“Money we don’t have”

Good NYT article on deficit hysteria, with an especially illustrative quote from Rep. Cooper (D, TN):

“We have to stop spending money we don’t have,” said Representative Jim Cooper, a Tennessee Democrat who voted against the bill. “I hope deficit reduction fever is catching.”

The U.S. is in the midst of a balance sheet recession, with demographic ratios shifting an an unfavorable economic direction for several more years.  Under those conditions, deficit reduction fever will lead directly to the dreaded Japanese Disease —  another decade of stagnation, underemployment, and opportunity costs, all of which will impose greater burdens on future generations than expanded federal deficits would.

And policymakers — not to mention most members of the electorate, including analysts and the media — continue to commit two fundamental errors regarding fiscal policy:

1. They believe that all deficit spending must be financed with interest bearing debt, thus competing with the private sector for scarce financial resources.  However, judging by current Treasury rates, there’s still plenty of room for expanded federal borrowing.  And there’s a symbiosis between federal deficits and repair of balance sheets in the financial sector, as evidenced by the perfect quarters turned in by several major investment banks recently.  Politically, that relationship is almost nauseating, as it’s doing very little to relieve distressed households — but it nevertheless makes apparent the  dynamic between public sector fiscal deficits and private sector balance sheet relief.
2. They also believe implicitly that the U.S. is on a gold or similar standard, where fiscal and monetary policies are constrained by the supply of some exogenous factor, and governments can thus literally “run out of money.”  Governments can’t run out of money, as it is ’created’ by nothing more than digital ledger entries.  In other words, government (today, via operations of the quasi-private Fed) is the sole creator and supplier of high powered money.  Thus, the only constraint on money creation is inflation and a loss of confidence in the currency, and at the moment, those forces are emphatically not in play.  This too is symptomatic of Japanese Disease.

The fears of incumbent politicians like Cooper are certainly understandable.  But they’re borne of either ignorance about how these things work, or self-preservation.  Either way, it smacks of lousy political leadership. 

And given that Republicans are likely to benefit in November, we’d expect the trend towards fiscal conservatism to intensify.  Even President Obama, in a speech yesterday, promised the following:

• A three year freeze on all non-discretionary federal spending beginning in 2011
• Expiration of tax cuts via sunset provisions
• Elimination of 120 federal programs
• Reinstatement of PAYGO
• Higher fees on banks that are expected to lower federal deficits by $90B over ten years

He promised all of this as a way to force the public sector to budget in the same way that families and businesses do.  Again, this is wrong, and is borne of either ignorance or pandering.  And as with Congress, it smacks of crummy political leadership either way. 

The administration’s jawboning is also reminiscent of budget austerity measures touted by the Carter administration in the 1970s in reaction to the “tax revolt” — austerity measures that contributed to its eventual demise, even though they may have been more appropriate to the conditions prevailing at the time (e.g., baby boomers entering adulthood, global trade and financial integration, etc).   Today, austerity is far less appropriate, but even more vigorously pursued.  That almost certainly spells trouble for Obama in 2012 – assuming the GOP can field a worthy candidate and avoid blowing all of its political capital in the intervening years. 

You also have to wonder, were he to experience a change of heart, whether there’s any credible way for him to backtrack from his neo-liberal rhetoric.  The DLC, Brookings, Peterson, and all the other usual suspects have painted the guy into one hell of a corner.

In the meantime, assuming that reality will align with rhetoric, the political climate continues to be favorable to the USD and Treasuries, and rather risky to gold.  A contrarian call? You bet.  But it’s based on what we think is a well-grounded and – just as importantly – non-ideological assessment of the facts. 

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (“SCM”) is a state registered investment adviser in the Commonwealth of Pennsylvania. The views expressed by the author are as of the publication date, and are subject to change based on market and other conditions. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy or a solicitation to sell any security, or to engage in any investment strategy. Investors should not use this information as a basis for any investment decisions without first consulting their own financial adviser. SCM is an Amazon.com associate, and earns a commission on sales generated through links from our website. Some clients of the firm are long GLL and/or long TLT.  At the time of writing, neither the firm nor its principals owned any securities mentioned. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

URLs:

http://www.nytimes.com/2010/05/29/us/politics/29deficit.html

http://www.japanreview.net/review_bsr.htm

http://www.miraeasset.com/ourmarket/outlookView.do?board_id=1125&group_id=1&pageNo=2

http://www.investmentnews.com/article/20100602/FREE/100609973

http://seekingalpha.com/article/208174-how-deficit-hawks-will-keep-cutting-spending-until-we-re-all-on-food-stamps

A brief “Now what?!?”

Equity markets and indices are down over 2% today on worries about what most pundits refer to as the “Greek bailout,” which took its (supposedly) final shape over the weekend, with details to follow from the IMF and other parties. The terms, as currently laid out, are brutal, a fact reflected by the intense street protests in Greece and the government’s loss of union support. The theories and practices underlying them are highly questionable and pitifully anachronistic as well, which make it all the more frustrating.   

There’s no doubt that Greece has made some mistakes, that the lack of accurate fiscal disclosures by its previous government was extremely unethical, and that labor market reforms may be in order. But there are humane ways to approach and work through the entire imbroglio. Unfortunately, neither the IMF nor major eurozone countries seem to be giving that much thought. And as Marshall Auerback has pointed out, Germany’s longstanding inflation paranoia has it behaving as if it’s 1921 all over again; when to us, reality appears to be much closer to the deflationary late 1920s and 1930s.   

We referred to the Greek plan as pitifully anachronistic because it embodies what we might call gold standard era thinking, when the supply of new money was a function of mining output and demand for gold ownership in the private sector. At the turn of the 20th century, economist Knut Wicksell pointed out the need for a “rational monetary system“, while highlighting intellectual obstacles to it:   

It is no exaggeration to say that even to-day many of the most distinguished economists lack any real, logically worked out theory of money, a circumstance which has not, of course, been particularly conducive to the success of modern discussions in this field.   

Wicksell’s sentiments are still relevant today, and (in our view) have been powerfully echoed and expanded upon by proponents of neo-chartalism, also known as Modern Monetary Theory. Bill Mitchell, an occasionally acerbic but ever prolific member of the MMT club, recently posted the following diagram on his website:   

The essential point of the diagram is to illuminate that, under a fiat currency system, the government (whether through its treasury or via a quasi-public central bank) is the sole provider of money. And one of the resulting takeaways of this fact is that under certain conditions, fiscal austerity in the public sector will impose significant costs on the private sector. In turn, that will tend to raise the value of money, all else equal, which is the essence of deflation. And as Wicksell pointed out over a hundred years ago, deflation, like inflation, comes at a cost (emphasis added):   

…when a rise or fall occurs in the money prices of all, or of most, commodities…[a]djustment can no longer proceed through changes in demand or through a movement of factors of production from one branch of production to another. Its progress is much slower, being accomplished under continual difficulties, and it is never complete; so that a residue, either temporary or permanent, of social maladjustment is always left over.   

By linking the inflation boogeyman to public sector debt levels, prevailing economic theory sometimes leads to poor policy prescriptions and outcomes, as we are now seeing in Greece. It also fails utterly to explain the experience of Japan over the last two decades, and it looks set to fail in both the Eurozone and the U.S. in the coming decade.  So far, our contrarian calls for a strengthening USD and a dovish view of long term U.S. Treasury yields has lent support to this thesis.   

As with our recent “What Happened?!?” piece, we also think it’s important to tie the Greek “rescue” package to the current U.S. policy outlook. Today, speaking to the Business Council, President Obama once again invoked our “unsustainable fiscal deficit” and argued for immediate reimplementation of PAYGO. Looked at in terms of Mitchell’s diagram above, that implies that at best, the federal government is unlikely to add to the supply of vertical money.  It’s also important to realize that a concept like PAYGO essentially restricts the vertical money supply function to the central bank. And yet, according to recent testimony from Fed Chairman Bernanke, the Fed is targeting roughly a 50% contraction in its balance sheet, which also implies a contraction in narrow or vertical money supply (though rising velocity could give the Fed some room to work with).  Similarly, it was over tightening in both the fiscal and monetary spheres that led to the 1937 recession after several years of economic recovery.

The upshot of all this is that leaders in the public sectors of both the U.S. and the Eurozone are clearly signalling their intentions to “crowd out” private sector saving and, potentially, income. And unfortunately, electoratal majorities in key countries seem to support this direction. Normally, we expect electoral outcomes to approach optimal, but in this particular case, we suspect that the historic lack of economic and financial education might steer us wrong. Then again, voters with incomes might be making some rational inferences about deficits, austerity, and taxes. If so, the burden of adjustment could rest even more heavily on the on the un- and under- employed (believe it or not, that’s something that a handful of policy pundits have advocated, and that at least one senator briefly pursued).   

Either way, deflation will be the inescapable result of excessive restriction or contraction in vertical money.  We’re currently getting slight whiffs of it from credit markets and price indices (although the latter are still positive); cooling measures in China are also likely to help it along. As noted in our “What Happened?!?” piece, we don’t expect it to manifest in an economic downturn until 2012 or 2013, but it could show up in market prices before that. We’ll be watching commodity markets closely, as a broad decline in those prices would provide an especially powerful confirming signal.  Stay tuned…   

URLs:   

http://www.newdeal20.org/2010/03/30/greece-and-the-eurozone-angie-aint-it-time-to-say-goodbye-9235/   

http://www.newdeal20.org/2010/04/12/the-piigs-problem-maginot-line-economics-9697/   

http://en.wikipedia.org/wiki/Inflation_in_the_Weimar_Republic   

http://en.wikipedia.org/wiki/File:GDP_depression.svg   

http://mises.org/books/interestprices.pdf   

http://bilbo.economicoutlook.net/blog/?p=7864  

http://www.econlib.org/library/Essays/wcksInt1.html   

http://symmetrycapital.net/index.php/blog/2010/04/a-brief-what-happened/ 

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC is a state registered investment advisor. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy nor a solicitation to sell any security, or to engage in any investment strategy.

Good advice for parents & students

BNET is carrying a good column by Cait Murphy (an Amherst alum by any chance?) on whether it pays economically to attend an elite university. After citing some poll data and a couple of empirical studies, she boils their findings down to:

For those who do not have a vocation for something like the ministry and are interested in earning as much as possible (be honest!) in economic terms, it probably makes sense to suck it up and go to an elite school, if you can. If you are lower income, definitely do so. ..

If the super-selective colleges don’t seem to want you for some reason, the evidence is that there is no reason, economically, to go to an expensive private one.  So financially savvy parents not averse to bribery might cut a deal along these lines:  Go to State U instead of Middling-and-Expensive Private U and we’ll throw in a car.  Or a summer in Europe.  Or both.

However the numbers are sliced and diced, though, one other thing is clear:  Character, ability, career choice and of course serendipity also matter.  Warren Buffett went to Nebraska, for example;  Steve Jobs dropped out of Reed, and Steven Spielberg went to Cal State Long Beach when the USC film school rejected him – repeatedly.

The list of (sometimes wildly) successful dropouts is much longer than this — something to keep in mind should your child decide to take a less beaten path.

Cait raises a few more good points.

First, a smart choice of school depends critically on your chosen profession. I’ll never forget a New York Times article I read a few years back about some young adults with pedigreed, six figure Master of Fine Arts degrees who were unable to afford the debt service on their student loans (yet another example of the horrible disservice we do by not providing primary financial education to all students). In the end, the price tag on an education should make sense based on well grounded expectations for future income.

Second, she writes that “in general, if you are good at math and choose a major to match, you are going to do very well indeed. The top majors in terms of high salaries, according to PayScale, are aerospace engineering, chemical engineering, computer engineering, electrical engineering, economics and physics.”

And third, ”all of these studies measure the effect of bachelor’s degrees. With more and more students going on for higher higher education, it might well turn out that the best strategy, economically, is to excel at a state university, then treat yourself to an elite law degree or MBA.”

URLs:

http://blogs.bnet.com/career-advice/?p=751&tag=col1;post-751

Good column by Ron Rhoades

 Good column by Ron Rhoades on RIABiz.com, in which he predicts what types of financial reforms might come out of Congress in the current session. He echoes some concerns we’ve raised (emphasis added):

There are many parts of the overall financial services reform legislation that are incremental improvements over what we have today, and which should be supported. I hope the upcoming amendments will address “too big to fail” and reduce the perverse compensation incentives which tend to drive improper risk-taking activities.

I am deeply troubled, however, by the lack of oversight of all credit default swaps and other forms of derivatives. There are likely to remain many gaps in regulation which can continue to be exploited.

Additionally, much of the bill appears to fragment, rather than to consolidate, banking regulation. Regulation needs to be robust – to paraphrase James Madison, if securities industry participants were all angels, regulation would not be needed. But regulation also needs to be efficient. Our country cannot afford inefficient regulation of the same functional areas through duplicative, often over-lapping agencies.

This point, on disclosure as panacea, was particularly interesting, and lends some support to our call (and others’) for bringing basic financial education (legal might be a good idea too) into primary education:

The fundamental problem is that the SEC continues to emphasize disclosure above all else. While I support better disclosures of compensation practices and conflicts of interest, we must be realistic in what disclosure can accomplish. Disclosures are usually ineffective, as research into behavioral biases has demonstrated.

Today the financial world is far more complex for consumers than it was in 1940. Hence, disclosures utterly fail to overcome the huge “knowledge gap” between financial advisors and their clients.

The full column is available here: http://www.riabiz.com/a/748005?subscribed=true

Stiglitz: The Dangers of Deficit Reduction

A timely column from Nobel economist Joe Stiglitz (emphasis added):

A wave of fiscal austerity is rushing over Europe and America…But despite protests by the yesterday’s proponents of deregulation, who would like the government to remain passive, most economists believe that government spending has made a difference, helping to avert another Great Depression.

…even deficit hawks acknowledge that we should be focusing not on today’s deficit, but on the long-term national debt. Spending, especially on investments in education, technology, and infrastructure, can actually lead to lower long-term deficits. Banks’ short-sightedness helped create the crisis; we cannot let government short-sightedness – prodded by the financial sector – prolong it.

Faster growth and returns on public investment yield higher tax revenues, and a 5 to 6% return is more than enough to offset temporary increases in the national debt. A social cost-benefit analysis (taking into account impacts other than on the budget) makes such expenditures, even when debt-financed, even more attractive.

In those last two paragraphs, Stiglitz is pointing out that if the returns on public spending are greater than the cost of financing them, then the future debt level will actually be lower. The government’s current cost of financing is simply the yield on Treasury debt. As of Friday, the ten year Treasury note yields 3.7%, while thirty year Treasury bonds yield about 4.6%. If publicly financed investments can be expected to return more than those figures, then undertaking them — and adding to current deficits and debt levels — is a no-brainer.

And as long as the yields on the securities of private sector issuers aren’t abnormally higher than those on Treasuries, the argument that the federal government is going to ‘crowd out’ the private sector is without merit.

Of course, it’s debatable (1) whether public expenditures are likely to produce returns of that magnitude and (2) whether future Congresses, Administrations, and Treasury Departments will manage the federal balance sheet appropriately. Unfortunately, no one’s openly debating these points. Instead, we’re treated to pithy but nonstop dogma from both sides, and a peculiar obfuscation by those in the middle, which in all cases overlook the basic financial calculus that Stiglitz reminds us of in his column.

Most importantly for debt and deficit hawks and those who fear higher taxes (those whom econo-nerds would refer to as ‘Ricardian equivalence’ subscribers), when the financial calculus is positive, then the debt service associated with marginal federal spending can be financed organically, via higher growth, rather than through higher taxes.

In short, people on all sides of the deficit issue should be able to agree, at least on financial and economic grounds, that investments yielding more than their cost of financing, when they do not crowd out private sector borrowing or resource demand, should absolutely be carried out.

—

Unfortunately, Stiglitz overlooks his own argument when he writes the following, which make us wonder if he doubts his 5 to 6% return figures, or if he’s just offering a gratuitous slap at the financial sector (emphasis added):

As the global economy returns to growth, governments should, of course, have plans on the drawing board to raise taxes and cut expenditures…

Continuing with his love of taxes:

The financial sector has imposed huge externalities on the rest of society. America’s financial industry polluted the world with toxic mortgages, and, in line with the well established “polluter pays” principle, taxes should be imposed on it. Besides, well-designed taxes on the financial sector might help alleviate problems caused by excessive leverage and banks that are too big to fail. Taxes on speculative activity might encourage banks to focus greater attention on performing their key societal role of providing credit.

As we’ve pointed out elsewhere, the domestic financial sector is going to shrink even without  punitive measures, as demographic composition shifts away from the saving and investing age groups. Well-designed regulation might be a better approach than taxes to constraining financial sector activities to socially beneficial ones (we admit that a ‘Tobin tax’ can be the most efficient approach to regulation under certain conditions, but aren’t convinced that it’s optimal for the financial sector).

And it would be profoundly unjust for the federal government, which so strongly encouraged and underwrote the expansion of mortgage financing (Stiglitz’ “pollution”), to retroactively punish the financial sector, its employees, and its current and future clients for simply following the government’s orders.

Stiglitz also takes a step back from his underlying thesis with this sentence:

Over the longer term, most economists agree that governments, especially in advanced industrial countries with aging populations, should be concerned about the sustainability of their policies.

From a technical standpoint, this isn’t as iron clad as so many of us reflexively believe. First, we have no idea whether an aging population is bound to be a drag on an economy, whether it depends on particular conditions, or anything else. There simply isn’t much historical data available to test such a proposition. Second, if we assume that it is a significant drag, then policies that are seen as unsustainable under “normal” conditions might very well be the most sustainable under those novel conditions. This could include expanded deficit spending and public debt, and/or expansion of money supply.

[To be fair, Stiglitz is almost certainly referring to entitlement spending obligations in that passage, which might be a bird of a different feather. We're just using it as an opportunity to critique some of the conventional wisdom around demographics.]

—

Despite Sitglitz’ inability to break out of his New Keynesian box, or part ways with his passion for higher taxes, we agree wholeheartedly with his essential argument:

…even with large deficits, economic growth in the US and Europe is anemic, and forecasts of private-sector growth suggest that in the absence of continued government support, there is risk of continued stagnation – of growth too weak to return unemployment to normal levels anytime soon.

The risks are asymmetric: if these forecasts are wrong, and there is a more robust recovery, then, of course, expenditures can be cut back and/or taxes increased. But if these forecasts are right, then a premature “exit” from deficit spending risks pushing the economy back into recession. This is one of the lessons we should have learned from America’s experience in the Great Depression; it is also one of the lessons to emerge from Japan’s experience in the late 1990’s.

…we must be wary of deficit fetishism…high-return public investments that more than pay for themselves can actually improve the well-being of future generations, and it would be doubly foolish to burden them with debts from unproductive spending and then cut back on productive investments.

These are questions for a later day – at least in many countries, prospects of a robust recovery are, at best, a year or two away. For now, the economics is clear: reducing government spending is a risk not worth taking. 

URLs:

http://www.project-syndicate.org/commentary/stiglitz123/English

http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

I’ll see your PAYGO and raise you a double dip

A key objective raised by President Obama in his state of the union address was to address the ‘fiscal hole’ of the federal government. His rationale was that “like any cash strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t.” he asked Congress to reinstate PAYGO, which reportedly helped the federal government “record surpluses in the 1990s,” and advocated investing in people “without leaving them a mountain of debt.” He closed on this point by saying that it’s just common sense.

Culturally, these ideas resonate with Americans. And for a business or household, budget constraints are a matter of common sense (even though we don’t always adhere to them). But there is no budget constraint on a government that can create money, i.e., non-interest bearing debt, out of thin air. The only meaningful constraint to the level of non-interest bearing debt is inflation, which occurs when a government creates more money than the economy requires, causing its non-interest bearing debt to lose value against most goods and services. Thus, while it may score some political points (thanks to our primary educational system’s lack of a financial and economic curriculum?), it’s absurd for the president to embrace the common sense that households and businesses use in setting budgets. The federal government faces an entirely different kind of budget constraint.

Instead, given the government’s power to create money, common sense would hold that the amount of money supplied to the economy should be equal to the amount of money required by the economy (please note, this simplification is not an attempt to resurrect the policy prescriptions of old school monetarism). Thus, the proper approach to budgets at the federal level is to ask whether there is currently a surfeit or deficit of USDs in our economy. Given the number of private financial commitments that were entered into in the past decade, and dramatic declines in economic activity, it’s difficult to argue that there’s currently a surfeit of dollars. And if recent political rhetoric is any indication, dollars are likely to become scarcer in the years ahead (it would be ironic if, instead of inflation, deflation became the motivating force behind a move away from the USD as global reserve currency).

The president did set forth some positive ideas, such as a zero capital gains tax on small business investment, capital investment incentives for companies of all sizes, and infrastructure investment. Assuming these are financed at least in part by new money creation, they would help to prevent a renewed liquidity crunch. But to the extent that they are “offset” by cuts or freezes elsewhere in the name of closing fiscal gaps and filling in budget holes, or by higher taxes on other activities, the net short term effect on the economy will be nil or worse. And like Japan, we’ll be in for our second lost decade out of two. As we’ve pointed out, leaving future generations without a “mountain of debt” sometimes means leaving them with equivalent (or greater) opportunity costs. We should strive to avoid both of those outcomes. To do so, we have to rethink the cultural common sense that debt is always and everywhere to be avoided.

From an investing standpoint, if vigorous policy actions follow the path being laid out by the rhetoric and “common sense” emanating from so many quarters, then the USD will continue to strengthen, the real economy will stagnate or weaken further, and nominal asset values will fall for all but the highest grade government paper. In that scenario, we would be lucky to tread water and leave only 16% of the country underemployed.

Mr. President, I’ll see your PAYGO and raise you a double dip recession.

RELATED READING (file under confirmation bias): 

We’re well aware that our current view of things puts us shoulder to shoulder with some members of the “loony left”, but the macroeconomics of this stuff are fairly straightforward. Our lonely wing nut sojourn continues, placing us in lockstep with one Mr. Paul Krugman: http://krugman.blogs.nytimes.com/2010/01/26/obama-liquidates-himself/.

The Fed is seeking an exit strategy from its liquidity programs and low interest rate policy. The impact of that exit can be either muted or amplified by Congressional actions. If Congress becomes hawkish, there is no reason for the Fed to do so. If they both begin tightening, it’s hello 1937: http://www.bloomberg.com/apps/news?pid=20601015&sid=aXeUAV7_bz_o

An excellent idea from Warren Mosler — a full payroll tax holiday — that has yet to fall on the radar of federal policymakers: http://moslereconomics.com/2010/01/28/tea-party-plan-for-dems-cut-to-the-front-with-tax-cuts/. Here’s how Mosler describes the cause of poor economic policymaking: “…so-called economic experts have confused themselves and their political masters with contrived explanations for the way the economy works, and their limited vision has limited the range of policy choice. The result has been a monumental economic and social disaster caused by an obvious shortage of aggregate demand. The spending power needed to make mortgage payments, car payments, and do a bit of shopping- all of which would fix the economy and end the financial crisis- just isn’t there.”

Marshall Auerback writes that “Any kind of spending cuts in the middle of the worst recession since the Great Depression is insane.  What we are beginning to see is the return of Herbert Hoover and the ‘liquidationists.’” http://www.newdeal20.org/?p=7731

Ed Harrison posts an email exchange with Auerback, in which the latter wrote: “What the US government is now in danger of repeating is taking its economy down the fast track to a double-dip recession.  With investment still flat, consumers trying to increase their saving ratio and net exports making a negative contribution to growth – the President and his advisors evidently believe the persistently high unemployment is something the private sector has to deal with.”  http://www.creditwritedowns.com/2010/01/what-president-obama-can-do-to-improve-the-economy.html. As we’ve noted elsewhere, the demographic research of folks like John Geanakoplos, Diane Macunovich, and Ajay Kapur implies that for the next decade, the U.S. private sector is not going to behave as the baby boomer decades have conditioned us to expect. Hence the case for a more activist — and just as importantly, ’self-financing’ – public sector. ‘Self financing’ today means the Federal Reserve creating the dollars that enable primary dealer banks to absorb Treasury offerings at auction via direct bids.  For that process to continue, the federal government must continue to issue debt, rather than shoveling dirt on the people and institutions that are still near the bottom of our deep ’fiscal hole’.

Jonathan Zasloff writes (TOH Krugman) that “At some point someone must make an argument for government.” http://www.samefacts.com/2010/01/politics-and-leadership/obamas-self-inflicted-lobotomy-proceeds-apace/  Why are Democrats today so afraid to make that argument? Like the health care debacle, could the lessons learned in the Clinton years be ill suited to today? As for the GOP, our take is that by harping on government in all its forms (besides those forms that help favored firms and industries collect their share of rents from the rest of us, of course), Republicans leave the door open to the development of increasingly socialist policies. In fact, if our take on the state of the private sector in the coming decade is accurate, they will practically mandate it.

State unemployment insurance tracker at Pro Publica (TOH Credit Writedowns) shows how critical federal government support currently is for many states: http://projects.propublica.org/unemployment/

George Soros thinks that premature budget tightening could be bearish for gold prices: http://www.telegraph.co.uk/finance/financetopics/davos/7085504/Davos-2010-George-Soros-warns-gold-is-now-the-ultimate-bubble.html. Reminiscent of Jon Nadler’s argument last fall against gold: http://symmetrycapital.net/index.php/blog/2009/11/a-gold-bears-comments/

Finally, in what might be a mirror image of our loney wing nut position, Bill Gross seems to be exhibiting a profound case of anti-Keynesianism: http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/February+2010+Gross+Ring+of+Fire.htm

Idle Speculator: Payrolls, Policies, Politics

Friday morning’s report on the employment situation had a little bit for everyone, bulls and bears alike. November revisions saw the first positive month for payroll growth since the current recession began, and the “less bad” trend remains firmly intact. However, the number of discouraged workers jumped dramatically, and payroll growth is still far too low to significantly bring the unemployment rate to a persistently lower level. While unemployment continues to pose a risk to Democrats in 2010, neither party is making a compelling offer to the electorate at the moment, and both of them are too focused on scapegoating the other. While we expect some positive economic surprises in 2010, the U.S. electorate and economy will remain stuck between an elephant and a donkey for some time.

Continue reading: http://symmetrycapital.net/idlespeculation/20100112.pdf

Conference Board: Job satisfaction at record low

Disturbing findings from the Conference Board’s latest job satisfaction survey, which reached its lowest level since the survey began in 1987. Some endpoint comparisons:

Source: Yahoo, Associated Press, Conference Board

According to the AP article, these findings imply that the American work force could become less innovative, competitive, and productive over time. Potential explanations for declining job satisfaction:

Conference Board officials and outside economists suggested that weak wage growth helps explain why workers’ unhappiness has been rising for more than 20 years. After growing in the 1980s and 1990s, average household incomes adjusted for inflation have been shrinking since 2000. Also, compared with 1980, three times as many workers contribute to the cost of their health insurance — and those contributions have gone up. The average employee contribution for single-coverage medical care benefits rose from $48 a month to $76 a month between 1999 and 2006.

It’s difficult to know what forces and factors might be driving the underlying trends (lower pay, boredom, security, unhappiness with superiors) that are manifested in higher levels of job dissatisfaction. It would be helpful to have data prior to 1987, but accepting that as is, and assuming statistically significant and unbiased results, let’s consider them in the context of major structural developments of the past two decades. Two forces that spring to mind are productivity growth and economic globalization.

• Rising productivity could have a positive or negative impact. To the extent that it raises net income and/or free time, it should raise satisfaction. However, we’d have to have some idea of how the gains from higher productivity have been shared/divided among different industries, different types of workers (including in managers’ and executives’ compensation), different stakeholders (customers, creditors, shareholders, governments, society at large), etc. Further study might try to analyze whether declines in satisfaction have coincided with changes in the rate of productivity growth.
• Globalization has been a rising force since 1987, especially since the early 1990s, with undeniable effects on the structure of U.S. employment. And while education and retraining are reasonable responses, it’s important to consider that, relative to renovating an individual’s human capital, a job can be outsourced rather easily.
• We would also toss in the declining marginal competitiveness of our corporate tax code as a factor that, if it pushes capital investment outside of the U.S., amplifies the negative impacts of globalization (admittedly, this assertion requires that some qualifications be added to the role of productivity growth). The burden of corporate taxes has also been found under certain conditions to fall disproportionately on workers’ income.

Productivity gains can be shared among owners (share value and dividends), employees (income and benefits), executives (compensation), governments (tax authorities and and regulatory bodies), and society. The following table is a highly simplified back of the envelope tabulation, based simply on the annualized after-inflation growth rates in each of the following items, using a core PCE inflation rate of 2.7% per year (it doesn’t contain any direct estimates of productivity growth). Executive compensation data is fairly slippery — the low end is based on an amalgam of sources, and the high end is based on estimates of the ratio of average CEO compensation to average employee compensation (2006 ~ $400, 1980 ~$42, 1965 ~$20). Information on data sources is provided below.

For globalization, an overly simple proxy is returns to equity owners in developing markets. Brazil’s economy and Bovespa stock market index have been among the top performers over the period in question, returning almost 16% annualized the last ten years, and over 20% annualized since 1994; against an official annualized inflation rate over the past decade, we get a real annualized return around 9%, a figure that comports well with other emerging market return statistics.

We need to emphasize that this is a back of the envelope analysis that leaves plenty of questions unanswered. A more credible analysis would consider other potential forces and factors, formalize and scrub the data, and provide some meaningful statistical insights.  However, if we can at least assume that the ordinal findings hold up, then it’s a good start, and implies that the benefits of economic growth over the past decade or two have accrued first to developing economies and markets, then to equity owners and executives, then to public coffers, and only minimally to employees, which could help to explain rising job dissatisfaction.

Please note that we are not anti-globalization. But we do believe that developed economy countries can do a better job of designing and implementing policies that, while still friendly to trade and growth, can help mitigate the negative domestic impacts brought about by global economic development. We also believe that while health care reform is an important piece of the puzzle, closing the ‘compensation gap’ domestically would ideally be resolved in the private sector. However, the issue requires some enlightened executive and board leadership, and if history is any guide, the problem is most likely to be addressed via higher tax rates on top incomes. Finally,  if corporate taxes fall disproportionately on labor income, or amplify negative impacts of globalization, then they could be an indirect factor in job dissatisfaction, along with the more direct impact of payroll taxes and benefits costs.

===

Via a tweet from Laurie Ruettiman of the Punk Rock HR blog, there’s a video version of the AP story. Ruettiman also blogged about a new CBS series, “Undercover Boss,” that might contribute towards reducing job dissatisfaction (or not…time will tell). If you get a chance to watch the trailer she linked, it’s worth it (it’s a fun site to peruse too, see especially her short and sweet employee handbook). According to Ruettiman, Undercover Boss (like The Office, The Beatles, white boy blues, and the Mini Cooper) is another clever premise borrowed from the Brits.

Judging by the trailers, the show gives executives an anonymous, and thus open, firsthand view of their company’s line operations, and more importantly, some insight into the questions we raised above. In a year when corporate profits are expected to rebound nicely, a show like this could gain quite a popular following (of course, more cynical interpretations of corporate participants’ motivations are possible). If this allows a growing ’fair pay’ movement to take root, shareholders beware. With Wall Street’s social capital at all time lows, labor costs, including non-union labor, might be due for a trend reversal in the years ahead – though admittedly, that might not happen in the face of historically high unemployment levels. If it doesn’t happen, then current job satisfaction trends are more likely to remain intact, which, over the long run, will impose unwanted costs on us all.

DATA: According to one set of estimates (http://www.pay-without-performance.com/Core_Guay_Thomas-IsUS-CEO-Compensation-Inefficient.pdf, p. 65), executive compensation increased at an annualized nominal rate of just under 13% from 1993 to 2003, and another 13% in 2004 (http://www.guardian.co.uk/business/2005/aug/04/executivesalaries.executivepay2). It declined 15% in 2007 and 11% in 2008 (http://www.forbes.com/2009/04/22/executive-pay-ceo-leadership-compensation-best-boss-09-ceo_land.html). If we interpolate conservatively (g = 0%) for the years 1987-1992 and 2005-2006, we get an annualized rate of 5.2%, which is in the ballpark of a study that found a 5.57% annualized increase from 1997 to 2004 (http://www.cfapubs.org/doi/pdf/10.2469/faj.v63.n3.4687). EBRI estimates that employee compensation costs grew at 3.3% annually from 1987 to 2004 (http://www.ebri.org/pdf/publications/facts/0305fact.pdf).

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a state registered investment advisor. The foregoing article is intended only for readers’ interest, amusement, and edification. It is not an offer to buy or a solicitation to sell any security, nor is it a recommendation to engage in any particular investment strategy. Any mention of public securities herein is purely coincidental, and no securities mentioned are owned by the firm’s clients, principals, or the firm itself. SCM participates in the Amazon.com Associates program and earns a small revenue sharing fee (~4%) on qualified merchandise for any “click through” sales from our website.

URLs:

http://finance.yahoo.com/news/Americans-job-satisfaction-apf-1483464009.html?x=0&sec=topStories&pos=3&asset=&ccode=

http://www.youtube.com/watch?v=Gps7Dx8cN4Q 

http://finance.yahoo.com/q/hp?s=%5EBVSP&a=00&b=5&c=2000&d=00&e=5&f=2010&g=m

http://www.bcb.gov.br/pec/metas/InflationTargetingTable.pdf

http://punkrockhr.com/undercover-boss/

http://www.amazon.com/gp/redirect.html?ie=UTF8&location=http%3A%2F%2Fwww.amazon.com%2Fgp%2Fentity%2FWhite-Boy-Blues-%28Series%29%2FB000AQ2MUU&tag=symmetrycapit-20&linkCode=ur2&camp=1789&creative=390957

Idle Speculator: Is the Federal Government Too Tight?

In our latest Idle Speculator piece, we ask whether — despite large recent and expected budget deficits — the federal government risks being too tight. We argue that:

(1) At certain times and under certain economic conditions, deficit financed improvements in the tax code and public expenditures and investments make sense.

(2) The U.S. may be in one of those periods now, while Japan may be exiting one. In both cases (as well as the Great Depression), demographic trends might be playing a larger role than conventional theories assume.

(3) Pro-growth fiscal policies would give the Federal Reserve a lot more room to raise rates and defend the USD.

(4) Given: the enormous nominal dollar figures attached to discussions of U.S. budget deficits and national debt; widespread misconceptions about public finance and its economic effects; and ideological rancor among voters and politicians; there will be increasing pressure to tighten up the federal budget in coming years. Such actions could be premature and threaten a nascent economic recovery.

http://symmetrycapital.net/idlespeculation/20091109.pdf

More Industry Black Eyes

The SEC believes it’s uncovered another case of wrongdoing, this time at a firm headed by a “prominent member” of the National Association of Financial Planners, or NAPFA. The bitter irony for NAPFA members is that the organization is very vocal about working in clients’ best interests, rather than following Wall Street business-as-usual.

Here’s an interesting editorial take on the story and what it means for the industry:

The allegations of wrongdoing against a former NAPFA president could not have come at a worse time for the group, which is part of a troika with FPA and the Certified Financial Planner^® Board of Standards lobbying Congress for creation of a new Self Regulatory Organization to oversee financial planners. Last month, another NAPFA member, Matthew Weitzman of AFW Wealth Advisors in New York City, was caught up in scandal and was reportedly the target of an SEC probe, according to a story by New York Times personal finance columnist Ron Lieber, who was one of Weitzman’s clients.

In a post here just yesterday, I mentioned that the continuing string of scandals involving RIAs make it unlikely that any effort to further regulate RIAs could be thwarted by NAPFA, FPA and the CFP Board. But revelations about Putman are particularly sad because he held himself out as a leader of NAPFA, an organization that is dominated by members with great integrity, advisors who have always been at the forefront in campaigning for issues in the interest of consumers. To see NAPFA’s reputation stained by a few bad members is heartbreaking…

While NAPFA has remained a beacon of light in the sometimes shrouded world of financial advisors by supporting a fiduciary standard, it also increasingly became a marketing machine for advisors who used the referral network and favorable press garnered by NAPFA to grow their businesses and who were little interested in the high ideals of many the group’s members. Perhaps the news about Putman’s troubles will cause an introspective discussion among NAPFA members and help the group reclaim its high moral ground.

Gluck concludes by calling the financial media to task:

One other good thing that may come of this is that maybe—just maybe—a reporter in the consumer press will write about the idiocy of these “top financial advisor” lists, which sell magazines but stink at figuring out which advisors are really the best. There is no substitute for real research, which these magazine stories always fail to do. While the articles in Worth and Medical Economics were great marketing for Putman’s firm, these publications can’t possibly research all of the nation’s advisors and find the best ones without a massive effort, an undertaking they are unlikely to know how to effecutate [sic] or finance.

Our editorial slant: Unfortunately, these kinds of episodes seem likely to increase the probability of excessive and/or poorly designed regulations, which will limit consumers’ choice and industry dynamism over the long run. We do accept that regulations can and should be improved when appropriate, but we don’t see how regulations will ever prevent human beings from being human beings (consider that despite the rule of law, societies still need prisons), however badly we want to reduce the risk of malfeasance in financial services to zero. There appear to be some common threads to most of the fraud cases brought by securities regulators, which leads us to believe that one of the most powerful tools for creating a better regulated industry is education. Not the kind of financial education we’re used to, like consumer pamphlets from public agencies and glossy marketing pieces from private organizations, but actual education, starting sometime in the K-12 years. There are few aspects of life more important or more prevalent than finance, and while almost everyone has the opportunity to use financial technologies (and potentially bring ruin upon themselves), far fewer have the opportunity to learn what it’s all about.

Fortunately, American civil life is still alive and well, despite occasional hysteria about its demise. We know of charter schools in our area dedicated to finance, business, and entrepreneurship, and other organizations have sprung up to fill the gap. We just came across this one in Colorado (thanks Google), which offers some some statistical data in support of its mission and our editorial above.

URLs:

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090608/REG/906079995/1094/INDaily01

http://www.napfa.org/

http://gluck.advisorblogcentral.com/post/2009/05/Former-NAPFA-President-Faces-SEC-Fraud-Charges.aspx

http://www.yacenter.org/index.cfm?fuseAction=financialLiteracyStatistics.financialLiteracyStatistics