Category Archives: Economics

Greek sympathy. Not.

Posted on by davald

A friend, also an economist, wondered about the reported austerity measures undertaken by peripheral Eurozone countries as a condition for (mostly) German loans. Have the governments of these countries actually reduced spending?

The chart above, based on FRED data, shows that all three countries reduced their “final consumption spending” from their peak in 2009, although Ireland began its adjustments a year earlier. Greece, to no one’s surprise, sharply curtailed spending.

The New York Times published recent data on several European countries, including Germany and France. Here’s a chart based on the figures:

Greece is in a world of hurt, and very much on the brink of exiting the Eurozone and reinstating the drachma. One of the country’s biggest problems is tax collection. The New York Times has a piece on how Greece’s wealthiest citizens avoid paying:

Mainly, though, these wealthy citizens have done what Greeks from the richest to those of modest means traditionally have done: Pay as little as they can in the way of taxes.

Such obstinacy no doubt galls the traditionally frugal Germans. Chancellor Merkel has steadfastly insisted that Greece institute much needed reforms, including the whole issue of taxes and their collection. The Times:

Last year alone, an estimated 8 billion euros ($10.2 billion) in collectible taxes were in arrears — nearly half of the country’s budget deficit [my emphasis].

Greece’s One-percenters, as the Times article reports, are loath to engage in philanthropy (a Greek term, for heaven’s sake). They are hoarding their cash or investing elsewhere. Sympathy is also a Greek word, but it’s in short supply amongst the wealthy. Thus, ordinary Greeks—counterparts to the Rest of Us here—suffer.

What a mess.

Private equity

Posted on by davald

Those who may be curious about what private equity firms do and the consequences of their transactions may want to read this report (pdf) from the Center for Economic Policy and Research. I give you the opening two paragraphs of the report’s executive summary:

Private equity (PE) companies have engaged in two big waves of leveraged buyouts in the U.S. in the last 30 years. The first was book-ended by the 1979 buyout by KKR of the Houdaille Corporation, a Fortune 500 conglomerate employing 7,700 people and by another spectacular KKR deal – its record-setting buyout of RJR Nabisco for $31.1 billion in 1989. The second wave began in the late 1990s and peaked in 2006-2007, with aggregate transaction value in private equity buyout deals in 2007 reaching $607 billion and the number of deals reaching 1,500.

Private equity companies are investment firms that recruit private pools of capital from pension funds, endowments, hedge funds, sovereign wealth funds, and wealthy individuals. They use extensive debt financing to take ownership and control of relatively mature businesses in a leveraged buyout. That is, private equity firms buy businesses the way that individuals purchase houses – with a down payment or deposit supported by mortgage finance. A critical difference, however, is that homeowners pay their own mortgages, whereas private equity funds require the firms they buy for their portfolios to take out these loans – thus making them, not the private equity investors, responsible for the loans. The only money that the private equity firm and the investors in its funds have at risk is the initial equity they put up as a down payment.

One takeaway from the report is that there are perverse incentives involved in a PE’s acquisition of a company. Since the investors in the PE expect a maximized return on their dollars, and since the apparent profitability of the newly acquired company depends on the difference between revenues and costs, and since “the market” dictates price, the acquired firm focuses on reducing costs. The biggest targets for cost-cutting are employees themselves, their wages, and their pensions. The management of the newly acquired company stands to gain handsomely on the eventual re-sale of the company, if they can lower costs and hype value. The study:

This kind of downsizing is facilitated by the fact that in the U.S., companies are not required to provide severance payments based on years of service to employees who are let go. An employee with a sterling record of performance over 20 or 30 years can be let go with little or no notice and without a severance package that recognizes his or her investment in valuable firm-specific skills.

Executives, by contrast, regardless of their years of tenure, expect a generous severance package, but there is no requirement for similar treatment of workers. Downsizing is costless to the company – at least over the short term.

In other words, employees get screwed. Nothing new about that.

Amartya Sen on Europe’s failed policies

Posted on by davald

Another Nobel Prize winner in economics chimes in. Amartya Sen condemns the German-dictated austerity measures, suggesting that they manifest a “transparent disdain” for the people. Besides, they are counterproductive, as Keynes argued 80 years ago. Sen:

IF proof were needed of the maxim that the road to hell is paved with good intentions, the economic crisis in Europe provides it. The worthy but narrow intentions of the European Union’s policy makers have been inadequate for a sound European economy and have produced instead a world of misery, chaos and confusion.

On the political side, Sen reminds us that the people ultimately decide who governs them. In recent elections, the citizens have tossed out the incumbents. But Sen also suggests that the failed austerity regime has fanned the flames of extremism on both the Right and the Left. We Americans know all about such polarization. Sen:

Europe cannot revive itself without addressing two areas of political legitimacy. First, Europe cannot hand itself over to the unilateral views — or good intentions — of experts without public reasoning and informed consent of its citizens. Given the transparent disdain for the public, it is no surprise that in election after election the public has shown its dissatisfaction by voting out incumbents.

Second, both democracy and the chance of creating good policy are undermined when ineffective and blatantly unjust policies are dictated by leaders. The obvious failure of the austerity mandates imposed so far has undermined not only public participation — a value in itself — but also the possibility of arriving at a sensible, and sensibly timed, solution.

This is a surely a far cry from the “united democratic Europe” that the pioneers of European unity sought.

Brooks-bashing

Posted on by davald

Well, deserved, of course. New York Times columnist David Brooks wrote an apology for Mitt Romney, the company he co-founded, and private equity firms in general. Brooks intoned:

Forty years ago, corporate America was bloated, sluggish and losing ground to competitors in Japan and beyond. But then something astonishing happened. Financiers, private equity firms and bare-knuckled corporate executives initiated a series of reforms and transformations.

If Brooks’s history were correct we would expect to see American products more competitive on the international market. We’d be running a trade surplus rather than a deficit. But the facts, those gnarly, inconvenient statistics, tell a different story. Consider the U.S. against other economic actors. This chart, for instance:

You see, Mr. Brooks, we’re importing far more goods and services than we are exporting. In other words, our products aren’t all that competitive.

Now let’s look at the U.S. current account balance over time. We’ll pay particular attention to what happened to the metric after 1980, or roughly 40 years ago, when America, through the efforts of Mitt Romney and his ilk, transformed the economy, rendering corporations leaner, meaner, and more profitable.

Economist Dean Baker quickly jumped on Mr. Brooks here. Baker:

…If he wants to credit private equity with turning around the economy then we should have seen the turn around in productivity growth in the 80s (or at least the beginning) when leveraged buyouts first became a major feature of the U.S. economy. Instead, we had to wait until the mid-90s, long after private equity was well established.

As a practical matter, turning around failing firms is only one way in which private equity companies make money. The most common way they make money is by gaming the tax system. This is done first and foremost by loading companies up with debt. Interest payments on debt, unlike interest payments to shareholders, are tax deductible. By reducing target companies’ tax liabilities, private equity firms can make large profits even if they don’t do anything to turn around the company.

Busy with selling his latest book, Krugman didn’t weigh in until today, although he did not mention Mr. Brooks by name. Krugman:

As the debate moves – appropriately! – to a discussion of Romney’s career at Bain, one thing I’ve noticed is that everyone on the right, and a fair number of people who should know better, basically believes that Gordon Gekko was right. Before the Gekkos came along, they assert, American business was sluggish, unproductive, and uncompetitive. Then came the LBOs and all that, and our economic energy was unleashed.

It’s unclear if Brooks is to be found amidst the Right or within the group of people “who should know better.” My guess is that Mr. Krugman would prefer that his fellow columnists on the Times “know better.” On the other hand, Brooks rarely writes anything credible.

Now, I may not be entirely fair with Mr. Brooks. Corporations have become more profitable. Let’s look at productivity first.

Hmmm. Something happened in the late 70s and early 80s to cause a dip in productivity. Must be those private equity firms unleashing workers to generate more output. Or not.

What about corporate profits? Here’s one measure. It’s a chart showing non-financial corporate profits over time.

We’ll notice that profits did indeed begin to soar after 1980, although there have been two major dips since, both occurring during recessions. So, both profits and productivity have risen. Who got the money?

Are you feeling it, the decline in your wages? The above chart tells you that you should. Someone is reaping the benefits of our work.

Again, the Great Divergence: the rich are getting richer and the poor poorer. Corporations seem to be doing well.

The above chart underscores Dean Baker’s comment, that corporate profits didn’t start taking off until sometime after the leveraged buyouts and other private equity firms’ transactions became the norm. The chart also tells us that the Great Recession delivered quite a blow to profitability. Just look at that downward spike in 2009. Don’t mourn for the corporations, however. They are back to making profits.

Taxes

Posted on by davald

Republicans, as a rule, loathe taxes. Some, like Ron Paul, would prefer to eliminate the IRS, which would have the effect of eliminating federal taxes, I suppose. Supreme Court Justice Oliver Wendell Holmes reportedly said in a 1934 speech that “taxes are the price we pay for a civilized society.” It would seem, then, that Republicans have no use for the latter, and it shows, given their rabid temperament—which is simply mean.

I have a decidedly different view of government, one more aspirational than descriptive. I believe that we deserve a government that works for the Rest of Us rather than as a tool for the filthy rich. As it stands, Congress is a cesspool of corruption, completely beholden to its wealthy benefactors.

Yet, if we were to have a government that Abraham Lincoln talked about, you know “of the people” and all that, taxes would have to rise on the rich, certainly, and perhaps a few quintiles below. Those taxes, however, would be used to fund what “the people” want.

But I’m going to eliminate Republicans from “the people,” since they don’t like government, any government, to begin with. That leaves progressives and liberals, the kind of people who long for a “kinder, gentler” nation. We, the real Americans (how’s that?) would gladly pay our taxes knowing that they would be used in furtherance of that goal.

So, speaking of taxes, I offer a few charts below.

The first two are based on historical data provided by the White House, one showing tax receipts from individuals and corporations. The second shows each as a percentage of the gross domestic product.

GDP actually fell in nominal dollars between 2008 and 2009, while tax rates remained constant. That helps explain the last spike in corporate receipts (red) and also in individual income taxes.

Corporate taxes as a percent of GDP have steadily declined since 1952, widening the gap with individual income taxes.  Individual income taxes reached their peak in 2000 (as a percentage of GDP) then fell sharply as a result of Bush II’s tax cuts.

Individual income taxes, as a percentage of GDP, remained fairly constant from the early 1950s to the middle and late 90s, when Clinton’s tax increases became effective. Moreover, I would expect that during that period the distribution of the income taxes changed with the marginal tax rate.

A while back I estimated the income taxes on a million dollars of earned income. Take a look:

The Republicans, who don’t count in my universe, would keep lowering the marginal tax and the taxes on corporations. Well, they wouldn’t stop there—everybody would get a tax cut. Except, lest we forget, the poor, those who don’t pay any income tax, though they pay other taxes (e.g., sales). These degenerates, in the Republicans’ eye, need to have “skin in the game,” so they would have to start paying taxes.

Oh, and the GOP would likely eliminate the Earned Income Credit. The poor just aren’t poor enough for the Republicans.

Robin Hood Tax

Posted on by davald

I’m ashamed to admit this, but either I once knew and forgot or I never knew—about the Robin Hood Tax. Last night I got around to watching a taped episode of Bill Moyers. He interviewed RoseAnn DeMoro, a leader of the largest national nurses’ association, about the tax

She and others would like Congress (or the states or the entire world’s governments) to impost a 0.5% tax on financial transactions, or 50¢ on every $100 trade or transfer. By their estimates, the tax would raise $350 billion a year in the United States and $77 billion in the Eurozone. That money could and should be used, says DeMoro, to put people back to work.

Moyers asked DeMoro for her “bucket list,” what she would like to see accomplished before she retires from the scene. She responded with single-payer universal health care, livable-wage jobs for everyone who needs work, and money out of politics.

DeMoro was asked if she or her association would endorse Barack Obama for re-election. She said probably not, because Obama has been a major disappointment, once uttering his support for single-payer and a public option in the current health care act, neither of which survived, of course.

Some global notables have come out in support of the Robin Hood Tax, including Desmond Tutu, Pope Benedict, Bill Gates, Warren Buffet, and even Germany’s Angela Merkel. We can appreciate that if all financial transactions across the planet were subject to this trifle of a tax, then the bankers couldn’t go elsewhere to gain advantage.

Another example of my ignorance is that the U.S. did have a transaction tax from 1914 to 1966. Hmmm. The end coincides with the beginning of the Great Divergence and the federal government’s accumulation of debt. Cause and effect or simple correlation? The tax was 0.1% of stock sales and 0.04% on transfers. Assuming 0.1% on all transactions, the amount that would have raised today is $70 billion per annum. That’s about three percent of current federal receipts, which were $2.3 trillion, according to the White House’s historical tables. (There is a much smaller tax on financial transactions, revenues from which are used to fund the SEC.)

At any rate, sounds like a good idea. Pass it on.

Gambling

Posted on by davald

John Maynard Keynes referred to Wall Street (and its London counterpart, from which Keynes himself extracted substantial profits) as a casino, in its literal meaning. That is, Wall Street is where people place bets.

The legal gambling could be of no moment to the Rest of Us. If rich bastards want to play with their own money, so be it. (They’ve got so much of it, that they no doubt face the challenge of what to do with all that cash. One option: buy a jersey worn by Babe Ruth for $4.4 million.) But, of course, the very rich are playing with our money, since taxpayers are on the hook should bets go south.

This is one major reason why the casino captains must be constrained against their own excesses. I’m talking government regulation. The bankers don’t like it, and why should they? They’re perfectly positioned: heads they win, tails we lose. They’ve made billions and billions of dollars engaging in moral hazard of the worst kind. Should they guess wrong, we come to the rescue. We do so (implicitly) because these guys are really too big to fail. They’ve captured such a share of the global economy that failure for them means catastrophe for all.

Lest you think I’m exaggerating the gambling part, take a gander at this New York Times article on what was going on, and may still be, at JP Morgan Chase. Without proper supervision, the underlings run wild, placing all sorts of bets and buying and selling the same toxic derivatives that brought the whole house down in 2007-2008. And it would still be down, along with the Rest of Us, but for TARP.

“When Ina [Drew] was there, things ran smoothly,” one former trader there said.

But Ms. Drew’s firm hand began to weaken after she contracted Lyme disease. Her absences opened the door for tensions among her deputies to flare into the open. “Look,” one current trader added, “it is a tough place to work.”

Most significant, her deputy in New York was increasingly at loggerheads with her deputy in London who spearheaded the strategy behind the losing bet, Achilles Macris, the current and former traders said.

But there was only so much she could do when she was away, even though some current traders and senior executives at the bank emphasized that Ms. Drew remained vigilant about risky trades throughout her tenure.

“No one could really challenge Achilles’s traders,” a former risk officer said.

Beyond that, the chief investment office was performing well, earning sizable profits for JPMorgan even as other businesses at the bank, like home loans, began to hemorrhage money. Those gains came as the size of the unit’s trades was increasing, but the office’s success blunted questions that were raised about the added risk.

During this time, Mr. Macris gained more latitude to build and expand trades from his desk in London — including the wagers that ultimately went so wrong for the bank. [my emphases]

We should understand that these are leveraged bets, based on some underlying asset, which may or may not be tangible. More often than not the asset is yet another financial instrument, itself based on an asset, either real or virtual. And so on. Should there be an external shock, a broad term encompassing just about any event or change in psychology, the entire scheme collapses. We should also understand that JP Morgan et al. often guess right on their bets, and they make lots of money.

But most important we should understand that these Wall Street gamblers aren’t doing a damn thing for the Rest of Us. Their profits are so many 1′s and 0′s in a computer, which enables them to buy baseball jersey’s, an island retreat, or a pro sports team.

In his column this morning, Paul Krugman makes the case for regulation. Krugman:

The point, again, is that an institution like JPMorgan — a too-big-to-fail bank, not to mention a bank whose deposits are already guaranteed by U.S. taxpayers — shouldn’t be engaged in this kind of speculative investment at all. And that’s why we need a return to much stronger financial regulation, stronger even than the Dodd-Frank regulations passed back in 2010.

Yet, I’m afraid that Krugman’s wise advice amounts to nothing. Even if Obama is re-elected he’s unlikely to rein in the likes of Jaimie Dimon, whom the president has previously labeled a very bright guy, or words to that effect. The Washington Post reports that Obama and his aides have spent quite a bit of time with Wall Street lobbyists. And via Chuck Schumer, Wall Street continues to pour massive amounts of dollars into Obama’s campaign chest. Should Romney acquire the White House we can kiss regulation goodbye and just about everything Obama has somehow managed to accomplish, including his health care law. Heck, Wall Street has purchased the best government their money can buy. Institutionalized corruption, I say.

Now everyone’s using it

Posted on by davald

I surely didn’t coin the expression ‘The Great Divergence,’ but I’ve been encountering that term with some frequency of late. First, Timothy Noah has a book by that title. And now this.

I do take exception to this excerpt from the linked piece:

I consider the Great Divergence to be one of the most important developments in the United States over the past thirty years. The growing economic divide between American communities is not an accident but the inevitable result of deep-seated economic forces.

Was the Great Divergence “inevitable”? I think not, and so do others, including Dean Baker (pdf), Jacob Hacker and Paul Pierson (Winner-Take-All-Politics) and John Cassidy (How Markets Fail). These authors chronicle the deliberate and concerted efforts of the money class to whittle down New Deal financial regulations and persuade Congress to pass bills in their favor. In their judgment, there was nothing “inevitable” about the Great Divergence at all. Here’s Baker:

Money does not fall up. Yet the United States has experienced a massive upward redistribution of income over the last three decades, leaving the bulk of the workforce with little to show from the economic growth since 1980. This upward redistribution was not the result of the natural workings of the market. Rather, it was the result of deliberate policy, most of which had the support of the leadership of both the Republican and Democratic parties.

Medieval

Posted on by davald

A friend, and fellow ex-Catholic, linked me to the video on this site, Catholics Called to Witness. It is indeed slick, in a production sort of way, and appeals not to one’s reason but to our limbic system. That is, it’s all about imagery and music. Therefore, it will surely be effective in calling Catholics to November’s voting booths to cast ballots that reflect the Church’s “values,” which are “marriage,” “life,” and “freedom.”

The video, which is positively medieval in tone and visual expression, with a blacksmith pounding out letters that are eventually assembled to spell out the “values,” emphasizes that marriage must be “reinforced” rather than “redefined.” Abortion, of course, must be prohibited in all circumstances. Compelling the Church’s institutions to provide health care insurance that covers contraception is anathema.

Conspicuously absent from this call to arms is any mention of the Church’s social gospel, the teachings found in the Sermon on the Mount, for example. Thus, we hear or see nothing about the plight of the poor and near-poor, roughly half our population, or that 40 million Americans lack health insurance, or the plutocracy that makes paupers of the Rest of Us, or the wars in Iraq and Afghanistan, or the thousands on death rows awaiting lethal injection. Nothing. Nada. Nichts.

The conspicuous absence is all in the name of our Lord. Damn the Church.

It really is the Republicans

Posted on by davald

So say Thomas Mann and Norman Ornstein in answering the question, Who’s to blame for our political and economic mess? They write:

The GOP has become an insurgent outlier in American politics. It is ideologically extreme; scornful of compromise; unmoved by conventional understanding of facts, evidence and science; and dismissive of the legitimacy of its political opposition.

Obama’s big mistake was that he failed to understand his enemy, choosing to negotiate and compromise with them. The Republicans, we should tell the president, eliminated those verbs from their dictionaries.