The Perry Prosecution And Giving Prosecutors The Benefit Of The Doubt

Seemingly every day brings news of one or more high profile prosecutions of major institutions or political figures.  Frequent recent targets include the likes of big banks (JPM, Bank of America, Citigroup), pharmaceutical companies (Prizer, GSK), and state governors (Blagojevich, Walker, Christie).  Probably you read the headlines and never get too much into the details of the alleged conduct or of the law allegedly violated.  It's way too complicated to try to figure out, and anyway, why would prosecutors be going after these guys if they didn't do at least something wrong?

And that's why the current criminal prosecution of Governor Rick Perry of Texas is doing such a great service to the country.  There's nothing complicated about it.  He threatened to, and then carried out, a veto of funding for a state office headed by a political rival who had been convicted of DWI.  Isn't that his job?  How could it possibly be a crime?  Anybody can understand it completely in less than 10 seconds.  This prosecution is blatantly outrageous overreaching.  The myth of the prosecutor in the white hat has been busted.

And thus you see the voices on the Left that are usually completely reliable in defending any and all initiatives beneficial to the Democratic party drawing the line on this one.   For example, Obama political guru David Axelrod tweeted: "Perry indictment seems pretty sketchy."  Or, from Ben White of Politico: "It seems quite perverse to indict a governor for exercising his clearly delineated constitutional authority."  Or, from Jonathan Chait of New York Magazine: "The indictment of Rick Perry is unbelievably ridiculous."  And so forth.

So now that you understand that it is entirely possible for a prosecutor to engage in gross misuse of his powers and office in furtherance of personal and political objectives, let me suggest to you that the Rick Perry prosecution is just the bare little tip of the tip of the iceberg.   As venal as many politicians and business people may be, prosecutors, on average, are just as venal and probably worse.  And the more high profile the prosecution, the more likely it is to be some kind of a vehicle to get some prosecutor's name in the press, at the expense of the lives and careers of people who did nothing wrong but happened to be in the way at the time.

I've covered the subject multiple times here, but as isolated instances rather than as a pervasive phenomenon, which is what it is.  So it's time to bring some of this together in one place.

For example, in the world of the big banks, it seems like one or another of them settles yet another threatened prosecution for one or multiple billions literally every week or two.   On July 1, 2013 in Annals Of Government Self-Promotion, Big Bank Edition, I covered some dozens of dubious settlements between big banks and various prosecutors and regulators, including a $25 billion settlement of five of them with 49 state AGs over alleged wrongful activities in enforcing underwater mortgages.  Then on July 25, 2013 in Our "Disinterested, Neutral, Expert" Regulators In Action, it was a settlement of about $500 million by JPM with FERC for what to all appearances was a perfectly legitimate energy trading strategy that embarrassed the regulators by being too successful.  On September 24, 2013 in More On The Government's "Sick Game" With J.P. Morgan, it was a $920 million settlement by JPM over the London Whale trading losses that to any rational observer should have been no concern to prosecutors or regulators whatsoever.  In recent months I've been failing to pay attention to this issue, even as Citigroup and JP Morgan did $7 billion and $13 billion settlements last year over allegations of misrepresentations as to mortgage backed bonds.  The latest in this line is a recently announced proposed settlement of BofA with Justice for some $17 billion, largely over the activities of BofA's ill-fated acquisition Countrywide.  Didn't BofA take over Countrywide as a favor to the federal regulators?  That won't help you when they need a scalp!

I've also been writing for years about the endless prosecutions of pharmaceutical companies for what is called "off-label marketing," that is, promoting drugs for uses not specifically approved by the FDA.  My first article on this subject was in 1999, and a more recent post was December 4, 2012 (The Second Circuit Stands Up For Free Speech).  If the drug has been established as safe and effective, aren't truthful statements about it protected by the First Amendment?  You would think so, but check out this 2009 roundup from Bloomberg of huge settlements paid by pharma companies for threatened prosecutions over the exercise of their rights, including what is dubbed "the largest criminal fine in U.S. history" of $1.19 billion paid by Pfizer in 2009.  No corporate entity will actually take these cases to trial, but an individual got himself convicted in 2009 and took his case to the Second Circuit in 2012, where the appeals court upheld his constitutional rights against prosecutorial overreach.  But just because they're dead wrong, don't get the idea that the prosecutors are going away on this one. 

Insider trading?  The prosecutor's office for the Southern District of New York has been completely consumed for multiple years with a jihad against what they falsely call "insider trading," even though the majority of the cases are not against insiders at all but rather against investment professionals who have made the mistake of making too much money and attracting attention as a potential useful scalp.  I covered the thinness of the prosecution legal theories on July 13, 2014 in The Impending Demise Of The Insider Trading Jihad.  An appeal contesting the legal theories has been argued in the Second Circuit, and a decision is expected imminently.  Of course in the mean time the poor schmos have had to endure millions in legal fees and suffer a conviction as the price of seeking to vindicate their rights to behave lawfully and earn a living.  Eighty or so other people who were not willing to go through that hell have had guilty pleas coerced out of them.  But Preet Bharara has great name recognition here in New York.

Check out if you will the new indictment against Federal Express for the sin of shipping prescription pharmaceuticals from what the feds contend are illicit online pharmacies.  The indictment alleges "money laundering," or, in other words, as a FedEx spokesman put it in the Memphis Daily News, "FedEx, of course, requires customers to pay for our services."  FedEx points out in its defense that it has been asking the feds for years for a list of objectionable pharmacies, but the feds decline to provide one.  No surprise there.  And by the way, the same Memphis Daily News article notes that UPS settled with Justice last year over similar allegations for $40 million.

Looking for more?  Then look, for example, at the careers of Eliot Spitzer or Rudy Giuliani, who each rode a series of phony but big name prosecutions to fame and higher office.  They are the model that hundreds of other young and ambitious prosecutors try to follow.

I can't see any reason why prosecutors are entitled to the slightest benefit of the doubt.  Thanks to the Perry prosecution for helping others to learn this important lesson.

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.