Thursday, July 31, 2008

It's the Worst "Not Quite A Recession" since the Great Depression.

A fast check at Google News a few minutes ago quickly found news reports of how we now are in the ....

"worst economic crisis since the Great Depression"

"worst financial crisis since the Depression"

"worst housing downturn since the Depression"

"worst venture and investment environment since the Depression,"

"worst credit crunch since the Depression"

"worst year for the newspaper business since the Depression" (if the New York Times says so itself)

and ... wait for it ... "the worst financial crisis since the Great Depression, the biggest housing bust since the Great Depression, the coming biggest systemic banking crisis in the last 50 years, the worst U.S. recession since the stagflations of the 1970s, the biggest liquidity and credit crunch in decades...."

....among many others.


The Bureau of Economic Analysis reported today that U.S. real GDP grew at a 1.9% annual rate in the second quarter of 2008, less than many analysts had been predicting a week ago, but substantially better than the 6-month-ahead predictions for that number that we were hearing back in January.

Today's report contained some good news. The main reason that the final GDP number was weaker than predicted was the big drawdown in inventories. Without that negative contribution from inventories, real final sales grew at a robust 3.8% annual rate... [Econbrowser]
By the way, "the big draw down in inventories" is good, it means manufacturers will have to increase production to replace them, or at least that overstock is being eliminated. Either way it portends increased future production.

Wednesday, July 30, 2008

Are China and Saudi Arabia behind the Fannie and Freddie bailouts?

It seems that the US arranged for foreign governments to buy Fannie Mae and Freddie Mac bonds with their dollar holdings, to get a higher return than from US government securities while still enjoying the safety of an "implicit" US government guarantee. Or so writes Martin Mayer in the NY Times...
Historically, foreign central banks that found themselves with excess dollars as the result of the American trade deficit invested that money exclusively in Treasury notes and bills. As a service, the New York Fed made those investments for them, guaranteeing them the best current price and retaining legal custody of the paper as their agent.

However, by the mid-1990s the countries that had large trade surpluses with the United States — primarily in East Asia and the Persian Gulf — began to demand a better return on investment than that offered by Treasury paper. In response, the New York Fed began to buy them “federal agency” paper — including large amounts of obligations from Fannie and Freddie. This paid somewhat better interest, and while it was not officially guaranteed by the government in the way Treasury bills were — well, you know, if push came to shove, Washington could be counted on to do the right thing.

These foreign-government accounts now hold $985 billion worth of Fannie and Freddie paper. It explains why, in mid-July, Secretary Paulson (as well as Senator Chris Dodd, the Connecticut Democrat who heads the Senate Banking Committee) began giving press conferences about how sound the two firms really were, no need to worry. Behind the scenes, Treasury officials overseas made phone calls to the local central banks and finance ministries, stressing that the two mortgage giants would weather the storm...

If the government had not guaranteed the full payments of principal and interest on their paper, the foreign governments that own so much of it might have had to show losses on their dollar-denominated accounts. To say the least, this would make them reluctant to continue to finance our trade deficit, our wars and the strength (such as it is) of our dollar. Our interest rates, and not just for mortgages, would soar.

So the debate about whether dishonest lenders and dumb borrowers should have been bailed out was really meaningless — the conclusion was foregone.

The international position of the dollar had to be defended against even the hint of possible failure at Fannie and Freddie; they had to be saved at all costs....

Tuesday, July 29, 2008

New York Times correction of the day

In an early version of the Today's Headlines e-mail for Sunday, a photograph of Johnny Carson was incorrectly paired with an Op-Ed article about Radovan Karadzic.

Monday, July 28, 2008

Old jokes. Really old jokes.

2600 BC: "How do you entertain a bored pharaoh? You sail a boatload of young women dressed only in fishing nets down the Nile and urge the pharaoh to go catch a fish." According to researchers at the British Museum, this is the first written joke. Loses something in the translation.

4th or 5th Century BC: The Philolegos, a Greek anthology of more than 200 jokes, is recorded. The Greeks loved jokes about "scholastikos," or eggheads. "An egghead was on a sea voyage when a big storm blew up, causing his slaves to weep in terror. 'Don't cry,' he consoled them, 'I have freed you all in my will.'"...
(From a review of Stop Me If You’ve Heard This. A History and Philosophy of Jokes. )

Sunday, July 27, 2008

Thirtieth Anniversary of the "Pooper Scooper" Law.

The great battles fought over the advance of civilization should not be forgotten...

On this, the 30th anniversary birthday of our famous "poop scoop" law, the first of its kind to work in a big city and model for communities around the world, what are we celebrating -- besides the fact that we don't have to scrape something off our shoes?...

It was New York's decline in the early 1970s that allowed the poop-scoop law to pass in the first place. More people owned dogs for protection, and strays ran through the boroughs. Alan Beck, the head of the Bureau of Animal Affairs, estimated that by 1975, there were 300,000 to 500,000 pounds of dog crap left on city pavements daily.

Had the city been, er, flush, it could have hired more sanitation workers to handle the problem. But New York was in the midst of a fiscal crisis, basic services were being scaled back, and street cleaners refused to do more dirty work.

When eyes turned to the owners, author Cleveland Amory and other animal rights advocates, along with humane organizations and shelters, united against a "pick it up yourself" proposal they considered harsh and unfair. In the long run, they predicted, the law would force people to abandon their loved ones, and would lead to an eventual ban on dogs...

"Like the Jews of Nazi Germany," said the head of New York's Dog Owners Guild with typical understatement, "we citizens, including the old and the infirm, are being humiliated by being forced to pick up excrement from the gutter."

A raucous hearing in 1972 led to a stalemate and citizens started taking matters into their own hands. Town meetings degenerated into shouting matches and the stuff didn't just hit the fan -- it was thrown at people.

On the pavement, walking a dog could be stressful and even violent. The simple pleasures of canine companionship were spoiled as paranoid pet owners looked over their shoulders for vigilantes...

It took several years of bad community relations, and a no-nonsense mayor like Ed Koch, who went to the state level for support, before the fighting ended. But even in Albany there was strong resistance to the scoop ... The main concern was that similar laws had already been tried and failed in other places, and those opposed feared that yet another unenforceable decree would only encourage more disrespect for authority in general.

The irony is that they were right, at least about the unenforceable part. Health Law 1310, which eventually passed in August 1978, was tough to police and erratically used. It succeeded not because of fines (of which there weren't huge numbers), but because the debate forced dog owners to take action.

Slowly but surely, owners learned that picking up wasn't so bad. They started to believe that lending a helping hand would get New York back on its feet. The vast majority of dogs owners continue to comply, not because they have to -- they never really did -- but because they want to. Cleaning up a dog's mess had become, as Parks Commissioner Henry Stern rejoiced, "a respectable and honorable act."....

If there are downsides to 1310, it's when legislators take the precedent too far. In the case of the poop-scoop law itself, there are calls to increase the fines -- proposed by of all people Sen. Frank Pavadan, who opposed the original legislation -- and for video surveillance of dog walkers in Brooklyn and the Bronx... [NY Post].
But we'll fight those battles later. Today, our shoes are clean.

Saturday, July 26, 2008

What's Wrong with the Hybrid Tax Credit for Gas-Electric Cars

[Note: This is a "director's cut" of some scribbling that appeared in the Sunday opinion pages of the Atlanta Journal Constitution on July 20. That version is not available online.]

There's an old saying in politics that as every new crisis arises, Congress strives mightily to appear to do something about it. Whether or not it actually does something constructive is another question.

Take the matter of the tax credit for people who buy hybrid gas-electric powered cars, worth up to $3,400 per purchase. Preparing this article I asked a half-dozen acquaintances whether they approved of the credit and would like to see it continued or expanded. They all said "yes", emphatically. Why? Because, they say, the hybrid credit puts more gas-efficient cars on the road to reduce gas consumption and help the environment. And because it enables them to pay less when buying an energy-efficient car.

So Congress has succeeded in its objective -- it appears to have addressed the gas crisis with the tax credit.

But here are five reasons why this tax credit may actually achieve much less than my friends think, both for the environment and their pocketbooks:

1) Say you are driving an old Oldsmobile getting too-few miles to the gallon, and $4 gasoline has finally convinced you it's time to upgrade. You are looking to get the best deal for yourself and the environment.

As you shop around you'll find you get no tax credit for buying a high-mileage conventional-engine car like the Toyota Corolla (32-mpg), nor for improving your mileage whatever car you buy by getting it with a standard transmission. But you can get a $2,200 tax credit for buying a SUV with a hybrid engine, like the GMC Yukon that gets only 20 mpg.

In other words, the tax credit rewards not high gas mileage but the makers of hybrid technology -- even when it is the lower-mileage option.

Well, you may think, you can use the credit to buy a top-mileage hybrid-powered car like the 48-mpg Prius. But no, you can't. Congress never wants to be too generous, so it limits the number of vehicles each maker sells that are eligible for the credit. There's no more credit for the Prius.

But as the most popular, top-mileage hybrids like it "sell out" and become ineligible for the credit, the credit remains in place to help sell other unpopular low-mileage vehicles. The Chevy Tahoe SUV, also around 20 mpg, gets a $2,200 tax credit too. And if your Chevy dealer has a 2007 Silverado pickup still in stock, about 17 mpg, you can use a credit of up to $650 to buy it.

2) What Congress gives through the tax code openly with one hand it often takes back slyly with the other. With the hybrid credit it does this through the Alternative Minimum Tax (AMT).

Persons subject to the AMT aren't eligible for the credit. And the profile of hybrid purchasers closely matches that of those subject to the AMT -- they have above-average household income and disproportionately live in states with tax rules likely to make them subject to the AMT, such as California, New York, Massachusetts, and Virginia.

Four million taxpayers were subject to the AMT last year -- but you can't tell if you will be this year because Congress hasn't set the AMT rules for 2008 yet. (Last year it didn't set them until December.) If you might be subject to the AMT this year, you'll just have to guess whether you'll be eligible for the hybrid credit.

3) The price of hybrids is increased by the tax credit for them. Whenever the government creates a purchase subsidy for a product, sellers try to grab it by raising their price. Compare the sale prices of car models that are the same except for having a hybrid engine and you'll find the hybrid versions consistently are significantly more expensive. Part of this is due to the tax credit.

If you are eligible for the credit you will still benefit from it, just by not as much as you think. If you lose the credit to the AMT, you will be stuck with a higher price, period.

4) Buying a car that gets better gas mileage is not the same as consuming less gas. Double the miles-per-gallon your car gets and you'll feel you can afford to drive more miles. To the extent you do, you give back your reduced fuel consumption. If you double your driving you don't reduce fuel consumption at all. You are better off personally because you've reducing your cost of driving (or perhaps not*) -- but the environment isn't any better off.

If you buy a hybrid you probably won't increase your driving by that much. But to the extent you (and other hybrid drivers) do so at all, environmental savings are less than you expect.

5) The total gas savings from all the hybrid cars on the road amount to barely a drop in the ocean of oil consumption. The savings may increase of course, but only over many years.

This is a basic problem with trying to reduce gas consumption by focusing on vehicle fuel efficiency -- you have to turn over the entire fleet to get the result you want. With CAFE standards that mandate increased miles-per-gallon for all cars this can take a decade or more. With the hybrid credit that applies to only a small percentage of cars it will take ... well, a lot longer.

So as a hybrid driver you may feel that you are doing your small personal part to reduce oil consumption and help the environment. But Congress for its part has done basically nothing at all to improve the big picture with the hybrid tax credit (even assuming it isn't used to sell SUVs and pickups!)

Is there a better, more efficient way to reduce gas consumption and help the environment through the tax code?

Yes, certainly: increase the tax on gasoline. This trumps the hybrid credit in all five ways above...

(1) It encourages all fuel saving practices -- including buying standard transmissions -- exactly in proportion to the fuel savings they obtain, with no handouts to makers of a favored technology even when perversely inefficient. (2) No hidden rules or tax traps affect it. (3) It adjusts prices and resale values of vehicles exactly in proportion to their fuel efficiency -- not giving a price "bonus" to sellers. (4) It focuses tightly on reducing gas consumption, and (5) its gas-saving impact is universal and immediate.

Moreover, it doesn't even have to cost taxpayers anything on net, because the gas tax could be rebated through lowered income taxes, employment taxes or some other way.

Yet my own friends, and the voters in general, have made it very clear they don't want a gas tax increase, while they do approve a hybrid tax credit that is far less effective at reducing fuel consumption, inequitable in its application, and more costly to them. So that is what Congress has given them.

Which brings to mind a saying of H.L. Menken's that may be paraphrased in a family newspaper thusly: Democracy is the political system that assures the voters get what they want, no matter how much it costs them.

* Footnote: This wasn't part of the story because it doesn't relate to the tax credit per se, but hybrids are just plain expensive. In rankings of auto model affordability by total ownership cost by, the highest-ranked hybrid was only 14th, the Honda Civic, followed by the Prius at 26th and the Altima at 59th. Forget the rest. (These rankings include the effect of the tax credit.)

"Same model" vehicles that differ only by having conventional engines typically are less expensive, for instance the conventional Civic ranked 5th. In fact, even with gasoline costing $6 a gallon, has the conventional Civic costing less to own than the hybrid version.

So if your objective is to "save the planet", a hybrid-powered car may be an option, though usually not as good a one as most people think, with the psychic reward being worth the dollar cost to you.

But if your objective is to save money due to $4 gasoline, you'll almost surely do best by making a smart purchase of a conventional gasoline-engine car.

PS: The endorsement of gas taxes above does not mean I've joined the Pigou club (as if anyone has invited me). It's made only in comparison to other interventions such as CAFE standards and the hybrid credit.

Tuesday, July 22, 2008

What's really going on with Social Security.

This started out as a comment on Andrew Biggs' blog on Social Security, but grew too long to fit in the comment section, I felt, so here it is (where it grew longer yet!)

I believe it may have some general value in clarifying the basic issues confronting Social Security. Or not, that's for you to decide.

It follows Andrew replying to Bruce Webb (replying to me)...

Bruce, I think you're not right regarding the backward funding (meaning net transfers to early cohorts), and the table you cite tracking trust fund balances wouldn't really give a yes/no answer in any case.

If you look at this table you'll see that past/present participants have received $17.4 trillion more in benefits than they paid in taxes.

Future participants, even under scheduled benefits, will pay $1.5 trillion more in taxes than benefits. Add in the current trust fund balance and net things out and you have the infinite horizon shortfall of $13.6 trillion.

The upshot is that the infinite horizon shortfall that people deride (based on the 'infinite' part) isn't a function of over-payments to future generations, but to past ones. We already know that future cohorts must get out a lot less than they pay in, because past ones got out a lot more...


Yes, we do know that -- or should.

Again, with a paygo system it is a matter of arithmetic -- under paygo, total benefits = taxes in total, so if one group within the system receives benefits greater than the taxes they pay by $X, then everyone else must receive benefits less than the taxes they pay by $X. The Trustees' value for $X is above.

I've pointed out these facts and numbers (2007 version) to Bruce before, but he's been extremely reluctant to admit them. While I don't engage in the kind of name calling that others have elsewhere when I've brought these facts up, I think it is fair to state objectively that anybody who doesn't understand the existence of this "backward transfer" doesn't understand the first thing, literally, about the problems of Social Security reform.

Because it is entirely the rather large "backward transfer" that causes the ...

[] Intergenerational equity problem, due to the real rate of return on contributions falling from ...

36% annually for the first "Ida May Fuller"retiree cohorts, to

12% for those retiring in the 1960s (when Paul Samuelson praised Social Security for being an actuarially unsound Ponzi scheme that works), to

5% for the retirees of the 1980s, when Congress protected benefits for then-seniors by cutting benefits for, and increasing taxes on, the then-young, to

Under 1.9% and falling (less than the projected "risk free" rate on Treasury bonds of 2.9%, and thus a real economic loss) for today's young workers born in the 1970s and later.

[] Forced future tax increases/benefit cuts for the young, due to the $13.6 trillion remaining funding gap -- that must further reduce net scheduled benefits (and returns) for younger workers.

[] Loss-sharing problem, regarding how the inevitable losses to be suffered by the young should be spread between their generations.

[] Political support problem, regarding how to keep the public supporting Social Security in the future when they know they are losing trillions of dollars to it.

Consider: Prior generations received the above-noted by Andrew $17 trillion more than they put into Social Security, and thought very highly of it. Surprise! But if they had received $34 trillion less than that -- if it had made them poorer by $17 trillion -- would they still have thought so highly of it? In fact, would they have stood for that at all? That's the political future of Social Security.

[] Many false rhetorical claims about reform proposals, such as that any reform creates the dreaded "transition cost" that can't be financed.

But as Milton Friedman pointed out, it is the backward transfer itself that is the transition cost -- the need to fund past workers' benefits from workers' future taxes -- and this is a cost of the status quo. Reforms merely inherit it from the status quo. And it is completely bogus rhetoric to claim a cost of the status quo is a cost of reform. The status quo is going to have to fund this very same cost the same way as will any reform, with tax collections and/or benefit cuts, so it is hardly a cost of reform!

People who don't understand the "backwards transfer" can't possibly understand these issues, and how it drives them.

That said, darn few people understand it, and the Bush Administration did a dang poor job of explaining it (and these resulting issues) to the masses during its drive for Social Security reform. Karl Rove was no genius on that score. With predictable results.

But enlightenment is out there. For instance, one can look at what one might call the "Friedman scheme" to understand the fundamental situation of Social Security today, and the possible benefits of reform in the most extreme -- and thus most clearly visible -- case. Following Friedman (as per here and elsewhere):

Say you simply end Social Security cold-turkey while committing to pay all benefits earned to date, as of maybe 1/1/09. From then on everybody saves for their own retirement as they wish. The US government then must still pay the "backwards transfer" of $X trillion of benefits already earned but not paid for -- the "transition cost" to a world of "no more Social Security".

How would it pay for this? By imposing a payroll tax only on lower-level wages? Highly unlikely! Much more likely would be to finance the cost with the income tax -- using a progressive tax on a base about twice as large.

The point: The "backward transfer" is a sunk cost and going forward from here it must be paid for one way or another. But there is no logic in paying it with payroll tax because it is not a return on past-paid payroll taxes.

It was a general cash transfer, above the return on past-paid payroll taxes, from the nation and its politicians to the seniors of the past, made for better or worse (that doesn't matter now) and represented today by a remaining liability of $X. All other such general obligations the nation has ever incurred (for wars, space programs, Great Society programs) have been paid off with general revenue -- income taxes. This one should be and would be too, in a "no more Social Security world".

Now consider real-life Social Security as it is going forward today. It makes no more sense to pay off the "backward transfer" with payroll taxes on workers in our world than it does in the situation above. Yet it is what we are doing, and that is what's causing all the problems for Social Security today.

So now imagine a Social Security reform in which the cost of the backward transfer is removed from payroll tax and added to income tax. This frees all the contributions of workers to be saved for their own retirements in a diversified portfolio of investments (Treasury bonds, corporate bonds, equities, etc.) and increases their real rate of return from 1.9% or less to about 4.0% to 5.5% (private accounts or not, doesn't matter). Consequences:

* The "transition cost" of reform is $0. The government uses the exact same amount in tax revenue to pay down the liability of the "backward transfer". No change.

* Shifting the tax cost of funding the "backward transfer" from payroll tax to income tax is progressive -- let's call that good. (Also, being that the income tax base is much larger than the payroll tax base, fewer points of tax are needed, which is more tax efficient, and good.)

* Workers now receiving double to triple the return on their contributions will have much more retirement wealth per dollar contributed. This is good. They can even receive more at retirement than under today's system while contributing less than today -- giving them more disposable income over their working lives. This too is good. For workers this is in fact all very good.

* The accounting for Social Security becomes transparent. The "backwards transfer" becomes seen for what it is, not a fair return to participants of the past on their contributions, but a general transfer from the nation to them, above the fair return amount. (Whether the voters from 2009 on would wish to continue making such a transfer to Warren Buffett and all the other "rich" would be up to them.) And workers' future savings from their pay for their retirement in fact really become savings for their own retirement. Transparency is good.

(* Also, if a scheme like this had been implemented in the 1990s, when such ideas were first proposed, Social Security would be largely "out of the Treasury" for real by the 2030s, making the funding crisis for Medicare easier to deal with by points of GDP. Which would have been good. But too late for that now.)

Summing up the results we have "no net cost", "progressive", "good", "good", "good", "good", "good", ("good"). And all the problems resulting from the backwards transfer listed earlier are resolved going forward to the extent humanly possible.

So why does only a Milton Friedman consider such a thing? Why does everyone else think the backward transfer must be paid off with payroll taxes? When this produces a worse result by every measure? Even though "there is nothing in the nature of things that requires a particular tax to be linked to a particular expenditure."

Because, as Friedman also stated, FDR was right that the political psychology of the payroll tax is very powerful -- as LBJ's Great Society guy Wilbur Cohen said, peoples' perception and belief that that they are paying for their own benefits through the payroll tax (even when clearly not true) practically welds them psychologically to the payroll tax -- even to their own cost. It's politically mesmerizing.

Of course the "Friedman scheme" is a theoretical simplification -- there are practical problems with it, like maybe pushing income tax rates too high when the future cost of Medicare is added. But some tax must be used to collect the same amount, so if you don't like income tax you must find a better tax. (Some are proposing a new VAT.)

Yet I think it is very useful for clarifying one's view of what is really going on with Social Security, amid all the heated rhetoric and political noise.

A postscript about the "infinite" thing -- "infinite" isn't as long as you may think:

Many people hand-wave away the problems of Social Security thinking that since they are measured over an "infinite" term they will land on generations too distant in the future to matter to us, and probably can't be measured accurately anyway. This is a mistake.

When the finances of Social Security are measured over any limited, finite period (25, 75, 100 years, whatever) the net liability to the people living in that period is significantly understated.

This is because all the taxes paid by all the workers alive in the period are counted -- but the cost of benefits earned by and payable to millions of the same workers is not counted, due to benefit payment dates falling after the end of the period. The Treasury explains [.pdf] ...
It is important to understand that the magnitude of the infinite-horizon actuarial deficit is not driven by the use of distant or speculative long-range projections. Rather, the smaller size of the 75 year (or any finite period) deficit results from its use of a truncated time horizon.

The Trustees Report indicates that Social Security’s unfunded obligation for only past and current workers equals $14.4 trillion, which is actually slightly greater than the infinite-horizon shortfall. [Emphaisis in the orginal.]
Those "past and present" workers are you and me -- and the unfunded obligation for us is greater than that counted unto infinity.

Wednesday, July 16, 2008

The value of your life isn't what it used to be.

Are you feeling underappreciated depreciated of late?

An American Life Worth Less Today

The "value of a statistical life" is $6.9 million in today's dollars, the Environmental Protection Agency reckoned in May — a drop of nearly $1 million from just five years ago....

Though it may seem like a harmless bureaucratic recalculation, the devaluation has real consequences. When drawing up regulations, government agencies put a value on human life and then weigh the costs versus the lifesaving benefits of a proposed rule. The less a life is worth to the government, the less the need for a regulation, such as tighter restrictions on pollution.

Consider, for example, a hypothetical regulation that costs $18 billion to enforce but will prevent 2,500 deaths. At $7.8 million per person (the old figure), the lifesaving benefits outweigh the costs. But at $6.9 million per person, the rule costs more than the lives it saves, so it may not be adopted...

... economists calculate the value based on what people are willing to pay to avoid certain risks, and on how much extra employers pay their workers to take on additional risks. Most of the data is drawn from payroll statistics; some comes from opinion surveys. According to the EPA, people shouldn't think of the number as a price tag on a life... EPA officials say the adjustment was not significant and was based on better economic studies....

At the same time that EPA was trimming the value of life, the Department of Transportation twice raised its life value figure. But its number is still lower than the EPA's.

The environmental agency traditionally has placed the highest value of life in government and still does, despite efforts by administrations to bring uniformity to that figure among all agencies.

Not all of EPA uses the reduced value. The agency's water division never adopted the change... [AP]

Economists get catty.

Love it when they hiss and their claws come out.

Arnold Kling on Brad DeLong on the FMs....
Over at Grasping Demagoguery with Both Hands, Brad DeLong writes...

[evil Republican deregulation did it]

Let me give Professor DeLong an assignment. Find a list of all of the prominent calls for regulation of Freddie Mac and Fannie Mae over the last 15 years. Then write the name of the political party or the publication who called for that regulation on the blackboard. Do it 100 times. It will help your penmanship. It might even help your grasp on reality.

Jagdish Bhagwati on "What Makes Capitalism Work"...
Bill Gates has done something remarkable, which most everyone admires.

By contrast, George Soros made money from "speculation," which most people hold in low esteem ... On campuses in the U.S. we are all under instructions not to criticize him for the rubbish that he peddles, for fear that we may lose a contribution; but Gates would draw admiring crowds ...

The contrast between Gates and Soros is dramatic in this regard. The contrast between Obama (whom I have supported from the beginning) and the Clintons in this regard is also dramatic and is in Obama's favor. If I were Maureen Dowd, and I thank God I am not, I would say that Bill Clinton's problem is that he has gone from White Trash to White Cash...
Oh, that's what makes capitalism work. (I'm trying to picture Jagdish Bhagwati as Maureen Dowd.)

Friday, July 11, 2008

How to short oil on a one-way bet -- lease a SUV.

A number of people on various blogs have been wondering whether today's oil prices are a bubble, and making comments like: "If I was brave I'd short oil ... If there was an easy, low-cost, safe way, I'd short oil..."

Well there is. Lease a new SUV. Short oil while riding in the lap of big-wheeled luxury. Making a one-way bet.

An SUV? Today??

Sure. Thanks to the explosion of the price of gasoline, the price of SUVs has plunged. That lower price compensates for the higher price-of-gasoline operating cost -- that's how markets work.

In short, you can buy a heck of a lot of gasoline with a multi-thousand dollar price discount. And you can't enjoy that big-wheeled luxury in any other kind of car. Meanwhile, the price of Mini Coopers and such is rocketing up (and you have to pay extra for premium gas in a Mini).

The people who are getting killed owning SUVs are those who bought them 18 months ago -- not only are they paying double for gas after paying top price for the vehicle but their vehicles are plunging in resale value, which is likely to cost them even more than the extra gas cost.

But that's them -- if you are getting your new SUV today, that plunge in SUV market value is good for you.

Now when you get your new SUV you lease it. First, this further reduces the cash acquisition cost, compared to the financing payments if you purchase. Lease payments are smaller than loan payments. (Be sure to haggle the lease payment down -- SUVs are very haggleable these days.) But more to our point, if you lease a SUV and ...

[] The price of gas goes up further, "peak oil"-like, you are protected from any loss of the SUV's value -- it falls on the leasing company.

[] The gas price starts falling, "burst bubble"-like, then the value of SUVs will surge up again -- and your purchase option at the end of the lease term may turn out to be a nifty bargain that gives you a very nice profit when exercised.

And that's how to short oil while riding in big-wheeled luxury enjoying a one-way bet.

How much fun is that? Compared to trying to pry yourself in and out of your Mini Cooper ... that you paid a big premium for ... three years from now when the price of gas is $1.90 ... and your Mini's value has plunged ... so you can't sell it because you still owe more on the loan than the car is worth ... while you still have to pay extra for premium gas to run it.

Sunday, July 06, 2008

Who will want to "renege" on the Social Security trust fund bonds in the 2020s? 

Who won't?

From a discussion elsewhere that started on another subject and evolved into one on Social Security (as so many econo-blog threads are prone to do)...

Regarding paying down the Social Security Trust Fund bonds:

"In addition, it’s hard to believe that politicians will vote to renege on a debt to what is likely to be the most powerful voting block in American history..."

Well let's think about this for a minute. This is a very common comment. But most people who make it are considering the interests of the "seniors" voting block in the past. Try to imagine their voting interests in the future, say in 2030...

As per CBO, seniors (like everyone else) have just been hit with a 35% income tax rate increase from today's levels to pay for their Medicare benefits (this tax landing on their income from pensions, IRAs, Social Security, etc.).

On top of that, they are being hit with another 16% income tax increase for Social Security, mostly to pay off the trust fund bonds. For which they receive nothing, no further benefit. They are not happy about all this!

But they have a simple solution for Social Security: Means test "the rich" out of Social Security to reduce promised benefits by a little more than about 15% total, cuts made at the top, and the entire income tax increase needed to pay off the Social Security trust fund bonds is gone! Social Security continues to be funded entirely with payroll tax as for the 50 years before.

It's the year 2030. Who wants this? Let's take a vote!

[] The great majority of middle-class seniors say, "Why should we pay an income tax increase on our fixed incomes from our pensions, IRAs and Social Security benefits(!) to pay money to Bill Gates and the rich? Yes for means testing!"

[] Bill Gates and the rich say, "Why would we want to pay an income tax increase on all our huge investment and business income to protect our piddling Social Security benefits? Yes for means testing!"

[] Businesses across America say, "Why would we want to pay an income tax increase? Period. Yes for means testing!"

[] The lobbyists for every interest group that gets money from the Treasury -- the Agriculture Dept., Defense Dept., Education Dept., Zoological Dept. -- say, "We want that income tax revenue for ourselves, Yes for means testing!"

[] The young, who are paying the cost of raising children and making mortgage payments, who know they are never going to get back from Social Security what they put in, even without an extra income tax, say ... guess what?

Significant means testing (well disguised) already started in the 1983 Social Security reform. It's being talked of everywhere today ... by Kaus last week, with Pozen-type plans, there's all kinds of ideas for it all about -- and the date for it is still a decade away.

Who is the voting block that figures to vote for imposing a significant new extra income tax on itself to pay down the trust fund bonds?

Unless you can think of a fair bunch of them, it is going to remain entirely plausible to me that Congress will vote by 2030 to change Social Security so that a tax increase needed to pay down those Social Security trust fund bonds will never occur -- because the entire electorate insists!

After which Congress can do what it wants with the trust fund bonds -- transfer them to Medicare to "secure" a previously promised benefit at no net new tax cost, put them on display in a museum, whatever...

Would that be "reneging"?

There's a lesson in all this. Franklin Roosevelt famously said the reason for the payroll tax had nothing to do with economics, "they are politics all the way through". By keeping Social Security's funding "out of the Treasury forever" with its own dedicated funding source, "no damn politician can ever scrap my social security program".

But to the extent Social Security goes back into the Treasury for general revenue funding, via income tax increases, it will no longer be "the third rail of American politics" -- it will be tied to the tracks.

Friday, July 04, 2008

Americana on Independence Day

New York City's Great Patriotic Cheddar Cheese

A sculpture of the signing of the Declaration of Independence made from a one-ton block of cheddar cheese glistened on the sidewalk of Times Square in New York on Thursday as an artist's tribute to the Fourth of July.

"It's very patriotic ..." said Troy Landwehr, who carved the sculpture for cracker company Cheez-It to celebrate U.S. Independence Day. He worked eight hours a day for a week in a 40-degree cooler carving the block of Wisconsin cheddar.

The replica of an iconic painting by John Trumbull shows John Adams, John Hancock, Benjamin Franklin and others standing around a table signing the historic document.

The work is not the first time Landwehr has recreated U.S. history with cheese. Last year he carved a cheese version of Mount Rushmore ... [Reuters]

As a Manhattanite, I'd expect such a thing more likely to appear in Wisconsin. But I guess I'll take a walk up and take a look today. And kudos to the big marketing brains at the Cheez-It company -- they think like Americans!

Baseball trade of the season -- it's the American game

Player traded for 10 bats sees it as shot at redemption

An umpire teasingly calls him "Bat Man." His teammates consider it an embarrassment and a "slap in the face." ... it sounds like the punchline of a cruel joke, or maybe an episode from baseball's more colorful past.

But minor league pitcher John Odom sees the trade that sent him from the Calgary Vipers to the Laredo Broncos for 10 baseball bats as a shot at redemption ... [AP]

That's it, always look for the opportunity in a situation -- it's the American attitude.

Uncle Jay explains the Supreme Court on Americans' right to own guns (well, you've heard everybody else on it.)

And what could be more American than guns and cars?
A car dealership in the United States is offering a free handgun with every vehicle sold. Max Motors in Butler, Missouri, says sales have quadrupled since the start of the offer.

Customers can choose between a gun or a $250 gas card, but most so far have chosen the gun. Owner Mark Muller said: "We're just damn glad to live in a free country where you can have a gun if you want to."

Mr Muller said that every buyer so far "except one guy from Canada and one old guy" chose the gun, rather than the gas card.

He recommends a Kel-Tec .380 pistol, which he describes as "a nice little handgun that fits in your pocket". [BBC -- with audio]

Well, maybe ... cars and beer (and grandma)?

Grandma crashes car through store to buy beer

Lynne Rice of Norwalk reportedly announced, "I'm here for beer," after plowing her 1988 Cadillac through the front window of Joe's Food Mart, 10641 E. Imperial Highway, at about 6 p.m. Sunday, said Deputy Jeff Tibbetts of the Norwalk Sheriff's Station.

The owner of Joe's Food Mart, Atef Awada, says he has surveillance footage of Rice getting out of the car after the crash, walking over to the cooler and pulling out a six-pack of beer.

... Rice was later arrested on suspicion of driving under the influence... [Press-T]
"Suspicion" ... That's American understatment.

Thursday, July 03, 2008

Public education spending in the US

Via Marginal Revolution we get from Brad Delong...

The true history of the U.S. since 1980 ....

1. The end of the Cold War

2. Other winner-take-all factors that have, in combination with education, pushed American income polarization back to Gilded Age levels.

3. The failure of American taxpayers to support their state and local governments in expanding funding for public education -- and the impact of reduced public education effort in sharpening the distinction between rich and poor...

Let's quantify this failure of American taxpayers to support funding for public education since 1980. From the National Center for Education Statistics we learn ...

Current expenditure per pupil in fall enrollment in public elementary and secondary schools:

school year .... 2007 dollars

1980-81 .... $5,438
2004-05 .... $9,266 +70%
So a 70% increase in real funding per student over 24 years is "the failure of the American taxpayers to support ... expanding funding for public education".

One can hurl a lot of damning critcisms at how the public schools are run in this country -- but failure to expand funding is not one of them.

Seeing it anyhow seems about par for the course over there at DeLong's over the last few years, which is why I learn what little I do about what he writes these days only from other people's blogs, which is a loss considering how good DeLong's blog was when he started it.

The motto he's adopted since then is "Grasping reality with both hands". Maybe he does -- but that sure doesn't keep it from squirting out between his fingers!

My personal belief is that when a person is good at grasping reality you'll recognize that fact for yourself without anyone telling you. While when a person feels compelled to proclaim to you in a loud voice and big block letters that he grasps reality....
"The paradox of urban school reform is the steady increase in education cost per pupil with no increase in student outcomes."
-- Robert Sarrel, Ed. D., Director of Budget Allocation, New York City Board of Education
Never let the left, Democrats, or DeLong ever trouble themselves to consider such a thing. After all, how much does the failure of public education as a cause of "sharpening the distinction between rich and poor" really matter to them, anyhow?

Wednesday, July 02, 2008

How they used to play the game -- or at least pitch it.

Forty-five years ago today in the world of baseball, Juan Marichal of the San Francisco Giants and Warren Spahn of the Milwaukee Braves both "went the distance" and then some, pitching an epic 0-0 game into the 16th inning.

“I begged [Giants' manager] Mr. Dark to let me stay a few more innings, and he did,” Marichal said ... “In the 12th or 13th, he wanted to take me out, and I said, ‘Please, please, let me stay.’ Then in the 14th, he said, ‘No more for you,’ and I said, ‘Do you see that man on the mound?’ and I was pointing at Warren. ‘That man is 42, and I’m 25. I’m not ready for you to take me out.' ”Marichal said his catcher, Ed Bailey, was telling him: “Don’t let him take you out. Win or lose, this is great.” [NY Times]
Willie Mays won the game for the Giants and Marichal, 1-0, with a home run to left field hit off Spahn with one out in the bottom of the 16th. Marichal and Spahn today are both in the Hall of Fame (as is Mays, of course). Their pitching lines...

Marichal: 16 innings, 8 hits, 0 runs, 4 walks and 10 strikeouts. Spahn: 15 1/3 innings, 9 hits, 1 run, 1 walk and 2 strikeouts.

And this wasn't the only game like this for either of them. Spahn had lost two prior 16-inning performances, one against the Brooklyn Dodgers in 1951, and another in 1952 against the Cubs (after striking out 18 and hitting a home run for his own cause). Marichal would go on to pitch a 14-inning 1-0 win against the Phillies and a 14-inning 1-0 loss to the Mets.

That's surely all a far cry from today's world of scientific baseball where starting pitchers are held to rigorous pitch counts, rarely throwing more than six or seven innings to protect the teams' huge investment in them, to be followed in the game by a sequence of specialized relief pitchers.
“Pitchers of the generations up until Marichal had a belief that ‘this game is mine,’” said Steve Hirdt, executive vice president of the Elias Sports Bureau. He added, “The idea of doing permanent harm to a pitcher’s arm didn’t come into anyone’s mind.”
Last season the most innings thrown by pitcher in the major leagues was 241, and the most complete games was six.

Marichal threw more than 241 innings nine times in a 16-year career, and averaged 15 complete games per season. Spahn threw more than 241 innings 17 years in a row, and over that stretch averaged more than 21 complete games per season -- all without any apparent harm to his arm, considering his ability to throw 15 1/3 shutout innings at the age of 42.

But with starters now throwing only every fifth game, for maybe six innings, and the "specialists" claiming ever more of the action, the game is "theirs" no more.

This year, when the Yankees moved their great young hope of the moment Joba Chamberlain from the bullpen to the starting rotation, for the first time in my life I heard the fans and sportswriters protest the move from reliever to starter as a demotion to a lesser job.

... why general manager Brian Cashman would succumb to Hank Steinbrenner’s wishes on the questionable Joba strategy makes me scratch my chin. Here you’ve got a lights-out reliever, an outstanding successor to Rivera in a year or two, probably guaranteeing that the Yanks will have the sport’s most dominant closer for two decades, and suddenly that late-inning weapon is wiped out. As a Sox partisan, I love the move, but it still doesn’t make much sense... [NY Press]
"It doesn't make much sense" that a promising specialist relief pitcher throwing maybe one inning in two out of every three games should be reduced to being a starter.

Such is the march of science, money, and specialization through sports.