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Reader Arne, a long time and well informed commenter submitted to Tuesday's Social Security post a list of seven deceptively simple in form questions to get my take on them. Which I gave in comments. Unfortunately what HaloScan gives it can take away and a time this morning both his questions and my answers had vanished. Well they came back and I thought it useful to front page them and invite readers either to attempt their own answers or comment on mine.



Remember the rules. Anyone can ask for a response to a question or argument. No one has the right to demand one. Silence in this case does not equate to consent.That said what is on your mind? Anything related to Social Security is fair game. But first over to Arne.



Here are some questions I think are interesting, but I would prefer to see Bruce post them with his thoughts and for others to try to stay tightly on-topic.



1) What should we do if the SSA intermedicate forecast is right? When and how would we change?

2) Which is really more important, productivity or demographics?

3) Given that the TF lasts at least 20 more years, is moving (some of) it from US Treasuries to equities a good idea? How does that change with LC instead of IC?

4) Is solvency relevent? {mild edit to remove a side irrelevant side issue}

5) Are the stochastic projections (Appendix E) meaningful?

6) What do the 1984 and 1985 reports show us about intent?

7) Why did the TF ratio outperform expectations in the late 90's? Can it do so again?







1. Well there are two answers to that. One would rely on what I call Rosser's Equation and point out that 'crisis' means a 78% result of a benefit scheduled at 160% relative to what similarly situated retirees get today. Since 78% of 160% = 125% and the event if and when will come after I am gone, I don't see why I should get exercised about this one way or another. Particularly if the plan to avoid sticker shock is just to phase it in faster. So one perfectly good response is Nothing.



The second answer would be to point out with Coberly that a tax based solution is in fact pretty cheap. The current payroll gap is down to 1.7% of payroll which for a household of $50,000 would require an $850 a year fix, or half that if you examine that from an employer/employee split. But as I argue in Cost of Inactivity the trend short term is good and mathematically calculates out to Nothing for now as well.



The legal answer is to wait until the Social Security system falls out of Short Term Actuarial Balance. Under Intermediate Cost assumptions the TF ratio falls below 100 in around 2036, meaning the system would fail the test some nine years earlier or in 2027 which would leave 14 years to 2041 to come to a policy decision, which would be plenty of time and a much more informed information environment. Of course if depletion continues to move out in time then so would this decision point. So once again the answer to your question in the here and now is Nothing. Ask me again in 2027.



2. For decision making? Productivity. Because the Demographics are already built into the model and do not vary much over the short term that will be determinative, which is to say the 2009 to 2012 time period. Fluctuations in fertility obviously only manifest themselves 21 years or so out of phase. Whereas year over year productivity can vary greatly.



3. Diversification of the Trust Fund is in my view a good thing, though equities would not be my choice of asset class. The question is to some degree moot under IC. Surpluses start shrinking after 2017 and vanish after 2023. Given that fairly short investment window the difference in yield probably wouldn't offset the risk of markets crashing at just the wrong time. We would be a little embarrassed if the Great Crash of 2023 wiped out most of our portfolio just as we needed to cash parts of it in. Under LC I would argue that diversification is almost an absolute necessity in that it avoids the Interest on Interest problem. If we assume Low Cost and took the current surplus and invested it in outside assets and then reinvested the earnings we would have a chance to really build a portfolio. Under Low Cost the time to tap the Trust Fund portfolio does not start until 2023 and at a much lower rate amounting to 25% of the interest accrued from a portfolio of Special Treasuries, presumedly something less with better yielding outside assets. You can do quite a bit with a reinvestment rate of say 80% of earnings. As to asset class I would pick school and transportation bonds which would serve to create jobs, lower borrowing costs to states and local jurisdictions, yet maintain the predictability of Treasuries.



4. Solvency is relevant because opponents of Social Security have framed the argument in those terms. They chose not to fight this out on straight out ideological, pro market terms. Instead they sold the message of 'bankrupt'. I can only fight on the battlefield in play and for the most part that is one of Solvency.



5. I don't find the Stochastic Projections compelling. I am even less a statistician than I am an economist but the following passage was troubling. Perhaps you could explain it:



"Each time-series equation is designed such that, in the absence of random variation, the value of the variable would equal the value assumed under the intermediate set of assumptions."



The language in Appendix E is rather opaque, perhaps deliberately so, but it seems to build in the assumption that is actually in challenge, that Intermediate Cost is overall a reasonable median. But really the question of the Stochastics are above my pay grade.



6. Well the unkind answer would be to say 'Look' and link to http://www.ssa.gov/OACT/TR/index.html but I went ahead and checked the 1985 Summary. They essentially gave the system a clean bill of health with the actuarial deficit of Intermediate II-B only being .41% while the 1985 definition of 'close actuarial balance' was 'estimated average annual income rate between 95% and 105% of the average cost rate'. So I would sum their intent as 'maybe we fixed it, but lets keep a close eye on it'. Because they were only .09% of payroll of falling outside their preferred band.

http://www.ssa.gov/history/pdf/1985.pdf



7. Well that one is easy. Whether you take as your key variable Real GDP, Real Wage, population in employment all were way ahead of expectations. Whether the late nineties could happen again depends of what you think caused it to happen in the first place, a question which has economists of all ideological types coming up with different answers. Personally I am a little more optimistic that those times could come again. Then again they are not needed to achieve Low Cost results. Low Cost only assumes 2.8% ultimate GDP and 2.0% productivity both well below the rates we were seeing in the late 90s. Which is probably the least understood thing about Low Cost. In historical context its numbers seem to be pretty low hanging fruit. To me anyway, I am still waiting for someone to explain why no year in the future could possibly be as good as 2006. I don't need to appeal back to 1999.



Fire away.

by Bruce Webb (noreply@blogger.com) on May 22, 2008 03:29 PM

Bloomberg carries an article noting that credit was tight but there appeared to be plenty of money for commodities. Here is another piece of the action.

Credit is scarce but not capital. Mortgage-ravaged banks and Wall Street firms often have to borrow from the Federal Reserve, as lender of last resort, to meet current bills. They have no problem at all raising big sums from investors for future use.

In recent months, these financial companies have sold $262 billion in new securities -- much of it common and preferred stock -- according to Bloomberg data. This gives them capital they need to offset losses from subprime mortgages that now total $343 billion.



Investors obviously don't see this as throwing good money after bad: They eagerly buy more shares than the companies initially planned to sell.



Late last month, Citigroup Inc., the biggest U.S. bank by assets, planned to sell $3 billion in common stock. Investor demand boosted the total by 50 percent to $4.5 billion. People bought without assurance that the bank's need for capital was sated.



Citigroup so far is the champion capital-raiser, refurbishing its balance sheet with $44 billion in new money. There's symmetry here. Citigroup's subprime-related losses are also the highest, at $41 billion.



American International Group Inc., the biggest insurance company by assets, got stuck in the subprime mire too, by guaranteeing payment on loans. The company had a first-quarter net loss of $7.8 billion. Still, last week AIG said it had raised more than the $12.5 billion in new capital it had planned.

Stocks and Bonds



The company said it sold $11.9 billion in common shares and units that can be converted into common and might offer more of both to meet investors' demand. AIG also sold $4 billion in bonds. AIG's loss and new capital figures aren't included in the Bloomberg data cited above.



Though others damaged by subprime losses have cut their dividends to conserve cash, AIG on May 8 raised its quarterly dividend to 22 cents a share from 20 cents. The company is in effect raising money from new investors to pay off old stockholders -- a modern-day Ponzi scheme.



Wachovia Corp., the fourth-largest U.S. bank, was able to sell $8 billion in common and preferred stock last month, $1 billion more than planned. No matter that the bank was absorbing losses from once-popular mortgages that allowed homeowners to skip some interest payments and add the amount to principal.



Washington Mutual Inc., the biggest U.S. savings and loan, with subprime losses so far of $8.3 billion, sold $7 billion in common and convertible preferred shares in April to investors led by David Bonderman's TPG Inc. The company has raised a total of $10 billion in new capital.



Real Money



UBS AG, Switzerland's biggest bank, has reported $38 billion in write-offs and other losses from mortgages. It has raised $28 billion in capital. Merrill Lynch & Co., the third- biggest U.S. securities firm, has brought in $18 billion in new money against its subprime-related losses of $32 billion.



The parade will continue. Freddie Mac, which supports the U.S. mortgage market by purchasing loans from lenders, said last week it plans to sell $5.5 billion of common and preferred shares soon.



Freddie Mac and its sister government-sponsored company Fannie Mae may be in the market for money repeatedly in the months ahead as the U.S. government looks to them to keep the mortgage market liquid.



Investors may feel they can't lose by putting money into financial companies. The Federal Reserve -- by engineering the takeover of Bear Stearns Cos. by JPMorgan Chase & Co. in March - - showed that no company big enough to have a major impact on the banking system will be allowed to fail.



What's more, both Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson have urged banks and investment firms to raise more capital so that they can lend more and boost the economy. People also may be intrigued by their ability to buy stock at a haircut from the market price.



Still, when they buy common shares and preferred stock convertible into common, they dilute the earnings potential of all stockholders. And when the companies have to sell more shares in the future, that process starts all over again.



(David Pauly is a columnist for Bloomberg. Opinions expressed are his.)

by rdan (noreply@blogger.com) on May 22, 2008 01:26 PM

The Washington Post reports:

With scores of lenders unable to come up with money to provide student loans, the Department of Education is preparing to exercise broad new powers in the coming weeks that could fundamentally recast how millions of students pay for college.



This initiative could transform the federal government from a guarantor of student loans into the dominant provider, replacing the outside lenders to whom students and their families have long turned. Though the Education Department has been making a portion of these federally backed loans, it is now aiming to dramatically expand its role as a direct lender to fill the void created by an exodus of private-sector lenders, due primarily to the credit crisis.



...



Traditionally, there have been two primary sources of student loans guaranteed by the federal government. About a fifth have come from the Education Department itself. Outside lenders have represented a far larger share of the market. But now, as the mortgage crisis has crippled the broader credit markets, many firms are exiting the student loan business, saying it's no longer profitable. The expanded role of the Education Department -- both as a direct lender and a source of capital to other lenders -- is just one of the fundamental changes sweeping through the student loan industry. According to FinAid, 88 lenders, including 25 of the largest firms, have announced they will no longer offer federally guaranteed loans, citing their difficulty in getting financing from the troubled credit markets.

...



Now, the department is being asked to issue far more loans this year than it ever has in the past. Last year, the department provided $14 billion in federally guaranteed loans directly to students. This summer, during the peak of the student-lending season, that share is expected to more than double and possibly reach $35 billion, or about half the market, according to FinAid and other analysts.



In addition, the department will likely have to take over the market that consolidates federally guaranteed loans for post-graduates. This is a $37 billion business that allows these borrowers to combine all of their student loans into one package with a single, relatively low rate. Already, lenders representing 77 percent of the consolidation market have dropped out since the start of the credit crisis. Department officials said they are prepared to hire contractors to handle this burden.



Edward M. Kennedy (D-Mass.), who chairs the Senate Health, Education, Labor and Pensions Committee, recently sent a letter to the presidents of all the nation's universities, urging them to join the direct-lending program as soon as possible. He is concerned that a flood of requests to switch to the direct-loan program will come late in the summer and overwhelm the department, aides said. Since the beginning of March, nearly 300 universities and colleges have applied to make their students eligible for direct loans from the government.



Some leading Democrats in Congress have urged the government to take responsibility for providing all federally guaranteed loans. Sens. Hillary Rodham Clinton (D-N.Y.) and Barack Obama (D-Ill.) have both said that, as president, they would hand the entire market to the Department of Education.



At the same time that the department is expanding its direct loan program, its officials are also working with financial experts from several federal agencies, including the Treasury, the Council of Economic Advisers, and the Office of Management and Budget, to plan for purchasing loans from other lenders. Officials familiar with the plan, which is likely to involve money from the Treasury, said it may take weeks to release details.



Kennedy and Rep. George Miller (D-Calif.), who chairs the House Education and Labor Committee, are also preparing a letter that asks the Government Accountability Office to keep a close eye on how the measure is carried out because the department is required to buy student loans in a way that does not result in a loss for taxpayers.

by rdan (noreply@blogger.com) on May 22, 2008 01:02 PM

Micheline Maynard's story today on airline route cutbacks leads with small cities losing air service entirely, but arguably the more important information is in the accompanying table. The combined flight cutbacks at the 10 largest airports losing service (~1,500 monthly flights) add up to just about half the reduction in flights at Chicago O'Hare alone between January '07 and January '08.



Now, blowing $61 million on an enlarged runway at Hagerstown, Maryland is undoubtedly a big deal for Hagerstown. At ORD, they're in the midst of blowing as much as $20 billion on a program to rearrange the airport in the modern fashion with multiple well-spaced parallel runways. Some of this may be justifiable in reducing operational issues in bad weather for the inframarginal flights, but a major justification was accommodating anticipated essentially unlimited growth in flights that someone projected out of past trend under the implicit assumption that cheap aviation, like cheap motoring, would go on forever.



Even half of that $20 billion would amount to an enormous investment in reasonably high-speed rail — Stephen Karlson of Cold Spring Shops argues persuasively that 300 km/h electrified bullet trains shouldn't be made the enemy of very useful service capable of being implemented without such large investments in fixed capital (see here for some links to his archives). Since short-distance feeder flights congest big airports just about as much as long-distance jumbo jet services that may remain the efficient way to get people across oceans, you could theoretically de-congest hub airports to some degree with a well-planned investment in 180 km/h rail that would be a bargain in comparison to airport megaprojects, and provide more places with real modal choice in ground transportation essentially as a side-effect!



The catch is that doing so requires political will, both for the money and to deal with the need to make some people along the routes unhappy, and advance planning. (E.g. it would take at least a couple years to extend the successful 130 km/h service between Milwaukee and Chicago the eighty miles or so to Madison even if the project were amply funded.) Perfect foresight may be hard to come by, but right now it doesn't take genius and a time machine to see that people are going to start wanting this stuff yesterday.



Along those lines, the presidential candidates are all somewhat disappointing, as preserving cheap motoring forms the bulk of their transportation policy positions. However, members of the Pigou Club might note that the Obama campaign did at least bother to drop a paragraph in acknowledge that other transportation modes exist, whereas the space program is more important to McCain than Amtrak. (Recall that McCain recently picked up some Common Touch points from the press corps for riding the Acela Express instead of his wife's jet, but is a long-standing opponent of Amtrak funding.)

by Tom Bozzo (noreply@blogger.com) on May 22, 2008 12:03 PM

A few days ago in a post on Greg Mankiw we got into a discussion of stock market valuation where vtcouger wondered about using 10 year trailing earnings to evaluate stocks. vtcouger wondered why Benjamin Graham recommended using 10 year trailing earnings rather then one year trailing earnings. Remember, Benjamin Graham was writing in the 1930s when earnings volatility was much greater then since WW II. Moreover, earnings growth was much weaker

As the chart shows, from 19871 to 1940 EPS growth was only 2% and the volatility was much greater. It was so great that if you used trailing one year earning growth to estimate stock market valuation it could generate major problems. For example, the day FDR was elected president was one of the best time ever to buy stocks. But based on trailing one year earnings the market PE was 25,which said the market was massively overvalued. To get around that problem Graham and Dodd advocated using trailing 10 year earnings. This measure of EPS would include both peak earning and trough earnings and so generate an estimate of normalized or trend earnings so that investors would not be mislead by using peak or trough earnings to calculate stock valuations.



Just as an aside, note that from 1875 to 1900 EPS did not grow. But we see many people talking about that as a great era of prosperity and deflation. I wonder how many of those who thing the late 1800s was so great would really be happy with decades of falling earnings or profits.



Since WW II earnings growth has become much more stable and market valuation has come to depend on future earnings growth rather than dividends.

Corporation now retain a much larger share of earnings and investors buy stocks much more on the basis of expected future growth from these retained earnings rather than current dividends that were so important to Graham and Dodd. Note, when they wrote in the 1930s expected earnings growth was 2% and now it is 7% and in the late 1990s bubble it was even higher.



But investors still have the problem that basing valuation of peak earnings or trough earnings can distort valuations even though EPS growth is now much more stable then it was before WW II. For the market as a whole you can use the Graham and Dodd practice of using trailing 10 year EPS that includes both peak and trough EPS. Another way to do it is to use trend EPS growth. If you look at the above chart on EPS since 1960 you see the dotted 7% EPS growth trend. So rather than using actual trailing EPS, or forecast EPS, use this trend line to estimate market valuation. This chart does just that.



In addition I have shown my estimate of what the PE should be given current interest rates. The estimate is based on the actual relationship between 1960 and 1996 before the late 1990s bubble so it excludes the bubble from the regression results.



I hope this explains things to your satisfaction vtcouger.



Note: my EPS data is reported EPS until 1989 and since 1989 it is operating EPS.



Note: read Brad Delong at http://delong.typepad.com/sdj/

by spencer (noreply@blogger.com) on May 21, 2008 11:53 PM

Watching Cspan at lunch of the House debt on taxes and energy Rep Emanual stated there are currently 9300 unused oil drilling permits in the US. The counter to the statement was from Rep McCrery: There must be a reason for them being unused.



Yes, obviously if they are unused there is a reason. Any guess? Of course, that they are unused McCrery noted is the reason why we need to drill in ANWR and all 3 coasts; East, West, Gulf. Rep



McCrery seems to imply here that the permits are unusable. Well, if they are unusable, then why are they still open? Why have they not been returned as unusable and thus the ares of permit removed from the list of viable drilling property.



Fascinating. Being that we are not opening up any new refineries which is blamed on all sorts of things (usually those tree hugger types) where would all this oil, whether from the republican wish list of holes in the ground or the current 9300 ok'd potential holes in the ground be refined? If not here, then we are exporting crude. Will that offset our import costs?

by Divorced one like Bush (noreply@blogger.com) on May 21, 2008 07:48 PM

The American Farmland Trust argues for the provision in the new farm bill that is being called ACRE:

A genuine government safety net should protect farmers against unexpected losses in revenue (price multiplied by yield) based on actual market conditions, rather than pay farmers based on historical production or when prices fall below artificial targets set by Congress.

Dan Morgan notes a potential problem with ACRE:

A major new program in the recently enacted farm bill could increase taxpayer-financed payments to farmers by billions of dollars if high commodity prices decline to more typical levels, administration and congressional budget officials said yesterday ... The voluntary program guarantees farmers a subsidy if they suffer losses because of low prices or poor crops. Since the amount of the subsidy for 2009 is tied to recent record prices, farmers could reap a windfall if prices drop suddenly ... A blog item posted Monday by the agricultural magazine Pro Farmer described the new program, known as Average Crop Revenue Election (ACRE), as "lucrative beyond expectations," and said it is a "no brainer" for farmers to sign up for it. The Agriculture Department estimates that subsidy payments to corn farmers alone could reach $10 billion a year if prices - which have been $5 to $6 a bushel - were to drop to $3.25 a bushel, a level seen as recently as last year ... Currently, corn farmers receive a government subsidy when prices drop below $2.63 a bushel. But critics say that subsidy does not protect farmers who bring in low yields in a year when prices are high ... But as the farm bill moved through Congress, lawmakers sweetened the subsidy provisions, in part to encourage more farmers to sign up. The final version of the program is more generous than ones proposed earlier by the House and the Bush administration. The new program insures a farmer's revenue at close to the current high prices. USDA estimates that a farmer could draw a payment even with corn prices at $4.39 a bushel. "They have taken a good idea and gone to an extreme in terms of creating an opportunity for revenue flows at the highest possible level," Conner said.

President Bush wants to veto this bill. On this one – I think he’s right!

by PGL (noreply@blogger.com) on May 21, 2008 06:23 PM

I took this photo of a riser display selling US flags at Lowe’s in Memphis, TN. Click the image for a larger view.

I laughed my ass off.

by tgirsch on May 21, 2008 04:48 PM

Greg Mankiw, clearly distracted by his former collaborator's wife having been denied a tenured position at Harvard, quotes Fred Bergsten in the WSJ, Instapundit-style:

By effectively killing "fast track" procedures that guarantee a yes-or-no vote on trade agreements within 90 days, lawmakers in Washington, led by House Speaker Nancy Pelosi, have destroyed the credibility of the U.S. as a reliable negotiating partner.

Which leads to the obvious conclusion: Republicans "destroyed the credibility of the U.S. in 1998 when they did the same thing to President Clinton.



Strangely, Greg Mankiw (Fortune, January 12, 1998) "knew better."

Policy and politics diverged again in the fast-track debate. Clinton was asking Congress for something all recent Presidents have had--the authority to negotiate trade deals that Congress would consider without amendment. This power is crucial if the President is to continue the multilateral process that over the past half-century has moved the world toward freer trade and greater prosperity.



Although economists are united in support of free trade, opinion polls show the American public is more skeptical. The public's view is partly based on the false analogy that trade is like war--some countries must lose for others to win....



Because of the public's ambivalence--and the opposition of interest groups that fear foreign competition--fast track went down to defeat. This may put an end to the multilateral approach to opening up world trade. But it need not mean an end to the free-trade movement.*

Got it? If it's a Democratic Congress, then Pelosi is a "problem." If it's a Republican Congress doing the same thing, it's Through No Fault of Their Own.



And by not pointing out that he himself used to know better, Greg Mankiw destroys not Fred Bergsten's credibility, but his own.



Cross-posted from Marginal Utility.



(See also Dani Rodrik, who gives the lie to the whole line of "reasoning.")



*Yes, I omitted Mankiw's framing issue (tomatoes), but if he really wants to claim George W. "Steel Tariffs" Bush was different, the only possible response is "Bring it on."

by Ken Houghton (noreply@blogger.com) on May 21, 2008 03:04 PM

By ilsm



Carlyle Group just bought Booz Allen Hamilton which does $3.5 (about $5B total corporate revenues) a year "consulting" for DoD.



Now Carlyle owns the consultants who will "advise" the DoD to keep to the "strategy and structure" of the think tanks and support investing in more and more potentially useless things from companies in which Carlyle has interests.



One of the longstanding strategies that drive expensive DoD structure is observable,: “continuous mobilization”: Always being "ready" to fight a theoretical battle on the military industrial complex' terms defined by the think tanks and developed largely to sustain a profitable or health industry. Never ask whether any of it is worth the expense of scarce national resources.



Some history:



Prior to 1950, the US prepared to fight the most expensive type of think tank theorized war. This was to be "industrial age" war perfected prior to 1914 against the Red Army in Central Europe. It included tactical nuclear forces to overcome logistical limitations and the size of enemy conventional forces. Those of you around in the mid 50's; did you get an Atomic Cannon for Christmas one year, like my baby brother? Anyway, there was no think tank concerned for slogging it out in another 1936 Sino Japanese style light infantry war in Asia. Mac Arthur presciently warned against a conventional war in Asia and his "run in" with Truman was less insubordination than demanding the president keep to the playbook.



RAND helped to establish strategies to fight nuclear armegeddon, the Air Force who got tons more money than the Army and Navy, who got stuck fighting the wrong war in Korea in June 1950.



The Korea police action added the need for conventional war “continuous mobilization” to the nuclear warfare (Air Force pilots, every one a Capt Kirk) mission requirements.



This renewed capability to fight Mao on his terms helped get the US stuck in Vietnam. The think tanks developed new strategies and theories of conventional and unconventional warfare to sell anything from counterinsurgency warfare, Special Operations Command (SOCOM) to new super weapons to refight the Battle of Kursk. Army brand think tanks devised "air mobile" doctrine first tried in Vietnam, and discredited, but revised for a Central European Armageddon, complete with Apache helicopters armed with tank busting rockets, supporting 60 ton tanks, that today blow up Toyotas in Baghdad.



Navy brand think tanks sell a dozen aircraft carrier battle groups to fight the battle of Midway again. The Soviets never built a ship equal to one of ours. No one today is working a carrier remotely equal to any US ship. The Air Force lost its monopoly in nuclear warfare, as the Navy got its branding in nuclear Armageddon with Rickover's Polaris/Poseidon/Trident nuclear submarine fleet. Finally, the Navy brand kept their WW II North Atlantic anti submarine navy to guard the convoys going over to reinforce the US Army in Europe in holding back the Red Horde.



The Marines have their brand. While the Navy has 3 navies for their dreams of expensive orders of battle, they keep a fourth navy for the Marines!! That is the dozen or so Landing Ships and supporting ships that carry about a thousand Marines each. All of which together could just about invest Saipan if someone were so rude as to take it from the US.



All these "branded" orders of battle, devised, revised and sustained by think tanks' whim, ratified by beltway bandits working in service office like Booz Allen consultants support the wishful thinking of building up the military industrial complex.



Continuous mobilization is based on faulty estimation of threats, such as the perennial estimation of the Red Army and now Islamic terror, created the most expensive, unneeded war machine that money could buy. Lately, continuous mobilization termed "broad spectrum" warfare or more of the same preparing for the war they wish they could fight, and making a lot of money.



The folks who describe the beaks to be whittled are now part of the guys who make money on their dreams.



Further reading from Robert Gates is here.

---------------

This one by ilsm.

by rdan (noreply@blogger.com) on May 21, 2008 10:32 AM

David Ranson repackages one of the usual suspects from the bag of lies from the rightwing:

Will increasing tax rates on the rich increase revenues, as Barack Obama hopes, or hold back the economy, as John McCain fears? Or both? Mr. Hauser uncovered the means to answer these questions definitively. On this page in 1993, he stated that "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." What a pity that his discovery has not been more widely disseminated.

Say what? Regular readers of this blog might have seen this silly claim made by certain rightwing trolls many times. I could demolish this line of nonsense by showing Federal revenue by source (individual income tax, corporate profits tax, and payroll tax) as a percent of GDP but Zubin Jelveh has already done so in his Lying with Charts:

Hmmm, corporate tax revenues have declined dramatically. Why, then haven't overall tax revenues dropped? Well, we can primarily thank social insurance programs like Social Security for that. Here's a chart showing social insurance program tax revenues

Zubin also charts individual income taxes as a percent of GDP showing that this ratio did rise after the 1993 tax increase while it fell after the 2001 tax cut. The claim made by Ranson has been made by many others – and it has been shown to be silly many times as well. But the WSJ oped page does seem to be on a mission to outdo the National Review for the dumbest rightwing rag with respect to economics.

by PGL (noreply@blogger.com) on May 21, 2008 10:01 AM

Healthy Rivers, my favorite blog for such matters, reports that:

Congress just moved a little closer to establishing your right to know for sewage spills. Last Thursday, the House Transportation and Infrastructure Committee voted to pass the Sewage Right to Know bill (HR 2452) and send it to the full House for consideration. The bill now has the support of over 150 groups, including the National Association of Clean Water Agencies, who represent many of the nation's biggest sewer utilities.

USA Today ran a great story last week highlighting our crumbling infrastructure and the need for increased investment (for more about our views on this, see my earlier story). Right to know for sewage spills is a straightforward idea whose time has come and will allow us to enjoy and appreciate our local streams and rivers, while staying healthy. This sort of recognition of the problem will get people to realize that continued investment in our water infrastructure is needed. Instead of paying high prices for bottled water (pdf), let's pay to protect our streams and rivers that provide many of us with reliable drinking water in the first place.

Water and our need to consider basic infrastructure cost have not been in the headlines except for highways and bridges. Water shortages tend to be discussed in relation to agriculture.



We made the investment in water and sanitation in an earlier day. Probably the issue won't be part of the election campaign, but the costs of renewing our committement to basics are certainly greater than some of the issues front and center.

by rdan (noreply@blogger.com) on May 20, 2008 08:30 PM

Or perhaps we could call this 'Social Security basics as seen by Bruce'. In any event.



Some recent e-mail exchanges and comments have led me to conclude that there are certain misconceptions about Social Security finance, misconceptions that both feed on and feed into certain pernicious myths initiated by people who oppose Social Security on principle but want you to believe it is all about the finance.



The first misconception stems from the fact that the Treasury Department taken as a whole doesn't need the equivalent of a Savings Account, that is a place to hold large amount of actual dollars in reserve. The reason is simple, when put in the crudest terms it not only has excellent credit which it exercises daily, if it comes to it Treasury owns the printing press. On the other hand it manages a number of programs who do need that equivalent of which the three largest are Social Security Retirement, Social Security Disability, and Medicare. So how do they handle this. Well the mechanism is simple, it just results in some conceptual confusion. More below the fold.

The mechanics of Social Security are pretty simple. The Federal Government collects taxes on wages and on high income benefits and then turns around and spends much to most of that right back out the door in the form of disability and retirement checks. If there are surpluses the money is credited to the Social Security Trust Fund which then turns around and invests them in the safest historical investment known, in this case a special type of T-Bill known as a Special Treasury. Like the case of all T-Bill sales the proceeds flow to the Treasury and are available for the government to spend as they like. Nothing wrong there, that is what happens when you buy a bond, they take the money, give you a promise to repay, and then they invest the money is hopefully productive ways. This is not 'raiding', this is not 'looting', but it is a promise that creates a specific future obligation, and is specifically booked as debt and shows up in the familiar $9 trillion total debt as seen on various debt clocks. Note too that this process can, and as we will see, has reversed. If there is a string of years when Income from taxes lags cost then the flow reverses, the General Fund makes up the difference and retires an equivalent amount of debt.



Which leads to myths one and two: the Great Raids of Johnson and Reagan. The narrative here suggests that Johnson raided Social Security Trust Funds to fund Vietnam and that Reagan raided it again to pay for the Cold War and that as a result the cupboard was left bare. This is just numeric nonsense and betrays both a misunderstanding of the nature of the Trust Fund and of the Special Treasuries they hold plus a total exaggeration of the dollars in question. The latter can be seen in Table VI.A4.—Historical Operations of the Combined OASI and DI Trust Funds,Calendar Years 1957-2007 [Amounts in billions]. For our purposes the key columns are the right hand three under 'Assets'. Taking the last first, the Trust Fund Ratio is the Trust Fund balance expressed as a ratio of time with 100=1 year. Legally the Trustees are supposed to monitor the Trust Fund ratio and alert Congress any time it falls out of Short Term Actuarial Balance, which is defined as a projected TF Ratio of at least 100 in each of the next 10 years.



Which gives us mythbuster one: any year that Social Security has a TF Ratio close to 100 is a year when nothing is being looted, instead the President, Congress and Trustees are all fulfilling their fiduciary responsibility. If we look at the table we see that Johnson maintained the Trust Funds at ratios between 97 and 110 at the end of each of his full years in office, and delivered a 101 ratio to his successor, in respect to Social Security he was practically the perfect steward.



Now if we look forward in time we see that Nixon allowed the TF ratio to fall below 100 and so out of Actuarial Balance, and that Ford and Carter did nothing about it. Though this made them perhaps poor stewards at one level, it didn't make them thieves the direction of cash flow during these years was actually from the General Fund to Social Security (third column from right).



Which leads us to the Reagan Administration. Reagan inherited a lemon, Social Security was coming off a string of six years of cashing in Trust Fund assets with money from the General Fund, although all the bills had been paid and all legal obligations met, the cupboard was in fact bare. The ideologues were howling to just let it die, they hated Social Security from the beginning and were just waiting for their day to come. It came and Reagan let them down, instead he instituted a medium term fix.



Which puts the lie to myth 2: the Reagan raid. First if we look at the Trust Fund year by year (third column) we see that one, the dollar figures in any given year are not particularly big, with half of the total increase coming in the last year of his term. Second the Trust Fund ratio although improving was only up to 41. But there was no raid, instead there was a simple accumulation of investments to get the fund back on track to a TF ratio of 100. Whatever else his faults, Reagan is totally blameless over Social Security. He did his job.



As did Bush I. He didn't do anything dramatic but he did deliver a Trust Fund with a ratio of 97 and clearly on track for Actuarial Balance.



Which gives rise to myth 3: pre-funding. Any year that the Social Security Trust Funds have a ratio of 100 or less they are not prefunding anything, in fact they are in actuarial imbalance and in effect under water, which was true for every year from 1971 to 1993. There was a real crisis in Social Security in the early eighties but collectively this country fulfilled its responsibilities to Social Security retirees. (Although I will hasten to note that the entire net bill was picked up by workers, capital's role was limited to not actually wrecking the system). But there is no hard evidence I know of that the Commission ever thought of their efforts of doing more than returning it to actuarial balance, and a recent interview with the Executive Secretary of the Commission confirmed as much. While they did present a set of numbers that would do the job, they were hardly in a position to predict that series of years in the late nineties when Social Security was actually set on the path to solvency.



The state of affairs under the Clinton and Bush Administration is in fact somewhat of an anomaly but there it is. Current surpluses and current economic growth are coming in at rates that should allow us to pay all or almost all of benefits going fowards. If and only if we are vigilent enough to keep future governments simply fulfilling their fiduciary duty. And the politics of that will have to wait on another day and another post.

by Bruce Webb (noreply@blogger.com) on May 20, 2008 06:30 PM

I think he may believe it's good news that the S&P 500 forward valuation (what we believe we might make next year, having nothing necessarily to do with current earnings or actual sales) has returned, approximately, to the level of 1998.*



The problem, as I noted more than two years ago, is that, even ignoring that the numbers are more WAG than analysis, it's still well above the historic levels that promise good returns.



So this, again, seems a good time to reproduce a graphic borrowed Burton G. Malkiel (it was on page 257 of a previous edition):







UPDATE: I wasn't clear enough in my initial post, so I'm pulling vtcodger from comments:

Mankiw has a chart there. The label says it is S&P500 PE Ratio. The numbers it shows are in the high 20s -- which is consistent with my gut feeling that the stock market has been substantially overvalued for the past 15 years. Over the very long term PE ratios for healthy markets have typically been below 15.

Now, it's possible that something has changed since 1993 to make higher ratios more attractive. But I wouldn't bet that way, though Brad DeLong, for one, appears to do so (though his argument is one of Relative, not intrinsic, Value).



*That is, two years after Saint Alan mumbled something about "irrational exuberance" and turned Robert Shiller into a popular author.

by Ken Houghton (noreply@blogger.com) on May 20, 2008 06:08 PM

Out here on the edge of the grain belt, my local newspaper's editorial board today bravely stood up for biofuels. They argue, in part, that corn supply is not fixed:

In 1995, before the ethanol boom began, American farmers produced 162 million metric tons of corn for food and export.



By 2007, ethanol production was taking 62 million metric tons of corn. So the corn left for food and export was — 308 million metric tons.



That's right, 308 million metric tons — 82 percent more than before the ethanol boom, thanks to higher yields and more land in cornfields.

Corn for everybody! Almost makes you wonder why the price is so high.



While I don't quite match their numbers with data from the USDA's Foreign Agriculture Service, corn production and supply have in fact increased since 1995 — though they managed to pick a relatively low-production year for their comparison:



(Source: USDA Foreign Agriculture Service. Click to embiggen.)



However, their characterization of ~300 million tons available for (human) consumption is misleading, and increased ethanol demand isn't exactly a blip in the U.S. corn market. Here's a coarse breakdown of the corn crop's uses:





Traditionally, the major use of corn has been for animal feed. That's been in a roughly 20 million metric ton range for the last ten years. (Before the mid-90s, corn production was relatively volatile and a lot of the variation was reflected in animal feeding modes.) Other food and industrial uses have usually taken second place, and exports have mostly fallen in the range of 40-60 million MT annually.



Since the USDA began breaking out ethanol as a source of corn demand in 2002/2003, it's taken up an additional 50 megatons of corn. Should the 2008/2009 ethanol forecast comes true, that'll be more like 75 megatons. Were that corn not indirectly pumped into American gas tanks, it could nearly triple U.S. corn exports; or, from another perspective, we're set to use a bit more than an eighth of the world crop for fuel. A couple more years of billion-bushel (~25 megaton) growth in corn directed to ethanol production and ethanol could take over from animal feed as corn's primary use in the U.S. This also goes to show that converting the entire current corn crop into ethanol wouldn't make much of a dent in U.S. gasoline demand.



A curious (and worse) argument is that corn ethanol is a gateway to better future biofuel-production processes. It strikes me that a lot of the current ethanol production capital in the U.S. is one way or another ill-suited either to currently more efficient sources of carbohydrates like sugar cane or to hypothetical cellulosic properties. The big unit trains of ethanol tankers are mobile enough, but otherwise all these giant distilleries are in the middle of corn country for a reason, which is to say subsidy-farming.



Added: See also Menzie Chinn at Econbrowser.

by Tom Bozzo (noreply@blogger.com) on May 20, 2008 11:49 AM

Further lifting (of comments like cactus) by juan:



"...the term 'speculators' tends to imply short-term traders while it's my understanding that most of the index funds take longer term or more 'sticky' positions, but this can become a matter of semantics that detracts from what Briese and some others have tried to bring out -- a financialization of price and at least a few of the major actors.



So, a few clips not from the Barron's article but another and related posting by Steve Briese:

What you didn’t read in the Barron’s cover story

[...]

The Commodity Exchange Act addresses excess speculation in commodity markets, and states that “the Commission shall…fix such limits on the amounts of trading which may be done or positions which may be held by any person.” The only exceptions are “to permit producers, purchasers, sellers, middlemen, and users of a commodity or a product derived therefrom to hedge their legitimate anticipated business needs”(7 USC 6a).



The CFTC regulations 17 CFR 1.3(z) further spells out who is to be considered a bona fide hedger in such intricate detail as to make it unmistakable that exemptions to speculative limits are intended only for those commonly known as “the trade” who carry on a cash business in the commodity itself.



The Commission acknowledges that speculative limits apply to indexers: “Mutual funds (or for that matter institutional traders) who want to gain commodity exposure”, whether in an individual commodity future or in several commodity futures that make up an index, are not entitled to an exemption as a bona fide hedger.”



But what agency takes away with one hand, it gives back with the other: “Swaps dealers that have swap agreements with clients that provide the clients with a return on an index of commodities can hedge the exposure from that agreement by buying futures contracts in the commodities underlying the index.”



The illogic of limiting position sizes for indexers dealing directly in futures while exempting indexers who use a swap deal intermediary has apparently not escaped the Commission’s attention. And it has a proposal on the table to correct this inequity. In November the agency proposed new exemptions for “risk management positions,” which would open the door to all indexers while, of course, leaving the swap dealer exemptions in place.

[...]

In proposing the new exemptions, the CFTC acknowledges that index-based positions differ enough from bona fide hedges as to make hedge exemptions inappropriate under current law. It does not state where it found the authority to classified swap dealers as hedgers in the first place. It is also unclear why swap dealers should be accorded special treatment.



Their cozy arrangement began during the Reagan Administration under CFTC Chairman Wendy Graham (the other half of the Texas Senator Phil Grahm’s duo that Barron’s dubbed “Mr. & Mrs. Enron”). She began exempting swaps from CFTC oversight in 1989, and in 1992 granted Enron regulatory exemption for its energy-swap operation just five days before resigning her Chair to join Enron’s audit committee.



In 2000 the CFTC officially granted dealers broad relief with the result that today swaps are cleared through the US futures clearing systems alongside futures contracts, thus affording exchange level payment guarantees to non-exchange traded and non-regulated derivative contracts.



Then in 2006, in undertaking a “Comprehensive Review of the Commitments of Traders Report” the Commission acknowledged that its practice of reporting the positions of swap dealers under the “commercial” category may be misleading. Though it received a record public response with practical unimity for continued and expanded position reporting, it bowed to the one dissenter.



The International Swaps and Derivatives Association (ISDA), although opposed to a separate reporting category altogether, allowed that “If the Commission decides otherwise, we recommend that any additional reporting be in a no more than two-year pilot program that we would be prepared to work with the Commission to design with a limited number of commodities.” The resulting “COT-Supplemental” report consists of just twelve markets and its two-year mandate expires at the end of this year.



More enlightening than the swap dealers wish for anonymity, was the reason stated in the ISDA’s letter to the CFTC: “the [swap dealer] category is highly concentrated, with, we believe, the top four swap dealers composing over 70% of the category. In some of the lower-volume commodities markets, only a single swap dealer is a dominant participant”.

With one to four unregulated swap dealers controlling upward of 60% of the long open interest in some markets, the CFTC’s has created a nightmarish level of concentration. Even assuming that their dealings in fact originate from non-leveraged investors, sudden setbacks in other investment areas could easily jeopardize a swap dealer’s ability to meet margin calls, al la Bear Stearns.

Complete at Commitments of Traders.



Also

corrected link to Gene Epstein's Barron's cover story Commodities: Who’s Behind the Boom?



Next, the 'Chart' link above was not intended to be LAN but Nymex light sweet crude oil contract, continuous, for the last decade -- this one for benchmark West Texas Intermediate captures the same move. I would note that according to Citigroup commodity analyst Alan Heap, (Beyond Fundamentals...), long only funds such as index began entering late 2003-early 2004



Finally, Frank Veneroso (Veneroso Associates) made an interesting presentation at the World Bank Executive Forum last year.

Veneroso Associates:

Reserve Management The Commodity Bubble, The Metals Manipulation, The Contagion Risk To Gold And The Threat Of The Great Hedge Fund Unwind To Spread Product

which can be accessed here and places greater emphasis on the role of hedge funds.

by rdan (noreply@blogger.com) on May 20, 2008 10:55 AM

Bloomberg has a poll that takes a look at rational investor behavior, with which I am very familiar, over the panic behavior laid out by our conservative ideologues over touching capital gain taxes of any percentage.



If the monied sloshers are as sensitive as they imply, maybe they aren't so rational, and are actually in panic mode for the percentages all the time. Having adrenaline in the brain everyday causes physical damage to brain function, and warps perceptions.



Ask any soldier on the front...it changes the mind. And not for the good in civilian life. You have to get rid of the adrenaline to function in a different, more peaceful setting.



Our 'rush' to gain percentage probably, over time, damages our common family and community as well. Staying high all the time did not work for hippies, why should it work for sloshers?



Just saying.

by rdan (noreply@blogger.com) on May 20, 2008 10:19 AM

Unless, as with my Loyal Reader at MU, you played chess competitively against him in the mid-1970s.

by Ken Houghton (noreply@blogger.com) on May 20, 2008 03:58 AM

As a direct result of the six-Republican, one Democrat California Supreme Court's decision last week, people who have shared everything for 21 years now get to marry. Pull quote:

As a Japanese American, I am keenly mindful of the subtle and not so subtle discrimination that the law can impose. During World War II, I grew up imprisoned behind the barbed wire fences of U.S. internment camps. Pearl Harbor had been bombed and Japanese Americans were rounded up and incarcerated simply because we happened to look like the people who bombed Pearl Harbor. Fear and war hysteria swept the nation. A Presidential Executive Order directed the internment of Japanese Americans as a matter of national security. Now, with the passage of time, we look back and see it as a shameful chapter of American history. President Gerald Ford rescinded the Executive Order that imprisoned us. President Ronald Reagan formally apologized for the unjust imprisonment. President George H.W. Bush signed the redress payment checks to the survivors. It was a tragic and dark taint on American history. [Updated to note: Three Republicans, including an alleged totemic icon. The Ancestral Party used to know how to Do the Right Thing.]



With time, I know the opposition to same sex marriage, too, will be seen as an antique and discreditable part of our history. As U.S. Supreme Court Justice Anthony Kennedy remarked on same sex marriage, "Times can blind us to certain truths and later generations can see that laws once thought necessary and proper, in fact, serve only to oppress."

by Ken Houghton (noreply@blogger.com) on May 19, 2008 11:28 PM

Just a quick chart to compare the current situation to the 1970s.



When I ran the chart I did not expect such a nice match.



The price series is West Texas intermediate.

by spencer (noreply@blogger.com) on May 19, 2008 08:43 PM

Hilzoy, on the GOP’s currently bleak outlook: They Should Have Read Their Hayek.

by tgirsch on May 19, 2008 06:55 PM

Deroy Murdock seems to have trouble with the spelling of Milton Friedman’s last name – oft typing it as if it were Freidman. But I like his chart that compares the Tax Foundation’s “days worked to pay for taxes” versus the graph that shows days worked to pay for government spending:

AIER’s Kerry Lynch wrote last April 15. Tax Freedom Day peaked on May 3, 2000, near the end of President Bill Clinton’s administration but before President G. W. Bush signed multiple tax cuts. Lynch added: “Friedman Day shows that it is not because the government is spending less, but because it is borrowing more, in the name of tomorrow’s taxpayers.”

Since 2000, government spending as a share of GDP has increased even as tax collections have declined. Murdock isn’t exactly correct in the following:

Up and up and up perfectly describes the path of federal spending, which constantly rises, as if gravity were reversed ... Republicans are supposed to squelch such rubbish. And yet 100 House Republicans approved it. GOP voters, already disgusted by Republican profligacy, will find this betrayal of their party’s core principles enervating. Democratic voters will back their party’s genetic big spenders, rather than the GOP’s hypocritical posers.

We did see a drop in government spending relative to GDP from 1992 to 2000 – and this came under a Democratic Administration. Odd isn’t since Murdock thinks Democrats are just big spenders.

by PGL (noreply@blogger.com) on May 19, 2008 06:03 PM

May 2008 // Washington, DC – Today, Citizens for Responsibility and Ethics in Washington (CREW) and VoteVets.org released an e-mail obtained from a Veterans Affairs (VA) employee directing VA staff to refrain from diagnosing soldiers and veterans with Post Traumatic Stress Disorder (PTSD).

On March 20, 2008 a VA hospital’s PTSD program coordinator sent an e-mail to a number of VA employees, including psychologists, social workers, and a psychiatrist stating that due to an increased number of “compensation seeking veterans,” the staff should “refrain from giving a diagnosis of PTSD straight out” and they should “R/O [rule out] PTSD” and consider a diagnosis of “Adjustment Disorder” instead. The e-mail is available at www.citizensforethics.org.



This week, CREW sent a Freedom of Information Act request to the VA asking for all records pertaining to any guidance given regarding the diagnosis of PTSD.

Some context would be useful here. The DSM IV says(the list has links to definitions):



An adjustment disorder is a debilitating reaction, usually lasting less than six months, to a stressful event or situation. The development of emotional or behavioral symptoms in response to an identifiable stressor(s) occurring within 3 months of the onset of the stressor(s).



These symptoms or behaviors are clinically significant as evidenced by either of the following:



Distress that is in excess of what would be expected from exposure to the stressor.



Significant impairment in social, occupational or educational functioning.



The symptoms are not caused by Bereavement.



The stress-related disturbance does not meet the criteria for another specific disorder. Once the stressor (or its consequences) has terminated, the symptoms do not persist for more than an additional 6 months.



Adjustment Disorders Subtypes:



309.24 Adjustment Disorder With Anxiety

309.28 Adjustment Disorder With Mixed Anxiety and Depressed Mood

309.3 Adjustment Disorder With Disturbance of Conduct

309.4 Adjustment Disorder With Mixed Disturbance of Emotions and Conduct



309.9 Adjustment Disorder Unspecified



Adjustment Disorder unspecified can be used for insurance purposes before a diagnosis is made to begin the process. Here in MA the limit is theoretically three months, but in practice can be used for much longer.



A diagnosis od adjustment disorder for this particular population, for troops coming out of the fighting environment special to the ME, can simply postpone appropriate treatment in what could be a critical time to actually make the diagnosis to implement appropriate treatments. The environment is special compared to civilian life.



Disruption of family relationships, onset of or lack of treatment for drug abuses, TBI diagnosis, or the dropping out of the system after the delay of months waiting for service are cause for concern.



Anxiety in psychological terms can be up to and including quite violent behavior. The same for Irritability.



The average waiting time is already over 1000 days for some in the system. How does the use of a very mild diagnosis category aide the process?



Also, my series on PTSD from last year is relevant to the issue. I will put together a list of links in order. It can be searched using the search bar at the top of the site should you not want to wait.



Update: 309.81 PTSD was mistakenly cut and pasted into the list of Adjustment problems. My very bad. The point of the post was that they were quite different diagnosis. It has been deleted for clarity.

by rdan (noreply@blogger.com) on May 19, 2008 05:36 AM

1. The stories about the problem of mechanical-dial fuel pumps being unable to register prices over $3.999/gallon make me wonder, why can't the stations needing to charge $4 or more simply ignore the reported purchase amount and calculate the correct amount of the sale from the quantity and the actual price? The obstacle seems to be one of weights and measures regulations rather than a technically workable solution being costly. (According to the WaPo story, a station got into trouble with the State of Virginia for setting a pump to the half-gallon price and adjusting the sale at the register, which certainly could be confusing in the absence of very clear signage.)



Note that the pump need only accurately register the quantity, not the price, to enable correct computation of the sale amount. Thus, the technical solution can be implemented for approximately $0: the price of an opaque barrier to cover the price display and a basic pocket calculator, versus the $30,000 figure sometimes quoted for new pumps with digital readouts. It may not be the apotheosis of convenience — e.g. for people trying to fill up to a dollar amount, though I can think of cheap solutions there too — but stations with the old pumps probably aren't selling the "conveniences" of the modern automated filling station. The regulatory barrier is not necessarily expensive to overcome, relative to the cost of retrofitting thousands of low-volume pumps (mostly in locations remote from other stations). So the economic story is more in the "who'd'a thunk" department than anything else.





2. A while back at the old blog, I'd contemplated some of the members of the crack (smoking) McCain economic team and asked, "Who's next, Donald Luskin?" Well, life evidently imitates parody yet again, as Oliver Willis reads the Cunning Realist who finds Luskin calling himself an "unpaid economic advisor" to the McCain campaign. Doesn't an equation of marginal benefits and marginal costs require Luskin to pay McCain to take his advice? (As necessary, go to the Great Gazoogle and enter the search term 'Luskin "stupidest man alive" site:delong.typepad.com'.)





3. Philadelphia International Airport's shabby Terminal E still isn't anyplace I'd want to be forced into an extended stay, but hooray for PHL for offering quasi-free WiFi. (I say quasi-free in that the terms-and-conditions page effectively serves as an ad for wireless service provider AT&T.) Spoke airports — notably excepting my home base — have mostly gotten the clue that free wireless makes passengers happy, but hubs are still mostly on pay networks. Though the ad-supported wireless at Denver worked pretty well, too. By comparison, I don't seem to be able to visit non-free Detroit or Minneapolis without finding dead spots and bum routers. I wonder if the quasi-free services actually offer better service since, in contrast to subscriber-supported services, they're sure not to pay off (one way or another) if they can't make connections.





4. I got to see quite the 35-mph non-offset frontal crash into a deformable barrier the other day, the barrier in question being a red-light-running pickup truck T-boned by a late-model Acura TSX (a/k/a Honda Accord in Europe and Japan). Let's just say that it was an excellent safety advertisement for Honda in that the car's front end was demolished but the driver walked away merely a little dazed from the airbag detonation. In the pickup was a very sick infant on the way to the A.I. du Pont Children's Hospital in Wilmington, Delaware, which fortunately was only a couple blocks from the crash site; the poor kid's understandably distraught dad was playing ambulance and ran out of luck. PSA: Very Bad Idea. If you need to get to the hospital that fast, call a real ambulance.

by Tom Bozzo (noreply@blogger.com) on May 19, 2008 01:22 AM

Dr. John F. Gaski, an associate professor of marketing at the University of Notre Dame, has an opinion piece in today's Indy Star on the "causes" high gas prices. He boils it down to several causes, summarized below:

1. Legal restrictions on refinery construction and rehabilitation
2. Legal restrictions on drilling in off-shore areas
3. Legal restrictions on drilling in the Alaska National Wildlife Refuge
4. Legal restrictions on nuclear power plant construction
5. Strategic errors of the Federal Reserve that has allowed the collapse of the dollar
6. Legal restrictions requiring refiners to use "boutique" blends of gasoline to protect the environment

Notice five of the six reasons Gaski cites various forms of "legal restrictions". Thus government is to blame. But not just any kind of government:

Note that all the cited policy mistakes are those of one political camp. For decades the liberal Democrats have done everything they could to raise domestic oil and gasoline prices, and now that those higher prices have come home to roost, the Democrats pretend not to like them. Currently, their anti-oil industry propaganda campaign is on track to create the abysmal public ignorance that is a precondition for the same base level of public policy, and policy outcomes.

Gaski blames "liberal" Democrats for our current gasoline woes; in fact, that seems to be the entire point of Gaski's piece. This is especially ironic given that the GOP has controlled the House of Representatives for 12 of the last 13 years, the Senate for 4 of the last 5 years, and the Executive branch for the last 7. They're the ones who have been at the helm. In addition, most of these regulations have been in place for decades, yet the price of gasoline (and oil) have skyrocketed only recently.



I'd rather not engage in partisan sniping, however, despite the fact that partisan sniping is exactly what Gaski intended. Instead, I was especially interested in this portion:

[W]hat do you think the oil company's profit is? (Assume an integrated major oil company that even owns the filling station, so we don't have to separate producer, refiner and retailer profit. That is, we identify profit for the whole oil/gasoline industry out of the purchase price.) Would Big Oil make a profit of 60 cents, 70 cents, $1, $1.50?

No. Try 25 cents.

That is correct. With an industry-wide average net profit margin on the retail sale price of about 8 percent, the net profit on your gallon of gas is about a quarter, give or take a penny or two depending on the size of the oil company. (About 3 cents net goes to an independently owned station, leaving 22 cents for Big Oil, but the total is still a quarter.)

An accurate understanding of oil industry profit levels dramatizes that it is misguided to accuse the oil industry of price gouging. Beyond the cited 8 percent profit on sales, the industry's return on investment is right at the average across all of American industry -- about 25 percent. And these profit indices were much lower during the recent lean years in the oil business.

What of ExxonMobil's "obscene" $40 billion total profit last year? Isn't it natural for the largest corporation to earn the largest profit? Anything other than that would be a major upset. Moreover, record profits year after year are the natural order of things in business, reflecting normal growth.

Gaski claims "Big Oil" only makes $0.25 per gallon of gas. He cites this fact as evidence that Big Oil isn't engaging in price gouging.



One measly quarter per gallon of gas, especially since a gallon of gas now costs about $4.oo per gallon, seems like very little. But that $0.25 per gallon figure doesn't tell you much in isolation. So I decided to see how oil industry profit has changed in relationship to gasoline consumption over time.



I don't know where Gaski gets his $0.25 figure from. I assume that's what the average profit Big Oil makes from a gallon of gas in the US, given the context of Gaski's comments. I don't know where I can find statistics on how much Big Oil has made in just the US, given that the companies that make up Big Oil are giant multinational corporations that have global reach. So I decided to square apples with apples as best I could.



I calculated world gasoline consumption using data from BP. They list consumption in tonnes of oil equivalent (toe), so I converted that to gallons (US) using this website. Next, I tried to find a website that lists annual profits of the oil industry the last few years. Unfortunately, I could only find this one that goes back to 2001. (If anyone knows another place to find these data, especially if it goes back earlier than 2001, I'd appreciate it).



Here is a figure illustrating worldwide gasoline consumption and oil industry profits from 2001 to 2006:

I calculated the profit in dollars per gallon consumed by just dividing the two. Here is that figure:

This assumes a couple of things. First, all of the industry profits are directly tied to gallons consumed. We know this is not true, because not all oil is converted into gasoline. Nevertheless, I ended up calculating that profit per gallon worldwide is much less than the $0.25 per gallon that Gaski reports. But the point of all of this is how these values have changed over time. I calculated the percent change in these three values relative to 2001:

As you can see, industry profits and profit per gallon consumed have increased enormously the past few years relative to gas consumption. Gas consumption was 16% higher in 2006 than it was in 2001. Industry profits, on the other hand, were 190% higher in 2006 than in 2001.



It is clear the the profits of Big Oil have grown much faster than gasoline consumption the past few years. Perhaps the profit accrued by Big Oil over the past few years do not come from gasoline sales but from other revenue streams. I doubt it, though.



Does this mean Big Oil is participating in some grand conspiracy of collusion to drive prices higher? Of course not; I think it's pretty clear that the increase in price of gas and oil is the result of increased demand, however small, with no increase in supply given that we are at capacity supply right now. Nevertheless, the data strongly suggest that the profit pocketed by Big Oil per gallon of gasoline consumed is increasing, something that runs contrary to what was suggested by Gaski in his piece.

by Afferent Input (noreply@blogger.com) on May 18, 2008 11:51 PM

Rock the Vote clues young voters in:

President Bush has nominated von Spakovsky -- a champion of voter suppression -- to serve on the Federal Election Commission.



Because of his work promoting photo ID requirements for voters, hundreds of thousands of students, low income people and seniors may be turned away from the polls in November.



And that's not all. At the Department of Justice he tried to force states to keep voters off the rolls for typographical errors or other mistakes made by election officials.

The photo ID has potentially many more uses than the more narrowly focused project for voter eligibility. It is interesting that when citicorp bank pushed photo ID for credit cards, it flopped. Which says to me it might be much harder to get people IDs without some organizing...is that to be left to the private political parties, or a government agency?

by rdan (noreply@blogger.com) on May 18, 2008 09:54 PM

Well I am just going to lift the following from my little visited blog. In my defense a commenter back in April suggested publishing it on Angry Bear, at the time I didn't have posting privileges.

People who follow Social Security issues understand that in addition to the Intermediate Cost Alternative whose dates and numbers are universally reported in the press that the Trustees also present two other models called Low Cost and High Cost. Low Cost is typically depicted as being more 'optimistic' while High Cost being more 'pessimistic'. But that depends on your perspective. In reality Low Cost is better depicted as 'hotter' in economic terms and High Cost as 'cooler'. Now for most purposes the a relatively hotter economy than current Intermediate Cost assumes would be a good thing, all kinds of things are possible given higher levels of productivity and GDP, but for the specific purposes of Social Security it is possible that you can get too much of a good thing.

by Bruce Webb (noreply@blogger.com) on May 18, 2008 08:38 PM

Greg Mankiw reports on the difficulties US beef producers are having selling in the Japanese market.



He blames it on Australian competition.



Does he not know that the problem is that Team Bush will not allow American beef exporters to inspect their beef for mad cow disease?



Does he really have such a low opinion of the readers of his blog that believes he can get away with stuff like this?



No wonder he does not allow comments.

by spencer (noreply@blogger.com) on May 18, 2008 07:52 PM

J. C. Bradbury notes that early-season weather and home runs hit, while it is noted in comments that the decline is primarily in the American League and some suggestions on developing a model are made.



(No, I'm not turning this into a baseball blog. There are purposes to these posts. All will be revealed.)

by Ken Houghton (noreply@blogger.com) on May 18, 2008 05:34 PM

25*30 = 750



104/750 = 13.9%



For those more conversant in the "disincentives of enforcement" literature than I, can you back into the Rational Expectation of Enforcement Practices that would lead nearly 14% of a population to conclude it is maximizing utility?



And, given your calculation, what would that say about the Management Practices of the organization?

by Ken Houghton (noreply@blogger.com) on May 18, 2008 03:41 PM

We all feel this at times, when our ideas come together and form a wonderful pattern that would 'work'. Writers sometimes shine as their works strike a chord in readers, and we have a grasp on reality.



Then the light moves on. Often it happens in adolescence based on where we live and under particular conditions, and the power of the pictures of reality formed are quite strong, and last a long time. But the light moves on, and we adjust, and search under new conditions and a new day.



Just saying.

by rdan (noreply@blogger.com) on May 18, 2008 02:20 PM

I have a horse race to watch so this will be short and in the form of a intellectual challenge.



In any year that Social Security is in surplus, as it is now and is projected to be until 2017, cutting benefits actually increases total federal debt and so worsens the overall financial outlook going forward. The result is to a striking degree counterintuitive but it is in fact true, if you sit down and think about the implications of investing the entire Trust Fund in Special Treasuries. Which same fact makes revenue increases through such things as a cap increase transform into long term debt.



The arithmetic seems beyond the best efforts of Cosi and tends to baffle Obama supporters who think that a cap increase is progressive (it isn't) and would somehow help Social Security (it doesn't). Not everything in life is intuitive, for example it is simply absurd how much of modern mathematics and engineering depends on the use of the square root of negative one ('i').

(http://en.wikipedia.org/wiki/Imaginary_unit) and lets not even get started on Schroedinger's Cat. Social Security financing is not as baffling as Quantum Mechanics but it does has its quirks, and this is one of them.



Cutting Social Security spending near term creates long term Federal debt. Discuss.

by Bruce Webb (noreply@blogger.com) on May 17, 2008 08:08 PM

Via Mark Thoma comes a very good discussion from Don Pedro. Don dismantles some utter nonsense written by Thomas E. Brewton entitled Obama’s Excremental Economics where the thesis seems to be that reversing the Bush tax “cuts” (more deferrals) will lead to a recession. Its secondary theme is:

The basic thrust of Keynesianism is the belief that control of the economy must be collectivized at the Federal level, because private business is incapable of providing full employment, and because the proper goal of economic policy must be thwarting greedy businessmen to attain so-called social justice: equal distribution of income and wealth, without regard to merit, capability, or hard work. Not surprisingly the New York Times editorial board and the Times’s propagandist Paul Krugman are prominent Keynesian enthusiasts. In practice (in the 1930s Depression and in the 1970s stagflation) Keynesian economics caused devastating harm to every citizen.

Thomas has a Statement of Purpose for this blog:

The View from 1776 presents a framework to understand present-day issues from the viewpoint of the colonists who fought for American independence in 1776 and wrote the Constitution in 1787.

I guess he never bothered to read the General Theory, which was written in the 1930’s, as he certainly does not understand what it said. And I guess Thomas is unaware that we raised taxes in 1993 and the economy didn’t exactly fare badly after that.

by PGL (noreply@blogger.com) on May 17, 2008 11:13 AM

David M. Herszenhorn and David Stout report:

The Senate voted overwhelmingly on Thursday to approve a five-year, $307 billion farm bill, sending it to President Bush for what is expected to be his futile veto. The 81-to-15 Senate vote, like the 318-to-106 House vote on Wednesday, attracted broad bipartisan support and received far more than the two-thirds that would be needed to override Mr. Bush’s veto, should he keep his pledge to wield his pen.

While I wish the bill had failed, I wish the folks at the National Review would learn to actually write intelligently:

Even though $300 billion is a big burden on American taxpayers, it’s apparently not big enough to change the political calculus of farm-subsidy supporters in Congress, as this week’s votes indicate.

While $300 billion per year sounds like a lot, the story by Herszenhorn and Stout correctly noted that this was about $300 billion over five years or $60 billion per years. And with GDP approaching $14 trillion, the annual cost per years represents less than 0.5% of a year’s worth of GDP. So why cannot the editors of the National Review write more clearly? Are they too dumb to understand what Herszenhorn and Stout, or they just really poor writers? Now I would not wish to think these clowns would try to mislead their readers – again!

by PGL (noreply@blogger.com) on May 16, 2008 06:54 PM

Lifted from comments cactus style:



Reader juan suggests:

Econmagic



Charts



Bloomberg News





IT’S NOT EASY TO SIZE UP THE influence of the index funds. But based on their known cash commitments in certain commodities, and the commodity indexes their prospectuses say they track, it is possible to estimate the size of their commitments in all commodities they buy. Using this method, analyst Briese...estimates that the index funds hold about $211 billion worth of bets on the buy side in U.S. markets.



Applying a similar method, but with slightly different assumptions for indexes tracked, Bianco Research analyst Greg Blaha puts that figure at $194 billion. Either figure is enough to turn the index funds into the behemoths of the commodity pits, where total bullish positions now stand at $568 billion.

[...]

That this large, bullishly oriented group of funds is flourishing is partly a result of a regulatory anomaly. In recognition of the fact that the commodity markets are too small to absorb an excess of speculative dollars, the Commodity Futures Trading Commission, in conjunction with exchanges, imposes position limits on speculators. But the agency has effectively exempted the index funds from position limits.

[...]

The speculators, now so bullish, are mainly the index funds. To see how their influence on the market has become outsized, just look at how they operate. Nearly $9 out of every $10 of index-fund money is not traded directly on the commodity exchanges, but instead goes through dealers that belong to the International Swaps and Derivatives Association (ISDA). These swaps dealers lay off their speculative risk on the organized commodity markets, while effectively serving as market makers for the index funds. By using the ISDA as a conduit, the index funds get an exemption from position limits that are normally imposed on any other speculator, including the $1 in every $10 of index-fund money that does not go through the swaps dealers.



The purpose of position limits on speculators, which date back to 1936, is clearly stated in the rules: It’s to protect these relatively small markets from price distortions. An exemption is offered only to "bona fide hedgers" (not to be confused with "hedge funds"), who take offsetting positions in the physical commodity.



The basic argument put forward by the CFTC for exempting swaps dealers is that they, too, are offsetting other positions — those taken with the index funds.



There's really no question unless one rigidly adheres to a type of efficient market thesis.

by rdan (noreply@blogger.com) on May 16, 2008 02:48 PM

Greg Sargent reports on one of the many attack themes coming from Team McCain:

On a conference call with conservative bloggers this afternoon, John McCain launched what may be his most direct attack yet on Barack Obama's national security credentials, saying flat out that Obama is incapable of protecting America and lacks the necessary traits to keep it secure from foreign threats. In a reference to Obama's declared willingness to meet with the leader of Iran, McCain said: "I think [it] is an unacceptable position, and shows that Senator Obama does not have the knowledge, the experience, the background to make the kind of judgments that are necessary to preserve this nation's security." That seems like an unequivocal declaration that Obama is incapable of protecting this country. In the past, McCain has raised doubts about Obama's national security cred, but to our knowledge has never taken the step of declaring outright that he's unfit to defend the country. McCain's comments also go considerably farther than McCain did in his comments this morning about Bush's Israel speech attacking Dems.

Make the kind of judgments? Let’s review that “judgment” made on March 19, 2003 - the day we invaded Iraq. Now who was smart enough to say this was a mistake even before March 19, 2003 and who is stupid enough to think this decision was a good one?

by PGL (noreply@blogger.com) on May 16, 2008 09:15 AM

Andrew Samwick posts "one of the most depressing graphs [he has] ever seen."



Recall the simplest formula Tom used: Savings = Personal Income - Personal Taxes - Personal Consumption Expenditures [PCE]

by Ken Houghton (noreply@blogger.com) on May 16, 2008 03:25 AM

I’m no fan of Chris Matthews — not by a longshot — but we need