Wednesday, June 2, 2010

Look at the Gross

I’ve always been told “never to look at the gross” on my paychecks. By the time that taxes from local, state, and federal government come out I’ll be left with a (more) paltry net sum. But it turns out that the same complex accounting that makes me look only at the net should increase my attention to the government’s gross. According to recent presentations to the President’s Fiscal Responsibility Commission, the US now carries a debt burden in excess of 80 percent of GDP. Yet many experts continue to quote the more reasonable-sounding “debt held by the public”, which produces a debt to GDP ratio closer to 60 percent.

The net value on a paycheck on a government budget or debt level measures only the value of transactions today. For an individual worker this makes since, I expect to receive payments tomorrow but only if I keep working. Yet the government obligates itself to make payments to long-standing programs like Social Security and Medicare well into the future. These future obligations generate massive differences between gross and net debt levels.

As the figure below shows, the United States resembles other advanced economies in hidden gross debt.

Emerging economies have a lesser wedge between net and gross debt primarily because they have weaker social safety nets. Of course, the United States created it's safety nets in punctuated phases. Take for instance, the first Social Security beneficiaries who got very large benefits relative to their contributions. If an emerging market economy were to start such a program immediately it would of course radically alter the gross/net wedge

What separates the United States from both advanced and emerging markets is the sheer size of all debt. Within the IMF data, the United States ranks only behind Greece, Italy, Japan, and Belgium in its level of overall debt. In fact in 2010, IMF estimates show the US crossing the 90 percent threshold cited by Reinhart and Rogoff as a trigger for debt crises.

Monday, May 24, 2010

Swapping Risk

I promised more on Greece and that it wouldn't involve Greek drama. I'm following through on that below.

European leaders, especially in Germany, resisted initial clamor that they would bailout Greece before coordinated a 750 billion euro bailout plan. Now several Republican Congressmen are fighting against using IMF money funded by the United States to aid Greece.

The move puts them at odd with actions already being taken by the Federal Reserve. Just last week the Fed restarted swap lines with major central banks that allow them to access dollars. Of course the size of these swaps is miniscule. Total outstanding swaps were valued at less than $10 billion. Yet recognizing the chance of global contagion the move opens swap options to banks outside Europe, such as the Bank of Canada and Bank of Japan.

From swap size alone, Greece looks much more like Bear Stearns than Lehman or AIG, when swap lines grew to over $500 billion.

But looking simply at the size of the swaps is misguided. Before responding last week to the Greek crisis, swaps had been out of use since February. The haste by American officials to respond signaled a willingness to forestall a crisis, or more accurately to stand ready should the crisis spread. Lawmakers have both derided the Fed for acting with little authority and benefited by not having to approve any funding the Fed did provide. Moves to reduce American involvement in IMF plans are more likely to drive American involvement to places like the Fed, and outside of Congressional oversight, rather than reducing the overall burden.

Friday, May 21, 2010

Mourning Becomes Debt

So far this blog has been silent on the Greek debt. This first foray into the crisis let's me put the part of me that remains a disaffected English major to use. More rigorous analysis will appear in forthcoming posts.

In the heart of the Great Depression, there was a brief resurgence in American interest in Greek tragedy. Unhappy to simply play out classical drama Americans instead made the classics our own, such as the epic reimagining of the Oresteia set in the Civil War. The Americanized version is unsurprisingly bloodier, rougher, and much, much longer (running at over four hours, even after significant cuts). As Greece now plays out a debt tragedy, America is on course to repeat it’s Depression era mimicry by laying the groundwork (as I've written about previously) for its own debt crisis: one, like it’s theatrics, sure to prove more grueling and protracted than Greece’s.

Monday, May 3, 2010

Keeping Granny Working and Thinking

“Keeping Granny on the Job” is just mean and unfair.

Or so I was told at least a half dozen times while planning a conference of the same name late last year. As the recession displayed evidence that some seniors were in fact delaying retirement, scholars at the event explored the ways that public policy encourages workers to retire as soon as they can, with unfortunate financial consequences.

Yet, with all the attention on granny’s finances, nothing was presented to other aspects of granny’s wellbeing. In a new research paper that appeared at almost same time as the conference, and that I’ve just discovered, researchers from the Rand Corporation, indicate that seniors who work have much better cognitive skills. They examine retirement trends internationally and find that people who work longer score better on cognitive tests.

Maybe our conference was wrong, there’s no need to keep seniors on the job. They should want to stay.

Thursday, April 15, 2010

Enterprise: CRA awarded WaMu and Other Failures

I've got a post over at the Enterprise blog today about awards given by compliance agents for the Community Reinvestment Act. In several instances the awards went to firms who have since failed. Most notably 2003 winner Washington Mutual produced the largest bank failure in American history.

This morinng I attended a Congressional subcommittee hearing where the many benefits of CRA were extolled. CRA, according Chairman Gutierrez (D-IL), several expert witnesses, and most members of the majority, had no role in the financial crisis. I don't argue about the role that CRA played other than to say that CRA regulators were just as blind as many other private and government actors to the coming financial crisis during the boom years. Just as private players congratulated their "quants" for banishing risk and creating complex deviates with little thought to the long-term consequences, CRA officials gave the improper of government endorsement to "innovate" programs only to have to watch the managing firms falter.

Thursday, April 1, 2010

Enterprise: Bernanke's Room is Ready

I've got a post this afternoon over at The Enterprise blog on the Fed's release of financial data from all three Maiden Lane facilities.

I've already been told it's outrageous that the regional Fed banks spend all this taxpayer money on conferences. The cost maybe outrageous but it's not technically taxpayer money. The regional Fed banks are not actually government agencies. The Federal Reserve Board is but the banks are funded by commercial banks in their districts. We could call the fees that commerical banks pay an indirect tax on consumers but they are not directly your money. Plus the commerical banks get to sit on the Regional Feds' boards in exchange for their fees.

A bit of this could change under Charmain Dodd's bill. More on that later.

Thursday, March 18, 2010

CBO Bullish on TARP and Autos

I never thought that I’d be calling the Congressional Budget Office (CBO) a hidden bullpen. In large part because the CBO doesn’t typically analyze investments and it definitely doesn’t give advice to investors on where their money should be. The TARP and other components of the 2008 bailout have changed the workings of CBO a bit. Now that the US government owns shares (or the right to buy shares through warrants) in many companies, CBO’s reports now include a bit of corporate forecasting.

In its latest report, CBO estimates that TARP will cost taxpayers less than predicted by the White House’s Office of Management and Budget.

CBO estimates the program will cost $109 billion. That figure is $18 billion less than the $127 billion predicted by OMB. CBO gets the lower cost in two ways, first by estimating that the government will recover an additional $14 billion form its loans to AIG. Given that only a small portion of AIG’s business (and not a part of its namesake insurance business) was the hardest hit by the crisis it’s encouraging that the firm may be better able than expected to repay.

CBO’s second “savings” is more normatively ambiguous. CBO predicts that the Home Affordable Modification Program, which gives direct grants to homeowners will cost less than OMB predicts. CBO admits that these grants were never meant to be repaid. So the only way that CBO obtains a lower cost is by assuming that Treasury doesn’t spend all the money allocated to the program. If the government spent less because no one was losing their home, we’d cheer but numerous reports have shown that the program can be too slow to help homeowners, or just deny them help outright. So the Treasury spends less outright but it’s not clear the economy gets in better shape.

Lastly, yesterday’s report takes a buoyant view of the auto company loans. I’ve been crucial of these loans several times in the past. In an early auto loans report, CBO predicted a subsidy rate (the amount of money that will not be paid back) at 64 cents on the dollar. That figure has declined over time, even though little money has yet to be paid back. In the most recent report CBO expects the taxpayers will only lose 41 cents on the dollar. GM’s CFO Chris Liddell must share CBO’s improved outlook, saying that GM could profit as early as this year. I’m not surprised there but I am that CBO beat him to showing optimism. Although I must admit, I'm glad for it.

Wednesday, March 10, 2010

Massa's Confused Inheritance

Having watched much of Glen Beck's interview with former Rep. Eric Massa, I can say little actual policy was discussed. I did miss one great policy gem in Massa's babble though. Washington Post columnist Dana Milbank quotes Massa today as having said:

"You can't show up at a 'tea party' rally and claim that the entire budget deficit happened this year."
Actually you can, in fact that's the definition of a budget deficit. A deficit happens every year and goes into the budget as such. Massa was trotting out an old line about the debt, not the deficit. When President Obama came to office there was a government debt of about $12 trillion. Yet President Obama has now submitted two budgets. In those instances he could have driven the deficit to zero; doing so would not have solved the debt. Although it would have kept the debt from growing more.
Obama has actually promised to reduce the deficit in half by 2013. Doing so is a step in the right fiscal direction. Yet it would only put a small dent in the national debt. Much of which was accurred and continues to build under entitlements like Social Security and Medicare.
Massa may well have misspoken but the comment reveals just how difficult it is to separate out the debt and the deficit. When our (former) Congressmen misconstrue the two, it's even more encouraging when those showing up at tea parties often have it right.

Sunday, February 21, 2010

Could Metro enter a Growth Trap?

The Washington Post today has a look at the decline in Metro’s quality. The story comes just weeks before Metro begins a temporary increase of all fares by 10 cents. The increase is scheduled to last from March until the end of June. If anyone wants to bet that those increases stay “temporary,” I’d be happy to bet against them.

The fare hike is designed to help cover a $189 shortfall in the Metro budget. Rather than looking too much at costs the WaPo story takes a keener interest in Metro’s capital. The story points out that half of Metro’s cars are at least 20 years old (a full quarter are at least 30 years old).

Without giving too much background the WaPo provides the chart below to show new purchases of Metro cars.

Sadly, the chart doesn’t explain how many of these cars are replacements of older models and how many are just additions to the system (from the factoid about old cars it looks like most of them are additions.).

Leaving aside the politics, economic theory makes this situation look rather bleak. The growth model pioneered by Robert Solow, was designed to track national growth rates but a paired down version can be helpful for Metro.

Solow’s model looks at growth in an economy, we’ll use it here to consider the quality of Metro. Solow included labor and capital productivity growth, we’ll leave those aside (a Metro car can only carry a fixed number of people—a figure that may actually have decreased as Americans have gotten bigger). Instead, we need to note the role of capital accumulation and depreciation. Solow assumes that over time our capital stock ages (cars get old, tracks need repair, etc). The risk that Solow noted and that the WaPo implies is that there are two places an economy is likely to land.

Solow predicted that economies would converge to a point where capital accumulation just equals capital deprecation and population growth. Essentially Metro shouldn’t replace everything all the time but there is a needed lower limit.

The dark side of Solow’s model and what the WaPo hints at is there is a second “growth trap” solution to the model. In this instance, capital accumulation has been below the minimum for so long that without a giant one-time boost, the system settles to a new location where no capital is ever acquired.

We often apply the “growth trap” to highly indebted, poorly managed countries.

Metro’s financial backlog has been mentioned above. It’s manager, John Catoe is retiring in April in response to the fracas over the redline accident that killed people last year and the WaPo reports that finding a new manager could take the rest of 2010. All of that makes Metro look ripe too fall into a dangerous trap.

Wednesday, February 17, 2010

A Picture is Worth What it Can Hide

In a recent American article, AEI scholar Andrew Biggs tackled a politicization of the FY2010 budget regarding Social Security. If Biggs’ critique reached the White House it has not yet permeated it’s visual aids. Instead, The White House’s Economic Report of the President, released last week, continued to insist that per person health care cost growth rather than simply the exploding number of seniors poses the greatest threat to the nation’s entitlement programs. The move bolsters the White House’s push for health care reform at the expense of national solvency.
The report provides this figure, which shows the impact of ageing as almost flat.
Careful readers will see that the White House wants to stress health cost growth because “over the long-term they are by far the larger contributor to the deficit.” Before getting to that claim the White House has to admit that it agrees with Biggs about the short-term impacts of aging: Over the next 20 years, demographics—the retirement of the baby boom generation—is the larger cause of rising spending.

As Biggs explained, the short-term matters the most. Entitlements will engulf the federal budget long before we reach the “long-term” health care crisis. According to a presentation by CBO Director Douglas Elmendorf, spending on Medicare, Medicaid, Social Security Defense, and debt interest will be larger than all federal revenues by 2018. Forget twenty years, we’ve barely got 10.

Wednesday, February 10, 2010

Generation Gap

What happens when the longest post-War recession meets rapid population aging? For starters older workers, many of whom saw their 401(k)s decline in the stock market crash, are working longer. This isn’t to say that older workers are safe in their work. Many have lost their jobs with the unemployment rates for those 65-69 almost trebling from 3.2 percent in January 2008 to 8.6 percent the same time this year.

At the same time younger workers, who experience persistently higher unemployment due to low skills and high job turnover, have also seen joblessness spike. Workers from 16 to 24 years of age began 2008 with an unemployment rate of 12.3 percent and saw the rate rise to 19.8 percent in January of this year.

If the cultural divide between generations, that composed so much of 90s sitcoms looked bad, the knowledge divide between generations will be a disaster for Americas workforce.

All of this is part of a larger shift toward an older population. In a recent presentation, CBO Director Douglas Elmendorf showed that labor force participation, the share of the adult population employed or looking for work, will decline dramatically over the next decade. This is shown in the figure below.

The dotted line indicates what could have happened without the current recession but even along that path labor force participation will decline.

This will have deleterious impact upon national finances. The figure below shows total government revenues (the dark blue line) and spending on a core set of entitlements and defense. Just take a look at this year’s defense budget and you’ll realize that entitlements are the real driver of cost growth here.

This is a well-worn entitlement story. Many retirees being supported by fewer workers become increasingly expensive. The new twist created by the recession is that many of these older workers may work longer. This could increase their benefits and keep younger workers from gaining on the job experience or earning wages at a level that can significantly contribute to current expenditures through the payroll tax.

Debt Ceiling reaches historic high

I've got a several days old post at The Enterprise blog that I have until now failed to post here.

Friday, January 15, 2010

The Economy Wins... Or Losses

A new report from the World Economic Forum says that economic risks, not geopolitical incidents, terrorism, or natural disasters, are the most likely and most damaging global risks in the coming year. The figure below is the headline image from the report. All the labels have been added for ease.

The chart color codes economic (blue), geopolitical (gray), environmental (brown), societal (purple), and technological risks (orange). {Author’s evaluations in presence of colorblindness}. The horizontal axis provides a measure of how likely an event is and the vertical axis provides the cost if it does occur. As we move to the northeast region of the chart, the expected cost, the probability of an event multiplied by its cost if it occurs, increases. So the incident with the highest expected cost is an asset price collapse (6).

To some extent, all the blue in the upper right makes sense. Coming out of a financial crisis economic risks are still high and potentially costly. Of course, one of the events in the figure has already gone from possibility to reality. The figure rates an earthquake at only a 1-5 percent chance. The quake in Haiti has removed all chance form the calculation.

So could it be that a group of economists, funded by the financial market-dependent Swiss government, is simply overstating economic risks. Haiti’s earthquake is not itself a good indicator. Massive quakes are rare. The more surprising divide is the separation of geopolitical risks. The most likely geopolitical risk is the vague global governance gaps. The most probable discrete event, Afghanistan instability rates below the probability of economic collapses and weighs in at only a quarter to a third of the cost. It may be that economists simply don’t evaluate the risks of coups or insurrections as well.

There is another gap that the WEF should worry about, the one between economists and financers on one hand and foreign policy experts and military strategists on the other.

Friday, January 8, 2010

Social Security in the Slow Lane

I've got a post over at the Enterprise blog about an new Social Security Commission proposal. The piece discusses the scare tactics being used to undermine the commission approach. There are legitimate concerns about the current commission approach. In an open letter, members of the Greenspan Commission staff raise some excellent ones, such as membership design.

Yet both open letter and the NCPSSM video in my Enterprise post, are wrong to focus two much on the speed of the commission as a negative. This speed is all in the voting process. By forcing Congress to vote, members have to take a position on each proposal. Sure that's going to be quick but drafting the proposals will take time. Plus, the range of options is limited.

If Congress feels unsettled by a proposal, they can vote no. But members would rather just not vote at all.