How Did The United States Get In The Position Of Supporting The Deadbeats In Argentina?

In the realm of bad economic policy ideas, the country of Argentina has to rank near the top of almost everyone's list.  OK, the Soviet Union was worse, but they're gone.   Cuba, North Korea, Venezuela -- there are a few more.  But Argentina was once one of the world's wealthiest countries, and then went into a tailspin for what is now over two generations.

The United States once knew what good economic policy looked like.  It made us the wealthiest country in the world.  Today, we have mostly forgotten.  We have forgotten so badly that we even support Argentina in its folly.  Most recently the U.S. government has supported Argentina in its efforts to avoid collection of judgments issued by U.S. courts to enforce repudiated Argentine debt.

The era of good economic policy in the United States is not of course the recent era of fancy Ph.D.s from Ivy League schools at Treasury and the Fed.  Rather, it is the founding era.  The prime motivation for the founding was that the government under the Articles of Confederacy had no taxing power and couldn't pay the Revolutionary War debt.  The founders recognized that they needed a government that could pay its debts and establish its credit.

Literally the first thing that the government of the new United States did on the founding was to create a plan for paying off the Revolutionary War debt at full value.  One of the best accounts I have read is in the Ron Chernow biography of Hamilton.  Significantly, much of the debt had been bought up at steep discounts after being in default for long periods.  But Washington and Hamilton recognized that the way to establish the credit of the new country and make it a player on the world stage was to pay off the debt at par.  Clearly this is not the only reason that the United States took off as an economic power, but it is one of the top few reasons.  The United States had top international credit from the time of the founding through the Obama administration, when it received its first downgrade.

Now shift to today's Argentina.   The list of destructive economic policies is long.  Here is an article from the Wall Street Journal on August 8 with a good summary: crony capitalism on steroids; subsidies for everything; currency controls with special exchange rates for friends of the government; expropriation of the big Spanish oil company YPF; raging inflation; tariffs that make most manufacturing impossible; and so on.  But high on anyone's list must be the fact that in 2001 Argentina repudiated some $80 billion of bonds that it had issued in the 1990s.

Today the United States thinks that the way to live your life, as an individual or a country, is to spend unsustainably and take on as much debt as you can get away with.  Then you do a "bailout" or a "restructuring" and resume with another round of unsustainable spending and debt.  Here is the quote of their philosophy from an amicus brief submitted last April in support at Argentina's continuing efforts to avoid paying the repudiated debt:

[T]he district court's interpretation of the pari passu provision could enable a single creditor to thwart the implementation of an internationally supported restructuring plan, and thereby undermine the decades of effort the United States has expended to encourage a system of cooperative resolution of sovereign debt crises.  Allowing creditors recourse to such an enforcement mechanism would have adverse consequences on the prospects for voluntary sovereign debt restructuring , on the stability of international financial markets, and on the repayment of loans extended by international financial institutions.

It may seem briefly that these "internationally supported restructuring plans" promote "stability," but over time it is a fallacy.   The seeming "stability" just enables the next round of overspending and bad policies to continue.  The route to economic success is the one taken by the United States.  But the word is that the United States intends to continue to submit another amicus brief in support of the Argentine repudiation in the next round in the Second Circuit taking place over the next couple of months.  We'll see how badly they embarrass themselves.

Hurricane Sandy Relief Requests Will Show Whether Anyone Is Serious About Controlling Spending

As the tax/debt/deficit talks proceed in Washington, the Republicans supposedly are trying to put some limits on the explosion of Federal spending.  Can they trim, nip or tuck a little bit of the entitlement gusher?  Even as their attention is focused on entitlements, ten other things are taking off like a rocket, from food stamps, to Social Security disability, to student loans, and so forth.  Let's look at just one "little" item on the current Federal list:  spending for disaster relief from Hurricane Sandy.  Last week President Obama put out a number of $60.4 billion as what he wants the current Congress to appropriate right now as Sandy relief before going home for the year.

The lead story in the New York section of Saturday's Wall Street Journal was "Return Favor, Donors Tell Republicans," a report on how major Republican donors from New York are currently engaged in lobbying the Republican members of Congress to get behind President Obama's $60.4 billion Sandy relief request.   It seems that certain wealthy New Yorkers who contributed to the campaigns of Republican congressmen around the country are trying to use the clout from their donations to ensure passage of the relief package.  For example, here is Ken Langone (of Home Depot fame): "There's a time for all of us to pull together, and there's a time for all my colleagues in business to pick up the phone, and call all of those people up and say, 'OK, now you can do something for us.'"

I know I am a contrarian, but if the Congress can't resist this one, we might as well just throw in the towel.  Even if you believe that the Federal government should act as the infinite insurer of everything, and should draw on the infinite credit card to pay every dollar of every demonstrable loss from every hurricane or other natural disaster, there is still the issue that this $60 billion number is wildly, wildly inflated and is really just a thinly-disguised bailout of the budgets of three of the most fiscally irresponsible states, New York, New Jersey and Connecticut.

How do I know that the $60 billion is wildly inflated?  Because I've been paying attention.

Here's a story I previously linked from Crain's New York Business of November 26 describing how New York's Governor Andrew Cuomo put together his $40 billion demand for Federal funds.  A few tidbits:  "Mr. Cuomo is seeking 100% reimbursement from Washington for the recovery, citing the precedent of Hurricane Katrina and other disasters."  And what items are included?  How about: "$5.7 billion in lost gross product in the city, most of it among the city's small businesses."  How about $4.9 billion "to cover storm victims who lack insurance."  (Aren't those two duplicative?)  And here is my favorite:  "[A]n additional $9 billion for what Mr. Cuomo described as 'mitigation [and] prevention." 

In other words, give us an extra $9 billion for things that we can't even tell you what they are now and have no idea of how much they will ultimately cost and whether they will do any good.

Let's take a little closer look at another one of the items in the New York request, $4.7 billion for the MTA to get the subways and other trains up and running after the storm.  As I previously wrote here, this number is a very large multiple of anything remotely reasonable for repair of these facilities.  Included is $600 million for "repair" of the station at South Ferry that was just built new and opened in 2009 at a cost of $530 million.  It is absolutely not possible that even a full year repair project on this station could cost more than the four-plus year construction project to build it from scratch just a few years ago, including digging the gigantic hole.  Besides which the $530 million for just one station was wildly inflated to begin with.  Milan, Italy is currently building a 3.5 mile underground subway line with seven stations for $700 million.  Here is an article comparing New York's transit construction costs to those of other international cities -- we are a large multiple in every case.  I can understand that we might be 20% higher, or even 50% higher, but how could it be that our costs are more than 10 times as high?  To run up $600 million to repair this station over a year, you'd have to pay 2000 people $300,000 each.  There are nothing like 2000 people working on this.  Can't anyone recognize that this is a ridiculous sham?  They're going to spend maybe $100 million to repair this station -- even that far more than necessary -- and the rest of the money will disappear into a black hole.  The same comments go for the rest of the MTA's $4.7 billion.  It is preposterous.  Almost all of the system is already back up and running.  They would have had to have more than a hundred thousand people working on the repair to run up that much cost that fast.  The real number is less than a tenth of that.

Finally, a comment on New Jersey.  As I wrote here, Governor Christie initially came up with a wildly inflated figure of $29.4 billion, and then immediately got "out bid" by Cuomo's ridiculous $40 billion.  But in particular Christie, a man not otherwise known for lack of chutzpah, hadn't thought to toss in an extra stack of billions for future "mitigation."  On seeing Cuomo's $40 billion, including $9 billion of this imaginary "mitigation," Christie promptly upped his demand by $7.4 billion.  I like the .4 at the end -- it gives an air of precision, as if it was not a totally made-up number.  He should have made it $7.413 billion.

To just appropriate the $60.4 billion without seeing and scrutinizing the actual costs is the worst possible thing that Congress can do.   There is no possibility that legitimate Hurricane Sandy costs are remotely in that range.  And if we're just giving out handouts to anyone and everyone, then inevitably everything will get rebuilt bigger and better on the barrier islands ready to get hit by the next storm.

This infinite credit card stuff is a really dangerous game.  Republicans, show what you are made of! 

Do Our Monetary Authorities Know What They Are Doing?

I’m looking for some kind of indication that our economic and monetary officials know what they are doing.  I’m not finding anything.  All indications are that they don’t have a clue.

Let’s look at this from the lead article on the front page of Friday’s Wall Street Journal.

The Fed said Wednesday, at the conclusion of its last policy meeting of the year, that it would enter 2013 with a plan to purchase $85 billion a month of mortgage-backed securities, part of a continuing attempt to drive down long-term interest rates to encourage borrowing, spending and investing.  The Fed said it didn’t expect to touch short-term rates until it saw the unemployment rate fall to 6.5% or lower, as long as inflation forecasts remain near its 2% target.

So they now have the idea that they can just multiply the monetary base by a factor of five or so and there will be no inflationary effect?  I like that phrase “as long as inflation forecasts remain near its 2% target.”  Who is making these so-called forecasts, and where did they buy their crystal ball?  Did it occur to them to take into account that the monetary base is in the process of  multiplying by 5 without the economy growing much at all?  Exactly how do you even make a forecast of inflation without the monetary base/GDP ratio as your primary input?

According to data from the St. Louis Fed  here, the entire monetary base of the United States as of November 2008 was around $800 billion.  Then we had QE1, and suddenly it was about $1.7 trillion.  Then QE2 and suddenly around $2.7 trillion.  And now we’re going to be buying $85 billion more of assets per month, effectively monetizing all or nearly all of trillion-dollar-plus annual deficits.  Should be approaching $4 trillion by the end of 2013.  But don’t worry, our “forecast” is for inflation not to exceed 2%!

Here is the statement of the Fed's mission from Section 2A the Federal Reserve Act:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

That's rather an explicit statement of what they're supposed to do:  maintain monetary aggregates in a stable relationship with the economy, which in turn will lead to maximum employment, price stability, and "moderate" interest rates.   Now they've just turned everything around 180 degrees.  Our new number one goal is to drive unemployment down to 6.5%.  We'll do that by having a blow-out expansion of the monetary base.  Where do they possibly get the idea that they have control over the rate of unemployment, other than very indirectly influencing it through the blessing of stable money?  Can anyone give one example from history where a five-fold expansion of the money supply without substantial economic growth moved unemployment down a few points and did not ignite inflation?  Well, this is what is called hubris.  Unfortunately, we know what follows hubris.

Here's a little news for them.  No one knows when the inflation will come, but when it does come the value of the currency (against other currencies, or against gold or a basket of commodities) could drop to half (or maybe to a fifth) in the blink of an eye.  And they will have no ability to stop it, because they have already done the damage.  When you run your monetary policy like an Argentina or a Brazil or a Venezuela at the heights of their folly, sooner or later your currency will behave like the currencies of those countries.  

On The Irrational Attachment To Ponzi Schemes

Every day as I read about Social Security and Medicare and the fiscal debates in Washington, I am reminded of an event that happened about 44 years ago when I was a freshman in college.  Today, my older daughter sent me a link to a Washington Post editorial that makes clear the relevance.

In 1968 when I was a freshman at Yale my three new friends in the room next door came over one day in a state of excitement.  They had received a chain letter.  Just send $20 to a name two levels up the chain, it said, and then send out 10 copies of the letter to people you know.  Wait for the letter to progress to a second level beyond you, and you will receive $2000, as if by magic.  At the time, $2000 was almost equal to the year’s tuition at Yale.  The sender of the letter assured that this had worked perfectly for everyone in the scheme to date.

Somehow at that early date I had already become aware that monetary chain letters were treated as criminal frauds by Federal prosecutors, and I believed I understood why.  Hey, I was a future math major, and my friends had to be rather bright to have been admitted to Yale.  So I set out to explain to them why this was really a fraud and why it couldn’t possibly work.  To me it was just some simple math.  Did they realize that to progress to a tenth level this scheme would have to enlist more people than existed on the earth?

To my complete surprise, they would have none of my arguments.  In the short time between when they got the chain letter and when they first talked to me about it, they had become excited about and emotionally invested in the project.  Not only were they going to do it, but they kept trying to get me to do it too.  I didn’t.  They did.  I think one of them got his $20 back.  The others did not.

Skip forward to yesterday’s editorial in the Washington Post.   Compared to other voices of the left, this one takes a relatively sane approach, conceding the essential fact that the main entitlements are on an unsustainable growth path:

But the underlying fiscal problem is that federal expenditures are slated to rise faster than economic growth because of rising health-care costs and an aging population. The long-term drivers are Medicare, Medicaid, Social Security and subsidies for the health-care exchanges established by the Affordable Care Act.

That’s not a partisan statement. It is reality.

I’ll let the commenters take it from there:

The editorial board of this once decent rag has been bought and paid for by the sadistic, genocidal monsters at the Fix the Debt commission. The few remaining reasonable writers on this rag have admitted that SS does NOT drive the deficit, and that seniors PAID FOR their benefits, but the editorial board will not be happy until millions of seniors are dying of starvation on the streets. And that is not hyperbole. For shame, you sadistic lying pieces of excrement.

Social Security Insurance is paid for and is not an entitlement. Medicare is paid for and not an entitlement.
Medicaid is necessary and not an entitlement. The word entitlement is used rather loosely in the beltway.

Think – Exercise your brain. What system do real 21st century countries use to address universal medical care? Can you think about that and get back to me?

Well, is this just a matter of emotion or can we please address the math and whether it can possibly work as currently constructed?  You can call people evil when they point out the impossibility of the existing structure, but that will not keep the whole thing from crashing down like Madoff when there aren’t enough new entrants to keep it going. There are just two ways of looking at the world.  I'm looking at it the other way.  I guess that’s why I’m the Manhattan Contrarian.

The Senate's 60 Vote Requirement Shows That It is Still Useful

In a development of a type that I had begun to think was no longer possible, the Senate earlier today appears actually to have accomplished a modest reduction in the Federal government's provision of infinite insurance for everything.  The fight is not necessarily over, but there is real reason to hope that this has worked.

The program in question is called TAG -- the "Transaction Account Guarantee" Program.  You haven't heard of it?  This is the program by which the Federal government, through the FDIC, lifted all limits and agreed to go to infinity on guarantees of  bank deposits.  Up until the financial crisis in 2008, the FDIC only insured bank accounts up to $250,000, itself a way excessive amount.  During the panic in 2008 the government got buffaloed into thinking that infinite bank account guarantees would calm everything down and make the world perfect again.  So TAG was enacted, supposedly as a two year program.  In 2010, in the way of all Federal programs, it then got extended, for a second two years.  That extension runs out at the end of 2012, and hence we have the Senate taking up the question of extension. 

This is Federal insurance that by definition backs up people (and companies and governmental entities) with over $250,000 in the bank -- they're all rich!  It covers some $1.5 trillion of deposits.  Is there any hope that this wouldn't be continued like all other Federal handouts?

Turns out there is hope.  Senator Pat Toomey (R, PA) raised a "point of order," arguing that the extension had budget impact and should only be heard as part of budget-related matters.  Senator Johnson (D, SD) moved to waive the point of order.  That motion required 60 votes to pass.  The vote was 50 - 42 in favor, not enough to pass.  Note that if majority vote would do it, this would have passed.  By the way, if that motion had passed, the next motion would have been "cloture," otherwise known as a motion to cut off a filibuster.  That also requires 60 votes under current rules, and presumably the result would have been the same 50 - 42.  So at least for the moment this Federal giveaway to the rich appears to be dead.

The big backers of this were the American Bankers Association, and needless to say their head, Frank Keating, immediately came out with a statement seeking to keep the thing alive:

“We’re disappointed that the Senate failed to vote on a temporary extension,” American Bankers Association President and Chief Executive Officer Frank Keating said in a statement. “The TAG program has been fully funded by the banking industry at no taxpayer expense and millions of small businesses and municipal depositors would have valued its continuation during this period of economic recovery.”

(Keating was a conservative Republican governor of Oklahoma from 1994 - 2003, but unfortunately has now gone over to the dark side as a lobbyist.)  Keating's argument is eerily similar to the arguments made for years by the proponents of Federal flood insurance -- Hey, the premiums fully fund this program!  That is, until they don't.  In the case of flood insurance, the premiums covered it until Hurricane Katrina in 2005, when suddenly the program needed a $20 billion bailout; and now, how about another $20 billion after Sandy for the flood insurance program alone, and by the way another $60 billion of "supplemental" appropriations on top of that.  Same for deposit insurance.  So far the premiums have covered it.  Oh, except for the S&Ls, whose Federal insurer (FSLIC) got a bailout of around $160 billion to cover losses from the 80s through 2004.   Just wait until a systemic crisis of the same sort hits the banks insured by the FDIC.  Current insured amounts exceed $10 trillion, with TAG representing an additional $1.5 trillion.  Believe me, when the real crisis hits, the premiums will look like a drop in the bucket.  And, the crisis will hit.  It's just a question of when.

To be fair to those pushing for extension of TAG, there is another argument put forward, namely that without TAG the big banks have a huge advantage over small banks in attracting big deposits, since the big banks will be deemed "too big to fail" under the Dodd-Frank law.  It's not a ridiculous argument by the little banks, but there are many better solutions, including, in my order of preference, (1) remove "too big to fail," (2) make Federal deposit insurance applicable only to bank funds invested in designated non-risky instruments, and (3) break up the big banks.

The Union Movement In Its Death Throes

The big news in labor relations this week is the passage in Michigan of so-called right-to-work legislation, and its signing by Governor Rick Snyder.  Experience in the 23 states that previously had right-to-work laws indicates that this legislation, if it sticks, will have a very negative influence on union membership, revenues, and ultimately, influence.

But the dramatic decline of private sector unionism long pre-dated this latest legislation, and is highly likely to continue, even if the Michigan unions can succeed in somehow rolling back the legislation.  While right-to-work legislation is a serious negative for private sector unions, their much bigger problem is that companies, once unionized, fail to grow, then decline, and ultimately die.  Unions are not shrinking because they get voted out, or even because of inability to organize new workplaces.  Unions are shrinking because their conduct drives their employers out of business.

First, some broad numbers.  According to widely reported Labor Department statistics available for example here from the New York Times, the rate of union membership in the United States declined from 35% in the mid-1950s, to 20.1 % by 1983, to just 12.3% by 2009.  And that massive decline masks even more dramatic figures for the private sector, since during this period the rate of unionization in the public sector was increasing, reaching 36.2% in 2009, and leaving just 6.9% of private sector workers in unions.

Can anyone actually name an example of a union getting voted out of any workplace with a significant number of employees?  It does occur, but that is by no means the main source of the union decline.

Consider the auto industry.  According to data here, membership in the UAW has plummeted from over 1.5 million in the 1970s to around 300,000 today.  Has the union been voted out of GM, Ford or Chrysler?  Of course not.  What has occurred is that the combination of high wages, expensive health and pension benefits, and restrictive work rules made GM, Ford, Chrysler and many of their suppliers, uncompetitive in the marketplace.  They have closed plant after plant and their unionized workforces are a fraction of what they were at the peak.  That created openings for the likes of Toyota, Honda, Nissan, BMW, Mercedes and Hyundai. all of which greatly expanded manufacturing in the United States, and all or nearly all in the right-to-work states.  None of them would go anywhere near Michigan.  Back in Michigan, GM and Chrysler exist on government life support, the City of Detroit has lost well over half its population since the 1950s, and even the State of Michigan as a whole lost population between the 2000 and 2010 censuses, the only state to do so.  Not having a right-to-work law has preserved existing privileges of Michigan's union members and leaders, but has not prevented rapid decline of the union movement in the state.

Very similar stories exist in other formerly heavily-unionized industries, such as steel and tires -- huge declines in the unionized companies, accompanied by the rise of non-union competitors, often in right-to-work states.  New York is the state with the highest remaining rate of private-sector unionization, at over 20%.  But here is a report from the New York Times on September 3, 2012 on ongoing dramatic declines in private sector union jobs in New York City. 

The number of city residents with union jobs in the private sector has dropped by nearly 20 percent since the recession started in 2008, the report by scholars at the City University of New York shows. That amounts to a loss of about 95,000 union jobs, and a decline twice as steep as that for the rest of the nation, said Ruth Milkman, a sociology professor who wrote the report with Laura Braslow. . . . 

“I saw this happen in California in the 1990s,” Professor Milkman said. Such a sharp decline is difficult to turn around because the businesses created after a recession are less likely to be unionized than the older ones that failed in the downturn, she said.

And it only takes a little looking around to see where some of the next declines in unionization are going to occur.  How about the U. S. Postal Service?  They have gone from mostly-unionized 909,000 employees in 1999 to just 617,200 in early 2012, and they are hemorrhaging employment at the rate of 30,000 - 50,000 per year.  Will they even still be in existence in 2020?  Hostess just closed with a loss of over 18,000 mostly-unionized jobs.  If anything the trend is accelerating toward the end.