Share It

Follow Paul Gregory by Email

Saturday, March 31, 2012

Health and Human Services Obama Care Gobbledygook


HHS paragraph 13.1 - Medicare Policies (Rev. 71, 04-09-04)

“The National Coverage Determinations (NCDs) are developed by CMS to describe the circumstances for Medicare coverage nationwide for a specific medical service procedure or device. NCDs generally outline the conditions for which a service is considered to be covered (or not covered) under §1862(a)(1) of the Act or other applicable provisions of the Act. NCDs are usually issued as a program instruction. Once published in a CMS program instruction, an NCD is binding on all Medicare carriers/DMERCS, FIs, Quality Improvement Organizations (QIOs, formerly known as Peer Review Organizations or PROs), Program Safeguard Contractors (PSCs) and beginning 10/1/01 are binding for Medicare+Choice organizations.”

 

Friday, March 30, 2012

Tax Breaks for Big Oil or for Big Hollywood?

Congress rejected the Obama administration’s proposal to “end tax breaks for big oil.” The White House will prominently feature the Republicans as the lackeys of Big Oil in the 2012 election.
The Obama administration tells us that “tax breaks for big oil” deprive our treasury of billions.  Besides that, the energy giants are making giant profits. They are greedy and don’t want to pay their fair share. Also we hear that tax subsidies are driving up the price of gas at the pump. (I guess no one in the Obama administration took an economics exam. Subsidies increase supply and drive down the price).
If we dig deeper into the tax code, we learn that “Big Oil” tax breaks apply, in most cases, to other industries, not just to “Big Oil” as we are led to think. These other beneficiaries are not under attack. I guess they are either less successful, less greedy, or give more to the White House.
If the Obama administration wants to be honest, it should propose to Congress to continue tax subsidies that other industries routinely receive with the exception of oil and gas, for which the tax breaks will be cancelled on a discriminatory basis.
For example: 1) Depletion allowances apply generally to industries with finite supplies of natural resources above and below ground. They even apply to timber, which I thought was a renewable resource; 2) Intangible drilling costs allow oil companies to write off in one year costs associated with drilling, such as building roads and transporting supplies. Many other companies and industries have similar provisions (see Hollywood below); 3) The sheltering of taxes on profits earned abroad applies to all companies with international operations, not just to “Big Oil.” Microsoft may save as much from this provision as “Big Oil,” but Microsoft is not a target at this moment. Maybe later.
After reading Sec. 181 of the IRS code on “Treatment of Certain Qualified Film and Television Productions,” I became more concerned about “Big Hollywood” than about “Big Oil.” It turns out the filmmakers can write off the entire costs of film or television productions up to $15 million. In a deft touch of social engineering, I further learn that filmmakers can write off more if the costs are incurred in a low-income community (under section 4-D) or an isolated area of distress (designated by the Delta Regional Authority under section 20009aa-1 of Title 7). The latter must be a pay off to New Orleans. I can also imagine an IRS agent tacking film crews through treacherous slums to make sure they are spending their money in the hood.
I favor the elimination of all tax subsidies – to oil, timber, Hollywood, renewable energy and so on (The list is without end).  All tax preferences, even beloved ones such as the home interest deduction, distort economic decision making. So let’s get rid of all of them and place all economic activity on a level playing field. In return, we can all enjoy lower tax rates, not just “Big Hollywood.”

Sunday, March 25, 2012

A Community Organizer Among Hunter-Gatherers: Do We Have Socialist or Individualistic Genes?


 "I think when you spread the wealth around, it's good for everybody." Barack Obama October 13, 2008

A young community organizer is struck by lightning and is transported back to 20,000 BC, sitting around a fire as twenty five cold fur-clad men recount their day of hunting and gathering.

The community organizer feels an immediate kinship.  His Ivy League course on “Liberation Writings from Marx-Engels to Cornell West” taught him that these noble “first communists” constitute “our loving, peaceful, lyrically fair human core.”  Shared belief in collective production and equal distribution make us spiritual brothers. He is fortunate to be able to observe the “blissful conditions of a fabulous golden age of the remote past,” as one writer phrased it. This should be fun.

The glorious savages name him their leader.  Anyone who could make fire with the “flick of a Bic lighter” must be a god. Well, if our intrepid time traveler can organize tough Chicago neighborhoods, he can help this clan live up to its principles of  collectivism and redistribution.

The next day, the community organizer dispatches the hunters and gatherers. He divides them into groups of five and observes with dismay as they depart in ones and twos. He waits near the fire as they return – some with food, others empty handed. The rugged Thor returns with an antelope, and the clan gives him the place closest to the fire’s warmth.  The community organizer has to move.

Our community organizer writes observations in his notebook. Indeed, the successful hunters and gatherers share, except with two they call Hapless and Helpless. Our community organizer waits in vain for his share. Apparently hunter and gatherers think a god should know how to provide for himself. He goes to bed hungry.

The next day Gor bags a deer. He shares with all except Hapless, who got lost, and Helpless, who sprained his toe. Now Gor gets the place closest to the fire. The Community Organizer gets nothing.

Outraged, the community organizer rebukes Thor and Gor. They should pay their fair share!  Down-on-their-luck Hapless and Helpless need a helping hand. Also community organizers don’t work for nothing. In a dramatic gesture, he waves his magic cigarette lighter: “If you do not provide for me and the less fortunate, I will bring the wrath of the gods down upon you.”

The next morning Hapless, Helpless, and the community organizer awake to find the others gone. The community organizer snaps his fingers to return to the 21st century, but he is stuck in time. He, Hapless and Helpless become weaker and weaker and die.

My story is based on Thomas Mayor’s Hunter-Gatherers: The Original Libertarians. He demonstrates that we are genetically programmed to respect  individual rights to the fruits of our own efforts. Our prehistoric forbearers did not engage in voluntary redistribution. They shared perishable food, not out of altruism, but as insurance and reciprocal gift giving. Consistent shirkers were expelled from the band. If anyone tried to force them to redistribute, they simply picked up and moved on to another hunting ground.

go to forbes.com

The Most Accurate Account of Russian's Presidential election

For an informative cartoon on Putin's re-election:

Click here

Thursday, March 22, 2012

2011 Ruffin Gregory Awards for the Worst Treatment of Climate Change in an Economics Textbook.


Apparently, the 2011 Ruffin-Gregory Award for the Worst Treatment of Climate Change in an Economics Textbook are out. Roy Ruffin and I (who did not know this award existed until recently) congratulate this year’s co-winners (or are they losers?): Miller and Gwartney, Stroup, Sobel, and MacPhearson, who received the vaunted grade of F. Among the losers (with the best treatment of climate change) are Mankiw and Krugman and Wells, who were awarded coveted A’s.

We look forward with bated breathe for the announcement of the 2012 awards.

My Diminished Capacity to Understand Obama's Clean Energy Policy

It took President Obama’s Press Secretary Jay Carney to shock me to my senses. As someone who favors cutting government spending on clean energy and eliminating government subsidies in general, I was particularly distressed to learn (in Carney’s words) that “I am “aggressively and deliberately ignorant of the world economy not to know and understand that clean energy technologies are going to play a huge role in the 21st century.” Even worse, I learn that “I have a severely diminished capacity to understand what drives economic growth in industrialized countries in this century.”
And I had thought that if clean energy technologies were going to dominate the 21st century, private enterprise would figure this out and develop them itself. In my ignorance, I thought that subsidies are dictated by and for special interests not by economic rationality. I also believed that Solyndra and SunPower were not aberrations but representative of what is going on in Secretary Chu’s and Obama’s energy department. What I fool I have been.

Sunday, March 18, 2012

Note to Krugman: Greece Proves Keynesian Economics Wrong

Times columnist Paul Krugman’s continuous railing against austerity reached a crescendo with Greece’s default. In his What Greece Means, Krugman vents his outrage:

“What Greek experience actually shows is that while running deficits in good times can get you in trouble… trying to eliminate deficits once you’re already in trouble is a recipe for depression…Greece is the worst case, with unemployment soaring to 20 percent even as public services, including health care, collapse.”

Bankrupt economies, like Greece, need stimulus, not austerity, Krugman declares indignantly. The “austerity-induced depressions” around the European periphery are proof that Keynes was right.  Germany’s Angela Merkel, her IMF-austerity allies, and world-wide lenders do not understand that we need a massive stimulus to get Greece out of this mess. They need to step up to the plate if they are good citizens of Europe (or the world).

Krugman does not fess up that Greece’s Keynesian policy of endless borrowing to fund wasteful government spending and feed massive welfare programs is exactly what got Greece in the trouble it is now in. The Greeks cannot pay their  bloated public payrolls, out-of-kilter wages, and generous pensions and early retirements unless fools lend them money that will not be repaid. Even the Greeks themselves are not falling for that trick. They are too busy transferring their assets abroad. Merkel and her stingy Germans make for good scapegoats, but it’s not only them. Lenders throughout the world have shut down the lending spigot.

Liberals are gearing up to use Krugman's Greek fable of “Keynes has won” to justify further trillions of U. S. debt and growing government to ever greater heights, as Times columnist Nicholas Kristof reveals in his In Athens, Austerity’s Ugliness:

 

 “Europe declared war on Keynes, and Keynes is winning…If you want to know how well (Republican budget cutting) works, come visit Europe — especially Greece. Yes, Greece needed a wake-up whack and economic reform, but Republican-style austerity knocked the patient unconscious.”

Greece’s Keynesian orgy leaves  it with two unpalatable options. One: Without further European bailouts, Greece exits the Euro zone, its drachma collapses, and its living standards fall to Bulgaria’s. Eventually, after prolonged pain its wages and prices fall enough to restore its competitiveness. Two: It meets the terms of its EU bailout agreements, it stays in the Euro zone, cuts government spending, and reduces wages and prices over an extended period of time until its competitiveness is restored.

One statistic explains why Greece must experience rising unemployment, let wages and prices fall, and fix its broken welfare system under both scenarios. German unit labor costs (the cost of producing one unit of output) have been flat over the past decade, while Greek unit labor costs soared, fueled by borrowed money from abroad. Germany (and the rest of Northern Europe)  kept its costs in check by wage restraint, rising productivity, and checking the welfare state. Greece became a broken economy no longer able to compete either within the European or world market. Keynesian economics brought them to this sad state of affairs.

Greece is not a test of Keynesian economics as liberals would like to claim.  Only economic illiterates could call for deficit spending when there are no lenders. In order for there to be a deficit, someone somewhere has to pay for it.

Thursday, March 15, 2012

More Speculation Nonsense


I regret that the “profitable speculation” diagram has disappeared from economics texts. If more people knew it, we could avoid unnecessary nonsense. Even observers from the right have no idea of  the positive role of profitable speculation.  Bill O’Reilly this evening launched another attack on speculators.

If Bernie Sanders’ (and others’) proposals succeeded in eliminating speculation, we would experience broader price and quantity swings and would be worse off.

The concept is very simple. If speculators anticipate lower future supplies (and higher prices), they buy now and hold for future sales. If they guess right, they sell in the future at a profit. If they guess wrong, they sell in the future for a loss. The profitable speculator has moved supply from a period of relative abundance to a period of relative scarcity and has smoothed out prices. We have been made better off.

In other words, profitable speculators perform a positive service for the economy. Unprofitable speculators make things worse, but they can’t stay in business if they continue to guess wrong. They disappear. Those with a knack for speculation remain and smooth out prices and supplies.

Notice that there is no outcry when speculators conclude that future supplies will improve and they push prices down.

I guess that people will never understand this simple proposition. So we’ll have to live with this hot air.

Tuesday, March 13, 2012

Phoenix Shows Romney Right and Obama Wrong

I wrote the following advice to President Obama in late August:

“Instead of trying to prop up the overbuilt housing market, the President should propose measures to allow the economy to work off its excess inventories of housing and to find a bottom in housing prices. Only after the bottom is reached will construction resume.” 

In a campaign appearance, Mitt Romney came to the same conclusion, saying that we must let the housing market clear and then we can have a recovery. Romney was widely ridiculed and has said little since then. In the meantime, Obama has tried one scheme after another to keep housing prices up and foreclosures down.

Today’s Journal’s Rise in Phoenix Housing Prices Shows Path for Other Cities shows the wisdom and courage of Romney’s words.  Phoenix’s housing prices fell  fifty five percent and its foreclosure rate rose to number three in the nation, but Phoenix housing prices are turning around.  Whereas, housing prices continue to fall nationwide, Phoenix’s are rising as low prices have brought new buyers into the market. Buyers from Canada are flooding the market and investors are bidding for blocs of homes, which they put on the rental market. Owners of underwater homes are being offered purchase contracts which allow them to stay in their houses as renters.

As one expert notes: “Phoenix has hit bottom.”  This means that Phoenix will be among the first cities to experience a revival in homebuilding and the jobs that go along with it.

I remember well the housing bust of Houston as oil prices plummeted in the 1980s. No one propped up mortgages. Underwater homes went on the market. The inventory disappeared, and housing construction revived.

This is simple economics of supply and demand.

What appears to liberals as mean spirited capitalism actually shortens the period of pain and accelerates the recovery.  I guess they will never learn this elementary lesson.

Sunday, March 11, 2012

Much Too Early to Say Putin has Won: Understanding the Big Lie


Today’s gloom-and-doom Times piece concludes that the Russian protest movement “collided with the cold reality of Mr. Putin’s convincing victory” in the March 4 presidential election. Protesters lack a leader and a positive message. Sunday’s demonstrations gave them an opportunity “to cry out together, one more time, for political freedom.” No further demonstrations are scheduled. All is lost. Putin has won.

The White House has signed on to this “Putin has won” version.  After five day’s of hesitation, President Obama called Putin, as the White House communiqué reported, to congratulate him on his March 4 victory. Other Western nations sent more muted messages, but not Obama.

Not so fast. Let’s get this straight. Putin did not win a “convincing electoral victory.” Real elections require an opposition, not the sorry rogues’ gallery Putin allowed to oppose him. His Central Electoral Commission disqualified everyone else. As one protester complained: “We can’t go to the courts. We cannot go to the prosecutor.” The streets remain the only option.

As long as we believe the big lie that March 4 was a real presidential election, Putin can triumphantly declare (with tears in his eyes?) democracy alive and well.  True: Voters went to the polls. Putin might have won even without the ballot stuffing, carrousel voting, and intimidation. But Putin’s “Party of Scoundrels and Thieves” barely scraped by against the shopworn communists and nationalists in the December 4 parliamentary elections. He could take no chances on March 4.

go to Forbes.com

Friday, March 9, 2012

Unless It’s a Typo, Greece is Going to Default on Its Default!


Buried amidst the details of today’s Financial Times account of the Greek default was  a sensational figure. If I understand it correctly, it said that the “new” Greek bonds are trading in grey markets at 28 to 40 cents to the Euro. Following this was the remarkable statement that, in effect, said that  markets anticipate that Greece will default on its default.

Banks that exchanged “old” for “new” Greek bonds got about 47 cents on the Euro. If they were to turn around and sell them on the market at 40 cents on the Euro, they would get about 18 cents per Euro on their “old” bonds. Or did I miss something?

I also believe that the European Central Bank has agreed to accept the “new” Greek debt as collateral at their full face value. If so, the European Central Bank will be holding collateral assets that are overvalued by 60 percent.

Maybe I am missing something, but if I am right, this sounds sort of crazy to me. Can someone help me out on this?

Greece: Default or No Default?

Yesterday, 83 percent of Greek sovereign debt holders agreed to “voluntarily” exchange their bonds for new bonds with face value of 53 percent of the original bonds. The Greek finance ministry announced that it would invoke the collective action clause to impose the swap on an additional thirteen percent of bond holders who did not agree to the swap. This thirteen percent purchased Greek sovereign bonds under Greek law and are subject to the parliament’s collective action clause. This seems to leave seven percent holdouts who did not agree to the swap and did not purchase under Greek law. What will happen to them remains unclear.

With this “successful” restructuring, the troika monitoring Greece agreed to release a new tranche of bailout funds to stave off a “disorderly” Greek default. These funds will give Greece a short amount of breathing space.

Notably, the Wall Street Journal referred to yesterday’s actions as  “the largest-ever sovereign-debt default and the first for a Western European country in half a century.” As I write, the ISDA is meeting in London to rule whether Greece’s actions will trigger the 3.8 billion Euros of credit default swaps. Greece and the EU had hoped to label the debt restructuring as “voluntary” and hence avoid the CDS trigger. [Yes, they did agree on the obvious: Greece did default].

These dramatic events simply give Greece perhaps a month of breathing  space. Greece cannot borrow and must meet its austerity pledges to the EU, European Central Bank, and the IMF before it can tap more rescue funds. With parliamentary elections forthcoming and austerity universally unpopular, Greece will not be able to implement its austerity program, in my view. At that point, the troika must decide whether to bail Greece out with no conditions or to let in go under and leave the Eurozone.

The Greece story is only beginning.

Wednesday, March 7, 2012

I, Like Ms. Fluke, Am Denied Free Access to Preventive Care

Dear  HHS Secretary  Sibelius:

After viewing Ms. Fluke’s testimony on her right to free access to contraception, I wish to bring to your attention that I am also being denied free access to vital preventive health care. Medical studies prove the reduced health-care costs of  senior citizens, who engage  in  moderate daily exercise in a proper facility under supervision of a physical therapist certified in geriatric care.

Medical research has clearly demonstrated that I – as a 71 year old male -- will have fewer hospitalizations and need fewer prescription medications as a result of daily moderate supervised aerobic and other exercise. I provide in the attached appendix actuarial calculations that demonstrate the discounted present value of health-cost savings over my projected lifespan exceeds the cost of the vital preventative medical care that I hereby petition.

I base my claim on HHS paragraph 13.1 - Medicare Policies (Rev. 71, 04-09-04), which clearly states that:

“The National Coverage Determinations (NCDs) are developed by CMS to describe the circumstances for Medicare coverage nationwide for a specific medical service procedure or device. NCDs generally outline the conditions for which a service is considered to be covered (or not covered) under §1862(a)(1) of the Act or other applicable provisions of the Act. NCDs are usually issued as a program instruction. Once published in a CMS program instruction, an NCD is binding on all Medicare carriers/DMERCS, FIs, Quality Improvement Organizations (QIOs, formerly known as Peer Review Organizations or PROs), Program Safeguard Contractors (PSCs) and beginning 10/1/01 are binding for Medicare+Choice organizations. NCDs made under §1862(a)(1) of the Act are binding on Administrative Law Judges (ALJ) during the claim appeal process. (See 42 CFR 405.732 and 42 CFR 405.860).

I am confident you will agree with my reading of HHS paragraph 13.1, rev. 71,04-09-04, that I am entitled to free access to this vital preventive medical care.



Sunday, March 4, 2012

Moscow March 4: Sights and Sounds of Today's Russian Election

Here is an account of the sights and sounds of today’s  Russian Presidential election. As expected, Putin sailed to an easy victory with over 60 percent of the vote.

March 4th Russian Elections – grey day, nothing special…


Gregory Kataev, Moscow

It’s warm, around 0 C, snow melts, wide springs of dark mud near the sidewalks, water-drops fall from every roof, grey day, distant misty sun. I enter the regional election headquarters on Fadeyeva street inside the State Glinka Musical Culture Museum built in mid 70s.

The elections took place on the second floor in a huge lobby with a beautiful stained-glass window on one side. There were many people. Some of them were voters like me. Others were observing the landscape, monitoring the situation. I saw a couple of web cameras on the walls. Two policemen were quietly standing at the entrance to the 2nd floor. The other two were standing on the other side of the lobby.

I came over to the table where there was a sign with several street addresses, including may own. A nicely dressed woman in elegant glasses was sitting opposite me. She checked my passport and address, wrote down my passport number in a huge hard-covered notebook. She asked me to sign and gave me two voting bulletins with the lists of candidates. The  first was for the regional city council, the second for president of Russia. I looked through both. The second list contained no surprises.  The first was full of completely unknown names. I looked at the woman. She smiled at me with her mouth tightly closed and eyebrows arched as if to say: “That’s all I’ve got for you, any questions? “

I smiled in return and said out of earshot of others: “You know, the grocery sections with the small items have variety and freshness, but the main dish menu looks definitely stale.” She looked glanced around and said in a hushed voice: “Everything depends on your taste.” I replied: “They all look tasty, but don’t their labels say they have already expired? She started laughing without emitting a sound. An elderly man behind my back joined in the repartee: “Young man, you’re not in a resort hotel, it’s too late to drink Borjomi.”*

Nevertheless, I read carefully the names of all the regional city council candidates, examined the shining faces of the presidential candidates, made my choice, voted and started down the marble stairs. On my way out, I met my new friend, the elderly man. I smiled at him; he nodded to me and made a deep sigh of resignation.

I went back to the first floor and looked around – there were two wide tables not far from the exit covered with different goods for sale. A temporary first-floor lobby mini-market. There were Chinese toys, Russian sweets, honey, and… American cowboy hats.

How come? - I thought approaching the table.

A young woman greeted me: “Congratulations on the elections!”  She was dressed in a Russian folk costume. “Would you like to buy something?”
“No thank you,” I answered. “Have you already voted?”
“No,” she laughed.  “I will not vote, I have no time, take a look – we have very nice folk artist’s cups, plates and vases.”
“Funny,” I asked: “Why do you have American cowboy hats?”
“Because, except for the Russian things, everything comes from China. She picked up one of the cowboy hats. “These hats are very good, natural leather, and even Americans order them from China.”

Her appearance and her light accent revealed she was not from Moscow, but from some Russian town nearby. She went on: “I took the brown one for my husband.” A serious look crossed her face: “In fact in Russia we could make such hats even better than the Chinese.
She kept smiling. She wasn’t pretty, but she was very nice with a clear and open face. I imagined her husband in a Russian folk outfit and Chinese American cowboy hat. The visual picture struck me as ridiculous but at the same time touching.

She doesn’t have time to vote. And probably she doesn’t know what’s going on around and for whom to vote. She, and I assume many Russians, are simply out of this issue.

I bought a honey. Russian honey in natural honeycombs.

Outside in the windy open air, a policeman, guarding the entrance, turned to me: “Have you got a light?” – “No, I quit smoking.” – “That’s the right thing to do,” He added – “I’ll quit smoking in my new life.” I asked: “And whom do we have to elect to start a new life?” He looked at me, sizing me up: “You voted for Prokhorov, didn’t you?” I pretended not to be surprised: “How can you be so sure?” He responded: “Nothing to be sure about. It’s enough just to look at you.” I joked: “Can you see through the walls also? So that’s why you’re standing here, right?” He repositioned his Kalashnikov on his shoulder more comfortably and answered with a peaceful smile: “Come on, that’s fine, Prokhorov seems a good guy, at least young enough to change something.” Then he lowered his voice, moved closer to me and said: “Does it really matter for whom you vote?” He abruptly turned from me to stop the conversation, asking a man entering the Museum: “Excuse me, have you got a light?”

The policeman’s choice remained unclear to me.

Walking home I remembered how I was standing on the White Ring round the Sadovoye Kol’tso (Garden Ring) the  previous Saturday, a week back. Passing cars of protesters were joyfully honking at us. People waved from open windows, and we waved back at them with our white ribbons. The high point was a brand new Ford Mondeo police car. Two cops were inside, and both smiled at us, waved and spiritedly honked. Then I came to myself: “Where am I?”  I thought: The guard I just met will probably never get the “new life” in which he can get the motivation to quit smoking.

* Borjomi – famous Georgian mineral sparkling water known for its healing microelements. The Russian expression "It’s too late to drink Borjomi" means that it’s too late to take light medicines and that more radical measures are needed.

Rattner Delusional on Obama’s Detroit Bailout? A Virtual Chris Wallace Interview

Chris Wallace: We wish to welcome Steve Rattner to this virtual edition of Fox News Sunday.

Steve Rattner: Pleased to be here Chris.

Chris Wallace: Tell us what your position in the Obama administration was.

Steve Rattner: Well, the Times lists me as Obama’s lead advisor on his automotive task force. I was really his “Car Czar.” As with his other Czars, I had all the power and no need for Senate confirmation. Boy, was that a rush.

Chris Wallace: In your Delusions About the Detroit Bailout, you claim there was no alternative to the government bailout of Detroit, which your critics characterize as a corrupt, cronyist, and inefficient payoff to organized labor and the green energy lobby.

Steve Rattner: Yes, I wrote that no conceivable providers of funds had the slightest interest in financing those companies on any terms. Let me say this Chris:  I recognize the risks of government intervention, particularly rewarding failure and the scary prospect of politics entering private sector decision-making. But when markets fail, government should have the ability — in fact, the obligation — to step in.

Chris Wallace: But your critics argue that you should have only provided a bridge loan, secured by GM and Chrysler assets, and then stepped aside for an experienced bankruptcy judge. Instead, as the GAO reports, you put in $62 billion of taxpayer funds to control the process from start to finish. Your critics argue that GM and Chrysler would have emerged leaner and more competitive at no taxpayer cost from a regular bankruptcy, and all stakeholders would have shared sacrifice. You could have avoided the “scary political” charge that the Detroit bailout was a corrupt payoff to Obama’s labor and green-energy contributors. 

Steve Rattner: (Changing the subject). What critics conveniently ignore is that the president’s plan was litigated throughout the federal court system — all the way to the Supreme Court, in the case of Chrysler — without so much as a nod to the opponents from a single judge.

Chris Wallace: Your critics would say “Hogwash.” Bankruptcy courts and superior courts regularly accept “voluntary” agreements among stakeholders. GM and Chrysler’s TARP lenders could scarcely resist Obama’s demand for their “shared sacrifice.” The secured Chrysler lenders were strong-armed into accepting 29 cents on the dollar after the President of the United States publicly accused them of being “speculators” who hold out when everyone else is making sacrifice.

Steve Rattner: (Becoming angry). Chris, you should refrain from inflammatory language like “strong armed.”

Chris Wallace: Wait a minute, Sir. The Director of the Indiana State Pension Fund – scarcely a speculator -- complained that Indiana retirees ended up with pennies while non-secured UAW funds got 55 percent of the “new” GM, and senior union members still earn $116,480 in wages and benefits. You have to admit that is pretty good pay for high-school graduates. UAW members currently pay only 7 percent of their health-care costs. The UAW’s own website brags that Obama’s bankruptcy saved the UAW’s gold-plated pension fund from being reduced 65 percent to pension rates in other industries. Do you agree that the UAW did not sacrifice and the Indiana Fund is, as it claims, a victim of the abuse of power by the Executive Branch to further its political agenda?

Steve Rattner: (At a loss for words). No. There was shared sacrifice all around!

Chris Wallace: Excuse me sir, but did not you recently say: The members of President Obama's Auto Task Force did not work as hard as we did in order for workers to see their pay slashed.

Steve Rattner: Well, I had to backtrack from unguarded remarks before a Detroit business group, where I admitted that the UAW members should have taken a pay cut.

Chris Wallace: Well, does not that….

Steve Rattner (Interrupting to change the subject): Don’t forget that the Bush administration approved the first loan to Detroit in its last two weeks in office.

Chris Wallace: Excuse me, sir. You, not the Bush administration, handled the bankruptcy. Did you inform the Bush administration that you were going to use the bankruptcy to reward political supporters?

Steve Rattner (Weakly): But we saved a million automotive jobs.

Chris Wallace: Excuse me sir, but other industries that have gone through regular bankruptcies have saved as many or more jobs. Top legal minds also say GM could easily have found a private buyer or private investor once the bankruptcy proceeding was underway. Instead, the reorganization was structured as a sale that excluded private capital and that preserved a very large flow of union and environmental contributions.

go to Forbes

Saturday, March 3, 2012

Is There are Clearer Case of Media Bias? Gas Prices under Bush and Obama


The Times’ March 1 news piece Tensions Raise Specter of Gas at $5 a Gallon reflects an obvious media bias. As the Times news piece claims, rising gas prices are the result of international events over which President Obama has no control. I cite the first paragraph:

With no clear end to tensions with Iran and Syria and rising demand from countries like China, gas prices are already at record highs for the winter months — averaging $4.32 in California and $3.73 a gallon nationally on Wednesday, according to AAA’s Daily Fuel Gauge Report. As summer approaches, demand for gasoline rises, typically pushing prices up around 20 cents a gallon. And gas prices could rise another 50 cents a gallon or more, analysts say, if the diplomatic and economic standoff over Iran’s nuclear ambitions escalates into military conflict or there is some other major supply disruption.

Under Bush, the “rising gas price” news story would invariably mention  Bush by name, Big Oil, and his long-standing ties to the oil industry.

I was about to document this media bias by searching news archives, when I found an excellent blog of March 1 by Julia Seymour, whose main results I cite below:

The Business & Media Institute examined all the broadcast network news reports mentioning gas prices during each of those time periods and found ABC, CBS and NBC aired more than 2 ½ times more stories (63 stories to 24) in 2008 than they did in 2011.
But it was more than just the amount of coverage that showed the media's willingness to spin gas prices one way under Bush, and another way under Obama. In 2008, network reporters mentioned "Bush," the "president" or "government" in gas price reports 15 times more often than in 2011 under President Obama (15 stories to 1).

Congratulations to Julia Seymour for excellent reporting and analysis.

Thursday, March 1, 2012

Kleptocrats, Oligarchs, and Billionaire Entrepreneurs

(Note: I posted this back in 2011. Someone stole my domain name back then so I am reposting it now. It seems relevant given Russia's March 4 presidential election)

Personal wealth is created in one of two ways. On the positive side, it arises as a result of innovation, hard work, brilliant insights, or even luck. Entrepreneurs create enormous wealth when they have a better idea (Henry Ford’s assembly line), discover and develop new products (Microsoft Windows or Google’s search engine), see a new business model (Sam Walton), or are simply at the right place at the right time. Often, it is a combination of innovation and timing, something economists call network externalities.

A second and negative route to personal wealth is through political connections, lobbying to obtain benefits from the state, violence to remove competitors, or outright theft of public resources. Those who earn their fortunes the first way create jobs, raise productivity, and contribute to economic welfare. Those who use the second route are “rent seekers” who subtract from growth and welfare for their own benefit.

Bill Gates, Sam Walton, and Sergei Brin represent wealth earned through entrepreneurship. Their Microsoft, Walmart, and Google made them not only among the richest persons in the world. They have created new technologies, hundreds of thousands of jobs, new business models, and have revolutionized they way we gather and process information. Carlos Slim, the world’s wealthiest man, made his fortune by monopolizing Mexico’s telecommunications market (presumably with help from government regulators). Poor Mexicans have been denied the wide range of choice of telephone services that others have and pay for his wealth in the form of the highest telephone rates on the continent.

The most egregious rent seeking occurs in autocratic and dictatorial regimes in which wealth accumulation is not constrained by an electorate, corporate transparency, or a free press. Such authoritarian regimes breed kleptocrats –those who accumulate wealth for themselves through their official positions. Oligarchs are those who use their access to those in power to accumulate wealth. Both kleptocrats and oligarchs transfer assets from society or from others to themselves; they do not create new products or additional jobs. They reduce economic welfare by crowding out real entrepreneurs, who refrain from economic activity knowing the fruits of their labor will be stolen. Kleptocracy and oligarchy are determined by the quality of society’s institutions and rule of law. The better the institutions, the more limited kleptocracy and oligarchy.

I present here some data on the world’s kleptocrats, oligarchs, and top entrepreneurs. The wealth of kleptocrats cannot be measured with any degree of precision because, as heads of state or government officials, they wish to conceal it. However, the figures capture rough orders of magnitude. Oligarchs, not being government heads or officials, are less prone to conceal their wealth. They may even feel a sense of pride when they see their names listed in Forbes.

I begin with a ranking of kleptocrat heads of state by absolute wealth. (I convert the wealth of past kleptocrats into current dollars). Four of the top six rule (or ruled) countries with rich natural resources (Putin, Nazarbaev, Aliev, Mobutu), such as energy or diamonds. The real “oil curse” is therefore the tendency of the rulers of mineral-rich countries to steal the national wealth. Other kleptocrats controlled poor countries lacking access to rich natural resources. The recently deposed Mubarak (whose personal wealth is listed at the maximum estimate) is in the middle range of notable kleptocrats. Of the eleven countries represented, four (Philippines, Indonesia, Nicaragua, and Peru) have subsequently democratized, although Nicaragua’s democracy may be shaky. Democracy strikes at the root causes of kleptocracy by making the rulers accountable to an electorate and investigative journalists.


Ruler(ranked top to bottom)YearWealth (bl. 2010 $)
Putin (Russia)201140
Suharto (Indonesia)1998 25
Nazarbaev Kazakhstan)201120
Marcos (Philippines)19867.5
Aliev (Azerbaijan)201110
Mobutu (Congo, Zaire)19975
Mubarak (Egypt)20115
Abacha (Nigeria)19983.5
Milosevich (Serbia)20001
Duvalier (Haiti)19860.55
Fujimori (Peru)20000.6
Alemain (Nicaragua)20020.1
Estrada (Philippines)20010.08

Heads of state who steal from less populous countries (Serbia, Haiti, and Nicaragua) accumulate less wealth ceteris paribus than those in populous economies (Russia, Indonesia and Nigeria). The grazing ground for kleptocrats is less spacious in poor countries than in rich countries. The percentage of the kleptocrat’s wealth to GDP is a measure of the kleptocrat-head-of-state’s s burden on society. This table shows that Mobutu, at the end of his reign in Congo, had accumulated wealth equal to more than forty percent of the nation’s meager output. Duvalier had accumulated an estimated ten percent – a figure comparable to the Central Asian oil magnates of Kazakhstan and Azerbaijan. Marcos and Suharto are in the three to four percent range, whereas Putin and Milosevic are in the one to two percent range.

Ranked top to bottomYearPercent of GDP
Mobutu (Congo, Zaire)19970.4202
Aliev (Azerbaijan)20110.1111
Nazarbaev (Kazakhstan)20110.1036
Duvalier (Haiti)19860.1000
Marcos (Philippines)19860.0429
Suharto (Indonesia)19980.0331
Putin (Russia)20110.0180
Milosevich (Serbia)20000.0165
Abacha (Nigeria)19980.0127
Mubarak (Egypt)20110.0100
Alemain (Nicaragua)2002 0.0073
Fujimori (Peru)20000.0029
Estrada (Philippines)20010.0003

It should be noted that these figures show the economic burden imposed only by the head of state. Heads of state have their courts, which share in the plunder of resources. The court’s assets are not calculable, but we imagine that, if they could be included as well, the kleptocratic burden would be multiplied many times over.

The next table shows the cumulated wealth of the ten wealthiest persons in industrialized democracies (the United States, the European Union, and South Korea), in two former Soviet states (Russia and Ukraine), Mexico and in China. These figures omit the wealth of the head of state.

The table shows that the top ten have more wealth in the large and wealthy United States and European Union (between 170 and 270 billion). Relatively poor Mexico and Russia both have nearly one hundred billion. (There are as many billionaires listed for “poor” Russia as for the “rich” United States – a remarkable testimony to rent seeking in Putin’s Russia.) The top ten in South Korea and Ukraine have the same amount of wealth even though South Korea is five times richer. China lies between Mexico and Ukraine although it has the world’s second largest economy.

Ranked top to bottomWealth of Top 10 (bln $)
US264.8
EU (without UK)171.5
Russia97.0
Mexico90.3
China42.3
South Korea21.4
Ukraine17.7

The US top 10 list is comprised largely of entrepreneurs whose ideas and business methods changed whole industries (Gates, Buffet, Walton, and Brin). The Russian top 10 list is made up of Kremlin-favored oligarchs who were awarded extremely valuable assets that had previously belonged to the state. The South Korean list is populated by industrialists who formed conglomerate businesses that compete in world markets, while the Ukrainian list is made up of those who received valuable state assets during privatization. China’s list is of industrialist owners of successful Chinese companies (most partially owned with the state), who could not have been successful without the support of the Chinese state.

The next table shows the wealth of the top ten as a percent of GDP. In those countries (US, EU, South Korea) where the top wealth holders play primarily entrepreneurial roles, their share is between one and two percent. Viewed in the light of their contribution to the economy, their wealth reward seems rather modest. In Ukraine and Russia, the share of GDP of the top ten is between four and six percent – a rather substantial return to those making a negative or questionable contributions to output and welfare. The high Mexican share is due to the “Carlos Slim Effect.” He alone accounts for most of the high Mexican figure.

Top 10 PersonsWealth of top 10 as percent of GDP
Ukraine0.0586
Mexico0.0583
Russia0.0437
US0.0184
South Korea0.0147
EU (without UK)0.0113
China0.0042

China is an outlier. The wealth of its richest persons is small relative to the size of the Chinese economy. What this suggests is that there are forces at play, other than the usual constraints imposed by democracy and a free press, that have limited rapacious rent seeking on the part of connected Chinese businessmen . At this juncture, we do not know enough about the internal workings of large Chinese businesses to define the entrepreneurial roles played by their chief executives. These constraints on rent seeking in China may be one of the many (still unexplored) reasons for China’s rapid growth.

The basic message of this analysis is that, in countries with good institutions, generous wealth accumulation is a reward for positive contributions to the economy. These are rewards for innovation, radically new ideas, persistence, and risk taking. In societies with good institutions, the rewards are relatively modest as a percent of total economic activity. These rewards are constrained by competition, social morays, and the rule of law. In countries with poor institution, wealth is accumulated either by the head of state or by oligarch cronies by transferring assets from others or from society itself. Such transfers not only do not increase national wealth; they reduce it insofar as real entrepreneurs cannot prosper in such an environment.

We are often reminded of the greed of those at the top. Little attention is devoted to the contributions of those entrepreneurs whose ideas and methods have contributed to economic growth. Walmart, Microsoft and Google currently employ 2.1 million, 93,000, and 22,000 respectively. The indirect employment they create through suppliers, vendors and other stakeholders is a multiple of these figures. Their annual payrolls equal a large fraction of the accumulated wealth of their founders.

Warnings about the growing concentration of wealth at the very top must be considered in proportion to the size of economic activity, whose increase is in fact positively affected by those at the top. Today, the top ten account for less than two percent of GDP in the United States. At the turn of the twentieth century, the top ten accounted for more than five percent! In a ranking of the 100 top wealth holders from the founding of the United States to the present (as a percent of GDP), only five living persons are listed, and Gates and Buffet are ranked only numbers 31 and 39 respectively.

Data sources: This data is drawn from Forbes rankings of the world’s richest people, from estimates of Transparency International, and independent estimates of the wealth of Vladimir Putin and informal estimates of the wealth of Nazarbaev of Kazakhstan and the Aliev family of Azerbaijan. The wealth of other kleptocrats is given as of the date of their removal from power converted into 2010 US dollars. The top five Ukrainian oligarchs are taken from http://ukrainianguide.com/5-wealthiest-ukrainian-oligarchs/2/ Only five Ukrainian oligarchs made the billionaire list; so I assume there are five more slightly below one billion. Mubarak’s wealth is taken from an ABC News report of February 11, 2011 citing U.S. intelligence sources. These sources dismiss the high figures cited in the press and place Mubarak’s wealth between $1 and $5 billion. I take the upper figure to avoid underestimation. The wealthiest 100 Americans throughout history is taken from http://www.getrichslowly.org/blog/2006/07/29/the-wealthy-100-a-ranking-of-the-richest-americans-past-and-present/

“Voluntary Exchange” of Greek Debt? And There Goes Another Market

Credit default swaps are default insurance for corporate and sovereign bonds, to be paid in the event of the restructuring of the debt, a failure to pay coupons or principal on the bonds, or a bankruptcy.

The International Swaps and Derivatives Association's EMEA Determinations Committee voted yesterday that no “event” had occurred despite the Greek parliament’s passage of legislation that forces private creditors to accept losses on their holdings.

The Greeks and banks that sold credit default swaps had hoped to avoid triggering the credit default swaps by claiming that the swap of Greek bonds for “new” bonds at a loss of 53.5 percent was “voluntary.” The problem with this argument was that a number of private lenders were not willing to go along. Now the Greek parliament has legislated that they must.

So we now have a restructuring that is not a restructuring. We’ll have a default that is not a default. We now use semantics to solve inconvenient problems in new virtual universe of finance.

Greece’s long term problem is that lenders do not trust it to meet its obligations. I trust that memories are long. Such arbitrary action against private lenders and against holders of credit default swaps will only delay Greece’s return to credit markets.  Moreover, they cast a pall over sovereign debt, the cost of which  will be borne by borrowers generally.

Holders of credit default swaps join Chrysler’s secured lenders.