Robert Waldmann

The www.washington.com Headline and abstract person has outdone himself or herself writing

CBO sees debt estimates soar

Analysts say health law has not improved budget and Obama's tax agenda will make things worse.

Lori Montgomery

As Kevin Drum says always click the link. Lori Montgomery actually wrote

President Obama's overhaul of the health-care system has done little to improve the nation's budget outlook, congressional budget analysts said Wednesday.

So "little" has become none. The abstract contradicts the actual story.

Finally well down in the story we get to what Doug Elmendorf said

The health-care overhaul made "steps in the direction of a sustainable fiscal policy. But they are small steps relative to the journey that will be needed for fiscal sustainability," CBO director Douglas Elmendorf said Wednesday in testimony before Obama's bipartisan commission on the deficit.

small "relative to the journey that will be needed for fiscal sustainability" is not small. We do not normally measure sums of money "relative to the journey that will be needed for fiscal sustainability". Another way of putting that would be "unimagninable huge immense and gigantic but nowhere near as colossal as the long term budget shortfall".

So in the hands of the Washington Post small "relative to the journey that will be needed for fiscal sustainability" becomes "small" and then none. Too the Post hundreds of billions of dollars are zero.

Clearly that organization is not qualified to report the news. Even the simplest most cut and dried gigantic numbers are too subtle for them.

This is the end of my short punchy post. A general rant follows after the jump.

More below the fold...

Under CBO's 'Extended Baseline', i.e. roughly Current Law the 75 year actuarial gap is up to 1.6% from 1.3% and the date of Trust Fund Exhaustion moved back from 2043 to 2039. Under the 'Alternative Fiscal Scenario' the corresponding numbers are 2.1% and 2037 or right in line with the Social Security Trustees 2009 projections. Meaning that the NW Plan as currently formulated would handle even CBO's more pessimistic projection. The sky is not falling and contrary to some people's calculations the Trust Funds will not go to zero by 2012.

And while the percentage of GDP that will go to Social Security is projected to increase from 4.8% to 6.2% under both alternatives this has to be (or at least morally should be) balanced against the fact that the percentage of people eligible for retirement will grow from 22% to 35%. Unless someone would care to make the argument that older people should ipso facto get a smaller share of productivity per capita in the future than they do now this hardly seems unreasonable.

by Bruce Webb

CBO Director's Blog summary of Long Term Budget Outlook (Interesting side comment: "Later this week, CBO will release a report on a number of different policy options for changing Social Security"). Elmendorf, not surprising given his history and current job, is fully on the side of the deficit hawk/hysterics.

Report text (1.2MB PDF) Long Term Budget Outlook

These were just released at 9AM Eastern so I haven't had a crack at them yet. Feel free to beat me to the juicy parts and put them up in comments. I'll update this post as necessary through the course of the morning.

More below the fold...

by Linda Beale
crossposted with Ataxingmatter

Some Links Worth Noting at CBPP--causes of deficit, increases in income inequality

Center on Budget and Policy Priorities, Where Today's Large Deficits Come From

Amidst all the renewed talk about budget deficits, it's important to remind ourselves what caused the signficiant expansion of the deficit. As I've noted, it can be attributed primarily to three things: Bush's tax cuts, Bush's decision to go to war in Afghanistan and Iraq, and the need for economic stimulus and financial system bailout to counter the financial crisis that began in the next to last year of Bush's Administration as a result of the four-decades-long financialization of the economy due to deregulation and development of a casino-gambling mentality in the nation's commercial and investment banks. The Center's graphs and data do a good job of setting out more of the details of those three causes of the deficit.

Center on Budget and Policy Priorities, Income Gaps Between Very Rich and Everyone Else More than Tripled in the last three decades, new data show,June 25, 2010, hat tip Tax Prof

More below the fold...

Andy Harless presents the case for a double dip (second recession) - I would re-order #1 and #2 on that list - and that for a sustained recovery. #6 of Andy's case for a sustained recovery (he calls it Case Against a Second Dip) caught my attention, pointing me to an earlier Paul Krugman article about positively-sloped yield curves in a zero-bound policy environment.

In a related article, Krugman argues that a current policy of near-zero short-term rates precludes the lowering further of future short-term rates. Therefore, the steep yield curve reiterates that rates have nowhere to go but up rather than that the economy is expected to improve.

Reasonable; but it was Krugman's comparison to policy during Japan's lost decade that got the mental wheels rolling:

Indeed, if we look at Japan we find that the yield curve was positively sloped all the way through the lost decade. In 1999-2000, with the zero interest rate policy in effect, long rates averaged about 1.75 percent, not too far below current rates in the United States.

In my view, current Fed policy is generally more credible than policy undertaken by the Bank of Japan in the early 2000's. The fed funds target has been near-zero since December 2008; and the new reserve base (liquidity) peaked quickly since the onset of QE and has since remained in the banking system.

More below the fold...

by Linda Beale
crossposted with Ataxingmatter


The Supreme Court's Decision in In re Bilski:: does it allow tax patents or not?

The Supreme Court handed down its decision in Bilski Monday, holding, as almost everyone had predicted, that the hedging process that was the subject of the Bilski claim was unpatentable. Download Bilski at SCOTUS 08-964. The question for those of us following the case, of course, was not whether the Court would consider the claim patentable. The question was on what ground the Court would rest its decision and whether the decision would shed any light on the larger category of business method patents generally and tax strategy patents specifically.

The opinion of the Court was written by Justice Kennedy and joined by the four justices on the right--Alito, Roberts, Thomas and Scalia. The opinion agreed that the Federal Circuit's "machine-or-transformation" test was a valuable clue to the question of process patents eligibility, but rejected the Federal Circuit's conclusion that it was the exclusive test for process patents. The statutory analysis in the opinion was the kind of stretched, "ordinary meaning" dictionary and common usage based interpretation that becomes absurd quickly in the context of a highly technical statute such as the Patent Act. Consistent application of that everyday definition of process would allow patenting of almost any novel human activity, including a series of steps to implement a tax planning strategy. Further, the opinion treats a remedies provision (enacted in the wake of the State Street Bank case to protect those who might be accuse of infringing this new cateogry of business method patents approved by the court) as an amendment of the key patentability categories language rather than as the stopgap measure it was clearly intended to be because of the Federal Court's condoning of business method patents.

More below the fold...

by Mike Kimel
Cross-posted on the Presimetrics blog.

Taxes and Private Sector Investment - Evidence from the Real World
Last week I had a post (which appeared both here and at Angry Bear). The post included the following graph:

Figure 1

The graph looks at every eight year period since 1929 (the first year for which National Accounts data is available from the Bureau of Economic Analysis) that can be thought of as a complete “administration.” It notes that there is a very strong negative correlation between the tax burden in the first two years of an administration and the economic growth that follows in the remaining six years of the administration. In plain English – the more the tax burden was reduced during the first two years of an administration, the slower the economic growth in the following six years. Conversely, the more the tax burden was raised during the first two years of each administration, the faster economic growth was during the following six years.

At this point I note… this is not my opinion, it is what the data shows. And there is no cherry picking – I went back as far as there was data and included every eight year stretch for which a single President occupied the Oval Office or in which a VP took over from a President in the middle of a term. And these real world results contradict just about everything that standard economic theory (Classical, Austrian, you name it) tells you.

So I tried providing an explanation:

More below the fold...

The Washington Post reports on an interesting development. If people aren't able to "see" how they personally fit in to the 'economy' or 'carbon footprint' in a real way, they often ignore the 'problem' or keep it so abstract it does not touch them.

Three years ago, Dan Yates and Alex Laskey, the co-founders of Arlington-based Opower, came to a conclusion: People cared about their carbon footprint, for the most part, but needed a blueprint for reducing it. The longtime friends recognized an opportunity to create that path by providing people with an analysis of their electricity consumption.

Since then, Opower has blossomed into one of the rising stars of the energy industry, on track to post a $35 million profit this year, roughly eight times its revenue in 2008, according to the privately held company.

"We're starting to see stronger adoption of Opower's product by a lot of operators," said Teresa Mastrangelo, an analyst with researcher Smart Grid Trends. "It's a very simple way to start educating consumers on how they use energy."

Opower essentially takes raw data, obtained from a utility company that contracts its services, and creates detailed reports on how customers' consumption compares with their neighbors. The report also provides customized tips for each customer to address wasteful behavior. What's more, the Opower team, made up of 105 employees, redesigns utility Web sites, offering e-mails and text alerts to update customers on usage...

by Bruce Webb

via Brad DeLong we learn that CBO is releasing its 2010 Long Term Budget Outlook on Wednesday at 9AM. Which is also the date that the 2010 Social Security Report is (over-)due to be released. Which means some head to head, apples to apples comparisons of economic projections over the 75 year window.

The Long Term Budget Outlook shouldn't be confused with the more detailed (for my purposes) Long Term Social Security Projection typically put out by CBO in August, but there should still be plenty of material on Social Security and Medicare to discuss. Good times!

http://www.cbo.gov/publications/
http://www.ssa.gov/OACT/TR/index.html

by Beverly Mann
originally posted at The Annarborist

A Caveat, Walter Dellinger

“In Skilling (ably explained by Paul's posting), my law firm colleagues pressed the argument that the statutory crime of denying anyone of the "intangible right of honest services" was unconstitutionally vague unless it was sharply limited to bribery and kickbacks. Given that the honest-services statute had been the basis of hundreds of prosecutions that had been upheld in every federal court of appeals, it may have seemed an unlikely gambit to challenge its constitutionality at this late date. The fact that all nine justices agreed that this long-standing and frequently invoked law was unconstitutionally vague suggests once again that litigants should not take law "settled" by court of appeals as a given.”

—Walter Dellinger,* writing in Slate

Well, no, with due respect to Walter Dellinger—and a great deal of respect is due here; this post and his others thus far are outstanding in their analysis not just of the narrow substantive issue that the Court decided in the cases he’s discussing, but also in their underlying indications— the fact that all nine justices agreed that this long-standing and frequently invoked law was unconstitutionally vague suggests once again that litigants who fall within one of the privileged classes of parties whose petitions to the Court will be given actual consideration by the justices should not take law "settled" by court of appeals as a given.”

The Skilling case and the related Black and Weyrauch cases decided in concert, all of them challenging as unconstitutionally vague the “honest services” statute, illustrate, as does another high-profile opinion the Court issued within the last two weeks, Stop the Beach Renourishment, Inc. v. Florida Dept. of Environmental Protection, that these justices will look the other way for many years (some of the justices, for decades), rejecting one after another after another request that the Court consider a challenge to the constitutionality of, or a challenge to a lower federal courts’ interpretation of, some statute or court-created procedural or jurisdictional “doctrine” (e.g., a court-created rule that determines whether the federal courts have “subject-matter jurisdiction” to hear the case at all), until some zillionaire CEO or some Fortune 100 corporation or some group or individual challenging as unconstitutional some government-caused diminishment of the value of their property or some other government action opposed by the Republican Party’s base.

Or at least until some other private litigant has the sophistication and financial wherewithal to hire a member of the elite group of regular Supreme Court litigators. Or until some government or government official or employee asks the Court to consider the issue.

More below the fold...

Paul Krugman is direct and to the point this morning:

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

More below the fold...

Hat tip Rebecca for this link to the Curious Capitalist

Invariably, when we start debating jobs programs and stimulus spending, people start talking about the long-term problem of government spending. It raises our national debt, and could cause inflation down the road. But what is often overlooked when inflation is brought up, is that not doing anything about high unemployment can have really bad long-term ramifications for the economy, perhaps even worse than inflation. Here's why:

First of all, it's not just upward mobility that is at risk. I wrote a story back in January about high teen unemployment and that what is at risk is not just whether teens will have to cut out trips to the mall. Without entry-level jobs, young workers can't gain work experience. The result is a lower skilled workforce that results in longer-term productivity for the US economy in general.

And what the Journal and I pointed out is just the tip of the iceberg in terms of the problem the high unemployment rate creates. The Atlantic had a story in their March issue about the much broader effects that high unemployment will have on American society.

Read more here

Michael Hudson at New Economic Perspectives points us to the difference between the overall economy and the financial sector:

When politicians let the financial sector run the show, their natural preference is to turn the economy into a grab bag. And they usually come out ahead. That's what the words "foreclosure," "forfeiture" and "liquidate" mean – along with "sound money," "business confidence" and the usual consequences, "debt deflation" and "debt peonage."

Somebody must take a loss on the economy's bad loans – and bankers want the economy to take the loss, to "save the financial system." From the financial sector's vantage point, the economy is to be managed to preserve bank liquidity, rather than the financial system run to serve the economy. Government social spending (on everything apart from bank bailouts and financial subsidies) and disposable personal income are to be cut back to keep the debt overhead from being written down. Corporate cash flow is to be used to pay creditors, not employ more labor and make long-term capital investment.

The economy is to be sacrificed to subsidize the fantasy that debts can be paid, if only banks can be "made whole" to begin lending again – that is, to resume loading the economy down with even more debt, causing yet more intrusive debt deflation.

This is not the familiar old 19th-century class war of industrial employers against labor, although that is part of what is happening. It is above all a war of the financial sector against the "real" economy: industry as well as labor.

In Linda's post on the budget deficit in the comments it was claimed that the budget deficit was Obama's fault and a chart was cited that showed the deficit in someone's estimate of real dollars.

The standard way of comparing deficits across time and across different countries is to show the deficit -- past and projected future -- as a share of GDP. There are good reasons for this standard practice, as it is the only valid way to make meaningful comparisons over long periods of time when the dollar values change so much. Using other approache makes it too easy for readers to be mislead.

But here are the latest CBO data and projections. The CBO data is the gold standard for making budget comparisons and any other projections are automatically suspect.

The data shows that the budget deficit peaked just as Obama took office. If CBO actually published seasonally adjusted quarterly data it would show that the deficit was over 10% of
GDP before Obama took office and that Obama has actually reduced the deficit since taking office. Moreover, the CBO projections show that in the out years the federal deficit will actually be smaller -- as a share of GDP -- than it was in the final years of the Reagan administration.



Yes, the federal deficit is a serious problem. But much of what you hear and see about it is pure republican propaganda that massively exaggerates the scope and scale of the problem.
As with most propaganda it depends on the ignorance and/or gullibility of the reader for it to work.

by Linda Beale
crossposted with Ataxingmatter

What caused the Budget Deficit (Before the Financial Crisis)?

Kash on Angry Bear put together a really good graph in 2006 comparing where we might have been if Clinton policies (bad as they were in many cases) had stayed in place compared to where we were and expected to be with the Bush tax cut and spend policies. Responsibility for the Federal Budget Deficit, Angry Bear 2006. Deficits under Bush were projected for more than $500 billion annually. Of course, that was before the greedy, reckless banks threw the financial system into a tizzy with too much credit invested in too many houses by people with too little income to pay for them. Add the costs of backstopping the Big Banks, and we end up with the trillion dollar hole we are currently in.

Answer would seem to be--1) make the banks pay with a tax based on leverage and 2) end the tax cuts or at least a goodly share of them and 3) reinstate an estate tax that has some bite, so that those at the top who can afford to pay do pay.

Seems like there are at least a few in Congress realizing that item 3 makes some sense. Sanders, Harkin and Whitehouse have proposed that the estate tax should have a $3.5 million exemption and a graduated rate, with those at the top paying a rate of 65% (a base rate of 55% and a surtax of 10% on the amount above $500 million or above $1 billion for a couple). The surtax would mean that the estate tax would hit the 403 billionaires who have a net worth of $1.3 trillion harder than it hits the smaller estates. See Janet Novack, Three Senators Call for Billionaires Estate Tax, Forbes.com, June 24, 2010. Now that makes some sense.

Senators Kyl and Lincoln are pushing the so-called "compromise" that would eviscerate the estate tax by creating a $5 million exemption and lowering the rate to 35%. That is a step in the wrong direction. Especially when Congress is making such big noises about the deficit that it is unwilling to pass stimulus funding for unemployment benefits to support Americans hard hit by the Great Recession.

Look at this lovely old drawing. Fernlike leaves, flower heads like old fashioned crochet embroidery. This is Daucus carota ssp sativa, originally native to temperate regions of Europe and southwest Asia. Now print this picture out and go to the supermarket and try to find it in the produce section.

If you are lucky, you might spot some by their leaves. But mostly you will find only the bare, leafless root, or even stubby vegetable batons identifiable only by their colour.

Carrots themselves don’t want to be stubby batons of pure edibility. In fact, that kind of carrot can’t exist as a living thing – it’s just what’s left when most of the living parts of the carrot are shaved and chopped away.

Now, no grocery shopper would choose the whole carrot (leaves, stems, flowers, taproot, feeder roots and a bit of dirt) over the bagged orange cudgels when planning to make a stew. But would a sane grocery shopper deny that all those bits need to exist? Would they demand to pay “only for the carrot” and not pay for the other bits?

And how long would carrots last if they were “paid” only by root-weight, not on a whole-life basis? As a wholly domesticated species, they wouldn’t. They’d be gone in a generation, if they even came to exist in the first place. Only the wild ones would still live, of a low quality from the shopper’s viewpoint, but surviving.

This is why business, worldwide, needs to pay fairly, and provide benefits and pensions.

Woah! Where did THAT unsignaled left turn come from?

More below the fold...

The Senate voted down the American Workers, State, and Business Relief Act of 2010, 57 to 41 (see an earlier version of the CBO's estimate here for a breakdown of the Bill). The emergency extensions to weekly unemployment benefits will now expire, leaving many without government support as the labor market improves at snail speed.

Those who support the Bill claim that benefits prop up consumer spending. It is true, that unemployment benefits payments are more likely to be spent rather than saved. However, the latest version of the Bill allocated about $35 billion to benefits, just 0.34% of consumer spending in Q1 2010. Consequently, the direct impact on consumer spending of extending the benefits would have been small. (The provisions of the Bill in full would have quickened the recovery, according to David Resler at Nomura.)

Those who oppose the Bill claim that extending the benefits only increases the duration of unemployment - in May 2010 median duration was 23.2 weeks, its highest level since 1967. This is a weak argument when 7.4 million jobs, near 6% of the current payroll, have been lost since the onset of the recession (this is a cumulative number, which includes the gains since January 2010). The bulk of the unemployed would likely jump at an opportunity to work rather than live on benefits.

One way or another the government will plug the hole that is private spending. And the government will find this out the easy way (expansionary fiscal policy) or the hard way (perpetual deficits that result from weak private-sector tax revenue). Apparently it's going to be the hard way.

At 9.7% unemployment, isn't it obvious that Congress is not "spending" enough?

More below the fold...

by Linda Beale
cross posted with Ataxingmatter

Bank Tax: France, Germany and UK, but where's the USA?

On June 23, the big three Euro countries--France, Germany, and Britain--agreed to tax banks directly, "to ensure that banks make a fair contribution to reflect the risks they pose to the financial system and wider economy, and to encourage banks to adjust their balance sheets to reduce this risk." See Saltmarsh, France, Germany and UK Support Bank Tax, NY Times, Jun 22, 2010; Eddy, Germany, France, UK commit to bank tax, IdahoStatesman.com, Jun 22, 2010; Cf Berlin approves bank levy plan to fund future bailouts, Deutsche Welle, Mar. 31, 2010.

The tax in the UK (which is also increasing its capital gains tax) will be imposed on banks with liabilities in excess of $20 billion pounds and should raise about $3 billion a year. Saltmarsh op cit. It will be based on the aggregate amount of riskier liabilities (i.e., liabilities other than Tier 1 capital and insured deposits). Berlin's Finance Ministry noted that "All three levies will aim to ensure that banks make a fair contribution to reflect the risks they pose to the financial system and wider economy, and to encourage banks to adjust their balance sheets to reduce this risk." IdahoStatesman op cit.

Although the US has ostensibly supported such a tax, we have been notoriously reluctant to impose any real constraints on banks. The financial reform legislation wending its way through Congress has been watered down, so that both consumer protection and protection of the national fisc have given way to the desire of banks to continue to grow in size so that they can compete globally. Geithner has indicated that big banks are essential so they can lend to big multinational corporations and so that US banks can "be competitive" with foreign banks.

This competitiveness stuff is nonsense. What good is it to have a competitive monster that we have to stand behind and whose costs of funds depend in part on an implicit guarantee that the government will backstop its losses? Why can't a bevy of smaller banks serve big multinationals banking needs? Sure, it means that funds may be more costly to the banks and that big multinationals may not have as big an advantage compared to smaller firms. Both of those are GOOD results--we need to think about ways to downsize banks. I'd prefer Merkel & Levin's proposal for limiting size by setting liability and asset caps but surely we should not continue to refuse to enact good reforms for the sole purpose of letting banks continue to be too big to fail! A bank tax based on risky liabilities is an excellent way to recoup some funds from banks that benefit from the cost of funds advantage of an implicit government guarantee and at the same time incentivize banks to hold less of such risky liabilities.

by Bruce Webb

Mostly lost in the furor over whether BP Apologist Joe Barton should remain as Ranking Member of the House Energy Committee and so potentially the Chairman should the Republicans take over the House is the fact that under Republican caucus rules he is term-limited out. Something high-lighted in this Feb article focused on Barton and obviously prior to the blowout event itself.

Politico: Term limits rule rankles ranking GOP

Even if House Republicans regain the majority this year, they’ll have to live with an old rule from their 1994 revolution: term limits atop key committees.

Some longtime lawmakers were none too pleased with the Steering Committee’s decision, which was announced Wednesday by Minority Leader John Boehner (R-Ohio).

Texas Rep. Joe Barton, the top Republican on the Energy and Commerce Committee who would be term-limited out of a chairmanship, called the limits that apply to ranking members “counterproductive.”

“Don’t ask me to do a good job in the minority and make a rule that says you can’t continue to do a good job as chairman,” said Barton, who is a member of the steering committee that decided to keep the policy.

Are Republicans so beholden to Big Oil that they will actually override rules they reaffirmed four months ago explicitly to keep Joe as Ranking Member/Chairman in Waiting?

In say Baseball it is one thing to let your Manager stay on even if the team is having an off-year. But to actually renew the Contract?

... While it will be many years yet before we can put a hard number on the amount of taxpayer dollars actually lost in the bailout, the Center for Media and Democracy's latest assessment of dollars disbursed in the bailout graphically illustrates the extraordinary lengths to which the federal government went to bailout the financial sector.

The silence from deficit hawks is deafening on this point, even on how to have the money returned eventually...except, it appears, for Social Security and unemployment insurance. Are you really going to put up with this from either party? Looks to be yes, of course! (update: sources of numbers found at Sourcewatch)

by Linda Beale

David Cay Johnston has noticed a tax giveaway through FERC

[hat tip to Tax Prof; edited to correct typo and provide links]

David Cay Johnston, writing in Tax Notes, has focused on a tax giveaway that most of us have missed--a provision that permits partnerships that own pipelines to charge consumers for a tax that they don't actually pay, resulting in considerable profits for the partners of the partnerships with little or no accompanying tax liability. See Master LImited Partnerships: Paying Other People's Taxes, 129 Tax Notes 1393 (Jun. 21, 2010), available for free at tax.com, here. There's also a brief explanatory video by Johnston, here. This pipeline policy stems from the Federal Energy Regulatory Commission and a 2007 court decision upholding the shift. ExxonMobil Oil Corp v. FERC, 487 F.3d 945 (DC Cir. 2007).

As Johnston explains:

For a traditional corporate owned pipeline, these costs include the corporate income tax on company profits. However, the income taxes ofn individual investors have never before counted as a cost of providing service. .... [But] even though the MLP does not pay the corporate income tax, FERC lets MLP pipelines include income tax in the rates charged to customers. FERC policy assumes the top marginal rate. Since the only income tax paid is by individual owners, this means that the rates include the individual income tax the MLP investors owe. In other words, you are forced to pay the income taxes of the MLP investors when you buy natural gas or petroleum products that were transported on [a publicly traded partnership's] pipeline. Id.

In fact, Johnston notes, the consumers pay the partners' income taxes "even if they are only 'potential' taxes." The result is incredible profits for partners in the partnership owning the pipelines.

The math here is stunning. When rates include a tax that does not exist, the investors make out like, well, bandits. Investors in an MLP pocket 75 percent more inn after-tax profits than they would if they invested in a traditional corporation owning a pipeline. Id.

FERC lost the originall BP West Coast case, so then it just issued a statement of policy, with private meetings between commissioners and lobbyists to agree to a general rule allowing a maximum tax to be in included in the rate calculation, even if there were no business level tax to affect business profits (and only individual investor taxes, which are not costs of any business). The court allowed this new policy to survive, based on extraordinary deference to the agency, even for an arbitrary and capricious standard of review. Isn't it clear that allowing an agency to decide that companies that operate through non-taxed partnerships can nonetheless increase their rates by a non-paid tax is an arbitrary and capririous decision that is unfair to regulated entities as well as to consumers--especially when the order of magnitude is considered--$1.6 billion a year for gas pipelines and $1.3 billion a year for petroleum pipelines. Johnston notes that such pipelines consequently have rent-like profits of 42% of revenues, four times the typical margin for the 12,000 largest corporations.

Further, this tax shifting is inflated by FERC's own regulatory practices.

FERC has acknowledged that there is some over-collection by oil pipelines and yet it continues to grant rate hikes based not on costs, but on an index. ...[T]he overcollection is pure profit except for the income tax burden, which is shifted to customers. Id. at 1395

Johnston makes two important points (paraphrased here):

1. Every industry has an incentive to get this treatment, since the "tax" is hidden from consumers and goes directly to industry investors' bottom lines, resulting in a small charge to everybody and a huge gain to the industry investors
It would be very simple for Congress to pass this advantage along to more industries, just by a minor change to the loophole exempting industries from the publicly traded partnership provisions intended result (treating publicly traded partnerships like corporations subject to the corporate tax).

2. And he notes that such treatment of monoplies is disturbing as a matter of principle, violating "two long-standing principles of rate regulation that are fundamental to fairness and integrity"--that owners be entitled to recover costs and earn a reasonable return on equity and that customers only be charged for actdual expenses. This is a trend towards "corporate socialism, under which profits are concentrated through government action and losses are socialized through bailouts."

The House-Senate conference committee on financial reform takes up the derivatives issue tomorrow. Will they adopt the Senate version (which covers 90% of derivatives according to the CFTC) or the House version which is riddled with loopholes and covers only 60% of derivatives trading?

by Rebecca Wilder

GIIPS labour costs not moving in the "competitive" direction
The GIIPS (Greece, Italy, Ireland, Portugal, and Spain) hope: exports. Fiscal austerity crimps the saving of the private sector. And provided the governments make good their plans to put on the fiscal straight-jacket, there’s no other impetus for growth except foreign demand. Financial crises are often accompanied by currency crises, i.e., Sweden 1991, which drives export growth if there is sufficient external demand. For Sweden, there was.

For the GIIPS, there is not. But worse yet, there's not a possibility of a currency crisis deep enough to drive sufficient external demand growth in Greece, Italy, Ireland, Portugal, and Spain. Therefore, it’s generally understood that the GIIPS will get the economic boost if internal competitiveness is restored. Put another way, in lieu of a domestic impetus to economic growth, "internal devaluation” (Marshall Auerback calls it “infernal devaluation”), i.e, dropping hourly labor costs and final goods prices through productivity gains and reform, is the only economic means to attract a sufficient boost of external income to grow the economy.

Well, internal labour cost devaluation has yet to materialize in the GIIPS or the Eurozone as a whole. According to last week’s Eurostat release of Q1 2010 quarterly labour costs for the European Union, labour costs are still very much rising:

The two main components of labour costs are wages & salaries and non-wage costs. In the euro area, wages & salaries per hour worked grew by 2.0% in the year up to the first quarter of 2010, and the non-wage component by 2.1%, compared with 1.6% and 2.0% respectively for the fourth quarter of 2009. In the EU27, hourly wages & salaries rose by 2.3% and the non-wage component by 1.9% in the year up to the first quarter of 2010, compared with 1.9% and 2.5% respectively for the previous quarter.

There is a lag associated with labor cost growth, especially in Europe. But over the last two years, the Eurozone 16 saw labour costs rise a cumulative 5.3%, which is on par with the previous two-year horizon, 5.7%; labour cost growth isn't even slowing.
(this chart was updated at 4:00pm on June 23)

The chart illustrates the two-year cumulative labour cost gains across the Eurozone 16 (seasonally and working-day adjusted) alongside the annual gains over the last year (working-day adjusted only). Note: country-level data for Ireland, Finland are not available. Furthermore, country-level data through Q1 2010 are not available for Belgium, Italy, and Greece, so Q4 2009 is used instead.

According to the measure of "labour costs", it appears that “competitiveness” is not improving markedly in any country across the Eurozone, especially in the GIIPS that need it. In contrast, US nonfarm business unit labor costs dropped 4.2% over the last two years.

To be sure, there are other measures of “infernal devaluation”, like final goods prices. But strictly speaking labour costs remain too sticky in the Eurozone to attract external demand sufficient enough to offset the drag that would stem from the announced fiscal tightening across Europe.

Rebecca Wilder

Hilary Doe, the National Director of the Roosevelt Campus Network, spoke this week at the National Academy for Social Insurance conference in Washington, DC. She thinks ahead to the year 2040 — and fighting to keep Social Security around.

Think 2040 is the Roosevelt Institute sponsored platform for Millenial generation input into the whole debate.

Follow the link to the National Academy of Social Insurance website.

by Bruce Webb

Those of us who follow the Obama Deficit Commission and its seeming hyper-focus on cutting Social Security were heartened last week by what turned into a veritable de-pantsing of Commission co-Chairman Alan Simpson in the course of an 8 minute video interview outside the (closed) doors of the Commission by Social Security Works Communications Director Alex Lawson. Alex's video went viral and then some. Anyway you can read and hear my new buddy Alex speaking for himself: http://socialsecurity-works.org/author/alex-lawson/.

Plus Jane Hamsher and Firedoglake have been live streaming Alex's and SSW's film with the latest installment here: Livestreaming the Closed Door Fiscal Commission Pt. 5. Not real lively on a minute to minute basis, unless you are a big fan of tall polished wood doors, but I thought this little note from Jane was interesting.

[Ed. Note: After Alex's encounter with Alan Simpson, the committee has apparently moved the meeting location without notice. Alex is trying to find out where it is being held.]

Well it looks like somebody struck a nerve. Congrats to Alex and to his bosses at SSW, Nancy Altman and Eric Kingson (plus Policy Director Lori Hanson), who along with Roger Hickey and his people at CAF are keeping the heat beating on that tin roof.

So to those who have been wondering when someone, anyone besides Baker and Krugman were going to call out the Social Security 'Reformers' the answer is "right now".

P.S. the original revised release date for the Annual Report of the Trustees of Social Security was for next Wednesday June 30th. There are rumors that that date might slip for reasons unstated (the Report by law is due April 1), but when it does come out you can fully expect Social Security Bears Bruce and Dale to come out of our caves and bring you the numbers, plus in due course an updated Northwest Plan for a Real Social Security Fix.

Lest readers fall asleep about the idea of proxy access, take note of the Business Roundtable reaction.

Business Roundtable voices discontent:

Ivan G. Seidenberg, chief executive of Verizon Communications, said that Democrats in Washington are pursuing tax increases, policy changes and regulatory actions that together threaten to dampen economic growth...
...
The final straw, said Roundtable president John Castellani, was the introduction of two pieces of legislation, now pending in Congress, that the group views as particularly bad for business. One, a provision of the administration's financial regulation overhaul, would make it easier for shareholders to nominate corporate board members. The other would raise taxes on multinational corporations. The rhetoric accompanying the tax proposals has been particularly harsh, Castellani said, with Democrats vowing to campaign in this fall's midterm elections on a platform of punishing companies that move jobs overseas.

The Washington Post reports the importance attached to proxy access:

A rush of chief executives from a wide swath of industries has been coming through Washington over the past three weeks, talking to lawmakers about a long-debated issue called "proxy access," which would make it easier for shareholders at all publicly traded companies -- not just banks -- to nominate board directors. Opponents say the rule has nothing to do with overhauling Wall Street and doesn't belong in the legislation.

"This is our highest priority," said John Castellani, president of the Business Roundtable, which represents 170 chief executives. "Literally all of our members have called about this."
...
Advocates for shareholders' rights, including unions and institutional investors, say the crisis on Wall Street had everything to do with corporate boards failing to do their jobs.
...
With proxy access, shareholders would be able to send a strong message to management if they weren't happy with a company's strategy, for instance, in managing risk or charting growth. On the other side, public companies fear that proxy access will mainly invite activist investors and hedge funds to infiltrate boards and topple existing management -- whether out of displeasure with how a company is run or to pave the way for a hostile takeover.

The end result, corporate executives warn, is that board directors will feel constant pressure to juice up their company's stock price and put short-term considerations ahead of the firm's long-term health...

While of course not true for all businesses, I thought that 2005 to 2007 were especially good years for stock price pushing and short-term health advocates without the help of proxy access, for instance. And I haven't even emphasized MSN taxes! Which I will later.

Update: Hat tip Naked Capitalism for this link to Don't gut proxy access by Lucien Bebechuk from Harvard University.

More below the fold...

The NYT has a story on what look to be 'ruthless' bankruptcies in store for companies who sought or were forced to take too much leveraged debt:

American companies currently have more than $1.7 trillion in S.&P.-rated bonds and loans maturing from 2011 to 2014. The total debt load coming due will climb steadily over the next four years, with the proportion of debt in the speculative category growing, the credit rating agency said.

In 2011, there will be about $300 billion in debt due, of which 41 percent is considered speculative. But by 2014, the amount of debt due climbs to about $550 billion, 72 percent of which is speculative.

“We believe that many borrowers at the low end of the ratings scale will encounter serious hurdles to their refinancing needs in 2013 and 2014,” John Bilardello, a managing director at Standard & Poor’s, said in the report. “Unlike investment-grade entities, for which the main issue is the rising cost of capital, speculative-grade borrowers may find that financial institutions and investors are wary of lending to them.”

Much of this debt currently owed by American companies was a result of heavy borrowing during the leveraged-buyout boom, which lasted from 2005 to 2007.

Private equity firms borrowed enormous sums of money from banks to finance the buyout of companies and then loaded the target companies up with debt.

But the target companies have since had a hard time paying down their debt because of the down economy, which blunted profits.

S.&P. believes that these companies have been successful in pushing back their debt maturities past 2010, avoiding a potential rash of defaults and bankruptcies this year...

Rdan here...The following post is the first of a possible four concerning shareholders, that magic group of owners of publicly traded companies which is invoked as beneficiaries of actions and policies by company officers and Boards. While many readers are well versed in shareholder doings, we also have readers less versed in how this is done, hence Proxy Voting 101 at my request to begin. But if you read news media, all is done for the sake of 'shareholders'. Lets begin the discussion.

A guest post from Doug Gates, vice president and co-founder of Moxy Vote (www.moxyvote.com).
Proxy Voting 101

When you own something you generally expect to be able to control it. This is easy if you’re the only owner – “it’s my car, so I’ll decide when to change the oil.” It gets more complicated when there are multiple owners – “it’s our house, so ‘Honey? Is it time to fix our deck?’” This can create long discussions about budgets, priorities, plans and other issues. Now imagine there are millions of owners. You need to keep these owners informed about what they own and you need their input on big decisions. Organize this mob into a productive committee and you’ll be ready for work in corporate governance.

American companies ostensibly serve at the pleasure of their shareholders, so they periodically look to us for a nudge in the right direction. Our financial and regulatory system has developed the proxy voting process to deliver these nudges and give the shareholders a say.

Here’s how it works in theory: companies assemble proxy ballots and distribute them to shareholders. Shareholders cast their votes, one per share, and the votes are tallied. The result is announced and the business moves on.

Of course, this well-intentioned process is never this easy. Let’s look at this piece by piece:

More below the fold...

This idea was lifted from an e-mail exchange with Noni Mausa this morning. The following well seasoned joke reminds me of political communications among the people who write the copy for our leaders:

A carpet layer had just finished installing carpet for a lady. He stepped out for a smoke, only to realize he’d lost his cigarettes. He went back in and in the middle of the room, under the carpet, was a bump. “No sense pulling up the entire floor for one pack of smokes,” he said to himself. He got out his hammer and flattened the hump.

As he was cleaning up, the lady came in. “Here,” she said, handing him his pack of cigarettes. “I found them in the hallway.”

“Now,” she said, “If only I could find my parakeet.”

Part of Noni's note:

What is worrisome is that we don't always correct our steering as we should, jumping back and forth between data, predictions, steering, more data and comparisons to our predictions.

But the biggest problem isn't poor execution of good-faith strategies. It is clever execution of bad-faith strategies.

All the fuss still ignores main driver of popularity says Steve Korniak at Salon:

That's because, for all the talk about whether he gave away too much on healthcare or hasn't reacted angrily enough to the oil spill, Obama (like every president) is a prisoner to the economy. As long as the unemployment rate remains high, no amount of "magic" will restore Obama's robust January 2009 poll numbers. (At this point, only some kind of international or terrorist incident, which might produce a rally-around-the-flag effect, could do so.)

It is absolutely not a coincidence that the basic themes of Blow's column were also sounded by pundits in the first half of Ronald Reagan's first term. Reagan, after all, was the last president to deal with double-digit unemployment. (His presidency also began with broad popularity, high expectations, and a souring economy -- sound familiar?) At virtually this same point in his first term (August 1982), Reagan's approval rating dipped to 41 percent. It was seen as a stunning decline for a man who had been elected in a 44-state landslide less than two years earlier. The unemployment rate when that survey was conducted was 9.8 percent, and trending upward. Today, it is 9.7 percent, with no substantial drop on the immediate horizon.

None of this is to say that Obama hasn't made mistakes, possibly big mistakes, in his presidency. But they are not the reason why his poll numbers are where they are. Mass opinion doesn't respond to the details of policy, no matter how important they might be. It responds to the economy. If the economy turns around, Obama's numbers will, too. If it doesn't, they won't. There's really nothing magical about it.

I believe voters overall do not allow nuance to impact their votes...it is a forced choice game anyway, which may or may not match up to personal thinking or feeling. One of those major drivers is perceived performance and expectation of the 'economy' personally or for people we know...examples of the focus on 'economics' are everywhere, even if couched in other terms.

The economic headline this morning is that China has agreed to allow the yuan to appreciate.

The announcement is being credited with about a 1% higher opening for the stock market and numerous pundits are claiming this will make a significant difference.

But this has happened before and it had little impact. From 2004 to 2007 the yuan appreciated some 20%. But the net impact was about a 1% rise in the price index for US imports from China and essentially no impact on the US trade deficit with China.So why should anyone expect a different reaction this time?

by Mike Kimel

This post appeared in the Presimetrics blog.

Presidents, the Tax Burden and Corruption - Explaining Economic Growth

One of the topics we cover in Presimetrics is the relationship between the tax burden (i.e., the share of income going to taxes) and economic growth. As shown also in a recent post, Presidents who cut the tax burden tended to produce slower growth than Presidents who raised the tax burden.

In this post, I want to begin to address causality. As we stated in the book and as I’ve since said a few times, I don’t think higher tax burdens in and of themselves cause faster economic growth, but rather that increasing tax burdens are correlated with some other criteria that create conditions that help produce economic growth.

But let us start by addressing the issue of timing first. A number of people have indicated in comments or offline that perhaps the reason for the strong correlation between tax burdens and economic growth could be because when the economy is growing rapidly, Presidents feel comfortable boosting taxes.

I’ve pointed out a few a problems – theoretical and empirical - with this line of argument, but I think I can illustrate it best with a simple graph. Since 1929, the first year for which data is available from the Bureau of Economic Analysis’ National Income and Product Accounts (NIPA) tables, there have been five Presidents that have served an eight year or more term: FDR, Ike, Reagan, Clinton and GW. Additionally, there are several more “quasi-eight year terms.” These are instances in which a VP took over upon the death or resignation of the President and maintained a similar a policies similar to those of his predecessor (JFK/LBJ and Nixon/Ford), or in which a VP took over a mere few months into a new terms and thus could put his own stamp on just about the entire eight years (Truman).

The graph below shows the change in the tax burden in the first two years of each administration on one axis and the growth in real GDP per capita during the remaining six years of each administration on the other axis.

Figure 1

More below the fold...

Tom aka Rusty Rustbelt

Medicare Fee Ordeal - Continued

As of Friday the Senate has passed a six (6) month patch to counter the Sustained Growth Rate formula cuts directed at most physicians.

The average for all physicians was a 21% cut, with changes ranging from primary care (+6%) to cardiology (-42%).

The House will consider the patch next week, and is likely to pass the necessary legislation.

CMS contractors will process claims from June 1 forward - someday. This will really help cash flow in medical practices.

Stay tuned.

by Rusty Rustbelt

PEANUT BUTTER REGULATIONS

Watching people spread peanut butter is interesting.

I am a semi-neurotic peanut butter spreader, I try to cover most of the bread and try to get the thickness close to even, but I am not a perfectionist-neurotic spreader. There are also slap-and-eat messy spreaders.

Having dealt with a wide range of government regulatory agencies over 35 years, dealing with both health care and small business, I am familiar with “peanut butter regulation.”

Peanut butter regulation spreads regulatory effort evenly over all regulated entities, even when it is well known that 20% of the targets represent 80% of the problems.

Nursing home regulation comes immediately to mind. Also food safety. And the SEC.

Regulation and regulatory capture are a hot topic these days. Do we need more targeted regulatory efforts?

Peanut butter regulation reminds me of drunk driving checkpoints, stop everybody and eventually the cops find a drunk. Is there a better way?

Some regulators are complaint based, such as wage-and-hour and OSHA, should these agencies be more like peanut butter?

We gotta get better.

By Maria Scrivan here

by Beverly Mann
originally posted at The Annarborist


A Blueprint for Avoiding the Younger v. Harris ‘Doctrine’ In Some Cases

The U.S. Court of Appeals for the 3rd Circuit last month enjoined a Pennsylvania county prosecutor’s office from indicting teenage girls who had sued in federal court because their county’s prosecutor was threatening “sexting” indictments unless the girls agreed to attend a months-long class devised by the prosecutor to educate the girls about the prosecutor’s sense of sexual morality for teen girls. The case is Miller v. Mitchell.

The court’s opinion gained widespread attention in legal circles. And not only because it concerned the hot topic of teen sexting. The ruling was based, surprisingly, not on grounds specific to sexting but instead on the prosecutor’s interference with what the court said was the kids’ parents’ constitutional right to decide, free of state interference, what “ideas of morality and gender roles” their children will be taught. And on what the basis that the prosecutor’s indoctrination-by-extortion plan violated what the court said was the kids’ free speech rights to not be compelled by the state to write a mea culpa essay in conformance with the prosecutor's sense of morality.

The opinion is being hailed as a civil rights victory. And it is a civil rights victory, but not just for the obvious reasons. Other civil rights advocates thought, “This is a big free-speech victory." And, “This is a big parents’-rights victory.” Me? I thought, “This sets a blueprint for avoidance of the Younger doctrine.”

The Younger doctrine?

The Supreme Court regularly engages in the extracurricular activity of proclaiming court-created ‘doctrines’ that undermine the Civil Rights Act of 1871, 42 U.S.C. § 1983, the statute that is the main federal statute that provides for access to federal court in order to challenge the constitutionality of a federal, state or local law or government policy, or an action of a particular government official or employee.

One of those court-created doctrines is the “Younger abstention doctrine,” named for a 1971 Supreme Court opinion called Younger v. Harris, 401 U.S. 37(1971), the case in which the doctrine originated. The essence of that doctrine originally was that, in the name of neo-federalist comity toward states, federal courts are required to “abstain” from hearing any civil rights claims brought by a person who is currently being prosecuted for a matter arising from that claim. The Supreme Court later expanded the doctrine to require the lower federal courts to abstain from hearing constitutional challenges to a state court’s procedural or substantive handling of civil cases during the pendency of the case in state court. The doctrine does have a few eye-of-the-judicial-beholder exceptions, which are rarely invoked.

More below the fold...

Robert Reich asks and answers the question "Which do you trust less – Big Business (including Wall Street) or Big Government?":

But fundamentally, the debate is absurd.

It’s not the purpose of the private sector to protect the public. Companies like Goldman Sachs, Massey Energy, WellPoint, and BP will do everything they can to make money. They owe allegiance to their shareholders. Hopefully along the way they also make great products and provide terrific services. If the market is competitive, both consumers and investors gain.

The purpose of government is to protect and enhance the well-being of Americans. Its job is to protect the public from corporate excesses — enacting laws that bar certain actions that may hurt or endanger the public, and fully enforcing those laws.

We get into trouble when the two sets of responsibilities are confused – when big business and Wall Street spend vast amounts of money trying to influence government, and when government officials (including the officials of regulatory agencies) pull their punches because they’re aiming for lucrative jobs in the private sector.

The real challenge of our time has nothing to do with whether one trusts Big Business and Wall Street more or less than Big Government. The challenge is to keep the two apart, each focused on what they’re supposed to be doing. (That’s why, for example, I still think it unwise to have BP run the operation to plug the hole in the bottom of the Gulf.)

Jon Walker at FDL begins a chat on politics and agendas. The big picture is built on thousands of pixels...so is national politics apparently if your advertizing budget is small.

The elected officials in the cooperatives formed a large pool of potential recruits to run for political office and to be elected to positions within the CCF. By being position- holders, these potential candidates also had a built-in base with a trusted network of potential supporters within their cooperatives. We know that being elected to a position, regardless of how small, is a great predictor of a person’s willingness and ability to win larger elections. Nothing breeds success like success.

For example, running for Congress seems like a daunting hill to climb. But if you have been elected as the chair or treasurer of the local chapter of an organization, you might feel comfortable using that as a base of support for run for town council. Going from town council to, say, state legislature might then feel like a modest progression. The jump from state representative to Congress becomes a less frightening undertaking.

Several political movements have shared the pattern of candidate development by moving leaders from relatively modest spots in local associations to more important offices. The Christian right developed local leadership among those elected to positions in churches and school boards. The churches served a similar organizing and unifying focal point that cooperatives did for the CCF. These churches are incubators for electing community leaders: deacons, elders, prayer or fellowship meeting leaders and more that in turn use these positions as a base to run for higher office.

Progressives could learn a lesson about leadership development from the CCF and the Christian right. I’m disappointed that the progressive movement does not have an overwhelming number of small, locally elected positions in independent organizations. Nor are there many strong financial and social networks that lean progressive but are not purely political, with local elected leadership. By promoting local chapters and associations with high levels of involvement, electing minor local position holders, a progressive organization can create a broad pool of talent to draw from for future leaders and candidates for higher office.

Firedoglake takes on Simpson: Alan Simpson: Cutting Social Security Benefits to “Take Care of the Lesser People in Society”

...cuts he would recommend to the President and Congress on CNBC, Simpson said “We are going to stick to the big three,” meaning Social Security, Medicare and Medicaid. His sentiments haven’t changed.

(Rdan here...the transcript reads faster than the talk. I really worry about rational thought on the part of some of the players in the Senate. I received a fund raising letter from the Democratic National Party a few days ago. My personal response will be a short letter instead of a check, and separate checks to local races of my choosing.)

Did others notice that year-to-date inflation, as measured by the CPI, is zero?

What's your mental image when you hear the word "austerity?" Do you see in your mind's eye a few Grecian elders standing around in simple white robes, or monks in a monastery having their evening meal of a potato, a small bowl of soup and a crust of bread, while they listen to the 12th Psalm ? or perhaps you imagine a bank manager in a shabby suit with trouser creases nonetheless sharp as a knife, whose old shoes are polished to a mirror-like shine? or his sister the librarian with her hair tied back in a bun so tight you could crack eggs on it?

Of course these are all stereotypes, but when we pick a powerful word like "austerity" to define a culture-wide plan of action, all of those stereotypes are consciously considered by the person designing that plan of action.

Austerity is one of several American images of virtue. Austere people are not wasteful, they save their money, they use the same dining room table and dishes for 50 years, they subscribe to Consumer Reports -- and take notes. They steadily save 20% of their income for decades on end, and they buy with cash when they buy it all. They think about what they're going to say before they say it, and often say little or nothing.

There are several virtues, depending on how you count. Faith, Hope and Charity are the high theological virtues, and Fortitude, Justice, Prudence and Temperance are the others, the so-called Earthly Virtues. (Chastity comes in there somewhere, also, if I remember correctly, but that's probably not part of this essay.)

In any event, an austere person probably exhibits all four of the earthly virtues, and this doesn’t make him a very desirable consumer. So why are we again being told that the ownership society ought to be replaced by the Benedictine society, or possibly something along Buddhist lines?

Ah, but you see this particular "austerity" is only intended to be temporary, partial austerity, nothing permanent. It’s not austerity for all, just austerity for you.

Since I am a boomer, I know legitimately "austere" people, although they might not think of themselves that way. Most of them are 20 or 30 years my elders, and their austerity sprang from a time when you save your money because if you didn't have a little put away, there was no likelihood that anyone else would help you when you needed it, and you were almost certain to need it. Spending -- especially North American hobby spending -- would have been seen by The Austere Generation as a ridiculous waste of time and money. Example: my high school best friend's parents, who built their own house after World War II, are still in it, with the furnishings and furniture practically unchanged over the past 50 years. Clean as a pin, watertight above and below, a little house that needs and knows nothing of Extreme Makeovers.

It strikes me that business would not intentionally want a country full of austere people. They’ve certainly worked hard against it for decades. And government doesn’t benefit from it either, at least in the long run. In a consumer-driven economy, austerity on the part of the people means lower GDP, lower tax revenues, and animal spirits in hibernation. So, why this pervasive need to talk up the virtue of austerity?

Because, I think, the Austere American also has other qualities.

They talk little, they complain little, if the crop fails they just wait for the following year and try again. Great misfortune is treated as an act of God and an occasion to practice fortitude, another one of those virtues. The word “laconic” was invented for them. All of them prefer silence to noise, and they are slow to anger. (Remember, I'm still working with the stereotypes.) They are not dramatic, and very inclined to see their job as keeping their family and community functioning despite downturns.

In other words, I think what is wanted is not the saving, the careful judgment, or the patience of austerity. What's wanted is the reluctance to complain in the face of loss -- the loss of investments, the dialing back of pensions and salaries and so-called "entitlements", and the erosion of civic freedoms.

What exactly does "austerity" mean? Here, from the Merriam-Webster dictionary we find:

aus•tere

Etymology: Middle English, from Anglo-French, from Latin austerus, from Greek austēros harsh, severe; akin to Greek hauos dry — more at sere. Date: 14th century

1 a : stern and cold in appearance or manner b : somber, grave
2 : morally strict : ascetic
3 : markedly simple or unadorned
4 : giving little or no scope for pleasure
5 of a wine : having the flavor of acid or tannin predominant over fruit flavors usually indicating a capacity for aging

“Harsh, severe, dry, stern and cold, strict, simple, giving little or no scope for pleasure.” Does that sound like a fun social policy? The only glimmer of hope in here has to do with wine.

Now, this usage is hardly new. To see how the word is used in government pronouncements, have a peek at the very useful Google News Archive search for austerity:

The word has long and consistent use over time, but golly -- look at that jump for 2010.

Nip into any timeframe in that link to see what the word means in the news of the day, and it appears to always mean "no soup for you!", i.e. cuts to public service pay, and cuts to services. The word seems to travel with other words like "riots," and "general strikes."

When an old farmer watches a promising crop washed away by a mid-summer flood, the correct response is patient perseverance because Mother Nature can't be taken to small claims court. She can’t have her assets frozen and a bankruptcy panel divide up the capital among her creditors. She can’t be voted out of office.

However when a citizen watches the promises and investments of decades eroded or washed away by businesses that want the cake but not the dirty diches, or governments who want the tax contributions but not payouts for services already paid for, the old farmer’s appropriate response is not patient perseverance -- not the austerity of suffering -- but incisive, stern, severe demands for accountability and the keeping of promises made one or two generations before -- the austerity of judgment.



"Austerity" is not a synonym for resignation. Remember the final dictionary definition? the wine that is preserved and enriched over time by the bitterness of tannin? the wine that lasts for years, and still has a bite when it leaves the bottle? That is the kind of austerity we need in the face of "austerity."

"Stately, Plump Buck Mulligan." Unless you're a chubby chaser, it's not an image that one immediately thinks of as licentious.

After a few days, Apple is at least considering this. (The headline appears to jump the gun.)

Yes, it's that time of the year again.

There was an interesting blog post over at the Macroblog (Atlanta Fed) regarding productivity. John Robertson and Pedro Silos highlight the contributions to GDP growth from various factors, including productivity and employment. One of their findings:

As this chart shows, relatively high labor productivity growth during a recession is not a phenomenon isolated to the 2007–09 and 2001 recessions (for present purposes, the end of the most recent recession is identified with the trough in GDP in the second quarter of 2009). All recessions from WWII through 1970 also featured sizable growth in labor productivity.

The article focuses on the contribution of productivity gains to GDP growth during a recession and the early stages of the recovery. The authors do not comment on, however, a very interesting bit of their story: the “hourless” recovery. Lockhart speaks of this curtly in his speech - the focus of the macroblog article:

Current data on the use of part-time workers suggest that businesses have some scope to increase hours without hiring new full-time employees.

The precipitous drop in hours worked has differentiated this labor downturn from previous cycles (papers here and here). According to the BLS Q1 2010 productivity report, the recovery of the 2007-2009 recession has so far been “hourless”, which is consistent with the previous two cycles.

More below the fold...

Industrial production and housing starts were reported today. It has been well covered elsewhere, but I though I would make a couple of comments.

Compared to other cycles this recovery in industrial production continues to be moderate.

It is stronger than in the weak recoveries, but compared to the depth of the downturns the rebound is quite weak. The good point is that in the early stage of a recovery industrial production is driven largely by inventory rebuilding. But we have probably passed that point in the cycle as the economy shifts from the recovery stage to the expansion stage. This means that we are now seeing quite strong industrial production that is driven by changes in final demand rather than by inventory restocking. This implies that good growth in industrial production is likely to continue in contrast to previous expansions when industrial production growth flattened out after inventory restocking ended.

The other point in the report was that capacity utilization was rising. Normally rising capacity utilization is an important driver of business capital spending and is a good omen for continued growth. But that optimistic premise should be tempered by the point that one of the reasons capacity utilization is rising is that industrial capacity is actually contracting.

It is down -1.3% from a year ago, the largest contraction on record.


In contrast to growth in industrial production housing starts actually fell from 659,000 to 593,000. This reflects the major difference between the two economic sectors. Industrial production is being driven by a rebound in final demand while final demand for housing is weak. Moreover, this weakness in housing demand reflects the over a decade of over-production in housing that built excess supply that still has to be worked off.

More below the fold...

Debt, Deficits, and Defense...The Sustainable Defense Task Force set in motion by Rep. Barney Frank has comprehensive suggestions. It is more specific than other suggestions I have read.

David Ignatius of the Washington Post sees deficits concern as a possible unifying process among right/left thinking. I don't see it.

Bruce Bartlett comments on deficits and defense spending here and here.

Concerns about budget deficits and rising debt levels are leading to fractures in the heretofore unified conservative support for ever-higher defense spending. At least a few Republicans are now openly suggesting significant cuts in the defense budget, raising concerns among conservatives primarily concerned about national security. I believe that ultimately national security conservatives will be forced to choose between cuts in the defense budget and tax increases to reduce deficits.

Health care reform blog reminds us both complexity of costs:

Thus, areas with high medical spending do not have offsetting lower pharmaceutical spending; in fact, if the coding practices in different regions are not too dissimilar, the substantial variation in pharmaceutical spending does not seem to be strongly associated with variations in medical spending at all. Spending on pharmaceuticals itself is variable and thus warrants scrutiny similar to that given to medical spending, in order to glean lessons about optimal prescribing, insurance characteristics, and resource allocation. Our findings reinforce the importance of understanding the drivers of geographic variation, since increases in medical spending or pharmaceutical spending do not appear to be associated with offsetting savings in the other realm. Using this more complete measure of spending reveals that area-level variation in total spending is not driven primarily by patient characteristics. These data may offer us an opportunity to gain insight into the underlying causes of the intensity of use of health care resources and the potential for public policy actions to improve the value of the health care delivered in the United States.

(Bolding is mine)

Good health care less money

Advocates for health care reform (including yours truly) have frequently argued that it is possible to reduce the amount of care without reducing the quality--or, to put it more simply, that less care doesn't have to equal worse care.

Several other links point to information to quality and costs:

Is more care better?


The Cost Conundrum
What a Texas town can teach us about health care.
by Atul Gawande

Massachussett is still wrestling with cost:

The Mass Hospital Association did not offer access to their membership white papers when I asked, just public positions. These are the latest on the website. If represzentative. the two suggested are disappointedly indicative of the inability of insurance companies and the big hospitals to come to terms with cost despite promises of cooperation in MA.

Mass Hospital Association points to wage increases as problem:
Lots of data, but the end result appears to epmphasize the idea that higher costs of the private sector subsidizes the public sector, but cost reduction strategies appear limited. Global payment system billed as a cost savior of major proportions.

Mass Hospital Association primary recommendation to cost reduction appears to be through insurance plans:

"Employer/employee cost reduction through reduction of services and at least increased co-pay.....insurance plans are 'rich', premiums high because insurance mix is too rich."

In the deficit atmosphere in MA, the public sector 'too rich' insurance plans will come under attack through a change in law on making health plans part of wage negotitions mandatory...towns will be able to change terms unilaterally is my bet.

Martha Coakley, Attorney General for MA, has a report showing utilizationhas not increased nearly as fast as prices over the last 3-4 years.