Saturday, July 31, 2004

Economy: Middle Class Squeeze or Stagnation?

Here's an interesting fact buried in page two of a NYT article on the Middle Class Squeeze.

The disparity is also widening between middle-income and high-income earners. Adjusted for inflation, wages for middle-income men - those in the 50th percentile of earnings - were virtually flat at about $15 an hour between 1980 and 2003, according to a paper that will be published in September by the Economic Policy Institute, a liberal research group in Washington. By contrast, wages for high-income men - those in the 95th percentile of earnings - climbed by one-third, to $44 an hour in 2003 from $32 an hour in 1980.

"It has been going on for a long time," said Lawrence Mishel, president of the Economic Policy Institute. "Middle-wage workers have not done well over the past three decades."

David Autor, an associate professor of economics at the Massachusetts Institute of Technology, said middle- and lower-income workers enjoyed real gains during the economic boom from 1995 to 2000. But their earnings went flat once again after the recession in 2001, and have yet to start rising.

"What's happened in the last few years is that people's earnings have stagnated again, except for those at the top end," Professor Autor said. "It really hasn't been as much of a middle-income squeeze as a middle-income stagnation." [emphasis added]

First I would note that the trend has been going on for a long time - even throughout the highly praised economy of the Clinton Presidency. Second of all, I don't blame Bush for this but he's clearly not doing anything about it, precisely because he's too dumb to even realize it's happening while he takes money from big business interests pushing the policies making this happen. Third of all, that if it was a normal and healthy economic progression there would be a "rising tide lifting all boats" effect. That's not happening.

I don't think it's arguable that it's a disparity in education that's creating these living standard deviations. The 95th percentile is a very narrow band, and there are a lot more people who get college educations in our society than the top 5%. So wages are stagnating even for many of the college educated and middle class people discussed in the article, and not just for high school educated blue collar workers. A lot of college educated people are in that 50th percentile band there.

I also think that the consumer sentiment figures are misleading. They are rising. But consumer spending is dropping. (The Economist) People say they're optimistic, but when it comes to their pocket books they're actually spending less.
One of the abiding motifs of America’s recovery so far has been the “indefatigable consumer”. But the American consumer is now looking as tired as the cliché. Household spending grew by just 1% in the second quarter; expenditures on consumer durables fell by 2.5%. The Federal Reserve’s recent anecdotal report on the American economy, the so-called “beige book”, paints a greying picture. The environs of Chicago are doing well, but New York, Cleveland, Richmond, Kansas City and San Francisco showed evidence of a slowdown, albeit modest. Cars are no longer flying off the sales lots, and retail sales in general appear to have weakened.

It is becoming increasingly apparent that the gains from America’s productivity-led recovery have been unevenly distributed. Corporate profits are strong, and business investment leapt by almost 9% in the spring. But pay has lagged behind, and the wages of production workers have stagnated. [emphasis added]

One of the things that the economists and political scientists have been promising us is that the transformation of the economy and the loss of jobs from outsourcing would improve productivity and this would translate into new better jobs for Americans. In this I include people like Brad Delong as much as people like Daniel Drezner. I understand that these people are highly educated and mean well.

However when you look at the cold hard data then even a less-than-liberal and an extremely-pro-market publication like The Economist has to admit that the wealth is not being shared. Let's face it, the faith that new and better jobs would be created to take the place of the old ones is not being fulfilled. (from the NYT article)
The mixed picture here coincides with what many economists are observing. Almost three years after the last recession ended, hourly wages have declined in the past year after accounting for inflation. And even though the nation has added 1.5 million jobs since last August, it is still more than one million jobs below the total number of jobs in 2001. At the same time, the adult population has swelled by more than three million people.

Okay we have waited now for three years, and the economic recovery has not materialized. The economy is clearly on life support, propped up by war spending and artificially low interest rates that are undermining the dollar and producing monetized inflation. The faith, and it is a sort of religious faith, that Delong, Postrel, and Drezner have that these jobs will materialize somewhere somehow out there is simply not justified so far by the facts and the observed data.

We can wait longer if these proponents like, but that begs the question of just how long do we have to wait and how bad the numbers have to get before the admission has been made. Remember the NYT and EPI figures show that this trend has been going on for three decades. Is there some point at which the proponents of "new, better jobs" will admit that it's simply not working? Maybe another three decades just to be sure?

The oldman don't care if you disagree with him, but if you disagree with facts then the oldman really doesn't like that. Because that's crazy. And it saddens me how many people have bought into this craziness.

Philosophy: The Greatest Threat to Civilization Is...

Not terrorism. Not rogue nuclear and biological weapons. Not the increasing tension between China and the US. Not AIDS. Not the looming resource battle over fossil fuel energy sources. Not crazy ideologues weilding power. Not resurgent fascism. No ... it's feminism ... at least according to the Pope.

Vatican criticizes radical feminism
Fears movements blurring differences between men and women

The Associated Press
Updated: 1:59 p.m. ET July 31, 2004
VATICAN CITY - The Vatican on Saturday denounced feminism for trying to blur differences between men and women and threatening the institution of families based on a mother and a father.

The drive for equality, the Vatican said, makes “homosexuality and heterosexuality virtually equivalent, in a new model of polymorphous sexuality.”

The concerns, raised in a 37-page document written by one of Pope John Paul II’s closest aides, broke no new ground, maintaining the Church’s ban on women priests, for example.

But some observers said they feared how the document might be used.

Professor Paul Lakeland, an expert on the Catholic Church at Fairfield University in Connecticut, said the paper could be used by Church conservatives to condemn any form of advocacy for women.

The pamphlet by Cardinal Joseph Ratzinger, the Vatican’s orthodoxy watchdog, was published during a Vatican campaign to protect what it terms the Christian family. Earlier salvos have blasted same-sex marriage and appeals to politicians, regardless of their religion, to prevent them from winning legal recognition.

Addressed to bishops worldwide, the document contended that new recent approaches to women’s issues are marked by a tendency “to emphasize strongly conditions of subordination in order to give rise to antagonism: women, in order to be themselves, must make themselves the adversaries of men.”

Such an attitude, the document said, “has its most immediate and lethal effects in the structure of the family.”

First of all I agree that the family is taking a hit, and a conservative and an educator I would argue that this has an undoubtedly corrosive force on the evolution of our society and the education of our citizens. Things really are getting worse out there. However I think that times like this point out the major flaws in religious hierarchies. Other religions have their follies as well, but the problem is that when you combine the self-importance of religious conviction with dogmatic hierarchies that claim absolutist correctness you have a big problem.

Personally I think there are a lot bigger threats to the family out there. For instance the fact that most families do have to have two incomes. But they have to do this for economic reasons. Of course some people could argue that these people could get by with less, live in a worse neighborhood, in a smaller house, go to worse schooles, etc. However I would challenge these people would you accept such a standard of living and passing on of expectations to your children? If not, then they should just freaking shut the hell up.

Families put two people to work not because they want to, and usually not because they want the extra cars - it's the reverse - the extra cars are there because people have to work. Kids in high school have to work, not because they need the spending money but because their parents realize they need to absorb the work ethic early to succeed in life. The parents both work, again not because having fancier cars are better, but because they grimly understand what happens to the kids of those parents who are willing to settle less and they see clearly exactly what society is willing to relegate them to.

If you're not getting ahead, you're falling behind, and that's the simple facts in modern day America.

I would support wages high enough so that one spouse could stay home and be the care-giver. I don't think it has to be the mom, though I think for personal and biological reasons generally the mom will choose to do so more often. But I'm all for dads getting into the parenting act. However if you're forcing people not to just choose between a standard of living, but what track their kids are going to get onto and what expectations those children are going to have out of life ... then people will choose to work harder to provide better opportunities to their family.

It's that simple.

Now I'm not saying this because I'm a big feminist guy. I remember meeting my first feminazi. At the time, the word hadn't even been coined. It was this girl, and she was dressed androgynously. I'm not against that, but on her it looked terrible. She didn't have the body to pull it off. She was also incredibly intelligent, and incredibly wrong in only the way that high intelligent and educated people who have learned to believe in utter bullshit can be. I didn't think she was wrong because she had different priorities and values, I thought she was wrong because she slanted her arguments and twisted her logic to meet her preconceptions.

Now I'd always been open minded about feminism. It sounded like a good idea. However the more the avowed feminists I met, the less I had a liking for them. I still maintain that feminism as a policy promoting social equality of opportunity and gender-blindness in business competition is a great idea. I dislike as much as the Vatican the tendency of feminist philosophers to blame patriarchial power structures for their oppression.

Most little girls if you give them the choice, will actually play with dolls. Some will like fire engines instead. Let the little girls who want to play with dolls, play with dolls and the ones who like fire engines play with fire engines. And disturbing as I find it personally, the same goes with boys. I figure if a little boy is going to be interested in playing dress up, maybe he's got a future as a fashion designer and you can't get in the way of that out of a little squeamishness that your little boy might be hitting for the other team. That's just economic reality.

Is there such a thing as a glass ceiling? Sure there is. I didn't deny it. I just don't think that carping at length about it is going to be the best way to remove it. Women are making progress. Perhaps that's why feminism as a philosophy has morphed among young women. They're all about the equality of opportunity and competition, but they'd like on the main to be just girls socially.

However as much as I dislike the feminists I've met and the strange writing of many of their thinkers, the fact is that the movement has declined. The very things I've mentioned have turned off so many people, including women, so that by now the movement has almost no modern social influence so to speak. It's no threat at all.

Which is why it's weird that the Vatican should choose this moment, when people are being raped and burned alive in the Sudan, while HIV infections spread throughout the world, while economic trends squeeze families into working harder to stay in one place, while meglomanacial politicans battle for power while the very sustainable basis of civilization is endangered ... to attack a weak and descredited ideology with almost no political impact so to speak.

I'm sure the pope is a nice guy, but clearly his perspective is limited. It just brings about a spectacle of ridiculousness when he launches an attack like this. Of course other religious leaders do it too, but the fact that power is spread out among many of them dilutes the ridiculousness of any one person's foolish attitudes. The centralized hierarchy of the Catholic church then backs Catholics into either ignoring their pope, backing him up in a ridiculous situation, or becoming guilty of failing to adhere to Church policies.

I mention all of this because it's really a big power play. The Vatican feels that the American parishes have become too liberal and too powerful and too independent from Rome. So it attacks their social values, yada yada yada in the name of the social blight it produces. When viewed in that light, the statement makes perfect sense. Politicians are always ready to play king of the hill, even if that hill is a pile of rubble from their neglecting real priorities for their power games.

It's just that playing a game like that while normal to a politician, is just a little disappointing from a religious and spiritual leader.

War Drums Beating: Chinese Anti-US Sentiment

The CSM reports this seemingly minor but ominious story.

from the July 30, 2004 edition

US, China in tiff over Niagara incident

China's media are whipping up anger over the roughing up of a Chinese tourist by a US border guard last week.

By Robert Marquand| Staff writer of The Christian Science Monitor

BEIJING – A weird and unfortunate incident involving a US border guard who beat a female Chinese tourist at Niagara Falls last week is getting increasing play in China's state-run media as a high-emotions story, with the public receiving continual images of the woman's grotesquely wounded face in newspapers, on the Internet, and on TV talk shows.
For state media to feature so prominently a racially sensitive story, and to stoke the flames of considerable anger felt on the street here yesterday, suggests some cooling on the Chinese side of Sino-US relations, analysts say. After being phoned by Chinese Foreign Minister Li Zhaoxing, Secretary of State Colin Powell vowed to conduct a full investigation into the matter.

Zhao Yan, a Chinese businesswoman on holiday, was chased and grabbed late at night on July 21 near Niagara's famed Rainbow Bridge by a guard who thought she was part of a drug deal involving pounds of marijuana. After creating some suspicions by her movements, Ms. Zhao ran away just as authorities were doing a drug search. A customs agent, now charged with excessive force, grabbed Zhao, pepper-sprayed her, and roughed her up and badly bruised her face when she swung her arms at him in a struggle, according to US officials.

Now, shocking photos of Zhao with eyes swollen by the spray and panel talk shows featuring famous law professors on prime-time Chinese TV are playing here as part symbol, part stereotype of American aggressiveness. This comes after this spring's surfeit of images and other coverage here of the Abu Ghraib prison scandal.

Moreover, the Zhao story seems to be featured by state media in China just as relations between the two powers are slightly less sunny and a bit more testy over the question of Taiwan, and with less than enthusiastic Chinese support for the US occupation of Iraq, analysts say.

I think we can expect little Chinese cooperation over North Korea, and an increasingly hostile tone over Taiwan. Unless we get this thing resolved in Iraq quick, the military may indeed actually need a draft if we're going to try to fight a second front preventing a Chinese invasion. Normally this would not be a consideration, but we're stretched pretty thin on ground troops and while our naval forces could repulse a Chinese attack the gap isn't as big as most people might think it is and its rapidly narrowing. Within one to two years, they could with their combined force structure and new naval deployments be a significant threat. 2006 is the time frame the controversial President of Tawain has called for a date regarding a referendum on Taiwanese independence, a goal China has stated that would be a unilateral causus belli.

Friday, July 30, 2004

Economic Growth: What does "Patchy" mean?

Apparently, it means this. (MSNBC)

U.S. GDP grew at a modest 3 percent annual pace in spring

The Associated Press
Updated: 11:13 a.m. ET July 30, 2004

WASHINGTON - The U.S. economy grew at an annual rate of just 3 percent in the spring, a dramatic slowdown from the rapid pace of the past year, as consumer spending fell to the weakest rate since the slowdown of 2001, the government reported Friday.

The Commerce Department said that the gross domestic product, the country’s total output of goods and services, slowed sharply in the April-June quarter from a 4.5 percent growth rate in the first three months of the year.

The size of the slowdown caught economists by surprise. Many had been looking for GDP growth to come in around 3.8 percent in the second quarter. Even that would have been a sharp deceleration for an economy that had been growing at a 5.4 percent annual rate through the year ending in March.

It raised the issue of whether the economy, which Federal Reserve Chairman Alan Greenspan said last week had encountered a “soft patch” in June, could be in danger of seeing growth falter even more in coming quarters.

Growth is going down to zero, and if you factored in real inflationary forces it is a negative already. Yet we continue even by the generous standards of the CPI to have negative real interest rates.
In one piece of good news, inflation pressures eased with a key GDP inflation gauge that excludes energy and food rising at an annual rate of just 1.8 percent in the second quarter, down from a 2.1 percent increase in the first quarter.

Despite the fictions of excluding food and energy prices increases, which seem to me not to be transient at all this time around, even by that incredibly generous standard we have real interest rates of -0.55% ... the Fed Funds rate 1.25% minus the CPI excluding food and energy 1.8%. Include those and we have real negative interest rates of close to negative one percent or something like that. This is a situation that cannot but help engender more monetary inflation in the long run, but the slowed economy is presenting a dilemma. In the short term, raising interest rates will slow the economy and generate inflation. Hence why it was critical to attempt to raise interest rates previously while nominal inflation numbers were still low. Now Greenspan and the FOMC are the horns of a dillemma, and this one is of their own making. Whatever their previous excuses the signals this time around were quite clear, but they chose to ignore them.

College Costs: Rhetoric and Reality,

I think sometimes that the financial aid and loans, however laudable in their ability to help people obtain higher education have obscured the rise in the base cost of such an education and what it implies for Americans. At a time when it is becoming conventional wisdom that to earn a decent living one has to have a college degree, and when Alan Greenspan is lecturing Americans about needing more education, we have to ask ourselves is education truly affordable anymore?

Begging that question came some what seemed at first odd comments by Tom Ridge. (MSNBC)

Several senior Homeland Security officials told The Associated Press that Ridge has indicated in recent weeks he probably will resign after the election, even if Bush wins. They spoke only on condition of anonymity, citing the delicate nature of describing private conversations with their boss.

Ridge, 58, has explained to colleagues that he needs to earn money to comfortably put his two children, Tommy Jr. and Lesley, through college, officials said. Both are now teenagers. Ridge earns $175,700 a year as a Cabinet secretary.

Considering that most Americans don't make $175,700 dollars a year and their kids go to school, this claim at first glance seemed laughable. Then I considered it as a serious proposition. Suppose that Tom Ridge pays the 33% in Federal Income Tax rate. That's a bit low, but we need to add in State and local taxes, suppose that's 35% total just for arguments sake, then Tom Ridge nets yearly (0.66 x $175,700) about $116,000.

Now since he's probably assuming that he needs to retire, and won't be able to survive on social security for him and his wife, a good financial adviser would tell him he needs to invest about 10% of that income, which would cut him down to about $104,000. That's still more than double what many Americans take home before taxes.

If Tom Ridge and his wife wants their children to have elite status like them and be able to make a lot of money, they can't just send their kids to any old university. They need to send them to a very competitive or distinguished school. Well as it turns out, Harvard tuition is rising at over 5% yearly and costs about $40k a year.
Published Thursday, March 25, 2004
Harvard's tuition to increase 5.15 percent in '04-'05

Following a trend at other Ivy League Universities, Harvard College announced a tuition increase for the 2004-2005 school year Tuesday.

Harvard's term bill will increase 5.15 percent, with undergraduates paying $39,880 for their educations next year. In February Yale announced a 5 percent term bill increase for next year.

Compared to other Ivy League university term bills for the upcoming year, Yale's is one of the least expensive at $38,850, Yale President Richard Levin said.

In spite of the tuition increase, Harvard officials said financial aid will continue to adequately cover expenses for those in need. In February, William C. Kirby, Harvard dean of the faculty of arts, announced a change that will eliminate the requirement for families in households earning $40,000 or less to contribute to their children's education costs.

"We are determined to protect every student's ability to come to Harvard regardless of financial background," Kirby said in a press release.

Yes, but I would bet that the Ridge's don't recieve financial aid. I'm not here to bash Harvard, as the article cites Yale boasts of the "low" Ivy league school cost of a mere $38k a year. In addition, I'm sure many less well advantaged but academically talented kids get to these schools because of their financial aid offerings so they haven't completely shut their door to the middle class. The point is that the Ridges are elites and their kids will be groomed as elites and so this is a good guess at what such an elite Ivy League education would cost them.

But with two kids in school, that would put back the ridges $79,760 yearly, so they would have to live on $23,024 or $23k a year. Now I could live on that easily, but they have an elite lifestyle and probably more than one house - not that I'm saying they're being excessive since working in DC as a Cabinet official is a lot easier if you do buy a residence there and you'll have your normal out of DC residence. So having to live only on $23k a year would probably not be feasible for the Ridges assuming they have to maintain at least an upper middle class existence.

So weirdly enough I don't think it's that strange an idea that the Ridges would feel financially pinched by his income. I think it's more a testament to how wildly college education costs have grown, and how this has been masked emotionally from the public by financial aid and loans. This is important because this type of schooling is important insofar as becoming groomed to be an elite, meaning it's necessary for lubricating social mobility.

There are still people who go to state public schools and become millionaires, and there are still people who work themselves up by seniority and by ingenuity or by self-promotion. Just think of Madonna or Jobs or Wozniak. There are even still elites, like Bill Gates, who are genuinely creative and successful.

It is however a matter of degrees. I really do think as wage scales diverge that inevitably social inequity on a statistical basis will emerge. Our society is still a far cry from pre-Revolutionary France, but some disturbing trends are in play when a Cabinet official of the USA argues that he can't maintain his lifestyle and groom his kids to succeed like him for a mere $175k a year.

Thursday, July 29, 2004

Fate in our Hands: Must Read for Any American,

And I fear Canadian or Mexican as well, and perhaps the British and Australians and New Zealanders. Let's face it, our fates are pretty much entwined to a great degree. This is a must read opinion piece. I have heard other people state this as well in the press, but they have often been coy or so alarmist that it turned off the public. This is beginning to be spoken of openly now. That means that tbe beginning of the end can't be far away.


The Unbearable Costs of Empire
Establishment types are trumpeting America's role as global police force. Too bad the U.S. just can't afford the job By Mark Weisbrot

Updated: 12:00 p.m. ET July 29, 2004

Since September 11, 2001, the phrases "American empire" and "America as an imperial power" are being heard a lot more. But in contrast to the 1960s and 1970s, when such terms were brandished by an angry domestic anti-war movement or by developing nations in U.N. debates, the concept they represent has now at least partially entered the mainstream. However much it has incurred hostility throughout most of the world, including European and other countries usually allied with the U.S., the "new imperialism" has gained ground among the Establishment here.

The post-9/11 rationale is that America has terrorist enemies and rogue states that will do it serious harm -- maybe even with weapons of mass destruction -- if it doesn't police the world to stop them. "Being an imperial power is more than being the most powerful nation," writes Michael Ingatieff at Harvard's Kennedy Center. "It means enforcing such order as there is in the world and doing so in the American interest."

But what most analysts have missed --- whether or not they support the idea of an American empire -- is that the U.S. simply can't afford the role of global cop.

THE REAL DEBT. First, the U.S. is entering this new age of empire with a gross federal debt that is the highest in more than 50 years as a percentage of gross domestic product. For fiscal 2005, which begins in October, the U.S. gross federal debt is projected to be $8.1 trillion, or 67.5% of GDP. By the time 100,000 U.S. troops were in Vietnam in 1965, it was 46.9% and falling.

One technical point that's vitally important here: It's the gross federal debt and deficits that matter, not the smaller "debt held by the public" and "unified budget deficit" that are generally cited in the press. For example, the most commonly reported estimate of the annual federal budget deficit is $478 billion for 2004. But this number is misleading, because it doesn't include borrowing from federal trust funds -- mostly Social Security and Medicare.

But the money the government is borrowing from Social Security and other trust funds will, with nearly 100% certainty, be paid back -- just like the money it borrows when it sells bonds to Bill Gates or the Chinese government. The annual federal budget deficit is, therefore, $639 billion, according to the numbers from the Congressional Budget Office. This is 5.6% of GDP, a near-record level for the post-World War II era.

BORROWING FROM ABROAD. America can --- just barely -- afford this deficit right now, but that's about to change. First, the interest burden on the debt is currently manageable because of extremely low interest rates. But the Fed is expected to raise short-term rates to 2% by yearend. More important, long-term rates will almost certainly rise even more because inflation has accelerated to 4.9% over the last six months -- a big jump from 2003's 1.9%.

If Kerry wins and takes back the tax cut for households earning more than $200,000 a year, as promised, that won't even reduce the deficit by 1% of GDP. And if he keeps his spending promises, then the monies realized by repealing the tax cut would be canceled out. The Bush budget, which the conservative CATO Institute's Chairman Bill Niskanen recently described as "a fraud" put together by "borrow and spend Republicans," would make the deficit and debt problem even worse.

Then there's the problem of the U.S. --- both the government and the private sector --- borrowing from foreign countries. Most government borrowing is now being financed from overseas -- especially the central banks of China, Japan, and other countries. These institutions are deliberately buying dollars in order to keep their currencies from rising against the greenback. But they won't keep doing this indefinitely. The U.S. is borrowing more than $600 billion a year from the rest of the world, and it can't go on much longer.

THE BIG BANG. Sometime within a decade, and most likely in the next couple of years, foreign investors will see that a steep decline of the dollar is unavoidable and will begin to unload them and U.S. Treasury securities. As with any bubble, it will be better if this one bursts sooner rather than later, when it would be even bigger. But adjustment and pain will still occur, including higher interest rates and consequently slower growth.

Slower growth will also mean larger federal budget deficits. And one event that will certainly slow growth and increase federal government borrowing well beyond current projections is the bursting of the housing bubble. Housing prices have seen an unprecedented run-up since 1995 of more than 35 percentage points above the rate of inflation. That has created more than $3 trillion in paper wealth that --- just like the illusory wealth of the stock-market bubble -- is programmed to disappear. This, too, is almost certain to happen in the next few years.

The economic impact will be at least equivalent to that of equities popping in 2000-02, which caused the last recession. Another slump is, therefore, likely in the near future, and with it a further ballooning of the federal budget deficit, as tax revenues fall and automatic countercyclical spending rises.

CHINA RISING. The combination of unsustainable public debt and foreign debt is a deadly and explosive mix by itself. Rising real interest rates and a looming housing bubble bursting make it all the more dangerous. Financial markets will exert the necessary discipline if politicians refuse to do so, but either way the U.S. can't afford even the $486 billion a year that it's currently spending annually on the military and homeland security.

And even these spending levels are a lot less than would be necessary to maintain America's power in the world. Over the next decade or so, the Chinese economy will actually surpass the U.S. in size. America has 100,000 troops in East Asia. If the U.S. were to try to maintain its current dominance of the region -- something that will probably prove impossible -- it would boost our military spending even further.

The bottom line is that the American empire just isn't affordable. Within a decade or so, the U.S. will be forced to be much less preemptive and outward-looking and to engage in scaled-back foreign policy -- even if the foreign-policy Establishment never changes its views or ambitions.

REALITY CHECK. In the meantime, the segment of American society that would like to see advances in health care, education, poverty alleviation, or any other positive economic or social goals will get bad news. The foreseeable future is a lot different from most of the post-World War II era, during which the U.S. added such programs as Medicare and Medicaid while spending literally trillions of dollars on cold and hot wars.

This time, little or no federal money will be available for any of these things until U.S. foreign policy changes. The most likely scenario is that most areas of nonmilitary discretionary spending will be squeezed relentlessly before anything gives in the realm of superpower ambitions.

The post-9/11 age of American empire will close not with a bang but a whimper, suffocated by the laws of arithmetic, the constraints of public financing, and the limits of foreign borrowing. What remains to be determined is how much the U.S. will pay -- in lost and ruined lives, as well as bills for future generations -- and how many enemies it will make throughout the world, before coming to grips with reality.

Copyright © 2004 The McGraw-Hill Companies Inc. All rights reserved.

Yes, I know that I'm violating copyright considerations but I hope that MSNBC will forgive my small error in light of the many eyeballs I've brought them by linking to their articles, or won't notice. This is too important not to be publicized however.

We have paid already almost $200 billion for the war in Iraq. At this rate of hemmoraging we will see another $100 billion drain a year on top of what the official budget numbers are. If we conduct another war on top of that, say with Iran or North Korea then financially we would be sunk. There are some Democrats that believe that Kerry-Edwards could still pull us out of this one, and that is true but only with a complaisant Congress.

Does anyone expect that the Republican party, driven to the brink of madness apparently, will in defeat act gracefully for the greater good? Or will they lock up the Senate and House and fight a Democratic Administration tooth and nail? I'm not saying there's no point in voting for Kerry. Surely if Bush has a second term, we may not be looking just at bankruptcy but at possible Armageddon. I do not that say that because of my religious convictions, but because of his religious convictions if you get my drift.

But let's be realistic, the best scenario I can see probablistically emerging is that of a weak Kerry Presidency limiting the damage rather than solving the problem. I find that preferrable to Bush rushing us toward disaster full speed ahead and damn the torpedoes, but that's pretty far from avoiding national financial bankruptcy.

Yet not all hope is lost. If society remains stable, then those with foresight should be able to take steps to safeguard their interests. But to do so we need to be realistic, we need to start thinking about what it was like to live in the seventies and the Great Depression and start making hard headed choices about how to provide for ourselves and our families. We have to start making choices not to get into debt or to dig ourselves out, and to make conservative business decisions.

I have not given up, but in order to see clearly through the times ahead we need to be honest to ourselves about where things are going and only then will we find a pathway through.

Work and Cleaning: Stuff to Do

Sorry folks, I got a bunch of stuff to do in my personal life. Prepping for a presentation, cleaning out my old place, getting some winks, etc. Be back in a day or so. In the meantime I'm tracking down more stuff on the producitivity story based on a lead Spencer threw me in his paper.

Besides everyone seems to be in a love-fest over this convention thing. I think I'll take a breath and stop trying to compete with that coverage. I understand how a lot of Democrats could be all agog over the revitalization of their party and ideals, but it would be less disturbing if I didn't think that a lot of commentators were on the verge of having an infatuation or crush on Obama and Edwards. It's getting to say the least just a slight bit close to either hero-worship or homo-eroticism depending on the commentator. I'll come back when the air clears from this private party, since I'm not really a Democrat at heart just temporarily allied against the madness of my former comrades in the Republican party. I still talk with those people close to every day.

My advice to dem's is don't underestimate how far this can go, how far the Republican leadership will go to stay in power. They're not backing off from this fight, and they don't intend to fight fairly.

later folks,


Bubble Watch: IRS Tax Receipts Show Crash

One of the arguments between market watchers and economists is whether a market correction is simple a market fluctuation or has real impact on the "main street" economy. The answer it seems is that it does, but that usually that affect isn't noticeable unless the correction becomes a crash. The NYT reports that the IRS has reported income declining.

(How does the Bush Tax cuts play into this? A: None as far as I can tell, because the IRS is reporting income declining as well as tax receipts, to be fair tax receipts are higher than expected this year.)

Published: July 29, 2004

The overall income Americans reported to the government shrank for two consecutive years after the Internet stock market bubble burst in 2000, the first time that has effectively happened since the modern tax system was introduced during World War II, newly disclosed information from the Internal Revenue Service shows.

The total adjusted gross income on tax returns fell 5.1 percent, to just over $6 trillion in 2002, the most recent year for which data is available, from $6.35 trillion in 2000. Because of population growth, average incomes declined even more, by 5.7 percent.

Adjusted for inflation, the income of all Americans fell 9.2 percent from 2000 to 2002, according to the new I.R.S. data.

While the recession that hit the economy in 2001 in the wake of the market plunge was considered relatively mild, the new information shows that its effect on Americans' incomes, particularly those at the upper end of the spectrum, was much more severe. Earlier government economic statistics provided general evidence that incomes suffered in the first years of the decade, but the full impact of the blow and what groups it fell hardest on were not known until the I.R.S. made available on its Web site the detailed information from tax returns.

The unprecedented back-to-back declines in reported incomes was caused primarily by the combination of the big fall in the stock market and the erosion of jobs and wages in well-paying industries in the early years of the decade.

In the past, overall personal income rose from one year to the next with relentless monotony, the growth rate changing in response to fluctuations in economic activity but almost never falling...

Before the recent drop, the last time reported incomes fell for even one year was in 1953. The only other time since World War II that the I.R.S. reported an interruption in income gains was from 1947 to 1949, but that was because of changes in the tax law at the time that affected how income was reported rather than an actual fall.

From 2000 to 2002, individual income taxes fell 18.8 percent, more than three times the decline in adjusted gross incomes, the I.R.S.'s latest statistical reports show. (Adjusted gross income is the broadest category of income taxpayers report to the government, excluding only a small portion of income in other forms, notably interest on tax-free bonds.)

Spencer England has recently sent me a paper he wrote detailing why he felt that the S&P500 hadn't been over-valued. I don't think there's necessarily a contradiction here, because it was the NASDAQ that was hit the hardest and was the most bloated. However it seems that this "hi-tech" segment of our society truly was overloaded and overhyped.

A genuine asset inflation bubble seems to have formed, and when it crashed it depressed actual income levels. The actions of the Federal Reserve in lowering interest rates in light of that were necessary, but in the context of a dysfunctional monetary supply, currency, and fiscal situation there were perhaps no right answers to what the FOMC should have done only least wrong ones. In a similar vein, Greenspan may be choosing to save GDP now but the choice of doing so is to continue a situation where the long term fiscal structure of the USA is undermined steadily. Without a budgetary and national debt solution, and absent the political will to restructure the economy through painful policy choices, Greenspan and co. seem to be merely playing a delaying game and hoping for the political situation to rectify itself. Perhaps they are even correct.

What still remains disturbing however is their rhetoric rationalizing as beneficial these choices. Perhaps this news meant for public consumption is meant to prevent a panic, but the very obliviousness it promotes lends itself to moral hazard and the very self-fulfilling prophecy of the long term financial crisis and fiscal default the Federal Reserve is surely attempting to avoid. It also brings into question the probity of the Federal Reserve, since it leads critics to question whether the Federal Reserve actually believes its own rhetoric and understands the seriousness of the long term situation.

Wednesday, July 28, 2004

Economic Theory: War Economy,

I think it's pretty clear by now that without the stimulus and war spending that we would be in a clear recession. This is a war economy according to the durable goods orders.

Posted 7/28/2004 8:44 AM
June durable goods orders are down, ex-transportation

WASHINGTON (Reuters) — Orders for durable goods rose 0.7%, much less than expected, in June, but excluding the transportation sector, orders dropped 0.6%, government data showed Wednesday.
On the plus side, the Commerce Department revised May's drop from 1.8% to a 0.9% decline.

But June's figures were disappointing. Economists had forecast a 1.9% rise, as the factory sector recouped after two months of loss.

Durable goods orders excluding defense fell 0.4%, fourth fall in six months, while orders excluding transportation declined 0.6%, a third monthly retreat.

The data signals that demand was only building slowly at the close of the second quarter. And growth may not get as strong a boost from the factory sector as officials had hoped as the third quarter gets under way.

Preliminary second quarter gross domestic product will be released Friday and is forecast to show U.S. growth slowed to a 3.6% annual rate, compared with 3.9% in the first quarter.

Transportation equipment orders advanced 4.2% and capital goods gained 4.1% in June but many other categories were subdued, with computers and electronic products retreating 1.0%.

Non-defense capital goods excluding aircraft — a proxy for business spending — was up 1.2%. Defense-related capital goods orders jumped 30.4% while demand for military aircraft soared 79.1%.

It's a mixed bag. Companies are buying more capital goods- factory equipment, etc.-but durable goods are down overall indicating that consumer buying is considerably off for the total number to be down. The transportation sector is being bloated by the incredible 79% jump in the military aircraft orders. What the hell are we buying?

At any rate, we're in a full blown war economy. It explains a great deal about why things are bad, but not that bad. War economies always have this eerie artificially inflated quality to them. Things aren't good, but the bottom doesn't fall out because of the war spending.

Employment: Trade and TINSTAAFL,

As I've pointed out before, proponents of "free" trade seem to have this curious utopian faith of the benefits of trade being inevitable, infallible, and (eventually) universally beneficial. This sort of anti-logic seems to apply to basic addition and subtraction skills.

You see here are the wages of average workers, flat or declining. (Courtesy of Billmon)

Here is executive pay, courtesy of CNN.

CEO pay hikes double

Corporate Library survey finds median raise for S&P 500 CEO was 22.18% in 2003.
July 28, 2004
: 8:34 AM EDT

NEW YORK (CNN/Money) - The CEO's at the nation's largest companies saw their raises more than doubled in 2003 as the median raise handed out by S&P 500 companies to their top executives was 22.18 percent, according to a study by The Corporate Library.

The watchdog group said that stock options and awards of restricted stock drove the larger pay hikes. But most elements of the pay -- base salary, annual bonuses, restricted stock, long-term incentive payout, value realized from stock options and total compensation -- showed increases. The only type of compensation not to show a gain was the value of stock option grants during the year.

"This double-digit rise in pay shows that calls for pay restraint appear to be being ignored," said the statement from the group.

I bring this up not to suggest that CEO pay is unwarrented, or that market demand dynamic is not the driving force behind labor compensation. The oldman has dealt with those topics previously.

The oldman this time is addressing a different topic. The infallible faith of most "free" trade proponents always brings them to suggest that new, and higher quality jobs, are being created to compensate for the ones lost. Well there is a different possibility of course. The profits from "cost cutting" labor could instead be transferred to owners such as shareholders or to management.

As a matter of fact, if we're using ordinary accounting those dollars flowing to shareholders, capital, and to management, such as CEO's, surely must not be available to create these new, better, jobs that we're always hearing about but are always somewhere else where we're not looking. TINSTAAFL, afterall. If the CEO pay is rising, and probably executive pay in general, those dollars aren't around to hire new workers or improve pay grades. Given how much CEO's make, hundreds of times what the average pay - by no means is this the common worker's pay - in their companies even small rises in their compensation would mean that many people would not be hired or have their compensation upgraded. Instead of small increases we see a meteoric rise of management pay.

Can the "free trade" proponents handle the concept that it might simply be that the heads of companies are making more from their employees, and simply paying themselves more and dividing up the rest of the benefits among shareholders?


Trade: Free Markets and TINSTAAFL

I find it curious that people continue arguing about "who will support free trade".

One of the key factors behind my indecision over who to vote for is that I don't know which candidate will have the better trade policy...

Sigh. I should be used to being out in the political wilderness on these issues. But that doesn't mean I have to like it.

I'll close with a link to Brink Lindsey's great July 2004 cover story in Reason, "10 Truths About Trade", which nicely debunks a lot of the horses#&@ that masquerades as policy debate on this topic.

Dan and Brad seem to be of this opinion that what is going on out there is in fact "free trade" or something approaching it. I agree that it is trade. Adding the prefix of "free" is somewhat more problematic. Then going further and suggesting that it will is inevitable, infallible, and beneficial simply smacks of utopianism. Even the site "debunking" the myths against free trade merely uses a great deal of slight-of-hand with numbers.

That's the theory. These are the facts, as reported by the NYT.
Some African countries demanded over the weekend that the United States agrees to eventually eliminate its cotton subsidies, revisiting an issue that helped destroy talks last year in Cancún, Mexico.

At the same time, a small group of 10 of the world's wealthiest countries, including Switzerland and Norway, were trying to block attempts to rein in their protections of special agricultural products in their countries, like rice for Japan.

The European Union also came under criticism - even as it won praise for offering to cut all of its nearly $3 billion in export subsidies - for trying to protect too much of its agricultural market as special products. Delegates wondered whether complaints from France would eventually undercut the European offer.

Yet all the factions said they understood that if no compromise is reached this week, the Doha round of trade talks to help the developing world could well be ruined, which seemed to make some more determined to reach a pact. After raising serious objections to farm subsidies of developed countries at a news conference, India's minister of commerce, Kamal Nath, nonetheless said: "I'm looking at the next three days with optimism. It is possible to make improvements."

Of course, if asked about these agricultural subsidies any of the "free trade" proponents would problem cluck and say "Yes, but isn't that terrible. Those should be removed!" This is something akin to a Bolshevik reacting to stories of the KGB's actions while supporting Stalin. The entire economic system as it exists is stabilized by these agricultural product subsidies.

If developing countries were allowed to flood the market with cheap food, the agribusiness complexes of rich countries would founder. The agribusiness model of the developed world depends on genetic control of the seed crop. In addition its profits derive from passing off costs to consumers through vertical integration of production and processing. The artificially enhanced economies of scale would not be possible without the subsidies.

In addition, the agricultural subsidies serve another purpose. While they produce food cheaply if not as cheap as the poorer nations could possibly do so, they stabilize the price of food. Ironically dispensing with agricultural subsidies would lead to increased uncertainty and price variations in food supply. The uncertainty would have to be compensated by people creating a greater savings margin, or increasing their credit line. To either save more, or finance more debt service, people would have to be paid more. Food price fluctuations would seriously undermine passivity in the face of stagnant wages while real cost of living increases real inflation fater than the nominal CPI "inflation" rate.

It is not an accident that as food prices have risen in the past year, that many commentators have begun muttering about the stagnation of wages.

Furthermore cheap and stable food prices are essential to the public passivity in the face of economic transformation. Employment insecurity is tolerable only in the face of food security. The greater the food insecurity, the more employment insecurity from the "economic transformation" of globalization would be tolerated. Again it is higher real inflation especially in food prices and increasing food insecurity that has by no accident increased unrest regarding the effect of employment security from globalization.

The simple truth is that Brad and Dan are living in a dream. It is a pretty shiny dream, but it is a dream. Just as the KGB acted to support the regime of Stalin, and the often boisterous Stalin could not exist without his secret police and its regime of terror, so too globalization and "free trade" could not be tolerated in advanced countries without a cheap stable domestic food source. Agricultural subsidies being the sacrificial price of such an economic agenda, they cannot be distinguished as some sort of ugly step child.

As a matter of fact, they are the sine non qua of the very heart of the process that Dan and Brad accept as inevitable, infallible, and beneficial. Genuine free markets have volatility as supply, demand, and liquidity all surge and fall in response to information and market moving events. It is impossible to conceive of an agricultural food base that would not be subject to such price volatility in a genuine free market.

Such "shortages" however intermittent however generate a human psychological need to compensate by seeking more stability elsewhere. At the very least, there is no such thing as a free lunch. The very "job churning" and "reducation" has a price. The populace accepts such a thing if they can buy food cheaply. Even in foreign countries this is the case. Cheap chicken in Ghana for instance produced by agricultural subsidies in Britain, is a prerequisite for people in Ghana to accept the globalization agenda.

How long ago was it that in America, a politician promised "a chicken in every pot."?

Housing: Skyscrapers into Condo's in LA

In LA there's a $100 million project to convert a 37 story commercial office skyscraper with low occupancy into a residential condominium. $40 million for the building purchase, and up to $60 million for the makeover. Really.

July 28, 2004

Buyers Seek a Home Life for Empty L.A. Tower
The new owners plan to turn the 37-story office building downtown into plush condominiums.

By Roger Vincent, Times Staff Writer

A long-pending $40-million sale of a ghostly skyscraper on the edge of downtown Los Angeles has been completed and the new owners plan to start converting the office building to plush condominiums in the fall...

The recent housing renaissance downtown made the unusually shaped tower a viable contender for residential use. Average prices for downtown condominiums have risen from $194 a square foot in early 2001 to $437 last quarter, said CB Richard Ellis real estate broker Mark Tarczynski, who represented both sides in the transaction with his partner David Louie.

The makeover could cost as much as $60 million, said David Martin, managing partner of TMG Partners, a San Francisco developer that specializes in mixed-use urban projects. Work is scheduled to be completed next summer. [emphasis added]

And people say there is no housing bubble.

Dept. of Doublespeak: Freedom is being Chained,

In the grand Orwellian tradition of the Patriot Act, we now bring you the "Freedom Project,"!

RFID tools vendor Symbol Technologies reported on Tuesday that it has agreed to buy rival radio tag specialist Matrics for $230 million in cash.

The deal marries two vendors that have been pushing hard to become leading hardware providers in the nascent radio frequency identification space. RFID technology combines chips armed with wireless antennas together with other IT systems to provide detailed information about products to which the devices are attached. In certain scenarios, they're not unlike pumped-up, wireless bar codes.

The technology has developed rapidly over the last year, after mandates to employ RFID were handed down from several major retailers, including Wal-Mart Stores and Target, to their suppliers.


Hewlin said Holtsville, N.Y.-based Symbol viewed Matrics as the vendor with the best fixed-RFID readers--devices used to scan the chips that can be mounted on everything from loading dock doors to trucks--on the market. The executive said his company believes the first wave of RFID adoption will favor fixed readers over the sexier handheld devices it has been developing, a realization that helped spur the acquisition. Matrics has also been featured in high-profile RFID tests outside the retail industry, including work on radio tag-based luggage tracking systems already in place at several airports, including Hong Kong International Airport.

The two companies were already working together on a proposal for RFID hardware standards, dubbed "Freedom Project," which is currently under review by Brussels-based industry group EPCglobal. The companies' proposition, which also includes work from several other vendors, including Atmel, is one of three guidelines the standards body plans to choose from in defining its RFID hardware standard, which is due out in early October, 2004. [emphasis added]

The oldman ain't a fundie christian, but he doesn't think that a society that isn't so far ready to have transparent and free and fair elections is ready for this technology. The oldman doesn't care if they start requiring this tech for sensitive positions or even to fly. On purely sociological grounds he will refuse to get these cybernetic tracking implants as long as the entire setup is bent toward reducing privacy and individual freedom. Besides the vets who use the same technology on dogs say that sometimes there is an irritable reaction.

Tuesday, July 27, 2004

Productivity: Satan Increases Productivity?

It's proof gone to hell in a handbasket one could say. According the Federal Reserve Bank of St. Louis, a study was conducted that found a correlation between the belief in hell - mind you which begs the question of how this was determined objectively - and less corruption. Now I know that the Federal Reserve is grasping at straws in order to explain the productivity gap.

I first saw the study in a piece on MSNBC:

Economists searching for reasons why some nations are richer than others have found that those with a wide belief in hell are less corrupt and more prosperous, according to a report by the Federal Reserve Bank of St. Louis.

Researchers at the regional Federal Reserve bank acknowledged the importance of productivity and investment in the economic process but looked at some recent unconventional efforts to explain differences in national prosperity. [emphasis added]

Knowing the tendency of the press to get technical details wrong, I sauntered on over to the Federal Reserve Bank of St. Loius's website, hoping for a reasonable explanation for this otherwise outrageous statement. Unfortunately, it was true - it was all true. The Federal Reserve really was trying to imply that Hell, or at least the belief in it, was better for productivity.
Economists have long been interested in why some countries are rich and why some countries are poor. Differences in labor productivity, inflation, and saving and investment rates are traditional economic explanations for variations in wealth across countries. But when these explanations fall short, researchers sometimes turn to noneconomic factors. Two such factors are a country’s legal and social institutions. Religious factors can also help explain variations in economic growth, many economists are increasingly finding. In particular, in countries where large percentages of the population believe in hell, there seem to be less corruption and a higher standard of living.

Say it ain't so, Alan! It's so. Sadly too, because this is a good example of junk science. To prove my point, all you have to do is scroll down to the very bottom and look at two charts. Let's look at the very bottomost one labeled GDP per capita vs. Corruption. All the data points are tightly bunched together. There is a steady trend with tight groupings of data points going from right to left, with those with higher GDP per capita (vertical scale) being tightly to the left side of the graph (low corruption) and those not so high up (lower GDP per capita) being steadily to the right with the lowest to the far right where there is the highest corruption.

This is an example of a good data sample and results that are conclusive. Now look at the next to last chart, labeled generously Corruption and Fear of Hell. Well as it turns out, there are data points all over the place. There are some with pretty high corruption and fear of hell. There are some with low corruption and low fear of hell. There are some with high corruption but low fear of hell. There are some with low corruption but high fear of hell.

It seems that there is a weak correlation between the two, expressed by a slightly sloping line. But that correlation doesn't seem to hold. Remember when the oldman discussed the concept of standard deviation? The statistical significance of this correlation seems highly unlikely to be highly significant. The error bars, unshown, are probably huge reflecting that the points are all over the place and (pardon my language) scatter shot all to hell. The standard deviation value is probably larger than the resultant value, which is always the sign of a bad conclusion.

Even if there is a weak correlation between the fear of hell and lower corruption, it can be explained by non-causal relationships. For instance, Christian nations are historically more likely to have religions that believe in hell. As it so turned out, European and Christian populated nations in general such as America tended to industrialize and develop modern economies before non-European and non-Christian nations did. It may be that just as the average rate of childbirth declines with economic development, so does the average rate of corruption.

So the chart doesn't prove anything, and especially not with such a weak correlation and statistical significance and huge standard deviations. This is shoddy and junk science. I am frankly disgusted that the Federal Reserve Bank allowed this on their website.

However the rationale becomes clear by examining the motive professed in the cover piece in MSNBC. The rationale is to find increasingly bizarre and outre stretched explanations to account for the unrealistic gaps in productivity, which as the oldman has been blogging are highly suspect. In order to justify these numbers, as more and more criticism is brought to bear the Federal Reserve is apparently willing to cling to ever more outlandish and frankly strange explanations to justify their unrealistic productivity projections. Until, oh yes, the final straw is reached and they resort to the final justification of all scoundrels:

"The devil made me do it,"

Yes apparently the Fed wishes us to believe that it is the devil, or at least the belief in hell, that makes America so productive. What the hell is that all about?

Housing: Who is buying Mortgage Securities?

This is a question that Col Lounsbury asked, and since it was relevant to a discussion my readers have been having on this blog I decided to repost the hilights.

Who is buying mortgage securities? People who buy government backed bond funds.

At least some of the record amount of cash flowing into bond mutual funds is going the right direction -- into mortgage-backed securities.

“We don’t really like Treasurys now,” says Mark Kiesel, a member of Pimco Funds’ investment committee. “We’re buying mortgages.”

Commonly called Ginnie Mae funds, shorthand for the Government National Mortgage Association, these are something we rarely see these days: government bond funds that don’t appear overpriced. Another attractively priced group: municipals. And an even prettier bird on that roost: the sovereign debt of European countries.

Traditionally, most of these buyers have been institutions.
Investors in the $1.7 trillion agency mortgage securities market include institutions of all sizes: corporations, commercial banks, life insurance companies, pension funds, trust funds, mutual funds and charitable endowments. In recent years, individual investors have also become significant purchasers of mortgage securities.

Over the years, foreign buyers like China have subsidized our mortgage rates as well over the years.
In the 12 months ended in April (2001), Chinese financial institutions gobbled up nearly $30 billion in dollar-denominated securities issued by Fannie Mae and Freddie Mac, the two big mortgage-finance companies chartered by the U.S. government. That was more than was purchased by U.S. commercial banks and nearly three times as much as was bought by U.S. insurance companies during roughly the same period, says James Bianco, a market analyst with Bianco Research LLC.

Banks have been buying these mortgage-backed securities like these people:
Annaly Mortgage Management, Inc. owns and manages a portfolio of mortgage-backed securities to generate net income for distribution to its shareholders. All of the mortgage-backed securities it owns are issued by agencies of the United States government and carry an actual or implied AAA rating. It is self-advised and self-managed, and it performs similar investment strategies through its affiliate, Fixed Income Discount Advisory Company (FIDAC).

To give you the idea of the exposure that a bank might have this bank here seems to have $5 billion out of $42 billion in mortgage-backed securities
The Federal Home Loan Bank of Boston (the Bank) is a $41.9 billion wholesale bank for housing finance and economic development. It is cooperatively owned by eligible financial institutions that become members of the Bank by purchasing its stock. These members are community and regional financial institutions with headquarters in New England...

The Bank's investment portfolios are comprised of fixed-income securities and money-market investments. The Bank currently owns over $5 billion in mortgage-backed securities and an even greater amount of money-market investments, which include overnight and term fed funds, commercial paper, certificates of deposit, repurchase agreements, and bankers' acceptances. Other investments include U.S. Treasury and agency obligations and bonds issued by state and local housing-finance authorities. [emphasis added]

The WaPo had a good article out on Freddie Mac and Fannie Mae out as of May of 2004, indicating that the market has matured already moving from growth to value investors. However an interesting trend has been for banks to buy these mortgage-backed securities because they yeild more in a lower interest rate environment than Treasuries. This is the so-called "carry trade" at work, borrow at low and invest at higher rates.
But the biggest factor may be that the professional investors who own about 90 percent of Fannie's and Freddie's shares are coming to the conclusion that they are no longer growth stocks.

When you look at who owns Fannie and Freddie, you see "a transition from some of the higher-growth guys to some of the value guys," said analyst Paul Miller of Friedman, Billings, Ramsey Group Inc., the Arlington investment firm. FBR, which rates both stocks "buys," does not do investment banking business for either firm but has extensive investments in mortgage-backed securities guaranteed by Fannie and Freddie...

Recently, banks and savings-and-loan associations have invested much more heavily in mortgages than usual. Demand for loans is soft because of the slow economy, so the banks have extra deposits that need to be put to work. They have been so eager to invest in mortgages that they have driven up the prices of mortgage securities to the point where Fannie and Freddie consider them overpriced. [emphasis added]

So you can probably get a better micro picture by looking into who owns Freddie Mac and Fannie Mae.

Clearly we have a large degree of foreign exposure, and as I've commented there's clearly exposure to banks and savings and loans to the Fannie Mae / Freddie Mac bloat. Combine this with hedge fund credit line exposure and the consolidation of many local banks into national syndicates and conglomerates and its entirely possible if a bust were to occur that the banking system would be at systemic risk from the two ends of its carry trade - the mortgage securities end and the hedge fund end. The middle part of their business loans, municipal/state/corporate bonds, and consumer credit would just be generally hit by the hard economy and an increase in the already stratospheric bankruptcy rate.

Clearly there is some banking system risk here. Part of the reason why those "old-fashioned" anti-consolidation laws were on the books, is that they were "firewalls" leftover from the Great Depression era. Yes, they lowered the financial sector productivity but in return they created greater financial sector stability. Whenever regulatory changes like in the S&L industry that have removed these "firewalls" we've had debacles. In the late 80's it was opined that the options markets would prevent any systemic risk. They were wrong. Today the claim is that derivatives can guard against such systemic risk. In fact they can provide more flexibility in financial market transactions, or they can destabilize the market depending on how they are framed, or at least that's what Greenspan says:
Despite worries about derivatives, regulators should not impose heavier burdens on banks using the complex contracts to manage risk, Federal Reserve Chairman Alan Greenspan said Friday.
Indeed, the central bank chairman said that derivatives -- contracts that derive their value from an underlying stock, commodity or financial instrument -- have helped create wealth and improve standards of living by better allowing companies and financial markets to spread and manage risk.

Here Greenspan is talking in 1997 about derivatives. Here is a more skeptical view from 1999, discussing Greenspan's optimistic view of derivatives given their role in unraveling the Asian currency stability in the "Asian Financial Crisis" of the late nineties. Here is the speech that the critical piece refers to by Greenspan on derivatives again in 1999. Here's a commentary including comments on the money supply, Greenspan, and the potential problem with derivatives.

The picture however isn't that simple.
This paper critically reviews the literature examining the role of central banks in addressing systemic risk. We focus on how the growth in derivatives markets might affect that role. Analysis of systemic risk policy is hampered by the lack of a consensus theory of systemic risk. We propose a set of criteria that theories of systemic risk should satisfy, and we critically discuss a number of theories proposed in the literature. We argue that concerns about systemic effects of derivatives appear somewhat overstated. In particular, derivative markets do not appear unduly prone to systemic disturbances. Furthermore, derivative trading may increase informational efficiency of financial markets and provide instruments for more effective risk management. Both of these effects tend to reduce the danger of systemic crises. However, the complexity of derivative contracts (in particular, their high implicit leverage and nonlinear payoffs) do complicate the process of regulatory oversight. In addition, derivatives may make the conduct of monetary policy more difficult. Most theories of systemic risk imply a critical role for central banks as the ultimate provider of liquidity. However, the countervailing danger of moral hazard must be recognized and addressed through vigilant supervision.[emphasis added]

The GAO issued a report in 1994 examining the risk of a derivative market default creating systemic risk. However since then we've discovered LTCM. The problem isn't derivatives, but moral hazard. Derivatives can be used to hedge against risk, or to maximize leverage in arbitrage trades. The later actually increases market default risk as LTCM proved in fact rather than theory.

In any case it seems that foreign countries, banking conglomerates and syndicates, and even small investors are piling in on mortgage-backed securities. Given a booming real estate market and historically low interest rates, it seems a simple money play that even the most depraved stock-broker or fund manager can grasp as profitable. The problem therein is what happens when those trades unwind? Has Greenspan averted systemic risk? Or are there more dark secrets lurking in Fannie Mae and Freddie Mac accounting? Well I guess we're about to find out. If it didn't take a genius to realize that a simple "carry trade" could make money from these deals, then it also doesn't take a genius to figure out that the esteemed Chairman has been frantically signaling to people to lower their exposure.

Hopefully a lot of people listened. Hopefully.

Productivity: Higher than Overseas?

A question that has been troubling me for some time, is if American society is so darned fragging productive why is it that our companies are regularly outcompeted by foreign companies? An example is the car industry, which according to the NYT is about to get left behind, again.

ONE does not often hear financial analysts talk about climate change, but this month John A. Casesa, an analyst at Merrill Lynch, organized a teleconference to address a troubling question for Detroit's automakers: As regulators around the world move to curb global-warming emissions from cars and improve fuel efficiency, what happens if Wall Street adds up the costs?

The most likely answer will not make General Motors and Ford Motor very happy. Mr. Casesa's call included a presentation by the World Resources Institute, an environmental policy group in Washington, which recently issued a report on the subject with Sustainable Asset Management, an investment group based in Zurich.

The report forecasts that G.M. and Ford stand to lose the most, financially, of any automakers in complying with regulations that the groups expect the United States, Europe and Japan to adopt over the next decade - rules in addition to the pollution controls put in place over the last half-century.

Ford would have to spend $403 more on each vehicle to meet the expected new standards, the report estimates, and G.M. would have to spend $377 more. By contrast, the added cost to Honda would be just $24.

Car for car, BMW would have to spend even more than Ford or G.M., $649 on each vehicle, the report found, but because its prices are much higher, it would not be as difficult for it to absorb the cost.

Perhaps the most troubling finding for G.M. and Ford, the last two major automakers based in the United States, is that some foreign competitors, particularly Toyota, may actually be helped by tougher regulations because they have already invested much more in fuel-efficiency technologies, like hybrid gas-electric engine systems, that could generate profits.

Regulations related to fuel economy and global warming are "going to be one of the key drivers that determines competitiveness in the industry over the next decade and beyond,'' said Duncan Austin, who until recently was a senior economist at the World Resources Institute. He left to join a new investment firm that plans to use financial analysis to assess the effects of environmental rules and social trends.

One problem for analysts and investors who try to estimate these costs is predicting the outcome of the regulatory process, including the practical effects of voluntary agreements between governments and industry.

The whinging by industry about "extra-costs" of regulation is often short-sighted. Progress comes from change. American industry has been able to lobby itself into avoiding embracing new technologies, technologies which if embraced would have better prepared the American economy and the car industry in this for the market reality of higher oil and gas prices. However, the automobile industry has in this case lobbied itself into a dead end.

But looking beyond merely the car industry, there's a problem with the notion of America being "more productive" than Europe in general (courtesy of reader John St. Lawrence who sent this link to me).
Everyone knows the story by now. America may have its social problems, but its highly productive, job-generating, innovative economy is the envy of the world. Europeans, on the other hand, are in a despond of high unemployment and economic sclerosis. Europe's addiction to welfarism--its overcooked social contract--is killing the economic goose that lays the social egg. Americans may pay a price in inequality for their economic vitality, but when you take the country's extraordinary social mobility and opportunity into account the price is worth paying. You might want to reverse Bush's tax cuts for the very rich, but nobody sane is going to tinker with the essence of the great American Business Model that delivers so much wealth.

I contend--unfashionably and, I know, incredibly, given the consensus--almost the opposite. The American economy has great strengths, but it is not so all-conquering. And the American Business Model, with its ruthless focus on shareholder profits, has profound weaknesses. Indeed, American industry is at its strongest where it has not observed antistate, progreed precepts and operated in more European ways. Smart action by the state, a viable social contract and efforts by companies to harness human capital and serve a purpose larger than short-term profit maximization turn out to be indispensable components of successful American capitalism as well--though America's public conversation hardly concedes these points. It's a gaping omission that is costing the country dearly...

America's once proud culture of business building has given way to a culture of financial engineering, a doctrine of shareholder value maximization and a cult of the takeover. The game is to keep the share price up, and every sinew of the organization is bent to that end; shortcuts are ever tempting, and inevitably some companies resort to straight fraud. Nevertheless, the conservative inclination is to overlook one or two bad apples like Enron and WorldCom and to celebrate the rule of America's capital markets. It is Wall Street constantly holding corporate managements to account that drives up innovation and productivity, or so runs the conventional argument, with companies that fail to keep up facing a takeover.

Yet the evidence is that takeovers fail to raise shareholder value; consultant KPMG reports in a survey of 700 takeovers that more than four out of five either added no value or lost it. Still, investment banks continue to seduce overpaid CEO after CEO into believing that his deal will be the exception. And with share options that will provide fortunes if the deal comes off and golden parachute clauses that will secure an equally good pay-off if it bombs, most CEOs fall prey to the seduction. Despite a welcome wave of criticism of this febrile, amoral atmosphere, few took note in the heady days of the dot-com and telecom bubbles that this system was hollowing out the US economy. It is coming back to haunt the United States now...

This is the reality behind the ballooning current account deficit numbers. The US economy may boast an innovative IT sector and technological leadership in the military industry; beyond that, its claims for universal competitive strength are more and more dubious. Of course, America is home to some great companies, but not so many to justify the fawning acceptance that the American Business Model is better in every respect than the European one.

Europeans do not view the company as a casino chip to be traded away in a single-minded quest to enrich directors and shareholders. Rather, they see companies as living things, each one a network of human relationships organized to serve an overriding economic and social purpose. In the European perspective, a company has a defining organizational reason-to-be that serves as a jumping-off point for maximizing profits, a repudiation of the idea that anything goes in the quest for a fast buck. A company needs to be built over time, as resources are husbanded, personnel are groomed and trained, customers courted and innovation nurtured; its directors need to manage a complex set of trade-offs between the demands of shareholders and stakeholders, marketplace trends, the need to innovate and the engagement of employees. In this view, if only one voice counts--shareholders who want fast returns now--the company risks ruin.

The United States is vandalizing this conception of the company--once inherent in American capitalism--and is pulling down the structures that support innovation and productivity. It is Europeans who now invest more, sustaining a range of institutions that produce a highly skilled work force and a business-building culture. They may at first sight look like economic tortoises; in fact, they are set to overtake the American hare. High European unemployment, concentrated in Germany, which has made massive mistakes in macroeconomic policy by fixing its exchange rate too high within the euro, disguises the real performance of the European economy: Unemployment is lower in seven European Union countries than in the United States, and on the continent as a whole the participation rate of 25-to-54-year-old men in the labor market is almost the same as in the United States. As the euro becomes embedded, Europeans will secure the advantage of a single continental market even larger than the United States; when they get their macroeconomic policy right, the advantages of their economic and social model will become more evident.[emphasis added]

This is a provocative thesis. I don't know about that. What I do know is that Airbus is beating the pants off of Boeing. What I know is that foreign car makers have been more successful than American car makers. What I know is that in many areas, from steel, to agriculture, to telecom, to financial services, that the momentum seems to be on the side of the Europeans and not American companies. This is not true in every case, and it is true that American dominance in many fields still prevails but more and more this seems to be an artifact from the past.

Recently it wasn't just manufacturing old-economy companies that had a trade deficit, but America started bleeding red on the hi-tech trade items too in our current accounts balance. Frankly the only sector in which we seem more competitive than our overseas competitors on an industry-wide basis is simply financial services, and that is quickly eroding as well.

So if many of our companies aren't competing well in the global market place, how can we be more productive than other societies? We might be, but at the very least the discrepency calls into question either what we mean by productivity or what the benefit of focusing on such a metric is.

Businessweek has a strong article out on American vs. European productivity, but reading between the lines it's clear that some of the productivity gains are real and some aren't.
The gap is even widening. This year the U.S. should record productivity gains of 3.3%, according to Eurostat, the statistical agency of the European Union. That's almost twice the rate of France and Germany and well above the British rate (yes, even dynamic Britain is struggling in this area). Europe now has an hourly output per worker some 20% below American levels...

Start with the issue of info-tech spending. A key to productivity increases is using IT to get the most out of workers and plants -- whether it's customer-relationship software in a sales office, process-control technology in a factory, or inventory-tracking systems in a store. European companies have ample access to all this knowhow from U.S. and Asian tech providers, not to mention from other European firms such as software giant SAP (SAP ), industrial powerhouse Siemens (SI ), or mobile-phone maker Nokia .

But this is where the differences between Europe and the U.S. become stark. European executives have invested much less in IT than have their U.S. counterparts. According to the Organization for Economic Cooperation & Development, in France, spending on information and telecommunications technology accounted for 1.97% of gross domestic product in 2002. U.S. IT spending accounted for 4.42%. That partly reflects differences in mind-set, says Roger Fulton, an analyst in the British office of IT researcher Gartner Inc. (IT ) "The U.S. is a 'just do it' society, whereas Europe has more of a 'let's think about it' society." That results in a greater hesitancy to buy into the benefits of IT and, therefore, to lower IT spending.

There's also a chicken-and-egg problem with IT investment in Europe. Heavy spending can help a company produce more with fewer workers -- often making layoffs inevitable, even desirable. "But the labor market is less flexible in Europe than in the U.S.," says Kasper Rorsted, managing director for Hewlett-Packard Co. (HPQ ) in Europe, the Middle East, and Africa. "Employees in Europe are seen as more of a fixed cost -- not something you can easily trim." With the cost of laying off a worker so high in Europe, companies hesitate to spend on labor-saving information technology in the first place. Rorsted is so concerned about low IT spending in Europe that he confers monthly with policymakers in Brussels on crafting investment incentives and loosening regulation...

Europe also simply doesn't have as large a tech sector as the U.S. That matters because fast-growing technology companies are themselves major contributors to productivity growth. According to McKinsey & Co., the IT sector generates 2.3% of total GDP in the U.S., but only 1.3% and 1.5% in France and Germany, respectively. McKinsey says that the U.S. tech sector accounts for more than a quarter of the entire economy's productivity growth. (Some studies suggest it is much higher.) In contrast, a smaller IT sector generates less than 20% of productivity growth in Europe.

At the same time, says Dirk Pilat, senior economist at the OECD in Paris, fewer new businesses -- most of which generate strong productivity growth if they survive -- are created in Europe. "You just don't get the same productivity impulse from new companies here," he says.

Europe also spends less on research and development -- about 2% of GDP, vs. nearly 3% in the U.S. Spending on R&D usually boosts productivity, too, as new processes and easier-to-make products flow from the labs to the assembly line. And many of the big European R&D spenders, such as Novartis (NVS ), are shifting more of their R&D to the U.S. to be closer to their biggest market. German-based BASF (BF ), for example -- the world's largest chemical company -- is not only trimming R&D spending but also deciding whether to move its genetically modified crop research across the Atlantic. Such moves mean that the U.S. economy benefits more than Europe does from any productivity payoff that comes from R&D.

Even if IT and R&D expanded dramatically in Europe, it's not clear whether they would have the intended effect...

Take Germany. The legal separation of commercial, savings, and cooperative banks in Germany means that there has been little financial sector consolidation. German banks have invested heavily in information and communication technology and developed highly efficient payment, customer-relations, and online-banking systems. But without the chance to exploit the economies of scale that come with consolidation, they can't derive maximum productivity benefits from it. The average German bank's productivity is 13% lower than its U.S. counterparts as a result.

There are even productivity-busting restrictions in Britain, the fastest-growing big economy in Europe. British retailer Tesco PLC (TSCDY ) over the past 10 years has spent heavily on IT. Retailing analysts estimate that Tesco's labor productivity growth has been about 1% a year higher than the recent British average for the past five years. "Their distribution systems are as tight as they can be," says Nick Isles, associate director at the Work Foundation, an independent research consultancy in London. That benefits Tesco's efficiency because it delivers the right goods at the right time.

Yet for all its success, Tesco hasn't been able to chalk up as many productivity gains as it could. One reason, say industry experts: Tough British planning laws make it harder to open large new supermarkets than in the U.S. That means Tesco can't fully benefit from productivity gains by setting up new shops and achieving the economies of scale it would in a less regulated environment.

Could Europe have a productivity spurt? Yes. Take what happened in the German electricity and gas market when it was liberalized in 1998. Wholesale prices fell, forcing power generators to improve their traditionally low productivity levels by investing heavily in IT -- $5.6 billion in 2000 alone. Annual productivity in the sector has risen 3.5% since. By contrast, Electricité de France, a state-owned virtual monopoly, has invested just a fifth as much in IT in recent years as has the German power sector. One result, say consultants: Labor productivity growth at EdF is less than a sixth of German levels.[emphasis added]

Proponents of the productivity boom have long argued that technology improves productivity. Apparently it doesn't, because the case of Europe shows that merely investing in the technology doesn't increase the productivity. What improves the productivity compared to Europe is the ability to use technology to replace workers. Well that's a fair if not-well-voiced argument. Automation does and can be used to promote progress by eliminating the use of labor in some areas.

Other areas of "productivity" growth cited in the article are much less valid however. For instance, the increased productivity of American financial sector seems to be based upon their ability to merge and consolidate, and therefore lay off workers. The previous article cited a KPMG study that indicated that most mergers do not add shareholder value, so the productivity gains are not through "synergy" but "cost-cutting" which means really cutting workers. Likewise the cited ability of the American retail sector to have greater productivity isn't by increasing technology or distribution patterns, it's from laws that allow them to move into areas and undercut local stores something that British laws discourage. Without Walmart being able to put mom and pop stores out of business, there would be no apparent productivity gap there then. And the fact that the big tech companies themselves add to our productivity, is itself a completely inappropriate contribution - especially if anyone remembers the hype and the illusion of the internet boom. The fact that the growth of tech companies themselves on their speculative capital investment basis are the basis of a quarter of US productivity growth is high disturbing.

It is a valid observation though that the Europeans invest less in hi-tech and especially R&D. It is also true that fewer new businesses are created in Europe, and so they don't have that entrepenuerial productivity bang. So I would think that even on a level playing field that America's productivity rating might have those things in its favor.

However investing less in hi-tech may be a rational decision in an environment where one cannot use it to displace workers easily. In other words, those particular productivity gains obtained by the gap in IT spending is really not a gain from IT as much as a gain from displaced workers. In the original paradigm of mechanized automation, displaced workers would eventually get better jobs in new industries. However when we combine this process with the globalized offshoring trend toward capital flight overseas to cheap labor, then we don't see new high quality or value-added jobs being created to replace the old ones displaced by mechanization.

When we combine this with the observations of the previous article, it seems clear that American companies and its economy is not more productive because they are sharper, better at competing, or have better technology but because their regulatory environment favors them and they are allowed to offshore their work to lower cost structures using foreign workers. Outside of this environment, when you actually let American companies compete on a level playing field they have much more difficulty - sometimes especially because they were coddled by our regulatory structure.

This is the strange combination that has developed, and helps explain the increased corruption in American business management. When success becomes about access and favorable regulatory lobbying, then the company and its executives become focused on political influence and dealing rather than improving their business model or products. Outside of this "hothouse" atmosphere, American companies are trending toward becoming less independent of the government and less able to compete on a level playing field in a free market. It is strange that America, the land that praises the free market, should become ever increasingly the model of a regulatory protectionist state.