Posts filed under “Wages & Income”
UPDATE DEUX: Heritage has now revised its numbers — see post above at 18:13 Eastern.
UPDATE: Apparently, in one document that can be found here, Heritage has simply disappeared the line item in which the unemployment rate falls to 2.8 percent by 2021. The document states: “Updated as of April 6, 2011 at 11:04 a.m. EST,” which update was presumably the removal of the unemployment rate projections. At this moment (13:30 Eastern), it still appears — for now – in this document (which I have saved in multiple spots). It is, frankly, remarkable to me that they would take such an action. Apparently when one’s analysis does not stand up to even the most cursory examination, the solution is simple: Delete the offending data.
Invictus here, folks. Filling in a bit for our traveling host with a side-by-side glimpse of our competing budget plans.
Paul Krugman has very recently written here and here about some improbable aspects of the Ryan budget proposal. In that vein, I thought it might be instructive to take a look at some of the similarities and differences of forecasts in Obama’s forecasts projections versus those being offered by Ryan.
What I have done in each case is as follows: I downloaded the appropriate series from the St. Louis Fed (or in one case BEA.gov), always on an annual basis. In almost all cases I made what I believe is a reasonable assumption for 2011 to bridge me from known 2010 (and prior) historical data to 2012 and beyond forecasts. Those assumptions are noted. I then simply took forecast numbers from the Heritage Foundation’s analysis of the two plans (the forecasts are in Appendix 3). Any input errors in creating the charts below are solely my fault, though I endeavored — under my noon deadline — to enter everything as accurately as possible. Please note any errors in comments.
(Click through any image for larger.)
First up, Real GDP. (FRED Series identifiers appear on most charts.)
Moving on to the Unemployment Rate:
So the proposed Ryan budget is going to reduce the unemployment rate to a historic — at least on an annual basis — low of 2.8 percent by 2021. And although that would have to be considered full employment and a taut labor market by just about anyone’s standards, we will see little or no impact on wages and/or inflation (beyond what Obama forecasts). In fact, the Ryan and Obama forecasts are almost literally on top of each other when it comes to inflation — but then Obama is not forecasting a 2.8 percent unemployment rate. In fact, his forecast is for almost twice that (5.2 percent at best). Honestly, is it possible to take seriously a projection that we are going to get the unemployment rate down to 2.8 percent by 2021 (or, actually, any time, for that matter)?
You literally cannot see Obama’s inflation forecast because Ryan’s sits atop it.
So let’s move on to jobs. How much more robust will the jobs market (private payrolls) be under Ryan’s numbers than Obama’s?
So the Ryan plan will produce about 2.5MM more private payroll jobs — about 21,000/month above Obama – over the next 10 years. I’m not sure how that translates into a 2.8 percent unemployment rate. (In the spirit of current sentiment, I assume not a single government worker will be hired in the next 10 years, at least, and therefore will not look at overall non-farm payrolls.)
Here are private sector wages and salaries followed by real disposable income. I would have thought a 2.8 percent unemployment rate would produce some discernable wage inflation beyond what we see below:
Unfortunately, it does not appear that the Ryan plan does anything meaningful on the one line item that matters most to the vast majority of Americans — Real Disposable Income – again, the lines are virtually on top of each other.
Presumably because this is a much more serious proposal that will get our house in order, Ryan’s plan forecasts lower rates on the 10-year note than Obama’s. The bond vigilantes will be held at bay as some $6 trillion is cut from the budget, or something like that.
The Heritage analysis contains comparisons on many more metrics than I’ve presented above; I simply chose a few that I thought might be of most interest. I may make further comparisons as time permits.
In wrapping this up, let me state for the record that I think virutally all forecasting beyond about 24 months — in almost any discipline – is generally an exercise in futility (of course there are exceptions). That said, the integrity and viability of what’s put before us always warrants some scrutiny and should be at least given the sniff test.
Putting an end to Wall Street’s ‘I’ll be gone, you’ll be gone’ bonuses By Barry Ritholtz Washington Post Saturday, March 12, 2011; 6:08 PM > Want to reform Wall Street bonuses? Try clawbacks. That’s right. We need to make executives personally liable for their reckless bets if we want to remove the risk for taxpayers….Read More
I was working on a column for the Washington Post on the IBGYBG Wall Street bonuses, when my partner Kevin Lane (the wizard behind the FusionIQ algorithms) pointed me to this article — Compensation 2011: Your definitive guide to advisor compensation across the industry — published at On Wall Street. Its a little “inside baseball,”…Read More
I’ve written about bank and Wall Street execs who got paid large, then bailed after they destroyed their firms. • Lehman Brothers Chairman and CEO Richard Fuld Jr. sold nearly a half-billion –$490 million – from selling LEH stock in the years before Lehman filed for Chapter 11 Bankruptcy • Countrywide Financial (now owned by…Read More
The following was co-authored a former UST employee, now working at another bulge bracket firm and Barry Ritholtz. It is a little inside baseball, but is quite instructive as to the state of the finance industry. ~~~ Bloomberg broke the story about U.S. Trust (a division of Bank of America) slapping its advisers with a…Read More
The phrase I was looking for in the last post was “I’ll be gone. You’ll be gone.”
Iain Bryson was the first who suggested it, and I then tracked it down to a few sources, the first of which was Jonathan A. Knee’s “Accidental Investment Banker.”
Its also mentioned in this 2009 video:
Transcript after the jump
Originally published December 4th, 2008,
Our different views prove that hindsight is often myopic. Larry White’s take is that Clintonian regulations perverted private incentives.
The boom and bust happened in a system with … extensive legal restrictions on financial intermediation. Nor have we had banking and financial deregulation since … 1999.
(One can’t explain an unusual cluster of errors by citing greed, which is always around, just as one can’t explain a cluster of airplane crashes by citing gravity. Anyway, the greedy aim at profits, not losses.) [T]o explain industry-wide errors we need to identify policy distortions capable of having industry-wide effects. The actual causes of our financial troubles were unusual monetary policy moves and novel federal regulatory interventions. Regulatory distortions intensified in the 1990s.
Perverse Compensation Systems are the Key
I disagree with Larry’s theses, but have space to demonstrate only an alternative perverse incentive. What went wrong is that modern compensation systems did not “align” interests, but rather created perverse incentives to engage in accounting “control fraud,” where the CEO uses an apparently legitimate firm as a “weapon” to defraud creditors and shareholders.  No regulation forced any lender to make a bad loan. Larry misses the key dynamic: “The greedy” do not “aim at profits, not losses” when compensation schemes are perverse. They maximize short-term accounting “profits” in order to increase their wealth. Making bad loans, growing rapidly, and extreme leverage maximize “profits.” Bad borrowers agree to pay more and it is impossible to grow rapidly via high quality lending. Lending to the uncreditworthy requires the CEO to suborn controls, maximizing “adverse selection.” This produced an “epidemic” of mortgage fraud, particularly in the unregulated nonprime sector. The FBI began warning in September 2004 about the mortgage fraud “epidemic.”  Fraudulent loans cause huge direct losses, but the epidemic also hyper-inflated and extended the housing bubble, and eviscerated trust, causing catastrophic indirect losses. When we do not regulate or supervise financial markets we, de facto, decriminalize control fraud. The regulators are the cops on the beat against control fraud—and control fraud causes greater financial losses than all other forms of property crime combined.
The most relevant economic works for understanding these crises are by Akerlof and Romer, Galbraith, and Minsky. Akerlof and Romer explain why “looting” (control fraud) can occur and the fraudulent steps looters take to optimize short-term accounting profits (which destroy the firm).  Note that they are writing about a form of a “market for lemons” in which the CEO maximizes information asymmetry. The failure of economists discussing the ongoing crises to cite the work of a Nobel laureate writing in the core of his expertise demonstrates why we have failed to learn the proper lessons from prior financial crises. James Galbraith extends Akerlof and Romer’s analysis to show why the state aids fellow control frauds.  Minsky describes the “Ponzi” phase of a crisis and why financial instability reoccurs. 
Modern executive compensation systems suborn internal controls. (Control frauds do not “defeat” controls—they turn them into oxymoronic allies.) The Business Roundtable’s spokesman, Franklin Raines, Fannie Mae’s former CEO, explained in a Business Week interview what caused the epidemic of accounting control fraud that became public in 2001 with Enron’s failure.
> The Bloomberg chart above compares year-to-year percentage changes in labor costs and consumer prices – from 1950 to present, for the past six decades (data source: Labor Department). These indicators had a high correlation — 0.82 during the period — according to Brian Belski, chief investment strategist for Oppenheimer & Co. Labor costs have…Read More