Archive for February 2009

A Failure of Nerve

October 2008 was a failure of nerve.  As so often happens, folks who normally support letting failing institutions fail when times are good tend to lose their nerve when the crisis is at hand, and find some way to convince themselves that somehow, this time is unique and different.  But it is not.   Only later is there remorse.  I won't want to pick on Megan McArdle too much, if for no other reason than she is generally the first person on the planet to admit she is wrong, but you can start to see some of the remorse here:

We're now making many of the mistakes that Japan did.  I know, I know--I supported TARP I.  But I did so because at the time, there seemed to be a reasonable possibility that the funds could stop a liquidity crisis from turning into a solvency crisis.  But if liquidity crises go on long enough, they become solvency crises, so whatever we had then, we now have a badly crippled banking system.  More of the same isn't going to help.

We need a plan that is going to force the banks to recognize and write down their bad loans, restructure dysfunctional borrowers, shut down the banks that are too far gone, and inject substantial capital into the banks that are strong enough to pull through.  But that kind of radical action is scary.  And whether they decide to do it by nationalizing bad banks, or by injecting capital into good ones, the political cost is going to be very high.  So we get baby steps and vague promises of major leaps forward down the road.

Another political problem is that recapitalizing the banking system involves, in the initial stage, conserving capital (read: cutting credit limits), and writing down bad loans means unpopular actions like restructuring failing companies (read:  layoffs) and foreclosing on hopeless borrowers.  One of the major arguments against bank nationalization is that a government-owned bank will find it harder, not easier, to do those things.  The temptation to keep large employers on life support will be large, and every congressman will have a list of firms in their district that can't be allowed to go bust.

I have tried to have this and other bailout arguments with a number of folks.  This is often a hard conversation, because people have trouble separating in their minds the productive assets of these companies (factories, investments, systems, deposits, trained people) from the institution itself.  So when we talk of bankruptcy of, say, GM, they think if GM goes poof, then all those factories and cars go poof.

But that is absurd.  Remember the huge gas shortages that resulted from the loss of the Enron gas trading desk and transportation infrastructure when Enron went bust?  Yeah, neither do I.  That's because all of Enron's productive assets flowed through the well understood chapter 11 (or was Enron Chapter 7) process to new owners.

By the way, by management, I mean something broader than just the CEO or the top tier of managers:

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.

Bankruptcy is a scary term, but here is what makes it beautiful -- it takes assets out of the hands of failed management, failed business plans, failed management cultures, etc. and puts those assets in the hands of new owners and managers.  These new owners and managers are not guaranteed to be better at managing the assets, but the odds are they will be since the performance bar set by the last management team is by definition so low (ie, they went bankrupt!)

When we interrupt the bankruptcy process and bail out a failing company, we do two things:

  • We leave the productive assets of the company in the hands of the same failing management (again, with this term defined broadly as above) that got the company into the current straights, rather than putting the assets in the hands of new owners
  • We focus the country's limited investment capital (via taxes or government borrowing that crowds out private borrowers) towards what are by definition among the worst managed institutions in the country.   If someone asked you to invest a billion dollars either in the top 10 most successful companies or the bottom 10 least successful, where would you put the money to create the most jobs and growth?  In the top 10, right?  But the government is doing EXACTLY the opposite.

Here is the true economic miracle of the 80's and 90's:  Not Reagan's tax cuts or Clinton's economic plan or Alan Greenspan in the Fed.  It was the fact that the government, with the American economy sweating under some very difficult conditions (worse than they are today, but you would never know it in the press) and under strong threats from Japan and Europe, basically did ... nothing.  There was all kinds of pressure to create an American MITI  (seriously, it seems like a joke today, but the push was strong).  We did not.  The American economy was allowed to restructure itself.

This is why our recessions tend to be shorter than those in Japan and Europe.  These other economies are generally more of a corporate state, with a major goal of the government to maintain the incumbents in the corporate world.   I would argue that the key determinants to recovering from a recession quickly are asset, capital, and labor mobility.  Japan has many structural limitations on these, and it dragged their recession out for years.  In the name of trying to avoid the problems Japan has faced, we are repeating the exact same mistakes.  Every step we have taken so far to deal with the "crisis" have reduced the asset, capital, and labor mobility the economy needs to right itself.

The Blowpop May Have Been Excessive

A framework for choosing a Valentines present (click to enlarge)


via Flowing Data.

I am kind of a Valentines Day scrooge.  I don't really like manufactured holidays aimed at converting my guilt into card and restaurant sales.  But I did spring for a dozen red roses from the grocery store ($10 baby!) and a giant cupcake for my daughter.

The Most Money Every Spent With The Least Scrutiny

We will be posting on the stimulus bill for months and years, because it will take that long to figure out what was in it.  Congressman who voted for it may never know what they actually voted for.  Veronique de Rugy takes a first swing at it:

Total spending amounts to $792 billion, with $570 billion in direct spending and $212 billion in tax provisions. These numbers don't include the massive amount of interest that will accrue on the increased debt. If we include that, the total amount comes to $1.14 trillion.

Supporters of the package describe the legislation as transportation and infrastructure investment, the idea being to use new spending to put America back to work while at the same time fixing decrepit infrastructure. However, only 17 percent of the discretionary spending in this package is for infrastructure items. More worrisome still, the final version lacks any mechanism to ensure that spending will be targeted toward infrastructure projects with high economic returns

De Rugy actually overestimates the infrastructure spending, because she looks at the spending over 10 years.  Since the stimulative effect of infrastructure spending in this recession is, at most, limited to 2009-2010 spending, and since the infrastructure spending is more back-end loaded, the percentage is much lower in the first 2 years -- something like 6-7% as I calculated here (I will go back through the CBO reports with an update when I get a chance, but Kevin Drum links them here, hilariously saying they "scored well."

Unfortunately, even this seems to wildly underestimate the true cost of the bill.  In creating the bill, Congress increased the general operating funds for zillions of departments and programs  (remember, 80+% of the spending is departmental budget increases, not infrastructure construction).  However, they show these increasing disappearing after a couple of years.  We all know that Democrats consider removing an increase to be "a massive cut" so we can assume that at some point, these budget increases will be extended for eternity.  If one makes this more realistic assumption, then the cost of the stimulus bill is over $3 trillion!  [update:  Carpe Diem demonstrates this with a nice set of graphs]

My other project I am working on is to look at some of the "shovel ready" projects on the mayor's list here  (warning!  600 page pdf!!) in the Phoenix area.  My incoming hypothesis is that any project on here either:

  1. Is not shovel ready, as it takes years to get a project through planning, procurement, and environmental permitting, but once anyone in DC finds that out, they won't take back the money, -OR-
  2. Is something that the local residents, who will enjoy the benefit, refused to fund, raising the question as to why the rest of us should fund it.

I won't spill the beans yet, but here are a few tastes from the Phoenix area:

  • A major upgrade to the water system of the town of Paradise Valley, a small community embedded in Phoenix which is, by a fairly good margin, the single wealthiest zip code in the state.
  • A lot of solar.  Solar is a particularly good choice for this list because 1)  Obama has a hard-on for it, so he is unlikely to question it  2)  Solar's problem is high capital cost vs. the amount of electricity produced, but if someone else is paying the capital cost....

Wither the SBA?

I don't have to explain to readers that I oppose the idea of government stimulus.   So I am loathe to argue about stimulus methodology, because I think one is just arguing over gradations of suck.

But if I were to discuss stimulus for employment, my first thought would be reducing the employer portion of FICA -- reduce the cost of employment, the quantity employed would likely go up  (of course, rather than doing this, the administration has done just the opposite, by requiring union shops on government contracts, effectively increasing the cost of employment).

My second thought was the SBA.  Most stats show that job creation is mainly in small businesses, and it appears to be small business credit that is impacted most for the 2008 banking crisis.  So, instead of sending more money to state governments; or welfare recipients; or large companies who have, by failing, proven themselves to have bad management or a bad business model or both  (none of whom are likely to be huge engines of private job creation).  Why not find a way to increase funding to small businesses?  Temporarily reduce the federal guarantee fee on SBA loans, provide tax credits for banks making such loans, something.

I called the SBA today.  They said they have no idea, just like the rest of us, what is in the bill.  Apparently there were a few incremental changes proposed, but nothing concrete.  The only specific proposal the SBA rep made was an early provision in the stimulus plan to raise the government gaurantee fee, which hardly seems like a way to promote small business credit.  It probably makes fiscal responsibility, but since when did the stimulus have anything to do with fiscal responsibility?

Getting Out Ahead of the Recovery

Ayn Rand had an image in Atlas Shrugged that has always stuck with me.  The government looter-weenies were likened to a guy standing on the roof of a boxcar on a speeding train, claiming to be in charge of the train's motion.  To extend the analogy further, a guy on top of a freight car (in Rand's day) only had the power to slow the train down (via the brake wheel on the car) but obviously had no ability to accelerate the train and had no relationship to the real motive force that drove the train.

The analogy has always been a powerful one for me in viewing Congresses and Presidents when they talk about the economy.  Claiming to be in charge of the economy, they have little power except to impede its progress.  And they have so little connection to the true motive force behind the economy, that it is clear they don't even comprehend its operation.

Which all leads me to wonder, is the rush to pass the stimulus bill based on a true perception of emergency, or is it driven more by the need to do something before the economy heals itself (which is the only way the economy every recovers).  Via Carpe Diem, the NY Fed model based upon year-ahead yield curves is predicting that we will be out of recession by the latter half of this year:


The home page for the NY fed model, including data, explanations, and its history is here.

Update: Here is a longer history of the metric.


No Comment Necessary


From the WSJ, via Carpe Diem

Thank God, I'm Not Totally Weird

I have always liked factories -- in college, I used to accept certain job interviews (example: Pontiac) just to get the factory tour.  Years ago, my wife gave me a travel book called something like "made in the USA"  which lists fun public factory tours you can take in the cities you visit.  One of my favorite tourist memories was going to the Fedex facility in Memphis at midnight to watch a sort.

But perhaps what made folks think I was really weird was when I told them I though that oil refineries, at night, could be some of the most beautiful places on earth.  When I worked in a refinery for 3 years, I used to love being there at night -- not just for the aesthetics, but for the amazing site of miles and miles of plant operating and producing tens of millions of dollars a day of product without a person in sight.

Well, at least one person shares my aesthetics.  Via a link from Radley Balko, comes this photo spread called factories and industrial complexes, but which look mostly like oil refineries at night.

The Classy Way to be Fired

Radley Balko demonstrates it.  Thank them for the opportunity, express sorrow for the passing of a good relationship, look for the next new thing.

$800 Billion in Hush Money

Well, it looks as if the "stumulus" bill has passed, and its all over except for the conference committees (which will likely comprimise the House and Senate bills by adding a $100 billion or so).

There is just no way there can be a Keynesian muliplier above 1 for such spending.  Even if someone could show me a theoretical example crafted for a particular economic situation with the best of all governments, there is simply no way this real-world government is going to spend the money that well.   500 geniuses with perfect incentives couldn't do it, and certainly the folks in Congress are not geniuses and have far less-than-perfect incentives.

So you ask, will we get any stimulative effect?  I would answer:  Just one.  Obama and Congress will now shut the hell up trying to panic everyone into battening down the hatches for the worst economy in history, and folks can get a bit of breathing space to look around them and see that business opportunity is still there.  This is $800 billion in hush money, a bribe we are paying Obama and Pelosi in the form of passing a lot of their pent up leftish wish list, in return for them taking some ownership interest in real economic health.

I Told You We Were Focused on the Wrong Thing

For years I have complained that the opposition to the GWB administration was focused on the wrong things vis a vis the detention policy at Gitmo.  There was too much focus on Gitmo itself as a lightening rod, and too much discussion of whether flushing a Koran down the toilet was torture.  My point was that there didn't have to be torture for it to be wrong to hold non-uniformed suspected non-combatants in a non-declared war indefinitely, as if they were captured Nazi U-boat commanders.   For example:

I believe strongly that the Bush administration's invented concept of unlimited-length detentions without trial or judicial review is obscene and needed to be halted.  But critics of Bush quickly shifted the focus to "torture" at Gitmo, a charge that in light of the facts appears ridiculous to most rational people, including me.  As a result, the administration's desire to hold people indefinitely without due process has been aided by Bush's critics, who have shifted the focus to a subject that is much more easily defended on the facts.

Justice Scalia argued that giving habeas corpus rights to enemy combatants during war time was unprecedented, but I responded:

I don't have enough law background to know if this is truly unprecedented in this way, but what it if is?  One could easily argue that the nature of the "enemy" here, being that they don't have the courtesy to wear uniforms that indicate their combatant status and which side they are on, is fairly unprecedented as well.  As is the President's claim that he has unilateral power to declare that there is a war at all, who this war is against, and who is or is not a combatant.  I know from past posts on this topic that many of my readers disagree with me, but I think it is perfectly fine [that] the Supreme Court, encountering this new situation, sides with the individual over the government.

So now, just as I feared, the soil was fertile for a classic political bait and switch.  Obama agreed to close Gitmo, the lightening rod of the controversy, thereby inspiring us to believe he is changing policyWhen, at its heart, the real problem is still there:

Harvard Law Dean Elena Kagan, President Obama's choice to represent his administration before the Supreme Court, told a key Republican senator Tuesday that she believed the government could hold suspected terrorists without trial as war prisoners.

She echoed comments by Atty. Gen. Eric H. Holder Jr. during his confirmation hearing last month. Both agreed that the United States was at war with Al Qaeda and suggested the law of war allows the government to capture and hold alleged terrorists without charges.

If confirmed as U.S. solicitor general, Kagan, 48, will defend the administration's legal policy in the courts.

I assume she and Holder are toeing the Obama line on this, though they could be the bearers of a trial balloon and it may be Obama has not made up his mind.  I hope so.  Here is some more.

"Do you believe we are at war?" Graham asked.

"I do, Senator," Kagan replied.

Graham cited the example of someone who is not carrying a gun or fighting on a battlefield. "If our intelligence agencies should capture someone in the Philippines that is suspected of financing Al Qaeda worldwide, would you consider that person part of the battlefield?" he asked. He added that he had asked the same question of Holder, who replied that he agreed that person was on the battlefield.

"Do you agree with that?" the senator said.

"I do," Kagan replied.

Graham said that under the law of war, the government can say, "If you're part of the enemy force, there is no requirement to let them go back to the war and kill our troops. Do you agree that makes sense?"

Kagan replied, "I think it makes sense, and I think you're correct that that is the law."

"So America needs to get ready for this proposition that some people are going to be detained as enemy combatants, not criminals," Graham concluded.

I may have missed it, but did the AUMF or whatever it was that Congress passed before we entered Afghanistan and Iraq actually declare we were at war with the organization named "Al Qaeda."  Or does the president saying the words "war on terror" enough times in 8 years just make it so?

Properly Hideous

My old Princeton roommate Brink Lindsey and I agreed today that our 25th reunion jackets meet the primary test of such apparel:  They must be both original and so hideous that one would never wear them outside of zip code 08544.


Can clothing be both hideous and cool at the same time?  I think so (which my wife would say explains a lot).  Now, if I could get Robert Graham to do an orange and black shirt to go with it....

PS:  Brink has a new paper out,  "Paul Krugman's Nostalgianomics: Economic Policies, Social Norms, and Income Inequality"

Update: Hat tip to the commenter who seems to be a fellow rail geek for coming up with the D&RGW locomotive analogy.  I almost ran this post differently.  I was going to have a joke post claiming to be an item from the stimulus bill, claiming one provision to increase employment was to replace traffic cones at construction sites with live humans wearing appropriate gear.  But I am having trouble seeing very much funny in the stimulus bill right now.  Never has so much been spent so quickly with so little deliberation or even understanding of what is being spent.

As for the test pattern comment, this does remind me of the "moiré" test patterns -- in fact, I had trouble trying to compress it too much as the jpeg  started producing moiré patterns.

Duh. Now, Let's Get To The Real Issue

Apparently, Obama is trumpeting victory because a company that will recieve a lot of the stimulus money will likely hire more people.

President Barack Obama says Caterpillar's chief executive has told him the company will rehire some laid-off workers if the stimulus bill passes.

The heavy equipment maker announced more than 22,000 job cuts last month as it scales back production amid the economic slowdown.

Seriously, do proponents of the stimulus really think that we opponents don't understand that individual projects funded by this new bill will employ people on the project?  I guess they do, because I had this very argument last night.  So, to clarify my position, I fully understand and comprehend that projects that get additional funding in the new bill will likely employ more people on that project than if they had not been funded by the bill.

The issue is that the $800 billion of "stimulus" comes from somewhere, in this case borrowing paid for by future taxes. At any point in time, there is only so much investment capital out there in the world.  So, the real question is not whether Caterpillar will hire more people if the government throws money its way. The real issue is who won't be hired somewhere else because $800 billion of investment capital that was going to be employed for some private purpose is now going to be spent by the government.

For those who are not confused about this, and want to discuss the multiplier, which is another way of asking how the net gains and losses described above balance, there is a good back and forth here.

One thing this country just seems incapable of considering -- it may be that there is simply nothing the government can do to make this recession better.  Everyone, from consumers to lenders, find themselves overleveraged and new spending is simply going to go down for a while until everyone feels comfortable with their reserves.  The only thing Obama has done so far is, by spreading panic, to increase the size of reserve everyone thinks they need (example here, and my analysis here)

Postscript: Obama's actions  of late are kind of funny.  He has been criticized for lacking experience and having only really demonstrated the ability to campaign well.  So, when things get tough and he starts to come in for some here-to-fore unprecedented criticism, he runs back to what he does best - campaign.

Job Losses

Job losses to date compared to other recessions, from Calculated Risk, via the Big Picture, with a bit of my annotation.


Not a great predictor yet, because we don't know where the bottom is.  But I do find it interesting how symmetric past recessions are - in other words, the time and slope back out of the trough seems surprisingly similar to the time to reach bottom.

Vampiric Regeneration

How can you get free power?  Well, one way is to steal it from other people.  And if you steal it in small enough bites from a lot of people, they may never notice.

This seems to be the basic idea in this article in the Guardian, whose author clearly attended lots of journalism classes while studiously avoiding any class that might have made mention of the first law of thermodynamics.

"Green" speed bumps that will generate electricity as cars drive over them are to be introduced on Britain's roads. The hi-tech "sleeping policemen" will power street lights, traffic lights and road signs in a pilot scheme in London that could be rolled out nationwide.

Speed bumps have long been the bane of motorists' lives, but these will capture the kinetic energy of vehicles.

Peter Hughes, the designer behind the idea, said: "They are speed bumps, but they are not like conventional speed bumps. They don't damage your car or waste petrol when you drive over them - and they have the added advantage that they produce energy free of charge." An engineer who formerly advised the United Nations on renewable energy sources, Hughes added: "If it [the energy] wasn't harnessed by the speed bumps, it would go to waste."

The ramps - which cost between £20,000 and £55,000, depending on size - consist of a series of panels set in a pad virtually flush to the road. As the traffic passes over it, the panels go up and down, setting a cog in motion under the road. This then turns a motor, which produces mechanical energy. A steady stream of traffic passing over the bump can generate 10-36kW of power.

OK, I am willing to believe that you might be able to recover some net energy from a system with this kind of dynamic speed bump replacing an existing static bump  (but I am skeptical, and would want to see the math).  Of course, if you really have a road with a speed bump and so much traffic that it will generate this much power and repay a large investment, then you probably have a road/traffic design issue.

But the article seems to be positing that towns could install these as flat devices --"virtually flush to the road" --  that drivers would hardly notice.  Power from these devices would help the town power its lights and other devices.  But unless these guys have invented the perpetual motion machine, there is no free energy to be had here.  In fact, due to that nasty old spoil-sport, the second law of thermodynamics, there has to be a total system loss.  The device might only steal the equivalent energy of a thousandth of a gallon of gas from each driver, so the driver of each car won't really notice, but the total system expenditure of the thousands of drivers who power the device will still be there, just hidden.  This is a new stealth tax on drivers, dressed up in green clothing.

Next up:  Britain proposes to put windmills on the roofs of electric cars as a power source.  After all, when you are driving at 60 miles per hour, all that wind energy coming past your car is just lost, right?  Once you got the car up to speed, it would just generate its own electricity.  LOL.  I shouldn't laugh, there is probably a billion or so for this in Obama's stimulus bill.

via Tom Nelson.

Politics as Usual

It is good that everyone has made clear to me that Obama represents change because otherwise, I would have thought that the current stimulus bill was politics as usual, only on steroids.  The other day I hypothesized that panic-stricken statements of disasters from both the outgoing Bush administrations and the new Obama administration, generally crafted to help push "emergency" legislation, are having a substantial negative effect on the economy.  It turns out, this is not a new accusation.  From Newsweek, 1991:

Be afraid, be very afraid. That has been the message of President George W. Bush and his economic team ever since December, when they realized that for the first time in 112 years they couldn't use the normal argument of new presidents to push their program. Invoking "the will of the people" wasn't going to cut it this time.

So they did something risky and unusual--they poor-mouthed the economy to build support for their tax cut (which, as currently designed, would have almost zero impact on the economy this year) and to sprinkle a little blame for any recession on Bill Clinton. Even if Bush turns out to be right in his predictions of gloom, that doesn't mean he was right to make them. Not "prudent," as his father might say. Not helpful.

Yes, the power of any president over the economy is often exaggerated. This latest slowdown began last fall and was probably inevitable. The tech-stock bubble inflated and burst without much influence from Washington. But if the origins of economic trouble cannot be blamed on a president, the way it spreads psychologically is very much within his job description, if for no other reason than that the American people believe it to be. Consumer confidence is central to any soft landing (or, in the case of real recession, any recovery), and that confidence can be bolstered or eroded by the man in the White House.

Update: the Washington Times article I quoted in a previous post points me to another such statement from the NY Times in 1991:

Normally, presidents are cheerleaders for the nation's economy....

Now comes George W. Bush, who is presenting what an analysis in The Financial Times last week called ''the novel spectacle'' of a president ''urging citizens to ignore good economic news and focus on the bad.''

All week, the president talked about the economy ''sputtering,'' and he wrapped up the week on Saturday by beginning his weekly radio address to the nation this way: ''Good morning. For several months, economic indicators have pointed toward a slowdown, and now many Americans are starting to feel its impact. The stock market is causing worries, high energy prices are straining family budgets and some workers and small-business people have been directly affected by layoffs and slowing retail sales.''

Because there is no disaster that immediate, decisive, wrong action cannot make worse

The post title is a quote from this video on the bailout, which is not a deep analysis of the financial crisis, but spot-on none-the-less. Via the Liberty Papers.

Talking Us Into A Depression

At what point do politicians bear some public accountability for their public statements and the effect those statements have on the economy?  I almost want to ask Obama and Pelosi -- what is the minimum size of pork-spending bill you will accept so we can just go ahead and pay the money and get you and your cohorts to shut the hell up on trying to convince everyone we are in the Great Depression.  Because, to some extent, such statements can be a self-fulfilling prophesy.  Seriously, the biggest stimulative effect of passing this stimulus bill will be, almost without doubt, that it will end the felt need for Washington weenies to create an atmosphere of panic.

Now, I suspect that I would have a different observation if I lived in Detroit, but I ask every business owner or manager I meet for the personal evidence they have of economic cataclysm.  Is their business down?  And in a surprising number of cases, I get the answer that their business is doing OK, but they are cutting back because surely the worst is soon to come, based on everything they see in the media.  And do you know what?  I have done exactly the same thing.  I had one bad month, but since then things have been pretty steady, but I am cutting like crazy anyway, because I can't ignore the only other information source I have on the economy, which are pronouncements in the media.

I strongly believe that public pronouncements of doom, starting last October with Henry Paulson and continuing now to almost daily excess by Obama (today's statement:  the economy is in a "virtual free fall") have measurably contributed to job losses in this country.  Many people who are on the street without a job today can probably trace their unemployment to "just in case" cuts made more in response to government assurances of doom as on actual declines in output.

I can't prove this, of course, but I will present one pretty good pointer that I might not be totally full of it.  With the January jobs report, the recent recession has become one of the five worst since WWII in terms of jobs losses as a percentage of the work force (I know you may, from reading the paper and listening to Obama, think it is the worst, but it is still only the fourth or fifth worst).  Let me compare the job losses and the output declines at this point in the recession for these 5 recessions:


As you can see, we have had far more job losses relative to output losses than any major post-war recession.  This does not mean that more output losses are not coming, but it means that, perhaps unique to this recession, job losses are preceding rather than following output losses -- in other words, job losses are occurring more than in any other recession based on the expectation of output losses, rather than in reaction to them.  I wonder who it is that is setting these expectations?

Wow, using panic to achieve political aims and in the process accelerating job losses.  And they say we libertarians are heartless!

Data updated by the Minn. Fed here.  They actually have job losses through 13 months, but I jused 12 months because there are only quarters for the output numbers.

Update: Via the Washington Times:

Just Friday, Mr. Obama said a report that 600,000 jobs were lost in January meant "it's getting worse, not getting better. ... Although we had a terrible year with respect to jobs last year, the problem is accelerating, not decelerating." Last week he said, "A failure to act, and act now, will turn crisis into a catastrophe."

But he isn't the only Democrat ramping up the rhetoric while talking down the economy. House Speaker Nancy Pelosi of California said last month that our economy "is dark, darker, darkest." Rep. David R. Obey of Wisconsin said, "This economy is in mortal danger of absolute collapse." And Sen. Claire McCaskill of Missouri said of the economic-stimulus bill, "If we don't pass this thing, it's Armageddon."

A Question about the Stimulus Bill

Kevin Drum, quoting Joe Klein, hopes the press (which we know to be so terribly biased against leftish ideas and new government spending) doesn't smear Obama's economic plan like they did Clinton's.

I won't get into all that, but I want to ask a related question:  To what extent does current legislation actually represent an Obama plan at all?  Maybe the press coverage has been poor, but hasn't Obama really been forced to put a happy face on and accept the half-baked mess that comes out of Congress?  Hasn't Obama really taken the role as Majority Whip, trying to wrangle votes for an existing piece of legislation, rather than actually crafting its framework?

I would define one of the key aspects of Presidential leadership as bringing some adult supervision to Congress, and particularly his own party in Congress.  Bush CERTAINLY never was able or willing to do so, and I don't see evidence of Obama doing so either.  Congress is running amuck, and every week seems to add another $100 billion in random pork to the bill.  In content, my perception is that the stimulus bill is Nancy Pelosi's bill but Obama's blame.  Or am I missing something?  Has the Administration had more involvement in the crafting of this bill than it appears?

Update: Jane Hamsher at Huffpo (HT to a commenter) argues that my understanding above is a result of furious Administration spin:

The story of the morning seems to be that the Obama team is unhappy with Nancy Pelosi and the House committee chairs for delivering up such a liberal, pork-laden bill that they themselves really had nothing to do with.

"Anonymous staffers" are fanning out to fuel the fiction that "during the transition Summers, his deputy Jason Furman, and the White House's top Congressional liason, Phil Schiliro, laid out the broad principles they wanted the bill to adhere to, but when it came to actual content, they deferred to the chairmen."

Except that it's not true.  The Obama transition team has been working on the substance of the bill from day one.  Their first step was to go to the Association of Mayors, the National Governors' Associations and other non-congressional groups and say "give us all your shovel-ready projects."  That and other provisions written by the Obama team became the spine of the bill.  It went through only three committee markups, and moved through the House at lightening speed in a way that made many House chairs unhappy, with the notable exception of Dave Obey (now also under attack) who helped push it through quickly.

The House bill is notable not only for its size but also because it had no earmarks, which are the lifeblood of House members, the way they show their constituents what they're doing for them.  As one person knowledgable about the writing of the bill says, "if you're in the House why would you write a bill without earmarks unless you didn't write the bill?"

But with public opinion quickly turning against the bill, and the House Republicans claiming the moral high ground as they held formation to oppose him, how could Obama be distanced from responsibility for elements of the bill under GOP attack and remain above the fray?  That seemed to be the locus of White House concern, and according to those familiar with what happened, the "polarizing" Nancy Pelosi was designated to take the fall.

Interesting.  Well, I don't often comment on politics per se  (vs. actual proposals) because I am so naive about this stuff.  Hamsher could in turn be shilling for Pelosi.  I just don't know enough.

By the way Hamsher tends to imply that it is a good bill with bad PR.  Phhhth.  It is an awful bill, and I am willing to bet that I have read more of it and the CBO report than she.


I haven't written for a while about lawsuits, in part because our company was in the process of being sued for hundreds of thousands of dollars in two cases for a) allowing a customer to get a splinter in his/her foot from walking barefoot on a wooden deck and b) allowing a guy who just had a knee operation and jumped from a height of six feet to hurt his knee.   I really didn't want to throw any more fuel on the discovery fire.

Anyway, that is all behind me, and just in time to post on a funny story via Overlawyered.  I have written a number of times about lawyers whose clients get coupons while they harvest millions in fees from a class action.  As I wrote here:

It used to be that clients would suffer some sort of injury and seek redress in the courts.  To do so, they would hire an attorney to help them.  The attorney was the hired help, compensated either hourly or via a percentage of any awards.

Today, the situation is often reversed.  It is the attorney who is identifying lawsuit targets for class actions and shareholder suits, and then seeking out clients who can maximize his chances of success.  Clients, who typically make orders of magnitude less than the attorney in class actions (think 50-cent coupons and $8 million attorney fees) are selected because they are sympathetic, or give access to a particularly plaintiff-attractive jurisdiction, or, in cases such as ADA suits in California, because they have effectively become partners with the attorney in serial torts.

So I had to laugh when I saw this story in Overlawyered yesterday:

The client class members were to receive only gift cards, not cash, in the settlement with Windsor Fashions, a clothing retailer, so Los Angeles Superior Court Judge Brett Klein thought it only fair to provide that Yorba Linda attorney Neil B. Fineman be paid his fee with "12,500 ten-dollar Windsor Fashions gift cards."

Great Comment on our "Unregulated Free Market"

Michael Smith comments over at EconTalk on a comment by one Mark K (via Cafe Hayek)

Mark K wrote:

These jokers on Wall Street, who according to Russ made "˜innovative' products like credit default swaps, showed us unregulated free market capitalism in all its glory.

The notion that we have an "unregulated free market" is false.

If we had an unregulated free market, the organizations and individuals that made stupid investment decisions -- those "jokers on Wall Street" -- would now be bankrupt, to be replaced by more competent organizations and managers. Instead, under the current system, they are "bailed out" -- at your expense -- and allowed to continue operating.

If we had an unregulated free market, the investment rating agencies that rated securities containing subprime loans as "AAA" would be disgraced, bankrupt and out of business -- no one on earth would deal with them any longer -- they wouldn't be able to pay people to use their services. Instead, under our current system, not only are all those rating services still in business, the S.E.C. requires that all issuers of investments use those rating agencies.

If we had an unregulated free market, no one would be forcing bankers to make riskier loans than they wish to, as is currently done by legislation such as the Community Reinvestment Act and threats of lawsuits from organizations like ACORN and from the Federal Government"˜s Justice Department (Clinton"˜s DOJ filed 13 major lawsuits against banks for failure to lend to "minorities").

If we had an unregulated free market, there would be no central banking entity in charge of a fiat money supply with the ability to:

a) Make vast amounts of credit available at below-market interest rates.

b) Follow such a persistent policy of inflation as to convince virtually everyone in the country that purchasing a house is "a good investment".

c) Eliminate ( or at least significantly reduce) risk aversion by guaranteeing bankers that they (the Fed) will always be there as "lender of last resort".

d) Condone and make possible a preposterously over-leveraged fractional reserve banking system under which banks currently hold total reserves of only about 4% and are thus extremely vulnerable to any sort of a run or loss of confidence in the bank.

If we had an unregulated free market there would be no quasi-government entities like Fannie and Freddie and the FHA to insure that trillions of dollars of that cheap credit made possible by the Fed was directed into the residential housing market, producing an unsustainable boom in housing construction, which, when it ends, leads inevitably into an economic bust.

If we had an unregulated free market, the Federal Government would not now be contemplating looting the American taxpayers of another trillion dollars or so to pay off various special interests that helped the latest collection of looters get into power.

We don't have an unregulated free market. We have a "mixed economy", with a few elements of capitalism struggling under the weight of literally thousands of pages of rules and regulations and dozens of government agencies interfering in virtually every aspect of our economic lives.

And under this set-up, it is you, the "little guy", the individual who doesn't have a powerful lobby in Washington to get the rules bent in your favor -- you, who cannot command an audience with Congress to beg for your personal bailout -- you, who can do nothing as government uses your funds to save the incompetent and the dishonest from the consequences of their own actions -- it is you who gets screwed.

We don't have an unregulated free market; we have an out-of-control government intent on looting us blind.

Famous Birthday Today

A key birthday today, February 6.  Find out who.

Hair of the Dog

Isn't this exactly the type of government policy that helped promote the housing bubble and in turn led to our current recession?

WASHINGTON (AP) "” The Senate voted Wednesday night to give a tax break of up to $15,000 to homebuyers in hopes of revitalizing the housing industry, a victory for Republicans eager to leave their mark on a mammoth economic stimulus bill at the heart of President Barack Obama's recovery plan.

Republicans:  We want to prove we can do stupid, populist sh*t too!

Update: Via TJIC, more hair of the dog:

Fannie Mae, the mortgage-finance company under U.S. government control, will loosen rules for homeowners seeking to lower their loan payments by refinancing.

Fannie Mae will drop some credit-score requirements, reduce income-documentation standards and waive the need for appraisals in some cases"¦

Best Google Research Project Ever

How many "A's" do you put in "Khaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaan!" ??

Wow, that has to be the hardest to punctuate sentence I have ever written.  Is there even a right way to punctuate that?


Update: This is also an interesting study in the Heisenberg principle (which, generalized from its quantum mechanics roots, posits that you can't study a process without altering it).  The very act of posting the results is changing future Google searches, so the original results will be invalid.

Update #2: There needs to be one of those web sites that do textual analysis of web content called the geek-o-meter.  I would suppose that by dropping a Heisenberg and a Star Trek reference in the same post, I have shot up there on any presumptive scale.   All I need is a D&D reference, which I actually came frighteningly close to in the last post when I wanted to say "it's like Obama dropped all his character creation points into charisma and didn't have any left over for wisdom."

Everyone Except Me, I Guess

Barack Obama, in the Washington Post:

By now, it's clear to everyone that we have inherited an economic crisis as deep and dire as any since the days of the Great Depression

Sorry, maybe I am just cynical from having politicians call 8 of the last 3 recessions the worst economy since the Great Depression**, but I don't think this is the worst crisis since the 1930's.  It's not even the worst since I was born.  The late 70's were worse, the early 80's were worse, and from a financial/banking crisis point of view, the late 80's were worse.

What Americans expect from Washington is action that matches the urgency they feel in their daily lives -- action that's swift, bold and wise enough for us to climb out of this crisis.

Actually what I have come to expect is arrogance, a desire to turn any crisis into increased power for Washington, and general incompetence.  So far, I have not been disapointed.

Our economy will lose 5 million more jobs. Unemployment will approach double digits.

OK, I will take that bet.  5 million more jobs with the base being the January employment numbers.

I won't get back into all the Keynsian arrogance in the rest of the piece -- suffice it to say that the overwhelming assumption is that the government can spend money more productively than can individuals.  But check out this economic jumble:

In recent days, there have been misguided criticisms of this plan that echo the failed theories that helped lead us into this crisis -- the notion that tax cuts alone will solve all our problems; that we can meet our enormous tests with half-steps and piecemeal measures; that we can ignore fundamental challenges such as energy independence and the high cost of health care and still expect our economy and our country to thrive.

I reject these theories, and so did the American people when they went to the polls in November and voted resoundingly for change. They know that we have tried it those ways for too long. And because we have, our health-care costs still rise faster than inflation. Our dependence on foreign oil still threatens our economy and our security. Our children still study in schools that put them at a disadvantage. We've seen the tragic consequences when our bridges crumble and our levees fail.

Is he really implying that our economic problems were cause by use of fossil fuels, health care costs, aging bridges, and classrooms with out enough computers?  Why yes, he seems to be saying just that.  The rest of the piece is dedicated to just those things as a solution to the problem. Seriously, what does any of this have to do with a recession spurred by 1) banking liquidity crisis 2) loss of consumer new worth through falling home prices and 3) panicky statements by senior government officials.  The answer, of course, is nothing.   Basically Obama is pursuing the old "this crisis will be solved by all the piecemeal programs I was pushing before the crisis" argument.

I am sure there are folks who believe these things, if done well, might increase GDP 10 years from now, but is there anyone who really thinks this will create 3 million jobs in the next 18 months?  I am reminded of the old joke, how do you make a million dollars in real estate?  Start with 10 million.  In the same vein, how does the government create 3 million new jobs?  By destroying 5 million others.

By the way, speaking of bait and switch, these solutions Obama focuses on - health information, energy projects, school rebuilding, and highways - account for at most 6.5% of the total tax cuts and spending programmed by the stimulus bill for the first 2 years (34.1 of 525.5 billion, which is a bit outdated because it is based on a CBO report of last week, and has not kept up with the new pork added by Congress since then).

I just can't believe this guy actually represents change for people.  To me, he sounds like a total flashback of every politician from the 1970s, who used to flail around with just this type of rhetoric.  What's next, Whip Unemployment Now?

**Footnote I think I am going to try to trademark "Worst Economy Since the Great Depression" like Pat Riley trademarked "threepeat."  Or maybe just trademark "WESGD."  Here are a couple of past examples:

Clinton / Gore 1992: "Mr. Gore lambasted Mr. Bush for what he called 'the worst economic performance since the Great Depression'".  The US unemployment rate peaked around 7.8% in 1992 and was headed down towards the 6's by the time Clinton was inaugurated.   The 1991-1992 recession turned out to be one of the shortest on record.

John Kerry, 2004: "In his Sept. 2 speech in South Carolina, Kerry claimed the U.S. is suffering 'the greatest job loss since the Great Depression.'"  The 2004 unemployment rate peaked at 5.8% and was headed down into the fours during Bush's second term.  The 2003-4 recession was almost as short as the '92 recession.

For perspective, via Carpe Diem, initial jobless claims as a percentage of the labor force:


Prediction: Resurgence of Options in Executive Compensation

Announced today:

President Barack Obama on Wednesday imposed $500,000 caps on senior executive pay for the most distressed financial institutions receiving federal bailout money, saying Americans are upset with "executives being rewarded for failure."...

The pay cap would apply to all institutions that have negotiated agreements with the Treasury Department for "exceptional assistance." Those would include AIG, Bank of America and Citi.

Firms that want to pay executives above the $500,000 threshold would have to use stock that could not be sold or liquidated until they pay back the government funds.

I don't get too worked up about this one way or another.  Once the government is a part owner of these companies, it is perfectly reasonable to expect them to dabble with things like compensation policy, and no surprise that focus of such dabbling would fall on whatever particular hobby horses the party in power seem to obsess about.  Which is reason #4097 why government shouldn't be bailing these guys out.

In terms of executive compensation, options have fallen a bit out of favor as executives have sought more of a guaranteed payday, and changing accounting rules and more scrutiny have made that harder to do with options.  The concern is,  of course, stock prices can fall or even go to zero and that part of the compensation package would be worth zero.  Executives are generally happy to take risks but only with other people's money (people who take risks with their own money are called entrepreneurs).

But in this case, most of these companies' stock is at what is likely to be the bottom, and each has the commitment of the government now not to let them go bankrupt, so the danger of stock values going to zero is, well, about zero.   Would you take warrants in a company priced at the market trough and with the US government guaranteeing the floor beneath you?   I can't think of a better time to get equity or option-based compensation, and so expect to see a lot of it in order to circumvent the $500,000 limit.  And a lot of big paydays 5-7 years hence.