Category Archives: Economy

Obama and the Fiscal Cliff

Posted on December 30, 2012 | 5 comments

Obama is confused.

Today he’s remarking that the republicans aren’t negotiating seriously:

In an interview broadcast Sunday, Obama told NBC’s “Meet the Press” that Republicans are responsible for the stalemate that brought lawmakers back to Capitol Hill on a Sunday afternoon.

“They say that the biggest priority is making sure that we deal with the deficit in a serious way. But the way they’re behaving is that their only priority is making sure that tax breaks for the wealthiest Americans are protected,” Obama said. “That seems to be their only overriding, unifying theme,”

To be clear, there is only one party in these negotiations that have, as their entire offer, a single overriding theme.  And that is the President himself.  The President’s entire offer, the whole of it, consists of raising taxes on the wealthy.

And that’s it.

No spending cuts.  No entitlement reforms.  No talk about any effort to reduce the deficit or attack the debt.

Just tax the rich.  And he knows that this isn’t going to address any of the problems we face, on the contrary – it will only make it worse.

But if that was the only aspect of Obama’s confusion, he could be forgiven.  We know that he’s nothing more than a class warrior who hasn’t an inkling of a clue on anything economic.  But he should know how bills make their way through Capital Hill:

Obama said the Senate should vote on legislation to make sure middle-class taxes are not raised and that 2 million people don’t lose unemployment benefits .

The Senate doesn’t initiate financial bills; the House does.  And they have.  Two of them.  Both waiting for Reid and the democrats to take them up, amend them and vote on them.  The pressure is squarely on the Senate right now.  Not the republicans.

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Posted in Debt - Deficit, Economy, Government, Politics: National

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Thelma And Louise

Posted on December 27, 2012 | 4 comments

I’m guessing we go over.

John Boehner has said that he’ll give House members 48 hours to get back to Washington.  That means if he were to call them right now they wouldn’t get to their offices until Saturday.  Which leaves 2 days to pass legislation.

And that’s if he agrees to pass the Senate version of the bill.

As it stands right now, I think that the problem is this:

  • The President will not budge on his demand that the tax rate on wealthy Americans goes up.  That is a deal breaker for him.
  • The democrats will not agree to spending cuts other than defense.
  • The republicans will not raise the tax rate on anyone.

The fiscal cliff is made up of two parts.  The first is the expiration of the Bush-era tax cuts.  Because these rates were pushed through using reconciliation, they were set to expire in 2011.  However, as part of a negotiation, the rates were extended for 1 year.  This agreement will end December 31st at midnight.  Failure to extend the Bush tax rates will result in a massive tax hike for every American.

The second part is the agreement made that will mandate budgetary cuts; spending cuts.  Among the items set to be cut is the defense budget.  This is seen to be unappealing to republicans.

A guilty pleasure of mine would be to see us go over this cliff in full.  I want to see how American’s react to the tax hike that will impact them January 1.  This would include the extraordinarily large impact of the AMT that would impact millions of Americans.

However, my sick sense of cosmic justice aside, I really am looking for a permanent extension to the Bush tax cuts.  It not only is the right thing to do, but trying to raise the rates like Obama has been insisting is only a political ploy not meant to address any of the fiscal issues that we have right now.  With the rates made permanent, the economy will be able to remove the uncertainty and move forward in recovery.

As for the cuts.  I say let ’em come.  The impact will be short-term dramatic.  I suspect the economy will move into recession but it will be quick and short.  However, the long term benefit of the cuts will reduce the size of government spending and allow the economy to grow more quickly than it otherwise might.

My desire aside I feel that the ball is in the Senate’s court.  Financial bills originate in the House and move to the Senate for consideration.  The Senate should pass the bill or amend it and return it to the House.  Under Boenher, the House has passed two such bills that are simply waiting to be considered by Harry Reid.  For whatever reason, Reid will not hear those bills and allow the Senate to act.

Right now, the delay in passing a bill is squarely on Harry Reid and the democrats.

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Posted in Economy, Government, Politics: National

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Did the Community Reinvestment Act (CRA) Lead to Risky Lending?

Posted on December 26, 2012 | 1 comment

Yes it did:

Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tractmonth that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

This should not be contentious or surprising or controversial.

The government wanted to increase the home ownership rate among US citizens.  The government created conditions that would increase that rate.  Such conditions led to practices that helped that increase.

In short; riskier lending.

And at the heart of it all?  The usual suspects; Fran and Fred:

To satisfy CRA examiners, “flexible” lending by large banks rose an average 5% and those loans defaulted about 15% more often, the 43-page study found.

The strongest link between CRA lending and defaults took place in the runup to the crisis — 2004 to 2006 — when banks rapidly sold CRA mortgages for securitization by Fannie Mae and Freddie Mac and Wall Street.

CRA regulations are at the core of Fannie’s and Freddie’s so-called affordable housing mission. In the early 1990s, a Democrat Congress gave HUD the authority to set and enforce (through fines) CRA-grade loan quotas at Fannie and Freddie.

It passed a law requiring the government-backed agencies to “assist insured depository institutions to meet their obligations under the (CRA).” The goal was to help banks meet lending quotas by buying their CRA loans.

But they had to loosen underwriting standards to do it. And that’s what they did.

Oh boy, this won’t play well in the press.

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Posted in Economy, Government, Politics: National

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Small Businesses Pessimistic

Posted on December 22, 2012 | 2 comments

ho ever you might wanna blame for the shenanigans in Washington, the result is not good for small business CEOs, their expectations and, presumably, their staffs:

SAN FRANCISCO, November 30, 2012 – Small business owners as a group are now the most pessimistic they have been since the third quarter of 2010, according to the latest Wells Fargo/Gallup Small Business Index. The Index fell 28 points to negative 11 (-11) in the post-election survey conducted Nov. 12-16, 2012.

Most interesting to Americans in general is the expectations surrounding jobs:

Likely related to owners’ pessimism, one in five small business owners (21 percent) expects to decrease the number of jobs at their company over the next 12 months – the largest percentage of small businesses expecting to reduce jobs since the inception of the Wells Fargo/Gallup Small Business Index in 2003. One in four owners (26 percent) reported a reduction in the number of jobs at their company over the past 12 months, representing the largest percentage since the fourth quarter of 2010.

There is little hope that the situation in Washington is going to work out for the small businessman.  Some of the blame can certainly be attributed to the expectation that republicans would refuse to work with Obama.  However, a significant amount of that pessimism most certainly is attributed to the anti-business attitude that the Obama administration brings to Washington.

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Posted in Economy, Government

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Fiscal Cliff: Musings From The Common Man

Posted on December 8, 2012 | Leave a comment

I’m sure that most Americans don’t pay attention to the goings on in the same way that I do.  Lot’s of people have a life, for example, and do fun things.  Likewise I don’t hold out much hope that the average Joe is very informed, so, random interviews with random people kinda mean, well, not much in the way of solid policy advice.

But this is cute:

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Posted in Economics, Economy, Politics: National

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Now That Would Have Been Some Useful Nuance Two Months Ago

Posted on November 19, 2012 | Leave a comment

A significant aspect to the Presidential campaign was how each candidate planned on reducing the deficit and addressing the fiscals woes of the nation.

Romney rolled out a plan based on rate reductions and deduction eliminations.  Romney was short of specifics; when working with a divided senate and house, the bill delivered may not contain the exact details promised on the trail.

He was ridiculed as being vague and without a clue.

Now NPR is reporting on a method to raise revenues in order to meet the President’s goal.  A method suggested by none other than one Mitt Romney:

That’s a tall order. One approach that was suggested by Mitt Romney during the campaign, and endorsed by the Wall Street Journal‘s editorial page last week, is to cap tax deductions at a specific dollar level. The nonpartisan Tax Policy Center has analyzed the idea. Its co-director, Donald Marron, says capping deductions for all taxpayers at $17,000 could produce $1.7 trillion in revenue over 10 years. That would meet the president’s dollar goal.

To be fair, there is a problem with that approach:

“That would get to the president’s revenue target, but obviously it would violate his desire not to raise taxes on people below the top 2 percent,” he says.

Even raising the limit would still put Obama at odds with his promise:

If you push that cap on deductions higher, let’s say, up to $25,000, you could meet that $1 trillion revenue target. But you still don’t eliminate the political problem, because around a quarter of the added tax burden would still fall on the middle-class taxpayers the president has pledged to protect.

In the continuation of fairness, Romney’s plan would have lost revenue on that rate reduction; a loss that he claims would have been made up by an expansion of the economy.

Whatever, it would have been refreshing to have had this open and honest discussion regarding Romney’s plan back when Romney was viable.  The man knows finance; he knows what businessmen like and what they don’t.  He knows why they invest and when.

I guess if America can benefit by his wisdom, even with the Statist in Chief in office, we;re better off for it.

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Posted in Debt - Deficit, Economics, Economy, Politics: National

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Walmart Wants To Pay People More

Posted on November 17, 2012 | 11 comments

So, I’ve already commented on the fact that a union decided that a 100% pay cut was better than an 8% pay cut.

I don’t get it, but hey, maybe the principle behind the whole thing mattered.

Then I hear of the story of Walmart workers who are mad at the prospect of making more money:

Along with Target and Sears, Wal-Mart has plans to open retail stores at 8 p.m. on Thanksgiving night. Employees said they weren’t given a choice as to whether they would work on Thanksgiving and were told to do so with little warning. “They don’t care about family,” said Charlene Fletcher, a Wal-Mart associate in Duarte, Calif. She said she is expected to report for work at 3 p.m. on Thanksgiving Day. The workers said that when they complain about scheduling and other problems, management cuts their hours or fires people.

I make a decent living.  In fact, I suspect I’m in the top 10% of Americans in terms of salary.  I enjoy the benefits of this condition.  However, there are sacrifices I have to make:

  1. When I got married, my wife and I stayed at a beach house.  I brought my laptop and was working everyday during my honeymoon.
  2. No matter where I go or what time it is,  I have my cell phone and am available night and day.  I often get called.
  3. Never, EVER, in my career have I let my management ever get the slightest inclination that I was a guy who would turn down work or responsibility.
  4. I remember a time when I worked 47 days straight, right through Thanksgiving, Christmas and New Years.  Every. Single. Day.
  5. If all goes well, I’m on a plane right now to Puerto Rico for a weeks vacation with family over the Thanksgiving holiday.  My laptop is in my luggage; I’ll work every day.

I don’t get it.  I don’t get the concept that says that hard work doesn’t pay off.  That sacrifice doesn’t lead to rewards.  I don’t understand how people who want money are resistant to working to earn more money.

Or at least I didn’t understand.

I saw a Facebook post recently regarding the strike at Hostess and the totally shocking result of the closing of the business.  One of the comments went something like this:

If they strike and  get released, at least they’ll get 100 weeks of unemployment.

I added that they would also now get free healthcare.

And that reminded me of this:

More and more these people don’t need jobs.  If they lose their job they’ll get unemployment for nearly 2 years.  Plenty of time to work something out.  Further, with the election of Obama, they are sure to get free healthcare as well.

Literally, what is it that would incent these people to work?  If they lose their jobs, what really is the downside?  How much would they net lose?

What kind of perverse incentives are we building into our society?

 

 

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Posted in Economics, Economy, Life

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The Impact Of The Fiscal Cliff – CBO Analysis

Posted on November 17, 2012 | 2 comments

Anyone who pays attention, and even a few of us who don’t, know that we are facing what the experts are calling “The Fiscal Cliff.”  This is in reference to the set of economic or fiscal policies set to be enacted if nothing changes.  That is, it is already law and will be implemented unless new laws are passed to change them.  Key among this cliff are two main components:

  1. Allowing the Bush Tax Cuts to expire.
  2. Sequestration – Mandatory budget cuts.

Recent headlines have cited a CBO report issued earlier this month.  In it, the CBO reports that tax hikes on the wealthy won’t really hurt the economy:

(Reuters) – Allowing income tax rates to rise for wealthy Americans, and maintaining rates for the less affluent, would not hurt U.S. economic growth much in 2013, the Congressional Budget Office said on Thursday, stepping into a dispute between Republicans and Democrats over how to resolve the so-called “fiscal cliff.”

The report by the authoritative non-partisan arm of Congress is expected to fuel President Barack Obama’s demand for higher taxes on the rich, part of his proposal to avoid the full impact of the expiring tax cuts and across-the-board spending reductions set to begin in early 2013 unless Congress acts.

The narrative is that allowing Obama to follow through on the class warfare rhetoric wouldn’t really be that harmful to the economy; almost saying that any negative impact is worth it in order to restore “fairness.”

This report, and other just like it, are using the individual analysis of each portion of the fiscal cliff:

Extending all expiring tax provisions other than the cut in the payroll tax and indexing the AMT for inflation— except for allowing the expiration of lower tax rates on income above $250,000 for couples and $200,000 for single taxpayers—would boost real GDP by about 1¼ percent by the end of 2013. That effect is nearly as large as the effect of making all of those changes in law and extending the lower tax rates on higher incomes as well (which CBO estimates to be a little less than 1½ percent, as noted above), primarily because the budgetary impact would be nearly as large (and secondarily because the extension of lower tax rates on higher incomes would have a relatively small effect on output per dollar of budgetary cost).

So, by keeping the tax cuts for everyone under 250k we grow by 1.25%.  But if we keep ALL tax cuts we grow by 1.5%.  And the analysis is that the 1/4 point in GDP isn’t significant.  Perhaps.  But it represents 16.67% more growth than if we raise the taxes on the wealthy.

16.67 percent seems like a pretty big “get,” especially when the President is struggling as is.

But how about jobs:

The CBO said the tax hikes for the wealthy would reduce job growth by around 200,000 jobs…

For a President that is interested in growing jobs, he has a funny way of showing it.

So, what happens if we avoid the cliff?

Output would be greater and unemployment lower in the
next few years if some or all of the fiscal tightening scheduled
under current law—sometimes called the fiscal
cliff—was removed.

Nice.

But is that all?

However, CBO expects that even if
all of the fiscal tightening was eliminated, the economy would remain below its potential and the unemployment rate would remain higher than usual for some time.  Moreover, if the fiscal tightening was removed and the policies that are currently in effect were kept in place indefinitely, a continued surge in federal debt during the rest of this decade and beyond would raise the risk of a fiscal crisis (in which the government would lose the ability to borrow money at affordable interest rates) …

Yeah….that’s interesting, but what happens if we do nothing and just fall over the cliff?

…Moreover, if the fiscal tightening was removed and the policies that are currently in effect were kept in place indefinitely, a continued surge in federal debt during the rest of this decade and beyond would raise the risk of a fiscal crisis (in which the government would lose the ability to borrow money at affordable interest rates) and would eventually reduce the nation’s output and income below what would occur if the fiscal tightening was
allowed to take place as currently set by law.

Not for nothing, but I think that reading ALL THE WAY to the second paragraph and reporting on the part of the report that kinda isn’t friendly to Obama is somewhat important.

Be that as it is, if it were me and I was the Speaker, I’d tell the Barackness Monster to go to hell, hold on and jump.  We’d be better off.

 

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Posted in Economics, Economy, Politics: National

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The Corrosive Impact Of Unions In Action

Posted on November 16, 2012 | 4 comments

If you wanna see a real life example of how the parasite kills the host look no further than Hostess Brands Inc.

Rocky Mount, N.C. — Hostess Brands Inc. filed a motion in federal bankruptcy court early Friday, seeking permission to shutter operations and end production of the snack cakes and breads known to generations of Americans.

The Texas-based company said in a statement on its website that it will try to sell its assets, including the iconic Twinkie, Ding Dong and Wonder Bread brands. Bakery operations have been suspended at all 36 plants, including one in Rocky Mount, following a week-long strike by thousands of workers protesting 8 percent wage cuts and benefit concessions.

In its statement, Hostess said the strike “crippled the company’s ability to produce and deliver products at multiple facilities.”

Already-baked products will continue to be delivered, and the company said its retail stores will remain open for a few days to sell off remaining stock.

“We deeply regret the necessity of today’s decision, but we do not have the financial resources to weather an extended nationwide strike,” Chief Executive Gregory Rayburn said. “Hostess Brands will move promptly to lay off most of its 18,500-member workforce and focus on selling its assets to the highest bidders.”

In essence, the union was negotiating either an 8% wage cut or a 100% wage cut.  The union decided that they wanted the 100% version.

However, unlike in other cases where the economic realities are hidden and not immediately obvious to the employees, the workers at the plant here in Rocky Mount North Carolina are keenly aware of the decision they are making:

The company has about 18,300 employees, including about 275 in Rocky Mount.

“We’re not in the dark. We know exactly what’s going to happen,” Hoffman said, “They’re going to shut the plant. They’re going to shut down all the (plants in the) United States.”

I have to hand it to the workers here in Rocky Mount.  North Carolina is a “right to work” state where workers can’t be forced to join a union.  Further, these workers were not yet affected by the contractual mess, they were simply honoring the picket lines of those workers elsewhere.   However, the actions of these employees acting on behalf of their unions have caused the corporation to go bankrupt.  The business will be sold off and these workers have lost their job in an economy that has continued to sputter along.

18,000+ employees out of work due to the union.

Amazing.

A note concerning Twinkies and GM.  I’ll bet you a candy bar that Hostess will sell everything.  The machines, the the trucks, the buildings and THE NAMES.  Someone will come along and buy the name “Hostess” and the name of every product they make.  And they begin to produce these products but in a manner that is more able to offer a return on investment.

The same thing would have happened to GM.

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Posted in Economics, Economy

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Obama’s Speech: What He Should Say Novermber 9th, 2012

Posted on November 9, 2012 | 2 comments

President Obama to Speak To America

President Obama is set to take the stage in about two and a half hours.  He’s gonna address the nation and discuss the economic conditions we find ourselves in.

What Obama Should Say:

The President should admit that the campaign just finished was brutal and divisive.  Now is the time for us to come together and demonstrate that we are going to work together.  He should take the mantle of leadership and declare that it is his responsibility to bring both sides to an agreement that both can live with.

The time for the rhetoric is over.

Further, Obama should admit that we are in trouble, deep trouble, and that we need to take a long hard look at our priorities.  We can no longer continue to spend the money that we’re spending.  Are their opportunities to increase the revenues coming into the federal coffers?  Yes, yeah there are.  But the true opportunity is to reduce the size of the government while at the same time make it more efficient.

At the same time Obama needs to acknowledge that the consequences of his health care legislation is having dramatic and immediate results.  Full time staff are being reduced to part time.  Others are simply being laid off.  Obama should detail his plans to meet with business leaders, REAL plans to meet with and enact their ideas, to encourage companies to grow and hire.

What Obama Will Say:

Obama is going to take the stage this afternoon and call on republicans, and of course democrats, to compromise.  He is going to reiterate that now is not the time for partisan bickering and party ideology.  There was a time for that and it played out in the recent elections.  Obama is going to claim a mandate and that mandate is that we need to raise taxes on the wealthiest among us that they be sure to pay their fair share.

The President will remark that we are facing an economy that is growing; albeit barely.  And that we cannot risk pushing it into recession due to an unwillingness to compromise.  We need to reduce the deficit and work on balancing the budget.  And to do that, some among us are going to have to sacrifice while expanding programs that create jobs; infrastructure programs, early education programs and green energy that will produce jobs here in America.

The speech will be high on rhetoric, calls for bipartisanship and new beginnings.  But it will be weak on details and substance.  And there will be precious little in terms of the democrat’s willingness to act in a bipartisan manner.

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Posted in Economy, Politics: National

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