Archive for category Economic policy
Youth Unemployment
Posted by TonyLima in Economic policy on May 5, 2013
Youth Under-employment
The May 5, 2013 New York Times has an interesting piece on youth unemployment. Economics writer David Leonhardt interviews economists about the youth underemployment rate. (Based on the description, the measure used appears very close to the Bureau of Labor Statistics’ U-6 rate.) The article points out that the underemployment rate in the 25 – 34 age group is 26.6%, well above even France (22.0%).
The article goes on to note that economists cannot explain why the youth underemployment rate is so high, especially compared to the year 2000 when the same rate was 18.5% for the U.S. While it would be interesting to examine the annual rates between 2000 and 2012, I don’t have time for that today. Instead, let’s just look at current unemployment rates by age group. The graph below shows that the unemployment rate in the 25 to 34 age group is about two percentage points higher than any of the four older groups.
Here’s some speculation. I’ve written many times about the heightened uncertainty in the economy. This has been created by the Obama administrations regulations, including Obamacare, the Dodd-Frank financial reform bill, and the host of regulations emanating from the EPA, the Bureau of Labor Statistics, the Civil Rights division of the Justice Department, and a host of other areas.
Economists have known for decades that hiring a new employee is not completely a matter of acquiring the quantity of labor that makes the marginal revenue product of labor equal to the wage rate. There are a variety of theories, most of which complement each other: efficiency wages, labor hoarding, and so on. Many of these theories were developed to explain the procyclical behavior of labor productivity. Productivity tends to rise during expansions and fall during downturns. The simplest explanation for this is that hiring an employee entails a certain amount of “setup costs.” These include advertising, screening, interviewing, and training. Therefore firms will try to hang on to workers even when demand decreases — at least if the firms believe the decrease in demand is temporary.
Think about a business faced with regulatory uncertainty as described above. If they hire a 25 year old, they hope to keep this worker for many years. But if they hire a 65 year old, they expect that worker to retire soon. Hiring the 25 year old exposes them to a much longer cost if the risk turns around and bites them. And they would have to possibly lay off the 25 year old. All they have to do with the 65 year old is wait a few years.
Betting Against the Obama Administration’s Economic Policies
Posted by TonyLima in Current issues, Economic policy on March 15, 2013
Two Market Indices
The other day I mentioned to an acquaintance — let’s call him Mr. X — that I had earned about 10 percent per year betting against the Obama administration’s economic policies. I’ll reveal my not-so-secret method shortly. But first I wanted to deal with the reply from Mr. X: if I had put my wealth into the stock market at the beginning of 2012 I would have made a killing.
This is, of course, tantamount to waving a red flag at an angry bull. Today I finally had a few minutes to pull some data together. Before looking at the data, however, I’ll point to an obvious flaw in my acquaintance’s logic: forecasting the past is always easy. Did he put his wealth into the stock market at the beginning of 2012? I doubt it very much.
But I did get curious, so I grabbed Mr. Excel and headed over to the St. Louis Fed’s FRED database to get the S&P 500 and Dow-Jones Industrial indexes. Here are the results. (I have not included dividends because I’m lazy.). Since January 1, 2000 the annual rate of return on the S&P has been 0.45% and the return on the Dow 1.62%.
But, of course, that wasn’t the question. What have the same returns been since January 1, 2012? Considerably better. The S&P is up 14% and the Dow 9.91%.
But we all know the real question: how has the market been doing since January, 2008 when President Obama took office? The S&P has averaged 1.82% per year and the Dow slightly better at 2.13%. Neither of those numbers look real inviting.
As always my methodology is transparent. You can download my Excel workbook by clicking here. But a warning: I’m using the FRED Excel plugin for Excel for the Mac 2011. Those using Excel for Windows are advised to proceed with caution.
So what’s my secret? A TIPS fund. TIPS are Treasury Inflation Protected Securities. They are issued by the U.S. government and are fully indexed for inflation. Once I saw the drastic actions the Fed was taking with its balance sheet and the monetary base, I became very frightened. Heck, I still am. I shifted a big chunk of our retirement accounts to a TIPS fund managed by TIAA-CREF. Since I got scared before most other people, I am enjoying the large capital gains on this fund. Here’s the bad news: it’s probably too late for others to take advantage of this opportunity. Sorry folks.
Health Care Shift to Electronic Medical Records Led to Rent-Seeking
Posted by TonyLima in Economic policy, Politics, The Intersection of Economics and Technology on February 23, 2013
“We called it the Sunny von Bülow bill. These companies that should have been dead were being put on machines and kept alive for another few years,” said Jonathan Bush, co-founder of the cloud-based firm Athenahealth and a first cousin to former President George W. Bush. “The biggest players drew this incredible huddle around the rule-makers and the rules are ridiculously favorable to these companies and ridiculously unfavorable to society.”
Part of the American Recovery and Redevelopment Act (ARRA) was incentives for the health care industry to switch to electronic medical records. A recent New York Times article (Feb. 19, 2013) looked at what went into this $19 billion pie. They concluded that the health care shift to electronics medical records led to rent-seeking behavior by the “big three” suppliers of electronic medical records. The three companies were Cerner Corp., Allscripts and Epic Systems of Verona, Wis. The three lobbied heavily to have the $19 billion included in the bill. And, of course, the requirements for suppliers were oriented toward systems produced by these three. No problem? Oh, wait, these companies are old and produce what should be legacy systems. I’ve written before about Jonathan Bush of Athenahealthcare. Here’s what he has to say about this clause in ARRA →
But if the customers are happy, who cares? Well, it turns out the customers are not all that happy. Again, from the Times article:
The records systems sold by the biggest vendors have their fans, who argue that, among other things, the systems ease prescribing medications electronically. But these systems also have many critics, who contend that they can be difficult to use, cannot share patient information with other systems and are sometimes adding hours to the time physicians spend documenting patient care.
“On a really good day, you might be able to call the system mediocre, but most of the time, it’s lousy,” said Michael Callaham, the chairman of the department of emergency medicine at the University of California, San Francisco Medical Center, which eight months ago turned on its $160 million digital records system from Epic. Michael Blum, the hospital’s chief medical information officer, said a majority of doctors there like the Epic system.
And, naturally, all that rent-seeking paid off:
Four years later, in December 2008, H. Stephen Lieber, chief executive of the group, wrote an open letter to President-elect Obama calling for a minimum government investment of $25 billion to help hospitals and physicians adopt electronic records. The industry ultimately got at least $19 billion in federal and state money.
In the months after that windfall arrived, sales climbed for leading vendors as hospitals and physicians scrambled to buy systems to meet tight timetables to collect the incentive dollars. At Allscripts, Mr. Tullman soon announced what looked like a game-changing deal: the acquisition of another records company, Eclipsys, for $1.3 billion.
“We are at the beginning of what we believe will be the fastest transformation of any industry in U.S. history,” Mr. Tullman said when the deal was announced.
Last spring, some of the Eclipsys board members left after a power struggle; Mr. Tullman left in December. He is now at a company he co-founded that focuses on solar energy — another area that, after Obama administration and Congress expanded government incentives in the 2009 stimulus bill, has been swept by a gold-rush mentality, too.
But Has It Paid Off For the Stockholders?
As a good economist, I believe that corporations should act in the best interests of their owners, the stockholders. And it appears that Cerner has done pretty well. Let’s look at stock prices and financial summaries. It happens, however, that Epic is privately owned. No financials from them. If you’re looking for information about them, their name is just Epic, not Epic Systems as they are called in the Times article. (Those who want the financial statements as Excel workbooks should click here to download a zip file containing three workbooks. Also, data and charts shown in this section are from Yahoo Finance.)
Ah the French
Posted by TonyLima in Current issues, Economic policy on February 21, 2013
Dear Mr. Montebourg: I have just returned to the United States from Australia where I have been for the past few weeks on business; therefore, my apologies for answering your letter dated 31 January 2013. I appreciate your thinking that your Ministry is protecting industrial activities and jobs in France. I and Titan have a 40-year history of buying closed factories and companies, losing millions of dollars and turning them around to create a good business, paying good wages. Goodyear tried for over four years to save part of the Amiens jobs that are some of the highest paid, but the French unions and French government did nothing but talk. I have visited the factory a couple of times. The French workforce gets paid high wages but works only three hours. They get one hour for breaks and lunch, talk for three, and work for three. I told this to the French union workers to their faces. They told me that’s the French way! The Chinese are shipping tires into France – really all over Europe – and yet you do nothing. In five years, Michelin won’t be able to produce tire in France. France will lose its industrial business because government is more government. Sir, your letter states you want Titan to start a discussion. How stupid do you think we are? Titan is the one with money and talent to produce tires. What does the crazy union have? It has the French government. The French farmer wants cheap tire. He does not care if the tires are from China or India and governments are subsidizing them. Your government doesn’t care either. “We’re French!” The U.S. government is not much better than the French. Titan had to pay millions to Washington lawyers to sue the Chinese tire companies because of their subsidizing. Titan won. The government collects the duties. We don’t get the duties, the government does. Titan is going to buy a Chinese tire company or an Indian one, pay less than one Euro per hour and ship all the tires France needs. You can keep the so-called workers. Titan has no interest in the Amien North factory. Best regards,
Maurice M. Taylor, Jr.
Chairman and CEO
French Labor Strike
Today’s New York Times brings a story that will warm the hearts of believers in free markets everywhere. At least one U.S. capitalist understands capitalism. That gentleman is Maurice Taylor Jr., the head of Titan International, a U.S.-based tire manufacturer. He has been in “negotiations” over the last four years aimed at keeping the Goodyear plant in Amiens, France, open. As of today that deal appears off the table. Ah, the French. They would rather cut off an arm than seek treatment for the infection.
France: Home of the 35 Hour Work Week
France is the home of the original 35 hour work week. This law, 13 years old this month, limits workers to 35 hours per week at no change in weekly pay. Economists recognize this as a negative supply shock that leads to higher unemployment and short-term inflation. The law is based on the long-discredited “bundle of work” economic hypothesis. If there is only a certain amount of work that can be done in an economy, then limiting workers’ hours will spread the work among more employees. On its face, that is an attractive model. But it assumes the amount of work is limited. In fact, the quantity of labor in any economy is directly related to the country’s gross domestic product — which, as almost everyone knows, fluctuates. The quantity of labor demanded is not fixed, but varies in response to a number of variables.
Titan, the Amiens Plant, and the French Government
Some facts are in order. The Amiens plant employs 1,173 French workers. Four years ago the French government asked Titan to try to save the plant. Rather than describe the course of the negotiations, I’ll simply quote Mr. Taylor’s letter to the French industry minister, Arnaud Montebourg (text from BusinessInsider, typographical and grammatical errors inin the BusinessInsider version). See pullquote →
Comparing the U.S. and France
Using OECD data, I assembled two economic indicators: the growth rate of real GDP per capita and the unemployment rate. Both variables covered the period 1990-2011 (the latest annual data available in the OECD online database). Here are the averages:
| Country | Average Unemployment Rate (1990 – 2011) | Average growth, real GDP per capita (1995 – 2011) |
| France | 9.01% | 1.00% |
| U.S. | 5.84% | 1.39% |
Pay close attention to that last column. The difference in the growth rate is 0.39% per year. Doesn’t sound like much, does it? First, you should know that real GDP is the same as the purchasing power of income (per capita). Let’s consider these growth rates over 30 years (usually the definition of one generation). If the annual income in year 1 was 20,000 (dollars or euros), after 30 years French income will be $26,992.89 versus $30,258.12 in the U.S. The U.S. economic standard of living will grow faster than that of France.
Let’s look at some graphs of the same variables. There’s something disturbing about one of them. I’ll point it out below.
Did you spot it? Since 2008 (the beginning of the Obama administration) the U.S. unemployment rate has risen to French levels. You may draw your own conclusions. I’ve written about this issue many times before. You can read my thoughts by clicking here and here and here.
As always, my data sources and methods are transparent. Click here to download an Excel 2007 file containing all data and calculations.
Conclusion
Mr. Taylor has stated his case very well. France is traveling the same road that Greece, Spain, and some other European countries followed years before. When the French economy begins to collapse I doubt very much that the German government will bail them out.
Feds Will Sue Standard and Poors
Posted by TonyLima in Current issues, Economic policy on February 5, 2013
The possible penalties of more than $5 billion are equal to the losses suffered by federally insured financial institutions that bought collateralized debt obligations and other securities that were tainted by S&P’s alleged conflicts of interest and other illegal behavior, Mr. Holder said.
S&P and other firms have long fought lawsuits targeting the quality of their ratings by citing the First Amendment to the U.S. Constitution, which protects freedom of speech, and contending that the ratings are an opinion. In its suit, the Justice Department lawsuit tries to get around that argument by dusting off a 1989 law from the savings-and-loan crisis that imposes a relatively lower burden of proof.
In a statement Monday, S&P said the U.S. government’s use of that law, the Financial Institutions Reform, Recovery, and Enforcement Act, is a “questionable legal strategy.” The firm said it would “vigorously defend our Company against such meritless litigation.”
…
In its statement Tuesday, S&P said its ratings reflected its best judgments about the RMBS and the CDOs in question.
“Unfortunately, S&P, like everyone else, didn’t predict the speed and severity of the coming crisis and how credit quality would ultimately be affected,” it said.
S&P also said “20/20 hindsight is no basis to take legal action against the good-faith opinions of professionals,” noting that its ratings were “based on the same subprime mortgage data available to the rest of the market—including U.S. Government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained.”
[Update 4:00 pm left coast time: I added a new section featuring quotes from Twitter. Folks over there are having too much fun with this.]
The news broke yesterday (February 4). The Feds will sue Standard and Poors. The alleged reason is that S&P rated mortgage-backed securities AAA when in fact they should have been rated much lower. For details see the excerpt from the Wall Street Journal article over there on the right (no pun intended).
Now there’s no doubt the AAA ratings were too high. But there are several remaining questions. First, why is the Justice Department not going after Fitch and Moody’s? Both also rated these securities well above what they should have been. Second, many of us are skeptical of the government’s motives in this case. You may recall that S&P was the first agency to downgrade the rating on U.S. government debt (from AAA to AA+). The announcement of the downgrade was August 5, 2011. It only makes sense to wait until after the election to file this lawsuit. Third, 20-20 hindsight is always 100 percent accurate. If it was so easy to see these securities were rated too highly, where were the government regulators?
Stockholders lose $3.8 billion
S&P is being sued for $5 billion. In the last two days, their parent company, McGraw-Hill, has seen the stock price fall by 23,29% (from $58.34 to $44.75). The company’s market cap has dropped from $16.2 billion to $12.4 billion, wiping out $3.8 billion in shareholder wealth. Here’s what that looks like:
McGraw-Hill stock price
(Data is from the Wall Street Journal website accessed February 5, 2013 at 3:45 pm GMT -8. Click here to download the Excel workbook containing the numbers and calculations.)
Meanwhile On Twitter and In the Blogosphere
In case you think I’m just a conspiracy nut, I am not alone. A lawyer for S&P refused to rule out a political motivation behind the lawsuit. And even the Federal Reserve didn’t see the crash coming as the recently-released minutes from their 2007 meetings. Should Justice also sue the Fed? The slideshow below shows some of the more entertaining comments from Twitter.
This is why singling out RBS, or UBS, or S&P, will never have the fearsome deterrent effect that the DOJ really wants. In fact, by going after the firms piecemeal, the DOJ may actually be encouraging future wrongdoers rather than turning them away from crime.
You see, the DOJ is going after one or two firms for actions that were widespread across the industry. Fixing interest rates was the work of thousands of people. It’s safe to say that S&P was not the only ratings firm that fretted that it would lose fees if it started downgrading bonds. In fact, S&P, according to the emails provided by the DOJ, frequently worried that it was not keeping up with Moody’s.
Conclusion
Someone on Twitter said, “S&P announced U.S. government debt is now rated AAAA+++.” The next time someone asks you why the U.S. economy is not recovering faster, point to actions like this. Why take any risk when the government can come in years later and hammer your market value?
The Current State of the Government Debt
Posted by TonyLima in Current issues, Economic policy on January 17, 2013
On Jan. 20, 2009, the national debt stood at $10.627 trillion—or $34,782 for every man, woman and child. As of Tuesday, it had reached $16.435 trillion, or $52,139 for every American. The public debt was equal to 40.8% of gross domestic product on Jan. 20, 2009. By the end of last year, it had reached 72.8% of GDP and is forecast by the nonpartisan Congressional Budget Office to hit 76.1% this year.
Mr. Rove includes a paragraph on the debt situation:
Hmmm. The key phrase is “public debt.” We economists call it the government debt. And, like most issues related to government finance, it’s messy.
Boring Stuff: Details of the Debt
The government debt is made up of two big parts: the federal government debt and total state and local debt. As of January 1, 2012 (effectively the end of calendar year 2011), the federal government debt was $10,810.6 billion. State and local debt totaled $2,985.0 billion. The sum of those two figures is $13,795.6 billion. Both of these figures are from the Federal Reserve database as maintained by the Federal Reserve Bank of St. Louis in their FRED database. Total government debt as stated by the Treasury department is $15,582.1 billion (also downloaded from FRED). My guess is that the Treasury number includes debt owned by banks and other financial institutions, while the Federal Reserve figures are government debt in the hands of the nonfinancial public (including nonfinancial businesses).
GDP numbers are from the Bureau of Economic Analysis. There is a direct link from that page that downloads GDP totals (real and nominal, annual and quarterly) directly as an Excel workbook. If only Treasury would learn from BEA and BLS.
So here’s the result:
| Federal Government Debt as percentage of GDP (Federal Reserve) | 71.71% |
| State & Local Government Debt as percentage of GDP (Federal Reserve) | 91.51% |
| Federal Government Debt as percentage of GDP (U.S. Treasury Dept.) | 103.36% |
Mr. Rove apparently used the first figure. But that number excludes federal debt held by financial institutions. Let’s assume federal debt held by financial institutions is equal to the difference between the Treasury and the Federal Reserve numbers for total government debt:
| Treasury – Fed | $1,786.47 |
| Federal Reserve govt. debt plus Debt Held by Banks | $12,597.08 |
| Total Federal Debt/GDP | 83.56% |
Conclusion
The debt-to-GDP ratio is too high. The U.S. is not Greece or Italy — yet. But if we stay on the current path, at some point an auction of Treasury securities will fail in the sense that there will be no bidders from the private sector. The Fed could bail out Treasury by purchasing the entire new issue. But that is a policy choice that the Fed must make. The really scary part of all this is that nobody knows the debt-to-GDP ratio at which an auction will fail. There will be warnings, however. Watch for rising interest rates on TIPS (Treasury Inflation Protected Securities).
Real Interest Rates
There was a hint of this in early 2011 when rates rose briefly (For a few months, all real interest rates were positive). This was interpreted as a sign that the markets were expecting economic recovery. A much more frightening hypothesis is that the rise in interest rates was caused by investors fleeing Treasury securities because of a perceived increase in risk. All we know is that the equilibrium interest rate rose and the equilibrium price of these bonds fell. As always, this could have been caused by shifts in either demand or supply. Assuming Treasury is reporting the yields on new-issue securities, the supply is completely controlled by the government. Therefore, demand factors as outlined earlier must be the determining factor. We can speculate all we want, but the interest rates will tell the story.
[Update Jan. 19, 2013, 15:45 GMT-8: I corrected several errors in the Excel workbook, added a new worksheet to accompany my new article on the subject, and improved several explanations.]
As always, my data and methods are transparent. You can download the Excel workbook for real interest rates by clicking here. And you can download the workbook for the government debt and GDP by clicking here.
The Hurricane Sandy Relief Bill Is 71 Percent Pork
Posted by TonyLima in Current issues, Economic policy on January 3, 2013
Senate Gutted the House Bill
[Update January 5, 2013. The comment below is correct. I used "trillion" in several places when I should have used billion. And in at least one place I used billion instead of million. I have made the corrections in the text below. My apologies for the error.]
House Speaker John Boehner has been lambasted in the media (and by so-called Republicans Peter King and Chris Christie) for refusing to bring the Hurricane Sandy Relief Bill (H.R.1) to a vote. Along with many others, he has argued that the bill is loaded with pork (referred to from this point forward as Porkulus Obama. Thanks to @DividendMaster for inventing that colorfully descriptive phrase). According to my calculations the Hurricane Sandy Relief Bill is 71% pork.
Politics
The bill labeled H.R.1 bears no resemblance to anything passed by the House of Representatives. Basically the Senate gutted the bill and replaced all of it with their own material. This is from the beginning of the bill itself
In the Senate of the United States,
December 28, 2012.
Resolved, That the bill from the House of Representatives (H.R. 1) entitled `An Act making appropriations for the Department of Defense and the other departments and agencies of the Government for the fiscal year ending September 30, 2011, and for other purposes.’, do pass with the following
AMENDMENTS:
Strike all after the enacting clause, and insert in lieu thereof:
That the following sums are hereby appropriated, out of any money in the Treasury not otherwise appropriated, for fiscal year 2013, and for other purposes, namely:
The next time Harry Reid and Barack Obama wonder why they’re not getting much cooperation from House Republicans, perhaps they should think about the insult contained in the above action.
The Data
As always, my methodology is transparent. I have read H.R.1 carefully and tried to copy it accurately into an Excel workbook. Click here for the Excel 2011/2007 version (recommended). Dinosaurs may click here for an Excel 2003 version. The full text of the bill is also available. Click here for the Word 2011/2007 version or click here for the pdf version.
Here’s some advice on using the Excel workbook. Read the notes, looking specifically for the word “detail.” That word means there is a worksheet containing additional calculations, usually for individual line items. Those detail worksheets link back to the main worksheet (labeled Rollup). It’s best not to change any dollar amounts on the Rollup sheet that are linked to a detail sheet.
Probably the main use of this worksheet is to change my estimates of the percentages allocated to Hurricane Sandy. In general, if the text specifies Hurricane Sandy, I allocated 100 percent to Sandy relief. I urge you to read the actual text of the bill before changing these percentages. To make this a little easier, the Word version of the full text of the bill has bookmarks at the beginning of each Title.
Some Swinish Examples
The main Porkulus Obama is in HUD’s Community Development Fund. Out of a $17 billion appropriation, only $2.52 billion is allocated in line items. The remaining $14.48 billion can, apparently, be used by HUD for anything it wants. That’s a cool 33.6 percent of the total.
Another 23.5 percent (about $11.9 billion) is allocated to the Federal Emergency Management Agency. You might think FEMA funds would be a slam-dunk, but not so fast. Here’s what the bill has to say about these funds:
“be for major disasters declared pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act” and “the amount in the previous proviso is designated by the Congress as being for disaster relief pursuant to section 251(b)(2)(D) of the Balanced Budget and Emergency Deficit Control Act of 1985″
“shall be transferred to the Department of Homeland Security `Office of Inspector General’ for audits and investigations related to disasters.”
“That these funds are available to subsidize gross obligations for the principal amount of direct loans not to exceed $400,000,000″
You are welcome to read the actual bill. Be sure to let me know if you can find any reference to Sandy in the FEMA appropriations.
Probably the most egregious (but not the most expensive) example is for State and Tribal Assistance Grants (lines 51 and 52 in the Excel workbook). These two items are called “Capitalization grants for the Clean Water State Revolving Fund” and “Capitalization grants for Safe Drinking Water Act.” I know the Mohawk and Mohican tribes are from the general New York area. But I’m not sure how much of their tribal lands were affected by Sandy. And this is only $810 million dollars, about 1.5 percent of the total bill. Here’s what the bill itself says about these two items:
“That notwithstanding section 604(a) of the Federal Water Pollution Control Act and section 1452(a)(1)(D) of the Safe Drinking Water Act, funds appropriated herein shall be provided to States that have received a major disaster declaration pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5121 et seq.) for Hurricane Sandy: Provided further, That no eligible state shall receive less than two percent of such funds: Provided further, That funds appropriated herein shall not be subject to the matching or cost share requirements of sections 602(b)(2), 602(b)(3) or 202 of the Federal Water Pollution Control Act nor the matching requirements of section 1452(e) of the Safe Drinking Water Act: Provided further, That notwithstanding the requirements of section 603(d) of the Federal Water Pollution Control Act, for the funds appropriated herein, each State shall use not less than 50 percent of the amount of its capitalization grants to provide additional subsidization to eligible recipients in the form of forgiveness of principal, negative interest loans or grants or any combination of these: Provided further, That the funds appropriated herein shall only be used for eligible projects whose purpose is to reduce flood damage risk and vulnerability or to enhance resiliency to rapid hydrologic change or a natural disaster at treatment works as defined by section 212 of the Federal Water Pollution Control Act or any eligible facilities under section 1452 of the Safe Drinking Water Act, and for other eligible tasks at such treatment works or facilities necessary to further such purposes: Provided further, That notwithstanding the definition of treatment works in section 212 of the Federal Water Pollution Control Act, and subject to the purposes described herein, the funds appropriated herein shall be available for the purchase of land and easements necessary for the siting of eligible treatment works projects: Provided further, That the Administrator may retain up to $1,000,000 of the funds appropriated herein for management and oversight of the requirements of this section: Provided further, That such amounts are designated by the Congress as being for an emergency requirement pursuant to section 251(b)(2)(A)(i) of the Balanced Budget and Emergency Deficit Control Act of 1985.”
I defy anyone to link that language to Hurricane Sandy.
Conclusion
As usual, the media have completely failed to do their job. Remember when reporters did the kind of digging I’ve done here? I know, it’s been a long time, but consider the amount of work Bob Woodward and Carl Bernstein put into Watergate. Point me to a reporter working for a major media outlet today who’s working half that hard and I’ll be impressed. I will concede that Jake Tapper (now CNN, previously ABC) is doing a pretty good job. For his efforts he will no doubt be banned from the White House press room.
The Economics of Champagne
Posted by TonyLima in Economic policy, Media Stupicity on December 31, 2012
Korbel Home Page
Today’s article is prompted by a story on NPR’s Morning Edition. The focus of the story was Champagne. There were so many inaccuracies and misstatements that I’m writing two pieces. This is the first, covering the economics of champagne with specific references to intellectual property issues. The second (What is Champagne?) is on CaliforniaWineFan.com, my wine and wine economics blog.
One point made in the NPR story is what can legally be called “Champagne.” Quoting from the NPR website [emphasis added].
And while we’re on the subject of French traditions, I should point out that if you listen to my story you’ll hear about the kerfuffle over the use of the term Champagne.
The French are keen to point out that the term Champagne should only be used on the bottles of sparkling wines produced in the Champagne region of France. Champagne producers have launched a campaign in the U.S. to raise awareness of this issue.
In deference to this, Frank, a few years back, took the word Champagne off his label. Instead he references the Champagne method. And he says he’s proud to promote his bottles of bubbly as sparkling wine from the Finger Lakes.
Bear with me — this is going to be a little dull. I promise it’s worth the effort.
Background: The WTO and TRIPS
The World Trade Organization (WTO) charter includes three main Annexes. Annex 1A is the Multilateral Agreement on Trade in Goods, 1B is the Multilateral Agreement on Trade in Services and 1C covers Trade-Related Aspects of Intellectual Property Rights (TRIPS). My concern is with TRIPS. There are eight specific areas mentioned in the TRIPS agreement:
- Copyright and Related Rights
- Trademarks
- Geographical Indications
- Industrial Designs
- Patents
- Layout-Designs (Topographies) of Integrated Circuits
- Protection of Undisclosed Information
- Control of Anti-Competitive Practices in Contractual Licences
Geographical Indications are the issue here. Quoting from Article 22,
1. Geographical indications are, for the purposes of this Agreement, indications which identify a good as originating in the territory of a Member, or a region or locality in that territory, where a given quality, reputation or other characteristic of the good is essentially attributable to its geographical origin.
Consider Parmesan Cheese. Technically any cheese labeled “Parmesan” must be made in the Parma region of Italy. Champagne is part of the same category. The area around Épernay (about 148 km northeast of Paris) carries the geographic indication “Champagne.” Under WTO rules, sparkling wine made anywhere else in the world cannot be called Champagne.
Do You Know the Way to Epernay
The U.S. has been slow to sign the treaties for geographic indications. Champagne is actually not the issue. But consider Parmesan cheese. Kraft Foods makes something they call Parmesan cheese. But it ain’t made in Parma, I promise.
Geographic Indications and Champagne
Rather than forcing you (and me) to wade through a bunch of legal documents, let me instead relate a story I heard several years ago during a tour of the Korbel Champagne Cellars in Guerneville (Sonoma County), California. The guide explained that U.S. sparkling wine producers were now prohibited from using “Champagne” on their labels, with one exception. Because Korbel was so old and used the méthode champenoise technique, they alone were allowed to keep Champagne on their labels. This was formalized in a bilateral treaty between the U.S. and the European Union in 2008. The NPR reporter completely misunderstood the legal ramifications of calling something “Champagne” when it was not made in Champagne, France.
Conclusion
NPR prides itself on not “dumbing down” their broadcasting. Sadly, they seem to spend too much time congratulating themselves and not enough time doing actual reporting.
Those Who Do Not Remember the Past
Posted by TonyLima in Current issues, Economic policy on December 29, 2012
“Those who do not remember the past are condemned to repeat it.” (George Santayana) Apparently over and over. This quotation is brought to mind by today’s Wall Street Journal lead editorial. The Journal correctly notes that temporary tax changes do not affect spending. None other than the late Milton Friedman formalized this relationship with his permanent income model of spending. In a nutshell, this model says that permanent spending depends on permanent income. In other words, people use saving and dissaving (including, perhaps, going into debt) to smooth temporary changes in their income and maintain relatively level spending. People try to stick to their chosen lifestyle.
I first became aware of this in the early 1970s. Then-president Lyndon Johnson wanted to fight the war in Vietnam, fight his “war on poverty” and not increase taxes. Eventually he agreed to a one-year 10 percent income tax surcharge. Which had no impact on the economy at all.
Having recently read material by fairly young economists, I am appalled at how little they know about even the most significant events in economic history. Unfortunately, non-disclosure agreements prevent me from giving detailed examples. Suffice it to say that Ph.D. programs are apparently doing a terrible job of teaching real-world economics. Today’s economists can solve systems of partial differential equations and understand set theory, but many don’t seem to know much about reality.
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