Coyote Blog

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.

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.

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 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.

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.''

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."

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:

Almost exactly 10 years ago, on my son's 5th birthday, I bought him some large scale (G-scale) trains and track.  It was a logical present given that I have always been a model railroader myself, though with smaller scale trains (HO and now N) and a different approach (for example, I fabricated my own track rather than buying it).

Anyway, I bought 4 boxes of track from the leader in large scale, LGB, for $85 a box  (I know because the price tag is still on the boxes).  We used the track only lightly and indoors.  Over the holidays, 10 years later, we decided to get rid of it.  I almost just gave it way, but put it on eBay instead.

Well, apparently LGB went out of business, and its track is still very much in demand on eBay.  I sold the boxes for an average of $200 a box.  That is an annual return, even leaving out the use we got out of it, of 8.9%.  Compare this to the 10-year return of the S&P500 index as of 1/2/09 of -1.4%.  Can you say, "found money?"

From the AZ Republic:

The owner of a glass company accused of a $132,000 scheme to smash Scottsdale school bus windows and profit from the repairs has been indicted.

A Maricopa County grand jury returned the Jan. 22 indictment against Troy Jason Vollberg, 34, who was arrested Friday by Scottsdale police....

documents accuse Vollberg, owner of Tri-State Glass, of being the mastermind behind an effort nearly two years ago to bilk the Scottsdale Unified School District out of hundreds of thousands of dollars to replace broken bus windshields.

Investigators claim Vollberg paid Scott Sloan $5,000 to find a person to knock out the glass, and then paid Mike Olivares $15,000 in April 2007 to break out the front windshields of 70 school buses in a Scottsdale bus yard.

Vollberg, whose company was a subcontractor for the school district, charged the district $134,000 to repair the windshields.

Police documents say Vollberg pocketed the money and used it for a "trip to Las Vegas and new tires for his truck."

Arrested for acting on the broken windows fallacy!  If only we could do the same with the Congressional authors of the stimulus bill.

Megan McArdle said a few days ago:

My reasoning for thinking of this as a depression, rather than a recession:  roughly, that we don't understand how to get in or out of it.

I have no doubt that unwinding serious problems with mortgage loans and the housing bubble would have pushed us into some kind of recession.  But one can easily argue that the bank failures in the 1980s and the housing market in places like Texas were far worse in the 1980's than they were in late 2008.  In fact, there is a fair amount of evidence that current mortgage and foreclosure problems are mainly limited to 4 states (Arizona, California, Nevada, Florida).

If one argues that we now have something worse than a run-of-the-mill recession (which I am still dragging my feet on admitting), then I think I know the cause:  economic hypochondria.  Yes, we may have a cold, but we have convinced ourselves it's cancer.

It all began with one man:  the US Treasury Secretary.  Who decided in October to scream to all the world that the US and all its financial institutions were facinig systemic disaster.

FDR did at least one thing I thought fairly clever.  One day, he declared a bank holiday, and told the country he was going to inspect all the banks.  And a few days later, a few were closed and the rest opened up, suddenly certified by the US Government as healthy.   He did exactly the opposite of Paulson - he faked it.  No way he really knew if all the other banks were healthy, but he saw a crisis of confidence and he bluffed.  The same way, in fact, Jeff Skilling bluffed (and went to jail for) when he faced a liquidity crisis and the leaders of Bear Stearns and many others have this year as well.  But Paulson screamed to the world "liquidity crisis" and we may not know much about how to get in and out of them, but we do know that such a statement is usually a self-fulfilling prophesy.

Once Paulson struck the match, everyone else had a reason to contribute to the fire.  Obama loved it, because a financial crisis could be laid at the door of Republicans.  The media loved it, because they always like to headline pending disasters and it supported their guy Obama.  Banks learned to love it, as they soon found that if the country bought the "disaster" story, they might get free government handouts.  And then GM and others saw an opening to stampeded the government into more handouts.  In one of the great ironies of all time, the looming depression became the greatest gravy train of all time, spawning what literally will be the largest pork-fest in all of history.

So what do the rest of us think?  Well, we might still have our jobs, but it sure seemed like we might lose them soon.  Just watch the news.  And our company joined right into the panic.  I have cut expenses and jobs like crazy in anticipation of a drop in revenue I haven't even seen yet!

Can I prove that this is anything more than just a libertarian fantasy-rant?  Not really.  The only potential proof I can offer is as follows.  If my story is correct, then we should see layoffs occurring faster than actual drops in output.  We should see job cuts in anticipation of, rather than as a result of, falling demand.  To which I offer these two charts, via Alex Tabarrok:

Postscript: To be fair, economists who look at this stuff much more deeply were calling out deep problems long before Paulson screamed fire in a crowded movie house (example).  I am not say we would not have had a recession, but the speed and depth of the drop may well have been affected by his mismanagement.

Well, it appears that Democrats who were angry at the cost of the Iraq war (a feeling to which I was always sympathetic) are attempting to even the score by spending approximately the same amount in a single bill.

Looking at the stimulus bill was kind of an odd experience for me.  Despite everything I preach here about politicians, I must have, somewhere in my deep back brain, under the onslaught of cultish media attention, absorbed some small hope that maybe perhaps Obama was really different.   Then I looked at the stimulus bill.  It is all the same crap that various folks have been trying to peddle unsuccessfully for years, repackaged in a hurry-up emergency form to avoid close scrutiny.  This is politics as usual, but even more so.  Jeez, this easily could have come from Tip O'Neal.  Everywhere you look in the bill, it smells. And Republicans are almost going to have to go along because they have pissed away any credibility they have by doing the exact same thing under the guise of TARP.

By the way, if you are confused about Keysian stimulus, here it is in a nutshell:  The economy is contracting some as people deleverage from over-spending and an asset bubble.  I mean, that's certainly what we are doing in the Coyote den, setting goals for both de-leveraging the business and our household.  But folks are worried, because while this has happened many times, one of those times we had a depression.  So the government does not want you to deleverage.  It wants you to spend and spend.  But it knows you won't, and that it has not yet accumulated enough power to force you to.  So it will borrow and spend for you.  Government stimulus means that when you are trying to save and reduce debt, government is going to run up debt in your name.

By the way, for those wondering how well this works, the last time we tried it was during the aforementioned depression, and the depression lasted another 8-10 years.

Under Bush:

• Iraq Invasion:  Hurry, we need this, emergency, rush, no time to argue, trust us
• Patriot Act and Related Legislation:  Hurry, we need this, emergency, rush, no time to argue, trust us
• TARP I:  Hurry, we need this, emergency, rush, no time to argue, trust us

Under Obama:

• TARP II:  Hurry, we need this, emergency, rush, no time to argue, trust us
• Stimulus bill(s):  Hurry, we need this, emergency, rush, no time to argue, trust us

Change we can believe in.

On a related note, Greg Mankiw looks at this graph in the TED spread:

And says:

[The TED spread's] decline suggests that the TARP is working and is certainly good news

Really?  You get all that from this chart?  I am not an economist, but I would have said the TED spread spiked up and came back down quickly in a very similar manner to any number of fear-induced price spikes, and had already fallen a fair ways before TARP was approved and had fallen a lot before the first dollar flowed (it is hard to read the chart, but by October 24 it had fallen to around 2.5).  This strikes me as pretty post hoc ergo propter hoc reasoning.  One could as easily say that the recent fall in oil prices was due to the most recent energy bill from Congress, but I am not sure even the most hard-core statist could say that with a straight face.

The longer-term history of the TED spread shows many such spikes, all of which came to earth quickly without a trillion federal dollars:

I don't think I need to even bother expressing to my regular readers my utter disdain for this kind of trough-feeding:

Overall, the article notes "the mayors of all 641 cities [represented by the U.S. Conference of Mayors] are asking for $96.6 billion in federal funds for 15,221 municipal projects." Whole bit here.

Here is my question for supporters of this bailout garbage as an economic stimulus.  I understand that in Keynesian economics, government spending has a multiplier effect that causes it give a bigger boost to the economy than private spending  (I don't agree, but I understand that people believe this and understand the faulty assumptions that get them to this conclusion).

But under what economic theory are we operating now that says that having the federal government borrow or raise taxes to spend on municipal projects has a greater stimulus effect than having local governments do it?  None, of course.   What is happening is that a bunch of munipal government weenies are going to Obama and saying "we don't have the credibility, support, and or cajones to raise taxes.  You seem to be hot now, can you do it for us?"

Moral hazard is the term for what occurs when one shelters an entity from the full cost or downside of taking risks.   The result is that the entity will tend to take on more risk than it would have had it had to bear the full costs.  For example, if a company knows that the government will make up the shortfall if its pension investments suffer, it will tend to invest in high-risk, high-return investments that reduce the company's need to contribute funds in the good years.   This is sometimes called privitizing profits and socializing losses.

One of the problems with demonstrating moral hazard is that the hazard often occurs years after the action (usually a government action) that creates the hazard.   But this week we have an amazing opportunity to see moral hazard operating within days of a government bailout:

Immediately after GMAC became eligible for TARP money, GM reduced to zero the interest rate"¦ on certain models. This, of course, penalizes GM competitors, including Toyota, Honda and other "transplants" whose cars are made in America by Americans for Americans, and Ford, which does not have the freedom of maneuver conferred by TARP money because Ford is not taking any"¦

GMAC has begun making loans to borrowers with credit scores as low as 621, a significant relaxation of the 700 minimum score the company adopted just three months ago as it struggled to survive. America's median credit score is 723"¦

If you pay people trillions of dollars in response to a bad behavior (in this case, credit lenience) then you will just encourage more of that behavior, even if everyone achnowleges it to be a bad behavior.

It is interesting watching a group of folks sink into mass hypnosis.  Specifically, much of the left is working really hard to convince itself that obsoleting much of the current energy and transportation infrastructure and raising the price of electricity and fuel will result in net jobs growth.  And, that despite 100 years of failure in countries too numerous to name, the government will suddenly become able to successfully plan and manage investment to the greatest economic benefit.  Here is just one example:

My meditation comes in the wake of reading an article about green jobs. Obama and (other) progressives have been making a case for government spending to develop a green energy infrastructure. As Van Jones said in his powerful speech at GreenFest, that's how we got the highway system and the space program that, to some extent, fueled the prosperity of the 50s.

The article makes the point that when the government picks favorites, it sometimes picks wrong, terribly wrong, as is the case with ethanol. That had me scratching my head for a minute, but then I remembered some key differences:

• Ethanol was an invention, lock stock and barrel, of the agribusiness lobby. It wasn't promoted by scientists as a good source of energy, as solar power is.
• The government already picks winners. It gives huge subsidies and incentives to the fossil fuel industry.
• If solar power turns out to be a boondoggle like ethanol, we should push the government to dump its incentives.

However, it seems unlikely that solar power will be such a dud, given that it's already boosting the economy as a sole sector of growth in these bleak economic times, according to the L.A. Times article.

Here was my response (with some links and additional thoughts added) from his comments section:

With your ethanol statement, aren't you contradicting your point about the government's ability to make sensible energy choices?  I agree that ethanol is a bad energy and environmental strategy, and that most scientists who were not industry shills thought it a break-even proposition at best.  But the fact is that Congresses and Administrations of both parties have backed tens of billions of subsidies for ethanol.  No matter what the rhetoric, when the rubber hits the road, politicians make political, not sensible, decisions.

The study you cited a while back about job gains is just silly - most economists laughed it off.  The study claimed 1.5 million net job gains from California electricity and energy efficiency regulations.  Based on October job numbers, this would mean 9.8% of Californians in October would not have had a job if these regulations hadn't been passed.  Really?  Does this pass any kind of smell test?  These regulations created a few visible jobs and killed some invisible jobs, which is how politicians always manipulate these numbers in their favor.

California has low per capita electricity consumptions primarily for three reasons:  1) it has the mildest climate in the country (when weighted for population location) 2) it has among the ten highest state-average electricity prices in the country and 3) its regulatory regime has driven a disproportionate number of heavy industrial electricity users out of the state (as demonstrated by manufacturing job losses higher than the national average and a low percentage of industrial electricity use vs. other states).

One may believe all of these things are a good thing from an environmental standpoint, but they certainly don't add up to net job gains.  Since you often drape yourself in the scientific mantle when responding to climate skeptics, I will do the same -- economics a science, and it is just as bad to willfully ignore this science as any other.  Claiming that being forced, by CO2 concerns, to obsolete current energy infrastructure and rebuild it in a different form is a gain to the economy is falling into Bastiat's broken window fallacy.

But here is the real argument for not letting the government pick winners -- any small body of people, no matter how smart, has too little information to do such planning on a national scale.  The better alternative is simply to raise the price (ie via a carbon tax) of the fuel or electricity that is viewed to have a high environmental cost (the tax can be made less regressive by offsetting the tax with a reduction in payroll taxes).

When prices rise due to the tax, you don't have a few hundred folks in government trying to figure out how to reduce demand, you have 300 million people trying to figure out how to reduce their consumption  (or start a business to help others reduce their consumption), all with their own knowledge of the opportunities they see around them.  Technocrats hate this kind of solution -- its too anarchic, its not "controlled" or "planned" -- but the fact is that it works.  In a large sense, since you are the environmental guy, I will say that it's more like nature.  Nature isn't planned or controlled from above - order and behaviors emerge bottom up from the responses of individual living things to stimulus.

The Arizona minimum wage is going up again:

The annual increase is the third since voters approved the minimum-wage initiative by a 2-1 ratio in 2006. This year's increase is 5 percent. At $7.25 an hour, the wage is up nearly 41 percent from December 2006 but still only about half of the state's median wage of $14.25, according to the Arizona Department of Commerce.

Oh my God!  You mean the minimum is still below the median?  (Sorry, that is a bit off-topic, but I just can never resist making fun of journalist's understanding of math and statistics).

In just over two years, the minimum wage is up over 41%.  As a company that employs a lot of minimum wage workers in Arizona, I thought I would report on the impact to date.  As a quick background, my company runs campgrounds (and other recreation facilities) all across the country.  We typically employ retired couples who live in their RV onsite and work both for the free camp site as well as a wage, usually minimum wage.  In a good year, our business makes between 6-8% pre-tax profit on sales, which I can tell you is a thin, thin cushion given all of my life's savings are locked up in this one investment.

I don't know where minimum wage supporters think the extra money comes from to pay higher wages.  If they think at all, I suppose they would say that the government is in effect collective bargaining for these workers and getting businesses to cough up some of their immense profits to pay a bit better wage.

Well, our labor costs are about 50% of revenues  (we are a service business).  This 50% is not just wages, but other costs calculated as a percent of wages, such as FICA, medicare, and unemployment taxes and workers comp premiums.  So, if I still want to earn a living for myself, and the state says half my costs must go up by 41%, then it means that prices are going up 20+%.  And that is what has happened.   Remember, at the same time, fuel prices, electricity prices, insurance prices, and everything else has gone up, so that camping prices have risen by 20% or more.  But there is a limit to how far we can push prices, particularly since our typical customer tends to be relatively low-income.  So we are pursuing two other longer term responses:

• We are increasingly turning to automation solutions, like automatic pay systems and gates, to replace people.  While we like to have someone actually there to answer questions and to help visitors, fee collection machines work 24 hours, are not subject to overtime rules, they never get hurt, they never sue us, and the government never passes laws to increase their price.
• We are changing our operating strategy from hiring retired couples who live on-site to hiring younger workers.  This is a change I really hate.  The business model of hiring retired folks who live on-site at a campground is an old and successful one.  Folks in their seventies (and I even have workers in their eighties and nineties) don't work very fast, and they have more workers comp claims, but they had the ability to live on-site and life experience that helped them with customer service.  But trade-offs that worked at $5.15 an hour don't work as well at $7.25 and higher.  So far only selectively, but we are hiring younger folks from the local community to come in and do some of the janitorial and maintenance work.  Even if I pay them $8 or $10 an hour, they make sense if they can be twice as productive.

When I have discussions with folks about oil prices, supplies, and "peak oil," the conversation almost always requires some digression into the nature of oil reserves themselves.  The most important thing to understand is that men have never, ever even come close to pumpng out all the oil that is in a particular field.  Many, many fields have closed, but that is because the incremental cost to get the oil up and out are higher than expected oil prices.

So, changes in technology and changes in price can and do change expectations of how much oil can or will be recovered from a particular field.  For example, my family has a ranch near Glenrock, Wyoming.  When we first started going up there, the fields were booming.  Then they seemed to be completely shut down for a decade or more.  Recently, they were booming again, due to changes in technology and price.

My point, then, is that world recoverable reserve estimates are different -- for the same fields -- at expectations of $25 oil and $125 oil, but you seldom if ever see the MSM being very intelligent consumers of reserve data.   Michael Giberson addresses this issue in the context of an interesting year-end accounting issue:

Geoff Styles offers a timely discussion of how SEC requirements for reporting oil and gas reserves and current low prices will combine to force a potentially dramatic drop in reported oil and gas reserves as of the end of the year. In brief, current SEC rules require that oil and gas reserves reported on financial statements be limited to quantities very likely to be recoverable at the end-of-year market price for such resources. Given the quite low price expected at year end 2008 - current prices are under $40/bbl while 2007 prices ended over $95/bbl, companies owning oil and gas reserves will report sharply lower amounts of oil and gas in reserve.

Un-savvy investors may be alarmed - where did all that oil go? - and un-savvy political commentators will find the reports as more evidence for peak oil. But as Styles points out, the reserves are not going anywhere, and the resources are still there to be had for a price.

Styles explains that while current SEC rules require reserves reports to be based upon a single day's price, industry practice has long shifted to using less-volatile metrics for reserves evaluation. The SEC has proposed adapting its rules so as to reduce the effects of price volatility on reserves reporting, and Styles says the upcoming dramatic "loss" of reserves demonstrates the urgent need for such a change.

Here is the reality of the green jobs myth Obama is pushing (via a reader):

The Arizona Corporation Commission raised the monthly charge that Arizona Public Service Co. residential customers will pay in 2009 to support renewable energy to $3.17 a month from $1.32 a month.

That's a 140 percent increase for the maximum tariff on people living in homes and apartments. Businesses would see their monthly charge increase to a maximum of to $117.93 from $48.84.

Large industrial customers could see tariffs of $353.78, compared with the current cap of $146.53.

The tariffs will be worth an estimated $78.4 million to the utility, which uses the money to acquire renewable energy and pay incentives to people who use rooftop solar and other renewables.

Nothing says "jobs creation" like increasing electricity prices.  Note that these prices are "per meter."  Since many businesses have many meters (we have nearly 100 in Arizona), the price increase is much higher.  For example, we expect to see a $2-$5 thousand dollar increase next year from this program.

Oh, but you say that this money is invested and creates jobs?  Yeah, right. )  via Michael Giberson

A power producer typically gets paid for the power it generates. In Texas, some wind energy generators are paying to have someone take power off their hands.

Because of intense competition, the way wind tax credits work, the location of the wind farms and the fact that the wind often blows at night, wind farms in Texas are generating power they can't sell. To get rid of it, they are paying the state's main grid operator to accept it. $40 a megawatt hour is roughly the going rate.

This is really incredible.    The power companies are constructing wind turbines and, at certain times, not only providing the power for free but actually paying the grid to take it.  All to capture subsidies and tax credits paid for by these special rate surcharges.    The only jobs being created are analysts trying to find the best way to rent-seek under these new laws.  I would rather pay people to dig holes and fill them back in.

I have argued for a while that the US appears to be regressing back to the 1970s.  George Bush is showing every sign of rivaling Richard Nixon for the award for most heavy-handed, misguided economic interventions by a President nominally espousing free market principals.  And there is no reason to think that Obama's outsider appeal and leftish economics will clean things up any better than did Carter.

Another sign the 1970's are back is Obama's appointment of Paul Ehrlich buddy John Holdren as his Science Adviser.   The Reference Frame has more on his work and "credentials", but suffice it to say there is very little there.

He is a strong practitioner of what I call post-modern science, where being fact-based and rigorous is far, far less important than coming to politically correct conclusions that are wrapped in just enough pseudoscience to wow science-illiterate media and most of the public.  His only highly cited works are Club-of-Rome type stuff with Ehrlich in the 1970s, and, not surprisingly, climate alarmist work today.   He is the type of scientist that is more comfortable (and better received) on an Oprah episode than in a detailed science debate.  He has a tendency to declare issues settled without having ever produced any evidence, and a history of eventually backing down from ludicrous positions he adopted without evidence in earlier phases of his life, only to then make the exact same mistake again in a slightly modified form.

The title comes from perhaps his most famous work, and is a great example of exactly what this guy is about.  I=PAT is supposedly an equation to measure man's impact (generally interpreted to be negative impact) on the Earth.  The letters stand for Impact (or Influence) = Population x Affluence x Technology **

The fact that he has an "equation" makes it look like science.  But in fact, it is not an equation at all.  He never tries to put any numbers to it, and in fact one cannot put numbers to it.  It is merely a political point of view popular on the left - that growth and technology and wealth are all bad - made to look like there is some science behind it.   It gives the scientific impremateur to something that is no such thing, so limits-to-growth supporters could yell back at their critics that is was "settled science."  Its a kind of voodoo, where activists could wave Holdren and Ehrlich at their critics, to try to keep the fact-Gods at bay.  Similar forces are at work in climate, though climate scientists have learned not to put their equations on paper (since then churlish outsiders can criticize it) but to bury them in a black box climate model.

In fact, even as a concept I=PAT fails.   Because at least two of the three terms have exactly the opposite relationship.  What do I mean?  Well, I guess I could be convinced that, all things being equal, rising human population has a net negative impact on the environment.   But affluence and technology should be in the denominator, not the numerator.  I won't bother with an extensive proof, since Holdren never proves his equation, but I will offer up a couple of thought experiments:

• Imagine 6-7 billion people on the earth today but with the wealth and technology of the pre-Jethro Tull 17th century.  It would be a freaking disaster.  The catastrophe, to humanity and the environment, would be unimageable.   We are able to have the P we have today only because it is offset by A and T.  Or, in a point made in an earlier post, poverty is not "sustainable."
• America is demonstrably less polluted and cleaner than in 1970, despite a higher population.  Many areas are cleaner than in 1920, and we have more untouched land and more forest coverage today than we did in 1920.  Why?  Technology and affluence.

If one really wanted to be scientific about it, and studied actual data, I think he would find that environmental impact follows a parabola with development.  Initial increases in population and industrialization lead to messy problems, which are then fixed with increasing wealth and technology.  There are many places in the world where halting growth would merely freeze the country at the top of this parabola.  China is a great example.  China's environmental problems will get solved through increasing wealth.  Stopping it from growing would actually increase the negative impact on the environment.

Anyway, I just spent more time on the proposition than it deserves.  If Holdren ever steps down, I suppose there's always Rosie O'Donnell to replace him.

** This is based on the popular interpretation of the equation.  In fact, in its original form, T was not technology but just a plug factor, something like impact per population-dollar.  At this level, the equation is certainly true, as mathematically it is hard to argue against the equation impact = population x dollars x impact per population-dollar!  So, at some level, the finding was not wrong but simply trivial.  However, in popular mythology, T was changed to technology, and the authors really did nothing to correct this interpretation, because essentially they agreed with it, even if they hadn't proved it.  (more here)  This approach, of proving one thing that is trivial and then claiming the proof is of something broader and more robust is now typical of climate science.

From here and here:

I haven't checked these numbers, and they are supposed to be all in real dollars, but YMMV.

So we are going to spend 33% of GDP to avoid a recesion, when the worst recession in history (the Great Depression) had a peak-to-trough GDP loss of about 20%.

Update: This chart is obviously based on a lower estimate.  But it does give one pause when considering the "bailout all due to US laissez faire."

I hate to pick on Kevin Drum twice in a row, but my God is this the worst economic prescription you have read of late:

The only sustainable source of consistent growth is rising median wages. The rich just don't spend enough all by themselves.

The flip side of this, of course, is that rich people are going to have to accept the fact that they don't get all the money anymore. Their incomes will still grow, but no faster than anyone else's.

How do we make this happen, though? I'm not sure. Stronger unions are a part of it. Maybe a higher minimum wage. Stronger immigration controls. More progressive taxation. National healthcare. Education reforms. Maybe it's just a gigantic cultural adjustment. Add your own favorite policy prescription here.

This isn't just a matter of social justice. It's a matter of facing reality. If we want a strong economy, we can only get it over the long term if we figure out a way for the benefits of economic growth to flow to everyone, not just the rich. This is, by far, Barack Obama's biggest economic challenge. Until median wages start rising steadily and consistently, we haven't gotten ourselves back on track.

This is so crazy, its is hard to know where to begin.  And since it is after midnight, I will keep it short.  But here are a few thoughts:

• Note the embedded theory here of income and wealth, which is really startling.  For Drum and most of the left, income is this sort of fountain that spews forth on its own out in the desert somewhere.   Rich people are the piggy folks who crowd close to the fountain and take more than their fair share of what is flowing out.  There is absolutely no recognition that possibly wealth is correlated with individual initiative, work, intelligence, and behaviors.  More on zero-sum economic thinking here and here.

• I am sick and tired of the "stagnant median income" meme.  How many times does this have to be debunked?  But the quick version is

1. Median total compensation per individual is not stagnant, it has risen steadily.  The only way to show stagnant incomes is to look only at cash wages, and ignore the shift in compensation value to health care and other non-cash benefits.  Also, folks trying to push this meme typically look at household income rather than individual income, but since household sizes have been shrinking rapidly, it skews the data.
2. Median income numbers are weighed down by strong (legal and illegal) immigration.  New immigrants entering at the bottom bring the median down.  If one were to look at apples and apples, ie the same people without immigrants ten years ago and today, one would see strong median income growth.  Just to drive the point home, if there have been 10 million new immigrants at the poor end of the economy, then one needs to count up the list of incomes 10 million spaces to get the true apples-to-apples median income comparison.
3. Individuals matter, not medians.  Even with a stagnant median income, all individuals can and probably are doing better as incomes improve with age.
4. A lot more here

• I feel like I am living in some weird new incarnation of Brave New World or Midas World where the government sets its highest purpose as promoting ever-higher consumer spending.  The last such goal the government set for itself was increasing home ownership.  And that worked out really well.
• This is back to the 70's time, something I have been predicting for a while.  How is it that educated people can believe that protectionism + strong restrictions on the free movement of people + higher taxes + government tilt of the labor management bargaining power further towards the unions + creation of a massive new government bureaucracy = increased prosperity?  I think of all the crap I catch from leftists that I am somehow anti-science and anti-reason for being a climate skeptic.  But economics is a science too, and willful ignorance of that science is far more destructive than other instances of scientific ignorance to which they point.
• Isn't protectionism + strong unions + comprehensive 3rd party-paid health care + high government regulation exactly the approach the US auto industry has taken.  How's that working out?

I posted some data this morning showing the current jobs report ranked not on absolute job losses but as a percentage of the total work force.  I have now pulled the whole data set from the BLS, which goes back to about 1939, and this is what the entire monthly series looks like of employment changes as a percentage of total employment (the purple line is a 3-month moving average).

Folks familiar with this data base may know of reasons the data has become less volatile (perhaps improved seasonal adjustments?) but never-the-less, I have a hard time reconciling this with the popular leftish notion that the decline of traditional American manufacturers (e.g. autos) and unions have led to increasing risk and job/income volatility.  I played around with a couple of ways to summarize the trends.  Here is the number of substantially negative (monthly losses greater than 0.25% of the workforce) jobs reports per decade:

And here is a metric of the volatility of the jobs number.  Since most folks don't really buy the classic economic argument that "risk" equates to volatility up or down, but feel that risk is only to the downside, I have looked at what is sometimes called the downside standard deviation of the jobs change numbers, in which all monthly data greater than zero are set to zero, and then a normal standard deviation is taken on the data.

This was sent to me by a reader:  Much as looking at percentage moves in the Dow is much more meaningful than looking at nominal points moves (500 points means a lot less when the average is at 10,000 than when it is at 1,000), it is useful to look at the recent jobs report in the same way.  While 553,000 lost jobs is certainly a lot, it is only the 41st worst loss since WWII when looked at as a percentage of the workforce  (and it would be much further down the list if we had similar metrics back into the 1930's and 1920's).  Via Bespoke Investment Group:

This tends to confirm the statement I made last week, that this recession is likely worse than anything a 20-something Obama supporter can remember, but is not yet even close to some of the problem years of the 1970's, much less the 1930's.

By the way, it is interesting to see all those 1950's dates in there but no dates in the last 25 years, given there are many who have been writing about the current economy being so much riskier for workers than the 1950's.

I also thought about titling this post "Recession:  Rich, white males hardest hit."  This is one of the more interesting economic/demographics charts I have seen of late  (of course from Mark Perry):

See Mark Perry's post for more, and some guesses at explanations.

MaxedOutMamma (an economist somewhere but she seems to only drop tantalizing clues as to where she plies her trade) is concerned:

I was troubled by how many people seemed to feel the economy wasn't in deep trouble.   Profound skepticism and the belief that this is all media/political highjinks seem almost to be the consensus.

I guess you may have to put me in the majority.  I certainly don't doubt that we are headed for a recession.  And it would not surprise me if this is the worst recession that most 20-something Obama voters have experienced, though that is not saying much.  But I am not sure we are even facing the Seventies in this one and we certainly are not facing the 1930s.

Here is the problem that we more casual consumers of economic news must struggle with -- the media has fairly accurately predicted 20 of the last 3 economic downturns.  Everywhere you turn, you see analogies to the Great Depression, a period of time where unemployment topped 25%.  Given the media's track record and the nearly breathless panic about the looming economic disaster, any sane person has to put a divide-by-X filter on economic news.  It is certainly possible that I and other are using too large of an X as a correction factor, but is that my fault, or the fault of the purveyors of information who can't tell any story straight.

By the way, for us Polyannas, here are several interesting posts from Mark Perry

• Housing affodability highest since 2002
• Loan delinquency rates at historical lows (except mortgages, but mortgage delinquency rates still below 1991)
• Real estate bubble limited to less than 10 states (and really only four)