December 2003 ~ Angry Bear

Tuesday, January 20, 2004

Employment Charts in Thirty Seconds

I just came across a really cool application, Labor Force Statistics from the Current Population Survey, at the Bureau of Labor Statistics web page. There, you can quickly assemble charts and graphs on a number of labor and economic measures collected by the BLS, broken down by a variety of demographic categories. Just to try it out, I thought I'd take a look at the seasonally adjusted number of people looking for full-time work, and within seconds I had a table (then select the "include graph" box for a graph.) My only complaint is that exporting the graph doesn't work well -- it looks great on the BLS page, but there's no convenient export function. In any event, here it is:

Series Id: LNS13100000
Seasonal Adjusted
Series title: (Seas) Unemployment Level - Looking For Full-Time Work
Labor force status: Unemployed looking for full-time work
Type of data: Number in thousands
Age: 16 years and over

The number looking for full time work climbed by by 2.5 million from 1/01 to mid-2003, before falling by 500k. Notice any similarities between 1993 to 2003? (In fairness to the younger Bush, the population is larger now than in 1993 by about 20 million, so his 7.5 million isn't as bad as Bush Sr.'s 7.5 million looking for full time work.)

AB

Read More on " "

Iowa's Effect on the Political Markets

As I’ve mentioned before, the Iowa Electronic Market is a great place to see how events shape the perceived probabilities of each candidate winning the nomination. Here is today’s graph, showing the last night’s Iowa caucus results have affected the shares of all of the candidates. Note that Edwards is contained in the grey ROF line just below Kerry’s line in recent days.

The market apparently now thinks that Kerry and Dean have almost equal chances of winning the nomination now (about 30-35% each) while Clark and Edwards both have around a 20% chance of winning. I agree with AB: This is going to be good – pass the popcorn!

Kash

Read More on " "

A Preview of the State of the Union: More Concealed Costs?

Bush has made a specialty of proposing policies that are tremendously expensive without actually addressing their costs. Some examples include:

Tax cuts. Stated cost by Bush before the fact: none. The claim was that they would boost the economy so much that tax revenue would increase. Actual cost: hundreds of billions of dollars per year.
War in Iraq. Stated cost by Bush before the fact: none. As Paul Wolfowitz said, "Such estimates are so dependent on future, unpredictable circumstances as to be of little value." Actual cost: $100bn so far and counting.
Moon and Mars bases. Stated cost by Bush before the fact: $1 billion. Someone at some point in the future will presumably pay for and accomplish these missions, after all; Bush is just in charge of getting the vision started. Actual cost: We’ll see, but estimates are in the neighborhood of $130 to $250 billion.

So, what new costless, extremely expensive proposals can we expect tonight in Bush’s State of the Union speech? Privatizing Social Security might be one, making the 2001 tax cuts permanent might be another... but we’ll just have to wait and see to know for sure.

Kash

Read More on " "

Edwards-Clark or Clark-Edwards?

The title is actually intended to mock the proclivity of the press for taking any event and projecting it linearly into the future: Dean is definitely down, but not out. Also, I remain firm in my conviction that Kerry will not be the nominee (though I will support him if he is). Overall, it's definitely tough to attribute Dean's dramatic fall to anything other than the rash of negative press he got, unfairly for the most part (I'm giving Iowa Democrats enough credit to assume that the Club for Growth ads didn't play a role in Dean's defeat). And I'd like to attribute Edward's strong second place finish to his lack of negativity vis-a-vis other Democrats so far, but perhaps that's too optimistic.

So what does it all mean? Beats me. Where's the popcorn?

On second thought, I'll venture a call now: Edwards or Clark will be the nominee, and the winner will choose the loser to complete the ticket. Perhaps my predictive skills will surpass those of Atrios. On the other hand, my Condoleeza Rice Resignation Watch is now in day 175, so my prognistications are questionable at best.

AB

P.S. Just a week ago, Matt Y. predicted that "Dean's moment of inevitability would be followed by an inevitable moment of evitability which would be followed by victory. Now it really doesn't look inevitable right now, but I stand by that prediction." Query: Did Matt predict the Iowa outcome, or not?

Read More on " "

Monday, January 19, 2004

We don't care if it's right, thorough, or helps prevent future attacks...Just get it done!

And by get it done, we mean get it done soon enough that voters won't remember it come November:

A growing number of commission members had concluded that the panel needs more time to prepare a thorough and credible accounting of missteps leading to the terrorist attacks on the World Trade Center and the Pentagon. But the White House and leading Republicans have informed the panel that they oppose any delay, which raises the possibility that Sept. 11-related controversies could emerge during the heat of the presidential campaign, sources said.

Much of the delay is due to the lack of cooperation by the White House, as spokesman Erin Healy explained:

"The administration has given them an unprecedented amount of cooperation."

Not an unprecedentedly large amount of cooperation, but simply an unprecedented amount. That is, find the smallest amount of cooperation by any White House in an investigation of this sort. If the current White House cooperates a bit less than that amount, then Healy's statement is technically true.

AB

Read More on " "

The No Jobs President

James K. Galbraith, who heads the University of Texas Inequality Project and who I correspond with fairly often, has today's lead piece in Salon, The no jobs president. Here's a highlight:

Next, notice when the deep dive ends. That's right: It was just after Sept. 11, 2001. It's true that President Bush ought not to be blamed for the job losses of the Internet bust. But neither can he properly blame his troubles on Osama bin Laden: Job losses slowed down when the war on terror began.
Bush should be judged on the record after that -- on the creation of jobs in 2002 and 2003. After all, the recession officially ended in November 2001. How many new jobs did we get since then? An average loss of 22,000 jobs every month.
There are no new jobs. Total job growth in the Clinton years: 23 million. Total job losses so far in the Bush years: over 2 million. Total gains in the last six months, since the so-called recovery supposedly accelerated in the third quarter? Just 221,000. That's less than a single month's average under Clinton. And last month? One thousand new jobs.

There's a lot more, including a discussion of the decline in labor force participation, a cynical (but not inaccurate) take on Bush's major policies, and a very pessimistic take on Bush's proposed immigration reform. Read the whole thing.

AB

Read More on " "

Sunday, January 18, 2004

Mea Culpa?

Washington Post ombudsman Michael Getler has apparently been getting lots of email alleging that the Post is burying or slanting anti-Bush stories, particularly stories related to Iraq (the WaPo editorial page is pro-war). Point by point, Getler reviews the charges and then admits that they have some merit. The tone is one of denying actual impropriety, but admitting that there may in fact be an appearance of impropriety. Gertler's conclusion:

Editors should not edit because things may "look bad" to some readers. But there is a lot of smoke out there, and probably a fire.

Not mentioned is a plan for addressing these concerns.

AB

P.S. For another mea culpa, this time from NPR Ombudsman Jeffrey Dvorkin, click here (scroll down to "mea culpa").

Read More on " "

Saturday, January 17, 2004

What's With Sully?

Noted conservative hack, Andrew Sullivan, posted this on Thursday:

LET THE KIDS PAY FOR IT: I'm talking about this $170 billion foray into space. After all, the next generation will be paying for a collapsed social security system, a bankrupted Medicare program, soaring interest on the public debt, as well as coughing up far higher taxes to keep some semblance of a government in operation. But, hey, the president needed another major distraction the week before the Iowa caucuses, and since he won't be around to pick up the bill, why the hell not? Deficits don't matter, after all. And what's a few hundred billion dollars over the next few decades anyway? Chickenfeed for the big and bigger government now championed by the Republicans. This space initiative is, for me, the last fiscal straw. There comes a point at which the excuses for fiscal recklessness run out. The president campaigned in favor of the responsibility ethic. He has governed - in terms of guarding the nation's finances - according to the motto: "If it feels good, do it." I give up. Can't they even pretend to give a damn?

Later that same day, he added this:

AND WHEN IN DOUBT, LIE: Leave it to Rick Santorum to say the following: "I would just suggest we stayed within the budget targets the President has set forth. They are substantially less than what the increases were under the Clinton administration. They are, I would argue, fiscally responsible." Here's the truth: If you take defense and entitlement spending out of the picture altogether (and they have, of course, gone through the roof), Bush and the Republican Congress have upped domestic spending by a whopping 21 percent in three years...

Astounding! I completely agree with both posts. But Sully was only experiencing a brief moment of clarity. On Friday, he returned with a very disingenuous and specious account of Gen. Clark's pre-war assessment of the steps America should take to deal with Saddam Hussein. (To see why Sully's argument is specious, see Kleiman, Marshall, Drum, or Columbia Journalism Review's new blog.)

AB

Read More on " "

American Street Update

There's one more to-be-revealed contributor, but the list is otherwise complete:

Angry Bear
Bill Scher
Chuck Currie
Dave Johnson
David Neiwert
Digby
Dirk Steele
General J.C. Christian
Jeff Alworth
Jeralyn Merritt
Kash
Kevin Hayden
Luis Toro
Mary Ratcliff
Mark A.R. Kleiman
Ross
skippy
Tom Burka

The most recent additions are Ross, Tom Burka, and General J.C. Christian. Ross adds some great expertise on health care issues, while Tom Burka and The General ably mix healthy doses of insight with even healthier doses of humor. Overall, I think Kevin Hayden did a great job of assembling a group with complementary skills. Nice job, Kevin.

AB

Read More on " "

Friday, January 16, 2004

Full-Scale War in the Senate?

With this news, President Bush may have fired the launched a meaner, dirtier, nastier Senate than any of us has ever seen in our lifetimes.

Kash

Read More on " "

Why Are Long-Term Interest Rates Still So Low?

In a thought-provoking post, Brad DeLong ruminates on the fact that bond ~~prices~~ yields are far below where most economists think they should be.

My two favorite explanations:
1. Vast quantities of foreign demand for US bonds is keeping bond prices high. As the Treasury report mentioned in the post below indicates, foreigners (especially central banks) are plunking down $20 to $30bn every month to buy US government bonds. I think that should be plenty to keep prices significantly higher than they would be otherwise. In addition, some of those buyers (again, especially central banks) have other priorities (such as exchange rate goals) that supercede their beliefs about the future of US inflation and interest rates.

2. Short-term rates affect long-term rates. The fact that the Fed is keeping short-term rates so low for so long does seem to cause long-term rates to fall. Yes, the Fed is supposed to only be able to affect short-term rates, but as one of my friends at the Board of Governors says, “I don’t know how or why, but we DO have control over long-term rates.”

Kash

Read More on " "

Foreigners Still Buying US Assets

Today the US Treasury released the latest statistics on international capital flows into the US, covering the month of November 2003. It shows a few interesting and surprising things.

1. Foreign private firms and individuals increased their purchases of US stocks and bonds in November. In fact, through Nov 2003 private net purchases of stocks and bonds totaled $575bn, up from $511bn in 2002. This surprises me, since I expected that the falling dollar was in response to weak private foreign demand for US assets. However, foreigners were still gobbling up US stocks and bonds in November. This suggests that the fall in the dollar may be due more to speculative activity in short-term investments rather than due to a major shift in long-term investor sentiment.

2. Foreign central banks continued accumulating US government bonds, buying a net of about $19bn during November. However, nearly all of this is accounted for by Japan alone. Japan’s central bank now owns over $525bn worth of US government bonds, up from about $385bn at the beginning of the year. (See chart below.) This is a stunningly massive quantity of US government bonds under the control of one institution. Good thing they’re on our side.

3. China’s central bank has not been accumulating large amounts of long-term US government bonds – contrary to what I expected, given their massive increase in foreign reserves. Together, China and Hong Kong have only added about $30bn in US government bonds to their portfolio this year. (Again, see chart below.) This creates a bit of a puzzle: where is China putting all of their dollars, if not in US government bonds? Is it all in short-term assets such as cash and T-bills?

It’s an interesting report. I need to take a closer look at it and think about it some more, but my preliminary conclusions are to be less worried about a significant drop-off in the willingness of private foreigners to lend in the US right now, to be more perplexed about China’s reserves, and to be more sanguine about the possibility of a huge sell-off in US government bonds this year, since I think Japan is much less likely to do that than China would be.

Kash

Read More on " "

Thursday, January 15, 2004

Pension Problems

Not good:

WASHINGTON, Jan 15 (Reuters) - The federal agency that provides a safety net for U.S. corporate pension funds said on Thursday that its deficit had more than tripled last year, to a record $11.2 billion.

The U.S. Pension Benefit Guaranty Corp., which insures the pensions of about 44 million Americans, had started fiscal 2003 with a $3.6 billion deficit. Executive Director Steven Kandarian said the growing red ink threatened the agency's ability to protect pensions in the future.

This is a problem that’s going to get a lot worse before it gets better. Expect US taxpayers to pony up several tens of billions of dollars to fund these pensions over the next decade.

Kash

Read More on " "

Kash’s Call #4: Housing Market Prices

My prediction is that housing prices will peak in 2004 in many (perhaps most) of the major regional markets in the US. By late 2004 or 2005 house prices will actually begin to fall in many of those markets.

Why? First, because housing prices are historically high. The chart in the post below that shows house prices in several states describes what I mean. I’m a great believer in reversion to long-run trends in general, and housing is one market in particular where prices have almost always reverted to long-run trends. As the IMF report also cited in the post below concludes, "housing booms are more likely than stock booms to end in a bust."

Second, because the discrepancy between rents and house prices is huge. Right now, rental markets are soft in many places. Rents are stable or falling, and renting is cheaper than buying a similar place almost everywhere in the US. Historically, such a condition does not persist – people arbitrage between renting and buying (albeit slowly), and in the long run the two types of housing prices tend to converge.

Third, because interest rates will rise later this year. Various forces make this likely, including decreased lending by foreign investors and an increase in inflation in the US from its historically low levels. Recently, low interest rates have enabled people to put off repaying more of their house until later, so some people have been willing to pay a higher price for a given house than they would have otherwise (see the post below for further explanation). Well, the reverse is also true – when interest rates and inflation rise, people will react by being willing to pay less for their house.

Put these factors together and I am forced to conclude that we’re near the peak of house prices in several markets – and that once we’re past the peak, they will go down.

Kash

Read More on " "

Dispelling Myths About The Real Estate Market

To lay the groundwork for my next prediction, let me first summarize and dispel a few commonly-held misperceptions about home ownership.

Myth #1: Real estate prices never fall.

In fact, housing price busts are extremely common. For some examples, take a look at the graph below, which shows real housing prices in several different states in the US since 1975. (Note: data is from the Office of Federal Housing Enterprise Oversight.) It’s evident that house prices can fall as well as rise, despite the overall upward trend.

To provide a broader picture of house price busts, the IMF published a couple of papers about asset price bubbles and crashes last April (available here). They studied 52 stock market busts and 20 housing market busts that have happened in the last 30 years. Among the numerous interesting points they made were:

Whereas only about 25% of stock market booms are followed by busts, about 40% of housing booms are followed by busts.
On average, when there is a bust in the housing market, real prices fall by an average of about 30%.
The bigger the price boom in the period leading up to the peak, the bigger the fall in prices after the peak.

Myth #2: Owning is always preferable to renting, because at least you build up some equity with your monthly payments.

While it is true that you build up equity when you own a home, there are other factors to consider.

During the first 5 years of the typical mortgage with 10% down, about 85% of your mortgage payments go straight to the bank’s pockets as interest payments.
If the price of your house falls by just 5% during those first five years, your equity in the house will be lower than your initial down payment, so you will have lost money despite the fact that you were supposedly building up equity.
If your monthly payments to buy a house are 15% more than your monthly payments to rent something similar, you could rent at the lower monthly rate, save the difference in a money market account, and still come out ahead (in the absence of capital appreciation) by renting versus buying.

Myth #3: It’s okay to pay a high price for a house right now because interest rates are very low, reducing the monthly payments.

Actually, interest rates are not particularly low right now in real terms. The following graph shows the average interest rate on 30 year fixed mortgages, adjusted for inflation. Yes, nominal interest rates are very low right now, but that’s simply because inflation is very low. Real interest rates are about average for the past 15 years.

What does this mean? It means that while low nominal interest rates make monthly payments on a mortgage look cheap, it also means that the burden of your monthly payments won’t be eroded over time by inflation as much as it would if inflation were higher. Effectively, this means that you pay off less of your loan now, and more of it in the future. But the house is not any cheaper because of low nominal interest rates any more than a car is cheaper when you repay your car loan over 5 years instead of 3 years.

The fact that these commonly-held conceptions are wrong does not mean it’s never worth buying a house. In fact, it almost always still makes sense to buy a house if you’re going to be living there for several years. And even if it’s more expensive to own versus renting, there are non-monetary benefits to home-ownership that are not trivial. However, the points made above are important to understanding my next prediction...

Kash

Read More on " "

Wednesday, January 14, 2004

Offered Without Comment
From the Washington Post (Mike Allen Reporting):

In the winter, Bush and his heartiest alpha aides burn the towering pyramids of cedar.

That may sound like a chore, but Bush would certainly rather be there than here. The early-rising president can get crabby and punchy if he doesn't hit the pillow by 10 or so at night. On Monday, Bush was not scheduled even to arrive at a dinner hosted by Mexican President Vicente Fox until 9:10 p.m. local time (10:10 Eastern).

Bush, who returned to the White House on Tuesday night, sounded tired and bored at the few public appearances during his 28-hour visit. His remarks had unusually long pauses. Cutaway television shots captured Bush glowering into space as other heads of state talked about "economic growth with equity to reduce poverty," "investing in people" and "democratic governance."

AB

Read More on " "

How Much Oxygen is There in Mars' Atmosphere?

Here's what I think would be a really bold experiment that NASA could use to determine whether there's enough oxygen on Mars.

Build another Mars Rover. Call it Spirit II (cost: about $500 million, assuming the second one will be cheaper than the first one):
Fill it up with cash, large bills.
Send to Mars.
Conduct experiment: see if cash will burn on the surface of Mars.

__________________________________
??

If the money does not burn, then fire powerful missile at the cash.
Repeat steps (1) through (4) as needed until need to waste money and unquenchable thirst for deficits are satiated.

AB

BTW, those are plus signs, though they could double as crosses, in which case they would represent the faith-based component of the Mars mission.

UPDATE: Dwight Meredith astutely observes that this proposal "bears an uncanny resemblance to the ethanol program here at home."

Read More on " "

American Street Update

As Ezra K. at Pandagon quipped, the number of bloggers at TAS is "growing by the minute too ... Like liberal bacteria." Our latest ~~paramecium~~ contributor is Digby, of Hullabaloo, writing about Bush's credibility gap.

AB

UPDATE: Digby's post brings to mind this exchange from Brit Hume's interview of George Bush:

HUME: How do you get your news?

BUSH: I get briefed by Andy Card and Condi in the morning. They come in and tell me. In all due respect, you've got a beautiful face and everything.

I glance at the headlines just to kind of a flavor for what's moving. I rarely read the stories, and get briefed by people who are probably read the news themselves. But like Condoleezza, in her case, the national security adviser is getting her news directly from the participants on the world stage.

HUME: Has that been your practice since day one, or is that a practice that you've...

BUSH: Practice since day one.

HUME: Really?

BUSH: Yes. You know, look, I have great respect for the media. I mean, our society is a good, solid democracy because of a good, solid media. But I also understand that a lot of times there's opinions mixed in with news. And I...

Read More on " "

Dollar up Sharply

Apparently, Kash knows what he's talking about. Two posts below this one, he predicted that the dollar's fall should stop. In the news today, Dollar Up Sharply:

In morning trading, the euro was at $1.2655, down from $1.2751 late Tuesday in New York. Sterling was also lower at $1.8350 from $1.8447, while the dollar rose against the Swiss franc to 1.2326 from 1.2227.

Theory number two is that the dollar traders are reading Kash's posts and making their trades accordingly.

AB

Read More on " "

On NPR's Fresh Air Today

Terry Gross interviews Paul O'Neill and Ron Suskind.
AB

Read More on " "

End of the Dollar's Decline?

This week’s Buttonwood column in The Economist is all about the prospects for further decline in the dollar. Buttonwood is starting to think that we’re near the end of the dollar’s fall. It’s worth a read, if the subject interests you. The column ends with some good questions without ready answers:

The dollar has already fallen a lot, but how much further does it need to fall to correct America’s imbalances? American assets are already a lot cheaper than they were, and thus, presumably, more attractive to foreign buyers. How long will European policymakers be content to see the euro rise so sharply when Asian currencies are not? Judging by comments from Mr Trichet and others, not that much longer, especially given that Europe’s recovery is a lot more fragile than America’s seems to be. And how long will Asian countries continue to spend money building up foreign-exchange reserves that earn next to nothing and carry the risk of currency losses, rather than use the money to invest in their own region, which seems set to grow an awful lot in coming years? Fund managers’ view of the dollar is at an all-time low—reason enough, one might have thought given their track record, for being a bit more bullish.

Kash

Read More on " "

Koufax Awards Update

I just noticed that Angry Bear was nominated for a third Koufax Award, this time in a category where Kash and I have a shot at finishing in the top ten: Best Expert Blog. Ok, so there are only fourteen nominees, but still. Right now, they're just taking nominations in order to narrow down the list; I'll update when the voting opens.

And speaking of contests, MoveOn has announced the winners of the Bush in Thirty Seconds contest, and my favorite ad, Child's Play (warning: sound), won.

AB

Read More on " "

Tuesday, January 13, 2004

The American Street

Now available: Kash's first post, A Preview of Bush's Budget Plans, and my first post: Myths: Fiscal Responsibility and Irresponsibility.

AB

Read More on " "

One Reason Why a Weak Dollar May Not Help the Trade Deficit

This morning the BLS released an interesting tidbit of data:

The price index for overall imports rose for the third consecutive month, rising 0.2 percent in December. From December 2002-December 2003, the index was up 1.9 percent, which followed a 4.2 percent increase over the previous year.

Why is this interesting? Because the US dollar has lost around 15-20% of its value against its trading partners, which means that imports should have cost the US 15-20% more over the year. The fact that they only cost about 2% more tells us one thing: importers and/or foreign firms who sell in the US have substantially cut the price that they’re willing to accept, presumably in order to keep market share in the US.

Economists call this phenomenon “exchange rate pass-through,” and it is crucial to understanding if the weaker US dollar will help the US trade deficit. If firms selling imports in the US are accepting lower prices in order to maintain their market shares, as this report seems to suggest, then the weaker dollar will not reduce imports at all. That’s why the decline in the dollar may have less of an impact on the US’s trade balance than many think.

Kash

Read More on " "

Previewing Bush's Budget

What do you get when you put together Bush's idea of a building a manned base on Mars, his stated intention of making the 2001 and 2003 tax cuts permanent, and his stated goal of halving the budget deficit by 2009? Take a look at this post on The American Street for the answer.

Kash

Read More on " "

More on O’Neill

From Reuters this morning:

Speaking on NBC's "Today" show, the ex-Treasury Secretary said the documents were given to him by the Treasury's chief legal officer after he requested them to help former Wall Street Journal reporter Ron Suskind write a book on O'Neill's time in the Cabinet.

"I said to him (the general counsel) I would like to have the documents that are OK for me to have. About three weeks later, the general counsel, the chief legal officer, sent me a couple of CDs, which I frankly never opened," said O'Neill, who resigned under pressure a year ago in a shake-up of Bush's economy team.

A bit of perspective is probably called for at this point, too. Don’t be under the illusion that O’Neill is going to start doing ads for the Democratic party:

He described the reaction to Suskind's book as a "red meat frenzy" and said people should read his comments in context, particularly about the Iraq war...

Asked about his comment that during Cabinet meetings Bush was like "a blind man in a room full of deaf people," O'Neill said he regretted some of the language he used to describe his former boss.

"If I could take it back, I would take it back. It has become the controversial centerpiece."

Pressed whether he would vote for Bush in the November presidential election, O'Neill said he probably would, but he said the American people needed to demand more of their leaders.

Kash

Read More on " "

The American Street

Is it possible that my earlier link to the latest and coolest group blog, The American Street, was somewhat self-serving? Visit The American Street throughout the day and find out!

AB

P.S. The list of contributors now includes Jeralyn Merritt, Dave Niewert, Colorado Luis, Skippy, Dave Johnson, Mary Ratcliff, Mark Kleiman, Kevin "The Organizer" Hayden, and an economist or two. And there's more to come, including at least one more of my personal favorites.

Read More on " "

Monday, January 12, 2004

Rove's Payback Begins

Well, that didn't take long:

WASHINGTON (Reuters) - The U.S. Treasury has asked the U.S. inspector general's office to investigate how a possibly classified document appeared on Sunday in a televised interview of ex-Treasury Secretary Paul O'Neill, a department spokesman said on Monday.

As you may know, O'Neill provided 19,000 documents to Suskind to help him write his book, some of which apparently appeared on the 60 Minutes interview.

I can't help but think that Rove chuckled to himself, just a little, when O'Neill said "I'm an old guy, and I'm rich. And there's nothing they can do to hurt me."

Kash

Read More on " "

Follow-up to the Unemployment Rate Puzzle

AB pointed to a line of thinking that suggests that increasing numbers of people on disability may be contributing to the fall in the labor force participation rate (LFPR) that I pointed out the other day in a post on The Unemployment Rate Puzzle. Among the excellent comments on that post were some other suggestions, however. A longer-horizon graph provides us more information about their relative importance.

The most notable feature of this graph is the strong downward trend, which is the result of a) a slight trend toward men staying at home with kids, and b) a substantial trend of men retiring earlier than they used to. From this chart, it looks like the recent drop in LFP is exactly consistent with the long-term trend.

One other interesting and unexpected thing to note is what the graph does not show – a cyclical fall in the LFPR that corresponds with recessions. Instead, the LFPR typically falls in the middle of the expansion portion of the business cycle, not during recessions (which are shaded on the graph).

Put this graph together with two other tidbits: a) as dc pointed out in the comments to the Unemployment Rate Puzzle, the age group in which men are most significantly leaving the work force more than women is in the 45-54 year old category; and b) college-educated people are leaving the work force more (or earlier) than poorly-educated people. Combining these bits of data with the fact that the graph shows that men’s LFPR is simply returning to its trend rate, I come to the conclusion that early retirement is a major contributor to the recent fall in the LFPR. Men who are well-educated are leaving the work force at a younger age than they used to. Put another way, it looks like some men who had put off retiring during 1999-2002 have decided to finally do it, and have left the labor force. Together with the disability story, I think this accounts for a large portion of the unemployment puzzle.

Kash

UPDATE: Anne (regular contributor to the comments) reminded me of this relevant NYTimes story from the other day, about the trend toward early retirement. It's worth a read if you haven't read it yet.

Read More on " "

Kash’s Call #3: A Financial Crisis in the US?

My third prediction: there will not be a major financial crisis this year in the US, a la Argentina.(*)

Why not? Many of the ingredients for serious financial problems are in place for the US right now: massive government borrowing with no realistic prospect of future fiscal responsibility; enormous borrowing from the rest of the world in the form of the current account deficit; corporations and individuals that are burdened with historically high debt burdens; eroding confidence in the dollar.

However, there’s one big difference between the US and an Argentina or Thailand: all of our domestic and foreign debts are denominated in our own currency. This means that if there’s a loss in confidence in the ability of the US to repay its loans, then foreign investors will stop investing in the US (and may withdraw some of their investments), long-term interest rates will go up substantially, the dollar will fall substantially… but that will be the end of it. There will be no follow-on effects to cause a general financial crisis such as typically happens in a developing country in the same situation.

Over the coming year there will probably be a significant tapering off of foreign investment in the US – in fact, we may already be seeing this happen, according to some. The possible exception is the Asian central banks – they may keep buying dollar assets to keep the dollar from falling further. But any net reduction in the foreign willingness to lend to the US will happen gradually, not in a sudden, dramatic shift. The result will be further erosion in the value of the dollar over the year, and a gradual but significant increase in long-term interest rates in the US. But no crisis.

The US is not at risk of being the next Argentina. But that doesn’t mean that the consequences of the US’s excessive borrowing from the rest of the world will be pleasant.

Kash

(*) Some might argue that it’s cheating a little to predict what won’t happen, but since many people have expressed concerns about the US heading for an Argentina-like crash, it seems fair game to me.

Read More on " "

More Unemployment

In an earlier post Kash gave some data on declining labor force participation, a decline that is particularly sharp among men and people with a high school degree or more education. We don't really have an explanation for the pattern, though one theory is that people are going back to school -- basically building up human capital while waiting out the bad times (Matt Y. and a number of CalPundit commenters second this theory.)

The economists over at Economists for Dean have what is likely another big part of the explanation: rising disability claims. When a worker claims disability, they are not counted as part of the labor force, and disability claims are up a lot. Economists for Dean cite a recent NYT Op/Ed by Austin Goolsbee that addresses this point:

Research by the economists David Autor at the Massachusetts Institute of Technology and Mark Duggan at the University of Maryland shows that once Congress began loosening the standards to qualify for disability payments in the late 1980's and early 1990's, people who would normally be counted as unemployed started moving in record numbers into the disability system — a kind of invisible unemployment. Almost all of the increase came from hard-to-verify disabilities like back pain and mental disorders. As the rolls swelled, the meaning of the official unemployment rate changed as millions of people were left out ... From 1999 to 2003, applications for disability payments rose more than 50 percent and the number of people enrolled has grown by one million.

AB

Read More on " "

Sunday, January 11, 2004

If Only

For Eagles fans and more importantly, for those who dislike Rush Limbaugh, be sure to click here and then watch the "Frank's Picks: Divisional Playoffs" video segment. Watch to the end.

Via Atrios, who I suspect is very happy today.

AB

Read More on " "

Completely and Utterly Damaging

And depressing, too (but unlikely to be devastating.) That's my take after watching Leslie Stahl interview former Treasury Secretary Paul O'Neill and author Ron Suskind. It looks like O'Neill gave Suskind every document he had, including transcripts of cabinet and NSC meetings. Other anonymous top officials apparently followed suit. The forthcoming book (available Tuesday), The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O'Neill, should be a must-read. Now the question is what the political fallout, if any, will be from this.

Another interesting question: who are White House sources other than O'Neill? Christie Whitman comes to mind, but who else?

It's not there yet, but I expect Josh Marshall to have the most reliable predictions, assuming he makes any. Stay tuned.

AB

Read More on " "

The American Street

Check out the latest group blog, The American Street. The proprieters are unveiling the contributors all week, but so far they have Dave Neiwert from Orcinus (who just had his 1-year blog anniversary), Jeralyn Merritt from TalkLeft, Skippy the Bush Kangaroo, and Kevin Hayden/Cowboy Kahill, with more to come. Should be worth keeping an eye on.

AB

UPDATE: Add Luis Toro (Colorado Luis) to the list of contributors.

Read More on " "

Friday, January 09, 2004

60 Minutes Sunday

Should definitely be worth watching; Leslie Stahl will be interviewing former Treasury Secretary Paul O'Neill (who was basically fired) about his time in the White House. Here's the lead from CBS's teaser:

President Bush was so disengaged in cabinet meetings that he "was like a blind man in a roomful of deaf people," says former Treasury Secretary Paul O'Neill in his first interview about his time as a White House insider.

It looks like O'Neill's tale will comport with John DiLulio's recounting of the Mayberry Machiavellis. Via Brad DeLong

AB

Read More on " "

Conservatives Against Republicans

The American Conservative Union is launching a campaign against Republican fiscal policy. I never thought I would see such a thing.

Republican Congress on a Wild Spending Spree

Federal government spending is out of control. Despite the Republican Party hegemony - control of the White House and both houses of Congress - federal spending is increasing at a rate that is unacceptable.

The American Conservative Union has launched a special project: Stop the Spending! The project's objective is to reverse the Washington spending spree, return fiscal discipline to Congress, and lay the groundwork to shrink government and its increasingly intrusive role in the private lives of average Americans.

Of course, this doesn’t mean that they’ll be supporting fiscally responsible Democrats to replace irresponsible Republicans, but it’s still fun to see.

By the way, if you want to see what a non-partisan, thoughtful, and well-respected organization fighting for fiscal responsibility looks like, check out The Concord Coalition.

Kash

Read More on " "

Kash’s Call #2: The Economic Recovery

My second prediction: the recovery will continue apace for another few months... but will start to die out by summer 2004.

Why? Put simply, I think that the bulk of the economic growth that we’re experiencing right now is due to the credit card binge that AB so aptly described yesterday. And that credit card binge will be coming to an end soon, without any source of economic growth to replace it.

We can divide the economy into four pieces, and consider each in turn.

1. Government taxing and spending (G and T, for those of you who've taken a course in macroeconomics): We haven’t quite maxed out on our national credit cards yet, but we’ve probably reached the peak of the current round of expansionary fiscal policy. Bush says he now wants to seriously rein in spending (though we'll see about that). For sure, the tax cuts have largely come and gone by now. If the budget deficit starts to shrink mid-way through 2004 as it’s projected to, that implies a fiscal drag on the US economy. So G and T will start slowing the economy after the summer of 2004.

2. Consumer spending (C): Consumer spending has been rising like gangbusters (relative to everything else) over the past couple of years. But consumer debt is now at record levels (even if you look at payments/income instead of the gross level of debt), credit card defaults are at record levels, people have mortgaged their houses up to the hilt and already spent the proceeds, and the tax rebates and cuts will have been largely spent by May. That leaves one source for possible increased consumer spending: current income. But since my prediction is for a slowdown in the economy this summer, that implies a slowdown in consumer spending, too. So C doesn’t help the economy, and probably starts hurting it later this year.

3. Business spending (I): Yes, there’s a bit of pent-up demand for business spending to replace old equipment, but not much. The things that worry me hear are 1) corporate debt, which is still historically very high (though not quite as high as in 2001); and 2) excess capacity. Firms are wallowing in tons of excess capacity. Until that starts to get used up, businesses will not undertake further major expansions. So I will not provide a sustainable source of economic growth in the next year.

4. Foreign trade (X and M): Here we have the one real possibility for help. Thanks to the falling dollar, we may see some pick-up in exports. However, I don’t expect it to be a big one, for a couple of reasons. 1) It takes a long time for a fall in the dollar to translate into a major change in trade – like 2 or 3 years; 2) US exports depend not only on prices, but also on how much income the rest of the world has. With pretty sluggish economic growth around the world, there’s a big question mark about that; 3) Fundamentally, the US is not going to have an improving trade balance until it starts saving more and spending less as a country. In the absence of the latter, the fall in the dollar will just be offset by an increase in export prices and a fall in import prices, keeping US trade about where it is now. So X and M will not provide a big stimulus to the US economy this year.

Add it all together, and what do you get? Continued growth for a few more months, perhaps, but tapering off in the second half of the year.

Kash

Read More on " "

The Unemployment Rate Puzzle

This morning’s release of December’s unemployment data by the BLS contains the same puzzle that’s been dogging this economy for months. Why has the unemployment rate continued to fall over the past 6 months, even though jobs have not been created?

The answer is that people are dropping out of the labor force. The BLS conducts a survey every month and asks about 60,000 households whether they are working, and if not, whether they are actively looking for work. The number of people who have responded that they are not working but are actually looking for work (and thus are technically unemployed) has fallen from about 9.2 million in June to 8.4 million in December. That’s good. Unfortunately, they apparently haven’t stopped working because they’ve found jobs, since the number of jobs in the US economy is still below where it was a year ago. (See the graph in this post to see what I'm talking about.) They’ve stopped working for some other reason.

This makes me curious. Who is it that’s dropping out of the labor force and giving up on the search for work? And why are they no longer looking for work? The following graphs give some interesting information about this, though they don't provide the answer.

The first one shows the “labor force participation rate” (LFPR), which counts the percentage of the total population that is either employed or actively looking for work. As you can see from the brown line, it has fallen quite a bit over the past couple of years, and shows no sign of picking up yet. The blue line shows the LFPR for women only. It rose a lot during the 1990s, and interestingly, hasn’t fallen. That gives us one piece of information about who’s leaving the labor force: they're men, not women.

The second graph breaks the labor force into education categories. The brown line shows the LFPR for all people who are over 25 years old but never completed high school. The blue line shows people over 25 who have a college degree. The results really surprise me, but there they are: more poorly educated people are working, while more college educated people are dropping out of the labor force.

What's the explanation? I honestly don't know. Maybe this reflects a boom in low-skill jobs and a dearth of high-skill jobs in the US economy? Or maybe it's a reflection of the growing income inequality in the US -- well-educated (and thus wealthier) families have gotten so rich that can afford to have one member of the family stay home, while families who earn relatively little are being forced to work more to maintain their income. Or maybe it reflects a shift in preferences -- perhaps some well-educated people are deciding that their families are more important than finding a new job?

If anyone has another good theory to explain these facts, I’d love to hear it.

Kash

Read More on " "

A Surprising Unemployment Report

The BLS reported this morning that the US economy created a net grand total of 1,000 jobs in December, according to the Department of Labor’s survey of businesses. That’s pretty bad. Surprisingly bad, in fact. According to the less reliable household survey, the US economy lost 54,000 jobs in December.

The good news is that the unemployment rate went down to 5.7%. That’s less bad. But since jobs aren’t being created, the only reason the unemployment rate is falling must be people dropping out of the labor force. Which is probably also bad.

Kash

Read More on " "

Mission to Mars

This NYT story must mean that Saddam hid the WMD on the Moon, the Red Planet, or perhaps both: Bush to Announce Ventures to Mars and the Moon, Officials Say.

AB

UPDATE: It looks like Calpundit came up with the same theory, but a bit earlier.

Read More on " "

Another Koufax Nomination!

Who knew that two constituted a "group"? Kash and I are now nominees in the "Best Group Blog" category in Wampum's ongoing Koufax Awards. Once again, we are being resoundingly trounced, but it's an honor just to be nominated (no, really, it is).

AB

Read More on " "

Giant, Happy-Fun, Credit Card Party

Mark Kleiman points to and excerpts a piece, Sustained Budget Deficits: Longer-Run U.S. Economic Performance and the Risk of Financial and Fiscal Disarray, by Peter Orzag (Brookings), Robert Rubin (Citigroup), and Allen Sinai (Decision Economics). (Synopsis here; full paper here.) I could blather on about the importance of inflation expectations, as well as consumer and investor confidence, to the smooth functioning of financial markets and the economy in general. But instead I'll try an analogy.

If I were willing to max out my credit cards, I could have a really wild two or three week bender in Las Vegas. Not Dollar Bill Bennett style by any stretch, but a great time nonetheless. Until the supply of credit dwindles and the bills come due, at which point the good times cease.

If only there was some way I could pass the bills off to someone else, say my children and yours, and I didn't particularly care about the well-being of those children, then everything would be fine and I could have my Las Vegas bender. This plan, in a nutshell, is precisely the economic policy of Bush and the Congressional Republicans.

AB

Read More on " "

Thursday, January 08, 2004

Compassionate Conservatism?

What Army bureaucrat thinks that this is reasonable behavior for a civilized society?

Amanda Bolduc on Wednesday was holding on tightly to her 3-month-old son, taking advantage of every last minute, memorizing his every feature -- she won't see him again for a very long time.

The young mother, a 2nd Lieutenant in the Army National Guard, has been deployed to Iraq. She will have to leave Brayden behind for the next 18 months while she serves with the 133rd Engineering Battalion.

Chalk it up as another cost of this war.

Kash

Read More on " "

Kash’s Call #1: China and the Yuan

I’ve gone back and forth on this one a bit, but this is my first prediction: China will maintain the yuan’s peg to the dollar throughout 2004.

Why? The key is China’s banking sector. I know, “the banking sector” sounds like an incredibly boring answer, but for better or worse it’s often the lynchpin of the whole economy. So let me explain. No, there is too much. Let me sum up.

Think of it this way. If China revalues (changes the exchange rate so the yuan is stronger), that will depress exports, reduce inflation, and cause holders of dollar assets in China to take a significant capital loss. On the other hand, if China holds the exchange rate constant, exports continue to boom and inflation rises.

But a bit of inflation is exactly what China wants right now. China has been flirting with deflation for a couple of years, and as fester reminded us yesterday, China now has a potential banking crisis to contend with. China’s banks are groaning under the weight of loans that borrowers can’t repay.

This sounds eerily like the situation in Japan in about 1990 or 1991. To cap off the analogy, note that China is also experiencing a housing market bubble, just like Japan at that time. Japan’s nemesis throughout the 1990s became deflation, which makes banking problems much worse. (It’s easier for borrowers to repay fixed loan amounts when prices – and hence their revenues – are rising rather than falling.)

China’s policymakers are aware of this. That’s why they will welcome some inflation – both to keep out of the deflationary spiral that ensnared Japan, and also to help improve the solvency of their banks. China is under significant pressure to turn its banks around fast, by the way, because according to WTO rules China must open its banking sector up to foreign competition by 2006. A bit of inflation would make the job that much easier. By contrast, a revaluation that causes banks to lose money on their dollar assets would make it that much harder.

One last note: As I already predicted back in August (remember, I get to remind you of those predictions I’ve made that were right), what China does with the yuan has become increasingly important, both politically and economically. That’s why my first 2004 prediction has to do with the value of the yuan. Economic events in China will have a bigger impact on the US than events in any other country. As a result, almost all of my other predictions depend on this one. So I’m going to start off the year guessing that China will hold the yuan where it is.

Kash

p.s.: I’m sure lots of you will disagree with me on this one, as well as my other calls; I'm looking forward to finding out why!

Read More on " "

The IMF Criticizes Bush's Economic Policy

Yesterday the IMF released a paper called “U.S. Fiscal Policies and Priorities for Long-Run Sustainability.” In it, the IMF delivers a surprisingly sharp criticism of the Bush administration’s fiscal policy. It’s the first time that I’m aware of that the IMF has criticized US policy in such strong terms. You can find the paper here, but I’ll give you a few highlights:

The stimulus effect of current fiscal policy will taper off and be replaced by higher interest rates, crowding out of investment, and therefore lower productivity growth in the US: “In one simulation, for example, the tax cuts would eventually lower U.S. productivity—in terms of labor output per hour—by ½ percent in the long run.”
This harmful increase in interest rates will affect the rest of the world, too: “Simulations reported in Section II suggest that a 15 percentage point increase in the U.S. public debt ratio projected over the next decade would eventually raise real interest rates in industrial countries by an average of ½–1 percentage point.”
The US is racking up a dangerous amount of foreign debt: “The United States is on course to increase its net external liabilities to around 40 percent of GDP within the next few years—an unprecedented level of external debt for a large industrial country (IMF, 2003b).
Social security is at serious risk: “The fiscal imbalance [over the next 75 years, including future entitlement liabilities] is as high as $47 trillion, nearly 500 percent of current GDP... Closing this fiscal gap would require an immediate and permanent 60 percent hike in the federal income tax yield, or a 50 percent cut in Social Security and Medicare benefits.”

The IMF’s conclusion is that it is not quite too late to avoid a fiscal disaster in the US... but that time is quickly running out, and the negative consequences of failure will be severe, both for the US and for the rest of the world.

This is all old hat to readers of Angry Bear, I'm sure. So what may be most significant about this report is simply that the IMF was willing to be so critical of the Bush administration’s fiscal policy management. The IMF is traditionally directed to a fair degree by the US Treasury Department, and rarely (never?) criticizes the US, as a result. I guess that tradition didn't hold true this time.

Kash

Read More on " "

Ready for 2004

I’m finally back at my desk, after a couple of weeks of some play and some more work. After clearing off enough mail so that I can now actually SEE it (my desk, that is), I’m now ready to write again. One of the first things I’ll be doing is giving you some predictions for the year 2004. You just have to promise me that by December of 2004 you will have forgotten all of them. That way I can just remind you of those predictions that turned out to be right on the mark. Otherwise it doesn’t work. Deal?

By the way, thanks to fester for his help over the last couple of weeks. (The timing of this post worked out curiously well as a virtual handoff, don't you think?) I'm looking forward to catching up on his writing.

Kash

Read More on " "

Fester's Last Guest Post

I would like to thank Angry Bear and Kash for allowing me to guest blog for the past two weeks here at Angry Bear. I have had a wonderful time learning from your comments and reactions to my writing. I greatly appreciate the opportunity to write before such a large and diverse audience of serious policy wonks, economists, casual bloggers and innately curious people. This has been a fun challenge and I would like to be able to do this again sometime in the future, but right now I am out of anything that I recognize as a good idea worthy of a post here on Angry Bear, so I'm pulling back to writing over at my blog, Fester's Place.

Thank you and adieu.

Read More on " "

Whore of The Year

I'll admit that my first thought was "Tim Russert by a mile" for his idiotic performance with Dean back in August, his idiotic first interview with Clark, his idiotic interview of Hillary Clinton, and general hackery and whoreishness.

But as Horse points out, David Brooks is making a strong if somewhat late run for the title, and Charles Krauthammer is always a top contender:

Until today, it appeared as though Dr. Chuckles Krauthammer would emerge as the anti-Russert should several of the other minority contenders fade, but officials have informed us on the condition of anonymity that new internal polling shows the January Surprise in today's New York Times - a bizarre piece by dark horse David Brooks that claims neocons and PNAC and their exhaustively documented crackpot schemes are figments of Bush opponents' imaginations - may pose a serious threat to both the Chuckles and Tim-meh candidacies.

For details on Brooks' last-minute surge, see Tuesday's Daily Howler; for the best-case scenario for the Washington Post's Krauthammer's candidacy, see this Daily Howler.

Still, the contest is for whore of the year, not hack of the year. Krauthammer is a long-acknowledged Republican hack. David Brooks has long been known as a conservative but until his twice-a-week NYT gig, Brooks apparently didn't publish often enough to fully reveal the extent of his servility.

Russert, on the other hand, has the distinction of having spent many years building up a solid reputation as a tough-but-fair interviewer and moderator before prostrating himself before Republicans in control of the elected branches of government and a surge in the popularity of conservative media. For his willingness to -- nay, talent for -- shimmying and writhing for a few conservative nickels, Russert remains by far the strongest candidate for Whore of the Year.

AB

Read More on " "

TNR Jumps the Shark

I can only hope that two of my favorite writers, two people rarely far off in their analysis of domestic policy, John Judis and Jonathan Chait, were not part of the "by the editors" group at The New Republic that today officially endorsed Joe Lieberman. This article by Chait suggests that he likely did not second or third, nor fourth or fifth, the endorsement. Judis' coauthoring of The Emerging Democratic Majority with Ruy Teixiera suggests that he is also an unlikely endorser of Lieberman. So I can continue appreciating their work while still being dismayed at TNR's foolishness.

In a nutshell, TNR's reasons for the endorsement appear to be that (1) Lieberman supported the Iraq War and has not let intervening discoveries (e.g., the lack of WMD) change that view; (2) He advocates policies that the Democratic base doesn't like ("Only Lieberman--the supposed candidate of appeasement--is challenging his party, enduring boos at event after event, to articulate a different, better vision of what it means to be a Democrat". Also courageous was Lieberman's "denouncing [of] Clinton on the Senate floor"); and (3) Only Lieberman believes in the Clinton/New Democrat legacy of "Foreign policy hawkishness, free trade, and fiscal discipline." The last two are certainly parts of Clinton's legacy, but Clinton's foreign policy was "activist" rather than "hawkish".

Not addressed by TNR is how Lieberman can make a compelling general election campaign, much less get out the vote in swing states, from the message that he'll repeal the most regressive of the Bush tax cuts and otherwise do everything just like Bush, only slightly less so.

In fact, the endorsement is nearly as much an attack on Dean as it is promotion of Lieberman. A quick count reveals 24 instances of "Lieberman", 14 of "Dean" (*), 3 of "Clark", and 2 of "Kerry".

AB

(*) The mentions of Dean are particularly negative: "Dean and his supporters have embraced an analysis potentially even more damaging than that of the party leaders they seek to depose"; "The problem with Dean's vision of the Democratic Party is more than electoral; it is intellectual and moral; "Dean's opposition [to the Iraq war] suggests an old Democratic affliction."

CORRECTION: The story linked above as authored by Jonathan Chait is actually by Jonathan Cohn, so Chait may not be in the clear.

Read More on " "

Wednesday, January 07, 2004

Don't Be an A**hole

WARNING: If you click the following link, there will be sound, words that you are likely to find quite hilarious but that your colleagues and bosses may find offensive. That said, here's a must-see parody of MoveOn's Bush in 30 Seconds campaign. (For the real thing from MoveOn, click here.)

Also note that I believe that the correct spelling of "Pusbag" is "Pussbag".

AB

Read More on " "

Democrats in The House ...

The Democratic Congressional Campaign Committee (DCCC) is the main organization in charge of putting Democrats into the House of Representatives. As such, they are not surprisingly dismayed by the latest ruling on Texas redistricting. The DCCC has now issued an official statement; here's the highlight:

The Court’s decision will now be appealed to the United States Supreme Court. In the meantime, Mr. DeLay is sadly mistaken if he expects Democrats in Texas to roll over and play dead in the face of this new assault. The reality is that the Texas Democratic delegation is comprised of tough competitors, many of them with a proven record of competing - and winning - in majority Republican districts. They know how to raise money, and run hard-hitting campaigns that address issues about which Texas voters really care.

The DCCC page also includes similar statements by House Minority Leader Pelosi and several other Democratic Representatives.

If you want a full rundown of the reaction in Texas to the ruling, and likely effects, Off the Kuff is the place to go (Charles Kuffner's extensive coverage of the Texas Redistricting Fiasco earned him a well-deserved "Best Series" nomination in the Koufax Awards.)

AB

Read More on " "

Following up on Yuan Post

I am following up on the Yuan post because Anne is raising several good points and also some new information for me.
First, my primary concern as I stated in comments is not a raise in the value of the dollar against the Euro. Another 10-20% change in the terms of trade will not do a lot to the US economy because the Eurozone is reasonably self-sufficient (60%+ of their trade is internal trade) and we import and export reasonably similiar goods to each other. My primary concern with China is that the 3.3% drop in dollar valuation that it seems that the Central Bank is considering would be the start of a policy change where the Chinese Central Bank realizes that it is too expensive to hold onto the dollar peg even as a stronger yuan/weaker dollar will cost the Chinese economy significant jobs and the risk of significant political instability.

Now Teddy at It's Still the Economy, Stupid and a real economist instead of me who plays one on the blogs, has some of these same concerns. He is concerned that the Chinese banks are massively overrun with bad loans but to fix this problem the Chinese have to first pop a real estate bubble and then liquidate their dollar assets in order to gain flexibility and working capital. They have to do this at some time or another, but the real question is the timing. I am speculating that the yuan needs to appreciate relatively quickly, while others such as Garber are arguing that the integration of the Chinese labor force into the world labor market will allow for a neo-Bretton Woods fixed exchange rate system to exist for a generation.

Crossposted at Fester's Place

Read More on " "

Texas Redistricting

The Republican redistricting of Texas crossed another threshold yesterday, when a three judge panel ruled that the DeLay Plan was politically, not racially, motivated and therefore legal:

"While heavily aware of the long history of discrimination against Latinos and Blacks in Texas . . . we are compelled to conclude that this plan was a political product from start to finish," wrote Judge Patrick Higginbotham of the U.S. Court of Appeals for the 5th Circuit, a Reagan appointee, and Judge Lee Rosenthal of the U.S. District Court for the Southern District of Texas, an appointee of the first President Bush.

Sadly, this result is unlikely to change -- there's really nothing in the US Constitution (other than race, and even that is covered by the Civil Rights Act, not an amendment) limiting states' ability to decide how to choose their districts. It will, however, be interesting to see whether the new districts can be delayed until after the 2004 election.

Now the question is when the heavily Democratic states will respond in kind. Should that happen, the Republicans may find that they have won the battle yet lost the war. Purely partisan redistrictricting requires total control of the state machinery. Most states are split in ways that rule out such redistricting, but the states where Democrats could someday push through a partisan plan contain many more people than the states where Republicans could do the same. The Republicans can redistrict Texas and Colorado, but after that the list shrinks: Montana, Wyoming, perhaps Utah. On the other hand, potential gerrymanders for Democrats include NY, CA, IL, and MI. This seems rather unlikely in the near term, but a distinct possibility over the next 10-15 years.

AB

Read More on " "

Tuesday, January 06, 2004

Yuan Revaluation?

I am worried about the US dollar. People far smarter than I are worried about the US dollar.

There is some speculation that the dollar will rapidly crash through the $1.35 mark against the Euro. Right now the US dollar is floating at $1.28 per Euro. The $1.35 mark is just another 5% away which is not far as the dollar has already declined from its high of costing only .84 cents to buy a Euro to today's values.

The dollar has not slid against the Yen and the Yuan as much for two reasons. First, it has seemed that the Asian central banks are treating the US dollar as a perfectly elastic good right now. They are willing to be the buyers of last resort of US dollars at almost any price in order to artificailly suppress the value of their home currencies in order to facilate export led growth. Secondly, the Chinees have been willing to defend the value of the yuan aggressively as they maintain a fixed peg against the dollar. Actually these are the same reasons.

This good news may come to an end soon. Stirling Newberry's Dkos diary links to a NY-Times article which indicates that the central bank of China is using its foreign currency reserves to began bailing out China's banks. The first bail-out package is consuming $45 billion dollars of hard currency which according to international economist is just a good start. The two banks in question are only having half of their bad loans liquidated and the banks have less than half of the market. Using simple logic we have a ground floor number of at least four times the current intervention as the amount that China would need to spend today to straighten out its banking sector.

The most interesting thing in this article is that the Chinese central bank are willing to allow the bailed-out banks to convert their dollars into yuan at 8 yuan/dollar instead of the current peg of 8.28/$. This is a minor revaluation of the yuan and weakening of the dollar, only 3.3% more purchasing power will flow to each yuan but the importance is not the magnitude of the change but the fact that there is a change in Chinese policy.

IF this Chinese policy change continues and it prompts the Japanese central bank to follow, then we will see a rout of the US dollar on the international market as we will see a rational currency weakening cascade. That will lead to high US interest rates, and the cut-off of international capital flows which have been keeping us afloat for the past decade.

It will not be pretty.

Crossposted at Fester's Place

Read More on " "

Clark and Political Jujitsu

Lies, damm lies and statistics has an interesting piece of political jujitsu for the Democrats that should be a tract that the eventual nominee investigate to deal with both national security and tax policy concerns that the pundits are conceding to Bush. The basic proposal is to argue for a repeal of certain parts of the Bush tax cuts and tax shifts by advocating dedicating all reclaimed revenues for general purpose national security improvements. These could be broadly defined to include public diplomacy, educational opportunities in the math, sciences and international studies and the Peace Corps.

The Clark plan for tax reform seems to be very well suited for this type of proposal. It is aimed at increasing tax fairness for children and their guardians which almost no one opposes per se while being revenue positive for the government by reducing or eliminating almost all of the goodies that are designed specifically for the richest of the rich in the Bush tax changes. As long as Clark or the Democratic nominee uses clear numbers to illustrate that 90% of the US population will never be on the first name basis of someone whose taxes are being raised under the Clark proposal, then this will do well as a tax policy. Since he is a general, it will also do extremely well as a cheap piece of national security protection.

I agree with Matthew Yglesias and NTodd that this is a damm good tax plan that I hope that Dean if he is the nominee, quickly steals from Clark. I would probably want to work around the edges to improve the plan, but it is a good idea. The national security angle is interesting too.

Crossposted at Fester's Place

Read More on " "

Monday, January 05, 2004

Checking In

AB here, checking in from a working vacation. Kash and I should be back to normal posting on Wednesday, though Fester is welcome to keep posting through the week (and thanks to Fester for filling in and make sure to add Fester's Place to your regular reads.)

One interesting bit of news: Angry Bear was nominated for a Koufax Award in the "Best Blog" category. Looking at the nominees, Angry Bear is clearly not going to win (though it is, of course, an honor just to be nominated.) In fact, I'll be voting for another blog, though deciding which one is very tough. On the other hand, it would be nice to not come in last, or perhaps even to be a finalist, so vote early and vote often (you vote via comments to the post or emails to Dwight or MB of Wampum. Actually, given that comments are votes, Anne could nearly singlehandedly propel us to the top -- j/k Anne.)

AB

Read More on " "

Sunday, January 04, 2004

Free Advice for Clark

DISCLAIMER: FESTER IS A DEAN SUPPORTER, so take this piece as you wish

Josh Marshall in his pre-New Hampshire travelling post lays out a pretty good and fair analysis of the primary horse race. There is an interesting question of Clark's return on investment in New Hampshire and the question of where Kerry's Iowa expectations actually are. The most important assumption that Josh is not explicitly stating is that it will drop down to a Dean-Clark race real fast, and this is an assumption that I agree with.

Now Josh after a long series of good thoughts has an interesting question:

One final thought: an interesting strategic question.
Would Clark gain more from a solid Iowa victory for Dean which effectively ended Gephardt's and Kerry's candidacies (thus forcing a two-man race by default) or by one of the other candidates breaking out, thus knocking Dean significantly off his stride?

If I am the Clark campaign manager, then I would be praying for an expectations victory for Kerry in Iowa or more preferably an outright victory by Gephardt in Iowa. I have several reasons for this opinion. First, an outright victory by Dean in Iowa will bring with it massive amounts of free and most likely very complementary press. Dean already receives fairly good press on a very consistent basis, and Clark struggles at times to maintain or increase his press share. More Dean good press will most likely translate into more Dean voters as it has been shown that Dean has some of the best net favorability ratings out there. As people get to know him, they like him, and then they vote for him. It is a virtous cycle for Dean, and it is one that Clark can not afford to allow to continue.

Secondly, if I was the Clark campaign strategist, I would want Kerry and Gephardt in the race for as long as possible for two reasons. First, I am worried about money. Dean had another record setting quarter, while Clark had a damm good one, but still raised only 67% of Dean's take. Even with matching funds, Clark is most likely poorer than Dean even when we forget about the significant cash on hand advantage that Dean possesses. However if Kerry and Gephardt can stay in the race until at least Feb. 3, 2004, the combined anti-Dean warchests will be larger than the Dean warchest. Another reason why I would want Dean to be knocked off stride is that the more candidates involved in attacking Dean the more angles that can be logically attacked. It makes no sense for Clark to attack Dean from the left on trade policies as their published positions both indicate that they buy into the Washington Consensus, however it makes plenty of sense for Gephardt to do so. This may not switch votes from Dean to Clark, but it may depress voter turnout.

Finally, looking at the most recent national poll for the hypothetical national primary, we see that Dean is trouncing Clark. Clark is doing the best among the other eight non-Dean candidates, but Dean has a signifcant edge. There is little evidence that there is a coherent and large popular Anti-Dean sentiment. Clark's best chance is to string the race out for as long as possible until he gets to favorable territory in the South and hope that Dean stumbles. If the race collapses to Dean v. Clark by Feb. 1, Dean will have fewer opportunties to screw up while he is killing the clock. However if Dean is facing pressure from several angles, then the odds, in my opinion, of a true gaffe will increase which would give Clark some maneuvering room.

Crossposted at Fester's Place

Read More on " "

Weakening the Reserves, Again

The Pittsburgh Post-Gazette is reporting that a Western Pennsylvania based Reserve MP Company has returned home and is fundamentally demobilized as of yesterday. Congratulations and welcome back home. I hope that these men and women will be able to transition back into civilian life reasonable successfully and that they can get the follow-up care that some may need.

However the interesting thing that I saw was in the last two paragraphs:

Military service isn't over for all members of the 307th. Several soldiers have volunteered to return to Fort Dix to help train the troops of B Battery, 107th Field Artillery, a Pennsylvania National Guard unit based in Shadyside.

B Battery, which was activated Dec. 18, will be leaving for Iraq in February or March, where the troops will function as military police.

The military police function is still extremely needed and valuable in Iraq. However the US Army has run through pretty much its entire military police component either through deployments to Iraq or Afganistan, security at Guatanamo and typical force protection missions. Artillery units are expected to provide their own local security and guard their own road convoys, but they are not military police, they are not infantry. It is a striking indication of how thin the Army is stretched that Reserve and National Guard artillery units are needed to act as light infantry/MPs in Iraq.

This policy will continue for a signficant amount of time because the Army is running out of troops who are willing to enlist. The US Army has instituted a comprehensive stop-loss order for every unit that is scheduled to deploy to Iraq in the next five months. This article states that over 16,000 National Guardsmen have been retained on active duty although they want to retire.

As this Boston Globe article demonstrates, the Reserves are already facing a recruitment shortfall. This shortfall was "was largely the result of a larger than expected exodus of career reservists, a loss of valuable skills because such staff members are responsible for training junior officers and operating complex weapons systems." There is also a significant recruiting problems, with a 13% underachievement of National Guards new enlistments.

The stop-loss will temporarily stop the arterial bleeding but once it is lifted there are plenty of anctedotes which suggests a large exodus will commence from both the Active and Reserve components. This will cripple the US Army and force it to either hollow itself out, discard missions or continue in a death spiral of longer deployments, shorter recuperation and reconstitution times and increased uncertainity which will drive more soldiers out of the Army. It will also lead to more situations where units which have a vital warfighting mission such as heavy artillery support will be crosstrained for only a couple of weeks in a totally different field and thrown into the mess.

So why again are Republicans good on national defense?

Crossposted at Fester's Place

Read More on " "

Friday, January 02, 2004

Economic uncertainty for the Average Joe

Although we are seeing the economy starting to have as Brad dealing puts it "some unambiguously good unemployment news as new claims dropped below 350,000 for the first time in over two years, the economy is still weak for the average American. MB at Wampum notes that the average hourly wage for the American worker has fundamentally ceased to increase. Since November of 2002 hourly wages for non-exempt workers have been stuck in a 4 cent band in 1982 dollars. There is no new purchasing power being distributed to workers.

The Economic Policy Institute has a good graph that illustrates this point and they correctly note that wage growth, in the long run should roughly correlate to productivity growth and economic growth in general. However we have seen two good years of productivity growth and no corresponding wage growth. This is definitely a long and variable lag.

What new jobs are being created are not as good as that jobs that are being lost. Another EPI quickshot demonstrates that the growing industries in this economy have lower wages than the declining industries which are losing jobs. This is a probable explanation as to why median income has been falling for two years now.

The average Joe Six-Pack is not seeing an economic recovery. Instead he is seeing an increase in his debt service obligations, no increase in his real wages, increased housing costs and a decrease in his overall standard of living. Savings are depleted and the risk factor of being unemployed is extremely high still. One or two good reports such as the ISM survey do not remove this uncertainty and risk from the average Joe's mind.

Read More on " "

Pittsburgh's Woes
Atrios has a good summary of the problems that the city of Pittsburgh faces for the next year. I have gone into long details about the basic problems that the city faces in previous posts. However I will recap the basic problems and provide a quick update on what is going on. Basically the city is facing a massive structural deficit and it has very little maneuvering room for legal, financial and political reasons. The city has the basic infrastructure of a city twice its population and it is decaying which drives up maitenance costs. Additionally local political wills and realities means that we can not rightsize the city government services effectively. Finally the city has rung up a massive amount of debt in an attempt to "grow" our way out of the looming fiscal crisis by offering the $50,000 a year plus suburbanite crowd a good reason to visit the city.

The solution space is fairly limited. New taxes have been proffered on a variety of items and targets. Beer, payroll preperation, wages, deed transfers etc. have all had new taxes proposed. None of these proposals have been approved as of yet. Most of these proposals will require changes in state law, and the Republican dominated Assembly will not approve of actions that result in commuter taxes. The primary plan in action right now has been for the city to apply for and be declared a "distressed city under the 1987 law ACT 47 which is the municipal bankruptcy law for the state. Act 47 status has been granted to the city and it will allow for better bargaining power with city union contracts, technical assistance from the state and the ability to levy commuter taxes.

Mayor Murphy has for two years in a row proposed budgets that do not even come close to reality and rely on invisible sources of funding to even come close to balance. Last year it was pour taxes and wage taxes, now it is a commuter tax that is not yet approved and vocation tax increases. Last year's gap was partially filled by closing down the city's Parks and Recreation programs and stretching out some payments. Additionally approximately 100 cops were either laid-off or chose early retirement.

City Council voted the 2004 Murphy budget down and approved a budget that relies on a couple new taxes, including an increaes in the parking tax and some spending cuts. However the City Council budget is still assuming that there will be several significant increases in revenue that I do not believe are realistic. The City is expecting that the Sports and Exhibition Authority which owns the new football and baseball stadiums as well as the new convention center will be able to increase the payment in lieu of taxes. However the SEA (disclosure: I have a good friend working with the SEA) is currently running at a substantial deficit for this year. The Council budget also is assuming significant first year costs savings as they propose service consolidations with the county. I have doubts about that.

Fundamentally the city is stuck at the moment. It can not balance its budgets by cuts as too much of the expenditures are legally guaranteed at the moment. It will gain some flexibility in the next two years as the majority of the municipal employee union contracts will expire, but there are few cost savings currently available that would not devestate city services. New taxes are needed in the short to medium term in order but the state government is reluctant to allow the city to raise the needed revenue from suburban commuters. Local consolidation with the county will not proceed although service sharing will increase.

The city is screwed. The best solution for this year is to buy time with a series of additional one-off revenue enhancements such as debt refinancing, selling the city's asphalt plant and rejiggering the pension plan yet again. All of these measures increase the long term cost to the city but will probably occur as the city has few to no other options left.

Cross-Posted at Fester's Place

Read More on " "

Winning the War on Terorrism

There are many plans to win the war on terorrism. Some are completely insane, others are pretty decent. Now some non-bloggers, and people with actual influence and power are proposing plans to invade the rest of the world sometime in the second Bush term (there is a good reason why I am working to beat that SOB) But none of these strategies are victory strategies in the war on terrorism. Some are victory or at least non-loss strategies for Iraq, and I refer to Tactitus' plans, others are completely insane in general but they are not comprehensive in nature.

I can not offer a comprehensive plan, however Juan Cole has a great short list of objectives that we need to seek in order to leave 2004 more secure than 2003. I hope that I do justice to his thoughts as I condense them.

5) Stabilize Pakistan because they have nukes and a strong militant population and political base. Additionally a stable Pakistan can be leverage in the creation of a continental market which should improve living standards for most people and reduce the frustration experienced.

I would think that one policy that the US can immediately take to improve Pakistan's stability is to remove the import tariffs

4) Stabilize Afganistan --- 'nuff said, be willing to spend the money, political capital and the troops needed to create a reasonably strong and unified central government. Remove power from the clans and tribal warlords

Now here is the problem with the opportunity cost of Iraq, where can the US get the manpower and cultural expertise since it is all deployed to Iraq right now

3) Stabilize a united Iraq so that there is not a three way civil war if there is a loss federal structure of government. The Sunni Arabs have few oil resources but plenty of military experience. They can cause trouble if they are cut off from the one present source of Iraq wealth.

Now where do we get the troops and the political will to stabilize the situation versus helping the Bush re-election campaign.

2. The US must capture Osama Bin Laden, Saad Bin Laden, Ayman al-Zawahiri, Saif al-Adil, and other top al-Qaeda leaders, of both the older and the younger generations. This task was far more important for the immediate security of those of us who live in the US than conquering Iraq, and it was highly irresponsible to undertake the latter before accomplishing the former.

1) Lean heavily on Isreal to prevent the Bantustanation of the Palestinian people. The US is not seen as a fair broker in the Middle East and this is one of the prime grievances of the entire Arab world. No PR campaign will work unless there are a series of concrete and politically painful actions on the part of the US political establishment to signal that the US will become a fair broker instead of an Isreali lackey.

I agree with Juan's plans and objectives, however I have a problem of implementation. These plans sound competent, well-thought and plausible. The Bush Administration will not go for that.

Crossposted at Fester's Place

Read More on " "

Tuesday, December 30, 2003

Kurdish Sell-out Watch Continues

Juan Cole has a long analytical post that is examing the Kurdish position on self-governance. Basically the Kurds are willing to be a part of Iraq as long as they have an extremely high level of autonomy. If I am understanding these articles, I would imagine that they are seeking a deal similiar to the Dayton Accords where there is a national government composed of the three major ethnic groups but a high degree of regional/ethnic indepedence. A major Shi'ite party, counting the votes, is opposing any weak form of federal government.

The threatening thing that I saw in this post by Juan is the implicit threat that the the Kurdish peshmerga which have aided the US Army in maintaining a reasonable degree of civil order in the north, may decide to undertake active combat operations against both American and potentially Turkish targets. That is one thing that we do not need as Kos points out, we have lost another twenty nine soldiers in the past two weeks and that these casualties are not in the Kurdish areas.

So bad news may be on the horizon.

Cross posted at Fester's Place

Read More on " "

Desperately Poor Countries

Brad DeLong recently took a lot of heat in his comments for this statement:

I wonder about Bob Herbert: is he smart enough to have, when he looked in the mirror this morning, thought, "I see a man who is trying to keep India a desperately poor country?"

Brad's acerbic comment was inspired by this piece in which Mr. Herbert writes about the problem of the "off-shoring" of white collar jobs. Not only is Brad right that opposing such off-shoring is tantamount to wishing poverty upon India, if IBM doesn't outsource thusly then some other firm will, putting IBM at a competitive disadvantage, leading to job losses at IBM. But I want to focus on the "desperately poor" part of the issue, rather than the comparative advantage part of the issue.

Via Anne in comments, I see an NYT editorial today, Harvesting Poverty: The Unkept Promise. It speaks poignantly about the cost that protectionism in the US, EU, and Japan imposes on Third World nations (in addition to raising the price of food in the developed world -- a cost borne primarily by the poor):

The club of rich nations that wrote the rules of global trade has been aggressive in dismantling barriers when it comes to industrial goods and services, in which they hold a comparative advantage. But they refuse to do the same when it comes to agriculture. Politically powerful farm lobbies in Japan, Europe and the United States are not willing to face global competition on fair terms. So agriculture remains the hypocritical asterisk to our fervent free-trade and free-enterprise creed.
... Worse, the developed world funnels nearly $1 billion a day in subsidies to its own farmers, encouraging overproduction, which drives down commodity prices. Poor nations' farmers find they cannot compete with subsidized products, even within their own countries. In recent years, American farmers have been able to dump cotton, wheat, rice, corn and other products on world markets at prices that do not begin to cover their cost of production, all courtesy of the taxpayers.
... The World Bank estimates that an end to trade-distorting farm subsidies and tariffs could expand global wealth by as much as a half-trillion dollars and lift 150 million people out of poverty by 2015.

I'll say it again. U.S. farm subsidies and import tariffs are truly bad policy and the bulk of the subsidies go to large farms, not the ma and pa farms of our idyllic but distant past. They make food more expensive in the U.S. while adding to Third World impoverishment. Finally, if I can't count on them to back free trade, then what are Republicans good for?

AB

Read More on " "

Plame On

Remember Valerie Plame? Ashcroft has apparently recused himself from the investigation:

Attorney General John D. Ashcroft has decided to recuse himself from a widening Justice Department investigation into the leak of an undercover CIA officer's identity, sources said today.
The probe into the disclosure of CIA agent Valerie Plame's name to a columnist will be overseen by U.S. Attorney Patrick J. Fitzgerald of Chicago, who will report to new Deputy Attorney General James B. Comey, sources said.

AB

Read More on " "

Ephedra Ban

Today, the FDA today banned Ephedra, a substance that has no documented beneficial effects and some documented side effects:

Manufacturers of the supplement insist their product is safe when taken as directed. But FDA and Health and Human Services Department officials have been saying for months that they would like to ban ephedra and were building their case so there could be little dissent.

One interesting thing about the ban is that it's an admission by the administration that self-regulation by industry participants doesn't always work -- though such self-regulation remains the preferred choice in the environmental arena.

A second interesting factor is that Ephedra became so widespread in the first place due to Orrin Hatch's fervid support of the "Homeopathic" or "Herbal" industry, which eventually lead to passage of the 1994 Dietary Supplement Health Education Act, which exempted herbal supplement makers from proving the efficacy of their products. No double-blind testing needed. (*)

AB

(*) Bob Park explains the virtues of double-blind testing:

The most important discovery in the history of medicine was the randomized double-blind test. It allows us to find out what works and what doesn't. So far, herbals are in the "doesn’t" category: St. John’s Wort doesn’t relieve depression, but it does interfere with some cancer drugs; echinacea doesn’t ward off colds and flu; ephedra causes frequent injuries and even death; and this week we learn that ginkgo biloba doesn’t enhance memory in people over 60.

Read More on " "

Saturday, December 27, 2003

Sugar Farmers are Morally Superior to Candy Cane Makers

Just as we decided, via the steel tariffs, that Pennsylvania residents are more deserving than Michigan residents (and along the way, made every consumer pay more for goods made out of steel or made with machinery made out of steel), the latest example from the Chicago Tribune shows that we must think residents of Louisiana are superior to residents of Illinois and Ohio (and along the way, raised the price of anything made using sugar):

In the last three years, nearly half of all U.S. candy cane production has shifted to Mexico, industry experts say.
That's true of the candy cane maker based in this northwest Ohio town, Spangler Candy Co., which recently opened a plant in Juarez that generates half of Spangler's striped treats.
But the story of the Mexican candy cane isn't your typical tale of American manufacturers chasing lower wages. It's more about the cost of sugar than the cost of labor.
Because federal tariffs and subsidies push the price of U.S. sugar far above what it fetches on the world market, candy cane makers such as Spangler are opening factories overseas, where sugar can cost 6 cents a pound compared to 21 cents back home....
Other makers of hard candy have followed a similar pattern, at least in part because hard candy, unlike chocolates which can use corn syrup substitutes, are so sugar-intensive.
In Chicago, for example, Brach's Confections plans to shut its plant in 2004, forcing about 1,000 workers out of their jobs. The Chicago area, the center of the U.S. confection business, has lost an estimated 3,000 candy-related jobs since 1998.

Yet another example of why making stuff more expensive is a bad way to protect jobs.

Via Dan Drezner, who points out that the recently passed Central American Free Trade Agreement may remedy this situation.

AB

UPDATE: In a post titled "Pour Some Sugar on Me," Matt Y. adds, "In practice, the economical hard-rocker will instead ask for some high-fructose corn syrup to be poured on him, as the price of this ersatz sugar product is not nearly so distorted by the farm dole."

Read More on " "

Friday, December 26, 2003

General Zinni

From the Washington Post, a piece on General Anthony Zinni, a self-professed moderate Republican and former chief of the Central Command (U.S. Military Headquarters for African and the Middle East), now dismayed by the administration he endorsed in 2000:

[Gen. Zinni] was alarmed that day to hear Cheney make the argument for attacking Iraq on grounds that Zinni found questionable at best:
"Simply stated, there is no doubt that Saddam Hussein now has weapons of mass destruction," Cheney said. "There is no doubt that he is amassing them to use against our friends, against our allies, and against us."
Cheney's certitude bewildered Zinni. As chief of the Central Command, Zinni had been immersed in U.S. intelligence about Iraq. He was all too familiar with the intelligence analysts' doubts about Iraq's programs to acquire weapons of mass destruction, or WMD. "In my time at Centcom, I watched the intelligence, and never -- not once -- did it say, 'He has WMD.' "

The rest of the story is definitely worth reading.

AB

[Source corrected]

Read More on " "

Thursday, December 25, 2003

Progressive Consumption Taxes

Ruy T. has an interesting post that got me, once again, thinking about consumption taxes. At first glance, consumption taxes appear intrinsically regressive because poor and middle class households spend most of their income on consumption while wealthy households spend only a fraction of their income on consumption. Suppose there's a consumption tax of 20% and that poor households spend 90% of their income on consumption (food, clothing, shelter, and miscellany) while wealthy families spend only 50% of their income on consumption. In this example, 18% of the poor household's income goes to taxes while only 10% a wealthy family's income goes to taxation.

But a system of exemptions could, in principle, make consumption taxes progressive. Exempting spending on housing from taxation is a good starting point because as income rises, a smaller portion of income is spent on housing. Continuing the example, suppose the poor household spends 40% of its income on rent and the wealthy family spends 20%. The taxable consumption by the poor family then falls to 50% of their income and the wealthy family's taxable consumption falls to 30% of income. So with a 20% consumption tax, the poor family pays 10% of its income in taxes and the wealthy family pays 6% -- still regressive, but less so. To make it actually progressive, high taxes could be added to luxury items, and further exemptions (e.g., of staple foods) could be implemented. Of course, for every exemption implemented, the tax rate on the non-exempted items has to be increased if the exemption is to be revenue neutral.

My fear is that a progressive consumption tax would lead to massively distorted relative prices, reducing economic efficiency (causing a "dead weight loss" in Econ 101 terminology). Worse, the lobbying and influence activity by firms seeking to have their goods and services favorably taxed would be severe. Even worse, development and design decisions would be distorted towards creating products likely to receive favorable tax treatment, creating further inefficiency.(*)

In short, a regressive consumption tax would be a simple, but bad, policy. A progressive tax might be good policy, but the devil is in the details; and in this case, the details are likely to swamp the otherwise potentially positive aspects of a progressive consumption tax.

What about approaching consumption taxes from the other side, by exempting savings? Because all the money you make has to go somewhere, taxing consumption and not taxing savings work out the same. Intuitively, if savings are exempted from taxation then the only money left to tax is income spent on consumption -- a consumption tax (a point I made earlier). And this is precisely what the Bush administration's proposed Lifetime Savings Accounts would accomplish.

This raises three questions: (1) Are the current Bush proposals in fact regressive? (The answer is yes); (2) Is any plan that uses tax incentives to encourage saving necessarily regressive? (The answer is no); and (3) Would a progressive savings-based tax plan also be unwieldy and introduce substantial economic distortions similar to those that would occur under a progressive tax on consumption? (The answer is perhaps not.)

The new Center for American Progress, a center-left think tank, now has a section devoted to this issue. It includes "Critiques of the Bush administration plan" (documenting point (1) above) and "A Progressive Alternative: The Universal 401(k)" (focusing on points (2) and (3) above). Soon, I'll review the CAP proposal, but in the meantime, you can check it out for yourself.

AB

(*) Don't income taxes also introduce distortions? Yes, but they only mess up one tradeoff, the labor vs. leisure decision. Moreover, the impact of income taxes on the amount of work people do is ambiguous. On the one hand, it will discourage work because whenever you tax something, people will do less of that thing. On the other hand, it will encourage work because people have to work more to afford a given set of goods. (For another Econ 101 flashback, the first effect is the substitution effect and the second is the income effect). If the two effects are roughly equal in magnitude then the amount people will work when income is not taxed and the amount they work when income is taxed are about the same, meaning that the economic distortion and inefficiency created by an income tax is modest. I doubt that the two effects precisely counteract each other in this fashion, but this does attenuate the distortion; with consumption taxes, there is no similar mitigating effect.

Read More on " "

Tuesday, December 23, 2003

Money and Inside Baseball Post

This USA Today article contains some information that blows holes in my matching funds projections. I had projected Clark will be eligible to receive 8.7 million dollars off of $15 million in fundraising for Q-3 and Q-4. While USA Today supports the total fundraising amount, they are projecting Clark will be eligible for only $3.7 million dollars. This can either be due to timing of donations or a change in donor profiles as he may just be getting very big money donations instead of the numerous and more valuable small donors.

IF this is true then Clark will have a significant cash on hand deficit compared to Dean as Dean had a 9 million dollar COH advantage at the end of the third quarter and the USA Today article is indicating that the Dean campaign believes that it should be able to increase its cash on hand for this quarter. Clark is spending some serious bucks on consultants and advertising so if his matching contribution is this low then he is facing serious competitive disadvantages against Dean.

Crossposted at Fester's Place

Read More on " "

And she forced the pills down his throat too!

Attorney: Limbaugh blackmailed by maid. Damn, I'm sick of whining Conservatives yapping endlessly about personal responsibility -- until they're caught with their hand (or other body parts) in the cookie jar. Then it's "the maid did it" or "I talked to him and God forgives me" (Rush and Gov. Rowland's respective defenses).

AB

UPDATE: More personal responsibility here.

Read More on " "

Nader Update

I'm not sure what this means:

Ralph Nader, the third-party candidate viewed by many Democrats as the spoiler of the 2000 election for taking votes away from Al Gore, has decided not to run on the Green Party ticket next year, a party spokesman said Tuesday.
Nader, who garnered nearly 3 percent of the national vote in the last presidential election, has not ruled out running for president as an independent and plans to make a decision by January.
[snip] ... Nader said running as an independent would not hurt his campaign. "As an independent, you can do more innovative things because you don't have to check with all the bases," he said.

Why Independent and not Green? Are there people inside the Green Party, people with sufficient intra-party power, opposed to Nader running? Opposed to any Green candidate running in 2004? Who knows. Still, this should get the Democratic candidate an extra .5% to 1% in some important states.

AB

Read More on " "

It Isn't

Secretary Powell:

"U.S. strategy is widely accused of being unilateralist by design," Mr. Powell wrote. "It isn't. It is often accused of being imbalanced in favor of military methods. It isn't. It is frequently described as being obsessed with terrorism and hence biased toward preemptive war on a global scale. It most certainly is not."

By non-utilateralist, non-imbalanced, and non-obsessed, Secretary Powell appears to mean not starting a war with a county or continent with a population that outnumbers ours:

"I think we have managed China, Russia and Europe rather well if you look at where we are at the end of the year since the beginning of the year," Mr. Powell said.

AB

Read More on " "

Monday, December 22, 2003

Bush is vulnerable on the Economy

There has been a recent poll in which 55% of Americans approve of Bush's handling of the US economy. Fox News from where I have gotten this poll is saying that this number will show that the Bush re-election is inevitable. However there are several major caveats that need to be made. First the last two paragraphs are interesting as most people expect the national economy to be getting better but a small majority of people expect that their local economies will either be the same or getting worse in the next six months.

This finding is intriguing as it shows the divorce between perceptions and realities that are occuring. The American economy is splitting into two sections; those who own captial are doing extremely well, and those who sell their labor are doing poorly. The rest of this essay will expand upon the basic economic uncertaininty that the majority of the American public faces.

The average American worker is not gaining ground. Real wage growth is decreasing and as Uber Alles shows that median income has dropped for two years in a row. This is at a time when basic necessities such as natural gas and healthcare are rapidly increasing in price. Matt Yglesias links to a Fortune column which states that "Many of his clients say they'll be giving raises of even less than 3%. Why so stingy? "Inflation is low. At the same time, many businesses have only recently gotten their costs in line, producing earnings that are much improved, and they want to stay the course until uncertainty about demand has really lifted," LeBlanc explains. "Another thing is, the labor market is still soft, so few employers are worried about turnover." Don't we know it. "For most workers, the situation will be very discouraging," he predicts. "More people will be getting zero pay increases in order to allow for bigger raises for top performers. After taxes, pay raises may not even be enough to offset higher health-insurance deductions from paychecks. On top of that, many employees are doing more work than ever because co-workers have been laid off."

These data points are the result of a declining share of national income which is going to labor. Brad DeLong is linking to an article in which the share of profits and productivity gains are shrinking for the average worker while profits are aggregating into smaller and smaller concentrations of people. Included in the share of national income which goes to labor are the costs of fringe benefits which people can not eat and these benefits are under pressure to be cut as their costs have also increased rapidly. These low wage gains are leading to a record number of personal bankruptcies. As Calpundit notes, organized labor in the service industries is the difference between barely scratching by and at the mercy of any emergency and being able to live a life that has some uncertainity insurance and asset accumulation made possible. However unionization is at a relative low rate.

Under the Bush administration, these trends will not be changing. Instead they will continue to accelerate as there are further proposals to favor the wealthy and attack union and other pension plans which give economic security to the working class. Angry Bear notes that the Republican Party wants to continue moving to a consumption based tax system in order to shelter as much wealth as possible from any and all forms of taxation. The propaganda will be one of fairness and social mobility but as Paul Krugman recently wrote that income and wealth mobility in America has signifcantly declined in the past generation as the strong institutions in American civil society which created a great Compression of wealth after the Second World War lost their strength and political consensus.

Retail sales for December are projected to be weak. Deep discounters had success as well as the very high end luxury stores while the middle ground department and mall stores had difficulty. This continues to show the bifurtification of the American economy right now. The rich truly are getting richer and benefitting from the tax and incentive policies that the Bush Administration has instituted which favor an aristocracy of incompetents.

If you are a working stiff, the Bush economy has not been a good economy for you. It has created a massive amount of uncertaininty for most people, as there has been increased job competition, high real debt service costs as wage inflation and wage growth are minimal and a continued assault on the ability of people to accumulate small amounts of wealth. For these reasons, Bush is extremely vulnerable on the economy.

Crossposted at Fester's Place

Read More on " "

Visceral Communication

I am a #1 for Dean, strong supporter and right now it will take a couple of sticks of dynamite to get me off of the Dean campaign, but with that said, I like what I have been hearing from Wesley Clark in the past couple of days. I am firmly convinced that we will be seeing the ugliest campaign in my lifetime and probably the lifetime of my parents. The nominee of the Democratic Party will be smeared as anti-God, pro-sodomy, pro Saddam, pro-French and anti-Apple Pie and baseball. It will not matter who the nominee is.

We are already seeing the smear machine cranking up against both Dean and Clark as I think that they are the only ones with the organizations capable of running effective decentralized campaigns which are in my opinion the best way to win in 2004.

Resume will be unimportant in protecting Clark, as we have the Max Cleland example of a triple amputee from Vietnam being smeared as unpatriotic and not knowing how to protect America. He, as well as Dean, will have to convince on a visceral level that they can provide better security for all Americans than Bush. We know that Bush is a policy disaster but he is doing something so he has institutional inertia on his side.

Well Clark is doing a good job of creating the groundwork for that visceral knowledge. First he is willing to rip Tom Delay a new asshole when Clark's patriotism was impugned by the Roach. I am very glad that Clark gets that being civil is a loser's strategy in this game. I am also glad that the facts and the evidence are on our side.

More importantly in the creation of a visceral reaction are Gen. Clark's comments when asked what he would do if anyone impugns his patriotism: ""I'll beat the s--- out of them," This is the type of visceral toughness that will need to be exuded in order to convince people that Clark will protect them. Dean has controlled, focused anger and the wrestler's build which can communicate this message, and Clark has 35 years of training on how to systemically and methodically cause serious bodily harm.

I am glad that both are willing to utilize their respective assets to communicate viscerally.

Crossposted at Fester's Place

Read More on " "

Sunday, December 21, 2003

New to the Blogroll

The Decembrist--a former high level aide to Bill Bradley and current research director (on sabbatical) of George Soros' Open Society Institute. (Via Ruy T.)

AB

Read More on " "

What is the Face of Next Year's Politics

The Boston Globe is examining the role of the economy in next year's election using New Hampshire as a case study. It has lost 20,000 jobs during this recession and jobloss recovery but it is starting to add jobs again at a reasonably rapid rate. The economy has diversified over the past decade since the last major recession and it has diversified by going into high tech and away from manufacturing. However the state's largest employer used to be Digital Computers, now part of Compaq, but now it is Wal-Mart with that honor.

New Hampshire will need to make a decision as to whether to measure the economy by the derivative of the growth path and give their support to Bush in 2004 or to ask themselves the question "Are you better off now than four years ago." This will be the primary theme of the economic issue debate over the course of the next year as the Bush administration will try and trumpet every small piece of good news while burying all of the bad news. However there are certain demographic concerns that should be making New Hampshire a little more blue.

The high tech revolution has finally reached the Granite State and that means a whole lot more college educated workers and "Creative Class" individuals are working in the state. This has already made parts of Southern New Hampshire competitive for the Democrats as that part of the state is fundamentally populated by Massachusetts Techies who are looking for some place cheaper to live.

These will be the two battle lines next year; how well are we doing, do we look at rates of change or absolutes, and do the techies/creatives have enough mass to decide the vote.

Crossposted at Fester's Place

Read More on " "

Consumption Taxes in Disguise

Via Matt Yglesias (see Digby as well), I see that consumption taxes are back on the agenda. Here's Matt, writing about David Brooks' latest editorial:

The program that Brooks describes sounds reasonable enough, but this bundle of proposals is, in fact, designed to accomplish something rather different. The idea is to shelter from taxation various savings and investment schemes that will provide a minor level of help to average middle class folks. At the same time, however, there will be no caps on the quantity of money that can be thereby sheltered.

By definition, all money is either saved or spent. So if money saved is exempt from taxation, then only money spent is taxed -- a consumption tax. If you follow the links under the "Topics" section to the left, you'll see me argue that consumption taxes, unless very carefully designed, will be regressive. This is because as a household makes more, it spends less income on consumption, so replacing income taxes with consumption taxes benefits the wealthy. Presented as a consumption tax, such a plan would surely be unpopular; presented as a savings-encouragement plan it might sound good, but it's just a dressed-up consumption tax.

AB

Read More on " "

Tammy Bruce is Everywhere

Bob Somerby spent much of the past week dissecting Tammy Bruce (here, here, here, and here) -- remind me never to get on his bad side. In case you missed it, Ms. Bruce is a recently hired 'liberal' analyst for Fox News, but her liberalism can really make you yearn for Alan Colmes. In a nutshell, she starts most of her statements with "as a progressive, lesbian, liberal, and feminist ..." before going on to some nutty attack on Democrats and liberals.

As I read the Howler pieces, I thought "nice job, Somerby, but why waste your time on someone so insignificant?" Sure, it highlights Fox News' silliness, but we already knew that.

Then, driving in my car the other day I hear YANCLM (yet another conservative loud-mouth) on the radio, a woman. Briefly I wonder at what point talk radio will run into diminishing marginal returns to conservative blowhards, but before I can finish the thought I hear her say something very close to "I'm a progressive and a former leader of NOW," and the alarm bells went off. Yes, it was in fact the same Tammy Bruce, guest-hosting the Larry Elder show. If you've ever heard the Larry Elder show, you might be wondering why such a staunch conservative would have a "progressive, lesbian, liberal, feminist" guest-host.

AB

Read More on " "

Subscribe to: