I just heard a radio commercial today urging listeners to learn how to flip houses to great profit with absolutely no capital or down payment required. What a great idea.
Archive for the ‘Economics’ Category.
I got an email today from some group telling me that the majority of small business owners support annual increases to the minimum wage. I found that odd, so I clicked through to the study. I will save you the time looking for it, the study had no discussion of how it identified a representative group of small business owners, or even how it validated the respondents were business owners in the first place. All it says is that it was an "internet survey".
It turns out the second question of the poll answers the first. The people in the poll overwhelmingly supported raising the minimum wage because the businesses polled overwhelmingly did not hire minimum wage workers.
In fact, the most lost fact in the minimum wage debate is the percentage of the work force that actually earns the minimum wage. According to the Department of Labor, in 2011 only about 3% of all employed wage and salary workers were making minimum wage or less. However, about half of these folks are people who mainly work for tips (which are not included in the base wage number). When you exclude the folks whose tips presumably take them over the minimum wage, just 1.5% of American workers make minimum wage.
Minimum wage work is a niche, generally confined to special situations and to low-skilled young people entering the work force.
Sure, a minimum wage hike would help many of those 1.5% (at least those who did not lose their jobs when the higher wage rates priced out their work). But what about the group five times larger than this, the unemployed? Are they really better off when the bar they have to clear to find their first work keeps getting raised? If no one will currently hire 30% of teens at $7.25 an hour, how many will get hired at $10 an hour?
Here is the question the group should have asked: For those of you who currently pay some workers minimum wage, would you expect to employ more, the less, or about the same after an increase in the minimum wage?
As quick background, R&R had a study that found that higher government debt levels correlated to lower, even negative, economic growth. More recently, others have found computational errors that exaggerated this result, and have criticized their methodology, particularly their approach to weighting data from different countries and years.
A few thoughts:
- A major reasons the errors were found is that R&R actually made their data available for replication. This is apparently rare - certainly it is rare in the climate world. I am glad they are getting kudos for this and hope the academic world can find a way to incentivize / force more data sharing
- I would not have expected a direct relationship between country debt levels and economic growth. What I would expect is that growth can still be good at higher debt levels, but the risk of hitting a tipping point starts to rise dangerously with debt levels. Eventually levels get so high that an interest rate shock or liquidity shock is almost inevitable
- More than a relation between GDP growth and absolute debt levels, I would have expected a relationship between GDP growth and changes in debt level. Absolute government debt levels may represent resources removed from the productive economy years and decades earlier. Increases in government debt represent recent decreases in capital available for productive use.
There are people who think that plunder loses all its immorality as soon as it becomes legal. Personally, I cannot imagine a more alarming situation. However that may be, one thing is certain, and that is that the economic results are the same...
Moral: To use force is not to produce, but to destroy.
Selected essays on a political economy. I love how Bastiat writes, and 165 years has done absolutely nothing to harm his relevance. Its amazing that we hare having the exact same economic battles today.
I predicted last year that the biggest economic story of the year would be the end of full-time employment in the retail service industry. An update:
The nation's largest movie theater chain has cut the hours of thousands of employees, saying in a company memo that ObamaCare requirements are to blame.
Regal Entertainment Group, which operates more than 500 theaters in 38 states, last month rolled back shifts for non-salaried workers to 30 hours per week, putting them under the threshold at which employers are required to provide health insurance. The Nashville-based company said in a letter to managers that the move was a direct result of ObamaCare.
I am fascinated by Bitcoin and would love to see it be a success. But Tyler Cowen has a quote that reflects some of my concerns about it:
…bitcoins are an uncomfortable combination of commodity and currency. The commodity value of bitcoins is rooted in their currency value, but the more of a commodity they become, the less useful they are as a currency.
Bitcoin is in the midst of an enormous price bubble, with increases in value of as much as 50% over just a few days. This is astounding volatility for even a commodity, much less a currency.
Cowen said something at the end of the post, almost as a throw-away, that got my attention: "There is, by the way, no current way to short Bitcoin." The reason this caught my eye is that I have argued a long time that short selling is an important mechanism to reduce market volatility.
Every time we get to a market bubble or problem, insiders always start arguing against short selling saying it makes volatility worse and undermines markets. But what they are really saying is that they like volatility so long as it is up. They had no problem with the bubble that propelled their securities up, they just don't want them to come back down to Earth.
In certain bubbles, when interest in a certain asset class gets really frothy, anyone who is skeptical of the asset and its new high values will sell and get out. This means that as the bubble grows, all the skeptics are long gone from the market. No longer owning the asset, these skeptics have no further "vote" or influence on the price. Short selling is a way for skeptics to continue to influence the price and asset values. To this extent, I think it tends to limit the peak of bubbles, just as bottom-fishers limit the debt of troughs.
Bitcoin would likely benefit from skeptics having some sort of influence on bitcoin values. But without a way to short, Bitcoin values are driven solely by wacky anarcho-capitalists (e.g. people like me) and people fearful of Cyprus style depositor losses. Essentially all the true believers are bidding against themselves.
We all know from progressive and Democratic writers the the Community Reinvestment Act and other efforts to offer cheap home loans to people without good credit had nothing to do with the mortgage industry offering too many loans to people without good credit.
So we should not be in the least bit worried that the Obama Administration is calling for more mortgages to be given to people with weaker credit, while sub-prime auto loans are simply booming. Because we have learned from Iceland and Greece and Cyprus that the best way to deal with a debt crisis is by encouraging consumers to take on more debt, and the best way to respond to an asset bubble is to try to re inflate the bubble.
All of this, of course, is simply crazy talk. The people who are involved HAVE to know this won't end well, because the most recent example of this leading to disaster is only 4 years old. Hell, the people doing this were in office when this same approach fell apart last time. But politicians refuse to face some pain now to avoid huge pain in the future - for politicians, the discount rate on pain is infinite.
I am a bit late to the game in addressing Krugman's comments several days ago when he said:
But the truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment.
This was in response to the implosion of Cyprus banks, which was exacerbated (but not necessarily caused) by the banks being a home for a lot of international hot money - deposits so large they actually dwarfed the country's GDP.
I generally rely on Bastiat's definition of the role of the economist, which I will quote from Wikipedia (being too lazy on this Friday morning to find a better source):
One of Bastiat's most important contributions to the field of economics was his admonition to the effect that good economic decisions can be made only by taking into account the "full picture." That is, economic truths should be arrived at by observing not only the immediate consequences – that is, benefits or liabilities – of an economic decision, but also by examining the long-term second and third consequences. Additionally, one must examine the decision's effect not only on a single group of people (say candlemakers) or a single industry (say candlemaking), but on all people and all industries in the society as a whole. As Bastiat famously put it, an economist must take into account both "What is Seen and What is Not Seen."
By this definition, Krugman has become the world's leading anti-economist. Rather than reject the immediate and obvious (in favor of the larger picture and the unseen), he panders to it. He increasingly spends his time giving intellectual justification to the political predilection for addressing symptoms rather than root causes. He has become the patron saint of the candle-makers petition.
I am not naive to the fact that there are pools of international hot money that seem to be some of the dumbest money out there. Over the last few years it has piled into one market or another, creating local asset bubbles as it goes.
But to suggest that international capital flows need to be greatly curtailed merely to slow down this dumb money, without even considering the costs, is tantamount to economic malpractice.
You want to know what much of the world outside of Western Europe and the US would look like without free capital flows? It would look like Africa. In fact, for the younger folks out there, when I grew up, countries like China and India and Taiwan and Vietnam and Thailand looked just like Africa. They were poor and economically backwards. Capital flows from developed nations seeking new markets and lower cost labor has changed all of that. Over the last decade, more people have escaped grinding subsistence poverty in these nations than at any other time in history.
So we have the seen: A million people in Cyprus face years of economic turmoil
And the unseen: A billion people exiting poverty
By pandering to those who want to expand politicians' power based on a trivial understanding of the seen and a blindness to the unseen, Krugman has failed the most important role of an economist.
Other thoughts: I would offer a few other random, related thoughts on Cyprus
- Capital controls are like gun and narcotics controls: They stop honest people and do little to deter the dishonest. In the case of Cyprus, Krugman obviously would have wanted capital controls to avoid the enormous influx of Russian money the overwhelmed the government's effort to stabilize the banks. But over the last several weeks, the Cyprus banks have had absolute capital controls in place - supposedly no withdrawals were allowed. And yet when the banks reopened, it become increasingly clear that many of the Russians had gotten their money out. Capital controls don't work as a deterrence to money that is already corrupt and being hidden.
- No matter what anyone says, the huge capital inflows into Cyprus had nothing to do with the banking collapse. The banks had the ability to invest the money in a range of international securities, and the money was tiny compared to the size of those security pools. So this is not like, say, a housing market where in influx of money might cause a bubble. The only harm caused by the size of the Russian investments is that once the bank went bad, the huge size of the problem meant that the Cyprus government did not have the resources to bail out the bank and protect depositors from losses.
- Capital controls are as likely to make bubbles worse as they are to make them better. Certainly a lot of international money piling into a small market can cause a bubble. But do capital controls really create fewer bubbles? One could easily argue that the Japanese asset bubble of the late 80's would have been worse if all the money were bottled up in the country. When the Japanese went around the world buying up American movie studios and landmark real estate, that was in some sense a safety valve reducing the inflationary pressure in Japan.
- Capital controls are the worst sort of government expropriation. You hear on the news that the "haircut" taken by depositors in Cyprus might be 20% or 80% or whatever. But in my mind it does not matter. Because once the government put strict capital controls in place, the haircut effectively became 100%, at least for honest people that don't have the criminal ability or crony connections to beat the system. Cyprus basically produces nothing. Since money is only useful to the extent that it can buy or invest in something, then bottling up one's money in Cyprus basically makes it worthless.
- Capital controls are a prelude to protectionism. First, international trade is impossible without free flow of capital. No way Apple is going to sell ipods in Cyprus if they cannot at some point repatriate their profits. Capital controls can also lead to export controls. If I can't export money, I might instead buy jets, fly them out of the country, and then sell the jets.
- Let's not forget that the core of this entire problem is a government, not a private, failure. Banks and investors treated sovereign euro-denominated debt as a risk-free investment, and banking law (e.g. Basil II) and pension law in most countries built this assumption into law. Cyprus banks went belly-up because the Greeks, in whom they had (unwisely) invested most of their funds, can't exercise any fiscal responsibility in their government. If European countries could exercise fiscal responsibility in their government borrowing, 80% of the banking crisis would not exist (housing bubbles and bad mortgage securities have contributed in some countries like Spain). There is a circle here: Politicians like to deficit spend. They write regulations to encourage banks to preferentially invest in this government paper. When the government debt gets iffy, and the banks face collapse, the governments have to bail them out because otherwise there is no home for their future debt. The bailouts get paid for with more debt, which gets crammed back into increasingly over-leveraged banks. What a mess.
- All of this creates an interesting business school problem for the future: What happens when there are no longer risk-free investments? Throughout finance one talks about risk free rates and all other risks and risk premiums and discussed in reference to this risk-free benchmark. In regulation, much of banking capital regulation and pension regulation is based on there being a core of risk free, liquid investments. But what if these do not exist any more?
- I have thought a lot about a banking model where the bank accepts deposits and provides basic services but does no lending - a pure deposit bank with absolute transparency on its balance sheet and investments. I think about a web site depositors can check every day to see exactly where depositors money is invested and its real time values. Only listed, liquid securities with daily mark to market. Open source investing, as it were. In the past, deposit insurance has basically killed this business model, but I think public confidence in deposit insurance just took a big-ass hit this week.
Postscript: I don't want to fall into a Godwin's law trap here, but I am currently reading Eichmann in Jerusalem and it is impossible for me to ignore the role strict capital controls played in Nazi Germany's trapping and liquidation of the Jews.
The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference. Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape—not merely for the rich but for everybody.
I found this article on foreclosed homeowners vindictively trashing houses now owned by the bank to be really depressing. An example quote:
Myra Beams, a realtor in Tamarac, Fla., said half of her foreclosed properties, regardless of the price range, have been vandalized by the former owners. "I think the former owners are angry, and for some reason, they think they're entitled to destroy properties," said Beams. "I guess they're angry at the banks for giving them the mortgage."
There is a lot more like that. A couple of quick thoughts
- The sense of entitlement here is stunning. It is these homeowners, not the bank, that failed to fulfill their end of the bargain. Who is the guilty party here, anyway?
- These folks are lucky to live in the US -- we have the most lenient home mortgage system in the world. Very, very few other countries in the world have no-recourse mortgages where one can walk away only with a ding on their credit record, without even a personal bankruptcy. Almost anyplace else, they would be facing years of garnishments for whatever losses on the loan the bank had after they sold the home.
- I always thought the critique of lower income people "trashing" housing projects in the 70s and 80s had a vaguely racial tone to them, as if this were somehow a proof of African-Americans being shiftless and irresponsible. But here we have white middle class people actively trashing their homes. Proving once again that being an inconsiderate jerk is truly a multi-racial, multi-ethinic behavior.
Had an interesting discussion with my favorite New England liberal this weekend about the Time Magazine article on Hospital pricing and charges. We both found the articles to be excellent. But drew completely different conclusions. She saw this all as a failure of capitalism, a sign of the inherent corruption that occurs that demands more goverment intervention. I saw it as a totally screwed up market, from the dominance of third party payers to government-enforced monopolies (e.g. certificates of need), that killed any incentive of consumers to shop. The entire pricing mechanism is broken, and simply replacing it with a set of fiat prices from the government is not going to make things better.
Megan McArdle has a good interview with Bart Wilson on this very topic. Here is a small excerpt:
Megan: Okay, so let me ask the obvious question: if a whole lot of health care wonks think that government-rate setting would fix health care costs, why should I be skeptical?
Wilson: Who knows the conditions of who values what and the opportunity costs of supplying health care? What set of minds in the government has the knowledge needed to make tradeoffs, to know who is best to supply this service or that one?
The values and costs of healthcare have to be discovered.
Megan: The wonks who favor rate-setting argue that health care simply isn't like any other market. For one thing, there's an information problem: how do I know if I want a heart bypass or not?
Why not let an expert who has read all the studies on heart bypasses make that decision?
Wilson: Right now, the doctor recommends to the patient what the insurance company will pay for. What incentive does the patient have to find alternatives? (None.)
There is the assumption that an expert knows all the alternatives. Doctors are not interchangeable. They know different things.
The function of a market is let us learn who will serve us sufficiently well.
Megan: So let's step back even farther, to 30,000 feet or so, for a second. What does the price do in a market? Why should I want to put a price on my lung transplant?
Wilson: A price is like a symbol at any moment of what millions of people are willing and able to do. All of the technology and services of the doctors have to be weighed against whatever else they could be applied to.
The prices of alternatives to lung transplants are doing the same thing. The difficulty is assuming that a lung transplant is "inelastic". What a price system does is find what part of say, healthcare, is on the margin.
“Inelastic” means that I’m relatively indifferent to the price. The last glass of water in a desert is the quintessential inelastic good; people will pay all they have to get it. Things can be more or less inelastic, which is to say, that demand can be more or less responsive to changes in price. Health care is often thought to be very inelastic.
Megan: But this is precisely the argument that health care wonks make: when I need a lung transplant, I don't have the time, or the emotional ability, to comparison shop. So there's no price discovery mechanism.
Wilson: Does the government know or have the ability to comparison shop for me? Do they know my circumstances?
Also, for some healthcare services, you do have the ability to comparison shop. Those services will then discipline the healthcare market in general.
We have heard about the difficulty folks who are retired are having with low interest rates. But low interest rates are having a huge impact on corporations that still have defined-benefit pensions.
Across America's business landscape, the gap between the amount that companies expect to owe retirees and what they have on hand to pay them was an estimated $347 billion at the end of 2012. That is better than the $386 billion gap recorded at the end of 2011, but the two years represent the worst deficits ever, according to J.P. Morgan Asset Management.
The firm estimates that companies now hold only $81 of every $100 promised to pensioners.
In general, everything happening on the liability side of the pension equation is working against companies. A big source of the problem: persistently low interest rates, set largely by the Federal Reserve....
Pension liabilities change over time as employees enter and leave a pension plan. For financial-reporting purposes, companies use a so-called discount rate to calculate the present value of payments they expect to make over the life of their plan.
The discount rate serves as a proxy for the hypothetical interest rate that an insurance company would expect on a bond today to fund a company's future pension payments. The lower the discount rate, the greater the company's pension liabilities.
Boeing's discount rate, for example, fell to 3.8% last year from 6.2% in 2007. The aircraft manufacturer said in a securities filing that a 0.25-percentage-point decrease in its discount rate would add $3.1 billion to its projected pension obligations.
Boeing reported a net pension deficit of $19.7 billion at the end of 2012.
The discount rate is based on the yields of highly rated corporate bonds—double-A or higher—with maturities equal to the expected schedule of pension-benefit payouts.
Moody's decision last summer to lower the credit rating of big banks hurt UPS and other companies by booting those banks out of the calculation. And because bonds issued by some of those banks carried higher yields than other bonds used in the calculation, UPS's discount rate fell 1.20 percentage points.
This is obviously not a wildly productive use of corporate funds, to divert ever-increasing amounts of money to pay people who are no longer producing. But at least corporations are acknowledged the problem (I will give credit where it is due -- thanks to accounting rules and government regulations that force a fair amount of transparency here).
It is interesting to note the Boeing example, where their expected rate of return on pension funds fell from 6.2% to 3.8%. Compare that to corrupt government entities like Calpers, which bravely faced this new reality by cutting its discount rate from an absurd 7.75% to a still absurd 7.5%. This despite returns last year around 1%. By keeping the number artificially high, Calpers is hiding its underfunding problem. An interesting reform would be to force Calpers to use a discount rate equal to the average of that used by the 10 largest private pension funds.
I had an argument about the (economic) stimulative effect of war the other night. As usual, I was not entirely happy with how I argued my point in real time (which is why I blog). Here is an attempt at an improved, brief answer:
One of the reasons that people often believe that war "improves" the economy is that they are looking at the wrong metrics. They look at unemployment and observe that it falls. They look at capacity utilization and observe that it rises. They look at GDP and see that it rises.
But these are the wrong metrics. What we care about is if people are better off: Can they buy the things they want? Are they wealthier?
These outcomes are hard to measure, so we use unemployment and GDP and capacity utilization as proxies for people's economic well-being. And in most times, these metrics are reasonably correlated with well-being. That is because in a free economy individuals and their choices guide the flow of resources, which are dedicated to improving what people consider to be their own well-being. More resources, more well-being.
But in war time, all this gets changed. Government intervenes with a very heavy hand to shift a vast amount of the resources from satisfying people's well-being to blowing other people up. Now, I need to take an aside on well-being in this context. Certainly it is possible that I am better off poor in a world with no Nazis than rich in one dominated by Nazis. But I am going to leave war aims out of the concept of well-being. This is appropriate, because when people argue that war stimulates the economy, they are talking purely about economic activity and benefits, and so will I.
What we find is that in war time, unemployment is down, but in part because young people have been drafted (a form of servitude) to fight and die. Are they better off so employed? Those who are left find themselves with jobs in factories with admittedly high capacity utilization, but building things that make no one better off (and many people worse off). GDP skyrockets as government goes deeply in debt to pay for bombs and rockets and tanks. This debt builds nothing for the future -- future generations are left with debt and no wealth to show for it, like taking out a mortgage to buy a house and then having the house burn down uninsured. This is no more economically useful than borrowing money and then burning it. In fact, burning it would have been better, economically, as each dollar we borrowed in WWII had a "multiplier" effect in that it destroyed another dollar of European or Asian civilian infrastructure.
Sure, during WWII, everyone in the US had a job, but with war-time restrictions and rationing, these employed people couldn't buy anything. Forget the metrics - in their daily lives Americans lived poorer, giving up driving and even basic staples. This was the same condition Soviet citizens found themselves facing in the 1970s -- they all had jobs, but they could not find anything to buy. Do we consider them to have been well off?
There is one way to prosper from war, but it is a terrible zero-sum game -- making money from other people's wars. The US prospered in 1915 and later 1941 as Britain and France sunk into bankruptcy and despair, sending us the last of their wealth in exchange for material that might help them hang on to their existence. Ditto in 1946, when having bombed Japanese and German infrastructure into the stone age. we provided many of the goods to help rebuild them. But is this really the way we want to prosper? And is this sort of vulture-like prosperity even possible with our inter-woven global supply chains? For example, I can't see a China-Japan war being particularly stimulative for anybody nowadays.
In the current novel I am writing, set in the future, the dollar has collapsed and everyone uses something called "zons" instead, a currency backed not by gold or the full faith and credit of the US Government (lol) but on the stable pricing and the promise of redemption at Amazon.com. Yesterday, reality overran this admittedly small element of my story. I will need to write faster.
The $604 million issue from consumer lender Springleaf Financial, the former American General Finance, will bundle together about $662 million of loans secured by assets such as cars, boats, furniture and jewelry into ABS, according to a term sheet. Some loans have no collateral.
Personal loans haven't been a part of the mainstream ABS market since securitizations from Conseco Finance Corp. in the late 1990s, according to Michael Dean, co-head of Fitch Ratings' ABS group. That market dried up as the recession hit and, under the weight of bad subprime loans, Conseco filed for bankruptcy in 2002.
Springleaf's issue comes as prices on traditional issues backed by auto loans, credit cards and student loans have soared as investors pile into debt with extra yield over Treasurys. As those yields fall, ABS investors have been giving unusual assets that were previously shunned a second look....
The 190,627 loans in the Springleaf deal have an average FICO credit score of 602, in line with many subprime auto ABS. But the average coupon of 25% on Springleaf's personal loans is above that on even "deep subprime" auto loans, probably because there is no collateral for 10% of the issue, an analyst said.
Bonus points for AIG's involvement in this offering (btw, now that AIG has repaid obligations to taxpayer, expect a corporate name change in 3..2..1..)
We had a credit bubble in part where the market likely under-priced certain risks. Bubble bursts and risks take their toll. Economy floundered. The Fed reduced interest rates to zero. Frustrated with low interest rates, investors have begun seeking out risk, likely driving down the price of risky investment. Repeat.
Price controls, like those famously instituted by Diocletian, are something like 0 for 162,000 in their success rate at "fixing" inflation.
So of course, Argentina has instituted price controls on supermarkets. Argentina, meet Zimbabwe. Another agricultural powerhouse that will soon see food shortages.
Cost-based pricing would say that digital media streamed to the home should always be less expensive than the same media delivered on physical disks in boxes delivered by UPS.
Value-based pricing says that someone with a Roku who wants to see a show right now, not two days from now, and doesn't have a DVD player and doesn't want to hassle with putting disks in and out to get through a whole season of a TV show might pay more for the digital delivery.
Sometimes cost-based pricing rules. Sometimes value-based pricing dominates. Sometimes pricing is weird due to temporary scarcity or gluts. Sometimes pricing is inexplicable. Which is this (click to enlarge):
Entire Season on physical DVD's with free Amazon Prime delivery: $13.99
Entire Season streamed digitally: $22.99
Since I like to buy the disks and then rip them to my video server at home running XBMC, I was happy to get the disks inexpensively.
Bloomberg does a ranking of where one should go if he is unemployed. Before we go to their ranking criteria, lets think about what criteria I would recommend to someone:
- Go where the jobs are. Duh. Pay particular attention to where there are jobs that match your skills, but in general a rising tide will lift all boats (e.g. you don't just have to be an oil field worker to find opportunity in North Dakota, they are paying a fortune for waitresses and retail clerks to handle the new demand).
- Look at pay for your skills vs. cost of living. Manhattan may pay the most for waitresses but living costs there are insane. You can get good work in Vail, Colorado over the winter but good luck finding a low cost place to live anywhere nearby.
- Think about tax rates. You may be exempt now, but hopefully as things get better you will care about income tax rates, and if you are unemployed you certainly are going to care about sales tax rates
OK, so let's look at Bloomberg's ranking criteria. They also have three:
- Unemployment rate. So far so good. Go where the jobs are.
- State unemployment payment rates. Seriously, their criteria is not cost of living or average payments for new workers, but how much one can extract from the government for NOT working? But OK, this still makes some sense (though there are a lot of barriers to crossing state lines for a better unemployment deal).
- Income inequality. WTF? What in heavens name does this have to do with unemployed people and how easily they can improve themselves. Is this psychological -- ie you will feel worse about being unemployed if there are a lot of rich people around? The average unemployed American is a service worker (if you are a skilled manufacturing worker, say a machine operator, and can't find work, you are in a minority). Rich people drive demand for service workers.
Kevin Drum begins this post by making a point I have made forever -- that selling debt to Chinese investors does not somehow put the US in China's power. In fact, one can argue just the opposite, that Chinese policy options vis a vis the US are circumscribed to some extent by the desire to get paid back on all this lending some day.
However, he goes on to make this incredible statement:
Rising U.S. debt hasn't caused inflation. It hasn't sent interest rates skyrocketing. It hasn't reduced Chinese demand for American bonds. It hasn't reduced demand for long-dated bonds. Really, it hasn't done any of the things that conservatives have been predicting with apocalyptic fervor for the past four years.
I am left agog at the incredible blindness of this position, and find it intriguing how it contrasts with Drum's position on rising atmospheric CO2 levels. In the latter case, he constantly argues that lack of warming today is not an excuse for inaction, that CO2 is dangerous and its production must be greatly curtailed. He takes this position despite any real historic evidence of harm from CO2 levels -- ie future harm is hypothetical and without precedent. But still he wants action now.
On the other side, there is plenty of historical evidence for what rising deficit spending and government debt will do to a country and an economy. Heck, you don't even have to look at history -- it is being pushed in our face every day by Greece and Spain and Italy. And yet he councils full steam ahead.
Even most climate skeptics (including myself) would not make a statement about CO2 as denialist as Kevin Drum makes about debt. We acknowledge CO2 is rising, believe it has some impact on rising temperatures, but differ from the most alarmist in the amount of future temperature increases expected. We expect more modest anthropogenic temperature increases that make more sense to deal with by adaption -- but we don't generally deny its effect altogether (crazy talk show host and a few prominent bloggers notwithstanding).
Postscript: The Weimar Republic went from relative normalcy to hyperinflation in less than three months, the time between two quarterly meetings of the Fed. In Europe, one day there was no problem in Greece and Spain and Italy and a day or a week later, boom, the crisis is upon them.
Note: I am not an expert on the Fed or the operation of the money supply. Let me know if I am missing something fundamental below
Kevin Drum dredges up this chart from somewhere to supposedly demonstrate that only a little bit of spending cuts are needed to achieve fiscal stability.
Likely the numbers in this chart are a total crock - spending cuts over 10 years are never as large as the government forecasts and tax increases, particularly on the rich, seldom yield as much revenue as expected.
But leave those concerns aside. What about the Fed? The debt as a percent of GDP shown for 2012 in this chart is around 72%. Though it is not labelled as such, this means that this chart is showing public, rather than total, government debt. The difference is the amount of debt held by federal agencies. Of late, this amount has been increasing rapidly as the Fed buys Federal debt with printed money. Currently the total debt as a percent of GDP is something like 101%.
The Left likes to use the public debt number, both because it is lower and because it has been rising more slowly than total debt (due to the unprecedented growth of the Fed's balance sheet the last several years). But if one insists on making 10-year forecasts of public debt rather than total debt, then one must also forecast Fed actions as part of the mix.
Specifically, the Fed almost certainly will have to start selling some of the debt on its books to the public when the economy starts to recover. That, at least, is the theory as I understand it: when interest rates can't be lowered further, the Fed can apply further stimulus via quantitative easing, the expansion of the money supply achieved by buying US debt with printed money. But the flip side of that theory is that when the economy starts to heat up, that debt has to be sold again, sopping up the excess money supply to avoid inflation. In effect, this will increase the public debt relative to the total debt.
It is pretty clear that the authors of this chart have not assumed any selling of debt from the Fed balance sheet. The Fed holds about $2 trillion in assets more than it held before the financial crisis, so that selling these into a recovery would increase the public debt as a percent of GDP by 12 points. In fact, I don't know how they get the red line dropping like it does unless they assume the current QE goes on forever, ie that the FED continues to sop up a half trillion dollars or so of debt every year and takes it out of public hands.
This is incredibly unrealistic. While a recovery will likely be the one thing that tends to slow the rise of total debt, it may well force the Fed to dump a lot of its balance sheet (and certainly end QE), leading to a rise in public debt.
Here is my prediction: This is the last year that the Left will insist that public debt is the right number to look at (as opposed to total debt). With a reversal in QE, as well as the reversal in Social Security cash flow, public debt will soon be rising faster than total debt, and the Left will begin to assure us that total debt rather than public debt is the right number to look at.
So I propose a simple challenge to pave the way to my refutation: Tell me how to sell the abolition of the minimum wage to the typical Feeling American.
I am not sure what makes for a soft head argument, but lots of talk about oppressors and racism combined with argument by anecdote rather than facts felt right, so this was my shot at it:
Bobby is a black teen in Chicago. Since he has just 9 years old, the only way he could support his family and survive in his neighborhood was to join a gang and deal drugs.
After his recent arrest, Bobby wants to go straight, to escape the cycle of crime and violence into which he has become trapped. But no one will hire him without experience. He needs a history showing he can do simple things, like show up reliably to work on time, cooperate with other employees, and interact well with customers.
Bobby would be willing to work for free to gain this experience, to get a toe-hold on the simple skills many of us take for granted. Be he can't. he is barred by law. He cannot legally be offered a job for less than $8.25 an hour, a wage he could one day earn but right now lacks the basic skills to justify.
The minimum wage raises the first rung on the ladder of success higher than Bobby can possibly reach. This is not an accident. Early proponents of the minimum wage in the early 20th century supported it precisely because it protected white workers from competition from blacks attempting to enter the work force. The minimum wage began as, and still is, a tool of oppression,preventing young men like Bobby from gaining access to good employment.
Today, the unemployment among black teens has risen to nearly 40%. This is because the government has been working for years to help older white workers with political clout keep men like Bobby out of the workforce, and the minimum wage is their most powerful tool for doing so.
When I was reporting on Wall Street, I used to be told with some regularity that government was needed to counteract the short-term thinking of the business sector, who never thought much beyond the next quarterly earnings report. This now seems as quaintly adorable as picture hats and daily milk deliveries. An ADHD day trader with a cocaine habit and six months to live has considerably more long-term planning skills than our current congress.
Part of a generally awesome rant
Silver chooses to focus on individuals working in a tight competition and their motives and individual biases, which he understands and explains well. For him, modeling is a man versus wild type thing, working with your wits in a finite universe to win the chess game.
He spends very little time on the question of how people act inside larger systems, where a given modeler might be more interested in keeping their job or getting a big bonus than in making their model as accurate as possible.
In other words, Silver crafts an argument which ignores politics. This is Silver’s blind spot: in the real world politics often trump accuracy, and accurate mathematical models don’t matter as much as he hopes they would....
My conclusion: Nate Silver is a man who deeply believes in experts, even when the evidence is not good that they have aligned incentives with the public.
Distrust the experts
Call me “asinine,” but I have less faith in the experts than Nate Silver: I don’t want to trust the very people who got us into this mess, while benefitting from it, to also be in charge of cleaning it up. And, being part of the Occupy movement, I obviously think that this is the time for mass movements.
Like Ms. O'Neill, I distrust "authorities" as well, and have a real problem with debates that quickly fall into dueling appeals to authority. She is focusing here on overt politics, but subtler pressure and signalling are important as well. For example, since "believing" in climate alarmism in many circles is equated with a sort of positive morality (and being skeptical of such findings equated with being a bad person) there is an underlying peer pressure that is different from overt politics but just as damaging to scientific rigor. Here is an example from the comments at Judith Curry's blog discussing research on climate sensitivity (which is the temperature response predicted if atmospheric levels of CO2 double).
While many estimates have been made, the consensus value often used is ~3°C. Like the porridge in “The Three Bears”, this value is just right – not so great as to lack credibility, and not so small as to seem benign.
Huybers (2010) showed that the treatment of clouds was the “principal source of uncertainty in models”. Indeed, his Table I shows that whereas the response of the climate system to clouds by various models varied from 0.04 to 0.37 (a wide spread), the variation of net feedback from clouds varied only from 0.49 to 0.73 (a much narrower relative range). He then examined several possible sources of compensation between climate sensitivity and radiative forcing. He concluded:
“Model conditioning need not be restricted to calibration of parameters against observations, but could also include more nebulous adjustment of parameters, for example, to fit expectations, maintain accepted conventions, or increase accord with other model results. These more nebulous adjustments are referred to as ‘tuning’.” He suggested that one example of possible tuning is that “reported values of climate sensitivity are anchored near the 3±1.5°C range initially suggested by the ad hoc study group on carbon dioxide and climate (1979) and that these were not changed because of a lack of compelling reason to do so”.
Huybers (2010) went on to say:
“More recently reported values of climate sensitivity have not deviated substantially. The implication is that the reported values of climate sensitivity are, in a sense, tuned to maintain accepted convention.”
Translated into simple terms, the implication is that climate modelers have been heavily influenced by the early (1979) estimate that doubling of CO2 from pre-industrial levels would raise global temperatures 3±1.5°C. Modelers have chosen to compensate their widely varying estimates of climate sensitivity by adopting cloud feedback values countering the effect of climate sensitivity, thus keeping the final estimate of temperature rise due to doubling within limits preset in their minds.
There is a LOT of bad behavior out there by models. I know that to be true because I used to be a modeler myself. What laymen do not understand is that it is way too easy to tune and tweak and plug models to get a preconceived answer -- and the more complex the model, the easier this is to do in a non-transparent way. Here is one example, related again to climate sensitivity
When I looked at historic temperature and CO2 levels, it was impossible for me to see how they could be in any way consistent with the high climate sensitivities that were coming out of the IPCC models. Even if all past warming were attributed to CO2 (a heroic assertion in and of itself) the temperature increases we have seen in the past imply a climate sensitivity closer to 1 rather than 3 or 5 or even 10 (I show this analysis in more depth in this video).
My skepticism was increased when several skeptics pointed out a problem that should have been obvious. The ten or twelve IPCC climate models all had very different climate sensitivities — how, if they have different climate sensitivities, do they all nearly exactly model past temperatures? If each embodies a correct model of the climate, and each has a different climate sensitivity, only one (at most) should replicate observed data. But they all do. It is like someone saying she has ten clocks all showing a different time but asserting that all are correct (or worse, as the IPCC does, claiming that the average must be the right time).
The answer to this paradox came in a 2007 study by climate modeler Jeffrey Kiehl. To understand his findings, we need to understand a bit of background on aerosols. Aerosols are man-made pollutants, mainly combustion products, that are thought to have the effect of cooling the Earth’s climate.
What Kiehl demonstrated was that these aerosols are likely the answer to my old question about how models with high sensitivities are able to accurately model historic temperatures. When simulating history, scientists add aerosols to their high-sensitivity models in sufficient quantities to cool them to match historic temperatures. Then, since such aerosols are much easier to eliminate as combustion products than is CO2, they assume these aerosols go away in the future, allowing their models to produce enormous amounts of future warming.
Specifically, when he looked at the climate models used by the IPCC, Kiehl found they all used very different assumptions for aerosol cooling and, most significantly, he found that each of these varying assumptions were exactly what was required to combine with that model’s unique sensitivity assumptions to reproduce historical temperatures. In my terminology, aerosol cooling was the plug variable.
By the way, this aerosol issue is central to recent work that is pointing to a much lower climate sensitivity to CO2 than has been reported in past IPCC reports.