights that someone projected out of past trend under the implicit assumption that cheap aviation, like cheap motoring, would go on forever.

Even half of that $20 billion would amount to an enormous investment in reasonably high-speed rail — Stephen Karlson of Cold Spring Shops argues persuasively that 300 km/h electrified bullet trains shouldn't be made the enemy of very useful service capable of being implemented without such large investments in fixed capital (see here for some links to his archives). Since short-distance feeder flights congest big airports just about as much as long-distance jumbo jet services that may remain the efficient way to get people across oceans, you could theoretically de-congest hub airports to some degree with a well-planned investment in 180 km/h rail that would be a bargain in comparison to airport megaprojects, and provide more places with real modal choice in ground transportation essentially as a side-effect!

The catch is that doing so requires political will, both for the money and to deal with the need to make some people along the routes unhappy, and advance planning. (E.g. it would take at least a couple years to extend the successful 130 km/h service between Milwaukee and Chicago the eighty miles or so to Madison even if the project were amply funded.) Perfect foresight may be hard to come by, but right now it doesn't take genius and a time machine to see that people are going to start wanting this stuff yesterday.

Along those lines, the presidential candidates are all somewhat disappointing, as preserving cheap motoring forms the bulk of their transportation policy positions. However, members of the Pigou Club might note that the Obama campaign did at least bother to drop a paragraph in acknowledge that other transportation modes exist, whereas the space program is more important to McCain than Amtrak. (Recall that McCain recently picked up some Common Touch points from the press corps for riding the Acela Express instead of his wife's jet, but is a long-standing opponent of Amtrak funding.)

Another whittling the beak

By ilsm

Carlyle Group just bought Booz Allen Hamilton which does $3.5 (about $5B total corporate revenues) a year "consulting" for DoD.

Now Carlyle owns the consultants who will "advise" the DoD to keep to the "strategy and structure" of the think tanks and support investing in more and more potentially useless things from companies in which Carlyle has interests.

One of the longstanding strategies that drive expensive DoD structure is observable,: “continuous mobilization”: Always being "ready" to fight a theoretical battle on the military industrial complex' terms defined by the think tanks and developed largely to sustain a profitable or health industry. Never ask whether any of it is worth the expense of scarce national resources.

Some history:

Prior to 1950, the US prepared to fight the most expensive type of think tank theorized war. This was to be "industrial age" war perfected prior to 1914 against the Red Army in Central Europe. It included tactical nuclear forces to overcome logistical limitations and the size of enemy conventional forces. Those of you around in the mid 50's; did you get an Atomic Cannon for Christmas one year, like my baby brother? Anyway, there was no think tank concerned for slogging it out in another 1936 Sino Japanese style light infantry war in Asia. Mac Arthur presciently warned against a conventional war in Asia and his "run in" with Truman was less insubordination than demanding the president keep to the playbook.

RAND helped to establish strategies to fight nuclear armegeddon, the Air Force who got tons more money than the Army and Navy, who got stuck fighting the wrong war in Korea in June 1950.

The Korea police action added the need for conventional war “continuous mobilization” to the nuclear warfare (Air Force pilots, every one a Capt Kirk) mission requirements.

This renewed capability to fight Mao on his terms helped get the US stuck in Vietnam. The think tanks developed new strategies and theories of conventional and unconventional warfare to sell anything from counterinsurgency warfare, Special Operations Command (SOCOM) to new super weapons to refight the Battle of Kursk. Army brand think tanks devised "air mobile" doctrine first tried in Vietnam, and discredited, but revised for a Central European Armageddon, complete with Apache helicopters armed with tank busting rockets, supporting 60 ton tanks, that today blow up Toyotas in Baghdad.

Navy brand think tanks sell a dozen aircraft carrier battle groups to fight the battle of Midway again. The Soviets never built a ship equal to one of ours. No one today is working a carrier remotely equal to any US ship. The Air Force lost its monopoly in nuclear warfare, as the Navy got its branding in nuclear Armageddon with Rickover's Polaris/Poseidon/Trident nuclear submarine fleet. Finally, the Navy brand kept their WW II North Atlantic anti submarine navy to guard the convoys going over to reinforce the US Army in Europe in holding back the Red Horde.

The Marines have their brand. While the Navy has 3 navies for their dreams of expensive orders of battle, they keep a fourth navy for the Marines!! That is the dozen or so Landing Ships and supporting ships that carry about a thousand Marines each. All of which together could just about invest Saipan if someone were so rude as to take it from the US.

All these "branded" orders of battle, devised, revised and sustained by think tanks' whim, ratified by beltway bandits working in service office like Booz Allen consultants support the wishful thinking of building up the military industrial complex.

Continuous mobilization is based on faulty estimation of threats, such as the perennial estimation of the Red Army and now Islamic terror, created the most expensive, unneeded war machine that money could buy. Lately, continuous mobilization termed "broad spectrum" warfare or more of the same preparing for the war they wish they could fight, and making a lot of money.

The folks who describe the beaks to be whittled are now part of the guys who make money on their dreams.

Further reading from Robert Gates is here.
---------------
This one by ilsm.

Hauser’s Law, Laugher Curves, and Why One Should Never Trust a WSJ Oped

David Ranson repackages one of the usual suspects from the bag of lies from the rightwing:

Will increasing tax rates on the rich increase revenues, as Barack Obama hopes, or hold back the economy, as John McCain fears? Or both? Mr. Hauser uncovered the means to answer these questions definitively. On this page in 1993, he stated that "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." What a pity that his discovery has not been more widely disseminated.

Say what? Regular readers of this blog might have seen this silly claim made by certain rightwing trolls many times. I could demolish this line of nonsense by showing Federal revenue by source (individual income tax, corporate profits tax, and payroll tax) as a percent of GDP but Zubin Jelveh has already done so in his Lying with Charts:

Hmmm, corporate tax revenues have declined dramatically. Why, then haven't overall tax revenues dropped? Well, we can primarily thank social insurance programs like Social Security for that. Here's a chart showing social insurance program tax revenues

Zubin also charts individual income taxes as a percent of GDP showing that this ratio did rise after the 1993 tax increase while it fell after the 2001 tax cut. The claim made by Ranson has been made by many others – and it has been shown to be silly many times as well. But the WSJ oped page does seem to be on a mission to outdo the National Review for the dumbest rightwing rag with respect to economics.

Tuesday, May 20, 2008

Right to know bill out of committee

Healthy Rivers, my favorite blog for such matters, reports that:

Congress just moved a little closer to establishing your right to know for sewage spills. Last Thursday, the House Transportation and Infrastructure Committee voted to pass the Sewage Right to Know bill (HR 2452) and send it to the full House for consideration. The bill now has the support of over 150 groups, including the National Association of Clean Water Agencies, who represent many of the nation's biggest sewer utilities.
USA Today ran a great story last week highlighting our crumbling infrastructure and the need for increased investment (for more about our views on this, see my earlier story). Right to know for sewage spills is a straightforward idea whose time has come and will allow us to enjoy and appreciate our local streams and rivers, while staying healthy. This sort of recognition of the problem will get people to realize that continued investment in our water infrastructure is needed. Instead of paying high prices for bottled water (pdf), let's pay to protect our streams and rivers that provide many of us with reliable drinking water in the first place.

Water and our need to consider basic infrastructure cost have not been in the headlines except for highways and bridges. Water shortages tend to be discussed in relation to agriculture.

We made the investment in water and sanitation in an earlier day. Probably the issue won't be part of the election campaign, but the costs of renewing our committement to basics are certainly greater than some of the issues front and center.

Social Security Zero: the Basics Revisited & Three Myths

Or perhaps we could call this 'Social Security basics as seen by Bruce'. In any event.

Some recent e-mail exchanges and comments have led me to conclude that there are certain misconceptions about Social Security finance, misconceptions that both feed on and feed into certain pernicious myths initiated by people who oppose Social Security on principle but want you to believe it is all about the finance.

The first misconception stems from the fact that the Treasury Department taken as a whole doesn't need the equivalent of a Savings Account, that is a place to hold large amount of actual dollars in reserve. The reason is simple, when put in the crudest terms it not only has excellent credit which it exercises daily, if it comes to it Treasury owns the printing press. On the other hand it manages a number of programs who do need that equivalent of which the three largest are Social Security Retirement, Social Security Disability, and Medicare. So how do they handle this. Well the mechanism is simple, it just results in some conceptual confusion. More below the fold.
The mechanics of Social Security are pretty simple. The Federal Government collects taxes on wages and on high income benefits and then turns around and spends much to most of that right back out the door in the form of disability and retirement checks. If there are surpluses the money is credited to the Social Security Trust Fund which then turns around and invests them in the safest historical investment known, in this case a special type of T-Bill known as a Special Treasury. Like the case of all T-Bill sales the proceeds flow to the Treasury and are available for the government to spend as they like. Nothing wrong there, that is what happens when you buy a bond, they take the money, give you a promise to repay, and then they invest the money is hopefully productive ways. This is not 'raiding', this is not 'looting', but it is a promise that creates a specific future obligation, and is specifically booked as debt and shows up in the familiar $9 trillion total debt as seen on various debt clocks. Note too that this process can, and as we will see, has reversed. If there is a string of years when Income from taxes lags cost then the flow reverses, the General Fund makes up the difference and retires an equivalent amount of debt.

Which leads to myths one and two: the Great Raids of Johnson and Reagan. The narrative here suggests that Johnson raided Social Security Trust Funds to fund Vietnam and that Reagan raided it again to pay for the Cold War and that as a result the cupboard was left bare. This is just numeric nonsense and betrays both a misunderstanding of the nature of the Trust Fund and of the Special Treasuries they hold plus a total exaggeration of the dollars in question. The latter can be seen in Table VI.A4.—Historical Operations of the Combined OASI and DI Trust Funds,Calendar Years 1957-2007 [Amounts in billions]. For our purposes the key columns are the right hand three under 'Assets'. Taking the last first, the Trust Fund Ratio is the Trust Fund balance expressed as a ratio of time with 100=1 year. Legally the Trustees are supposed to monitor the Trust Fund ratio and alert Congress any time it falls out of Short Term Actuarial Balance, which is defined as a projected TF Ratio of at least 100 in each of the next 10 years.

Which gives us mythbuster one: any year that Social Security has a TF Ratio close to 100 is a year when nothing is being looted, instead the President, Congress and Trustees are all fulfilling their fiduciary responsibility. If we look at the table we see that Johnson maintained the Trust Funds at ratios between 97 and 110 at the end of each of his full years in office, and delivered a 101 ratio to his successor, in respect to Social Security he was practically the perfect steward.

Now if we look forward in time we see that Nixon allowed the TF ratio to fall below 100 and so out of Actuarial Balance, and that Ford and Carter did nothing about it. Though this made them perhaps poor stewards at one level, it didn't make them thieves the direction of cash flow during these years was actually from the General Fund to Social Security (third column from right).

Which leads us to the Reagan Administration. Reagan inherited a lemon, Social Security was coming off a string of six years of cashing in Trust Fund assets with money from the General Fund, although all the bills had been paid and all legal obligations met, the cupboard was in fact bare. The ideologues were howling to just let it die, they hated Social Security from the beginning and were just waiting for their day to come. It came and Reagan let them down, instead he instituted a medium term fix.

Which puts the lie to myth 2: the Reagan raid. First if we look at the Trust Fund year by year (third column) we see that one, the dollar figures in any given year are not particularly big, with half of the total increase coming in the last year of his term. Second the Trust Fund ratio although improving was only up to 41. But there was no raid, instead there was a simple accumulation of investments to get the fund back on track to a TF ratio of 100. Whatever else his faults, Reagan is totally blameless over Social Security. He did his job.

As did Bush I. He didn't do anything dramatic but he did deliver a Trust Fund with a ratio of 97 and clearly on track for Actuarial Balance.

Which gives rise to myth 3: pre-funding. Any year that the Social Security Trust Funds have a ratio of 100 or less they are not prefunding anything, in fact they are in actuarial imbalance and in effect under water, which was true for every year from 1971 to 1993. There was a real crisis in Social Security in the early eighties but collectively this country fulfilled its responsibilities to Social Security retirees. (Although I will hasten to note that the entire net bill was picked up by workers, capital's role was limited to not actually wrecking the system). But there is no hard evidence I know of that the Commission ever thought of their efforts of doing more than returning it to actuarial balance, and a recent interview with the Executive Secretary of the Commission confirmed as much. While they did present a set of numbers that would do the job, they were hardly in a position to predict that series of years in the late nineties when Social Security was actually set on the path to solvency.

The state of affairs under the Clinton and Bush Administration is in fact somewhat of an anomaly but there it is. Current surpluses and current economic growth are coming in at rates that should allow us to pay all or almost all of benefits going fowards. If and only if we are vigilent enough to keep future governments simply fulfilling their fiduciary duty. And the politics of that will have to wait on another day and another post.

Capital gains increase will change investor behavior? Nah.

Bloomberg has a poll that takes a look at rational investor behavior, with which I am very familiar, over the panic behavior laid out by our conservative ideologues over touching capital gain taxes of any percentage.

If the monied sloshers are as sensitive as they imply, maybe they aren't so rational, and are actually in panic mode for the percentages all the time. Having adrenaline in the brain everyday causes physical damage to brain function, and warps perceptions.

Ask any soldier on the front...it changes the mind. And not for the good in civilian life. You have to get rid of the adrenaline to function in a different, more peaceful setting.

Our 'rush' to gain percentage probably, over time, damages our common family and community as well. Staying high all the time did not work for hippies, why should it work for sloshers?

Just saying.

Monday, May 19, 2008

Tyler Cowen as you may never have seen him

Unless, as with my Loyal Reader at MU, you played chess competitively against him in the mid-1970s.

The Biofuel-Backlash Backlash

Out here on the edge of the grain belt, my local newspaper's editorial board today bravely stood up for biofuels. They argue, in part, that corn supply is not fixed:

In 1995, before the ethanol boom began, American farmers produced 162 million metric tons of corn for food and export.

By 2007, ethanol production was taking 62 million metric tons of corn. So the corn left for food and export was — 308 million metric tons.

That's right, 308 million metric tons — 82 percent more than before the ethanol boom, thanks to higher yields and more land in cornfields.

Corn for everybody! Almost makes you wonder why the price is so high.

While I don't quite match their numbers with data from the USDA's Foreign Agriculture Service, corn production and supply have in fact increased since 1995 — though they managed to pick a relatively low-production year for their comparison:

(Source: USDA Foreign Agriculture Service. Click to embiggen.)

However, their characterization of ~300 million tons available for (human) consumption is misleading, and increased ethanol demand isn't exactly a blip in the U.S. corn market. Here's a coarse breakdown of the corn crop's uses:

Traditionally, the major use of corn has been for animal feed. That's been in a roughly 20 million metric ton range for the last ten years. (Before the mid-90s, corn production was relatively volatile and a lot of the variation was reflected in animal feeding modes.) Other food and industrial uses have usually taken second place, and exports have mostly fallen in the range of 40-60 million MT annually.

Since the USDA began breaking out ethanol as a source of corn demand in 2002/2003, it's taken up an additional 50 megatons of corn. Should the 2008/2009 ethanol forecast comes true, that'll be more like 75 megatons. Were that corn not indirectly pumped into American gas tanks, it could nearly triple U.S. corn exports; or, from another perspective, we're set to use a bit more than an eighth of the world crop for fuel. A couple more years of billion-bushel (~25 megaton) growth in corn directed to ethanol production and ethanol could take over from animal feed as corn's primary use in the U.S. This also goes to show that converting the entire current corn crop into ethanol wouldn't make much of a dent in U.S. gasoline demand.

A curious (and worse) argument is that corn ethanol is a gateway to better future biofuel-production processes. It strikes me that a lot of the current ethanol production capital in the U.S. is one way or another ill-suited either to currently more efficient sources of carbohydrates like sugar cane or to hypothetical cellulosic properties. The big unit trains of ethanol tankers are mobile enough, but otherwise all these giant distilleries are in the middle of corn country for a reason, which is to say subsidy-farming.

Added: See also Menzie Chinn at Econbrowser.

Greg Mankiw Gives Us Another Reason to Scream "Yours!"

I think he may believe it's good news that the S&P 500 forward valuation (what we believe we might make next year, having nothing necessarily to do with current earnings or actual sales) has returned, approximately, to the level of 1998.*

The problem, as I noted more than two years ago, is that, even ignoring that the numbers are more WAG than analysis, it's still well above the historic levels that promise good returns.

So this, again, seems a good time to reproduce a graphic borrowed Burton G. Malkiel (it was on page 257 of a previous edition):

UPDATE: I wasn't clear enough in my initial post, so I'm pulling vtcodger from comments:

Mankiw has a chart there. The label says it is S&P500 PE Ratio. The numbers it shows are in the high 20s -- which is consistent with my gut feeling that the stock market has been substantially overvalued for the past 15 years. Over the very long term PE ratios for healthy markets have typically been below 15.

Now, it's possible that something has changed since 1993 to make higher ratios more attractive. But I wouldn't bet that way, though Brad DeLong, for one, appears to do so (though his argument is one of Relative, not intrinsic, Value).

*That is, two years after Saint Alan mumbled something about "irrational exuberance" and turned Robert Shiller into a popular author.

Oil prices: 1970s vs Current Situation

Just a quick chart to compare the current situation to the 1970s.

When I ran the chart I did not expect such a nice match.

The price series is West Texas intermediate.

Michelle Malkin Will Get the Vapors When She Sees This

As a direct result of the six-Republican, one Democrat California Supreme Court's decision last week, people who have shared everything for 21 years now get to marry. Pull quote:

As a Japanese American, I am keenly mindful of the subtle and not so subtle discrimination that the law can impose. During World War II, I grew up imprisoned behind the barbed wire fences of U.S. internment camps. Pearl Harbor had been bombed and Japanese Americans were rounded up and incarcerated simply because we happened to look like the people who bombed Pearl Harbor. Fear and war hysteria swept the nation. A Presidential Executive Order directed the internment of Japanese Americans as a matter of national security. Now, with the passage of time, we look back and see it as a shameful chapter of American history. President Gerald Ford rescinded the Executive Order that imprisoned us. President Ronald Reagan formally apologized for the unjust imprisonment. President George H.W. Bush signed the redress payment checks to the survivors. It was a tragic and dark taint on American history. [Updated to note: Three Republicans, including an alleged totemic icon. The Ancestral Party used to know how to Do the Right Thing.]

With time, I know the opposition to same sex marriage, too, will be seen as an antique and discreditable part of our history. As U.S. Supreme Court Justice Anthony Kennedy remarked on same sex marriage, "Times can blind us to certain truths and later generations can see that laws once thought necessary and proper, in fact, serve only to oppress."

Tax Freedom Day v. Friedman Day

Deroy Murdock seems to have trouble with the spelling of Milton Friedman’s last name – oft typing it as if it were Freidman. But I like his chart that compares the Tax Foundation’s “days worked to pay for taxes” versus the graph that shows days worked to pay for government spending:

AIER’s Kerry Lynch wrote last April 15. Tax Freedom Day peaked on May 3, 2000, near the end of President Bill Clinton’s administration but before President G. W. Bush signed multiple tax cuts. Lynch added: “Friedman Day shows that it is not because the government is spending less, but because it is borrowing more, in the name of tomorrow’s taxpayers.”

Since 2000, government spending as a share of GDP has increased even as tax collections have declined. Murdock isn’t exactly correct in the following:

Up and up and up perfectly describes the path of federal spending, which constantly rises, as if gravity were reversed ... Republicans are supposed to squelch such rubbish. And yet 100 House Republicans approved it. GOP voters, already disgusted by Republican profligacy, will find this betrayal of their party’s core principles enervating. Democratic voters will back their party’s genetic big spenders, rather than the GOP’s hypocritical posers.

We did see a drop in government spending relative to GDP from 1992 to 2000 – and this came under a Democratic Administration. Odd isn’t since Murdock thinks Democrats are just big spenders.

Index funds and commodities 2

Further lifting (of comments like cactus) by juan:

"...the term 'speculators' tends to imply short-term traders while it's my understanding that most of the index funds take longer term or more 'sticky' positions, but this can become a matter of semantics that detracts from what Briese and some others have tried to bring out -- a financialization of price and at least a few of the major actors.

So, a few clips not from the Barron's article but another and related posting by Steve Briese:

What you didn’t read in the Barron’s cover story
[...]
The Commodity Exchange Act addresses excess speculation in commodity markets, and states that “the Commission shall…fix such limits on the amounts of trading which may be done or positions which may be held by any person.” The only exceptions are “to permit producers, purchasers, sellers, middlemen, and users of a commodity or a product derived therefrom to hedge their legitimate anticipated business needs”(7 USC 6a).

The CFTC regulations 17 CFR 1.3(z) further spells out who is to be considered a bona fide hedger in such intricate detail as to make it unmistakable that exemptions to speculative limits are intended only for those commonly known as “the trade” who carry on a cash business in the commodity itself.

The Commission acknowledges that speculative limits apply to indexers: “Mutual funds (or for that matter institutional traders) who want to gain commodity exposure”, whether in an individual commodity future or in several commodity futures that make up an index, are not entitled to an exemption as a bona fide hedger.”

But what agency takes away with one hand, it gives back with the other: “Swaps dealers that have swap agreements with clients that provide the clients with a return on an index of commodities can hedge the exposure from that agreement by buying futures contracts in the commodities underlying the index.”

The illogic of limiting position sizes for indexers dealing directly in futures while exempting indexers who use a swap deal intermediary has apparently not escaped the Commission’s attention. And it has a proposal on the table to correct this inequity. In November the agency proposed new exemptions for “risk management positions,” which would open the door to all indexers while, of course, leaving the swap dealer exemptions in place.
[...]
In proposing the new exemptions, the CFTC acknowledges that index-based positions differ enough from bona fide hedges as to make hedge exemptions inappropriate under current law. It does not state where it found the authority to classified swap dealers as hedgers in the first place. It is also unclear why swap dealers should be accorded special treatment.

Their cozy arrangement began during the Reagan Administration under CFTC Chairman Wendy Graham (the other half of the Texas Senator Phil Grahm’s duo that Barron’s dubbed “Mr. & Mrs. Enron”). She began exempting swaps from CFTC oversight in 1989, and in 1992 granted Enron regulatory exemption for its energy-swap operation just five days before resigning her Chair to join Enron’s audit committee.

In 2000 the CFTC officially granted dealers broad relief with the result that today swaps are cleared through the US futures clearing systems alongside futures contracts, thus affording exchange level payment guarantees to non-exchange traded and non-regulated derivative contracts.

Then in 2006, in undertaking a “Comprehensive Review of the Commitments of Traders Report” the Commission acknowledged that its practice of reporting the positions of swap dealers under the “commercial” category may be misleading. Though it received a record public response with practical unimity for continued and expanded position reporting, it bowed to the one dissenter.

The International Swaps and Derivatives Association (ISDA), although opposed to a separate reporting category altogether, allowed that “If the Commission decides otherwise, we recommend that any additional reporting be in a no more than two-year pilot program that we would be prepared to work with the Commission to design with a limited number of commodities.” The resulting “COT-Supplemental” report consists of just twelve markets and its two-year mandate expires at the end of this year.

More enlightening than the swap dealers wish for anonymity, was the reason stated in the ISDA’s letter to the CFTC: “the [swap dealer] category is highly concentrated, with, we believe, the top four swap dealers composing over 70% of the category. In some of the lower-volume commodities markets, only a single swap dealer is a dominant participant”.

With one to four unregulated swap dealers controlling upward of 60% of the long open interest in some markets, the CFTC’s has created a nightmarish level of concentration. Even assuming that their dealings in fact originate from non-leveraged investors, sudden setbacks in other investment areas could easily jeopardize a swap dealer’s ability to meet margin calls, al la Bear Stearns.
Complete at Commitments of Traders.

Also
corrected link to Gene Epstein's Barron's cover story Commodities: Who’s Behind the Boom?

Next, the 'Chart' link above was not intended to be LAN but Nymex light sweet crude oil contract, continuous, for the last decade -- this one for benchmark West Texas Intermediate captures the same move. I would note that according to Citigroup commodity analyst Alan Heap, (Beyond Fundamentals...), long only funds such as index began entering late 2003-early 2004

Finally, Frank Veneroso (Veneroso Associates) made an interesting presentation at the World Bank Executive Forum last year.
Veneroso Associates:
Reserve Management The Commodity Bubble, The Metals Manipulation, The Contagion Risk To Gold And The Threat Of The Great Hedge Fund Unwind To Spread Product
which can be accessed here and places greater emphasis on the role of hedge funds.

Sunday, May 18, 2008

Sunday Short Takes

1. The stories about the problem of mechanical-dial fuel pumps being unable to register prices over $3.999/gallon make me wonder, why can't the stations needing to charge $4 or more simply ignore the reported purchase amount and calculate the correct amount of the sale from the quantity and the actual price? The obstacle seems to be one of weights and measures regulations rather than a technically workable solution being costly. (According to the WaPo story, a station got into trouble with the State of Virginia for setting a pump to the half-gallon price and adjusting the sale at the register, which certainly could be confusing in the absence of very clear signage.)

Note that the pump need only accurately register the quantity, not the price, to enable correct computation of the sale amount. Thus, the technical solution can be implemented for approximately $0: the price of an opaque barrier to cover the price display and a basic pocket calculator, versus the $30,000 figure sometimes quoted for new pumps with digital readouts. It may not be the apotheosis of convenience — e.g. for people trying to fill up to a dollar amount, though I can think of cheap solutions there too — but stations with the old pumps probably aren't selling the "conveniences" of the modern automated filling station. The regulatory barrier is not necessarily expensive to overcome, relative to the cost of retrofitting thousands of low-volume pumps (mostly in locations remote from other stations). So the economic story is more in the "who'd'a thunk" department than anything else.

2. A while back at the old blog, I'd contemplated some of the members of the crack (smoking) McCain economic team and asked, "Who's next, Donald Luskin?" Well, life evidently imitates parody yet again, as Oliver Willis reads the Cunning Realist who finds Luskin calling himself an "unpaid economic advisor" to the McCain campaign. Doesn't an equation of marginal benefits and marginal costs require Luskin to pay McCain to take his advice? (As necessary, go to the Great Gazoogle and enter the search term 'Luskin "stupidest man alive" site:delong.typepad.com'.)

3. Philadelphia International Airport's shabby Terminal E still isn't anyplace I'd want to be forced into an extended stay, but hooray for PHL for offering quasi-free WiFi. (I say quasi-free in that the terms-and-conditions page effectively serves as an ad for wireless service provider AT&T.) Spoke airports — notably excepting my home base — have mostly gotten the clue that free wireless makes passengers happy, but hubs are still mostly on pay networks. Though the ad-supported wireless at Denver worked pretty well, too. By comparison, I don't seem to be able to visit non-free Detroit or Minneapolis without finding dead spots and bum routers. I wonder if the quasi-free services actually offer better service since, in contrast to subscriber-supported services, they're sure not to pay off (one way or another) if they can't make connections.

4. I got to see quite the 35-mph non-offset frontal crash into a deformable barrier the other day, the barrier in question being a red-light-running pickup truck T-boned by a late-model Acura TSX (a/k/a Honda Accord in Europe and Japan). Let's just say that it was an excellent safety advertisement for Honda in that the car's front end was demolished but the driver walked away merely a little dazed from the airbag detonation. In the pickup was a very sick infant on the way to the A.I. du Pont Children's Hospital in Wilmington, Delaware, which fortunately was only a couple blocks from the crash site; the poor kid's understandably distraught dad was playing ambulance and ran out of luck. PSA: Very Bad Idea. If you need to get to the hospital that fast, call a real ambulance.

Gaski on Gas

Dr. John F. Gaski, an associate professor of marketing at the University of Notre Dame, has an opinion piece in today's Indy Star on the "causes" high gas prices. He boils it down to several causes, summarized below:

Legal restrictions on refinery construction and rehabilitation
Legal restrictions on drilling in off-shore areas
Legal restrictions on drilling in the Alaska National Wildlife Refuge
Legal restrictions on nuclear power plant construction
Strategic errors of the Federal Reserve that has allowed the collapse of the dollar
Legal restrictions requiring refiners to use "boutique" blends of gasoline to protect the environment

Notice five of the six reasons Gaski cites various forms of "legal restrictions". Thus government is to blame. But not just any kind of government:

Note that all the cited policy mistakes are those of one political camp. For decades the liberal Democrats have done everything they could to raise domestic oil and gasoline prices, and now that those higher prices have come home to roost, the Democrats pretend not to like them. Currently, their anti-oil industry propaganda campaign is on track to create the abysmal public ignorance that is a precondition for the same base level of public policy, and policy outcomes.

Gaski blames "liberal" Democrats for our current gasoline woes; in fact, that seems to be the entire point of Gaski's piece. This is especially ironic given that the GOP has controlled the House of Representatives for 12 of the last 13 years, the Senate for 4 of the last 5 years, and the Executive branch for the last 7. They're the ones who have been at the helm. In addition, most of these regulations have been in place for decades, yet the price of gasoline (and oil) have skyrocketed only recently.

I'd rather not engage in partisan sniping, however, despite the fact that partisan sniping is exactly what Gaski intended. Instead, I was especially interested in this portion:

[W]hat do you think the oil company's profit is? (Assume an integrated major oil company that even owns the filling station, so we don't have to separate producer, refiner and retailer profit. That is, we identify profit for the whole oil/gasoline industry out of the purchase price.) Would Big Oil make a profit of 60 cents, 70 cents, $1, $1.50?
No. Try 25 cents.
That is correct. With an industry-wide average net profit margin on the retail sale price of about 8 percent, the net profit on your gallon of gas is about a quarter, give or take a penny or two depending on the size of the oil company. (About 3 cents net goes to an independently owned station, leaving 22 cents for Big Oil, but the total is still a quarter.)
An accurate understanding of oil industry profit levels dramatizes that it is misguided to accuse the oil industry of price gouging. Beyond the cited 8 percent profit on sales, the industry's return on investment is right at the average across all of American industry -- about 25 percent. And these profit indices were much lower during the recent lean years in the oil business.
What of ExxonMobil's "obscene" $40 billion total profit last year? Isn't it natural for the largest corporation to earn the largest profit? Anything other than that would be a major upset. Moreover, record profits year after year are the natural order of things in business, reflecting normal growth.

Gaski claims "Big Oil" only makes $0.25 per gallon of gas. He cites this fact as evidence that Big Oil isn't engaging in price gouging.

One measly quarter per gallon of gas, especially since a gallon of gas now costs about $4.oo per gallon, seems like very little. But that $0.25 per gallon figure doesn't tell you much in isolation. So I decided to see how oil industry profit has changed in relationship to gasoline consumption over time.

I don't know where Gaski gets his $0.25 figure from. I assume that's what the average profit Big Oil makes from a gallon of gas in the US, given the context of Gaski's comments. I don't know where I can find statistics on how much Big Oil has made in just the US, given that the companies that make up Big Oil are giant multinational corporations that have global reach. So I decided to square apples with apples as best I could.

I calculated world gasoline consumption using data from BP. They list consumption in tonnes of oil equivalent (toe), so I converted that to gallons (US) using this website. Next, I tried to find a website that lists annual profits of the oil industry the last few years. Unfortunately, I could only find this one that goes back to 2001. (If anyone knows another place to find these data, especially if it goes back earlier than 2001, I'd appreciate it).

Here is a figure illustrating worldwide gasoline consumption and oil industry profits from 2001 to 2006:

I calculated the profit in dollars per gallon consumed by just dividing the two. Here is that figure:

This assumes a couple of things. First, all of the industry profits are directly tied to gallons consumed. We know this is not true, because not all oil is converted into gasoline. Nevertheless, I ended up calculating that profit per gallon worldwide is much less than the $0.25 per gallon that Gaski reports. But the point of all of this is how these values have changed over time. I calculated the percent change in these three values relative to 2001:

As you can see, industry profits and profit per gallon consumed have increased enormously the past few years relative to gas consumption. Gas consumption was 16% higher in 2006 than it was in 2001. Industry profits, on the other hand, were 190% higher in 2006 than in 2001.

It is clear the the profits of Big Oil have grown much faster than gasoline consumption the past few years. Perhaps the profit accrued by Big Oil over the past few years do not come from gasoline sales but from other revenue streams. I doubt it, though.

Does this mean Big Oil is participating in some grand conspiracy of collusion to drive prices higher? Of course not; I think it's pretty clear that the increase in price of gas and oil is the result of increased demand, however small, with no increase in supply given that we are at capacity supply right now. Nevertheless, the data strongly suggest that the profit pocketed by Big Oil per gallon of gasoline consumed is increasing, something that runs contrary to what was suggested by Gaski in his piece.

Correlation is not Causation, but

J. C. Bradbury notes that early-season weather and home runs hit, while it is noted in comments that the decline is primarily in the American League and some suggestions on developing a model are made.

(No, I'm not turning this into a baseball blog. There are purposes to these posts. All will be revealed.)

BW on Soc Sec X: the Danger of Low Cost

Well I am just going to lift the following from my little visited blog. In my defense a commenter back in April suggested publishing it on Angry Bear, at the time I didn't have posting privileges.
People who follow Social Security issues understand that in addition to the Intermediate Cost Alternative whose dates and numbers are universally reported in the press that the Trustees also present two other models called Low Cost and High Cost. Low Cost is typically depicted as being more 'optimistic' while High Cost being more 'pessimistic'. But that depends on your perspective. In reality Low Cost is better depicted as 'hotter' in economic terms and High Cost as 'cooler'. Now for most purposes the a relatively hotter economy than current Intermediate Cost assumes would be a good thing, all kinds of things are possible given higher levels of productivity and GDP, but for the specific purposes of Social Security it is possible that you can get too much of a good thing.

Whether a 'crisis' that comes in the form of a benefit cut in 2041 is really one depends on your perspective. Under current law and projections the General Fund will be under a modest but real strain in the late 2030s as the Trust Fund is finally redeemed. But given that there is no legal obligation to actually backfill that benefit cut, the economic result of doing Nothing in 2041 would be a fairly large tax cut for 2042. Note that this assumes Intermediate Cost results.

But what happens under Low Cost? Well until the 2007 Report the Low Cost alternative always returned the same result: fully funded Social Security with flat Trust Fund ratio (reserves expressed as a function of time). While at first glance this seems like an ideal outcome a look at the numbers reveals a little different story.

2007 Report: Trust Fund Operations 2007-2085

Under 2007 Low Cost Income excluding Interest continues to exceed cost until 2023 at which time a portion of the interest accrued needs to be tapped. The amount needed never exceeds more than about a fourth of the actual interest earned and doesn't amount to a whole lot once you adjust the total for inflation, in constant dollars it works out to about $120 billion a year. But it never stops. Generation after generation ends up paying interest on a debt piled up by people paying excess taxes from 1983 to 2023 even after all utility of that borrowing has been exhausted and the people who paid in the actual extra dollars have all moved on. This isn't a terrible outcome but it does hack away at the fundamental strength of Social Security as a worker funded insurance plan for workers, under 2007 Low Cost the General Fund subsidy, though certainly legally obligated, starts making it take on aspects of a welfare system.

With the 2008 Report we entered into a whole new world. Rather than Low Cost showing an outcome with a Trust Fund ratio in equilibrium we have Outcome I in the figure at the top of the post, a Trust Fund ratio that bottoms out around 2040 and then accelerates upwards after about 2060. This is a bad outcome. If the assets in the Trust Fund are real, and they are legal obligations, why should workers continue to pay into a system with trillions of dollars of accumulated surpluses? But flattening out that tail becomes more and more difficult, the only way to do it is to slash away at FICA taxes so that enough interest has to be drawn from the Trust Fund to get it back to equilibrium. The mathematical result is that the balance between Income and Interest in relation to Cost starts skewing. At an extreme a Trust Fund Ratio of 2000 with an assumed interest rate of 5% can only go to equilibrium by paying 100% of benefits from the General Fund in the form of Interest (5% of 2000 = 100% of Cost). At a Ratio of 1000 you end up at the crossing point where fully half of Social Security is being paid out of the General Fund by taxpayers that never benefited directly from the early 21st century borrowing to start with. Operationally Social Security starts looking like just another Federally funded social program, in a word welfare.

What is the solution? Well first we need to have a plan to flatten the tail of Low Cost, perhaps combined with some reexamination of what the long term Trust Fund Ratio should be. Under the law the Trustees are mandated to maintain a Trust Fund Ratio of at least 100 and that seems to be a reasonable target, that would deliver a total system where 95% of benefits are being paid from payroll tax and 5% by transfers to pay the accruing interest. And it would be nice to have as a goal meeting the benefit levels of the current schedule. Which is why I want to call this the 100/100 Plan. 100% of scheduled benefits and a Trust Fund with a consistent 100 TF Ratio.

Making this happen requires changing our conceptual Social Security model from one of projections to one of explicit targeting. First we need to provide a Baby Bear model, which is to say that combination of growth outcomes and taxation adjustments needed to achieve 100/100 equilibrium and then pair that with a truly median economic and demographic projection (because Intermediate Cost is not cutting it). If the actual economy performs better than Baby Bear in the current year than you calibrate the tax adjustment down, if the actual economy under performs Baby Bear you set the future adjustment up. If we put the actual adjustment on a schedule with minimal political influence, say in the third year of every Presidential term, you would end up with a system of minor tweaks starting in 2011.

My bet is that the first tweak would likely be a relatively small cut in FICA, but with an extended recession it might be a somewhat larger boost but in any event in the range of plus/minus .2% of payroll. But in any event we need to plan for outcomes enough better than Intermediate Cost to risk the runaway Trust Fund we see under Low Cost.

Just a distraction

25*30 = 750

104/750 = 13.9%

For those more conversant in the "disincentives of enforcement" literature than I, can you back into the Rational Expectation of Enforcement Practices that would lead nearly 14% of a population to conclude it is maximizing utility?

And, given your calculation, what would that say about the Management Practices of the organization?

Greg Mankiw on beef exports to Japan

Greg Mankiw reports on the difficulties US beef producers are having selling in the Japanese market.

He blames it on Australian competition.

Does he not know that the problem is that Team Bush will not allow American beef exporters to inspect their beef for mad cow disease?

Does he really have such a low opinion of the readers of his blog that believes he can get away with stuff like this?

No wonder he does not allow comments.

The glorious feeling of holding truth

We all feel this at times, when our ideas come together and form a wonderful pattern that would 'work'. Writers sometimes shine as their works strike a chord in readers, and we have a grasp on reality.

Then the light moves on. Often it happens in adolescence based on where we live and under particular conditions, and the power of the pictures of reality formed are quite strong, and last a long time. But the light moves on, and we adjust, and search under new conditions and a new day.

Just saying.

Saturday, May 17, 2008

BW on Soc Sec IX: the Paradox of Benefit Cuts

I have a horse race to watch so this will be short and in the form of a intellectual challenge.

In any year that Social Security is in surplus, as it is now and is projected to be until 2017, cutting benefits actually increases total federal debt and so worsens the overall financial outlook going forward. The result is to a striking degree counterintuitive but it is in fact true, if you sit down and think about the implications of investing the entire Trust Fund in Special Treasuries. Which same fact makes revenue increases through such things as a cap increase transform into long term debt.

The arithmetic seems beyond the best efforts of Cosi and tends to baffle Obama supporters who think that a cap increase is progressive (it isn't) and would somehow help Social Security (it doesn't). Not everything in life is intuitive, for example it is simply absurd how much of modern mathematics and engineering depends on the use of the square root of negative one ('i').
(http://en.wikipedia.org/wiki/Imaginary_unit) and lets not even get started on Schroedinger's Cat. Social Security financing is not as baffling as Quantum Mechanics but it does has its quirks, and this is one of them.

Cutting Social Security spending near term creates long term Federal debt. Discuss.

Photo IDs

Rock the Vote clues young voters in:

President Bush has nominated von Spakovsky -- a champion of voter suppression -- to serve on the Federal Election Commission.

Because of his work promoting photo ID requirements for voters, hundreds of thousands of students, low income people and seniors may be turned away from the polls in November.

And that's not all. At the Department of Justice he tried to force states to keep voters off the rolls for typographical errors or other mistakes made by election officials.

The photo ID has potentially many more uses than the more narrowly focused project for voter eligibility. It is interesting that when citicorp bank pushed photo ID for credit cards, it flopped. Which says to me it might be much harder to get people IDs without some organizing...is that to be left to the private political parties, or a government agency?

Adjustment Disorder

May 2008 // Washington, DC – Today, Citizens for Responsibility and Ethics in Washington (CREW) and VoteVets.org released an e-mail obtained from a Veterans Affairs (VA) employee directing VA staff to refrain from diagnosing soldiers and veterans with Post Traumatic Stress Disorder (PTSD).
On March 20, 2008 a VA hospital’s PTSD program coordinator sent an e-mail to a number of VA employees, including psychologists, social workers, and a psychiatrist stating that due to an increased number of “compensation seeking veterans,” the staff should “refrain from giving a diagnosis of PTSD straight out” and they should “R/O [rule out] PTSD” and consider a diagnosis of “Adjustment Disorder” instead. The e-mail is available at www.citizensforethics.org.

This week, CREW sent a Freedom of Information Act request to the VA asking for all records pertaining to any guidance given regarding the diagnosis of PTSD.

Some context would be useful here. The DSM IV says(the list has links to definitions):

An adjustment disorder is a debilitating reaction, usually lasting less than six months, to a stressful event or situation. The development of emotional or behavioral symptoms in response to an identifiable stressor(s) occurring within 3 months of the onset of the stressor(s).

These symptoms or behaviors are clinically significant as evidenced by either of the following:

Distress that is in excess of what would be expected from exposure to the stressor.

Significant impairment in social, occupational or educational functioning.

The symptoms are not caused by Bereavement.

The stress-related disturbance does not meet the criteria for another specific disorder. Once the stressor (or its consequences) has terminated, the symptoms do not persist for more than an additional 6 months.

Adjustment Disorders Subtypes:

309.24 Adjustment Disorder With Anxiety
309.28 Adjustment Disorder With Mixed Anxiety and Depressed Mood
309.3 Adjustment Disorder With Disturbance of Conduct
309.4 Adjustment Disorder With Mixed Disturbance of Emotions and Conduct
309.9 Adjustment Disorder Unspecified

Adjustment Disorder unspecified can be used for insurance purposes before a diagnosis is made to begin the process. Here in MA the limit is theoretically three months, but in practice can be used for much longer.

A diagnosis od adjustment disorder for this particular population, for troops coming out of the fighting environment special to the ME, can simply postpone appropriate treatment in what could be a critical time to actually make the diagnosis to implement appropriate treatments. The environment is special compared to civilian life.

Disruption of family relationships, onset of or lack of treatment for drug abuses, TBI diagnosis, or the dropping out of the system after the delay of months waiting for service are cause for concern.

Anxiety in psychological terms can be up to and including quite violent behavior. The same for Irritability.

The average waiting time is already over 1000 days for some in the system. How does the use of a very mild diagnosis category aide the process?

(Edited by rdan for readability)

A Batshit Insane Critique of Fiscal Responsibility

Via Mark Thoma comes a very good discussion from Don Pedro. Don dismantles some utter nonsense written by Thomas E. Brewton entitled Obama’s Excremental Economics where the thesis seems to be that reversing the Bush tax “cuts” (more deferrals) will lead to a recession. Its secondary theme is:

The basic thrust of Keynesianism is the belief that control of the economy must be collectivized at the Federal level, because private business is incapable of providing full employment, and because the proper goal of economic policy must be thwarting greedy businessmen to attain so-called social justice: equal distribution of income and wealth, without regard to merit, capability, or hard work. Not surprisingly the New York Times editorial board and the Times’s propagandist Paul Krugman are prominent Keynesian enthusiasts. In practice (in the 1930s Depression and in the 1970s stagflation) Keynesian economics caused devastating harm to every citizen.

Thomas has a Statement of Purpose for this blog:

The View from 1776 presents a framework to understand present-day issues from the viewpoint of the colonists who fought for American independence in 1776 and wrote the Constitution in 1787.

I guess he never bothered to read the General Theory, which was written in the 1930’s, as he certainly does not understand what it said. And I guess Thomas is unaware that we raised taxes in 1993 and the economy didn’t exactly fare badly after that.

Friday, May 16, 2008

How Big of Burden Will That Farm Bill Be?

David M. Herszenhorn and David Stout report:

The Senate voted overwhelmingly on Thursday to approve a five-year, $307 billion farm bill, sending it to President Bush for what is expected to be his futile veto. The 81-to-15 Senate vote, like the 318-to-106 House vote on Wednesday, attracted broad bipartisan support and received far more than the two-thirds that would be needed to override Mr. Bush’s veto, should he keep his pledge to wield his pen.

While I wish the bill had failed, I wish the folks at the National Review would learn to actually write intelligently:

Even though $300 billion is a big burden on American taxpayers, it’s apparently not big enough to change the political calculus of farm-subsidy supporters in Congress, as this week’s votes indicate.

While $300 billion per year sounds like a lot, the story by Herszenhorn and Stout correctly noted that this was about $300 billion over five years or $60 billion per years. And with GDP approaching $14 trillion, the annual cost per years represents less than 0.5% of a year’s worth of GDP. So why cannot the editors of the National Review write more clearly? Are they too dumb to understand what Herszenhorn and Stout, or they just really poor writers? Now I would not wish to think these clowns would try to mislead their readers – again!

Index funds influence

Lifted from comments cactus style:

Reader juan suggests:

Econmagic

Charts

Bloomberg News

IT’S NOT EASY TO SIZE UP THE influence of the index funds. But based on their known cash commitments in certain commodities, and the commodity indexes their prospectuses say they track, it is possible to estimate the size of their commitments in all commodities they buy. Using this method, analyst Briese...estimates that the index funds hold about $211 billion worth of bets on the buy side in U.S. markets.

Applying a similar method, but with slightly different assumptions for indexes tracked, Bianco Research analyst Greg Blaha puts that figure at $194 billion. Either figure is enough to turn the index funds into the behemoths of the commodity pits, where total bullish positions now stand at $568 billion.
[...]
That this large, bullishly oriented group of funds is flourishing is partly a result of a regulatory anomaly. In recognition of the fact that the commodity markets are too small to absorb an excess of speculative dollars, the Commodity Futures Trading Commission, in conjunction with exchanges, imposes position limits on speculators. But the agency has effectively exempted the index funds from position limits.
[...]
The speculators, now so bullish, are mainly the index funds. To see how their influence on the market has become outsized, just look at how they operate. Nearly $9 out of every $10 of index-fund money is not traded directly on the commodity exchanges, but instead goes through dealers that belong to the International Swaps and Derivatives Association (ISDA). These swaps dealers lay off their speculative risk on the organized commodity markets, while effectively serving as market makers for the index funds. By using the ISDA as a conduit, the index funds get an exemption from position limits that are normally imposed on any other speculator, including the $1 in every $10 of index-fund money that does not go through the swaps dealers.

The purpose of position limits on speculators, which date back to 1936, is clearly stated in the rules: It’s to protect these relatively small markets from price distortions. An exemption is offered only to "bona fide hedgers" (not to be confused with "hedge funds"), who take offsetting positions in the physical commodity.

The basic argument put forward by the CFTC for exempting swaps dealers is that they, too, are offsetting other positions — those taken with the index funds.

There's really no question unless one rigidly adheres to a type of efficient market thesis.

Unfit to Defend America – McCain or Obama?

Greg Sargent reports on one of the many attack themes coming from Team McCain:

On a conference call with conservative bloggers this afternoon, John McCain launched what may be his most direct attack yet on Barack Obama's national security credentials, saying flat out that Obama is incapable of protecting America and lacks the necessary traits to keep it secure from foreign threats. In a reference to Obama's declared willingness to meet with the leader of Iran, McCain said: "I think [it] is an unacceptable position, and shows that Senator Obama does not have the knowledge, the experience, the background to make the kind of judgments that are necessary to preserve this nation's security." That seems like an unequivocal declaration that Obama is incapable of protecting this country. In the past, McCain has raised doubts about Obama's national security cred, but to our knowledge has never taken the step of declaring outright that he's unfit to defend the country. McCain's comments also go considerably farther than McCain did in his comments this morning about Bush's Israel speech attacking Dems.

Make the kind of judgments? Let’s review that “judgment” made on March 19, 2003 - the day we invaded Iraq. Now who was smart enough to say this was a mistake even before March 19, 2003 and who is stupid enough to think this decision was a good one?

Thursday, May 15, 2008

Spending Model

Andrew Samwick posts "one of the most depressing graphs [he has] ever seen."

Recall the simplest formula Tom used: Savings = Personal Income - Personal Taxes - Personal Consumption Expenditures [PCE]

Angry Bear U.: Savings 101a, Defining and Measuring Personal Savings

In response to some vigorous discussion in the comments last week, the other Bears and I decided to host a blog seminar in 'Savings 101,' and I was duly nominated (i.e. drafted) to get the ball rolling. This installment will primarily cover the definition of personal savings and major features of how it's measured for the purposes of the U.S. National Income and Product Accounts (NIPA). I liberally and without other citation draw on a number of methodology papers posted by the Bureau of Economic Analysis, get them here. A second installment will discuss rationales for savings and financial "innovations" that may affect savings behavior. As demand warrants, later installments may discuss savings of firms and governments.

We'll get the ball rolling after the jump.

1. Defining Personal Savings

A simple definition of personal savings, which also happens to be the NIPA definition, is whatever's left over from personal income after taxes and consumption:

Savings = Personal Income - Personal Taxes - Personal Consumption Expenditures [PCE]

From the NIPA accounting perspective, this definition relates sources of personal income with uses of the income; "savings" is the term makes the accounts balance. At least in the short run, PCE may be greater than income after taxes and savings will be negative. To make a little more sense out of it than the accountant's desire to balance ledgers, net savings may also (and relatedly) be considered as a flow of funds to or from stores of wealth. Indeed, the BEA handily provides a comparison of NIPA and flow-of-funds savings measures, and they track each other pretty well. (The latter series is a lot noisier.)

In addition to personal savings, NIPA also counts savings by businesses in the form of retained earnings and by government in the form of unspent tax dollars. In 2006, essentially all of the net savings recorded in NIPA, around $250 billion, came from businesses' retained earnings of some $400 billion. That year, personal savings were $39 billion, and the government sector dissaved to the tune of nearly $196 billion thanks mostly to the federal government's unified budget deficit. (State and local governments, which commonly operate under balanced-budget constraints and also may maintain small rainy-day funds, were net savers.) You may compare these to 2006 GDP of $13,195 billion, personal income of $10,983 billion, business income of $5,814 billion, and government revenues of $3,935 billion as you'd like.

2. The NIPA Measurement of Personal Savings

The basic relationship defining personal savings above may be simple enough on its face, but it does beg the questions of just what constitutes personal income (PI) and what is included in PCE (and how it's measured).

PI is a bit more straightforward than PCE. By far the biggest component of PI is wages, salaries, and benefits. Next is dividend and interest income. Then comes transfers, mostly from government benefits programs. Then comes income from business proprietorship, and finally a small amount of rental income.

Contributions to government social insurance programs (read, Social Security and Medicare) are subtracted from PI and added to government receipts. So accumulation of social insurance trust funds is considered savings in the NIPAs, though government rather than personal savings. Of course, as seen above the Social Security program's savings currently serve to offset in part dissavings elsewhere in the government sector, i.e. the "on-budget" federal deficit.

The other big question is, what is included in PCE? PCE tries to measure personal consumption quite broadly, covering consumption of durable goods (which have an expected useful life of three years or longer), non-durable goods, and services. Non-durable goods and market services are straightforward, at least in theory, in that those basically involve current expenditures for current consumption. For housing and other durables, the NIPAs offer something to make everyone a little mad, since those measurements involve a variety of assumptions and imputations that aren't necessarily innocent.

The big imputation relates to owner-occupied housing, a/k/a "owner's equivalent rent." The idea here is that houses and other residential structures are forms of fixed capital and the consumption is of shelter services produced using that capital. Renters pay for those services in market transactions, but owners — while they consume similar shelter services to renters of comparable dwellings — don't literally charge themselves rent. However, the rent that could hypothetically be obtained by renting out a house instead of occupying it is an opportunity cost of owner-occupation. That opportunity cost amounts to owners' implicit expenditures on shelter services. Importantly, there's no reason to view owners' mortgage payment(s), or lack thereof, as having any particular relationship to that implicit shelter expenditure.

The rent imputation helps make the measurement of housing services less invariant to how people obtain them. Think of two identical houses next door to each other, one of which rents for $10,000/year and the other of which is occupied by an owner who owns the house outright. In the absence of the imputation, PCE would measure only the $10,000 in market rent. If instead the owner rented the house next door, and rented out her or his house for the same $10,000, measured PCE would increase to $20,000 even though all we've done is move families between two identical houses.

Finally, and importantly for savings measurement, the imputation of rent effectively splits housing outlays into savings and consumption components. To the extent actual outlays exceed the imputed rent, the excess is treated as saving.

Economists of a reasonably orthodox bent shouldn't take issue with owner's equivalent rent at a conceptual level, but the actual measurement involves a fair amount of sausage-making. In particular, the owners' rent is extrapolated from market rents. While the rental-extrapolation method is based on the presumed existence of "well-developed" housing rental markets, in many cases those markets are quite thin in units comparable to the owner-occupied housing stock.

If you think the PCE methods are too economically pure for housing services, the BEA's methods are more expedient than correct for other consumer durables (e.g. autos). PCE simply includes the full selling prices of durables at the time of durable-goods sales. This would tend to make durable-goods PCE more volatile than actual durables consumption. This may also make NIPA savings appear relatively low during durables booms and high during durables busts.

A final large category of imputed consumption is for financial services provided without explicit charges. These services aren't free, of course; the assoc

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