Category Archives: Economy

Detroit – How Did We Get Here


De’troilet is and has been a mess for decades now.  A prime example of what happens when a democrat party controlled by unions (sorry to repeat myself ) has control of a city.

An insightful story in what residents of De’troilet have to look forward to:

In a small mill town in New England, dozens of retired policemen and firefighters are feeling the pain of what they see as a broken promise, offering a glimpse into what could happen to thousands of public workers in Detroit facing massive reductions in pension payouts after the city’s declaration of bankruptcy.

Donald Cardin became a firefighter at age 20 in Central Falls, R.I., a town just north of Providence that filed for bankruptcy in 2011. He was making $60,000 a year as a fire chief before retiring at age 42 in 2007 to take care of his wife Lana, diagnosed with thymic carcinoma, a rare cancer with extremely low survival rates.

The couple relied on Cardin’s health insurance, which required no copay, to cover Lana’s $8,000-a-month treatment. Cardin worked a part-time contracting job to make up the difference between his $34,000-a-year pension and his former salary.

But that all changed in 2011 when Cardin, and his fellow firefighters and policemen, were called to a meeting at the local high school, where state-appointed receiver Robert Flanders warned them that the city would not have enough money to survive if pensions were not cut. Weeks later the city would file for bankruptcy.

Bruce Ogni, 53, president of the Central Falls Police Retirees Association, won’t forget that day, either.

“All of a sudden they dropped this on us. There was no real negotiation. Flanders came in and said the city is in big trouble, we need half your pension and your medical,” he said.

With a wife and twin boys to care for, Ogni lost $1,200 a month and had to pay additional fees incurred by his wife’s health insurance. Eight months ago, Ogni’s wife was diagnosed with breast cancer, adding more medical bills to the family’s worries.

Ex-fireman Laurie and his wife, Kathleen, live off disability from social security (which he receives from previously working part-time jobs in addition to his service as a fireman) and a $19,000-a-year pension — down from $39,000 before the cuts.

The Lauries makes just enough money not to qualify for public assistance, but the $2,700 the family brings in each month barely covers their $2,300 in monthly bills.

Each of these individual stories is heartbreaking, to be sure.  Life threatening cancer to disability to expecting twins.  All of which is enough to occupy a man, but then the additional pressures of having your world turned upside down.

But there are some striking observations:

  1. What reasonable world do we live in that allows a man to retire at 42 with $34,000 in pension AND full health benefits?
  2. Every single one of the subjects is a tragedy.  Cancer, disability and expecting wife with twins.
  3. A 53 year old President of the Retired Police Association?

Personally, I think that contracts between companies and their pensioners should be upheld – the folks no longer have a position from which to bargain.  If my company changes my compensation, I can leave or stay.  However, with that said, these unions have absolutely been acting in bad faith and without moral concern for the parties involved.

They elect their cronies to office in order to negotiate with themselves.  The deals they strike are so ridiculous as to fail to pass a red face test.  And then, when the parasite finally kills the host leaving nothing but a dead husk – they act so SO surprised and innocent.

As if.

Wherein Pino Becomes A Business Owner

Small Business

Posting has been light lately.  In part because I’ve been somewhat busy in life.  Work is ramping up some and the family has been doing some traveling.   However, the large reason blogging has taken a hit is that a good friend and I have started a new small business here in Carolina.

I’ve always wanted to strike out on my own but I’m pretty severely risk averse.  The idea of depending on my own resources for a living to support home and family is horribly frightening.  Which makes this opportunity nice.  We’re able to operate while maintaining our normal day jobs.

It’s hard, to be sure, to do both.  But the security is well worth the extra time.

Some things that I’ve learned:

  1. Working for someone else is a massive benefit.  As an employee there is minimal risk while the owner carries significant non-trivial risk.  Not only in terms of money, but in terms of time and of potential liability; personal and property.
  2. Customer service is not an inherent trait in most people.
  3. The perceived need of a minimum wage is an illusion created by the left.
  4. The unemployment rate doesn’t begin to address the whole picture of who is and who isn’t working.  People are working and making money; on the books or off.

I’m no where near being in danger of transition from the red to the black, but so far the experience has been positive, even if not enjoyable.

Unemployment Benefits to End In North Carolina


The most recent recession has seen massive amounts of folks joining the ranks of the unemployed. Compounding that problem is that it is hard to obtain a new job in this economy.  In an effort to alleviate, or help alleviate, some of the pain, benefits have been extended.

But it doesn’t come cheap:

The new law is a response to the more than $2 billion the state owes the federal government, money that was borrowed to cover state-funded unemployment benefits after unemployment soared beginning in 2008.

While the state does get help from the federal government, they have to pay that money back.  And if that money isn’t paid back in time, there are penalties.

So what is North Carolina doing?

About 70,000 people will stop receiving federal extended unemployment benefits June 30 – the result of a state law that goes into effect July 1. (See the state and Triangle jobless rates, and the rates for all 100 counties, in the interactive graphics at the bottom of this story.)

The law, one of the first passed by the legislature this year, reduces the maximum state benefits a laid-off worker can receive by roughly one-third. It also reduces the maximum weeks of benefits funded by the state.

Those changes triggered the end of the federal extended benefits because federal law requires states to maintain current benefit levels. Extended benefits, which kicked in after the unemployed had exhausted their 26 weeks of state-funded benefits, have provided as many as 47 additional weeks of benefits for those unable to find a job.

We’re reducing the unemployment benefits.

This, of course, is one of the reasons for Moral Monday protests here in Raleigh.  It’s an example of an extremist legislature dominated by republicans to wage a war on the poor and middle class of North Carolina.

Never mind the fact that this money is going to have to be paid back.  Never mind the fact that, at some point, the benefits are going to end.  Never mind the fact that data suggests that people begin to look in earnest for their next job 2 weeks before their benefits end.

It’s time.  It’s long past time to return to a state of things where benefits are a simple and short bridge to the next job.  No one envisioned nearly two full years of unemployment benefits when the program was instituted.

Housing Bubble – Government Creation Part III

Housing Bubble

Setting the stage.

My argument is that government policies created an environment that encouraged loans to individuals that had an elevated risk of defaulting on those loans.  In many cases the government sponsored enterprise directly encouraged the loans and in others, the actions of those GSEs encouraged others in the market to make riskier and riskier loans themselves.

First, how did Fannie and Freddie define loans:

To better understand how this accumulation of weak mortgages came about, a description of the loan classification system used by Fannie and Freddie (the GSEs) and followed by others is in order. Fannie and Freddie did not classify subprime and Alt-A loans based on objective risk characteristics but on the basis of how the lender or securities issuer classified a loan. Thus a loan was only subprime or Alt-A if a lender or issuer denominated it as such.

Fannie and Freddie didn’t perform any due diligence on their own.  When did Fannie and Freddie acknowledge this?

“We have classified mortgage loans as Alt-A if the lender that delivered the mortgage loans to us had classified the loans as Alt-A based on documentation or other features. We have classified mortgage loans as subprime if the mortgage loan was originated by a lender specializing in the subprime business or by subprime divisions of large lenders. We apply these classification criteria in order to determine our Alt-A and subprime loan exposures; however, we have other loans with some features that are similar to Alt-A and subprime loans that we have not classified as Alt-A or subprime because they do not meet our classification criteria.” P. 182 of Fannie’s Q.3:2008 10-Q

What does this mean?

…one of the key triggers of the Financial Crisis was a policy decision to promote the widespread use of high LTV (highly leveraged) lending in the early 1990s. The risk inherent in high LTV lending was well known.  When Fannie decided to proceed with a 97% LTV program in 1994, objections were made – pointing out the poor experience on 95% LTV lending just a dozen years before…

And that risk?


The risk in proceeding with a 95% LTV loan is about 4 times the risk compared to a conventional 20% down loan.  The table above demonstrates.

Consider an individual taking out a loan; credit score between 680 and 720.  Further, they are putting down between 20 and 30%.  Their risk is assigned a value of “1”.  The same individual taking out a loan but only putting down between 5 and 9%?  The risk moves to a rating of 4.1.  Four times the previous rate.

These were the types of loans that Fannie and Freddie, indeed, other government agencies, would be encouraging.

The beginning.

Florida: Drug Testing Welfare

Drug Test Welfare

Much ado has been made of Florida’s attempt to drug test welfare applicants.  Florida’s idea is that if an individual has enough discretionary income to afford drugs, that person has enough income to be disqualified from a need based program.

Lately, the left has been trying to make the case that conservatives should be against the initiative based on fiscal calculations:

From July through October in Florida — the four months when testing took place before Judge Scriven’s order — 2.6 percent of the state’s cash assistance applicants failed the drug test, or 108 of 4,086, according to the figures from the state obtained by the group. The most common reason was marijuana use. An additional 40 people canceled the tests without taking them.

Because the Florida law requires that applicants who pass the test be reimbursed for the cost, an average of $30, the cost to the state was $118,140. This is more than would have been paid out in benefits to the people who failed the test, Mr. Newton said.

So, I did my own math.  And what I found was interesting.

The Times article above uses the number of failures at 2.6%, however, other sources I’ve read use a number more like 2%.  Because that number helps the liberal cause, I’ll use 2%.  Because Florida has a 6.7% drug use rate, the 2% failure rate is indicative  of a self-selecting population.  That is, drug users are not applying for benefits knowing they will fail, and have to p ay for, a test.

Further, once an individual fails a test, he is ineligible for benefits for 12 months.  A savings not taken into account.  With all of that said, here is my data:

Drug Test Welfare data

Assuming a constant rate of applications and a conservative 2% failure rate the data shows that 25 people fail each month.  Because Florida hums along at a 6.7% drug use rate, I calculated that a certain number of people would simply not even try to test.  Again, to be conservative, I used a 6% rate and found that 50 people each month did not apply.  Finally, I begin to sum the failure and count the benefits that they WOULD have been given as savings.  I do this on a rolling 12 month period.  Additionally, I assume that this month’s drug users will not be using next month and only count 50 Missing Failure each month; I don’t sum them.

To be fair, the short term cost to the state is negative.  For the first 8 months of this system, the state loses money.  However, by September of the of the first year, or month 9, the state begins to realize savings and finally is in the black12 months after that.

The numbers would be even great if we used a normal 6.7% drug use on the welfare population and didn’t make the assumption that this months drug users will not continue to use next month.

As much as I like it when people use numbers and data to make their point, it’s important that such numbers reflect reality.

Sequestration: Impacts

Fiscal Cliff

The cuts are becoming more pronounced now.  The mandatory budget cuts are kicking in and the public is starting to feel the impact.  Perhaps the most visible example are the flight delays:


Air travelers headed into New York’s LaGuardia Airport were facing two hour delays on Tuesday morning.  By Tuesday afternoon La Guardia’s delays had improved by as much as an hour for some flights.

With fewer air traffic controllers showing up to work, the government has warned of problems at several large airports including those in the New York area, Los Angeles, Dallas-Ft. Worth and Las Vegas. The Department of Transportation warned that those airports are facing “staffing challenges” on Tuesday.

However, Sequestration not impacts the public, it impacts the folks being furloughed.   And the other day, Reuters had a story on just such events:

(Reuters) – The government’s effort at cutting spending across the board is hurting a population once considered among the most financially stable – dual income families where both partners are government employees.

Starting on Monday, employees at agencies such as the Federal Aviation Administration and the Office of Management and Budget will be required to take unpaid days off – a consequence of the U.S. government’s sequestration budget cuts. These forced furloughs come on top of the first round of cuts that began on March 1, and they will reduce some workers pay by as much as 12 percent a month.

Twelve percent is a sizable amount, to be sure.  And it’s ballpark correct.  I mean, if folks are being given 1 day off every other week, that’s 2 days a month, maybe a little more over time.  And with about 4 weeks per month, that comes to about 20 working days per month, add 1 for love and ya get 21.  2 out of 21 is about 10%, a little less.  So yeah, maybe 12% is high, but not by much.

However, the specific example cited by Reuters struck me as strange:

The cuts, which include decreased work hours for federal employees, hiring and pay freezes and layoffs, hit hard couples like Laurie and Jack Swensen, FAA employees in Kansas City, Missouri. When they both start furloughs next week, the couple will earn $1,900 less every month. The cuts come just as they were making moves to buy a house, said Laurie Swensen.

So, if the Swensens are among the hardest hit, taking 12% of their salary, that means they normally bring home $15,833.  A MONTH!  That’s an annual take home of $190,000.  I’m not sure that using a couple in the top 5% of American take home pay is the subject for such sorrow.

But it continues:

With six family members, including their eldest son and his pregnant wife, living in a two-bedroom rental home, the Swensens were eager to move. But the furloughs and subsequent pay freezes have forced the family to reconsider.

We have 4, FOUR, working age adults living in a single 2-bedroom home.  We know that the two parents bring home near 200k a year and who knows how much the kids make.  And we’re somehow supposed to feel a tug?

At least I’m not the only one who noticed, the article is getting hammered in the comments.

Wherein Slate Agrees Minimum Wage Is Silly

minimum wageMinimum wage and minimum wage laws.  The creation of a system that forces employers to engage in charity by compensating someone more than their production would warrant.

Without getting into the concept that implementation of minimum wage laws, with the noble intention of helping out marginal employees, which hurt the very folks they are trying to help, let us suffice it to say that even Slate understands the economics of the whole thing:

I’m relatively bullish on the American economy, but I do worry that the prolonged downturn has created some odd mental blocks among American CEOs. Today, for example, the Wall Street Journal has a long story about how even though McDonald’s did fairly well at the depths of the recession they’re now having problems with the quality of the customer service they provide. I’m no management genius, but even I know that how much you pay people is relevant to how demanding you can be about the quality of the work they do.

And the converse is also true- how much you can earn is relevant to how demanding you are about the quality of your work.

And it continues:

Part of what you’re seeing here is that the prolonged weak labor market has in some ways been a sweet ride for managers. As things bounce back, it gets tougher. You might need to add staff. And to add high-quality staff you might need to offer better wages and working conditions.


This is why attorneys are paid more than gas station attendants.

Income Inequality Crisis in 16 Charts – Response Part I

16 Charts.2

There has been a constant dull roar regarding the meme of income inequality.  I often see it in blogs and news articles in left leaning publications.  Lately though, I’ve seen it hit my social media pages.  Last night I found the whole thing summed up in one article:

Now we are engaged in a great tug-of-war over a few points in the top tax rate in Washington. But even if the White House pulls hardest, it won’t amount to much of a victory for the long-suffering middle class. The sources of their income stagnation are too deep, too varied, and too long-term for Clinton-era tax rates to cure them.

“There is a huge amount of focus on progressive taxes in our policy world but progressive taxes are not much of a solution to this,” said Lawrence Mishel, president of the left-leaning Economic Policy Institute. “We need to get unemployment down rapidly. We need to greatly change our labor standards. We need to raise the minimum wage.”

He’s right: The middle class crisis — and its resulting income inequality — is the most important economic story of our time. There are a million ways to tell it, and here’s another: an annotated slide show, culled from the amazing 2012 edition of the State of Working America from EPI.

Thompson goes into an argument for the next 16-17 slides and discusses the usual suspects; wage gap, wealth distribution, distribution of stock market wealth and minimum wage.  There are some other pieces of data there to, but all the big ones were represented.

As I scrolled through, I just by chance grabbed the 2nd chart to investigate.  Thompson says:

Adding to the mystery is the remarkable de-coupling of productivity from real hourly compensation for all workers, including college graduates. The break seems to have occurred in the 1970s and accelerated very recently. Productivity grew steadily in the 2000s. Compensation didn’t.

I checked into what might have happened that would cause this de-coupling.  This is what I found:

The level of productivity doubled in the U.S. nonfarm business sector between 1970 and 2006. Wages, or more accurately total compensation per hour, increased at approximately the same annual rate during that period if nominal compensation is adjusted for inflation in the same way as the nominal output measure that is used to calculate productivity.

More specifically, the doubling of productivity since 1970 represented a 1.9 percent annual rate of increase. Real compensation per hour rose at 1.7 percent per year when nominal compensation is deflated using the same nonfarm business sector output price index.

In the more recent period between 2000 and 2007, productivity rose much more rapidly (2.9 percent a year) and compensation per hour rose nearly as fast (2.5 percent a year).

The relation between productivity and wages has been a source of substantial controversy, not only because of its inherent importance but also because of the conceptual measurement issues that arise in making the comparison.

Two principal measurement mistakes have led some analysts to conclude that the rise in labor income has not kept up with the growth in productivity. The first of these is a focus on wages rather than total compensation. Because of the rise in fringe benefits and other noncash payments, wages have not risen as rapidly as total compensation. It is important therefore to compare the productivity rise with the increase of total compensation rather than with the increase of the narrower measure of just wages and salaries.

The second measurement problem is the way in which nominal output and nominal compensation are converted to real values before making the comparison.   Although any consistent deflation of the two series of nominal values will show similar movements of productivity and compensation, it is misleading in this context to use two different deflators, one for measuring productivity and the other for measuring real compensation.

In short, compensation has, in fact, kept pace with productivity not lagged.  In fact:

Total employee compensation as a share of national income was 66 percent of national income in 1970 and 64 percent in 2006. This measure of the labor compensation share has been remarkably stable since the 1970s. It rose from an average of 62 percent in the decade of the 1960s to 66 percent in the decades of the 1970s and 1980s and then declined to 65 percent in the decade of the 1990s where it has again been from 2000 until the most recent quarter.

Again, when viewed as compensation and not the more simplistic wage, we are, to quote, remarkably stable” since the 1970’s.

But what happened in 1970’s that might change the way compensation was distributed?  Legislation:

During the 1970s, there were some important legislative and legal changes affecting compensation and workplace issues. Among the most important were the Employee Retirement Income Security Act of 1974 (ERISA) and the Revenue Act of 1978. ERISA regulated private pensions and imposed financial and accounting controls. ERISA also established the Pension Benefit Guaranty Corporation to ensure that workers would be paid their vested pension benefits, if their pension plans were terminated. The Revenue Act encouraged flexible benefit plans, and created the 401(k) defined contribution retirement savings plan. It also allowed employees to make elective pre-tax contributions to a variety of savings vehicles, such as saving, profit sharing, and employee stock ownership plans. In retrospect, these laws were extremely important, as they contributed to the change in the share of compensation accounted for by pensions and other retirement benefits.

Other important legislation that affected active and retired workers without necessarily affecting compensation directly included the Occupational Safety and Health Act of 1970, which authorized the Secretary of Labor to establish occupational safety and health standards in the workplace; the Comprehensive Employment Training Act of 1973, which consolidated and decentralized Federal employment programs and provided funds to State and local governments who sponsored employment services; and the 1974 amendment to the Social Security Act, which provides automatic cost-of-living adjustments, based on the Bureau’s Consumer Price Index.

The below chart shows what has happened over the twenty year period from 1966 to 1986:

16 Charts.2a

Just in those 20 years, cash money took a nearly 10% hit in the ratio of compensation.  Keeping that compensation constant, there should be little surprise that wages have fallen in proportion to productivity.

It turns out that Thompson’s analysis of the data depicted in that chart is incorrect, or misleading.  Employees are being compensated nearly the same since at least 1970.


An Impact Of Sequestration

Budget Cut

I’m more than a little annoyed that the whole sequestration process is refereed to as a cut in funding.  Washington is referring to the budget action in this manner and worse, the media is reporting as a cut in funding as well.  The truth is that spending will not be cut but will. in fact, increase.  The difference is that the level of increase is less than it might otherwise have been.

Only slightly less annoying than this detail is the rhetoric coming out of the White House regarding the impacts of these cuts.  Everything from having to mothball an aircraft carrier to the FBI losing agents to DHS releasing illegal immigrants to teachers and first responders getting fired.  Heck, even traveling is going to get harder with TSA agents facing shortages.

I suspect precious little of this will actually occur.  Take for example, teachers:

The good part is at 1:30.

The sequestration is SO bad that teachers are already receiving pink slips; they are already being fired.

But, is it true:

Near the very end, the Secretary gets into a little detail.  The teachers in jeopardy of losing their jobs are Title I teachers; folks who are funded through the federal government. But right after that, at about 1:50, he also mentions a teeny tiny piece of information:

The cuts may not be related to sequestration.

Further information:

When he was pressed in a White House briefing Wednesday to come up with an example, Duncan named a single county in West Virginia and acknowledged, “whether it’s all sequester-related, I don’t know.”

And, as it turns out, it isn’t.

Officials in Kanawha County, West Virginia say that the “transfer notices” sent to at least 104 educators had more to do with a separate matter that involves a change in the way West Virginia allocates federal dollars designated for poor children.

The transfer notices are required by state law and give teachers a warning that they may be moved to a different position next school year. They don’t necessarily mean a teacher has been laid off, said Pam Padon, director of federal programs and Title 1 for the Kanawha County public schools. “It’s not like we’re cutting people’s jobs at this point.”

She said those 104 notices will ultimately result in the elimination of about five to six teaching jobs, which were likely to be cut regardless of the sequester.

“The major impact is not so much sequestration,” she said. “Those five or six jobs would already be gone regardless of sequestration.”

So we have increases in spending referred to as cuts in spending.  Then you have cuts in services turning out not to be true.  I’m beginning to believe the reports that more frightening to the democrats than the actual sequestration is that the impact won’t even be noticed.  America is going to wake up on Friday and realize that we can cut $85 billion and not even know we did it.


Barack Obama Commenting On Barack Obama’s Plan

Barack Obama commenting on the upcoming sequestration:

Let’s look at that again.  Here’s what he is saying will get cut:

  • Military Readiness
  • Job Creating Investments
  • Emergency responder’s ability to help communities to respond to and recover from disasters.
  • Border patrol agents
  • FBI Agents
  • Federal prosecutors
  • Air Traffic Controllers
  • Airport Security
  • Thousands of teachers and educators
  • Tens of thousands of parents who need childcare
  • Hundreds of thousands of Americans who need primary care and preventive care
  • Navy’s ability to deploy aircraft carriers to critical locations

This is an extraordinary laundry list.  Some thoughts:

  • Sequestration is NOT a cut in spending.  It is a reduction in the amount we are going to INCREASE spending.
  • Over a decade.
  • If this is the apocalyptic vision of America when we’re looking at $85 billion, what is that saying about our general overall financial health?
  • This might be minor, and he may means something else, but I don’t think the federal government pays teachers.