The Think Tankard

Look at the Gross

2010-06-02T16:01:00.006-04:00

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.

Swapping Risk

2010-05-24T17:42:00.004-04:00

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.

Mourning Becomes Debt

2010-05-21T10:10:00.006-04:00

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.

Keeping Granny Working and Thinking

2010-05-03T16:15:00.000-04:00

“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.

Enterprise: CRA awarded WaMu and Other Failures

2010-04-15T15:29:00.003-04:00

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.

Enterprise: Bernanke's Room is Ready

2010-04-01T15:15:00.002-04:00

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.

CBO Bullish on TARP and Autos

2010-03-18T09:43:00.001-04:00

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.

Massa's Confused Inheritance

2010-03-10T14:52:00.004-05:00

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.

Could Metro enter a Growth Trap?

2010-02-21T12:04:00.003-05:00

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.

A Picture is Worth What it Can Hide

2010-02-17T09:33:00.002-05:00

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.

Generation Gap

2010-02-10T11:45:00.004-05:00

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

2010-02-10T11:40:00.001-05:00

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

The Economy Wins... Or Losses

2010-01-15T11:41:00.002-05:00

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.

Social Security in the Slow Lane

2010-01-08T10:25:00.003-05:00

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.

Should the US have More Say at the IMF?

2009-12-31T10:48:00.004-05:00

The United States is typically believed to have too large a presence in global financial and military institutions. Former World Bank Chief Economist Joseph Stiglitz criticized the IMF for being too much a tool of the Washington Consensus during the Asian financial crisis. The Fund itself built its massive (and highly secured) headquarters only blocks from the White House. Yet for all its influence, a new report by the Congressional Research Service makes the US look more like underrepresented China than like EU powers.

The figure below charts the proportion of IMF votes against a country’s share of global GDP.

According the CRS report, the US “is unlikely to lose voting power in the negotiations, as the United States is actually an under-represented country at the IMF. The United States chose to allow its proportional share to decline in recent decades, partly to make room for new members and partly to lower its financial obligation.”

I’ve written about IMF voting shares previously and shown the US is by no means lacking representation. Under a move this year to allow the IMF to respond to the current crisis by selling some gold, the US still has 16.73 percent of all IMF votes. That’s the largest share to any single country and more than twice the 6.23 percent of votes given to Japan the second most prominent country. Additionally, the so-called BRIC (Brazil, Russia, India, and China) developing countries make up only 10.26 percent of IMF votes. That’s a large share but it still leaves the US as the dominant power.

Nor is global GDP really the relevant measure. IMF votes are assigned proportionately to contributions to IMF funds, not to global output. In other words, the US’s official position in global financial institutions has more to do with our level of involvement than with superpower status. As measures to reform global finance in the wake of the crisis, staying involved should be a priority.

The New GM Theory

2009-12-30T10:26:00.002-05:00

I haven’t written about the auto bailout in sometime. I mostly skipped writing about Cash for Clunkers. I’ll say now that the program appears to have increased the price of used cars by scrapping many of the clunkers. Americans who decried bailouts to risk taking banks sadly saw little resemblance to having their investments in their cars propped up to the disadvantage of first time car buyers.

But Cash for Clunkers, which cost about $2.8 billion, looks about as expensive as Goldschlager looks gold-dense when compared to the funds given to auto companies directly. The first annual report of the Office of Financial Stability shows that the US government still has almost $15 billion in loans out to Chrysler, GM, and GMAC. The figure below shows how these loans were converted into government ownership of Chrysler and GM.

Now the government at least bought into GM near a historic low point for the company, so any uptick could generate some returns but the company’s ownership has been radically reorganized. Chrysler will face challenges from being majority-owned by VEBA, a representative of employees and their pension funds. GM faces a less clear future being owened largely by governments that say they don't want to own auto companies. Further complicating GM is that the company is co-owned by the American and Canadian government.

Now let’s think this through. We now have a large firm, with high fixed costs, a lagged cycle for innovation and high costs to making one year of bad products, owned by multiple governments, facing tough international competition. I think I’ve seen this game before, in fact I think applying it to Airbus helped win Paul Krugman a Nobel Prize. Yet the now classic Boeing-Airbus game doesn’t say that governments should dump their corporate investments but should instead encourage domestic production in such markets.

The Tax that Wasn't

2009-12-17T11:45:00.003-05:00

I've got a post over at the Enterprise blog today on the Social Security earnings test. I'm propsing the unconvential approach that misunderstanding about the test could actually cause people to work longer.

Balancing Act

2009-12-16T14:55:00.005-05:00

The Federal Open Market Committee just released its policy statement. No major surprises here. The Federal Funds Rate is staying in its 0 to .25 range. For some time I’ve been using the compare function of MS Word to track the changes in the FOMC’s statements. The function which is meant to find revisions in updated versions of the same document works surprisingly well for the FOMC. In other words, there are not a whole lot of changes between statements. The minimalist approach means that I’m going to each change got Joyciean attention (James Joyce was rumored to have ceased writing for days simply to fixate on one word that he wanted to get right).

So here are this month’s changes. The Fed is
1. Shifting the winding down of the MBS purchases into the present tense.
2. Says firms are “reluctant to hire” rather than the active cut backs from last month.
3. Eliminates the phrase “the fed is monitoring the size and composition of its balance sheet”
4. Has reaffirmed its commitment to end most of its special programs by February 1, 2010.

I’m still watching the balance sheet, given that, as the chart above shows it’s still double the size that it was before the crisis began. Additionally, it's the red section of the chart, direct asset, purchases that is growing and likely carries the most risk. Just as Treasury has called the Capital Purchase Program closed even while sitting on nearly $100 billion of potentially toxic assets, the Fed may be stuck with a good deal of garbage for a long time.

New York, Unequal New York

2009-12-02T20:42:00.006-05:00

This morning, Felix Salmon of Reuters pointed out an “income barbell” on Manhatten and some of its boroughs. The post begins:

Did you know that there are more rich households (anything over $192,000 a year for a family of four) in Bay Ridge than there are on the East Side south of 14th Street?

Salmon’s post draws on a mapping application from Envisioning Development.

I’ve never been to Bay Ridge and my time in New York City is only cursory. I actually noted the post mostly because of the great work being done in that neighborhood by a Columbia J-School student.

But from the Envisioning Development data, I was able to test just how much of a barbell there is in any New York neighborhood. For the reasons above, I’ve picked Bay Ridge as a test case. The EV map provides a number of people in various income ranges for each neighborhood. For instance, the Bay Ride data says that 5,595 middle income families, who earn between $61,000 to $91,000, live in the neighborhood. The EV data also reports that the median income in the neighborhood is $65,800* or 85 percent of the citywide median. The distribution is called a “barbell” due to the large number of people near the bottom and the top.

Yet it turns out that the barbell in Bay Ridge is not really much different from the national average. I drew this conclusion by simulating the distribution of Bay Ridge’s income form the EV data. I created a random sample of families with income distributions the same as the EV data. Since the EV data only provides a range of incomes, I’ve assumed that any income value within a given range is equally likely. The other assumption used in my analysis is to top code the income distribution at $325,000.&

I’ve compared my analysis to a common metric of income inequality, the Gini Coefficient. Gini values close to zero indicate equal income across a population and Gini values close to one are more unequal.

According to the Census Bureau the national Gini index was .461 in 2007. I’ve produced a value of about .42, on average for multiple iterations, of the simulation.

Below is the Lorenz Curve, the graphical representation of Gini, for a single iteration of the sample.

*My simulated cohorts produce a similar value.& Public Use Micordata released by the Census Bureau typically top codes at $250,000. I’ve used a higher value to account for the smaller than usual sample size.

Forget the Phantoms, the Real Districts are Behind

2009-11-22T11:04:00.004-05:00

Much attention was paid last week the errant phantom districts created by the federal administrators of the stimulus bill. Online policy watchers at Watchdog.org have done a good job of counting the 30,000 jobs “created or saved” in 440 phantom districts created by coding errors.

Since then the top level information on the Recovery.gov website has been changed so that districts are now compiled as “unassigned congressional district.” The errors remain in the downloadable data files.

The phantom districts don’t really matter, except that they undermine the data. These simple code errors reveal a lack of oversight. As Ed Pound, director of communications for the Recovery Accountability and Transparency board, told Watchdog, “Our job is data integrity, not data quality.”

It’s this lack of attention that allows for massive over-reporting from Georgia to Colorado, to name a few. These repeated errors cast doubt upon the entire dataset.

Most economists will tell you that Congressional district is a terrible breakdown for job analysis. The choice to mandate such reporting the stimulus bill was likely more to garner bragging rights about local job generation. While low in economic meaning, those numbers could be powerful talking points next November. Despite potential inflation, most districts have not made surprisingly large job gains.

When the stimulus bill was being debated, district by district job creation estimates were created based on a wider analysis by CEA Chairwoman Christina Romer and Jared Bernstein. Those estimates were for the full two years after passage and most districts are far from reaching the predicted levels. Yet 16 districts have already surpassed their two year creation expectations. Of the 16, 13 are represented by Democrats, most notably; California’s 5^th district in Sacramento and represented by Representative Doris Matsui (D) has already produced 12 times as many jobs as predicted. Even without those outliers, Republican districts report on average 521 jobs compared to the average 679 reported in Democratic districts. Of course, it could be a phantom difference.

Be prepared to work more

2009-11-16T13:13:00.002-05:00

The Federal Reserve Bank of Philadelphia released its forth quarter suvery of forecasters today. The survey predicts that economic growth will be stronger than expected in coming years and that unemployment will be higher compared to last quarter's survey. Those two factors combined are likely to mean more work for those Americans who are working.

The basic conception of national output (Y) is usually given as Y=f(K, AL). This means that output is a function of capital (K) and labor (L) with a multiplier for technological advancement (A). The new Philadelphia numbers indicate that L is going to continue to decline for some time. The capital stock, K, seems unlikely to rise anytime soon. As the figure below shows non-defense capital goods orders have declined drastically this year. While the figure appears to be leveling off, it will likely take some time to regain lost levels.

This leaves A to drive growth. Increases in A are by no means synonymous with more work. During the tech bubble A increases were the result of things like e-mail and internet access. In the present recovery, the growth is likely to come from one place: hours 1. Of course hourly increases are not going to be distributed evenly. The average workweek for nonsupervisory production works is 33 hours a week, its lowest level since WWII. That of course is linked to the lower panel shown above, with lots of unfilled orders businesses just are not producing right now.

The situation may not be all bad news. The New Yorker ran a story in March that those who are working are seeing steady wage increases. Plus research out this year indicates that it’s the un- and under-employed who are the most likely to experience depression. Happy work hours.

1. We could of course think of more hours as an increase in L. I’ve eschewed that here so as to separate out the impact of number of people employed and work per person employed.

More Marathon analysis

2009-11-15T11:27:00.005-05:00

Several weeks ago I posted upon the results of a half marathon that I recently ran. Since then, the marathon season has run it's biggest races of the fall, including Chicago, New York, and DC's Marine Corps. I haven't had the pleasure of running any of these trials (I'm hoping for a debut next fall). I've been encouraged to see that more analysis has come from watching those races.

One of the most past along was this post by Paul Kedrosky of Infectious Greed asking why the wining finish times at New York have been less volatile overtime. The post provides a great question with little answer. I've discussed this disparity with several runners (including one who finished in the top 400 males runners at Boston this year) and several hypothesis have struck us.

I. Weather. The New York and Boston marathons are run at different times of the year and weather maybe in more flux in the Boston spring than the New York fall.

II. Competing Races. The New York marathon competes with Chicago, DC, and Detroit for runners. Boston competes with London, in 2010 the two are a week apart. As a result New York may attract a wider international field and Boston may have a more American appeal.

III. Prize money disparity. I've checked and this explanation seems unlikely. Boston paid out$150,000 to winning runners and New York paid out $130,000 to winners. Unless the evolution of the two races' prizes has been different, I'd expect that Boston with the higher prize would have less volatile times as it should consistently attract top talent.

Analysis of this type is a test, evaluate, and reject kind. There are lots of possible reasons but probably only a few that hold up to rigorous analysis.

Speaking of rigor, I've done a bit more work on the half-marathon I ran and owe readers an update. I originally provided a simple linear regression on gender and age. I tested other specifications and did not get any more significant explanitory power. Well, at least not statistically. Here's a case where common sense needs to play an important role. The model that I originally reported implies that someone of the lowest age should run fastest, for example that a 8-year old boy should best a 21-year old man. This makes little sense. Instead the model should and now does include a variable for the square of age.

The new regression is shown below.

This regression is only for men. The linear line is the original formulation. The upward-sloping curve is the squared regression. This new model has two important implications. First, it estimates that a man should run his fastest time at 23.4 years of age, eliminating the problem of superfast pre-teens. Second, at older ages, beginning around age 55, the curve increases much faster than the line. The squared model indicates that at each age above 23 each additional year of age adds more time to finish than the last year. As a result the move from age 60 to 61 is much more significant than 24 to 25.

Also plotted on the figure is my finish time. In my modest defense, I'd like to say that the models are best fit. The full data shows that I'm still within a dense cloud of finish times. I'm taking all this as an incentive for improvement rather than a reason to retire.

Depression Fatigue?

2009-11-05T09:01:00.005-05:00

I wrote over the summer about the manic consumer mood during recessions. My argument then was that by calling a recession, policymakers could send consumer confidence into a tailspin.

With the current recession creeping toward it's second full year (even if NBER calls June the end of the downturn, as some predict, that will make the recession 18 months), this is the longest contraction since the Great Depression. Calling a recessions is academic for this instance. Today, I want to know what happens in long recessions. The figure below charts the unemployment rate (the BLS' headline U-3) and the ICS (the University of Michigan and Reuters confidence index that I used before.The model that I provide is hyperbolic, allowing it to take the curved shape in the blue regression line. The model, which accurately predicts the current ICS from the September unemployment rate, indicates that small changes in the unemployment rate drag on confidence more than at high levels.

The model is far from perfect because unemployment is one of the last indicators to recover form a recession. Yet unemployment tends to peak at the end, or just after the end of a recession. So we can use high unemployment levels as as a proxy for the length of a recession.

People appear to be most respond emotionally to the beginning of a contraction. We're seeing this now. Chairman Bernanke called the recession "officially over" recently and the Fed said in it's FOMC statement yesterday that consumer spending is "expanding."

Oh for the wonks, the model specificaiton is:
ICS=187 (1/unemployment rate)+54
R2=.25
*The model outperforms ln, linear, or quadradic specifications
Data from 1978 to present

Science over at The Enterprise

2009-10-28T11:30:00.002-04:00

I have a post this moring over at The Enterprise blog of The American this morning on why the stimulus bill will not produce path-breaking science.

Parks Half-Marathon Formalized

2009-09-17T22:44:00.006-04:00

So far I’ve used this blog to describe economics issues of interest to my professional experience. This blog will continue to chronicle those events as my skills are often of most use there. On occasion, some personal event will provide an opportunity to utilize the lessons of economics in a practical way.

Last weekend, I participated in a half-marathon (a 13.1 mile run for the uninitiated). Sure it tested my health but it’s after effect provided a great statistical inquiry. Analysis of the Parks provides a few lessons.

I. Age is of little matter to runners. My results show that age, while statistically significant, has little impact on the timing of a run. In fact, I show below that increasing age by one year increases the total finish time by less than one minute. That’s very impressive when you consider that this equates to an addition of less than 5 seconds per mile.

a. This is course panel data rather than time-series data. While there is little difference amongst people of different ages in this sample it is unclear that runners in this sample will maintain this pattern as they themselves age.

II. Gender does matter. Men run almost 15 minutes faster than their female counterparts of equal age.

Now that you’ve got the headline lets delve into the proof.

Figure 1 below shows the distribution of finish times, in minutes, of all runners at the September 2009 Parks half.

We can see that the values bunch around 120 minutes. Ten percent of runners finish in 98 minutes or less and fifty percent of runners finish in 122 minutes or less.

While this is a helpful way to look at the data, it provides little explanation as to why it occurs. The only other information available about runners is their age, gender, and city/state of residence. I have taken the age and gender of runners to explain finish times.

The results of a linear regression of the finish time based on these variables are in Table 1 below.

Table 1 shows that both variables are statically significant. I’ve used the age difference from (current age-38), as 38 is the median sample age (this should not impact the size of the coefficient but it makes it easier to understand our baseline who is a 38 year old female). The table shows that men finish about 15 minutes earlier than women of similar age and that aging by one year adds about 40 total seconds to finish time.

According to my model, I should have finished my race in about 10 less minutes than I did. This is encouraging. I means that I should be able to PR with some ease in my next outing and that with age I won’t gain too much time.

Public Option Identity Crisis

2009-09-10T12:03:00.003-04:00

The public option will be small and you probably won’t use it. Or at least that’s the message that President Obama presented in his joint address to Congress.

“Let me be clear – it would only be an option for those who don't have insurance. No one would be forced to choose it, and it would not impact those of you who already have insurance. In fact, based on Congressional Budget Office estimates, we believe that less than 5% of Americans would sign up,” said Obama.

For a provision that was once a major component of Obama’s health care reform, the speech expressed a willingness to experiment to get everyone covered, that’s not a lot of impact. In fact, a plan that size will have little chance of rivaling the big insurance plans that Obama wants to see face more competition. According to Obama’s own count 34 states have at least 75 percent of their health insurance market controlled by five or fewer companies. President Obama’s public option sounds like backing Tata to take on Ford, Chrysler, and GM in the US.

This size issue presents two plausible paths.

The first is that the public option really will only attract 5 percent of the population. Those most desperately unable to access private insurance will gravitate to this plan due to heavy subsidies. Anyone who can get care by other means will continue to do so. The unwillingness of average Americans to join the option will speak to substandard quality of care. It will be poor service targeted at the poor.

Yet the administration wants to argue that the public option can be competitive. Alright, if that’s true than more Americans will want to buy it and its share of the marketplace will rise about 5 percent, possibly by leaps and bounds.

Wait did I say there were two plausible paths? Yes, unless the government does with this small public program what it has done with past programs. Take Social Security for instance. At its founding the program covered only workers in commerce and industry. Railroad workers and more importantly American farmers, who made up a large share of the labor force (in fact according to the Department of Agriculture the number of farms in the US peaked in 1935), were excluded. In the early 1950’s both those groups were rolled into Social Security and today almost all workers are covered by the system. There’s nothing inevitable about this choice. Social Security intentionally excluded wealthy Americans in the beginning because it was believed that they could fend for themselves. As the program grew, our trust in any American’s ability to plan for their own retirement declined and the system’s growing deficit demanded that more people be integrated in order to pay for it.

There’s nothing inevitable about this path for the public option either. Medicare and the food stamp program have expanded in some ways but remain options for the poorest. Obama’s plan would be better directed at those most in need of health care rather than trying to constantly wade between access and leaving most Americans alone. It would make the plan more efficient and remove the spector of government control from people who are already insured.

The Legacy Continues to Build

2009-09-03T14:31:00.003-04:00

Sometime early this year the Administration stopped calling unsalable assets "toxic," as Secretary Paulson had done, and began calling them "legacy assets." Even that rhetoric has evaporated or just been ignored more as of late. That's unfortunate because the Fed's big moves from early last year have mostly evaporated as the true legacy assets are still accruing.

The figure below shows several Federal Reserve programs that began last year.

The two that were most prominent in 2008, central bank liquidity swap lines and the commercial paper program were sensible, short-term program. The liquidity swap lines were extended to other central banks so that they could obtain US dollars. The commercial paper facility allowed firms to trade on their own short-term debt obligations. The move was important because firms rely on the commercial paper market to manage their day-to-day finances.

The other two programs both show a different view of the bailout. The green Maiden Lane line is the sum total of funds given to bailout and purchases assets from Bear Stearns and AIG. These assets are definitely legacy assets. You can see that after the levels only jump when the Fed picked up Bear and then Later AIG. Since then the Fed has been unable to unload these assets. Much unlike the central bank swaps and commercial paper programs where private markets have stepped into resolve the issue, no one wants to touch Maiden Lane.

Also, it's clear that Maiden Lane is simply a small portion of bailout efforts. While the Bear and AIG episodes have lots of other costs, as you can see that the central bank swap lines become much more important once Bear fails, they are not themselves the big cost.

The real cost and the one most likely to resemble Maiden Lane is the Fed's purchases of mortgage-backed securities (MBS). The Fed has continued buying these up in an effort to cleanse financial markets. These are the quintessential "toxic" assets. The Fed will be unable to sell most of this stuff and have to hold it until the underlying liabilities are paid back. Given that a lot of those are home loans, the Fed could have a good deal of these assets for 20 to 30 years. The recession rhetoric may be over but the legacy will be with us for some time.

Profiting from Payback? Unlikely

2009-08-31T12:34:00.001-04:00

The New York Times today released a look at the amount of profit coming to the US government from TARP. The government has made about $4 billion from repayment so far with some likely to continue. As the Times’ graphic points out the Treasury still holds warrants with JPMorgan and Capital One. It could profit from a third-party sale or, much more likely, repurchase by JPMorgan and Capital One.

The Times does some credit for pointing out that this is far from final. Rather than quoting the early arguments for possible TARP profit from then-Treasury Secretary Henry Paulson they look at current market conditions. Paulson’s case needs a grain of salt since he began making it back when TARP was going to be used to buy assets not bank equity.

More importantly the money made back from TARP has vanished in other areas. The FDIC reported last week that it lost almost $3.7 billion in its insurance fund. While the fund is paid for by bankers rather than taxpayers the fund is dipping as the FDIC increased its concern for “problem institutions,” rose. At the end of June the list had 416 institutions with $299.8 billion in assets.

The TARP figures also exclude possible losses on Bear Stearns and AIG, which were funded by separate programs. A year from the tumult of late August and early September 2008 the financial situation is markedly improved but it’s not time to start counting profit yet.

Second Life Growth overstated, Ignores Crash

2009-08-14T15:02:00.006-04:00

Linden Labs, the developer of the (supposedly) addictive Second Life online game, reported this week that Second Life's economy grew by 94 percent in the last year. The report even converts the game's in-game currency, Linden dollars (L$) to real US$, a sample process because a real exchange market for the two currencies sets a price just like that between dollars and Euros. Yet putting together the information in the charts provided in the release shows that this virtual economy per capita grew at 18, not 94 percent, over the last year.

There are two main problems with the analysis done by Linden.

First, the report also gives the number of user-hours in Second Life. This is essentially a measure of population. I use user hours because in reality we cannot extend our days. In Second Life more time online essentially expands population.

Figure 1 shows the value of user-to-user transactions per user-hour.

It’s very clear that back in 2007, the Second Life economy crashed. In fact the per user value of the Second Life economy, fell in 8 of the last 14 quarters. This decline beginning in Q2 2007 through Q2 of 2008 is about as long as the current US recession. It also resulted in the per capita economy contracting by 27 percent, a level more akin to the Great Depression than the current US recession.

Second, the report gives the value of all user-to-user transactions in Second Life. Notice that I have not shorthanded any of his with GDP. That’s because real world metrics like GDP measure only the value of final goods produced. This means that computer circuit sales are not measured directly but as a component of the price of computers. I don't know what people are trading on Second Life but if any of them are trading for things that they then use to create new products, actions, or environments then the report is double counting. The available data doesn’t provide a way to correct this error but the real per economic value is likely lower than reported.

The lesson from this is likely that the Second Life economy is more volatile than the actual one. The turn-around in Second Life that began in Q2-2008 seems to signal little for the real economy.

California follows national trend

2009-08-14T14:59:00.002-04:00

In a recent article, I warned that national leaders should look at the problems facing California as a harbinger for the national debt outlook. California paid out almost $2 billion in IOUs since beginning the new fiscal year without an operating budget in July. While the IOUs, officially warrants, were set to mature at latest on October 2nd, California has announced that it will end warrant issuance on September 4th and begin repaying them. The move comes as Gov. Schwarzenegger signed a budget that should eliminate the projected fiscal shortfall in FY2010.

The improving credit conditions are not unlike those at the national level. In its statements this week the Federal Reserve’s governing body, the FOMC, announced that it would end its $300 billion Treasury purchase program one month later than expected. The move will spread out the remaining purchases, of less than $50 billion, over a longer period, and wane the economy of Fed purchases. Other Fed programs aimed at private firms, such as the commercial paper program, have already seen stymied outflows as firms find better borrowing rates in the market.

Yet in neither Sacramento nor the Fed have debt issues been resolved. California is taking a loan to pay its IOUS. The Fed’s balance sheet remains double the size that it was at the beginning of 2008.

California follows national trend

2009-08-14T14:59:00.000-04:00

Jobs

2009-08-11T15:04:00.005-04:00

Early this year, projections released by recovery.gov made me skeptical that the outcome of the American Recovery and Reinvestment Act could meet the public promises on the jobs front. The issue was not the number of jobs but the cross-state equality promised in the projections. The projections were the culmination of a paper written at the Council of Economic Advisers by Jared Bernstein and CEA Chairwoman Christina Romer.

Romer and Bernstein combined proportional projections, essentially multiplying each states labor force by a constant factor, with modeling to produce a estimates of the number of jobs likely to be “Saved or created over the next two years” in each state. Figure 1 shows the number of jobs predicted to be saved or created as a share of the state’s total labor force against the unemployment rate at the time of the estimates. The results show that Idaho, a low unemployment state was expected to gain a higher proportion of jobs than Michigan, where high unemployment should have made creating jobs cheap.

The modeling work took methods used by Moody’s Mark Zandi into account, yet the results were seemingly unaffected by unemployment. Zandi’s method incorporate “resource slack,” a technical term meant to describe that people in low employment areas will take low paying jobs. When unemployment is high there is a significant amount of slack and less money is needed to induce people to work.

Not only are the results not differentiated by unemployment, but are almost constant. At the median the program was supposed to save or create 2.27 percent worth of pre-recessionary labor force worth of jobs. Even the weakest growth state, Rhode Island, was projected to gain or save 2.08 percent of it’s labor force. The only outlier in the group was DC, expected to gain or save 60 percent more jobs as a share of labor force than the average state. The results for DC likely account for the concentration of the government as a jobs provider, a sector that would grow as the government expanded programs and created new ones, like administering ARRA.

New data from Recovery.gov seems to follow this tight concentration of results. The site now provides information on the total amount spend by ARRA (divided into loans, grants, and contracts). As figure 2 shows, the money from ARRA to date has not been evenly distributed. The three biggest recipients, California, New York and Florida, have received 25 percent of all funds. Yet they are also big states.

When we compare the amount spent so far to the projected jobs impact released earlier this year, the states appear to receive a much more equal share. Figure 3 charts the cost per job in each state with the December 2007 state unemployment rate, the metric used in the jobs projections earlier this year. The trend is weakly positive (albeit not statistically so). While the figure appears to undercut the resource slack assumption, arguing that it actually costs more per job in high unemployment states to create jobs there is still a significant amount of funds to be spent.

A more complete picture will emerge at the end of this week when tentative job creation numbers will be released. I expect the new numbers to vary from those released back in the first months of this year. Likely indicating that some states have had difficulties in creating jobs.

Who's the Pig's Head?

2009-08-11T09:15:00.004-04:00

Typically, I'd just tweet a funny link but this one really deserves a bit more attention. A comic over at Abstuse Goose combines The Lord of the Flies with a fictive history of the Federal Reserve. The joke takes the expense that with a Federal Reserve system the lost boys could fund elaborate weapons production and make the ensuing madness more "civilized."

Sure the error in the this comic, which I often make mentally, is to equate the Fed as an established institution. The first panel purports to create a "government and Federal Reserve Banking System" all in one stroke. In reality, Treasury came along with the Washington Presidency but we don't get the Federal Reserve Act until 1913. Even then the structure of Fed Independence that we know today isn't enshrined until the Fed and Treasury reached The Accord in 1951 over who would manage debt.

More than a historical lesson, the Fed faces revision today. The Administration's financial regulatory reform plan would turn the Fed into a systemic regulator. The comic doesn't assume such a role for the Fed, in large part because the intuition already has important goals: price stability and full employment.

Volcker and Greenspan shaped a mysterious Fed. One that appears to have always existed. It hasn't. The current crisis could make the current Fed structure as ephemeral as we have believed it permanent.

Americans Oppose Financing Health Care with Tax on the rich

2009-07-21T11:27:00.001-04:00

A new Rasmussen poll indicates that 48 percent of likely voters disagree with a plan to pay for health reform by imposing a tax on people making $250,000 a year or more. Yet only less than 2 percent of Americans actually make that much. Not to mention that we know at least some prominent members of the 2 percent, including the President, not only support such as tax but are actively seeking to enact it. So, more than 46 percent of Americans oppose a tax that they would not pay. There are likely two selfish reasons why.

In part, Americans don’t trust the government’s assertions that taxing just the rich can pay for the program. The same poll 78 percent of voters think that it is “very/somewhat likely” that taxes on the middle class will rise to fund the program. The Obama administration has proposed previous taxes on those making above more than, $250,000, in particular to patch Social Security. AEI scholar Andrew Biggs argued that tax plan would fail to solve that programs finances, and Americans understand why.

The other likely solution is that Americans are aspirational and hope to become a part of the upper 2 percent one day. Some cynics argue, as poll during the 2000 election shows, that at least some Americans mistakenly place themselves higher in the income distribution than they belong. Yet even with such miscalculations Americans target the long haul. In the latest version of the Panel Survey of Income Dynamics , 23 percent of respondents expected that their children would have earnings "somewhat higher" than themselves, while 29 percent expect their children’s' top earnings to be "much higher" than themselves. Respondents don’t want to protect today’s rich, they want to ensure that they can become rich tomorrow.

Econ Blog Community

2009-07-16T11:18:00.002-04:00

The WSJ prints an article today on the rising fame of econo-bloggers. The article highlights the titans including Greg Mankiw and the most recent Nobel winner Paul Krugman. In an associated guide, the WSJ lists a suite of 30 econ blogs for the uninitiated.

I don't know whether to be encouraged or distressed that I already subscribe to 14 of their list and see the others at least occasionally?

Hiring at SEC

2009-07-14T10:35:00.003-04:00

This morning, SEC Chairwoman Mary Schapiro will be grilled by members of House Financial Services on the direction for the SEC. The harshest fire will actually be levied against Schapiro's predecessors. Rep. Bachus (R-AL) and Rep. Royce (R-CA) both criticized the failure to catch Bernie Madoff.

Schapiro expressed "regret" about the Madoff fraud. A figure attached to her testimony (below) shows that Wall Street has simply increased the amount of trading to a level that overwhelmed the SEC staff.

So if you're into finance, and don't want your compensation scrutinized in public, the SEC may be willing to take your work.

According to Schapiro:

For example, to better enable our staff to conduct oversight of complex trading strategies and
products that exist in today’s markets, we are enhancing training for our staff and also recruiting additional professionals with expertise in securities trading, portfolio management, valuation, forensic accounting, information security, derivatives and synthetic products, and risk management.

Of course, Congress' concerns were about the quality not quantity of the SEC staff so hiring experts makes sense. In fact sub-committee Chairman Kanjorski is asking about the possibility of firings and accountability.

Consumer Confidence Falters

2009-07-10T10:59:00.003-04:00

After rising for four straight months, the preliminary July confidence figure from the University of Michigan and Reuters delinted. While we won't get the final measure for two more weeks, the index fell more than 6 points and will definitely be lower than June even with potential revision.

I wrote previously about the increased volatility in this measure and how announcing a "recession" causes it to spiral downward. If we look at volatility than the previous four months are encouraging. The last time the index rose for four straight months was as the 2001 recession ended. There was a fall then but much less than today. Furthermore, the decline in this recession has been much more dramatic and will likely still take quite some time to recover to pre-recession levels.

Money Multiplier

2009-07-08T11:22:00.003-04:00

In a guest post this morning on CFR's Follow the Money, Mark Dow provides a chart of the money multiplier and the Federal Reserve balance sheet. The data comes from a Bloomberg chart of the day, and he notes some issues with confirming it. While I don't have the Bloomberg data, public data sets from the St. Louis Federal Reserve's FRED database confirm the step drop in the M2 money multiplier.

Source: Author's caclulations, St. Louis Fed FRED data base, M2 (M2SL series) and Total Reserves

The money multiplier begins a step decent in September of last year, just as Lehman Brothers failed,AIG had to be bailed out, and TARP passed. The FRED data shows a 95 percent decline in the money multiplier since August of last year.

This decline creates major problems for the stimulus bill as each dollar spend produces less benefit. I wrote about Dr. Larry Summers' belief in the money multiplier and it's ability to increase the size of the stimulus back in January.

Mortgage Fraud Fillings on the rise

2009-07-07T15:57:00.004-04:00

New data from the US Treasury's Financial Crimes Enforcement Network shows that fraud claims in the mortgage market rose in 2008. The absolute increase is unsurprising as the total number of filings has risen every year since 2000. More surprising is the rate of change of filings (the line graph in the figure below).

The chart shows that the largest percentage increase in filings was in 2003 and 2004, during the height of the housing bubble. The information should make us reconsider the argument that consumers were tricked by mortgage sellers into housing that they could not afford. At least the kind of massive fraud that Secretary Geithner commented upon back in March. Geithner's comments were about the incentives of financiers to engage in fraud a case that these numbers do not speak toward.

The data is only filings and as we learned when Harry Markopolos' repeated calls for Bernard Madoff to be investigated by the SEC reporting a suspected fraud doesn't mean that anyone is going to do though follow up. Even if firms were reported by a few savvy customers they may have continued to operate.

They may also have gotten more savvy themselves about not getting caught. This may explain the slow growth in fraud filings during the current crisis.

Financial Sunset in California

2009-07-02T11:25:00.003-04:00

I've got a piece today over at TCS Daily on the budget crisis in California. The state is set to begin issuing IOUs at 2pm Pacific time today. I conclude that CA's budget crisis could presage the likely outcomes for the US Federal government is nothing is done about spending, Social Security, or Medicare/Medicad costs.

I'll try to tweet updates on CA via www.twitter.com/apumich

Subsidy Rate Falls in new CBO Report on TARP

2009-06-25T23:11:00.002-04:00

In a report released today, the Congressional Budget Office (CBO) lowered it's estimate for the total subsidy rate for the Troubled Asset Relief Program (TARP). The new report, which assess TARP transactions through June 17 lowers the subsidy rate, a measure of the amount of total outlays that Treasury does not expect to recoup, to 36 percent from 45 percent in it's March baseline.

The reduction reflects improved market conditions and quicker than expected TARP repayments, including a repurchase of almost $70 billion in warrants by 10 major institutions earlier this month.

New aid to homeowners has a 100 percent subsidy rate, as that program does not require repayment to Treasury.

While the overall prospects are encouraging, the auto industry shows little promise of repaying it's "loans." With the exception of the foreclosure plan, the auto industry assistance, with a subsidy rate of 73 percent is the worst expected return of any part of TARP. The estimates follow closely previous, disaggregated auto industry assistance subsidy rates posted on this blog in January.

New Citi Plan could reduce risk

2009-06-24T16:16:00.002-04:00

Citicorp announced plans to increase salaries today. The plan raised the ire of TARP oversight chairwoman Elizabeth Warren.
Yet Warren, who testified to House Financial Services today in defense of the administration’s proposed Consumer Financial Protection Agency, is misdirecting her anger.

As CNN reported today, the Citi plan is not to make its employees richer. Instead the plan swaps bonuses for salary. While it may be strange to most, almost two thirds of compensation for financial industry workers is not in their salary but rather in bonuses. Remember the “golden parachutes?” None of that money was salary.

So the plan is about redirecting the type of payment. Bonuses have been blamed for making traders more likely to take excessive risk and focus on short-term profit. Shifting to salary should reduce those incentives. The plan makes financial analyists more like other workers, and they think less about how their actions contribute to the profit margin in next quarter's report. While theory suggests that employers care most about total compensation, the Citi move indicates that the type of compensation really does impact incentives and should be considered in business decisions.

The Uninsured are Young Men

2009-06-19T12:09:00.005-04:00

The chart above is from new data released today by the US Census Bureau. The chart shows the percentage of people by age and gender who are insured. Amidst disccusion of universal coverage through a possible health care mandate, the chart above reminds us that Americans do a very good job of obtaining health care coverage. Almost 85 percent of Americans have coverage.

Those least likey to have health care coverage are the young. Yet even among men aged 20 to 24, the group least likely to be covered, 69 percent have coverage. A successful mandate could increase coverage in this group by no more than 30 percent. While some young people may want health insurance and cannot presently afford it. Young people do face significnatly higher unemployment rates (the rate for men 20-24 was about 10 percent in 2008 and reached over 16 percent in the first quarter of 2009). Given that employers typically sponsor health plans, low labor force particiaption may be a barrier for some. Yet many likely see themselves as healthy and are willing to take a risk by not having health insurance.

Thos who support mandates are most likely to point to the right side of this chart and point out that mandates have worked for older Americans. The coverage rate jumps from the high eighties to almost one hundred percent at age 65, the Medicare claiming age. Yet a Meicare-like option, where younger workers help support fees for older workers though payroll taxes, cannot be replicated upon younger workers—there is no one younger to subsidize them.

As the US demands less, can the world demand more?

2009-06-15T22:24:00.001-04:00

A report today by the IMF, concludes with an advisory that the US should not be counted upon to continue as the “global ‘buyer of last resort.’”

This claim is by no means new. Yet coming from a multi-national development institution that has long relied upon the United States to provide a bulk of its funding it takes on new urgency. In particular President Obama pledged a new $100 billion US contribution to the IMF earlier this year. (I commented on the implications of this injection for IMF voting in a previous post.)

Yet it’s unclear which, if any, country is ready to take upon the role the US played in driving global demand. The ideal candidate would be a large growing economy. Yet the biggest players have serious problems. China is known for its high personal savings rate. Plus, as CFR’s Brad Setser pointed out over the weekend much of the current growth in Chinese demand has been focused on domestic production, a trend that is likely to continue as long as the yuan is pegged to a basket of currencies in an attempt to encourage cheap exports.

India’s consumer economy may be more robust but like China it’s found domestic producers for a great many products. Indians may be beginning to drive but don’t expect to see many of them in Fords; they have Tata and other regional players.

When it comes to reliance on US demand, paraphrasing Churchill may be most helpful. It’s the worst system around, except that we have no other to try.

Fearing the R-word

2009-06-14T10:28:00.003-04:00

Among elected officials, there is rarely a desire to be the first to use the "R-word": Recession. While the word does not evoke the same fear of breadlines and shantytowns that Americans have been trained to associate with a Depression, the term still reminds people of slim times and cutting-back.

Friday the University of Michigan and Reuters released their headline confidence index: the Index of Consumer Sentiment. The measure tracks how people feel about the economy at any given time. The index sat at a

bout 80 points just before the current recession began in December of 2007. Since then it feel to a low of 55.3, a level unseen since 1980.

Confidence is beginning to recover, reaching 69 points in the preliminary June estimate. This good humor comes even as unemployment continues to rise and economists tell us that Americans have "lost their spirit."

Yet more interesting than the immediate swing in confidence is the increased variation when we do enter recessions. Beginning in the 1980s, peoples confidence became markedly different during recessions (as timed by the NBER) then during the rest of the business cycle.

The chart below gives the average level of consumer confidence by decade. It then provides decade-long averages for both recessionary and non-recessionary periods. Starting in the 1980s the gap in confidence between recessions and the rest of the business cycle becomes stark. While the current recession has been deep, the 1990's and even early 200s saw mild recessions associated with large deterioration in confidence. Consumers look more manic than they once did.

Source: Author's calculations, University of Michigan/Reuters Index of Consumer Sentiment, National Bureau of Economic Research Business Cycle Dating

Banks Stress Competitiveness in TARP Repayment

2009-06-09T15:09:00.001-04:00

Treasury has announced that it will allow 10 institutions to payback $68 billion in funds obtained via TARP’s Capital Purchase Program (CPP). The move comes as the Administration mounts pressure to limit executive compensation. Last week, Kenneth Feinberg, the man who handled compensation for 9/11 victims' families was reported to be taking a position as a compensation czar. The Wall Street Journal reported the new position as "Special Master for Compensation."

In testimony today, Secretary Geithner said that TARP has been successful but is only one piece of the solution. While calling for a “delicate balance between intervention and allowing market participants latitude to operate,” Geithner did call for a new regulatory structure.

So it's not surprising that the Treasury release did not name the banks that are paying back the funds yet Bloomberg had no problem naming them. In fact, an excited release from JP Morgan Chase touts the firm’s “fortress balance sheet." Firms want everyone to know that they are getting out of TARP. Ironically, when the CPP launched Treasury quickly gave funds to lots of institutions, some who may not have needed it, to obscure the unhealthiest institutions. By the end of 2008, 214 institutions had funds and at present 601 disbursements have been made.

These institutions want both potential employees and investors to know that they are steady enough to get rid of the TARP funds but more importantly they want to signal that they can get out before Congress or the Administration imposes new rules and regulations.

Academics probe Twitter habits

2009-06-03T22:21:00.003-04:00

A new study out of the Harvard Business School, takes a look at Twitter the newest, yet to make money, social networking craze. While the study finds some interesting gendered impacts (men are more likely to follow other men), I'm struck by the graphic below of how concentrated Twitter production is.

The study finds that 90 percent of tweets come from the top 10 percent of users. They compare this to 30 percent of content production by the same share of other social networks.

One possible explanation is that Twitter allows few types of content. Other networks like Myspace or Facebook allow posting of music, photos (which twitter does allow), or surveys.

Twitter is also at a different stage of development than more mature networks.

New Markets are Urban Markets

2009-06-02T10:32:00.005-04:00

This post should have gone up several days ago, fortunately the finding is evergreen.

Last week Treasury announced it's New Markets tax credit. The program provides $1.5 billion this year for community development and is funded through ARRA.

While the headline was the amount of money going out, the point that few noticed is how much of this community development is headed to urban areas.

Source: CDFI releases, author's calculations

The figure gives the share of the total disbursements. The data comes from individual allocations, which state the share of their funds going to each type of location. The clear tendency is to spend in urban areas. In fact of the 32 organizations that received funds only three intend to use more than 40 percent of their funds in urban areas. Of course this is only one part of ARRA.

Give me the Bad News

2009-05-28T16:32:00.005-04:00

This post is going to make a new economic forecast look a bit less hopeful. If you're looking for better news, I recommend that the reader link over The Good News Economist instead.

Yesterday, the National Association of Business Economists (NABE) released it's May economic outlook. The outlook predicts that the recession will end this year and that 2010 will see 2.7 percent growth (Q4 to Q4). Now NABE is not a group of bulls, they call the growth beginning this year a "subpar 1.2 percent rate in the second half."

The group gives a fair estimate. It just buries some of the information. When talking about 2010, the release says that growth "is slated for a return to near its historical trend." That's true growth in the high 2 to low 3 percent range has not been uncommon in the US of late. The problem is that we still had a recession, so while growth is back on trend the level of GDP remains off trend.

Taking a look at the rates predicted by NABE, one can produce the chart below (if you also pull in the BEA's GDP data).

I do assume that the 2.7 percent annualized rate is constant across quarters. This is not entirely realistic but if the 2.7 holds then shifting the quarter growth will likely only make the recovery happen more slowly. In either case until the third quarter of 2010, GDP is lower than it was when the recession began and by the end of 2010 growth since the beginning of the recession (according to NBER in December of 2007), is only .0456 percent.

A Picture is Worth a Third of your Housing Wealth

2009-05-26T11:31:00.006-04:00

Thanks to Vincent Reinhart and Nick Schulz, we have a new spiral figure of the US home prices up at The American's Enterprise blog.

The new spiral shows that US home prices in 20 major urban areas are down 31.4 percent from their peak in May of 2006. This rapid decline follows the bubble in housing prices that drove the 20-city index to increase 74 percent between January 2000 and December 2005, data for available five year changes are below.

While, it may not make sense for home prices to remain flat over time, in fact longer time series show real growth, there may still be room for prices to continue falling. The supply of new homes is falling, which may help to stabilize the price over time.

Households seek less debt

2009-05-19T14:13:00.003-04:00

A letter out of the Federal Reserve Bank of San Fransisco shows that American households are a lot like their banks, neither wants to be carrying much debt right now. The Federal Reserve Bank looked at the ratio of household debt to personal disposable income and found that since the recession began there has been a slight decline. From an all time high of 133 percent in 2007, the ratio now stands at 130 percent.

According the the report, "going forward it seems probable that many US households will reduce their debt." The report even finds that the US could face a situation similar to Japan in the 1990's and push the debt ratio below 100 percent. This all makes sense given that the most prominent avenue to wealth creation in the US his home ownership, which has seen rapid declines in value over the last year. As the New York Times reported in March, household wealth dropped about 9 percent in 2008. Yet house prices have fallen faster, almost 19 percent year over year in 2008 and 30 percent from their 2006 peak.

An honest deleveraging will require casting off much more debt. Of course, given that much of this is mortgage debt there is likely to be a long adjustment

Investment Plummets says EU Release

2009-05-14T10:40:00.003-04:00

A new release out of the European Union's Eurostat program today, provides a glimpse at how the global recession has impacted financial flows. A release today tells that foreign direct investment in the 27 EU member countries fell 60 percent last year. Investment from the US to the EU fell particularly hard to 45 bn euro in 2008 from 194 bn euro in 2007, down 76.8 percent. At the same time those 27 countries invested 30 percent in the rest of the world.

Of course this data represents corresponds to the freezing of credit markets last fall. Yet it may also indicate changes in long-term investment expectations. Foreign direct investment (FDI) is seperate from pure financial flows that includes a wider array of short-term investments in stocks, currency, etc. FDI focuses on "obtaining a lasting interest by the investor in one economy in an enterprise resident in another economy." The Eurostat release lists purchases that buy more than 10 percent of a firm's stock in this way. Think of Inbev's purchase of Anheuser-Busch.

These declines come just as President Obama seeks to change profit repatriation laws to reap more tax revenue. Criticism of the plan exists both at home and in EU countries like Ireland, which has been a beneficiary of American subsidiary profits to tax. If investment falls, the impact of such taxes changes may be less than everyone expects.

Treasury Doubles Down on Risk

2009-05-13T09:13:00.006-04:00

Treasury Secretary Timothy Geithner is now finishing a speech to the Community Bankers of America. Full text here. He's just announced, to large applause, that the Treasury Department finds itself addicted to private lending.

Treasury plans to used the "proceeds of repayments we expect to receive from some of the largest banks" to allow banks with total assets of less than $500 million to re-apply to the Capital Purchase Program (CPP). The CPP, which is the bulk of the TARP funding, will now be going to small public and private corporations and mutual intuitions, among other types. This applies both to banks that have applied previously and new applicants. Treasury will also extend the deadline for small banks to form holding companies and re-apply to CPP for the next six months.

This move puts the returns gained from CPP back up for market risk. In addition is does so just as markets appear to be recovering and we should be encouraging private capital not flooding another round of government investment.

In his remarks Geithner stressed that these community banks, such as Farmers National which has $400 million ins assets and received $7.5 million from CPP were healthy before they received CPP. Treasury's lending too such can make a "viable bank stronger and ensure that it could lend more aggressively."

Yet we know that smaller institutions were low on the totem pole of CPP from the start. The largest amount of funds went to small number of institutions in a short time, as I've posted previously. CPP began about crisis management and that lending strategy made sense. Yet CPP is beginning to look more like industrial policy. In fact if Bank of America, the firm which according to the Fed's stress test needs to raise the most capital of the 19 banks tested has already found $7.4 billion of its required $34 billion in private capital, "viable" banks should be encouraged and able to raise private capital. In fact the stress test made such encouragement. Yet in his comments to small banks, Geithner make no calls for them to raise private capital.

"a" Gifts: Thoughts on the 2009 Trustees Report

2009-05-12T23:00:00.002-04:00

Today, the Social Security Trustees released their annual report for 2009. It's an annual event that Meagan McArdle of The Atlantic referred to as "every journalist's favorite annual kabuki ritual."

For those looking for the headline news, the Trustees have given the program a more bleak forecast than last year. The program is no expected to begin running deficits one year earlier, in 2017 and the Trust Fund will be exhausted four years earlier in 2034.

For those who don't want the wonkish titular explanation, please leave this post now and go read LOLFed (seriously, it's great). For the few of you left, a few thoughts.

1. Social Security "current law" crisis deniers are not putting their money on the table to support their assertions. Unlike the US general budget, the Trust Fund is accounted for seperately and only used for Social Security. In addition to taking in payroll taxes, and some intra-government transfers, the Trust Fund also accepts gifts. This year, even as Social Security turned 70, few gave. In fact the amount is a generic footnote in a table "a. $-.5 to $.5 million." Ouch. Especially since I think such gift programs could be successful at gauging public demand for government services if they were available more broadly in this line item fashion.

2. There's no COLA, and no need for a COLA. Get over the COLA

When it comes to pop, we all know there are healthier beverage options but flavored sugar water is always tempting and ultimately unsatisfying. It's the same with COLAs (Cost-of-Living Adjustments). There be no COLAs until at least 2013 since inflation is expected to remain low. When I say 'expected' I mean by government agencies like CBO who believe that the Fed can quickly unwind toxic, uh "legacy assets." For an alternative inflation outlook see Alan Meltzer.

Yet the National Committee to Preserve Social Security and Medicare (NCPSSM) says we need to ensure that everyone gets a COLA. I agree with NCPSSM that retirees do have a consumption basket skewed toward higher health spending. I'd also like to know that those same seniors draw on Social Security and the other program NCPSSM wants to protect. Currently, these programs serve most retirees well.

Unemployment Rises to 8.9 percent

2009-05-08T16:54:00.006-04:00

The Bureau of Labor Statistics released the unemployment rate for April today. It's estimated at 8.9 percent of the labor force, an increase from 8.5 percent in March. This is moth a slower job loss than last month and not much of a surprise. I wanted to point out two quick things.

1. The "rosey" assumptions in the Obama FY2010 Budget look more unrealistic with time. Below I've charted the US unemployment rate so far this year along with projections needed to match the average unemployment rates predicted in the budget (8.1 percent) and by CBO (8.3) back in January.

The figure assumes that unemployment declines at a constant rate each month to reach the average. Already unemployment would have to decline by .2 percentage points a month to 7.3 percent by year's end to meet the budget's annual average. Yet the administration projects an average of 7.9 percent unemployment in 2010. So it's going to take some wild gyrations in unemployment to get these results. I've dismissed these assumptions before but the numbers, for unemployment at least, continue to underscore just how off they were.

2. I'm glad to see that BLS gave attention to something I've blogged about previously, the growth of discouraged workers. The chart below from BLS show that discouraged and marginally attached workers have grown during this recession.

Do you Own the Shirt on your Back?

2009-05-06T16:57:00.004-04:00

According to a report out of the UK, it looks like much of what Americans "own" is actually borrowed. The chart below is taken from the UK's Financial Services Authority Turner Report. Of course, the important follow-up question to ask is: "What sort of activities is all this debt financing?" If the answer is education or job training we may be able to get a good return. Yet the more likely result, that we are borrowing to finance present consumption means that there may not be the future resources to repay all this debt.

Markets but not Capitalists

2009-05-06T12:58:00.002-04:00

A new Rasmussen poll out yesterday shows that only 35 percent of American voters find free market economies and capitalist economies to be the same thing. Rasmussen says that:

This helps explain earlier data showing that 77% prefer a free market economy over a government managed economy while just 53% prefer capitalism over socialism.

Yet the more important question is why are the two seen as so different. Assuming that their are no sample errors unique to either poll (I'd be shocked if their were), people are exhibiting different reactions to terms often thought of as synonymous. The result of the most recent free market study was supported by a March survey by the Pew Research Center that found that 70 percent of of American believe that they were better off "in a free market economy even though there may be severe ups and downs from time to time." (HT: AEI President Arthur Brooks. Note that Brooks' article "The Real Culture War is Over Capitalism uses both "capitalism" and "free markets" to talk about is values).

A few points may make the difference:
1. Capitalist can refer to a person. In fact, a kind of person whom a Google search is likely to caricature like JP Morgan: fat, bearded, and wearing a suit that would surely have been devoured by moths decades ago.

2. Free markets are almost always the purview of international trade. Domestic "free" markets are typically pretty settled. Only in rare cases, say the need to contain invasive creatures are products not allowed across local, state, or provincial lines. It's the national borders where goods are stopped. Maybe trade gets more positive association than the actual method of production.

3. People really have no idea what a capitalist system is.

Learning Large Numbers

2009-05-04T11:49:00.002-04:00

The slew of numbers coming out of Federal programs, from the $1.25 trillion that the Federal Reserve will spend on asset purchases to the Obama administrations $3.5 trillion budget, have many struggling to figure out how to comprehend these numbers.

NPR took an academic approach. Video bloggers have taken to using piles of pennies to represent the budget The online project, Econ4U, who recently took out large ads in DC Metro stations, did stand-up interviews asking "How Many Millions Are in a Trillion?" Only 21 percent of respondents got the question right.*

The concern is great and if the goal is simply to inform people it's doing a good job. Yet any hopes that people might apply, or that that matter retain, their knowledge suffers from the same problems that "awareness" movements always have: how to turn knowledge into action. Given the struggles people have to exercise or eat right despite an array of knowledge on health, convincing them to act on difficult to conceive deficits with abstract comparisons may not be an effective pressure on policy.

*The correct answer is a million million.

Will Doha Bounce?

2009-04-26T21:32:00.002-04:00

Much has been made lately in equities that even a dead cat will bounce if dropped hard enough. Bears use this quip to dismiss market gains as temporary reactions to very low levels. But will this theory of stock rebounds work for a trade round that has been pronounced dead many times in its seven year run?

In their communique yesterday, the IMF hopes that some face time with pavement will do more than play on a cadaver's little-known elasticity but bring it back to live. The communique calls for completion of the Doha trade round via the World Trade Organization. The communique calls for:

4. We stress the importance of members taking account of the effects of their economic, financial, and investment policies on others, and refraining from protectionism in any form. The IMFC calls for urgently concluding an ambitious and balanced Doha Development Round, which will help boost the recovery of the global economy, and emphasizes the importance of ensuring the availability of sufficient trade finance.

As part of its crisis management solutions. Given that Doha has been held up in part over the developed world's unwillingness to make concessions on issues like agricultural subsidies, which could cost farming jobs in the US and Europe, I doubt those countries will be willing to budge now during a period of rising unemployment.

Detroit Businesses Create their own Currency

2009-04-22T22:19:00.001-04:00

It’s been a week for 19^th century ideas. Congressman Ron Paul called for the US to encourage privateers to fight piracy, Rasmussen found that some Texans are still for succession, and now Detroit businesses have invested money (US$) to form their own currencies.

Private currencies are not themselves new (see Liberty Dollars) but two things are surprising here.

1. This initiative is being sponsored by businesses. They are taking on a lot of cost for something that may not work. Especially given that deflation, not inflation, is the policy concern right now, the timing may be bad.

2. This new money is stil backed by and convertible to the US$. While convertibility is good for trade, it doesn't do much for inflation risk, especially if you are committed to a one-to-one fixed exchange rate. Unlike China, who is accused of undervaluing it's peg, the Cheers likely overvalues itself at one-to-one convertibility. Convincing new businesses to take these notes difficult.

At the same time, The Associated Press reported earlier this year that bartering, essentially a form a currency with similar liquidity problems of a private currency but without the legal restrictions is making a comeback. Of course the dollar faces little threat for a small amount of barter but all this does remind that there are alternatives to the dollar. SDR anyone?

Are Negative Fed rates really possible?

2009-04-19T08:35:00.004-04:00

Harvard Economics Professor Gregory Mankiw thinks so. In this morning's New York Times, Mankiw proposes having the Federal Reserve decrease the Federal Funds rate below 0 percent. The zero bound has been considered binding because reducing it further would make potential lenders better off simply holding cash than lending. Mankiw, who is well aware of the problem of hording cash provides two unlikely solutions.

The first would be a "tax" on money. Likely by dissolving all money ending in a randomly selected serial number a year from now. Of course such a move would require some enforcement. Someone would actually have to check serial numbers in a way that would discourages businesses from accepting the now worthless bills. Not to mention the way such a move could strain both domestic and international trust in the US dollar.

Mankiw's simpler solution is to simply have the Fed promise future inflation. He writes:

Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates — interest rates measured in purchasing power — could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend.

Yet commitments from the government are difficult to obtain and even more difficult to keep and have people trust. Mankiw mentions that Bernanke seems well equipped to make such a commitment. Bernanke’s term as chairman expires at the start of 2011. The possibility of President Obama appointing an new chairman could be enough to break faith in an inflation promise. More importantly, while inflation helps borrowers, it hurts anyone whose wages are not adjusting upward to meet the new price level. While many employees have contracts that include inflation-based cost of living adjustments, non-contract, hourly workers are likely to be negatively impacted; a situation that the Fed would be pressured to avoid.

Fed press Confernces?

2009-04-15T10:13:00.002-04:00

The snarky blog LoLFed scans a report from Reuters saying that the Federal Reserve is considering holding more regular press conferences. While such press meetings seek to improve communications with the general public, I'm not convinced they will add a lot. The Federal Reserve, for all it's opacity, has already added a great deal to the information it releases this year. It even put out an extensive web overview of how it conducts monetary policy and its host of new liquidity facilities.

Besides today is Beige Book day. At 2pm, the Fed will release an almost 50 page document on regional economic activity across the country. The total number of readers, probably about a dozen. I'm not sure that Fed press conferences would be any more popular.

Credibility: a security the Fed cannot purchase

2009-04-14T11:37:00.002-04:00

In a speech today, Federal Reserve Chairman Ben Bernanke addressed concerns that the Federal Reserve's recent expansion could cause inflation down the road.

As a general rule, my strong preference is that any firm that cannot meet its obligations should bear the consequences of the marketplace. But recent circumstances have been truly extraordinary.

Bernanke went on to discuss the "waves of panic and fear" that impacted markets and lead to action by Treasury.

Yet these extreme cases are the ones that make providing credible threats not to intervene in the future difficult. It's easy to not intervene when only one institution is set to fail (see Lehman Brothers) but it's the systemically risky cases (see AIG one day later), where the Fed and other government agencies have the hardest time keeping their hands-off policy. This difficulty has been part of why Bernanke has asked Congress for more rules lately. While not looking to eliminate the freedom under Section 13 (3), rules from Congress could act as a backstop to the Fed's credibility.

A great post by Mark Thoma over at Economist's View, provides a great primer on Fed credibility, plus a few helpful charts.

Government Incentivizes Bigness

2009-04-13T09:32:00.004-04:00

Actions taken under the TARP's Capital Purchase Program as of 4/2/09

This blog earlier reported criticism of Treasury’s slowness in launching its financial stability clearing house web shop. The site financialstability.gov has been up and running for several weeks now. The site has offered little new information since launch and the data provided has been more limited than I would have expected. Yet the treasure trove that is here has barely been examined. The new site allows users to download all the purchases made under the Capital Purchase Program (CPP), one of the largest TARP measures.

A quick look at the data shows that CPP has been a program for big banks. The program gave out 54.5 percent of the $183.6 billion spent so far in its first week of operations. In that time, only seven firms received funds. The top names were not surprising: Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, and State Street Corp. Following that massive first round injection, more than five hundred firms have been funded through the program. Above I’ve carted the value of money given and the number of firms receiving funds (right axis). The smaller banks all received much smaller injections.
Additionally, while almost all the injections have involved warrants, essentially options to convert to stock the government’s investment, smaller institutions are the ones who have seen those warrants exercised. No institution in the top 40 distributions has had warrants exercised against it.

Of course, TARP passed amid financial panic; concerns about providing incentives for excessive risk-taking were subordinated to preventing a system-wide meltdown. Yet the application of CPP should be a concern for moral hazard, excessive risk-taking by those who believe they can get government bailouts, going forward.

Yet with the threat of an immediate collapse receding, the Obama administration’s Financial Stability Plan (FSP) has provided little change regarding the focus on large institutions. The new plan to buy toxic assets, the Public Private Investment Partnership, draws heavily from Paulson’s original plans for TARP. The new plan requires that applicants to manage the government subsidized funds must have at least $10 billion under management. The size restriction is designed to attract the most talented managers to the funds, without pesky executive compensation provisions, and will allow the largest firms to extract the most gains. Treasury also seeks to create a “systemic regulator” to regulate specially designated institutions. This opens opportunities mostly to the large institutions that seem to have too much risk. Allowing smaller agents to manage funds could shift risk to institutions that currently have little and reduce the chance of one large firm defaulting.

Can I pay for that in SDR?

2009-04-09T11:42:00.001-04:00

No, of course not.

A brief yesterday from The Economist explains why the IMF's Special Drawing Rights are not currency.

The SDR, a unit of account based on the US$, yen, pound, and the euro does allow countries to access real currency in hard times. The countries take on debt from the IMF in SDRs in exchange for currency. The SDR gained new attention late last month when members of China's central bank called for greater use of SDR in global accounting, displacing the US dollar as the standard reserve currency.

Yet as The Economist points out the SDR only really provides one of the functions of money: it's a unit of account. It's not currently a store of real value, since its essentially used to account sovereign debt, and it's not a medium of exchange. Even if you could get SDRs printed, you wouldn't be able to get your local McDonald's to take them as payment. In fact, unlike foreign currency, you wouldn't be able to find a McDonald's anywhere willing to take the SDR.

The Economist article also provides a chart that touches on another IMF issue. The injection of $750 billion proposed to the IMF at the G-20 last week will change the voting patterns of the organization. Votes are determined by funding and the new funds will re-balance this. I've copied The Economist chart to show that while the US losses a small vote share, that the UK, France, Belgium, and Russia are the big losers; they all lose more than 10 percent of their current share. Hence The Economist's chart title "Unfair."

To Global Economy: G-20 Supports You

2009-04-02T13:05:00.005-04:00

The G-20 released the final version of the communique that will leave the London Summit today.

The take away I'm getting from a word cloud is: support. The G-20 intends to support a range of broad concepts like market discipline, financial stability, and sustainable compensation.

The communique also lends quantifiable support to several institutions. The IMF will get more funds through an allocation of $250 billion in Special Drawing Rights (SDR), the IMF "currency" that Chinese central bank president, Wen Jiabao, recently said should be used for more international transactions rather than the dollar. The world's Multilateral Development Banks (MDBs) will receive at least $100 billion to loan to low income countries.

Financial Stability Has Arrived

2009-03-31T17:22:00.002-04:00

Well, the government website at least has. The long awaited financailstability.gov has come to be a full site similar to recovery.gov.

The nicest feature of the site so far is the ability to download into Excel the full listing of money given out through the Capital Purchase Program that was announced in October and that began work in February. There have been 519 actions under CPP as of March 20 (the latest report).

Below I've listed the top 10 recipients under CPP. It's not a sup rising list.

Amount in Millions of US$

More surprising is how ubiquitous warrants have become. The CPP requires the Treasury to take warrants, essentially a future option to buy stock, as a guarantee for all transactions of more than $50 million. Of the 250 transactions below that threshold, only eleven have given the government only preferred stock with no warrants.

Irish lose AAA rating

2009-03-30T22:11:00.003-04:00

The government of the Republic of Ireland lost it's AAA rating from Standard and Poor's today, according to the Irish Times. The country's debt was downgraded to AA+. According to S&P that means that Ireland no longer has an "extremely strong capacity to meet financial commitments" just a "strong capacity." The move puts Ireland in the same category as Kuwait and Saudi Arabia.

The move, comes almost eight years after Ireland first gained the coveted AAA-rating. The boom of the Celtic Tiger has been heavily hit by the current global downturn. The country's GDP was off 7.5 percent year-over-year in the forth quarter of 2008, according to Reuters.

Ireland is not the first European country to have it's debt downgraded. Greece had it's debt downgraded in January and ratings agency Moody's cut Hungary's debt back in November.

The downgrades will make the cost of borrowing more expensive at the same time that President Obama will try to convince EU leaders to enact fiscal stimulus.

HT at The Corner

2009-03-26T12:33:00.003-04:00

The piece that I posted on Treasury's financialstability website. Got a hat tip in a posting by John J. Miller at National Review's The Corner this morning.

It also seems that Treasury's web comedy continues unabated at their main website. On Inauguration Day, Treasury launched a new e-mail alert called "Secretary's Corner." The site was to be a place for the Secretary to put out releases and thoughts. To my understanding something akin to the great Director's Blog over at CBO that the former and current Director utilize. As of today the number of post at the Secretary's Corner: 0.

The Treasury states that the site is the "Future Home of Secretary's Corner." I'm a bit doubtful.

Posting at The American

2009-03-23T16:57:00.002-04:00

I've got a short piece this afternoon at The American. It's on the Public Private Invetment Plan released today.

The full piece can be found here.

Quantative Easing Primer

2009-03-19T15:12:00.001-04:00

As the last post was extremely wonky, here is a video primer (serioulsy no reading) from the Finanical Times that gives a very simplied explination of quantitative easing.

Federal Reserve given Lessons from Japan

2009-03-19T14:45:00.000-04:00

Yesterday the Federal Open Market Committee, the board that votes on policy rates at the Federal Reserve Bank buried it’s lede. After making the predicted moves of keeping the Federal Funds rate near zero and extending $750 billion to buy agency mortgage-backed securities, the FOMC announced a move upon long-term interest rates.

Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

The move places the Fed clearly in the position of quantitative easing, although they prefer the term credit easing. The policies involve continuing to expand reserves at a central bank even after the policy rate has hit zero. This is done in the hopes of using the balance sheet to impact the economy. The US’s efforts to use new discount windows like TALF are examples of such a program.

The Fed’s decision reverberated at a IMF conference in Washington this morning. The conference, “Japan’s Policy Response to a Financial Crisis: Parallels with the United States Today,” offered insights from those who had dealt with a long episode of quantitative easing in Japan earlier this decade.

Before introducing speakers, the IMF’s James Gordon expressed that the planners doubted if an event on Japan would be relevant by the time it could be arranged. Yet rather than recover the US economy has taken on more characteristics of Japan’s “Lost Decade.”

Hiromi Yamaoka, the Alternative Executive Director for Japan at the IMF and a former Bank of Japan (BoJ) official, reviewed the Japanese experience. While many see the zero bound as a great constraint for central banks, Yamaoka referred to the period of low rates between 1998 and 2005 (Japan held a rate of zero for most of 1999 and 2000 and a rate of .25 following) as “the busiest time in my life as a central banker.” While Yamaoka stressed that the US has been more aggressive than Japan, reaching the zero bound in just over 18 months, a feat that took Japan nine years, he explained that they have yet to detail their entire direction. Speaking to the FRB’s preferred terminology, Yamaoka said that “the complete definition of credit easing is not yet widely shared.”

Alternative monetary policy alone will not solve the crisis, said Yamaoka. He pointed to the 1998 case of Yamaichi Securities, at the time one of Japan’s largest securities firms. To bailout the firm, the BoJ provided a large loan with little collateral. The firm became insolvent and the BoJ lost 111.1 billion yen.

According to Adam Posen, the deputy director of the Peterson Institute for International Economics, investing in rocky firms, like the American auto industry can pay off in the short run. While his preliminary research here shows some positive correlation between the “wastefulness” of a project and it’s short-run multiplier effect. Taking a longer run view, Takatoshi Ito of the University of Tokyo said the government should instead direct fiscal stimulus toward areas like health care, and education where efficiency gains are possible.

Unending Stimulus?

2009-03-10T15:42:00.003-04:00

The website at Recovery.gov continues to offer up information, even on days when little is added. I've written on the stimulus projections before but I've been taking the administration's projections ending in 2019 at face value. What if they actually intended the stimulus to be with us forever?

At the bottom of the recovery web page is a timeline that lets you track important upcoming reports or actions associated with the stimulus bill. The last listed event is on July 15, 2009. But wait, there's more...

Much more, due to what I assume was an attempt to create a simpler HTML code. The stimulus milestone chart appears to extend into eternity. I gave up around 2045. Sure I realize this is just a coding error that gives us an eternity of nothing but it's a hilarious result.

Private Sector Competes on Recovery

2009-03-09T12:25:00.005-04:00

Sometimes the best discoverys are mistakes. This one's getting added to that group.

Hoping to pick-up on traffic headed for recovery.gov, the government run clearinghouse for everything about the recent stimulus bill, the business-government partnership facilitation firm picked up a nice piece of web real estate: recovery.com

The firm lists information about specific projects funded by the stimulus bill and offers to connect firms that will try to access those funds with the proper government agencies. The stimulus bill was designed to create counter-cyclical spending but no doubt spending used to lobby/bid for government funding will be lambasted as wasteful, even though they create jobs. So despite comments that "jobs are jobs" we really do care where they are created.

The site is also putting out some easy to follow figures for tax payers. The chart below compares the stimulus spending to the overall spending typically given to each state.

Source: Recovery.com

The small size of the stimulus funding relative to the state's regular appropriations gives some credibility to Paul Krugman's argument that its just too small. Although, the stimulus money is in addition to, not a substitute for, all that regular funding.

I take the spending as a case that it may do more rather than not enough good. If the stimulus gave out huge funds to programs like unemployment insurance states could face problems readjusting to pre-stimulus levels.

Unemployment: Is that all?

2009-03-06T13:26:00.002-05:00

The unemployment rate reached 8.1 percent in February according to new data out today from the Bureau of Labor Statistics. The administration's budget projected an annual unemployment rate for the year of 8.1 percent for 2009 followed by 7.9 percent in 2010.

The administrations predictions had already been called rosey; they are beginning to look illusory. If unemployment continues to rise it will likely have to drop below the predicted 7.9 percent in 2009 just to hit the 81. percent yearly figure.

Geithner's "Full Range"

2009-03-06T08:58:00.004-05:00

The goal of all the bank bailouts, mortgage adjustments, balance sheet expansion and the like is simple: growth. Terms like jump starting the economy, creating jobs, and recovery are all about returning the US economy to a path of growth. The 2010 Fiscal Budget has been criticized for providing estimates of growth that are unreasonably high. In his testimony to Congress, Treasury Secretary Geithner was asked by Rep. Kevin Brady (R-TX) to name an economist that supported the projections. He responded:

“It’s an important question. The administration’s forecast is within the range of CBO’s post-stimulus forecast, it’s within the range of the full range of private forecasts that are out there.”
Here's the image of what he means:

Source: 2010 FY Federal Budget, CBO Macro Effects of ARRA (March 2, 20009)

The Low/High CBO lines are estimates produced by the Congressional Budget Office that include the impact of the stimulus. The budget line is the forecast utilized by the administration in it's budget projections, which also includes estimates of the stimulus' effect, and the Blue Chip is a trend reported in the budget taken from information by traders.

I'm not going to respond directly to the private forecasts although the blue chip consensus provided in the budget itself is well below the Budget projections. Yet the CBO projections do little better. To establish the CBO low and high lines above, the CBO estimated low and high estimates of how much growth the stimulus bill (ARRA) will add to growth on top of its 2009 baseline (reported in the budget).

As we can see the CBO estimates are, well, high. The high estimate forecasts growth of 5.4 percent in 2011. According to data from the Bureau of Economic Analysis the last time that real GDP grew that much was 1984.

Even the budget baseline and the CBO low forecasts three years of growth greater than 4 percent from 2011 to 2013. The US had a streak like that recently, from 1997 to 1999. Of course that was following years of sustained growth in the early 1990's and during the dot com bubble not in a recovery.

Even beyond the large numbers, Geithner's comments ring a bit hollow. Since CBO provides no information on how likely it's high or low estimates are evaluating them is more difficult. If, as is likely the CBO high represents a possible scenario well above the median outcome, say the 75the percentile , then calling on this hopeful range as good proxy for likely outcomes may be a poor choice.

CBO could have used stochastic simulation to solve this problem. Stochatic simulations, run multiple iterations of large models to produce an array of results and then attempting to assign probabilities to each outcome, or more precisely to assign outcomes to a probability distribution function. The Social Security Administering (SSA) has included such models in its Trustees Report for some time (see Figure II.D7 in the link). Although SSA still uses low/high estimates as well. The benefit of low/high, and the reason that CBO likely generated them, is that they are simple to read and much faster to compute.

Paid in Prestige or Sign of a Terrible Job Market?

2009-03-05T14:15:00.000-05:00

Some jobs pay in salary and others pay in prestige. Prestige has long been a consideration in wage-setting (See Mayer, Prestige and Wages, 1959). Some people take lower wages in exchange for prestige or access, take Hill staff for example. Yet this ad posted to DC's Craigslist today is one of the more inventive attempts to trade on a title I've seen in awhile.

Sandwich and Salad Assembler
Organic to Go
$8/hour

Citi, Treasury both release mortgage plans

2009-03-04T10:18:00.000-05:00

The US Treasury this morning released new details about its Making Home Affordable Plan. The plan seeks to refinance or modify loans for between seven and nine million Americans. One interesting point provides cash incentives of up to $1,000 for three years to homeowners who enter and stay in the program.

The federal government is not the only one seeking to adjust loans. Citigroup announced yesterday an Unemployment Assist program. The plan reduces mortgage payments for the unemployed with the idea of making the homes similar in price to rental properties that foreclosed individuals often opt to enter. Citi had announced a one month foreclosure moratorium for mortgages on primary residences. That month is set to expire on March 12.

Celebrating the Graying of America

2009-03-03T08:33:00.000-05:00

Thanks to JFK, with a name revision by Jimmy Carter, we are only two months away from Older Americans month. While this blog so far has focused mostly on the financial crisis, another segment of my job is Social Security and pension reform.

This morning the Census Bureau released its Facts for Features for Older Americans month. Of interest to pension reformers, the Census Bureau expects employment among those over 65 to grow from 5.8 million in 2007 to 10.1 million in 2016. This is an increase of almost 84 percent. Labor force projections from the Statistical Abstract (Table 568) predict that the growth will be split almost evenly between men and women. This could be good news as the number of people over 65 is only expected to grow by 24 percent by 2015, from 37.9 million in 2007 to 46.8 million (Statistical Abstract Table 10).

As the population shifts toward a more square age pyramid this increase in older age working population could shift expectations about Social Security and allow for reforms. If a greater share of older people retain wages and see Social Security as a supplement rather than their whole income the ability, benefit reductions may be more palatable.

More Students Major in Econ

2009-03-02T14:49:00.000-05:00

NPR reported yesterday that the number of students majoring in Economics is on the rise. It's worth the four minute listen. If only for the joke about jaded journalists and bandwagons at the end.

While this may be good for the field, I'm not convinced that it's good for my salary prospects. Using the lessons learned from the courses that this new crop of economics enthusiasts is taking, an increase in the supply of economists will reduce the price they can charge for their work. I would have thought that the collapse of investment banking and the government intervention in banks would have students running from economics.

Are they all hoping to become regulators?

Or did they all read Forbes this summer? ranked economics as the second most lucrative major for college students, behind only computer science.

Mixed Signals on the Bugdet

2009-02-26T13:37:00.000-05:00

The White House's FY2010 budget is now online. the new proposal sends a couple of mixed signals. As Obama promised, the budget seeks to reduce the deficit. Under this plan the deficit would go from 12.3 percent of GDP today to 3.5 percent in 2012 at the end of Obama's first term. That's a big decline in deficits does not surely mean any reduction in the debt.

Financial Stabilization Reserves

The budget could be altered significantly by the existence of one line item: additional financial stabilization efforts. The current budget places $250 billion in for 2009 and provides no estimates for following years. According to the proposal, "Additional action is likely to be necessary to stabilize the financial system and thereby facilitate economic growth."

The $250 billion is meant to facilitate $750 billion in additional asset buys (assuming that the government is able to recover 66 percent of any purchase price--the average recovery rate for purchases so far). In a previous post, I noted that recovery rates vary considerably by asset type, with the auto loans resulting in little expected return. If the government goes after the most toxic assets recovery rates are likely to decline.

Upbeat Unemployment projections

The budget's projections for unemployment signal faster recovery than either the CBO or market participants project. Below are the projections for unemployment along with those from the CBO and according to the blue chip stocks. We can see that the budge unemployment projections peaks at least .5 percent lower than the other two measures and begins to decline in 2010 rather than 2011. These near term differences could impact how much money needs to go toward further stabilization, and the budget uses the projection lest likely to call for more spending.

Source: An Era of New Responsibility, Office of Management and Budget, 2-26-09

Big Purchases by the Federal Reserve

2009-02-24T11:14:00.000-05:00

In his semi-annual report to Congress today, Federal Reserve chairman Ben Bernanke said:

To support housing markets and economic activity more broadly, and to improve mortgage market functioning, the Federal Reserve has begun to purchase large amounts of agency debt and agency mortgage-backed securities.

He's very serious since the Federal Reserve started tracking mortgage-backed securities (MBS) in its assets in January, it's made big purchases.

Factors Affecting Federal Reserve Balances H.4.1

Yes, that's purchase of more than $55 billion during the week of February 12th. This kind of aggressive action fits the model begun by the interest rate slashing and other credit lines and purchase programs created by the Fed within the past year.

New Federal Reserve website

2009-02-23T10:51:00.001-05:00

This morning the Federal Reserve launched a new section at the Board of Governors website. The new section on Credit and Liquidity Programs and the Balance Sheet gives a good overview of the actions the Fed has taken to deal with the crisis. Most importantly, it's pretty readable for a general audience. Of note is the inclusion of charts of the Fed's balance sheet. The sheet has more than double this year from about $920 billion in January of 2008 to over $2 trillion the same time this year.

The Fed provides the figure below.

The Fed chart which goes back to 2007 does a good job of showing the spike in assets. Yet if we go back farther, say to 1996 we see that the growth seen this year is phenomenal.

(Source: Federal Reseve Statistical Release H.4.1 Factors Affecting Reserve Balances, Board of Governors of the Federal Reserve, weekly)

Sorry the data is only a few points since the Fed provides this series only as text--I have yet to read it all into a file. Yet we can still see the slow growth over that period. It took over a decade for the Fed's assets to double. Due to the Fed's litany of new lending programs including TALF, swap lines, and commercial paper, the current doubling took less than a year.

Prepare for what you Believe

2009-02-23T09:51:00.000-05:00

In a joint agency statement, Federal financial experts stressed that banks are well capitalized. For now. Yet the new plan prefers for "a more challenging economic environment." You don't plan for that unless there's a chance it's coming.

The announcement, preceding the launch of the Capital Assistance Program (CAP) on Wednesday, says that things could get worse. CAP will allow firms to take on mandatory convertible prefer ed shares form the government. The plan prefers that firms seek private capital but provides government money as a backstop.

Today's announcement seems caught between announcing a new government capital injection and trying to shore up confidence. Unlike TARP, the money is not be rushed out the door and may be vetted more clearly. According to the statement,

Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized. This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated. The customers and the providers of capital and funding can be assured that as a result of this program participating banks will be able to move forward to provide the credit necessary for the stabilization and recovery of the U.S. economy. Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands.

Two things to note, one the government is preparing for a situation worse than current estimates. Estimates have changed very quickly for major industries lately (GM's latest sales projections come to mind). Second, the statement skews against bank nationalization but doesn't rule it out.

Michiaganders Support Auto Bailout

2009-02-19T16:33:00.000-05:00

IMBY (In My Back Yard), please.

In a new poll out today, Rasmussen Reports finds that 52 percent of Michigan voters approve of additional taxpayer-backed loans to GM and Chrysler. 36 percent of Michigan voters disapprove and 12 percent are undecided.

The figures markedly contrast the 64 percent national disapproval for more loans.

While the wedge already seems large, the timing may make it worse. The national poll was conducted on February 16-17. The auto companies released their new plans and projections on the 17th, meaning that some in the national poll had yet to see the size of the packages being requested. The Michigan-wide report was conducted February 18th, after the companies requests had been released and prominent papers like The Detroit Free Press outlined the proposals.

In the national poll, some people were responding to the very idea of more money for Detroit. In the Michigan poll some were likely responding to their more immediate reaction the the outlined plans.

Fed: 2009 will worsen with improvements in 2010

2009-02-18T14:27:00.000-05:00

Today's release of the minutes from the Federal Open Market Committee's January meeting provides new insight into the thinking of the Federal Reserve. Beyond the rather dry voting record the FOMC has begun releasing a Summary of Economic Projections (SEP). The SEP addition provides forecasts of the economy and tracks changes in the outlook of FOMC members. The figure below provides the January outlook for GDP growth and unemployment in the coming years.

GDP growth began to slump and unemployment began to rise in 2007 and saw rapid change in 2008. The FOMC predicts that 2009 will be worse by both measures but that growth will increase in 2010. The Fed is careful to state that while its new data should inform policy that "
Considerable uncertainty attends these projections, however."

In fact, predicted ranges widen as the figures head out toward 2011.

The new release is part of an effort, stressed in a speech today by Chairman Bernanke, to improve transparency at the Federal Reserve. Commented Bernanke,

But, as I have discussed today, we will do more on this front, both expanding the information we provide and improving how we communicate that information. Increased transparency is the best way to demonstrate that the Federal Reserve's nontraditional policies are well conceived, well managed, and produce substantial public benefit.

This plan is to include a new website to the slew of websites already being added to the government rolls, recovery.gov, financialstability.gov, among others.

The FSP was unclear even to its planners

2009-02-17T13:10:00.000-05:00

The Washington Post reports today that the administration's financial rescue plan, the Financial Stability Plan, underwent large changes in the 11th hour before Secretary Geithner's speech last week.

While NYT columnist Paul Krugman is at least encouraged that Geithner was able to take the lead in changes, I'm more concerned about the continued vacuum left by Treasury's vague plan. The WaPo story includes a series of rhetorical questions, all of them reporters would surely enjoy answering. The lists inclusion leads me to believe not that The Post is slacking but that Treasury simply has no clear answers.

From The Post:

But there were multiple complications: How much government financing would be needed? What other incentives would be needed to get private firms on board? Where would the government get the money? What assets would the fund buy? Would the government have a say in which banks they're bought from? Might there be more than one fund?

If only Treasury had some place where it had told people to go for information. Oh wait, it's still just a test page.

FOMC: Adding employment or folly?

2009-02-13T10:12:00.000-05:00

The Federal Open Market Committee (FOMC), the Federal Reserve group that sets interest rates added to it work hours today.

The FOMC has eight remaining meetings this year. Four were one-day meetings and the other four were two-day affairs. Today the FOMC announced that all eight will be two-day meetings. The extension will allow members additional discussion time. From a pure policy standpoint, this extra discussion may yield little, as short-term interest rates are already zero and the FOMC has made clear it will not raise them soon.

Yet the FOMC is greatly changed since last year. Tim Geithner left his post at the FRBNY to go to Treasury. He has been replaced by new FRBNY President William Dudley.
Also at the start of each year Presidents of the regional Fed banks filter in and out of the FOMC. This year Chicago, Richmond, Atlanta, and San Francisco all serve. If the extended meetings increase the appearance of hard-working and unified Fed, they may be worthwhile.

Auto Financing Rates on the Rise

2009-02-06T16:12:00.000-05:00

Source: Federal Reserve Statistical Release G.19 Consumer Credit, Release February 6, 2009

As the automotive industry watches sales plummet, the interest rates on auto loans has increased.

New data released today by the Federal Reserve shows that the interest rate for new car loans has at auto finance companies has increased to 8.42 percent in December of 2008 from 6.41 percent in October. These rates have been on the rise since July, the December figure is the highest since 1997. This likely explains some of the fall off. In a future post, I hope to compare these rates to other consumer credit rates.

We're Discouraged

2009-02-06T11:21:00.000-05:00

By now everyone has seen the dismal jobs numbers from January of this year. The Department of Labor release from this morning is bad. Unemployment rose .4 percent up to 7.6 percent. It's highest level since 1992, according to Bloomberg. That's a loss of almost 600,000 jobs. Of course, beyond the headline numbers there is more bad news. One understated figure is the number of people who want jobs but have stopped looking for them. This number has grown steadily in recent months, increasing by 889,000 people year-over-year.

While people leave the labor force for a variety of reasons, the Department of Labor's Bureau of Labor Statistics (BLS) asks people if they were discouraged.

According to BLS, discouraged include people perceive that:

A)no work available,

B) they could not find work,

C) They lack schooling or training,

D) employers think they are too young or old

E) they other types of discrimination.

This subcategory of the people who want but are not seeking work has also grown. I've charted the percentage of people who want but are not seeking work, who say they are discouraged.

The figure now stands at 12.51 percent, a 33 percent increase year-over-year since last January. These people may be difficult to woo back into the labor force. While they may not impact unemployment figures they may not contribute much to the economy.

Will the stimulus make life more expensive

2009-02-05T15:01:00.000-05:00

In my last post, I commented on the timing of the stimulus. In a letter yesterday to Committee on Budget ranking member, Senator Judd Gregg (R-NH), the CBO applied a bit of basic macro theory to the stimulus package. The letter, which examines the Senate's version of the bill, predicts a stimulus in the short-run but a small decline in long-run GDP due to increased debt.

In the longer run, the legislation would result in a slight decrease in gross domestic product(GDP) compared with CBO’s baseline economic forecast.

More importantly, the CBO underscores that stimulus cannot provide long-run growth if it only increases demand without increasing our productive capacity. According to the letter,

Even if the fiscal stimulus persisted, however, the short-run effects on output that operate by increasing demand for goods and services would eventually fade away. In the long run, the economy produces close to its potential output on average, and that potential level is determined by the stock of productive capital, the supply of labor, and productivity. Short-run stimulative policies can affect long-run output by influencing those three factors, although such effects would generally be smaller than the short-run impact of those policies on demand.

This statement provides the integrated short-run (Keynesian), long-run (classical) framework that causes aggregate supply to have very different properties over time. Without increases in agrregate supply, the stimulus could lead to inflation if an increase in demand must adopt to lower long-run supply. It may of course be that we are operating below the long run supply (the exact arguement that stimulus supporters will use high unemployment numbers to make). If so then the timing of the stimulus again becomes important.

Even strong Keynesian's like Steve Fazzari have noted that what we spend our money on matters. Increases in education or training may increase long-run aggregate supply spending on infrastructure may not if we are just using old techniques to repair roads, etc.

It should also be noted that the CBO report provides a wide range of possible impacts from the stimulus. For instance it indicates that the plan could provide anywhere from 1.4 percent over baseline increase in GDP to 4.1 percent in 2009. Sadly, the estimates are non-stochastic (or at least not presented as such) so their likelyhood is more difficult to determine.

Stimulus Spending will not be immediate

2009-01-28T13:52:00.000-05:00

Despite the $845 billion, now closer to $900 billion with the Republican-proposed AMT exemptions, price tag on the stimulus only about $340 billion will be spend in the 2009 fiscal year. The stimulus plan includes two sections.

Division A

Provides for new discretionary spending. This spending is likely to take some time to spend. In it's scoring earlier this week the Congressional Budget Office (CBO) presented estimates of how soon the funds would be spent by category.

Table 1 below provides this information:

The figure shows a long time frame for many of these projects, including estimates for Agriculture and Rural Development, Energy and Water, and Financial Services that extend to 2013. Now some of these projects, like laying broadband wire in rural areas may still have value in 2013 but more as development projects than as stimulus.

Division B:

Includes tax cuts and funding for pre-existing programs like Medicare, Social Security, and food stamps. The difference between the two divisions is the speed they can be delivered.

The figure shows, by Division (sorry labeled section) and total, the percentage of total expected outlays that are spent by the end of each fiscal year. As we can see, CBO expects that 25.9 percent of Division B outlays will be spent in the coming fiscal year whereas only 8.1 percent of Division A in the same time. By the end of 2011, 91.4 percent of Division B will be spent it will take until the end of 2013 for Division A (at 92.7 percent to catch up to that). This makes sense with the "shovel-ready" phrase being thrown about. Tax cuts and money to current programs is faster than money to new programs.

Guest Post at NOSSR

2009-01-28T13:46:00.000-05:00

I've got a guest post today at Notes on Social Security Reform (NOSSR).

The post explains how the stimulus bill would impact Social Security.

In brief, the stimulus actually discourages the saving that Social Security is designed to promote. Much of the tax cuts will result in lower payroll taxes. This takes funds that were intended to support Social Security and puts them in peoples hands. In fact, the stimulus has been promoted to make people spend their rebates. The plans shifts funding from the future to today, essentially an increase in benefits today at later generations expense (given that we will so no linked decrease in benefits).

The plan also looks to put more people on SSI, the means-tested program for low-earners with short work histories. By increasing the income cap, the plan actually encourages those at the margin to stop working.

Multiply, but it may not be fruitful

2009-01-27T15:10:00.000-05:00

On Sunday's Meet The Press, new National Economic Council (NEC) chairman Larry Summers sparred with David Gregory about the size of the stimulus package.

From the show (emphasis added):

MR. GREGORY: I, I--and I want to go through all that. But I just want to go back to your central point, which is that one of the biggest mistakes you can make is doing too little. Yes, this is the largest stimulus in our history, but the problem, as you said, is something we've never seen in our history. So if you have a hole in the economy that's at least a trillion, maybe 2 trillion, don't you need a stimulus package that fills that hole?

DR. SUMMERS: Well, no, David. We have what economists call the multiplier. A fact--when the government--when the government spends...

MR. GREGORY: Right, which is if you create a job, it creates another job.

DR. SUMMERS: ...when the government spends a dollar creating a job, that person has higher income; because they have higher income, they're able to spend more, that creates other jobs down the road. That's why we surveyed a range of economists. We talk--and this is something the president insists on--to a lot of experts, both Democrat and Republican. And you know, frankly, some of them think the stimulus should be larger, some of them think the stimulus should be, should be smaller. President balanced the different views and I think came to the approach that we've taken, and came to an approach that's balanced in another way. It's balanced between very substantial new investments that are referred to between very important protections to prevent teachers and cops from being laid off, and also--and this is a substantial part of the package--tax cuts, because we recognize that we've got to help households to be able to spend, and businesses.

Summers is correct to point out the money multiplier. It's an important economic fact. It's also a variable that we can measure. And the current measure does not bode greatly for Summers.

The money multiplier is based on how fast money moves through the economy. To multiply, a dollar needs to circulate from the backer to the miller to farmer, etc. Yet if the baker gets a bailout and stops buying, which is the concern around bailed-out banks paying dividends or not lending, then there is no multiplication. This speed is known as the velocity of money.

Below is a table from the St. Louis Federal Reserve Bank's monthly Monetary Trends survey.

The figure provides two values of the velocity of money. Nominal GDP/M2 and Nominal GDP/MZM. The figures vary because they use different measure of the money supply. Both include dollars, checking accounts, and other liquid assets but MZM does not include time deposits like CDs that are not immediately accessible. As we can see removing time deposits has made a big difference in the past year, as the MZM measure has dropped quickly.

A lower velocity will supress the multiplier effect and lower the true benefit of the stimulus closer to its price tag.

Of course stimulus does not exist in a vacuum. It could on its own provide liquidity and boast velocity as people spend their stimulus. It could also just be a blip.

Auto Bailout: Concentrating on Cost Likely the Right Plan

2009-01-26T12:09:00.001-05:00

In previous post, I featured a recent Congressional Budget Office (CBO) report that undercut the idea that aid to the auto industry is really a loan. The report, which provided estimated subsidy rates--or expected losses to the government--for pieces of the TARP, gave the financial sector low subsidy rates, ranging from 18 percent subsidy for the Capital Purhcase Program to 53 percent on the AIG injections. Yet GM and its (now holding company) GMAC had subsidy rates of 63 percent.

A report released Friday from the Brookings Institution chides that looking only at the subsidy rate may be too narrow a view. In the report, Measuring the Cost of the TARP, Brookings scholar Douglas J. Elliott indicates that there may be both differential cost and differential benefit.

This matters because some uses of TARP funds are expected to lose much more than others. CBO projects that funds for the automakers and AIG are likely to suffer losses of about 55 cents on the dollar while the main bank rescue package loses only 18 cents, less than one third as much. Perhaps the greater losses are outweighed by larger economic benefits to the nation, but we cannot honestly make that choice without the right cost estimates.

Elliott, whose main point is really about how we should use the subsidy rate to measure TARP cots, makes a good point. If we want to be serious about a cost-benefit analysis, we need to include the benefit as well. This includes taking into account jobs saved, tax revenue generated, etc by continuing to have GM and others make cars.

Sadly for the automakers, the production estimates that they need to use the federal funding effectively are not coming to bear. As Jim Manzi points out at The Atlantic's new business channel, GM is still not selling cars. Actual annualized sales for December estimate 10.3 million units, well below GM's Baseline of 12 million and even below its "downside" situation of 10.5 million. It may be that December was simply a very under performing month. Especially if tax cuts and stimulus checks go though we may see more purchases, but only for a short while.

Again, the auto industy stimulus may have large benefits to the economy but calling them loans is simply not warrented at this time.

The Auto "Loans"

2009-01-16T16:31:00.000-05:00

A large part of the argumentation concerning the allocation of TARP funds to the auto industry belied a "we're good for it mentality." The auto industry, the argument went, was going through a rough moment and would recover. When it did it would pay back its loans. This followed the logic of the Chrysler bailout during the Carter administration. Unfortunately, we are not in that situation. Despite talk of loans, the government released information today indicating that the financial sector is more likely to pay back than the auto industry.

The figure below is from the first Congressional Budget Office (CBO) report on the TARP, released this afternoon. Click the image for a larger view.

Sorry its a bit hard to read the figure. The image gives the amount given by type of institution and the expected "Subsidy." This is essentially how much money the government does not expect to get back from this disbursement. The total subsidy rate for all TARP money so far is 18 percent. This means that the government expects to recoup 82 percent of its expenditure.

For the auto "loans" that figure is vastly different. For GMAC which received $4 billion the subsidy is expected to be $3 billion, a subsidy rate of 63 percent. The separate loans to the auto industry are valued in exactly the same 63 percent subsidy rate. So while the total allocation to GMAC and all auto industry was small, only $8 billion in this report (more has been given since). The expected repayment is lower than the massive amounts given to the financial sector.

On a plus for the whole thing, GM released new, "more conservative market volume assumptions" yesterday.

Disagregated Stimulus

2009-01-16T10:40:00.001-05:00

The NYT today has a great breakdown of the stimulus plan proposed in the House.

The big take away of course being that at $825 billion this is a huge amount of money.

Now I'll give the Social Security-specific tax. I'll skip the monetarists take because to put it simply that interpretation is "don't do stimulus; it doesn't work. Fed policy will get you out of this." That interpretation of course matters and has strong evidence. Sadly, the Hill is likely to ignore it.

There are several things here that matter for Social Security. The biggest being the $275 billion in tax cuts. The plan gives $500 to individuals and $1000 to couple in reduced payroll withholding. This is essentially Obama's Making Work Pay plan. The difference is that instead of refundable tax credits they are going after payroll. This make little to no accounting difference for Americans who already pay no income taxes (about 45 percent of Americans).

The other provision is a small one to spent $4billion (small in this context) to increase benefits to low-income and disabled retirees. This is essentially just an injection into current programs.

Saving, a little, for the future.

2009-01-14T13:11:00.001-05:00

New data from the Bureau of Economic Analysis show s that private savings rates reached levels not since September 2003. The new data, reported for November of last year, shows that personal savings rates hit 2.8 percent. As the following figure shows this rate is by no means large by historical standards.

I'm also not convinced that the increase will have any permanence. Personal savings rates spiked to 4.8 percent in April of 2008, after exactly a year of rates below 1 percent. That spike tracks well with the first fiscal stimulus package more than any change in attitudes about saving. Similarly, the recent data follows on the heels of the stock market collapse with rates declining until August and then beginning to grow again.

The increase in FDIC insurance, now set at $250,000 from $100,000 likely caused some people too swap risky assets into safer savings.

In fact other data from the BEA on total national savings indicates a large spike in the second quarter of 2008 that came down, while still above past levels in the third quarter. The table below shows personal saving rates sine 2007 (yell0w)

Of course all this personal savings is dwarfed by the upshoot in the federal government's dissavings (blue).

We're not Japan but its still expensive

2009-01-13T11:46:00.000-05:00

In a speech today before the London School of Economics, Federal Reserve Chairman Ben Bernanke sought to distance the Fed's current course from that of the Bank of Japan in the late part of the 1990's and early 2000's.

From August 1999 to July 2000, Japan kept it's benchmark interest rate at zero. This zero-bound prevented the short-term rate from being used as a method to inject liquidity. Instead the Bank of Japan (BoJ) engaged in quantitative easing--the practice of holding more reserves than needed to maintain the overnight rate. The process caused the Bank of Japan's real assets as a share of GDP to peak at just over 30 percent in late 2005.

The US now looks to be on the same path. In December, the Fed abandoned its single figure Federal Funds rate target and instead took up a range of 0-.25%, closing in on the Bank of Japan. As the figure below shows, the BoJ used to be an outlier in global policy rates but all rates have moved down quickly this year. (UK--yellow, US-dark Blue, BoJ-bottom, European Central Bank--Purple, Australia--thin blue)

Yet, says Bernanke the US is "credit easing" not quantitative easing. Says Bernanke:

Our approach--which could be described as "credit easing"--resembles quantitative easing in one respect: It involves an expansion of the central bank's balance sheet. However, in a pure QE regime, the focus of policy is the quantity of bank reserves, which are liabilities of the central bank; the composition of loans and securities on the asset side of the central bank's balance sheet is incidental. Indeed, although the Bank of Japan's policy approach during the QE period was quite multifaceted, the overall stance of its policy was gauged primarily in terms of its target for bank reserves. In contrast, the Federal Reserve's credit easing approach focuses on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses.

He's right. The Fed has taken on a lot of assets, from bank equity to less savory commercial paper and GSE debt that it's never held before. He's also aware of why he's doing it and that just monetary policy may not be enough.
In a 2002 speech about Japan, Bernanke noted that:

As the Japanese certainly realize, both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japan's long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy.

So there we are. Monetary policy seems to be on the right track, being even more aggressive than the BoJ. Structural reform, at places like the SEC, may be much harder.

Social Security and the end of white america

2009-01-12T16:42:00.000-05:00

In this month's Atlantic, Vassar College professor Hua Hsu explains that America's majority white racial category is disappearing. To demographers this factoid is not all the surprising. Although Hsu's piece "The End of White America?" does get credit for teasing out the cultural implications of the shift in the total melanin in the US population.

While demographers have long been aware of the rise of majority-minority cities and the fact that the US will soon have no majority racial demographic, I was struck by one fact in Hsu's article. He writes:

According to an August 2008 report by the U.S. Census Bureau, those groups currently categorized as racial minorities—blacks and Hispanics, East Asians and South Asians—will account for a majority of the U.S. population by the year 2042.

Usually, I wouldn't worry too much about a random, even year somewhere in the future of my lifetime. The reason I do worry is that the Social Security Actuaries most recent report expects the Social Security Trust Fund to drop to zero. The fund will continue to take in revenue but have no accrued savings.

When it comes to demography and Social Security immigration is the most noted impact. Since immigrants tend to be younger and have more children they add to the working age population. Do not look behind the curtain and remind that those people will age eventually.

Yet few have talked about the impact of changing racial demographics on family structure and its perception of Social Security. A 2001 Census report on the living-situation of children breaks down how many live in extended family homes. The percentage of children living in extended family homes, most often created by the precense of an older relative is below.

Race Extended home
White 7.4
Non-Hispanic 5.6
Black 13.2
American Indian 16.9
Asian/Pacific Islander 20.6
Hispanic 17.5

As we can see non-Hispanic whites are least likely to live in extended family homes. If changing demographics shift this balance toward more such homes, cutting Social Security benefits may become more politically palatable as they will be seen as a support to workers to care for elders rather than a pure tax to retirees.

Obviousl this speculative but may be worth researching.