“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.)
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
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.
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)|
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.
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.
The damage from a minimum wage hike depends on the overall labor market. If the job market is buoyant, as it is in the fracking boomtown of Williston, N.D., fast-food workers may already make more than $9 an hour. But when the jobless rate is high, as it still is in California and New York, the increase punishes minority youth in particular.
That is what happened during the last series of wage hikes to $7.25 from $5.15 that started in July 2007 as the economy was headed toward recession. The last increase hit in July 2009 just after the recession ended, and as the nearby chart shows, the jobless rate jumped for teens and black teens especially. For black teens, the rate has remained close to 40% and was still 37.8% in January.
A study by economists William Even of Miami University and David Macpherson of Trinity University concludes that in the 21 states where the full 40% wage increase took effect, “the consequences of the minimum wage for black young adults without a diploma were actually worse than the consequences of the Great Recession.”
The Neumark-Wascher Meta-Analysis
The first paper, by David Neumark and William Wascher (National Bureau of Economic Research, Inc, NBER Working Papers: 12663, 2006) summarizes the results of 102 empirical studies of the impact of the minimum wage on employment. These studies were all done after 1990. To economists that means the studies were done carefully and correctly using the appropriate statistical techniques. Of the 33 studies the authors selected as being the “most credible” 85 percent found a significant negative impact of a higher minimum wage on employment. Raise the minimum wage and unemployment increases. (Using all 102 studies, “only eight give a relatively consistent indication of positive employment effects.” (Neumark and Wascher, p. 121). In other words, about 92% of the studies found a negative or ambiguous impact on employment. The authors also state that about 2/3 of the 102 studies find unambiguous negative impacts on employment when the minimum wage rises.
Prof. Neumark has written extensively on this subject, including an intriguing article on the interaction between the minimum wage and the earned income tax credit (EITC). In “Does a Higher Minimum Wage Enhance the Effectiveness of the Earned Income Tax Credit?” (Industrial and Labor Relations Review, July 2011, v. 64, iss. 4, pp. 712-46). Summarizing their results, they find that the EITC is a far more effective tool for raising income without negative impacts on employment. They also found that a higher minimum wage has virtually no impact on poverty.
The Wall Street Journal article also cites two other studies. Here’s a pullquote from the Wall Street Journal editorial →.
The Even-Macpherson Micro Study
Even and Macpherson (“Unequal Harm: Racial Disparities in the Employment Consequences of Minimum Wage Increases.” Employment Policies Institute, May, 2011. This is the summary page. Scroll to the bottom to find the links to a longer summary and the full text.) look at a sample of about 600,000 males between 16 and 24 years old without a high school diploma. They examine the impact on three groups: whites, Hispanic, and black. Their results are pretty incredible. Rather than try to summarize a long, detailed and very specific study, let me just quote from the Executive Summary:
In this new study, labor economists William Even (Miami University) and David Macpherson (Trinity University) overcome this problem by amassing a dataset from the years 1994 to 2010 that includes over 600,000 data observations—including a robust sample of minority young adults unprecedented in previous studies on the minimum wage.
By taking advantage of the “natural experiment” created by the substantial interstate variation in the minimum wage between 1994 and 2010, and carefully controlling for labor market and demographic differences, the authors provide conclusive answers to the crucial policy question of whether wage mandates have a disparate impact on minority groups.
Drs. Even and Macpherson focus on 16-to-24 year-old males without a high school diploma, a group that previous studies suggest are particularly susceptible to wage mandates. Among white males in this group, the authors find that each 10 percent increase in a federal or state minimum wage decreased employment by 2.5 percent; for Hispanic males, the figure is 1.2 percent. But among black males in this group, each 10 percent increase in the minimum wage decreased employment by 6.5 percent.
The effect is similar for hours worked: each 10 percent increase reduced hours worked by 3 percent among white males, 1.7 percent for Hispanic males, and by 6.6 percent for black males.
But the picture grows even more troubling when the authors focus just on the 21 states fully affected by the federal minimum wage increases in 2007, 2008, and 2009. Approximately 13,200 black young adults in these states lost their job as a direct result of the recession; 18,500 lost their job as a result of the federal wage mandate—nearly 40 percent more than the recession. In other words, the consequences of the minimum wage for this subgroup were more harmful than the consequences of the recession.
The substantial disemployment effects that emerge from the data raise an important question: Why do black males suffer more harm from wage mandates than their white or Hispanic counterparts?
The authors find that they’re more likely to be employed in eating and drinking places–nearly one out of three black young adults without a high school diploma works in the industry. Businesses in this industry generally have narrow profit margins and are more likely to be adversely impacted by a wage mandate. There’s also substantial variation in regional location, as black young adults are overwhelmingly located in the South and in urban areas.
Those who believe that increases in the minimum wage do not reduce employment are simply in denial. Economists have a mountain of evidence in support of this proposition. You are free to believe what you like, but please don’t call yourself an economist if you choose to deny the facts.
Copyright 2013 by Tony Lima. Permission is granted to quote entire paragraphs of text without editing. If you wish to edit a paragraph, I must approve your editing before you publish it.
This brief survey article will look at the various impacts of changes in the minimum wage. All abstracts and citations are from EBSCO, specifically the EconLit database.
Economists recognize three main impacts of the minimum wage. The two I will be concerned with here are impacts on employment and impacts on income distribution. The third effect, the impact on total income, I’ll deal with in a cursory fashion.
Impacts on Employment
The most recent paper is by Jeremy R. Magruder (Journal of Development Economics, January 2013, v. 100, iss. 1, pp. 48-62), Using a two-sector model of the labor market in Indonesia, Magruder finds that an increase in the minimum wage increases employment in the formal sector and decreases employment in the informal sector. (The formal sector is covered by the minimum wage. The informal sector operates outside the law. Workers in this group are either avoiding taxes or willing to work for less than the minimum wage with wages usually paid in cash.) The net impact on unemployment is uncertain. The following paragraph is from the conclusion of the paper (pp. 61-62):
This big push discussion recalls much older economic thought which has been widely discredited within the profession. Few economists today argue as 1920s and 1930s economists did, that increasing wages and local demand could be a motor for economic growth. One reason is the limited (and potentially negative) effect these policies had on depression-era America. There are of course many differences between 1990s Indonesia and 1930s America. One, as a less-developed country receiving substantial foreign investment, Indonesia may have had new access to potential, unadopted, and profitable technologies that simply needed a market. A second is that much of the 1990s were a time of growth in Indonesia, when sticky wages may have limited wage growth (the opposite of conditions in the depression). Finally, Harrison and Scorse (2010) show that anti-sweatshop activism also raised labor standards in foreign firms without an accompanying drop in employment. This indicates that wages may have indeed been below marginal products in the 1990s, reducing coordination and creating an opening for policy. Of course, the analysis employed in this paper cannot determine whether any of these conditions were important for these results. Further research, both empirical and theoretical is needed in considering the role of labor standards throughout the business cycle in modern less developed countries.
Translation: Indonesia’s economy was in exceptional circumstances during this period. It’s a mistake to generalize this to developed economies. Abstract:
Big push models suggest that local product demand can create multiple labor market equilibria: one featuring high wages, formalization, and high demand and one with low wages, informality, and low demand. I demonstrate that minimum wages may coordinate development at the high wage equilibrium. Using data from 1990s Indonesia, where minimum wages increased in a varied way, I develop a difference in spatial differences estimator which weakens the common trend assumption of difference in differences. Estimation reveals strong trends in support of a big push: formal employment increases and informal employment decreases in response to the minimum wage. Local product demand also increases, and this formalization occurs only in the non-tradable, industrializable industries suggested by the model (while employment in tradable and non-industrializable industries also conforms to model predictions).
Another relatively new work is by David Lee and Emmanuel Saez (Journal of Public Economics, October 2012, v. 96, iss. 9-10, pp. 739-49), The authors make some heroic assumptions to show that there is an optimal minimum wage. But at the beginning they acknowledge that a higher minimum wage increases unemployment. They then to on to assume that government values redistribution toward low wage workers and unemployment hits the lowest surplus workers first. The first assumption implies a social welfare function for the government. In other words, the government is making rational decisions to transfer income. The “lowest surplus” workers are, roughly, those with the smallest difference between the lowest wage they would accept to work and the minimum wage. This assumption seems reasonable. But the authors never deal with the incentive effects of redistribution policies. Higher-income individuals are likely to act to reduce their tax payments when confronted with redistribution. That, in turn, will reduce overall social welfare. Abstract:
This paper provides a theoretical analysis of optimal minimum wage policy in a perfectly competitive labor market and obtains two key results. First, we show that a binding minimum wage–while leading to unemployment–is nevertheless desirable if the government values redistribution toward low wage workers and if unemployment induced by the minimum wage hits the lowest surplus workers first. Importantly, this result remains true in the presence of optimal nonlinear taxes and transfers. In that context, a binding minimum wage enhances the effectiveness of transfers to low-skilled workers as it prevents low-skilled wages from falling through incidence effects. Second, when labor supply responses are along the extensive margin only, which is the empirically relevant case, the co-existence of a minimum wage with a positive tax rate on low-skilled work is always (second-best) Pareto inefficient. A Pareto improving policy consists of reducing the pre-tax minimum wage while keeping constant the post-tax minimum wage by increasing transfers to low-skilled workers, and financing this reform by increasing taxes on higher paid workers. Those results imply that the minimum wage and subsidies for low-skilled workers are complementary policies.
John T. Addison, McKinley L. Blackburn, and Chad D. Cotti looked at county-level employment data in the U.S. restaurant-and-bar sector (British Journal of Industrial Relations, September 2012, v. 50, iss. 3, pp. 412-35). They found that what matters is not the level of the minimum wage, but the minimum wage relative to other states or localities. This is, of course, consistent with the well-known proposition that relative prices and wages are important while absolute price and wage levels are not. Abstract:
We use US county-level data on employment and earnings in the restaurant-and-bar sector to evaluate the impact of minimum-wage changes in low-wage labour markets. Our estimated models are consistent with a simple competitive model in which supply-and-demand factors affect both the equilibrium outcome and the probability of the minimum wage being binding. Our evidence does not suggest that minimum wages reduce employment once controls for trends in county-level sectoral employment are incorporated. Rather, employment appears to exhibit an independent downward trend in states that have increased their minimum wages relative to states that have not, thereby predisposing estimates towards reporting negative outcomes.
Impacts on Income Distribution
The most recent study is by Mark B. Stewart (Oxford Economic Papers, October 2012, v. 64, iss. 4, pp. 616-34). In “Wage Inequality, Minimum Wage Effects, and Spillovers” the paper finds that changes in the minimum wage in the U.K. have no discernable impact on the upper half of the wage distribution. Abstract:
This paper investigates possible spillover effects of the UK minimum wage. The halt in the growth in inequality in the lower half of the wage distribution (as measured by the 50:10 percentile ratio) since the mid-1990s, in contrast to the continued inequality growth in the upper half of the distribution, suggests the possibility of a minimum wage effect and spillover effects on wages above the minimum. This paper analyses individual wage changes, using both a difference-in-differences estimator and a specification involving comparisons across minimum wage upratings, and concludes that there have not been minimum wage spillovers. Since the UK minimum wage has always been below the 10th percentile, this lack of spillovers implies that minimum wage changes have not had an effect on the 50:10 percentile ratio measure of inequality in the lower half of the wage distribution.
Our results highlight that, political rhetoric not-withstanding, minimum wages are poorly targeted as an anti-poverty device and are at best an exceedingly blunt instrument for dealing with poverty.
Michele Campolieti, Morley Gunderson and Byron Lee (Journal of Labor Research, September 2012, v. 33, iss. 3, pp. 287-302) find that raising the minimum wage has little impact on employment among the poor. Specifically, the poor get about 30% of the earnings gain (non-poor get the other 70%) and the poor bear the brunt of job losses. As the authors so eloquently put it,
We estimate the effect of minimum wages on poverty for Canada using data from the Survey of Labour and Income Dynamics (SLID) for 1997 to 2007 and find that minimum wages do not have a statistically significant effect on poverty and this finding is robust across a number of specifications. Our simulation results, based on the March 2008 Labour Force Survey (LFS), find that only about 30% of the net earnings gain from minimum wage increases goes to the poor while about 70% “spill over” into the hands of the non-poor. Furthermore, we find that job losses are disproportionately concentrated on the poor. Our results highlight that, political rhetoric not-withstanding, minimum wages are poorly targeted as an anti-poverty device and are at best an exceedingly blunt instrument for dealing with poverty.
Impact on Total Income
Total income is the product of the number of hours worked per year and the wage rate per hour. If the number of hours worked does not change, any increase in the wage must cause total income to rise. However, demand curves slope downward. We can be certain that the number of hours worked will fall. Thus the wage rises and hours worked fall. What will happen to total income (wage x hours)?
The answer depends on the elasticity of labor demand with respect to the wage rate. I’m willing to accept without debate that for low-income workers demand is inelastic. That means total income will rise for those workers who keep their jobs. As economists have repeatedly observed, the true minimum wage is zero which is what workers who lose their jobs earn. And some workers will certainly become unemployed.
Here’s a parenthetical note about why demand for labor matters and supply of labor does not. I have assumed the minimum wage is above the equilibrium wage. That means total employment is determined exclusively by demand. The difference between the quantity supplied of labor and quantity demanded is unemployment and underemployment. But the supply curve only determines willingness to work at the minimum wage, having no impact on the actual number of worker hours hired.
These are but a few of the studies. Anyone can do what I’ve done here. Find a library that subscribes to the EconLit database. Log in and search for “minimum wage.” And have fun.
I will end by noting that there are a few studies that purport to show that raising the minimum wage increases employment. These studies are usually produced by “Marxist economists” identifiable by either their university affiliation (the University of Massachusetts, Amherst is one example) or their citations. These studies generally torture the data until it is no longer recognizable, then perform statistical tests on what amounts to no data at all. You are welcome to believe those studies, but, if you make that choice, please do not call yourself an economist.
“Its not a serious story guys, It’s like a little radio ad and you guys run like lap dogs to report it. … It’s not a burp, it’s barely a fart.”
Texas Governor Rick Perry says come on down to California businesses. In a recent ad, Governor Perry bought $24,000 of airtime to broadcast this message in California. Governor Jerry Brown responded, “ ”Its not a serious story guys, It’s like a little radio ad and you guys run like lap dogs to report it. … It’s not a burp, it’s barely a fart.”
Economists, unlike politicians, try to quantify issues like this. One common measure of supply and demand is the rental rates for trucks for one-way trips between two destinations. I used U-Haul’s rates for a 14 foot truck between Burbank, CA and Dallas, TX. The Burbank to Dallas rate was $1,546.00. Dallas to Burbank: $829.00. Conclusion: more people want to move from Burbank to Dallas than vice-versa.
Governor Brown has changed a lot over the decades between his terms as governor. Unfortunately, he doesn’t seem to have learned any economics.
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:
(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.
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?
By falling in line with other states, California is abandoning its push for all eighth-graders to take algebra.
Last month, the State Board of Education unanimously shifted away from a 15-year policy of expecting eighth-graders to take Algebra I. The state will allow them to take either Algebra I or an alternate course that includes some algebra. New state standardized tests will focus on the alternate course — the same one adopted by most states under the Common Core curriculum being rolled out across the nation.
The change is controversial because success in Algebra I is the single best predictor of college graduation.
From the February 4 San Jose Mercury-News:
Yes, you read that correctly. President Obama and Education Secretary Arne Duncan have decided algebra is too tough for eighth-graders. Apparently the president doesn’t want anyone to be better at math than him. And this is a
recommendation requirement of their Common Core curriculum. (If you really believe this is just a recommendation, you haven’t spent much time trying to work with the federal government, specifically the department of education.)
The President’s Math
For those who don’t remember President Obama’s infamous interview with Jay Leno, here’s a link to the transcript. And here’s the relevant excerpt:
Jay Leno, reading question from viewer: “When you help your daughters with their homework, is there a a subject you struggle with?”
President Obama: “Well, the math stuff I was fine with up until about seventh grade. But Malia is now a freshman in high school and — I’m pretty lost. You know, it’s tough. Fortunately, they’re great students on their own and if something doesn’t work, I’ll call over to the Department of Energy and see if they have a physicist to come over.”‘
But don’t take my word for it. I know the link above goes to RealClearPolitics.com and many of you simply won’t believe that source. For your edification, here’s a link to a video of the full interview (hosted on my blog’s server, don’t worry about that):
The View From a University
I am semi-retired from California State University, East Bay. Prospective students are “required” to know algebra to be admitted to any of the California State University campuses. I can assure you that some graduates of CSUEB cannot solve even the simplest algebra problem. Why not? The entire CSU funding system is based on enrollment. One more student means a few more dollars in a university’s budget. One fewer student means fewer dollars. Administrators in this system have every incentive to keep students on campus. Eventually those students graduate. If they can’t do algebra, there are plenty of majors where they can still get a degree.
Who Needs Algebra
Today even manufacturing jobs require algebra. Do a quick search on the string “manufacturing math” and you’ll find courses, online classes, tutorials, textbooks, and a host of other resources. NPR recently ran a major story on this subject. Can’t do algebra? Practice this phrase: “You want fries with that?”
The dumbing down of the U.S. population apparently will continue under the current administration. I weep for my country.
Ms. O’Brien declined to cooperate with the investigation without receiving immunity from criminal prosecution. But the government is hesitating to grant her request, according to the people close to the case, fearing that doing so would set a bad example for future investigations.
A long story in today’s New York Times is headlined “MF Global’s Bankruptcy Nears a Happy Conclusion“ has some good news for former customers who have been waiting 15 months to find out whether they would ever see their money again. It now looks like they will get 100 percent of their funds back. Probably without interest, however. Since many of those accounts were in six figures, even at a low interest rate that’s a bit of a hit. For example, at a 2 percent interest rate, the loss on $100,000 would be about $2,500. Not exactly chicken feed (sorry).
Ms. O’Brien declined to cooperate with the investigation without receiving immunity from criminal prosecution. But the government is hesitating to grant her request, according to the people close to the case, fearing that doing so would set a bad example for future investigations.
My prediction: Jon Corzine will walk. And that’s yet another mark of shame for what’s left of the U.S. justice system.
When environmentalists discuss the proposed Keystone XL pipeline project, they often state that their real goal is to prevent Canada from developing the tar sands. Unless and until Canada becomes our 51st state, I have bad news for these folks: Canada is a sovereign nation. They have a government that is separate from the U.S. But, in the spirit of education, I offer a small video clip that will show them how to stop development of the Canadian tar sands. (This video is available in three flavors. One is a small .m4v file designed for mobile users. The second is a larger .m4v file suitable for larger screens and faster connections. The third is a Quicktime .mov file that most web browsers can play in native form.)
Mobile m4v (3.9 mb): Stop Canada’s Tar Sands
Full-sized m4v (14 mb): Stop Canada’s Tar Sands
Full-sized Quicktime .mov file (80 mb, be patient, it will start eventually) Stop Canada’s Tar Sands