Sitting here at negative interest while…

ROIs on various lobbying efforts range from a whopping 5,900% (oil subsidies) to a gargantuan 77,500% (pharmaceuticals).

Bubblicious

Paul Campos, via the Daily Dish:

In effect, the system allows any 22-year-old American University chooses to admit to borrow a sum equal to the average home mortgage, but without a single one of the actuarial controls that are supposed to minimize the risk that homeowners will borrow too much money.

Sigh… Initial Claims.

As The U.N. Deadline Nears, The Death Toll Rises

Kofi Annan’s plan for a diplomatic end for the Syrian violence, terms which would have Bashar al-Assad’s Syrian forces withdraw troops from battle zones and cease the killing that has marred the country for more than a year, is crumbling as the death toll ratcheted up over the past few days.

Via Al-Jazeera;

Damascus had agreed to a Security Council-backed Tuesday deadline to withdraw troops from and stop using heavy weapons against Syrian towns, to be followed by a full ceasefire by the army and rebels on Thursday morning.

Annan still holds a bit of hope that the cessation of violence can stop, but Monday alone saw 160 Syrian martyrs, one of the highest death tolls in months of fighting, and violence in cities in all regions of the country. In the past 8 days alone the Syrian National Council has the death toll at 1,000 Syrians while the Local Coordinating Committees of Syria has a more conservative estimate of over 600. EA Worldview reports that Tuesday’s death toll has reached 101. Violence has also sprung up along the Syria-Lebanon, and Syria-Turkey borders, where many refugees are fleeing from state violence. This border violence is sure to become a powder keg for potential crises as Turkish Prime Minister Tayyip Erdogan has already denounced the Syrian forces firing over the border into Turkey, wounding four Syrian refugees and two Turkish refugee camp staff workers. The situation in Lebanon is also on knife’s edge as Hezbollah’s support within Lebanon has been hurt and renounced by Sunnis in Syria because of its previous support of Assad during the uprising.

It is inconceivable that any talks will bring the two sides close to a ceasefire. It is clear that the government forces and shabiha raids have not stopped one bit. This conclusion is not a very surprising event, as Assad has pulled this bluff before. Many opposition leaders have already rejected the U.N. plan as the bloodletting has not abated one bit, and Assad still refrains that his forces are battling terrorist groups bent on destabilizing the country. Once the deadline passes on Thursday and the provisions have not been met, what is left on the table for diplomacy?

Looking ahead, it is extremely unclear as to what the international community will decide on Syria. The commitment of Russian and Chinese governments to stop the violence does not put them directly behind the opposition. In a meeting with the Walid Muallem, Syria’s foreign minister, Russia’s foreign minister, Sergei Lavrov, wants equal international pressure on the opposition to lay down their weapons. While they may be for sanctions or strongly worded decrees, I would not bet the house on Chinese or Russian support of any kind of U.N. led peace keeping ground forces. The Local Coordinating Committees of Syria have called for the SNC/FSA fighters to comply with the six points of the U.N. plan, which would bring their plight in to a clearer view while the Syrian government forces continue with their horrific non-compliance. Perhaps this is one way in which international sentiment will crystallize in the coming days.

If the deadline passes and Assad continues to kill his own citizens in ever greater numbers there will surely be an even greater groundswell of Syrian hawks in the U.S.; whether it be to aid the opposition through arms, air strikes, or an international ground force. Only the last option would have any real means of the success the hawks desire. Arming the Free Syrian Army would ensure much more bloodshed on both sides, prolonging the civil war, and entrenching each side’s positions. Arms in such instability could even produce even more sectarian violence. Aiding escalation would invariably pin the bloodshed on the intervening. Air strikes have all but been proven ineffective, as it did little to hurt Gaddhafi’s forces in Libya. Al-Assad’s army is even bigger and more conventional than Gaddhafi’s army. The last option, using ground troops to force a regime change, would most likely devolve the region into many more unintended consequences than even the Libyan campaign had (destabilizing its neighbors and causing a civil war in Mali). And while the most likely for regime change, would also be the most likely to end with a reconciliation worse than we started with.

The West has a moral obligation to support the Syrian opposition in the face of mass murders of the men, women, and children of Syria, but that support has to be checked by rational plans for a more stable outcome lest we have another Libya or Iraq on our hands. We know that the U.S. government’s goal is to dethrone Assad and clip off another Iranian satellite, but using our own military forces would defeat any gains of such an occurrence. The risks are too high and this is a test to see whether or not America can resist from inserting its military influence in any and every global conflict. While a Syria less in the hands of Iran is in America’s interest, it may not be in the best interest of the region. A Sunni majoritarian ruled Syria would further polarize the Saudi Arabia Sunni satellites and Iran and its Shi’a client states. We can, however, use our efforts to secure borders and aid countries like Turkey and Lebanon with the huge influx of predicted refugees. This type of non-intervening goodwill may pay dividends with the sentiment of many Middle Easterners.

Why Development Economics Should Not Only Be About Economics

At the engrossing Why Nations Fail blog run by Daron Acemoglu and James Robinson;

Back in the 1950s development economists viewed poor countries as being stuck in various types of “poverty traps”. The basic idea was that poverty tends to breed poverty. And poor countries just happened to be poor and trapped in poverty. The most popular version emphasized the availability of capital. Poverty made saving and capital accumulation impossible, according to this view, and as a result, it persisted — come to think of it, there are still some who subscribe to this view, but we are digressing….

One of the most famous versions of this thesis was Paul Rosenstein-Rodan’s “Big Push” thesis. Rosenstein-Rodan’s argument was similar to what many others in the 1950s and 60s formulated: development was about moving people from “backward” to more productive “modern” sectors of the economy. And this could only happen if everyone coordinated their behavior and increased their investments — so the Big Push required a big push in capital accumulation.

One thing that all of these theories had in common— and, digressing again a little bit, one thing they share with several current theories of economic development — was that they were only about economics. Politics and institutions didn’t matter; only “economic fundamentals” mattered. The ones Rosenstein-Rodan emphasized were how much a society saved and how much foreign aid they got (which in the 1950s and 1960s was assumed to simply add to capital accumulation).

Of course, things didn’t quite work out that way. In fact, many of the economies about which Rosenstein-Rodan was bullish are not much richer today than they were in 1961. Liberia and Haiti’s economies contracted since then. Angola, Kenya, Nigeria and Uganda haven’t done so well either. We of course know that Afghanistan, India and Pakistan grew more slowly than South Korea, Taiwan, Thailand and Singapore. Argentina and Haiti were no match for Costa Rica, the Dominican Republic and Panama.

The main reason why Rosenstein-Rodan got it so wrong is because he completely ignored the role of institutions and politics.

Now the thing is that, though most economists today would espouse more sophisticated theories than those of Rosenstein-Rodan, much of development economics — especially when it comes to the practice of development — still ignores institutions and politics.

These two know economic development and if they say this kind of fundamental thinking is still widespread then that is an egregious problem since looking at solely economics gives such massively missed forecasts as Rosenstein-Rodan. Acemoglu and Robinson focus on extractive institutions a lot and the politics of how they keep countries mired in the same economic underdevelopment. To me the divergence in economic development makes a lot of sense for all formerly colonized countries. African nations, in particular, were treated vastly dissimilar based on which European nation was in charge of their institutions. Since women’s education and literacy is an incredibly important component for economies to jump-start development, looking at women’s educational attainment levels seems like a place to start forecasting. For example, colonial African educational policies differed which affects those countries well after colonial rule. Countries formerly under British control have a much greater percentage of women at all levels of educational attainment than countries formerly under French control. Luckily Acemoglu and Robinson are helping to spread the type of approach needed to continue the upward trajectory of economic development rather than seeking gain from an economic standpoint which does not see the whole picture.

The Huge March Non-Farm Payroll Miss

The March BLS Non-Farm Payroll numbers came in with expectations of 205K, but hit just 120K today. The unemployment rate did fall from 8.3% to 8.2%, mainly due to the fact that there are nearly 88 million Americans not in the labor force, a record high. January was revised down to 275K while February was revised up to 240K.

Free Exchange via FT Alphaville’s view on the miss;

There is a 90% chance that employment rose by between 20,000 and 220,000 jobs. The change in the number of unemployed from February to March was probably between (roughly) -400,000 and 150,000, and there’s a good chance that the unemployment rate is between 8.1% and 8.5%. Reported changes for important subsectors are too small relative to the margin of error to be worth discussing.

A revision might make the number look better, but that will not help the economy feel better. We are so far from the old “normal”, that it really does seem that this is the new “normal.”

Will another month of less than stellar growth numbers reverse the Fed’s recent opposition of a new QE?

Romney’s Foreign Policy Manicheanism

The Republican party just cannot step back from the same W. Bush ideology that led them to launch a decades long War on Terror. Most recently there is the presumptive Republican Presidential Candidate, Mitt Romney’s ridiculous gaffe, in the spirit of 1945, that Russia is our “number one geopolitical foe.” This could be relegated to the annuls of gaffe, but of course his adviser’s have the chutzpah to say that this Russophobia is a carefully thought out foreign policy. Luckily everyone basically takes Romney’s harping as a joke, except of course, Romney and the rest of the Republican Party doubling down on their take that you are either “with” or “against us.” Russian President Dmitry Medvedev praised the Obama Administration’s efforts on the U.S.-Russian “reset”, saying, “these have perhaps been the best three years in relations between our two countries over the last decade.”

Part of the problem may be that the Republican Party is unwilling to admit that the U.S. is not a global hegemon, and thus cannot impart its foreign policy objective with impunity. Compromise and selectivity are necessities in this day and age. A lot of the hullabaloo may also just be anti-Obama campaign riffraff, but foreign policy rhetoric from the Right comes from the ideology of American exceptionalism. Thus, anything close to a multipolar world scares them into feeling that American power is waning. More pieces in the pie means a smaller slice for America. And in a world with bipolarity, it must be the West that is leading the East. Romney’s campaign talk amounts to building up geopolitical bogeymen while he should be focusing on plans for international economic cooperation. All in all, Romney may pivot back during the general election, but his recent hawkishness surpasses many on the Right.

Foreclosure Crisis Part Deux

The U.S. housing market may well have been straying through a clearing in the woods, and will soon reach the dark, dense forest, as experts are expecting 2012 to be a monumental year for foreclosures. Five years into the housing crisis, Americans have had to deal with the sub-prime mortgage crisis, robo-signing fraud, foreclosure fraud, refinancing fraud, and fraud on a systemic level ad nauseum with no more than a slap on the wrist given to offenders, while they have seen housing prices drop precipitously without a bottom in clear sight. So it is hard to imagine that the worst may yet be to come. Signs that the shadow inventory, property in forbearance but not yet marked to market on bank balance sheets, will flood the housing market are particularly ominous.

At Reuters, Nick Carey asserts that the faint glimmer of hope for housing market vitals will be extinguished by coming foreclosures. Pundits pushing the resurgence of the U.S. housing market may very well have to explain why the complete opposite is on the horizon.

Five major banks eventually struck that settlement with 49 U.S. states in February. Signs are growing the pace of foreclosures is picking up again, something housing experts predict will again weigh on home prices before any sustained recovery can occur.

Mortgage servicing provider Lender Processing Services reported in early March that U.S. foreclosure starts jumped 28 percent in January.

More conclusive national data is not yet available. But watchdog group, 4closurefraud.org which helped uncover the “robo-signing” scandal, says it has turned up evidence of a large rise in new foreclosures between March 1 and 24 by three big banks in Palm Beach County in Florida, one of the states hit hardest by the housing crash

Although foreclosure starts were 50 percent or more lower than for the same period in 2010, those begun by Deutsche Bank were up 47 percent from 2011. Those of Wells Fargo’s rose 68 percent and Bank of America’s, including BAC Home Loans Servicing, jumped nearly seven-fold — 251 starts versus 37 in the same period in 2011. Bank of America said it does not comment on data provided by other sources. Wells Fargo and Deutsche Bank did not comment.

Housing experts say localized warning signs of a new wave of foreclosure are likely to be replicated across much of the United States.

Online foreclosure marketplace RealtyTrac estimated that while foreclosures dropped slightly nationwide in February from January and from February 2011, they rose in 21 states and jumped sharply in cities like Tampa (64 percent), Chicago (43 percent) and Miami (53 percent).

RealtyTrac CEO Brandon Moore said the “numbers point to a gradually rising foreclosure tide as some of the barriers that have been holding back foreclosures are removed.”

One big difference to the early years of the housing crisis, which was dominated by Americans saddled with the most toxic subprime products — with high interest rates where banks asked for no money down or no proof of income — is that today it’s mostly Americans with ordinary mortgages whose ability to meet payment have been hit by the hard economic times.

“The subprime stuff is long gone,” said Michael Redman, founder of 4closurefraud.org. “Now the folks being affected are hardworking, everyday Americans struggling because of the economy.”

One of the most important aspects of the new foreclosure wave is the last bit, that it has morphed from the sub-prime crisis of 2006. The context for this new kind of crisis are the global recessionary pressures that are forcing many, many Americans, to fall behind on their mortgages because of under or unemployment. At the NY Fed’s Liberty Street Economics Blog, Joshua Abel and Joseph Tracy delve into today’s foreclosures. Sub-prime mortgage loans are no longer the big problem, instead the country’s economic woes have led to prime mortgage defaults.

Abel and Tracy explore the data behind home prices and unemployment to understand the underpinnings of the changing conditions:

They explain that surveying the two graphs above gives a good sense of how economic conditions turned originally reliable homeowners with 30-year fixed rate mortgages into defaulters. Housing prices here are based on the percent change from when the mortgage was signed to when it was foreclosed upon, averaged by year and quarter. The chart above demonstrates that until 2008, local housing prices were still rising. Both unemployment started to rise and housing prices started to fall  at very close times. So the non-prime foreclosures of 2006 and 2007 happened during periods of falling local unemployment rates and rising local housing prices. The 20% decrease in housing prices and mid-single digit unemployment increases reflect on how prime mortgage foreclosures became the majority of the share since 2009. It is no longer just about irresponsible loans to borrowers financially unfit for those loans, but previously stable mortgages are being affected by local unemployment and housing prices.

The authors also correlate the evolution by examining the time before a mortgage went delinquent. They looked at the 25th, 50th, and 75th percentiles of time before missed payments. They also look at the quartile percentiles of FICO scores too, which demonstrate mortgage owners with good credit ratings are being driven to foreclosure and those ratings have plateaued since mid 2009.

Initially, when most foreclosure starts were associated with nonprime mortgages, 25 percent of the borrowers had been in the house fewer than eight months before falling behind on their payments, and 50 percent fewer than eighteen months. However, more recently, as the composition of foreclosures shifted to prime borrowers, 75 percent had been in the house more than three years, and 50 percent more than four years. This suggests that as the recession hit, foreclosures shifted from borrowers who often could not afford their houses to borrowers who had demonstrated that they could (by virtue of making payment for several years) but began to fall behind on their payments when they were hit by the dual crises of house price declines and high unemployment.

This wave of foreclosures hits hard to the core of the housing market and the U.S. economy as a whole. 30 year fixed rate mortgages from reliable borrowers have been turning up with negative equity. The trend rose from 2006 and plateaued in 2009, staying near half the share of foreclosure starts. Policymakers need to tackle the current foreclosure problem as it should tackle the economy, with a robust movement towards lowering unemployment and hoping a construction boom will drive the fundamentals of our economy. Keeping the prime borrowers in their homes may also be of priority via large scale refinancing. The Federal Reserve’s current zero interest rate policy is supposed to be a boon for the housing market, but that impetus just has not been effective. Even with mortgage rates at historically low levels, prospective buyers remain weary. When interest rates inevitably rise, all hell may break loose. Perhaps the rapidly rising cost of renting will drive people to starter homes. But maybe the previously foreclosed houses, now being turned into rentals, will keep prices low and the construction of new homes depressed. The market still needs to clear too, and with the foreclosure hiatus seemingly over, courtesy of a crooked settlement deal, as bad as this little clearing has been,  the dark forest is extremely foreboding.

Southern California real estate expert G.U. Krueger cites USC’s Casden Multifamily Forecast’s prediction that rental growth will continue for the next two years in the area. Krueger explains that the rising rents may push prospective renters into homeownership because of the cost. The story varies widely nationally, but certain areas may The falling number of foreclosures, which in March, as per RealtyTrac, hit a five year low, is keeping distressed homes off the market and further propping up the rental market. But the boom will eventually come, and when the distressed property market gets flooded with foreclosures, the rental market will see its bull run end. Brandon Moore, CEO of RealtyTrac gives his view of the March numbers;

“The low foreclosure numbers in the first quarter are not an indication that the massive reservoir of distressed properties built up over the past few years has somehow miraculously evaporated. There are hairline cracks in the dam, evident in the sizable foreclosure activity increases in judicial foreclosure states over the past several months, along with an increase in foreclosure starts in many judicial and non-judicial states in March. The dam may not burst in the next 30 to 45 days, but it will eventually burst, and everyone downstream should be prepared for that to happen — both in terms of new foreclosure activity and new short sale activity.”

The impending rash of foreclosures must be dealt with though, and eventually the housing market will stabilize to a degree. Perhaps investors will see many opportunities to convert foreclosures into rentals and drive down the price in the rental market. Meanwhile, even though housing prices will fall for the foreseeable future, once the distressed market gets bought up and rehabilitated, neighborhoods once damaged by foreclosures can see elevated prices and rejuvenation.

I suspect the mercurial nature of our economic outlook has a pronounced effect on how prime mortgages may just become an even larger share of foreclosures. Employees can hardly ever be certain they will be, not even at the same job, but employed ten years down the road. Locking into a 30-year mortgage is just something not many people have the privilege of knowing they will be able to pay off. A stable income is less and less the norm for a large swath of the American labor force. This uncertainty for much of the mid to tail end of the millennial generation may create an entirely different and unknown landscape for the U.S. housing market.

U.N. Security Council Unanimously Backs Aid For Syria

Via Al Jazeera;

The United Nations Security Council has adopted a statement backing joint UN-Arab League envoy Kofi Annan’s plan for ending the year-long violence in Syria, as a government crackdown on opposition strongholds has continued.

The statement adopted on Wednesday expressed the council’s “full support” for Annan’s efforts, and called upon both the government and the opposition “to work in good faith with the envoy towards a peaceful settlement of the Syrian crisis” and to fully implement his six-point proposal.

The statement threatened “further steps” if the government failed to comply with the proposal.

…

Anan’s plan calls for a ceasefire, specifically a “daily two hour humanitarian pause,” to be established, as well as for both sides to engage in political dialogue and to allow humanitarian aid agencies access to areas where citizens have been caught up in an increasingly militarised conflict.

It also calls for those detained during a government crackdown on protests to be released, and for restrictions on the freedom of movement of foreign journalists to be removed.

The 15-member UNSC, including China and Russia who have vetoed previous moves, called on the Syrian government to commit to working with “an inclusive Syrian-led political process to address the legitimate aspirations and concerns of the Syrian people”.

…

Speaking in Berlin, Sergei Lavrov, the Russian foreign minister, said that the text of the statement “reflects the reality in Syria and supports Annan’s aims. We support it fully”.

“The document does not contain any ultimatums, threats or assertions about who is guilty,” he said,

Earlier, Lavrov told radio station Kommersant-FM that Russia believed that “the Syrian leadership reacted wrongly to the first appearance of peaceful protests and … is making very many mistakes”.

…

Lavrov also spoke of a “future transition” period for Syria but continued to reject calls from most Western and Arab states for Assad to resign, saying this was “unrealistic”

How will this affect the opposition’s willingness to reach a diplomatic end to the warfare? Opposition leaders have already rebuked Kofi Annan’s call for diplomacy, a plan which seems foolish in the face of the more than ten thousand dead Syrian citizens. So will this give nothing more than token aid to distressed citizens, and perhaps inflame the international community if there are no ceasefires, or broken ceasefires, that kill U.N. workers attempting to get aid into bombarded areas. Will a ceasefire be broken by the opposition, prompting outrage against them? Or will this be a watershed moment, as Russia and China drop their previous veto, that manufactures a peace between warring parties? Perhaps “further steps” will be necessary against the recalcitrant Assad regime.

Screen Size Matters

More via Andrew Sullivan;

Neuroscientist Mark Changizi explains how e-books, like much of the web, lack spatial navigability, which can be key to remembering information:

We don’t navigate the web so much as beam hither and thither within it. Can’t find your way to the ticket site? No matter, you can Google-beam directly there by typing in the name. And not only is the web not spatial or navigable, but the new reading experiences within documents have lost their spatial sense as well. … Need to jump to that part of the book where they discussed cliff jumping? You will get no help from the local topography, but you can beam yourself directly there via a within-document text search. 

Screen size also matters:

[Jakob Nielsen, a web “usability” expert,] says that studies show that smaller screens also make material less memorable. “The bigger the screen, the more people can remember and the smaller, the less they can remember,” he says. “The most dramatic example is reading from mobile phones. [You] lose almost all context.”

I recently too wondered about the effects that E-book reading has on one’s ability to recall. I have recently read a few books on my 4.5 inch phone. The reading itself was fine and the environment not straining or difficult, but I have felt a measurably drastic loss of context. In my personal experience, the actual spatial dimensions of different pages of a book seem very important to memorability. It is as if having an physical thing helps create stops in your mind where you can remember the end of a chapter, or the timeline of the plot itself. I can remember the plot well enough, as it wholly engrossing, but that missing “local topography” makes all the difference in terms of being able to piece together what happened around a specific plot point. It is no wonder reading and jotting down notes in the margins is held highly in esteem as the best way of fully imbibing in a text by many famous writers. My lamentation is that the books I have read on my phone were absolutely wonderful; and I now have to resolve to go back and read them in their physical form one day soon. It is too easy to download a book off the internet and start reading it right then and there. Perhaps we will come to a point where physical book and e-book sales will meet at equilibrium due to the contextual dearth e-books create. I wonder what this says about our culture as a whole; that we will increasingly become myopic, or that there will be a drive against the proliferation of material on screens. Will this affect children now who are learning with tablets and iPads?

The U.S. Hospitality/Services Sector

Via Andrew Sullivan;

Nona Willis Aronowitz explores restaurant work:

Nearly half of people ages 16 to 29 do not have a job. A quarter of those who do work in hospitality—travel, leisure, and, of course, food service. A study of 4 million Facebook profiles found that, after the military, the top four employers listed by twentysomethings were Walmart, Starbucks, Target, and Best Buy. The restaurant industry in particular is booming; one in 10 employed Americans now work in food service—9.6 million of us. Those numbers are growing each year. Even though more and more laid-off, middle-aged Americans are turning to restaurant jobs, as of 2010 about two-thirds of food service workers are still under age 35. And the industry’s workforce is more educated than it was just 10 years ago. In major U.S. cities, about 9 percent more food service workers have been to college.  

Matt Yglesias comments on Willis Aronowitz’s article as well:

If owning a Quiznos franchise becomes systematically more profitable than owning a Subway franchise due to some labor arrangement, then what will happen is Quiznos franchises will proliferate across the land as Subway withers and dies. Meanwhile, one of the main reasons why the food service sector has become our “employer of last resort” in the United States is precisely because the jobs are bad and the wages are low. Firms have not yet invested a lot of time and energy in figuring out ways to get by with fewer fast food workers, but in France I saw that McDonalds outlets had installed touchscreen kiosks where you could place your order without needing to visit a cashier. American manufacturers got remarkably good over the decades at producing more stuff with fewer workers, precisely because one man’s good job is another man’s employee I’d like to find a way to lay off. 

The more promising thing about food service is that some of the same characteristics that make it a poor venue for large-scale labor organizing—relatively low startup costs and relatively few barriers to entry—make it feasible to experiment with new models. You can start a brewpub coop or take your talents on the road with a food truck or leverage a reality TV appearance to escape wage slavery and become a local entrepreneur. But all this kind of thing requires some modicum of skills—real cooking ability or understanding of business principles or both. It’s important for the country to start taking food service seriously as an industry and major element of the labor market, because the ongoing rise of e-commerce is going to mean that more and more of our commercial space will be dedicated one way or another to these things.

We all know that as globalization progresses, the more developed nations will have less in the way of a manufacturing sector, unless wages rise so low as to keep them globally competitive. But that really does not seem possible as there will be a bottom for the foreseeable future; rising wages in China will force movement to Bangladesh and India. Focusing on the service sector, especially the food service industry seems prudent. Those are the types of jobs that will not diminish in number due to offshoring. There’s no reason we cannot be seen as a culinary destination, and although there surely have been individual attempts to try, the current demographics can spur a new push. Maybe skilled workers who have been are are getting laid off will put their mental capital, education, and experience, into innovations for food service. With luck, there will be some successful entrepreneurial endeavors out of these young and middle aged workers who now make up the bulk of the hospitality industry.

Yglesias explores the factors behind Willis Aronowitz’s discussion of organized labor too. He credits industries where windfall profits which create an incentive for workers to organize and negotiate a share of the higher up’s profit to be a driving criterion. I would say that a tighter labor market is more of a factor than just windfall profits. There needs to be a highly competitive labor market to spur workers to organize. Windfall profits are probably more of a correlated offshoot though.

Matt Yglesias Takes A Look At The Output Gap

At Yglesias’ Moneybox blog:

Lately I’ve seen a lot of chatter about the idea that maybe the mistakes aren’t as terrible as they seem because actually the CBO’s estimates of “potential output” are wrong and all this suffering is due to a generalized productivity collapse rather than policy errors.

I thought the idea could be usefully explored by examining the specific details of the decline through the lense of the old GDP = C + G + I + NX framework, while separating residential investment from fixed investment since housing is obviously an important part of the story of the recession. What we see is that in 2007, Personal Consumption Expenditures were 71% of Potential GDP, Government Purchases were 19%, Residential Investment was 4%, and Non-Residential Investment was 12% and then you knock off -5% for imports and it all adds up to 100%. Since that time, a total output gap equal to 6% of potential GDP has opened up. That’s composed of a 4 percentage point decline in PCE relative to potential, a 1 percentage point decline in government purchases, a 2 percentage point decline in residential investment, and a 2 percentage point decline in non-residential investment but it’s all offset by a 2 percent increase in net exports. In other words, in 2007 when housing had already decline a lot we were operating at CBO-estimated potential. Since then we’ve seen a further decline in residential activity that’s been precisely offset by an increase in net exports. But then over and above that we’ve seen a large decline in personal consumption expenditures, and small declines in government purchases and non-residential investment.

Inequality’s Effect On The Lower Rungs

At Project Syndicate, Raghuram Rajan explores the correlation of the declining pre-Great Contraction U.S. household savings rate and income inequality.

Bertrand and Morse find that in the years before the crisis, in areas (usually states) where consumption was high among households in the top fifth of the income distribution, household consumption was high at lower income levels as well. After ruling out a number of possible explanations, they concluded that poorer households imitated the consumption patterns of richer households in their area.

Consistent with the idea that households at lower income levels were “keeping up with the Vanderbilts,” the non-rich (but not the really poor) living near high-spending wealthy consumers tended to spend much more on items that richer households usually consumed, such as jewelry, beauty and fitness, and domestic services. Indeed, many borrowed to finance their spending, with the result that the proportion of poorer households in financial distress or filing for bankruptcy was significantly higher in areas where the rich earned (and spent) more. Were it not for such imitative consumption, non-rich households would have saved, on average, more than $800 annually in recent years.

This is one of the first detailed studies of the adverse effects of income inequality that I have seen. It goes beyond the headline-grabbing “1%” debate to show that even the everyday inequality that most Americans face – between the incomes of, say, typical readers of this commentary and the rest – has deep pernicious effects.

This is a type of consumption that I have always heard of anecdotally but never seen personally. But it is a type of pathological response of the middle class to a society bend on ostentatious consumption. Once the bank grants the mortgage you cannot really afford on a house in a nice neighbor you probably become hell-bent on displaying belonging. So you borrow on that shaky mortgage to lease a luxury car to park in your driveway and get a weekly maid service, and max out some credit cards to fill your house with expensive technological goods and cloth yourself in designer brands. This process is something we could all probably acknowledge if we really looked deep into our habits and inner longings, but when credit is loose and pressures for “imitative consumption” are constant, there is apparently no stopping until you hit bankruptcy. Looking at household savings rates, you can see that these would plunge as people spent more than their income to fuel their consumption. Leveraged over their eyeballs when the recession hit, the middle class had to deleverage since 2008.

Revolving credit (e.g. credit cards) has plummeted down from 2008 Q4 highs to but the rate of change has rolled over and credit started to rise again from 2011 Q2 lows. Deleveraging halted performed an about face. As Bertrand and Morse hypothesize, the middle class debt overhang emerged well before the Great Recession, and it has since dogged middle class balance sheets ever since. As inflation hits the goods the lower rungs of income distribution need to survive; energy, food, and health care. Credit is needed to buy the same amount of goods and services they once used. Rising revolving credit, stagnant or declining real wages, and declining personal consumption expenditures is creating a maelstrom of debt just to survive. Imitative consumption is a problem of the past. Now inequality has brought a rash of borrowing to get to work, borrowing to put food on the table (or applying for SNAP), and borrowing for a roof over your head. This now is the crux of American inequality.

Banana Republic Watch

Since gasoline prices are so important during an election year, the U.S. has decided to release some emergency oil reserves from its strategic petroleum reserve and is requesting that the UK do so as well. From The Telegraph – Debt crisis: as it happens

15.26 Reuters is reporting that the UK expects a formal request shortly from the US to release its emergency oil reserves. Brent has fallen on that news.

Although sooner afterwards, an Obama aide declared the release as “inaccurate.”

And stocks stayed up on this news from ratings agency S&P:

16.26 S&P has said that the outlook on the US remains negative. Ratings agency says it is improbably any economic improvement would bring back AAA.

US markets still in positive territory though. Dow up 0.3pc, S&P 500 up 0.5pc, Nasdaq up 0.5pc.

The Decoupling Of Labor Productivity And Median Wages

At the OECD Insights blog, James Plunkett announces findings from the Professor John van Reenen and Joao Paulo Pessoa of the London School of Economics study funded by the Resolution Foundation, Decoupling of Wage Growth and Productivity Growth? Myth and Reality. The research gives keen insight to the problems of median wage stagnation, concluding that there has been a great amount of decoupling between labor productivity and median hourly wages in the UK. Median hourly wages were essentially flat for the past two decades but for a four year growth.

The study defines an important distinction between net and gross decoupling; one which supports the narrative and one which does not. While the first, net decoupling, defined by van Reenan and Pessao as the difference between GDP growth per hour (labor productivity) and average compensation, with GDP deflator taken into account for both, was found not to have diverged, gross decoupling has. Gross decoupling is much more critical; the relationship between GDP growth per hour and median worker wages. The authors stress the usage of wages in gross decoupling rather than compensation, as wages underline the effect on the median worker whereas compensation is more in the realm of banker’s bonuses, or pensions and health benefits. That although labor’s share of income has not fallen off, the median worker’s share has, confirming a rise of inequality between the average worker and the higher-ups.

For worker’s median wages in the UK, the authors analyzed the Labour Force Survey which measures the pre-tax wages of 60,000 UK households each quarter. In their treatment of various UK labor statistics, the authors find that net decoupling is not existent but that there is a 43% difference between median hourly wages and mean hourly compensation versus labor productivity. The statistics also show that the trend line for mean hourly wages cuts halfway through the disparity starting from the mid-late 1990’s and ending with their final data point, 2010. The authors conclude that this means about half of the divergence between median hourly wage and labor productivity can be explained by inequality. The other half is due to the doubled growth of compensation versus wages.

To quantify the driving factor of compensation in this growth versus median wages, the authors use UK Office of National Statistics data for non-wage compensation from 1999-2007. Over this period, Van Reenan and Pessao found employers’ contributions to national insurance schemes to rise 67% and employers’ contributions to pensions rose 98% while wages rose 47%. ONS and LFS data was analyzed over a four decade period as well. By 2010 gross decoupling was 42.5%, with more than three-quarters of the decoupling due to inequality and wage/compensation divergence. The other factors are a combination of GDP deflator/RPI differences, the gap between employed and self-employed earnings, ONS/LFS growth disparties.

Plunkett asserts that the difference in net decoupling and gross decoupling should not be discounted as a sort of anomaly. Although compensation is a more inclusive quantifier of benefits, wages are vastly more accrued by workers who earn less. Higher paying jobs get the lions share of compensation benefits. The nature of jobs in the lower half of earnings distribution means that their wages are much more essential for survival based on their reliance on wages to pay for every day needs. Since this measure “most accurately captures how well off people feel”, the indication is that the stagnation has primarily sat on the back of those with lower shares of labor’s share of income.

Jared Bernstein and Lawrence Mishel reached similar conclusions in their 2006 paper, The Growing Gap Between Productivity and Earnings. The paper aimed at contending the narrative set out by President Bush’s chief economist, Edward Lazear, and Federal Reserve Governor Randall Krosner that recent American productivity gains are a “success story.” Bernstein and Mishel argue against the prevailing macroeconomic theory that productivity gains beget wage gains which began rising standards of living. The authors deflate compensation data with the GDP deflator instead of CPI, since the GDP deflator takes investment goods, which have grown at a slower rate than consumption goods, into account. Use of the CPI to deflate rates of compensation growth would not tell the correct story.

Bernstein and Mishel tackle the inequality wedge as well, quoting from Robert Gordon and Ian Drew Becker’s 2005 paper, Where did the Productivity Growth Go?;

The standard link between the standard of living and productivity growth is broken by our finding that over the entire period 1966-2001, which encompasses the period of the 1965-1979 productivity growth slowdown and subsequent 1995-2005 productivity growth revival, only the top 10 percent of the income distribution enjoyed a growth rate of total real income (excluding capital gains) equal to or above the average rate of economywide productivity growth. The bottom 90 percent of the income distribution fell behind or even were left out of the productivity gains entirely.

The authors also analyzed decoupling through plotting productivity against real hourly wages of non-managerial workers, which make up about the bottom 80% income distribution in the U.S., from 1966 to 2005. The decoupling starts in the early 1970s and as productivity rises from a baseline of 100 to nearly 220, real non-managerial wages are nearly stagnant; wavering between 110 and 100, ending up near 110 by 2005. For the authors along with this inequality aspect, the difference in GDP and CPI deflators, and the increase in capital’s share of national income as opposed to labor’s share, are the three main factors that explain decoupling in the U.S.

The paper then goes on to try to explain why the productivity/wage gap is symptomatic of something within the U.S. economy. Bernstein and Mishel contend that marginal production theory, that the a worker’s marginal wage is based on his or her productivity, does not fit well with the gap since there are many externalities that make the assumption somewhat moot. To understand the economic forces at play, the authors looked at 20th percentile real wages, productivity, and unemployment for the periods of 1984-1989, 1995-2000, and 2000-2005. To preface this, the authors look at unemployment rates from 1947-1973, a time when the split between productivity and wages was non-existent, which averaged 4.8%. Even with demographic and social shifts, from 1973-2005, the unemployment rate averaged 6.3%. Examining the return to full employment in the late 1990’s is crucial to the discussion. The data shows that at the height the business cycle’s unemployment rate of 1989 and 2000, unemployment was 5.3% and 4.0% while, over the period, productivity grew at an annual rate 1.5% and 2.5%, respectively, but 20th percentile real wages from 84-89 fell 0.1% annually while growing 2.3% annual from 95-2000. The authors looked at 2000-2005 data to extrapolate the findings; unemployment went back up to 5.1%, productivity rose 3.1% annually, while 20th percentile real wages only rose 0.1% annually. Only during the spell of full employment in the late 1990s did worker’s wages in the lowest quintile of the distribution scale rise in tandem with productivity gains. The authors attribute the gap and the violation of marginal productivity theory to particular social forces such as lessened worker’s bargaining power, a drive to productivity with the least labor costs as possible, wage caps, and cheap immigrant labor .

Next, Bernstein and Mishel try to discern whether or not rising health care costs explain the decoupling. The authors steadfastly say no, citing that 48% of workers do not get health care through their job; for workers making under $15, more than 6 of 10 do not. If health care coverage were filling in some of the gap between productivity and median wages, one would expect the rate of  wages to grow faster for workers without health care coverage. They looked at 10th, median, and 90th percentile wages over 2000-2005 and compared them to employer-provided health care coverage at the same percentiles. Instead of rising costs filling in the gap, the opposite occurred, with wages growing faster for workers with a greater share of health care coverage. Exacerbating this health care wedge was the declining percentage of health care as employer’s costs; rising costs begot less coverage.

Bernstein and Mishel take fault with Lazear’s and other economist’s explanation that lags have caused the decoupling and that productivity will soon level off. But structural changes within the U.S. economy over a period where full employment is the rarely seen point to decoupling as a fixture.

Peter Harrison’s study, Median Wages and Productivity Growth in Canada and the United States, found that from 1980 to 2005, real median hourly wages rose an average of 0.33% per year while labor productivity saw gains of 1.73% per year. This gap of 1.40% was driven mainly by inequality, which explained half of the split between productivity and wages. In Canada, the gap was a bit less, 1.26%, and inequality only accounted for 25% of the gap. Canada saw greater changes in supplementary labor income and labor’s terms of trade. Both the U.S. and Canada’s decline in labor’s share of income contributed to the decoupling as well; 17% and 20%, respectively. Harrison’s research pointed directly to the rising share of the top one percent of income distribution and the leveling or declining income shares elsewhere as the main drivers of the inequality. This data supports the ongoing struggle within American politics and social discourse about inequality between the 99% and 1%.

In the U.S. as present day recessionary forces press companies to cut back, they attempt to retain the most productive and talented of their work force. In order to keep these employees they may offer better compensation packages to attract the necessary talent, but try to accomplish a higher standard of work with less hires. Also, as the talent pool that employers realistically look at shrinks, less and less people get employee training that would have happened in the decades past. So the share of workers that can be competitive within these tough hiring environments drops as a result. As a longer trend, unions have been gradually declining and are now nearly insignificant in the U.S. labor landscape. Globalization also surely plays a part in the split as productivity gains can be seen by moving production of goods to countries with cheaper labor while the company profits stay at the top of the ladder. Plunkett turns to Jared Bernstein’s analysis that the problem is even more damaging as workers’ wages were not increasing during a time when the UK’s economy is growing and productivity was rising. Now more than ever, the average minimum wage worker in the U.S. will feel the consequences of these changes as inflation drives up the cost of necessity goods. A bigger and bigger cut of wages will go towards food, transportation, and shelter.

Dwight D. Eisenhower On The Opportunity Cost Of Defense Spending

From Harper’s Magazine online archive:

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some fifty miles of concrete pavement. We pay for a single fighter plane with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people. This is, I repeat, the best way of life to be found on the road the world has been taking. This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron. […] Is there no other way the world may live?

–Dwight David Eisenhower, “The Chance for Peace,” speech given to the American Society of Newspaper Editors, Apr. 16, 1953.

Gas Prices Explained

Menzie Chenn and Mark Thoma: Stimulus Redux

UW-Madison Professor of Public Affairs and Economics, Menzie Chenn, revisits the oft contended American Recovery and Reinvestment Act of 2009. Chenn finds fault in the “massive” descriptor which is often added to the stimulus package and tries to put the stimulus’ budgetary effect in context with the Bush tax cuts of 2001 and 2003, spending on the Iraq War in 2010, and the Affordable Care Act (Obamacare) with this graph:

Mark Thoma sounds off on the redux:

Menzie Chinn makes a point I’ve been trying to emphasize (with less than full success). When people ask why the fiscal stimulus didn’t do more to elevate the economy, the right question to ask is what fiscal stimulus? When the federal efforts are combined with the contractions at the state and local level, there was very little net stimulus. That doesn’t mean the federal efforts didn’t do something positive and important — if the federal government hadn’t offset the state and local contractions things would have been even worse — but it does mean that people looking for more than simply treading water as evidence that the fiscal stimulus had an impact are asking the wrong question…

Some Perspectives On Iran And Obama’s Riposte

Via Andrew Sullivan:

Suzanne Maloney thinks it’s the best bet:

Negotiations in the absence of mutual trust present a difficult dilemma but not a hopeless one. The depth of the estrangement that exists today between Washington and Tehran is hardly less fierce than it was during the hostage crisis, yet ultimately a mechanism for dialogue and a resolution to the standoff was found largely because both sides could ascertain no better alternative to achieve their interests. Even then, it took repeated forays and failures in diplomatic outreach by both sides, the persistent efforts of a well-situated objective intermediary, and a considerable investment in staff work to ensure preparation, mediation, and implementation of the complex financial, legal, security, and other dimensions of a bargain.

Paul Pillar factors in the effect of sanctions:

Western negotiators need to persuade the Iranians that concessions on their part will lead to the lifting of sanctions. This may be hard to do, partly because the legislation that imposes U.S. sanctions on Iran mentions human rights and other issues besides the nuclear program, and partly because many U.S. hawks openly regard sanctions only as a tool to promote regime change or as a necessary step toward being able to say that “diplomacy and sanctions have failed,” and thus launching a war is the only option left. The challenge for the Obama administration is to persuade Tehran that this attitude does not reflect official policy.

Meanwhile, President Obama addressed the GOP war hawks; from a Talking Points Memo rush transcript:

Now, what is said on the campaign trail, you know, those folks don’t have a lot of responsibilities. They are not commander-in-chief. And when I see the casualness with which some of these folks talk about war, I’m reminded of the costs involved in war. I’m reminded that the decision that I have to make, in terms of sending our young men and women into battle, and the impact that has on their lives, the impact it has on our national security, the impact it has on our economy. This is not a game, and there is nothing casual about it. And, you know, when I see some of these folks who have a lot of bluster and a lot of big talk, but when you actually ask them specifically what they would do, it turns out they repeat the things that we’ve been doing over the last three years. It indicates to me that that is more about politics than actually trying to solve a difficult problem. Now, the one thing that we have not done is we haven’t launched a war. If some of these folks think that it’s time to launch a war they should say so, and they should explain to the American people exactly why they would do that and what the consequences would be.

An adept deflection to all the GOP bluster, and perhaps, in particular, to his supposed Presidential opponent, Mitt Romney, who flat out lied when he said this on March 4th:

This is a president who has failed …  to communicate that military options are on the table and in fact in our hand. And that it’s unacceptable to America for Iran to have a nuclear weapon.

Bets are that Romney will not take a chance to defend his words directly. There’s a definite possibility he will try to posture himself in some weaseling two-faced way though.

Netanyahu’s Speech to AIPAC

Yesterday, Netanyahu gave his speech to AIPAC. Netanyahu hit all the formulaic talking points needed in a speech that will resonate through the U.S. and Israeli war hawk camps. Obama, who set his feet firmly in the sand against Iran procuring nuclear weapons while not speaking against their obtaining the capability, is now rebutted by Netanyahu redrawing the line in the sand once again ahead of Obama’s feet.

I think Netanyahu’s conflation of Iran’s repressive regime and “terror proxies” with a future recklessness with nuclear weapons ignores the simple understanding of risk. Iran’s government and the Ayatollah must know that if they discharge a nuclear missile upon any state in the world, they will be blasted back to the Stone Age. Israel has always been the dominant power in the Middle East during the nuclear age. It stands to reason they would not like any challenge to this position.

Netanyahu predictably says Iran’s procurement of a nuclear weapon is near, given their enrichment of uranium to medical cancer research levels. This is a decades old act; Juan Cole unpacks Scott Peterson’s timeline of the “imminent Iran nuclear threat”, which started all the way back in 1979:

1992: Israeli member of parliament Binyamin Netanyahu predicts that Iran was “3 to 5 years” from having a nuclear weapon.

1992: Israeli Foreign Minister Shimon Peres predicts an Iranian nuclear warhead by 1999 to French TV.

1995: The New York Times quotes US and Israeli officials saying that Iran would have the bomb by 2000.

1998: Donald Rumsfeld tells Congress that Iran could have an intercontinental ballistic missile that could hit the US by 2003.

Besides foretelling the actions of a nuclear Iran, Netanyahu spouts typically hyperbolic and emotionally charged rhetoric perfect for the Republican hawk delegates and the like. A taste:

Through terror from the skies and terror on the ground, Iran is responsible for the murder of hundreds, if not thousands, of Americans.

…

Just a few months ago, it tried to assassinate the Saudi Ambassador to the US in a restaurant just a few blocks from here.  The assassins didn’t care that several Senators and members of Congress would have been murdered in the process.

Now this is real chutzpa, Iran accuses the American government of orchestrating 9/11, and that’s as brazen as denying the Holocaust, and they do…

Iran calls for Israel’s destruction, and they work for its destruction – each day, every day.

This is how Iran behaves today, without nuclear weapons.  Think of how they will behave tomorrow, with nuclear weapons.  Iran will be even more reckless and a lot more dangerous.

There’s been plenty of talk recently about the costs of stopping Iran.  I think it’s time we started talking about the costs of not stopping Iran.

A nuclear-armed Iran would dramatically increase terrorism by giving terrorists a nuclear umbrella. Let me try to explain what that means, a nuclear umbrella.

It means that Iran’s terror proxies like Hezbollah, Hamas will be emboldened to attack the United States, Israel, and other countries because they will be backed by a power that has atomic weapons. So the terrorism could grow tenfold.

Bibi begins and ends his speech bringing up the spectre of the Holocaust. In the middle, he of course, refers to Iran as a country of Holocust-deniers. At the end of the speech, Netanyahu uses the cautionary tale of a letter to the World Jewish Congress proclaiming that bombing Auschwitz in 1944 would take away from operations elsewhere and may even provoke even worse treatment at the hands of the Germans. Netanyahu then goes on to say:

The Jewish people are also different.  Today we have a state of our own.  And the purpose of the Jewish state is to defend Jewish lives and to secure the Jewish future.

Never again will we not be masters of the fate of our very survival. Never again.

That is why Israel must always have the ability to defend itself, by itself, against any threat.

We deeply appreciate the great alliance between our two countries.  But when it comes to Israel’s survival, we must always remain the masters of our fate.

…

Israel’s fate is to continue to be the forward position of freedom in the Middle East.  The only place in the Middle East where minorities enjoy full civil rights; the only place in the Middle East where Arabs enjoy full civil rights; the only place in the Middle East where Christians are free to practice their faith; the only place in the Middle East where real judges protect the rule of law.

The last bit is just particularly sickening, a proclamation only bought by a deluded ultra-Orthodoxy and its political coattails and deafening hypocrisy which only degrades the uniqueness of the state of Israel and its government.

Furthermore, Netanyahu praises the EU and U.S. sanctions which have devastated Iran’s economy in the past months. Of course much evidence points to the fact that economic sanctions do little to change a country’s policies; UK House of Lords paper. But surely Netanyahu feels immense pleasure that Iran’s financial lifelines are being strangled. Perhaps he does know that the sanctions will only force Iran’s citizens inward and create a more monolithic anti-Western sentiment, one easier to combat and use propaganda against in the public’s eyes.

President Obama’s speech to AIPAC is a lesson in their two contrasting styles. Obama’s measured statement of policy gets a ratcheting up of fear. Containment is off the table for both, but Obama leaves the choice up to Iran. Even if that choice has already been made there and there is no way an about-face will occur, the same pro-war rhetoric is not there. Efforts to pursue diplomacy may still work. A preemptive attack is not inevitable. But Netanyahu chooses to commit Israel to one path, and if that path has to be walked alone, it will be. Will these two speeches to AIPAC be a defining moment in U.S.-Israeli relations? Netanyahu’s statement of cause and intention pushes America to either stand with Israel or to stand aside.

It is not in America’s direct interests to go to war with Iran, just as it is not in America’s best interests to follow Israel’s lead wherever it dare stick its nose. Here, Gideon Levy brilliantly writes of the phenomenon that is an elephant being led by an ant. Levy ponders the questionable dynamics of the foreign relations puzzle and wonders whether the interests of America and Israel will decouple anytime soon; his conclusion is succinctly given by the article’s title and byline, It’s just a matter of time before U.S. tires of Israel: Israel doesn’t know when to stop, and it could pay dearly as a result. Levy expresses his incredulity at the relationship’s recalcitrance. While many Jewish Americans and non-establishment Israelis realize all these conclusions and want to U.S. and Israeli foreign policy to not be one in the same as fast as possible, ironically it may not be in their hands. The religious and Biblical rhetoric used by the Orthodox political factions and Netanyahu pander to the Christianist bloc in America. They see and hear the Biblical language and geographical locations set out rightfully to the Jewish by the word of God and will follow means to those ends blindly. So this faction accepts Palestinian colonization and the Zionist movement.

There will surely be more blustering from here on out, especially with renewed diplomacy back on the table according to this article. The new round of talks has not been set yet.

EU foreign policy chief Catherine Ashton said the five permanent members of the U.N. Security Council and Germany agreed to a new round of nuclear talks with Iran. Previous talks have not achieved what the powers want — an end to uranium enrichment on Iranian soil. The last round of negotiations in January 2011 ended in failure.

…

Ashton said in a statement that the EU hopes that Iran “will now enter into a sustained process of constructive dialogue which will deliver real progress in resolving the international community’s long-standing concerns on its nuclear program.”

The Dynamics Of U.S. And Israeli War Talk

In this post, Daniel Larison echos Daniel Levy’s point that Netanyahu is risk-averse, and delves into the political and popular constraints Bibi feels in Israel. Public opinion does not back the higher ups want to start a war with Iran. A poll from Shibley Telhami of the University of Maryland recorded the following:

Only 22 percent of Israelis believe that a military strike by Israel would delay Iran’s ability to develop nuclear weapons by at least five years; another 22 percent estimate a delay of three to five years. Nine percent of Israelis believe the delay would be only one or two years. Thirty percent of the respondents believe a strike would either have no effect on the Iranian program or would accelerate it. Asked what the effect of an Israeli strike would be on the Iranian government, respondents were evenly split between those who believe a strike would weaken the Iranian regime and those who believe it would be strengthened.

On the key question of whether Israel should launch such a strike notwithstanding the fact that the United States and powers advise against it, only 19 percent of Israelis favor a strike even in the face of U.S. opposition. Thirty-four percent oppose a strike no matter what. A plurality—42 percent—would back a strike only if it had at least the support of the United States.

In this you can see the similarities that the conservative wing in both the U.S. and Israel have been beating the war drums. The penetration to the bulk of the populace is not very deep at the moment; both populaces have economic problems to focus on, and starting a costly and potentially extremely destabilizing war is not first priority. To me, the most important conclusion the poll makes is that a good percentage Israelis think a strike on Iran would do little to or accelerate any Iranian nuclear weapons program. Even if a strike was able to completely annihilate all of Iran’s nuclear operations, they would still have the capabilities to rebuild, and rebuild in secret, and in branched out form to lessen the affects of any future attacks.

One of the problems with the air of militancy at the moment are the upcoming Israeli elections. For both the U.S. and Israel, an attack on Iran would mean catastrophically high global oil prices. Aside from their aversion to striking for other reasons, the price at the pump would compound any political benefits from aggression. Not only is Netanyahu’s reelection a source for treading lightly while brewing up talk is that the Israeli higher ups obviously want U.S. backing their military coercion. So far we have not indulged this suicidal request. Perhaps this means that if President Obama is reelected a more forceful stance will be held after November. In the mean time Netanyahu’s own coalition is not fully supportive of his push for war. Daniel Levy makes this case:

Especially noteworthy is the extent to which the elements of Netanyahu’s coalition further to his right have not embraced or promoted military action against Iran. In fact, they tend to demonstrate a lack of enthusiasm at the prospect. This applies to both the ultra-Orthodox and the greater Israel settler-nationalists. One reason is that they view the Iran issue as peripheral when compared with, say, the pursuit of settlements and an irreversible presence in all of greater Israel. 

Leave it to the ultra-Orthodox and nationalists to always put the Israeli-Palestinian question over any other geopolitical consideration. Incredibly, Levy points out that an attack on Iran would take away from settlement efforts. Larison thinks this is a point lost on much of U.S. public opinion, who think war hawks are equally in favor of settlements. Levy’s point that Iran talk keeps many minds off settlements, a residual effect perhaps, but one that is advantageous to their goals.

At a speech before AIPAC today, Obama reaffirmed his goal of preventing Iran from obtaining nuclear weapons, stated in his interview with Jeffrey Goldberg. This does not mean to decapitate the Iranian nuclear program; they would still have the capability, but his objective is to keep nuclear weapons out of the hands of the Iranian government. From his speech at AIPAC:

Iran’s leaders should know that I do not have a policy of containment; I have a policy to prevent Iran from obtaining a nuclear weapon …. Already, there is too much loose talk of war. Over the last few weeks, such talk has only benefited the Iranian government, by driving up the price of oil, which they depend upon to fund their nuclear program. For the sake of Israel’s security, America’s security, and the peace and security of the world, now is not the time for bluster; now is the time to let our increased pressure sink in, and to sustain the broad international coalition that we have built. Now is the time to heed that timeless advice from Teddy Roosevelt: speak softly, but carry a big stick.

As Spencer Ackerman notes, Obama’s speech shows a resiliency against Netanyahu’s war mongering, and set his feet firmly in the sand; a position against war, and against nuclear weapons. From practical terms this should be a popular place to stand. Iran armed with a nuclear weapon would create a whole new dynamic in the Middle East. Nuclear proliferation would ramp up and many countries would try their hand in the race to armament. Israel would have to deal with many more threats to its sovereignty. The President also reaffirms his pledge to the Israeli state; something he must have felt compelled to do before AIPAC. Here’s Ackerman ending, peering into one of the many facet Netanyahu will have to consider with the cards in his hand:

Are we closer to avoiding an Iran war? It seems like it The onus is on Netanyahu now to respond to Obama. One can cynically suggest that one of Netanyahu’s targets in a strike on Iran is Obama’s presidency; I would not put anything past Netanyahu. But Netanyahu has to consider — and my understanding is his advisers are indeed considering this — that Obama may very well be reelected, and then Israel will have to deal with the consequences of defying him when he returns to the height of his political power. Obama’s speech to AIPAC threw down a gauntlet to multiple audiences, while challenging them to do things his way.

This leaves me with the ultimate hope that President Obama is leaving the door slightly ajar for a diplomatic solution. Perhaps it is possible to hash out a plan of denuclearization for the U.S. and Israel to whip up goodwill. It is hard to see the future road going anywhere good. Iran’s nationalistic pride over its nuclear program is a massive barrier to diplomacy of disarmament. And Israel, never even official stating that it has nuclear weapons, should be seen as an equally stubborn wall. President Obama must maneuver in such a narrow diplomatic strait that the chances of the ship grounding on either side of the problem is very high. Obama’s rhetoric leaves being drawn into war equally as likely as diplomacy. This is the main problem of his speech before AIPAC, that while firmly placing America’s feet in the sand, that position may be in front of the line it needs to be to stay out of costly combat. The challenge now will be whether the President can retrace his steps instead of being drawn consequences much larger than Libya. In the face of AIPAC he may not be able to, but if he is able to re-posture the conversation within a larger context of Israeli and U.S. popular opinion, he may be able to regain a workable backbone.

Are Commercial Mortgage-Backed Securities About To Crumble?

On the ground feedback tells people on a personal level that commercial real estate is in a period of immense stagnation. From deserted strip malls and unoccupied mall stores, to the fall of Sears and K-Mart, commercial real estate has hit a wall, as brick and mortar shops decline in line American aggregate demand.

As Jim Quinn explicates, in Extend & Pretend Coming To An End, the central banker’s manufactured flood of easy money into the market from 2005 until the start of the financial crisis in 2008. Most know that the crash was due to bank’s overexposure to disproportionately irresponsible home loans hedged by investment banks. But the rush of liquidity to mall developers and retail companies looking that have been reaping massive profits for the past few years while their commercial property prices have plunged since the financial crisis. If the economy had been on the path to recovery, the loan extensions made post-crisis would be been fine and in line with returning American demand. But they are the same types of loans that got us into the whole MBS mess in the first place; with nonexistent regulation and given without a fair value assessment on property values (down a whopping 42% since its peak before the Great Recession). And while companies are lining  their pockets with profits, they do not have the equity to pay down those trillions of dollars of commercial loans.

Quinn rightfully calls our attention to the extend & pretend tactics that are keeping commercial and industrial loans north of $1 trillion even after 2008. This push against downward pressure is singularly caused by banks allowance of loans not backed by any property values and banks’ willingness to use accounting voodoo to keep their balance sheets propped up. But the sore fact of the matter is, just like the U.S. housing market, is that the problem is at least a magnitude higher than what the banks are letting on. And the bank’s blind eye conflates the problem as they pretend property values are still high, and extend loans that should never be given, all to keep banker’s bonuses in tact, while institutionalizing moral hazard, a seething risk now priced in to all aspects of the world’s financial system. Quinn points out that the normal commercial real estate loans have a normal maturity 5 to 7 years. So the escalating loans handed out from 2005 to 2008 will start to mature in 2012 and onward.

Quinn quotes an article from the Urban Land Institute:

Ann Hambly, who previously ran the commercial servicing departments at Prudential, Bank of New York, Nomura, and Bank of America said a wave of defaults is coming in commercial mortgage–backed securities (CMBS). And Carl Steck, a principal in MountainSeed Appraisal Management, an Atlanta-based firm that deals in the commercial real estate space, said property values are still falling.

Noting that CMBS investors booked $6 billion in real losses in 2011 and have already taken on $2 billion more in losses so far this year, Hambly told reporters in a private briefing that “it’s going to take a miracle” for many borrowers to refinance their deals when they come due between now and 2017.

Carl Steck said that lenders who are taking over the portfolios of failed institutions are finding that the values of the loans “are coming in a lot lower than they ever thought they would.” And as a result, he thinks a “fire sale” of commercial loans is just over the horizon.

The numbers for the commercial real estate landscape are horrifying;

Office vacancies remain at 17.3%, close to 20 year highs, as 12.3 million square feet of new space came to market in 2011. Vacancies are higher today than they were at the end of the recession in December 2009. The recovery in cash flow has failed to materialize for commercial developers. Strip mall vacancies at 11% remain stuck at 20 year highs. Regional mall vacancies at 9.2% linger near all-time highs. Vacancies remain elevated, with no sign of decreasing. Despite these figures, an additional 4.9 million square feet of new retail space was opened in 2011.

Just like the robo-signing and foreclosure fraud systemic of the U.S. real estate market, so too do banker and mortgage servicer’s morally bankrupt practices extend to the commercial real estate market. Quinn highlights a Harbinger Analytics Group report about fraud for land title underwriting of commercial real estate financing and hits on the coming effects of the crumbling of commercial real estate:

This fraud is accomplished through inaccurate and incomplete filings of statutorily required records (commercial land title surveys detailing physical boundaries, encumbrances, encroachments, etc.) on commercial properties in California, many other western states and possibly throughout most of the United States. In the cases studied by Harbinger, the problems are because banks accepted the work of land surveyors who “have committed actual and/or constructive fraud by knowingly failing to conduct accurate boundary surveys and/or failing to file the statutorily required documentation in public records.

The Wall Street geniuses bundled commercial real estate mortgages and re-sold them as securities around the world. The suckers holding those securities, already staggering from the overabundance of empty office space, will be devastated if it turns out they have no claim to the properties. They will rightly sue the lenders for falsely representing the properties. Mortgage holders in these cases may also turn to their title insurance to cover any losses. It is unknown if the title insurance companies have the wherewithal to withstand enormous claims on costly commercial properties. It looks like that light at the end of the tunnel is bullet train headed our way.

According to Andy Miller, quoted in Quinn’s article, by Thanksgiving of 2011, the underwater commercial property owners started showing up due to an Accounting Standards Update by the Financial Accounting Standards Board. This update, made effective June 15, 2011 on wards, made properties undergoing forbearance, or extending a foreclosure because a loan is underwater, subject to a fair value assessment (mark to market). So the extension habits and moral hazard can no longer be on the books, instead we must know the true extent of the damage the coterie of bankers has inflicted.

Quinn further broaches the future of retailers, taking fault with the BLS’ reported retail sale numbers:

Retail sales in 1992 totaled $2.0 trillion. By 2011 they had grown to $4.7 trillion, a 135% increase in nineteen years. A full 64% of this rise is solely due to inflation, as measured by the BLS. In reality, using the true inflation figures, the entire increase can be attributed to inflation. Over this time span the U.S. population has grown from 255 million to 313 million, a 23% increase. Median household income has grown by a mere 8% over this same time frame. The increase in retail sales was completely reliant upon the American consumers willing to become a debt slaves to the Wall Street bank slave masters. It is obvious we have learned to love our slavery. Credit card debt grew from $265 billion in 1992 to a peak of $972 billion in September of 2008, when the financial system collapsed. The 267% increase in debt allowed Americans to live far above their means and enriched the Wall Street banking cabal. The decline to the current level of $800 billion was exclusively due to write-offs by the banks, fully funded by the American taxpayer.

Lastly, Quinn does a commendable job combating the cable media reports of certain big box retailers who paint rosy pictures whose backing frames have been slowly rotting for some while. This is just the consequence of the protracted real double digit unemployment and its effect on consumer spending levels. Those touting a recovery would be surprised with what Quinn brings to light:

Home Depot was praised for their fantastic 2011 result of $70 billion in sales and $6.7 billion of income. The MSM failed to mention that sales are $7 billion lower than 2007, despite having 18 more stores and profit exceeded $7.2 billion in 2007. Sales per square foot have declined from $335 to $296, a 12% decline in four years.

…

Widely admired Best Buy has screwed the pooch along with the other foolish retailers that have massively over expanded in the last decade. They have increased their domestic sales from $31 billion to $37 billion, a 19% increase in four years. This increase only required a 444 store expansion, from 873 stores to 1,317 stores.

A Short And Sweet Zero Hedge Manifesto

Tyler takes them to the woodshed…

 

While reading Advanced Trading today we stumbled across the following curious excerpt:

Advanced Trading: You mentioned regulators and politicians are ignorant …

[ITG’s Jamie] Selway: I would say that their knowledge is incomplete.

Advanced Trading: Is this causing HFT to be scape-goated?

[ITG’S Jamie] Selway: Yes, there’s a mixture of that. I am fond of saying I am not a huge regulations guy but I am a fan of regulations at an appropriate level that boosts confidence. I for one would prefer to be regulated by the SEC and not by ZeroHedge. So we have a team of experts and multiple agencies that are expert in regulations and know the markets and have the resources.

And here we were thinking that after three years of reading us, at least the supposedly more sophisticated market elements would have moved beyond merely pedestrian stereotypes. Alas, as always happens when we assume anything other than sheer stupidity, we end up 100% wrong.

Here’s the deal Jamie: Zero Hedge, knowing full well we are quite mortal, and as like everyone else – very susceptible to temptation – realize we too ‘have our price’, would have no interest in finding out just what said “price” may be, by succumbing to bribery or any other form of corruption by you and/or your HFT peers and competitors. Nor do we have an interest in pretending to “regulate” you for several years, then submitting our resumes to you, tired of five figure government jobs, and expecting some quid pro quo in exchange for all those years when we saw the HFT ‘lobby’ engage in gross market manipulation, and demanding some form of equitable recompense, preferably in a far better paying job (for example moving from the NASD to Goldman Sachs… in a purely hypothetical scenario of course) but really anything with a lot of the zeros (that we enabled) at the end of it, would do.

We have no interest in that.

We realize that makes us different than the SEC. Because frankly, just like you, we also realize that the first entity to be purchased in any regulated venue, is none other than the regulator. Which in the absence of the SEC, we assume would be us.

We have no interest in that either.

But more importantly, we would not even dream of regulating you, or anyone else for that matter, because frankly, unlike the collapsing and insolvent status quo, we believe in the myth of a fair market, one where a room full of academics does not believe it is smarter than the collective rational whole of countless unitary market actors.

We believe in a market that regulates itself.

That means that the banks can go hog wild in loading up on CDOs, selling CDS, leveraging themselves 1000x times, and whatever else they feel like doing in pursuit of that ever more elusive ROE, but when they blow up, as they always inevitably do in a world in which they know that the politiciansand regulators they have purchased have no alternative but to rescue them, they blow up. Period. Game over: not a penny in taxpayer money would ever be used to rescue them.

That means abolishing the Fed, firing the 10 academics that determine the fate of the world on a daily basis, and letting the market itself determine the true cost of money. Of course, that also would mean scrapping generations of Ivy League-taught economists as their art, pardon science, is exposed to be the flawed and erroneous travesty that has led the world to a precipice, whose outcome could easily be global war next. Just like that last time.

But that is irrelevant to you.

What is relevant, is that we would most certainly let you and your “market-making, liquidity providing” colleagues run amok in the market, sub-pennying each other, stub quoting endlessly, churning and quote stuffing to the point where you and all your HFT peers drive the last remaining real investor out of the market, in the process sending volatility to record proportions and terminally breaking what’s left of the a stock market. At that point the real cannibalization can begin, which is the only way that the market can eradicate itself of the scourge that is HFT – because what would happen then is the perfectly normal and long overdue reversion to the mean, long pushed away from its equilibrium point courtesy of endless artificial intervention propping up parasitic trading, or, said otherwise, your quarterly EPS bottom line, which of course, is all your care about.

Incidentally we have seen what happens when HFT is not regulated, such as ever since the adoption of Reg NMS: first an algorithmic take over of all trading, then a flash crash, then hundreds of billions in retail capital outflows as the retail investors figure out what a sham (and scam) the marketplace truly is, and finally the collapse in volume, which as you well know Jamie, is the death knell for you and your peers.

What is most ironic in all of this, is that the second before you pull the plug on your algos for the last time, as the hollow market collapses under its own weight, you will wish that Zero Hedge had been regulating you…

It will be too late.

And The War Drums Beat On…

Because, according to a CNN Poll, 7 out of 10 Americans believe that Iran already owns nuclear weapons.

Friday’s release of the CNN/Opinion Research Corporation survey comes just hours after Iran’s supreme leader, Ayatollah Ali Khamenei, said the Islamic republic isn’t seeking and doesn’t believe in pursuing nuclear weapons. Khamenei was responding to a draft United Nations report that said that Iran may be working to develop a nuclear weapon.

The poll indicates that 71 percent of the public says Iran has nuclear weapons, with just over one in four disagreeing. More than six in ten think the U.S. should take economic and diplomatic efforts to get Iran to shut down their nuclear program, with only a quarter calling for immediate military action.

“But if economic and diplomatic efforts fail, support for military action rises to 59 percent, with only 39 percent opposing military action under those circumstances,” says CNN Polling Director Keating Holland.

The European Central Bank’s End Gam(e)bit

The ECB changed the rules of the game by swapping their bonds with new Greek bonds, the swapped bonds eligible to bypass the necessary haircut that private bondholders will need to eat through the Private Sector Involvement. Getting to a Greek bailout may happen, but this now subordinates sovereign bonds for all other Eurozone countries. This signals to PIIGS that this Greek “bailout”, or rather, a final gambit for banks to cash in before the storm comes, is a one off. Once Credit Default Swaps are triggered, it will signal for other sovereign bondholders to dump their holdings since as the endgame has come.

The new ECB Greek Government bonds will not be forced under the Collective Action Clause which may cause all private bondholders to take a % haircut, a write down of their bond values. The ECB has subordinated all other private bondholders, and in a move to make their bonds safe from the CAC. They have essentially skirted the rules to get around the CAC as to not take a loss on their bonds, protecting Eurobankers’ bonuses, and will have to slot in the CAC on private bondholders as a retroactive implementation. The ECB made these decisions unilaterally, writing their own rule book. The private bondholders bought their bonds in 2009, 2010, but Greece will pass a law making those bonds retroactively subject to the CACs. There is a bit of unknown as to whether this will stand in Greek courts, and if someone challenges the ruling and the CACs cannot be implemented then this will obviously mean a default since hedge funds hold a certain percentage of those bonds which had been sold off in the past few months. Without the CACs the PSI will need 100% of bondholders to agree to the haircuts and the hedge funds are in a prime position. These hedge funds bought credit default swaps, betting that Greece will default and they will cash in if the move for CACs fails.

Bloomberg reported on the ECB bond swaps on February 17, 2012;

The ECB will exchange its Greek debt for new bonds with an identical structure and nominal value, though they’ll be exempt from so-called collective action clauses the government is reportedly planning. That implies senior status for the ECB over other investors, according to UBS AG, and the use of CACs may lead to credit-default swaps protecting $3.2 billion of Greek bonds being tripped.

“It may appear that the ECB is receiving preferential treatment, raising questions about whether the ECB is senior to private-sector bondholders,” according to Chris Walker, a foreign exchange strategist at UBS, the world’s third-biggest currency trader. “If a coercive default does indeed eventually take place then a CDS event seems very likely with all the negative consequences for risk appetite that may bring.”

…

Subordination of other bondholders behind the central bank is a problem “not only in the case of Greek debt, but also regarding the debt of other euro-zone nations that the ECB may be purchasing,” London-based Walker wrote in a report. The ECB’s plan “will likely lead to euro weakness,” he wrote. Still, it’s “a sign of progress toward an eventual Greek debt restructuring.”

…

Greece will introduce legislation next week that may allow CACs that force bondholders to accept debt writedowns, Naftemporiki reported. Swaps on Greece may be trigged if the CACs are used because all investors would be bound by a majority agreement to accept a proposed debt restructuring.

“One of the basic principles of bond markets is you cannot impose subordination on a particular set of bondholders,” said Padhraic Garvey, the head of developed-market debt at ING Groep NV in Amsterdam. “The probability of triggering CDS has increased because the ECB has protected itself.”

ECB officials previously rejected the possibility of a credit event triggering swaps, arguing it would encourage traders to bet against indebted nations and worsen the crisis.

The introduction of the clauses doesn’t in itself trigger default swaps, though using them does, according to rules of the International Swaps & Derivatives Association. David Geen, ISDA’s general counsel, declined further comment.

Credit events that trigger swaps can be caused by a reduction in principal or interest, postponement or deferral of payments, or a change in the ranking or currency of obligations. Any of these must result from a deterioration in creditworthiness, apply to multiple investors and be binding on all holders. ISDA’s determinations committee rules whether contracts can be tripped.

…

“If indeed this maneuver is intended to protect the ECB from forced losses, then the risk of a voluntary restructuring morphing into a coercive one has arguably increased significantly,” UBS’s Walker wrote. “A private-sector bondholder that has been suddenly and unexpectedly subordinated may have a reduced incentive to continue to hold onto that debt.”

As usual, Zero Hedge reveals the reality behind the circus, telling of bond subordination’s impact;

How this will impact the sovereign bond market in the long run is anyone’s guess, but it will hardly be positive. Especially when one considers that going forward even bonds issued under UK-law, should Greece attempt to strip these, will be percevied as insufficiently secure. Which means that the bond market going forward will no longer look at new sovereign bond issuance with the view that all bonds are created equal and have a pari passu standing, but that at any given moment one may be primed arbitrarily, or see any and all covenant protection stripped.

…

…one thing we are sure of: if the runaway central planners of the world believe they can legislate their way into an ‘upper hand‘ over the bond market, in ever more desperate attempts to avoid the day of reckoning, they will fail without any shadow of a doubt. Because demand for risk comes first and foremost from a sense of stability, of fair and efficient markets, and equitability: something which has long been missing in the stock market, and which may very soon be taken away, by force, from the bond market as well.

Dismal GOP Primary Participation

Timothy Egan at the NYT;

In barely a century’s time, the population of the United States has more than tripled, to 313 million. We are a clattering, opinionated cluster of nearly all the world’s races and religions, and many of its languages, under one flag.

You would not know any of this looking at who is voting in one of the strangest presidential primary campaigns in history. There is no other way to put this without resorting to demographic bluntness: the small fraction of Americans who are trying to pick the Republican nominee are old, white, uniformly Christian and unrepresentative of the nation at large.

…

So far, three million voters have participated in the Republican races, less than the  population of Connecticut.  This means that 89 percent of all registered voters in those states have not participated in what is, from a horse-race perspective, a very tight contest.

Yes, we know Republicans don’t like their choices; it’s a mehprimary. But still, in some states, this election could be happening in a ghost town. Less than 1 percent of registered voters turned out for Maine’s caucus. In Nevada, where Republican turnout was down 25 percent from 2008, only 3 percent of total registered voters participated.

This is not majority rule by any measure; it barely qualifies as participatory democracy.

Future Generations Need To Be Robust Over All Fields Of Study

Andrew Sullivan relays this excerpt from Adam Frank’s article on NPR;

What is true for science is also true for the other great human endeavors. To engage with the world in search of any kind of Truth is an expression of the search for excellence. That, by its very nature, is desperately difficult. There will always be a price to be paid in time, sweat and tears. We should never sugarcoat that reality. We want to teach students more than just how to get jobs, we also want to teach them how to live with depth and for purposes that stretch beyond their own immediate interests. We should never forget that connection. If we do, we are in danger of losing more than just the next generation of science majors.

Matt Yglesias has the following to say to the idea that the study of liberal arts fails to add value to real life skills;

In order to do well in courses on 19th Century British Literature or Social Anthropology or Philosophy or American History in a properly running American college, what you need to do is get pretty good at reading and writing documents in the English language. These are very much real skills with wide-ranging practical applications. Clearly relatively few people are professional writers, but a huge amount of what goes on at the higher levels of a typical business is a steady stream of production and consumption of reports and memos. If you can compose an email that’s 10 percent clearer in 90 percent of the time as the other guy, you’re going to get ahead in a wide range of fields. Outside of office work, a big part of the difference between a hard-working individual who’s pretty good at his job and a person who’s able to leverage his skills and hardwork into an entrepreneurial or managerial role is precisely the ability to research things and write up plans. Everyone knows that a kid growing up in rural India is obtaining valuable skills if he gets better at English, but this is equally true for a kid growing up in Indiana. 

Now of course perhaps not every liberal arts program is in fact imparting reading and writing skills to its graduates. But that’s a problem of execution not of concept. It’s a fallacy to think that in an increasingly technology-performed society that technical skills will be the only sources of value. Computers are going to put accountants out of business long before they start hurting the earnings of talented interior decorators. The important point is that mastering a specific body of facts is not nearly as useful in 2012 as it was in 1962. 

These policy recommendations would do well for implementation down the road. At this point in our economic treading, companies hiring are more generally looking for specific qualifications; in my limited experience looking at job postings, a myriad of technical qualifications and prior experience in the field are precursors to even being looked at. And dozens of others will meet the checklist.

Recently there have been a lot of mentions of how certain jobs will be made obsolete by automation; like accounting and even informative journalism through algorithmic data instruments, etc. Technical skills will be useful in fields like Computer Science still, but most likely many more unforeseen jobs will be taken over by machines. Both Frank’s and Yglesias’ advice would yield definite benefits to regard for future policy. STEM and liberal arts undergraduate degrees equip students with quite a broad background in their field of study; it is unlikely, especially in today’s job market that you will find job specifically tailored to the knowledge you gained through your undergraduate studies. But those degrees do provide a more general competence, a mark proving you could get through 120 credits of college study. For liberal arts degrees, as Yglesias suggests, critical analysis and writing are often areas which firms can gain and judge productivity through real value added. This seems quite right. When working at a new company, if you need job training, these strengths will hasten the adoption of new processes. The future job market will most likely be full of shifting sands, and adaptation will be the key to productive growth. I especially like the point Yglesias makes about learning the English language and think it should also be extended to encompass all other large global languages; Mandarin, Hindi, Arabic, etc. English is already greatly valued for foreign businesses, and the value of specific languages may spread out as the global economy coalesces even more.

Frank’s suggestion that future generations must toughen up and buckle down is stark contrast to today’s quick certification programs and commercials promising a paralegal or criminal justice degree in little time at all. He hits a nerve that humans should thrive for greater fulfillment rather than just to be able to apply for a cookie cutter job. For him I would think the pursuit of scientific knowledge should be more like science of the past when scientists would explore a divergent range of topics. I am not too sure that type of reversion can be possible, Frank may be romanticizing that past a little bit. The trend is definitely towards more specialization, so proffering up a grand notion of reaching the Truth in pursuit of scientific knowledge through diligent work just might not jibe with the future.

Yglesias last bit about liberal arts education being a problem of execution should resolve itself over time it the right policy corrections are made. Big public universities with full coffers for funding liberal arts studies and, well hopefully, dedicated professors and TAs, should streamline those fields for practical application. That is not to say undergraduates should not be able to pursue Russian Literature in Translation if they wanted to. Those classes should still be offered. But maybe our education system should try to instill those types of diverse and esoteric interests from a much earlier age. In this way, it may be possible to co-opt both Frank’s and Yglesias’ points. That way by the time students get to college, they can focus on undergraduate work to add value to society and be able to hold those interests from their childhood. Meanwhile, certain liberal arts programs in smaller universities and community colleges may be eliminated precisely because of the problem of execution. It comes down to the reality that, ceteris paribus, graduating with an English degree from Northwestern will give you better job prospects than an English degree from your local CC.

Those Entitled Elderly, Disabled, and Working Poor

Kevin Drum points us to this Center on Budget and Policy Priorities study; Contrary to “Entitlement Society” Rhetoric, Over Nine-Tenth of Entitlement Benefits Go to Elderly, Disabled, or Working Households, that flies right in the face of the conservative narrative that our society has slowly become one big pile of lazy coach potatoes leeching off the country’s vast entitlement system:

The study reports;

Some conservative critics of federal social programs, including leading presidential candidates, are sounding an alarm that the United States is rapidly becoming an “entitlement society” in which social programs are undermining the work ethic and creating a large class of Americans who prefer to depend on government benefits rather than work.  A new CBPP analysis of budget and Census data, however, shows that more than 90 percent of the benefit dollars that entitlement and other mandatory programs[1] spend go to assist people who are elderly, seriously disabled, or members of working households — not to able-bodied, working-age Americans who choose not to work.  (See Figure 1.)  This figure has changed little in the past few years.

…

In 2010, 91 percent of the benefits provided through entitlement programs went to people who were elderly (65 or older), disabled (receiving Social Security disability benefits, SSI disability benefits, or Medicare on the basis of a disability — all three programs use essentially the same disability standard, which limits eligibility to people with medically certified disabilities that leave them substantially unable to work), or members of a household in which an individual worked at least 1,000 hours during the year.

…

The data in this analysis also dispel other common misperceptions, such as a belief (sometimes fanned by political figures) that entitlement programs shift substantial resources from the middle class to the poor.  The data show that the middle class receives approximately its proportionate share of benefits:  in 2010, the middle 60 percent of the population received 58 percent of the entitlement benefits.  (The top 20 percent of the population received 10 percent of the benefits; the bottom 20 percent received 32 percent of the benefits.

These figures contrast sharply with the distribution of the extensive deductions, credits, and other write-offs in the federal tax code, known as tax expenditures (former Federal Reserve Chair Alan Greenspan has called them “tax entitlements”).  The Urban Institute-Brookings Institution Tax Policy Center estimates that for tax year 2011, the top fifth of the population will receive 66 percent of the $1.1 trillion in individual tax-expenditure benefits (the top 1 percent alone will receive 23.9 percent of the benefits), the middle 60 percent of the population will receive a little over 31 percent of the benefits, and the bottom 20 percent of the population will receive only 2.8 percent of the benefits.

Also, contrary to what a substantial share of Americans may assume, non-Hispanic whites receive slightly more than their proportionate share of entitlement benefits.  Non-Hispanic whites accounted for 64 percent of the population in 2010 and received 69 percent of the entitlement benefits.  In contrast, Hispanics made up 16 percent of the population but received 12 percent of the benefits, less than their proportionate share — likely because they are a younger population and also because immigrants, including many legal immigrants, are ineligible for various benefits.  Non-Hispanic African Americans account for 12 percent of the population and received 14 percent of the benefits.

It would be really helpful to see more information about disability and Medicare fraud, if recording that is even possible. I wonder how much of the entitlement society belief comes from seeing able bodied workers cheat the system by simultaneously collecting disability benefits and holding down a paying job. If this was more widespread than we currently understand it to be, perhaps this accounts for some of the disconnect. I think it undoubtedly accounts for some of the story, and second hand accounts seemingly point to disability fraud as a major contributor to the disillusion. Republican Presidential and media rhetoric most likely serves only to stir up this real world problem. The impact of disability fraud is likely to be more prevalent in poor communities who also have more conservative beliefs. But the way the conservative narrative shapes the argument, the Entitlement Society is nothing more than a ghost story that diverts people’s attention from the problem that we can actually solve.

The only real way to combat the narrative as a whole is to root out the instance of fraud, which seems to have been set up in Kentucky (a state with communities like those I suggest would be ripe targets) through a Cooperative Disability Investigations Office in Lexington in 2011. The more overarching Office of the Inspector General Social Security Administration’s webpage cites;

For Fiscal Year 2011, OIG’s Cooperative Disability Investigations (CDI) efforts nationwide resulted in more than $281 million in projected savings to SSA programs, and more than $182 million in projected savings to non-SSA programs, according to recent data from OIG’s Office of Investigations.

This is an uptick from FY 2010. That is a lot of money to be uncovering due to disability fraud. I am kind of at a loss for what kind of penalty system we should pursue against the committing individuals. Clogging up our prison cells and hiring a battalion of government lawyers would be similarly wasteful. You want these people to still be able to contribute to society. An incentive program for people to out fraud would probably generate distrust among communities. Each OIG update includes a story from a local CDI office of incredible cases of fraud. They are striking in that they end with the individual being denied disability benefits, nothing else. So while there is no obvious solution to me, there is an obvious need for a crackdown. Maybe changing the plan of attack can defeat the entitlement myth.

Pew On The Economic Conditions Of American Young Adults

The entire report, Young, Underemployed and Optimistic: Coming of Age, Slowly, In a Tough Economy, at Pew Research Center.

 

January Jobs Report Redux

The quantity may be there, but the quality is lacking. Heralding an economic recovery solely based on BLS statistics seems so irresponsible, but the mainstream media is probably incapable of anything else.

Via Zero Hedge:

While the BLS is the best, if massively seasonally adjusted, tracker of job quantity, the only true indicator of job quality is the FMS’s Daily Treasury Statement, which tracks and updates how much government revenue is generated any given day courtesy of withheld income and employment taxes. So to avoid any potential semantic confusion, we will stick to numbers and bullets: hopefully even the most dedicated newsletter sellers and “asset managers” can follow those without losing much in translation.

• In the fiscal year 2011 and 2012 (starting October 1) and continuing through the date of the most recent BLS update or January 31, there have been 87 official work days. This is the period which we will define as YTD (fiscal year to date period) for 2012, and will use its matched equivalent for 2011 for comparative purposes.
• In the 2012 YTD period, the US Treasury recorded personal income withholding tax revenue of  $592.676 billion (source)
• In the comparable period for 2011, beginning October 1, 2010 and continuing through January 31, 2011, withholding taxes were $592.984 billion (source)
• In other words, the US Treasury collected $310 million more in tax withholdings in the first 4 months of fiscal 2011 than in the first 4 months of fiscal 2012.

Presented visually – the black bar shows the cumulative divergence between the fiscal 2011 and 2012 data series. Below zero, such as that on January 31, is bad.

• Based on establishment survey data, the US started fiscal year 2011 (Sept 30, 2010) with 129,885,000 employed (source)
• Based on establishment survey data, the US started fiscal year 2012 (Sept 30, 2011) with 131,694,000 employed (source)
• Based on establishment survey data, at January 31, 2011, the US had 130,456,000 employed (source)
• Based on establishment survey data, at January 31, 2012, the US had 132,409,000 employed (source)
• Said otherwise, in the first 4 months of fiscal 2011 the US “created” 571,000 jobs; in the first 4 months of 2012, the US “created” 715,000 jobs. 
• More importantly, between January 31, 2011 and January 31, 2012 the US added 1,953,000 jobs.

And yet…

• Over the same period, as shown above tax withholdings are actually trending lower in 2012 compared to 2011!

But that’s not the kicker. This is:

• The 130.456MM workers “employed” at January 31, 2011 created a total of $592.985MM in withholdings, or on average of $4,545.48 per worker over the first 4 months of the fiscal year 2011.
• The 132.409MM workers “employed” at January 31, 2012 created a total of $592.675MM in withholdings, or on average of $4,476.09 per worker over the first 4 months of the fiscal year 2012.

Translation: based on the above, even as America was “creating” jobs, 2 million to be precise (and 2.5 million between Sept 30, 2010 and January 31, 2012), the government tax revenues created by these jobs actually declined in 2012 compared to 2011, on a per job basis, by roughly 1.5%!

…

Finally, and most, importantly, we hope that this analysis has proven that while the BLS may play around with various numerators, denominators, seasonal adjustments, and other irrelevant gimmicks which are only fit for popular consumption particularly by those who have never used excel in their lives, a deeper analysis confirms our concerns, that not only is America slipping ever further into a state of permanent “temp job” status, but that a “quality analysis” of the jobs created shows that the US job formation machinery is badly hurt, and just like the marginal utility of debt now hitting a critical inflection point, so the “marginal utility” of incremental jobs is now negative, which means that Obama, or whichever administration, can easily represent to be growing jobs, and declining the unemployment rate by whatever gimmick necessary. Yet these very jobs are now generating far less in so very critical tax revenue for the US treasury, and continue to declining steadily in quality.