Author: Megan McArdle

Tyler Cowen looks at Christina Romer’s take on the current unemployment problem, and comes away unimpressed.  It relies too heavily on aggregate demand shocks.  Yet job creation has been especially low, and it’s hard to get there from a purely AD shock.  He says:

Yet the nominal wages on those jobs-to-be are not constrained by previous contracts or agreements.  Tell stories as you may, but it’s hard for me to see that as exclusively an AD problem.

I wonder what is the behavioral postulate for how long all these unemployed workers are all staring jobs in the face yet persistently stubborn about their appropriate nominal wage.  I’m all for behavioral economics, but I don’t buy the necessary story here.

I’m not sure you need this to get stickiness. Employers might be reluctant to hire new people at dramatically lower wages than their current employees; such differentials rarely go undiscovered, and they tend to produce big headaches for management.

Still, I broadly concur with Tyler and Arnold Kling:  I don’t think you can explain this all by falling aggregate demand.  Consider that, as Romer notes, unemployment is about 1.7 percentage points higher than can normally be explained by the change in GDP.  That doesn’t sound like so much.  But it’s really quite a lot.  If you assume that the natural rate of unemployment is probably somewhere around 5.3%, that means the total shift has only been 4.4 percentage points.  In other words, almost 40% of our currently elevated unemployment rate comes from something other than the decline in GDP.

Moreover, we know that there are large sectors that require structural readjustment:  autos and construction.  Those workers are geographically and skill-constrained.  To think that the current level of unemployment is all about aggregate demand, you have to think that there are lots of jobs into which those displaced workers could easily transition.  But if you own a house in the Detroit era, or have a spouse who still has a job, this is just clearly not the case.

There’s been a lot of indignant chatter about how Goldman Sachs had been selling investors long positions that they were short on, and how this represented a conflict of interest, or something.  This rather fundamentally misunderstood the role of a market maker, which is, after all, to take the other side of the trade.

On the other hand, if the SEC complaint filed today holds up, these complaints will turn out to have a certain . . . truthyness . . . to them:

The hedge fund, Paulson &Co., paid Goldman $15 million to create the CDO in early 2007, when the U.S. housing market and related securities were beginning to show signs of distress, the SEC complaint said.

According to the SEC, Goldman Sachs failed to disclose that Paulson played a significant role in selecting the CDO’s portfolio, but the firm then bet against it by entering into a credit-default-swap transaction with Goldman to buy protection on certain layers.

As a result of that bet, Paulson made about $1 billion, SEC said.

“Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

One wants to be cautious about saying that Goldman Sachs is definitely guilty.  Financial crises produce immense political pressure for securities regulators and attorneys general to go head-hunting, and the cases often turn out to be weaker than they seem once the defense gets a chance to speak.  The case against two Bear Stearns hedge fund managers, for example, turned out to hinge on horrific-sounding quotes that had very clearly been ripped out of a context that totally changed the implications. Which just goes to show how heavy the pressure is on prosecutors to make these cases. 

But it certainly sounds as if the SEC has the goods here.  Felix Salmon has gone through the pitchbook, and pronounces it free of any indication that a third party with a strong economic interest in the transaction was picking the securities to be included.  I will be interested to hear the defense rebuttal.  It should, at the very least, be entertaining.

Was anyone hurt by it?  That’s less clear–at that point, the market still had a bit of froth left, and people might well have bought the securities if Paulson’s interest had been disclosed.  But that doesn’t matter.  It’s hard to imagine anyone making an argument that Goldman didn’t have an obligation to disclose this information–and the fact that they failed to disclose seems to indicate that Goldman, at least, thought that the information would adversely impact the sale price.

I suspect this case will get a lot of public traction.  At this point, what galls people is not so much the stupid behavior that led to the bailouts, but the blatant self-dealing that seems to have gone on.  Unfortnately, much of that self-dealing is not actually illegal . . . so when we find an example that is legally actionable, the public and the court system are bound to jump on it with both feet.

Maybe I spoke too soon about Greece:

One official said Athens now hopes to raise between $1 billion and $4 billion from U.S. investors, and could cancel the sale if demand continued to sink. Greece had previously hoped to sell up to $10 billion of bonds.

Euro-zone countries on Sunday made an effort to persuade investors that the pledge was for real, saying they could make up to €30 billion ($40.1 billion) in loans this year and going so far as to detail the formula for the interest rate charged. That relieved markets–but only for a few days. As investors fretted about the procedural difficulties of putting the bailout in place and about Greece’s longer-term prospects, Greek borrowing costs climbed back up.

Midday Thursday, investors were demanding 4.20 percentage points more in interest than ultra-safe Germany pays for a 10-year loan. That spread was practically as high as levels seen last week, before the unveiling of the €30 billion package, all but dashing the hopes of those who thought Greece could skate through a spring of heavy debt repayments without a bailout

When it comes down to it, investors are right to anticipate a bailout, and probably right to anticipate some form of eventual default.  Maintaining these sorts of structural adjustments while lashed to the monetary policy of less indebted, and more prosperous nations, is going to be very tough.   No surprise that Greece is opening up talks with the IMF–though it’s not clear how much that will do to get down the outsized bond yields.  Ultimately, borrowing more money, even on good terms, will not do much besides papering over the nation’s problems.  Unless Greece can find the political will to make horrendous cuts in salaries and services, they’ll just find themselves in the same spot in short order.

There’s been a lot of back-and-forth recently over the fact that almost half of all Americans pay no Federal income tax.  Conservatives trumpet this as evidence that we’re too focused on taxing the rich; liberals retort that the poor often pay heavy payroll taxes, and anyway, the rich make more of the income.

Who’s right?  To my mind, they both are.  Or perhaps, both wrong.

To start with, it isn’t true that everyone at the bottom end of the pay scale pays 12.4% payroll tax; relieving them of that tax burden is part of the point of the EITC.  And while the share of income held by the top earners has increased, so has the share of the federal tax burden that they bear; it’s now around 70%.  And before you start complaining about state and local taxes, they also bear a heavy share of those, particularly in high-income jurisdictions where they’re likely to live.  They are the net payers of property taxes (your family needs to be in a pretty pricey house before the town gets back in taxes what it gives you in services.)  Even sales taxes don’t necessarily hit the poor harder, because so many of the goods they buy are exempt or subsidized.  The real regressive action is in sin taxes, user fees, and Social Security, none of which are notably Republican projects.

On the other hand, the liberals have a point about fairness.  Warren Buffet should pay a higher percentage of his income in taxes, because losing 25% of his income is a much smaller burden on him than it is when his secretary loses 25% of hers.  Trying to get everyone to pay the same percentage smacks too much of “The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges and to steal bread.”

I think the real problem with the current setup is the political economy of it.  A very large percentage of our electorate has nothing at stake when they vote for new spending.  Since that spending imposes real costs on other people, and the economy at large, this is a problem.  We don’t want to end up in a situation where 65% of the population is systematically voting to take the stuff possessed by the other 35%.

But that doesn’t mean we need to raise taxes on poor people; rather, it means they should have some skin in the game.  Simplify the tax code, and expand the EITC into a negative income tax which then continuously scales into a progressive income tax up to some maximum . . . and then make it clear that new spending means that all the marginal rates go up a little bit.  If you want a new project, you have to be willing to give up some of your EITC to pay for it.  Not as much, percentage-wise, as Warren Buffet might pay.  But no free programs.

This is something of a pipe dream, but it seems to me that this should be something liberals and conservatives can broadly agree on.  Liberals get a somewhat more generous welfare state–and conservatives get a natural check on further growth.

As many of you probably know, Bryan Caplan, Will Wilkinson, and others have been debating whether there was a libertarian golden age, ca. 1880, to which libertarians would return if they could.  The “pro Golden Age” side notes low taxes and regulation; the “anti” side notes Jim Crow, anti-sodomy laws, and the substantially reduced rights of women.  For whatever reason, the debate has settled around the coverture laws of the period.

Interestingly, this debate seems mostly to be taking place among libertarian men, probably because there aren’t that many libertarian women.  But as one of the elusive creatures whose preferences are being discussed, I thought perhaps I’d weigh in.  Straight from the horse’s mouth, as it were.

First, let’s point out that 1880 simply wasn’t a libertarian
paradise–and neither was any other era in American history.  Yes,
commercial taxes and regulation were lower.  On the other hand–even
leaving aside the special rules for various minority groups and
women–we’re talking about an era of school prayer, blue laws, various
gross infringements of economic liberty by state legislatures
cutting special deals for their friends, criminal punishment for union
organizers, high tariffs, and so on.  We’re not arguing about whether
we want to be in libertarian paradise, or not.  We’re arguing about
whether the departures from the ideal in 1880 were better, or worse,
than the departures today.

If you are a white male,
probably–not definitely, but probably.  If you are black, the question
is ludicrous–you’re talking about an era of legalized public
discrimination.  Likewise if you’re gay, which was, as far as I know,
an actual criminal offense.  But what about white women?

I think
part of the disconnect between Caplan and his interlocutors is that
Caplan is simply discounting all non-government forms of coercion.  So
the fact that in 1880 my life choices would have been marriage,
sponging off of relatives, or teaching, does not interest him.  Nor
does what that implies for the balance of power in marriages.  It is
not for nothing that so many passages written by women of the time
describe their husbands as “tyrants.”

Obviously, I find this a
tad more interesting than he does.  But it’s a valid point:  to what
extent can you count social discrimination against the legal system? 
For liberals, the answer is “quite a lot”–if something is wrong with
the social system, the government should fix it!  But this is not the
default libertarian position.

And in fact, we have to acknowledge that the overwhelming majority of women in 1880 would be positively horrified by the prospect of living my life.  Not only is it flagrantly immoral, it violates much of what they themselves thought of as the core of womanhood.  Should we get excited about women being denied the right to go to medical school, who did not want to go to medical school?  I mean, I suppose in some sense I’m being “denied the right” to move to Saudi Arabia, but I don’t think we can count this as a meaningful infringement of liberty.

But in the case of the laws of 1880, I believe that yes, we can count them as serious infringements. As Tyler Cowen has pointed
out, the laws of the time reinforced that social structure in many,
many ways.  Take divorce, which could only be obtained for cause.  Now,
as I understand it, if both parties wanted one, a “correspondent” could
be hired who would be caught with the man in a compromising position. 
But if he didn’t want a divorce, well, what was she to do?  Divorce was
shameful–but a woman caught in adultery was a moral outrage.

There
are also ripple effect.  If no one you know gets divorced, then it
becomes that much more unthinkable for you–especially since the social
system to deal with divorce won’t exist.  There was no place in
American society of 1880 for a divorced woman, and that matters.

Or
take the laws banning women from entering various professions.  Sure,
this only affected a small minority of the population . . . but ain’t I
a woman?

You cannot simply snip the legal system neatly out of
its social context.  Moreover, those laws would be harmful in any social context.  Would I agree to bring back the laws of 1880
concerning women, in exchange for lower taxes and looser business
regulation?  No. 

First of all, as imperfect as they are, many
of those laws are good libertarian laws, like the laws forbidding
people to dump any random chemical into the water commons. 

Second
of all, even though the laws about emancipation, property and divorce
would have much less impact upon women living in the social structure
of 2010 than that of 1880, they would clearly and obviously change the
balance of power in my marriage and social life.  Not even a man as
unimpeachably committed to equality, in theory and action, as Peter
should be trusted with that kind of power over his wife. 

And
third of all, the social system of today does not exist independent of
our laws.  If it were not illegal to pay married men more than women,
to discriminate against women in hiring, and so on, most of us might
still be stuck as secretaries . . . which would probably mean most
women still stayed home after they had children, and that the social
and economic networks supporting female independence would be
considerably weaker.  This is why I can’t get all worked up about the
injustice of affirmative action.  Maybe it doesn’t work . . . but even
so, it’s still pretty low on my priority list of things to repeal.

In the short run, it now seems as if the euro has been saved.  Greece has received a massive infusion from the EU, its bonds are selling once again, the birds are singing and all is right with the world.

But Wolfgang Münchau makes a persuasive case that in the long run, a Greek default remains very likely.  The structural adjustments required to get its budgets back into reasonable balance are simply massive (hence the demonstrations that keep turning into near-riots).  That is going to require considerable austerity from the population, not to mention unemployment.

It has been done in the past, but with one key difference:  the countries involved were able to devalue their currencies.  This lowered the burden of paying debt denominated in the local currency, and it also made exports more competitive, giving a boost to employment.

Greece doesn’t have this option.  It’s going to be stuck with a monetary policy that will be way too tight for the economic pain it is experiencing, exacerbating the difficulty of paying the debt, and the broader suffering of the citizenry.  Not to mention the political pressure to exit the euro.

Though it’s weathered this episode, I continue to think that the euro remains extremely vulnerable.  The problems of running a monetary union between countries with vastly different business cycles, economic structures, and political resources, can apparently only be overcome with fairly massive transfers.  How many times will France and Germany be willing to open up their wallets?

Join the conversation about this story »

In the short run, it now seems as if the euro has been saved.  Greece has received a massive infusion from the EU, its bonds are selling once again, the birds are singing and all is right with the world.

But Wolfgang Münchau makes a persuasive case that in the long run, a Greek default remains very likely.  The structural adjustments required to get its budgets back into reasonable balance are simply massive (hence the demonstrations that keep turning into near-riots).  That is going to require considerable austerity from the population, not to mention unemployment.

It has been done in the past, but with one key difference:  the countries involved were able to devalue their currencies.  This lowered the burden of paying debt denominated in the local currency, and it also made exports more competitive, giving a boost to employment.

Greece doesn’t have this option.  It’s going to be stuck with a monetary policy that will be way too tight for the economic pain it is experiencing, exacerbating the difficulty of paying the debt, and the broader suffering of the citizenry.  Not to mention the political pressure to exit the euro.

Though it’s weathered this episode, I continue to think that the euro remains extremely vulnerable.  The problems of running a monetary union between countries with vastly different business cycles, economic structures, and political resources, can apparently only be overcome with fairly massive transfers.  How many times will France and Germany be willing to open up their wallets?

Felix Salmon pens an interesting couple of paragraphs:

The fact is that a defined-benefit pension scheme is always going to run the risk that it won’t be able to meet its liabilities as they come due. The California pension plans constitute an attempt to save hundreds of billions of dollars to pay for the pensions of the state’s workers; the attempt might succeed, or it might not.

But right now there are clearly more important and urgent things to do with California’s tax revenues than throw them into a pension pot to support the retirees of the 2040s and beyond. CalPERS might not be perfect, but it’s a lot less dysfunctional than most of the rest of the state government. Let’s get our priorities straight here.

This is a sentiment very common among CEOs of struggling companies, which is why we have laws to make them put in their pension contributions anyway.  Should we feel differently about states?

Both libertarians and liberals evidently do.  Libertarians complain about excessive public pensions, which are indeed excessive, grossly irresponsible gifts from politicians to some very powerful constituencies.  But that’s neither here nor there, because people worked, often for decades, under those promises; you can’t just unilaterally abrogate them.

Liberals, meanwhile, want to ignore pension contributions so that there don’t need to be drastic cuts to services.  But it seems to me that the same problem applies–you can’t dip into the pension fund no matter how worthy your cause.  Delaying the contributions for a few years in an emergency won’t hurt–but if you endorse it, I think you’ll find that it’s always an emergency.

Of course, there’s no actual means of cutting state level pensions, since Chapter 9 doesn’t seem to apply to states, only municipalities.  So this is going to be a political problem:  are we willing to cut state pensions?  And If so, how, since their inviolability is often built into state law?

I’d guess that broad public sentiment runs in favor of cutting the pensions.  But the most motivated sentiment belongs to the pensioners.

It is by now conventional wisdom that the economy is going to cost Democrats big in the midterm elections . . . so it’s refreshing to see folks like James Surowiecki challenge that wisdom.  After all, the economy has started growing again, and, in what must be an astonishing coincidence, we’re just about to get a big river of stimulus money sluicing through voter pockets.

Possibly.  But conventional wisdom has a lot going for it.  I agree with Surowiecki that what matters is not the headline numbers on the newspaper page, but peoples’ actual felt experience with the economy, particularly real income growth.  That felt experience is maybe improving a tiny amount.  Consider the following, however:

• At this point, there is not enough time for employment
  to recover significantly.  We lost a lot of jobs, and if analysts are
  right that this represents mostly structural change in the economy
  (rather than a temporary collapse in aggregate demand), employment will
  rebound only slowly.  It took years under the Bush administration to
  work off the relatively modest collapse around 9/11.
• Most
  peoples’ major asset will still be worth a whole lot less than it used
  to be.  And people who are pinched will not have the housing piggybank
  to cushion their anxiety.
• Delinquencies are finally slacking
  of, but the backlog of foreclosures is eventually going to come on the
  market, further pushing down home values in many areas.
• We
  can’t really afford to expand the various forms of housing support much
  further . . . but if we stop them, housing markets will look even worse.
• Low
  inflation means the cost of living doesn’t go up . . . but people are
  now conditioned to expect nominal wage increases.  Money illusion is
  going to make people perceive the labor market, and income growth, as
  worse than they actually are.
• Health care costs are going up
  due to selection effects in individual and small business
  markets–healthy people are cutting the expense when they lose their
  jobs, landing companies with a smaller, sicker pool.  That’s going to
  further cut into any wage growth.
• Budget deficits are almost
  certainly going to keep going up in the short term.  People get
  especially touchy about deficits when they are personally strapped.
• Oil prices are still rising.

I’m
not saying the Democrats can’t pull it out.  Nothing is impossible, and
they have GDP growth on their side.  On the other hand, they’re facing
some pretty strong headwinds–much stiffer than Bill Clinton faced when
he lost the House to the Republicans in 1994.  And contra what I was
assured by many Democrats, health care reform has not gotten more popular since it passed; arguably, it’s gotten slightly less popular.

That base had better be very motivated.

We’ve been dipping our toes into the DC housing market recently, but after this weekend, I think I’m just about ready to give up.  Anything that comes on the market at a decent price is snapped up almost immediately–by my count, mean time from listing to contract is under seven days.  The only things that stay on the market long enough to look at fall into one of two categories:

1.  The owner bought the house between 2004 and 2007, and wants to get their money back out, hopefully with a little profit . . . and has therefore priced their home at least $100,000 above what the market will bear.

2.  The house has been rented, and the tenants, familiar with their copious rights under DC housing law, are essentially refusing to allow the house to be shown.

We’ve seen multiple halves of houses, where the house had been divided, and one of the units was still occupied by a recalcitrant tenant.  In one case, we were invited to make an offer on the place contingent upon seeing the upstairs, at which point listing agent expected the owner would finally leap into action and . . . do what?  This is a city that requires you to have a forecast of at least four days of good weather above 65 degrees in order to evict a tenant.  And I’ve heard of one case in which they showed up to do the eviction, the tenant politely declined to be evicted, and the bailiffs went away again.

This should be a golden time for buyers with decent credit, stable incomes, and modest requirement for neighborhood safety.  But there’s almost no inventory, and what there is, can’t be sold.

I spent the weekend in long conversations about why this might be with our real estate agent, and a friend who develops property in DC.  There’s a big “shadow inventory” of houses in late-stage delinquency or foreclosure, particularly in the areas where we want to buy.  Why can’t we find anything?

In part, because that shadow inventory isn’t coming on the market.  There are two components to this, one DC-specific, one not.  The specific part is the aforementioned tenant laws, which make New York’s arcane housing court system look like a bastion of pro-landlord sentiment.  The only way to break a lease is to be a single-family owner who wants to take occupancy.  The bank has to let the tenant’s lease run before they are evicted, as well as give them ninety days notice of the intent to vacate the property.  Given the difficulties of selling a house that cannot be shown, a lot of banks are choosing to do just that.  Others are putting it on the market and then finding that, surprise! they somehow never can schedule a showing.  Yet the banks are understandably unwilling to drag the tenants into court, which is very time consuming, and a huge burden on already overwhelmed administration.

The broader nationwide problem is that banks have a huge backlog of these bad loans, which means first, that they simply don’t have the adminstrative capacity to put them all on the market at once, and second, that at least in the case of the larger lenders, they are trying to dribble them out over time and avoid crushing the market.

Meanwhile, the fall in house prices since 2007, even in DC, where the collapse has been relatively mild, means that no one wants to sell unless they have to.  Everyone’s hoping to wait until the market turns around–and given how optimistic people seem to be about the housing market, that’s hardly surprising.  So there’s very little inventory other than distress sales, or people who have to move for one reason or another.

Meanwhile, DC is one of the relatively fortunate areas in this recession.  Our unemployment rate is high, but it hasn’t shot up the way it has in other areas, pushing previously solid homeowners to the brink of foreclosure.  Meanwhile, the expansion of government is attracting ever more young professionals to the area.  The combination means a lot of money looking to buy very few houses.

It’s not totally unreasonable to think that prices will go up in DC, eventually; huge swathes of Northwest and incresingly, Northeast are gentrifying at a pace faster than anything I’ve ever seen–and before I moved here, I was a lifelong New Yorker.  But even here, that shadow inventory means it’s not going to happen for a few years. 

Nationwide, we’re probably looking at a long period over which house prices don’t fall, but they don’t really rise much, either, and the market sorts itself out by letting inflation eat away the nominal value of peoples’ outstanding mortgages.  And over here on Florida Avenue NW, we’re probably looking at a few more years crammed into an oddly-laid-out one-bedroom-plus den flip house.

(Nav Image Credit: La Citta Vita/flickr)

Stan Collender blogs a tricky situation facing politicians: voters consistently say they’d rather cut spending than raise taxes to reduce the deficit. But when you ask them what they want to cut, the only program there is strong support for cutting is foreign aid . . . which is like trying to pay off your credit cards by slashing your chewing gum budget.

What I’d really like to see is a poll which reads off a list of the major areas in the federal budget, names the percent of the federal budget they compose, and then asks people which of these areas they think should be cut in order to close the deficit. Obviously, you couldn’t get too deep with this, since people can’t remember more than five or six numbers at a time. But the answer would be more interesting than noting that people with a poor command of the federal budget think we should cut the enormous fantasy programs they think are wasting all of our tax dollars.

Even more interesting would be if you paired this with some realistic tax math–if you made it clear to them that the budget gap also cannot be closed simply by raising taxes on “the rich”, but rather that it probably involves a broad-based regressive tax like the VAT.

But this would be very complicated, which is, I presume, why it hasn’t been done.

Update: Ezra Klein pulls this graph from the Wall Street Journal to illustrate the problem

Meanwhile, one of my commenters says:

There are two points that you are missing. Conservatives (and libertarians) like to go on and on about how Americans are generally fiscally conservative. Polls like this one show that Americans are generally fiscally clueless. Americans certainly ARE socially conservative in lot of ways (we’re more religious, more invested in the institution of marriage, etc.), but the idea that Americans are prone to being fiscally conservative is a fiction. It’s a fiction that a lot of American believe, but still.

The point is that they agree with you less than you seem to assume that they do. In fact, they like entitlements and defense spending quite a bit. Informed libertarianism is very much a minority position.

Having said that, that doesn’t mean you are wrong. I (who am way left in sentiment, but sympathetic to libertarian policy ideas) agree with you about these things being real problems. Entitlement spending and defense spending are out of control, and dealing with those issues is a real political need.

But this poll suggest to me that we should stop claiming that Americans are fiscally conservative. We should start claiming that either Americans like to think of themselves that way or that Americans are by and large, completely incoherent when it comes to economic stuff.

I promise you, I have never been under the illusion that my political beliefs were anything other than a (very) minority position. Nor are any other libertarians I know. Still, I think this is not quite right.

Saying “Americans are fiscal conservatives” is, by and large, simply a statement of how they rank relative to national or international political discourse–not a precise allocation of where they fall on the political curve. Faced with a choice between raising taxes and cutting spending, they generally seem to favor cutting spending, even when the taxes to fund the spending are very progressive.

Now, I quite agree that these polls show that this may be based on a misperception of where the money goes. On the other hand, they also misperceive how progressive the tax system is. If properly informed, and then asked questions, would they want taxes raised or spending cut? Given their knee jerk responses, I suspect that they might start to feel differently about Medicare and Social Security if they understood that the alternative was the equivalent of a 10% sales tax on every item. But that’s only a guess, and it might well be wrong.

So in some ideal universe where they are fully informed about the options, maybe they’re not fiscally conservative. On the other hand, maybe they are. But in this universe, where they are very poorly informed, their expressed preference is for spending cuts over tax increases.

Think of it this way: perhaps in some ideal universe where you could sit down with his platonic self and go over all the options, your drug addicted cousin would choose to dry out. But that doesn’t allow you to say that he doesn’t want to do the drugs in this universe. He does, which is why he’s out trying to score right now. It’s appropriate to call him a drug addict even if he wouldn’t be one in a perfect world full of perfect information.

The analogy is imperfect, because we’re talking about stated preference versus revealed preference. But we don’t have any way to get at revealed preference, other than the incredibly messy task of trying to sort out why they voted the way they did. Which brings you right back to the polls.

(Nav Image Credit: Wikimedia Commons)

If you want to understand how libertarians see most of the public policy process, watch this video:

In The Know: Should The Government Stop Dumping Money Into A Giant Hole?

I have a forthcoming piece on QVC, which means I’ve been spending a lot of time keeping current on home shopping news.  I have become a huge fan of the Home Shopping Queen, who displays an astonishing breadth of knowledge of all things home shopping, and does a yeoman’s job keeping abreast of the news.

That’s where I caught this little tidbit:  the Smithsonian is licensing its jewelry collection to QVC.  Now you, too, can own your own copy of the Hope diamond, done in authentic Diamonique simulated diamond, and available on five easy payments of $15.47.

Actually, I think it’s nice–and yes, I also approve of those machines that let you have a canvas replica of a Monet for $150.  Why shouldn’t people have beautiful replicas in their homes?  Allowing the American public to enjoy a little piece of their national museum seems like a nice alternative to just raising their taxes.

Greece’s fiscal problems are turning into one of those endless sagas, the kind we watch unfold at Thanksgiving every year.  Aunt Daphne is going to leave Uncle John!  No, they’re in counseling! Wait, now Aunt Daphne is breaking up with the counselor, too!  The rumors are starting to take on a toxic life of their own, driving up the yields demanded on Greek debt–which in turn, makes it less likely that they’ll be able to finesse the crisis with a moderate infusion of outside cash.

Paradoxically, that seems to be good news for us, pushing our debt yields lower; we are the proverbial “any port in a storm”. This phenomenon is what makes it so difficult to assess the risk of US fiscal trouble.  On the one hand, the US budget is clearly on a completely unsustainable path, and frankly, our household budgets don’t look so much better.  This should make investors nervous about our bonds.

And as far as I can tell, they are.  But they’re even more nervous about bonds everywhere else . . . because everywhere else has worse demographic problems, and a less impressive history of economic growth.  So they aren’t signal ling their nerves the way we’d expect, by slowly and steadily pushing up bond yields.

But that in itself is a vulnerability.  If at any point we are not seen as the safest game in town, we will take a gigantic–the better word might be “catastrophic”–hit on our bond interest.  If there’s somewhere safer to park our money, suddenly we lose the premium we currently enjoy for having bonds considered the “risk free” rate.  So while our super-sterling credit rating may delay the onset of a fiscal crisis, if we ever let it get to that point, the onset may be even more sudden and disastrous than these things usually are.  All the more reason to start getting our fiscal house in order now.

Join the conversation about this story »

Greece’s fiscal problems are turning into one of those endless sagas, the kind we watch unfold at Thanksgiving every year.  Aunt Daphne is going to leave Uncle John!  No, they’re in counseling! Wait, now Aunt Daphne is breaking up with the counselor, too!  The rumors are starting to take on a toxic life of their own, driving up the yields demanded on Greek debt–which in turn, makes it less likely that they’ll be able to finesse the crisis with a moderate infusion of outside cash.

Paradoxically, that seems to be good news for us, pushing our debt yields lower; we are the proverbial “any port in a storm”. This phenomenon is what makes it so difficult to assess the risk of US fiscal trouble.  On the one hand, the US budget is clearly on a completely unsustainable path, and frankly, our household budgets don’t look so much better.  This should make investors nervous about our bonds.

And as far as I can tell, they are.  But they’re even more nervous about bonds everywhere else . . . because everywhere else has worse demographic problems, and a less impressive history of economic growth.  So they aren’t signalling their nerves the way we’d expect, by slowly and steadily pushing up bond yields.

But that in itself is a vulnerability.  If at any point we are not seen as the safest game in town, we will take a gigantic–the better word might be “catastrophic”–hit on our bond interest.  If there’s somewhere safer to park our money, suddenly we lose the premium we currently enjoy for having bonds considered the “risk free” rate.  So while our super-sterling credit rating may delay the onset of a fiscal crisis, if we ever let it get to that point, the onset may be even more sudden and disasstrous than these things usually are.  All the more reason to start getting our fiscal house in order now.

The airline industry is not a particularly attractive market.  You’re selling a perishable commodity–once the doors close, any unfilled seats are worthless–to an audience that stubbornly resists treating your product as much other than a commodity.  Attempts by the airlines to resist this, with their byzantine pricing rules and frequent flier programs, have by and large not succeeded particularly well; business travelers tend to have multiple frequent flier accounts unless they live near a single airline’s home airport, and economy fliers don’t care.  Meanwhile, software is steadily eroding their ability to thwart bargain-hunting consumers through pricing power.

In an industry like this, overcapacity is particularly ruinous, and unfortunately for airlines, planes fly for a long, long time.  It takes eons for attrition to reduce the number of planes in the air, especially since the old majors have multiple powerful unions that make cuts tricky.  That’s why you get serial bankruptcies–and CEOs who spend inordinate amounts of time lamenting overcapacity.  It seems to be the airline CEO equivalent of talking about the weather.

But while, as Oscar Wilde noted, “everyone talks about the weather, but nobody does anything about it”, United and US Airways have been for some time desultorily considering action, in the form of a merger.  Now it appears that the merger chit-chat has heated up into preliminary “talks”.

This makes business sense–it would give the two majors more pricing power, and let them streamline their staff.  But that, of course, is itself a major obstacle.  Regulators don’t like it when airlines get pricing power, and unions don’t like it when they cut staff.  As the Wall Street Journal notes, “The airlines have flirted with mergers a few times in recent years. They aborted a deal in 2001 after unions protested and antitrust enforcers threatened to file a lawsuit to block a deal.”

It’s not clear why this time is supposed to be different–it’s not like the Obama Justice Department is likely to be more merger-friendly than the same department under Bush.  And even if they succeeded, they’d spend years negotiating with regulators and angry unions over things like slots, and seniority.

On the other hand, what else are they supposed to do?  It’s all very well to say that they need to manage their business better, but the business they’re in isn’t a particularly good one, and they’re hampered at every turn from making the kinds of changes that would give them a sustainable business model.  It seems that as a nation, we prefer serial bankruptcies and cheap, uncomfortable seats.

The Government Accountability Office has a report out today on the unfunded liabilities of the GM and Chrysler pensions.  The most controversial aspect of the bankruptcy reorganizations orchestrated by the Obama administration is that the companies reaffirmed their obligation to their retirement plans, which are often terminated when a company undergoes a bankruptcy.

For the most part, the terms of the restructuring called for current levels of employee benefits– including pension benefits–to remain in place for at least 1 year. Specifically, the master sale agreements for both companies stipulate that, in general, union employees are to be provided employee benefits that are “not less favorable in the aggregate” than the benefits provided under the employee pension and welfare benefit plans, and contracts and arrangements currently in place; nonunion employees are to receive current levels of compensation and benefits until at least 1 year after the date the agreements are signed.

A lot of people–including me–regarded this as a gift to the UAW, at the expense not only of the bondholders who had lent the firms money, but also of the company’s future chances at profitability.

The GAO report offers a rather dour picture of the plans’ funding status:

Nevertheless, according to GM’s projections utilizing valuation methods defined under PPA, large cash contributions may be needed to meet its funding obligations to its U.S. pension plans beginning in 2013 (see fig. 4). GM officials told us that cash contributions are not expected to be needed for the next few years because it has a relatively large “credit balance” based on contributions made in prior years that can be used to offset cash contribution requirements that would otherwise be required until that time.47 As of October 1, 2008, GM had about $36 billion of credit balance in its hourly plan and about $10 billion in its salaried plan. However, once these credit balances are exhausted, GM projects that the contributions needed to meet its defined benefit plan funding requirements will total about $12.3 billion for the years 2013 and 2014, and additional contributions may be required thereafter. In its 2008 year-end report, GM noted that due to significant declines in financial markets and deterioration in the value of its plans’ assets, as well as the coverage of additional retirees, including Delphi employees, it may need to make significant contributions to its U.S. plans in 2013 and beyond.

Similarly, Chrysler’s management expects that contributions to meet minimum funding requirements may begin to increase significantly in 2013, but are projected to be relatively minimal until then (see fig. 5). Chrysler, like GM, intends to use credit balances to offset the contribution requirements for some of its plans. As of end-of-year 2009, Chrysler had credit balances of about $3.5 billion for its UAW Pension Plan and about $1.9 billion across the other eight plans for which it provided funding information. In addition, Chrysler also has $600 million in payments from Daimler to help meet its funding requirements over the next few years.49 Nevertheless, Chrysler’s funding projections reveal that about $3.4 billion.

As Pete Davis notes:

GAO notes the complicated role played by the federal government, which guaranteed those pensions and now owns GM and Chrysler. GM and Chrysler bought union peace by overpromising pension benefits, knowing that the taxpayers stood behind those promises. Now what should the government do, take it out on the auto workers or hit the taxpayers to benefit the auto workers? Your elected officials will have little difficulty making this decision, invariably hitting future taxpayers to benefit favored constituents, like the auto workers.

Too true, but how likely is that?  There are a lot of scary big numbers floating around about the potential unfunded liabilities of the Pension Benefit Guarantee Corp., which guarantees private sector pensions.  They are indeed huge, and I think it more likely than not that the PBGC will eventually need a bailout.  But not for the total amount of its potential unfunded liabilities; many of those companies will keep operating.

So the important question is, will GM be among the problem children who actually dumps its pension obligations on the taxpayer?  As luck would have it, GM’s numbers are just out, and . . . um . . . they’re losing a lot less money than they used to!!!  Only $4.3 billion since they emerged from bankruptcy.  And the CEO says they might even make a profit in the near future, maybe.

To be fair, that includes whopping dose of one-time charge.  On the other hand, there’s a lot of grim news lurking deeper in the reports, according to The Truth About Cars:

Of course, you have to dig into the numbers to find the bad news, like the $56.4b in “cost of sales,” or the $700m interest cost, or the 48 percent North American capacity utilization in 2009, or the 16.3 percent US car market share.

Make no mistake, these companies are still on life support.  The CBO expects that the lion’s share of the government’s losses on TARP will come, not from anything the Bush administration did, but from the Obama administration’s decision to bail out the automakers and to a lesser extent, its bailout of homeowners.  It seems that a big chunk of our cost may come from picking up the gold plated pensions . . . “Cadillac Plans”, if you will . . . of the automakers.  And lest you think I’m picking on unions over management, it was management that used the UAW as a prop to extract these gargantuan sums from the pockets of innocent taxpayers.

I feel like we ought to get a little something back, here.  At the very least, they could offer everyone in America that OnStar service that sounds so great in the commercials.

Join the conversation about this story »

The Government Accountability Office has a report out today on the unfunded liabilities of the GM and Chrysler pensions.  The most controversial aspect of the bankruptcy reorganizations orchestrated by the Obama administration is that the companies reaffirmed their obligation to their retirement plans, which are often terminated when a company undergoes a bankruptcy.

For the most part, the terms of the restructuring called for current levels of employee benefits– including pension benefits–to remain in place for at least 1 year. Specifically, the master sale agreements for both companies stipulate that, in general, union employees are to be provided employee benefits that are “not less favorable in the aggregate” than the benefits provided under the employee pension and welfare benefit plans, and contracts and arrangements currently in place; nonunion employees are to receive current levels of compensation and benefits until at least 1 year after the date the agreements are signed.

 A lot of people–including me–regarded this as a gift to the UAW, at the expense not only of the bondholders who had lent the firms money, but also of the company’s future chances at profitability.

The GAO report offers a rather dour picture of the plans’ funding status:

Nevertheless, according to GM’s projections utilizing valuation methods defined under PPA, large cash contributions may be needed to meet its funding obligations to its U.S. pension plans beginning in 2013 (see fig. 4). GM officials told us that cash contributions are not expected to be needed for the next few years because it has a relatively large “credit balance” based on contributions made in prior years that can be used to offset cash contribution requirements that would otherwise be required until that time.47 As of October 1, 2008, GM had about $36 billion of credit balance in its hourly plan and about $10 billion in its salaried plan. However, once these credit balances are exhausted, GM projects that the contributions needed to meet its defined benefit plan funding requirements will total about $12.3 billion for the years 2013 and 2014, and additional contributions may be required thereafter. In its 2008 year-end report, GM noted that due to significant declines in financial markets and deterioration in the value of its plans’ assets, as well as the coverage of additional retirees, including Delphi employees, it may need to make significant contributions to its U.S. plans in 2013 and beyond.

Similarly, Chrysler’s management expects that contributions to meet minimum funding requirements may begin to increase significantly in 2013, but are projected to be relatively minimal until then (see fig. 5). Chrysler, like GM, intends to use credit balances to offset the contribution requirements for some of its plans. As of end-of-year 2009, Chrysler had credit balances of about $3.5 billion for its UAW Pension Plan and about $1.9 billion across the other eight plans for which it provided funding information. In addition, Chrysler also has $600 million in payments from Daimler to help meet its funding requirements over the next few years.49 Nevertheless, Chrysler’s funding projections reveal that about $3.4 billion.

As Pete Davis notes:

GAO notes the complicated role played by the federal government, which guaranteed those pensions and now owns GM and Chrysler. GM and Chrysler bought union peace by overpromising pension benefits, knowing that the taxpayers stood behind those promises. Now what should the government do, take it out on the auto workers or hit the taxpayers to benefit the auto workers? Your elected officials will have little difficulty making this decision, invariably hitting future taxpayers to benefit favored constituents, like the auto workers.

Too true, but how likely is that?  There are a lot of scary big numbers floating around about the potential unfunded liabilities of the Pension Benefit Guarantee Corp., which guarantees private sector pensions.  They are indeed huge, and I think it more likely than not that the PBGC will eventually need a bailout.  But not for the total amount of its potential unfunded liabilities; many of those companies will keep operating.

So the important question is, will GM be among the problem children who actually dumps its pension obligations on the taxpayer?  As luck would have it, GM’s numbers are just out, and . . . um . . . they’re losing a lot less money than they used to!!!  Only $4.3 billion since they emerged from bankruptcy.  And the CEO says they might even make a profit in the near future, maybe.

To be fair, that includes whopping dose of one-time charge.  On the other hand, there’s a lot of grim news lurking deeper in the reports, according to The Truth About Cars:

Of course, you have to dig into the numbers to find the bad news, like the $56.4b in “cost of sales,” or the $700m interest cost, or the 48 percent North American capacity utilization in 2009, or the 16.3 percent US car market share.

Make no mistake, these companies are still on life support.  The CBO expects that the lion’s share of the government’s losses on TARP will come, not from anything the Bush administration did, but from the Obama administration’s decision to bail out the automakers and to a lesser extent, its bailout of homeowners.  It seems that a big chunk of our cost may come from picking up the gold plated pensions . . . “Cadillac Plans”, if you will . . . of the automakers.  And lest you think I’m picking on unions over management, it was management that used the UAW as a prop to extract these gargantuan sums from the pockets of innocent taxpayers.

I feel like we ought to get a little something back, here.  At the very least, they could offer everyone in America that OnStar service that sounds so great in the commercials.

(NAV Image Credit: GM Mike Licht, NotionsCapital.com/flickr)

This is the first real good news I’ve seen in the housing market:  rental rates finally seem to be stabilizing.  Rents rose in 60 of the 79 metro areas tracked by Reis, a real-estate research firm.

Obviously, if you are looking to rent a place, this is not great news, and DC, my metro area, posted one of the highest growth rates.  But as Felix Salmon, among many others, has pointed out, the buy-to-rent price ratios remain out of whack in most places.  That was one of the most pressing signs that there was a housing bubble, and the fact that ratios remain high by historical standards is troubling.

However, as many people have also pointed out, the Federal government has been intervening very heavily in the housing market in order to keep prices from falling.  You can go back and forth on whether this is a good policy, or whether we should let prices collapse in a sort of modern day “purge the rottenness” strategy.  Either way, what it means is that instead of a sharp fall, you’re going to see a long period of stagnant prices, as markets slowly seek a more normal level.

One way that happens is for prices to stand still in the purchase market, but the other way that happens is for rents to start growing again.  And although vacancies remain very high, rising prices seem to signal that the vast excess inventory in the housing market is finally starting to be absorbed.  There are now so many distorting price signals and various sorts of stickiness built into the homebuying marketplace that rental prices are probably the only way to tell which way demand is heading.  Right now, the answer may finally be “in the right direction”. 

The head of the IRS seems to be confirming what we suspected:  the agency is going to enforce the mandate by deducting any penalties from your tax refund, not by using its other enforcement authorities such as the ability to file tax liens.

This bodes ill for the power of the mandate to prevent insurance markets from spiralling out of control; apparently, we’re already seeing some evidence of gaming in Massachusetts, though it’s not clear how widespread the practice is.  But leave that aside for the nonce, because it’s tax season, and I want to point out something that most people seem unaware of:  it is not a good thing to get a tax refund.

Getting a “refund” on your taxes means that you have just made an interest-free loan to the government.  Do you relish the opportunity to make interest-free loans to anyone else, just for the sheer joy of eventually getting your own money back?  I hope not.

If you get a tax refund every year, that means that you’re withholding too much.  Go to HR and change that–and then bank a little bit of your salary in an FDIC-insured money market, where you’ll at least get a few bucks out of it.  If you’re really clever, you’ll set that up as an automated direct deposit transaction.  That will give it all the characteristics of your tax refund–the money will automatically disappear from your paycheck before you see it, so that if you don’t look at the money market fund all year, you can be pleasantly surprised by your “refund”.  The only difference is, your money is working for you, instead of the government.