An Open Question to Romney Supporters

If you're going to vote for Romney, either you must like him as a candidate, be such a die-hard Republican the candidate doesn't matter, or hate Obama so much you're rather vote for a dead skunk.  (Have I missed any possibility?)

Whatever your reason, please answer for me as many of these three questions as you are able, in as much specific detail as you can muster.

What do you like about Mitt Romney that makes you want to vote for him?

What do you like about Republicans (or hate about Democrats) that make you a die-hard Republican voter?

What is there about Obama that makes you hate him so much?

Fed Policy Failure As Root Cause

I decided long ago to not read Scott Sumner, but I'm not bigoted about it.  Karl Smith directs us to this post by Sumner, in which he does a clever personal riff on a Wittgenstin quote.

In the context of the great recession we are still enduring, Sumner uses this to blame the Fed.  He says this in comments to his post, at 14:13 on 16 Dec,. re: the Fed.

 They intervene every second of every day. They control monetary policy and hence NGDP. 

And this:

The crisis of 2008 was caused by tight money at the Fed. They deviated from their normal dual mandate in September 2008, and it was all downhill from there.

There is probably a good argument that the Fed was following tighter policy than they should have around that time - and quite possibly had been for a considerable while.  But the view that monetary policy is omnipotent seems awfully one-dimensional to me.  I cite the inability of QE money to spur the economy - it has mostly wound up in excess reserves. This view also implicitly dismisses the idea suggested about 20 minutes earlier by commentor Donald A Coffin, that capitalism has some level of inherent instability -- which Sumner simply shrugged off.

The idea that that the Fed is intervening during seconds, hours, days and weeks on end, when they make no policy decisions at all seems to be a reach too far.

The really striking thing, though, is the accusation that that the Fed made a policy turn in September, 2008.  Does anybody have a clue what they might suddenly have started doing differently?

Later in comments, flow5 says:

That’s not exactly what happened. Bernanke tightened MVt for 29 consecutive months. The Case Schiller housing index peaked @189.93 when Bernanke initiated his tight money policy. Based upon the FED’s technical criteria (interest rates), the 4th quarter contraction in 2008 was already “set in stone” beginning in Jan of that year. I.e., the Fed’s failure to prevent NGDP from falling started long before the economy collapsed.

In the midst of all this, what I find most puzzling is Sumner's insistence that a market in NGDP futures contracts will lead to stable levels of NGDP.  This is the highest order of dog wagging I have ever seen suggested to any tail.

Quote of the Day

"Ars longa, vita brevis, occasio praeceps, experimentum periculosum, iudicium difficile."  - Hippocrates 

Questions:

Why is this quote from the ancient Greek "Father of Medicine" passed down to us in Latin translation?

Why do we usually only get the "Ars longa, vita brevis" part, which might suggest rather a different meaning than the entire phrase?

If this can be rendered into English as 'life is short, the art (craft/skill) long, opportunity fleeting, experiment treacherous, judgment difficult', would you interpret the meaning as, 'it takes a long time to acquire and perfect one's expertise (in, say, medicine) and one has but a short time in which to do it'.
 
And couldn't this be pretty well be summed up as, "Ars longa, vita brevis"

H/T to Argyle at The Corner
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Das Kapital

I could probably get an answer to this question by opening a text book on Economics or Corporate Finance, but I'm contrary and not inclined to do that.  First let's define the term, Capital.   A Google search reveals a long list of definitions, including these:

• assets available for use in the production of further assets
• wealth in the form of money or property owned by a person or business and human resources of economic value

Let's narrow the focus a bit, and use capital to mean the cash (and equivalent) assets of a commercial enterprise.

The question then is: What can the enterprise do with it's capital. I see two possibilities: distribution and use.

I)  Distribution
a)  Payment, as salaries, wages, bonuses, etc.
b)  Payment as dividends
c)  Donations - charitable or political
d)  Taxes
e)  Bribes (let's be both complete and realistic)

II)  Uses
a)  Investment - here, narrowly defined as spending on:
     i     Property (for facility use)
     ii    Physical plant
     iii   Equipment
     iv   Employee training
   
b)  Rent seeking 
     i     Loans
     ii    Interest bearing notes
     iii   Speculative Ventures  (Financial tail chasing)
     iv   Mergers and Acquisitions

c)  Reduce liabilities (H/T to Angry Saver in comments)

d)  Hoarding  (H/T to Stagflationary Mark in comments)


That's all I can come up with.  Help me out here.  Am I on the right track?  What did I miss?
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A Different Look at Social Security

All the talk you might hear about Social Security financial problems and federal budget busting is lies and drivel - aka, BULL SHIT.  Let's have a look at SS funding for a different reason.

Here is some detail on the SS premium withheld from pay, from Money Zine.

Generally, FICA taxes are collected at a rate of 7.65% on gross earnings - earnings before any deductions. The breakdown of FICA is 6.2% for Social Security (Old-Age, Survivors, and Disability Insurance or OASDI) and 1.45% for Medicare.  The following table shows the FICA limits for 2005 through 2011:

2011 FICA Tax and Social Security Limits

• FICA Tax Rate = 7.65% (see note below)
• Social Security Limit = $106,800 
• Maximum Social Security Contribution = $6,621.60 (employer) / $4485.60 (employee)

Note:  In 2011, the FICA tax rate for employees was lowered to 5.65%.  The employer tax rate remained unchanged, while the Social Security rate for employees was lowered to 4.20%.

2010 FICA Tax and Social Security Limits

• FICA Tax Rate = 7.65%
• Social Security Limit = $106,800
• Maximum Social Security Contribution = $6,621.60

2009 FICA Tax and Social Security Limits

• FICA Tax Rate = 7.65%
• Social Security Limit = $106,800
• Maximum Social Security Contribution = $6,621.60

2008 FICA Tax and Social Security Limits

• FICA Tax Rate = 7.65%
• Social Security Limit = $102,000
• Maximum Social Security Contribution = $6,324.00

2007 FICA Tax and Social Security Limits

• * FICA Tax Rate = 7.65%
• Social Security Limit = $97,500
• Maximum Social Security Contribution = $6,045.00

2006 FICA Tax and Social Security Limits

• FICA Tax Rate = 7.65%
• Social Security Earnings Limit = $94,200
• Maximum Social Security Contribution = $5,840.40

2005 FICA Tax and Social Security Limits

• FICA Tax Rate = 7.65%
• Social Security Earnings Limit = $90,000
• Maximum Social Security Contribution = $5,580.00

 At first, I wasn't going to pull such a long quote, but the information illustrates how the funding base increased through 2009, leveled, and now has been cut.  Many economists are enthused by the extra $2146 this will put into the pocket of whoever is making $106,800, and up - proportionally less for those who make less.  Again, I call BULL SHIT!  This will cause underfunding of the SS trust, and give ammo to those who claim SS is unsound and want to blow it up.  Big, big mistake.  It would have been far, far better to increase the dole in some other way for those at the low economic end of the spectrum.  But that is not anybody's goal these days.

Here is a look at total FICA collections per year from 1957 on.  The hook at the end is rather disturbing.  (Vide supra.)  Other than that, it's an exponential looking line, and those are hard for the human eye and brain to suss - at least for this aging, bifocal-laden human.  Let's try a log scale.

I'll over-state the obvious again, since it's central to my main point: a log scale presents a steady rate of growth as a straight line.  What we have here is clearly two different realms, with two different growth rates.  Each realm has a best-fit straight line superimposed.  Raising the amount collected per earner in the most recent years has not even maintained the slower growth rate of recent decades.  I picked a break point of 1984.  Your eyes might wiggle it around a bit differently, but that is a second order detail, at best.


Here is a close-up of recent history.

It's no surprise that the Clinton era was above trend, and the W regime pretty much defines the trend since Reagan.  Receipts for '08-9 are not just below trend, but flat, due to the recession.  In 2010 we have only actual decline in the data set.

What does this tell you about the state of the American worker?  Remember, the collection base went up every year through '09.

Here's a look at what a program in trouble - and then not -  looks like.  The plot is log of Total Fund Assets at the end of the year.

It looks as if the fund - for whatever reason - was not on a sound actuarial basis through the 60's and 70's - despite robust growth in collections.  During the Reagan administration, this was addressed, and the fund has grown every year since - even through 2010, with receipts stagnating.

Slower year over year growth in receipts since 1984 saved the program.  It will take someone with more knowledge than I have to explain that conundrum.

But my main point is that - at least through 2010 - total FICA receipts are an indirect indication of how the American worker is faring.  It's clear that since around 1984, he hasn't been faring very well.

Data through '09.
Data for '10.
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Of Deficits and Inflation - Part 2

In Part 1, I took a hard look at deficits and inflation, from 1951 through 2009, and wound up with some questions.  One them was - "What does the very different look of the first chart before and after 1980 mean?"  Here, for your convenience, is the first chart.

I constructed cloud charts, as in part 1, for the data up to 1980, and after 1980.  The differences between the two time frames are striking.  The differences with different time delays are not.  I'm only presenting 3-year delay here.  Basically, all the charts up to 1980 make a pretty similar set, irrespective of time delay; and all the charts after 1980 make another similar set that is very different from the first.

As in part 1, The year over year change in CPI is plotted as a function of the deficit (as a percentage of GDP) three years earlier.  The slope is 1.73 - an increase of inflation of 1.73% CPI for each % of deficit, with a three year lag.  The correlation coefficient is an impressive .672.

Here is a similar plot for the years after 1980.

For this plot, the slope is only 0.168 - less than a tenth of the slope for the previous period.  The correlation coefficient is only .31.

Here is a plot of slopes and correlation coefficients for the two time frames, with CPI lags from 0 to 5 years.

In the earlier period, the inflation measure peaked three years later than the subject year, as did the correlation coefficient.  For this period, correlations in the two to four year range are all greater than .5 - the strong correlation region.

In the later period, the effect is slight, the response from 2 to five years flat, and the correlation coefficient low, indicating weak correlation.

The first time frame is based on 29 data points, so there is a pretty high level of statistical significance to the data.  The second time frame has a varying number of points, depending on the time lag chosen, but never fewer than 24.

The conclusion I draw from this is that from 1951 to  about 1980, and from about 1981 on represent two quite different economic environments.  The earlier period was characterized by secular inflation, and deficits led to higher inflation.  The later period was characterized by secular disinflation, and inflation has been quite insensitive to deficits.  Based on this data, I think we can make those statements with a high degree of confidence.

OTOH, I have no confidence at all about the future.  I'm afraid we've slipped into actual deflation, or something very close to it.  My guess is running deficits will do nothing to spur inflation, but that is speculative.  We shall have to see what we will see.

What this exercise suggests very strongly is the map of the economy has different regions, each having different characteristics that require different approaches (a la Keynes, frex.) I'm convinced that before and after about 1980, the post WW II era is divided into two distinctly different realms: an expansion phase followed by the great stagnation. The M1 multiplier had been sagging since the mid 80's, before it fell down in '08 and couldn't get up.

If I may editorialize a bit, the problem with Libertarians and Austerians is not that they are absolutely wrong, but they are right within a certain realm; and they let that make them think they are right in all realms - because, in their absolutism, they refuse to recognize that different realms exist.

Because of this one-concept-fits-all-circumstances mind set, they end up exploring the jungle in parkas and snow shoes. They forget (or deny) that Keynes didn't overturn classical economics (his big mistake, IMHO) he expanded it, the way Einstein expanded Newtonian mechanics.

What do you think?
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Of Deficits and Inflation

It's part of common wisdom that Federal budget deficits are inflationary. 

Update: Here is an example.  And a direct refutation.

Well, common wisdom is a lot more common than it is wise.  Let's see how this bit of it stacks up.


Here's  a look at deficits, as a percentage of GDP, along with inflation, as measured by year-over-year change in the Consumer Price Index, since 1951.  For the graphs in the post, deficits are positive numbers, and surpluses are negative.  This trick is to allow a possibility for deficits and inflation increases to be positively correlated.  I'm not thrilled with CPI as an inflation measure, but I have the data at hand, so we'll just go with it.

It looks as if there might be two realms, from 1950 through 1980, with generally increasing deficits and inflation, and since 1980 with small or non-existent deficits and low to moderate inflation.  In 2009, we may have entered a totally different economic realm, but that remains to be demonstrated, at least with regard to these variables.

From 1950 to 1980, peaks in deficits and valleys in CPI line up almost perfectly.  Though in the big picture they are rising together, at the detail level the year to year correlation is actually inverse. Change your perspective a little, and deficit peaks seem to lead inflation peaks pretty consistently.  Since 1980, I can't see any relationship, no matter how hard I squint.

Here are some scatter plots of YoY CPI percentage change against deficit as a percentage of GDP.   First, both variables are measured for the same year.

Lots of scatter, a trend line that basically traces the 4% CPI line with a very slight positive slope, and a correlation coefficient of 0.0476 - essentially nothing.  But we are expecting the deficit increase to lead the CPI increase, so here's a look at a 1 year delay: Deficit vs CPI increase a year later.

The scatter doesn't go away, of course, but now we can see a bit of a trend; about 0.28% inflation for each percent of deficit/GDP in the previous year.  But, with all the scatter, the correlation coefficient is only .19 - very weak correlation, indeed.  So far we have a small slope, weakly correlated.  Let's look at longer lags.  Because of the lags, deficit values for recent years will fall out of the data set.  As can be see in the graph immediately above, 2009's 9.91% deficit was the first to go.

Though the scatter drifts a bit, the two and three year delays give pictures that are otherwise very similar. Here  we have a somewhat greater slope, about .4% inflation for each percent of deficit three years earlier.  The correlation, at .27, is a bit less weak, as well - but still pretty anemic.

Farther out, the trend line flattens back down, again close to a constant 4% at 5 years, and the correlation collapses to a measly .12.

What are we to make of all this?  My first thought is, with such low correlations - not too much.  But to see both the slope and the correlation rise and then fall again over a 5 year period does suggest that there might be a real cause and effect, operating with a lag of 2 to 4 years.  Here is a graph of the slopes and correlation coefficients from 0 to 5 years out.

I can think of two reason why correlations might be weak, even if the cause and effect is real:
-  Inflation is a function of more than one factor, so other things, possibly operating independently, can be equally or more important. 
-  If the time lags are meaningful, the lags from up to 5 years in the past are all operating together.  None of that is sorted out here.

Questions in my mind now are -

1) Is this correlation meaningful, or just a data artifact?

2) What does the very different look of the first chart before and after 1980 mean?

3) Do the current large deficits suggest that there may be some inflation around 2012 to 2013?

4) Or are we now in a different realm where deficits either don't correlate with inflation, or perhaps correlate in a dramatically different way?

This exercise has been rich in generating questions, but not too effective in generating answers.

What are your thoughts?

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The Natural History of Problems

Over at Modeled Behavior, Adam asks (and answers):

. . . “what problems do you think are important today that you didn’t think were important in 2004, and what policies would you favor now that you would have opposed then?”. My answer is that low house prices are a problem today where I would previously said low prices are just transfers from sellers to buyers, and I would favor policies that prop them up when I would previously have opposed them. What are yours?

Without any certainty that I actually answered his question, I commented thusly:

My view in 2004 (or maybe it was ’05) was that the prices in both housing and crude oil were in bubbles – parts of the rolling bubble phenomenon as mis-distributed financial assets, aided and abetted by a lack of regulation and the proliferation of derivative instruments that nobody knows how to evaluate, roamed the world in search of the next big killing, rather than being channeled into any productive investment – and that there would be problems when they burst. Oil prices have held up more than I thought – I really expected well below $50 by this time. 

Actually, I think all the problems of today were problems in 2004 – a futile, misplaced, no-win, war effort, extreme and growing wealth disparity, tax policy close to regressive, the choking of the middle class, and an economy on the edge of depression. The latter was pretty well concealed at the time, but I always thought the alleged recovery from the 2001 recession was a chimera.

And I disagree with you about housing prices. They only look too low by comparison to previous bubble-inflated valuations. By rent income producing capability or any other look at fundamentals, they still need to come down. This is really bad news.

We have a long hard road ahead of us. I think the naughts were a lot like the roaring 20′s, with the rich getting richer and the poor struggling with an ever-smaller slice of the pie; and if policy is made by folks who think like Gary, above, channeling Andrew Mellon circa 1930, then the next great depression is far more likely to become a reality.

Sadly,
JzB

Rebecca opines, more or less to my point:

  . . . It’s not that so much has changed, simply that people are becoming more aware. . . .

What do you think?  Has the world changed?  Stayed the same?  Moved farther down a destructive path?  Corrected itself?

Update: On the subject of derivatives, consider THIS.
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Question of the Day

This is prompted by seeing the Word AVER, clued as "state firmly," in yesterday's L.A. Times Crossword by the always brilliant Jerome Gunderson.

Is the thing that you AVER an AVERAGE? And if what you AVER is characterized by malice, would it be a MEAN AVERAGE?

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