Friday, September 30, 2011

Infectious Disease Responsible For Regional IQ Differences

From Scientific American, "Why Is Average IQ Higher in Some Places? A surprising theory about global variations in intelligence" by Christopher Eppig:
So far, the evidence suggests that infectious disease is a primary cause of the global variation in human intelligence. Since this is a developmental cause, rather than a genetic one, it’s good news for anyone who is interested in reducing global inequality associated with IQ. If the primary factors were genetic, as some have suggested, IQ would be very difficult to change.
Read the complete article here.

The research paper, "Parasite prevalence and the worldwide distribution of cognitive ability" by Christopher Eppig*, Corey L. Fincher and Randy Thornhill is available here.

Sylvia Robinson, Mother Of Hip Hop, Dead At 76

Star-Ledger file photo
Sylvia Robinson, the visionary singer-songwriter known as "the mother of hip-hop," has died at the age of 76. She is pictured in this Star-Ledger file photo from 1973.
From The Star-Ledger "Sylvia Robinson, the 'mother of hip-hop,' dead at 76" by Tris McCall:
Sylvia Robinson, singer, songwriter, pop music visionary and entrepreneur, died today of congestive heart failure. The longtime Englewood resident was 76 years old.

Although Robinson, who was born Sylvia Vanterpool in New York City, had hits of her own as a recording artist — including the infectious "Love is Strange," which was inducted into the Grammy Hall of Fame in 2004, and the seductive "Pillow Talk" — she’s best known as the producer of the Sugarhill Gang’s "Rapper’s Delight," the first hip-hop hit single.
Read the complete article here.

Thursday, September 29, 2011

Hispanic Kids Now Largest Children's Group Living In Poverty

From The Washington Post, "Hispanic kids the largest group of children living in poverty" by Carol Morello and Ted Mellnik:
Hispanics now make up the largest group of children living in poverty, the first time in U.S. history that poor white kids have been outnumbered by poor children of another race or ethnicity, according to a new study.

In a report released Wednesday, the Pew Hispanic Center said that 6.1 million Hispanic children are poor, compared with 5 million non-Hispanic white children and 4.4 million black children. Pew said Hispanic poverty numbers have soared because of the impact of the recession on the growing number of Latinos.
Read The Washington Post article here.

Read the Pew Hispanic Center report, "The Toll of the Great Recession" here.

From The Pew Hispanic Center :
More Latino children are living in poverty—6.1 million in 2010—than children of any other racial or ethnic group. This marks the first time in U.S. history that the single largest group of poor children is not white. In 2010, 37.3% of poor children were Latino, 30.5% were white and 26.6% were black.

This negative milestone for Hispanics is a product of their growing numbers, high birth rates and declining economic fortunes. According to the 2010 U.S. Census, Hispanics today make up a record 16.3% of the total U.S. population. But they comprise an even larger share—23.1%—of the nation's children, a disparity driven mainly by high birth rates among Hispanic immigrants.

Of the 6.1 million Latino children living in poverty, more than two-thirds (4.1 million) are the children of immigrant parents. The other 2 million are the children of parents born in the U.S. Among the 4.1 million impoverished Latino children of immigrants, the vast majority (86.2%) were born in the U.S.

Wednesday, September 28, 2011

NYS Proposes Regulations for Hydrofracking: Opens Comment Period And Schedules Public Hearings

New York State Department of Environmental Conservation High Volume Hydraulic Fracturing (Hydrofracking) Proposed Regulations, along with a calendar of scheduled public hearings, assorted background information and ways to comment are available here.

Tuesday, September 27, 2011

Continued US Joblessness Comes From Weak GDP Growth: Current Jobless Rate Post Recession Typical Of Past Weak Recoveries

From Federal Reserve Bank of Cleveland Economic Commentary "This Time May Not Be That Different: Labor Markets, the Great Recession and the (Not So Great) Recovery" by Murat Tasci:
net job creation has also been relatively anemic, and we have gained back less than 20 percent of the jobs that were lost during the recession. The situation has analysts asking if this “jobless recovery” means that there is now something fundamentally different about the labor market.

In this Commentary, we show that the labor market’s performance has largely been consistent with the path of output during the recession and the subsequent recovery. The jobless nature of the current recovery stems from weak GDP growth. There is little evidence of a fundamental change in the labor market. [Emphasis added].

Source: Federal Reserve Bank of Cleveland

The figure shows a relatively strong correlation between GDP growth and employment growth in recoveries. The current recovery is located in the southwest corner of the chart—indicating that the recovery has experienced both weak GDP growth and weak employment growth. Indeed, based on the patterns observed in prior recoveries, payroll employment growth is just where one would expect it to be given the growth in GDP. Moreover, all the previous recovery episodes that did not lead to significant employment gains—the jobless recoveries—are associated with weak output recoveries. [Emphasis added].
Read the complete commentary here.

SEC Proposes New Stock Market Circuit Breakers: An Unneeded Rule

From Bloomberg, "SEC Proposes Cutting Threshold for Trading Halts" by Nina Mehta:
The Securities and Exchange Commission began an overhaul of rules adopted after the Crash of 1987 designed to shut down the stock market during periods of volatility
S&P 500 declines of 7 percent, 13 percent and 20 percent from the prior day’s close would set off halts across all markets, narrowing the current thresholds of 10 percent, 20 percent and 30 percent, according to the SEC.
Read the complete article here.

With the volatility index, VIX, at double its historical average, the potential to reach a lower circuit breaker limit is much greater than its been in the past. The VIX is currently trading at around 36, which translates into a daily VIX of around 2.25 and more, if the VIX goes back to its recent highs in the 40s.. The 7 percent suggested SEC limit is about 3 standard deviations. A 3 standard deviation event, on the loss side, is expected to occur about 1.5 times out of a thousand. A thousand trading days is approximately four years. So, we should expect the SEC circuit breakers to kick in on average at least 3 times every 8 years.

Of course, stock prices are information about value, changes in a company's profit outlook, the economy, and the pricing of risk.

Trading and the disclosure of prices are a form of speech about the current value and future value of the security, its expected cashflows and riskiness. Any curtailment of the right to speech, except in the cases allowed by the US Supreme Court, is an abridgment of first amendment constitutional rights. Volatility, even extreme volatility, while annoying and at times unsettling, does not cause physical harm, or the potential for physical harm, to persons or property. It is not equivalent to yelling fire in a crowded theater. It can cause an economic loss if someone trades at a temporary low price relative to the prices before and after the temporary dip, but trading is a voluntary activity. Why do we need to protect sellers from an activity they chose to do, i.e. sell all or part of their stock investment during periods of high volatility?

Clearly if temporary occurring extreme volatility is a problem, the markets would develop a trading order that limited selling during a short period of high volatility and sellers would develop better skills at assessing the duration of the impact on prices of information.

New information can cause big price jumps and new information and rumors about the economy, government policy or legislation can cause big price changes. Financial economists have long known about price jumps and have developed and used jump diffusion modeling processes where appropriate.

We do not need the government and the SEC to write short term puts for big drops in stock market prices. Let the markets develop their own mechanisms for dealing with occasional temporary price dives.

Saturday, September 24, 2011

Robert Lucas Calls For Permanent Tax Cut On Capital To Spur Economic Growth

From The Wall Street Journal "Chicago Economics on Trial: Nobel-winning economist Robert Lucas on the high cost of the welfare state, why he voted for Barack Obama, and how Milton Friedman changed his life." by Holman W Jenkins Jr:
Mr. Lucas: "The president keeps focusing on transitory things. He grudgingly says, 'OK, we'll keep the Bush tax cuts on for a couple years.' That's just the wrong thing to say. What I care about is what's the tax rate going to be when my project begins to bear fruit?"

Mr. Lucas pulls up a bit when I ask him what specific advice he'd give President Obama....
Still, an answer comes. Mr. Lucas launches into a brisk dissertation on the work of colleagues—Martin Feldstein, Michael Boskin, others—whom he credits with disabusing him and fellow economists of a youthful assumption that taxes have little effect on the overall amount of capital in society. A lesson for Mr. Obama might be: If you want to stimulate growth in investment, productivity and income, cut taxes on capital.
Read the complete Lucas interview here.

Successful 30 Year Alternative To Social Security Exists

From The Wall Street Journal, "Perry Is Right: There Is a Texas Model for Fixing Social Security: Public employees in three Texas counties have benefited from an 'Alternate Plan' for 30 years." by Merrill Matthews:
three Texas counties that decades ago opted out of Social Security by creating personal retirement accounts. Now, 30 years on, county workers in those three jurisdictions retire with more money and have better death and disability supplemental benefits. And those three counties—unlike almost all others in the United States—face no long-term unfunded pension liabilities.

Since 1981 and 1982, workers in Galveston, Matagorda and Brazoria Counties have seen their retirement savings grow every year, even during the Great Recession. The so-called Alternate Plan of these three counties doesn't follow the traditional defined-benefit or defined-contribution model. Employee and employer contributions are actively managed by a financial planner—in this case, First Financial Benefits, Inc., of Houston, which originated the plan in 1980 and has managed it since its adoption. I call it a "banking model."
Read the complete article here.

Friday, September 23, 2011

Higher US Wages Do Not Cause Loss Of Domestic Manufacturing

My comment to Cafe Hayek, "Artificial Scarcities Are Not Wealth" by Don Boudreaux:
Lower wages in a foreign country are not the reason that manufacturing of a product declines in the US and increases in a foreign country and becomes an import.

Labor cost is about only 10-15 percent of manufacturing cost in the US. The US is a capital-intensive country. Each US worker, whether in farming or manufacturing, can produce a lot due to our heavy use of machinery. US worker productivity led to our high standard of living.

Capital and the complementary labor are allocated in the US to their most productive uses. These are the manufacturing and farming goods for which we have the highest international comparative advantages. The US exports these goods. It imports the remaining goods it wants after capital and labor are allocated to their most productive uses in the US.

Labor and capital in the US go to their most productive uses in a hierarchical fashion, until capital and labor are fully allocated. Goods for which it is not economically efficient to allocate capital and labor get imported.

The remaining manufactured goods, even if the US has an international comparative advantage (lower comparative wages, etc.), are not produced in the US, and are imported, because the US can more efficiently produce other goods for the world and domestic markets.

The market, labor and capital reallocations are the negative effects of this process. Government and union intervention can impose barriers to changes in resource use but it cannot stop it.

Certainly, since Ricardo's time, economists understood that a domestic economy benefits if it can allocate its resources to manufacture a good with a higher relative comparative advantage. Even if it is a low cost producer of goods it imports, as long as it has a bigger comparative advantage on the goods it manufactures, the domestic economy benefits from imports. See Wikipedia or any economics site on the web about comparative advantage and trade.

While unions are often blamed for high labor costs, it is their rigidity, their inefficient seniority linked demands, and other union rules, which causes the most problems. These union characteristics make other capital, labor investments more attractive, and impede the reallocation of union members.

Lower US labor costs for a doohickey do not guarantee a domestic US manufacturer, if there is a more productive use of those resources in the US. It can be beneficial to the US to import a good for which it is the low labor cost producer, if there is a better domestic use for that labor and capital.

The IKEA Effect: Loving What We Make Ourselves

From Neoacademic, "Unfolding the IKEA Effect: Why We Love the Things We Build" by Richard N. Landers:
The IKEA Effect refers to the tendency for people to value things they have created/built themselves more than if made by someone else – in fact, nearly as much as if an expert had created the same item.
asking consumers to do a little legwork, you can increase their belief in the value of the product they have created, even if it would have been better constructed by professionals. Perhaps the best-known application of this principle is the theory’s namesake, Swedish furniture manufacturer IKEA. IKEA furniture is sold in boxes, with sometimes a great deal of assembly required.
Read the complete post here.

Hillary Clinton, Interviewed By Chelsea, Calls For An Economically Literate Public For More Fact Based Public And Private Decisions: Video

Secretary of State Hillary Clinton, interviewed by her daughter Chelsea Clinton, calls for an economically literate citizenship.

Hillary stated that the media is at times alarmists and outrageous, too many public and political opinions are not evidence based or "tethered to facts" and better economic decisions could be made in the public and private sector if the citizenry were economically literate and economic decisions were based on economic facts.

Of course, one has to wonder if this is an indirect dig at Obama since one of the major complaints against Obama is his lack of knowledge and understanding of economics.

Thursday, September 22, 2011

Two-Thirds Say Maximum Tax Rate Should Be 20 Percent, According To Poll

From "Poll: What is the wealthy’s ‘fair share’ of taxes?" by Alexis Levinson on The Daily Caller:
The poll asked respondents: “What do you think is the maximum percentage that the federal government should take from any individual’s income?”
“Nearly two-thirds of voters — 65 percent overall, including 71 percent of Republicans, 62 percent of Independents, and 63 percent of Democrats — think the maximum tax rate should be twenty percent or lower,” writes McHenry [John McHenry, partner and vice president of Ayres, McHenry and Associates].

“And a quarter of voters — 27 percent overall, including 26 percent of Republicans, 24 percent of Independents, and 30 percent of Democrats — think the maximum percentage should be no more than ten percent.””
Twenty-seven percent of respondents said income taxes should be capped at 10 percent of an individual’s income; 16 percent of respondents said fifteen, 22 percent of respondents said twenty, 14 percent of respondents said thirty, just 4 percent of respondents said forty, and 3 percent of respondents said fifty percent or more. Thirteen percent expressed no opinion.

Blinder "Operation Twist" Video Interview: Says Marginal Impact On Economic Behavior

Former Fed Vice Chairman Alan Blinder's interview, video below, about "Operation Twist." Blinder says the Fed's new intervention will have a "marginal, not revolutionary effect on economic behavior."

The video is from "Bernanke Will Never Give Up: Alan Blinder" by Jeff Macke | Breakout.

Election Markets Show Republicans To Take Commanding Popular Vote Lead In 2012 But Electoral College Still A Tossup

Price data for the 2012 presidential election voting share securities, from the Iowa Electronic Markets, shows that the Republicans are widening their lead in the popular vote for the next president. As it now stands, the public's vote for US president between the two major political parties, Republicans and Democrats, will be split 52.5 percent for the Republicans and 47.5 percent for the Democrats.

From Iowa Electronic Markets
2012 US Presidential Election Markets
Of course, it is the Electoral College and not the popular vote that decides which candidate will become the next President of the US.

The Intrade security for which political party will win the 2012 presidential election shows that the two parties, Democrats and Republicans, are virtually tied as to who will win the US Presidency in 2012 based on Electoral College votes. Intrade gives the Republicans a 49.1 percent chance of winning in 2012 and it gives the Democrats a 49 percent chance of winning the presidency.

Wednesday, September 21, 2011

Connection Between High Medical Costs And US Productivity

A comment I posted on Code Red, "Why Aren’t Medical Prices Infinity?" by dranove:
Potential productivity and per capita GDP loss to the household measured from the onset of the medical condition's negative impact on production, and not first doctor visit, set an upper bound on the value (price, opportunity cost) of the medical service.

For example, suppose a member of a household has a bad knee, which would improve with proper medical care. The bad knee either directly negatively affects the worker's output or if it occurs in a non-working family member, requires a working family member to lower his/her productivity by devoting time to the ill family member for care, transportation to doctor, etc, as would be the case for a child, elder parent, severely ill family member.

The opportunity cost of the lost production starts from the onset of the condition, and not from time of first doctor visit, and ends when the condition is sufficiently resolved to allow productivity to go back to its pre-symptom level.

The US has high productivity and GDP per capita.

Delays in getting doctor appointments, delays in diagnostic tests, delays in accurate diagnosis, delays in EFFECTIVE treatment (specialists), need for retreatment and long recovery times are opportunity costs to the affected worker.

Comparative medical access and recovery times are shorter in the US than in other countries. You cannot have short access times to medical care without excess capacity.

In other countries, the costs of delayed doctor appointments, diagnoses and treatments are not captured in the prices paid for medical services. In the US, the costs of avoidance of the social costs, the opportunity costs of delayed or incorrect medical care is captured in US medical prices.

Even if other countries captured these costs in their medical care prices, the higher US per capita GDP and productivity would still make the US medical services prices higher.

Tuesday, September 20, 2011

SEC Inspector General Report On David Becker Conflict Of Interest

Copy of the SEC Inspector General's report, "Investigation of Conflict of Interest Arising from Former General Counsel's Participation in Madoff-Related Matters" Case No. OIG-560, September 16, 2011, referring the results of its investigation relating to David Becker's conflict of interest to the United States Department of Justice, Criminal Division, Public Integrity Section is available here and embedded below.

SEC Inspector General Report on Former General Counsel David Becker

Forgive Student Loan Interest

My comment posted to "Forgive Student Loans? Worst Idea Ever." by Justin Wolfers on Freakonomics:
The government should at least forgive the interest on student loans.

The government shares, through taxes, in the extra income of college graduates. Government student loans, loan guarantees and lender subsidies make the government the equivalent of an equity investor in a college graduate's earnings.

The payment of interest to the lender on the government part of student loans, guarantees or subsidies, is an unnecessary double payment.

Equity investors, like the US, who participate in the profit, through increased taxes on the extra earnings, need not also get interest on their investment.

Sunday, September 18, 2011

US Oil Production Up 10 Percent Since 2008: Net Imports Down From 60 Percent To 47 Percent Since 2005

From The Wall Street Journal, "There Will Be Oil: For decades, advocates of 'peak oil' have been predicting a crisis in energy supplies. They've been wrong at every turn, says Daniel Yergin" by Daniel Yergin:
The idea of "proved reserves" of oil isn't just a physical concept, accounting for a fixed amount in the "storehouse." It's also an economic concept: how much can be recovered at prevailing prices. And it's a technological concept, because advances in technology take resources that were not physically accessible and turn them into recoverable reserves.
Overall U.S. oil production has increased more than 10% since 2008. Net oil imports reached a high point of 60% in 2005, but today, thanks to increased production and greater energy efficiency (plus the use of ethanol), imports are down to 47%.

Things don't stand still in the energy industry. With the passage of time, unconventional sources of oil, in all their variety, become a familiar part of the world's petroleum supply. They help to explain why the plateau continues to recede into the horizon—and why, on a global view, Hubbert's Peak [Peak Oil] is still not in sight.
Read the complete essay here.

Saturday, September 17, 2011

Former SEC General Counsel Faces Criminal Probe For Actions As Commission's Lawyer

US Government ethics officials will recommend a criminal investigation of the SEC's former general counsel, David Becker, for his role in recommending more generous compensation for Madoff' victims.

Becker persuaded the SEC to reverse its existing investor compensation policy to a more favorable investor recoupment while failing to disclose that his family and himself, as an estate beneficiary, had a personal financial interest in Madoff investor victim compensation claims.

See NY Times, "Officials Eye Madoff Role of a Lawyer" by Gretchen Morgenson and Louise Story:

The Wall St. Journal, "Ex-SEC Lawyer's Madoff Ties Face Scrutiny: Watchdog to Urge Justice Department Review of Whether Conflict-of-Interest Laws Were Broken" by Jessica Holzer:

Bloomberg News, "SEC Watchdog to Refer Ex-Counsel’s Madoff Work to Justice" by Robert Schmidt and Joshua Gallu.

Friday, September 16, 2011

Election Prediction Markets Now Show Obama Losing In 2012

The Intrade election security market now shows a higher probability for the Republican presidential candidate to win the 2012 election than for the Democratic candidate. Intrade's odds are 50 percent for a Republican presidential win and 49.3 percent for a Democratic candidate win.

The Iowa election markets are consistent with a 51.8 percent popular vote share for the Republican candidate and a 48.8 percent share of the popular vote for the Democratic party candidate.

Odds Of Finding Higgs Boson Particle Drop To 20 Percent

The price of the Intrade security contract reflecting the odds of finding a Higgs Boson particle dropped significantly. The price of the December 2013 and December 2014 contracts dropped to 20 percent.

Productivity Comes From Small Gains: Even Minor Regulatory Burdens Can Inhibit Improvements.

An example of a real world business process improvement leading to a productivity gain.

From The Wall Street Journal, "Delivery Drivers to Pick Up Pace by Surrendering Keys" by Jennifer Levitz:
Soon, drivers will wear a digital-remote fob on their belts and will be able to turn the engine off with a button that will unlock the bulkhead door at the same time. That automatic door opening will save 1.75 seconds per stop, or 6.5 minutes per driver per day, while also reducing motion and fatigue, said David Abney, UPS's chief operating officer.
Now try to imagine the US Postal Service caring about saving 6.5 minutes per day in delivering the mail, or any other government agency trying to do a job faster so it can accomplish more per day.

Its not that 6.5 minutes is a lot of time, but large business productivity gains occur by accumulating many small changes.

Poland Spring in the last couple of years slightly reduced the size of its bottle water caps to save a tiny amount of material cost per bottle. Over the last 15 years Poland Spring reduced the amount of PET plastic its uses in bottles by 60 percent. Big changes do not happen in one step.

Businesses are constantly looking for small changes in materials and processes to reduce material, labor, transportation and time costs. Lower costs leads to lower prices and improvements in the US standard of living. Each savings though is usually small. It is the process of constantly looking to reduce costs in small ways that leads to big gains.

Try to imagine how companies would operate and search for improvements if the companies had to justify each of their productivity improvement actions to regulators. Many small changes would not occur because the regulatory costs of justifying the action for each minor improvement would typically outweigh the benefit.

Lower costs means more sales of the product or more available consumer cash for spending on other consumer goods and services increasing those sales. More sales translate into more staff and a greater likelihood of expansion and the hiring of more staff.

Regulations do not have to be overly burdensome or draconian to curtail productivity improvements, business expansion and employment growth. When governments and agencies analyze regulatory costs, they do not consider lost opportunities, such as lost productivity gains. Primarily, regulators consider only out of pocket costs when promulgating regulations.

A small regulatory cost can negate a small improvement and the loss of small improvements, over time, builds into a loss of large productivity gains and a loss of economic growth and employment.

Eventually, many regulated businesses face the need to achieve large gains all at once, and as one learns in economics and finance, to make large gains one needs to take large risks. Regulatory costs can, as an unintended effect, push firms to take excessive risks to achieve productivity and profitability gains. Excessive risks leads to a greater likelihood of financial failure, ruin, and safety shortcuts, often the exact opposite of the reason for regulation.

Wednesday, September 14, 2011

States With Democratic Party Legislatures And Unionized Public Sector Employees Pay More To Borrow In Bond Market

From The Wall Street Journal, "A Blue-State Bailout in Disguise: Our new study shows that under the Obama jobs bill, debt-ridden states will get another big handout" by Paul E Peterson and Daniel Nadler:
In a new study at Harvard's Program on Education Policy and Governance, we discovered why the Obama administration is so interested in helping out the states. States with a bluish hue—that is, states with legislatures that are heavily Democratic and have a highly unionized public-sector work force—must pay interest rates that are often an extra half a percentage point higher than states with a reddish coloring.

Specifically, a 20 percentage-point increment in either the Democratic share of the state legislature or a comparable increase in the share of the public work force that is unionized drives up interest rates by nearly a half a percentage point on a five-year security note. That amount is nontrivial. In Obama's home state of Illinois, it is costing governments over $700 million annually.

The impact of these political factors on interest rates is in addition to the impact of standard economic factors, such as a state's unemployment rate, its gross domestic product growth, and its debt-to-GDP ratio, all of which are themselves shaped in part by the state's political climate.

In short, the bond market has concluded that the more unionized the state and the bluer its political coloring, the riskier it is to hold bonds marketed by that state. [Emphasis Added].
Read the complete article here.

US Companies Not Investing Due To Behavioral Bias And Loss Aversion: McKinsey & Co Study

From McKinsey Quarterly, "A bias against investment? Companies should be investing to improve their performance and set the stage for growth. They’re not. A survey of executives suggests behavioral bias is a culprit." by Tim Koller, Dan Lovallo, and Zane Williams, September 2011:
Most executives, the survey found, believe that their companies are too stingy, especially for investments expensed immediately through the income statement and not capitalized over the longer term. Indeed, about two-thirds of the respondents said that their companies underinvest in product development, and more than half that they underinvest in sales and marketing and in financing start-ups for new products or new markets. Bypassed opportunities aren’t just a missed opportunity for individual companies: the investment dearth hurts whole economies and job creation efforts as well.
Executives also reported a high degree of loss aversion in the investment decisions they’d observed. They exhibited the same tendency themselves, even when the value they expected from an investment appeared strongly positive. When asked to assess a hypothetical investment scenario with a possible loss of $100 million and a possible gain of $400 million, for example, most respondents were willing to accept a risk of loss only between 1 and 20 percent, although the net present value would be positive up to a 75 percent risk of loss. Such excessive loss aversion probably explains why many companies fail to pursue profitable investment opportunities.
Executives may be limiting the investments of their companies because of economic fundamentals and policy uncertainties. But their decision making is also tainted by biases and loss aversion that harm performance and cause companies to miss potentially value-creating opportunities. [Emphasis Added].
Read the McKinsey study here.

Boston Fed Finds Mortgage Securitization Did Not Cause Lax Origination Screening Prior To Financial Crisis: Fannie And Freddie Able To Control Lenders’ Screening Rules: No Moral Hazard: 5% Dodd-Frank Mortgage Securitization Retention Rule Unneeded

From The Federal Reserve Bank of Boston, "Securitization and Moral Hazard: Evidence from Credit Score Cutoff Rules" by Ryan Bubb and Alex Kaufman, Public Policy Discussion Paper No. 11-6:
It has now become conventional wisdom that securitization contributed to the sharp rise in mortgage defaults that precipitated the recent financial crisis. The logic of the moral hazard problem posed by securitization is straightforward: lenders that sell loans they originate to dispersed investors may bear less of the cost when loans default, and hence they may have less incentive to screen borrowers. The belief that this moral hazard problem played an important role in the financial crisis has influenced regulatory reform, with the 2010 Dodd-Frank Act adopting a requirement that securitizers and/or originators retain a 5 percent interest in mortgages they securitize to better align their incentives.

However, there are reasons to think that securitization may not have had a large moral hazard effect on lender screening. Mortgage securitization was developed over decades, and as early as 1993 the overall securitization rate was nearly as high as in the period leading up to the financial crisis.

Lenders and securitizers both had strong incentives to devise ways to avoid the moral hazard problem posed by securitization, and a range of practices were indeed developed to mitigate it (Gorton, 2009). These include contractual provisions such as representations and warranties by lenders and clauses that require lenders to buy back loans that default soon after sale, monitoring strategies like the extensive underwriting guidelines and audits used by some large loan purchasers, and software systems that automate parts of the mortgage underwriting process. Hence, the extent to which securitization actually reduced lenders’ screening is an empirical question.
Our findings provide evidence that securitizers were to some extent able to mitigate the incentive problems posed by securitization. When Fannie Mae and Freddie Mac, the two largest mortgage purchasers, determined that using credit score cutoff rules to determine how carefully to scrutinize loan applications could improve mortgage underwriting, they included credit score cutoff rules in their underwriting guidelines. The ubiquity of the 620 and 660 FICO credit score cutoff rules in the 3mortgage markets is a testament to the ability of Fannie and Freddie to enforce their underwriting guidelines through software, contractual provisions, and monitoring. Interpreted in light of our findings and analysis, the discontinuities in default at certain credit score thresholds do not provide evidence for the hypothesis that securitization led to lax screening. Rather, they provide evidence for the opposing hypothesis: large securitizers like Fannie and Freddie were to some extent able to regulate lenders’ screening behavior. [Emphasis Added].
Read the complete research paper here.

Majority Of Americans Skeptical Of Obama's Job Plan

From Bloomberg, "Obama Approval Plummets on Jobs Plan" by Julianna Goldman:
By a margin of 51 percent to 40 percent, Americans doubt the package of tax cuts and spending proposals intended to jumpstart job creation that Obama submitted to Congress this week will bring down the 9.1 percent jobless rate. That sentiment undermines one of the core arguments the president is making on the job act’s behalf in a nationwide campaign to build public support.
Read the complete article here.

Tuesday, September 13, 2011

Tough Choices For Government Spending Programs: Significantly Tax More, Substantially Spend Less or Both: CBO Congressional Testimony

From "Confronting The Nation's Fiscal Policy Challenges" by Douglas Elmendorf, CBO Director, September 13, 2011, testimony before the Joint Select Committee on Deficit Reduction, US Congress:
Given the aging of the population and the rising costs for health care, attaining a sustainable budget for the federal government will require the United States to deviate from the policies of the past 40 years in at least one of the following ways:
  • Raise federal revenues significantly above their average share of GDP;

  • Make major changes to the sorts of benefits provided for Americans when they become older; or

  • Substantially reduce the role of the rest of the federal government relative to the size of the economy.
The nation cannot continue to sustain the spending programs and policies of the past with the tax revenues it has been accustomed to paying. Citizens will either have to pay more for their government, accept less in government services and benefits, or both. [Emphasis added].
Read the complete CBO statement here, watch the video of the testimony below or look at the PowerPoint slides from the presentation below the video.

Monday, September 12, 2011

US Experiencing An Average GDP Recovery After A Banking Crisis Caused Recession: The US Is In Its First Post WWII Banking Crisis GDP Recovery: No Economic Consensus On Remedies Or Causes Of Below Trend Growth

From Economic Letter, Vol. 6, No. 9, September 2011, Federal Reserve Bank of Dallas, "The Sluggish Recovery from the Great Recession: Why There Is No ‘V’ Rebound This Time" by Mark A. Wynne, senior economist and vice president :
The Great Recession of 2008–09 was by far the most severe United States economic downturn since the Great Depression of the 1930s. Real gross domestic product (GDP), the most comprehensive measure of U.S. economic activity, topped out in fourth quarter 2007 and has yet to approach that peak. Employment totaled just below 138 million jobs in January 2008 and, as of July 2011, was still nearly 5 percent below its precrisis level.

Conventional wisdom holds that severe recessions are usually followed by strong recoveries.
This Time Is Different
Unlike all other post-World War II recessions, the 2008–09 episode was precipitated by a banking crisis. A number of researchers have shown that downturns associated with banking crises tend to be more severe, and furthermore, in their aftermath, output takes a lot longer to recover. In some cases, the crisis seems to persistently affect the trend rate of growth, while in other cases, the growth path of activity seems to shift down.

Chart 2 is a summary of the average impact of financial crises on output. It shows average deviation of output from its trend path in a sample of countries that experienced banking crises from the early 1970s to 2002, along with a measure of the range of outcomes (shaded area). During the first year of a banking crisis, output falls by about 2.5 percent on average and then slips further in subsequent years. The persistent decline in output relative to the precrisis trend is striking. The finding that banking crises tend to have persistent effects on output is robust to alternative definitions.

Why does output tend to stay below its precrisis trend path in the aftermath of recessions associated with banking difficulties? There is little or no consensus on this issue. Banking crises tend to have persistent effects on productivity, the employment rate, investment and the capital-labor ratio. Fortunately, there is little evidence of a persistent impact on growth rates: Most countries experiencing banking crises tend to return to their precrisis rates of growth over time.

Recessions and Banking Crises
While the U.S. economy has been in a recovery for almost two years, the pace has been unusually weak by the country’s historical standards. Rather than seeing the V-shaped recovery that might have been expected given the severity of the downturn, the nation is undergoing a more protracted process. However, when viewed in a broader international context, the pace of the recovery seems to be very much in line with what other countries have experienced. The persistence of the output losses associated with banking crises should serve as additional motivation—if any were needed—for preventing recurrences in the future. [Footnotes omitted] [Emphasis added].
Read the complete article here.

Laffer's Economic Advice To Obama: Undo

If the U.S. wants prosperity, government doesn't need to do something, it needs to undo much of what it already has done.
From The Wall Street Journal "How to Fight Black Unemployment: The tragedy of the failed stimulus is felt hard in minority communities. There's a better way" by Arthur Laffer.

Read the complete opinion piece here

Friday, September 9, 2011

Teacher Credentials Unrelated To Student Achievement

From "Measuring Teacher Effectiveness: Credentials Unrelated to Student Achievement" by Marcus Winters, Senior Fellow, Manhattan Institute for Policy Research, Issue Brief No. 10, September 2011:
In the U.S. public school system today, the method used to determine teacher effectiveness—and thus to drive salary, promotion, and tenure decisions—is based on a few external credentials: certification, advanced degrees, and years of experience in the classroom. Yet according to a new analysis of student performance in Florida that two colleagues and I conducted, little to no relationship exists between these credentials and the gains that a teacher’s students make on standardized math and reading exams. Our expansive study included all test-taking public elementary school students in the state of Florida over a period of four years.

Switching To Natural Gas will Not Slow Global Warming

From "No big climate gain in switching from coal to natural gas" on ScienceBlog, September 9, 2011:
Although the burning of natural gas emits far less carbon dioxide than coal, a new study concludes that a greater reliance on natural gas would fail to significantly slow down climate change. The study appears this week in the Springer journal Climatic Change Letters.

Tom Wigley, a senior research associate at the National Center for Atmospheric Research (NCAR), underscores in his study the complex and sometimes conflicting ways in which fossil fuel burning affects Earth’s climate. While coal use causes warming through emission of heat-trapping carbon dioxide, it also releases comparatively large amounts of sulfates and other particles that, although detrimental to the environment, cool the planet by blocking incoming sunlight.

The situation is further complicated by uncertainty over the amount of methane that leaks from natural gas operations. Methane is an especially potent greenhouse gas.
Read the complete article here.

Corporate Tax Elimination Cost Less Than Payroll Tax Cut And Is A Stronger Economic Boost

From The Tax Foundation, "Doubling Down on the Payroll Tax Holiday is a Bad Bet" by William McBride:

Source: Tax Foundation

The chart also reveals that corporate income tax revenues are a relatively small share of total revenues. In fact, the corporate income tax could be eliminated for less than the cost of this payroll tax holiday. Now that would add jobs. According to the OECD, the most harmful tax to economic growth is the corporate tax. Gordon and Lee estimate that lowering the corporate rate by 10 percentage points adds 1 to 2 percentage points to growth.

Eliminating the corporate tax would create an unprecedented economic boom. I'm afraid this president has missed a golden opportunity....
Read the complete article post here.

Video And Text Of Obama's Speech To Joint Session

Address by the President to a Joint Session of Congress
United States Capitol
Washington, D.C.
7:09 P.M. EDT, September 8, 2011

Mr. Speaker, Mr. Vice President, members of Congress, and fellow Americans:

Tonight we meet at an urgent time for our country. We continue to face an economic crisis that has left millions of our neighbors jobless, and a political crisis that’s made things worse.

This past week, reporters have been asking, “What will this speech mean for the President? What will it mean for Congress? How will it affect their polls, and the next election?”

But the millions of Americans who are watching right now, they don’t care about politics. They have real-life concerns. Many have spent months looking for work. Others are doing their best just to scrape by -- giving up nights out with the family to save on gas or make the mortgage; postponing retirement to send a kid to college.

These men and women grew up with faith in an America where hard work and responsibility paid off. They believed in a country where everyone gets a fair shake and does their fair share -- where if you stepped up, did your job, and were loyal to your company, that loyalty would be rewarded with a decent salary and good benefits; maybe a raise once in a while. If you did the right thing, you could make it. Anybody could make it in America.

For decades now, Americans have watched that compact erode. They have seen the decks too often stacked against them. And they know that Washington has not always put their interests first.

The people of this country work hard to meet their responsibilities. The question tonight is whether we’ll meet ours. The question is whether, in the face of an ongoing national crisis, we can stop the political circus and actually do something to help the economy. (Applause.) The question is -- the question is whether we can restore some of the fairness and security that has defined this nation since our beginning.

Those of us here tonight can’t solve all our nation’s woes. Ultimately, our recovery will be driven not by Washington, but by our businesses and our workers. But we can help. We can make a difference. There are steps we can take right now to improve people’s lives.

I am sending this Congress a plan that you should pass right away. It’s called the American Jobs Act. There should be nothing controversial about this piece of legislation. Everything in here is the kind of proposal that’s been supported by both Democrats and Republicans -- including many who sit here tonight. And everything in this bill will be paid for. Everything. (Applause.)

The purpose of the American Jobs Act is simple: to put more people back to work and more money in the pockets of those who are working. It will create more jobs for construction workers, more jobs for teachers, more jobs for veterans, and more jobs for long-term unemployed. (Applause.) It will provide -- it will provide a tax break for companies who hire new workers, and it will cut payroll taxes in half for every working American and every small business. (Applause.) It will provide a jolt to an economy that has stalled, and give companies confidence that if they invest and if they hire, there will be customers for their products and services. You should pass this jobs plan right away. (Applause.)

Everyone here knows that small businesses are where most new jobs begin. And you know that while corporate profits have come roaring back, smaller companies haven’t. So for everyone who speaks so passionately about making life easier for “job creators,” this plan is for you. (Applause.)

Pass this jobs bill -- pass this jobs bill, and starting tomorrow, small businesses will get a tax cut if they hire new workers or if they raise workers’ wages. Pass this jobs bill, and all small business owners will also see their payroll taxes cut in half next year. (Applause.) If you have 50 employees -- if you have 50 employees making an average salary, that’s an $80,000 tax cut. And all businesses will be able to continue writing off the investments they make in 2012.

It’s not just Democrats who have supported this kind of proposal. Fifty House Republicans have proposed the same payroll tax cut that’s in this plan. You should pass it right away. (Applause.)

Pass this jobs bill, and we can put people to work rebuilding America. Everyone here knows we have badly decaying roads and bridges all over the country. Our highways are clogged with traffic. Our skies are the most congested in the world. It’s an outrage.

Building a world-class transportation system is part of what made us a economic superpower. And now we’re going to sit back and watch China build newer airports and faster railroads? At a time when millions of unemployed construction workers could build them right here in America? (Applause.)

There are private construction companies all across America just waiting to get to work. There’s a bridge that needs repair between Ohio and Kentucky that’s on one of the busiest trucking routes in North America. A public transit project in Houston that will help clear up one of the worst areas of traffic in the country. And there are schools throughout this country that desperately need renovating. How can we expect our kids to do their best in places that are literally falling apart? This is America. Every child deserves a great school -- and we can give it to them, if we act now. (Applause.)

The American Jobs Act will repair and modernize at least 35,000 schools. It will put people to work right now fixing roofs and windows, installing science labs and high-speed Internet in classrooms all across this country. It will rehabilitate homes and businesses in communities hit hardest by foreclosures. It will jumpstart thousands of transportation projects all across the country. And to make sure the money is properly spent, we’re building on reforms we’ve already put in place. No more earmarks. No more boondoggles. No more bridges to nowhere. We’re cutting the red tape that prevents some of these projects from getting started as quickly as possible. And we’ll set up an independent fund to attract private dollars and issue loans based on two criteria: how badly a construction project is needed and how much good it will do for the economy. (Applause.)

This idea came from a bill written by a Texas Republican and a Massachusetts Democrat. The idea for a big boost in construction is supported by America’s largest business organization and America’s largest labor organization. It’s the kind of proposal that’s been supported in the past by Democrats and Republicans alike. You should pass it right away. (Applause.)

Pass this jobs bill, and thousands of teachers in every state will go back to work. These are the men and women charged with preparing our children for a world where the competition has never been tougher. But while they’re adding teachers in places like South Korea, we’re laying them off in droves. It’s unfair to our kids. It undermines their future and ours. And it has to stop. Pass this bill, and put our teachers back in the classroom where they belong. (Applause.)

Pass this jobs bill, and companies will get extra tax credits if they hire America’s veterans. We ask these men and women to leave their careers, leave their families, risk their lives to fight for our country. The last thing they should have to do is fight for a job when they come home. (Applause.)

Pass this bill, and hundreds of thousands of disadvantaged young people will have the hope and the dignity of a summer job next year. And their parents -- (applause) -- their parents, low-income Americans who desperately want to work, will have more ladders out of poverty.

Pass this jobs bill, and companies will get a $4,000 tax credit if they hire anyone who has spent more than six months looking for a job. (Applause.) We have to do more to help the long-term unemployed in their search for work. This jobs plan builds on a program in Georgia that several Republican leaders have highlighted, where people who collect unemployment insurance participate in temporary work as a way to build their skills while they look for a permanent job. The plan also extends unemployment insurance for another year. (Applause.) If the millions of unemployed Americans stopped getting this insurance, and stopped using that money for basic necessities, it would be a devastating blow to this economy. Democrats and Republicans in this chamber have supported unemployment insurance plenty of times in the past. And in this time of prolonged hardship, you should pass it again -- right away. (Applause.)

Pass this jobs bill, and the typical working family will get a $1,500 tax cut next year. Fifteen hundred dollars that would have been taken out of your pocket will go into your pocket. This expands on the tax cut that Democrats and Republicans already passed for this year. If we allow that tax cut to expire -- if we refuse to act -- middle-class families will get hit with a tax increase at the worst possible time. We can’t let that happen. I know that some of you have sworn oaths to never raise any taxes on anyone for as long as you live. Now is not the time to carve out an exception and raise middle-class taxes, which is why you should pass this bill right away. (Applause.)

This is the American Jobs Act. It will lead to new jobs for construction workers, for teachers, for veterans, for first responders, young people and the long-term unemployed. It will provide tax credits to companies that hire new workers, tax relief to small business owners, and tax cuts for the middle class. And here’s the other thing I want the American people to know: The American Jobs Act will not add to the deficit. It will be paid for. And here’s how. (Applause.)

The agreement we passed in July will cut government spending by about $1 trillion over the next 10 years. It also charges this Congress to come up with an additional $1.5 trillion in savings by Christmas. Tonight, I am asking you to increase that amount so that it covers the full cost of the American Jobs Act. And a week from Monday, I’ll be releasing a more ambitious deficit plan -- a plan that will not only cover the cost of this jobs bill, but stabilize our debt in the long run. (Applause.)

This approach is basically the one I’ve been advocating for months. In addition to the trillion dollars of spending cuts I’ve already signed into law, it’s a balanced plan that would reduce the deficit by making additional spending cuts, by making modest adjustments to health care programs like Medicare and Medicaid, and by reforming our tax code in a way that asks the wealthiest Americans and biggest corporations to pay their fair share. (Applause.) What’s more, the spending cuts wouldn’t happen so abruptly that they’d be a drag on our economy, or prevent us from helping small businesses and middle-class families get back on their feet right away.

Now, I realize there are some in my party who don’t think we should make any changes at all to Medicare and Medicaid, and I understand their concerns. But here’s the truth: Millions of Americans rely on Medicare in their retirement. And millions more will do so in the future. They pay for this benefit during their working years. They earn it. But with an aging population and rising health care costs, we are spending too fast to sustain the program. And if we don’t gradually reform the system while protecting current beneficiaries, it won’t be there when future retirees need it. We have to reform Medicare to strengthen it. (Applause.)

I am also -- I’m also well aware that there are many Republicans who don’t believe we should raise taxes on those who are most fortunate and can best afford it. But here is what every American knows: While most people in this country struggle to make ends meet, a few of the most affluent citizens and most profitable corporations enjoy tax breaks and loopholes that nobody else gets. Right now, Warren Buffett pays a lower tax rate than his secretary -- an outrage he has asked us to fix. (Laughter.) We need a tax code where everyone gets a fair shake and where everybody pays their fair share. (Applause.) And by the way, I believe the vast majority of wealthy Americans and CEOs are willing to do just that if it helps the economy grow and gets our fiscal house in order.

I’ll also offer ideas to reform a corporate tax code that stands as a monument to special interest influence in Washington. By eliminating pages of loopholes and deductions, we can lower one of the highest corporate tax rates in the world. (Applause.) Our tax code should not give an advantage to companies that can afford the best-connected lobbyists. It should give an advantage to companies that invest and create jobs right here in the United States of America. (Applause.)

So we can reduce this deficit, pay down our debt, and pay for this jobs plan in the process. But in order to do this, we have to decide what our priorities are. We have to ask ourselves, “What’s the best way to grow the economy and create jobs?”

Should we keep tax loopholes for oil companies? Or should we use that money to give small business owners a tax credit when they hire new workers? Because we can’t afford to do both. Should we keep tax breaks for millionaires and billionaires? Or should we put teachers back to work so our kids can graduate ready for college and good jobs? (Applause.) Right now, we can’t afford to do both.

This isn’t political grandstanding. This isn’t class warfare. This is simple math. (Laughter.) This is simple math. These are real choices. These are real choices that we’ve got to make. And I’m pretty sure I know what most Americans would choose. It’s not even close. And it’s time for us to do what’s right for our future. (Applause.)

Now, the American Jobs Act answers the urgent need to create jobs right away. But we can’t stop there. As I’ve argued since I ran for this office, we have to look beyond the immediate crisis and start building an economy that lasts into the future -- an economy that creates good, middle-class jobs that pay well and offer security. We now live in a world where technology has made it possible for companies to take their business anywhere. If we want them to start here and stay here and hire here, we have to be able to out-build and out-educate and out-innovate every other country on Earth. (Applause.)

And this task of making America more competitive for the long haul, that’s a job for all of us. For government and for private companies. For states and for local communities -- and for every American citizen. All of us will have to up our game. All of us will have to change the way we do business.

My administration can and will take some steps to improve our competitiveness on our own. For example, if you’re a small business owner who has a contract with the federal government, we’re going to make sure you get paid a lot faster than you do right now. (Applause.) We’re also planning to cut away the red tape that prevents too many rapidly growing startup companies from raising capital and going public. And to help responsible homeowners, we’re going to work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4 percent. That’s a step -- (applause) -- I know you guys must be for this, because that’s a step that can put more than $2,000 a year in a family’s pocket, and give a lift to an economy still burdened by the drop in housing prices.

So, some things we can do on our own. Other steps will require congressional action. Today you passed reform that will speed up the outdated patent process, so that entrepreneurs can turn a new idea into a new business as quickly as possible. That’s the kind of action we need. Now it’s time to clear the way for a series of trade agreements that would make it easier for American companies to sell their products in Panama and Colombia and South Korea -– while also helping the workers whose jobs have been affected by global competition. (Applause.) If Americans can buy Kias and Hyundais, I want to see folks in South Korea driving Fords and Chevys and Chryslers. (Applause.) I want to see more products sold around the world stamped with the three proud words: “Made in America.” That’s what we need to get done. (Applause.)

And on all of our efforts to strengthen competitiveness, we need to look for ways to work side by side with America’s businesses. That’s why I’ve brought together a Jobs Council of leaders from different industries who are developing a wide range of new ideas to help companies grow and create jobs.

Already, we’ve mobilized business leaders to train 10,000 American engineers a year, by providing company internships and training. Other businesses are covering tuition for workers who learn new skills at community colleges. And we’re going to make sure the next generation of manufacturing takes root not in China or Europe, but right here, in the United States of America. (Applause) If we provide the right incentives, the right support -- and if we make sure our trading partners play by the rules -- we can be the ones to build everything from fuel-efficient cars to advanced biofuels to semiconductors that we sell all around the world. That’s how America can be number one again. And that’s how America will be number one again. (Applause.)

Now, I realize that some of you have a different theory on how to grow the economy. Some of you sincerely believe that the only solution to our economic challenges is to simply cut most government spending and eliminate most government regulations. (Applause.)

Well, I agree that we can’t afford wasteful spending, and I’ll work with you, with Congress, to root it out. And I agree that there are some rules and regulations that do put an unnecessary burden on businesses at a time when they can least afford it. (Applause.) That’s why I ordered a review of all government regulations. So far, we’ve identified over 500 reforms, which will save billions of dollars over the next few years. (Applause.) We should have no more regulation than the health, safety and security of the American people require. Every rule should meet that common-sense test. (Applause.)

But what we can’t do -- what I will not do -- is let this economic crisis be used as an excuse to wipe out the basic protections that Americans have counted on for decades. (Applause.) I reject the idea that we need to ask people to choose between their jobs and their safety. I reject the argument that says for the economy to grow, we have to roll back protections that ban hidden fees by credit card companies, or rules that keep our kids from being exposed to mercury, or laws that prevent the health insurance industry from shortchanging patients. I reject the idea that we have to strip away collective bargaining rights to compete in a global economy. (Applause.) We shouldn’t be in a race to the bottom, where we try to offer the cheapest labor and the worst pollution standards. America should be in a race to the top. And I believe we can win that race. (Applause.)

In fact, this larger notion that the only thing we can do to restore prosperity is just dismantle government, refund everybody’s money, and let everyone write their own rules, and tell everyone they’re on their own -- that’s not who we are. That’s not the story of America.

Yes, we are rugged individualists. Yes, we are strong and self-reliant. And it has been the drive and initiative of our workers and entrepreneurs that has made this economy the engine and the envy of the world.

But there’s always been another thread running throughout our history -- a belief that we’re all connected, and that there are some things we can only do together, as a nation.

We all remember Abraham Lincoln as the leader who saved our Union. Founder of the Republican Party. But in the middle of a civil war, he was also a leader who looked to the future -- a Republican President who mobilized government to build the Transcontinental Railroad -- (applause) -- launch the National Academy of Sciences, set up the first land grant colleges. (Applause.) And leaders of both parties have followed the example he set.

Ask yourselves -- where would we be right now if the people who sat here before us decided not to build our highways, not to build our bridges, our dams, our airports? What would this country be like if we had chosen not to spend money on public high schools, or research universities, or community colleges? Millions of returning heroes, including my grandfather, had the opportunity to go to school because of the G.I. Bill. Where would we be if they hadn’t had that chance? (Applause.)

How many jobs would it have cost us if past Congresses decided not to support the basic research that led to the Internet and the computer chip? What kind of country would this be if this chamber had voted down Social Security or Medicare just because it violated some rigid idea about what government could or could not do? (Applause.) How many Americans would have suffered as a result?

No single individual built America on their own. We built it together. We have been, and always will be, one nation, under God, indivisible, with liberty and justice for all; a nation with responsibilities to ourselves and with responsibilities to one another. And members of Congress, it is time for us to meet our responsibilities. (Applause.)

Every proposal I’ve laid out tonight is the kind that’s been supported by Democrats and Republicans in the past. Every proposal I’ve laid out tonight will be paid for. And every proposal is designed to meet the urgent needs of our people and our communities.

Now, I know there’s been a lot of skepticism about whether the politics of the moment will allow us to pass this jobs plan -- or any jobs plan. Already, we’re seeing the same old press releases and tweets flying back and forth. Already, the media has proclaimed that it’s impossible to bridge our differences. And maybe some of you have decided that those differences are so great that we can only resolve them at the ballot box.

But know this: The next election is 14 months away. And the people who sent us here -- the people who hired us to work for them -- they don’t have the luxury of waiting 14 months. (Applause.) Some of them are living week to week, paycheck to paycheck, even day to day. They need help, and they need it now.

I don’t pretend that this plan will solve all our problems. It should not be, nor will it be, the last plan of action we propose. What’s guided us from the start of this crisis hasn’t been the search for a silver bullet. It’s been a commitment to stay at it -- to be persistent -- to keep trying every new idea that works, and listen to every good proposal, no matter which party comes up with it.

Regardless of the arguments we’ve had in the past, regardless of the arguments we will have in the future, this plan is the right thing to do right now. You should pass it. (Applause.) And I intend to take that message to every corner of this country. (Applause.) And I ask -- I ask every American who agrees to lift your voice: Tell the people who are gathered here tonight that you want action now. Tell Washington that doing nothing is not an option. Remind us that if we act as one nation and one people, we have it within our power to meet this challenge.

President Kennedy once said, “Our problems are man-made –- therefore they can be solved by man. And man can be as big as he wants.”

These are difficult years for our country. But we are Americans. We are tougher than the times we live in, and we are bigger than our politics have been. So let’s meet the moment. Let’s get to work, and let’s show the world once again why the United States of America remains the greatest nation on Earth. (Applause.)

Thank you very much. God bless you, and God bless the United States of America. (Applause.)
The text of the speech is available on
The video of the speech is also available on whitehouse,gov for viewing or downloading.

Thursday, September 8, 2011

Economic Benefits Of Entrepreneurs: Kauffman Video

(HT: Growthology)

Need Present Value Cuts And Not Accounting Cuts Of Government Expenses To Induce Private Sector Employment And Economic Growth

Major businesses use present value, aka discounted cash flow, analysis to determine the benefits of an investment, expansion, new hire, etc. Present value converts future costs and future revenue benefits into today's dollars.

Unlike a Congressional Budget Office legislative analysis, which treats a dollar spent today as equal to a dollar in expense reduction 10 years out, discounted cashflow adjusts for the differences in the timing of expenses and revenue. For example, at a seven percent discount interest rate, a dollar benefit 10 years out is worth about 50 cents in today's value. Spending a dollar today and receiving a dollar benefit in expense reduction in 10 years is not a wash and revenue neutral. In present value amounts, it costs 50 cents. CBO analyses are accounting based and do not adjust for the time value of money.

Many unsophisticated small businesses intuitively think in present value terms. They are aware of future expense increases, such as a lease renewal with a rent increase, and start planning on how they will be able to cover that additional expense, as the increase gets closer to the current date. They make a determination if they can pass the increase along via a future price increase or if they must cut other future expenses to pay for the increase costs.

Congressional actions that look beneficial on an accounting basis, or a CBO analysis, are not necessarily beneficial on a present value basis. Reducing payroll taxes, or deferring debt payments, both of which must eventually be paid back, do not produce any positive economic benefits or investment inducements to the private sector on present value analyses. These are examples of accounting manipulations that do not produce any long lasting economic value.

Businesses understand that on a going concern basis expenses and debts must be paid, if not today, then in the future with interest.

In a non-inflationary economic environment, US debt does not devalue over time because the US must pay interest on the debt. Reducing taxes, payroll or otherwise, without decreasing US governmental expenses, increases the amount of US debt. Tax reduction does not provide an economic value benefit to the private sector because the expenses and the debt associated with it remain valued in current dollars and must be paid back with tax increases. The present value benefit of the tax reduction to businesses and individuals is zero.

If Congress wants to induce private sector investment, Congress has to increase the value of investments. Reducing taxes today without reducing government expenses pushes the private sector tax increase to payback the current expense to some future date in future dollar equivalents. On a present value basis, there is no economic value increase to the private sector investment from the current tax reduction.

Congress needs to think in present value terms and set up economic programs that will reduce future government expenses on a present value basis. A present value reduction in government expenses is equivalent to a present value reduction in taxes. A present value reduction in taxes, a true reduction that does not just delay repayment and a tax increase, will increase the economic value of private sector investment and hiring.

A present value analysis of economic proposals to increase private sector employment and investment will more clearly delineate which proposals are likely to improve the US economy, increase private sector economic growth and lower the unemployment rate.

Wednesday, September 7, 2011

Current Economic Slowdown Signals Another Coming Recession

From The Federal Reserve Bank of Cleveland, Economic Trends, "Interpreting the Recent Slowdown: Delayed Recovery or Stall Speed?" by Margaret Jacobson and Filippo Occhino:
As recently emphasized by Jeremy Nalewaik, economic activity tends to decelerate in the year before a recession. After growing along the trend in the expansion period, the economy may enter a state of stall speed, with GDP growing at a rate slower than trend just before the arrival of a recession. Average growth in the year before a recession tends to be lower than during the preceding years. This pattern suggests that the current slowdown in economic activity may signal another recession coming.

Friday, September 2, 2011

12 Years Needed To Reach Pre-Recession US Employment Levels

From "Taking the Job Gap to the State Level: A Closer Look at the August Employment Numbers" by The Hamilton Project, The Brookings Institution:
The August “job gap” is estimated at 12.4 million jobs, up 180,000 jobs from July.
If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until February 2024—almost 12 and a half years—to close the job gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate for the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by December 2016—over five years.
The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how  long it will take to close the job gap under alternative assumptions about the rate of job creation going forward.

Per Capita Real GDP At 2005 Levels

Chart from EconomPic "Real GDP per Capita at March 2005 Levels" by Jake, below, shows that the per capita real GDP has not grown in the last 6 years. Real per capita GDP has reverted to its March 2005 levels.

While Jake adds a historical long term trend line at 2.15 percent yearly growth, shows the gap between the trend and actual per capita GDP and mentions mean reversion, the uncertainty about the future US economy is the long term trend growth rate line going forward from now.

The longer the future real per capita growth rates are below the historical trend growth rate, the more the entire trend line will move downward and be below the historical yearly growth of 2.15 percent over the period of the chart.

When the average trend growth rate is subject to change and uncertain, mean reversion to the historical trend line from above average growth rates is just as likely as a shift downward in the total trend growth rate line due to a decline in future growth rate below historical average. In other words, actual growth rates can increase to meet up with the long term trend growth or long term trend growth can decline to meet up with lower than average actual future real per capita GDP growth rates.

Only time will tell if future growth rates increase to raise real average per capita GDP growth to the historical growth rate or if the average growth rate will stay below long term trend and cause the long term trend average growth rate to decline. If future growth rates stay below historical trend, the entire trend line will shift down and make the 1950s through the 1990s look like a real per capita GDP growth bubble.

Real Per Capita GDP Chart

Thursday, September 1, 2011

Competitive Markets Look Darn Good In Comparison To Government Performance

From The Wall Street Journal, "The Great Recession and Government Failure: When comparing the performance of markets to government, markets look pretty darn good" by Gary Becker, 1992 Nobel economics laureate:
The traditional case for private competitive markets goes back to Adam Smith (and even earlier writers). It is mainly based on abundant evidence that most of the time competitive markets work quite well, usually much better than government alternatives. The main reason is not that individuals in the private sector are intrinsically better than government bureaucrats and politicians, but rather that competitive pressures discipline market behavior much more effectively than government actions. The lesson is that it is crucial to consider whether government regulations and laws are likely to improve rather than worsen the performance of private markets. In an article "Competition and Democracy" published more than 50 years ago, I said "monopoly and other imperfections are at least as important, and perhaps substantially more so, in the political sector as in the marketplace. . . . Does the existence of market imperfections justify government intervention? The answer would be no, if the imperfections in government behavior were greater than those in the market."

Government Does Not Create Value Adding Jobs

From Investors Business Daily Editorial, "Gov't Is Job Killer, Not Creator" by Benjamin Powell:
The problem is: Government doesn't create jobs that add value to the economy; companies and entrepreneurs do. Through taxes, mandates and regulation the government typically discourages hiring and destroys jobs. What Washington should do right now is step aside.
While President Obama's new proposal doesn't include digging canals with spoons, it is bound to include the economic equivalent — jobs that create work but not necessarily value.
Read the complete editorial here.

Mortgage Modification Programs Raised Unemployment And Lowered GDP

From the abstract to "Labor Market Dysfunction During the Great Recession" by Kyle Herkenhoff and Lee E. Ohanian, University of California, Los Angeles (UCLA) - Department of Economics, August 2011, NBER Working Paper No. w17313:
This paper documents the abnormally slow recovery in the labor market during the Great Recession, and analyzes how mortgage modification policies contributed to delayed recovery. By making modifications means-tested by reducing mortgage payments based on a borrower's current income, these programs change the incentive for households to relocate from a relatively poor labor market to a better labor market. We find that modifications raise the unemployment rate by about 0.5 percentage points, and reduce output by about 1 percent, reflecting both lower employment and lower productivity, which is the result of individuals losing skills as unemployment duration is longer. [Emphasis added]