Thursday, December 31, 2009

New QBR is up 

Here's the short summary of our latest report:
Despite continued weakness in the regional labor market, St. Cloud-area firms are finally beginning to expect an improved future economic outlook. While it is still too early to declare that the local recession has ended, this improved outlook does suggest that 2010 will be a year of recovery and expansion for area firms.

The area economy appears to be following the path of national economic activity. A large majority of economists agree that the national economy emerged from recession at some point in the second half of 2009. While national labor market conditions remain weak, U.S. production, income and sales data indicate a national recovery has begun. While the lags on the availability of data on local income, sales and output are long, the results of this quarter�s St. Cloud Area Business Outlook Survey provide some evidence that area firms will begin to enjoy this recovery by the middle of 2010. For example, the outlook for future business activity is the highest it has been in the fall survey since fall 2006.

Local labor market conditions remain weak. St. Cloud employment declined by 3.4 percent over the year ending October 2009 as only the leisure and hospitality
sector experienced employment growth over this period. The St. Cloud Index of Leading Economic Indicators continued to slide, though at a slower rate. The latest reading of the Probability of Recession Index predicts that it is 73 percent likely the local economy will be in recession in February to April 2010.

Thirty-four percent of surveyed firms report an increase in economic activity over the past three months, while 25 percent report a decrease. This is a large improvement over the survey from one year ago...
Full report available from here.

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Gearin punts 

The news that a district court judge has undone Governor Pawlenty's budget fix via unallotment sounds quite horrible for conservatives. Gary has the expected reactions from GOP officials. However, I want to argue that it's a useful order that Judge Gearin has given, even though I disagree with several substantive points. The arguments are over things that are sufficiently vague that one hopes the higher courts take up the case. She at times seems to want to have it both ways, and at other times seems begging a higher court for help. Here's betting she gets that help.

Here's the full order
. The part quoted by the newspapers is indeed one of the points of contention.
"The authority of the Governor to unallot is an authority intended to save the state in times of a previously unforeseen budget crisis," wrote Gearin. "It is not meant to be used as a weapon by the executive branch to break a stalemate in budget negotiations with the Legislature or to rewrite the appropriations bill."
The sentence appears on page 6 of the order. The full paragraph is as follows:
In the beginning of June of 2009, Defendants took the steps to unilaterally balance the budget by unalloting specific programs enacted into law during the session. By exercising his unallotment authority to apply to reductions in revenues that were determined by a forecast made before the budget had even been enacted and by not excluding reductions that were already known when the budget was enacted, the Governor crossed the line between legitimate exercise of his authority to unallot and interference with the Legislative power to make laws, including statutes allocating resources and raising revenues. The authority of the Governor to unallot is an authority intended to save the state in times of a previously unforeseen budget crisis, it is not meant to be used as a weapon by the executive branch to break a stalemate in budget negotiations with the Legislature or to rewrite the appropriations bill.
I believe the facts presented beforehand illuminate Judge Gearin's reasoning. It seems more a matter of timing to her. The biennium had not started. And yet the law doesn't require one to wait for a forecast. The trigger for the unallotment process is a letter from the Commissioner of Finance. The House Research Department reviews this:
Subd. 4. Reduction.(a) If the commissioner [of finance] determines that probable receipts for the general fund will be less than anticipated, and that the amount available for the remainder of the biennium will be less than needed, the commissioner shall, with the approval of the governor, and after consulting the legislative advisory commission, reduce the amount in the budget reserve account as needed to balance expenditures with revenue.
(b) An additional deficit shall, with the approval of the governor, and after consulting the legislative advisory commission, be made up by reducing unexpended allotments of any prior appropriation or transfer. Notwithstanding any other law to the contrary, the commissioner is empowered to defer or suspend prior statutorily created obligations which would prevent effecting such reductions.
Judge Gearin says the law has been determined constitutional, citing Rukavina v Pawlenty. I talked about this in June. (Note the link to the case in the June article has gone dead -- the one above worked this AM.)
In the Rukavina case the Court of Appeals stated: "We conclude that MinnStat 16A.152 does not reflect an unconstitutional delegation of Legislative power, but only enables the Executive to protect the State from financial crisis in a manner designated by the Legislature." That remains the settled law in the State of Minnesota, and it would be improper for this Court to revisit the constitutionality of the unallotment statute itself. It is constitutional. It was the specific manner in which the Governor exercised his unallotment authority that trod upon the constitutional power of the Legislature, and the Legislature alone, to make laws that, in the Court's opinion, was unconstitutional. (p. 4)
She then reviews the history of the 2009 session, noting the Governor Pawlenty signed the HHS appropriations bill, simultaneously noting that he would unallot to balance the budget if he did not get a balanced one. This came days after telling the Legislature that he would not accept a tax increase (see his letter of May 8 in re the tax bill.) After the announcement the Legislature and the Governor passed budget proposals back and forth. The Legislature then does three things: fails to override the tax bill veto; fails to override the GAMC line-item veto; passes a new tax bill unveiled a mere two hours before adjournment. The Legislature was given time to act to come to an agreement with the Governor. They did not agree.

Most of that history does not appear in Judge Gearin's order. She mentions the second revenue bill like it is well-formed, with no requirement upon them to bargain in good faith with Pawlenty. The burden of bargaining in good faith seems put too much on him.

Timing appears to be an issue for Judge Gearin, and on this point I think a valid concern is raised. The trigger letter from MMB Commissioner Tom Hanson is dated June 16. Note that there is in the law NO requirement of waiting for a forecast from Finance or the state economist, just this letter; nowhere does the law say the Commissioner must wait for a new forecast. On that point I think she's wrong. A statement begins two days later on how the unallotment will be effected -- the biennium has not yet been set. Given Judge Gearin's fascination with June, it appears she thought that the Governor was obligated to call the Legislature back into special session. Yet that is nowhere in 16A.152. There is a vagueness that I for one would have liked clarified.

My point, then, is that while Judge Gearin says she can't rule on the constitutionality of the unallotment law, she is trying to put limits on where it can be used. At no point does Rukavina tell you when the unallotment is constitutional, and it does not give the Legislature an upper hand in taxing authority.
Although appropriation of money is the responsibility of the legislature under Minn. Const. Art. XI � 1, it is an annual possibility that the revenue streams that fund those appropriations may be insufficient to actually realize each appropriation. For that purpose, the legislature, by statute authorized the executive branch to avoid, or reduce, a budget shortfall in any given biennium. Minn. Stat. � 16A.152 does not represent a legislative delegation of the legislature's ultimate authority to appropriate money, but merely enables the executive to deal with an anticipated budget shortfall before it occurs.
It may be that you have to be in the biennium to enjoy this power. That is not for Judge Gearin to decide -- that will be up to the Court of Appeals and, I'll dare say, the state Supreme Court. The TRO she places on Pawlenty is in essence an invitation to the higher courts to clarify: Does he have to wait for the beginning of a biennium? If he knows there's a deficit, does he have to try again with a special session? Given that, in the present case, the Legislature never gave Pawlenty an overall budget target to which he could refer for the purpose of line-item vetoes, was Pawlenty entitled to treat the appropriations as things the Legislature would have to bargain over with him? It should be obvious from a reading of the history that they did not bargain. They passed a bill he disagreed with, that they knew he disagreed with, and for which they did not have the votes to override. Yet they continued to send spending bills. It's unfortunate that Judge Gearin chose not to include that history in her order.

At any rate, probably much ado about something that will be overturned quickly. Judge Gearin wants either the Governor and Legislature to agree to something, or for a higher court to review the constitutionality of the law as being perhaps overly broad. She'll get at least one of those, at which time her order will be a footnote. But she's doing us a favor, clarifying what has long been a rather vague statute.

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Wednesday, December 30, 2009

Whatever it takes, Uncle Sugar provides 

I suppose, compared to the open vault for Fannie and Freddie. $3.5 billion (or is it $5.6 billion) more money for GMAC feels like peanuts. Treasury Secretary Geithner said on December 10:

"We said if you do not go raise capital from the private markets, if you are unable to, we will put capital into you because it is important to the stability of the system," he told a congressional oversight panel. "It was never going to be possible for GMAC. They are in a unique and difficult situation."

Geithner said the new investment in GMAC would likely be "a little lower than we anticipated."

With Fannie and Freddie, it may be about the risks to the housing market, or it may be (as Nick Timiraos argues) a possible back-door to refinance mortgages with principal reductions. Ed Morrissey points me to this discussion with Ed Pinto with other explanations. Calculated Risk suggests this is much ado about nothing; if most of Treasury was taking the week between Christmas and New Years Day off, they simply waited to the last minute to do unilaterally what would have required Congressional action after January 1. I would rather have Congress vote on giving Fan/Fred carte blanche, but there you are.

But there doesn't seem to be any such reasoning for GMAC. Perhaps Saturday Night Live was on to something when it suggested the company answered all the questions on Geithner's stress test with the answer "taxpayer bailout." "[T]hat did turn out to be the right answer to 30" of the 50 questions.

With the new loan, taxpayers are now the majority shareholder.


Buy the premise, buy the bit, part V 

John Taylor has a longer post that can be explained by my title (see previous episodes here, here, here, and here in a variety of different contexts). If you believe fiscal policy works, you have a model that says fiscal policy works. When you estimate the effects of fiscal stimulus, you will say it works.

If you believe fiscal policy is ineffective, you have a model that finds it doesn't work, and so when you estimate the effects of fiscal stimulus, lo and behold, you show no effect and say it doesn't work.

Taylor says "the models have had their say. It is now time to look at the direct impacts using hard data and real life experiences." Yes. Robert Hall, for one (ungated copy? think so) suggests that while you could have a new Keynesian model which makes the purchases portion of the stimulus work, it was simply too small ($62.5 billion) to close the GDP gap ($1.2 trillion.) Paul Krugman would agree. But you have to assume a larger deficit would still have zero effect on real interest rates to argue for one big enough (in Hall's case, more than ten times the size for 2009.) I for one don't buy that premise.


Tuesday, December 29, 2009

More on income and wealth 

After reading my post on wealth mobility and Dane Smith's latest cri de coeur for lost tax revenues, University of St. Thomas economist John Spry writes to Dane and me about a new paper by Gerald Auten and Geoffrey Gee on income mobility. (The paper in the National Tax Journal, but the first link above is to an ungated copy without the tables. You can find the tables here.) Auten and Gee have some presentation slides as well if you want a lighter skim.

The importance of the study, John writes, is that by use of IRS records Auten and Gee can track the same individuals over time:
By tracking the same people over time it can answers questions like: how has income changed for people that were in a particular income quintile in 1996 by 2005 (adjusting for inflation)? This is a different question than comparing people in a particular income quintile in 1996 with the set of people in the same income quintile in 2005. Some of the same people will be in the same income quintile, but some will move up or down.
John suggests you look at Table 4 (scrolling the table link), which is also the basis for most of the presentations slides. It is a little too hard for me to format, but this should do:

Percent Change in:

1996 Income Mean Median
Quintile Income Income

Lowest 186.8 77.2

Second 60.4 36.9

Middle 40.0 24.4

Fourth 31.7 17.9

Highest 25.8 8.6

Tap 10% 26.6 0.3

Top 5% 27.8 -10.6

Top 1% 10.1 -30.9

All Income Groups 37.1 22.7

Their main conclusions (quoting from the introduction):

  1. There was considerable income mobility of individuals in the U.S. economy over the 1996-2005 period. More than half of taxpayers (57.5 percent by one measure and 55 percent by another measure) moved to a different income quintile over this period. About half (56 percent by one measure and 42 percent by another) of those in the bottom income quintile in 1996 moved to a higher income group by 2005.
  2. Median incomes of taxpayers in the sample increased by 24 percent after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. Furthermore, the median incomes of those initially in the lowest income groups increased more in percentage terms than the median incomes of those in the higher income groups. In contrast, the real median incomes of taxpayers who were in the highest income groups in 1996 declined by 2005.
  3. The composition of the very top income groups changed dramatically over time. Less than half (39 percent or 42 percent depending on the measure) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005. Less than one-fourth of the individuals in the top 1/100th percent in 1996 remained in that group in 2005.
  4. The degree of relative income mobility among income groups over the 1996-2005 period was very similar to that over the prior decade (1987-1996). To the extent that increasing income inequality widened income gaps, this was offset by increased absolute income mobility so that relative income mobility neither increased nor decreased over the past 20 years.
  5. Upward and downward mobility is affected by many factors. Based on a regression analysis, we find that initial position in the income distribution and changes in marital status are among the more important factors associated with changing positions in the income distribution.
I'll add in my defense that wealth distribution and income distribution are different, and I took Dane's challenge to be about the former. Still, the Auten and Gee study is quite important insofar as it uses individual tax return data to trace the path of a person in 1996 to where their income goes over a decade.

I found this fact quite interesting: For the top 1/100th of 1% of the income distribution -- the 11,700 wealthiest tax filers in 1996 -- their 1996 income was $11.6 million and their 2005 income was $4.1 million. Not suffering at all, but still a fall in median income of near 65%.

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Look at all those mandates 

There was an item in WSJ's Political Diary that discussed a study by the Small Business and Entrepreneurship Council on ranking health care costs for small business across the 50 states. It is what I feared it was, an arbitrary summing up of a series of qualitative measurements, without any explanation of why the scale was chosen as it was. For instance, if you have no high-risk pool to handle the "medically uninsurable" in your state you get a 1 (getting points is a bad thing -- you want to be close to zero), since leaving those people in the general insurance pool leaves some uninsured and pushes up emergency room use. A mandate in your state health insurance law adds 0.05. So why do 20 mandates equal a lack of a high-risk pool? These are the kinds of questions we tried to get at in the book, and it's one of those things that drives me mad with these mystery meat indicators.

Still, the underlying raw data was interesting, and so with that big caveat here are the rankings for upper Midwestern states.

HSA deduct GI/SE
CR/ SG GI/ Ind
CR/ Ind
High Risk
Man- dates
2 Nebr. 0 0 0.33 0.00 0.00 0.00 1.60 1.93
4 Iowa 0 0 0.33 0.00 0.33 0.00 1.30
SDak 0 0 0.33
0.00 0.33 0.00 1.50 2.16
11 NDak 0 0 0.33 0.00 0.33 0.00 1.70 2.36
21 Wisc 1 0 0.33 0.00 0.00 0.00 1.70 3.03
37 Minn 0 0 0.33 0.00 0.33 0.00 3.40 4.06

Thanks to HTML Tables for formatting. Here's a brief guide to the labels, and see the study for details:
So you can see Minnesota's low ranking is almost all due to mandates, double or more of any of its neighbors. So what are those? SBEC's source is a study by the Council for Affordable Health Insurance, which finds 68 separate mandates for Minnesota. (This study was previously discussed on this blog.) Some of them are relatively rare: MN is one of five states that requires coverage for Lyme's Disease, though in that case I can see a case. In others, such as being one of only two states that mandates coverage of port wine stain elimination, one of two for reconstructive surgery or one of three for psychotropic drug therapy, one might see some places we could reduce costs. But any one of them has a small intense group that lobbies for coverage and nobody really interested in elimination because the change in the price of health insurance coverage might be less than 1%. The problem is, 20 such items -- which would get us to about the median -- would create some real savings. It's a classic Olson collective action problem.

There then is some use for this study: It focuses us on what the issue for health care costs in Minnesota is. It also suggests that reducing these will be hard. Alas, federal health legislation may reduce the differences in mandates between the Nebraskas and the Minnesotas before much longer.

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My landlord, the state 

The Christmas Eve nationalization of Fannie Mae and Freddie Mac (or at least removing any doubt about their futures) has John Palmer dismayed:
My guess is that these agencies will become bloated agencies of rent-seekers throughout the US. It would take another Reagan-type sweep to de-politicize the mortgage insurance business.
Tom Petruno is puzzled why investors are buying shares in this company because private shares will eventually be worth zero. I think it's an example of the greater fool theory. When the Treasury statement says they are "retaining flexibility" to not unwind their participation in the mortgage market, can there be any doubt that the Federal government is not being honest in saying it wants "the private market ... to provide a larger source of mortgage finance." The only credible commitment the administration has made is to not ask Congress for permission to expand its role in those markets.

And in the meantime, the delinquent mortgages in Fannie's portfolio continue to rise...

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Monday, December 28, 2009

The jawbone of an ass 

While the Jets win today ended Indianapolis� streak and showed once again how difficult it is to go undefeated, I want to congratulate the Colts on a great run.
Don Shula. Remind me how many teams with winning seasons were on the Dolphins' regular season schedule again? (Make a peace sign, you got it. Two 8-6 teams, that's it.)


If by rich you mean the top 60% 

Dane Smith thinks the last decade, the "tax-cut decade" in his terms, was a terrible decade:
For a quick tutorial on the specifics of how bad the decade was, check these two sources: a concise and authoritative McClatchy Newspapers article by Tony Pugh, published in September, and our good friends at the Minnesota Budget Project,... The McClatchy analysis echoes the overhwelming consensus that those in the top 1 percent or the top 10 percent benefitted enormously and disproportionately from whatever economic growth occurred, and now have a greater share of wealth and income than the top tier has enjoyed since 1929, just before the Great Depression.
So is that really true? I went to the 2007 Survey of Current Finance (released early in 2009, and as a triennial survey is as close as we get to a systematic look at household finances) and pulled up a couple of datapoints on family net worth:

Median income 2007
Median wealth, 2001
Median wealth 2007

All data are in thousands of 2007 dollars (i.e., inflation-adjusted) using weighted adjustments (i.e., the internal data the Fed uses in creating reports.) Feel free to whip, chop and puree that data as you like. The point is that the middle and upper middle quintiles of the distribution saw increases in real net worth, while the lower two tiers were worse off. So it's not the top 1% or 10% but the top 60% that are doing better.

A couple other facts from that dataset:
  1. As has often been pointed out for income, the premium for a college degree has grown. But real net worth rose for those with only a high school diploma; where it fell was for the family with a head of household who had some college but not a four-year degree.
  2. Regionally, the average Midwest family saw its net worth fall from $124,400 in 2001 to $107,500 in 2007. In the South, it rose from $86,300 to $97,100. Single parents rose from $22,900 to $25,100. I think that because the Midwest has a higher share of employment in manufacturing, this is could be a source of decline.
So did the rich gain more than others and did inequality grow? Yes, perhaps, though clearly more than half of America gained wealth between 2001 and 2007. And we don't know what happens to this post-stock market collapse or real estate collapse. In the former the rich were probably harder hit; in the latter, the effect was probably more on the lowest quintile, since they hold a higher share of their wealth in real estate. (It's roughly 23-24% for all other income classes except the top 10%, for whom it is a far smaller share.) Whatever those changes are, I'd be interested to see how they are blamed on the "tax cut decade."

To the extent it's a tax cut decade, what of the extra 5% of families that no longer pay federal income tax in 2007 that did in 2001? The share of adjusted gross income paid in income taxes fell for both the poor and the rich. Again, what accounts for the differences in effect of these? I don't really know, but I don't think Dane does either.


Friday, December 25, 2009

Blessings at Christmas 

There is nothing quite so pretty as a Christmas morning with snow filling the pine trees in the back yard. (Only one of them is mine; my neighbor has five more that I see from the breakfast nook. God bless externalities!) The old tool shed has a white hat, and the wheelbarrow we never put away is filled.

Because Mrs. is a church pianist first and accompanist second, our mornings are always long and relaxed while we wait for her to come back from church service -- Littlest and I figure we did our share in the last weeks with Advent, Sunday and Christmas Eve services, and so we sleep. The two of them went sliding at 10pm after church last night; wish my back would permit it, but I settled for a Christmas Eve Cafe Creme or two and a cup of coffee with a dollop of adult beverage. With snow drifiting down and the frozen Mississippi behind me, I thought I should have brought the flip camera but, honestly, you couldn't have done the memory justice.

So Littlest slept while I ran the snowblower for Mrs. to get to church. 10" on the ground since Wednesday night; heavy stuff that strains my little 5hp mower that would make Soucheray snicker with derision. Then grab Littlest and go to a tradition we have called Christmas Breakfast with a Jew, which involves my golf partner and several friends. The group has changed over the years but the tradition continues -- the local Holiday Inn may be the only place with a Christmas breakfast buffet, and they expect us. So do many of the other patrons, many who are at other tables in St. Cloud's Panera the other 364 days.

Then home and open presents. Now that Littlest is a high schooler it doesn't have the same buzz, but it is a time for laughing as many gifts are humorous. Littlest got slime and a snow brick mold, Mrs a gaydar detector (Littlest's idea, not mine; I think I outgrew Spencer's Gifts last year) and I got tidy whities. I've announced they will be worn to Christmas dinner at the sister-in-law's tonight; they laughed at being brought in on the secret. Probably just humoring me, which is the best gift a man can get.

That will probably be all I do this afternoon. If the family wants to go sliding again I'm taking a bigger cigar, and will drink port from a mug. Not elegant, but effective. Sometimes an old friend calls and we walk together with the cigars and brandy (he does not like port, a pity.) The snow will make it harder work, but well worth the effort.

So much to be thankful for. A new radio show that I thought was a terrible idea four months ago and love now; a sabbatical and changes to my life as I stop being a department chair next summer; my younger child about to start driving lessons; a full humidor; a year of better health and a back that feels as good as it has in ten years; memories of China still being processed. ("Walk the Great Wall" is now scratched off the bucket list.) If I sat here for an hour I could triple this list.

I did honestly think last September I might decide to close this blog -- seven years and over 7000 posts is much more than I had planned to do. But it has just become too much a part of my day and as so many other things are changing for me this has gone from fling to habit to anchor. When in China I was told I could not blog I thought there had to be a way. (There is, btw, via email. That's how I posted.)

Some gifts keep giving, and in this season where we celebrate the greatest gift of all time, God's gift of salvation, I just wanted to thank those of you who keep reading what Janet and I put up here. Your clicks are gifts to us, each and every day.

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Thursday, December 24, 2009

Christmas Magic 

As with many children, my brother and I always looked forward to Christmas. Church was always special because of the music and decorations. But, our home also was special. Our parents went out of their way to keep Christmas as magical as possible, at least until we were older. Our dad worked for the USPS and at that time, put in an incredibly long day on December 24. He would arrive home late, often after my brother and I had been put to bed.

We would awake Christmas morning (always early) and go downstairs to see a Christmas tree, lights, the cardboard-house village underneath the tree, the Manger creche and presents. Then it was a burst into our parents' room, "Wake up, wake up! Santa came last night." My poor dad had to drag himself out of bed, probably with less than 3-4 hours sleep.

My parents kept the magic alive for a number of years. After gaining a bit of maturity and realizing that Santa Claus hadn't decorated the tree on December 24/25, I finally asked them where they had kept the Christmas tree? See, neither my brother nor I had ever found it. It just appeared on Christmas Day.

What they had done was buy the tree, then they stuck it in the neighbor's back yard among other trees. After Dad came home from work on Christmas Eve, they rearranged the living room furniture, hauled in the tree and decorated it, during the night. My brother and I were never the wiser.

Today, and when I was a single parent, the tree is decorated before Christmas. We have a different ritual where we decorate the tree, have great finger food, and play Christmas carols. This year, as last, our son is deployed overseas but we kept the ritual alive. When he returns next Christmas, we'll do it again.

Rituals and magic are important. I was lucky as a kid to have parents who understood all the beauty of Christmas. Today, as we recall memories and celebrate Christmas in all its manifestations, let's remember the real reason for the holiday - a gift of life for all.

Merry Christmas to our readers.


Not too fast 

At a meeting with community bankers -- whom he absolved of guilt in the financial crisis -- President Obama suggested that perhaps, just perhaps, the banks have been hit a little too hard with regulators scrutinizing loans.
Business loans on the balance sheets of all federally insured U.S. banks fell $89.1 billion, or 6.5%, from July 1 to Sept. 30, according to the Federal Deposit Insurance Corp. That was part of a $210-billion drop in overall loans outstanding, the largest such decline since at least 1984.

"In some ways, the pendulum may have swung too far in the direction of not lending, after a decade in which it had gone way too far in the direction of getting money out the door, no matter the risk," Obama said. "If we can get that balance right . . . there are businesses and communities out there that are ready to grow again."
Prof. Charles Goodhart is seeing a similar story in Britain.
"What has happened to all the monetarists? Growth in money holdings and lending has plummeted. Thirty, or 40, years ago they would have been forewarning doom and destruction at this juncture, and casting anathemas at the authorities," he wrote in a consultant report for Morgan Stanley.

"There is a danger that markets and authorities become obsessed about the fiscal implications of the crisis at a time when the real worries should still focus on private sector access to credit and money."

Did anyone ask Bernanke about this in confirmation hearings earlier in the month? No, and the closest answer we got in written responses was that to Brad DeLong's 3% inflation target question, which Scott Sumner excoriated.

The risk is that we don't know where the Fed is heading next between this and the . Nariman Behravesh of Global Insight is nervous:

"Any number of risk could knock us back down into recession," ... These risks include botched monetary policy by the Fed, a major retrenchment of consumer spending in the face of rising unemployment, and another chapter to the financial crisis.

Behravesh isn't saying it's the most likely scenario; but at 20% the probability is "too high" for his liking.

Would tightening credit in Q1 or Q2 be an example of "botched" monetary policy? (Thanks to Gary for the last link.)

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Another reason to not tax Minnesotans: A congressional seat 

Minnesota would just barely miss keeping its eight Congressional seats, based on an analysis of new state population estimates from the U.S. Census Bureau.

The Congressional reapportionment forecast by State Demographer Tom Gillaspy projects Missouri would receive the last seat apportioned, with Minnesota just missing by about 1,100 people � a difference of less than one month�s population change for Minnesota. The difference between California, Texas, Missouri and Minnesota for the last three seats is about 2,200 people, which is well within the potential estimating error.

�Basically, this is a dead heat,� said Gillaspy. �Remember, these are just estimates by the Census Bureau, and our chances of retaining eight seats are improving every day. What will decide the issue is getting everyone in Minnesota counted in the 2010 Census.� Every household in the state will receive the 10-question Census form in mid-March 2010, which should then be returned to the Census Bureau by April 1.
I hope we don't have to depend on California continuing its slow slide to oblivion in order for us to keep eight seats, but that might be what it comes down to.

North and South Dakota each grew faster than Minnesota. In 2008 there were almost the same number of moving vans coming here as leaving, according to United Van Lines. I've got some students needing senior projects this spring; maybe to help settle the old discussion Charlie Quimby and I have had on this issue we should get one to play with the data. (Or maybe with the IRS data. I've wanted to have someone do this for awhile. Off to check references on Google Scholar. So far I find [1], [2], [3]. [4] papers worth reading; not all appear to go in the same direction regarding the outcome. This note is a placeholder for that lucky student.)

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Wednesday, December 23, 2009

Media alerts 

While the King Banaian Show will take this weekend off, you have a few opportunities to hear me anyway. Tonight I'll visit James Joyner on his Outside the Beltway Radio on BlogTalkRadio at 4:30pm CT. The health care bill and the government's ability to end wait times on airplanes will be two topics -- I'll bet there's more.

Holidays usually mean my substitute radio work goes up, and indeed I'll be filling in for Don Lyons on the Morning Show on KNSI next week, 6-8am Monday through Wednesday. (St. Cloud mayor Dave Kleis is taking both Christmas and New Year's Eves.) Wake up with me if you live nearby, or stream it.


Game theory and ping-pong 

There's been a lot of moralizing about the holdout strategies of Lieberman and Nelson, but under some game-theoretic accounts it is a blessing in disguise, a blessing for Obama at least. For instance Rahm Emanuel can now say to the House: "look, we just can't renegotiate this any more or the coalition will fall apart. You'd better get on board with the Senate version of the bill" A lot of these legislative games don't otherwise have a core, or it takes so long to find the core that the deal falls apart in the meantime.

The holdout behavior of one decisive Senator decreases the need to cut bargains with other members of Congress. The key words here are "credible precommitment to no further renegotiation." The more anxious or wavering Nelson and Lieberman were/are, the more credible this precommitment.

Tyler Cowen. No offense to my friends who are waging the battle against the bill by holding out for conference committee, but my best bet is that it never gets there. Keith Hennessey wrote last week: "When one legislative body credibly says 'We cannot pass anything but X,' and the other says 'We don�t want to pass anything but Y,' X wins." John Fund concurs:

When Democrats took over Congress in 2007, they increasingly did not send bills through the regular conference process. "We have to defer to the bigger picture," explained Rep. Henry Waxman of California. So the children's health insurance bill passed by the House that year was largely dumped in favor of the Senate's version. House Ways and Means Chairman Charles Rangel and other Democrats complained the House had been "cut off at the knees" but ultimately supported the bill. Legislation on lobbying reform and the 2007 energy bill were handled the same way -- without appointing an actual conference.

Rather than appoint members to a public conference committee, those measures were "ping-ponged" -- i.e. changes to reconcile the two versions were transmitted by messenger between the two houses as the final product was crafted behind closed doors solely by the leadership.
So even if they can't get 218 on this version of the Senate bill, they may just circumvent conference and send something back to the Senate to which Reid and Pelosi have already agreed.

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In my mailbox 

Mark Yost's new book, Varsity Green, a book on the economics of college athletics, which is due out in a few weeks from Stanford University Press. From the Amazon blurb:
Money is college sports is nothing new. But readers will be amazed at the alarming depth and breadth of influence, both financial and otherwise, that college sports has within our culture. Readers will learn how academic institutions capitalize on the success of their athletic programs, and what role sports-based revenues play across campus, from the training room to the science lab. Yost pays particular attention to the climate that big-money athletics has created over the past decade, as both the NCAA's March Madness and the Bowl Championship Series have become multi-billion dollar businesses. This analysis goes well beyond campus, showing how the corrupting influences that drive college athletics today have affected every aspect of youth sports, and have seeped into our communities in ways that we would not otherwise suspect. This book is not only for the players, policymakers, and other insiders who are affected by the changing economics of college athletics; it is a must-read for any sports fan who engages with the NCAA and deserves to see the business behind the game.
I know Mark talks to several sports economists (plus me, who doesn't really count as one any more), so I'm sure it will be a good read for most of us. The intro about Bob Huggins' one year at Kansas State is alone worth the price.

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A bit of Davy Crockett 

Crockett is said to have created the word logrolling (used in the post below). I wanted to see where it came from, and it does appear in "Sketches and eccentricities of Col. David Crockett of west Tennessee" by J.S. French in 1833. Crockett apparently wrote a narrative as a preface to the book to correct any wrong impressions, but from this I think we can say the word comes perhaps from a story about Crockett more than from Crockett's own mouth. French relates the following story at pages 79-80 -- I've corrected what appear to be typos, Crockett's words in italics:
While in the legislature, there was a bill before it for the creation of a county. The author of if wished to run the boundary line, so as to support his popularity ; to this the colonel was opposed, because his interest was affected by it. They were hammering at it for some time ; whatever the author of the bill would affect by speaking, the colonel would undo by logrolling; until the matter was drawing to a close, when he rose and made the following speech:

"Mr. Speaker, � Do you know what that man's bill reminds me of? Well, I 'spose you don't, so I'll tell you. Well, Mr. Speaker, when I first come to this country, a blacksmith was a rare thing; but there happened to be one in my neighbourhood : he had no striker, and whenever one of the neighbours wanted any work done, he had to go over and strike till his work was finished. These were hard times, Mr. Speaker, but we had to do the best we could. It happened that one of my neighbours wanted an axe, so he took along with him a piece of iron, and went over to the blacksmith's to strike till his axe was done. The iron was heated, and my neighbour fell to work, and was striking there nearly all day ; when the blacksmith concluded the iron wouldn't make any axe, but 'twould make a fine mattock ; so my neighbour wanting a mattock, concluded he would go over and strike till his mattock was done ; accordingly, he went over the next day, and worked faithfully ; but towards night the blacksmith concluded his iron wouldn't make a mattock, but 'twould make a fine ploughshare ; so my neighbour wanting a ploughshare, agreed that he would go over the next day and strike till that was done ; accordingly, he again went over, and fell hard to work ; but towards night the blacksmith concluded his iron wouldn't make a ploughshare, but 'twould make a fine show ; so my neighbour, tired working, cried, a show let it be � and the blacksmith holding up the red hot iron, threw it into a trough of water near him, and as it fell in, it sung out show. And this, Mr. Speaker, will be the way with that man's bill for a county ; he'll keep you all here doing nothing, and finally his bill will turn out a show, now mind if it don't."
Any parallels between this story and the Senate health care bill are coincidental. Or not. Anyway, seemed worthy of its own post.

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I'm shocked, shocked there's vote-trading in Casablanca 

Say then, my friend, in what manner does tyranny arise? --that it has a democratic origin is evident. -- Plato, The Republic.

I guess I had thought it was pretty well known that legislators trade votes and seek favors. Rentseeking has been around for centuries. Ever since James Madison wrote of factions in Federalist #10, we have known that we cannot remove the causes of special interests without removing liberty itself, so we have to control its effects.

Madison wrote, "When a majority is included in a faction, the form of popular government, on the other hand, enables it to sacrifice to its ruling passion or interest both the public good and the rights of other citizens." This is the situation in which we find ourselves today. The majority in the Senate prefers to gain control of the health industry, as it would any other if it found a pretense. This is the tyranny of the majority. So why did Madison think this would be nevertheless a good form of government? This is why he preferred a republic to a democracy, because a republic could better infuse the minority position into the legislative process:
In the next place, as each representative will be chosen by a greater number of citizens in the large than in the small republic, it will be more difficult for unworthy candidates to practice with success the vicious arts by which elections are too often carried; and the suffrages of the people being more free, will be more likely to centre in men who possess the most attractive merit and the most diffusive and established characters.

It must be confessed that in this, as in most other cases, there is a mean, on both sides of which inconveniences will be found to lie. By enlarging too much the number of electors, you render the representatives too little acquainted with all their local circumstances and lesser interests; as by reducing it too much, you render him unduly attached to these, and too little fit to comprehend and pursue great and national objects. The federal Constitution forms a happy combination in this respect; the great and aggregate interests being referred to the national, the local and particular to the State legislatures.

That last bit, "State legislatures", of course refers to the fact that Senators at that time were to be appointed by the state legislatures and not by popular, direct election. It seems highly unlikely that, if they were so elected today, that Sen. Ben Nelson would have an opportunity to be vote #60. But that's not how we pick them today, even though I believe it means senators do not have enough "acquaintance with all their local circumstances." A couple of paragraphs later,

It will not be denied that the representation of the Union will be most likely to possess these requisite endowments. Does it consist in the greater security afforded by a greater variety of parties, against the event of any one party being able to outnumber and oppress the rest? In an equal degree does the increased variety of parties comprised within the Union, increase this security. Does it, in fine, consist in the greater obstacles opposed to the concert and accomplishment of the secret wishes of an unjust and interested majority? Here, again, the extent of the Union gives it the most palpable advantage.
Madison clearly understood the ability of legislative leaders to vote-trade, as Harry Reid and Ben Nelson and the rest of the Democrats have now done. I don't think we should be surprised by it. Colbert King tells us to simply get over it: "My friends, dry your eyes, suck it up, and get on with it." And truly, Mr. King is right that the temptation to trade votes and to place pork in legislation is a temptation to which their has been bipartisan surrender and failure. This shock that Sen. Nelson has engaged in vote trading is a bit disingenuous. Challenge the constitutionality of the language of Nelson's bribe, or that of the binding of future Senates not to change the actions of the Independent Medicare Advisory Board. And sure you can point out who got which thirty pieces of silver. But let's not pretend this doesn't happen. It is the nature of government to logroll and always has been. (More on this in the preceding post.) James Joyner concurs:
This doesn�t mean we shouldn�t shine a light on these abuses. By all means, we should. But let�s not pretend that they�re a recent invention.
But it would be a good outcome if his most brazen legislative language -- how often do we explicitly name the state who gets the goodies? how often do we get a Senate Majority Leader so unashamed that he accuses those who don't get pork as having failed? at least Dodd had enough shame to drag a stick behind his tracks as he snuck off with $100 million for U Con -- reminded our populace of how voting out one set of pork-consumers doesn't mean you get clean government. Sometimes you get hungrier pork-consumers.

Boettke and Rogers, in a wonderful (and wonderfully thin) volume The Beginners Guide to Liberty (whole thing at that link), remind us of a story:
There is an old tale that many economists use to set up the discussion of how well the market works in comparison to government policy. A Roman Emperor is asked to judge a contest between two singers. After hearing the first contestant sing, the Emperor awards the prize to the second singer under the assumption that surely the second cannot be worse than the first.
The point of the story is that even when markets fail -- and the authors acknowledge that they do -- governments can fail too. When government failed in the second Bush Administration, people chose a different government. Perhaps next time they'll realize that when markets fail, the answer is to use markets to solve the failure.

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Tuesday, December 22, 2009

Turn this plane around! 

I seriously want to know how it is government thinks it can control tarmac delays at airports.
The federal government will impose stiff penalties starting this spring on airlines that keep passengers waiting too long on the tarmac without feeding them or letting them off the plane � a remedy that will relieve many travelers but mean longer delays for a few.

...Under the rule, airlines that do not provide food and water after two hours or a chance to disembark after three hours will face penalties of $27,500 a passenger, the secretary of transportation announced on Monday.

In recent years, relatively few flights have been held on the ground for more than three hours � about 1,500 a year, or roughly one out of 6,200 flights � but that has been enough to affect more than 100,000 passengers a year and to create substantial public resentment.

�This is President Obama�s Passenger Bill of Rights,� said the secretary, Ray LaHood, using the term favored by proponents of like-minded legislation that is before Congress. The administration�s action does not require Congressional approval.

The right granted for disembarkment to passenger 1 is to make the time until takeoff longer for passenger 2 who decides to stay on the plane. Turning the plane around involves not only going back to the gate (if such gate is still empty; there's the possibility of fewer flights in order to have disembarkment points) and then, in the winter in northern parts of the US, a second de-icing of the plane. Air traffic controllers can only waive the rule, the DOT's press release says, if "for safety or security or if air traffic control advises the pilot in command that returning to the terminal would disrupt airport operations." I have no idea how big a carve-out that is. The law also applies to international flights.

The cost-benefit analysis of this is online; it says ExpressJet, the proposed new carrier to St. Cloud, would bear costs of $1.6 million per year for compliance. (It's the largest carrier of the smaller jet companies with planes in the 30-60 passenger class, the perpetrator of the Rochester overnight delay last August, and largest of the bunch.) Overall the cost of this program will be $100 million to the airlines

The government's delivery of these rights usurps a proper judicial function of torts. Most delays are the function of weather and air-traffic control, both beyond airline control. 7000 passengers were able to settle for $7.1 million over that Detroit fiasco that Northwest botched after snow clogged runways in 1999. That comes out to about $1000 per person. Will we have too much protection against unpredictable weather in the future to avoid penalties 27 times that much? Will it lead to cancellation of flights? The cost-benefit analysis guesses 2.5% of flights get canceled based on a single study that said if an airport gets closed for one hour for security reasons you get a 5.9% increase in cancellations. (See p. 104.) I find that figure for example a SWAG. There are many more.

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Sentence of the day 

The radical uncertainty of how to please consumers is an argument FOR free markets.
William Easterly. The graphic he copies over from the Wall Street Journal will be in my introductory economics course this spring, and a mark of success in teaching the course will be getting them to appreciate that sentence, even if they disagree with the argument.


A larger than expected revision 

Looking backwards is often useful, and particularly when you need to change the story of our supposed recovery. I had asked after the initial report of 3.5% GDP growth in Q3 "How much of our third quarter GDP growth is due to this stimulus?" The revision of data to a 2.2% gain makes that question all the more interesting. In that post I showed that disposable personal income less transfers was still declining in the third quarter -- that has not changed. What has?
The "third" estimate of the third-quarter increase in real GDP is 0.6 percentage point, or $17.3 billion, lower than the second estimate issued last month, primarily reflecting downward revisions to nonresidential fixed investment, to private inventory investment, and to personal consumption expenditures.
The way many forecasters will read these results is that the inventory correction that is expected to crank up Q4 GDP will now be larger. That is, a smaller Q3 number will imply a higher Q4 number. Real final sales in Q3 were up 1.5%, but GDP excluding output of motor vehicles rose only 0.8% after declining 0.9% in Q2.

I am quite eagerly awaiting the November data on income and outlays, due out tomorrow morning. Personal savings is now tracking in a pattern of 4.5-5% of GDP, well above levels earlier in the decade, as families continue to rebuild their portfolios. GDP growth is likely to be slow in 2010 if this number gets and stays above 5%.

Best news in the report: inflation as measured by the deflator for personal consumption expenditures was revised downward.

The news in Minnesota is not much better. Private sector employment in the state is still down 3.4% in the 12 months to November, and the latest Federal Reserve Bank of Minneapolis forecast is for another 0.4% decrease in employment in 2010. They expect the unemployment rate in the state to remain stuck at about 8%. In one bit of good news, the Philadelphia Fed's state coincident indicators series shows Minnesota with a green color, with a bit of expansion off an August low. I wouldn't get carried away about this just yet, but it beats being red for as long as we have. Look for more in our latest Quarterly Business Report, which will be out on Monday next week.

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Monday, December 21, 2009

Giving is social 

A friend of mine works in a church and told me this story this weekend. His church is having an Advent fundraising effort to help provide potable water to African villages. (I think it's this group. I've supported them and think they are a good group.) They set a target for the effort which my friend thinks is a modest goal -- each member-family provides enough money to bring water to one family (which requires about $4 per family.) In the first three weeks they raise almost double that number. The church leadership now has a decision to make -- do we announce how well we're doing before the last collection for the project? Their fear is that it encourages free-riding and reduces collections on the last week. In fact, my friend finds, it went up. He asks me, is this economically rational?

My hypothesis is that everyone wants to be part of a success. Announcing that it already is and then completing the project allows others to purchase (via donation) the good feeling of being part of it. "Yes, wasn't that project great? I'm glad I gave to it." You can imagine the conversations over coffee in the church narthex. My friend wondered why the leadership didn't set a higher target, and if they should. I responded no, you should underpromise and overdeliver. I think you can overdo that, as biasing one's expectations downwards leads over time to people expecting overdelivery.

We know from economic experiments that social influence on charitable giving is an important factor. I also noted that his church collected donations by placing jars in front of the sanctuary and having people bring the money forward. Nobody wants to be seen not standing up, particularly when the pastor has just told you everyone else gave more than expected. The combination of the method of collection and signaling others' donations were good incentives to get others to also give.

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These days 

I know we�re all busy these days.

By the way, have you ever wondered what �these days� are? Were there ever any other �days� when people just sat around with nothing to do? Are we all busy �these days�? Sure, but no one in pioneer days had leisure time. Peasants in Czarist Russia didn�t twiddle their thumbs a lot. And for most of human history, every single human, from the second he woke up to the second he went to sleep in the cave, did nothing � NOTHING � but look for food. Every second of every day, look for food, look for food, look for food. Where�s Bob? Where do you think? Looking for food

This is the economic history of humanity in a nutshell: From 2 million or 200,000 or 20,000 or 2,000 years ago until the 18th Century there was slow growth in population, almost no increase in health or decrease in mortality, slow growth in the availability of natural resources (but not increased scarcity), increase in wealth for a few, and mixed effects on the environment. Since then there has been rapid growth in population due to spectacular decreases in the death rate, rapid growth in resources, widespread increases in wealth, and an unprecedently clean and beautiful living environment in many parts of the world along with a degraded environment in the poor and socialist parts of the world.


Sunday, December 20, 2009

Children of Deployed Soldiers 

This Sunday's article in Parade Magazine discusses the fact that children of deployed soldiers are in danger and suffer higher levels of emotional stress than their peers. I agree wholeheartedly with Executive Director of the National Military Family Association, Joyce Raezer, that the Department of Defense may need to do more for these kids but I also have a few other points to make:

1 - Too many of these kids have teachers who are against the war - their anti-war mantra has to affect these kids. Instead of putting down the USA, the military, and related groups, these teachers should be thanking these kids, their families and their military parents for the sacrifices, bravery and heroism displayed by the vast majority of our military, the real protectors of freedom.

2 - Perhaps if the mainstream media, Hollywood and so much of the rest of the "entertainment" industry covered and were supportive of the heroic efforts our soldiers show, these kids would have better scores.

Remember, there are over 200 of us, non-soldiers, enjoying our lattes, free education, shopping, freedom of choice because we have a couple of million people willing to serve our nation part time or full time. These people are the real heroes - and their kids deserve all the support we can give them.

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Friday, December 18, 2009

By very small steps 

Pick up the Senate health-care bill�yes, all 2,074 pages�and leaf through it. Almost half of it is devoted to programs that would test various ways to curb costs and increase quality. The bill is a hodgepodge. And it should be.
Atul Gawande in the New Yorker this week. Hat tip to James Kwak, who adds the sentence of the day:
So the only political option is incremental reform through small programs that experiment with different ways to change the incentives of private-sector actors at the margin.
Yes, a thousand times yes, and it will cost you much, much less than the Senate health-care bill. Why can't they just pass all the experimental programs and leave the crushing taxes behind?

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Thursday, December 17, 2009

A graph that explains and needs explaining 

Finally, it is of interest to note that a discussion of the prospects for US economic growth, and consumption behavior, cannot be realistically appraised using the standard Keynesian consumption function. Rather, some discussion of how consumption depends on both current disposable income and net household wealth is essential.
Menzie Chinn this morning. I think I have done this in past lectures in my own graduate macro course, but perhaps not so much in intermediate undergraduate macro. Chinn is absolutely correct on how we will need to adjust macro textbooks regarding consumption, but it's the first opportunity to see a noticeable wealth effect. This ties well to a look at household balance sheets by James Kwak which I've used often in presentations. I'll be adding Chinn's graph to that mix, thank you sir!

(I can hear some of you asking "but did you ever use Keynesian consumption functions?" "Use" is too strong a word. But show and explain them, with critical appraisal of strengths and weaknesses? Certainly. They are still the language of many large-scale macroeconometric models. Hard to find a forecasting model for U.S. consumption that doesn't have some variant of disposable personal income in it.)


What would Wellstone do? 

Democratic Sen. Al Franken took the unusual step Thursday of shutting down Sen. Joe Lieberman on the Senate floor.

Lieberman, a Connecticut independent, currently is the target of liberal wrath over his opposition to a government-run insurance plan in the health care bill.

Franken was presiding over the Senate Thursday afternoon as Lieberman spoke about amendments he planned to offer to the bill. Lieberman asked for an additional moment to finish � a routine request � but Franken refused to grant the time.

"In my capacity as the senator from Minnesota, I object," Franken said.

"Really?" said Lieberman. "OK."

Lieberman then said he'd submit the rest of his statement in writing. ...

Franken's spokeswoman, Jess McIntosh, said that the Minnesota senator wouldn't allow Lieberman to continue because time limits were being enforced by Senate leaders rushing to finish a defense spending bill and get to the health bill.
One thing Wellstone would do is not rely on his spokeswoman to explain everything from how he votes to what he eats. But I think there's more:
In a world that has become so divisive and so partisan, so angry, whether in this Chamber or in the House Chamber, Senator Wellstone reflected in the passion for his belief that politics was not a death sport, it was something which you could agree to disagree and still shake a hand and ask: How are you doing? And move on. -- Sen. Norm Coleman, 10/25/07
If you were sworn in on the man's Bible, you may want to pay attention to things like that, Senator.


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None dare call it... statefare 

...stimulus three or four. So it's instead a jobs bill that "reprises" Porkulus, in many ways.

By a vote of 217 to 212, the House approved additional spending for "shovel-ready" construction projects and money to avoid layoffs of teachers, police and other public employees. No Republicans voted for the bill, and 38 Democrats voted against it.

The Senate is expected to consider the measure early next year.

Leftover money from the government's $700 billion bank-bailout fund would cover $75 billion of the bill's price tag.

That's right. TARP legislation said that the money was to be paid back:
TRANSFER TO TREASURY.�Revenues of, and proceeds from the sale of troubled assets purchased under this Act, or from the sale, exercise, or surrender of warrants or senior debt instruments acquired under section 113 shall be paid into the general fund. (Sec. 106(d))
If you read Sec. 120, though, they gave the Secretary of the Treasury an out:
(a) TERMINATION.�The authorities provided under sections 101(a), excluding section 101(a)(3), and 102 shall terminate on December 31, 2009.
(b) EXTENSION UPON CERTIFICATION.�The Secretary, upon submission of a written certification to Congress, may extend the authority provided under this Act to expire not later than 2 years from the date of enactment of this Act. Such certification shall include a justification of why the extension is necessary to assist American families and stabilize financial markets, as well as the expected cost to the taxpayers for such an extension.
And on the 9th of this month Secretary Geithner took advantage of this authority:
In order to accomplish these goals, pursuant to Section 120(b) of EESA, I certify that I am hereby extending the authority provided under the Act to October 3, 2010. This extension is necessary to assist American families and stabilize financial markets because it will, among other things, enable us to continue to implement programs that address housing markets and the needs of small businesses, and to maintain the capacity to respond to unforeseen threats, as described above.
Now read that last part carefully. It says he's extending it for limited purposes of extending the mortgage modification program (which is a mess) and to encourage some more lending to small businesses, the ostensible reason President Obama invited fat-cat bankers to the White House on Monday. There is no provision for extending TARP for a jobs bill. It is quite simply fresh government spending, another stimulus package meant to cover up the fact that the money states took in last year was simply a one-year patch that was not followed by enough job growth to keep those people in jobs. From the Reuters report:

The bill would provide $48.3 billion for infrastructure projects that promise to get workers back on job sites by April. Highway construction projects would get $27.5 billion, while subway, bus and other transit systems would get $8.4 billion.

...The bill would also help cash-strapped state and local governments avoid layoffs of public employees.

States would get $23 billion to pay 250,000 teacher salaries and repair school buildings, and $1.2 billion to pay for 5,500 police officers.

States would also get $23.5 billion to help pay their share of federal healthcare programs for the poor.

The bill does not include two approaches backed by the White House: increased lending for small business, and funds to make buildings more energy-efficient, but Democrats say they plan to take up additional job-creating measures next year.

The bill also extends unemployment benefits and healthcare subsidies for the jobless for another six months, at a combined cost of $53.3 billion.

Italics added. Get that? We are using the TARP money for this spending, but we are not using it for the purposes that Geithner said he would keep TARP open, even when the Administration asks for it. Two months of the unemployment benefits are being attached to a must-pass defense bill in an act that stretches the word "germane" beyond any recognition.

We need a new word for pork that goes mostly to state and school district budgets: statefare. Goodness knows they're desperate for the cash. Will there be any Republican governors this time who say no?

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Wednesday, December 16, 2009

Apple Valley Job (aka tax) Summit 

Tuesday, after attending a job (aka tax) summit in Apple Valley (AV) sponsored by the AV Chamber of Commerce, I visited a friend who works at Medtronic.

He told me about Medtronic's founder, Earl Bakken. His is a classic story, �What is the problem? Here is a solution." The first battery powered pacemaker was developed by Bakken as a huge improvement to the then existing devices that required a wire connection to an electrical source. Today there are over 1, 000,000 pacemakers implanted per year, and additional millions in use. This is the good news. The sad news is that today, it quite possible the device never would have been invented. Why? Government regulations. Now it can take up to five years to get approval to test a new medical device, and more to get a device to humans who can use them. Because of far too much bureaucratic intervention, many life-saving device ideas never see the light of day.

Connection with Apple Valley: The attitude that government can solve everything was alive and well with the legislators attending the AV summit who were DFLers and one lone Republican, Representative Tara Mack (who does not have a government can do all belief). Their talks were short but also worrisome. While MN does face problems including these:

1� Banks leery of lending money for two reasons: First, some government agency will come and second guess them; second, if you can get money at 0% from the federal government and earn a safe 2-3% in an investment, why take the risk on someone for a possible 6% return? Solution � the government needs to let the markets determine the interest rates, that is the value of money.
2 � Employers cutting back on hours worked in order to save jobs. Actually, this is commendable because it gives people an income versus letting them go.
3 � An erroneous attitude that in two years, the economy would rebound and all would be fine. In fact, that is one of the reasons the DFL wants to push through a $1,000,000,000 bonding bill this year. It looks nice but this is just more debt MN will have to retire. But oh, it goes for roads, zoos, etc.

Does the government have to intervene to solve everything including jobs?

As I listened to the politicians, I learned that MN has established a lot of government agencies trying to �help� business through programs, training, etc. While all this may sound good, it costs the taxpayers money to fund "middle man" government bureaucracy. I would think a business enterprise could provide the same service. What also was bothersome, some DFLers mentioned they wanted to "work with our partners at the federal level" to solve the job problem.

I distributed a chart with data that shows the 5+x rate of spending in MN versus population since 1960. Immediately, I was challenged on specific blips on the chart, etc. My response, �Even if the chart is off 100%, the approximate 45 degree trajectory is simply unsustainable. The easiest solution is to get government out of the way of business. Then the creativity, the risk takers, the Earl Bakkens, etc. can get moving on the job creation.�

My ultimate suggestion was this: �In the upcoming legislative session, make a commitment to cut business taxes and regulations by 20%. If you want jobs to come and stay in MN, this is the fastest way to get them. If government believes companies that left will come back, wake up, they won�t. They are gone. Now we need to protect the jobs still here.

Some regulation is necessary but the mindset to "protect everyone from everything" and
"government must interject itself to solve all problems" will not work. We need to remove the lousy middle man in job creation, the government.

Addition: Today's Star Tribune tells the story of a former Olympic swimmer who has a pacemaker. Would she even be alive without this invention? Who else will be denied a life-saving device because of "middle man" government's eagerness to "help" (aka get in the way)?

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Can you get me a CD of Armenian death metal? 

Tyler Cowen calls it the extent of the market. Chris Anderson calls it the Long Tail. Tyler points to music as an example, citing Brian Eno.
...go into a record shop and look at the dividers used to separate music into different categories. There used to be about a dozen: rock, jazz, ethnic, and so on. Now there are almost as many dividers as there are records, and they keep proliferating. The category I had a hand in starting�ambient music�has split into a host of subcategories called things like �black ambient,� �ambient dub,� �ambient industrial,� �organic ambient� and 20 others last time I looked. A similar bifurcation has been happening in every other living musical genre (except for �classical� which remains, so far, simply �classical�), and it�s going on in painting, sculpture, cinema and dance.

...As people become increasingly comfortable with drawing their culture from a rich range of sources�cherry-picking whatever makes sense to them�it becomes more natural to do the same thing with their social, political and other cultural ideas.
Glad they still call them 'record shops', but honestly I don't go to them much any more (sad about this since I still like the people at Electric Fetus and miss their selections sometimes.) I did back then, and the joy of finding Here Come the Warm Jets filed right behind Emerson Lake and Palmer is now replaced by Genius lists on iTunes and a podcast of Irish rock I discovered after watching the movie Once. (If you've not used this movie for a night with your one true love, you have an opportunity knocking.)

When I asked Littlest who she's listening to the other night, she gives me a name I never heard of and calls it a "screamo band". What's screamo, I ask? Is it like emo? "Oh Dad, nothing like that." And the arguments over who gets the label are hilarious (I did a Google search for bands that are screamo, and the discussion is entertaining.) So we can expect more and more labels. #1 Son, when consulted, simply said "You've listened to Slayer -- she'd probably like that." He was wrong. My guess is, we'll simply divide the market further.

This goes further and further. Mrs. S asked this morning about personalized trains. Now I remember personal train cars from The Wild Wild West and the Atlas Shrugged, but a whole personal train? I said, this is why we have cars. Panera, not a coffee shop, still manages to have four flavors of coffee (light, dark, flavored, decaf), and we kvetch when the one we want isn't there. But what Eno is describing is that music that we missed out on because Rhino or the Fetus didn't have it -- and you thought they had everything! -- is now ubiquitous. I want to try out for a musical, I want to hear the soundtrack. But not just any soundtrack -- I want the one where so-and-so sang that part. Ten minutes later it's on my iPod, and in 15 I'm humming along and trying to learn the words. And it pretty much doesn't matter which musical I'm describing. I want some Armenian death metal? If I don't know any and there isn't a category, I start with someone nearby like System of a Down and seek similar bands via Pandora. Within an hour, I'd find something close. (note: I do not like metal. Just an example. But I did discover Visa the other night using SoaD, Gogol Bordello and some Armenian folk rock. I'm already addicted.)

Need to grade. I'll have some Bernanke thoughts this evening, please stand by.

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Are they fluffing up the cap & trade jobs data? 

James Taranto included this nugget in yesterday's Best of the Web.
President Barack Obama's clean-energy initiatives will help create more than 700,000 jobs and allow the U.S. to double its renewable-power generation in three years, according to a report by Vice President Joe Biden," Bloomberg reports. Wow, that's a lot of jobs.

Or is it? Take a look at footnote 3 on page 2 of the Biden memo:

All of the job estimates used in this document correspond to jobs that last for one year. Of course, some jobs could last longer--in this case the number of distinct jobs would be reduced proportionately. For example, a project that employs one person for two years would count as creating two jobs.
I checked; it's there. It's not 700,000 jobs, it's 700,000 job-years. Now the median job in America lasts about five years, according to the Employee Benefits Research Institute. So the number of actual jobs created may be inflated by a factor of five. 140,000 jobs would be about 0.1% of the workforce.

The jobs in here include some rather pie-in-the-sky stuff like three electric vehicle and advanced battery factories, as well as the more mundane (and useful) construction of nuclear power plants. There are plenty of projects in here that will make some areas (and their representatives) happy as it is. So why fluff the number of jobs? Following the funny accounting of Porkulus, this seems a pretty odd thing for the White House to do.


Tuesday, December 15, 2009

Best sentence I read today 

Instead, if you think in terms of "how can we optimally regulate so that banks have only incentives to do great things and no incentives to take excess risk," you are on the wrong track.
From Arnold Kling, who argues that if you cannot imagine a world without deposit insurance -- and he doesn't -- then you have to have a world without big banks. Our experience with private deposit insurance so far has been miserable, as the fate of state deposit insurance funds in the S&L crisis made clear. Nobody has deep enough pockets. If banks can constantly game the system once they hit a certain size, perhaps you just can't let them be that size.

Simon Johnson seems to think you can just cut out all the bad things banks can do and make them just do the unrisky stuff. But didn't we try that with Glass-Steagall? How do we really think we can put the genie back in that bottle?

Wish I had time to think more about this, but grading continues for hopefully only another 24 hours. More when I can. In the meantime, please read back on "the regulatory dialectic".

P.S. I was going to give this to Alex Tabarrok's post on setting a carbon tax that varies by temperature when I started writing it this morning. Worth your time.

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Are they inconsistent? 

I have made the increased economic literacy of adults my new cause. As evidence that there's demand for what I want to do I add this from Victor Fuchs:

My reading of the replies leads to the following conclusion: Despite all the media coverage (or maybe because of it), most of the public has a very limited understanding of the health care system and health policy. They think the insurance companies are the main problem. They think an employer mandate is a good idea because employers pay for care. They want to control cost, but oppose every policy that might do that except for thinking that drug company and insurance company profits are too high. They say they want everyone to have access to care but only one in four favors an individual mandate.

Why is the public�s understanding so limited?

I don't really follow why wanting access to care necessarily leads to favoring individual mandates, but the rest of it is rather consistent with the view that people don't get economics well. H/T: Bryan Caplan, whose writings have helped me come to decide this should be a cause we support, and who calls normal voters both economically illiterate and childish. If I can fix the former, I think the latter cares to itself.

Caplan also notes a poll question, "If the government makes these changes to health insurance [i.e., extending coverage], would that probably cause you to pay more, less, or the same amount for your own health care?"
And that comes as a result of the individual mandate. As of the moment, the latest CBO numbers indicate that in the individual market (about 33 million people) average premiums go up; those below twice the federal poverty level get a subsidy that brings down the number below what they had before. For those in employer groups (159 million) on average the benefits stay the same, but there could be substantial variation says CBO. (Thanks to Gary for the link.) CBO still insists that any cost-shifting that occurs with Medicare cuts gets offset by scale economies from more standardized policies (meaning, you don't get to choose which benefits you get as much as you used to) and fewer uninsured. That isn't impossible, but it's arguable and offered without much evidence.

Should voters care about other people's costs rather than their own? And how would improving people's understanding of health care policy improve public attitudes? Is it the job of economic education to soften these people up for a greater public role in health care?

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Monday, December 14, 2009

Step aside, Greece and Dubai 

Here comes Austria:
Austria has nationalised the Carinthian lender Hypo Group after it ran into trouble on hidden losses in Eastern Europe, offering a stark reminder that Europe's banks are not yet out of the woods.

Finance minister Josef Pr�ll said the government had been forced by fast-moving events to take a 100pc stake in the bank, Austria's sixth biggest lender with assets of �42bn (�38bn).

"The risk situation of this bank has created an enormous threat to Austria, to its future as a financial centre, and to the whole economic region in recent days and weeks," he said, speaking after a 14-hour emergency session overnight on Sunday.

Chancellor Werner Faymann sought to calm the fury of Austrian citizens and opposition leaders, saying there would have been "catastrophic consequences" if the bank had been allowed to fail.

Austria's press said that Mr Faymann was under intense pressure from Jean-Claude Trichet, the head of the European Central Bank, who feared a "domino-effect" that would undermine other banks and damage Austria's sovereign rating.
This is a big deal. Hypo was owned by a Bavarian state bank, which now has to tighten its credit, harming Germany. And it shows that the ECB is much more heavily involved in regulation of individual banks at a time when it is reassessing how involved in supervision it wants to be.

Probably the biggest concern of this, however, is that the problems of eastern Europe are not just coming from Greece. The Baltics are in dire straits, and tail risk is rising elsewhere. The ECB's actions perhaps support this Bloomberg report from last week that ECB fears the Baltics getting pulled in by another wave of credit tightening. Don't know -- that connection is a little vague even to me, but taken with Greece and Dubai suggests something bigger might be happening.

UPDATE: Ruh-roh. Mexico downgraded.


Another oddity from Obama last night 

Apparently the Administration has decided bashing bankers is good politics:
President Obama, already at odds with bankers over big bonuses and new regulations, plans to urge executives at a White House meeting today to provide more loans to small-business owners.

Top White House economic adviser Lawrence Summers said Sunday that Obama will remind the bankers of the taxpayer help they received during last year's financial crisis.

"We were there for them," Summers said on ABCsThis Week With George Stephanopoulos. "And the banks need to do everything they can to be sure they're there for customers across this country."

During a taped interview broadcast Sunday night on CBS' 60 Minutes, Obama blasted banking executives for opposing tighter regulations on Wall Street and for awarding themselves multimillion-dollar bonuses after they had repaid federal bailout money.

"I did not run for office to be helping out a bunch of, you know, fat-cat bankers on Wall Street," Obama said.
Remind me again how he voted on TARP? Oh yes. He was for it before he was, um, for it.

Anyway, the thesis of Mr. Summers' statement is that customers are there waiting to borrow money from banks and the banks are being stingy. The National Federation of Independent Businesses -- representing the people who would be standing in line in Mr. Summers' story -- say they're not:
�Twenty-four months of recession have sapped the financial strength of many small firms,� said [NFIB chief economist William] Dunkelberg. �Historically weak plans to make capital expenditures, to add to inventory and expand operations also make it clear that many potentially good borrowers are simply on the sidelines. They are waiting for a reason to make capital outlays and order inventory and to take out the usual loans used to support these activities.�

Twenty-nine percent reported all their borrowing needs met (unchanged) compared to 10 percent who reported problems obtaining desired financing (up one point, not seasonally adjusted).
That is, there's no demand for loans because small businesses are not adding capital or inventory. It may be harder to find a loan, but most business owners aren't asking for them anyway, and not because of anything fat cat bankers are doing.

Commercial capital lenders are reporting stabilizing demand for loans, according to industry risk management firm PayNet. This is another sign that credit supply might not be the problem the administration wants you to believe it is.

Ed Morrissey writes
that the bankers have every good reason to be cautious in lending.


Administration views on recession dating 

Dave Prychitko finds a nugget in Council of Economic Advisers chair Christina Romer's appearance on Meet The Press yesterday:
MR. GREGORY: When do you expect you will be able to say the recession is over?

DR. ROMER: Well, I'm not going to say the recession is over until the unemployment rate is down to normal levels, until...

MR. GREGORY: Which would be?

DR. ROMER: You know, again--are you asking me, you know, timing?

MR. GREGORY: No, what's a normal level?

DR. ROMER: Well, the normal, you know, where we were before the recession is sort of in the--certainly in the 5 percent range. That is, you know, what Americans are, are used to.

MR. GREGORY: Can that be accomplished in a year's time?

DR. ROMER: Well, it--we'd have--I think we're going to--it's going to take--you know, this recession took a long time coming, it's going to take a long time coming out. We can make incredible progress. We can get that unemployment rate coming down.
Prychitko thinks the administration will declare victory long before then. CBO projected in August the unemployment rate to by 9.1% in 2011 and to average 6.4% between 2012 and 2013. 5% is in the area of CBO's estimate of the natural rate of unemployment. What that would seem to mean is that she won't declare the recession over until we are near the peak of the expansion.

President Obama on 60 Minutes last night had a lot more to say.
Here's what I know. That when I walked in to office, we had gone through a debilitating financial crisis. The banking system was close to meltdown. And in that first quarter, we lost over 3 million jobs. In December, we lost 681,000 jobs. That's before I was sworn in. January, 700,000 jobs. That was just about as I was being sworn in. The following month, before we had put any of our programs in place, we had lost another 681,000 jobs, and it just kept on going.
I can forgive the addition error on 3 million jobs lost in the first quarter -- it's more like 2 million -- but he's still trying to parcel out blame to others. He does it a minute later:
Now, what we had to do was he had to make sure that there was some buoy, some stabilizer in the economy so that it didn't go into a Great Depression. And that's why we passed the Recovery Act. And for all the criticism that it received from the other side --and we got no help from any Republicans, other than a couple, in passing it -- what we now know and every economist who's looked at it will acknowledge this, is that it helped us [stem] the panic and get the economy growing again. And it probably saved somewhere between a million and a million and a half jobs.
I really liked what Russ Roberts said about this last week:
In biology, a biologist doesn't pretend to know how many frogs there are at a particular point in time in the rain forest. He may have an estimate but if you ask him well "how many will there be in six months?", he can't give an honest answer about that. He can't even give you an honest answer and he won't pretend to give you an honest answer if you ask him well "what will happen in six months if something changes in the rain forest to the frog population?" That's what we expect of economists and that's wrong. We're not good at that.
Not that we don't do it -- we do, and I have. But I also teach on the difference between extrapolating within sample and outside of sample, and the truth is we don't have any datapoints that look close enough for me to say whether it's one or one million jobs saved or created. Given an annual benchmark revision to employment data that is about +/- 275,000, I don't think we know.

The President continues:
All right, so financial market stabilized, economy growing again. The problem we now face is that in any recession, job growth is what's called a lagging indicator.
Which, I believe, contradicts Dr. Romer.
Businesses don't start hiring again until they have some confidence out there that there's actually a market for additional goods and services. That's always true in any recession.

Usually, it's worse when you have a big financial crisis like this that prompts the recession. And this one's been exceptionally bad, partly because businesses were very spooked, and it was a global crisis. But partly because, frankly, businesses have figured out that maybe they can sustain themselves just with fewer employees producing the the same amount of goods and services.
At this point one would have hoped Steve Kroft would have asked two questions:
  1. Mr. President, what policies have you taken that would give businesses some confidence that there's a market for their goods and services?
  2. Mr. President, why do you think firms keep redundant labor on hand?
Perhaps it's not redundant labor -- perhaps it's labor whose marginal cost potentially going to be lower soon, so businesses are waiting to hire until you come through with those potential tax credits.


Blink, Dubai-style 

Abu Dhabi rides in to Dubai's rescue at the last moment.
[T]he Government of Abu Dhabi has agreed to fund $10 billion to the Dubai Financial Support Fund that will be used to satisfy a series of upcoming obligations on Dubai World.

As a first action for the new fund, the Government of Dubai has authorized $4.1 billion to be used to pay the sukuk obligations that are due today. The remaining funds would also provide for interest expenses and company working capital through April 30, 2010 � conditioned on the company being successful in negotiating a standstill as previously announced.
The rest is used to support Dubai creditors elsewhere. The announcement also includes a plan to create a workout for Dubai World if they cannot meet their obligations. It's a big acknowledgment by the UAE and Abu Dhabi that they are backers of Dubai's troubled credit, but James MacIntosh notes it seems to have enough vagueness that there should still be the lesson that a private company in Dubai is private.

"Brinksmanship", says Seabee, who I think is unconvinced by that argument. We'll see.


Sunday, December 13, 2009

US Constitution 

In a past career, I taught kids about the US Constitution. We parsed the Preamble so as to understand its meaning. The Preamble is very short but packed with key phrases. Every student had to recite it in front of the class.

As I've watched the chipping away and now gouging of our Constitution, I'm reminded of two key phrases: ..... PROVIDE for the common defense and PROMOTE the general welfare. Seems our current Democrat leaders have the words 'promote' and 'provide' backwards. It's time to take back our Constitution. You want to be inspired? Go watch this You Tube video of Lt. Col. Allen West, running for US Congress in FL's District 22. He nails it big time. And, if you can spare a few $$, send them his way. He gets it and says it very well.


Saturday, December 12, 2009

Commenting shift 

A quick, rare Saturday post. Haloscan, which has been my commenting software almost as long ago as I had this blog, is being retired after being bought by JS-Kit. Their new software, for a very reasonable price, is called Echo. It's not quite as high-tech as some commenting software I've seen, but it's pretty full-featured and at the price (just $9.95 for us Haloscan converts) just wonderful. The pages will turn over to Echo from Haloscan, and hopefully all the comments will be retained even on the oldest posts.

BTW, I'm also trying out the beta of Chrome for Mac, and this seems to work pretty well. Safari would have occasional hiccups with some of the script for Blogger, which was a drag. So far I rather like Chrome.


Friday, December 11, 2009

Financial reform bill passes anyway 

They gone and done it. It was 223-202 on final passage, but the motion to recommit (send back to committee, what I hoped would happen this morning) drew 10 extra noes, meaning some Democrats voted to not recommit but then either voted against the bill or slipped out of the chamber. Folks like Ike Skelton of Missouri, for instance, who is feeling a lot of heat on his re-election, tried to split the baby.

One thing for higher education people to watch: an amendment that requires students to get financial aid counseling before receiving student loans from private lenders.

I'll have more on the bill and its provisions on the King Banaian Show tomorrow.

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Your fever is a little less today 

That's a variation of a line I used on a reporter today discussing a local unemployment insurance claims, but it would also apply to the retail sales figures released this morning. Yes, they are up 1.3% over the previous month and 1.9% over a year ago. A year ago, however, was hideous. Dig down just a little bit and you find the first 11 months of 2009 are 7.4% below the first 11 of 2008, which wasn't exactly good times. Remember as well that the advance number you are looking at has a lot of estimation in it -- it guesses at car sales, department stores, etc. Gas prices drove up their sales quite a bit in the last month as well. Even net those things, however, if there's not a significant revision that's two months up (and perhaps four if you could net out the effect of Cash for Clunkers.)

So it's better, but off a base that's so low that a little better isn't good enough. If you think of there being a separate phase of recovery before you get to expansion (off a business cycle trough) I might say recovery is beginning. But calling it expansion seems a little much.

I'm still waiting on employment and disposable personal income net of government transfers to make up my mind on the recession's end.


Financial reform bill nears passage with lots of sausage 

The House Rules committee reported out a rule for hearing H.R. 4173, the Financial Stability Improvement Act of 2009. It has a number of very noxious provisions in it and I am hopeful that measures will be taken to slow this down and get the bill fixed. Many of these I wrote about last July are still in this draft.

One provision many of my friends may like is at the beginning, where the act orders an audit of the Federal Reserve's actions during the financial crisis and its use of emergency powers. This has been the subject as well of work my friend Vern McKinley has been doing through a FOIA action. I need to get him back on the air to talk about this, but that will have to wait a week or two.

The text is 1,316 pages, and it will take a week (while I'm grading papers) to sort through all of what is in here. There is a council envisioned to decide who gets called a bank that could pose systemic risk; if you are determined to be one, you face a 15-to-1 leverage limit. Secs. 1104 and 1105 give a new council wide powers to determine what activities a financial firm can undertake, with whom they can merge, capital limits, etc.

I am not now and never have been in favor of expanding the Federal Reserve's power in the direction of supervising non-banks. It should have one job -- preserve the value of our money. To borrow from Russ Roberts' recent piece in The Economists' Voice, controlling money supply growth is like controlling airplane flight -- most of the mistakes are either pilot/chairman error, with mechanical catastrophes a very secondary effect. Financial systems are not that at all, and asking the Fed to do two tasks not only means they do the one they can't do poorly, but it impedes them from doing well the thing they could do well.

The bill may be passed this weekend, and the Rules vote appears to fast-track this for passage next week. There are several amendments to it that we can't see yet. So ask your congressperson to support sending this back to committee for further work.

P.S. I'm aware that the Republicans are seeking to get the TARP extension out of this bill; while I support that fully, there is so much more wrong with this bill that we need the motion to recommit to say more than that.


Thursday, December 10, 2009

"Evolving Cluelessness" 

Bill Easterly's latest is a must-read for those of us who think about how economies grow, and why it happens in some places and not others. The answer to "will the data ever tell us what drives growth" is a pretty depressing 'no'. But the reason I worked for two years on the book was to argue for something slightly different than to write a page in his "History of Evolving Cluelessness." The book's main premise is that people do not know what the data they use really means. We have the IMF, or the Penn World Tables project, or whatever, telling us about quantities like capital and labor. But we "know" that institutions matter and search for "institutional variables", which involve some social scientist writing down a measure of "strength of property rights" or "central bank independence" or "corruption" and publishing a dataset that every other social scientist swarms like flies to honey. But they don't know if it's honey, it's just that it smells "like" their idea of honey.

If you don''t have a theory of honey, you'll believe just about anything might be honey. This was our point in the introduction: You need a theory of which institutions matter and why before you know what to measure. When measuring a country's capital stock you make a decision about which structures are in and which are out. Factories? Sure. Museums? Probably. The shed in back of my house that stores my patio furniture and lawnmower? No. Why? Because you want that which leads to the production of goods, and you HAVE A THEORY of what kinds of structures do this and what kinds do not.

Do we have a theory of corruption? If so, what should we measure based on that theory? Same for trade openness, democracy, or any of the other things we think belong in a cross-country growth equation, inflation equation, etc. I don't know that answering this correctly ends our evolving cluelessness, but we think it's a good place to continue the search.


Slowing layoffs but fewer hires 

Those who've listened to my radio program the last two weeks have heard me obsess over this survey of job openings, hirings and job separations. Thanks to Calculated Risk for the graph above. Those red bars indicate the rate at which workers are being involuntarily separated. That has fallen since March. But the rate at which jobs are being filled is also dropping.

That hire rate may be why the White House favors job summits. But Ed Morrissey noted yesterday that the threat of clean air regulation is creating job destruction in the coal industry. A local company filed papers to close its shop and lay off 93 workers; people I have spoken to in the last week indicate the firm was solvent, but saw no scope for growth of their capital. (Let this be a reminder -- the shutdown point for a firm can still be where capital earns an above zero return, but not as much as its opportunity cost.) As interest rates rise when inflation becomes a bigger concern than deflation, we will see more such decisions. Casey Mulligan offers the explanation for this pattern as a rise in marginal tax rates, rolling out over two years. His update yesterday shows the data generally following the pattern we see so far, though I would need to see almost two more years of data to be sure he was right.

Keith Hennessey highlights this morning one source of a tax increase: the Reid health care bill. Another is the use of credits and offsets in cap-and-trade; Ted Gayer of Brookings shows that a carbon tax would be less distorting and increase certainty for businesses. (h/t: Mankiw)


Wednesday, December 09, 2009

Mortgage modifications -- the devil is in the details 

I'm fascinated and horrified by this story:

Hamp (Home Affordable Modification Program) is aimed at reducing interest payments and delaying principal payments for eligible homeowners. To do this they have to apply and then agree to enter a three-month trial period, in which they need to make the lower payments and submit some additional documentation (stuff like proof of income). If that�s done successfully, the homeowner is granted a permanent mortgage modification - with lower monthly interest payments and longer principal forbearance.

Only, a major problem of the programme is the number of permanent mods (or lack thereof) being completed.

To give you an idea of the problems the programme is facing, below is nice chart from the Tuesday testimony of Molly Sheehan, senior vice president at JP Morgan Chase Finance...

...for every 100 Hamp trial plans initiated through April to September 2009, only about 20 borrowers managed to complete all the required documentation and were eligible for the modification. Of those 20, according to Sheehan, 15 will probably get a Hamp mod with a payment reduction.

Actual numbers, as you can see from the table, are even lower. Out of 199,033 mods offered in the period, just 4,302 have become permanent and completed.

The figures are similar over at Bank of America, the country�s biggest mortgage servicer (CHK). In his testimony, Bank of America Home Loans credit loss mitigation strategies exec Jack Schakett said that of 65,000 homeowners who have made the three trial payments, 50,000 have not submitted the right documentation. Those 65,000 trial mods are due to end on December 31.

The government is of course pushing hard to get more permanent modifications, but with 29% of JPM mortgagees not making the payments and another 51% either not having the right documentation, a job, or being underwater on their homes, it's hard to see how this is going to work. So the government is now contemplating not just having principal payment delayed but forgiven. Said one expert, the government program is "destined to fail." Said another,
�The phenomenon of underwater mortgages is one of the most troubling aspects of the entire housing market collapse,� Julia Gordon, senior policy counsel at the Center for Responsible Lending, told the committee. �Homeowner equity position has emerged as a key predictor of loan modification re-default, more so than unemployment or other facts.�
Calculated Risk reports JPM's private programs (through Chase) have had better success, but Congress is moving from jawboning to threatening a mortgage cramdown, but the latter might be coming. Before bashing that, I want to see how it handles second- and third-lien holders. It could make a much bigger mess, and cause more bank failures in 2010.


The thing you're looking for is called "price" 

iPhone users represent 3% of AT&T Wireless' subscription base but they use 40% of the bandwidth. This is causing problems for their networks in New York and San Francisco. So what to do?
Many customers don�t know how much bandwidth they�re consuming, Mr. [President Ralph] de la Vega added. When AT&T conducted a broadband test, customers often reduced their data use. Longer-term, he said, a pricing scheme based on usage is likely, though it will be determined by industry competition and regulatory guidelines.
I first read this and thought "well why wouldn't you just use price to solve that issue?" But it turns out to be more complicated than that. Treating 3G wireless and broadband as the same thing in regulation is the issue. As a frequent VoIP user, I would be very interested in an iPhone if I could place international calls on VoIP lines like Skype or Google Voice.

In the meantime, my new htc Hero, after a week of annoying power draining, is working as advertised and I absolutely love the thing. And it makes Google Voice and Skype calls just fine.


A little too much PR? 

The 60 Minutes interview with Ben Bernanke (we remarked about it then) has won an Emmy. Most seem to think this was part of a PR campaign by Bernanke, which may or may not have helped.

I had wondered about this last night and spent a few minutes today re-reading Donald Kettl's Leadership at the Fed. While the Fed maintains a political independence, he argues, it's up to each chairman or chairwoman to build support to keep it.
Throughout the Fed's history, its power over the economy has depended more on the political leadership of its chairman than on any other factor. Both the friends and enemies of the Fed focus on its unrivaled legal independence, but that independence is only a precondition for power, not power itself. The Fed's power depends on the support it can build, not on its legal status. Without political support, its credibility is low, its effectiveness is sharply limited, and its legal independence is fragile. Indeed, as the Fed's history shows, its much-vaunted legal independence is most important because it provides the flexibility for building support. And this central job -- of building support, of developing credibility, of dealing with the complex and conflicting political environment in which the Fed finds itself -- has been the central job of the chairman. (193)
Chairman Bernanke, when he was an academic and when he was a governor of the Fed, was a strong advocate of increasing transparency, including his support of inflation targeting (see Bernanke and Mishkin [1997] and Bernanke [2003], e.g.) But he's had to learn that transparency doesn't always mean that one's actions are understood. And transparency doesn't always mean you build support for your actions. Harry Reid is perhaps too transparent on health care these days, for example. If I was a Democratic adviser, I'd tell the man to button his lip.

Has Bernanke built support by his statements? Judging by his poll numbers you'd have to say no. (Support was about 50-50 in October 2008 when the Lehman/Merrill/AIG hit the fan.) A Gallup poll of Greenspan in 2005 found only 20% of Americans had a "great deal" of faith in his ability to manage the economy -- and that's when the economy was not in recession. It was at 29% in April 2001. Barry Ritholz has a Bernanke approval graph. It is worth noting, as Kettl does, that after the wrenching recession of 1981-82, 46% of Americans felt Paul Volcker had made "a major contribution" to lower inflation and 64% were willing to have the Fed tighten money again if inflation reappeared. If we had another banking panic, would Bernanke have that kind of support?

Support means, though, support from the Congress and the executive branch. The Senate Banking Committee votes on his re-confirmation next week and it looks like he'll pass, though with several dissents. The same most likely when the full Senate votes, probably in January. The magic number on the Senate floor will be 19, though. That's the number of senators who didn't vote for Volcker's reappointment in 1983. No Fed chair has ever had 20 noes.

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Another parable 

As told by Mike Munger:
Suppose I go to a baseball game, with my teen-age son. I've just been to the bank, and the smallest bill I have is a $100.

I send my son up to get two hot dogs, some peanuts, and two diet sodas. I know that costs maybe $18.

He comes back with the stuff and sits down. I ask him for the change. He looks at me like I'm crazy. "That money is going to be spent on other things! That's leftover money!"

What would I do? I'd grab him by the belt, and shake the money out of his pockets! That's my money! I want my change back. I WANT MY CHANGE BACK!
Haven't I seen that on a bumper sticker lately? The Dems reportedly are looking for $70 billion out of a plan Treasury Secretary Geithner says spent $42 billion out of a $700 billion dollar bill. Some people who want the change back.


Tuesday, December 08, 2009

A parable 

Suppose a man has a drinking problem. He decides to repent of his evil ways and, to make the commitment more binding, tells all his friends to come to his home at some appointed time. At that time he announces "I will not drink any more at all, and to prove it I will now have Dr. Smith implant this device in my arm. If I should take a drink, this implant will assure that I get very sick for 24 hours, with no lasting effects."

The man's friends divide in two groups. One thinks it laudable that the man is using a commitment device to assume he doesn't drink any more. The other group says "this is an extreme and inflexible tool that takes decision-making power out of your hands."

You say, "but that's the point. I need the power taken out of my hands because I'm helpless to prevent myself of drinking without some enforcement mechanism."

Your friend says "but you had the ability to do this before and you didn't."

"I know. That's why I'm starting now, before the bar opens again."

For more, see Barry Weingast's 1990 review of Margaret Levi's Of Rule and Revenue. Countries that did constrain the state's revenue collection abilities fared better than those that did not, he argues. Note that the graph at top is in real 2000 dollars.

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Monday, December 07, 2009

Guess who said it 

"The notion that because some people abuse something, you prevent everyone from doing it is as great of a threat to the individual as any cause I have ever seen."
From Chad Millman's ESPN Insider blog (subscriber link.)

HINT: It has to do with internet gambling. Click here when you think you know the answer if you can't use Chad's blog (which is, by the way, the best place to read about sportsbooks anywhere in the world.) Rich Muny at Big Government describes this as Prohibition Redux.

Note which party is on which side here, and shake your head. Freedom is still looking for an agent.

David Henderson offers another ray of hope.

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I'll say this until I'm blue in the face 

All scarce goods are rationed somehow. It doesn't matter how the good is allocated: If there is more of the good desired at a zero price than is available, some mechanism develops that determines who gets it. Thus for mammograms, California now wants to bar those under 50 from getting the good for free. The Senate, meanwhile, wants free mammograms for any woman over 40.

Steve Chapman runs the cost-benefit for us:
The task force's rationale was that the benefits of routine breast cancer screening to women in that age group are insufficient to justify the harms it causes them. Yes, it can be expected to save one life for every 1,904 women age 40 to 49 who get mammographies, but it also yields false positives, which require additional procedures.

Even when the positives are not false, they often lead to unnecessary treatment -- surgery, radiation and chemotherapy -- for tumors that pose little risk. The panel noted that mammograms often serve only to detect "a slower-growing cancer that would have eventually become clinically apparent but would never have caused death."
In the open market, mammograms are about $100. (Source.) So one might ask how to solve the question: If a mammogram saves a life one time in 1,904 procedures, it would be rational for you to spend $100 on one if you valued your life at $190,400. Given that most statistical value of a life calculations are measured in millions (Dept. of Transportation example, article in Regulation) this means that the rational person under the age of 50 will pay for the procedure herself, if someone else does not pay for it. The vote on the Mikulski amendment was only to decide who pays for them, not that they won't get done. Unless somehow we conclude that health reform is going to force mammograms into back alleys, we're only fighting over income distribution here.

A note for my conservative friends then: First, there's always rationing. Second, there can be such a thing as too many mammograms, just as there could be too many prostate tests. There may be, in fact, more mammograms now than would happen in the free market, or there may be less. We don't know, we don't live in a free market for mammograms. Where there are free markets, like LASIK, prices seem to come down. Perhaps the price of a mammogram would drop significantly if only we told the government don't pay for them, let us decide for ourselves.

Let's drop the "they're rationing!" bogeyman. When government says it wants to control costs ask "whose costs are those?" If it wants to control its costs say "fine, let us keep our money and let us bear the costs. We might make a better decision than you do anyway."

(h/t for Chapman link: Russ Roberts)

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Every bubble pops, eventually 

The federal deficit was $1.4 trillion in the fiscal year that ended in September, or 10% of GDP, the largest peacetime deficit on record. But net interest � the cost of servicing the national debt � was only 1.3% of GDP, the lowest in about 40 years. For comparison, net interest was absorbing about 3% of GDP in the 1980s and 1990s.

In other words, loose money has created a temporary mirage where a massive increase in government spending appears to be an easy burden to carry. In particular, the mirage of low rates colors the public�s view of legislative efforts to fully nationalize the US healthcare system, making it seem more affordable than it is in reality.

How is this any different than the housing market from a few years back? Homeowners thought they could afford a larger home as long as they assumed interest rates would stay low forever.

Just like homeowners who relied too much on short-term adjustable rate mortgages, the federal government�s average debt maturity remains less than 4.5 years, which means net interest costs will soar over the next several years as thegovernment rolls over its debt at higher interest rates.

But here�s what makes a government bubble even worse. When private sector bubbles burst, investors flee that sector. Home building went from 6.3% of GDP back in 2005 to a recent low of 2.4%. Does anyone think a government bubble is going to bring about smaller government anytime soon? Of course not�government will try to keep its bubble alive by taxing and borrowing even more. But it can�t last forever�every bubble pops�eventually.
From Brian Wesbury and Robert Stein this morning. Let me add one thing to this. CBO's August forecast puts net interest cost rising from 1.3-1.4% of GDP in 2010 (as Wesbury and Stein note) to 3% by 2015 and 3.4% by 2019. It doesn't come down. CBO's economic forecasts project interest rates to rise to 5.5% on the ten-year bond and 4.7% on the three-month bill on average for 2014-19. If one believes that the inflation rate will be above 3% in the next five years thanks to all the liquidity used to reflate this economy (and I understand some think this isn't so, see for example Mark Thoma) do we believe that forecast? CBO is projecting long-term inflation below 2%.


Mattress stuffers 

Demand for �50 notes has risen sharply during the recession because the public has lost faith in the banks, the Bank of England's chief cashier Andrew Bailey has suggested.

..."Two features of the current situation strike me as most relevant in explaining this development: first, lower levels of public confidence in the banking system and second, low interest rates," he said.
Source. That got me to wonder how much we are issuing in $100 bills here in the USA. Turns out the data is only annual, but we did issue $55 billion additional C-notes in 2008. As of November 23, there isn't much more in total currency issued -- no breakdown of the size of the notes there. Then again, when your economy contracts you would expect lower demand for currency, which makes the UK figures all the more surprising.

UPDATE: Paul Murphy suggests a third reason: worker remittances. But if anything remittances are down, not up in 2009. I have had several reports on lower remittances into Armenia this year, perhaps by more than a third from 2008.

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Where do physicists work? 

These physicists were born in 32 different countries. They studied for their first degree in 30 different countries; they did PhDs in 22 countries; and they are presently located in only 16 countries. Hence the data show a kind of 'funnelling' effect of approximately 50% from birth: people from 32 nations now reside in half that number. flows of physicists between first degree and the present day demonstrate that top scholars head to countries with high levels of R&D spending. Switzerland and the US are the world's large importers, per capita, of elite physicists. CERN in Switzerland must play some role here ... [A]mong elite physicists a current affiliation in the US is associated with a 13%�19% higher h-index [a measure of higher citations of research by physicists]. This may be a genuine productivity difference, or reflect some form of pro-US citations bias, or some mixture of the two.
Source: Hunter, Oswald and Charlton, "The Elite Brain Drain", published in The Economic Journal [2009] (ungated copy). As worker mobility is lowered more high-quality researchers move to places where their talents are more highly rewarded; in this case it's not only money but also access to better facilities and higher probability of publications that others read.


Friday, December 04, 2009

Tomorrow on the King Banaian Show 

Show starts at 9am on KYCR. I will cover the jobs report, the estate tax, and what does it mean that North Korea had a monetary reform this past week. I am pleased to be joined in the 10am hour with Paul Rubin, president of the White Bear Lake Superstore, to talk about both cash for clunkers and the turnover of leadership at GM.

There is an online stream available from the station link; you can reach us during the show via Twitter using the search term #kbrs or the show's Twitter stream.

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Stasis and the jobs report 

Today's jobs report caught everyone by surprise, including me. When it happens while I'm on the air, it is rather fun. The station has a deal for a local financial advising group to come on at 7:45, fifteen minutes after the jobs figures are posted. Since I only need to talk for about two of the intervening fifteen minutes -- the news and sports people do everything but weather in between -- I had time to digest the figures, get another interested person's take on it, and stew awhile.

They're good numbers no matter how you slice them. Perhaps lost in the middle of the report is the fact that job loss figures for September and October were trimmed by 124,000 and 79,000. That is, the job loss from September on was not as bad as we thought. Temporary workers gained another 52,000 jobs in the month, the fourth consecutive gain. Only 7,000 jobs gained in the public sector, so let's not say it's just make-work Porkulus. The number I've waited on for saying the recession is over is the hours index, and that turned positive for the first time this month. As Justin Fox correctly points out, the data could get revised again, but if they didn't and if December and January go the way of November, I'm going to put the end of the national recession at October until NBER rules.

Of course we realize that it takes about a +150,000 jobs reading to get the unemployment rate to flip over. We had 291,000 workers leave the labor force last month, which is helping to pull that unemployment rate down. If the job market improves those workers will come back. And contradicting that possibility is that the broad U-6 figure gave back 0.3% to 17.2%.

I'm still not all smiles: here is where I still have a concern. The rate at which the country is creating jobs on a gross level has been falling through this recession (see the JOLTS survey; see my article on the churn of Minnesota from 2007) so that gross job gains currently run around 4 million a month. Most of the slowdown in job loss has come from slowing job separations. In this market, you don't quit your job unless you have your next. That stasis, that lack of dynamism, that failure of creative destruction -- all plant the seeds of potentially slow growth. You can get only so much productivity by cutting labor costs and shedding workers. Eventually you need a new line, a new way of working, and to do so you have to add some workers. When we get the gross month hires number going in the right direction, is when you will start to see a more robust recovery.

One may wonder, as Ed does, whether the retail sales figures contradict the good news. But let's look at the details. If you are a discounter not named Target, you're doing pretty well. Target is trying to shift downscale, and may still be comparing sales to both a higher market profile and worse credit card portfolio. Their profits are not hurting. Some upscale firms are doing fine with good plans -- Aeropostale, The Buckle -- or with deep discount outlets. If you're upscale you are having problems (it's The Rack that keeps Nordstrom's above water.) After 20+ months of recession, it seems likely people are still going to be skittish about going shopping. The extra money in weekly pay, Spencer notes, should help holiday shopping. You're just not going to give that to Missy to go to Hot Topic at the mall just yet. We'll need not just people getting more overtime to make that turn around. We'll need both those without work beginning to see more openings, and those in good-for-now jobs seeing the possibility of advancement and change. That part will take awhile.

Keith Hennessey is right that we need another month or two to blow the all-clear signal for this recession and put it to bed. But a recovery has to start somewhere, and it may have started today.


Mrs. S writes 

A second column on health care. She says "the devil is in the details." She gets a lot of them into 650 or so words, working through an interview with state Rep. Steve Gottwalt. A couple people have said to me they really liked this one, so please check it out.

To see more devils, behold Canada, where the rate of increase of medical spending is growing faster than available revenues.
Provincial government health spending has grown at an average annual rate of 7.4% over the 10-year trend period examined in this report (1999/2000 to 2008/2009). At the same time, the average annual growth rate for total available provincial revenue has been only 6.5%. Provincial government health spending has also grown faster than provincial GDP, which grew at an average annual rate of only 6.4% over the same period.

...The most recent one-year growth in government health spending was 8.3% (on average across all provinces), while the growth in total available revenue was only 5.2%.
So how do you fix that? In Canada, they queue:
Unfortunately, provincial governments typically attempt to slow the growth of health spending by restricting or delaying access to publicly insured health care. For example, the most recent data show that wait times for access to medical services have increased in every province over the 10-year trend period (Esmail et al., 2008). In addition, provincial publicly funded drug programs are, to an increasing degree, covering only a small percentage of new medicines. Such policies have the effect of slowing growth in government health spending in the short term. However, the rationing of health goods and services cannot continue indefinitely without increasing medical risks for patients.
Link added.

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Death and taxes, together again (updated) 

One of the odd parts of the Bush tax cuts was that for 2010 there would be no estate tax. Republicans hoped to make that permanent, but 2008 pretty much killed that idea. So it came as no surprise yesterday that the House voted to make the current 2009 estate tax rate permanent.

The bill passed 225 to 200, with 26 Democrats joining all Republicans present in voting no. If Congress does not act, the estate tax will disappear in 2010, then return in 2011 under the higher rates -- 55 percent and a $1 million exemption -- that existed before President George W. Bush took office.

The tax is one of several bills and expiring laws that require attention from Congress by Dec. 31, even as the Senate expects to devote much of its time to the marathon health-care debate.

The Senate may decide to just patch it over for one year at the 2009 rate, leaving the threat of the higher rate and lower exemption hanging into next year. Republicans might like to have that as a campaign plank, but I can't remember when I last saw a tea party for the estate tax.

Nonetheless, this is a pretty big deal. 23% 0.23% of estates are taxed according to the article, and since there's no indexation that number would go up over time. (See below for update.) If Congress allows the tax provision to expire and does nothing, many more would come under the lower $1 million exemption. If the Senate does nothing with this bill passed by the House, there may be a few life-and-death decisions later this month that will have tax considerations in play.

The Obama Administration supported the House bill at the beginning of this year. Someone in the White House press corps should ask Press Secretary Gibbs whether they still do and if they would like the Senate to take up the estate tax bill before finishing with the health care bill.

UPDATE: Well, that was bad! I missed the decimal in front of the 23 in the Post article. For the current year, the share of filers affected would be 0.23%. But a federal report from earlier this year shows that the number would rise to 2.5% of all returns, including 10% of farms, if we revert to the 2001 rates. About 3% of farms currently have assets over $3.5 million.

Thanks to Charlie Quimby for finding my mistake.

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The price of pretty good college 

A report shows a troubling trend continuing: Students are leaving Minnesota colleges with record debt.

Minnesota's 2008 graduate had an average of $25,558 in debt -- the sixth-highest in the nation, according to the Project on Student Debt. (The state ranked fifth last year.) The proportion of graduates with debt -- 72 percent took out loans -- puts the state fourth in the nation (up one spot from last year).

...Students in the District of Columbia, Iowa and Connecticut had the three highest average debt loads in 2008, while those in Utah, Hawaii and Kentucky had the lowest.

Here's the project that studied it. SCSU students leave here with a little less than $25,000 of debt, with about 2/3 of it federally guaranteed.

Is this a good return on investment? It turns out to depend on where you go, at least according to Caroline Hoxby's latest NBER study. Because students are now willing and able to select higher education in a national rather than regional market, colleges and universities compete more intensely for the best students. At the very best schools, that competition actually drives down the cost of an education that is borne by a student (or parents.) The remainder is paid by an endowment; each graduate in turn pays for good students to come after them. Even though the donations to the alumni fund are higher at the best schools, the total investment made on the best student, and the rate of return on the investment, generate both larger alumni funds and more income for those students.

So what happens to the remainder? It turns out the remaining schools are less selective, insofar as the accomplishments of an incoming freshman (based on NAEP scores) are now lower. Students have re-sorted themselves, she says, so that the top schools have a more uniform level of student achievement, and the best students who used to choose the nearby schools now travel further away. From the paper (ungated copy):
Average tuition paid as a share of student-oriented resources falls for every selectivity group, but the patterns differ. The least selective colleges start out with average tuition paid being about 60 percent of resources, and this statistic vacillates, ending up at about 44 percent. Most of these colleges are public colleges whose students have modest incomes. Thus, tuition paid is not a large share of resources because tax dollars make up the difference. Colleges at 51st through 60th percentile of selectivity have tuition paid fall from 88 percent of resources to about 65 percent of resources. This is a substantial decrease but students at such colleges (and other middling selectivity colleges) continue to finance most of their own investments in human capital through the tuition they pay.

In contrast, students at the most selective colleges paid tuition equal to only 46 percent of their human capital investment even in 1967. By 2007, they were financing only 21 percent of their investment through tuition!
Thus, the share you pay to go to the less-selective college is higher, and the difference between the amount of spending done by a very selective college and a not selective college (per student) widened from a ratio of about 4 to 1 to nearly 8 to 1 (even though all schools spend more per student nowadays.) Getting into a 99th percentile school just gets you access to so much more, and it seems to get you access to mostly high-quality classmates, where there may be complementarities.

This means that for our public four-year schools, there are fewer high-quality students around; our students are borrowing more to come here, and relatively speaking getting less of an advantage than they would have thirty years ago. Increasing specialization should lead to better delivery of high-quality education to those who can best use it. The paper is not as clear on whether the person borrowing $25,000 to come to a public four-year school would have been better off putting that money in the stock market (it appears not to be so for the most selective schools.)

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Thursday, December 03, 2009

A blessing to be busy 

Just one of those days when I can't get to blog, but partly because I was just having too much fun sneaking peeks at the WSJ live blog of the Bernanke confirmation hearing. I don't see it as having been rougher than other ones; the most hilarious part is that he is asked about fiscal policy repeatedly -- he at first doesn't answer, gets asked still, answers some, then at the end Sen. Corker criticizes him for speaking too much about fiscal policy.

There's no question in my mind that he'll be confirmed; I'd be long on a contract that paid for every vote for confirmation over 60.

In the meantime, please enjoy a profile of a very special woman in my life. My aunt was the one who didn't live in New England, who treated me with UCLA (NOT USC) gear as a kid, who let me stay at her house when I first moved to southern California and didn't have my dorm room secured yet so she potentially was stuck with nine boxes of my junk, and remains my LA home-away-from-home. She is probably my most liberal friend (in a family with dots all over the political spectrum) who takes a joke as well as she emails one. It is inspirational what she is doing at 78 years old; I hope I can keep up the family tradition of long lives and long careers. Or, to borrow a styling from Larry Miller, REMEMBER: IF YOU WALK OUT OF BED THIS MORNING AND LOOK IN THE MIRROR THINKING "I CAN'T WAIT UNTIL I'M 75 AND still WORKING???", YOU'VE WON THE GAME AND THANK GOD FOR GREAT GENES.

P.S. And I'll be walking out of bed and into a 6am studio for the KNSI Morning Show tomorrow, at least that's it for this week.

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Wednesday, December 02, 2009

You don't say! 

The University of Minnesota-Twin Cities has come under pressure to reject a faculty panel's proposal to require students in its education school to doubt the United States is a meritocracy and to demonstrate an understanding of concepts such as "white privilege."

...Jean K. Quam, dean of the university's College of Education and Human Development, said today in an interview that the proposal was just one of several being offered up by various faculty panels as the college moves to overhaul its teacher-education program to better prepare students to deal with today's classrooms. She characterized the proposal as "a brainstorm of ideas" that the education school had yet to act upon as it develops a sweeping plan to change teacher preparation in the coming academic year.

"We would never impose requirements of how people are required to think or act as part of their teacher education," Ms. Quam said. "We are trying to broaden the way that they think or act and not narrow that view."

From the Chronicle of Higher Education this afternoon. Yet according to that task force's own final report:

...let there be no doubt that we consider cultural competence to be an indispensable characteristic of all beginning teachers and, hence, an obligatory goal of teacher education. In fact, we believe that the following outcomes that we present should serve as an overarching framework from which beginning teachers frame the rest of teacher education courses and practice.

...Future teachers will understand themselves as beings who position themselves and are positioned by others in relation to dimensions of differences (racial, social class, gender), and other hierarchies in school and society.
Emphasis added in both cases. Did the Chronicle author read the report?

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Kimfiscatory monetary reform 

North Korea takes a page from the later Gorbachev monetary policy playbook.
Chaos reportedly erupted in North Korea on Tuesday after the government of Kim Jong Il revalued the country's currency, sharply restricting the amount of old bills that could be traded for new and wiping out personal savings.

The revaluation and exchange limits triggered panic and anger, particularly among market traders with substantial hoards of old North Korean won -- much of which has apparently become worthless, according to news agency reports from South Korea and China and from groups with contacts in North Korea.

The currency move appeared to be part of a continuing government crackdown on private markets, which have become an essential part of the food-supply system in the chronically hungry North.

In recent years, some market traders have stashed away substantial amounts of cash, while establishing themselves in profitable businesses that the government struggles to control.

But under the rules of the new currency system, the wealth of these traders has largely disappeared, unless it is held in euros, dollars or Chinese yuan.

The revaluation replaces 1,000-won notes with 10-won notes but strictly limits the amount of old currency that can be exchanged, news reports said.

According to two Web-based groups with sources in the North, that limit was set Monday at 100,000 won, which at current black-market rates amounts to $40. All North Korean currency that individuals possess in excess of that amount becomes worthless under the revaluation.

Back in 1991, Mikhail Gorbachev confiscated old ruble notes in much the same way. Rather than make them worthless he forced citizens to deposit excess cash rubles into state-owned banks with the accounts frozen for five years. Hyperinflation in 1992-93 did the same work that Kim Jong-Il is doing to his citizens.

For many in poor countries like North Korea, banks are shunned because of a lack of transparency and poor service. People prefer to hold cash. It is not just speculators but average citizens who put their cash in safes, shoeboxes, mattresses, etc. To do this as winter sets in virtually assures that some small farmers, who will have converted crops to cash so they can buy food later, will now go hungry.

The confiscation of won will most likely stall inflation in North Korea. As the Soviet economy wound down additional rubles were printed to pay bills that could no longer be covered by a crumbling state industrial sector. It is less than a year from the confiscation to the end of the USSR. Not to predict that North Korea is going out of business soon, but this is certainly a sign of serious stress within the North Korean economy and political structure. To see what happened next, consider this account from Yuri Maltsev:
Everyone in the higher reaches of power had known for some time that a coup against Gorbachev [in the summer of 1991] would be a snap. One evening in Moscow, I discussed the possibility with a friend of mine, a general in the Soviet Army. He told me that an actual coup would be the easy part. "We could take power in ten minutes," he said. "But then what? We have no sausages, no bread � nothing to offer the people." The Moscow junta hoped its power grab would be bolstered by Gorbachev's low popularity. But as much as the people hated their ruler, they hated the coup leaders more. The coup government achieved only a short moment of glory. Once in power, it faced a people seething with anger at the crimes of totalitarianism and the poverty of socialism. The coup leaders also faced a hard winter, a very bad harvest, and the prospect of mass starvation. They lost their nerve, and Boris Yeltsin thwarted their efforts.
Does North Korea have a Yeltsin? I have no idea, but I'm going to be watching.

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Now the real budget fun begins 

In case my dean wants to know why I was constantly checking the cell phone during a meeting today, it was to see the new Minnesota budget forecast. ("My name is King, and I'm a budget addict." "Hi King!")
General fund revenues are now forecast to fall $1.156 billion (3.7 percent) below earlier estimates for the 2010-11 biennium. After adjusting for actions taken by the Governor following the legislative session, general fund expenditures are $44 million lower. When combined with a $91 million reduction in the ending balance from FY 2008-09, a budget deficit of $1.203 billion is now projected for FY 2010-11. About 70 percent of the projected deficit is due to a reduction in expected income tax receipts.
The loss in revenues is pinned on mostly a fall in wages (income from interest and capital gains "changed little".) The previous forecast was drawn in up February, was little changed from the November 2008 forecast except for the calculation of the effects of the Obama stimulus. Nine months between forecasts in this environment is an eternity, and there was no way anyone expected even this summer that the number wouldn't revise down by a billion or so. So I don't think this report is a shock or a sign that the economy is any more terrible than what I thought it was yesterday.

On the other hand, a new hand is dealt to the Legislature and Governor Pawlenty. They will be having press conferences in a while and we can expect DFL legislators to start their call for asking the rich to pay their fair share. Public employee union leader Eliot Seide was on the radio this morning (I listened during the Morning Show) saying the rich only pay 2/3 of their fair share and that getting the right amount from the rich would add $3.8 billion to revenues. For the life of me I can't figure out where either number comes from; what's this "fair share" he keeps talking about? Meanwhile, the governor is offering to talk to legislative leaders saying he doesn't want to use unallotment again. But having demonstrated he is willing to do it and not running for re-election, he undoubtedly feels he bargains from a position of strength. If you thought end of session in May was fun, pop some corn and settle in. This could be a hoot.

A couple of other quick notes while talking state budget. I did read this profile of state economist Tom Stinson and its effort to make him a pain in Governor Pawlenty's side. The article creates controversy where one doesn't exist, and the reporter was calling for weeks trying to dig up dirt on this topic according to people I spoke with. Tom's doing his job; everyone knows he tends to "go low" with the revenue figure, since the cost of underpredicting revenue is a lot lower than the cost of overpredicting (as we will now see; but the overprediction is certainly not an error made by the Minnesota Finance staff. Very few of us had 10% unemployment forecasts back in February.) The only shock in that article that I saw was Tom's age. I thought he was younger.

The other thing is this decision to list a separate estimate of inflation in the out-biennium forecast. I don't like it, I never have, and I wish they would stop it. You cannot assume a cost that doesn't yet exist. The decision to spend a public dollar takes a vote; it is not implied by previous decisions as taxes are.

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Cash offends some people 

I have an old friend from my grad school days who once said of giving gifts, "cash offends no one." He, like me, was trained as an economist and to us it seemed obvious. And Mrs. S and I are more often than not likely to send gift cards or checks to my family out East for the holidays. Costs less to send, and you can use it everywhere. Cash offends no one.

But many readers will say "no, not always." You can't give cash to a romantic interest; they won't gasp with delight when they open the pretty box and see a check inside. Even my parents seem to remember and like more when I send something other than cash, even when we know that gifts destroy value.

Bryan Caplan argues that our understanding of people is improved when they are better at being selfish. In the formal rules that economists think apply to being "saintly selfish" Caplan includes not putting someone else's satisfaction directly as a factor in one's own. Yet doesn't that seem to be the gift problem in small: I only really worry about buying gifts for those closest to me; a niece or nephew almost always gets the gift card, but never the spouse? Why, if not because her happiness directly infuences mine? "If Mama ain't happy, ain't nobody happy."

I suspect that interdependent-utility-functions condition is the one we find least realistic. Turns out, unfortunately, you can't prove many of the welfare-maximizing properties of competitive markets if you relax the assumption of independent utility.

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Tuesday, December 01, 2009

O's Speech 

Reading through O's speech on Afghanistan right now, I cannot help but wonder just where this guy got any kind of education.

Regardless, it would do him well to heed President Lincoln's phrase,
Abraham Lincoln
"You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time."

To paraphrase it, you can please some of the people some of the time; some of the people all of the time; but you cannot please all the people all the time. Seems as though President O is trying the latter and he will fail miserably and take far too many troops and Americans with him. In less than one year, he has done more damage to the planet than anyone else. This speech is just pathetic.

Disclosure, we have a son in the Army.

KING ADDS (12/2): I don't think the speech was pathetic. Many have noted that the speech does not contain the words 'win' or 'victory' or reference to the evils of al Qaeda. That really wasn't what I was looking for. Last August there was a story from Iowa of a congressman saying he heard the president say he'd be willing to be a one-term president in return for passing health care reform. Asked about the comment, Robert Gibbs included Afghanistan on a list of things "he'd be comfortable with" meaning he would only be four years into.

Now, I've heard the president talk frequently about health care. Regardless of what you think of the policy particulars, I think there is little doubt of the passion the president has for that part of his agenda. What I wanted to hear last night was that same level of passion. Does President Obama care as much about Afghanistan or Iraq as he does health care reform? I wish he would care more about the war than his domestic agenda; I really don't agree with the latter. But that decision got made in November 2008. What I want to know is if I can count on him to do what he thinks is the right thing regardless of the consequences for his political future.

Read or see and decide for yourself. Compare it to the video of his health care plan. My opinion is no, but yours can be different. Here's just one thing to ask yourself: It appears that $30 billion a year matters to the President when it comes to Afghanistan. If he needed an extra $30 billion a year for health care reform, do you think he would change his mind?

JANET ADDS (12/2): Some in the comments misinterpret my original post. I am not at all opposed to sending more troops; in fact, I would have preferred meetingGen. McChrystal's full request for 40,000. My disappointment is with the tepid and flat speech itself, including the emphasis on leaving rather than on winning. That's not the right way to ask our soldiers to put their lives at risk.

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Media reminder 

I will be hosting the KNSI Morning Show the rest of this week. Please listen in. It is not the format of the old Final Word or the new King Banaian Show: early morning radio in markets like St. Cloud have many ads for local firms, news and sports and weather every 30 minutes, etc. But we sneak a little fun in from time to time, and even a quick point about current events. I hope you'll tune in.

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Buy the Keynesian premise, buy the Keynesian bit 

(Title with apologies to Johnny Carson)

CBO is now saying that the stimulus is working as planned. Menzie Chinn provides an outline; Derek Thompson calls it "the handiwork of dirty Keynesians." If by dirty Keynesians you mean people who use large-scale macroeconometric models, then I would say you're right. But that's what everyone uses in this business.

You would think we'd dump them; there's a nice bit of analysis from April by Eric Falkenstein explains why they fell out of favor: Complexity in modeling made them pretty much useless in forecasting. I appreciate Chinn's defense of the ceteris paribus assumption: "without the stimulus, output would have been x% lower and employment yyy thousand workers fewer", etc., without having lived in that world. That's quite true. But you need somehow to decompose the error from this nasty graph in to what was because of modeling error, what was an external shock (something that we used to teach in forecasting with Theil's U statistic.)

So why aren't they dumped? The answer comes from having all those equations: It's quite easy to mine a large macro model for a story of why your forecast went wrong than it is to use one of those three-equation VARs that Chris Sims showed were so much better for not having heroic assumptions. I can better talk my way out of a bad forecast, the more moving parts I have to wave my hands in front of. Try to explain a black box, as Scott Beaulier did with his students, and you get confusion and a pink slip as a forecaster.

And this is, by the way, why I think most of the estimates offered for long term budget impacts of health reforms and cap-and-trade bills need to be taken with a very large serving of skepticism; if you rejoice when the model goes your way, you have to accept when it doesn't, and you have to accept the large errors their models can make. They come from models most graduate programs do not teach our graduate students any more -- those students who have to work with them later learn them after they get their doctorates, if they are economists. You don't need even to be one to run one: Fairmodel, discussed earlier, is a 30-equation plus 100-identities model that you can try at home.

(BTW, in our program, all applied economics masters students get a graduate0level course in forecasting and do know a thing or two about these models. Alumni report it helps in the job interview, FWIW.)


How to win friends and influence people, Dubai-style 

Sheikh Mohammed bin Rashid al-Maktoum, the ruler of Dubai, today criticised international investors' reaction to the Emirate's debt crisis, claiming: "They do not understand anything."

The defiant ruler, whose Government yesterday washed its hands of Dubai World, the state-owned conglomerate that owes $59 billion (�35.8 billion), also said: �We are strong and persistent."

Sheikh Mohammed's comments follow support from Sheikh Khalifa bin Zayed al-Nahayan, President of the United Arab Emirates, who said that Dubai's leader and his Cabinet �face every morning challenges, but plan to remove all obstacles to score achievements�.

Well yes, that's much more reassuring. Thanks, guys!

Just a couple of weeks ago Sheikh Mohammed's quirkiness was highlighed by Tyler Cowen. And Andrew Ross Sorkin's well-written story includes this note:
What about the risk? The view was, and apparently still is, that if Dubai gets in trouble, its oil-rich neighbors in Abu Dhabi will bail everyone out to avoid damage to their collective reputation and, by extension, the region�s economy. Just as the United States stood behind its banks, in part, to avoid losing the confidence of foreign investors, Abu Dhabi might have to do the same.

That had to be what Citigroup, with its firsthand expertise with bailouts, must have been thinking when it lent $8 billion to Dubai last year. Oh, and here�s an interesting fact: Citigroup made the loan to Dubai on Dec. 14, 2008. Take a look at the calendar � that�s after it received tens of billions in TARP funds. Citigroup�s chairman, Win Bischoff, said at the time, �This is in line with our commitment to the U.A.E. market in general, and reflects our positive outlook on Dubai in particular.� Good call.
Damian Reece at the Telegraph in London echoes a similar story and reminds us of who Dubai's #1 trading partner is: Iran. That connection could use further scrutiny.


After watching last night's football game... 

...does anyone still want to argue about going for it on 4th and 2?

If anyone wants to argue that the Patriots played poorly last night because Belichick had damaged their psyches a few weeks ago, please, stop reading this blog.

That is all.