Greg Mitchell's twitter feed reminds us of Upton Sinclair's 1934 campaign for Governor of California.

Working on Sinclair's campaign, as noted in an article we ran several years ago in NYRSF, was a former Naval Officer in his mid-20s whose career was cut short by tuberculosis: Robert A. Heinlein.

As Mitchell notes:

The champion of all dirty races in this century, in fact, was that 1934 contest. Like Barack Obama, Sinclair led a "change" campaign with masses of new or re-energized voters leading him to an upset victory for the nomination from the Democrats in dire economic times. Like Obama, he was pictured as mysterious interloper. And like Obama, he was labeled a "Socialist."

Well, actually, that was mostly true in his case.

It's always interesting to note that to all the people who say they became "libertarian" because of Heinlein.

McGill University Macroeconomics Comprehension Exam, May 2003, Question 10 (Essay):

The stock market bubble burst in the spring of 2000. The popular pres now talks about a housing bubble, referring to ever rising prices of houses in North America (and elsewhere). They say that if the housing bubble bursts it will have a much more severe effect on the economy. Do you agree? Sketch a model that would capture your argument.

by Bruce Webb

What special holiday falls on March 31st? Yep is is Social Security Report Release Day. Now as I type it turns out that the Social Security Bunny (aka Commissioner Michael Astrue) has not actually delivered his special SS Egg, and gosh who knows, given that we are still in transition from the old Administration and that three of six Trustees' spots are vacant SSRR Day may come late this year.

But just in case it comes today you can get your own copy from the Reports of the Trustees website in either PDF or in paper via paid first class mail. Plus there is an HTML version to which (if file name conventions stay the same) I have linked from my blog 2009 Report: Due March 31st

Update 2: A commenter reports that the release is probably going to come in mid-May. Which seems reasonable and hopefully will allow some adjustments for the bruising data that came in Q4 of last year and Q1 of this one and so get us a better data set. So I have moved the rest of this post below the fold.


The Report has been released as late as May 1st (that was mostly a matter of the Bush Administration trying to pressure the Senate into reconfirming the two Public Trustees for an unusual (maybe unprecedented) 2nd five year term in an apparent effort to keep privatization alive through the next President's first term), but generally it is released without fanfare some time during the course of the day on March 31st.

The contents of the SSRR Day Basket may not be as yummy as those of the typical Easter Basket, if fact they are kind of dry. But I find them pretty tasty. Try it, you might like it.

If it comes before noon PST I'll update this with numbers.

Update: there seems to be some advanced push back. Today the WaPo published this from Lori Montgomery Recession Puts a Major Strain On Social Security Trust Fund: As Payroll Tax Revenue Falls, So Does Surplus which is just a rehash of a piece by Kevin Hassett of AEI for Bloomberg yesterday Recession Bites Into Social Security’s Surplus. What they are doing is using a special definition of 'surplus'. When Social Security surpluses are reported for Unified Budget purposes they include both any cash surplus from taxation plus interest earned on the Trust Fund. That is why people say Social Security was running $200 billion a year surpluses over the last few years. Hassett here is just using cash surpluses and moreover ignoring the fact that almost all the damage is a temporary hit on the DI Trust Fund. And the WaPo as always is just picking up the talking points and pushing them to the broader audience.

Dean Baker will not be pleased. He hasn't posted at Beat the Press yet today, but I suspect Ms. Montgomery is in for a drubbing when he does.

Tom Bozzo

1. Well, duh.

2. In the NYT, William J. Holstein's case for Wagoner should be read as damnation by faint praise. Promoting efficiency and quality improvements is laudable enough, but hardly the sort of vision thing that merits a U.S. CEO salary. Bob Lutz's product-development record is mixed in part due to Lutz's contempt for greenery and faulty assumptions that SUV demands were not price-sensitive, and in more significant part because GM's management was full of pound-foolishness as important product developments (e.g. marketable compact cars) were underfunded when the company more-or-less had money. The company can easily go bankrupt building bulletproof Buick Lucernes. And, troublingly, GM has persisted in future-mortgaging despite the availability of government aid.

3. Nevertheless, my question is, why not the more obvious choice of Chrysler's Robert Nardelli? If GM management has been years late and billions short, Chrysler's Cerberus-hired management has shown no public signs of elementary competence. Where GM's product plans are questionable (Cadillac station wagon?), Chrysler's are an intergalactic void unless you're very optimistic about its ability to bring its electric showcars into production or eagerly anticipating Americanized Fiats. As a major net beneficiary of the housing bubble and poster-child for CEO excesses, Nardelli is perfectly cast for the scapegoat role, not least because he's substantively more deserving of sh*t-canning as Wagoner.

The concern of course is that someone(s) on the Obama team think Nardelli is more deserving of forbearance than Wagoner because of his private equity bosses. I'm not saying that's true, but if it were, then I'd want to play poker against whomever can't see that Cerberus Capital Management has been exploding myths of the power of patient private capital and by most indications wants out.

rdan (re-post)

Perhaps Simon Johnson is correct in his estimation of a captured financial/government combination than is discussed in detail to date. Here is his Atlantic Monthly piece a la IMF perspective...two paragraphs stand out for me on the first page, but explanation goes on for several pages.

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

Dani Rodrik responds and states bankers were not as powerful as Johnson suggests, and the IMF does not have a stellar reputation in some areas regarding policy for emerging economies. He questions whether economists should rule the world as well. (h/t Mark Thoma)

Update: Then again, Pension Pulse has a quote suggesting the word banker is outmoded and limits are changed. (He has two graphs worth reading on pension mix of assets in public pension funds as well. The Mass Teacher Assoc. declared a drop of 29% value, about right for equities. Many teachers were not following the numbers.)

One senior pension industry insider wrote me tonight, telling me the following:
"Just read an interesting statistic that 37% of all private equity capital raised over the last 30 years was raised in the last three years. A giant experiment whose results won't be known for another 5 to 10 years."
A scary thought indeed, and he is absolutely right, we simply do not know how all these billions of dollars into hedge funds, private equity and real estate funds will pan out over the next decade.

Tom Bozzo

Notes with approval that Barack Obama has chosen Ed Montgomery, Professor of Economics and lately Dean of the College of Behavioral and Social Sciences at the University of Maryland at College Park, as "Director of Recovery for Auto Communities and Workers."

The only possible response to this post is here.

Robert Waldmann

JimLuke argues that GM will almost certainly go bankrupt because ...

there may be thousands (perhaps even millions) of seperate bondholders, the vast majority have no voice in the negotiations. Instead, there is a “bondholders’ committee”. Who is on the committee? The “experts” and the large bondholders: primarily banks and bond funds. These banks and bond funds presume to speak for all bondholders. But their interests are not in line with all bondholders. We know that there are very large number of outstanding Credit Default Swaps (CDS) contracts on GM. So who likely holds the CDSs? The very same large banks and bond funds that are negotiating. So, in effect, if GM goes BK, then the bondfunds/big banks are hedged and get full payment via the CDS. If they agree to a restructuring, they get less than full payout. So there’s no chance they’ll agree.

I fear he's right about CDS contracts, that the writer doesn't have to pay the CDS holder if there is a "voluntary" restructuring. The CDS writers aren't on the committee.

update: From comments

JPKK says:
Today, 3:21:07 PM
“Most CDS have a modified restructuring clause in the US, which allows for the delivery/cash settle based on bonds within a window of the same maturity as those that were restructured (principle reduced, payment reduce, maturity extended). The reason for modified restructuring revolves around a case where Household restructured some short debt, but it in no way had an affect on long bonds, but under vanilla restructuring CDS holders were able to delivery long bonds which were discounted due to rate changes.

rdan

NYT shouts out about Wagoner and GM.

Chrysler must merge with Fiat? Wagoner needed to go in my opinion, but so do some of the bankers. When is that to happen?

Perhaps Simon Johnson is more correct in his estimation of a captured financial/government combination than is discussed in detail to date. Here is his Atlantic Monthly piece a la IMF perspective...two paragraphs stand out on the first page, but explanation goes on for several pages.

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

rdan

Good News Economist suggests there is good news that many banks are still lending and were not caught in the crazy markets of sub-prime and CDOs.



The story looks to be more complicated than just mega-banks and credit freezes.

rdan...lifted from comments by Movie Guy

Key points from CBO's analysis of implementing the President's budgetary proposals.

DEFICITS:

"As estimated by CBO and the Joint Committee on Taxation, the President’s proposals would add $4.8 trillion to the baseline deficits over the 2010–2019 period. CBO projects that if those proposals were enacted, the deficit would total $1.8 trillion (13.1 percent of GDP) in 2009 and $1.4 trillion (9.6 percent of GDP) in 2010. It would decline to about 4 percent of GDP by 2012 and remain between 4 percent and 6 percent of GDP through 2019."

"The cumulative deficit from 2010 to 2019 under the President’s proposals would total $9.3 trillion, compared with a cumulative deficit of $4.4 trillion projected under the current-law assumptions embodied in CBO’s baseline."

"CBO’s estimates of deficits under the President’s budget exceed those anticipated by the Administration by $2.3 trillion over the 2010–2019 period. The differences arise largely because of differing projections of baseline revenues and outlays. CBO’s projection of baseline deficits exceeds the Administration’s estimate (prepared on a comparable basis) by about $1.6 trillion."

TAXES:

"Proposed changes in tax policy would reduce revenues by an estimated $2.1 trillion (or 6.1 percent) over the next 10 years."

"The proposals with the greatest effect on the budget include modifications to and the permanent extension of provisions of the 2001 and 2003 tax legislation (EGTRRA and JGTRRA); extension of the Making Work Pay tax credit; indexing of the exemption amounts for the AMT; implementation of a cap-and-trade program to reduce greenhouse-gas emissions; and limits on itemized deductions."

EXPENDITURES:

"Proposed changes in spending programs would add $1.7 trillion (excluding debt service) to outlays over the next 10 years, an increase of 4.4 percent above baseline levels."

"Outlays for refundable tax credits, higher spending for payments to physicians under Medicare, and increased discretionary spending for a variety of annually appropriated programs account for the bulk of those changes."

DEBT SERVICE:

"Debt held by the public would rise, from 41 percent of GDP in 2008 to 57 percent in 2009 and then to 82 percent of GDP by 2019 (compared with 56 percent of GDP in that year under baseline assumptions)."

"Interest costs associated with greater borrowing would add another $1.0 trillion to deficits over the 2010–2019 period."

Two other links include OMB budget 2009 and OMB on CBO's New Numbers

guest statement by Movie Guy:

The real problem with the President's budget proposal falls within the deficit projections for FY2013-19. Simply stated, the deficit numbers are headed in the wrong direction.

The burden of responsibility for government funding will shift to the Congress once the FY2010 budget is adopted in legislation (whatever final product is rendered). But, at this time, the problem exists with the outyear deficit projections put forth by the President and his Administration.

The President has not put forth a sustainable set of budget proposals through 2019.

The deficits projected for 2013-2019 are the problem.

(Update by BW. I have added the respective tables first from the OMB original release and then the CBO's Preliminary Analysis to allow some side by side comparison of economic projections)

OMB Table S-8

CBO Table 2-6

Robert Waldmann

Due to a snarky suggestion from sammy, I actually read this pdf fact sheet from the Treasury about the Geithner plan (thanks again sammy). It was much less bad than I thought.

Although he doesn't like to disagree with Krugman, Maynard at Creative Destruction makes this argument (much more briefly and clearly than I will here).

The problem with this [Krugman's] example is that it assumes that each loan guaranteed by the FDIC is used to buy a single asset that either defaults or pays in full. ... But in fact the Treasury’s plan, as I understand it, is for PPPICs to bid for pools of loans/securities held by banks. The FDIC loan guarantee will apply to the pool rather than the original loan. The PPPIC will only default on the loan if the value of the pool turns out to be considerably less than the purchase price (specifically, less by the amount of the firm’s capital investment).

For me a chance to disagree with Krugman is a rare pleasure. I also had a blast disagreeing with Brad DeLong on the same issue. That means I am ... consistency is the hobgoblin of small minds.


Now disagreeing with Ken Houghton, now that is scary (don't let it go to your head Ken its partly that Krugman won't bother with me). Gulp. here goes (after the jump).

update: Citizen K is on the case too.



The Geithner plan as described in the official fact sheet is much less bad than I thought. In particular there are 3 programs (including Talf II the legacy).

The program which involves the FDIC, provides a large no recourse loan to buy pools of loans. The FDIC must approve the pool. The the pool is auctioned, then the FDIC decides how big a loan to make (if any).

The FDIC can (try to) protect its trust fund by not allowing pools with (predictably) huge variance. FDIC bosses do not want to have to go to congress to beg for a top up of the fund (I think that's putting it mildly). I now think the delay in the roll out may have occurred because the FDIC demanded better tools to protect itself (my old theory was that Warren Buffett demanded that the FDIC get worse tools to protect itself -- hobgoblin etc).

Now if the pools were pools of same rated tranches of similar pools of tranches of etc, the Krugman Sachs scam would work. But the FDIC can just say no. I have the impression that the pools which come with a huge FDIC donated Geithner put are supposed to be pools of loans -- first order toxic. To me the PDF isn't clear on whether pools of higher order toxic waste are eligible, but it is clear that the FDIC must agree.

The higher order toxic waste (or junk too toxic for the FDIC) is to be bought in a separate Treasury program in which private partners have to put up at least a third of the money and the Treasury has at least half of the equity. This reduces the value of the Geithner put. In fact letting private partners cut off the losses at the investment losing 2/3 of purchase price might be a reasonable correction for the fact that private partners are risk averse and the Treasury is, or should be, risk loving (if things tank worse than we expect we *want* a larger than planned budget deficit).

So maybe maybe not so bad. I'd say that the banksters have further hard lobbying to do at the FDIC to get a huge handout, so it's not time for dispair (yet).

Disclaimer: Brad DeLong has authorized me to post quotations from Keynes and Orwell on his site. This post is not pay back. Honest.

By Stormy

As more and more people understand how great wealth is garnered and protected, they will understandably seek ways of ensuring that all pay their fair share. Multi-million dollar bonuses and salaries that escape real and significant taxation place undue burdens on the rest of us. The OECD estimates that between $1.7 trillion and $11.5 trillion is now held in tax havens. That the estimate has such a wide range reflects how little we understand of just how much wealth is there: There is no transparency.

It is interesting to note that the rise of tax havens corresponds with falling taxation rates on the very wealthy. In fact, as the following graph and discussion will demonstrate, the number of tax havens significantly increased after tax rates had fallen. While I do not wish to draw a causal relationship, I do wish to point out that the last three decades have been in control of those with the greatest wealth. Until we start to address the issues surrounding great wealth, we will never create a more equitable society or civilization.

A top marginal rate of 90% is not out of line. Consider the following historical graph of top marginal rates.

During the Great Depression top marginal rates climbed dramatically, rightfully reaching their zenith during WWII. In response to 9/11, we of course cut rates precisely at the moment we were fighting wars on two fronts. Bush Junior told us that going to the mall was the best way to confront Bin Laden. Easy credit and consumer spending was our shared responsibility, I guess. Business thrived; the wealthy got wealthier and Saddam Hussein was punished for not having weapons of mass destruction: All was right with the world.

Now consider the period from 1950 to 1980. During the Civil Rights Movement, top marginal rates remained high (over 70%): It was a period of rising expectations and prosperity. The slight blip upward was our response to the Vietnam War.

Between 1980 and 1990, top marginal rates fell dramatically. Trickle down had taken hold. Here things become interesting. During the 1980's, tax havens proliferated. In 1984, the International Business Companies Act became a statute of the British Virgin Islands, a response to the U.S. repeal of double taxation with microstates, specifically tiny island nations. This act was replicated elsewhere. To understand its popularity, consider its popularity in the British Virgin Islands. [Source: British Virgin Islands via Wikipedia.]



Tax havens proliferated beyond the Virgin Islands. While the IBC was eliminated in 2006, subsequent laws have not curbed tax havens. As the OECD states, the amount of money now held in tax havens is considerable and unknown. Suppose it is $115.5 trillion?

Nonetheless, we can draw some conclusions. High top tax rates did not create tax havens.

Many will argue that tax havens arose as a response to high taxes. Tax havens came into play after top rates had fallen significantly. To argue that 50% tax rates or higher--say 70% or even 90%--forced the wealthy to go elsewhere is not exactly persuasive.

Others will argue that lower tax rates were a response to the growth of tax havens. That argument has slightly more merit, although I find it still weak.

Tax havens, however, grew fastest when taxes were lowest. I would argue that for the very rich, enough has never been enough.

Money has gone elsewhere despite lowering tax rates. Slick money handlers, slimy tax havens, and piggy politicians that cannot keep their snouts out of the lobby gravy train have seen to that.

We talk endlessly about the impoverished poor, about the promise of globalization. Here in the U.S., we talk endlessly about what do about those losing their jobs and those with no health insurance. We worry about the enormous debt we are creating, while we do everything we can to insure that those who have made that debt inevitable keep their cash, their plush hide-a-ways.

We worry and fret about how we should approach those with obscene amounts of money. Do we dare raise their taxes? Will we offend them? Will we be accused of trampling on the divine entrepreneurial spirit? Does not every individual have the right to amass billions? Hell, no. Every billionaire has countless little people to thank. He sits upon a mountain of struggling poor--top dog, indefinably noble, a testament to the principle we seem to hold dear: Greed.

Here is the taxation principle I would propose: No one should walk away with more than one million dollars a year after taxation. I think one million is more than generous. Money garnered from these silk purses would go a long way towards creating a more equitable world. Ask the world's poor who now rummage through the world's garbage heaps for a bit to eat or something to wear.

Oh, I am so un-American! Frankly, my dear, I don't give a damn.

We have serious problems ahead--and the monstrous inequities in wealth that now cancer the planet will explode as we face global warming, resource depletion, rising seas, and ever-growing pollution. Rest assure, those with great wealth will build their mountain retreats while the rest of us scramble. We are facing a threat greater than any world war. If we do not confront it directly, then the show is over. We do have resources. Unfortunately, we are sadly lacking in will and moral stature.

rdan




The following is the meme on the deficits for many Republicans. I do not recall any CBO thoughts being quoted so forcefully and completely on the budget by a Republican...or even mentioned much...in years. Supporters are tossing out the meme, usually with no numbers or per centages and a comparison. Prove it Mr. McCain, don't just spit it out. There have been a lot of experiments since the 70's.

Of course such spending is unsustainable...everyone knows that. How does one deal with today, post TARP? Our Republican friends toss out warnings and hope something sticks? What are they tossing...mud, hopefully.

Time quotes McCain on the new budget:

“The Congressional Budget Office report proves that the Administration has indeed engaged in a policy of generational theft,” said Senator John McCain. “The CBO numbers show the reality of the fundamentally flawed assumptions of the President's budget and make clear what it really is: a risky, debt-ridden threat to the Nation. The CBO's report projects deficits of over $2 trillion higher than what the White House predicted.”

“This staggering deficit threatens our children's and grandchildren's future and simply cannot be sustained,” continued McCain. “If the Administration had learned anything in the last week, I would have hoped that it was that the American people deserve an honest accounting of what they're paying for. The profligate spending spree the Congress and Administration has been engaged in must be controlled. I call on my colleagues on both sides of the aisle to chart a different course toward real change and fiscal responsibility.”

Update 2: Bruce Webb says "Considering that just about $1.2 trillion of FY 2009 debt was accrued on Bush's watch a fair reading of the CBO chart is that Obama would have exactly one year higher than Bush's highest." in comments.

Update: This is a graph from the CBO analysis:

Robert Waldmann

This post about a post by Matthew Yglesias was, in part, motivated by a post by Ezra Klein on how he should't care how many comments a post gets.

I have noticed that posts with titles including either "soak the rich" or "Social Security" get lots of comments. I don't want to horn in on Bruce Webb's turf (and besides he knows what he is talking about) so if another post of mine gets 0 comments, I think I will just entitle an open thread "Soak the Rich."

I mean what was wrong with it ? It even had a (trying to be) funny title. You kids do remember the advertising slogan for Jaws II ("just when you thought it was safe to get back in the water" a perfect canonical brilliant wonderful use of illogic in the service of commerce) don't you ?

by Bruce Webb

Social Security is typically discussed in static terms, that is it 'will' or 'is projected' to get to this state or that at some fixed point in the future. This I think is an artifact of 'crisis' being seen as the result of a known fixed event, namely Boomer Retirement. And it is certainly true that what was until recently the largest demographic cohort in American history is scheduled to retire between now and 2031. That is we know the wave is going to crash the only question is how rough the surf is going to be when it does.

It is this sense of inevitability derived from a fixed or static event that has led us to decision making drawn from 'will' rather than 'if'. But in actuality Social Security is not fixed in stasis by the demographics, it is instead a dynamic system on any number of axes and should be studied as such in our search for proper policy choices.

One dynamic axis is that of Report time, in that the projected outcomes vary from Report year to Report year. If the crisis was really a static one fixed in place by the demographics you would expect that any year of inaction would make the ultimate gap between cost and income that much harder to fill and/or make the onset of the gap be sooner than projected. This is turn would lead naturally to assertions like 'sooner is better than later' and 'the longer we wait the greater the shock treatment needed'. And indeed this was the actual outcome of Report Years 1993 to 1996, Trust Fund depletion came ever closer in time and the cost of the fix needed continued to rise. But a funny thing happened starting in 1997, the arrow reversed and TF depletion started retreating back in time and the cost of an immediate fix started to shrink. Suddenly what had been a crisis fixed by demography became a dynamic system. Which should have changed the analytical question from 'what should we do' to 'why is it moving the way it does' and more importantly 'can this go on'.

That analytical shift never seemed to happen, to the extent that anyone even noticed the reversal it tended to be seen just as variation around the known result of Boomer Retirement, because whatever the numbers showed Boomers were not getting any younger. But for those who chose to ask the 'why' and 'can' question the result was kind of stunning. Social Security was not static at all, its outlook changed depending on particular projections that varied dynamically not only within each Report but between them. 1997's Intermediate Cost alternative was not necessarily identical to 2000's which in turn were not those of 2004. Once you break through the idea that you are fundamentally facing a static crisis fixed by the demography you end up open to some new analytical avenues.

One is just to examine the various projections in sequence, what caused the 1998 result to be so much better than the 1997, why did you get the deterioration between 2005 and 2006 Reports and the improvement between the 2007 and 2008? Are these movements just variations around a trend line firmly aimed at crisis or is the trend line pointing somewhere else? And the answers to these questions show that the SSA's Office of the Chief Actuary is wrestling with a live system where the inputs never quite come in exactly as expected and the assumptions remain open for modification. For example there was a change in projected depletion date from 2034 to 2037 between the 1999 and 2000 Reports with a corresponding drop in cost of an immediate fix from 2.02% of payroll to 1.92%. On inspection the cause of this dramatic change was a big change in input from actual 1999 economic performance, future numbers were if anything moved in a more pessimistic direction. Which is to say that 10% of 'Crisis' simply vanished and I might add never really came back. Further dynamic movements in inputs and assumptions have moved that date to 2041 and the payroll gap down to 1.7%. (And we can expect the marked slump in receipts first visible in early Fall to move those numbers at least slightly the other way).

More analysis of the dynamic (if not dynamic analysis) below the fold.

Once you break free of the stasis you are free to examine the dynamics of Social Security from several perspectives. One is the diagnostic, what caused the models to move in the first place? And is this improvement likely self-sustaining, i.e.will the patient simply get better on its own? Or is the improvement simply transitory with a reversion to full blown crisis ahead? Or perhaps the improvement is real but plateaued, just leaving us with a smaller problem perhaps requiring a different fix? Alternatively you could take a pro-active stance. Having learned that the models can move and having determined why they moved are there steps we could take to assist that movement?

All of these questions come almost automatically once you make the shift from a static projection of demographic crisis to a dynamic projection taking in all the moving parts and determining which ones are moving on their own and which need some exterior push. But it all starts with noticing that the system is moving at all.

Back in 2000 the answer to these questions was pretty easy. From 1997 to 2000 the Reports had significantly under estimated near term growth, moreover then wise men like Greenspan were busy assuring us that these growth rates were totally sustainable, that we could crank out 3% productivity forever. Which if true meant that there would be no Social Security crisis at all, if anything that meant the system was over-funded going forwards and the real discussion should be the amount of timing of FICA tax cuts. Well much of the bloom went off that particular rose when productivity crashed in Q4 2005 and with it stalled the steady improvement in outlook we had experienced right through the Spring of that year (which in retrospect explains the ease of the victory of the ' There Is no Crisis' pushback on the Bush plan). And flashing forward to today is truly sobering, recent numbers show OAS having stalled and DI actually in retrograde. (Biggs has the February numbers in his post Slowdown Slashes Social Security Surplus and they are not pretty). On the other hand the 2009 Report is due out next week and so will give us a new moving target to examine.

(And speaking of moving target it will be very interesting to compare the GDP projections in the Social Security Report to those in the Budget to those in the CBO analysis of the Budget. The 2008 Report had Intermediate Cost projecting 2.3% Real GDP by 2017 and never improving from there over the actuarial window, while Low Cost had Real GDP at 2.8% with ultimate 2.9% long term. My bet is that we will end up splitting the difference.)

Much of the typical argumentation around Social Security was formed in place via a snapshot of where the system was at the time, typically from the early 1990's when the projected collision of 'deficits as far as the eye can see' and Boomer retirement set up a fairly grim scenario. For example people often point out that Krugman was fairly pessimistic about Social Security in 1996. Well he had a right to be concerned the dynamics of SS from 1993 to 1996 were awful. But the earth moved under his feet by 1999 Baker and Weisbrot were fully justified in calling it a Phony Crisis, and this was still true in 2004. Given the totality of what we knew then and the Bush Administrations own projections of economic growth from his tax cuts there simply was no crisis at all. And there still isn't, not really, even the big shock of the current recession/depression will probably be weathered fine by Social Security. But the situation is fluid, it is dynamic and needs to be discussed in those terms. We need to shelve the 'will be' and embrace the 'may be' and the 'if so'.

(To anticipate some commenters. The current deficits projected for the next decade don't create the same scenario as those of the late eighties, early nineties because the date of TF depletion has been time shifted forward in time in a way that is irreversible, it has now more or less been disconnected from the point of maximum Boomer strain on the system rather than coinciding with it as it used to project).

rdan

Associated Press carries some news on our perceptions and priorities. Now who HAS the money for more drugs...especially cocaine? Oh the irony!

CHARLESTON, W.Va. – Want government assistance? Just say no to drugs.

Lawmakers in at least eight states want recipients of food stamps, unemployment benefits or welfare to submit to random drug testing.

The effort comes as more Americans turn to these safety nets to ride out the recession. Poverty and civil liberties advocates fear the strategy could backfire, discouraging some people from seeking financial aid and making already desperate situations worse.

Those in favor of the drug tests say they are motivated out of a concern for their constituents' health and ability to put themselves on more solid financial footing once the economy rebounds. But proponents concede they also want to send a message: you don't get something for nothing.

"Nobody's being forced into these assistance programs," said Craig Blair, a Republican in the West Virginia Legislature who has created a Web site — notwithmytaxdollars.com — that bears a bobble-headed likeness of himself advocating this position. "If so many jobs require random drug tests these days, why not these benefits?"

Blair is proposing the most comprehensive measure in the country, as it would apply to anyone applying for food stamps, unemployment compensation or the federal programs usually known as "welfare": Temporary Assistance for Needy Families and Women, Infants and Children.

Lawmakers in other states are offering similar, but more modest proposals...

Update: PGL writes about some of this in 2006 here

A heartfelt congratulations to the United State of Georgia (from whose namesake "University of" I got my Finance MBA), which today passed California in the battle for Most Failed Banks (9 v 8) in the past year.

In fairness, California did not have a failure until July, while Georgia waited until August.

The two states have been running virtually neck-and-neck, but Georgia's third failure of this month, and second in two weeks, allowed it to close the month with the overall lead.

In other news, those who are still foolishly holding out the hope that p*ss*ng away several Billion more dollars will make The Big C solvent are invited to meet the reality of their asset mix. Or the staid, less optimistic version here (companion text here).

Robert Waldmann

"All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of" [the universe]


Note the placement of the close quotation mark and no peeking please.



Adam Smith (1776) "The Wealth of Nations." Book III Chapter 4.

Robert Waldmann

Non-Standard Monetary Policy

Robert Lucas on Non-Standard Monetary Policy 2008

A dead end? Not at all. The Fed can satisfy the demand for quality by using reserves -- or "printing money" -- to buy securities other than Treasury bills. This is the way the $600 billion got out into the private sector.

This expansion of Fed lending has not violated the constraint that "the" interest rate cannot be less than zero, nor will it do so in the future. There are thousands of different interest rates out there and the yield differences among them have grown dramatically in recent months. The yield on short-term governments is now about the same as the yield on cash: zero. But the spreads between governments and privately-issued bonds are large at all maturities. The flight to quality means exactly that many are eager to trade private paper for non-interest bearing (or low-interest bearing) reserves and with the Fed's help they are doing so every day.

Maynard Keynes on Non Standard Monetary Policy 1937

If the monetary authority were prepared to deal both ways on specified terms in debts of all maturities, and even more so if it were prepared to deal in debts of varying degrees of risk, the relationship between the complex of rates of interest and the quantity of money would be direct. The complex of rates of interest would simply be an expression of the terms on which the banking system is prepared to acquire or part with debts; and the quantity of money would be the amount which can find a home in the possession of individuals who — after taking account of all relevant circumstances — prefer the control of liquid cash to parting with it in exchange for a debt on the terms indicated by the market rate of interest. Perhaps a complex offer by the central bank to buy and sell at stated prices gilt-edged bonds of all maturities, in place of the single bank rate for short-term bills, is the most important practical improvement which can be made in the technique of monetary management.

Ben Bernanke (2009) is following their advice.

I'd say that, when Robert Lucas and Maynard Keynes agree, they probably have a point.




Of course there is a counter-argument, based, in large part, on the key question of the Central Bank's inability to pre-commit to the optimal policy rule (known as dynamic inconsistency)

The short-term rate of interest is easily controlled by the monetary authority, both because it is not difficult to produce a conviction that its policy will not greatly change in the very near future, and also because the possible loss is small compared with the running yield (unless it is approaching vanishing point). The the long-term rate may be more recalcitrant when once it has fallen to a level which, on the basis of past experience and present expectations of future monetary policy, is considered “unsafe” by representative opinion.

[snip]

Thus a monetary policy which strikes public opinion as being experimental in character or easily liable to change may fail in its objective of greatly reducing the long-term rate of interest, because M2 [speculative demand for money not what we call M2] may tend to increase almost without limit in response to a reduction of r [the nominal interest rate] below a certain figure. The same policy, on the other hand, may prove easily successful if it appeals to public opinion as being reasonable and practicable and in the public interest, rooted in strong conviction, and promoted by an authority unlikely to be superseded.

J. Maynard Keynes 1937

And what does Prof. Lucas have to say to that ? A mere $ 1 trillion many not be enough to move long term interest rates below the rate which market participants consider normal. Lucas is making rapid progress, so he might catch up with Keynes 70 years ago some day.

Robert Waldmann

The Kid has dropped his mask (he's been hinting at this for years but ... 95% !!!!)

What if we had a 95 percent marginal tax rate on income over $10 million? What dire consequences would flow from this? Perhaps a certain outflow of top-flight baseball talent to Japan. But I don’t see this leading to any kind of economic calamity. Producers of certain classes of supply-constrained luxury goods would lose out as their prices go down. But my strong suspicion is that at the end of the day most of the super-rich would ultimately find it a relief to get off the treadmill of status-competition and the not-quite-so-rich would be thrilled to see their betters cut down to size.

I’m prepared to be talked out of this view if Brad DeLong or someone can really lay it out for me, but I don’t see it for myself. If anything a de facto cap on compensation would probably make firms better-managed.

OK look a 95% tax might be OK, but it is not acceptable to say that Brad DeLong is the only economist worthy of debating Matthew Yglesias (I mean the only one worth naming. I mean that shows disrespect for Paul Krugman himself).

I must object.

update: In 1936 J Maynard Keynes responded to M Yglesias

Since the end of the nineteenth century significant progress towards the removal of very great disparities of wealth and income has been achieved through the instrument of direct taxation — income tax and surtax and death duties — especially in Great Britain. Many people would wish to see this process carried much further, but they are deterred by two considerations; partly by the fear of making skilful evasions too much worth while and also of diminishing unduly the motive towards risk-taking,

Click the link to find Robert Waldmann making the same 2 arguments in the same order (but with many many more wasted words) in 2009. I promise I was not consciously following Keynes.





But first I note that another benefit is that a progressive tax punishes volatile income as in a huge bonus this year then no job because the firm is bankrupt next year. It increases risk aversion (by penalizing variance). This also means it penalizes short termism. Also a bit more risk aversion would have been nice no ?

I think the problem with 95% tax rates is not that they reduce incentives to work. I mean after the first 30 million or so, I don't think that the point is having the money as opposed to getting the high score in the money game.

The problem is that they make tax avoidance schemes profitable. Fatcat CEOs play two games -- who can get the most out of shareholders and who can pay the least to the IRS.

The second game is a total waste of time and energy.

update: Now I have a thought. Many tax avoidance schemes (not to mention tunnels that is semi legal embezzlement schemes) require fat cat managers to also be in business on their own account (for example owning a firm that owns a structure and subtracting depreciation so the firm has negative profits and then a huge capital gain when the structure, which hasn't really depreciated, is sold). How about conflict of interest rules for the top 5 officer of publicly traded corporations which require them to have no other income other than compensation from the corporation and Tresury security interest on their wealth ? I'd say that eliminating conflict of interest is a worthy goal in itself *and* that this would make tax avoidance very difficult.

Another problem is that we really like start up entrepreneur types who take huge risks. They are motivated partly by the hope of huge rewards. They are probably about as rational as the average lottery ticket buyer, but their crazy optimism is socially useful. I wouldn't want to tax their winnings over 1,000,000 at 95% (for one thing they would otherwise reinvest them in their promising but liquidity constrained firms).

So tax the hell out of way overpaid employees, but leave super successful small (but getting big fast) businessmen alone ? Uh Uh, I'd guess that the fat cats will redefine themselves as freelance management consultants.

The problem with taxing at 95% is that defining the tax so that it doesn't have loopholes is impossible (if a loophole is worth millions per year per client lawyers will find one).

So, in the end, I'd support at 75% tax, but 95% seems a bit too high.

rdan

Jeffrey Sachs at Huffington Post has a good take on Geithner and Summers as well.

by reader coberly


SOCIAL SECURITY: RETURN ON INVESTMENT

We often hear claims that the "rate of return on investment" of Social Security is less than what a person could realize by investing "in the market." So much so that some authors claim that Social Security has created a "legacy debt" that amounts to a "backward transfer" of wealth from future generations to past generations.

This claim is as bizarre as it sounds. No future taxpayer will be giving money to his long dead grandparents. But it is also fundamentally wrong headed. Social Security is not an investment club in which returns paid to some subscribers result in less money available to earn interest to pay other subscribers. Social Security is an insurance policy, and the costs and "returns" of an insurance policy must reflect the real world costs of the insured event. They cannot be a simple expression of an arbitrarily chosen interest rate.

Calculations of "rate of return" usually leave out important complications like fees, taxes, inflation, and market variations. And they never refer to the insurance function whereby Social Security protects you from disability and your family from your early death. And no consideration whatever is given to the accidents of health or employment that could leave you unable to save enough through market investments to pay for even a marginally adequate retirement.

And finally, these comparisons always ignore the fact that as an insurance policy, there is no one "rate of return" that adequately describes the facts of Social Security. My purpose here is to make a beginning to addressing that lack of understanding. Ultimately there are too many complications for a short essay to address all the possibilities, but here is a start:

RESULTS
I'll explain the method below, but here are the results.

An employee earning a below average wage of 26000 per year (adjusted for inflation and average real wage growth), in order to get the benefits Social Security will guarantee to him and his wife, would have to invest his 6.2% payroll tax and get a steady 12% return on investment per year every year above taxes and fees.

That same employee without a wife would have to get 10%.

A self employed person, investing the entire 12.4% payroll tax, would have to get 8.5% if married, 6.3 % if single.

An employee earning the average wage of 44,000 per year, adjusted, would have to get 10.4% married, 8.5% single; self employed married 6.7%, self employed single 4.5%.

An employee earning 70,000 per year, adjusted would have to get 9.2% married, 7.3% single; self employed married 5.5%, 3% single.

METHOD

I assumed an average wage equal to the "average wage index" given in Table V.C1, page 98 of the 2007 Trustees Report, for each year from 1975 through 2009. This is nearly equivalent to starting at $8600 per year in 1975 and increasing 5% each year after that. For the low wage worker, I assumed 60% of the average. For the high wage worker I assumed 160% of the average. In each case I assumed an investment each year equivalent to either 6.2% of the wage for "employee" or 12.4% for the self employed.

I calculated benefits based on the average adjusted wage, which is the same as the final wage in this exercise, using the bend points in Figure V.C1, page 100 of the 2007 Trustees Report. I assumed the retiree would be able to buy an annuity using all of his savings plus return on investment calculated above. I assumed that annuity would earn 8% and pay the Social Security calculated benefit plus 3% inflation adjustment each year for a life expectancy of 15 years following retirement. I assumed that a married retiree would receive an extra 50% spouse allowance.

DISCUSSION

Since I looked at only the required 35 years for the Social Security calculation, some would argue that I neglected the money the employee would have earned, and paid taxes on, over a greater number of years. On the other hand, since early wages tend to be lower in relation to the average wage than later wages, by holding the wage constant, as a function of the average wage, I very likely overestimated the earnings from the early years, those that would have the greatest increase due to compounding. I did not count wages earned by the spouse, but neither did I count taxes and fees, possible inflation surges and market dips. Nor did I consider that actual life expectancy is even now somewhat longer than 15 years after retirement.

The largest source of contention, I suspect, would be whether or not the employer's share of Social Security taxes would be available for the employee to invest if there was no tax. My view is that while it is reasonable to guess that they would be, obviously for the self employed, probably for high earners with bargaining power, or unionized employees with bargaining power, it is extremely unlikely they would be for low wage workers who have no bargaining power. And it is even more unlikely that if those taxes magically turned into a 6% wage hike for the low wage earner, that he would save and invest them. A worker making 400 dollars per week is not going to invest 50 dollars on the market even if you give him a 25 dollar raise. In any case according to the law, and in historical fact, the employer's share does NOT come out of the employee's earnings. I prefer to deal with reality rather than the woulda shoulda coulda of even the best economists' imaginations.

And the whole point of Social Security is to provide retirement security for those workers who, for whatever reason, end up after a lifetime of work without enough money saved to pay for a retirement that includes a roof and groceries. Since this could be you... even now... if you are currently enjoying high expectations, instead of obsessing about what you "could have" earned "if only," let me suggest you pour a glass of good wine and rejoice that you are going to at least get your money back adjusted for inflation. And all in all it is better to pay a little for insurance you don't "need" than to not pay for insurance you end up wishing you had. In fact, if the universal mandatory automobile insurance requirements are a guide for thinking, there is some reason to suppose that it is better for you that other people have insurance, even if you yourself will never need it.

CONCLUSION

A low wage employee with a stay at home wife would have to get more than 12% "rate of return" from investing his Social Security tax to get the same retirement income that Social Security guarantees him. This is based on current tax and benefit schedules and historical data that reflect roughly a 3% inflation rate and a 2% real income growth. An unmarried, self employed, average earner would have to earn 4.5% every year on his savings of 12.4% of his income in order to get the retirement income that Social Security guarantees him. The rate of return is highly dependent on income level, with rates of return being much higher for people whose lifetime earnings fall below average. But even a single, self employed, high earner will at least get his taxes back adjusted for inflation. Social Security is insurance, not an investment, but its "rate of return" is quite competitive with real world investments.
_____________________
by reader coberly

by reader Noni Mausa

Title: Going into Shock

Subhead: Some economic metaphors seem more appropriate than "tighten your belt."

Explaining economic realities and their likely solutions can be made a lot easier with the judicial use of well-understood metaphors. Unfortunately, these tools can be also Used for Evil, or at least Confusion.

In times of economic catastrophe like these, one of the common metaphors is that, when times are bad and money is scarce, people, nations, and businesses need to "tighten their belts." The idea is that since the ordinary household cuts back and saves money and puts off Johnny's new bicycle to next summer, therefore it makes just as much sense for America to stop spending and put off her bicycle to next summer.

In this case, a different metaphor seems more appropriate. Compare the economic body to a human body going into shock.


A detailed description of shock [link http://en.wikipedia.org/wiki/Shock_(circulatory) ] makes it clear that it's no minor ailment. Shock is a killer -- not a psychological event but a string of chemical processes which lead to organ failure and death if not interrupted.

Like all biochemistry, it's pretty complicated. The commonest form of shock is called hypovolemic shock -- that is, shock due to loss of blood volume, often from serious accidental injury, stabbing, gunshot, or hemorrhage.

In sequence, the inadequate blood volume leads to loss of oxygen and nutrients to the cells. This leaves the cells trying to keep themselves going by using other energy sources which have toxic byproducts. Soon, breakdown of the cell membrane and failure of the sodium pump follows, leading to a bodily release of digestive enzymes, which releases more toxic substances into circulation. Eventually capillary damage and generalized cell death follows -- that is, the patient dies of pervasive metabolic poisoning and organ failure.

It seems to me that the sudden loss of circulatory volume to the economic body is having much the same effect on the interconnected and mutually dependent nations of the world.

So, how is shock treated? By telling the patient to "snap out of it" and tighten his belt? Hell no. The article goes on:

In the early stages, shock requires immediate intervention to preserve life... The management of shock requires immediate intervention, even before a diagnosis is made. Re-establishing perfusion to the organs is the primary goal through restoring and maintaining the blood circulating volume ensuring oxygenation and blood pressure are adequate, achieving and maintaining effective cardiac function, and preventing complications....

(Sounds a bit like a stimulus package, doesn't it?)

In hypovolemic shock, caused by bleeding, it is necessary to immediately control the bleeding and restore the casualty's blood volume by giving infusions ... Regardless of the cause, the restoration of the circulating volume is priority. As soon as the airway is maintained and oxygen administered the next step is to commence replacement of fluids via the intravenous route.

...Vasoconstrictor agents have no role in the initial treatment of hemorrhagic shock, due to their relative inefficacy in the setting of acidosis, and because the body, in the setting of hemorrhagic shock, is in an endogenously catecholaminergic state. . Definitive care and control of the hemorrhage is absolutely necessary, and should not be delayed.

Roughly this last paragraph says : "...trying to raise blood pressure by administering drugs that constrict blood vessels doesn't help prevent the ongoing release of metabolic poisons..." (I confess I don't have a clue as to what the "endogenously catecholaminergic state" has to do with it -- or even what it is.) Anyway, to carry on:

Regardless of the cause, the restoration of the circulating volume is priority. As soon as the airway is maintained and oxygen administered the next step is to commence replacement of fluids via the intravenous route.

As I see it, capillaries are local communities, smaller businesses and civic governments, the large organs skirting failure are states, nations and large financial and business organizations, and the cells are the struggling people themselves.

Telling them to tighten their belts is to accelerate, not ameliorate the situation. Urgent action is indeed necessary, lest the toxic byproducts of social malfunction build up further, to destroy the very people and institutions that make up a healthy body politic. A transfusion and an IV drip, not a balanced budget, is the approach of choice right now.

So what else is new?

In several hearings this month, members of Congress said they believed the derivatives had often been used to speculate, not to manage risk. They have expressed outrage that A.I.G.’s trading partners got 100 cents on the dollar for their money-losing trades when ordinary Americans paying for the bailout have suffered big losses in their 401K accounts and other investments.

Some have also been dismayed to learn that taxpayer money had ended up bailing out foreign banks. Some of the biggest beneficiaries of the bailout of A.I.G. were banks in Europe, including Societe Generale of France and Deutch Bank of Germany, each of which received nearly $12 billion, Barclays of Britain, which received $8.5 billion, and UBS of Switzerland, which received $5 billion.

Of course, Merrill Lynch, Goldman Sach, and JPMorgan got paid as counterparties through public funds to AIG.

Deeper yet, what did the FED, Bernake, and Paulson and Geithner know and when did they know it?

They have been playing this game for quite a while. If they are surprised, they are collectively incompetent. If they knew, they are culpable. And now Geithner wants sweeping authority over hedge funds. Hard not to be cynical here. I want to know precisely what he is going to do when the government seizes control. Specifically, let's see some concrete guidelines for renegotiating employee contracts and counterparty contracts. Is the government going to pay off those counterparty contracts? Deep six those contracts, I say.

And while we are asking questions, how does the Geithner plan handle credit default swaps? We have talk of toxic assets; no talk of credit default swaps. And if private investors are going to buy toxic assets, will they shoulder any real risk risk? Or is the FDIC going to insure that the real risk is its?

Reality (h/t Dr. Black):

In certain ZIP codes in places like Homestead and Florida City, around 25 percent of the homes are in one stage of foreclosure or another. Countless others were built by developers and sit vacant in ghostly subdivisions, with not a buyer in sight.

In the days after Andrew, then-Dade County Emergency Management Director Kate Hale famously said on national TV: ''Where the hell is the cavalry on this one?''

The same could be asked now, in this new disaster. People in south Miami-Dade -- just like people in foreclosure-strewn cities across the nation -- are wondering: How did we get here?

Fantasy (via The Sports Law Blog):

The stadium did undergo some renovations in 1999 to make it more baseball-friendly, but the Marlins have been drawing low attendance figures. The Marlins averaged 16,688 fans last year, their third straight season averaging under 17,000 per home contest.

As Marc Edelman notes at the link above:

Last year, the Marlins team payroll was just $22 million...by far the lowest in the league. Rather than investing in their own team, Marlins President David Samson often used the threat of keeping a low payroll as part of his strategy in demanding public subsidies.

Miami-Dsde officials, as those from Montreal know well, must be really stupid if they think Jeffrey Loria is going to invest in making the team competitive just because they just wrote him a Very Large Check. Then again, maybe they figure one more vacant property won't make a difference.

This is why we don't believe the bailout will work the way you think it will (i.e., to increase lending):

Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.

Instead of using the bailout monies to lend, or even make their balance sheets more creditworthy, the firms have been doubling-down on the assumption that they will be fellated by Timmeh and Larry. (At least Bill Gross and PIMCO (h/t Robert) did it when there was still a chance of sane monetary policy.)

I take back part of what I said earlier: this isn't comparable to hitting on 17 because you're drunk; it's hitting on 19 because you're desperate and insane. As Barry R. closes:

If anything, this argues against bailouts and in favor of nationalization, firing management, wiping out S/Hs, zeroing out debt, haircutting bond holders, etc.

Some economists may need to spend less time reviewing brilliant analysis from Barry Eichengreen (link is to PDF) and more reviewing Friedman and Savage (link is to PDF) in the context of principal-agent problems.

By Spencer

The updated fourth quarter real GDP revisions really did not have much interesting information.

But maybe the most important data was the release of fourth quarter profits, especially for financial corporations. From the fourth quarter of 2007 to the fourth quarter of 2008 financial corporation profits fell from $370.3 billion to $122.4 billion, or about 66% while total profits only fell 21.5%.

Since their peak in 2002 financial corporations profits have fallen from 41.2% of corporations domestic profits to 26.5% in 2008. But in the fourth quarter of 2008 the share was only 14.1%, back where it was in 1959.




During this bear market financial stocks have fallen from some 22% of the S&P 500 capitalization to 9.8% at the end of February. Since write off are such a large share of the drop in financial corporations profits does financials share of the S&P falling under 10% signal a buying opportunity as it did for tech stocks at the end of the tech wreck?

Challenging question.

Robert Waldmann

The USSR (Union of Serious Socialist Republicans or House GOP caucus) just came out in favor of nationalizing banks.

From their alternative non budget

[O]ur plan supports a process to address insolvent institutions that stops throwing good money after bad into failing institutions and places insolvent ones into temporary receivership. ... For insolvent firms, either the FDIC or a Resolution Trust Corporation-type entity would restructure these firms in receivership by selling off their assets and liabilities, reappointing private management, while protecting depositors -- a process that builds off Washington Mutual's arranged sale last year.

via Elana Schor

Now, if an when the Obama administration gets around to actually nationalizing, they will denounce it as socialist revolution. It won't be anything new for them to contradict themselves. Still good news as far as it goes.

Robert Waldmann

I just read the pdf of Geithner's new regulatory proposal.

Generally pretty mild I'd say.

Geithner is firmly of the view that firms should not be able to pick their regulators. He proposes a new regulator for "systemically important firms (rough definition like Lehman and AIG) which would decide which firms (including potentially even hedge funds if they are huge and leveraged) are systemically important. He likes procyclical capital controls which will be tighter than current except in crises and fall back to current in a crisis. He wants a central clearing system for OTC derivatives like CDS so regulators can know who owes what to whom. He wants more regulation of money market funds.

He doesn't propose a ban on cash settlement CDSs. He doesn't say that money market funds are clearly banks (they are FDIC insured at the moment for God's sake) and should be regulated as such. Compensation reform is briefly mentioned but vanishes when he gets to general regulatory proposals (there are no specific proposals).

However, his last proposal isn't so mild. He says we need a resolution authority for systemically important non depository institutions. Note he wants resolution not revolution. The resolution would be triggered by unanimous agreement of the Fed, the FDIC and the President. It could involve appointing a conservator (alternate title for this post conservatives against conservators) who would have pretty much absolute power including the power to abrogate contracts and who would not be subject to the creditors.

Wow. My guess is he's establishing a bargaining position. Still you have to appreciate the rhetoric. "Resolution authority" conservator no hint of nationalization or socializing the means of production or seizing the commanding heights of the economy except for the bit about how that is exactly what he has in mind.




Longer notes (but really just read the pdf it is longer but better written)

My reading of http://www.house.gov/apps/list/hearing/financialsvcs_dem/geithner032609.pdf

1. New regulator of all Systemically important firms. Definition roughly is Lehman and AIG were systemically important firms.
No cherry picking. (how ?). Capital controls tighter in non crisis loosen to like now in crisis so don't amplify crisis. (I'd go for 2 lines with milder punishment for crossing more demanding line).

2. overnight loans (???) and OTC derivativs e.g. CDS must have central clearing so can keep track of who owes what to whom.

(note no ban on cash settlement CDS). Really pretty mild I tihink.

3. Hedge (& etc) funds with more than x under management must register with SEC and report. If leveraged and C systemic regulator may decide to regulate them.
(I don't get it. I think this is for Europeans, who were talking about regulating hedge funds. Most are registered. Authority of systemically important firm regulator already there depending on leverage and well importance and not legal form).

4. Regulate money market funds more (I would declare them to be banks -- they are FDIC insured now so why not ?)

5) we need a resolution. Conservatorship not socialism. Total power if FED, FDIC and POTUS agree. break contracts, ignore complaints of creditors. Take over, alll the way over. Give me powerrrrrrrr.





1. We can't allow firms to cherry pick among competing regulators, and shift risk to where it faces the lowest standards and constraints.

2. global

3. Review Firms (incl investment banks, AIG Fannie and Freddie) acted like banks, but weren't regulated as "depository insitutions" rather under weak prudential regulation and without access to the Fed discount window.

4. Lack authority to deal with failures of systemically important non bank financial institutions (I want power to nationalize)

5 systemic risk,

consumer and investor protection, regulation of dealing with regular people.

eliminating gaps, no cherry picking

international coord. FSF with G-20, IBRD and IMF. deal with tax havens.

6. Systemic risk

1) one regulator (but which ?) must prevent turf wars and concern for organizational charts to block this (how ?). Key is "systemically important" not "depostitory institution." Hints at a definition.

2) Build up capital during good economic times. Look ahead and account for losses during downturns (cyclical capital requirements ? YES for "stystemic" firms) in any case stronger capital requirements.

c) regulate compensation to make sure it encourages focus on the long term. (odd mentioned in abstract but not on list)

3) (regulation of hedge funds, private equity funds, venture capital funds) register with SEC if have over threshold assets under management *and* if leveraged.

4) better trade on markets than OTC (so ? a wish is not a plan).

5) something on money market funds (how about declaring them to be banks ?)

6) give me power to nationalize.

7) for systemic firms aouthority to force "protective actions" before hit the line.

8) regulate settlement systems for key funding and risk transfer markets (overnight lending and CDS). Regulate key OTC markets as exchanges are regulated.

I So new systemically important firm regulator. No cherry picking. Procyclical Capital requirements

II) hedge funds (the word leverage has disappeared) . Systemic risk regulator could regulate them (seems idea would if huge and leveraged). All vague and scary and I don't see why needed if don't borrow.

III) CDS and other OTC All dealers regulated by systemic regulator. Will keep track of who owes what to whom by mandating a central clearling system.
Cash settlement CDS still allowed.

IV) Regulate MMFs more.

V) A resolution regime (nationalization is resolution not revolution).

(oh you say you want a resolution he he cause we've waited long enough).

Need OK by Fed, FDIC, SecTreas and Potus. If go to "conservator" (not socialism conservatorism) can repudiate contracts and not subject to OK of creditors. Won't use FDIC funds.

rdan

Run 75441 comments on the WTO and US stimulus spending (lifted from comments):

Lori Wallach, Director of Public Citizens Global Trade Watch did a recent (March 12, 2009) report to the subcommittee on Terrorism, Nonproliferation, and Trade, "US Foreign Economic Policy in the Global Crisis." Briefly this is what she is saying about banking and trade globally and how we may have signed away our rights.

Obama and company are on a collison course with the WTO and its Financial Service Agreement as signed by 39 countries including the US. By signing such, we have to treat foreign financial institutes as if they were the same as Amerrican banks, etc. Last year's November Doha meeting was meant to develop a coordinated reponse to the current crisis. I suspect there will be much gnashing of teeth as the Obama reverses the trend of supporting the WTO expansion into domestic banking regulations and limitations. Other countries have excluded certain aspects of the WTO limiting its reach into such areas as well as production. In our push for greater deregulation globally, we instead achieved the control of the global banking and financial system by a few.

I guess we were the naive bunch on the global neighborhood block?

More under the fold from rdan...

The WTO’s procurement agreement and those of the FTAs into which the United States has entered limit how Congress may expend our tax dollars. Given the recent brouhaha attacking Buy American rules in the stimulus package as ‘protectionist,’ it is worth noting that the terms in question had nothing to do with tariffs or trade or the functioning of private markets. Rather at issue was Congress’ right to decide how to best spend U.S. tax dollars in a manner that could stimulate our economy. Yet, “trade” pacts such as WTO and the FTAs set limits on Congress’ decisions regarding use of our tax dollars in a manner that provides preferences for U.S.-made goods or U.S. firms.

Thus Congress’ stimulus spending of our tax dollars will not fully cycle through the U.S. economy, even though studies show that doing so provides important economic gains. For instance, the $20 billion in funding for electronic medical record keeping in the 2009 Economic Recovery Plan is probably more likely to be spent offshore rather than to employ Americans. Meanwhile, despite the hysteria regarding the Buy American rules relating to infrastructure projects, in reality even though the stimulus package included the much broader Senate version of Buy America rules, only a small share of that money can be directed into the U.S. economy thanks to the limits set in trade
agreement procurement rules. For instance, firms operating in 39 countries, including all of Europe, that signed the highly controversial WTO procurement agreement and firms in the additional 13 countries who are signatories to U.S FTAs must be treated as if they were U.S. firms for certain aspects of even the covered spending. While there are some important exceptions listed in the U.S. schedule of commitments in these agreements that safeguard the right to use domestic preferences for some categories of goods, the United States altogether gave up its rights to provide preferences to U.S. firms regarding the construction and other service procurement contracts.

rdan

Dean says:

Why Is "Buy America" Okay for Banks, but Not Steel?

Those damn protectionists in the Obama administration obviously don't know anything about economics. How else can we explain the decision to require that the fund managers in their bank bailout plan must be headquartered in the United States.

I can't wait to see the outraged and condescending editorials in the Washington Post and elsewhere explaining how protectionism is not the way to promote jobs and growth.

(Credit for the protectionism detection goes to my former colleague Heather Boushey, who can now be found at the Center for American Progress.)

--Dean Baker

rdan

Fresh Air and Terry Gross carried an interview with Frank Partnoy, a former trader and author of the 1997 book FIASCO: Blood in the Water on Wall Street, provides an interesting perspective and history.

Via Instaputz, an explanation of why stealing tax dollars in order to decouple securities from the assets they are allegedly securitizing is A Really Stupid Idea, presented directly, yet also in a way an econometrician wiill understand.

The idea that they aren't inviting Yves, CR, and Roubini onto the calls either led me to wonder for a moment if there was another factor in the invitations.

But skipping Felix, even if he is a short-timer, means that they weren't judging by the blog in the first place.

by Bruce Webb

Barkley Rosser and I among others have long claimed that Social Security's economic models are too pessimistic in light of performance both over the whole post-war period and particularly over the last dozen years. And the numbers looking back are pretty clear, Social Security income/cost ratios have come in better than Intermediate Cost projections and were right up to around August of 2008 (when things went into decline).

These claims have drawn some pushback from the 'Crisis' folk including Andrew Biggs. In his most recent post he calls on Doug Elmendorf of CBO to give the explanation. CBO Explains Why Future GDP Growth Will be Slower than in the Past. But first Andrew explains why GDP in and of itself is not the key metric.

This difference comes down to the fact that the Trustees don't think about "GDP growth" as a single thing, but break it down into its components and project how those components will change over time. In fact, despite Langer's claim that "The Gross Domestic Product (GDP) is the key economic assumption in estimating costs," it actually plays no direct part in estimating Social Security's finances: Social Security doesn't collect taxes based on GDP, nor does it pay benefits based on GDP.

To some degree this is a straw man argument, critics of the current Intermediate Cost economic model use Real GDP because it is a widely reported and pretty well understood metric that within limits reflects the factors which really determine Social Security solvency, which is to say more people working at higher wages with lower inflation. In any event whatever the source of increased GDP the larger it is the easier it is to supply a basket of goods to a more or less fixed cohort of future retirees, (being that almost everyone who will be collecting Social Security over the 75 year actuarial window being already alive). So granting the point that GDP is not a perfect proxy for Social Security solvency why is it going to be smaller going forward? Elmendorf explains (and Biggs follows up)

Projected growth from 2015 to 2019 is also below historical average growth rates, a difference that is more than accounted for by slower growth in the labor force because of the retirement of the baby boom generation. Over the postwar period, the labor force grew at an average annual rate of 1.6 percent; by contrast, we project it to grow only 0.4 percent per year in the period from 2015 through 2019. As a result, potential GDP grew 3.4 percent per year on average in the postwar period, but CBO expects that it will grow by only 2.4 percent annually (allowing for a tad more productivity growth) in the 2015-2019 period.

In other words, the economy will grow more slowly in the future because the labor force will grow more slowly in the future. No conspiracy needed.

Excuse me for leaving my tin foil hat on. My response to Biggs is under the fold.

A slower growing labor force in the future implies more demand for the labor hours that remain which if the rules of supply and demand work in the way that most economists insist they do should translate into real wage gains (which are directly captured by FICA taxes). Instead we are told that real wage increases will decline permanently to an annual 1.0 to 1.1% rate.
Table V.B1.—Principal Economic Assumptions

Similarly if the economy is sputtering going forward due to a slowing in labor force growth (and so a slip in covered worker ratio) you would think you could counteract that via an increase in legal immigration. Instead we are told that by 2010 legal immigration will stabilize at a rate 21% below that of 2006 and remain at 750,000/year forever.
Table V.A1.—Principal Demographic Assumptions, Calendar Years 1940-2085
Which means that as the population increases from 308 million in 2007 to 481 million in 2085 the proportion of foreign born Americans is projected to steadily drop. This flies in the face of American historical experience, when we needed farmers to open up the frontier we got them from the Scots-Irish and the Germans (that's when my ancestors checked into America). When we needed laborers to build the railroads we got them from Ireland and China. If we have a growing yet ageing population and a dire need for more night nurses and geriatric care doctors we have a ready supply going forward in Mexico and the Philippines.

Perhaps someone can provide a reasoned explanation why in the face of an economy handicapped by a stagnant labor supply our policy response will be to clamp down on both legal and illegal immigration in the way implied by the data tables. But until that contradiction gets satisfactorily explained I will be keeping that hat firmly down around my ears.

Because it all still looks like a model chasing a desired conclusion. Particularly when Low Cost itself sees immigration settling out an an absolute rate lower than the 2006 peak. This really doesn't make any real world sense at all.

I want to highlight that last point. Per the 2008 Report legal immigration for 2006 was estimated to be 950,000 with illegal immigration adding another 380,000 for a total of 1,330,000 adding to a total population equalling 306 million. Under Intermediate Cost assumptions those numbers are projected to settle out at 750,000 and 380,000 by 2020 (1,130,000 out of 345 million people) and to an ultimate 750,000 and 275,000 or 1,025,000 new immigrants out of a 2085 population estimated at 481 million. Now these numbers do imply that we ultimately get reasonable control of the borders, which is not a bad thing in and of itself. But it also implies a specific policy decision to limit legal immigration 17% lower in absolute numbers than the 2006 peak. While this maybe would come as good news to the no-growth zealots currently controlling the Sierra Club, it would be an odd response to an systematic economic slowdown caused by low labor supply growth.

And this remains true when we turn to Low Cost. It also suggests we will get better control over the borders with illegal immigration dropping through the 75 year window, although slower than IC. But it also implicitly argues that we will by 2010 set a hard, permanent cap on legal immigration at 960,000. Which date is exactly when Boomer retirement picks up and so the need for cheap labor to care for us in our old age. The notion that we will be beating our heads against the wall wondering where we will get landscapers and nursing home aides come 2020 is pretty odd. Because unless Mexico and the Philippines drop off the face of the planet this shouldn't really be a problem.

The conspiracy I see is not in Intermediate Cost projections, that could be explained away as the natural caution of actuaries. But in data category after data category it is Low Cost that seems artificially capped both on the economic and demographic fronts. The argument boils down to saying that the near future (say the next twenty years) cannot even on your most optimistic assumptions be as good as the recent past. We probably will not hit every component of Low Cost, that is a function of a model that assumes every factor favorable to solvency tracks together (Low Cost) or alternatively that every factor moves negatively (High Cost). (We indeed would be served better with an expanded matrix of alternatives, something suggested by the SSAB). That is no reason to simply accept that demography has us in a helpless trap that dooms us to no better than 1.1% Real Wage, 1.7% Productivity, and 2.1% Real GDP.

Come on we can do better than that! We are not passive victims here, we can if necessary craft policy in a way that targets economic growth. That is if we want Low Cost outcomes we can implement Low Cost policy, and if that requires relighting the torch on the Statute of Liberty sobeit.