Wednesday, January 25, 2012

more confusion on Romney and tax percentages paid



How the details of Romney's extensive wealth will play among taxpayers, rival campaigns and the news media started to emerge Tuesday, as more than 500 pages from a 2010 tax return and a 2011 estimate spilled out both significant and minor revelations about Romney's scattered holdings, tax strategies and charitable donations.

--> First problem: why do we have a tax code where *anyone* needs hundreds of pages to file? 
--> Second problem: a tax code with so many loopholes that hundreds of pages are in play? Flat tax, anyone? Anyone?

The returns outline both the dimensions of Romney's finances and the complexity of the tactics used to reduce his effective tax rate to less than the 15% paid by many middle-class Americans...Romney paid about $3 million in federal income taxes in 2010 on an income of $21.7 million, putting him among the wealthiest of American taxpayers. At the same time, Romney gave nearly $3 million to charity -- about half of that amount to the Mormon church -- which helped lower his effective tax rate to a modest 14%...

A big part of his lower rates is taxation on capital gains (lower than labor income, but based on income that's already been taxed once). The other consideration is that many people think marginal tax rates are the same as average tax rates, overestimating what wealthy and middle-class people usually pay in federal income taxes. (Contrary to Braun's assertion, few in the middle class pay anything close to 15%.)

Obama's SOTU and ignorance on economics and tax policy


Declaring the American dream under siege, President Barack Obama delivered a populist challenge Tuesday night to shrink the gap between rich and poor, promising to tax the wealthy more and help jobless Americans get work and hang onto their homes.

--> President, you and Congress are the ones continuing to lay the siege!
--> Faux populist; more style than substance
--> He's been shrinking the wealth gap between "rich" and "poor". That's what recessions do!
--> More taxes on the wealthy. Not good for the economy, but if you're not going to cut spending...
--> Work and homes? How are you going to do that...really?

In a signature swipe at the nation’s growing income gap, Obama called for a new minimum tax rate of at least 30 percent on anyone making more than $1 million...“Now you can call this class warfare all you want,” Obama said, responding to a frequent criticism from the GOP presidential field. “But asking a billionaire to pay at least as much as his secretary in taxes? Most Americans would call that common sense.”...Obama calls this the “Buffett rule,” named for billionaire Warren Buffett, who has said it’s unfair that his secretary pays a higher tax rate than he does. Emphasizing the point, Buffett’s secretary, Debbie Bosanek, attended the address in first lady Michelle Obama’s box.

--> All billionaires pay far more, in dollar terms. Most billionaires pay far more, in percentage terms.  
--> Those who do not are subject to lower capital gains tax rates (paying tax on money for a second time) or are taking advantage of loopholes. Any credible, "fair" approach to income taxation would eliminate loopholes. But most Democrats and many Republicans don't want that.
--> If you want to deal with taxes and the middle class, your first priority has to be payroll taxes-- 15.3% of eery dollar earned. Democrats should step up on this issue, but they're busy demagoguing Social Security, Medicare, and tax policy. 

Romney and Buffett's "tax rates" (vs. the little people)

Romney and (supposedly) Buffett pay lower tax rates than common people?!

Variations of this story have been increasingly popular over the last few years. (Apparently, the President used this in the SOTU last night!) This isn't too surprising, given the economic doldrums inspired by the "Financial Crisis" and extended for more than four years now by the policies of Presidents Bush/Obama and their Congresses. Envy and resentment find more fertile ground in tougher times. (I wonder whether the politicians are dopes or are doing this on purpose, but that's another story.)

There are a variety of factors to consider-- differential taxes on capital gains vs. labor income; whether to include onerous payroll taxes on income in the calculations (but we usually ignore these, despite the pain inflicted on the lower-middle and middle classes, so why start now?); whether to include state and local taxes (more complicated and difficult to compare cases). In any case, the most common comparisons are simple (and simplistic), focusing on federal income taxes only.

Unfortunately, the comparisons often suffer from ignorance of the tax code and different expressions of "tax rate". Most notably, few people understand the difference between average tax rates (ATR) and marginal tax rates (MTR).

ATR is the proportion of one's income devoted to a tax or taxes in general. For example, if one has an income of $100K and pays federal income taxes of $12,000, then their ATR is 12%.

MTR is the proportion of tax paid on the last dollar earned. If one is in the 28% "tax bracket", then the last dollar earned is taxed at 28%. Each dollar earned is taxed in its respective tax bracket. Instead, most people believe that if you're in the 28% tax bracket, then every dollar earned is taxed at 28%. Not true! (The Tax Foundation does a really nice job with the big picture.)

For example, singles have a standard deduction of $5,800 and exempted income of $3,700. So, the first $9,500 earned is not exposed to any federal income taxes. (They've already lost about $1,400 to payroll taxes, but who cares about that?) If they earn $10,000, only the last $500 is exposed to the 10% MTR in the lowest tax bracket, resulting in taxes of $50 and an ATR of .5%.

In the Romney example popular on Facebook, Romney is said to have a tax rate of 13.9% while a teacher is said to have a 25% rate. Since there is no 13.9% tax bracket, the author must be referring to Romney's ATR. But if you do the calculations, a teacher who is single would need to earn at least $232,600 to have a 25% ATR (married with no children = $367,000; head of household with only one child = 314,700.) Why do I say "at least"? I'm assuming no itemized deductions, so our prospective teacher is a miser and doesn't have a mortgage on her home.

The irony of a valid comparison? The Occupy Wall Street crowd would say that she needs to be paying higher taxes!

Of course, teachers don't make this much money. So, those making such comparisons are invoking Romney's ATR and the teacher's MTR-- comparing apples and oranges, or better, apples and rocks.

the numbers on Romney vs. the teacher

If you take the comparison literally, then the teacher must be making at least $232,600.

Instead, it's a faulty comparison is based on (purposeful?) confusion of marginal and average tax rates (MTR and ATR). 

Using this tax table and looking at this year's 1040...

For a teacher who is single, a 25% ATR results from an income of at least $232,600.
-standard deduction of $5,800 and exempted income of $3,700 ($9,500 of income exempted)
-income of $232,600 results in taxable income of $223,100
-in the 33% tax bracket (MTR), resulting in a tax of $43,482.50 + 33% of the income over $178,650
-total tax of $58,151

For a teacher who is married (no kids), a 25% ATR results from an income of at least $367,000.
-standard deduction of $11,600 and exempted income of $7,400 ($19,000 of income exempted)
-income of $367,000 results in taxable income of $348,000
-in the 33% tax bracket (MTR), resulting in a tax of $48,665 + 33% of the income over $217,450
-total tax of $91,747

For head of household (with only one child), a 25% ATR results from an income of at least $314,700.
-standard deduction of $8,500 and exempted income of $7,400 ($15,900 of income exempted)
-income of $314,700 results in taxable income of $298,800
-in the 33% tax bracket (MTR), resulting in a tax of $46,430 + 33% of the income over $198,050
-total tax of $78,677

Why do I say "at least" $X in each of the three cases? I'm assuming no itemized deductions, so our prospective teacher is a miser and doesn't have a mortgage on her home.

The irony of a valid comparison? OWS would say that she needs to be paying much higher taxes!


Of course, teachers don't make this much money. So, those making such comparisons are invoking Romney's ATR and the teacher's MTR-- comparing apples and oranges, or better, apples and rocks.

Wednesday, January 4, 2012

my review of Entrepreneurship and Religion

As it appeared in The Journal of Markets & Morality...

Entrepreneurship and Religion
Ed. Leo-Paul Dana
Cheltenham, UK: Edward Elgar, 2010 (442 pages)

Entrepreneurship and Religion is a volume of articles edited by Leo-Paul Dana. He dominates the work; aside from the editing, he had a hand in writing nine of its 22 papers. (No other author appears more than once—except for two articles he co-authored with Teresa Dana.) Nine of the articles had already appeared in seven academic journals, signaling quality and providing a single outlet for related work.

Some of the articles are historical; others are contemporary. They have an international range, including research about minority peoples within a dominant society. Some of the work is empirical; most of it is descriptive. The result is a fascinating set of articles that, nonetheless, has limited impact as an academic approach. The projects are so context-specific that it is difficult to confidently extend their applicability.

Then again, that is the nature of this field. It reminds me of “Industrial Organization” in economics—where one studies various market structures, such as competition and oligopoly. One of my friends in graduate school jokingly described the field as a “compendium of special cases”. Much of this work has the same feature.

One deficiency in the editing is that many of the essays cover similar ground in their introductions—as they provide the background literature and an overview of entrepreneurship. This is good if one reads the essays separately, but creates much redundancy if one reads the book as a whole. (Along these lines, Dana’s introductory essay is most effective and allows one to skim the other chapters more quickly.)

One of the book’s strengths is in modeling and describing entrepreneurs as more than mere individuals who are to some extent constrained or encouraged by a legal framework. Entrepreneurial efforts are also a product of cultural, social, and religious contexts.

But as Dana notes in his introduction, culture, religion and society are intertwined with ethnicity. As it turns out, this hinders the goal of the volume. Often, inferences in the essays about the impact of “religion” are spurious or stretched. Beyond that, some of the essays do not address religion at all. (The book’s title should have included a reference to ethnicity and culture.)

For example, in Anne White’s study of Methodism (chapter 7), the reader is left wondering whether the entrepreneurs are driven by being Methodist, Christian, or Canadian. In Dimitri Tassiopoulos’s study of Greeks (chapter 4), one cannot tell whether the cause is Greek ethnicity or adherence to Greek Orthodox religion.

When such distinctions can be made, the authors effectively detail how religious beliefs and doctrine can be a catalyst or deterrent for entrepreneurship; observe that religions are generally effective at promoting and propagating values; and note that religious communities often provide low-cost “networks” for labor, product, and information. Some religious contexts create religion-centered, demand-side opportunities. (See, for example, specially-prepared foods for Jews and Muslims—and Welch’s grape juice for Methodists.) And some religious entrepreneurship is indirect—as a supply-side response to religious and ethnic discrimination.

The volume features a number of strong essays on religion and entrepreneurship: the influence of the “Protestant work ethic” (Ivan Light in chapter 6); the impact of Islam in general (Wafica Ali Ghoul in chapter 12); categories of entrepreneurs within Islam (Nekka & Fayolle in chapter 14); Jewish middlemen in Alsace before World War II (Dana in chapter 17); Jewish entrepreneurs in Montreal (Morton Weinfeld in chapter 18); and a comparative analysis of the French and Dutch portions of the island of St. Martin (Baldacchino & Dana in chapter 20).

Three other essays are solid and warrant attention from those interested in the title of the book: Edwina Pio on Hinduism and caste (chapter 1); Dana on Jews in a variety of countries (chapter 3); and Heilbrunn & Asbeh on the Druze living in Israel (chapter 15)

I found three points especially interesting. First, Light notes that as markets become more competitive, discriminatory behavior becomes more costly. Beyond that, he focuses on the impact of Protestantism’s “universalism”—as opposed to the insularity of Catholic and Jewish communities. He argues that our contemporary distaste against discrimination and favoritism should be credited to Protestantism.

Second, how much discrimination and favoritism is “personal” (based on bias) as opposed to “statistical” (where discrimination in the face of highly imperfect information is the “best” decision)? For example, Light (177) notes that Puritans faced a dilemma in “doing business with dynamic but unknown Quakers, who might be dishonest, versus the security of doing business with mediocres of known probity.” 

Third, in his study of Jewish middlemen in Alsace, Dana discusses the provocative idea that being an “entrepreneur” could be perceived as less risky than other alternatives—given one’s experience with being entrepeneurial!

This last observation leads to one of two suggestions in closing. How should we define “entrepreneur”? The literature seems to conflate entrepreneurship as a penchant for innovation along with someone who is hard-working. At one extreme, entrepreneurship simply becomes a synonym for any business venture, particularly if one is self-employed. To weigh one implication: the Amish avoid technology—and thus, to be successful, must work harder. Does this make them more or less entrepreneurial?

Finally, returning to the title of the book: More work should be done to distinguish “religion” as religious belief, rather than merely a blanket reference to a culture influenced indeterminately by religion. Maybe this point is difficult for researchers to recognize and embrace, because people routinely conflate these categories in everyday life. But in fact, they are quite different. As such, developing measures of religiosity would be a step forward in analyzing the impact of “religion” on behavior in general and entrepreneurship in particular.

Tuesday, December 13, 2011

science in theory vs. practice


Speed Bump

From Ronald Bailey in Reason-- on whether Dems or GOP'ers are more anti-science...

Dems point to stem cells and global warming. But Dems are often opposed to animal testing and genetic engineering. And they're usually opposed to nuclear energy. The Dems also get votes for their support of abortion (which can't be solved by science, but if one relies on it, then abortions after a few weeks would be out-of-bounds).

Finally, "as law professor Dan Kahan and his colleagues at the Yale Cultural Cognition Project have shown, the strong urge to avoid scientific and technological risk is far more characteristic of people who have egalitarian and communitarian values, that is to say, left-leaning folks..."

How do religions die? Generally they don't, which probably explains why there's so little literature on the subject...Consider the case of global warming, another system of doomsaying prophecy and faith in things unseen. As with religion, it is presided over by a caste of spectacularly unattractive people pretending to an obscure form of knowledge that promises to make the seas retreat and the winds abate. As with religion, it comes with an elaborate list of virtues, vices and indulgences. As with religion, its claims are often non-falsifiable, hence the convenience of the term "climate change" when thermometers don't oblige the expected trend lines. As with religion, it is harsh toward skeptics, heretics and other "deniers." And as with religion, it is susceptible to the earthly temptations of money, power, politics, arrogance and deceit...

Religions are sustained in the long run by the consolations of their teachings and the charisma of their leaders. With global warming, we have a religion whose leaders are prone to spasms of anger and whose followers are beginning to twitch with boredom. Perhaps that's another way religions die.


One of the changes among scientists in this century is the increasing number who believe that one can have complete and certain knowledge...I felt nostalgic for those times when even the greatest scientific minds admitted limits to what they knew. And when they recognized well that the key to the scientific method is that it is a way of knowing in which you can never completely prove that something is absolutely true. Instead, the important idea about the method is that any statement, to be scientific, must be open to disproof, and a way of knowing how to disprove it exists.Therefore, "Period, end of story" is something a scientist can say—but it isn't science...How about a little agnosticism in our scientific assertions...


This is one of medicine’s dirty secrets: Most results, including those that appear in top-flight peer-reviewed journals, can’t be reproduced…There is also a more insidious and pervasive problem: a preference for positive results...

Thursday, December 1, 2011

research on the impact of school choices on Christian children

The Cardus report on the impact of Christian education choices-- or more precisely, the impact of the type of education chosen for children self-identifying Christians...


There are many interesting and some surprising results: 
-Conservative Protestant schooling is more likely to result in church leadership and feel well-prepared for relationships, but least likely to like new and exciting experiences. 
-Religious homeschoolers are most likely to feel prepared for a vibrant religious/spiritual life, but also to get divorced and to lack direction. (Sobering if true!)
-Those educated in Catholic schools earn the highest incomes, are most likely to make political contributions, and least likely to accept the authority of church leadership.
-Public schoolers are most likely to volunteer their time but least prepared for relationships. 
And so on...Check it out.

This blog post seems to do a nice job in surveying some of the other relevant literature and wrestling with the validity of the Cardus report. The most interesting comments are about religious homeschoolers and trying to figure out whether the report is accurate with respect to homeschoolers.

three articles on education

1.) the growth of homeschooling in the African-American community (Tiffany Owens in World)

2.) the growth of school choice programs across the nation (Sheryl Blunt in CT)

3.) new-and-improved research on educational levels and religious practice (Tim Dalrymple in World)

First, by many measures the more educated are more religiously observant. They are more likely to engage in worship and devotional activities, and to affirm the importance of religion in public life...The more educated, although they are no less likely to believe in God and the afterlife, are less likely to believe that the Bible is the literal Word of God, or that there is only one true religion. This suggests that the educational establishment is averse not to religiousness in general, but to particular forms of faith. Thus, as people grow more educated, they are more likely to switch to mainline denominations...Finally, different religious groups are affected by education differently. Evangelicals, for example, are especially likely to grow more devout and more observant with more education.

OJCPSB: Occupy JCPS Buses

That seems to be the motto of the JCPS administration-- where putting kids on buses in the pursuit of racial diversity is really important. One can't say whether it's more important than the quality of the education provided, but it's obvious that it's important given the resources devoted to this goal-- both in what's extracted from taxpayers and what's imposed on parents and children. 

Here's the primary article in the C-J (by Antoinette Kunz) preceding the start of school this Fall. It has some amazing statistics and factoids:

-"They des­perately hope the many changes they've put into place will pre­vent the prob­lems that kept some el­e­mentary students from getting home [during the first week last year]...400 chil­dren getting home af­ter 6 p.m., with some still on buses as late as 9 p.m."

-"930 school buses will hit the road as early as 5 a.m. to trans­port approxi­mately 66,000 of the dis­trict's 101,000 students."

-"Those buses will be equipped with new ra­dios that have channels programmed exclusively to each bus com­pound, cutting down on communication confu­sion. The dis­trict spent $1.2 million on the ra­dios earli­er this year..."

-" a new JCPS bus hot­line...so par­ents can get the information they need before sending their chil­dren to the bus stop Monday...manned by about 10 staff members..."

-"...also pro­viding 200 additional staff members at the dis­trict's 20 el­e­mentary bus depots to help 'en­sure the chil­dren get on and off the right buses'..."

-"at ev­ery el­e­mentary school, bus rid­ers will have luggage tags attached to their backpacks, with labels that des­ignate the child's name, bus number and bus stop.The luggage tags, which cost the dis­trict $16,000..."

-"...ask­ing par­ents to be pa­tient on the first day, but he said he hopes to have all the students back home by 6:30 p.m. Eventually, he said, all el­e­mentary students will be de­liv­ered home by 5:30 p.m..."

Wow!

Here are more data from the latest editorial from the C-J'ers on the "busing tango"-- a nice term, except that it's more like police chasing those who want to break regulations instead of "it takes two/partners to tango".

-"...elementary student bus runs over 75 minutes now have been eliminated for the first time. The percentage of students riding between 60 and 70 minutes has been cut by two thirds to 2.8 percent (a total of 832 students) since the 2008-09 school year, the last one before the current assignment plan. The average elementary ride time is 29.2 minutes."

Those numbers are amazing enough, but the editorialists seem excited by an *average* bus ride of 30 minutes each way. 

JCPS is 16th in the country in terms of students transported daily, but 8th in miles driven. Among larger cities, Louisville is 3rd in terms of miles per bus (behind Chicago and Charlotte). 

They're good at driving kids around on buses. If only they were half that good at educating them...

more-on Keynesian failures

WaPo's Sarah Kliff in the C-J on the latest efforts to buy votes with our own money &/or efforts to "stimulate" the economy by robbing Peter to pay Paul...

The Obama administration will announce as much as $1 billion in funding today to hire, train and deploy health care workers, part of the White House’s broader “We Can’t Wait” agenda to bolster the economy after President Barack Obama’s jobs bill stalled in Congress...There will be an emphasis on speed, with new programs expected to be running within six months of funding...

Then again, the emphasis on speed is interesting, because fiscal policy is notoriously slow (in general) and President Obama has avoided "shovel-ready jobs" to pursue other agenda items. Here's the WSJ editorialists on an example:

President Obama used to be fond of "shovel-ready projects." He's also demanding that Congress pass his jobs bill immediately because 9% unemployment is a crisis, and, by the way, he's for making the U.S. less reliant on energy from tyrants. So how about putting 20,000 Americans to work on a North American energy project that's as shovel-ready as they come? Sorry...The $7 billion project is TransCanada's Keystone XL, a 1,700-mile underground pipeline that would deliver 830,000 barrels of heavy crude oil a day from Alberta to refineries in Oklahoma and Texas...He's president of the 1%.

Then, there are the broader discussions of Keynesianism's intellectual death 40 years ago and its more recent failures in the policy realm. Here's Tim Cavanaugh in Reason...

Nobel Laureate Paul Krugman, a prominent voice in favor of Keynesian economic intervention, argued that the 2009 stimulus failed because it was not large enough to close a gap in aggregate demand. But the most important goal of the stimulus was achieved almost a year ago: Consumer spending returned to its pre-recession level in the last quarter of 2010...

So why aren’t Krugman and other Keynesian interventionists cheering? John Maynard Keynes’ general theory teaches us that now should be Miller Time. According to the standard [Keynesian] macroeconomic model, you revive a stagnant economy by closing the gap in aggregate demand. Taking up the slack in demand is supposed to be the heavy lifting of an economic recovery, the part of the job so big only the government can do it...And yet the economy stays narcotized...

“There’s really nothing in Keynesian theory that encompasses indebtedness—consumer indebtedness and corporate indebtedness,” Higgs said in a phone interview....Higgs points out that while spending is back, investment remains low...Higgs and others hold that money is staying in the vaults because of regime uncertainty. The Patient Protection and Affordable Care Act, passed in 2010, has created a new panoply of expenses for anybody looking to hire an employee, but the full range and nature of those expenses can’t be measured even by a team of lawyers...

Saturday, November 19, 2011

homeschooling books for sale

Clearing out the basement. We homeschooled for three years and this is what we don't want (books, etc.) / didn't use (workbooks). Much like new; most of the rest in excellent shape. Mostly My Father's World, but some other stuff at the bottom.

My Father’s World
K (basic package): Teachers manual, alphabet flashcards, two copies of student worksheets (not first 7 weeks; retail $132; sell for $25)
1: Teachers manual and 5 books (retail $160; sell for $60)
2: Teachers manual and 5 books (retail $132; sell for $50)

3rd-8th Grade: My Father’s World—Exploring Countries and Cultures

Teachers manual and 9 books (retail $207; sell for $80)

4th-8th Grade: My Father’s World—Creation to the Greeks
Teachers manual and 12 books (retail $275; sell for $110)

Rod and Staff

English 3-6 (text and tests) and Spelling 2 (retail $66; sell for $25)

Miscellaneous

-Adam/Gordon's Spelling Power Ages 8-adult ($25)
-Serl's Primary and Intermediate Language books (more heavily used; $10 and $15)
-CLP's Exploring American History ($10)
-Mystery of History, Vol. 1 ($15)
-Writing Strands-- Level 3 ($5)
-3rd, 5th grade Scott-Foresman readers ($5)

Thursday, November 17, 2011

the sad case of Jon Corzine and the difficulty in govt regulation of the market (in reality vs. wishful thinking)

Speaking of "The Big Short" and my review of it, here's some of the amazing story of Jon Corzine-- former Democratic Senator and Governor from New Jersey-- and the fall of his investment firm, MF Global.

In the WSJ, Michael Rapoport describes how Corzine lobbied against greater regs, worked to hide the risks he had taken. All quite instructive-- and all quite connected to the dilemmas described in Lewis' book...

For the past two years, MF Global Holdings Ltd. may have disguised its debt levels to investors by temporarily slashing the debt it was carrying before publicly reporting its finances each quarter...ratings agencies defend their actions...The activity, referred to in the financial industry as "window dressing," suggests that the troubled financial firm was shouldering more risk and using more borrowed funds to facilitate its trading than investors could easily detect from the firm's regulatory filings...the firm's aggressive approach to the issue speaks to its strong appetite for risk, even as European markets spiraled lower this summer. But that appetite was not always completely apparent to investors...In each of the past seven quarters, from late 2009 to mid-2011, MF Global's quarter-end borrowings were an average 16% lower than the quarterly average...Window dressing isn't illegal, but it can mask a financial institution's true levels of borrowing and risk-taking. That is an issue of particular concern with MF Global, where borrowings fueled large trades on European sovereign debt that helped lead to the firm's demise...

MF Global...lobbied against a Commodity Futures Trading Commission proposal that would have placed tighter restrictions on how futures-trading firms can invest cash sitting in customer trading accounts. MF Global Chief Executive Jon Corzine in July participated in a conference call with CFTC officials and strongly opposed the restrictions, saying they would hurt business.

This WSJ editorial notes the absence of (an effective) regulatory presence, even after the subprime fiasco. 

If reports of missing funds are true, it's a significant embarrassment for the firm's regulators at the Commodity Futures Trading Commission. CFTC Chairman Gary Gensler has been leading the Beltway chorus for years in reciting the (false) story that the absence of regulation allowed AIG and its credit-default swaps to wreak havoc in 2008. 

Never mind that the Treasury Department's Office of Thrift Supervision did regulate AIG, and that an OTS official testified before Congress that the agency signed off on the swaps because it didn't expect Armageddon in the housing market. Mr. Gensler nonetheless succeeded in gaining for himself and his agency broad new powers over the derivatives market as part of Dodd-Frank in 2010...

It is also no small irony that MF Global was among the cheerleaders for Mr. Gensler's plans for new clearing arrangements under Dodd-Frank. Maybe if the regulators hadn't been so busy writing new rules, they would have checked if MF Global was following the old ones.

It was always fanciful to believe that the regulators who failed to prevent the last financial meltdown would somehow prevent the next one. The surprise is that this mirage of regulatory competence has been exposed so quickly.

Some takes on Corzine have been very rough. (See: Jon Stewart with a funny segment with the usual colorful language.) Others, like this from the AP's Angela Delli Santi, have been quite (overly?) respectful. This WSJ editorial notes that at least he lost, mostly, his own money (vs. taxpayers'). 

Finally, this Holman Jenkins WSJ op-ed revisits the Corzine political legacy in light of recent events.

The Big Short

A friend loaned me Michael Lewis' The Big Short. Really good stuff-- as usual from (what I've read of) Lewis. As a popularized of history, his work is readable and seems accurate. He does a nice job painting portraits of characters and laying out institutional and historical detail. (The one big disappointment-- an omission-- is that Lewis did not address the role of "mark-to-market" regulations as a catalyst for the crash, or at least its timing.) Overall: an easy, good read. 

The primary topics of the book are the burgeoning "subprime" home mortgage market (from $130B in 2000 to $625B in 2005), the subsequent market for investments connected to those mortgages (from $55B to $507B), and the failure of the market and govt regulating authorities.

A number of concepts are in play here, from economics and political economy: 

1.) A "subprime" mortgage is not inherently troubling, as long as the underlying (greater) risks are correlated with higher rates of return. If those risks are not easily understood, then the market will struggle. If those risks are subsidized, then the govt is causing inefficiency and other troubles within markets. Both occurred here. 

2.) Likewise, a subsequent market for mortgage-related investments is not inherently troubling, as long as the nature of the investments is understood and their risk is not subsidized. We see such financial markets arise to act as a form of insurance-- a "hedge" against various future outcomes. The problem in this market is that the investments were very complex AND the ratings agencies (in whom investors placed their faith) were a combination of inept and greedy. (Lewis noted that Warren Buffett had/has a 20% ownership stake in Moody's!) Moreover, the govt regulation of those agencies was insufficient-- whether more regulation was needed or whether existing regs should have been observed more closely. And govt policies proved subsequently to encourage the "moral hazard problem" through bailouts-- that failure would be bailed out will encourage more risky behavior.

3.) The key to the story is "imperfect information"-- in particular, information that was highly imperfect and worse yet, highly asymmetric. In the face of such information asymmetries, markets have some remedies and govt regulation can, at least in theory, provide a defense. Think of buying gasoline. How do you know how much gas you received? The little numbers say 9.3 gallons, but how do you know? The gas station has a reputation to uphold and some investigative journalism from a local TV station could bring down the company. But what sort of defense is this, really? Modest. The govt promises to help and hires inspectors to monitor this and affix stickers to the pumps, certifying their approval. But what does this promise? Do we faith in the sticker-placer and do we ignore the firm's post-sticker incentive to cheat and actually take advantage of our faith in the sticker?

In the case of investments, investors rely on credible/objective ratings agencies to step into this information breach. From Lewis' work, it seems clear that the agencies were mostly confused-- but in some cases, unwilling to pay the price for negative assessments of these instruments. Consider "house inspectors" as a parallel example. What makes for a "good" house inspector? Finding all the significant faults in the quality of a house, right? But that's only from the perspective of the buyer. From the perspective of the seller, a good inspector would turn a blind eye to less obvious faults. And more troubling, a realtor has similar incentives. What makes a good ratings agency? It depends on your perspective. And in this case, they failed to provide accurate, objective information. 

Lewis argues that the ratings agencies failed, in terms of competence (vs. motives), given the complexity of investment vehicle, by mistaking diversity for lower risk. Often, diversity lowers overall risk by spreading risk. But in the case of the mortgage-based securities, there was a bundling of diverse, but still highly risky loans (within the subprime housing market). Moreover, the agencies and the market participants who guessed incorrectly failed because their statistical models, based on historical data, assumed housing prices that would increase forever. 

All of this points to "market failure" (the academic term)-- or "market struggle" (to choose a more accurate term). But as always, market struggle must be contrasted with government failure/struggle. Will govt agents be able to regulate something they cannot understand either? The general public's reflex-- and for Congress as well-- is to seek more regulation. But as in many other cases, the record is that existing regs were not embraced to anything near their full extent. (Lewis discusses these failures in passing-- most notably on p. 166.) It is then an act of faith to believe that govt regs will improve things. Perhaps-- but perhaps not-- especially with the reality of interest group politics.

Thursday, November 3, 2011

the difference/divorce between worker pay, worker compensation, and the cost of hiring workers

A huge and oft-overlooked distinction: Workers, reasonably, focus on wage/salary. To a lesser extent-- and usually when forced to think about it once per year-- they look at compensation. And rarely do they look at what it takes to hire them. (And then there's the risk / rate-of-return calculation based on expectations of future productivity, costs, etc.-- all of which has had more variance injected into it by the policies of Bush, Obama and Congress.)


Employees may not realize it, but they are getting more expensive.


It isn't that their paychecks have suddenly started bulging. It's that other employment costs—like health and retirement benefits—continue to rise. Benefit costs in the private sector were up 4% year-on-year in the second quarter, more than double the 1.7% increase in wages and salaries. On Friday, the Labor Department's employment-cost index for the third quarter is likely to show this trend continuing...
[AOT]

The trouble is, this means employers are paying more for workers without actually paying their workers more. Higher benefit costs eat into profits without directly raising a company's output in the way hiring more workers would. In fact, this can actually discourage hiring. And the more that companies have to spend on benefits, the less take-home pay goes to workers...


Americans, in fact, sense this already. "People are worried about income security to an unprecedented degree,"  says Moody's Analytics economist John Lonski. Indeed, the share of those expecting their income to fall remains higher than the share expecting income to rise over the next six months, as per the Conference Board's October confidence survey. This situation never occurred in the survey's 30-year history prior to 2008. Now, it has become the norm. Low wages at least could spur hiring. But if employees are getting more expensive for other reasons, the risk is nobody benefits.