Wednesday, January 09, 2008
Wolf, M. (2008). Challenges for the world's divided economy. Financial Times. January 9, 2008. Available online: http://www.ft.com/cms/s/0/9a62eaa8-be14-11dc-8bc9-0000779fd2ac.html?nclick_check=1.
As Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard note in a brilliant new paper, this had similarities to the recycling of petrodollars to developing countries that preceded the debt crisis of the 1980s. This time, surplus savings were, in their words, “recycled to a developing country that exists within the US”: the subprime borrowers. The consequences for banks also look disturbingly similar.
One is tempted to say "People who were harmed will learn from this experience," but many might not. While there's plenty of in-group variation, between-income-group variation in general intelligence is stark. Many of the people who were directly bitten by the subprime mess are precisely the people least likely to learn from their experience.
Wednesday, December 05, 2007
An outrageous example of big government interventionism at its worst.
Capitalism is great without the risk.
Sunday, August 27, 2006
"3 tips: Maximizing Card Rewards," by Gerri Willis, CNN, 10 August 2006, http://money.cnn.com/2006/08/09/pf/saving/toptips/index.htm.
"Credit card issuers slash rebates on use at pumps," by Harriet Brackey, South Florida Sun-Sentinel, 25 August 2006, http://www.sun-sentinel.com/business/local/sfl-znoreward25aug25,0,5553635.story?coll=sfla-business-headlines.
Credit cards may become a little less good for you.
Citigroup said this week that it would slash by more than half the cash rewards it pays to holders of the Citi Dividend MasterCard on purchases at gas stations and grocery and drug stores. The 5 percent cash back will soon be 2 percent.)
American Express, too, will end double cash-back points paid on "everyday" purchases to cardholders in its Membership Rewards program starting in October.
(The second bit is especially interesting if you consider a recent CNN "correction")
An earlier version of this column incorrectly stated that 6 million credit card solicitations were sent out annually. In addition, it incorrectly indicated that American Express would eliminate double-reward points on all merchandise. CNNMoney.com regrets the errors.
This isn't exactly a big scandal -- Citibank and MasterCard are not in a league of villains with NationMaster and Ask.com -- but it's still annoying. Getting 5% has been nifty, and it will be annoying trying to find an alternative card or, failing that, using anyone-but-CitiMasterCard out of spite.
Is any 5%-on-food card company not betraying the hopes and dreams of American shoppers -- and American democracy -- by continuing such a rebate program?
Wednesday, November 30, 2005
In less than 24 hours I completed Freakonomics: A Rogue Economist Explains the Hidden Side of Everything. Mark Safranski already summarized Freakonomics better than I could, so my "buy this book" post will be a graphical summary of one of the chapters: Why Do Drug Dealers Still With Their Moms?
A heroic grad student named Sudhir Venkatesh worked with a crack cocaine gang -- the Black Gangster Disciple Nation -- for several years. After attempting to pass out a survey, which began
How do you feel about being black and poor?
(a) Very bad
(c) Neither bad nor good
(d) Somewhat Good
(e) Very good
Which, besides displaying a lack of symmetry between (b) and (d), left off the correct answer ((f) Fuck you) and almost got young Sudhir killed.
Slowly, though, Sudhir gained their trust, and discovered the corporate structure of the street toughts.
At the top of the pinacle where the Board of Directors, whose twenty boardmen each earned half a million dollars a year. Life was good for a Director
Below the Board of Directors are the regional Franchisees. Operating like Sheiks, they grossed around $400,000 a year. However, with the Franchisee's autonomy comes fiscal responsibility. Most of the franchisee's income has to be spent on expenses, letting the franchisee net $100,000 a year.
The Franchise of the Black Gangster Disciple Nation studied then had three officers: An Enforcer, who shared acted like Barnett's SysAdmin, maintaining peace from internal threats
A treasurer who, just like in Hall Governments, kept charge of the organization's money
And a Runner, in charge of logistics.
The annual salary of three officers was $8,000 per year each.
$8000 / officer / year * 3 officers / franchise * 100 franchises = $2,400,000 / year expense for BGDN
Below the officers were 500 Foot Soldiers. But like the groundtroops of the System Administrator, their job is not violence. As the local Franchisee reported:
We try to tell these shorties that they belong to a serious organization... It ain't all about killing. They see these movies and shit, and they think it's all about running around tearing shit up. But it's not. You've got to learn to be part of an organization; you can't be fighting all the time. It's bad for business.
Like Barnett's SysAdmin, the foot soldiers are mostly "private sector" -- their true job is salesman. Each of the 50 Foot Soldiers earned $3,960 (yes, much less than minimum wage) every year.
$3,960 / foot soldier / year * 50 foot soldiers / franchise * 100 franchises = $19,800,000 annual expense for BGDN
Below the Foot Soldiers are 200 "rank and file." These interns wish to rise to the level of Foot Soldier, and pay dues for the chance to one-day rise up the corporate ladder.
To graph annual income, for an average Director, an average Franchisee, and average Officer, an average Foot Soldier, and an average Rank & File:
Graphically, we can chart the organization structure as:
Or more traditionally, looking at the organizational structure as a "flow of security"
Realizing we can look at the "hierarchy" as just one type of flow, it becomes obvious we can chart the "flow of capital" as well:
Which opens questions about the political economy of crack cocaine gangs...
However, in Black Gangster Disciple Nation's defense, foot soldiers do make up the single largest payroll expense for their gang
One might note that if the Black Gangster Disciple Nation is typical of corporate-style crime, John Robb's suggestions are dangerously wrong.
Interested in learning more? Buy the book.
Update: Stephen J. Dubner, a highly respected journalist and co-author of Freakonomics, was kind enough to link to me on the Freakonomics blog
Dr. Steven D. Levitt, Professor of Economics at the University of Chicago, as well as the other co-author of Freakonomics, was kind enough to comment below.
Update: Over at John Robb, Jamie links to this critique of this gangster of Freakonomics
They do present some anecdotal evidence that the gangsters were not well paid that doesn't depend on the notebooks, but it's if anything even weaker. The simple fact that someone lives with his mother is not actually knockdown proof that he is strapped for cash; something like thirty per cent of young Italian men do it for the simple reason that it's better than cooking and cleaning for yourself. I also think it's quite naïve to assume that when the gang members (who were, we shall remember, full-time drug dealers) asked Venkatesh to try and get them a janitorial job at the university, this showed that anything, even cleaning toilets on minimum wage, was a better life than the Gangster Disciples. I am hardly the most streetwise guy around, but even I can work out a couple of other possible reasons why a full time drug dealer might want a job which allowed him to wander round a university campus more or less at will. Students buy drugs.
Furthermore, even if we take the numbers in the notebooks as reliable, we are faced with the observable fact that crack dealers (even street soldiers) have expensive tastes and hobbies. Even leaving aside the question of trainers and jewelery (on which I have no hard data about ownership to argue against Levitt), it is an undeniable fact that even the most junior members of the Gangster Disciples were able to engage in the hobby of pistol shooting, a popular but expensive middle-class pastime which I would consider to normally be beyond the means of a burger-flipper at McDonalds. The non-salary compensation of JT's street dealers might be really quite high; access to guns, free admission to nightclubs, favorable deals on stolen goods and clothing, regular social events with local rappers, it all adds up and compares really quite well to the fast food trade, and as far as I can see the informal healthcare plan was also quite generous compared to most mainstream employers in that it covered family members and had substantial death-in-service benefits which would have been worth quite a lot in a neighborhood that was not exactly Hampstead even for non-gang members. I find the seeming absence of any analysis of the non-salary component of compensation quite strange, particularly since the underlying work was done working with a sociologist who would at least have some analytical framework which one might use to measure the value of the benefit to the gang member of being in a gang and thus having some degree of status in a community where status mattered.
Read the whole thing
Interested in the graphics used in this post? Inkscape, OpenClipart, OpenOffice Draw, and Paint.Net are all free -- as in speech!
Tuesday, May 17, 2005
"H&R Blockbuster," New York Times, 17 May 2005, http://www.nytimes.com/2005/05/17/opinion/17tues1.html?.
A good suggestion from Nyt on increasing national savings: government-matching of IRA contributions
Another important reason is that typical tax- sheltered savings accounts - unlike the matched I.R.A. deposits in the H&R Block test - are not structured to take advantage of how people actually behave with regard to their money. It is more difficult to part with a portion of one's paycheck than it is to save part of a tax refund because a paycheck represents bread and butter, while a refund seems like a windfall. Psychologically, a match that is paid directly into one's account is more gratifying than a tax write-off. And then there's convenience. H&R Block made it easy for its clients to save. We can't say the same thing for the United States Congress, with its hodgepodge of poorly targeted and complex savings programs.
Lawmakers in Washington could establish a generous and easily understandable I.R.A. match for a fraction of what it would cost to extend the Bush tax cuts for the wealthy. The evidence in favor of doing so is compelling. Then, when the ideological din abates, a future Congress can enact the reforms that are actually needed to strengthen Social Security after midcentury: modest tax increases and tempered benefit cuts, phased in over decades.
Their suggestion to tax the young more to support a unconsciounable 1930s-era SS system is less moral, but I'm glad they have joined the discussion.
Thursday, May 05, 2005
"The Thrift Imperative," New York Times, 5 May 2005, http://www.nytimes.com/2005/05/05/opinion/05thu2.html?.
I realize its in the context of criticizing Bush... but wow. The New York Times agrees that saving is preferable to consumption. No more archiac Keynesianism for the Old Lady!
The stock market has been a scary place lately: new yearly lows followed by big daily gains, then more lows and so on. While no one fully understands these gyrations, we do know that markets become skittish when fundamentals are out of whack. There's arguably no more fundamental imbalance these days than the United States' low national savings - the amount Americans save minus the amount the government borrows. But don't expect to hear our nation's leaders talk about it.
Not only that, Nyt correctly identifies why money invested in personal real estate is not "savings"
Individuals also do not save enough, as reflected in the widespread inadequacy of retirement savings. Some argue that the amount of personal savings is understated because it does not take into account the increase in housing values, which has many homeowners feeling flush. But elevated home values do not add to national savings.
Such wealth is not converted into cold hard cash until houses are sold, and at that point the money flowing into the sellers' pockets is simply money that is flowing out of the buyers' pockets. No new wealth is created unless a seller saves the windfall - which is generally not the case in today's consumer economy. Instead, sellers increase their purchasing power, while the saving rate declines and the country as a whole becomes poorer. The uncomfortable reality is that saving is possible only by deferring today's consumption, not by spending freely while one's house appreciates.
Wow. More economic literacy than I ever gave the Times credit for. Wow.
Thursday, April 21, 2005
"A Bipartistan Moment," by Scott Conroy, CBS News, 21 April 2005, http://www.cbsnews.com/stories/2005/04/21/politics/main690042.shtml.
A victory for the Saniac wing of the Democrat Party, as it embraces part of modern Market Liberalism
While the battle over the future of the filibuster continues to rage in Washington, Congressional Democrats and Republicans have found a domestic issue on which they can agree: free money for babies.
Some of the most staunchly partisan members on both sides of the aisle came together on Thursday to introduce the ASPIRE Act of 2005, a bill that would allow a onetime $500 "kids account" contribution for every newborn child. The bill would affect all American children born after Dec. 31, 2006, but is particularly focused on families that fall below the national median income, who will be eligible for an additional $500 contribution and federal matching funds of up to $1,000 ($500 in the Senate version) for private contributions each year until the child is 18.
"I like to regard it as Head Start for your piggy bank," said Sen. Charles Schumer, D-N.Y.
Even better? The plan uses Thrift Savings Accounts -- exactly the same me mechanism Bush is proposing for personal retirement accounts! Great news!
Tuesday, April 19, 2005
"Supreme Court rules IRAs can be shielded from creditors," CNN, 4 April 2005, http://www.cnn.com/2005/LAW/04/04/scotus.bankruptcy.ap/index.html.
Sometimes a kind policy and a wise the same thing. This is one of those times.
The Supreme Court on Monday ruled that creditors may not seize Individual Retirement Accounts when people file for bankruptcy, giving protection to a nest egg relied upon by millions of Americans.
The unanimous decision sides with a bankrupt Arkansas couple fighting to keep more than $55,000 in retirement savings. As a result, IRAs now join pensions, 401(k)s, Social Security and other benefits tied to age, illness or disability that are afforded protection under bankruptcy law.
IRAs should not be treated any differently because the benefits are tied to people's age, the court said.
I can't comment on the points of law, but this is a great decision. It is important to raise America's savings rate, and retirement savings is a great way to do this. However, if individual retirement accounts were subject to bankruptcy seizures, less people would use them. If creditors could take them, this would increase their risk and decrease their attractiveness.
With this decision, the Supreme Court furthers a 21st century economy. Centrally controlled pension systems have had this protection for decades. Now individual investors also share in their benefits.
Thursday, March 31, 2005
Personal spending rose 0.5 percent in February while incomes rose a less-than-expected 0.3 percent, the Commerce Department said today in Washington. The Labor Department said today the number of Americans seeking first-time jobless benefits jumped in the last weekly tally before tomorrow's monthly jobs report.
Again spending rose faster than savings. This is great for Keynesians, but in the real world this retards growth and weakens are international position. Americans are literally selling out the future at steep discounts. A consumption tax would punish spendin, not earnings and not savings, and give us a sustainable economy.
Likewise, isn't it great being a hostage to the Middle East?
Crude oil rose and gasoline and heating-oil surged to records on signs that U.S. refineries lack capacity to make enough fuel and Goldman Sachs Group Inc. analysts predicted that oil could touch $105 a barrel.
"It's equally likely that oil will touch $105 or $15 a barrel,'' said Jason Schenker, an analyst with Wachovia Corp. in Charlotte. "It's not going to $105 without a major cataclysmic terrorist attack on significant oil infrastructure. It's not a rational expectation.''
A geogreen strategy would take pain today, in the form of consumption taxes on oil, to avoid this randomness tomorrow. Oil revenue makes bad regimes horrible and fair regimes crooked. The oil system is lose-lose.
So we have two bits of bad news. Why not combine them?
Record prices have failed to curtail surging fuel consumption, the Goldman Sachs analysts said in a research note. The firm's upper limit was $80 previously. U.S. supplies of gasoline and distillate fuels, such as diesel and heating oil, fell last week, according to an Energy Department report yesterday.
Great. We need a step enough oil tax to divert the excess revenue out of sheik's pockets. If it would go to the treasury, fine. If it would go to a special fund, fine. But we cannot keep this us.
Thursday, February 24, 2005
"The Overstretch Myth," by David H Levey and Stuard S. Brown, Foreign Affairs, http://www.foreignaffairs.org/20050301facomment84201/david-h-levey-stuart-s-brown/the-overstretch-myth.html, March/April 2005 (from Free Republic).
The article is so well written that few comments are possible
Summary: The United States' current account deficit and foreign debt are not dire threats to its global position, as would-be Cassandras warn. U.S. power is firmly grounded on economic superiority and financial stability that will not end soon.
Despite the persistence and pervasiveness of this doomsday prophecy, U.S. hegemony is in reality solidly grounded: it rests on an economy that is continually extending its lead in the innovation and application of new technology, ensuring its continued appeal for foreign central banks and private investors. The dollar's role as the global monetary standard is not threatened, and the risk to U.S. financial stability posed by large foreign liabilities has been exaggerated. To be sure, the economy will at some point have to adjust to a decline in the dollar and a rise in interest rates. But these trends will at worst slow the growth of U.S. consumers' standard of living, not undermine the United States' role as global pacesetter. If anything, the world's appetite for U.S. assets bolsters U.S. predominance rather than undermines it.
The statistic at the center of the foreign debt debate is the net international investment position (NIIP), the value of foreign assets owned by U.S. residents minus the value of U.S. assets owned by nonresidents. Until 1989, the United States was a creditor to the rest of the world; the NIIP peaked at almost 13 percent of GDP in 1980. But chronic current account deficits ever since have given the United States the largest net liabilities in world history. Since foreign claims on the United States ($10.5 trillion) exceed U.S. claims abroad ($7.9 trillion), the NIIP is now negative: -$2.6 trillion at the start of 2004, or -24 percent of GDP.
Note that many savings vehicles, including corporate savings plans and home ownership, are excluded from domestic savings:
An alternative perspective takes as its point of departure the accounting identity that equates the current account deficit with the difference between total investment in the United States and U.S. domestic saving. Low domestic saving, according to this view, is to blame for deficits. The fear is that a sudden reluctance by foreigners to continue exporting their excess savings to the United States would choke off the investment needed to sustain economic growth, sending the U.S. economy into crisis.
This explanation becomes less alarming, however, when you consider that both savings and investment are seriously undervalued in U.S. economic accounts. Capital gains on equities, 401(k) plans, and home values are excluded from measurements of personal saving; when they are added, total U.S. domestic saving is around 20 percent of GDP--about the same rate as in other developed economies. The national account also excludes "intangible" investment: spending on knowledge-creating activities such as on-the-job training, new-product development and testing, design and blueprint experimentation, and managerial time spent on workplace organization. Economists at the National Bureau of Economic Research estimate that intangible investment grew rapidly during the 1990s and is now at least as large as physical investment in plant and equipment: more than $1 trillion per year, or 10 percent of GDP. Consequently, the size and growth rate of the U.S. economy have been seriously underestimated. In fact, when tangible and intangible investment are both counted, the apparent (and much decried) increase in consumer spending as a share of GDP turns out to be a statistical artifact.
The GreaterEast Asian states have a strong interest in maintaining the current system:
In a series of recent papers, economists Michael Dooley, David Folkerts-Landau, and Peter Garber maintain that Asian governments--pursuing a "mercantilist" development strategy of undervalued exchange rates to support export-led growth--must continue to finance U.S. imports of their manufactured goods, since the United States is their largest market and a major source of inward direct investment. Only a fundamental transformation in Asia's growth strategy could undermine this mutually advantageous interdependence--an unlikely prospect at least until China absorbs the 300 million peasants expected to move into its industrial and service sectors over the next generation. Even the widely anticipated loosening of China's exchange-rate peg would not alter the imperatives of this overriding structural transformation. Ronald McKinnon of Stanford argues that Asian governments will continue to prevent their currencies from depreciating too much in order to maintain competitiveness, avoid imposing capital losses on domestic holders of dollar assets, and reduce the risk of an economic slowdown that could lead to a deflationary spiral. According to both theories, there should be no breakdown of the current dollar-based regime.
The consequences of an American recession are to be feared by Brussels and Tokyo (not to mention Bejing and New Delhi!) more than Washington:
But even if such a sharp break occurs--which is less likely than a gradual adjustment of exchange rates and interest rates--market-based adjustments will mitigate the consequences. Responding to a relative price decline in U.S. assets and likely Federal Reserve action to raise interest rates, U.S. investors (arguably accompanied by bargain-hunting foreign investors) would repatriate some of their $4 trillion in foreign holdings in order to buy (now undervalued) assets, tempering the price decline for domestic stocks and bonds. A significant repatriation of funds would thus slow the pace of the dollar decline and the rise in rates. The ensuing recession, combined with the cheaper dollar, would eventually combine to improve the trade balance. Although the period of global rebalancing would be painful for U.S. consumers and workers, it would be even harder on the European and Japanese economies, with their propensity for deflation and stagnation. Such a transitory adjustment would be unpleasant, but it would not undermine the economic foundations of U.S. hegemony.
While Europe fades, and dies away, the Second American Century looks bright
For foreign central banks (as well as commercial financial institutions), U.S. Treasury bonds, government-supported agency bonds, and deposits in highly rated banks will remain, for the foreseeable future, the chief sources of liquid reserve assets. Many analysts have pointed to the euro as a threat to the dollar's status as the world's central reserve currency. But the continuing strength of the U.S. economy relative to the European Union's and the structure of European capital markets make such a prospect highly unlikely. On the basis of likely demographic and productivity growth differentials, Adam Posen of the Institute for International Economics estimates that the U.S. economy will be at least 20 percent larger than that of the EU in 2020. The United States will maintain its 22 percent share of world output, but Europe's share will, in the absence of serious structural reforms, shrink by 3 to 5 percent. Moreover, European government bond markets, although larger than the U.S. Treasury market, are divided among five large countries and a host of smaller ones, greatly reducing liquidity, and European corporate bond and equity markets are smaller than their U.S. counterparts. With Asian capital markets still in their infancy, it will be a very long time before the pre-eminence of the dollar and U.S. capital markets is challenged
Final thoughts: the greatest threat to American hegemony are threats to Natural Liberty
At the peak of its global power the United Kingdom was a net creditor, but as it entered the twentieth century, it started losing its economic dominance to Germany and the United States. In contrast, the United States is a large net debtor. But in its case, no plausible challenger to its economic leadership exists, and its share of the global economy will not decline. Focusing exclusively on the NIIP obscures the United States' institutional, technological, and demographic advantages. Such advantages are further bolstered by the underlying complementarities between the U.S. economy and the economies of the developing world--especially those in Asia. The United States continues to reap major gains from what Charles de Gaulle called its "exorbitant privilege," its unique role in providing global liquidity by running chronic external imbalances. The resulting inflow of productivity-enhancing capital has strengthened its underlying economic position. Only one development could upset this optimistic prognosis: an end to the technological dynamism, openness to trade, and flexibility that have powered the U.S. economy. The biggest threat to U.S. hegemony, accordingly, stems not from the sentiments of foreign investors, but from protectionism and isolationism at home.
Update: Tom Barnett agrees
The Chinese leadership also likes to point out that while reserve holdings have tripled since 2001 (amazing, given all our war-mongering, yes?), the price of oil has doubled, and China is importing oil in unprecedented amounts.
Hmmmm. Security, money, energy. Sounds like a complex relationship.