Depositing or De-Leveraging?

Said a banker named Old Ebenezer:
"Don't think me a miserly geezer;
Though to work is a gift,
I must still practice thrift,
As my paycheck is going to Visa."

The Wall Street Journal reports that US personal income was up for the month of December, but spending was down ("Rising Income Is Saved, Not Spent"). This fresh statistic, which reverses the previous three months' higher spending, is cited – perhaps hopefully – as a break in the long-term pattern of Americans' spend-thriftiness. Conspicuous by its absence is any mention of the level of consumer debt, which was ruinously high before the crisis and, though since reduced, remains high today. In any discussion of the trends of American income and spending, one must take care to distinguish between actual saving and de-leveraging. I suspect that our thrift is really debt repayment.
Infographic courtesy of The Wall Street Journal.

Mr. Buffett, His Secretary & Their Tax Rates

Inequality's pair most iconic,
Mr. Buffett and Mrs. Bosanek,
Have talked up the facts
Of the rates of his tax,
Which are lower than hers – most ironic.

"But investors like Buffett," says Mankiw,
"Have firms that pay tax as well, thank you;
We must add the taxation
Of each corporation
To see in which bracket we rank you."

So taxation's not simple as "one-two",
You can argue the point if you want to,
But unequal or not,
Ms. Bosanek ain't got
Someone else she can pass the tax onto.

Harvard's famed Professor Greg Mankiw, who chaired President George W. Bush's Council of Economic Advisers (and may someday do the same for Mitt Romney, if things should take such a turn), has made his voice prominent in rebutting the claim of Warren Buffett that he pays a lower income tax rate than his secretary. Debbie Bosanek pays roughly 33% of her income in taxes, while her billionaire boss pays 19%. The difference is due to the 15% rate of taxation on capital gains, which liberals argue is unfair. Professor Mankiw has argued that one must consider the shareholder's stake in the corporate income tax paid by the companies he owns.

Along comes a new and intriguingly anonymous blogger to put meat on the bones of Mankiw's argument. "PrometheeFeu" points out that, if Buffett pays 15% tax on his dividends and the company paying the dividend has already paid 25% income tax, then this is the same as a 35% income tax between Buffett and the original source of the income. Furthermore, one must distinguish between the person who pays the tax and the people on whom the burden of the tax ultimately falls. In other words, corporate tax burdens can be passed along to customers, vendors and employees as well as shareholders. However, this second point undermines the first, since it suggests that the companies owned by Berkshire Hathaway may spread the burden of their taxes, while Mrs. Bosanek would be hard-pressed to do so.

Davos: Private Gain, Public Pain

There's a forum for serious chatter
By the bankers and leaders who matter,
Who will see, when they're done,
That the debts of the one
Are obligingly backed by the latter.

This week, the global business and political elite meet at the World Economic Forum in Davos, Switzerland. Founded in 1971, the WEF describes itself as an international organization of large corporations "committed to improving the state of the world" with "no political, partisan or national interests." But, says Bloomberg columnist Jonathan Weil, "It’s becoming hard not to suspect that the annual gathering in Davos has become a conclave for global elites to promote crony capitalism and state-backed enterprise, ensuring that national coffers remain available to be tapped for private gain." Exhibit A in Weil's case against the Forum is its Co-Chair, Citigroup CEO Vikram Pandit. Angrily detailing the ways in which Pandit has "failed upwards" at his former hedge fund and then at Citi, ultimately taking multiple federal bailouts while declaring his institution to be sound, Weil concludes, sarcastically: "These little rough patches in the financial industry offered just the kind of hands-on experience the forum’s organizers were looking for in a leader, in which case they found their man."

Industrialist Obama

"To create better jobs in the shorter view,
Manufacturing needs the support of you,
For to firm up the health
Of our national wealth,
We must build some more cars and export a few."

President Barack Obama, in his State of the Union address on Tuesday night, predicted that manufacturing products for export would turn the US economy around. The President singled out companies such as General Motors and Master Lock as examples of this potential. Such rhetoric made Marketplace reporter Heidi Moore wonder whether we could build enough stuff to fill the financial hole left by crisis-riven banks. After all, the financial sector accounted for one third of US corporate profits before the bubble burst. Responded University of Maryland economics professor Peter Morici:

"We cannot succeed as an economy without a strong manufacturing base." While Wall Street has made a lot of money, Morici says, "It's nothing compared to the wealth generated by labs that come out of manufacturing."

State of the Union: Commando-In-Chief

"Though obstructionists threaten to ruin it,
Those who know what they say don't impugn it:
When I sound the attack,
Our economy's back
Like the Navy SEAL Bin Laden unit."

US Pres. Barack Obama, seeking to tie his military successes to hopeful signs in the economy, gave his economic-themed State of the Union address a military motif. The speech began with a salute to returning Iraqi war veterans, and ended with a tribute to the amazing teamwork of the Navy seal unit that killed Osama bin Laden. These twin martial references helped the president emphasize two key points: first, that there is much on which the President and Congress can work together as a team for the good of the American people; second, that there is much that I, as Commander-in-Chief, can order without you.

IMF MD to EU

"If the euro would founder and fester
From the wounds that beset and distressed 'er,
Ideology marred
The chance," said Lagarde,
"Of avoiding zees awful deezester."

IMF Managing Director Christine Lagarde, speaking in Berlin, sounded the euro-alarm as never before: "It is about avoiding a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand," she said before the German Council on Foreign Relations; "A moment, ultimately, leading to a downward spiral that could engulf the entire world." The IMF managing director would like Germany, France, the ECB and other key players to strengthen their support of the eurozone's liquidity and financial stability, to avoid an Italian meltdown in particular. As Mme Lagarde expresses so dramatically, such a development would not be confined to Europe.

Why Apple Is Not Made in the USA

"With the notion we might go along
That employment at home should be strong,
But our skills, we apprise,
And our chain of supplies
Don't compare to those guys' in Guangdong."

A New York Times profile on Apple's manufacturing of the iPhone opens with President Obama at dinner with Steve Jobs, asking him what it would take to bring this operation back to America. It's a poignant moment, as it seems that both US iPhone jobs, as well as Steve Jobs himself, were going and not coming back. Charles Duhigg and Keith Bradsher take an in-depth look at the economics of iPhone manufacture and determine that factory-ready skills and scalable supply chains are lacking here at home. "Though Americans are among the most educated workers in the world, the nation has stopped training enough people in the mid-level skills that factories need," they write. As for supply chains -

The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.

Is massive vocational and technical training America's answer to this challenge?

A Strategic Withdrawal

The L.A. town council, climactic'ly,
Ruled that porn stars must act prophylactic'ly.
"To mandate a condom
Is really beyond 'em,"
Said producers; "We're pulling out tactic'ly."

In a case of regulatory overreach made for limericks, the Los Angeles City Council passed an ordinance that actors in pornographic productions must wear condoms as a condition of obtaining a film permit. Some immediately decried this unwarranted government penetration into business affairs, sensing a backdoor attempt to regulate the industry's license. Porn moguls fear that this law could lead to flaccid sales in a business that has never developed a pulsating market for safe sex films. The city responded that the filmmakers are being too thin-skinned about condoms, the use of which is really a public health issue. Taking a cue from their on-screen birth control practices, movie producers threatened withdrawal from a domain of which they are evidently not master. Industry observers (also known as voyeurs) cautioned against premature evacuation, as the business is too entrenched in Los Angeles. It is estimated that 80% of US pornographic films are produced within the San Fernando Valley.

China's Slowing Growth

As the world isn't sure of withstanding
A slowdown in China's expanding,
The brightest and best
Are correctly obsessed
With predicting a hard or soft landing.

The Hard guys are finding it troubling
That the property market is bubbling,
And China's growth race,
To equal the pace
Of construction, would have to be doubling.

Say the Softies: there isn't just one way
Of averting a slump the yuan way;
While liquidity's free,
One can easily see
There's a gentle descent to the runway.

Economists and analysts around the world are weighing in on the question of how quickly China's sky-high growth rate will fall, and with good reason: while the developed world limps along at 1-3% growth, China's National Bureau of Statistics announced that their nation's economy grew 9.2% in 2011. The problem is illustrated by the Wall Street Journal graphic; though China is the jet engine propelling the world economy, it is on a downward glide path. Will there be a hard landing, in which property markets collapse and, directly or indirectly, throw millions out of work?
Yes, says Professor Patrick Chovanec of Tsinghua University's School of Economics and Management in Beijing. Dr. Chovanec points out that an outsized portion of Chinese GDP growth belongs to real estate, which is growing unsustainably fast. "Frankly, you don’t need a real estate collapse in order to trigger a serious slowdown in these sectors. All you need is a pause in the hitherto frantic pace of construction," says the professor.
No, say Zhou Xin and Nick Edwards of Reuters; China's vast fiscal resources give it powerful tools to moderate a slowdown, which the Fed and the European Central Bank can only look upon in envy.
Both sides make good points, but the most important perspective is that the future of China is many times more important to the world economy than that of, say, Greece.

The Chief Yahoo Resigns

A founder who outlived his heyday
Kept investors from having their payday;
Compared to a buyout,
No tack he might try out
Could put off his "anchors aweigh" day.

The shares he was said to have ruined
Rose in price, as the towel he threw in;
But history may
Look kindly one day
On the groundbreaking things he was doin'.

As Yahoo! co-founder Jerry Yang announced his resignation, reaction varied from regretful musing to grim satisfaction. The latter was reflected in the $YHOO share price, which rose 3% in after hours trading to $15.90. Internet industry oldtimers (if there is such a thing) were more philosophical; the Wall Street Journal quoted Citibank analyst Mark Mahaney, who said: "The near-term Wall Street reaction is that he wasn't doing a good job, but the longer-term perspective is that he will go down as one of the top 10 Internet entrepreneurs." Mr. Yang co-founded Yahoo! with fellow Stanford University graduate student David Filo in 1996, and the company rode the dot-com bubble to a market valuation of $120 billion in 1999. Along the way it eclipsed or bought out such early rivals as Alta Vista, Inktomi and Excite. In the wake of the dot-com bust and the ascendancy of Google search, $YHOO has languished, and Mr. Yang incurred the wrath of investors when he spurned a $47 billion takeover by Microsoft in 2008.

World Trade Center 2.0

Those towers of stature and weight
That collapsed in the fires of hate,
Through devotion and skill
And political will,
Are rising up, doubly great.

Dr. Goose was privileged to witness first hand how the World Trade Center, more than ten years after its destruction, is finally headed toward completion. The driving force behind this achievement is the unsung Steven Plate (pictured at left), Director of World Trade Center Construction for the Port Authority of New York & New Jersey. He invited the mayor and town council of Glen Ridge, New Jersey (of which council Dr. Goose is a member) to tour the site and observe its progress up close. Mr. Plate knows all about thankless jobs, having once served as mayor of Glen Ridge - a volunteer, non-partisan position - himself. In his current role, his achievements loom large even if his name may not.

You may see photos of the tour on the Limericks Économiques Facebook page.

He Had A Dream

Said King: "The nation will win
When it judges my children and kin
By their character traits;
When their status relates
To their deeds - not the shade of their skin."

Today, the nation celebrates the life of Dr. Martin Luther King, Jr., for his dedication to fighting injustice through militant, non-violent action, modeled on that of Mahatma Gandhi. In the midst of a brutally enforced racial segregation, Dr. King electrified millions with his speech at the 1963 March on Washington, in which he declared: "I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin, but by the content of their character." The "I Have A Dream" speech is well worth reading (or better yet, viewing) in its entirety. Dr. King's is a legacy of which every American can be proud.

Happy Birthday, Dr. King, from Dr. Goose!

Liquidity Trap: Mankiw v Krugman

Said Mankiw: "I've made a regression
Of the Fed funds rate setting progression,
Which suggests we may snap
Our liquidity trap,
Or at least, that's the graphic impression."

Said Krugman, with Nobel derision:
"Your regression requires revision;
This tract on the Trap
I have shown to be crap,
When corrected with Keynsian precision."

Economic heavyweights Paul Krugman and Greg Mankiw recently debated whether the United States is exiting the "liquidity trap," an impossible state of affairs in which the Fed would have to drop rates below zero to set the right balance in its fight against inflation and unemployment. Some years ago, Mankiw had analyzed the Fed's interest rate actions and determined that they approximated a simple formula: FF = 8.5% + 1.4 (I - U), where FF is the Fed funds target rate, I is inflation (core CPI) and U is the unemployment rate. In other words, if the rates of inflation and unemployment are equal, then the Fed would set rates at 8.5%. For every percentage point by which unemployment exceeded inflation, the Fed funds rate would decline by 1.4%. If unemployment is high and inflation is low, as is currently the case, the Fed funds rate would logically be negative, but this is not possible; hence, the liquidity trap.

Professor Mankiw notes hopefully that an application of his formula to the recent CPI and jobless rates suggests that the theoretical Fed funds rate is heading upward and will soon break through zero (see graph), thus signalling an end to the liquidity trap. Enter Professor Paul Krugman, pouring cold water on the hopeful graph. First, he notes that the formula is based on actions that the Fed took in the '90s, which are not necessarily those that they should take today, in a different economy. Second, he notes that a recalibrated formula, based on Fed actions of the '00s, suggests that the US is still deeply within the liqudity trap (although headed upward). More stimulus, anyone?

Overheard in the Gingrich Campaign

"When desp'rate for polling improvement,
Out the window the positive groove went,
And Republican hacks
Were armed with the facts
From attacks by the Occupy Movement."

Observers from across the US political spectrum have marveled at the rhetorical turn taken in the Republican Presidential primaries. Opponents of front-runner Mitt Romney, notably former Speaker of the House Newt Gingrich and Texas Governor Rick Perry, are decrying Mr. Romney's erstwhile management of the private equity firm Bain Capital as "more ruthless than Wall Street" (in Mr. Gingrich's words) and "vulture capitalism" (in Mr. Perry's). Prominent Republicans, even those not affiliated with Mr. Romney's campaign, have voiced alarm at the seeming attack on free-market capitalism coming from within the GOP. The conservative Club for Growth think tank took Mr. Gingrich to task for his "downright Obamaesque... economically ignorant class warfare rhetoric."

President Obama's campaign of course enjoyed having its arguments advanced by the opposition before the general campaign even begins. "I guess the only downside is that Mitt Romney might not be the nominee," said Obama strategist David Axelrod. For its part, the PE industry's "Private Equity Growth Capital Council" is set to push back with a big PR and lobbying campaign. Finally, the Occupy Movement is left to ask: does this Republican "99%" rhetoric reflect the strength of our ideas, or only the political weakness of certain desperate Presidential candidates?

Franc-ly, My Dear...

Said the head of the Swiss central bank,
Whose wife played the dollar and franc:
"I may be remiss,
In our conjugal bliss,
If it's me she's beholden to thank."

Money and politics make for a volatile mixture; add marriage, and the results can be explosive. So were the halls of the Swiss National Bank rocked on Monday by the resignation of its chairman, following a scandal involving his wife's well-timed currency trades. Philipp Hildebrand, at 46 the youngest-ever Swiss central banking head, maintained that he had no prior knowledge of wife Kashya's purchase of US$504,000 against Swiss francs; Mrs. Hildebrand made this trade shortly before Mr. Hildebrand's bold currency intervention that drove down the value of the franc vs. the dollar and earned her a 17% profit. The case occurs against a tense political backdrop, in which Mr. Hildebrand's push for more openness in the Swiss banking system has met with strong resistance from the conservative Swiss People's Party. Against such opposition, the SNB chairman soon found himself in a farewell press conference: "Central bankers need to be absolutely credible," he said. "The resignation fills me with sadness." Mrs. Hildebrand, who had worked for the Moore Capital hedge fund in the '90s, expressed her remorse in a $79,000 donation to charity, effectively disgorging the tainted profits.

Conflict of Interest

Said an econ professor named Booth,
While instructing America's youth:
"The Original Sin
Of the business I'm in
Is to advocate, heedless of truth."

Members of the American Economics Association took a big step forward this past weekend at their annual meeting in Chicago, when they voted to adopt a code of ethics to address conflicts of interest. The 2010 Academy Award-winning documentary film "Inside Job" shone a harsh light on the ties of well-known economists to companies that later went bust in the financial crisis. Director Charles Ferguson charged that social scientists' lucrative and undisclosed ties to corporate interests caused them first to miss the signs of the impending crisis, and then to recommend policies that benefited their clients at the expense of the broader economy. Inside the AEA, professors such as the University of Illinois' Deirdre McCloskey echoed and amplified that view: "The master sin, in American economics especially, is advocacy without regard for the truth," she said to fellow delegates.

The new code of ethics is a first corrective step, limited to disclosure of potential conflicts of interest. AEA members will now have to disclose all sources of financing for their research and all "significant" financial relationships with groups or individuals with a "financial, ideological or political stake" therein.

Procreationism

A Republican hopeful's profundity
Surprised the political punditry,
When he said he expects
His constituents' sex
To flower in fruits of fecundity.

In his New York Times blog this week, Paul Krugman took time out from his spat with Tyler Cowen to remind everybody that former senator Rick Santorum (pictured) opposes contraception and would defund any federal support for it if elected President. In an electoral season in which Republicans compete to show the courage of their conservative convictions, Santorum stands out for his public commitment to old-fashioned sexual propriety, and his refusal to distinguish between private morals and public policy.

UniCredit, Triple Trouble

A bank holding company that had
Two acceptable banks and one bad,
Found itself, in duress,
On the whole, valued less
Than the sum of its pieces would add.

"Is it time for a breakup of UniCredit?" asks The Wall Street Journal's Heard on the Street column. UniCredit, an international bank based in Italy, has a third of its operations in Germany and Austria, and another third in the emerging markets of Central and Eastern Europe. Right now, though, it's the home country that investors focus on, where the bank has €40 billion exposure to Italian government bonds, equal to 90% of its equity. As a result, UniCredit trades "at a substantial discount to the sum of its parts." At this rate, writer Simon Nixon's tongue-in-cheek suggestion to rebrand the bank as "EineKredit" could only help.

Iowa Caucus

Said an analyst, voicing complaint:
"Though this Iowa caucus is quaint,
The candidate crowned
May be treated as bound
For the White House, but probably ain't."

Going into the first round of the 2012 Republican presidential nomination season, speculation swirled feverishly over which of Ron Paul or Rick Santorum would "surge" past the well-funded but unloved Mitt Romney to win the Iowa caucus. More than one political analyst, however, has cautioned against ascribing much meaning to this contest. The New York Times "Five Thirty Eight" blog, while valuing the caucus for early evidence of how "flesh and blood voters behave after exposure to the campaigns," allows that "it is true that no delegates will be chosen on Tuesday night, and it is true that the Iowa caucuses have far from a perfect predictive track record, especially on the Republican side."

2012 Outlook: Bad & Good

Said a hedge fund Colossus: "The crux
Is the global economy sucks;
But, by legerdemain,
To be perfectly plain,
My investors make billions of bucks."

The outlook for the developed economies is so bad that it might be a banner year for one of world's largest and most successful hedge funds. So says co-chief investment officer Robert Prince of Bridgewater Associates in Westport, Connecticut. "What you have is a picture of broken economic systems that are operating on life support," says Mr. Prince to The Wall Street Journal. "We're in a secular deleveraging that will probably take 15 to 20 years to work through and we're just four years in." Mr. Prince can only hope that the new year is as bad as the old, in which Bridgewater made 25% returns while the average "global macro" fund lost 3.7%. Among his firm's winning bets on bonds, stocks and commodities were "long" positions in gold (i.e., betting that the price would rise) and a well-timed call that the euro would fall against the yen.

New Year's Resolution

A researcher of deep comprehending
Said: "To hold down medicinal spending,
One would certainly fare well
To take to the stairwell,
And spend 30 minutes ascending."

This past weekend, The New York Times asked its economics columnists to think deeply on the issues and solutions that may have an impact in 2012. Professor Richard Thaler, who teaches economics and behavioral science to business students at the University of Chicago, suggests that our national health care spending crisis can be ameliorated with a few "nudges" from employers. The thesis of “Nudge,” by Dr. Thaler and Cass R. Sunstein, is

that “choice architects” can often help people achieve their goals simply by making the necessary steps easier.

According to Dr. Thaler, employers can nudge their employees in the right direction by, among other things, subsidizing healthy foods in the cafeteria, enticing workers to use the stairs instead of elevators, and tweaking insurance plans to make life-saving prescriptions free, thereby encouraging patients to keep up with their medications.