The Sunshine Report

Tag Archive: New York Times

1. Home Sick Shows How Work Incentives Matter

   November 3, 2009 10:41 am 3 Comments

   Last Wednes­day the New York Times Economix Blog pub­lished an arti­cle writ­ten by Casey Mul­li­gan that was billed as a sum­mary of how work incen­tives change employee behav­ior. I expected Pro­fes­sor Mul­li­gan to edu­cate read­ers as to how work and com­pen­sa­tion incen­tives change worker behav­ior and effect busi­ness. I quickly real­ized, how­ever, that the real pur­pose of Pro­fes­sor Mulligan’s arti­cle was to crit­i­cize health care reform and take a cheap shot at Paul Krug­man. What really sur­prised me was that Pro­fes­sor Mul­li­gan, a Pro­fes­sor of Eco­nom­ics at the Uni­ver­sity of Chicago, mis­used an IMF study to argue that pro­vid­ing health insur­ance to work­ers some­how pro­motes work­place absen­teeism. Instead of being either per­sua­sive or infor­ma­tive, Pro­fes­sor Mul­li­gan hurt his cred­i­bil­ity and that of the New York Times.

   Pro­fes­sor Mul­li­gan states in his article…

   Although the recent health care debate has fea­tured a num­ber of com­par­isons of Europe and the United States, lit­tle has been said about sick leave. Eco­nomic research has shown that work­ers in the Nether­lands, Swe­den and Nor­way often stay home sick.

   Incen­tives, and not the flu, seem to be the explanation.

   Paul Krug­man (among oth­ers) has explained how Euro­peans are health­ier than Amer­i­cans by just about every mea­sure. Thus it may come as a sur­prise that our poor health does not keep us Amer­i­cans away from work more often than Euro­pean workers.

   To prove his point Pro­fes­sor Mul­li­gan cites the IMF study that sup­pos­edly shows that U.S. work­ers have lower absen­teeism rates than their Euro­pean coun­ter­parts. As proof that U.S. work­ers have lower absence rates than Euro­pean work­ers Pro­fes­sor Mul­li­gan repro­duces a chart that shows that work­ers in the Nether­lands, Swe­den and Nor­way are absent from work at a rate a lit­tle more than two times the rate of the U.S.

   Pro­fes­sor Mul­li­gan fails to men­tion is that he selec­tively repro­duced the IMF chart and con­ve­niently ignored data that didn’t fit his the­o­ries. As it turns out, among the 18 Euro­pean coun­tries that the IMF stud­ied, the U.S. absen­teeism rate is about aver­age (actu­ally slightly lower than the arith­metic aver­age of the IMF coun­try data – there is no pop­u­la­tion weighted data pro­vided but it is likely that the U.S. is above the aver­age for absen­teeism among the Euro­pean coun­tries stud­ied if weighted for pop­u­la­tion).  Accord­ing to the IMF, the U.S. was dead cen­ter on the absen­teeism chart. Actu­ally, the IMF said there were 9 coun­tries with higher absen­teeism rates than the U.S. and 9 coun­tries with lower absen­teeism rates. I believe that the selec­tive use of data by Pro­fes­sor Mul­li­gan is at best mis­lead­ing and at worst out­right dis­hon­est. It cer­tainly isn’t some­thing that the Uni­ver­sity of Chicago would tol­er­ate from any of its stu­dents and isn’t some­thing that the New York Times should have published.

   Even worse, Pro­fes­sor Mul­li­gan con­tin­ues to state “Quite sim­ply, the finan­cial penalty for work absence in the Nether­lands, Swe­den and Nor­way was quite small (as com­pared with other Euro­pean coun­tries and the United States), and the labor mar­ket responded by keep­ing work­ers home “sick” more often.” Pro­fes­sor Mul­li­gan free­lances with the truth in this state­ment because the IMF came to a much dif­fer­ent con­clu­sion. In its con­clu­sion, the IMF iden­ti­fied as the work force par­tic­i­pa­tion as great­est cor­re­lated fac­tor dri­ving absen­teeism rates in the high absence coun­tries.  They said  

   “High sick­ness absence reflects…high labor force par­tic­i­pa­tion, par­tic­u­larly of women and older peo­ple. Coun­tries with high sick­ness absence have gen­er­ally high par­tic­i­pa­tion rates…”

   Many ana­lysts believe that high worker par­tic­i­pa­tion rates is evi­dence of an advanced and effec­tive health care sys­tem which is exactly the oppo­site of what Pro­fes­sor Mul­li­gan hoped to per­suade read­ers of. After all, when work­ers become older the abil­ity to keep on work­ing is evi­dence of good health and high par­tic­i­pa­tion by women is also typ­i­cally evi­dence of over­all good health (women tend to be pri­mary care givers to sick fam­ily and par­tic­i­pa­tion of women in the work force is gen­er­ally con­sid­ered to be inversely cor­re­lated to the sick­ness of their fam­ily members).

    By the way, the IMF study con­cluded that to the extent that finan­cial incen­tives make a dif­fer­ence it isn’t the amount of paid sick leave that affects absen­teeism rates but rather who bears the cost of sick leave. When employ­ers pay some of the cost of sick leave absen­teeism rates tend to be lower than when the gov­ern­ment reim­burses employ­ers for 100% of the cost.

   The authors of the IMF study explic­itly stated that there are no clear rela­tion­ships that they could find or stud­ied between sick­ness absence and “health sta­tus, work­ing con­di­tions, and…public insur­ance schemes.” As such I can’t under­stand how Pro­fes­sor Mul­li­gan can point to the IMF study as evi­dence that that “pro­pos­als to help employ­ees cope with a health insur­ance man­date” will “erode labor mar­ket incentives.”

   In a “gotcha” moment, Pro­fes­sor Mul­li­gan proudly points out that because of gen­er­ous sick leave laws in some coun­tries, like Swe­den, a large num­ber of men stay home some­times to watch sports on TV. I don’t know how to break it to Pro­fes­sor Mul­li­gan but when I grew up in the 1960s and 1970s Amer­i­can men used to stay home to watch the World Series on TV (it was before the games were played at night) and if Philadel­phia beats the Yan­kees and takes the Series I can pretty much guar­an­tee that absen­teeism will be up in Philadel­phia for a few days. Per­haps the fact that Swedish male absence is some­what coore­lated tele­vised sports events isn’t a func­tion of eco­nom­ics but rather a symp­tom of human nature and TV sched­ul­ing.  I have trav­elled around the world and I have found that pretty much in every coun­try I have been in some men stay home to watch “once in a life­time” sports events. 

   What Pro­fes­sor Mul­li­gan has proven to me in his arti­cle is why union rules that guar­anty life­time employ­ment are a bad thing. Over the last 30 years union rules that pro­tected work­ers hurt indus­tries as var­ied as steel, autos and cer­tain con­sumer goods. When work­ers are pro­tected they have lit­tle incen­tive to make sure that their work is either valu­able or of high qual­ity. It is no dif­fer­ent for tenured col­lege pro­fes­sors. Pro­fes­sor Mulligan’s arti­cle on work incen­tives is a real life exam­ple what hap­pens when work­ers start to believe their jobs and sta­tus are an entitlement.

2. The Economy’s Shape Is A Mystery That Isn’t Important To Solve

   November 1, 2009 10:12 pm Leave a Comment

   Today Cather­ine Ram­pell of the New York Times authored a story in the Week in Review that quoted an econ­o­mist who stated there are “as many views of the econ­omy going for­ward as you have let­ters of the alpha­bet to describe the recov­ery”.  I was dis­ap­pointed by the arti­cle because rather than focus­ing on the shape of the eco­nomic recov­ery (which is inter­est­ing to wonks but irrel­e­vant to most Amer­i­cans), the national debate needs to be whether or not the ben­e­fits of eco­nomic recov­ery are being con­cen­trated in only a few hands to the detri­ment of aver­age Americans.

   On the sur­face last week’s eco­nomic news was pretty good. Third quar­ter GDP was up more than most peo­ple expected, man­u­fac­tur­ing pro­duc­tiv­ity increased at a strong pace and infla­tion remains tame. Even so, the recov­ery is start­ing out as a job­less recov­ery with a real sep­a­ra­tion between the “haves” and the “have nots”.

   The haves are employed and live in the world of big busi­ness and Wall Street while the have nots make up the major­ity of Amer­i­cans that work and own busi­nesses employ­ing less than 500 work­ers. It is not coin­ci­den­tal that the haves are feel­ing like the reces­sion is end­ing; the gov­ern­ment helped them either directly or indi­rectly with tril­lions of dol­lars of aid while the have nots have had to make their own way through this crisis.

   Wall Street bail outs, Fed­eral Reserve pro­grams and TARP sub­si­dized bro­ker­age firms but also had the unin­tended con­se­quence of pro­vid­ing a com­pet­i­tive advan­tage for com­pa­nies that can bor­row money by issu­ing bonds. Only large com­pa­nies can directly access the bond mar­kets and it is large com­pa­nies that are the clients of bro­ker­age firms.

   On the other hand, smaller com­pa­nies obtain their financ­ing by bor­row­ing from lenders that make direct loans and not through cap­i­tal mar­kets activ­i­ties. These lenders are the small and mid-sized banks whose ranks are get­ting smaller every time the FDIC seizes another bank and from non-bank com­pa­nies like CIT which filed bank­ruptcy today and is illus­tra­tive of what has hap­pened to many non-bank lenders. The recov­ery of the bond mar­ket, which is a direct result of gov­ern­ment action, is almost irrel­e­vant to small man­u­fac­tur­ers and ser­vice com­pa­nies. Small com­pa­nies are the “odd man out” of this eco­nomic recovery.

   It’s great news that the econ­omy has started to recover. How­ever, it doesn’t make a lot of dif­fer­ence what shape the recov­ery takes, i.e., if it is a “W”, “V”, “U” or “L”, so long as the ben­e­fits of the recov­ery are con­cen­trated in only a few hands. And, right now the recov­ery is highly con­cen­trated and in fact pro­vid­ing unin­tended advan­tages to big busi­ness over small companies.

   Many econ­o­mists believe that when the econ­omy grows it is always the case that “a ris­ing tide lifts all boats” and there­fore every­one ben­e­fits. But, as any skip­per will tell you, boats that are tied to a fixed dock sink when the tide rises and that is what is hap­pen­ing to small and medium sized busi­nesses and their work­ers; they are teth­ered to lenders that aren’t ris­ing with the eco­nomic tide.

   The U.S. is at a cross roads that it hasn’t faced in decades. Unless the Admin­is­tra­tion works quickly to level the play­ing field so that small busi­nesses can get the same access to cap­i­tal as big busi­nesses there are going to be unin­tended con­se­quences to U.S. soci­ety for gen­er­a­tions to come. The dis­tri­b­u­tion of income, the even­ness of eco­nomic growth and the unin­tended con­se­quences of the bailouts are a lot more impor­tant sto­ries than report­ing on a bunch of econ­o­mists mus­ing about the shape of the recovery.

   PS. A num­ber of read­ers have noticed that on Sep­tem­ber 3^rd I wrote an arti­cle that pointed out econ­o­mists were churn­ing out an alpha­bet soup of pre­dic­tions and that the recov­ery will be very uneven As it turns out today I hit pay dirt twice. The New York Times reported on the alpha­bet soup of eco­nomic pre­dic­tions (only two months after I did and said that the alpha­bet let­ter analo­gies weren’t very impor­tant) and Sec­re­tary Gei­th­ner said that the eco­nomic recov­ery would be choppy and uneven. Some­times it is bet­ter to be lucky than good.

3. Hooverism Makes A Comeback In The New York Times

   October 26, 2009 12:18 pm Leave a Comment

   Last Wednes­day the New York Times Economix Blog pub­lished an arti­cle writ­ten by Casey B. Mul­li­gan sug­gest­ing Pres­i­dent Obama should con­sider let­ting “a bank panic run its course”. While Dr. Mul­li­gan is an Eco­nom­ics Pro­fes­sor at the Uni­ver­sity of Chicago and the New York Times is one of the most respected pub­li­ca­tions in the world, this arti­cle shouldn’t have seen the light of day and is a dis­ap­point­ing mis­take by the New York Times. The last Pres­i­dent who believed finan­cial pan­ics and bank runs were eco­nomic tools to purge the econ­omy of excess was Her­bert Hoover. Com­pe­tent jour­nal­ists and econ­o­mists should intu­itively know that the United States doesn’t need to try Hoover’s poli­cies and see if they work bet­ter the sec­ond time around.

   The idea that finan­cial pan­ics and  bank runs could be good for the econ­omy is ridicu­lous and a lie.
   

   Bank pan­ics are eco­nomic melt­downs that kill the fab­ric of soci­ety by snuff­ing out eco­nomic activ­ity and caus­ing mass human suf­fer­ing. Let­ting a bank panic run its course makes about as much sense as let­ting a nuclear melt­down go crit­i­cal. While nuclear win­ter may not be as bad or last as long as every­one thinks, no sane U.S. Pres­i­dent will inten­tion­ally roll the dice on uncon­trolled ther­monu­clear reac­tions and then see who sur­vives. Nor will any U.S. Pres­i­dent let a bank panic run its course because of the real chance that there won’t be any­thing left of the econ­omy or soci­ety to rebuild.

   Just like nuclear con­t­a­m­i­na­tion lasts a long time, uncon­trolled bank pan­ics kill eco­nomic activ­ity for decades. With­out banks money doesn’t work as a means for com­merce and exchange and barter takes over as the pri­mary mech­a­nism for com­merce. Just try to imag­ine going to the gro­cery store and bar­ter­ing for food, bar­ter­ing for shel­ter or bar­ter­ing for police pro­tec­tion. What would you offer to the local super mar­ket in exchange for food? In today’s econ­omy based upon spe­cial­iza­tion and ser­vice how many of us makes any­thing that we can barter to sur­vive. If a bank panic goes crit­i­cal we may have to learn to live in a world with­out ATMs, credit cards and checks. And, try to imag­ine a world with­out enough money cur­rency to go around. The destruc­tion of mod­ern U.S. soci­ety and the Amer­i­can way of life is one of the pos­si­ble side effects of an uncon­trolled melt down of the finan­cial system.

   I thought that the United States turned its back on the “liq­ui­da­tion­ist” school of eco­nomic thought when it rejected Andrew Mellon’s jus­ti­fi­ca­tion for Hoover’s eco­nomic poli­cies (Mel­lon was the Sec­re­tary of the Trea­sury under Her­bert Hoover who thought that finan­cial pan­ics and bank runs are good for the econ­omy). Since the Great Depres­sion it has been an arti­cle of faith between the gov­ern­ment and its cit­i­zens that Hooverism is dead and won’t be com­ing back any­time soon. Rewrit­ing this social com­pact ben­e­fits no body and smacks of either polit­i­cal oppor­tunism or media grand­stand­ing. Either way, the New York Times is sup­posed to know bet­ter and be more dis­crim­i­nat­ing in what it publishes.

   And, just like the New York Times should have known bet­ter, there is no place for a seri­ous econ­o­mist to advo­cate or accept mass suf­fer­ing as “good” for the econ­omy. Mulligan’s pedi­gree and employer doesn’t make his words any less ridicu­lous than some­one who is less edu­cated and doesn’t have any knowl­edge of eco­nomic his­tory.  It’s just that after years of being edu­cated and study­ing Mul­li­gan was sup­posed to have learned some­thing rather than learned what seems to be nothing. 

   Brad DeLong summed up his thoughts on Economix and this arti­cle when he wrote….

   Can We Please Shut Down the New York Times’s Economix Now?

   This is the final straw:

   The Panic of ’08: Reces­sion Cause or Effect?: Recent research ques­tions the claim that the finan­cial pan­ics them­selves con­tributed to their con­tem­po­ra­ne­ous and severe employ­ment downturns…

   That most peo­ple writ­ing for Economix are good is no excuse. You read it and you trust it, and you know less after­wards than you knew when you started.

   Why oh why can’t we have a bet­ter press corps?

4. How Did Economists Blow It? Part 3 – The Assumed Markets Theory

   September 15, 2009 5:51 am 1 Comment

   Two week­ends ago Paul Krug­man explained in a New York Times Mag­a­zine arti­cle that many econ­o­mists can’t fore­cast the econ­omy because they have a cultish belief in the nearly always wrong effi­cient mar­ket the­ory.  Mr. Krugman’s solu­tion, an aca­d­e­mic exor­cism where econ­o­mists renounce their loy­alty to the effi­cient mar­ket the­ory and swear alle­giance to neo-Keynesianism, has cre­ated quite a stir in the pro­fes­sion and prompted a num­ber of per­sonal and pro­fes­sional attacks on Mr. Krug­man.  Unfor­tu­nately, both Mr. Krug­man and the effi­cient mar­kets believ­ers are both wrong.  The the­ory is cor­rect but the con­di­tions nec­es­sary for the effi­cient mar­kets the­ory to work don’t exist. 

   Mr. Krug­man sug­gests that econ­o­mists missed the Great Reces­sion because they relied upon math­e­mat­i­cal mod­els that assume the econ­omy is a series of free and effi­cient mar­kets and there­fore a self cor­rect­ing pre­dictable eco­nomic organ­ism.  Mr. Krug­man pro­poses “econ­o­mists need to aban­don the neat but wrong solu­tion of assum­ing that every­one is ratio­nal and mar­kets work per­fectly”.  Instead, Mr. Krugman’s solu­tion is to sub­sti­tute Key­ne­sian mod­els for effi­cient mar­kets mod­els when he states that “Key­ne­sian eco­nom­ics remains the best frame­work we have for mak­ing sense of reces­sions and depres­sions”. 

   Unfor­tu­nately, the usu­ally smart and intu­itive Mr. Krug­man for­got that for the effi­cient mar­ket the­ory to work its pri­mary assump­tion must be true; that the mar­kets are free, fair and open, and that is sim­ply not the case. 

   Mr. Krug­man isn’t alone in assum­ing and fore­cast­ing based upon mar­kets that don’t exist, and then not under­stand­ing why fore­cast­ing don’t work.  Pretty much the entire eco­nom­ics pro­fes­sion plays a game of pre­tend when they write about mar­kets with­out check­ing the most basic real world under­ly­ing oper­a­tional and func­tional assump­tions. 

   Econ­o­mists assume that the U.S. mar­kets are free, fair and open and there­fore a per­fect Petrie dish for test­ing free mar­ket the­o­ries.  But, instead of try­ing to fig­ure out if free, fair and open mar­kets exist, when their math­e­mat­i­cal mod­els don’t work many promi­nent econ­o­mists (includ­ing Mr. Krug­man) take the posi­tion that investors aren’t ratio­nal, soci­ety has a herd men­tal­ity and gen­er­ally we are all “idiots”.  These econ­o­mists pon­tif­i­cate with­out self doubt and pub­lish with­out reflec­tion. 

   I dis­agree with the “our mod­els are wrong because peo­ple are idiots” crowd and think that, as a group, soci­ety is extra­or­di­nar­ily smart, log­i­cal and ratio­nal.  When we act in a herd it is because we are all get­ting stuck by the same cat­tle prod and being bit at by the same sheep­dog.  Instead of say­ing peo­ple are dumb and fric­tion exists in mar­kets, econ­o­mists should spend their time try­ing to under­stand the com­mon soci­o­log­i­cal, gov­ern­men­tal, psy­cho­log­i­cal and eco­nomic stim­uli that moti­vate each and every one of us. 

   I can’t think of a sin­gle major “mar­ket” that always sat­is­fies the under­ly­ing assump­tions of the effi­cient mar­ket the­ory.  Even the New York Stock Exchange, per­haps the most free and open mar­ket in the world, some­times is a free, fair and open mar­ket and some­times isn’t.  Free, fair and open are mov­ing tar­gets that require con­stant vig­i­lance to make sure soci­etal drift doesn’t con­vert mar­kets into rigged exchanges.  When the large bro­ker­age houses are able to rip bil­lions of dol­lars of profit out of New York Stock Exchange trades by front run­ning their clients with really fast com­put­ers, the New York Stock Exchange fails to be free, fair and open.  When no one is really sure what the short sale rules are or how they work, and nei­ther does the SEC, the mar­ket stops being fair.  And, when some peo­ple have inside infor­ma­tion that they sell to their best clients, the New York Stock Exchange stops being the show­case for the effi­cient mar­ket the­ory and turns into a Mid­dle East­ern rug bazaar. 

   But the prob­lems don’t stop with the NYSE.  Free mar­ket advo­cates argue that the credit deriv­a­tives mar­kets pro­vide asset price dis­cov­ery and increase effi­ciency but never test the under­ly­ing assump­tion of whether or not these mar­kets are real.  For exam­ple, it’s unclear if prices reported on credit default swaps (which are unreg­u­lated) are actu­ally accu­rate or made up and most insid­ers say that it is well known reported prices are often fake.  Even more uncer­tain is whether or not prices in the credit default swap mar­ket, if reported accu­rately, are being manip­u­lated by ad hoc car­tels that are exe­cut­ing coor­di­nated and coop­er­at­ing trad­ing strate­gies. 

   Even LIBOR, the float­ing inter­est rate index that under­pins most cor­po­rate and per­sonal debt in the world, isn’t really a mar­ket rate.  It is an esti­mate of a mar­ket rate that is cal­cu­lated by an indus­try trade asso­ci­a­tion in secret, with­out over­sight and based upon inputs from a select group of indus­try sources.  The sup­pos­edly free and fair inter­bank mar­kets that last year were the focus of intense media and pub­lic pol­icy scrutiny don’t trade based upon actual pub­lished infor­ma­tion and are there­fore nei­ther fair nor open.  Once again, the require­ments for the effi­cient mar­ket the­ory to be valu­able in pre­dict­ing behav­ior haven’t been met. 

   Free mar­ket the­o­ries require equal bar­gain­ing power among mar­ket par­tic­i­pants.  Who believes that con­sumers have equal bar­gain­ing power against banks, insur­ance com­pa­nies or util­i­ties?  Or, that con­sumers have real choice when they exe­cute the sim­plest finan­cial trans­ac­tions such as access­ing revolv­ing con­sumer credit?  The choice of “Mas­ter­Card” or “Visa” isn’t real choice or com­pe­ti­tion.  And, when was the last time any con­sumer was granted credit after opt­ing out of the credit bureau sys­tem?  Most con­sumer credit con­tracts are con­tracts of adhe­sion, i.e., con­sumers don’t have a real choice or bar­gain­ing power, and, as a result, the under­ly­ing assump­tions for effi­cient mar­kets don’t exist.

   Econ­o­mists who fell in love with free mar­ket the­o­ries can’t stand the fact that rules are needed to make sure that mar­kets are free, fair and open.  After all, rules are typ­i­cally enforced by gov­ern­ments and are called reg­u­la­tions.  Gov­ern­ment reg­u­la­tion is the sworn blood enemy of true free mar­ket believ­ers.  Free mar­ket believ­ers for­got that reg­u­la­tion is sup­posed to pro­mote com­pe­ti­tion and instead got car­ried away and destroyed mar­ket reg­u­la­tion that that made sure that the play­ing field was level and fair. 

   Vir­tu­ally all econ­o­mists would rather shift the blame for miss­ing the Great Reces­sion onto some­one else.  Free mar­ket econ­o­mists try to explain their mis­takes by say­ing that that mar­kets are irra­tional and it isn’t their fault for not being able to under­stand and pre­dict irra­tional and ran­dom behav­ior.  Some econ­o­mists, like Mr. Krug­man, shift the blame to other econ­o­mists for not real­iz­ing that while mar­ket the­o­ries have a place in eco­nom­ics, they are infe­rior to Mr. Krugman’s favorite Key­ne­sian framework.

   But mostly econ­o­mists got it wrong because they didn’t watch old episodes of All In The Fam­ily.  If they sim­ply watched late night TV econ­o­mists wouldn’t have assumed any­thing about mar­kets because they would have known what Archie Bunker explained to Amer­ica more than 30 years ago:

   “When you assume you make and ass of you and me”.

    

    

    

5. Low Oil Prices Kill Energy Investments

   December 17, 2008 8:00 am Leave a Comment

   Last week I pub­lished a blog arti­cle that dis­cussed energy pol­icy and sug­gested that an effec­tive energy pol­icy requires fed­er­ally estab­lished min­i­mum oil prices. Low and volatile oil prices destroy pri­vate invest­ment in energy projects because returns become too uncer­tain to attract financ­ing. As oil trades between $40 and $50 per bar­rel invest­ment capac­ity for energy projects is dis­ap­pear­ing. On Mon­day, the New York Times pub­lished a great arti­cle writ­ten by Jad Mouawad that artic­u­lates exam­ples of sup­ply destruc­tion occur­ring from low and volatile oil prices.

   If the U.S. wants to break its addic­tion to imported oil, set­ting and main­tain­ing floor prices for oil, gas and coal must be a cen­ter­piece of U.S. energy pol­icy. With­out min­i­mum prices, “in the real world” investors won’t com­mit enough cap­i­tal to domes­tic energy projects so that the U.S. can become energy inde­pen­dent. Domes­tic free mar­ket cap­i­tal can’t com­pete with for­eign gov­ern­ment spon­sored cap­i­tal and energy pol­icy needs to rec­og­nize this incon­ve­nient truth.

   Also, with­out min­i­mum energy prices “green energy” will remain a mirage on the hori­zon, always there but always beyond our reach. Green energy is more expen­sive than gov­ern­ment spon­sored Mid­dle East­ern oil and, with­out price sup­ports, it won’t attract the nec­es­sary invest­ment dol­lars to com­pete with cheap for­eign oil. Green energy advo­cates fail to real­ize that gov­ern­ment man­dates aren’t the same thing as mar­ket solu­tions. Only min­i­mum prices estab­lished through a vari­able sur­charge will pro­vide the mar­ket solu­tions that are needed to get green energy alter­na­tives into the mainstream.

   Below are some excerpts from Jad Mouawad’s New York Times article.

   From the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been sus­pended or can­celed in recent weeks as com­pa­nies scram­ble to adjust to the col­lapse in energy markets…

   …But the project delays are likely to reduce future energy supplies…

   …The pre­cip­i­tous drop in oil prices since the sum­mer, com­ing on the heels of a dizzy­ing seven-year rise, was a reminder that the oil busi­ness, like those of most com­modi­ties, is cycli­cal. When demand drops and prices fall, com­pa­nies curb their invest­ments, lead­ing to lower sup­plies. When demand recov­ers, prices rise again and com­pa­nies start to invest in new pro­duc­tion, start­ing another cycle…

   …Invest­ment in alter­na­tive energy sources like bio­fu­els that had flour­ished in recent years could dry up if prices stay low for the next few years, ana­lysts said. Banks have become reluc­tant lenders, espe­cially to renew­able energy projects that may prove unprof­itable in an era of low oil and gas prices…

   …Accord­ing to research ana­lysts at the bro­ker­age firm Ray­mond James, domes­tic drilling could drop by 41 per­cent next year as com­pa­nies scale back…

   …“We expect oper­a­tors to sig­nif­i­cantly cut their activ­ity in the com­ing weeks due to the hol­i­day sea­son, and many of these rigs will not come back to work,” the report said.

6. How the Credit Crisis Might Help American Manufacturers — A Reprint Of The New York Times Economix Blog

   November 6, 2008 6:05 pm Leave a Comment

   How the Credit Cri­sis Might Help Amer­i­can Manufacturers

   By Mark Sun­shine

   

   Mark Sun­shine is pres­i­dent of the com­mer­cial lend­ing insti­tu­tion First Capital.

   It’s hard to believe that the bank­ing cri­sis can be good for any­one, but the credit crunch is start­ing to help some Amer­i­can com­pa­nies at the expense of their for­eign competitors.

   Most peo­ple assume that man­u­fac­tur­ers in places like China always have an advan­tage over their coun­ter­parts in the United States because of cheap labor, cheap real estate and less reg­u­la­tion. But there are other fac­tors that influ­ence man­u­fac­tur­ing com­pet­i­tive­ness, includ­ing the avail­abil­ity of inex­pen­sive short-term bank loans.

   Abun­dant and cheap bank loans are needed for Asian man­u­fac­tur­ers to finance many of the goods con­sumed in the United States. Prod­ucts made in Asia have a long “sup­ply chain,” which means that man­u­fac­tured goods spend a long time being ware­housed, going through ports and cus­toms and being shipped from plants in Asia to buy­ers in the United States. Before imported goods are paid for, and while they are mak­ing their way to United States cus­tomers, Asian man­u­fac­tur­ers need cash to pay their bills. Bank financ­ing pro­vides the cash needed to pay bills and is crit­i­cal for Asian man­u­fac­tur­ers to export to the United States. If bank financ­ing either isn’t avail­able or is very expen­sive, then many prod­ucts in the Asian sup­ply chain can’t be shipped to the United States.

   On the other hand, goods pro­duced in the United States and shipped directly to buy­ers have short sup­ply chains. Prod­ucts man­u­fac­tured and con­sumed in the United States don’t spend a lot of time in tran­sit and can be deliv­ered quickly. As a result, many United States sup­pli­ers require a lot less bank financ­ing than their Asian com­peti­tors.Also, long sup­ply chains tend to require high lev­els of ware­housed inven­tory near the cus­tomer. The inabil­ity to pro­duce special-order goods for imme­di­ate deliv­ery cre­ates the need to ware­house extra inven­tory rather than man­u­fac­ture on an as-needed basis. Again, long sup­ply chains require higher inven­tory lev­els than short sup­ply chains and there­fore greater amounts of inven­tory financing.

   Over the last 18 months Chi­nese man­u­fac­tur­ers have suf­fered through high infla­tion, an appre­ci­at­ing cur­rency and new labor and envi­ron­men­tal laws. The credit crunch is their newest and tough­est chal­lenge. The dimen­sions of the prob­lem for Chi­nese and other Asian man­u­fac­tur­ers have become appar­ent only in the last 45 days, and the poten­tial for Amer­i­can sup­pli­ers to retake mar­ket share is only begin­ning to be realized.

   Last week’s eco­nomic sta­tis­tics don’t yet reflect shift­ing com­pet­i­tive­ness in favor of United States man­u­fac­tur­ers. In fact, both the Insti­tute for Sup­ply Chain Man­age­ment Report on Busi­ness (for Octo­ber 2008) and the Cen­sus Bureau report of new orders for man­u­fac­tured goods (for Sep­tem­ber 2008) showed mate­r­ial and grow­ing soft­ness in the United States man­u­fac­tur­ing sec­tor. But the full impact of the credit cri­sis hit the global econ­omy only in mid-September. The lack of bank financ­ing is begin­ning to depress Asian pro­duc­tion slated for deliv­ery in the United States in Decem­ber and beyond.

   It’s true that Amer­i­can man­u­fac­tur­ers may find their prod­ucts harder to sell in export mar­kets because of the recent appre­ci­a­tion of the dol­lar, also stem­ming from the credit cri­sis and flight to the dol­lar and yen. But pock­ets of increased demand for domes­tic man­u­fac­tur­ing, which is replac­ing Asian pro­duc­tion, are begin­ning to build and will have the effect of mut­ing an oth­er­wise bleak man­u­fac­tur­ing outlook.

   As the Obama admin­is­tra­tion takes office, it needs to closely exam­ine whether or not bank­ing res­cue assis­tance is being used to sup­port domes­tic man­u­fac­tur­ing and jobs or to bail out long sup­ply chains of for­eign com­peti­tors. If bailout pack­age funds are used to finance long sup­ply chains for imported goods, the gov­ern­ment will be indi­rectly sub­si­diz­ing for­eign man­u­fac­tur­ers at the expense of domes­tic com­pa­nies. The bailout bill could turn one of the few “sil­ver lin­ings” of the credit cri­sis into a dark cloud if pol­icy mak­ers are not careful.

7. MONEY SUPPLY AND ECONOMIC DATA WEEKLY WATCH (Part 2 – GDP and US competitiveness)" rel="bookmark">MONEY SUPPLY AND ECONOMIC DATA WEEKLY WATCH (Part 2 – GDP and US competitiveness)

   August 3, 2008 9:10 pm 4 Comments

   Gross Domes­tic Product

   Two num­bers from this week’s GDP release for Q2 2008 caught my eye, (i) exports were up 9.2% and (ii) imports were down 6.6%.

   For sev­eral months I have been dis­cussing improv­ing US global com­pet­i­tive­ness and the sec­ond quar­ter GDP release sup­ports my analysis.

   US exports are surg­ing and US firms are com­pet­ing against importers because of large nom­i­nal price swings since the begin­ning of 2007. Below is a very gen­eral exam­ple of how US com­pa­nies are becom­ing a lit­tle more com­pet­i­tive rel­a­tive to Chi­nese exporters.

   • Adjust­ment in US dol­lar exchange rates. The dol­lar has lost value rel­a­tive to most cur­ren­cies and in par­tic­u­lar rel­a­tive to the Chi­nese RMB. Since Jan­u­ary 2007, the dol­lar has lost 15% of its value rel­a­tive to the RMB.
   • Infla­tion in China, South­east Asia and the rest of the world. US infla­tion is much lower than infla­tion in most of the rest of the world. China infla­tion has aver­aged approx­i­mately 7.5% per annum in 2007 and the first half of 2008. Since Jan­u­ary 2007, cumu­la­tive price infla­tion in China has been approx­i­mately 11.25%.
   • Increased cost of trans­porta­tion. Accord­ing to CIBC research, high energy prices are increas­ing the cost of imported goods. As an exam­ple, trans­porta­tion costs rose in 2007 and 2008 and had the eco­nomic effect of approx­i­mately a 9% “tar­iff” on many Chi­nese imported goods. Such arti­fi­cial “tar­iff” is up from approx­i­mately 3% ear­lier in the decade or an increase of 6%.

   Since early 2007, many goods that are imported from China have expe­ri­enced price pres­sure in nom­i­nal US dol­lar terms of as much as 32.25%. Of course, the nom­i­nal cost of many US goods has inflated since early 2007, but gen­er­ally not any­where near 32.25%.

   As prices for imported goods from China and the rest of the world increase, domes­tic com­pet­i­tive­ness improves. As expected, trade is tip­ping in the direc­tion of US man­u­fac­tur­ing and ser­vice providers. Such tip­ping was reflected in the sec­ond quar­ter GDP results.

   There are other “indi­ca­tors” of improv­ing US competitiveness.

   • US Steel had a record break­ing sec­ond quar­ter (prof­its almost tripled from the first quar­ter). Orders and pric­ing were strong for US Steel and they antic­i­pate great per­for­mance for the rest of 2008. For the first time in 30 years, US Steel is able to deliver its prod­uct at com­pet­i­tive prices rel­a­tive to imported steel and as a result is prof­itably grow­ing mar­ket share.
   • On August 3^rd, Bloomberg reported that “[m]anufacturing in China con­tracted for the first time since a sur­vey began in 2005 as export demand fal­tered and fac­to­ries closed to clear the air before the Olympic Games. The Pur­chas­ing Man­agers’ Index fell to a sea­son­ally adjusted 48.4 in July from 52 in June, the China Fed­er­a­tion of Logis­tics and Pur­chas­ing said today in an e-mailed state­ment. The expan­sion of the world’s fourth-biggest econ­omy slowed for the fourth straight quar­ter in the three months through June on weaker U.S. demand. ”
   • The New York Times ran an arti­cle in today’s paper titled Ship­ping Costs Start to Crimp Glob­al­iza­tion. In the arti­cle, the New York Times reported on the “neigh­bor­hood effect” of high ship­ping costs. Such effect favors local sup­pli­ers for a wide range of prod­ucts. As a result, The New York Times reported that cer­tain domes­tic man­u­fac­tur­ers can com­pete against Asian imports.

   At a time when I have trou­ble find­ing good things to write about, the surge in US com­pet­i­tive­ness is a wel­come growth oppor­tu­nity and a rea­son for optimism.

8. PRIVATE STUDENT LOANS – THE LIQUIDITY CRISIS SPREADS" rel="bookmark">PRIVATE STUDENT LOANS – THE LIQUIDITY CRISIS SPREADS

   July 29, 2008 6:00 pm 2 Comments

   Today the New York Times pub­lished an arti­cle titled Agency in Mass­a­chu­setts Is Stop­ping Col­lege Loans. Accord­ing to the arti­cle approx­i­mately 40,000 stu­dents that either live or attend school in Mass­a­chu­setts are just find­ing out that the Mass­a­chu­setts Edu­ca­tion Financ­ing Author­ity (“MEFA”) isn’t going to be pro­vid­ing financ­ing for tuition bills that were due in early August.

   Accord­ing to the New York Times “In April, the financ­ing author­ity announced it would be unable to offer fed­eral edu­ca­tion loans because of the credit mar­kets. In late June it said it would be able to offer pri­vate fixed-rate loans, but it now says that is no longer fea­si­ble.” MEFA blamed their inabil­ity to pro­vide pri­vate stu­dent loans on the cap­i­tal mar­kets.  Last year MEFA pro­vided more than $500 mil­lion in edu­ca­tional loans.
   

   On July 18^th I pub­lished a blog arti­cle titled PRIVATE STUDENT LOANS — THE FALL SURPRISE FOR MORE THAN 1 MILLION STUDENTS.
   
   In that arti­cle, I dis­cussed the like­li­hood that pri­vate stu­dent loans were going to become unavail­able and that it was going to be a sur­prise to stu­dents, their fam­i­lies and col­leges and uni­ver­si­ties.
   

   The emerg­ing stu­dent loan issues are another man­i­fes­ta­tion of the credit cri­sis, delever­ag­ing and falling real money supply. 

   Unfor­tu­nately, I think that this is the end of the begin­ning phase of this cri­sis rather than the begin­ning of the end.

9. CHRYSLER OFFICIAL GRADUATES FROM THE “BAGHDAD BOB SCHOOL OF CORPORATE COMMUNICATIONS”" rel="bookmark">CHRYSLER OFFICIAL GRADUATES FROM THE “BAGHDAD BOB SCHOOL OF CORPORATE COMMUNICATIONS”

   July 27, 2008 6:00 am Leave a Comment

   Remem­ber Bagh­dad Bob, the for­mer Infor­ma­tion Min­is­ter of Iraq? Well, Jim Press, Co-President of Chrysler, appears to have grad­u­ated from the Bagh­dad Bob School of Cor­po­rate Com­mu­ni­ca­tions. On Fri­day, Press said it was good that Chrysler sud­denly sus­pended vehi­cle lease financ­ing and declared that deal­ers and cus­tomers should be happy.

   Press blamed the cur­rent envi­ron­ment for the leas­ing sus­pen­sion but didn’t say what in this envi­ron­ment was dif­fer­ent from past envi­ron­ments. I think things are dif­fer­ent because Chrysler is attempt­ing to roll over $30 bil­lion of short term debt that is col­lat­er­al­ized by loans and leases and Chrysler’s cred­i­tors are reluc­tant to con­tinue financ­ing Chrysler’s leas­ing busi­ness. But rather than admit to what I think is the truth about Chrysler’s access to financ­ing, Press decided to spout cor­po­rate “pro­pa­ganda” that rivals any­thing uttered by Bagh­dad Bob.

   The New York Times reported on Chrysler’s deci­sion in its arti­cle titled Plum­met­ing Resale Val­ues Lead Chrysler to End Leases and included three quotes from Press that are dis­cussed below.

   • Lease financ­ing isn’t attrac­tive because “low inter­est rates already have made financ­ing more appeal­ing than leas­ing”. Press sug­gests the illog­i­cal, i.e., that low inter­est rates don’t equally apply to lease and loan financ­ing and there­fore loan financ­ing is more appeal­ing. In fact, low inter­est rates tend to favor leas­ing over loans because leases have a higher implied unpaid prin­ci­pal bal­ance than loans and a higher pro­por­tion of monthly pay­ment are for inter­est. As such, low inter­est rates reduce lease pay­ments more than loan pay­ments. I think Chrysler’s prob­lem is that it can’t bor­row money cheaply enough to pro­vide com­pet­i­tive leases because Chrysler vehi­cles have high resid­ual risk that cred­i­tors don’t want to finance.  As a result, I believe Chrysler can bor­row for loan financ­ing more cheaply than lease financ­ing. What Press should have said is that “for Chrysler vehi­cle financ­ing is more appeal­ing than leas­ing”.

      

   • “We really reached a point today, in this envi­ron­ment, where the eco­nomic advan­tages of leas­ing have really dis­ap­peared”. Ummm…is Press sug­gest­ing that the US and state tax laws have been secretly amended to elim­i­nate the large tax advan­tages of leas­ing? There are two prin­ci­pal tax ben­e­fits that leas­ing pro­vides. The first is depre­ci­a­tion tax ben­e­fits. Assum­ing a $30,000 vehi­cle is leased for 36 months and depre­ci­ates 50% dur­ing the lease term, the leas­ing com­pany deducts $15,000 for depre­ci­a­tion which at a 40% tax rate saves $6,000 in taxes. If the same vehi­cle is financed with a loan the tax sav­ings is lost (because indi­vid­u­als can­not deduct depre­ci­a­tion). What Press should have said is that “in this envi­ron­ment Chrysler doesn’t have tax­able income and there­fore can’t use the tax ben­e­fits from leas­ing”. He for­got the part about Chrysler not hav­ing tax­able income. Sec­ond, sales tax is only paid on vehi­cle depre­ci­a­tion dur­ing the lease ver­sus pay­ing sales tax on the entire cost of the vehi­cle in the case of a pur­chase. Assum­ing a $30,000 car price and 7% sales tax, if the vehi­cle is pur­chased the con­sumer will pay $2,100 ver­sus $1,050 if the vehi­cle is leased, or a $1,050 tax sav­ings. For a vehi­cle cost­ing $30,000 the total tax ben­e­fit from leas­ing is approx­i­mately $7,050. It is hard to under­stand what Press is talk­ing about when he says that the eco­nomic advan­tages of leas­ing have really disappeared.

      

   • “Chrysler would offer dis­counts so that many cus­tomers who financed a vehi­cle would end up with about the same monthly pay­ment that they would have had in a lease” Chrysler can’t offer dis­counts deep enough to make monthly pay­ments the same for leases and loans. What Chrysler seems to be doing is replac­ing 36 month leases with 72 month loans. The 72 month loans will include down pay­ments and upfront sales tax pay­ments that are greater than the 36 month leases. Since 36 month leases have an under­ly­ing 72 months depre­ci­a­tion assump­tion, the “prin­ci­pal pay­ment” on a 36 month lease is about the same as for a 72 month loan. And, the inter­est rate for a loan and a lease (other than pro­vided by Chrysler) should be sim­i­lar. Since the inter­est rate and the prin­ci­pal pay­ment is sim­i­lar for a 36 month lease and a 72 month loan, the com­bined monthly pay­ment should be about sim­i­lar and Chrysler can claim that it is offer­ing the “same” monthly pay­ment for lend­ing as leas­ing.  I think Chrysler is bet­ting that con­sumers won’t notice the larger upfront pay­ments, the longer financ­ing term and the fact that resale risk has been shifted from Chrysler to consumers.

      

   While I was writ­ing this blog the TV was on with car ads play­ing (I was watch­ing VS and the Tour de France cov­er­age). Chrysler, Honda, Kia and Toy­ota bought adver­tis­ing while I watched. Stran­gly, all of Chrysler’s ads were push­ing a lease pack­age, not a pur­chase pack­age (they were for the Sebring). Kia and Toyota’s ads were for leased and pur­chased vehi­cles and Honda was mostly with­out any financ­ing pack­age men­tioned. I guess Press for­got to tell the adver­tis­ing guys that the eco­nomic advan­tages of leas­ing have really disappeared.

   Like Bagh­dad Bob, Chrysler had to put the best spin on defeat. Let’s hope that Chrysler’s cred­i­bil­ity sur­vives this pro­pa­ganda campaign.