Friday, December 24, 2010

Good News, Bad News

The NY Times reported today that online sales are up 15% this holiday season. More shoppers are turning to the web to fill Christmas shopping needs with clothing leading the way at over 25%. While online purchases represent a small percentage of retail sales; they represent a growing percentage. Overall retail sales will be up something like 3.3%.

So what does that mean for Brick and Mortar? The bad news is that commercial mortgage delinquencies are way up. Even though the price of securitized commercial mortgages has also gone way up.

As Floyd Norris reports, commercial mortgagees have powers that residential property owners can only dream of...

Then there is the fact that such mortgages are almost always nonrecourse, meaning the lender can seize the property but has no claim on other assets of the owner. Moreover, many commercial properties have extremely restricted uses, limiting the number of people interested in a troubled property.
That can give borrowers power that homeowners can only dream of when negotiating with their mortgage holders. Last week a $171 million loan on a shopping mall in Virginia was sold for $115 million. Trepp reports that will wipe out some classes of two securitizations that owned the loans, and provide payouts for others. The buyer of the loan was Vornado Realty Trust, which owns the mall. In effect, it was allowed to pay off the loan at a large discount to face value.
With declining demand for retail space as a result of the growth in onlone retailing; and the contining weakness in the economy will there be another dip in commercial properties?

Wednesday, December 22, 2010

Times Fail On Euro

Busy week finishing grading and reading some terrific master's thesis papers. But back to business of commentary and Christmas preparations.

In Saturday's NYTimes, Floyd Norris, who usually knows better took a strange path in discussing the Euro and its impact on trade among the EU16 countries. His analysis? That the strength of the Euro disadvantages countries like Italy and France while it has worked in the favor of Germany and the Netherlands. And his measure? Market share.

This reminds me of the old text, "Lies, Damned Lies and Statistics". You can make numbers appear to reinforce any view you have, but I have never seen an anlysis concerned with the market share of export activity. Market share is an effective measure (along with many others) of a firm's performance. But a country and specifically their exports?

First, the "strength" of the Euro relative to other currencies makes it easier for Euro zone countries to import products. All other things being equal. The problem is that they are not. Wage rates are a big determining factor in costs, markets determine prices. Prices determine the competitiveness of products and have an impact on exports, as do the level of income abroad. You can't buy other people's exports unless you have income of your own. Not surprisingly the countries with the biggest increases in exports are the lower wage countries such as Slovakia and Slovenia. Though France and Italy did fine as the world emerges from the crisis. The exception is Germany; high wages and high exports. But Germany is always an exception to any discussion of international trade. Instead of fixating on currency we should examine aspects of their industrial policy which may teach us something about competitiveness for the US economy.

Saturday, December 18, 2010

Devil in a Blue Wig

Yesterday the NY Times reported this story about models hired to attract donors to the Bone Marrow Registry. Today the Boston Globe added more details about the subsidiary of UMass Medical Center which hired a modelling agency to staff tables in area malls in order to generate interest. The models according to the Globe "wore short skirts, high heels, and sometimes sported neon blue wigs to recruit bone marrow donors at malls in Massachusetts and New Hampshire, Red Sox and Patriots games, and flower shows."

The story raises two issues, whether donors lured into signing forms by attractive models really have a commitment to go through with surgical procedures to remove marrow to help an unknown cancer patient and second why the health insurance provider of the potential donors were charged so much for the testing that was part of the application. The Globe mentions that concerns have been raised about the charges by health insurance companies that have been charged up to $4300 per person for tests.

And we wonder why health care costs increase so much in the US.

photo from the Boston Globe

Friday, December 17, 2010

Aging Infrastructure...

When I moved to New York City in 1979 I read a report from the Port Authority of New York/New Jersey on highway maintenance/replacement in the area. At that time the City and State of New York was just emerging from the final crisis so they had been underinvesting in many things. What has stayed with me to this day is the statistic that at the rate they were doing maintenance and replacement they would reconstruct their highways once every thousand years. That's right, it would take them a millenium to replace their highway system. New York City was turning into a giant pothole.

What brought this to mind was this post from Mike Mandel regarding the decline in public infrastructure investment since 1969. In general it looks bad for the US; but the worst performance is in the public investment.

So the scary thought is that overall, the infrastructure has gotten worse since that report from the Port Authority many years ago.

Thursday, December 16, 2010

Time Flies...

Wasn't it just a couple of weeks ago that the big story was doing something about the deficit? Yet today the Congress is on the verge of balooning said deficit because of the tax cuts being debated in the House. A recent poll by the Pew Research Center and reported on NPR shows the difficulty of taking on that task of deficit reduction as they polled various recommendations from the various commissions.

This is the classic paradox. People say they want one thing...deficit reduction...but they are not willing to make the big changes that further that goal. What they are willing to do is take away some benefits from the highest income Americans. Now the various deficit reduction commissions did not advocate letting the 2001/2003 tax cuts for the highest income folks expire, so they were not in the polling data. My guess is that they would be on the public's chopping block along with raising the social security tax cap, federal worker raise and lessened benefits for higher income social security recipients.

The issue is that the middle class, which does not feel they get much for their federal tax dollars, is not willing to make sacrifices at a time where they are hurting economically. Who can blame them?

Sunday, December 12, 2010

At the end of a long article in today's NY Times regarding the shadowy world of transaction management for derivatives trades a former bank regulator was quoted as follows...

Theo Lubke, who until this fall oversaw the derivatives reforms at the Federal Reserve Bank of New York, said banks do not always think of the market as a whole as they help write rules.
“Fundamentally, the banks are not good at self-regulation,” Mr. Lubke said in a panel last March at Columbia University. “That’s not their expertise, that’s not their primary interest.”
From his lips to God's ears. Banks are not good at regulating themselves. If the experience in the US was not enough take a look at Iceland and Ireland (for a start) to see what lax banking regulation means to the citizens of their country. But we are all at risk. The accompanying graphic shows the exposure we have to the derivitive market.

Keep in mind that worldwide GDP activity is probably about than $70 Trillion per year. So derivatives are being issued at a rate over 8 times the economic activity they are designed to support. Now, keep in mind that GDP does not count purely financial transactions such as refinancing a debt (like a mortgage) which may generate a derivitive. That may explain some derivative volume beyond GDP but not at that level.

As the article explains there are legitimate purposes to derivatives; helping firms hedge against a certain level of uncertainty with respect to future prices. So if they are dangerous what are the chances that Washington (or Brussels for that matter) will properly regulate the transactions?

This article in today's Boston Globe gives us a hint. Apparently the financial services industry has gone "all-in" on the future of Senator Scott Brown (R-MA). The flow of campaign contributions to this one Senator gives you an idea of what regulators are up against in order to straighten out this market.

So, contributions to Senator Brown go up as he has to vote on a sensitive economic issue. If a local elected official exhibited the same behavior, he or she would be eating holiday fruitcake in jail. But ethics, and rules are different in Washington.

Friday, December 10, 2010

Regressive or Progressive?

As is typical in discussions of public policy; perspective is dictated by what set of assumptions you choose to make. In the case of the proposed "tax" deal under discussion that rule also applies. The Tax Policy Center offered analysis of the distribution of tax benefits that found your conclusion on whether they changes made the tax code more progressive depended which time period you chose as the baseline.

Based on the tax code in place today (December 2010) the findings are that the proposed Obama-McConnell deal is progressive. The biggest reduction of tax rate accumulates to the lowest quintile of income, then to the second lowest and so on. Unfortunately the distribution of income being what it is; the small progressivity of the changes still mean that the largest dollar changes go to the highest income Americans.

Based on the tax code that will come into effect on January 1, 2011 (a potential result from no action by the Congress) the deal is regressive. The largest percentage decline in tax rates goes to those in the bracket of the top 1/10 of 1 %. The smallest decline is the lowest quintile at 3.5%.

Food for thought. Which is the better baseline? What exists today or what may exist tomorrow. Either way it shows how regressive the so called "Bush tax cuts" are as they allow this deal to look progressive.

Bernie Sanders ... the last of a breed

What a remarkable performance today by Senator Sanders of Vermont. He spoke non-stop for 8.5 hours today educating America about the dangers of the current proposal for tax changes. He was particularly concerned about the increase in income disparities this bill will represent. He held the floor not by reading the phone book, but in a manner that made me wish I had on tape to show my Macro students next term.

Wednesday, December 8, 2010

Question on U6

A great question came from a reader about the difference between the various measures of unemployment (yes there are several). Here is a good explanation from Portal 7:

  • U1: This is the proportion of the civilian labor force that has been unemployed for 15 weeks or longer. This unemployment rate measures workers who are chronically unemployed. During business-cycle expansions, this rate captures structural unemployment. However, during lengthy business-cycle contractions, this rate is also likely to include a significant amount of cyclical unemployment. U1 tends to be relatively small, in the range of 1-2 percent.
  • U2: This is the proportion of the civilian labor force that is classified as job losers (workers who have been involuntarily fired or laid off from their jobs) and people who have completed temporary jobs. During business-cycle expansions, this rate is likely to capture some degree of frictional unemployment. However, during business-cycle contractions, this rate is most likely to consist of cyclical unemployment. U2 is larger than U1, but still remains substantially less than the official unemployment rate (U3).
  • U3: This is the official unemployment rate, which is the proportion of the civilian labor force that is unemployed but actively seeking employment.
  • U4: This is the official unemployment rate that is adjusted for discouraged workers. In other words, discouraged workers are treated just like other workers who are officially classified as unemployed, being included in both the ranks of the unemployed and the labor force. It is technically specified as the proportion of the civilian labor force (plus discouraged workers) that is either unemployed but actively seeking employment or discouraged workers. The addition of discouraged workers generally adds a few tenths of a percentage point to the official unemployment rate.
  • U5: This augments U4 by including marginally-attached workers to the unemployment rate calculation. Marginally attached workers are potential workers who have given up seeking employment for various reasons. One of these reasons is that the workers believe such effort would be futile, which places them in the discouraged worker category. Those who have other reasons for not seeking employment are placed in the broader marginally-attached workers category. The addition of marginally-attached workers adds a few more tenths of a percentage point to the official unemployment rate.
  • U6: This augments U5 by including part-time workers to the unemployment rate calculation. The addition of part-time workers adds a full 2-3 percentage points to the official unemployment rate. This measure of unemployment is perhaps the most comprehensive measure of labor resource unemployment available.
So U6 is the broadest measure of unemployment and inclides "marginally attached" workers, in other words folks who have ceased looking for work due to futility and there fore are not in U3 which is the widely reported "unemployment rate".

As you can see the U6 is significantly higher than U3. The monthly numbers are available at the Bureau of Labor Statistics.

Tuesday, December 7, 2010

On the passing of a mom ...

... we received the news tonight of the passing of Elizabeth Edwards. I had the pleasure of spending time with her in New Hampshire during the 2008 election season. She was a warm person, interested in what others said and did. She had a passion for helping those less fortunate than her and was a tireless crusader for equal access to health care. My heart goes out to her family; particularly her children Cate, Emma Claire and  Jack.

I hope she has peace.

Monday, December 6, 2010

Update on Tax Deal

Apparently the extension of the unemployment insurance is retroactive to December 1 which helps hundreds of thousands that would otherwise have lost benefits.

I guess the first question that comes to mind is what did the highest income Americans give up in this deal? I see what the Republican idealogues conceded; but what is the shared sacrifice that involves the wealthiest?

First Thoughts on Tax Deal

I really liked the President's tie. Nice use of the blue and grey for us Georgetown guys. That is the good news.

Beyond that;

The extension of the 35% tax rate for upper income for two years is just bad policy. It continues exploding the deficit which continues the pressure to cut Social Security and Medicare benefits for working class retirees. We get to have the discussion again in a year to two years during the height of the presidential campaign.

The two percent payroll tax reduction is nice for working class Americans but still offers more money for the upper income group on their first $106,800. It will be somewhat stimulative, but not as much as a jobs program.

The inheritance tax "compromise" is outrageous. It is a two year fix, then we need to do that all over again.

The continuation of other tax cuts for working familiies such as the EITC, child care tax credit and the American Opportunity Tax Credit (education expenses) are helpful.

Finally, extended Unemployment Insurance benefits will continue for another 13 months. As some have pointed out...why 13 months for UI but two years for the upper income rates and inheritance tax?

More tomorrow once details are released.

Uncertainty in an Uncertain Time

Christina Romer, late of the President's Council of Economic Advisers and a prominent Macroeconomist (married to another one by the way), has a piece in Sunday's NY Times on the challenge of uncertainty in the economy. She starts by debunking the myth that the current debate over the tax rates is stopping businesses from spending and investing.

"This is a serious misreading of the situation. Uncertainty is likely holding back the recovery. But its sources are far more fundamental than the tax and environmental issues that typically top the list of complaints. And the solution is certainly not for the government to do less. Rather, it needs to do much more."
But after this promising start she falls into the trap of blaiming the long run deficit for the problem of uncertainty. Her solution is wise to the extent that it recognizes the need to enact the deficit reduction measures once full employment is achieved. Until that time, she commits us to fight unemployment as FDR pledged, as if it was serious as war.

"They should follow up with powerful fiscal and monetary actions to create jobs — coupled with a concrete plan for tackling our long-run budget problems. We are at a critical moment. With many in Congress opposed to further jobs measures and tax increases of any kind, the chances of prolonged gridlock are high."
By why grant the point about the long run deficit in the first place? Why not rearrange the essay to start with the stronger point that undertainty over the economic prospects of the future, primarily as a result of historically high unemployment rates, is stagnating consumer demand and making businesses cautious about investing.

The numbers are for goods consumption and show a flat line for nearly half a decade. With consumers not spending money, what business person would be willing to risk capital on expansion of facilities. The problem of uncertainty is based on consumer demand, not deficits. Romer is correct that government needs to take further action to reduce uncertainty; but as the Chair of the Federal Reserve has begged; Congress and the President must use fiscal policy to get the economy moving again. As consumers feel secure in their jobs and their prospects for the future they will drive consumption and growth. By granting the argument that deficits are an immediate problem (even if the solutions do not need to kick-in for a few years), we are just confusing the issue of uncertainty and reducing the power of the Macroeconomic argument for action.

Saturday, December 4, 2010

Economic Literacy - NY Times Edition

Dean Baker at the Center for Economic and Policy Research has a useful blog called Beat the Press; where he takes the media to task for economically unsound writing. His frequent target is the Washington Post and the tendency of Post economic writers to editorialize through what is supposed to be news reporting. I found an example of this in a NY Times article from Thursday titled "Euro Zone Is Imperiled by North-South Divide".

There are a surprising number of editorial comments and mistakes in the section that is published on the front page.

1. The article tries to create a Northern Europe - Southern Europe divide. Outside of the fact that the differences in income between Germany/France and Spain/Portugal have existed for generations, the reporter is challenged on geography too as he insists on including Ireland in his model for Southern Europe. As I ask my European Politics students ... why did Germany/France create European Integration with the Treaty of Paris in the 1950's and Spain/Portugal not until the 1980's? Spain/Portugal were dictatorships until the mid-1970's and the rule has been to bring nations into "Europe" once they were stable democracies. The years of dictatorship cost the nations dearly.

2. According to the article a Portugese business person laments the Euro for making their products less competitive in world markets compared to textiles from Poland (an EU country not in the Euro Zone). However, according to the CIA stats comparing income per capita, Portugal has 50% higher GDP per capita in 2009 than Poland. It makes higher costs then perfectly understandable...a higher standard of living is going to make export products marginally more expensive. This section illustrates the danger of getting macroeconomic expertise from someone who is a really good sales manager.

3. The theme then becomes that Portugal would otherwise devalue their currency to make their products more competitive, except they have tied themselves to the Euro. The reporter ignores the fact that 72% of Portugese trade is with EU nations, and one of the many reasons they have a common currency is so that terms of trade can not be disrupted by unilateral devaluations.

4. Perhaps the worst section is the painful construct the reporter tries to create that the two countries receiving assistance form the IMP and EU namely Greece and Ireland are peas in the same pod. The truth could not be further from this contention. In fact Ireland aggressively pursued the remedies advocated by the article in paragraphs 6 - 10. The lowered taxes, reformed labor markets and had growth...that wound up being largely the same asset bubbles that other economies suffered and have brought it to depression era conditions. Ireland let its banks run wild and now it was to cover their losses. Greece had financial mismanagement from its former government (friends of Goldman Sachs) which combined with recession in 2009 (milder than the US) and structural problems (large underground economy) results in debt.

5. In the back page continuation, the article does quote some economists (Roubini - is there a Roubini bubble now that he predicted the other bubbles?) as opposed to business people who may be confusing cause and effect. But even then, they disparage the capability of governments to adjust fiscal policies because of (horror) political considerations. Basically the reporter is saying that the four Portugese businesspeople should outweigh the voters as they make the determination of how much to spend/tax to support their public sector.

Barcelona Spain

Friday, December 3, 2010

Employment Report for November Released

The Bureau of Labor Statistics is out with its snapshot of the employment picture in November, and the news is not good. While overall employment rose by 39,000, that is a small number compared with ongoing growth in the labor force. The economy needs to be creating jobs in the hundreds of thousands a month for there to be significant reductions in unemployment. During the 1990's we generated 2.9 million in 1993 and 500 K in 1005 and 3.1 million in 1996. But in those days the labor force participation rate (number of people in labor force/noninstitutionalized adults and a good indication of people's confidence in the labor market) was hovering around 62 to 63 % and today it stands at about 58%.

The most watched unemployment rate edged up to 9.8% based on the November numbers. The numbers are from two different surveys conducted by the BLS; one is a household survey which results in the rate; the other an establishment survey which results in the nominal job figures. The one (very dim) bright spot is that private employment increased a bit faster than the overall. It was government employment that drove down the numbers. In fact government at all levels has shed about 135K jobs over the last three months.

So my tip for watching out for the economic hypocrisy of the day? Watch the public officials blaming the Obama Administration for failed policies as they encourage government austerity measures that will make the situation worse. From the excellent work at Calculated Risk.

This indicates the slow growth in employment since the "end" of the recession.

Wednesday, December 1, 2010

Welcome to Economically Speaking

This is my inaugural post on the blog which I will update each day based on reactions to interesting articles and discussions in government, the press, the academic community, new and old media. It is an extraordinary time to be considering issues in economics and politics. The fallout from the asset bubble(s) inspired financial crisis of 2008 still haunt us today and the US faces challenges in the short and long term regarding the economy. I have the privilege of talking through these issues each week with students in economics at Northeastern University. In recent weeks there is another focus on the fate of the Euro and challenges in the financial sector of the EU, just in time for my class in European Politics at New England College. I hope many of you join me for this ride.

Euro sculpture in Frankfurt