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.

http://dealbook.blogs.nytimes.com/2010/09/29/private-equity-thrives-again-but-dark-shadows-loom/?ref=business

“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.”

Michael Perelman's Analytical Biography

It probably needs some polishing.  Suggestions welcome.

http://michaelperelman.wordpress.com/an-ideological-biography/

The Home in the Valley

A personal story published this week. How Americanised Australians are. We were all the way with LBJ during the Vietnam War. Conscription, street protests and all.

Pledge to America: Short-term Fiscal Restraint and Long-term Fiscal Folly

Michael Ettlinger and Michael Linden focus on the fiscal folly part of the Pledge:

The “Pledge to America” budget would mean $11.1 trillion in deficits over the next 10 years. By 2020, the federal budget deficit would be 6.3 percent of gross domestic product, the federal debt would exceed 93 percent of GDP, and interest payments on the debt would be more than $1 trillion a year. The budget deficit would be about $200 billion larger in 2020 under the “Pledge to America” plan than it would be under President Barack Obama’s budget, and over the next 10 years deficits would be $1.5 trillion higher than under the president’s budget. The substantial increase in deficits under the “Pledge to America” budget are due to the significant tax cuts that come from extending all expiring tax provisions and the implementation of several new tax cuts. Altogether, tax revenues under the “Pledge to America” plan would average 16.7 percent of GDP. During the last period the federal government ran balanced budgets revenues averaged 20 percent of GDP. The document claims that these cuts will be offset by spending reductions, but their proposals for these reductions add up to significantly less than their revenue cuts. The vast bulk of these spending cuts are achieved through what are described as “hard caps,” but they provide little detail as to what programs would be cut. The “Pledge to America” also includes a repeal of the Affordable Care Act. But since the ACA reduces deficits over the next 10 years, repealing it increases the deficit as well.

Also take a look at their chart which shows how the deficit would be larger under the Pledge after 2012 but smaller over the next couple of years. In other words, the Pledge has fiscal policy all backwards. We need more short-term fiscal stimulus in the short-run with fiscal restraint after we get back to full employment. Which is why the Pledge’s promise to create new jobs is just stupid from an economic perspective!

Summers Over

It’s Sept. 22, and I’m looking at the news about the departure of Larry Summers from the White House. I agree with most commentators on the left that Summers was a disaster for the country and the Democratic Party. He used his aggressiveness and the confidence Obama placed in him to narrow the range of options given consideration—already well reported in the case of the undersized stimulus, and to be reported in the future on financial reform. (I’m guessing at this, but only a little.) He contributed mightily to the miasma of disappointment that surrounds Obama and encourages the paleolithic right.

I wish I could say that policy post-Larry looks to improve, but it doesn’t. By all indications, Summers faithfully reflected Obama’s own economic predilections, and the next economic team will probably follow down the same path. From a PR point of view, it may matter who the public faces are, but I see no reason to expect a significant mid-course correction. I really, truly hope I’m wrong.

Incidentally, I never got the bit about Summers’ “brilliance”. (Try googling “Larry Summers” and “brilliant”.) I saw him in action only once, on an AEA panel, and, while he was very quick and sure of himself, his comments were not particularly insightful. I’ve read a number of his papers, and I think he’s competent, but his work generally lacks the element of aha-ness I associate with brilliance, as opposed to just getting the job done. Economists often seem smarter than they really are to the general public, because they are so well-schooled in a narrow, formulaic intellectual framework. They have fast answers that are clever, often technically sophisticated, and seem to tie up all the loose ends. In the lingo of an older style of scholarship, mainstream economics offers a “premature totalization”, and the appearance of brilliance without the substance.

Nightmare On Elm Street Ticket: Palin And O'Donnell

It just occurred to me, two peas in a pod, and with the witchcraft and all too.

Climbing Out of a Very Deep Hole

As AP reports the National Bureau of Economic Research has deemed that the Great Recession ended in June 2009. While it is true that real GDP has inched upwards over the past 4 quarters, real GDP as of 2010QII was only $13,191.5 billion per year as compared to $13,363.5 billion as of 2007QIV. With 2007 witnessing a growth rate that was less than 2 percent and with negative cumulative growth since then – we are far below full employment today. AP also reports that the President isn’t exactly celebrating this NBER announcement:

President Barack Obama saw little reason to celebrate the group's finding that the recession had ended. Appearing at a town-hall meeting sponsored by CNBC, Obama said times are still very hard for people "who are struggling," including those who are out of work and many others who are having difficulty paying their bills. "The hole was so deep that a lot of people out there are still hurting," the president said. It's going "to take more time to solve" an economic problem that was years in the making, he added.

The problem, however, is that we still don’t see any bold and significant policy measures that would get us out of this deep hole.

Crass

This morning’s New York Times has an article about historic preservation in Italy: because of a shortage of funding, municipalities are renting out public buildings as billboards. Advertising revenue finances restoration, but at the cost of destroying the character of the country’s piazzas and palaces.

Here’s what I saw a couple of weeks ago in Turin. The photo was taken on the main square in the center of town; the building is the Palazzo Madama, an architectural gem. Its facade is draped by fabric to cover up the restoration work being performed on it. But note the ad—not only its size, but who it’s for: Mediaset, the TV empire owned by Silvio Berlusconi.

Dr Doom Does A Doo Doo

In yesterday's WaPo, accessible as one of Mark Thoma's general links, http://www.economistsview.typepad.com , Nouriel Roubini sounded very reasonable for anyone addressing the utterly corrupt and degraded "catfish" deficit commission soldouts. He proposed a cut in payroll taxes, to be made revenue neutral by following through on the Bush-mandated end of his own tax cut for those earning more than a quarter of a million a year. He then proposes, absurdly unrealistically, that if his favored payroll tax cut were to be actually implemented, in a couple of years it would be rescinded. Well, kiddie-poos, anybody who thinks that the probability of such a tax cut once delivered being undone in a few years is greater than that the Bush tax cut for the rich will be undone by this Congress, well, there is this bridge in Brooklyn that I hear is for sale and I have access for selling...

So, I have great respect for good old Doctor Doom, but on this one he is a bit too far from Washington. His proposal sounds not too bad on paper, but in the real world it sucks. He is too far from Washington, and really just does not know what is going on. The bottom line is that for the foreseeable future social security benefits will be dependent on the revenues from the specific taxes set up to fund it, the boring old payroll taxes that he wants to "temporarily" cut. Sorry, Nouriel, but that ain't going to happen. The bastards will not undo that cut, and then they will come down with all their bought-out disgusting piece of shit commisssions to use that as an excuse to really seriously cut future social security benefits far beyond the abysmal one year increase in some future retirement age for eligibility the current catfish commish is pushing. Get it together, Dr. Doom; you are out out to lunch with this. Leave the recognized funding for social security alone, even if it is highly regressive. It is the deep key to the deepest social contract that American society from the New Deal has.

Dr.

Deep Poverty Deepens In US

Robert Waldmann at Angry Bear has reported that the Census Bureau reports for 2009 that the poverty rate in the US rose to 14.3% of the population, while the deep poverty rate, those under half of the poverty line in income, rose to 6.3%. This last number is the highest seen since stats on that began being recorded in 1975. The previous high was 5.9% in 1983 at the end of the Reagan recession, when the overall poverty rate was higher than in 2009 at 15.2%. Waldmann hypothesizes that the difference is the result of the welfare "reform" of the 1990s, which replaced AFDC with TANF. He also notes that few seem to have noticed this. Mark Thoma links to this and some related discussions at http://economistsview.typepad.com/economistsview/2010/09/poverty-and-redistribution.html#comments .

I do not know if Waldmann is right about the source of this increased share of the poor who are very poor or not, although it is reasonable that he is at least partly right. He notes that most observers declared welfare reform a "success" around 2000, and the issue was put to rest. But careful observers then understood that much of that had to do with the booming economy that allowed many of the people being tossed off welfare to get jobs, and that when a serious recession hit, the new hole in the social safety net (can't stay on TANF for more than two years) would show up in increased poverty. Well, that recession is now, and the result should not be all that surprising.

Waldmann wonders about the lack of attention to this development, whatever its cause. I suspect that this lack is due to the focus many have had on the upper end of the income distribution. There we have indeed seen what may seem to be more dramatic developments, a huge surge in the share of national income going to the top one tenth of one percent of the population. This has indeed been the most dramatic shift and is an important matter. But in terms of human suffering, this increased share of the population at the rock bottom of the distribution in the sub-poverty basement may be more important.

Economics Detox Program

Cassidy, John. 2009. How Markets Fail: The Logic of Economic Calamities (New York: Farrar, Straus and Giroux).

105: "In 1996, when I set out to research an article for The New Yorker about the state of economics, I came across a lot of unhappiness and criticism. The economics department at Morgan Stanley, for example, was refusing to hire any economics Ph.D.s unless they had experience outside of academe. "We insist on at least a three-to-four-year cleansing experience to neutralize the brainwashing that takes place in these graduate programs," Stephen S. Roach, the firm's chief economist, told me. "Academic economics has taken a very bad turn in the road," Mark Dadd, who was then the top economist at AT&T and the chairman or the National Association for Business Economics, said. "It's very academic, very mathematical, and it really doesn't -- I want to choose my words carefully here: it is nothing like as useful to the business community as it could be."

Tax Increases on the Rich Will Not Greatly Reduce Aggregate Demand

Timothy Homan reports on a recent analysis from Chris Cornell and Mustafa Akcay of Moody’s Analytics that confirms what those of us who have been preaching the policy implications of the Life-Cycle Model have suspected:

Give the wealthiest Americans a tax cut and history suggests they will save the money rather than spend it.

The two Moody’s economists also note that wealth effects from changes in the value of stock portfolios have important impacts on how much the well-to-do consume. I have to wonder if Harm Bandholz of UniCredit Global Research grasps any of this in light of the following:

Economist Harm Bandholz said discouraging the wealthy from spending could weaken the economy, something Republicans argue will happen if the Bush-era tax cuts expire. “Most of the consumption growth is coming from the higher- income groups,” said Bandholz, chief U.S. economist at UniCredit Global Research in New York. “The lower income groups, they are barely living hand-to-mouth.”

Duh! Consumption among the wealthy is up because the stock market has revived not because they got a tax break. And “living hand-to-mouth” is essentially facing borrowing constraints which represents an exception to the Life-Cycle Model. So tax cuts for the poor will have a larger impact on consumption than tax cuts for those who are not borrowing constrained.

Horan also relates this analysis to the political debate over tax policy.

A Reminder On 9/11 That Al-Qaeda Is Un-Islamic

Readers of this blog probably do not need to be reminded of this, but given all the recent surge of anti-Islamic hyseria in the US, it is useful to remember how far off some of the claims being made now are. As is often the case, Juan Cole provides some perspective today at http://www.juancole.com. He lists five things that al Qaeda has done or attempted that are simply against clear statements in the Qur'an and the Hadith: 1) There is to be no attempt to coerce anyone into becoming a Muslim (free choice is crucial), 2) Aggressive war is forbidden, only defensive war is allowed, 3) A "civil engineer" cannot declare war, it must be declared by a recognized community leader, which today would be a president or prime minister or monarch, 4) Non-combatants are not to be killed or hurt, 5) Sneak attacks are not allowed, war must be announced well ahead of time.

Go in peace all of you on this sad day.

July’s Trade Uptick: Underwhelming

The good news is that the Bureau of Economic Analysis reported yesterday that the US trade deficit decreased month-on-month from $49.8B to $42.8B in July. While monthly figures are intrinsically noisy and subject to later revision, we should be grateful for any shaft of sunlight.

Alas, on closer inspection there is little to be grateful for. First, of the $7B movement, about $4.2 is accounted for by a decline in imports. This would be fine if the US economy were growing, and the drop in imports represented expenditure-switching. The reality, however, is that growth in the US is sputtering at best, and that fewer imports reflect general weakness in spending.

The export side, which is truly critical not only to domestic recovery but also global rebalancing, is even more disappointing. Of the $2.8B increase, fully $2.3B are in civilian aircraft, an especially lumpy category.

All in all, not much to crow about.