And Then There's Japan

As Europe's economies stagnate, or even decline a little, Japan has just turned in as stunningly bad a quarter of economic performance as one can conceive.  The Financial Times reports here that Japan suffered economic contraction at an annual rate of 6.8% in the second quarter.

How is it even possible to have an economy shrink at such a rate?  Well, perhaps we should mention that since early 2013 Japan has been engaged in a world-leading blowout Keynesian economic experiment of rapidly increasing government spending and taxes, aka "fiscal stimulus."  The program is often referred to as "Abenomics," after Japanese Prime Minister Shinzo Abe.

Here from the Council on Foreign Relations in June (before these latest disastrous numbers were out) is a backgrounder on "Abenomics" and how it was supposed to end close to two decades of economic stagnation in Japan.  Abenomics includes both monetary and fiscal "stimulus."  CFR describes the fiscal side of the program as follows:

Abe . . . ordered a hefty 10.3 trillion yen short-term stimulus package, approved by the cabinet in January 2013, which will go toward infrastructure projects with a focus on building bridges, tunnels, and earthquake-resistant roads.  . . .  Abe announced in October 2013 that he would raise the consumption tax in April 2014 from 5 percent to 8 percent; this is projected to increase to 10 percent in 2015.

Rapidly increasing government spending and taxes, on top of an economy with a debt to GDP ratio already exceeding 200%.  What could go wrong?

The FT correctly points out that there is likely a not small element of statistical aberration in the 6.8% quarterly decline.  Abe announced the tax increase several months before it took effect, giving the people the opportunity to game it by making their purchases in advance of the increase and stopping all purchases as soon as the increase took effect.  Thus there had been a reported 6.7% gain in GDP in the first quarter.  

Yet the contraction more than wiped out the earlier gain: growth from January to March was revised down in Wednesday’s report, from 6.7 per cent to 6.1 per cent, while the government also said it now believed the economy had shrunk slightly in the final quarter of 2013.

So the net, net is, three quarters in the thick of Abenomics, and Japan's economy has not grown, but rather has declined.  And remember, they count government spending on goods and services, no matter how wasteful, at 100 cents on the dollar in the GDP calculation.   If you figure (as I do) that government spending is worth at best half of what private spending is worth, then the economic decline is several points worse than they are reporting.

Needless to say, Official Manhattan Contrarian Worst Economics Writer Paul Krugman wasted no time in coming out with an article arguing that Europe and Japan were in stagnation because they still would not engage in enough "stimulus."

The not-enoughers — a group that includes yours truly — have argued all along that the clear and present danger is Japanification rather than Hellenization. That is, they have warned that inadequate fiscal stimulus and a premature turn to austerity could lead to a lost decade or more of economic depression, that the Fed should be doing even more to boost the economy, that deflation, not inflation, was the great risk facing the Western world.

How about making government spending 100% of GDP?  Would that be enough "stimulus" for you, Paul?  In that direction of course lies North Korea, where everybody starves.

At National Review, Kevin Williamson comments:

I’ll bet you your next unemployment check that if Japan continues to slide, the answer from the Left will be: “Abe was on the right track, but he didn’t go far enough."

Hard to make a safer bet than that.  No amount of real world demonstration of failure of their recommended policies can ever make the likes of Krugman and the IMF recognize reality.  Is there any escape from this mass hysteria?

Why Are We Supposed To Admire Europe?

The crisis of the eurozone has been off the front pages around here for a while.  And of course trendy left wing opinion is in thrall to the European model of high tax, high spend, cradle-to-grave social programs, single payer health care and long vacations.  So are the economies over there performing in any remotely satisfactory manner?

You won't find it in today's New York Times (maybe tomorrow?), but second quarter economic statistics are in for Europe, and the news is ugly -- stagnation in some places to even decline in others.  From Bloomberg news this morning:

German gross domestic product shrank 0.2 percent, more than economists forecast, while French data also released today showing the economy stagnated prompted the government to scrap its 2014 deficit target. Combined with Italy’s unexpected slide into recession, the reports may add pressure on the European Central Bank to expand stimulus. . . .  Euro-area GDP growth probably slowed to 0.1 percent in the second quarter from 0.2 percent in the first three months of the year, according to a separate Bloomberg survey.

Well, I suppose you can count 0.1% as "growth" if you have a sufficiently powerful microscope available to measure it.   And from the BBC:

Growth in the eurozone flatlined in the second quarter . . .  according to official figures.  The eurozone saw 0.0% growth compared with the first quarter, according to Eurostat figures.

Seems that Eurostat doesn't have quite as high-powered a microscope as Bloomberg News.

If you think that U.S. economic performance remains sub-par, you really need to look at the EU.  While U.S. unemployment is 6.1% (systematically understated I would say, but that's another story), the eurozone per its statistical agency Eurostat admits to a rate of 11.5%, and the countries that engage in the most irresponsible government spending are generally well above the average (Greece - 27.2%; Spain - 24.5%; Portugal - 14.1%; Italy - 12.3%).  

Can we learn from this then that irresponsible government spending and debt accumulation lead to the destruction of economic growth and to destruction of opportunity for young people coming into the system?  That would be my conclusion, but remarkably everybody who's anybody seems to reach exactly the opposite conclusion.  For example, Bloomberg has an editorial today entitled "Europe's Economy Is Broken" that advocates, in jargon-laden mumbo jumbo, for yet more government spending as the cure for the stagnation:  

German policy makers have resisted proposals to loosen the euro area's agreed fiscal targets. The European Commission has echoed the same line, insisting that supply-side reforms are the key to recovery. This is short-sighted. Europe needs both demand-side and supply-side stimulus -- but the first is both more urgent and can be delivered more promptly.

"Demand side stimulus" is fancy schmancy economist-speak for additional wasteful government spending.  I can't find the IMF yet coming out as advocating more "fiscal stimulus" for Europe, but since that is their normal M.O., I predict it won't be long.

Mind you, these are countries that are already spending close to 50% of GDP on the government, and in some cases more.   Here's a helpful chart from Wikipedia via the Heritage Foundation that lists government spending as a percent of GDP by country.  Examples:  France 56.1%; Greece 51.9%; Spain 45.2%; Portugal 49.4%; Germany 45.4%; UK 48.5%.  (For comparison, the U.S. is at 41.6%, Switzerland at 33.8%; Singapore at 17.1%.  Do you notice any correlation between government spending level and relative economic success?)  If spending of 56.1% of GDP on the government hasn't yet "stimulated" France into economic rapture, how is pushing that up to 60% going to make things any better?

In my case, I can't find anything to admire about how the Euorpeans run their economies.

Foolishness On "Income Inequality" From The Mayors

Yesterday's New York Times predicted that the United States Conference of Mayors would shortly issue a report on income inequality, and sure enough it promptly turned up here.  The Report was actually prepared for the Conference by a consulting firm called IHS Global Insight.  Friends of mine tell me that that firm is generally well respected in the field of economic consulting.  Perhaps that is true, but you would never know it from this Report.

According to the Times, Mayor de Blasio of New York is the "chairman" of the "task force" that is "tackling" the issue of income inequality for the Conference of Mayors.  The task force was apparently formed at the prior meeting of the Conference in Dallas in June, but its next meeting took place yesterday in New York, seemingly coincidentally with the issuance of the Report.  I guess they just left it up to de Blasio to come up with what to tell IHS, because the Report more or less parrots de Blasio talking points on the issue.

The problem with this Report is that it completely accepts U.S. Census income data at face value, without considering what is included and not included in those data and whether those data are suitable for the purpose for which they are being used.   The result is a series of howlers, occurring both in the sections on diagnosis of the issue and in the prescriptions for solution.

The centerpiece of the income inequality discussion is a chart of income by quintile of the population for selected years since 1975.  The chart is derived from U.S. Census data.  It seems to lose some formatting in my copying, but I think it is still legible, so here it is:

FIGURE 4: SHARES OF INCOME BY QUINTILE

            Quintile                 1975          1985          1995          2005          2012   
 
% of income
Lowest 20%             4.3            3.9            3.7            3.4            3.2
Second                10.4           9.8            9.1            8.6            8.3
Third                  17.0          16.2          15.2          14.6          14.4
Fourth                 24.7          24.4          23.3          23.0          23.0
Highest 20%            43.6          45.6          48.7          50.4          51.0
           Top 5%                16.5          17.6          21.0          22.2          22.3   

The Times summarizes the takeaway as follows:

From 1975 to 2012, the highest-earning 20 percent of households markedly outpaced the lowest-earning 20 percent in America. In 1975, the wealthiest households captured 43.6 percent of the nation’s income, while the poorest had a share of 4.3 percent. In 2012, low-income households saw their share drop to 3.2 percent while the high earners saw their share jump to 51 percent.

Now for starters, is it too tacky to mention that this Census data is pre-tax, so that the top earners lose up to half to income taxes while at the bottom they get a refund from the EITC?  That would change these numbers very dramatically, but no, it is not mentioned either in the Report or in the Times coverage.

And how about that 3.2% share of income in 2012 for the bottom 20%?  Those who know anything about this subject know that government in-kind handouts are also not counted in the Census data.  Are those enough to skew the answer?  Yes, hugely.   The most recent compilation I can find from the Heritage Foundation puts the annual cost to the taxpayers of all government means-tested benefits at $940 billion in FY 2011.  That would mean that they have to be well over $1 trillion today.  Well, that's about 7% of all personal income in the country, most to almost all of it going to that bottom quintile.  So how can we possibly take at face value the 3.2% share of the bottom quintile in national income?  Yes, a few of the government handouts are counted in the Census definition of income (e.g., TANF, SS disability), but the large majority are not (housing, food stamps, Medicaid, EITC).  Of course you can't actually get the real data anywhere, but my estimate is that the handouts would approximately triple the share of the bottom quintile in national income, and also completely reverse the direction of change for the share going to that quintile, from a small decline since 1975 to a large increase.  And no, neither IHS nor the Times mentions this.

And of course when you have no idea what's in the data you are using, you are very likely to come to ridiculous conclusions.  For example (from the IHS/Conference Report):

An existing program which may be expanded to directly reduce the after-tax income
inequality is the Earned Income Tax Credit, which also encourages work and builds
experiences and skills.

Well, yes, but after six more rounds of increasing the EITC, won't people like you still be quoting the pre-tax income inequality numbers, without saying so, to convince the ignorant to support yet more EITC redistribution?  That's certainly what you're doing here.  And even that's not as bad as then including a paragraph praising increased pre-K education programs as a way of reducing income inequality. 

Are New York City's Pension Plans In Trouble?

It's hard to be a doomsayer on public pensions, because the process of collapse moves so slowly.  Even if a given pension system is definitely in a death spiral from which no exit is possible, it still may be 20, 30 or even 40 years before the final collapse when the pension checks actually start to bounce.  That's just too long to maintain any kind of a sense of crisis.  Meanwhile the pension systems provide the perfect slush fund for politicians to play with, making promises to the people who put them in office, completely secure in the knowledge that the bill will come due long after they themselves are gone.

And thus we have new New York City Comptroller Scott Stringer, one of the trustees of each of the City's pension plans, coming out with a big press release last week touting the great performance of the City pension plans on his short watch:

New York City Comptroller Scott M. Stringer announced today that the New York City Pension Funds achieved a 17.4 percent investment return for Fiscal Year 2014, which ended June 30th.

Stringer also noted the strong performance of the funds over the previous four years, going back to 2010.   The result: more money for the City to spend on other programs!:

The pension investment returns from FY 2014 will lower the City’s pension contributions beginning in FY 2016, resulting in cumulative City savings of $17.8 billion  phased in over a six-year period with each year’s incremental savings repeated for 15 years.

So I guess there's no problem here!  Stringer's press release contains no mention of funding levels of the various plans (New York City has five), nor any discussion of whether the current level of pension promises is sustainable in any sense.

The New York Times, to its credit, promptly came out with a long front-page article on Monday August 4 taking a much deeper look at the City's pension situation and coming to an overall very pessimistic view.  Other articles critical of the City pension situation came from Greg David of Crain's and Megan McArdle of Bloomberg on August 5. 

While the Times article is not directly addressed to or critical of Stringer, it contains plenty of data to make Stringer's statements appear, frankly, ridiculous.  For example, while Stringer cites data on investment returns only from the last 5 years (2010 - 2014) during which the stock market has performed strongly, the Times points out that returns from 1999 to 2009 averaged only 2% per year.  That is a big, big problem for systems that at the time were calculating contribution and funding levels based on an assumed 8% rate of return.  And then the Times has a big chart showing contributions and funding levels  for 2003 - 12 for the biggest of the five plans, the so-called Employee Retirement System, now based on a new investment return/discount rate assumption of 7%.  In summary, for that plan over that period:

• Assets have gone from about $32 billion to about $47 billion.
• Contributions have been about $20 billion.  Do the subtraction and you see that contributions have exceeded the overall growth of the fund, meaning that all investment returns and then some have been consumed by payouts of pensions to beneficiaries.
• The present value of benefits accrued to date (7% discount rate) has soared from about $49 billion to about $104 billion. 
• Therefore the funded ratio (7% discount rate) has gone from about 65% to about 45%.

And now here's a calculation the Times does not do, but is important.  If you think a more proper discount rate would be 6%, or even 5%, what would the funded ratio be?  Assuming average duration of liabilities of 15 years (which I think is short) that would mean that liabilities at 6% would be around $120 billion and the funded ratio 39%; and at 5% the liabilities would be around $138 billion and the funded ratio around 34%.  

About the best you can say about this is that New York City, largely for having made very large contributions to these plans over the last decade, is in substantially better shape than, say, Chicago or Los Angeles.  On the other hand, as I have said many times, when you are in a Ponzi scheme, the best thing you can hope for is that it will collapse quickly; the alternative is that you spend more and more money to keep it going, only to have a much bigger and more horrible crash in the end.

In the face of this, Stringer's strategy is to fail to mention the funding situation at all, and to declare that more money is now available to spend!  And de Blasio?  According to the Times:

Mr. de Blasio, notably, did not mention the word “pension” during his hourlong budget presentation in May.

While there is lots of good data in the Times article, the big picture is that its main criticism of New York City's current pension situation is that a switch of higher risk investment vehicles (largely hedge funds) to chase higher returns has not notably increased returns but has notably increased fees.  The most recent number they give has fees running about 0.5% of invested assets, up from only about 0.1% earlier when the funds invested in less exotic stuff.  That is indeed real money, with lots of opportunity for graft. 

However, it is not the big problem.  The big problem is unsustainable pension promises, including retirement ages in the 50s or even 40s following working careers as short as 20 and 25 years in most cases.  Do even the simplest math and you realize that, as these promises work their way through the system, pension costs are going to exceed, and indeed far exceed, the costs of active employees.  No amount of magical returns from the stock market, or from hedge funds, can fix that problem.  

And that's the problem that de Blasio and Stringer will not even talk about.  I'm not sure they've even figured it out.    Prior Mayor Bloomberg had figured it out and did talk about it.  Also in the category of those who have figured it out are members of the bureaucracy, but they badly want for the problem not to be discussed, at least until they are collecting their own pensions. 

I'll close with this from the Times:

In the existing environment, important questions about cost and sustainability can be broached only with great diplomacy. In 2010, Blackstone Advisory Partners, a private equity firm, found out what can happen otherwise. On a conference call with investors, a company official answered a fiscal question by saying retirement benefits for public workers across the country were excessive. When New York City’s trustees got wind of the comment, they called for Blackstone’s chairman to apologize in person. A few months later, he did, and when that proved insufficient, Blackstone issued a statement saying it opposed “scapegoating public employees.”

Of course, the financial guys who work with the pension funds are among the very few people in the City who understand how these things work.  Shut them up, and you have a really good shot of keeping the whole subject of unsustainable pension promises out of the public debate.  And there are several hundred million of annual dollars in investment advisory fees for these funds to be used in the shutting-up project.

A couple of bad stock market years in a row and we could easily see the City's required pension contributions doubling to 20% or more of the budget.  Meanwhile, our current leaders fiddle.

Please Take Note: Argentina Has Defaulted

Having covered many times the Perils-of-Pauline saga of the Argentina debt crisis (for example, here, here and here), it is appropriate to take note that Argentina has now officially defaulted on is so-called "exchange bonds."   Holders of the exchange debt were supposed to receive a payment on July 30, and Argentina deposited the money with Bank of New York Mellon, but orders of a federal judge in Manhattan prevented BNYM from distributing the money to the bondholders unless Argentina also paid holdout creditors from previous issuances, which Argentina was not willing to do.  On July 30 Standard & Poor's announced that Argentina had defaulted; and subsequently the International Swaps and Derivatives Association declared that Argentina's failure to pay had activated the credit default swaps on Argentine debt.  See New York Times Dealbook summary here.  That's about as official as it gets.

A roundup here from Fact Check Argentina notes that Argentina continues to maintain that it has not defaulted.  Their theory is that the deposit with BNYM ought to be good enough, even if the bondholders didn't get the money.  Obviously, S&P and ISDA are not buying it.  Meanwhile Fact Check Argentina notes that the latest tactic of Argentina's lawyers from Cleary is to blame the court-appointed mediator, Dan Pollack, for failing to achieve a settlement.  Without knowing who offered what, it's hard for me to lay blame, but I will note that Pollack is a very respected guy in this business.

The whole saga of the bonds is of course a great distraction from what is happening in the underlying Argentine economy, where every kind of bad policy (crony capitalism on steroids, wild monetary expansion, exploding inflation, high trade barriers, subsidies for many basic services) continues to wreak havoc.  Here's a roundup from the Economist on June 27.  It seems that Argentina's economy has entered recession, based on 4Q 2013 and 1Q 2014 economic shrinkage -- in other words, that had already occurred well before the bond default. 

Many of Argentina’s problems are familiar. Inflation has plagued Argentina for much of the past decade; it still grew by an average of 5.6% from 2005-2013. Exchange and trade controls have long made it hard to get hold of primary materials, stifling production. But whereas in the past Argentina could maintain growth by propping up the peso and consumers’ purchasing power, falling foreign-exchange reserves mean it can no longer afford to do so.

Is the bond default even a negative for Argentina's economy?  If it is, it's a very small part of the problem.  Indeed, if it has the effect of imposing even a little discipline on the populist vote-buying culture of Argentina's political class, it might even do some good.

Which Are We For, Hospitals Or Condos?

Readers who have thought that the official position of the New York Progressive is to support hospitals and oppose condos have been in for a couple of recent surprises.  Is there a unifying principle?

As to just where you may have gotten the idea that a right-thinking Progressive should support hospitals and oppose condos, perhaps it was from the de Blasio campaign.  If your memory is short, check out the photos at this post from last August, showing de Blasio campaigning with Susan Sarandon here in the West Village in opposition to the new condo development under construction on the former site of our local hospital, St. Vincent's.  The signs read "Save Our Hospitals" and "Hands Off Our Hospitals." 

Meanwhile, out in Brooklyn, at least four hospitals remain in some stage of death throes.  Long Island College Hospital either has or has not finally done a deal to turn into a glorified emergency room and have the rest of the site developed into housing.  Interfaith just survived death with a last minute infusion from the State to enable it to exit bankruptcy (for the moment).  And at least two other hospitals are reported to be in serious financial trouble.  So perhaps we should all be relieved that Methodist Hospital in upscale Park Slope is proposing a substantial expansion to bring its facility up to top modern standards.

Not so fast!  On Wednesday July 30 an organization called Preserve Park Slope filed a lawsuit seeking to invalidate the zoning change that would enable the hospital to expand.  Here's a link to their website.  The basis for the suit:

“The process to secure approval of these variances has been conducted with complete disregard to key elements of the law, including proper environmental review and recognition of the 2003 re-zoning of the area,” said Andrea Stewart, a member of Preserve Park Slope and a petitioner in the lawsuit.

And as to opposing condos, I wouldn't be so sure of that one either.  New York has seen two great periods of the creation of top-end multi-family owner-occupied housing.  One is right now, and the previous one was a few generations ago in the 1920s.  Of course all right-thinking people are horrified by the current wave of wildly priced high end construction.  But how about those from the previous period, now known as the grandes dames of Park Avenue, West End Avenue, and Riverside Drive, among others?

The answer is, notwithstanding occupation by the super-rich, these now-iconic condos (and co-ops) must be preserved!  Indeed, after a long campaign by landmarking activists, the blocks of upper Park Avenue from 79th Street to 91st Street were just designated as a landmark district in April.  Other sections between 62nd Street and 79th Street were already landmarked, so the new designation means that almost the entire stretch of Park Avenue between the midtown office district and the emergence of the railroad viaduct from its tunnel at 95th Street is now landmarked.

So what is the unifying principle?  Forget the whole hospital/condo thing; that is just incidental to the NIMBYism of the moment.  I suggest this, from my "About" page:

[T]he current built environment is optimal and all attempts to change it in any way must be opposed at all costs.