Friday, October 29, 2010

Why Capitalism Cannot be Tamed

A little more than a year ago, I posted a note using football as a metaphor for the futility of effective regulation.

Some people dismissed the football metaphor. The Wall Street Journal today has a story about how people design new psychotropic drugs to get around regulation. It may be that these new drugs are more dangerous than banned drugs. In all likelihood, they can design these drugs faster than the government can make regulations.

How in the world can regulators get ahead of financial industry or tax lawyers, even if the lobbyists were not writing the regulations or the tax codes.

Whalen, Jeanne. 2010. "In Quest for 'Legal High,' Chemists Outfox Law." Wall Street Journal (30 October).

Thursday, October 28, 2010

This Is What Accounting Identities Look Like

I have been periodically raging against the ignorance of those who would slash fiscal deficits without regard to fundamental accounting identities. Such “serious” people somehow think that public and private debt levels can be lowered simultaneously, without a substitution of foreign assets in domestic portfolios (a current account surplus). It does not occur to them that one person’s debt is another’s asset—too confusing, I guess.

What this means is that, if the private sector is collectively paying down its debts, and the government tries to pare its deficits at the same time, either there is an increase in net exports to finance all of this, or it just doesn’t happen. That’s how it is with identities. Unlike other kinds of rules, they are not made to be broken.

Which brings us to this morning’s news about public finances in Europe: despite the earnest efforts of the austerians, fiscal deficits are not declining. Rather, tax receipts are going down, so that the ex post identities remain in force. As long as the private sector continues to deleverage, further efforts to produce “responsible” fiscal deficits will just lead to lower tax revenues and further spending cuts, in a downward spiral of pointless misery.

It reminds me of a bumper sticker that was popular a few decades ago: “Gravity. Not just a good idea—it’s the law.”

You Wouldn’t Know that Banking Is a Business

I was glumly reading this morning’s New York Times article about Spain, where bankruptcy law holds borrowers fully liable for their outstanding mortgage principle (plus interest and legal costs) even after their properties are foreclosed, when I came across this striking paragraph:

Several opposition parties in Parliament have been pressing for amendments to the country’s foreclosure laws, including letting mortgage defaulters settle their debts with the bank by turning over the property. But the government of José Luis Rodríguez Zapatero has opposed such a major change in lending practices. Government officials say Spain’s system of personal guarantees saved its banks from the turmoil seen in the United States.

So like the US, where Obama has refused to impose a foreclosure moratorium, despite massive fraud, in order to shore up the banking system. After all, we need these banks to remain sound and solvent if we are to emerge from the financial crisis, right?

Just one thing, though: aren’t the banks private, profit-making businesses? What is the implication for the rational allocation of resources, not to mention social justice, of ginning the rules so that one industry can enjoy greater profits at the expense of everyone else? And we’re not talking about struggling startups here: financial profits have simply metastasized in the 00s, driving income inequality and rewarding the very activities that put modern economies at extreme risk.

If banks truly are public utilities, providing an indispensable service that requires frequent infusions of public support—subsidies, bailouts, favorable regulatory dispensations—they should be publicly owned. No risk, no profit.

Wednesday, October 27, 2010

Deleterious Doodling About The Deficit: What Else Is New? Department

In today's Washington Post business section, Lori Montgomery has a big article on "A renewed focus on spending," starting with how the GOP is making noises about cutting spending to cut the deficit without raising taxes, while not mentioning anything too serious, although Boehner supposedly might be open to cutting some loopholes in the tax code, thereby de facto raising taxes, if Grover Norquist will let him (assuming as most think that the GOP will take control of the House after next week's election), and if anybody thinks elimination of the tax deduction for mortgage interest is remotely on the table in a period with a terrible housing market, there is a bridge in Brooklyn for sale to them. Then most of the article lugubriously goes on about all the efforts at supposed bipartisanship on the Deficit Commission.

Yet again, we read about all this agreement to "stabilize social security finances" by raising future retirement ages, because "The current Social Security program will not survive based on upon current rules." Well, beating a drum beaten often here, this latter is so much baloney. However, the rest of it is even worse. We get scare stories about the deficit of the last two years, when about half of this is due to the recession and the rapidly disappearing stimulus package, while the other half is due to the Bush tax cuts and increased defense spending due to wars in Iraq and Afghanistan, which will hopefully wind down in the not too distant future.

Raising future retirement ages does a great big doodley-squat nothing about any near term deficit, although Lori Montgomery and other reporters somehow fail to point this out in their so-called reporting. So, we suffer from an ongoing deterioration of discourse on this subject as the same old groups and politicians push the same old nonsense formuli for solving a problem that will hopefully mostly take care of itself, with almost no offsetting commentary, although undoing the tax cut part of the deficit is not going to happen if the GOP takes over the House.

French Pension “Reform” and the Life Expectancy Canard

Angela Doland reports on a bill passed by the French parliament:

France's parliament granted final approval Wednesday to a bill raising the retirement age from 60 to 62, a reform that has infuriated the country's powerful unions and touched off weeks of protests and strikes. The 336-233 vote in the National Assembly was a victory for conservative President Nicolas Sarkozy, who has stood firm despite the protests - a stance that has resulted in his lowest approval ratings since he took office in 2007 … Unions see retirement at 60 as a cornerstone of France's generous social benefit system, but the conservative government says the entire pension system is in jeopardy without the reform because French people now have longer lifespans - an average of nearly 85 years for women and 78 for men, according to newly released figures from statistics agency Insee.

I am not an expert on the French retirement benefits debate but this claim sounds like a canard that proponents of Social Security benefit cuts in the US have often made. If life expectancy is longer because fewer children die prematurely, then it has little to do with the solvency of any retirement benefit program. The issue at hand should be the remaining life expectancy when people reach age 60.

Sunday, October 24, 2010

The Ironies of the Commodity: My New Video

I just posted a new video regarding the ironies of the commodity, taking up from the respective analysis of Marx and Smith and the behavior of business.

Privatized Education Ripoff in the Homeless Shelters

Golden, Daniel. 2010. “The Homeless at College.” Bloomberg Business Week (30 April).

Here is how the article begins:

“Benson Rollins wants a college degree. The unemployed high school dropout who attends Alcoholics Anonymous and has been homeless for 10 months is being courted by the University of Phoenix. Two of its recruiters got themselves invited to a Cleveland shelter last October and pitched the advantages of going to the country’s largest for-profit college to 70 destitute men.”

“Their visit spurred the 23-year-old Rollins to fill out an online form expressing interest. Phoenix salespeople then barraged him with phone calls and e-mails, urging a tour of its Cleveland campus. “If higher education is important to you for professional growth, and to achieve your academic goals, why wait any longer? Classes start soon and space is limited,” one Phoenix employee e-mailed him on Apr. 15. “I’ll be happy to walk you through the entire application process”.”

“Rollins’ experience is increasingly common. The boom in for-profit education, driven by a political consensus that all Americans need more than a high school diploma, has intensified efforts to recruit the homeless. Such disadvantaged students are desirable because they qualify for federal grants and loans, which are largely responsible for the prosperity of for-profit colleges. Federal aid to students at for-profit colleges jumped from $4.6 billion in 2000 to $26.5 billion in 2009. Publicly traded higher education companies derive three-fourths of their revenue from federal funds, with Phoenix at 86%, up from just 48% in 2001 and approaching the 90% limit set by federal law.”

It gets worse:

Read More at:

Golden, Daniel. 2010. “The Homeless at College.” Bloomberg Business Week (30 April).

Saturday, October 23, 2010

Do No Evil: Pay No Taxes

Bloomberg has an excellent article describing how Google saves billions in taxes. Besides showing how Google constructs its international network of tax dodges (similar to what other high-tech companies use), the article discusses how taxes helped to create the company and how the federal government gave its blessing to the Google racket. I assume that I will also see the article tomorrow when my BusinessWeek arrives.

The article has too much in it to cull snippets. Here is the source so that you can read it for yourself:

Drucker, Jesse. 2010."Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes." Bloomberg (21 October).

Friday, October 22, 2010

A Very Small Step

The 4% solution proposed by Tim Geithner—countries should try to keep their current account surpluses or deficits within 4% of their GDP—offers the glimmer of a beginning of a first step toward rectifying global imbalances. In its own terms, the proposal is largely empty: it is strictly advisory, and it doesn’t specify how the goal is to be achieved. Nevertheless, I feel a little twinge of optimism. Something is beginning to stir.

Global imbalances have been a threat to economic stability for decades, going back at least to the 1970s. We had a crisis in 1982, and then another in the late 90s, and now the current crunch, all attributable to the absence of any institutional or structural force capable of keeping trade and capital flow imbalances within reasonable limits. The scramble for unconstrained external surpluses, or to avoid unconstrained external deficits, has resurrected mercantilism as a dominant philosophy of development, and it exerts intense downward pressure on environmental and social standards. (This pressure shows up as a failure to raise standards as much or more than as a propensity to weaken them.) It’s a central problem that cries out for a solution.

The benchmark isn’t it, but it at least puts the question on the table. Perhaps the realization will dawn that a modification of the international economic architecture to keep imbalances within limits is worth some effort. How this could be implemented is a topic for investigation and debate: how much can we rely on automatic exchange rate triggers, capital control safety valves or tradeable import quotas? How to get the most stability with the least distortion? The bland suggestions in Geithner’s message (“increase/decrease your savings rate”) have little to offer in this respect.

Economists don’t have to wait for the politicians to lead; they can begin thinking now about how to construct mechanisms that can keep imbalances within safe limits.

Thursday, October 21, 2010

Denial on Two Fronts, Climate and Keynes

This morning’s New York Times, without any apparent irony, gives us two front page stories in which science and empiricism are rejected in the name of political ideology. One, the refusal of Tea Partiers to accept climate change, is treated with humor and a whiff of incredulity; the other, the rejection of any coherent macroeconomics on the part euro-austerians, is offered with more respect.

Take the first case. Candidates and activists marching under the Tea Party flag are quoted as saying that climate change is unproved, a hoax perpetrated by those who want to impose global socialism. The religious angle is played up:

“It’s a flat-out lie,” Mr. Dennison [a Tea Party activist in Indiana] said in an interview after the debate, adding that he had based his view on the preaching of Rush Limbaugh and the teaching of Scripture.

The final word is given to another founder of a local Tea Party organization:

“Being a strong Christian,” she added, “I cannot help but believe the Lord placed a lot of minerals in our country and it’s not there to destroy us.”

Yes, God is like the tooth fairy, leaving oil and coal under our pillow as an expression of pure love. God especially loves the Saudis. (I’ll bet that, if this woman ever gets cancer, she will say that God is testing her. Maybe God is testing the human race by giving us an environmental “disease” that can be cured only by self-restraint. Don’t quote me on this.)

Meanwhile, a few inches north in column five, we are told about the wholesale rejection of Keynesian demand management by European political leaders. For them, the problem is budget deficits, not unemployment or stagnant economies. England’s budget, due to be slashed by almost 20% by the new ToryLib government, is described as “bloated”. A few “liberal” economists, like Brad DeLong and Joe Stiglitz, are left to wail in the wilderness.

What is missing from the economic story, however, is any recognition that there are accounting identities that define reality for all economies, whatever their political leaders may want to believe. The one that matters right now is that the change in net private debt plus the change in public debt plus the surplus on the current account must sum to zero. Austerians who are keen to reduce fiscal deficits must believe that this will be counterbalanced by either less deficit reduction by the private sector or by a big increase in net exports by everyone, all at once (in our trade with Mars, I guess). In other words, holding the trade balance constant, you can’t get net debt reduction in one part of the economy (banks and households) without permitting more debt somewhere else (government). This isn’t about Keynes, it’s about the iron grip of arithmetic on the realm of the possible.

Which means that the fiscal Kool-Aid conservative governments in Europe are gulping down these days has a lot of tea mixed in.

Tuesday, October 19, 2010

In Memory of Benoit Mandelbrot

I would have posted on the death of mathematician Benoit Mandelbrot on October 14 sooner, but my mother died on Oct. 8, and I have been completely absorbed with that until now (she is buried and all that).

Anyway, I think he was enormously important and deserved the Nobel Prize in economics. While one can see it implicit in not empirically sound work of Pareto in the 1890s and in Lotka and Zipf on city size distributions in the 1940s, it was Mandelbrot writing on cotton prices in the early 1960s who first recognized the phenomenon of fat tails in asset markets, which are ubiquitous in fact, and also linked these with the concept of fractals and fractal dimensionality, which has since become enormously influential and widespread across many disciplines, although the first fractal set was the Cantor Set, discovered by Georg Cantor in 1883.

I met Mandelbrot on several occasions and found him to be enormously impressive. He did have an enormous ego (and also the largest head I ever saw on anybody), but he was one of those people who had some grounds for his egotism. As most probably know, his career was very unconventional, and he was only offered an academic position when he was quite old (a special professorship at Yale), after he worked for many years at IBM.

In terms of current issues and debates, Mandelbrot was one of those along with Taleb who was warning for some time that we were likely to have a major crash of the financial system. More recently, John Cochrane invoked him in an effort to defend the Chicago School people from charges that their conventional financial market models that assume Gaussian normal distributions were partly responsible for the problems were not all that they believed. He pointed out that his father-in-law, Eugene Fama, had once been a follower of Mandelbrot, and therefore anyone who studied with Fama knew about fat tails, although Fama had fallen out with Mandelbrot over a technical issue (do variances vanish asymptotically; Fama was right that they do not but then dropped the ball by failing to notice that fourth moments, kurtosis, that is fat tails, do appear to vanish that way, making Mandelbrot right in the big picture).

Of course, when I went to look at Cochrane's big grad textbook, Asset Pricing, fat tails, kurtosis, and so on, much less fractals or power law distributions. do not appear in it at all. So, maybe Cochrane knew about fat tails, but he was not about to let anybody else know about them.

In any case, I think Mandelbrot was one of the few genuine geniuses writing about economics, although it was not his primary field of interest. His death is a great loss.

Sunday, October 17, 2010

Privatized Education Fraud: Stripping to Pay Tuition

Bloomberg Businessweek has done a good job of tracking the scandal of privatized colleges. I will post another piece in which the magazine describes these "colleges" peddling education in homeless shelters, knowing that the Feds will cover the inevitable defaults.

Hechinger, John. 2010. "What's This Degree Worth?" Bloomberg Businessweek (9 August): pp. 66-69.
Carrianne Howard dreamed of designing video games, so she enrolled in a program at the Art Institute of Fort Lauderdale, a for-profit college part-owned by Goldman Sachs. Her bachelor's degree in game art and design cost $70,000 in tuition and fees. After she graduated in December 2007, she found a job that paid $12 an hour recruiting employees for video game companies. She lost that job a year later when her department was shuttered. These days, Howard, 26, makes her living in a way that doesn't require a college diploma: by stripping at the Lido Cabaret, a topless club in Cocoa Beach, Fla. "I didn't know what else to do," she says. "I've got a worthless degree. It's like I didn't attend school at all".

"Like many investors, Goldman, owner of 38 percent of the Art Institute's parent, Education Management Corp. was drawn to for-profit colleges by their rapid growth and soaring stock prices. Now Goldman, which recently agreed to pay $550 million to settle U.S. civil-fraud charges related to the subprime mortgage meltdown, is invested in an industry under attack from Congress, the Obama Administration, and dissatisfied students. This week the Senate held a hearing featuring a Government Accountability Office undercover probe that found recruiters at EDMC's Argosy University in Chicago and 14 other for-profit colleges misled investigators posing as potential students about the cost and quality of their programs. Near their peak in April, Goldman's shares in EDMC were worth $1.39 billion. Since then they've fallen by 42 percent, to about $800 million."

"A proposed government crackdown could have a disproportionate effect on EDMC. The U.S. Education Dept. could restrict taxpayer-funded grants and loans to for-profit colleges like EDMC that offer $50,000 associate's and $100,000 bachelor's degrees in such low-paying fields as cooking, art, and design. Until recently the education business looked like a bonanza for Goldman. Pittsburgh-based EDMC, the second-largest U.S. chain of for-profit colleges after Apollo Group's (APOL) University of Phoenix, has 136,000 students -- more than three times as many as the University of Michigan. Its annual revenue doubled over the last five years, to $2.4 billion. Goldman and two other firms bought EDMC in 2006 and took it public in 2009. Along the way they shared at least $70 million in advisory, management, and other fees, according to securities filings. Goldman also became EDMC's biggest stockholder."

"Government grants and loans to students, combined with booming enrollment, have made for-profit colleges a rewarding investment. Federal aid to for-profit colleges jumped to $26.5 billion in 2009 from $4.6 billion in 2000, according to the Education Dept. EDMC currently receives almost 82 percent of its revenue from federal financial aid programs."

"On July 23, the Obama Administration proposed restricting -- and in extreme cases, cutting off entirely -- programs whose graduates end up with the highest debts relative to their salaries and have the most trouble repaying their student loans. EDMC will be affected more than most other for-profit companies because of its focus on "passion" fields, such as art and cooking, rather than more practical accounting or business degrees, says Jeffrey M. Silber, an analyst with BMO Capital Markets in New York. Cooking, fashion, and arts jobs tend to have low starting salaries: A beginning cook, for example, earns an average of $18,000 a year, according to U.S. Bureau of Labor Statistics data, while a two-year culinary degree can cost $40,000 to $50,000. EDMC spokeswoman Jacquelyn P. Muller says Art Institute students tend to earn more, with those holding culinary degrees starting at $28,000."

"EDMC also faces complaints from its own graduates and employees. A lawsuit filed in Texas state court by 18 students alleges they were misled about the accreditation status of their program, diminishing their degrees' value and leaving them with debts they can't repay. In another suit a former admissions officer claims the company engaged in high-pressure sales tactics, paying staff to sign up students. In July, dozens of faculty who tried, unsuccessfully, to form a union at one Art Institute campus complained that unqualified students were being let into their classes.

"Like some of its students, EDMC has substantial debt. In 2006, Goldman Sachs, Providence Equity Partners, and Leeds Equity Partners borrowed $2 billion when the group purchased the company for $3.4 billion, taking it private in a leveraged buyout. Goldman, which made the investment through GS Capital Partners, a" private-equity fund that uses money from Goldman and outside clients, took EDMC public again last October. The company has reduced its debt to $1.53 billion.

"The debt from the acquisition changed the culture of EDMC, according to Robert T. McDowell, who retired as EDMC's chief financial officer shortly after the buyout. Before the acquisition, McDowell says he and other executives resisted calls from Wall Street analysts to pursue growth opportunities that" could undermine academic quality. "You take on that amount of private-equity debt, you need to earn high rates of return for these investors," says McDowell, who worked at the company for 18 years. "I was worried that the quality of the experience for employees and students was going to deteriorate."

"At the New England Institute of Art in Brookline, Mass., administrators show off classes averaging 16 students using new computers and the latest software in the animation program. The school has a $500,000 sound studio, a 14,000-volume library, and a student-run art gallery.

"In its promotional materials, EDMC highlights graduates such as Jonathan Lukason, who received his bachelor's in audio and media" technology in 2008 from New England and has worked as a freelance audio engineer for NBC (GE) and ESPN (DIS). In an interview, Lukason calls the institute's program "the best one around." Still, Lukason complains, he earned $25,000 in his first year out of school, and he is struggling with $55,000 in student loans. "At this rate, I'll be dead before I pay it off," he says."

"To sell students on degrees, EDMC de-emphasized their costs and offered sales incentives to employees for signing up prospects, says Brian Buchanan, a former admissions officer whose lawsuit against EDMC was unsealed in May. Top producers won spots in the "President Club," which entitled them to trips to foreign beach" resorts, gift cards, and iPods, according to Buchanan's suit, which was filed in 2007 in U.S. District Court in Pittsburgh. Buchanan, a former waiter, worked as an admissions representative for EDMC's South University online from December 2005 until May 2007.

"In an interview, Buchanan said EDMC gave admissions staff a matrix showing them how much money they would make for each enrollment. Generally, each student was worth $800, he said. To recruit" students, EDMC told employees to use the "bring the pain" sales tactic, according to his lawsuit. For example, a single mother would be told, "How are you going to explain to your children that you cannot buy them the things they need because you couldn't be bothered to finish your education?" the complaint says. Buchanan's case is a whistle-blower suit that seeks to recover damages on behalf of the federal government with the plaintiff keeping a share. In a Securities & Exchange Commission filing, EDMC said the claims are "without merit."

"In July, instructors at the Art Institute of Seattle raised" questions about EDMC when they tried to join the American Federation of Teachers. The union lost in a 48 to 64 vote. Instructors objected to high-pressure marketing to students to take out loans they couldn't afford, says Sandra Schroeder, president of the AFT in Washington State. The institute encourages faculty to give passing grades to students who aren't making progress, she says, so the school can keep collecting federal aid money. EDMC administrators take the allegations seriously and "respect and promote the principles of academic freedom without fear of repercussion or interference," Muller says.

"Students also object to EDMC practices. Argosy University in Dallas falsely told applicants to the clinical psychology doctoral" program that the institution would get accredited by the American Psychological Assn., 18 former students claim in a lawsuit filed in Dallas County District Court last year. Stephanie Capalbo, one plaintiff, moved from suburban New York City to go to the Texas university. In an interview, Capalbo, who got her doctorate in 2008, says officials told her the school was in the process of getting accreditation, which it still hasn't achieved. Capalbo says she now owes about $130,000 in government loans for Argosy tuition and fees and another $150,000 in private loans for living expenses. Her payments are $1,500 a month, draining the $60,000 the 29-year-old makes each year working for a nonprofit that evaluates children for foster care in New York. Many" employers turned her down for higher-paying jobs because she lacks a degree with APA accreditation, she says. "I love being a psychologist, but I have a family," she says. "I'll be working the rest of my life to pay off these student loans. It's an unbearable debt."

"EDMC spokeswoman Muller says the allegations in the lawsuit against Argosy are "unfounded" and that APA accreditation isn't required for graduates to become licensed as clinical psychologists in most jurisdictions, including Texas. Argosy hasn't submitted an application to the APA and continues to prepare for the accreditation process, which takes time because of the data required, Muller says. She adds that colleges can't control the amount of debt that a student takes on.

"Carrianne Howard, the Florida student, didn't borrow for her education. Instead her parents paid roughly $70,000 in tuition bills. Her mother, an airline data analyst, and her father, a computer engineer, sold their California home and moved to Virginia after her father lost his job and her mother retired." They used money from the sale to pay for tuition, and her parents are now struggling financially, Howard and her mother say.

"Howard grew up in Valencia, Calif., a suburb of Los Angeles, and became drawn to video gaming during high school. One afternoon in 2004, an Art Institute ad popped up on her PC. "I was as excited as can be," she says. "I thought it was a dream come true." She and her mother toured the Fort Lauderdale campus, a bright, modern three-story building flanked by reflecting pools and palm trees." Her tour guide "just made it sound really exciting and a lot of fun, like I was going to make hundreds of thousands of dollars," Howard says. EDMC schools train representatives to make "no promise, implication, or guarantee" about employment, Muller says.

"A couple of years into her studies, Howard says she grew disenchanted. Some classes consisted largely of playing video" games, she says. She wanted to drop out but her mother insisted she finish because the family had spent so much already. She graduated in December 2007; in March 2009 she lost her first job, at GameRecruiter, a Fort Lauderdale-based gaming industry employment agency where she was making $12 an hour. Marc Mencher, GameRecruiter's president and CEO, says she was let go only because he closed down her entire department, and calls her "an exceptional performer."

"She may be struggling to find work in part because of inadequate preparation from the Art Institute's gaming department, Mencher says. "It's a weak program because it's understaffed," says" Mencher, who serves on the Art Institute's national advisory board for gaming programs. "I personally feel the students aren't getting their money's worth." After Bloomberg Businessweek asked EDMC for comment, Mencher sent a follow-up e-mail, saying that although the Art Institute is "not perfect and they have issues like any organization," it is "an excellent program built on input from respected industry professionals along with local employers." It has an "outstanding placement" record for graduates, he said.

"Howard applied for dozens of jobs, not only in gaming but also in grocery stores and nursing homes, mostly for minimum wage, she" says. In October 2009, Howard turned to adult entertainment by doing paid Web chats. In March she started dancing at Lido Cabaret, earning $400 to $1,000 a week, she says.

"She now hopes to save enough to go back to college and get a business degree. As she considers returning to school, Howard also helps run an anti-Art Institute website, where she has collected more than 70 names in a petition to send to the U.S. Education Dept.

"The private, nonprofit Florida Institute of Technology, where Howard would like to enroll, won't accept any of her credits from" EDMC, according to spokeswoman Karen Rhine, because the Art Institute doesn't have the kind of accreditation the traditional college requires. In its school catalog and other documents, the Art Institute "does not imply or guarantee" that credits will transfer to other universities, says EDMC's Muller.

"At 1 a.m. on a recent weeknight, Howard finished a shift at Lido. "This is what I do," she says. "When I'm in here, I try not to think about the Art Institute"."

Thursday, October 14, 2010

Why Greg Mankiw's taxes must be increased!

In the Sunday Times, Mankiw whines about how Obama's desire to let the Bush tax cuts for the rich expire reduces his incentives to take on extra work - such as, presumably writing obnoxious right-wing op-ed pieces in the Sunday Times. What is the down-side: more revenue and less drivel!

Wednesday, October 13, 2010

The tip of the Diamond iceberg

I have long thought that Diamond deserved a Nobel. His work, though, is wide-ranging and is not at all confined to what he was cited for - search theory and the labor market. His 1965 paper, "National Debt in a Neo-Classical Growth Model" is a wonderful paper, absolutely canonical. He adds capital to Samuelson's Pure Consumption Loans model (the Overlapping Generations model). Even in the area of labor markets, one of his papers - sorry I don't have the cite to hand - uses search theory and the idea of what have come to be called thick-market externalities to build a macro model with multiple Pareto-ranked real equilibria- a very important paper in that branch of the "new Keynesian" literature - unfortunately the less well-known branch- that did not focus on "sticky prices" as the root of all macroeconomic evil.

Tuesday, October 12, 2010

Social Security Freeze?

Matt Sedensky seems to think the government has decided to reduce the real value of Social Security checks given his title “Senior citizens brace for Social Security freeze”:

Seniors prepared to cut back on everything from food to charitable donations to whiskey as word spread Monday that they will have to wait until at least 2012 to see their Social Security checks increase. The government is expected to announce this week that more than 58 million Social Security recipients will go through a second straight year without an increase in monthly benefits. This year was the first without an increase since automatic adjustments for inflation started in 1975."I think it's disgusting," said Paul McNeil, 69, a retired state worker from Warwick, R.I., who said his food and utility costs have gone up, but his income has not. He lamented decisions by lawmakers that he said do not favor seniors.

There has been no recent decision by lawmakers to freeze nominal Social Security benefits. As our graph shows, the consumer price index for August 2010 is actually lower than it was in July 2008. So if CPI properly measures the cost of living – then seniors have received a slight increase in real income. Some prices may have increased while others have decreased. And perhaps food and utility for some seniors carry a higher weight in their own budgets than the typical consumer. But if that is the argument that Mr. Sedensky wants to make – then he should make that case well before the end of his article:

Advocates for seniors argue the Consumer Price Index doesn't adequately weigh the costs that most affect older adults, particularly medical care and housing. "The existing COLA formula does not account for the economic reality of the true costs that most seniors faced," said Fernando Torres-Gil, director of UCLA's Center for Policy Research on Aging and the first person appointed to the governmental post of assistant secretary for aging, during the Clinton administration.

Even here – I have a problem with what Mr. Sedensky writes. According to the Bureau of Labor Statistics, energy prices have dropped dramatically over this period. It is true that the food price index has increased slightly. Over the same period, the housing price index has declined slightly. The medical price index, however, has increased by 6.8 percent. OK, seniors who budgets are heavily weighted towards the cost of medicine may have to make cutbacks.

Update: Thanks to Econospeak reader JWMason who asks us to check the CPI-E, which is discussed here:

The Bureau of Labor Statistics (BLS) also calculates an experimental price index for Americans 62 years of age or older (often called the CPI-E). This article reviews price changes seen in the experimental CPI-E from December 1997 through December 2009 and reiterates the methods, sources of data, and limitations of the experimental index described in earlier articles. Over the 12-year period from December 1997 through December 2009, the experimental CPI-E rose 36.1 percent. This compares to increases of 33.9 and 33.8 percent for the CPI-U and CPI-W, respectively … The relative importance data for the CPI-E and the CPI-U and CPI-W populations show that older Americans devote a substantially larger share of their total budgets to medical care (see Table 1). In addition, for each population group, medical care prices rose more rapidly than the overall (all items) index during each of the eight years studied. For this reason, the medical care component accounts for a significant portion of the difference between the higher rate of increase measured for the CPI-E relative to the two official population groups during the 1998-2009 period … The CPI-E, reweighted to incorporate the spending patterns of older consumers, behaved more like the CPI-U than the CPI-W. This was expected, because the CPI-U includes the expenditures of all urban consumers, including those 62 years of age and over. The CPI-W, however, is limited to the spending patterns of wage-earner and clerical families and, therefore, specifically excludes the experience of families whose primary source of income is from retirement pensions. Finally, the medical care component of the CPI has a substantially larger relative weight in the experimental population compared to the CPI-U or CPI-W. As a result, the medical care component tends to have a larger effect on the elderly population than it does on the other two indexes. Other differences also play an important role, however, such as the greater weight of homeownership in the CPI-E.

So why not index on CPI-E rather than CPI-W?

Excessive Executive Compensation?

U.S. Supreme Court, Rogers v. Hill, 289 U.S. 582 (1933), Rogers v. Hill, No. 732, 289 U.S. 582

"While the amounts produced by the application of the prescribed percentages give rise to no inference of actual or constructive fraud, the payments under the bylaw have by reason of increase of profits become so large as to warrant investigation in equity in the interest of the company. Much weight is to be given to the action of the stockholders, and the bylaw is supported by the presumption of regularity and continuity. But the rule prescribed by it cannot, against the protest of a shareholder, be used to justify payments of sums as salaries so large as in substance and effect to amount to spoliation or waste of corporate property."

Monday, October 11, 2010

Greenspan Thinks Stimulus is a Dangerous Game

Bloomberg has Alan Greenspan’s remarks on tape as he compares US fiscal policy to that of Greece. Does the former FED chairman know how modest interest rates are? Let alone the current amount of economic slack in the US economy. Of course, that will not stop the Party of No from citing Greenspan as the all-time expert on the US macroeconomy.

Search Theory Gets a “Nobel”

The “Nobel” economics prize has just been awarded to the trio of Diamond-Mortensen-Pissarides (DMP) for their work on search theory, the most influential theoretical trend in labor economics. (The quotes around “Nobel” signify the non-Nobelian history of this prize.)

Others are far more qualified than I am to discuss the larger significance of their work. I’ve been interested in one aspect: its implications for the concept of full employment. In the days before search theory, one standard story went like this:

The labor market is like other markets in the sense that market-clearing occurs when there is neither excess supply nor excess demand. The difference is that there is great heterogeneity of jobs and workers, and information is often murky. The result is that, at any moment, there are many jobs looking for appropriate workers and many workers looking for appropriate jobs. Taken together, these reflect structural and frictional unemployment.

It can all be viewed in terms of a Beveridge Curve, with the number of unfilled jobs (vacancies) on the vertical axis and the number of unemployed workers on the horizontal axis:

The 45º line represents equal numbers of vacancies and unemployed workers, therefore no excess demand or supply in the aggregate. Its intersection with the B-Curve determines the level of unemployment that should be viewed as “full employment” for any particular economy. This full employment level can be lowered by making the labor market more efficient, through job training programs (to reduce structural unemployment) and information and referral systems (to reduce frictional unemployment).

A very different story, about inflation and the “natural rate” of unemployment, largely displaced this one, but I won’t go there now.

So back to the B-Curve. Along came D-M-P, and especially M-P, and we got a new definition of full employment. The 45º line, we were told, is arbitrary. Why should equal levels of vacancies and unemployed workers signify labor market equilibrium? On the contrary, we should pay more attention to the microstructure of labor markets. Two factors in particular intrude, the relative flows of workers and jobs into the market and the relative ability of workers and employers to locate a suitable match. Equilibrium occurs, it was asserted, at the ratio of vacancies to unemployed workers which, given these factors, will be stationary over time, ceteris paribus.

Consider a different B-Curve:

Unlike the other, this one isn’t symmetrical. Its shape suggests that the economy is “biased” toward higher unemployment; this can be because the “steady-state” flow of workers exceeds the corresponding flow of job openings, or because workers are less efficient at finding jobs than employers are at finding workers. A flatter line, at an angle significantly less than 45º, represents a ratio of vacancies to unemployed workers less than one-to-one; this ratio will remain constant given the underlying determinants of the B-Curve. Its intersection with the curve gives us the true level of full employment.

I never got it. (a) Why should a steady-state criterion represent either equilibrium or a normative goal for labor market performance? This would make sense if we lived in a steady-state world, but we don’t. The analysis is simply a snapshot, and what would be impossible if we had to sustain it for all eternity can be entirely possible if it occurs for only a few quarters. In particular, I would want to see worker and employer behavioral response functions that could be estimated with real-world data before I would draw any conclusions about what point on the B-Curve should be viewed as an equilibrium. (This goes for the “naive” 45º line story too.) Here, for instance, is where efficiency wage theory would come in. (b) The flows highlighted by search theory are themselves sensitive to cyclical influences. Workers are responding to today’s dismal labor market, for instance, by withdrawing from search and, in some cases, by choosing non-work alternatives, like more education (good) or giving up on personal ambition (bad). Over time, there is hysteresis. Job flows are influenced not only by immediate demand considerations, but also by delayed or discarded investment plans, another form of hysteresis. This may not affect the positive side of the story (equilibrium), but it should definitely change the normative spin we give to it.

As for myself, I remain agnostic. I accept the critique of the 45º line, and I don’t assume that the goal of macropolicy should be to equalize labor and job offers. I don’t think search theory has given us an adequate replacement, either. Maybe the best we can do at the moment is to benchmark our current performance against recent time periods when labor markets were in more acceptable shape—for instance, the late 1990s. By any reasonable standard, a greater than five-to-one ratio of unemployed workers to job vacancies is simply abysmal and refutes the claim that it is the position of the B-Curve (structural unemployment) that ails us rather than our position out at the far southeastern tail (deficient demand).

Thursday, October 7, 2010

Economics, Ethics, and the Good Life

I just gave this lecture regarding the decoding of economics. The subject matter was different from any other I have given. I describe how the subject mutated with the changing needs of the ruling classes. The audience included the public at large, students of economics, philosophy, and other subject. The first couple sentences were directed at the way that I was introduced.

Climate Science: Prepare for Increasing Uncertainty

Environment 360, a very useful online magazine, has a new article by Fred Pearce that explains why the next IPCC assessment (AR5) will tell us that the consequences of living with climate change will be even more uncertain than they predicted back in ‘07. Part of this is due to external pressure on IPCC to express uncertainty more honestly than they have in the past, and part is the result of including more feedback processes whose magnitude, and even direction, is not well understood.

Pearce worries about the political fallout from this trend: how will the public respond to the argument that, the more science advances in this field, the less confidence there can be in any particular prediction? I agree, and I think economists are going to have to rethink how they represent the economics of climate change. Point estimates of damages (expected benefits of mitigation) become less relevant to policy as error bars widen; rather quickly, as Weitzman and others have argued, the uncertainty itself becomes the story. Mitigation needs to be seen not as an investment, justified on cost-benefit grounds, but as insurance. What price are we willing to pay to reduce the extreme risks that the next report will include as within the realm of possibility?

Wednesday, October 6, 2010

Cuccinelli's Baaaack!: Witch Hunt, Part Two

"Witch Hunt, Part Two" is the title of the lead editorial in today's Washington Post, regarding the report that Virginia Attorney General, Ken Cuccinelli is not taking "no" for an answer in his effort to hound climate science researcher, Michael Mann, for his 1998 "hockey stick" paper, along with the University of Virginia. Following up on the narrow window of opportunity left by the court, he is investigating Mann again for the one grant he got from the Commonwealth of Virginia, supposedly to detect fraud, which Mann got for a study on "the interaction of the land, atmosphere, and vegetation in the African savannah," which has nothing to do with his hockey stick paper (which was cited in the grant application, giving Cuccinelli his thin shred of opportunity).

Beyond the earlier subpoenas to U.Va. (which is resisting all this), Cuccinelli now wants in addition all emails between Mann and 39 other scientists. The sign of what he is really after is that none of these include the two co-applicants on the grant in question. This is even a worse fishing expedition than the previous one, given that both the National Academy of Sciences and Penn State (Mann's current location) have absolved him of any wrongdoing, even though there are debates over how good his statistical methodology in the original 1998 paper was (which he has changed in subsequent research anyway). I also note that so far, U.Va. has spent $214,700 defending itself from Cuccinelli's earlier investigation, while Cuccinelli has himself spent $350,000 so far on this, with more to come during a period of supposed budget austerity. Of course, supposedly Cuccinelli is the legal defender of the University of Virginia, hack, cough.

There is a lot more I could say here, but I suspect my position on all this is obvious and well known, given that I have blogged on this matter previously. However, I fully agree with all the broader arguments the WaPo editorial brings up regarding this totally appalling matter.

Tuesday, October 5, 2010

Feldstein and the President Publicly Clash Over Ending Tax Breaks for the Wealthy

John McKinnon reports on a public debate between the President and two of his outside advisors – Martin Feldstein and William Donaldson – over the President’s proposal to let the Bush tax cuts for the wealthy expire:

When Harvard professor Martin Feldstein’s turn came to talk, he suggested continuing the current tax rates for two years for everybody, then ending them. He said that course would bolster demand at a time when the economy is weak, and also would reduce the long-term federal debt that Obama projects. When Harvard professor Martin Feldstein’s turn came to talk, he suggested continuing the current tax rates for two years for everybody, then ending them. He said that course would bolster demand at a time when the economy is weak, and also would reduce the long-term federal debt that Obama projects. William Donaldson, a former chairman of the Securities and Exchange Commission, then offered similar suggestions, saying that confusion over future tax policy is adding to business uncertainty.

The President needs better advisors than this. Donaldson’s argument that business uncertainty is retarding economic recovery strikes me as Tea Party propaganda but then Donaldson is not an economist. Feldstein is. The difference between the President’s and Feldstein’s policy positions centers on whether we should extend the tax cut for the wealthy for another two years. Does Dr. Feldstein really believe that a temporary tax cut for the wealthy significantly increases consumption demand? I’m sure most of his students at Harvard have heard of the life-cycle model of consumption and the Barro-Ricardian equivalence proposition!

Sunday, October 3, 2010

Finance Capital vs. a Productive Economy

To celebrate the closure of TARP, I just posted a video on finance capital versus a productive economy. Any comments will be appreciated. I apologize that did not feel very spontaneous in my presentation.

Saturday, October 2, 2010

The Wonders of Private Equity

No comment needed

Creswell, Julie and Peter Lattman. 2010. “Private Equity Thrives Again, but Dark Shadows Loom.” New York Times (29 September) Dealbook Special Section: p. 1.

“This summer, executives from the New York-based private equity firm SK Capital traveled to Houston to celebrate the first anniversary of their acquisition of a nylon manufacturing business. Soon they will have a bigger reason to uncork the Champagne. The nylon manufacturer has announced plans to issue about $1 billion in debt, of which $922 million will be used to pay a dividend to SK. For SK, which paid $50 million in cash for the business, that is an astonishing almost 18-fold return in a little more than a year.”

Friday, October 1, 2010