Wednesday, October 31, 2012

Historical US Unemployment Data

Step right up, and don't be shy
Because you will not believe your eyes
--The Tubes

Have been wanting to stitch together historical US unemployment rates for some time. Stitch is the operative word because this series has been subject to myriad methodological changes over the years making pure apples-to-apples comparisons impossible.

Researchers have taken various shots at reconstructing historical data in a manner that makes them comparable to the BLS U3 unemployment series extracted from the Current Population Survey. The BLS series has served as the 'headline' number since 1940, although this series itself has undergone significant methodological revisions that cast doubt about its integrity (some concerns outlined here and here).

Lebergott's (1957, 1964) studies of early US labor markets produced perhaps the most widely cited data on pre BLS unemployment estimates. Using census and other economic data along with interpolation techniques, he estimated unemployment rates during several periods in the 1800s (interesting chart here), and annual estimates from 1890 to 1940.

However, many researchers took issue with Lebergott's work, particularly because Lebergott employed far different methodologies than the BLS when generating his estimates. This led to several studies seeking to modify Lebergott's series to better coincide with the 'modern' BLS series. Romer's (1986) work is often regarded as the decisive revision of Lebergott's annual data from 1890 - 1930. Coen's (1973) estimates from 1922 - 1940 also have garnered validity.

The following graph shows the results of combining the various work.


Although the presentation suggests a uniform series, nothing could be further from the truth. This is actually a composite of 4 series:

1890 - 1930: Romer's (1986) modification of Lebergott's (1957, 1964) annual estimates
1930 - 1939: Coen's (1973) modification of Lebergott's (1957) annual estimates
1940 - 1946: BLS 'war time' estimates which count persons aged 14 and over in the civilian labor force
1947 - present: BLS U3 series which counts persons aged 16 and over in the civilian labor force

Given the academic brainpower involved in trying to 'normalize' the historical data, the combined series warrants some degree of face validity. However, there will always be limitations concerning apples-to-apples comparability. Heck, there are even legitimate questions about the extent to which the current BLS U3 accurately captures the unemployment construct.

Nonetheless, there is some utility here, I think. We'll examine in some future posts.

References

Coen, R.M. 1973. Labor force and unemployment in the 1920's and 1930's: A re-examination based on postwar experience. Review of Economics and Statistics, 55(1): 46-55.

Lebergott, S. 1957. Annual estimates of unemployment in the United States, 1900-1954. In The measurement and behavior of unemployment. Princeton, NJ: Princeton University Press.

Lebergott, S. 1964. Manpower in economic growth: The American record since 1800. New York: McGraw-Hill.

Romer, C. 1986. Spurious volatility in historical unemployment data. Journal of Political Economy, 94(1): 1-37.

Tuesday, October 30, 2012

Emergency Management and Government

I don't know about yourself or what you want to be
When we gamble with our time we choose our destiny
--Molly Hatchet

Laughable editorial by the NYT where the title, "A Big Storm Requires Big Government," says it all. The central claim is that "Disaster coordination is one of the most vital functions of 'big government.'"

Constitutionally, there is no enumerated power for the federal government to engage in disaster relief. Indeed, students of political history know that it is during crises that governments opportunistically seek to grab more power. The framers understood this, and made no provisions for expanding central government authority during emergencies. Indeed, because governments seek to accumulate power during crises, it is precisely during such events that constitutional limitations must be respected.

The essay offers no compelling argument as to why disaster relief is more effectively administered at federal rather rather than at state levels. Prior to the creation of FEMA during the Carter administration, states retained primary responsibility for disaster relief. Like all federal bureaucracies, FEMA's reach has extended far beyond its initial scope--which was to assume a dominant role in any nuclear disaster that might arise in the US. FEMA has attracted emergency resources at the expense of the states, which has created conditions of dependency and moral hazard as people take more risks under the assumption that their behavior has been federally insured.

The more compelling argument remains with the states. Local relief initiatives are positioned to respond quicker and in a more intelligent manner than remote initiatives. Levels of emergency resources should be determined locally; consequences for having too few or too many would be administered locally as well. States where weather and other disaster related risks are high, such as New York, Florida, Louisiana, California, would need to set aside more emergency resources rather than rely on others to insure their behavior.

For emergencies that extend beyond the ability of a state to handle, then it would be up to people in other states to assist as they see fit. Stepping up voluntarily to help others has been central to the American way. I know of no instance prior to the forceful assumption of control of emergency management the federal government that Americans voluntarily ignored the difficulties of others following disaster.

The implication that, absent FEMA, people are incapable of responding appropriately to disaster is absurd.

The true purpose of this opinion piece is to blast Mitt Romney, who has indicated that he would dismantle FEMA and return emergency management to the states. Whether Romney would actually do so is certainly questionable. But the notion of turning emergency relief back to the people is commendable.

Monday, October 29, 2012

Historical GDP Data

Who's gonna tell you when
It's too late
Who's gonna tell things
Aren't so great
--The Cars

Quick post to record a link to historical GDP data. US govt began 'officially' measuring GDP in 1930. National output prior to 1930 must be estimated. The site is operated by two profs at the University of Illinois and cursory review of methods suggests validity.

Plan to test drive the data soon...

Sunday, October 28, 2012

Sovereign Debt and the Middle Class

It ain't no use
We're headed for disaster
Our minds say no
But our hearts are talking faster
--Donnie Iris

Interesting explanation of who bears the burden of government debt. The idea that government debt that is bought by persons inside a country is not a burden on future generations is wrong, because resources are generated by individuals, not by countries. Debt constitutes the real transfer of resources between individuals.

Currently, the bottom of the economic pyramid benefits from transfer payments funded by taxes on the top of the pyramid. But, as the author notes, this is not the end of the story.

There are also reverse transfer payments made from the sovereign to the creditors in terms of interest payments on the bonds. Wealthy people own most of these bonds. As such, they receive some restitution for the income taxes they pay.

The demographic that gets hammered is the middle class. People in the middle receive relatively little in terms of welfare transfer payments or of bond interest payments.

Sovereign debt and the tax system employed to pay for the borrowing helps destroy the middle class.

Saturday, October 27, 2012

Health Insurance and Inefficiency

I wouldn't even trust you
I've not got much to give
We're dealing in the limits
And we don't know who with
--New Order

Interesting paper discussing the origins and growth of health insurance in the US. The author begins with the 1930s when hospitals (Blue Cross) and docs (Blue Shield) developed tax favored products to help cope with revenue loss during the Depression.

NOTE: While this may have constituted the beginnings of a commercial health insurance industry, I don't think that this was the beginning of forms of health insurance in the US. Prior to the 1930s, I believe that local groups local groups such as church memberships pooled financial resources to manage health care as well as others risks among members and people that memberships served.

Returning to the author's review, by the end of the 1930s, many commercial insurers were looking into health insurance products of their own, although they did not enjoy the same tax favored status of the Blues.

During WWII, the massive central planning effort here in the US included IRS rules that allowed employers to take offer health benefits to employees without having to pay related taxes.

This tax subsidy, argues the author, was a big driver of group health plan growth and today's high health care costs and inefficiencies. The argument is a simple one. Subsidize a particular economic behavior and you'll get more of it. Tax subsidies created booming demand for corporate health care products. From the 1940s to 1970, employees covered via corporate plans outnumbered individual plans approximately 5 to 1 according to data presented by the author. These corporate insurance products distorted the market, and removed responsibility from individuals individuals to shop for value. Conditions of moral hazard were thus created, and producers were consequently relieved of pressure to become more productive.

I am not fully on board with this conclusion. After all, government sponsored programs such as Medicare and Medicaid have done plenty to bloat the health care system on their own. But the role of historical corporate tax policies is a new angle for me that merits more thought.

Friday, October 26, 2012

Flagging Bonds

But if this ever changing world in which we live in
Makes you give in and cry
Say live and let die
--Paul McCartney

Interesting pennant pattern forming in 10 yr Treasury yield. Top edge lines up well with 200 day moving avg. Bottom edge lines up well w 50 day moving avg.


An interesting anomaly. Will also be interesting to see which way this thing breaks.

Should also note that the thought of shorting Treasuries is increasingly crossing my mind.

no positions

Thursday, October 25, 2012

Change of Tone

I tried to call you before but I lost my nerve
I tried my imagination but I was disturbed
--Tommy Tutone

Continues to feel like the tone of the tape is changing. Earlier this week the multi-month uptrend line was finally broken in a convincing manner.


Positive openings over the past couple of mornings have had trouble sticking. While indexes are approaching oversold levels on a daily basis, stochastics suggest overbought conditions on a weekly basis. This suggests that although the SPX might reach for near term support in the current 400 to 1420 area, there may be a larger downside date with destiny.

Also starting to wonder whether markets aren't beginning to wonder whether the Fed is out of ammo. After all, yesterday's FOMC announcement came and went with barely a wimper.

position in SPX

Wednesday, October 24, 2012

Gold Check

"The only thing better than blowing up 100 billion dollars worth of gold is making people think you did."
--John McClane (Die Hard With a Vengeance)

Some Germans are growing nervous about gold reserves being held with foreign central banks. The Fed is by far the largest holder.

Calls are growing for physical audits. Some rumblings for repatriation of gold reserves can also be heard.

In a world where monetary printing presses are running at historic speeds, such activity should not be surprising--particularly from a country that gave us Weimar.

When money is being printed in big volumes, people think more about where their gold is, and about making it more accessible.

position in gold

Tuesday, October 23, 2012

Robbery vs Slavery

Proximo: Can any of them fight? I've got a match coming up.
Slave trader: Some are good for fighting, others for dying. You need both, I think.
--Gladiator

Are income taxes better thought of as acts of robbery or slavery? Robbery is the forceful taking of property for the benefit of someone else. Robbery is different from theft. A thief can take property without directly threatening an individual. For example, a thief could steal items from a home while the owners are away on vacation.

Robbery involves the use of force or threat of force in appropriating property. The robber may shoot the gun, point the gun, or convince the victim that shots are imminent in order to obtain the victim's property.

Robbing the same person multiple times, while certainly possible, becomes challenging because the victim learns to anticipate and defend against attack. As such, robbery has a 'one off' nature about it. The application of robbery on a particular individual tends to be singular rather than routine.

Slavery is the forceful taking of production for the benefit of someone else. Slavery requires that the slave works in a manner that produces output that the slave master can benefit from. In order for slavery to be profitable, slave masters must ensure that the slaves engage in activities that produce output deemed as valuable. This may or may not require the use of force on slaves to work in a certain manner. In some institutional designs where slaves prefer the work and the output produced, the force is applied instead in the confiscation of production--either partially or in total.

Slavery is rarely a 'one off' crime. Production is routinely confiscated. If the slave becomes more productive, then the amount taken is likely to rise as well.

To be sure, slavery could be viewed as a form of robbery. The master robs the slave of property, and does so on a regular basis. But because property taken from the slave is directly tied to production, slavery can be readily construed as a direct violation of individual liberty, as it prohibits individuals from pursuing their interests in an unencumbered manner.

Rather than a one off appropriation of property, slavery is routine confiscation of production and the liberty that accompanies it.

Because of their focus on the output of production, and because of the regular occurrence of confiscation, income taxes seem to have more in common with slavery than with robbery.

Monday, October 22, 2012

Atlas Shrugged II

Though I saw it all around
Never thought I could be affected
Thought that we'd be the last to go
It is so strange the way things turn
--Peter Gabriel

Saw Atlas Shrugged II this weekend and very much enjoyed it. Different cast than AS1 as it appears that the producers want to change the cast for each part in order to focus more on story and less on celebrity. Will be sad to see this list of players go because I thought parts were very well cast.

During AS2, the State's grip on productive resources tightens, driving more and more producers to leave the system. Standard of living decreases in kind, and social unrest grows. The classic Misesian chaos endpoint of socialism is nearing.

As the AS2 plot unfolded, I thought of the menu of choices available to slaves as I pondered why Taggart, Rearden or any remaining producer chooses to stick around in the midst of stifling force of the State confiscating production--particularly as the producers become increasingly aware of a potentially attractive 'leave the system' alternative available to them.

The answer is that choosing the 'leave the system' option means that you succumb to force - force that is driving you to surrender your pursuits and interests in exchange for perhaps a safer or more comfortable environment.

As Jefferson eloquently wrote and as Patrick Henry eloguently spoke, for people who value their inalienable right to liberty, leaving the system could be viewed as a fate worse than death.

Sunday, October 21, 2012

Economic Consequences of Income Taxes

Should five percent appear to small
Be thankful I don't take it all
--The Beatles

Debates on the morality of income taxes, particularly those taken on a progressive scale, are rarely definitive. As Mises observed, the decision of whether to implement socialistic mechanisms like a progressive income tax system is ultimately a political one. If that political decision is based on democratic process, then voters will be tempted to revise their morals in a manner that helps them get what they want.

Less debatable are the economic consequences of a progressive income tax system. They are less debatable because they are grounded in natural laws that do not drift with the wind.

In this compilation, Hazlitt reminds us of two economic consequences of progressive income taxation. One is that appropriation of income on a progressive scale increases the chances that income destined for savings will be taken from private hands. When savings are reduced, there is less capital. When there is less capital, there will be less investment. Absent investment, productivity does not improve. Without productivity improvement, standard of living stagnates or declines.

Stated differently, progressive income tax systems invite capital consumption. When capital is consumed, there is less chance of productive investment that drives durable wage and job growth.

A second economic consequence of income taxation is that it reduces incentive to produce. ECON 101 tells us that taxing a behavior results in less of that behavior. Higher incomes are taxed at marginally higher rates in progressive tax systems. As such, progressive income taxes penalize high levels of production. Producers are therefore discouraged from being highly productive.

Once again, the result is less wealth produced. Less wealth means lower general standard of living.

Line Dancing

It's not in the words that you told me
It's not in the way you say you're mine
--Toto

Was surprised at the heavy feel of the tape this past Friday. Yes, there were some less-than-expected earnings reports, but the market had been shaking those reports off earlier in the week.

After a couple of up days, seemed like we could be off to the races. Instead, markets opened slightly lower and then weakened further. Even the requisite late afternoon bounce that has frequently erased earlier losses couldn't stick, and prices closed near the lows.


This leaves leaves the SPX at an interesting juncture. The index closed on its 50 day moving average and on the uptrend line marked from the early June lows. We have also been marking slightly lower highs and lower lows since the post Fed QE-infinity announcement in September. Daily stochastics are nowhere near oversold, suggesting 'potential energy' for downside movement.

Perhaps Friday was just an options expiration anomoly. The technical tea leaves suggests the upcoming week could be interesting.

position in SPX

Friday, October 19, 2012

Social Contractors

The moon looks mean and the crew ain't stayin'
There's gonna be some blood
Is what they're all sayin'
--Jay Ferguson

The door bell rings. You open the door to find a group of burly individuals, all carrying pistols in holsters and badges of some sort on their belts. The man closest to the door, who appears to be the leader, unsnaps his holster and brushes past you, entering your house. The others follow.

The group heads to the living room where all except the leader sit down and make themselves comfortable. With hands clasped behind his back, the leader slowly paces the the room, pausing occasionally to observe ornamental touches such as the family pictures on the fireplace mantel and the crown molding that edges the ceiling.

Finally he turns to you and says, "Nice place. Looks like you've been productive. As such, we're going to have to take 30% of your paycheck. Not just this week, but in all future weeks. If you produce more income, then we'll take an even greater percentage.

"If you refuse to pay, then we'll shake you down for what you owe us--plus a penalty. If we can't recover the difference, then we'll lock you in a room until you learn your lesson.

"But guess what? This is a great deal for you, because we're letting you keep the rest of your paycheck. Plus, if you don't like this arrangement, then you're free to leave anytime. You'll just have to leave your home, pursuits and other interests behind, and we'll take your remaining property as an exit fee."

The leader nods to the others, turns, and heads to the front door. The others get up and follow.

"Best part," the leader shouts over his shoulder while exiting premises, "is that there's nothing to sign. We already have your name down on the Social Contract."

Thursday, October 18, 2012

Voting the Protest Vote

Open up the window
Let some air into this room
I think I'm almost chokin'
From the smell of stale perfume
--Three Dog Night

Jim Rogers says that he 'will vote the protest vote' this election. This characterizes the problem that many are struggling with. A vote for what is perceived to be the lesser of two evils is still a vote for evil. Does one swallow hard and vote for the lesser evil, perhaps with hopes that the lesser evil will somehow see the light? Or does one vote for neither so that no evil is endorsed?

Wednesday, October 17, 2012

Freedom and Force

Benjamin Martin: May I sit here?
Charlotte Selton: It's a free country. Or at least it will be.
--The Patriot

I've seen several versions of the following argument:

"Policies that protect people's interests from forceful invasion infringe on my freedom. These policies force someone else's views on me and prohibit me from pursuing happiness as I see fit."

Criminals make similar arguments. "Laws against theft are unfair because I believe that I deserve what others have. These laws are designed to force me from getting what I want."

In a free society, all people can pursue their interests unencumbered by forceful interference by others. Just as others are not permitted to invade your interests, you are not permitted to forcefully interfere with the interests of others.

If this is not the case, then all people are not free.

In a free society, force is only justifiable as a means of self-defense. People have the right to defend their person and possessions against forceful invasion by others.

Tuesday, October 16, 2012

Mindless Poverty

Feed the babies
Who don't have enough to eat
Shoe the children
With no shoes on their feet
--Steve Miller

Prof Williams challenges the assertion often made by liberals that 'society creates poverty.' Poverty is the world's default condition, because the natural state of the world is one of scarcity. Scarcity can only be alleviated through production, the combination of labor with raw materials that generates goods that reduce want.

Except in its most rudimentary configurations, production requires voluntary cooperation and exchange among people in order to achieve high levels of productivity. High levels of productivity create more output per unit of input, thereby alleviating conditions of scarcity and poverty.

To the extent that it enables voluntary cooperation and exchange among people, society clearly facilitates the creation of abundance, not poverty.

As Williams observes, statements that society creates poverty are 'breathtakingly ignorant.' Empirical evidence along demonstrates that poverty defined in traditional terms of destitution (i.e., starvation, homelessness) has been driven to tiny levels in the US compared to conditions that existed at the time of the country's founding. The median poor American enjoys economic resources that few people had 100 years ago and that most people in the world still lack today.

An extension of the 'society creates poverty' claim is that people who are poor get that way not because of the decisions that they make, but because of exogenous factors in the environment. In the context of the poverty of black Americans, Williams notes that the empirical evidence suggests otherwise. The poverty rate among blacks is about 36 percent, mostly in female-headed households. The poverty rate among black married households has remained in single digits for years. Approximately 72% of black babies are born out of wedlock, nearly 5 times the rate of 1940. Less than 50% of black students graduate from high school, and black men make up about 40% of the US prison population.

Williams poses these questions:

Is having babies without the benefit of marriage a bad decision, and is doing so likely to affect income?
Are dropping out of school and participating in criminal activity bad decisions, and are they likely to have an effect on income?
Do people have free will and the capacity to make decisions, or is their behavior a result of instincts over which they have no control?

Based on the 'society creates poverty' mantra, it is likely that many people would rationalize an answer of 'no' to the last question. Many people believe that they are not responsible for their own actions.

Monday, October 15, 2012

Slaves Have Choices

"Relax," said the nightman.
"We are programmed to receive.
You can check out any time you like.
But you can never leave."
--Eagles

Recently I was engaged in a debate about the similarities between slavery and income taxes. This is not a new argument for these pages, nor is it a novel consideration for thinkers far above my pay grade (example1, example2, example3).

The argument is straightforward. Both slavery and income taxes are institutions of force. Both confiscate production from some for the benefit of others. A payer of income tax, therefore, is seemingly a slave.

Liberals in particular face difficulty when confronting this argument. In general, this group disapproves of slavery while approving income taxes. To avoid the appearance of hypocrisy, liberals must rationalize differences between slavery and income taxes that justify the institution of the latter.

In the particular debate that I was engaged in, liberals seemed to favor this line of thought: Income taxes are different from slavery in that payers of income tax are free to leave the system while slaves are not. Slaves have no choice in the matter.

Precisely how this is supposed to refute the claim of similarity between slavery and income taxes is unclear. Is it suggesting that income taxes are not institutions of force? Such a claim would be delusional.

Let's examine the core assertion that slaves have no choice in the matter of their predicament. Assume that an individual has already been enslaved, and that the person prefers freedom over slavery. What primary decision alternatives does the slave face? I can think of four.

One choice is to remain a slave--toil for the benefit of others under conditions of force. Although we stipulated that the enslaved individual prefers freedom over slavery, remaining a slave may be preferable when the penalties for pursuing other alternatives are estimated to exceed the disutility of slavery. This choice could also be desirable if the slave anticipates that the institution may collapse within a reasonable period of time, thus motivating the slave to 'tough it out' until the system changes.

A second choice is to cease productive effort as a slave. In this mode, the slave either does not work (e.g., sit down or slow down strike), or produces income that the slave tries to hide from the purview of the production control system. If it is difficult to monitor the effort or output of slaves, then this choice may have merit. If oversight is easy, then this choice may carry significant penalty.

A third choice is to seek to leave the system. While this choice may seem most prefereable, seeking to escape slavery could carry significant risk. The escape route may be physically challenging or even deadly. If caught trying to escape, the slave may face severe penalty including lethal sanction. There are other costs to consider as well. A successful exit may require the slave to leave valuable interests (e.g., family, friends, possessions, pursuits) behind. The decision to pursue escape implies that the utility of being outside the system is estimated to be higher than the risks/penalties of an unsuccessful attempt + the costs of interests left behind.

A fourth choice is to fight back. If a slave views liberty as an inalienable right, then that individual may choose to defend that right. The other alternatives elaborated above may be seen as undesirable compromises of the right to pursue one's interests unencumbered by forceful interference. Rather than comply, avoid, or run, the slave may choose to fight the hostile aggression of slavery operators and throw off the system.

The relative attractiveness of these choices will depend on various factors, including the utility that individuals place on liberty, the features and penalties associated with particular institutional designs, etc.

However these factors stack up, it is evident that several choices are available to slaves for coping with their situation. The assertion that slaves do not have choice, and in particular that they do not have a choice to try to leave the system, is plainly false. Depending on the institutional context, some slaves may not even view the escape alternative as preferable.

The fact that choices are available to slaves in no way diminishes the underlying evil of the institution: forcing some to work for the benefit of others.

Sunday, October 14, 2012

Legitimized Violence Against Liberty

"Why should I trade one tyrant three thousand miles away for three thousand tyrants one mile away? An elected legislature can trample a man's rights as easily as a king can."
--Benjamin Martin (The Patriot)

The United States was founded on the principles of life, liberty, and property as inalienable rights. Because people are tempted to obtain something for nothing, these rights have been constantly and quite literally under attack since the beginning of 'civilized' man.

The Constitution was written to protect individual rights--primarily by limiting the power of central government which, as the founders knew, tends to become the strong armed agent by which some forcefully take from others.

But a constitution is only as strong as the morals of a people. When enough people legitimize slavery or plunder, then no document can prevent institutional violence and aggression.

Society either collapses in a sea of violence and destitution.

Or the oppressed seek to throw off that violence and reclaim their liberty.

Saturday, October 13, 2012

Yield Sign

Well I was there and I saw what you did
I saw it with my own two eyes
--Phil Collins

Another series toeing its trend line is the 10 yr yield.


Stochastics are not oversold, suggesting some pent up energy should yields break lower.

no positions

Friday, October 12, 2012

Line Dance

It's not in the way that you hold me
It's not in the way you say you care
--Toto

Both the DJI and the SPX ended the weeks resting on their 50 day moving averages and uptrend lines from the June lows.


The COMP is also resting on its trendline although it has already broken thru its 50 MA.

The action early next week should be telling.

position in SPX

Peace Prize Sham

In violent times, you shouldn't have to sell your soul
In black and white, they really, really ought to know
--Tears for Fears

Three years ago the Nobel Peace Prize was awarded to President Barack Obama. The fact that this president had only been in office for months raised more than a few eyebrows. More importantly, his actions before and since have been oriented toward division and violence rather than toward unity and peace.

This president has sought to expand the role in government in both domestic and foreign affairs. Government is force--violent intervention in people's lives. When government's scope grows beyond that necessary to protect people's liberty and property, social capacity for voluntary cooperation decreases.

In domestic affairs, this president favors policies that employ the strong arm of government to forcefully take from some for the benefit of others. In foreign affairs, this president has prosecuted numerous illegal wars that have killed thousands, provided arms to various militant groups, and presided over the ongoing expansion of US military power. He boasts of the assassination of Osama Bin Laden during his administration.

This is a man of peace? A true peace-loving president would be shrinking government to remove this mechansim of force-- the single most powerful mechanism of force in the world, in fact--from peoples' lives as much as possible.

This year's Nobel Peace Prize has just been awarded to the European Union for 'promoting peace, democracy, and human rights for over six decades.' While countries have not been forced to join the EU, plenty of dissenting individuals in each member country were forced to play along. Indeed, 'promoting democracy' is promoting violence--violence exerted by the many on the few.

Now, individuals inside the EU are subject to increasingly greater force as EU officials desperately enact policies designed to 'preserve the union' (wink from Lincoln). For example, people are being robbed of their wealth through policies of suppressed interest rates, higher taxes, and devalued currency.

How can anyone pobjectively look at the EU currently and see a union of peace?

It seems the Nobel committee needs to consult a dictionary.

Thursday, October 11, 2012

Voices of Reason

"It is a kingdom of conscience, or nothing."
--Balian of Ibelin (Kingdom of Heaven)

In 2004-2005, audits of Fannie Mae and Freddie Mac suggested that the GSEs were carrying too much risk and vulnerable if housing prices softened.  Proponents of the GSEs, primarily Democrats, thew up their arms in anger and claimed that these insitutions were in fine shape. We know what subsequently happened.

About a year ago, presidential candidate Rick Perry claimed that Social Security was a Ponzi scheme. Proponents of Social Security threw up their arms in anger, saying that SS was nothing of the sort. Yet even a cursory look at SS accounting finds nothing but IOUs for future beneficiaries.  

A few months back Ron Paul was called onto the carpet at CNN for questioning some of the historical 'facts' surrounding Abraham Lincoln's presidency. Interviewers mocked Paul's answers, although there is ample evidence to back the Congressman's claims.  

Last May Mitt Romney told supporters that it did not make sense for him to focus scarce campaign resources on people who see themselves as dependent on government assistance, as arguments for shrinking government would not be received well by this group. When a video of that conversation hit the media a couple weeks back, Obama partisans went wild. Yet reason and empirical evidence suggests that playing the dependence/victim card is worth many votes.  

Last week former General Electric (GE) CEO Jack Welch claimed that the BLS jobs numbers were manipulated. Howls went up from government and those supporting the president. Yet there is reason to believe that last week's number was open to slant--as is nearly all government econometric series.  

The pattern is obvious. Speak out against an institution or institutional beliefs, and you will be sanctioned by those who support, or are supported by, the institution. It is the potential of such sanctions that institutionlists hope will keep dissenters silent.  

But reasoned people understand that societies often live institutional charades, where people rationalize the ugliest of practices. Such practices cannot persist, however, as they conflict with natural law. Over time, they will be brought down as social systems seek better balance.

Therefore, voices of reason must not be fearful. Stay the course, as truth will overcome the rhetoric of delusion.

Wednesday, October 10, 2012

Counter Views of Regulation

David Norris: Who the hell are you guys?
Richardson: We...are the people that make sure things happen according to plan.
--The Adjustment Bureau

Caroline Baum includes some interesting info in an article about policy contributors to our current economic predicament. Democrats on the campaign trail such as Mr Bill are blaming 'deregulation.'

Yes, CB, I laughed too. It was during Bill Clinton's tenure that much of the deregulation that Mr Bill rails on occurred. Glass-Steagall was repealed in 1999 and replaced by the Financial Services Modernization Act, which was signed into law by Clinton in 1999. The law removed  G-S imposed 'walls' between banks, investment banks, and insurance companies, thereby facilitating huge increases in institutional size and leverage. Clinton also signed the Commodities Futures Modernization Act in 2000, which exempted over the counter derivatives from regulation.

While the irony of Democrats like Clinton fingering deregulation is humorous, blaming our economic malaise on deregulation is hollow rhetoric. CB argues deregulation only accelerated the problem. I would have used the word 'exacerbated.' At best, deregulation exacerbated the problem.

Ground zero of the 2008 credit collapse was the housing market. People buying houses that they couldn't afford, lenders dishing out credit to poor credit risks, and mortgage-backed securities that carved up and distributed risk like metastatic cancer throughout the financial system.

Baum correctly identifies government policy seeking to get more people into houses as a root cause. Indeed. Government sponsored entities (GSEs) Fannie Mae and Freddie Mac were born out of FDRs New Deal fantasies that more Americans should be able to 'own' a house. The GSEs became the primary vehicle for expressing this policy by forcing mortgage rates lower than free market rates. Supporters, primarily Democrats, defended Fannie and Freddie thru the mid 2000s even when audits suggested dangerous leverage.

Reflecting on my personal situation on a college campus, I have encountered few students who are aware of counter views of regulation like the ones laced in Baum's article or in this piece. Yet, these counterviews are difficult to disprove out of hand, suggesting their possible validity. As such, regulation should be viewed as a classic classroom debate topic.

Why is critical thinking about regulation so low--particularly at the collegiate level where lively debate is supposed to occur?

Tuesday, October 9, 2012

Eye Movement

I follow you around but you can't see
You're too wrapped up in yourself to notice
So you choose to look the other way
--Madonna

My eyes are starting to migrate to the SPX as the action takes on a heavier feel. Technically, the uptrend off the early June lows is still intact. The 50 day MA provides a good proxy for the support line.


Today's heavy close puts the index 10 or so handles above support level. Should the index challenge SPX 1430, would think we'll see some concern among technicians.

position in SPX

Spend Trend

Drawn into the stream of undefined illusion
Those diamond dreams, they can't disguise the truth
--Level 42

We have shown some of these data before (e.g., here, here, here), but this chart (source here) nicely depicts the progression in spending over the past 100 years.


The Federal Reserve Act and the Sixteenth (income tax) Amendment were both passed in 1913. Note that prior to 1913, federal spending as a % of GDP consistently averaged 2-3%.

We should also note that to the extent that GDP is over-estimated (and it may well be), then the percentages would be even higher.

One takeaway from the above is that, in addition to the increased spending, is that it has been increasingly difficult to tax at the same rate as spending. Stated differently, there appears to be a ceiling for taxes at about 20% that is politically difficult to pierce.

If fed spending cannot be funded from taxes, then politicians are prone to borrow and print to fund their ways.

As such, one thing we could add here is federal debt as a % of GDP.

There can be little doubt that the current trajectory of federal spending can be traced back to institutions of the early 20th century. It has taken the system 100 yrs to move toward the tipping point.

Monday, October 8, 2012

Trajectory of Fools

There's a room where the light won't find you
Holding hands while the walls come tumbling down
When they do, I'll be right behind you
--Tears for Fears

Nice graph showing the change in borrowing fed govt trajectory since the 'credit crisis.' Prior to the crisis, the concern was the 7% CAGR in fed debt. A primary concern was that growth in GDP was no where close to cover the increase in borrowing.


Since the crisis, however, the federal govt 'solution' has been to spend and borrow even more. Fed debt is now growing at nearly double the pre-crisis rate. Borrowing now outpaces GDP growth by 4-8x (depending on the GDP growth estimates employed).

Those uncovering historical artifacts from the rubble of upcoming trainwreck will wonder why we sped up the train when conditions suggesting disaster were so clear.

We are either blind, or we are fools.

Sunday, October 7, 2012

Cost of Federal Job Programs

Well we're living here in Allentown
And they're closing all the factories down
Out in Bethlehem they're killing time
Filling out forms
Standing in line
--Billy Joel

Below is a picture of the monthly change in payroll employment as reported (and revised) by the BLS. Note that the Sept payroll number did not spike in a favorable direction like other numbers appearing in Friday's 'upside' report.


The Obama administration hates to shoulder blame for negative data--particularly data generated early in its four year term. OK, let's assume that this administration 'owns' the job story since Jan 2010.  Since Jan 2012 payrolls have seen a net increase of nearly 4.2 million workers, for an average of 127,000 employees/month.

This level of job addition is below that necessary to keep up with demographic change. Estimates vary, but ~140,000 is an oft-cited benchmark for monthly job formation in order to stay even with population growth.

The other thing evident with the series since Jan 2010 is that it is not trending. Currently, 127K makes for a good center line of a stationary process. Today's number, which happens to be the one that the media has not focused on, clearly has not altered the process picture.

Stated differently, job growth since Jan 2010 has been flat.

If we are to believe the Obama administration's claims, then federal government programs have been primarily responsible for the job growth obtained (although it is the fault of others, e.g., obstructive Republicans, the Bush Administration, perhaps even Herbert Hoover for the jobs that this administration could have produced...). So what have these jobs cost us?

Spending under the Obama administration has been about $13.4 trillion when we pro-rate OMB's 2012 outlay estimates thru Sept. Because the Obama administration likes to take credit for jobs 'created' from the programs, an important question is: How much have these jobs cost us?

Assume that $1 trillion of outlays during the Obama administration have gone to jobs programs. This is surely conservative, as unemployment assistance alone has cost at least half a $trillion since 2009. We are also not counting $2 trillion+ in spending by the Federal Reserve to stimulate the economy during this period.

Let's also conservatively assume that all of those 4.2 million jobs added since Jan 2010 were 100% due to federal spending programs.

$1 trillion in federal job programs divided by 4.2 million jobs equals about $238,000/job.

Using our conservative assumptions, we find that each job created has cost Americans over one quarter of a million dollars. If we relax our conservative assumptions to more accurately reflect reality, then the cost/job goes up. Adding the Fed's stimulus alone, which it could be argued is fully oriented toward job growth (as it indicated at the last FOMC meeting) pushes the cost toward $1 million/job.

You do not have to be a savvy manager or financier to recognize the poor return on investment here. If the jobs being created were producing, say, $200K or more in real income, then perhaps these these federal job programs are indeed valuable.

But that is not what is happening. The majority of the jobs being 'created' are low paying service and part time work (~500K in last Fri's report alone). The low salaries on these types of jobs make for ugly payback periods when the cost of each job is $250K or more. A part time salary of $25K would take 10 years are more to pay back. Few private sector managers would take on such low yielding projects.

Which is why they are reluctant to do so...

Government stepping in to 'fill the void' takes resources judged by private property holders as more prudently saved than deployed here. By confiscating that property and spending it, government consumes capital that at some point in the future would have formed the basis for durable economic growth.

Once consumed, however, capital is lost. We are currently burning capital on 'job projects' that should not see the light of day. Returns on these projects are meager to non-existent.

Moreover, consuming capital today puts us in a weaker position tomorrow.

Saturday, October 6, 2012

Reelection Cross Plot

One day you see me
The next day I'm gone
Don't fight me baby
I don't want to hold on
--Madonna

Interesting cross plot of the Intrade Obama odds vs the SPX. You don't need a correlation coefficient to observe the relationship.


However, it appears that the statistical fit would be better by using a curvilinear model rather than the linear model employed here. Although there are fewer data points at the high end of the range, the cross plot suggests that the Intrade Obama reelection odds 'max out' at about SPX 1450.

There are, of course, other factors in play. But the data here suggest that, were a multivariate model employed here, few factors are likely to explain more of the reelection variance than level of the SPX.

The cross plot also suggests that, were the SPX to sell off appreciably, Obama's reelection chances start sliding down a steep slope.

position in SPX

Friday, October 5, 2012

We'll Tax Them, Not You

I'm outta money, outta hope, it looks like self-destruction
How much more can we take with all of this corruption?
--Molly Hatchet

A message that the Obama campaign constantly conveys goes something like this:

"Vote for us because we will raise taxes on THEM but not on YOU."

This clip from VP Biden yesterday is a good example. The cavalier add ons ("My heart breaks," "Yes we do," "middle class bearing the burden of all that money going to the super wealthy") leave little doubt about the motives here. Similar thought process can be found in Marx & Engels (1848).

Not quite sure why I continue to find such statements so remarkable, but I do. The notion that a candidate would campaign on a platform of shaking down a minority group--and that voters would be receptive--suggests a deteriorating moral fiber. Such a pathology is not conducive to liberty.

De Tocqueville predicted that the American republic would survive until the time that Congress discovers that it can bribe voters with money taken from private hands. When he made that prediction in the early/mid 1800s, Congress had yet to implement the tools necessary to take large amounts of money from private hands. Mechanisms to do so, such as a central bank and a progressive tax system (both on Marx & Engels' 10 pt plan for overthrowing a free society), were not installed until the early 1900s.

Over the past one hundred years, the federal government has been advancing its skills in courting political favor and redistributing wealth. Were de Tocqueville to visit today, he might conclude that the American republic is done.

And he would be right. If enough voters decide that using the strong arm of government to take from some for the benefit of others is a legitimate endeavor, then liberty is certainly finished.

Thursday, October 4, 2012

Modern Day Pharisees

Gail Wynand: Mr Toohey, why should I consider your opinion?
Ellsworth Toohey: Well, after all, I am the architectural critic of The Banner.
Gail Wynand: My dear Toohey, don't confuse me with my readers.
--The Fountainhead

The Pharisees (the word comes from Hebrew derivations meaning 'set apart') were an elitist group of Jews operating during Jesus' time. It becomes readily apparent in the Bible that the Pharisees did not like how Jesus rolled. On multiple occasions the Pharisees questioned Jesus in manners clearly meant to trap him in his own words. The hope was that Jesus would generate some material that the Pharisees could use against him. The Pharisees would pass along the 'quotes' to the media of their time, the scribes.

Parallels between the Pharisees and modern day intellectuals are straightforward. Sowell defines intellectuals as dealers of ideas. Writers, academics, and think tanks often fit this profile. Once intellectuals develop ideas, they are distributed by the intelligentsia. The intelligentsia, of which the largest group by far is the media, provide channels for moving ideas to the masses.

Increasingly, intellectuals and intelligentsia operate with political motives. This is because politicians often retain intellectuals to support particular policies and agendas. Politicians suppose that co-opting intellectuals lends an air of legitimacy or credibility. While it surely 'works' to some degree, this approach provides an interesting means for measuring bias among the media intelligentsia.

Out of context quotes and analysis, 'fact checking,' think tank 'studies,' et al. are products of the intellectual community meant to promote their ideas and crush those of opponents. As in Jesus' time, a favored modern day Pharisee strategy for doing so is to trap people in their own words.

Wednesday, October 3, 2012

Money Production IS Political

David Trenton: If this goes wrong, we'll blame it on the cook.
Tom Breaker: Absolutely.
--Under Seige

Toward the end of this interview, Jim Grant provides one argument for the ludicrous claim that the Fed must be independent. The Constitution assigns the power to "coin money" to Congress. Congress has essentially abdicated their responsibility by outsourcing money production to the Federal Reserve.

By placing it in the hands of the legislature, the founders were saying that management of the money supply is political. If people do not like the job that Congress does with the money supply, then voters can 'vote the rascals out.'

Like so many other areas, Congress is trying to lay off responsibility for money production to some other entity. By claiming that the Fed is an 'independent agency,' then Congress thinks it can wash its hands of money related problems. The Fed becomes the scapegoat.

What people do not seem to understand is that this scapegoat is out of the direct influence of voters.

Congress is constitutionally responsible for the money supply. If this is no longer desirable, then the people must speak via the Constitution amendment process.

Tuesday, October 2, 2012

Campaign Ads for Fools

She musters a smile for his nostalgic tale
Never coming near what he wanted to say
Only to realize
It never really was
--The Doobie Brothers

It is hard to view presidential campaign ads right  now without reflecting on the sheer hypocrisy that is our political system and the media minions that promote it.

One minute I see an ad mocking the notion that large segments of entitlement and victim mentalities exist among the people. Next minute I see an ad for the same candidate pandering to those with entitlement and victim mentalities.

I find it hard to believe that politicians do not recognize the inconsistency in their statements. More likely, they believe that they can get away with it.

If that is the case, then they view us as mindless fools.

Monday, October 1, 2012

Federalist #10

So take that look out of here, it doesn't fit you
Because it's happened doesn't mean you've been discarded
--Big Country

In Federalist #10, James Madison considers a central problem inherent to democracies. Special interest groups, what Madison calls 'factions,' can gain control of the majority vote. Factions reign supreme and suppress liberty of those in the minority.

Madison argues that the Constitution (which was undergoing the process of state ratification at the time) helps address this problem through a republican design. A republic where people are represented by a few politicians is likely to mute tyranny of the majority and localize political issues.

Unfortunately, Madison did not anticipate what many anti-federalists did--that the federal government would consolidate power over time, thereby stripping localities of their political influence and focusing people's attention on Washington. This centralization has essentially overpowered the republican design envisioned by Madison and other framers.

Early in the essay Madison offers several other remedies to the faction problem, such as abolishing liberty and assigning similar interests to all individials. Madison dismisses these out of hand, although I am not sure that these alternatives are anything but straw men conveniently placed in front of Madison's argument.

What he does not consider as a cure to faction is what we have often cited on these pages (recently here). Take away the resource stream that government controls, and watch the market for political favor wither. Limiting the power of central government defeats tyranny of the majority.

I am somewhat surprised Madison does not discuss this here. Not only were such limitations designed into the Constitution, but Madison discusses these limitations at great length in other contexts.

In any event, this is an important Federalist Paper. It demonstrates that the problems associated with democracy were on the minds of the framers.