Cold Water on Lotto Fever

The lotto's a game of slim chances,
Though the jackpot immense at first glance is;
Of the fortunate few
Whose numbers come through,
Most end up in bankrupt finances.

With a record-setting $540 million jackpot up for grabs on Friday night, the Mega Millions game has given the country lotto fever. However, the cold fact is that nine out of ten lotto winners squander their prize in five years or less. CBS Moneywatch editor Jill Schlesinger has advice for those who feel lucky tonight: if, against impossible odds, you actually win, keep the news to yourself while you carefully hire an accountant, lawyer and financial advisor to help you work out a sustainable plan for your incredible windfall. Remember, the prize is always less than it sounds; the after-tax, lump-sum value will likely work out to half of the stated jackpot amount. Moreover, if you want it to last, you've got to leave most of it invested and live on the earnings. The bottom line is, if you can live on the $10 million or so annual earnings that the $540 million nest egg might throw off after taxes, then you, your new-found friends and your long-lost cousins will live happily ever after.
Hat tip to Tess Vigeland of Marketplace Money.

€uro Myth

Said an overwrought Eurocrat wistfully,
At the nightmare he once dreamed of blissfully:
"The euro must break up
Or else we must take up
The topic of joining fiscally."

Among the 9 Economic Myths deconstructed by Cullen Roche in his Pragmatic Capitalist blog is that of the euro: specifically, that the euro has been saved by the ECB's LTRO (long-term refinancing operation). Euro-zone banks have borrowed a net €520 billion of 3-year LTRO loans, which the ECB hopes will encourage liquidity and lending among the banks in its member countries. Unfortunately, this is another example of can-kicking. Says Mr. Roche:

The problem in Europe is simple. Because none of the countries are autonomous currency issuers, they all suffer from solvency constraints. They can’t print euro without the approval of a foreign central bank, in essence. So, unlike the USA, they can “run out of money”. This makes for frightened bond investors. The problems all arise out of the [intra-European] trade imbalance, which essentially forces the core to lend to the periphery to maintain growth. This is only sustainable up to a point and that point has been reached.

Hat tip to the Reformed Broker, Josh Brown.

Bernanke's Debt Crisis Lecture

"Calamitous circumstance thrust me
Into coping with crisis robustly,
And in daring to bail
The Too Big To Fail,
I rescued your tail, you can trust me."

Federal Reserve Chairman Ben Bernanke, in the third of his four lectures at George Washington University on the Fed and the financial crisis, told his students that the Fed's extraordinary 2008 actions prevented a "total meltdown". Said the Chairman, "I think the view is increasingly gaining acceptance that without the forceful policy response that stabilized the financial system in 2008 and early 2009, we could've had a much worse outcome in the economy." One of Mr. Bernanke's key slides, shown at right, compares the trend of industrial production in the periods beginning in 1929 (blue line) and 2008 (red line); by comparison with the Great Depression, the Chairman tells us, it's clear that things could have gone much worse this time.

Overheard in the Supreme Court

"I've studied Congressional acts a lot
On the government's power to tax a lot,
Which I'll argue today,
Though tomorrow I may
Invoke contradictory facts a lot."

Intense public interest in the Supreme Court hearing on the Affordable Care Act (a.k.a. Obamacare) means that even the most obscure preliminary arguments are followed with intense focus. Thus, the Wall Street Journal's article on the opening arguments was among the day's most popular, though it should normally have made one's eyes glaze over. The first day's argument turned on whether the penalty for non-compliance with mandated insurance is a tax. If so, argued Washington trial lawyer Robert Long, it is covered by the Anti-Injunction Act, which holds that taxes cannot be legally challenged until they are effective; in this case, that's not until 2014. The Obama administration, which evidently wants to get the legal challenges over with, did not agree, saying that the penalty is not a tax under the AIA. However, they intended to argue the next day that the penalty is covered by the government's constitutional power to levy taxes; certainly a nuanced position, to say the least.

Supply or Demand?

Professor John G. Treble of Swansea University in Wales paid a visit to our Rhymes by Readers page and contributed a classic economic limerick from the halls of academia:

Said Moore: 'Oh goodness, oh my,
This demand curve is sadly awry.'
'Not so', said Working,
'A fallacy's lurking.
It isn't demand. It's supply.'

This is a reference to the Identification Problem in econometrics; when observing the data on sales of a particular good, it is difficult to determine to what extent any changes are due to a shift in demand, or supply, unless one of them is fixed and the changes are a function only of the other. This problem was researched by Elmer Working (1900 - 1968) who, along with his brother Holbrook, was a pioneer of the field of econometrics. The Working brothers were preceded by an earlier pioneer in economic statistics, Henry Ludwell Moore (1869 -1958).

Thank you, Professor Treble, for this historical limerick-econometric contribution!

Pay To Play

Said a treas'rer: "It's no dereliction,
In financing my home jurisdiction,
If the bank we pick out
For its marketing clout
May've had the odd brib'ry conviction."

Matt Taibbi, raking the financial muck in Rolling Stone, is incredulous that the too-big-to-fail "banksters", who have established a pattern of bid rigging and paying to play in municipal finance, continue to win the lion's share of new issuing business. The attitude of state treasurers toward Bank of America and JP Morgan is conveyed by California's Bill Lockyer, who said:

"I haven't found an investment bank that hasn't had some problem in the last three years. We do business with them all. I think they provide good service. I think they've been highly ethical with us."

The conclusion is that, in the interest of getting the deals done, government treasurers are willing to tolerate a rigged, expensive system. Hat tip to Arthur Cutten of Jesse's Café Américain.

Thanks, Mitt - from Ohio Art

One's product becoming a meme
May be every brand manager's dream;
To shake up and then
Start over again,
Well-etched in a rank of esteem.

They're toasting the Mitt Romney Presidential campaign in Bryan, Ohio tonight. The Ohio Art Company, makers of the classic Etch A Sketch toy, found their product in an unaccustomed spotlight due to a gaffe by a Romney campaign manager. Adviser Eric Fehrnstrom told CNN that the Romney team was unconcerned with presenting his recent, hard-right positions to moderate voters in the fall general election: “Everything changes. It’s like Etch A Sketch,” he said. “You can shake it up and we start all over again.” The family-run toy company showed gleeful appreciation to be "DRAWING attention with political candidates...and SHAKING UP the national debate." This development immediately opened up a new market segment for the familiar erasable screen: the Gingrich and Santorum campaigns bought up Etch A Sketch devices to use as props against the Republican front-runner. Mr. Fehrnstrom may have received flowers from rivals to whom he gave a new catch phrase, now that "flip-flop" no longer sounded sketchy enough.

Prof. Bernanke vs. Gold Standard

Said Bernanke: "A standard of gold
Is empirically hard to uphold;
When bound to the ingot,
The high and low swing got
Too hard to be quickly controlled."

Fed Chairman Ben Bernanke has embarked on a series of four lectures at the George Washington University business school, on the role of the Federal Reserve system and the recent financial crisis. In his first lecture on Tuesday, on the origin and mission of the Fed, Prof. Bernanke came out swinging against the gold standard as a solution to our monetary and economic problems. The Chairman claimed that the gold standard:

• Creates deflation (famously decried by William Jennings Bryan in his "Cross of Gold" speech);
• Causes interest rates to rise during downturns and fall during good times - the exact opposite of what should happen, and a factor in the greater volatility that prevailed during the gold standard years;
• Links everyone's currencies, so that monetary policy in one country gets transmitted to others;
• Can quickly fall apart if speculators believe that the central bank has any other priorities than maintaining the gold standard (such as fighting unemployment).

Supporters of the gold standard (okay, gold bugs) were indignant at this use of the central bank / academic bully pulpit.  James Rickards, author of Currency Wars, tweeted: "I'm not troubled when #Bernanke misleads Congress since they can fend for themselves. But today he misled college students. Disgraceful." Mr. Rickards disputes Mr. Bernanke's assertion (shared by many others) that the constraints imposed by the gold standard were a factor in the Fed's inadequate response to the Great Depression.

That January Deadline

An economist whispered: "I fear
That the time for can-kicking draws near;
For tax cuts on income
And payroll (and then some)
Expire the first of the year."

Alan Blinder must hope that Congress doesn't want to "shoot the messenger." The Princeton economist and former Vice Chairman of the Federal Reserve reminds them and us that, in January 2013, deadlines loom for:

• the expiration of

the Bush tax cuts

the 2% payroll tax cuts

extended unemployment benefits

and

• the imposition of automatic spending cuts from the failed deficit reduction super committee.

Taken together, these falling cans - if not adroitly kicked further - would take 3.5% from America's GDP at one stroke. Time for those Congressional punters to start warming up...

iCash

"In business," said someone who knows of it,
"When a mound of liquidity grows of it,
A sizable herd
Will hang on your word
Of how you intend to dispose of it."

Apple enthralled the worlds of investment and technology on Sunday with their announcement of a conference call Monday morning to disclose what they intended to do with their $98 billion cash hoard. In the event, investors who hoped that some of this liquidity, which amounts to $104 per share, would be used to pay the company's first-ever dividend got their wish.

Tax-Time Limericks

Happy St. Patrick's Day! I sat down with Tess Vigeland of Marketplace Money to recite listeners' verses on taxes. Among the submissions was one by Mad Kane, who is heard here in her own voice. Erin (and taxes, unfortunately) go bragh!

The text of all the verses may be found on the Marketplace Money website.

St. Patrick's Day on Wall Street

There's a Blarney old stock market theory
That prices are frothy and cheery
On the eve of St. Pat,
But decline after that,
When Hibernian eyes are still bleary.

St. Patrick's Day is upon us, and all the sons and daughters of the Emerald Isle are thinking the same thing: what does this mean for my portfolio? With this question in mind, I went to seek answers in the Seeking Alpha blog. There, a laddy by the name o' Timothy Wood posted a wee guide to How St. Patrick's Day Can Make You Money in the Stock Market. Evidently, the market rises by an average of 0.34% in the two days before St. Paddy's. Indeed, in the years between 2006 and 2010, stocks rose during each four-day period from March 15 to 18. As if to confirm Mr. Wood's hypothesis, the S&P 500 rose by 0.6% on Thursday to close above 1400 for the first time in four years. Says Mr. Wood: "This peculiar occurrence is attributed to a rise in mood levels as people await the celebratory day, which encourages investment." In that case - Sláinte!

Dr. Goose reminds you to celebrate St. Patrick's Day responsibly... by listening to Marketplace Money this weekend! Your faithful limericker and host Tess Vigeland will recite tax-time limericks for your pleasure and edification. Check your local public radio listings for the time and station, or download the podcast!

Cruelty to Muppets

Said a Goldmanite, freaking his guys out:
"How my conscience courageously cries out!
Though I trusted this firm, it
Exploited poor Kermit,
Rapaciously ripping his eyes out."

The New York Times set Wall Street ablaze today with its publication of Why I Am Leaving Goldman, a banker's bitter swan song to a financial culture gone astray. Greg Smith, the suddenly former head of equity derivatives in the firm's London office, made an earnest confession (perhaps too earnest) of what everyone else has said for years: Goldman, Sachs makes money by ripping off its clients. Inside the firm, clients are disparaged as "muppets" who deserved to get their "eyes ripped out" (sorry, Kermit). But, aside from the insertion of non-disparagement clauses in the Vampire Squid's employment contracts, what will change as a result of this cri de coeur? Maybe nothing, but it does provide a moment of clarity for reflection: conservative blogger Noah Millman, a former equity derivatives man himself, explains the money behind Goldman's changing ethos -

It takes discipline to say, “let’s take care of the customer, and think of the long term” when you’re talking about normal amounts of money. When the amounts of money become as staggering as they were in the mid-2000s, the game – at best – becomes “how can we convince ourselves that we’re taking care of the customer.” Because what if the only way to take care of the customer is to get out of the game?

However, the final word should go to Marketplace's Heidi Moore, who looks into the soul of Wall Street and asks:

Did Goldman change the way it did business? Maybe. But the more likely view is that those flaws - in the industry, in the firm, in other firms - have been there for a long time and the scales just fell from his eyes when it finally turned against him.

Revenue-Optimizing Tax Rate

A broad economic review
Of the facts of how taxes accrue
Said that federal receipts
Would do well, if elites
Had a rate increase "up the wazoo".

Bruce Bartlett, former tax policy advisor to Reagan and George H.W. Bush, complains in The New York Times that one never sees conservatives providing evidence to support their claim that higher marginal income tax rates would discourage work and investment.

The reason for the conservative reluctance to estimate the revenue-maximizing top tax rate is that academic research generally shows that it is much, much higher than the current top rate or any that has been proposed by the Obama administration.

Two recent studies under the auspices of the National Bureau of Economic Research point to a revenue-maximizing top tax rate of 83%! One of the studies found no "supply side" effects of the reductions in the top tax rate since 1975, implying that an increase would not materially impinge on economic activity; which is a good thing, because the government really needs the money.

China's New Trade Deficit

A worsening balance of trade
In the land in which everything's made
May be read as a sign
Of commercial decline
In the rest of the world, I'm afraid.

The news of China's large global trade deficit in February came as a shock, and may evoke some Schadenfreude in Americans who have despaired over the size of our nation's trade deficit with China. However, this is no time for malicious glee in the centers of manufacturing, or legislation. For one thing, the $4.1 billion Chinese trade deficit in the first two months of the year did not redound to the benefit of the US, with which China still has a large trade surplus. Second, the Chinese trade deficit indicates weak consumption among its European trading partners, to which Chinese exports declined by 1.1%. This is a sign of a possible global slowdown, which benefits nobody.

A Myopic Perspective

Said a critically ill PhD
To his young, volunteer EMT:
"Your work, while essential,
Is only tangential
To raising the raw GDP."

Dr. Goose attended the annual Glen Ridge, New Jersey Volunteer Ambulance Squad Recognition Dinner and was impressed once again by the spirit of those who give their time, literally freely, for the well-being of others. Afterwards, he reflected on the value of volunteer work and how it is generally ignored in economics. Certainly, if one googles the "economics of volunteering," one finds some earnest attempts at bringing the third sector (after commercial and government activity) into the fold. However, volunteer work is not figured into national economic output, nor are those willing souls tallied like the ranks of the jobless and the gainfully employed. Perhaps the primary motivations for volunteers - a sense of personal achievement, giving back to society, learning a skill, or finding camaraderie - are just too hard to measure, though we know we could not survive without their selfless service.

Behavioral Research

An economist made a regression
Of love during growth and recession.
"What my scatter plot shows,
I cannot disclose,"
Said she, "for the sake of discretion."

My thanks to my fellow "tweep" @Bankrchick for her "patented Dating Age Cohort Theory."

Student Loan Bubble

When Millicent borrowed for college, she
Was taken aback by the knowledge she
Could have them remit
As much for French Lit
As for Health Information Technology.

The Wall Street Journal's Real Time Economics reports that surging federal student loans are confounding the general trend of consumer debt reduction. Thanks to our highly leveraged collegians, overall consumer debt increased by $18 billion (+0.7%) in January. As Dr. Goose and many others have warned previously, the rise in student debt, coupled with rising unemployment among young people, is an explosive trend. One step that could deflate this student loan bubble would be to introduce some form of credit underwriting to the process. Linking the availability of loans to the likelihood of a program of study to produce employable skills would help to restrain excess lending and direct young people into viable careers.

Birth Control Debate

"Re: the Pill," asked a lady named Gwen of it,
"Tell me why we're absolving the men of it?
The point that is lost
In 'who pays the cost?'
Is: the fellows get most of the benefit."

The nation erupted in controversy this past week, after right-wing radio host Rush Limbaugh insulted a Georgetown University law student who attempted to give Congressional testimony on the issue of compelling health plans to cover prescription contraceptives. On economic blogs, the question of whether women's birth control prescription costs should be socialized or even subsidized was hotly, and sometimes reasonably, debated. Rare was the partisan, however, who considered the role of men in this question. After all, women don't generally need contraception on their own. Since no-one can deny that men as well as women derive benefits from the pill, is this not a classic case of the "free rider" problem?

Taxing St. Patrick's Day

I will visit Marketplace Money the weekend of St. Patrick's Day, to join host Tess Vigeland in a wee bit o' limerickin' about taxes. If you have one you'd like to hear on the air, why not leave a comment here?

Alternatively, you can drop by the Marketplace Money Facebook page, and add your verse to the growing collection. Sláinte!

Conservatives vs Liberals

A conservative's someone it peeves
To pay taxes, because he believes
That they're soaking the rich
For entitlements, which
He somehow forgets he receives.

A liberal is fiercely intent
On the government's making a dent
In the plight of the poor,
At the cost, she is sure,
Not of her, but the top 1%.

Happy Birthday, Dr. Seuss

When I was a youngster I used to
Be among those they read Dr. Seuss to,
Whose way with a rhyme
Was ahead of its time,
And the reason that I'm Dr. Goose, too.

More Thrift Is A Gift

When economists found more frugality,
They hoped it was no abnormality,
As the habit of saving
Is useful in paving
The road to financial reality.

Countering the notion that more US consumer spending is unambiguously good for the economy, The Wall Street Journal's Real-Time Economics blog asserts: "For the U.S. recovery to last, savings are just as important as spending." RTE has been hopefully following a recent development in the data on incomes, spending and saving, whereby, for the last three months, rising incomes have not led to rising spending. The 5% savings rate of the last two years has been holding fairly steady, in contrast to the 3.1% average savings rate of the previous ten go-go years. That's a good thing because, as RTE notes: "It’s been long known that baby boomers need to save more now to have spending money during their retirements–an imperative that may increase if social security benefits are altered."

For those looking to boost their own personal savings rate, the Marketplace Money website is a good place for information and advice.