economy eyes

by Mike Kimel

Presimetrics on, er, in Parade (Magazine)

Cross-posted at the Presimetrics blog.

For a long time, I knew the date that Presimetrics, the book I wrote with Michael Kanell, was going to be released – August 11. The date was recently pushed back later in the month. But, the other day some interesting news came up…

Parade Magazine – the Sunday news magazine – will have a quiz based on the book in their Intelligence Report column on August 8th. Parade is distributed with more than 400 newspapers and has a circulation of over 32 million, the largest in the U.S. I believe they will also set up an on-line Q&A with Michael Kanell and I where readers can write in with what is on their mind.

Obviously, all of us involved in the book are very excited by this unexpected development. Black Dog & Leventhal, our publisher, is naturally moving up the release date so I believe the book is now expected to ship at the end of this month.

FWIW, I’m not that good at self-promotion and tooting my own horn, but I think our book can make a contribution to the discourse. Not only do we make a systematic effort to point out graphically what happened across a wide range of issues (and why), we emphasize time and again the importance of looking at information in an easy, intuitive, and methodical way. We think these are things that can have a big effect on society as a whole. If you believe in our approach, please help us get the word out!

Thanks!

Mike

For those interested in more information on job creation in the Employment Dynamics data
base these three article provide very good information.

Cordelia Okolie, “Why Size Class Methodology Matters in Analyses of Net and Gross Job Flows.” July 2004 Monthly Labor Review

Jessica Helfand, Akbar Sadeghi and David Talan, “Employment Dynamics: Small and Large Firms Over the Business Cycle.” March 2007 Monthly Labor Review

http://www.kauffman.org/uploadedFiles/firm_formation_importance_of_startups.pdf

All three are pdf files and for the second article the link takes you to the Monthly Labor Review where you can directly access the article.

The subject is more complex than generally thought as different methodologies can create significantly different results.

It was their idea, so it’s no surprise they like paying interest on reserves, even excess reserves:

For quite a while, the Fed was quite happy to have that money on its books. Indeed, the power to pay interest on reserves was considered a key tool to keep control over all the liquidity the Fed pumped into the system during the financial crisis. The Fed wanted to see bank lending increase, but in a controlled fashion, so as not to fan the flames of an inflation surge.

But as worries about the outlook have risen, the game has changed. Some see a move to drive all those reserves into the economy as a key way to produce better economic growth. Markets got to thinking Fed Chairman Ben Bernanke would indicate this as a possible path when he testifies before the Senate Wednesday and the House of Representatives Thursday on the economic and monetary policy outlook.

Economists, however, think ending the interest on reserves policy would be a bad idea.

Right, because the $2,534,722.22 a year paid in interest on $1 Billion in excess reserves is a drop in the bucket for the U.S. Federal deficit.

And because the risk-free rate of return that features in so many economic models should be different for intermediaries (financial institutions) than wealth-creators (businesses).

And because “excess reserves” are money issued by the government which is inflationary because of the multiplier effect of money—which, of course, assumes the money is being invested. (As this money is, in taxing our tax dollars and giving them to Vikram Pandit, Ken Lewis, Lloyd Blankfein, and Jamie Dimon [in descending order of theft; YMMV].)

And, of course, because that $1 Billion that is not being used in the economy would only produce about $5-8 Billion in GDP, which is roughly, what, 50,000 to 80,000 new jobs?

But, of course, banks have better use for the money than potential workers.

[Barclays Capital’s Joseph Abate] noted much of the money that constitutes this giant pile of reserves is “precautionary liquidity.” If banks didn’t get interest from the Fed they would shift those funds into short-term, low-risk markets such as the repo, Treasury bill and agency discount note markets, where the funds are readily accessible in case of need. Put another way, Abate doesn’t see this money getting tied up in bank loans or the other activities that would help increase credit, in turn boosting overall economic momentum. [emphasis mine]

Oh, well, since they’re not going to lend the money anyway, we should have no trouble paying them interest on it. What is The Fed other than a mattress stuffed by tax dollars?

The key phrase is “precautionary liquidity.” If you assume that the recovery started in June or July of last year,* then you would expect “excess reserves” held for “precautionary liquidity” to have declined over time, as the need for “precautions” is reduced as the economy becomes safer. But that hasn’t been the case.

Choose one (or both) from: (1) the banks don’t believe the economy is recovering or (2) the banks are holding assets on their books at higher levels than they know they are worth, and are therefore using “excess reserves” to cover real losses until they can’t any more.

It is unclear whether Abate sees the banks’s unwillingness to be intermediaries as a feature. But at least he knows not everyone is doing it.

Abate buttressed his argument that banks really just want to stay liquid by noting who is holding reserves at the Fed. He said the 25 largest U.S. banks account for just over half of aggregate reserve levels, with three by themselves making up 21% of the reserves.

So the biggest of the Too Big to Fail banks have decided not to act as financial intermediaries, preferring instead to continue feeding from the taxpayer trough (where the $25MM in interest really is a drop in the bucket) and/or pretend that they are more solvent than they really are.

And, according to the Wall Street Journal, economists believe we should continue to pay those banks for misvaluing their assets and refusing to perform their economic function.

The economic theory I learned is that capital is paid its marginal product. The marginal product of those excess reserves is zero, while the required reserves are intended to explicitly provide “precautionary liquidity.”

Unless the TBTF banks are arguing that the Fed’s current Reserve Requirements are too low—a possibility, perhaps, though the FT cites evidence contrariwise—the basis of all economic and financial theory indicates that they should receive no interest on those reserves.

An “economist” who says otherwise is either lying or selling something.

*I would argue—see yesterday’s post—that June 2009 is rather eliminated by the non-recovery of more than half the states’s job markets a full year later.

CoRev brought up the claim that small firms account for 70% of job creation in the US economy.

Several years ago the Small Business Administration and Census began an annual survey of employment by firm size.

You can find the data here:

Here is a table of what the joint survey of employment by firm size found. From 1988 to 2006 — the most recent year published — small firms (under 500 employees) share of total employment fell from 54.5% to 50.2% of private employment. Over the entire period employment by small firms grew 13.3% while large firms employment grew 21.8%.

That sure does not look like small firms account for 70% of employment growth.

Care to show us the data supporting the claim that small firms account for 70% of job growth.


The other interesting results of the survey was that payroll per employee in large firms averages 125% of that in small firms. The Small Business Administration published a study that claimed small business account for over 50% of business real GDP. They based this result on the claim that productivity was much larger in small firms. But if small firms salaries are so much smaller than large firms salaries I find it hard to accept that their productivity is higher.

Dodd-Frank Wall Street Reform and Consumer Protection Act (Enrolled Bill [Final as Passed Both House and Senate] – ENR)

Bill Text
111th Congress (2009-2010)
H.R.4173.ENR

Jim Hamilton used the Federal Reserve Flow of Funds data to present a question: who will buy “the additional $8 trillion in net new debt that would be issued over the next decade under the CBO’s alternative fiscal scenario.”

I thought that the analysis was curious and too “partial”. If one believes the deleveraging story, then domestic private saving is going to rise. The answer to his question seems pretty obvious…

Let’s say that consumption goes back back to the 1960’s-style 62% of GDP, then get ready for household Treasury accumulation. Spanning the decade of 1960, households held on average 30% of the Treasury’s liabilities.

A simple example illustrates my point. If the Treasury’s book doubles to $16.5 trillion, and the household share of Treasury holdings rises to 30% – as of Q1 2010 the stock of Treasuries outstanding was just about $8.3 trillion (see L.209 here) – then households will accumulate over $4 trillion of those new Treasuries. That’s just households, and holding all else equal (like financial funds and businesses).

So the answer is: the domestic private sector.

Rebecca Wilder

The WSJ Economics Blog, discussing June 2010 unemployment rates by state, uses the headline “Most Regions Show Improvement“*

I suppose we should be encouraged by the headline and not look at the text:

Washington, DC and 16 states recorded jobless rates in excess of 10%. North and South Dakota continued to have the lowest rates in the country, at 3.6% and 4.5%, respectively.

Despite the improvements in the jobless rates, 27 states posted a decline in payroll employment, while 21 notched increases. Montana and Alaska had the highest percentage increase from the previous month, while New Mexico and Nevada reported the largest percentage drops. [emphasis mine]

Less money is being paid in a majority of states. The clearest explanation, then, remains that the “decline” in U-3 reflects people dropping out of the work force, not being employed.

It gets more interesting if you look at the Year-on-Year Change. There, 28 of the 50 states show a U-3 unemployment rate that is higher than or equal to last year’s. (The District of Columbia’s U-3 rate declined by 0.1% over that time, so it is only 10.0% now.)

And the improvements are, lest we forget, from a high plateau. The 14 states with the greatest drop in their unemployment rate year-on-year have an average current rate of 8.4%—and a median rate of 8.95%, the average being skewed by the above-mentioned North Dakota, with it’s 9.3 people per square mile and total population under 650,000, 37% of which are not of working age.

Dropping North Dakota from the “biggest YoY winners” moves the median current unemployment rate to 10.0%, while the average is slightly above 8.75%.

If this is a recovery, then my December 2009 prediction that this will turn out to be a “cursive-zed” recession may turn out to be optimism.

*Also, “Jobless Rates Drop in Most States.”

Tom aka Rusty Rustbelt

HEALTH CARE – PUBLIC POLICY DILEMMA

Fifty years ago much mental illness treatment was done in-patient in state run facilities, and many of them were hellholes (One Flew Over the Cuckoos Nest was probably too positive compared to what I saw early in my career).

The de-institutional movement (starting in the late 60s) caused a build up of community based services, and in combination with better therapies has made a much better (although not perfect) system. In many areas the mental illness and substance abuse facilities are run through common governance, some areas not so.

But there are still people who need in-patient services, especially those who also have chronic physical health problems, and there are too few beds and too few payment paths to accommodate those patients.

So what to do?

Some are being dumped into geriatric nursing homes, and not surprisingly the results range from not very good to disastrous. Exact numbers are hard to come by, because the reporting mechanisms do not always separate those admissions. Generally we hear about these cases after something goes terribly wrong and hits the media.

Nursing homes are getting better equipped to deal with geri-psych issues, but younger and often agitated patients really do not fit. A few nursing homes have set up special units or dedicated the entire building to mental illness patients, but not many that I can find.

Nursing home regulatory protocols actually hinder aggressive psych treatments, as regulators and consumers are concerned about “chemical restraints,” the notion that nurses drug the residents into submission and then sit around doing their nails and reading magazines (no psych drugs can be administered without a physician’s order and a thorough care planning process).

So far no one has developed a really good response to this problem, either clicical or financial. The health care reform bill has not directly addressed this issue, although it creates an opening for the discussion.

(For anyone interested in some good reporting go to the Chicago Tribune website and put “nursing homes mental illness” in the search block. The Trib also does a lot of good work on nursing home problems in Illinois. A Google search will yield plenty of information. Also this MSNBC story http://www.msnbc.msn.com/id/29781318)

Tom aka Rusty Rustbelt

By Daniel Becker

An ad I’ve been seeing recently aired by BP is promoting how much work they are doing to clean up the oil spill. It is designed to leave you feeling comforted that they are on top of it, they are cleaning it up in a massive effort. Say, 29 million gallons of oil and water sucked up. Wow. 29 million gallons.

Ever think about how big that is? Every stop to get out the calculator and crunch a few simple numbers to see how big 29 million is? Did you ask: I wonder how much that is in relation to the guesstimated barrels of oil spilled? Do you even think you need to know? Did it occur to you that maybe, in order to make an informed voting decision, you should see just how big a mess the oil spill is by comparing it to the 29 million gallons BP is impressing people with? You know, figuring it out because there is the possibility that this oil spill thing really is more than you might think as it relates to catastrophes to tell your grand kids about.

No? Yes? Maybe? I don’t know?

June 10th estimates were 25K to 30K barrels per day. June 15th estimates were 35K to 60K barrels per day. Gallons per barrel: 42. 29 million / 42 = 690,476.19 barrels / 25K barrels = 27.62 days of spill.

690,476.19 / 35K = 19.73 days of spill. 690,476.19 / 60K = 11.5 days of spill.

Total number of days of spill: 94 (by my count, can’t get google to answer the question). 27.62 days is 29% of the spill days. 19.73 days is 21% of the spill days. 11.5 days is 12% of the spill days.

But, here’s the rub, not all of the 29 million gallons captured is oil. It is water and oil. Thus, the total amount of oil recovered as presented in number of days of spill is something less. Are you still impressed with BP’s results? Does this make you reconsider your estimate of the risk of oil drilling as it is currently performed?

At 35K barrels per day, there are 3,255,000 barrels of oil spilled. At 60k barrels there are 5,580,000 barrels of oil spilled. Roughly. That is 136,710,000 to 234,360,000 gallons of oil. At 29 million gallons of liquid sucked up, we are talking about 4.7 to 8.1 times the number of days it has taken BP to reach that 29 million mark. Assuming that all 29 million gallons was only oil. But, it was not.

Can you relate the need to do such a simple calculation to the concept of risk? “Yeah, there’s a risk” you may say in response. Are you thinking physical risk? How about the concept of risk as exemplified in the concepts of hedging, credit default swaps and derivatives? Or the economic profession’s use of the word risk? Because if you are only thinking about the physical risk, then BP succeeded in it’s messaging. They succeeded by diverting your mind away from their concern and thus their means, modeling and reference for interpreting life and thus formulating and implementing their intentions. This means the chances of you making the voting decision that best benefits you are slim. Why? Because you failed to walk in their shoes because you listened as if you were the only one in the conversation. Yes, the empathetic concept of walking in someone else shoes does not only serve your ability to help another and sooth your soul, it also protects you from one who would use you.

Still want to know why we can’t solve anything in this nation any more such that your life gets easier or do you get it as to your roll in this democracy now? Our roll is not to just take in the message and see if it fits our individual language of how life works. It is to also understand the messenger and their interpretation of how life works.