Thursday, June 30, 2011

Cleveland Fed Predicts 1.1 Percent Yearly GDP Growth And 1.7 Percent Chance Of Recession

From The Federal Reserve Bank of Cleveland, "Yield Curve and Predicted GDP Growth" by Joseph G. Haubrich, Vice President and Economist and Timothy Bianco, Research Analyst, June 30, 2011:
Projecting forward using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.1 percent rate over the next year, essentially the same as for May, and just a rounding convention up from the predictions for April and March. The strong influence of the recent recession is leading toward relatively low growth rates, with a steady beat of 1 percent predictions. Although the time horizons do not match exactly, the forecast comes in on the more pessimistic side of other predictions, though 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 June is 1.7 percent, up just a bit from May’s 1.3 percent and April’s 0.9 percent. So although our approach is somewhat pessimistic as regards the level of growth over the next year, it is quite optimistic about the recovery continuing.

Imports And Exports Lower Domestic Self-Employment: Bad News for Open Economies And Free Trade

From "Self-Employment in the Global Economy" Federal Reserve Boston of Boston, Working Paper 11-5, by Federico J. Díez and Ali K. Ozdagli:
This paper studies the effects of foreign competition on self-employment levels. We begin by pointing out a previously unknown fact: the greater the exposure to foreign competition, the smaller the fraction of self-employed people. This fact holds across very different countries, across relatively similar countries like European Union members, and across industries within the United States. We develop a model where heterogeneous agents select themselves into being either employees or self-employed in the spirit of Lucas (1978). This, in turn, translates into intra-industry firm heterogeneity as in Melitz (2003). Self-employed agents (firms) can also decide to enter into the export markets, subject to fixed and variable trade costs. The model delivers three basic predictions: (1) domestic self-employment increases with the trade costs of exporting from a foreign country to the home country, (2) domestic self-employment increases with the trade costs of exporting to the foreign country, and (3) higher levels of self-employment are associated with a lower fraction of exporting firms. Our empirical work on inter-industry data for the United States confirms these predictions of the model.
From the paper:
We start by unveiling a previously unknown fact -- namely, that the rate of self-employment in an economy (or sector) is negatively affected by the economy's (sector's) degree of openness, measured either as trade costs or as the ratio of exports and imports to GDP. That is, economies (sectors) that are more exposed to foreign competition show lower levels of self-employment.
Read the complete paper here.

Public's Psychological And Emotional Impediment To Fixing Medicare

If you talk to adults whose parents, one or both, are still living, many would tell you that it is worth spending money to treat parents' illnesses and extend their lives, even if the parent is severely ill and will only gain a few months of extra life. How could you deny a person a few more months of life or the possibility of a cure so that they could live a little longer, the adult child(ren) would likely say. Most of Medicare dollars are spent on the very old, those in their 80s and beyond, often in attempts to provide the elder patient a few months of life. How can money be an object, this is my parent and my children's grandparents, the adult children will say.

Yet, doctors have been in situations where Medicare has refused to pay for an elder's treatment. I have spoken with a few physicians, clearly not a statistically valid sample, and they have told me that adult children act differently and make different choices when it is their own money (or their inheritance) that will be spent versus government dollars.

While grown-up children will often fight for Medicare paid treatment, when Medicare will not pay, the children are given the option to get the treatment for their parent at their own expense. Invariably, when it is their own funds that will be spent on an expensive medical treatment, children are much more willing to forego treatment for their parent and to let the disease take its natural course.

Spending someone else's funds invokes no compromises. Spending one's own money involves setting priorities and making compromises, even about medical treatment for an elder parent.

People who work in hospices, where the goal is comfort and quality of life, versus curing an incurable disease or illness, will tell you how happy the patients (and staff) generally are.

Many people who have not faced an incurable illness will often underestimate their willingness to accept the inevitable. Adult children overestimate how much of their own funds they will spend to extend a elder parent's life a few months.

Of course, in all cases, people are more willing to spend other people's money and the government's money more freely than their own. If their there is not enough government money, just take more of other's money through taxes.

If people are not willing to spend their own money to extend their elder parent's life a few months, why should the government spend other people's money to do it.

With no skin in the game for adult children or their elder parents, there is a tremendous emotional and psychological barrier to reducing the most expensive part of Medicare.

To do it successfully, there needs to be a transition phase. Unless adult children and seniors get the experience of making medical choices using their own funds, having skin in the game, politicians will face a tough go in trying to curtail spending on very ill and medically expensive seniors.

Tuesday, June 28, 2011

Aging US Population Changing Suburbia Politics

From The Washington Post, "If baby boomers stay in suburbia, analysts predict cultural shift" by Carol Morello:
Although the entire United States is graying, the 2010 Census showed how much faster the suburbs are growing older when compared with the cities. Thanks largely to the baby-boom generation, four in 10 suburban residents are 45 or older, up from 34 percent just a decade ago. Thirty-five percent of city residents are in that age group, an increase from 31 percent in the last census.
The political ramifications could be huge as older voters compete for resources with younger generations.

“When people think of suburban voters, it’s going to be different than it was years ago,” Frey said. “They used to be people worried about schools and kids. Now they’re more concerned about their own well-being.”
Read the complete article here.

Monday, June 27, 2011

Is The Case For College Too Good To Be True?

Recent research, The Hamilton Project, mentioned in the New York Times, and on Greg Mankiw's blog, about the value of a college degree states:
On average, the benefits of a four-year college degree are equivalent to an investment that returns 15.2 percent per year. This is more than double the average return to stock market investments since 1950, and more than five times the returns to corporate bonds, gold, long-term government bonds, or home ownership. From any investment perspective, college is a great deal.
15 percent is the unleveraged return. Although college students often borrow funds to pay for tuition, the 15 percent return is computed on the total cost of the education and not on just the students' savings and funds invested, the equity portion, of the investment.

The 15 percent return is a consistent return over time. It is almost Madoff like, but these are the real average returns, not made up numbers. If someone came to professional or knowledgeable investors, and promised them double the stock market return over their working lives, they would think he was a scam artist and fraudster.

It is very difficult, if not outright impossible, to consistently surpass the investment returns of the stock market, yet alone achieve double the market return for many years, especially without leverage or without substantial risk.

Why The Double The Market Return?
Employers do not spend money they do not have to spend. Excessive compensation eats into corporate profits and lowers stock market share price. Why would employers pay a 15 percent return on a college investment when, most likely, employers would offer a lower return than 15 percent and many college graduate employees would accept less than 15 percent? Heck, any return above the risk free rate would make a college education worthwhile.

There are several possibilities to justify a double market return on investment:
  • There are wide statistical variances, high risk, in college graduate earnings and college graduates demand compensation for that risk. To earn double the market return, the systemic risk of college grad earnings would have to be double that of the stock market, which is equivalent to double the risk of the US economy. Since college grads have a lower unemployment rate than non-college grads, it is unlikely they face double the systemic risk of the economy. But, that is overall and not on an individual case. There maybe classes of college grads for which their is excessive earnings' risk not identifiable until they enter the workforce and for which they do not have self-knowledge until they are in the workforce.

  • The labor market for college graduates is highly inefficient with high transaction costs and employers are willing to pay a high salary for college graduates. However, market and capitalistic forces would work to erase or lower the inefficiency and transaction costs until they disappeared.

  • Demand for college graduates exceeds supply to the extent that their premium is double the market return. If true, it raises the question of why employers have not found a substitute strategy for college grads to avoid the high pay premium. Productivity can be increased from increasing capital investment as well as hiring more productive college grad employees.

  • There is survivorship bias in the reported results. The average return is computed after the fact. If some college graduates drop out of the labor market and they have lower wages than the colleges graduates that remain, the results will be skewed upwards. Professional investors know that mutual funds, hedge funds, etc. close the funds with low returns and keep funds with high returns to make average returns after the fact look better than they are. [Addendum} The cost of college for non-graduating students has to be included in the calculation. To only look at graduates understates the total risk and total cost to high school graduates who go to college. Not all college entrants will graduate and looking only at graduates understates the amount of investment and overstates earnings because it does not include the cost to high school graduates who enter college but do not graduate and their lower earnings.
Any, or all, of the above possibilities are the explanation for the high college grad wage premium.

Based on my own investment knowledge, I would guess most of the premium is survivorship bias. If all the college grads in any year were followed prospectively and their earnings tabulated going forward, I think the average return for their college investment results would be much closer to the average stock market return over the same period, if not below.

I am not saying a college degree is not a worthwhile investment. I am just questioning the extent of the above market return. I do believe a college investment will yield a positive return, just not double the stock market return.

Excellent McKinsey Article On Recognizing Bad Business Strategies

From McKinsey Quarterly, "The perils of bad strategy: Bad strategy abounds, says UCLA management professor Richard Rumelt. Senior executives who can spot it stand a much better chance of creating good strategies." June 2011, by Richard Rumelt:
Too many organizational leaders say they have a strategy when they do not. Instead, they espouse ... “bad strategy.” Bad strategy ignores the power of choice and focus, trying instead to accommodate a multitude of conflicting demands and interests. Like a quarterback whose only advice to his teammates is “let’s win,” bad strategy covers up its failure to guide by embracing the language of broad goals, ambition, vision, and values. Each of these elements is, of course, an important part of human life. But, by themselves, they are not substitutes for the hard work of strategy.
A strategy is a way through a difficulty, an approach to overcoming an obstacle, a response to a challenge. If the challenge is not defined, it is difficult or impossible to assess the quality of the strategy. And, if you cannot assess that, you cannot reject a bad strategy or improve a good one.
Read the complete McKinsey article here.

Cable Boxes Now Largest Electricity Use In Homes

From The New York Times, "Atop TV Sets, a Power Drain That Runs Nonstop" by Elisabeth Rosenthal:
Those little boxes that usher cable signals and digital recording capacity into televisions have become the single largest electricity drain in many American homes, with some typical home entertainment configurations eating more power than a new refrigerator and even some central air-conditioning systems.
Read the complete article here.

US Uses Oil In Just About Everything, Making A Reduction In Oil Dependency Difficult

From The New York Times, "Oil Oozes Through Your Life" by Stephanie Clifford:
Since petroleum replaced whale oil as a main fuel source more than a century ago, chemical companies and refineries have found a startling range of uses for it, from asphalt to vanilla flavoring in ice cream to pills from the drugstore. It has oozed into everyday life, so reducing dependency is a more complicated proposition than some might think.
Source: The New York Times
(click to enlarge)
Read the complete article here.

Sunday, June 26, 2011

Comparison Of Return From College Degree Versus Other Investments

From The New York Times, Economix, "Why College Brings a Huge Return" by David Leonhardt:

Source: The Hamilton Project as published in The NY Times 

Source: The Hamilton Project as published in The NY Times 

Read the entire New York Times article here.

Friday, June 24, 2011

US Labor Available At 25 Cents Per Hour

From "Will Work for 25 Cents an Hour! How bad is the job market? Tom Weber chronicles the lowest hourly wage that Americans, and others around the world, will accept for an hour of work." by Thomas E Weber on the Daily Beast:
To find out this country’s real minimum wage—the market-proven low that U.S. workers will accept for an hour’s work—The Daily Beast designed an experiment. Over several weeks, we used Mechanical Turk, an online marketplace for freelance work operated by, to post simple, hour-long jobs to see how much or how little we’d need to pay workers.
Each time a worker accomplished the task, we reposted the job at a lower wage, and repeated as necessary until we found the absolute bottom price that gave us takers. To make sure that one particularly desperate person didn’t skew the results, we would only consider a bottom wage that had three different workers who accepted and completed the task (we checked their results for accuracy to make sure they definitely completed the assignment).
The United States of America, where we were able to hire three workers to do our job for a shockingly low figure: 25 cents an hour.
Read the complete article here.

The brief, small experiment does raise questions about labor price stickiness, minimum wage effects on our current high unemployment and the labor market clearing price.

Thursday, June 23, 2011

Employers Face Shortage Of College Grads By 2020: McKinsey & Company

From McKinsey Quarterly "The growing US jobs challenge: It could take more than five years—longer than after any postwar downturn—to replace the millions of jobs lost to the 2008–09 recession. How can the US rev up its job creation engine?" June 2011:
The United States faces a daunting challenge in creating jobs: at current rates, it will take until 2016 to replace the 7 million of them lost during the 2008–09 recession. To regain full employment—finding work for the unemployed and accommodating the 15 million Americans expected to enter the labor force this decade—the US economy must create 21 million jobs by 2020.
  • Assuming current trends, the United States will not have enough workers with the right education and training to fill the jobs likely to emerge. By 2020, there will be up to 1.5 million too few college graduates to meet demand—and 5.9 million more Americans without high school diplomas than employers can use.

  • At all levels of postsecondary education, Americans are not getting the “job ready” skills that employers say they require. In our survey, 40 percent of the executives whose companies plan to hire next year said they’ve had unfilled openings for six months or longer because they cannot find qualified applicants.

Read the complete article here.

Tuesday, June 21, 2011

Our Diminished Return On Investment For Our Taxes

In The New York Times Blog, Enonomix, "Are Taxes High or Low? A Further Look" Bruce Bartlett writes:
Nevertheless, it is clear that federal taxes have not been rising and are, at least in historical terms, lower for most taxpayers than they have been since the 1960s. Those who assert that taxes are rising or are at confiscatory levels simply do not know what they are talking about.
I find it startling that economists and the media in their discussions about tax rates fail to consider and discuss what the tax paying public gets in return for its payments to and investments in government and whether the return on our taxes has decreased, increased or remain the same over the years.

In the years after WWII, our taxes invested in a strong and well-equipped armed forces for our perceived protection against a WWIII. American's taxes built an interstate highway system and supported scientific research, including manned and unmanned space satellites and a man on the moon. Taxes funded the GI Bill for veteran's college education and business start-ups. Additionally, our money funded college and technical school loans and scholarships for anyone who enrolled.

The government used our money to attempt to eradicate poverty, child malnutrition, to provide free and affordable healthcare for the poor, for children and for seniors, and to provide a quality k-12 education for all children.

Tax paying Americans saw their taxes as investments in America's future and prosperity.

What Do We Get For Our Taxes Now

We have a military that is in distant parts of the world with unclear objectives and unclear links to America's safety. We have an armed forces that we fund that is doing the work that Europeans and others should be doing and paying for themselves.

Our government run k-12 school system is atrocious, expensive and unaccountable to anyone.

Government healthcare costs have exploded to the point where the continue viability of Medicare and other government health programs are uncertain. Uncontrolled, above inflation rates, cost increases are one of the major reasons.

The US infrastructure, its roads, tunnels and bridges, are rapidly deteriorating, and major new projects are just dreams on drawing boards and in politicians' speeches.

For a while in the 1950s and the decades after, American's perceived and were promised a decent return for their money paid into government through taxes and fees.

Today, more people probably see government spending and its necessary taxes as incapable of providing a positive and fair investment value to the country. People see how government education has failed, how government reimbursed health care costs have spiraled out of control. Most people would say education and other government services are inferior today than they were decades ago.

Need A Benchmark Of The Value Of Government Benefits And Services.

To have a sensible discussion about tax rates and tax levels, we need a measure of the value of the return the public gets for its tax dollars.

If I spent $2 in inflation adjusted dollars for a pint, 16 ounces, of ice cream 20 years ago, and today, I spend the same amount, $2 in inflation adjusted dollars, but get 12 ounces instead of the previous 16 ounces, is it useful to look only at what I spent? Don't we have to also consider what I get back for my money? The same is true for taxes. Looking at only the amount of tax, rates or revenue, without considering what the country and its residents get for that money is an incomplete and thoroughly misleading analysis.

Until there is a measure of the value of government services, benefits, and spending to use to judge the value and benefit of taxes, discussions about tax rates are incomplete.

If part of the public perceives it will get back benefits of lower value than it used to from government tax dollars, that part of the public will be against tax increases. Likewise, if part of the public sees value to government spending, that part of the public will favor more taxes.

It would be extremely helpful for discussions about tax rates to have some objective measure of the value of the return that US residents get for their tax dollars.

Thursday, June 16, 2011

Lower Income And Capital Gains Tax Rates Raises Tax Revenues

From The Wall Street Journal, "Why 70% Tax Rates Won't Work: Memo to Robert Reich: The income tax brought in less revenue when the highest rate was 70% to 91% than it did when the highest rate was 28%." by Alan Reynolds:

It is particularly remarkable that individual tax revenues did not fall as a percentage of GDP because changes in tax law, most notably those of 1986 and 2003, greatly expanded refundable tax credits, personal exemptions and standard deductions. As a result, the Joint Committee on Taxation recently reported that 51% of Americans no longer pay federal income tax.
In short, reductions in top tax rates under Presidents Kennedy and Reagan, and reductions in capital gains tax rates under Presidents Clinton and George W. Bush, not only "paid for themselves" but also provided enough extra revenue to finance negative income taxes for the bottom 40% and record-low income taxes at middle incomes.
Read the complete article here.

Wednesday, June 15, 2011

Comment On Mortgage Interest Deduction In NY Times Economix Blog

My comment to Economix in The New York Times, "The Misunderstood Mortgage Interest Deduction" by Casey B. Mulligan:
Actually, the consumer mortgage interest deduction is irrelevant because mortgage interest rates will adjust (rise) to account for the government tax deduction subsidy. The subsidy will increase the demand for mortgages, but not necessarily increase the overall demand for homes. A homebuyer has a fixed monthly cash flow to divide among taxes, home-related payments (including mortgage interest), other spending and savings. Lowering tax payments through a mortgage deduction will free up cash for home-related payments, which will increase the demand for larger mortgages. The availability of cash for a higher mortgage amount will allow consumers to increase their mortgage to home value ratio or to purchase a more expensive home. Either way, mortgage interest rates will rise due to increased demand for purchase mortgage funds for a larger principal amount and due to the increased risk of homeowner default due to the higher amount of debt and leverage, absent a government guarantee against homeowner default.

The mortgage interest rate will rise until taxes and mortgage payments are in equilibrium again, such that the combined money on taxes and house payments remains the same with or without a mortgage deduction. The government mortgage guarantee (direct and implicit), GNMA, FNMA, etc., prevents more debt and more leverage, i.e. a higher mortgage amount for the same house price, from coming into play. The government guarantee prevents the mortgage interest rate from risk adjusting for the increased risk of homeowner default from the higher mortgage to home value ratio and for the increased amount of household debt. Interest rates will increase solely due to increased demand for mortgage funds due to the tax subsidy created by the interest deduction. Mortgage interest rates will not rise due to increase homeowner default risk, until payment from the government mortgage guarantee agencies, (GSEs), is itself in doubt.

The interest deduction increases demand for mortgage funds, acts as a subsidy, which raises interest rates. A new equilibrium point will be set to meet the demand for more funds, which should be the same as without the interest deduction because the increase in mortgage interest rates will lower demand for mortgage funds until the total of tax payments and house payments are where they were without the mortgage interest deduction. The interest deduction should have no effect on overall demand for housing. Demand for housing is generally affected by other economic factors, such as a region's economic growth, employment opportunities, availability of homes, population mobility, etc. Additionally, the GSEs guarantees will allow homeowners to take on higher mortgage amounts in excess of their risk levels.

Presidents Need Long-Term Economic Incentives: Modifying Presidential Compensation

An article about the economy and the President in today's Wall Street Journal, "A Welfare State or a Start-Up Nation?: After one generation, a one percentage point difference in growth rate becomes a 25% difference in per capita income." by Allan Meltzer raises an interesting point about short-term versus long-term US economic growth.

While not discussed directly by Meltzer, his article collaterally raises an important issue. Do Presidents have long-term incentives? Does the US need to create long-term incentives for Presidents? Should the President's (also maybe Congress's) compensation be modifed to include long-term, deferred compensation incentives?

Short Term Goals
Presidents and other elected officials definitely have short-term goals to get reelected and to be popular in the media and public's eyes. If the President were the CEO of a large corporation, part of his compensation package would attempt to promote long-term corporate goals through a long-term incentive compensation package, such as deferred compensation, stock options, etc.

Incentives Matter
Imagine the difference in a President's political and economic objectives if a President's compensation included a possible substantial deferred pay bonus after his term in office that depended on the future growth rate in GDP and the future change in unemployment levels.

Suppose our Presidents' salaries included a substantial deferred bonus per year, after they left the Office of the President, for same number of years they were President, to be paid immediately following their term as President, and that the amount depended on the performance of the economy after they left office as measured by GDP growth and the decline (or the stability if already low) in unemployment in each year of bonus eligibility.

Meltzer states:
The welfare of the citizens—poor, middle-class and wealthy—is best improved by using resources more productively. Of course, increased productivity isn't an instant cure for what ails us; there is no instant cure. Administration and Federal Reserve policies have tried mightily, and wastefully, to get quick gains—with few results to show. Despite near-zero interest rates and almost a trillion dollars in "stimulus" spending, unemployment remains stuck at 9% and a true recovery is elusive.
Mr. Obama and his followers claim they want a solution that is "fair." Why is it fair to distribute more welfare to today's voters at the expense of their children and grandchildren who will pay for this less productive use of resources? This is the same "fair" approach that Europeans chose decades ago, and which led to chronic low growth and high unemployment.
It isn't fair to tax future generations just because they can't vote. We have a choice between a brighter future for our descendants and more social spending now. The missing words "more productive use of resources" are critical for a rational choice. To realize the promise that the U.S economy has always offered, we must choose less social spending, less intrusive regulation, and more efficient use of resources in both the public and private sectors.
Helping Everyone
Long-term, sustained, non-inflationary economic growth helps everyone; the rich, the poor, the middle class, the current generation of workers and the future generation of workers. Additionally, economic growth fills state and federal governments' tax coffers and allows government to provide economic safety nets and government services where necessary.

Shouldn't we use all we know about economic incentives, incentive compensation and Public Choice Theory to foster long-term US economic growth and employment?

Intrade Contract For Health Care Law Declared Unconstitutional Drops 40 Percent

The odds on Intrade that the US Supreme Court will find the individual mandate in the new healthcare law unconstitutional before December 31, 2012 dropped 40 percent from 50 to 30.

The contract is more complicated than usual because there is a short limit on the time for the event to occur and there is a specific reason in the contract for the law's unconstitutionality, the individual mandate is unconstitutional. The contract's value and risk depends on time and a specific reasoning of the court, even if the law is declared unconstitutional.
  1. If the US Supreme refuses to hear the case, the contract will expire at 0 value.

  2. If the US Supreme Court decides the constitutionality of the law after December 31, 2012, the contract will expire at at 0 value, even if the Court declares the law unconstitutional at that later date.

  3. If the Supreme Court declares the health care law unconstitutional for reasons other than the individual mandate and finds the individual mandate within the powers of Congress, i.e. healthcare law declared unconstitutional but not due to individual mandate, the contract will expire at 0 value.

Saturday, June 11, 2011

Sarah Palin's Emails Available Online And Searchable

Sarah Palin's email collection is available online in searchable format, courtesy of Crivella West Inc, at

There is no charge or registration required.

At least 30 Reported Foodborne Illness Outbreaks With Sprouts Over Last 15 Years

From the federal government website
Since 1996, there have been at least 30 reported outbreaks of foodborne illness associated with different types of raw and lightly cooked sprouts. Most of these outbreaks were caused by Salmonella and E. coli.
The primary reason so many outbreaks of e coli and salmonella outbreaks are associated with bean sprouts, according to is:
Unlike other fresh produce, seeds and beans need warm and humid conditions to sprout and grow. These conditions are also ideal for the growth of bacteria, including Salmonella, Listeria, and E. coli.
Furthermore, the federal government regularly warns the elderly, the young and pregnant women not to eat sprouts:
Children, the elderly, pregnant women, and persons with weakened immune systems should avoid eating raw sprouts of any kind (including alfalfa, clover, radish, and mung bean sprouts).
In Germany, the death toll from the current case of tainted organic bean sprouts infected with a virulent strain of e coli has risen to 33 with thousands ill and over 700 suffering from related kidney failure.

Shouldn't we ban restaurants from serving raw bean sprouts? Or at least require restaurants to post warnings that food is prepared where raw bean sprouts are used? Or require restaurants to warn patrons if an item, such as a sandwich or pre-prepared salad, contains raw bean sprouts? Or require a notice on the menu that raw beans sprouts may be contaminated with e coli and salmonella?

Friday, June 10, 2011

Regulators Need to Stop Obsessing Over Bank Capital Amounts

From Bloomberg, "Fed Said to Consider Expansion of Capital Reviews" by Craig Torres:
The possible expansion of the reviews shows how the Fed and other regulators are focusing on capital as the most important buffer against risk.
Capital is an ancient artifact of double entry bookkeeping that has little use to protect banks in today's modern financial world. It is an balancing account so that the liability side of the balance sheet will match the asset side of the balance sheet. More capital, shy of 100 percent, would not have prevented the last financial crisis.

The bank crisis was initially a liquidity and funding crisis, which no amount of bank capital, shy of 100 percent, could have prevented. Lehman and Bear Stearns ran out of collateral for funding due to the decreasing collateral value of mortgage related securities. Citibank and other banks faced similar short-term funding and deposit withdrawal crises.

When a financial institution borrows, it always faces the risk that a rollover refunding and refinancing crisis will occur. Bank capital does not alleviate that risk, since capital reflects neither liquidation value, stock market value, selling price value, going concern value nor liquid securities or cash on hand.

Capital is an easy accounting metric to tally and to periodically report to regulators. More capital does not prevent financial crises. It however is an established regulatory metric and trigger for a regulatory takeover of an institution. More capital in a crises just delays regulatory involvement but it does not prevent financial institutional crises.

Even Money Odds US Supreme Court Will Declare Health Care Law Unconstitutional

The Intrade contract odds that the US Supreme Court will find the new health care law unconstitutional is trading at 50 percent.

Wednesday, June 8, 2011

Feldstein Holds Obama's Policies Accountable For Slow US Economic Growth

From The Wall Street Journal, "The Economy Is Worse Than You Think: Expect more bad news until someone enacts a plan to bring deficits under control without raising taxes" by Martin Feldstein:
The policies of the Obama administration have led to the weak condition of the American economy.
The economy will continue to suffer until there is a coherent and favorable economic policy. That means bringing long-term deficits under control without raising marginal tax rates—by cutting government outlays and by limiting the tax expenditures that substitute for direct government spending. It means lower tax rates on businesses and individuals to spur entrepreneurship and investment. And it means reforming Social Security and Medicare to protect the living standards of future retirees while limiting the cost to future taxpayers.
Read the complete article here.

Monday, June 6, 2011

30 Percent Of Employers Will Drop Employee Health Insurance Under New Health Law: 50-60 Percent Will Pursue An Alternative To Employer Health Coverage

From McKinsey Quarterly, "How US health care reform will affect employee benefits: The shift away from employer-provided health insurance will be vastly greater than expected and will make sense for many companies and lower-income workers alike." June 2011, by Shubham Singhal, Jeris Stueland, and Drew Ungerman:
  • Overall, 30 percent of employers will definitely or probably stop offering ESI [employer-sponsored insurance] in the years after 2014.

  • Among employers with a high awareness of reform, this proportion increases to more than 50 percent, and upward of 60 percent will pursue some alternative to traditional ESI.

  • At least 30 percent of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries.

  • Contrary to what many employers assume, more than 85 percent of employees would remain at their jobs even if their employer stopped offering ESI, although about 60 percent would expect increased compensation.
Health care reform fundamentally alters the social contract inherent in employer-sponsored medical benefits and how employees value health insurance as a form of compensation. The new law guarantees the right to health insurance regardless of an individual’s medical status. In doing so, it minimizes the moral obligation employers may feel to cover the sickest employees, who would otherwise be denied coverage in today’s individual health insurance market. Reform preserves the corporate tax advantages associated with offering health benefits—except for high-premium “Cadillac” insurance plans.

Starting in 2014, people who are not offered affordable health insurance coverage by their employers will receive income-indexed premium and out-of-pocket cost-sharing subsidies. The highest subsidies will be offered to the lowest-income workers. That reduces the social-equity advantage of employer-sponsored insurance, by enabling these workers to obtain coverage they could not afford on today’s individual market. It also significantly increases the availability of substitutes for employer coverage. As a result, whether to offer ESI after 2014 becomes mostly a business decision.

US Lags In Science And Math Teaching

From The Wall Street Journal, "Industry Puts Heat on Schools to Teach Skills Employers Need" by James R Hagerty:

Obama's Disruption Of Bankruptcy Rules And Priorities Will Be His Unfavorable Lasting Legacy

From The Wall Street Journal, "The Real Cost of the Auto Bailouts: The government's unnecessary disruption of the bankruptcy laws will do long-term damage to the economy." by David Skeel:
The claim that the bailouts were done at little cost is even more dubious. This side of the story rests on the observation that GM's success in selling a significant amount of stock, reducing the government's stake, and Chrysler's repayment of its loans, show that the direct costs to taxpayers may be lower than many originally feared. But this doesn't mean that taxpayers are off the hook. They are still likely to end up with a multibillion dollar bill—nearly $14 billion, according to current White House estimates.

But the $14 billion figure omits the cost of the previously accumulated tax losses GM can apply against future profits, thanks to a special post-bailout government gift. The ordinary rule is that these losses can only be preserved after bankruptcy if the company is restructured—not if it's sold. By waiving this rule, the government saved GM at least $12 billion to $13 billion in future taxes, a large chunk of which (not all, because taxpayers also own GM stock) came straight out of taxpayers' pockets.

The indirect costs may be the worst problem here. The car bailouts have sent the message that, if a politically important industry is in trouble, the government may step in, rearrange the existing creditors' normal priorities, and dictate the result it wants. Lenders will be very hesitant to extend credit under these conditions.

This will make it much harder, and much more costly, for a company in a politically sensitive industry to borrow money when it is in trouble. As a result, the government will face even more pressure to step in with a bailout in the future. In effect, the government is crowding out the ordinary credit markets.
Also, see my November 10, 2010 post, "Obama's Lasting Negative Legal Legacy: GM, Chrysler Bankruptcies" and my October 28, 2009 post, "Will The Adverse Future Impact Of The Chrysler And GM Bankruptcies Be Obama's Lasting Legacy?"

Friday, June 3, 2011

US Productivity Measures Overstate Domestic Gains: Explains Lack Of Workers' Wage Gains And Lack Of Job Growth: McKinsey & Co.

From McKinsey & Co, "Not all productivity gains are the same. Here's why." by Michael Mandel and Susan Houseman, June 2011:
Under ordinary circumstances, economic theory would tell us that an industry with rising productivity would pay higher wages and/or boost employment. However, real wages for many production and nonsupervisory workers stagnated in most tradable industries during this period, even as jobs disappeared. Notably, the durable goods manufacturing sector showed only a 0.2 percent cumulative increase in real wages for production and supervisory workers from 1990 to 2008, despite more than doubling in productivity over the same stretch, according to the Bureau of Labor Statistics.

But recent work suggests a resolution to this apparent paradox. [See, for example, Susan Houseman, Christopher Kurz, Paul Lengermann, and Benjamin Mandel, “Offshoring Bias in U.S. Manufacturing,” Journal of Economic Perspectives, Spring 2011. See also Michael Mandel, “Implausible Numbers: How our current measures of economic competitiveness are misleading us and why we need new ones,” February 2011.] The key is to understand that the US government’s systems for tracking the national economy were never designed to deal with offshoring or global supply chains. In particular, shifts in global sourcing to take advantage of lower costs—the very essence of globalization—are incorrectly picked up in the US economic statistics.

As a result, the apparent strong growth in the productivity or value-added per job in tradable industries actually combines three very different effects:
  • Improvements in domestic production processes
  • Gains in global supply chain efficiency
  • Productivity gains at foreign suppliers.
Each of these components of “productivity growth” has different implications for real wages and for the creation of new jobs. Understanding the distinctions among them can improve understanding of our current situation and open up new avenues for policy.
It matters greatly for wages and employment whether rising value-added per worker is being driven by domestic production improvements, supply chain efficiencies, or by productivity gains abroad.
Read the complete article here.