Friday, December 31, 2010

Two Aces Of Spades In Windows Solitaire Deck: Definitely A Computer Glitch: Should I Stop Trusting Computers?

The above is a cropped screen shot of a Windows solitaire game I was playing Thursday (December 30, 2010) evening that shows a deck with two aces of spades. The game is running on a Dell laptop with Windows XP Professional, SP3 and all updates, and 2GB RAM. The solitaire game software is the original installed Microsoft game included with Windows XP.

On which ace do I put the two of hearts?

In over a decade of playing Windows Solitaire on various computers, I have never seen two of the same cards in a single game before.

I think it is such an odd curiosity, I just had to post it on my blog.

In some ways, it is frightening. We rely so much on government, business and personal computers these days to store our personal information, and do our computations. Imagine what could happen if one of those computers suddenly duplicated information from a file and stored it under another person's name or id number, or made occasional mathematical errors.

The systemic risk from our reliance and over reliance on computers is immense. Just like in the financial sector, where there is an element of trust that enables interactions to work smoothly, individuals, firms and governments trust the stored data and computations from computers. If that trust is weakened, economic and political activity will feel the negative effects of lost trust in our technological infrastructure. The prospect of lost trust in our technological foundation due to random errors is a huge systemic risk to commerce and we are unprepared to deal with it.


After a few more cards, there are five aces, two spades, one heart, one diamond and one club.

Wednesday, December 29, 2010

Securitization Not Obstacle To Modifying Mortgages

From Federal Reserve Bank of Atlanta, " Revisiting real estate revisionism: Concessionary mortgage modifications during the Depression" by Kris Gerardi, Research economist and assistant policy adviser at the Federal Reserve Bank of Atlanta and Chris Foote, senior economist and policy adviser at the Federal Reserve Bank of Boston:
Fortunately, a recent paper by Andra Ghent of Baruch College exploits a new data set to shed considerable light on this topic. Her findings argue against the idea that lender reluctance to modify is a recent phenomenon .... her findings ... bury the notion that securitization is the primary obstacle to renegotiation in the current foreclosure crisis. [Emphasis added.]

Governments Are An Unregulated Source Of Systemic Risks: Atlanta Fed

From the Federal Reserve Bank of Atlanta Center for Financial Innovation and Stability, "The Economics of Regulating Systemic Risk" by Gerald P. Dwyer:
After the 2007–2008 financial crisis, it is natural to suppose that private firms and people are the sources of systemic risk. But they are not the only sources and maybe not the main ones (Reinhart and Rogoff 2009). Recent events in Europe have made this point dramatically. The sovereign debt problems in Greece, Ireland, and elsewhere in Europe make it plain that governments can be the source of systemic risk. The increases in interest rates and credit default swap rates for these countries pose a substantial risk to credit markets and the ability of the government to function. At least to some extent, these increases in spreads and rates are the result of decisions made by those in government. For example, Ireland's problems are largely a result of the government's guarantee of all the liabilities of Irish banks. It is not clear how such choices can be regulated other than through the ballot box. [Emphasis added.]
Is it possible that all systemic risk to our financial and economic systems is due to government actions, laws, regulations and policies? Think of FDIC insurance, Too Big To Fail, legislated bankruptcy preferences, TARP, US GM takeover lasting effect, union favoritism by government, Fed's money supply manipulation, etc.

New Economists Are Unaware Of Coase's Work

From "Happy Birthday Ronald Coase" by Mario Rizzo:
Today most students at the top economics have never been exposed to Coase’s work.
If economists are not exposed to Ronald Coase's work on property rights and transaction costs, it is unlikely the untrained economists will incorporate Coase's important ideas into their thinking and analyses.

No wonder most economists push for more regulations to solve problems, more taxes and government subsidies to modify consumer and corporate behavior, and more regulatory and government interference in markets to correct undesirable, unwanted and sub-optimal outcomes.

A Coasean analysis of unwanted outcomes would identify the various property rights and look for a market based approach to reduce and eliminate the negative effects without an imposition of more taxes or prohibitory regulations.

Coasean Property Rights Without Pigouvian Externality Taxes Can Solve Environmental Problems

From The Percolator Blog, "Coase’s 100th Birthday: No More 'Externalities' " by by Terry Anderson:
Unlike the Pigouvian approach, which claimed that market failure could be corrected by taxes, subsidies, and regulations, Coase taught us to view these issues in light of property rights and markets. In short, Coase taught against the use of the word “externality.”
Read the complete blog post here.

The Unrelatedness Of Global Warming And The East Coast Snow Blizzard

Pepper...and Salt
(Source Wall St Journal, 12/29/10)
Despite what one believes, hears on Cable and Network TV, and reads in newspapers and blogs, weather events like snow blizzards, record setting cold temperatures, heat waves, torrential rains and droughts, where you live or in other parts of the world, do not prove or disprove global warming and climate change.

Global warming is about the increase of a few degrees (probably around 5 degrees Fahrenheit) in the Earth's atmospheric average temperature.

There will be tremendous temperature variation in different parts of the world in the amount of temperature change. Some areas will see more change than the average, some will see less, some by the average amount and some parts may even see temperatures decline.

The average 5 degree change, plus or minus one or two degrees, is a high probability prediction. The extreme event of a much greater temperature change is not impossible under the current models. It is a low probability, but a possible, unlikely frightening and devastating occurrence.

Because there is so much weather variation around the globe at any given time and during a year or a decade, there is tremendous uncertainty about the effect global warming will have on any particular place's weather. Some places may see little or no change. Some places may see tremendous increases or decreases in temperatures. Some places may see big changes in weather patterns and others may see no changes at all.

Global warming will increase ocean water temperatures and will increase snow and ice melting at the polar caps. In different parts of the world, sea levels and coastal flooding will occur, with variations as to the amount of flooding and sea level rise.

Global warming makes no predications about any particular hurricane, tornado, tsunami, snow blizzard, torrential rain or drought. Global warming does not make any predictions about the amount or seasonal totals of those weather events, locally, regionally, or worldwide.

Global warming just says that due to the increase retention of heat in the atmosphere, the average temperature of the world will rise by a few degrees. Global warming does not predict how this will affect weather in any particular part or parts of the world.

The science of global warming is much more certain than the science about the effects global warming will have on the earth's weather. Global warming is a much more sure thing than how it will affect us.

What we should do to stop and to reverse global warming and when is speculation and guesses at this point in time.

Global warming is a concern because it will affect people's lives. Some people will be affected more than others. Those that are most affected will see their livelihoods, their wealth, and their countries' wealth affected.

It could cause mass migrations and movement of animals, plants and people, or it could not. It could change disease prevalence or it could not.

How and if it affects future weather in any particular place or country is unknown and unpredictable.

So, all those blogs, talk shows, news commentators and media stories about weather events and global warming are like Santa's sleigh tracking stories on Christmas Eve. The stories are make believe and media filler to retain and attract audiences.

The severity of the recent East Coast snow blizzard is unrelated to global warming. The storm proves nothing about the existence or non-existence of global warming.

Happy Birthday Ronald Coase

Happy Birthday Ronald Coase.

His Nobel Prize autobiography.

His 1960 paper, The Problem of Social Cost.

A current article in The Economist about Ronald Coase, "Why Do Firms Exist?"

Tuesday, December 28, 2010

Spending Cuts Are The Only Way To Successfully Balance The US Budget: Tax Increases Fail To Balance The Budget

From The Wall Street Journal article "The Right Way to Balance the Budget: The experience of 21 countries over 37 years yields a simple truth: Cutting spending works, and raising taxes doesn't" by Andrew G. Biggs, Kevin Hassett And Matt Jensen:
The data also clearly indicate that successful attempts to balance budgets rely almost entirely on reduced government expenditures, while unsuccessful ones rely heavily on tax increases. On average, the typical unsuccessful consolidation consisted of 53% tax increases and 47% spending cuts.

By contrast, the typical successful fiscal consolidation consisted, on average, of 85% spending cuts.
Consistent with other studies, we found that successful consolidations focused on reducing social transfers, which in the American context means entitlements, and also on cuts to the size and pay of the government work force. A 1996 International Monetary Fund study concluded that "fiscal consolidation that concentrates on the expenditure side, and especially on transfers and government wages, is more likely to succeed in reducing the public debt ratio than tax-based consolidation."
While tax hikes slow revenue growth, policies that credibly reduce government spending in the long run boost economic growth by more than their simple effects on deficits might imply. Any attempt to address the federal government's budget shortfall that relies on less than 85% spending cuts runs too large a risk of failure.
Read the complete Wall Street Journal article here.

Monday, December 27, 2010

Taxing The Rich Is Taxing The Middle Class

From Part I of the excellent four part Forbes Commentary "The 'Tax The Rich' Con" by Charles W. Kadlec:
In reality, the call to "tax the rich" is a cover story for levying higher tax rates on the prosperous middle class.
In addition, the "tax the rich" mantra assumes that the same individuals make the same amount of money each and every year. The reality is that, in many cases, producing an annual income of $250,000 is achieved after years of hard work and career advancement. Those who report incomes of more than $250,000 in a single year in many cases are also individuals who have owned and operated a business, built it over a life-time as they earned a modest income, and sell the business in the current year.

Thus, the higher tax rates the Democrats say are aimed at the rich actually are targeted at the baby boomers as they hit their peak earning years. There are no precise data on the demographics of those who make more than $200,000 a year. But based on Census data for 2007, the latest year available, it is clear that incomes tend to peak between the ages of 45 and 64--that is currently for those who were born between 1947 and 1966. Of the 23.6 million households with incomes of $100,000 and more in 2007, 12 million, or 50%, were within this 20-year group of baby boomers.

But where is the justice in reducing these individuals' financial ability to pay for their children's college educations, save some extra money for retirement or take a nice family vacation?
The complete Part I is available here.

Part II is available here.

Part III is available here.

Part IV is available here.

Sunday, December 26, 2010

Health Care A Right, Comment

My comment posted on Cafe Hayek, "Is Basic Health Care a ‘Right’?" by Don Boudreaux:
If there is a right to healthcare, then it is my right not to exercise it.

Freedom of speech does not require me to speak. The right to a jury trial and an attorney gives me the right to refuse a jury trial and an attorney, and instead to be tried before a judge, to represent myself w/o an attorney, and to plea bargain with the Prosecutor.

In contradiction to a right, the right to US healthcare requires me to obtain health insurance, requires me to obtain a government approved form of health insurance with mandatory coverage provisions. As a senior single male, I am required to obtain a health insurance policy that includes payment for mammograms, pregnancy and birth control and prevents the insurer from charging me a different price than a childbearing aged female.

A right includes the right to refrain to exercise, and the right to give away all or part of my right. For example, the constitutional right against self-incrimination includes the right to waive that right and negotiate with the government the right to full or partial immunity from prosecution.

Healthcare as implemented under the new law is the antithesis of a right.

Gulf of Mexico Suffered Little Damage From Deepwater Horizon Oil Spill

From the Weekly Standard, "Oil Spill Hysteria: The Gulf of Mexico suffered remarkably little damage. Why were so many so willing to believe otherwise?" by Robert H. Nelson, professor of environmental policy at the University of Maryland:
top White House staff were consumed by the spill and its political fallout for much of the spring of 2010. As staffers now lamented privately, this had diverted attention from other pressing issues—above all, the sputtering economy.

The political fortunes of the Democratic party were not the only collateral damage from the spill. Gulf coast tourism plummeted, even in areas untouched by oil. Seafood restaurants in New York and Chicago proudly advertised that they did not serve Gulf fish. And many oyster beds were devastated when they were flushed with fresh water from the Mississippi River as a “preventive” measure. Most recently, on December 1, Interior Secretary Ken Salazar cancelled previous plans for much expanded offshore oil and gas drilling, killing thousands of jobs and forgoing an opportunity to reduce the nation’s enormous foreign energy bill.

Oddly enough, however, the ecosystem of the Gulf itself turns out to have suffered remarkably little damage from the continuous gushing of oil into the water from April 20 till July 15, when the leaking well was capped. [Emphasis added.]
Read the complete article here.

20 Best Performing City Housing Markets of the Decade

From Zillow Blog, "Top 20 Best Performing Cities of the Decade" by Alison Paoli, Zillow PR Specialist | December 23, 2010:

By-Laws Are Better For Stopping Insider Trading Than The SEC And Government Enforcement

From the very good article, "Inside Insider Trading" by Warren C. Gibson, who teaches engineering at Santa Clara University and economics at San Jose State University:
Shareholders who object to insider trading are usually thought to have no alternative but government regulation. That’s just not so. Insider trading could be prohibited or restricted by corporate bylaw provisions. Outside auditors would monitor management behavior, and suspected violations would be referred to arbitrators. It might seem inefficient for small shareholders to expend the time and energy necessary to get together and pursue possible corporate violations. But following David Friedman’s innovative ideas on law and economics, we can imagine shareholders selling in advance their rights to recover damages from possible future violations. Specialists could acquire these rights and pursue violations efficiently. Corporate management would be well aware of the watchful eyes of these specialists.
Read the complete article here.

The comment I posted to the above article on Freeman Blog:
There is no need to make a by-law exception for takeovers. Acquiring companies will not pay more than their valuation of the worth of the target company or their ability to make a profit and increase shareholder value at the acquiring price. If the market raises the stock price too high for the acquiring company, the buying company will walk away. If the price stays above the original target price, it is an indication that the target company is worth more to another acquiring company.

Earlier release of the information that there is a possible acquiring company buying up shares will prevent shareholders of the target company from selling prematurely, while the buying company is acquiring shares prior to announcement. Earlier release of takeover information will also allow other companies to evaluate a takeover of the target and it could result in another company that gets a greater economic benefit from the acquisition bidding a higher price than the original acquirer would.

While it is cheaper to acquire shares before an announcement and run-up in the share price, it is at the expense of the target shareholders of a potentially higher acquisition price and at the expense of target shareholders that trade in the short period prior to announcement. Additionally, allowing more time for other companies to evaluate and bid could result in a better economic allocation of resources.

Thursday, December 23, 2010

Other Checkout Lines More Likely To Move Faster Than Your Line: You Are More Likely To Be In The Slowest Line

As you always suspected, you have a knack for choosing the slowest checkout lane at the store.

From "Scientifically, You Probably Are in the Slowest Moving Line" by Michael Santo:
scientifically, it can be proven that the other line is more likely to move faster than your line. As shown in the video, in a system with three checkout lines, 2/3 of the time, the other lines will move faster than yours. Watch the video below.

Anti Big Government, Anti Income Redistribution Americans Give 4 Times As Much To Charities As Liberals

From The Wall Street Journal article, "Tea Partiers and the Spirit of Giving" by Arthur C Brooks:
When it comes to voluntarily spreading their own wealth around, a distinct "charity gap" opens up between Americans who are for and against government income leveling. Your intuition might tell you that people who favor government redistribution care most about the less fortunate and would give more to charity. Initially, this was my own assumption. But the data tell a different story.

....the General Social Survey (GSS) found that those who were against higher levels of government redistribution privately gave four times as much money, on average, as people who were in favor of redistribution. This is not all church-related giving; they also gave about 3.5 times as much to nonreligious causes. Anti-redistributionists gave more even after correcting for differences in income, age, religion and education.

Of course, there are other ways to give than with money....those who said the government was "spending too much money on welfare" were more likely to donate blood than those who said the government was "spending too little money on welfare." The anti-redistributionists were also more likely to give someone directions on the street, return change mistakenly handed them by a cashier, and give food (or money) to a homeless person.

NY Med Schools Act Like Cartel: Try To Prevent Clinical Training And Influx Of Foreign Educated Doctors

From the New York Times, "Medical Schools in Region Fight Caribbean Flow" by Anemona Hartocollis:
New York State’s 16 medical schools are attacking their foreign competitors. They have begun an aggressive campaign to persuade the State Board of Regents to make it harder, if not impossible, for foreign schools to use New York hospitals as extensions of their own campuses.
More than 42,000 students apply to medical schools in the United States every year, and only about 18,600 matriculate, leaving some of those who are rejected to look to foreign schools. Graduates of foreign medical schools in the Caribbean and elsewhere constitute more than a quarter of the residents in United States hospitals.
The New York schools want the state to adopt the position of the American Medical Association, that “the core clinical curriculum of a foreign medical school should be provided by that school and that U.S. hospitals should not provide substitute core clinical experience.”
“There is evidence,” Mr. Muñoz [a deputy state education commissioner] said, that the more mature Caribbean schools “admit students with very competitive backgrounds. It appears that many of these students were not granted admission to domestic schools because of the limited number of available seats.”
Read the complete NY Times article here.

City Stops Paying Public Retirees Their Government Pensions

From The New York Times article, "Alabama Town’s Failed Pension Is a Warning" by Michael Cooper and Mary Williams Walsh:
Then Prichard [Alabama] did something that pension experts say they have never seen before: it stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full.
So the declining, little-known city of Prichard is now attracting the attention of bankruptcy lawyers, labor leaders, municipal credit analysts and local officials from across the country. They want to see if the situation in Prichard, like the continuing bankruptcy of Vallejo, Calif., ultimately creates a legal precedent on whether distressed cities can legally cut or reduce their pensions, and if so, how.

“Prichard is the future,” said Michael Aguirre, the former San Diego city attorney, who has called for San Diego to declare bankruptcy and restructure its own outsize pension obligations. “We’re all on the same conveyor belt. Prichard is just a little further down the road.”
A lawyer representing the city, R. Scott Williams, said that the city simply did not have the money. “The reality for Prichard is that if you took money to build the pension up, who’s going to pay the garbage man?” he asked. “Who’s going to pay to run the police department? Who’s going to pay the bill for the street lights? There’s only so much money to go around.”

Wednesday, December 22, 2010

Consumers Have Higher Auto And Credit Card Delinquencies Following Foreclosures

From "Foreclosure's Wake: The Credit Experiences of Individuals Following Foreclosure" by Kenneth P. Brevoort and Cheryl R. Cooper:
Our analysis documents the substantial declines in credit scores that accompany foreclosure and examines the length of time it takes individuals to return their credit scores to pre-delinquency levels. The results suggest that, particularly for prime borrowers, credit score recovery comes slowly, if at all. This appears to be driven by persistently higher levels of delinquency on consumer credit (such as auto and credit card loans) in the years that follow foreclosure. Our results also indicate that the experiences of individuals whose mortgages entered foreclosure from 2007 to 2009 have followed a similar path to borrowers foreclosed earlier in the decade, though post-foreclosure delinquency rates for the recently foreclosed have been higher and, consequently, credit score recovery appears to be taking longer.
The authors speculate in their paper as to cause and effect of the subsequent defaults in consumer credit. Bankers, however, know that one of the best indicators of a future loan default is a recent previous loan default.

Some borrowers characteristically feel less of an obligation to repay loans. Other borrowers suffer a persistent economic shock, such as a loss of a job, death of a wage earner, divorce, or an unexpected major expense, which impairs the borrower's ability to repay the loan.

Foreclosure in many cases is a signal of a borrowers unwillingness to repay or of the borrower's inability to repay due to loss of income from an economic shock.

I would guess that if the researchers looked at an opposite effect, consumer credit card and auto loan defaults prior to a foreclosure, they would have found a similar effect, but with the order of the loan defaults reversed. They would have found that consumer credit card and auto loan defaults of mortgage borrowers impaired future credit scores from subsequent mortgage foreclosures.

Mixing Cornstarch Into The Top-kill Could Have Stopped Gulf Oil Spill Sooner

From "Cornstarch might have ended the Gulf spill agony sooner" posted on ScienceBlog:
Jonathan Katz, PhD, professor of physics in Arts & Sciences at Washington University in St. Louis, ... suggested a simple fix, a change to the mud recipe ... the addition of a shear-thickening polymer like cornstarch to a dense top-kill mud might have allowed slugs of mud to descend against the upwelling oil instead of being ripped up and spat out of the well. Eventually, the column of mud would have prevented any further infiltration from the oil reservoir, killing the well.

15 To 19 Year Old Teen Birth Rates At 70 Year Low

From "Teen Births Hit Low in Hard Times" by Mike Esterl in The Wall Street Journal:
The birth rate among U.S. teenagers fell to a record low in 2009, and some experts attributed the decline to the recession.

The overall birth rate in the U.S. dropped 4% to a historic low last year, to 13.5 per 1,000 people from 14.0 in 2008, the Centers for Disease Control and Prevention said Tuesday. But a steeper decline occurred among those 15 to 19 years old, with the rate falling 6% to 39.1 births per 1,000 females in that age group, the lowest in seven decades of tracking. Rates among teens of all ages, races and ethnic groups also hit record lows in 2009.

Read the complete article here.

NY Attorney General Cuomo's Ernst & Young Fraud Complaint

From New York Attorney General Cuomo's press release, Attorney General Cuomo Sues Ernst & Young For Assisting Lehman Brothers In Financial Fraud :
NEW YORK, N.Y. (December 21, 2010) - Attorney General Andrew M. Cuomo today filed a Martin Act lawsuit against Ernst & Young LLP (“E&Y”), charging the accounting firm with helping Lehman Brothers Holding, Inc. (“Lehman”) engage in an accounting fraud involving the surreptitious removal of tens of billions of dollars of fixed income securities from Lehman’s balance sheet in order to deceive the public about Lehman’s true liquidity condition.

The Attorney General’s lawsuit claims that for more than seven years leading up to Lehman’s bankruptcy filing in September 2008, Lehman had engaged in so-called “Repo 105” transactions, explicitly approved by E&Y. The transactions purpose was to temporarily park highly liquid, fixed-income securities with European banks for the sole purpose of reducing Lehman’s financial statement leverage, an important financial metric for investors, stock analysts, lenders, and others interested in Lehman.
Read the complete press release here

The Ernst & Young fraud complaint is available on the NY AG site , on Scribd and embedded below.

When the SEC charged Arthur Andersen with criminal fraud, Arthur Andersen lost many of its clients and ceased to exist as a public accounting firm. The Ernst & Young fraud charges are civil and not criminal, from the New York Attorney General and not from the SEC, but are these distinctions without a difference?

Many a corporate counsel is in discussion with boards of directors of public companies audited by Ernst & Young about what, if any liability, a firm or its board may incur by continuing to use a public accounting firm charged by a governmental body with fraud. Hopefully, the accounting firm will survive, but only time will tell.

Ernst Young Fraud Complaint by Milton Recht

Monday, December 20, 2010

Oregon's Rich Go Missing After Tax Increase

From "Ducking Higher Taxes: Oregon's vanishing millionaires" in The Wall Street Journal:
Oregon raised its income tax on the richest 2% of its residents last year to fix its budget hole, but now the state treasury admits it collected nearly one-third less revenue than the bean counters projected.
One reason revenues are so low is that about one-quarter of the rich tax filers seem to have gone missing. The state expected 38,000 Oregonians to pay the higher tax, but only 28,000 did. Funny how that always happens.
All of this is an instant replay of what happened in Maryland in 2008 when the legislature in Annapolis instituted a millionaire tax. There roughly one-third of the state's millionaire households vanished from the tax rolls after rates went up.
If states expect to fund their overly generous unfunded state and municipal worker pension and healthcare liabilities through future tax increase, the states will be in for a big surprise. These future employee benefits are not affordable and are promises that will never be kept.

Comment To Effective Teachers Produce $400,000 In Student Earnings Gains

A comment I posted on The Economist Free Exchange blog, " "Wow" result of the day" about effective teachers producing a $400,000 income gain to students:
It is not doable. No one knows before the fact who is a good teacher or what observable characteristics make for a good teacher.

From the cited paper in the article:
"The related issue is what makes for an effective or ineffective teacher. The extensive research addressing this has found little that consistently distinguishes among teachers in their classroom effectiveness. Most documented has been the finding that master’s degrees bear no consistent relationship with student achievement (See Hanushek and Rivkin (2004, (2006)). But other findings are equally as interesting and important. The amount of experience in the classroom – with the exception of the first few years – also bears no relationship to performance. On average, a teacher with five years experience is as effective as a teacher with 25 years of experience. But, this general result about measured characteristics of teachers goes even deeper. When studied, most evidence indicates that conventional teacher certification, source of teacher training, or salary level are not systematically related to the amount of learning that goes on in the classroom. For example, two recent high quality studies of different preparation and entry routes into teaching compare the impact on student achievement of Teach for America (TFA) and other alternative routes into teaching with traditional teacher training (Boyd et al. (2006) and Kane, Rockoff, and Staiger (2008)). They find little differences by teacher training background."
The $400,000 number is about as meaningful and useful as if instead I computed how much money I could make in the stock market, if I only bought stocks that went up and not down. Just as I and everyone else do not know how to find (other than Bernie Madoff) anyone who never loses money in the stock market, we do not know how to find or train effective teachers.

The paper uses teacher quality as it starting point for student achievement improvement and ignores more cost effective alternatives:
"The analysis presented below is built on a simple premise: The key element defining a school’s impact on student achievement is teacher quality."
The NIH (National Institute of Health) has funded research that finds "Improving mothers' literacy skills may be best way to boost children's achievement"

" 'The findings indicate that programs to improve maternal literacy skills may provide an effective means to overcome the disparity in academic achievement between children in poor and affluent neighborhoods,' said Rebecca Clark, Ph.D., chief of the Demographic and Behavioral Sciences Branch at the Eunice Kennedy Shriver National Institute of Child Health and Human Development (NICHD), the NIH institute that funded the study."

Instead of paying more to teachers, just add literacy programs for mothers and watch our k-12 students improve. It will be much more cost effective and will improve k-12 results.
I would also add to my Economist comment that one has to factor in the cost of paying for ineffective teachers, since one cannot predict beforehand which teacher is a winner and which teacher is ineffective. It is similar to the venture capital industry. One cannot compute the returns in that industry by only looking at the winning investments and not the losers. Without knowing the hiring criteria for effective teachers, school districts will have to hire ineffective teachers along with effective teachers. The costs of paying salaries of ineffective teachers plus the lost earnings income of students in ineffective teachers' classrooms has to be subtracted from the $400,000 reported income gain number.

Also see my earlier blog posts on this topic:

"Improving Mother's Literacy Improves Disadvantaged Child's Academic Performance" and,

"We Do Not Know How to Improve Student Education Levels And High School Graduation Rates."

Cleveland Fed Predicts 1 Percent Real GDP Growth Next Year

From the Cleveland Fed, "Yield Curve and Predicted GDP Growth: December 2010":
Projecting forward using past values of the spread [10 yr - 3 mos US Treasury yield] and GDP growth suggests that real GDP will grow at about a 1.0 percent rate over the next year, the same projection as in October and September. Although the time horizons do not match exactly, this comes in on the more pessimistic side of other forecasts, although, like them, it does show moderate growth for the year.
Using the yield curve to predict whether or not the economy will be in recession in the future, we estimate that the expected chance of the economy being in a recession next December is 1.5 percent. This drop from November’s 2.3 percent and October’s 3.9 percent reflects the steeper yield curve.

Small Businesses Use Homes For Equity Loans, Lines Of Credit and Collateral: Home Value Decline Limits Small Business Owner Credit Availability

From the Federal Reserve Bank of Cleveland Economic Commentary, "The Effect of Falling Home Prices on Small Business Borrowing" by Mark E. Schweitzer and Scott A. Shane:
Because small business owners may rely heavily on the value of their homes to finance their businesses (through mortgages or home equity lines), the fall in housing prices might be one of the causes of their difficulty. We analyze information from a variety of sources and find that homes do constitute an important source of capital for small business owners and that the impact of the recent decline in housing prices is significant enough to be a real constraint on small business finances.

Figure 1. Percent of Households with Home Equity Debt

Read the complete article here.

Friday, December 17, 2010

Comment To Blinder's "Our Dickensian Economy" On The Fairness Of Wage Increases Less Than Productivity Increases

Comment I posted to Alan Blinder's Wall Street Journal article, "Our Dickensian Economy: Since 1978, productivity in the nonfarm business sector is up 86% but real compensation per hour is up just 37%. Is that fair?":
Blinder misses the point that productivity improvements also go to lowering prices. The question is not only are there wage raises, but what can a worker buy today compared versus 35 years ago. Today, the average worker, because of productivity improvements and lower prices, has a computer, a cell phone, a dishwasher, a microwave, can buy cheaper shoes and clothes at Walmart, Target, Kohl's, a flat screen tv, eats out more often, etc than 35 years ago.

To a consumer, a lower price nominally and as a percent of a wage are equivalent to a wage increase.

Christian Broda and John Romali, both from University of Chicago, found in their research that prices of consumer goods purchase by the higher income groups grew much faster than inflation and prices of consumer goods purchased by the lower income groups actually declined. See their research paper, "The Welfare Implications of Rising Price Dispersion"

In other words, the workers without substantial wage increases were able to buy more goods over time because prices declined, while higher income earners saw substantial price increases in consumer goods.

Average CPI is overstating the cost of goods to the lower income and understating the cost of goods to the rich.

So to answer Blinder's fairness question: Yes, it is fair that all or most of the productivity improvements did not translate into wage increases because they translated into lower prices for consumer goods.
Also, see my earlier post, "Much Of Income Inequality Disappears With Adjustments For Different Inflation Rates For Upper And Lower Income Groups."

Wednesday, December 15, 2010

Republican Commissioners Of FCIC Report, Financial Crisis Primer

Report of the Republican Commissioners On The Financial Crisis Inquiry Commission, Financial Crisis Primer, Questions And Answers On The Causes Of The Financial Crisis is available from the Republicans here, on Scribd here and embedded below.

[The Jan 27, 2011 Final Financial Crisis Inquiry Commission Report is available here.]

Financial Crisis Primer

Higher Capital And Dividend Taxes Worsened, Extended The 1930s Great Depression

From Federal Reserve Bank Of Minneapolis study "Capital Taxation During the U.S. Great Depression" by Ellen R. McGrattan:
higher taxes during the 1930s led to a dramatic decline in tangible investment, similar to that observed in the United States, with the most important factor being the rise in the effective tax rate on dividends. The pattern of investment shows a steep decline in the early part of the decade, followed by some recovery and another steep decline starting in 1937. The important factor in the latter period is the introduction of the undistributed profits tax. The model predicts a decline in GDP and hours between 1929 and 1933 that accounts for 40 percent and 47 percent of the actual declines, respectively.
Although the results show that tax policy had a major impact on economic activity in the 1930s, they also show that it could not have been the only factor contributing to the large contraction and slow recovery of the 1930s.
Adding New Deal policies ... would help in further accounting for the time series patterns in the second half of the 1930s....

Banning Prepayment Penalties Will Raise Rates, Restrict Credit For Riskier Borrowers

From "The Inefficiency of Refinancing: Why Prepayment Penalties are Good for Risky Borrowers" by Christopher J. Mayer, Columbia Business School, Tomasz Piskorski, Columbia Business School and Alexei Tchistyi, Haas School of Business, UC Berkeley, December 2010:
Empirical evidence from more than 21,000 non-agency securitized fixed rate mortgages ... suggest that regulations banning refinancing penalties might have the unintended consequence of restricting access to credit and raising rates for the least creditworthy borrowers.

Faulty Trade Statistics Exaggerate And Double US Trade Deficit With China

From The Wall Street Journal article,"Tech Supply Chain Exposes Limits of Trade Metrics" by Andrew Batson:
There's a growing belief that the practice of assuming every product shipped from one country is entirely produced by that country no longer reflects the complex reality of global commerce.

"What we call 'Made in China' is indeed assembled in China, but what makes up the commercial value of the product comes from the numerous countries that preceded its assembly in China in the global value chain," Pascal Lamy, director-general of the World Trade Organization, said in a speech in October. "The concept of country of origin for manufactured goods has gradually become obsolete."

Mr. Lamy said that if trade statistics were adjusted to reflect the actual value contributed to a product by different countries, the size of the U.S. trade deficit with China—$226.88 billion, according to U.S. figures—would be cut in half. That means, he argued, that political tensions over trade deficits are probably larger than they should be.

"The statistical bias created by attributing the full commercial value to the last country of origin can pervert the political debate on the origin of the imbalances and lead to misguided, and hence counterproductive, decisions," Mr. Lamy said in his speech to the French Senate in Paris.
Read more here.

Video: California Pension Crisis: Wall St Journal Discussion With David Crane, Governor Economic Advisor

Seven minute video of David Crane, special economic advisor to Governor Arnold Schwarzenegger, discussing the numbers behind the California pension crisis with Jame Freeman, WSJ asst editorial page editor.

US Debt Held By Public At 100 Percent Of GDP By 2020: CBO Projects

From CBO study, "Federal Debt and Interest Costs":
The past few years have seen a sharp rise in the debt of the federal government. At the end of fiscal year 2008, debt held by the public amounted to $5.8 trillion--equal to 40 percent of the nation's annual economic output (gross domestic product, or GDP), a little above the 40-year average of 35 percent. Since then, debt held by the public has shot upward, surpassing $9 trillion by the end of fiscal year 2010--equal to 62 percent of GDP, the highest percentage since shortly after World War II. The surge in debt stems partly from lower tax revenues and higher federal spending related to the recent severe recession and turmoil in financial markets. However, the growing debt also reflects an imbalance between spending and revenues that predated those economic developments.

At the same time, a sharp drop in interest rates has held down the amount of interest that the government pays on that debt. In 2010, net interest outlays totaled $197 billion, or 1.4 percent of GDP--a smaller share of GDP than they accounted for during most of the past decade.

The Congressional Budget Office (CBO) projects that, under current law, debt held by the public will exceed $16 trillion by 2020, reaching nearly 70 percent of GDP. CBO also projects that interest rates will go up. The combination of rising debt and rising interest rates is projected to cause net interest payments to balloon to nearly $800 billion, or 3.4 percent of GDP, by 2020.

Many other outcomes are possible, however. If, for example, the tax reductions enacted earlier in the decade were continued, the alternative minimum tax was indexed for inflation, and future annual appropriations remained the same share of GDP that they were in 2010, debt held by the public would total nearly 100 percent of GDP by 2020. Interest costs would be correspondingly higher. [Emphasis added]
The complete CBO study is available on the CBO site here, on Scribd here or embedded below.

Federal Debt and Interest Cost Decemebr 2010

xkcd Spoofs WikiLeaks

If the shoe were on the other foot, would it still be a freedom of speech, right to know issue, or would they cry foul?


Monday, December 13, 2010

'Skin In The Game' In The Mortgage Securitization Market Is Bad

A comment I posted on "Research: ‘Skin in the Game’ Is Good for Mortgage Market" on The Wall Street Journal Real Time Economics blog:
Mortgage providers' skin in the game does not reduce any particular borrower's chance of default. A lower credit rated borrower's risk of default is still the same. Skin in the game makes mortgage providers more cautious when lending to a lower credit rated borrower out of fear of losing their working capital to fund new mortgages. With skin in the game, lenders will turn off credit to higher risk borrowers.

Skin in the game appears to work because it denies credit to a whole class of borrowers.

The study [Mortgage-Backed Securities: How Important Is “Skin in the Game”? by Christopher M. James] cited in the article also finds that there was a higher yield to investors on mortgages with higher expected defaults. In other words, the financial markets worked and investors received a higher interest rate for higher risk. The article states:

"The final question is whether investors anticipated performance differences and therefore demanded higher yields or greater credit enhancement for MBS in which originators had less skin in the game. To address this, Demiroglu and James compare the average yield and percentage of securities issued with AAA ratings for affiliated and unaffiliated deals. Controlling for mortgage and borrower risk characteristics, they find average yields are significantly lower on securities in affiliated deals relative to securities in unaffiliated deals. In addition, affiliated deals were able to issue a relatively greater proportion of securities with AAA ratings. These results suggest that investors considered moral hazard when pricing MBS."

Skin in the game goes against many well understood macro-economic and finance principals. The capital available for mortgage lending will shrink significantly and skin in the game will act as a brake on economic activity, possibly causing recessions. The Fed will lose some of its macro-economic power to increase lending during those recessionary times because increasing the money supply will not enable banks to lend more to the housing sector since they will be constrained by a lack of available capital and funds to use for skin in the game requirements.

Skin in the game will also limit financial intuitions' institutions' abilities to diversify their asset holdings. The institutions will be required to retain mortgages and will not be able to decrease that asset class to control and diversify their lending risk. If constrained by skin in the game, the institutions will also not be able to increase that asset class to control risk. Diversification is a fundamental risk control mechanism and skin in the game limitations will create a whole host of currently unforeseen unintended consequences as financial institutions use other means to control, increasing or decreasing, the amount of their mortgage and institutional risk.

The credit rating agencies incorrectly labeled high risk MBS's (also ABS's) as low risk. The incorrectly labeled AAA securities brought in many investors who should not have invested in these securities. The undeserved AAA ratings also allowed banks to hold less capital than needed and regulatory required for the securities' risk. Dodd-Frank removed the power of a Nationally Recognized Statistical Rating Organization (NRSRO) to determine indirectly an asset's required capital level in the banking sector. Financial institutions will no longer be able to hold insufficient capital for an MBS (or ABS) and hide behind a credit rating agencies incorrect AAA analysis of a high-risk MBS security. In addition, Dodd-Frank's elimination of the NRSRO oligopoly has substantially increased the number of competitive credit rating firms.

The NRSRO changes in Dodd-Frank will force banks to increase their capital for higher risk MBS and ABS holdings. These changes will also eliminate the power of undeserved AAA ratings and naïve investors looking for only AAA ratings will no longer find themselves mistakenly holding high risk securities mislabeled as safe.

Skin in the game is a no win situation. It turns off bank credit to a whole class of borrowers. Some portion of these borrowers will turn to other sources of credit and others will go without.

Skin in the game constrains some of the Fed's macro-economic control of lending and the money supply.

Skin in the game constricts a bank's risk control and diversification ability.

Elimination of the NSRSO oligopoly and power over setting an asset's capital requirements solves many, if not most, of the problems associated with excessive high-risk MBS (ABS) securitization.

As the mentioned study shows, higher risk MBS's had higher yields than lower risk MBS's. The securitization market worked as expected and priced the risk. The credit rating agencies failed to accurately rate higher risk securitizations leading some investors to misperceive the risk of their holdings. Financial institutions failed to hold adequate capital for the higher risk MBS's due to the incorrect high credit ratings for the investment.

Dodd-Frank fixed the problems that occurred from high-risk mortgage lending securitizations through changes to NSRSO role and status. Skin in the game adds problems for institutions, borrowers and the Fed without any benefit.

Congress should modify Dodd-Frank to eliminate skin in the game requirements.

Americans Are Sicker As Life Expectancy Increases

From "We spend more time sick now than a decade ago" on ScienceBlog, December 13, 2010:
From 1970 to 2005, the probability of a 65-year-old surviving to age 85 doubled, from about a 20 percent chance to a 40 percent chance. Many researchers presumed that the same forces allowing people to live longer, including better health behaviors and medical advances, would also delay the onset of disease and allow people to spend fewer years of their lives with debilitating illness.

But new research from Eileen Crimmins, AARP Chair in Gerontology at the University of Southern California, and Hiram Beltrán-Sánchez, a postdoctoral fellow at the Andrus Gerontology Center at USC, shows that average “morbidity,” or, the period of life spend with serious disease or loss of functional mobility, has actually increased in the last few decades.
Read the complete article here.

There Is Constant US Job Creation, Even In The Midst Of Unemployment And Layoffs

Some thoughts I gleaned from reading a post about economist Julia Lane, "A Few Words about the Vladimir Chavrid Ward" on the Economics Principals blog by David Warsh.
  • data shows that even when firms don’t change their employment levels there’s a huge churn through the work force. Even firms that are laying workers off are still hiring.

  • in any given quarter, one job in four begins or ends, one in thirteen jobs is created or destroyed, and one in twenty establishments opens up or closes down.

Saturday, December 11, 2010

GM's Rebound Hurt By Federal Salary Limits

From "Top GM exec says federal pay limits hurt company" by Ken Thomas, Associated Press:
The top executive at General Motors said Friday that the automaker's attempt to rebound from its bankruptcy is being hindered by salary limits the government has clamped on executives at companies that accepted federal bailouts.

GM CEO Dan Akerson said in a speech to the Economic Club of Washington, D.C., that the company faces many challenges, including the retention of top talent in its executive ranks. He suggested relaxing the pay limits, and said he was meeting later in the day with federal officials who oversee executive compensation for companies that received bailouts.
Read more here.

Friday, December 10, 2010

Economic Impacts of Waiting Ten Years To Resolve The US Budget Deficit: CBO Study

From CBO's study of "Economic Impacts of Waiting to Resolve the Long-Term Budget Imbalance":
Effects of Delaying Action
Waiting to put fiscal policy on a sustainable course would lead to higher levels of government debt, which would be costly in several ways:
  • Higher debt would reduce the amount of U.S. savings devoted to productive capital (resources that produce economic benefits over time) and thus would result in lower incomes than would otherwise occur, making future generations worse off.

  • Higher debt would necessitate greater federal spending on interest payments, meaning that larger changes in revenues and noninterest spending would be needed to make fiscal policy sustainable. If those changes took the form of bigger cuts to spending programs, they would be more difficult for people to adjust to than smaller cuts would be. If the changes took the form of bigger increases in marginal tax rates, they would create larger disincentives to work and save, which would reduce incomes more than smaller tax increases would.

  • Higher debt would make it harder for policymakers to respond to unexpected problems, such as financial crises, recessions, and wars.

  • Higher debt would increase the likelihood of a fiscal crisis, in which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable interest rates.
At the same time, waiting to put fiscal policy on a sustainable course could make some current generations better off than they would be otherwise. In particular, a delay would tend to help older generations by deferring the tax increases or cuts in benefit payments and government services that they would face. For certain policies, that gain would outweigh the greater reduction in future incomes and the larger ultimate adjustment to taxes and spending that would result from delay, because the effect of those differences is muted for people who have completed all or part of their working lives. Whether that advantage of waiting would outweigh the costs to older generations from the other effects of higher debt—the government’s reduced ability to respond to unexpected needs and the increased risk of a fiscal crisis) because they would receive higher benefits or pay lower taxes for a number of years. For example, people who were age 60 or older in 2015 would be better off—by an amount equivalent to about 2 percent of their future consumption—if a policy that stabilized the debt-to-GDP ratio by cutting federal benefit payments for all adults was delayed from 2015 to 2025.

The economic consequences of rising federal debt that can be quantified using the analytic approach of this brief would be gradual and modest over the next 15 years, even with the sharp increase in debt projected in this analysis. However, other consequences that are not quantified here could be severe. The point at which investors would lose confidence in the government’s ability to manage its budget and meet its debt obligations is unknown. But rapid growth in debt relative to GDP would increase the likelihood of such a crisis—and it could occur long before the impact of rising debt on output and consumption became substantial. In the meantime, concerns about the possibility of such a fiscal crisis and ever-increasing interest costs on federal debt would limit the government’s ability to respond to unexpected events or meet other pressing needs. Ultimately, the fiscal imbalance will have to be addressed, whether quickly or gradually, and the longer the necessary adjustments are delayed, the more drastic they will need to be.

Read the complete 12-page CBO study here.

Economic Impacts of Waiting to Resolve the Long Term Budget Imbalance

Cost Estimate for HR 4853, Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

CBO Cost Estimate for HR 4853, Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 is available here. From 2011-2015, the deficit will increase by $893 billion and from 2011-2020 the deficit will increase by $858 billion.

Cost Estimate for HR 4853

Also see my previous post, "CBO's Analysis Of Extending The Bush Tax Cuts, Reducing The Payroll Tax And Extending Unemployment Benefits: Difficult Choices Between Current Or Future GDP Growth."

IO Mortgages And The Housing Bubble

A comment I posted on "The means to speculate" on The Economist Free Exchange blog:
See "A Model of Mortgage Default" by Campbell and Cocco, November 2010,

for a discussion of mortgage defaults and IOs [Interest Only Mortgages] with a different perspective.

IOs are used by borrowing constrained borrowers because of lower required monthly payments. IOs do not amortize principal and have higher remaining balances later in their life than amortizing mortgages.

IOs have a lower default rate in their early years (lower required payments), but higher default rates in later years when there is negative equity because they have a higher remaining balance.

In a bubble, there are many speculators (whether they cause or follow bubbles is an open debate). Speculators try to use as much leverage as they can to buy assets. Speculators would tend toward IOs because they can borrow more. In currency and commodity markets, they would use futures and options.

As the economy tanked and home prices started to decline, IO users were the most borrowing constrained, which means the most income constrained, and they had the most negative equity because of the lack of amortization with higher remaining balances. Their borrowing constraint with high negative equity caused higher defaults. Plus, if they own multiple homes, as likely for speculators, a negative income shock to a single borrower will cause defaults on several homes and IOs. There is a multiplier default effect.

IO use was coincidental to the collapse of the housing market and defaults, not the cause of the bubble or subsequent collapse.

In speculative markets, speculators look for means to use as little of their own equity and as much leverage as they can. IOs were used to borrow more to purchase more homes with more leverage, but if they were not available, speculators would look for other ways to maximize their use of equity and borrow as much as possible.

The use of IOs just shows there were speculators in the housing market. It does not show causation for the speculation or the defaults. If you eliminate or restrict IOs, speculators will find some other means to increase their ability to speculate in a hot housing market.

Past IO use in a housing market showed there were speculators in that market. Eliminate IOs and you will not stop speculation in a hot housing market. Does speculation cause bubbles (Did speculation cause house prices to rise and then drop)? Valid arguments exist for yes and no.

Economists Discuss The Tax Compromise: Greg Mankiw And Simon Johnson Podcast On NPR

Thursday, December 9, 2010

Health Care Costs And Worker Opportunity Costs

A comment I posted to "What's Cost Got to Do with It?" by Joseph T. Salerno on the Mises Daily blog:
Two points.

1. Health care costs, direct and insurance, were and continue to be a big issue, but they follow the same pricing principles mentioned. All the economic articles and research I have seen on the topic discuss, analyze, and provide solutions on the cost side of medical services and health insurance especially that costs are higher in the US than other countries and the US spends more per capita for medical services. They ignore the value to the consumer.

Like all other products and services, the price paid is determined by the value to the consumer. The US has very high GDP per capita and very high productivity rates. These factors would make a worker's opportunity costs, on average, high in comparison to other countries.

With a high opportunity cost, one would expect US medical prices would be higher than other countries as long as the higher price lowers the opportunity costs of medical services to the consumer. Delays caused by waiting for doctor appointments, specialist appointments, medical tests scheduling (such as MRIs, etc.), use of less efficient older technologies, use of older less efficient drugs that require re-treatment, lost productivity from the medical condition, etc. have a high opportunity costs for American workers (who often also have to take off work time to care for an ill child, parent, or spouse). Using new, efficient (in the sense of diagnosis time and treatment) technologies and decreasing the total time (and opportunity cost including lost productivity) to the consumer from the first phone call for an appointment to final result is expensive and will result in higher US medical costs. Most looks at other country medical services find the US had shorter wait times, newer technology to speed diagnosis and treatment, newer, more effective (and more expensive) drugs, and fewer doctor visits per year and per medical condition. This is not to say anything about end results, which are often used as a measure of comparative health care. It is about the speed of reaching that end result, the opportunity costs, beginning from a consumer's awareness of the condition (not first doctor appointment, but the wait for the first appointment) to final recovery.

To me, medical costs in the US are high because these services have a high value and lower opportunity cost to Americans. All attempts to directly control medical costs will fail because the value of the service to the consumer will remain high. American consumers will find ways to spend more, under any medical cost regime, to reduce their opportunity costs while receiving medical services.

Medical costs in the US will rise until they are equal to the consumers' opportunity costs and value.

If the value of the medical services were lower to US consumers, the medical establishment would find ways to reduce costs.

2. To all the comments that say costs are factored into price before production are ignoring that many businesses fail, despite adequate business plans, because consumers are not buying the goods in sufficient numbers for the business to remain viable. At a lower price, the business will sell more, but at a loss. Lack of demand kills many businesses.

Businesses I know consider demand as much as production costs and some will even regularly sell items at or below cost, such as loss leaders, in hopes of increasing overall demand and hopefully increase sales of their other goods. If costs were the main or only consideration, then profit margins would be much higher than they are at most businesses. Demand is determined by value and it sets an upper limit on price and profit.
Also see my earlier post, "The Marginal Value Of US Medical Service Is High So Medical Prices Are High" relating to this topic.

A Zero Stimulus Impact

From Economics One blog, "Stimulus Math: Many Multiples of Nothing is Still Nothing" by Stanford economics professor John B. Taylor:

States used stimulus funds to replace their borrowings. Government spending did not increase. How could there be any stimulus effect from these federal funds to states and municipalities if spending at the local level did not increase?

Economic research, from as far back as 1979 by Ned Gramlich, showed that federal stimulus funds substitute for state and local funds with little if any increase in spending.

See John Coogan and John B. Taylor's excellent article on this topic in today's Wall Street Journal, "The Obama Stimulus Impact? Zero: Liberals are still arguing that the federal spending stimulus wasn't large enough. How many multiples of nothing—its result according to new evidence—would they like?"

Wednesday, December 8, 2010

The Antidote To Fiscal Crisis Is Cutting Government Spending And Not Raising Taxes

From the Bloomberg article, "U.K. Takes Medicine, Greece Turns Doctor Away" by Kevin Hassett:
The antidote to fiscal crisis is fiscal consolidation, a dramatic change in spending and tax policy that reduces the indebtedness of a nation. Such consolidations have relied on varying degrees of tax increases and spending reductions. Some have successfully reduced debt, some haven’t. The data tell a clear story: What works is cutting government spending. [emphasis added]

A series of influential papers by Harvard University economist Alberto Alesina and various co-authors found decisive evidence that successful consolidations rely almost exclusively on spending reductions, while unsuccessful consolidations seek to close 50 percent or more of the gap with tax increases.

Cutting Is Key

A recent study by the International Monetary Fund supports the principle that cuts, particularly to entitlement programs, are key.

Also see my earlier blog post on this topic, "History Shows Cutting Spending And Taxes Spurs Economic Growth."

Lack Of Spending Cuts In The President's Tax Deal

I was going to mention the lack of spending cuts in the President's tax deal, but I deferred when I came across this blog post about it.

From The Voice of Reason blog, "The Tax Deal: What Everyone Missed" by Daniel Papes:
Republicans and those in favor of lower taxes for all certainly have something to celebrate if the current tax “framework” comes to fruition. All personal interests aside, this is absolutely the right thing to do for our economy and for all of our citizens. However, House Speaker-to-be Boehner and President Obama should have added one other crucial element to this framework, and not doing so missed a golden opportunity and makes us question seriousness in Washington in both parties, especially the incoming Republicans who exercised such influence. That element is spending cuts.
Read the rest of the post here.

CBO's Analysis Of Extending The Bush Tax Cuts, Reducing The Payroll Tax And Extending Unemployment Benefits: Difficult Choices Between Current Or Future GDP Growth

On September 28, 2010, CBO Director Doug Elmendorf presented to the US Senate Budget Committee a comprehensive analysis of the macroeconomics effects on employment, GDP and the deficit of various fiscal policy choices, including full and partial, temporary and permanent, extensions of the Bush tax cuts, reductions in the payroll tax and extending unemployment benefits.

I am republishing the weblinks to that full testimony, summaries, with and without charts, and an accompanying slide show below.

Following is a quote of the key assumptions from page 5 of the full CBO report. It goes to the core of the political and economic differences between those who want the deficit reduced now and those want to reduce taxes or increase government spending now. Lowering taxes or increasing deficit spending now will increase near term demand and GDP at the expense of higher future deficits, which will crowd out future private investments and capital spending and reduce future GDP. We are in a situation in the US where current economic policies must carefully thread a needle. We need to increase current employment and GDP, but we must be very careful to choose policies that will not seriously damage future economic growth, employment and GDP as we do it.
CBO expects that economic growth in the near term will be restrained by a shortfall in demand. All else being equal, lower tax payments increase demand for goods and services and thereby boost economic activity. In contrast, the models used to estimate the effects on the economy in 2020 and later years focus on the policies’ impact on the supply of labor and capital, because CBO believes that economic growth over that longer horizon will be restrained by supply factors. All else being equal, lower tax revenues increase budget deficits and thereby government borrowing, which crowds out investment, while lower tax rates increase people’s saving and work effort; the net effect on economic activity depends on the balance of those forces.
The full testimony of the analysis, with charts, is available here.

The summary with charts from the CBO study is available here.

The summary without charts is available here.

The accompanying slide presentation is available here.

Tuesday, December 7, 2010

Katie Couric Playing Shenandoah On The Harmonica: Video:Updated

Just for fun and because I enjoyed it, until the video is taking down by CBS legal, Katie Couric playing Shenandoah on the harmonica on the Late Late Show with Craig Ferguson, December 6, 2010.

[I have added a better picture and sound quality version from another site first and kept the original posted version after.]

Suspend The Minimum Wage To Help The Poor Build Workplace Skills

From The New York Times, "Unemployed, and Likely to Stay That Way" by Catherine Rampell:
The longer people stay out of work, the more trouble they have finding new work.
New data from the Labor Department, provided to The New York Times, shows that people out of work fewer than five weeks are more than three times as likely to find a job in the coming month than people who have been out of work for over a year, with a re-employment rate of 30.7 percent versus 8.7 percent, respectively.
With the US unemployment rate of 9.8 percent, was there ever more of a need to suspend the minimum wage for a year or two. The unemployed poor, often lower wage workers, need to be able to reenter the workforce quickly, need to retain and learn workplace skills and the easiest way is to eliminate the minimum wage for an extended period until the economy recovers. The US could modify the eligibility for Food Stamps and other government benefit programs to allow low-income workers who are paid below minimum wage to receive extra government benefits as a supplement to their wages.

Without a minimum wage, employers would hire many of the unemployed poor who would learn important workplace skills and increase their human capital value. With employment, workers will gain experience and increase their worth as they increase their human capital and their wages will rise as the economy recovers.

After a couple of years, the minimum wage would return to its previous legislated level. During the suspension period, many new workers will increase their workplace value through gaining many useful workforce skills that they would not otherwise be able to learn during an extended period of unemployment.

Monday, December 6, 2010

Exercise Will Not Help You Lose Weight

From TIME, "Why Exercise Won't Make You Thin" by John Cloud:
"In general, for weight loss, exercise is pretty useless," says Eric Ravussin, chair in diabetes and metabolism at Louisiana State University and a prominent exercise researcher. Many recent studies have found that exercise isn't as important in helping people lose weight as you hear so regularly in gym advertisements or on shows like The Biggest Loser — or, for that matter, from magazines like this one.

The basic problem is that while it's true that exercise burns calories and that you must burn calories to lose weight, exercise has another effect: it can stimulate hunger. That causes us to eat more, which in turn can negate the weight-loss benefits we just accrued. Exercise, in other words, isn't necessarily helping us lose weight. It may even be making it harder.
Read the complete TIME article here.

Saturday, December 4, 2010

CBO 2009 Data On US Immigration Policy

The Congressional Budget Office updated its February 2006 paper Immigration Policy in the United States. The embedded CBO paper below presents data through 2009 on permanent and temporary admissions of foreign nationals to the United States, the number and types of visas issued, the naturalization of residents, and enforcement of immigration laws—and makes comparisons with 2004, which was the most recent year for which most data were reported in the earlier paper.

Friday, December 3, 2010

Trends in Federal Tax Revenues and Rates: CBO Senate Finance Testimony

CBO Director Doug Elmendorf's testimony before the US Senate Committee on Finance, "Trends in Federal Tax Revenues and Rates" on December 2, 2010.

The sum and substance is that Federal revenues average 18 percent of GDP (with occasional yearly highs to 21 percent), Federal spending will reach 24 percent of GDP in 2020, the top 20 percent of households earned 55 percent of before-tax income and paid almost 70 percent of federal taxes and all the other quintiles paid a lower share of federal taxes than their share of income. The CBO added a macro-economic note that lowering tax rates boosts economic activity. Federal spending has to be cut by at least 3 percent of GDP (if can achieve a sustained 21 percent of GDP tax revenues) or more likely 6 percent of GDP (since Federal revenues average 18 percent of GDP and spending will be 24 percent if unchecked). The Federal government must cut its spending by 12.5 to 25 percent to eliminate the deficit.

Highlights from the CBO's summary of the testimony:

Federal Revenues: Trends and Projections
Over the past 40 years, federal revenues have ranged from nearly 21 percent of gross domestic product (GDP) in fiscal year 2000 to less than 15 percent in fiscal years 2009 and 2010, averaging 18 percent of GDP over that span. Most of the revenues--about 82 percent in 2010--come from the individual income tax and the payroll taxes used to finance Social Security, Medicare, and the federal unemployment insurance program. Other sources of revenues include corporate income taxes, excise taxes, estate and gift taxes--all together about 13 percent of revenues in 2010--and nontax revenues such as earnings of the Federal Reserve System, customs duties, fines, and various fees.
CBO also projects that under current law, federal spending will decline for a few years relative to GDP and then increase again, reaching nearly 24 percent in 2020--slightly lower than the peak level of almost 25 percent in fiscal year 2009 but well above the average of roughly 21 percent over the past four decades.
As a result, even with the projected substantial increase in revenues, under current law deficits between 2015 and 2020 will range between 2.6 percent and 3.0 percent of GDP. If lawmakers extended most or all of the 2001 and 2003 tax cuts and made no other changes to taxes and spending, revenues would be lower and deficits would be significantly larger.
As a result, even with the projected substantial increase in revenues, under current law deficits between 2015 and 2020 will range between 2.6 percent and 3.0 percent of GDP. If lawmakers extended most or all of the 2001 and 2003 tax cuts and made no other changes to taxes and spending, revenues would be lower and deficits would be significantly larger.
Taxes have an effect on the economy in addition to the revenues collected because they cause people to alter their economic behavior, which generally results in a less efficient allocation of resources. Taxpayers can respond in three general ways to taxes: They can change the timing of their activities, for example by accelerating bonus payments or the sale of assets into this year if they think tax rates on earnings or capital gains will increase next year; they can adjust the form of their activities, for example by substituting tax-preferred fringe benefits for cash wages if the tax rate on wages increases; or they can change more fundamental aspects of their behavior, for example by working or saving less if tax rates on earnings or capital income increase.
On balance, the evidence suggests that reducing tax rates boosts work and saving relative to what would occur otherwise, if budget deficits are held the same.
The Tax Burden and Who Bears It
Households generally bear the economic cost, or burden, of the taxes that they pay directly, such as individual income taxes (including taxes paid on dividends, interest, and capital gains) and employees’ share of payroll taxes. Households also bear the burden of the taxes paid by businesses. In particular, in CBO’s judgment (and that of most economists), employers’ share of payroll taxes is passed on to employees in the form of lower wages. In addition, households bear the burden of corporate income taxes....
The share of taxes paid by the top fifth of the population grew sharply between 1979 and 2007. Almost all of that growth can be attributed to an increase in that group’s share of before-tax income. In 2007, households in the highest quintile earned 55 percent of before-tax income and paid almost 70 percent of federal taxes; for all other quintiles, the share of federal taxes was less than the share of income.

The complete CBO summary is available here.

Elmendorf's slide presentation to the US Senate Finance Committee follows:
View more presentations from Congressional Budget Office.