Category Archives: Economics

Stagflation

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I'm old enough to remember the last period of stagflation our country suffered through, and even though I wasn't yet part of the working adult world I vividly remember the nightly newscasts as being both confusing and scary.  I'm starting to get a case of deja vu, and I don't like it.  From ZeroHedge (found via Fec):

A recent Bloomberg article talked about "leakage from quantitative easing (QE).” That is, American as well as foreign firms are increasing tapping the U.S. market for Fed’s cheap money, but instead of generating domestic jobs, the money is actually invested away from the U.S. and into emerging markets, commodity-based economies, commodities, and non-U.S. opportunities. 

So far, it is abundantly clear that a majority of the past two years’ worth of QEs–The Fed bought $1.7 trillion of bonds in QE1 and is now buying a second batch of $600 billion–is not trickling down to the real economy to create jobs as intended.

The easy Fed money is instead fueling Big Banks' speculative buying binges of commodities, incentivizing QE leakage, thereby brewing another "perfect storm" for stagflation, that is, high inflation coupled with high unemployment.   

Fed Speak Translated to English

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Cone pointed to this earlier and I think it's brilliant.  It's a site that translates the Federal Reserve's recent announcement (something to do with $600 billion) into plain English.  Example:

This: "Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow."

becomes this: "The economy still sucks."

 

SSA Gets Punk’d; Average Wages Worse Than Originally Thought

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The Social Security Administration got punk'd by two people who filed wildly inflated W-2s, maybe as some kind of joke.  The result of the SSA finding is that they had to revise their latest wage numbers:

Removing the phony W-2s reduced total compensation by $32.3 billion or 0.55 percent of all the wages, salaries and bonuses earned by Americans. The total number of people with any work was reduced by two to 150,917,733.

As a result of the revisions, the data show that the average wage in 2009 dollars declined by $457 (not $243), a 1.2 percent decline from 2008. The revision shows that since 2000 the average wage, in 2009 dollars, barely changed in real terms, increasing only $347 or 0.9 percent after nine years.

The median wage – half make more, half less — was unchanged at $26,261. The median is $37 lower than in 2000 and $253 lower than in 2008.

So our country's median wage has declined over the last 10 years?! Add that little tidbit of info to the fact that a good chunk of us are living in houses, our single biggest asset, that are worth significantly less than they were two years ago and I think you begin to see why so many folks are ticked off right now.  

Happy Days

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You know how the economists are all like, "The recession is over! The recession is over!" and we regular schmoes are all like, "Maybe, but the world's still a big ****hole"?  Well, the Census Bureau is here to validate our feelings:

The new figures show, among other things, that the number of people getting married fell to a record low level in 2009, with just 52 percent of adults 18 and over saying they were joined in wedlock, compared to 57 percent in 2000…

The government revealed that the income gap between the richest and poorest Americans grew last year by the largest margin ever, stark evidence of the impact the long recession starting in 2007 has had in upending lives and putting the young at greater risk.

The top-earning 20 percent of Americans — those making more than $100,000 each year — received 49.4 percent of all income generated in the U.S., compared with the 3.4 percent earned by the bottom 20 percent of wage-earners who fell below the poverty line, according to the newly released Census figures. That ratio of 14.5-to-1 was an increase from 13.6 in 2008 and nearly double a low of 7.69 in 1968.

A different measure, the international Gini index, found U.S. income inequality at its highest level since the Census Bureau began tracking household income in 1967. The U.S. also has the greatest disparity among Western industrialized nations.

At the top, the wealthiest 5 percent of Americans, who earn more than $180,000, added slightly to their annual incomes last year, government data show. Families at the $50,000 median level slipped lower.

Three states — New York, Connecticut and Texas — and the District of Columbia had the largest gaps in rich and poor, disparities that exceeded the national average. Similar income gaps were evident in large cities such as New York, Miami, Los Angeles, Boston and Atlanta, home to both highly paid financial and high-tech jobs as well as clusters of poorer immigrant and minority residents.

On the other end of the scale, Alaska, Utah, Wyoming, Idaho and Hawaii had the smallest income gaps.

The Hill’s Revolving Door

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Live in D.C. long enough you'll realize that there's a fairly standard playbook for the ambitious:

  • Get a job, no matter how lowly, in a Congresscritter's office.
  • Pay your dues.  Work insane hours for pretty low pay, at least by D.C. cost of living standards.
  • Build connections.
  • Go to work for a lobbyist, or start your own lobbying firm, and continue to work insane hours but now make some insanely good money in the process.
  • Pray that your people stay in power.
  • If necessary repeat the process to rekindle your connections/influence.

One guy I knew worked for a Republican senator, left working for him to partner with a couple of guys in a new lobbying firm, and his first year was close to earning seven figures.  I heard through the grapevine that subsequent years were even better, but I lost touch over the last few years so I have no idea how the rise of the Democrats in 08 affected his business.  I suspect it wasn't good, especially after seeing this research (found via Freakonomics blog)about the direct correlation between influence and income of ex-staffers from the Hill.  From the summary:

While there is no scarcity of anecdotal evidence, direct econometric evidence on the extent to which previous ocials are able to convert political contacts into lobbying revenue remains, to the best of our knowledge, non-existent. In this paper we provide such evidence. In particular, we study how the lobbying revenue of congressional sta ers turned lobbyists depends on the power of the congressional politicians for whom they have worked in the past…

Our main nding is that lobbyists connected to US Senators su er an average 24% drop in generated revenue when their previous employer leaves the Senate. The decrease in revenue is out of line with pre-existing trends, it is discontinuous around the period in which the connected Senator exits Congress and it persists in the long-term. The sharp decrease in revenue is also present when we study separately a small subsample of unexpected and idiosyncratic Senator exits. Measured in terms of median revenues per ex-sta er turned lobbyist, this estimate indicates that the exit of a Senator leads to approximately a $177,000 per year fall in revenues for each aliated lobbyist. The equivalent estimated drop for lobbyists connected to US Representatives leaving Congress is a weakly statistically signi cant 10% of generated revenue. We also nd evidence that ex-sta ers are more likely to leave the lobbying industry after their connected Senator or Representative exits Congress.

Here's a nice synopsis of the research:

A College Dies

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I spent my freshman year of college in Nebraska attending Concordia Teachers College in Seward (now Concordia University).  I played on the school's soccer team and one of the schools we played against was Dana College in Blair, Nebraska so when I read this article in the Wall Street Journal about Dana's closing it kind of hit close to home. From the article:

Nestled amid cornfields in eastern Nebraska, Dana and Blair have grown up together over more than a century. Blair, population 7,700, was established in 1869 by railroad baron John Insley Blair. Fifteen years later, Danish Lutheran pioneers opened a seminary, which later became Dana College.

Dana's red-and-white Viking logo decorates the town. Many loyal locals dedicate free nights to whatever the "Dana kids" are doing, said Vaughn Christensen, 79 years old, who met his wife, Clarice, at Dana about 50 years ago and sent their three children there.

"We went to everything—all the music, the theater, the basketball. I don't think we missed one home game," Mr. Christensen said.Enrollment at Dana peaked in the 1970s at about 1,000. Before closing, the college enrolled just under 600 and employed about 175 faculty and staff. A 2003 study estimated that Dana contributed $20 million annually to the local economy, largely through payroll and local expenditures….

Investors proposed to buy Dana and turn it into a profitable operation. But an accrediting agency effectively pulled the lifeline away by denying the college's application to change ownership. Such accrediting agencies were facing pressure from federal education officials, who accused some of being too lenient in certifying for-profit schools with lax standards. Officials said such schools often pushed students to take on heavy debt loads without preparing them for careers.

"I feel like Dana was kind of collateral damage," said Jeremy Bouman, former vice president for institutional advancement at Dana (which rhymes with banana). "There was never a chance to be successful because of the political scrutiny."

The HIDC

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Is home ownership the American dream or the American nightmare?  (No this isn't another post about my family's homeownership woes.  One can only write so much about buying and living in a lemon).  David Stockman writes about the "Housing Investment & Debt Complex" and posits that we should pull the plug on the government's program of homeowner subsidies. What he proposes, letting all those homeowners go belly up and making the financiers realize losses on all those loans, will never happen but it's fun to think about in a makes-you-sick-to-your-stomach kind of way:

Before Richard Nixon initiated the era of Republican “me-too” Big Government in the early 1970s — including his massive expansion of subsidized housing programs — there was about $475 billion of real estate mortgage debt outstanding, representing a little more than 47% of GDP.

Had sound risk management and financial rectitude, as it had come to be defined under the relatively relaxed standards of post-war America, remained in tact, mortgage debt today would be about $7 trillion at the pre-Nixon GDP ratio. In fact, at $14 trillion or 100% of GDP the current figure is double that, implying that American real estate owners have been induced to shoulder an incremental mortgage burden that amounts to nearly half the nation’s current economic output…

At the end of the day there are upward of 15-20 million American households that can't afford their current mortgages or will be strongly disinclined to service them once housing prices take their next — and unpreventable — leg down. But Pimco’s gold-coast socialism is exactly the wrong answer. Rather than having their mortgages modified or forgiven, these households should be foreclosed upon, and the sooner the better. In that event, there's absolutely no danger that impacted families will go without shelter. The supply of rental units is swelling by the day and rental rates will come down further as speculators buy up REO and recycle back to the rental market.

Stated differently, pulling the plug on HIDC will rescue millions of households from mortgage-payment slavery and put them into a buyer's market for rented-housing services — a social welfare gain under present circumstances. To be sure, they'll loose their credit and probably their credit cards in the process. But the days of living off the housing ATM and bank-issued plastic are over for the American people anyway. Creating an honest financial environment where households are required to rebuild their balance sheets and consume within their means isn't a disservice or injustice to anyone. 

Likewise, millions of additional families that can, in fact, service their mortgages or that own their homes debt-free will face a further shrinkage of their paper wealth. The $16.5 trillion of household real estate value reported by the Fed in its Flow of Funds for the first quarter of this year was already down about 30% from the 2006 peak, and could readily decline by another 20%. But would the implied $3 trillion loss of paper wealth be avoidable in any event? 

Found via Fec