Our First Happy New Year!

It’s been an, um, interesting 2010: unemployment still a major problem despite raging equity markets, twitter going “mainstream” (kind of), Dodd-Frank, wikileaks (aka delusions of gradeur of Albino creepsters), PIIGS crises,  and so many other things that I’m too lazy to list now.  After starting in February, we’ve received somewhere around 40,000 views this year, with our most popular month getting 6,000, our best day ~1,500 when we jumped all over Gretchen Morgenson for mixing up CDS and FX Swaps and the NYT for having an internal wikipedia-like library that’s about as authoritative as Gretch.

We appreciate all the views, comments, and feedback we’ve gotten hear and on Twitter, and hope to receive even more in 2011.  I’d like to throw some big shoutouts to everyone at Business Insider, Minyanville, FT Alphaville/Tilt, Stocktwits, and probably a handful of others I’m forgetting who’ve supported and dealt patiently with us this year.  We sincerely appreciate you and your extremely patient ways!

Going forward, we’ll be transitioning from wordpress.com to wordpress.org and redesigning the website (eta: early February for our 1-year anniversary), bringing on even more business/finance/etc pros, and expanding our coverage and reach to new markets/asset classes/industries/etc.  If you’re interested, shoot us an email stonestreetadvisors (at) gmail (dot) com.

From all of us at Stone Street Advisors, a Happy New Year to you & Yours!

Customer Service: Not Rocket Science, Airline Edition

While it’s no surprise that firms with monopoly/oligopoly power (real and/or perceived) are notoriously poor providers of customer service, I’m still mildly shocked that so many firms have their heads metaphorically stuck in the sand, Ostrich-style.  Firms now have the ability to measure and react-to customer sentiment in real-time with their websites and social media operations.  While some may argue that social media is still too young to judge firms on their twitter/facebook/etc acumen, there is absolutely no excuse for firms not using their websites for effective customer service.  What I’m talking about here is not, contrary to what you’d think from perusing most firms’ websites, Rocket Science; real-time status updates on store closings, system outages/delays, and any other business interruptions should be clearly posted to firms’ homepages, end of story.

This is especially true now more than ever since customers immediately and impulsively take to Facebook and Twitter to complain about poor/lack-of service and other bad experiences.  Several vendors offer tools to monitor and track brand sentiment in real-time, for example, Lithium, from Scout Labs (I recommend clicking on/reading that link as it further explains this point).

The reason I’m writing this post today is because of this lovely little snow-storm that has people throughout the North East running around like chickens without heads as if they’ve never seen snow before.  All of the NYC-area airports were/are still shut-down, New Jersey Transit bus service is still suspended (despite major roadways being clear since this morning…), and trains are no-longer running out of New York Penn Station on NJ Transit due to signal problems (really, I’m not making this up!).

Interesting Dichotomy: Unacceptable service, good communication.

While I can’t possibly comprehend how in 2010 we don’t have affordable, robust, quality train signal technology, nor why bus service is still suspended despite every highway camera I checked showing clear roads, at least NJ Transit has got the customer communication thing down right.  Frequent, clearly-marked, and informative, at least informative enough that commuters have enough information to make alternate plans (not that there’s much alternative besides sitting in terrible traffic or working from home).  Unfortunately, repeatedly-bankrupt/reorganized/merged airlines still haven’t gotten the memo…

Great! We’ve got a prominent alert that we can no longer buy American Airlines tickets on Expedia or Orbitz, and a News section, yet no mention on the main website about travel advisories, delays, etc.  Unacceptable.  Just watching my Facebook/Twitter feed I saw several complaints of flights being delayed for days from American.  Curiously, though, it looks like American Airlines has a pretty transparent and effective social media operation:

I’m actually quite shocked here, seldom do firms “get” social media while simultaneously missing the simple, more-established methods of customer relations/communications.  Both a tip of the hat and a wag of the finger to American.  Let’s check out Continental’s website:

Whoops! Zero sign of any delays/cancellations on the homepage.  Clicking on the tiny Red “Important Notices” link next to “Latest News and Offers” takes us to a relatively confusing kind of catch-all “alerts” page that’s unnecessarily complicated and so poorly-organized I’d imagine the average internet user may very-well give up before they find the information for which they’re looking.  Like American, though, Continental appears to have a decent Twitter effort (although redirecting traffic back to the aforementioned unspectacular website is a real faux pas):

Now I’m not really very surprised that the incumbent airlines have sub-par customer service, news that is not, but I did expect newer/more nimble airlines like Virgin Atlantic to be much more on-top-of things.

Not much better than the other guys, eh?  A relatively small, non-distinct “latest news” link on the lower right hand side of the homepage.  Again, seems VA, like its larger competitors, learned a little from Jet Blue and appear to be relatively adept with social media:

Speaking of Jet Blue, often regarded as having best-in-class customer service, this is what their website looked like earlier today:

Well look at that!  Only took four airlines to find a website that prominently displayed weather/flight delay/cancellation information on the homepage, sigh…

I’m curious what these firms pay all their consultants and layers of managers for when they can’t plan/execute the basics of customer communication/business-disruption-management right.  As I said above, in today’s world of instant-communication, a not-insignificant part of customer service is managing and shaping expectations and giving customers the information they need to interact with your firm.  All of these airlines were tweeting madly about know about long wait-times on their customer-service phone lines were today, but if they did a better job of diseminating information on their websites (etc), I’d venture to guess alot of passengers wouldn’t have needed to call in the first place.  Remember, these are the same firms that jump to outsource and minimize the cost of their customer service operations, yet continually fail to realize that customer-service isn’t just a responsive cost-center, it can and should be a driver of competitive advantage and increased brand loyalty/equity!

A Free Lesson on e-Publishing for The New York Times, And/Or: Things That Are Not News

I’m feeling generous & in the holiday spirit so let’s just say blogs – and best practices that evolved from them – didn’t achieve any real popularity until 2006.  Even if I temper my already low, low expectations from the MSM and specifically the New York Times, 4+ years is a LONG time to apparently be in the media business without picking-up on prevailing trends in that business, like in-line citation of source material, for example.  Whereas blogs and the more forward-thinking members of the 4th Estate understand that when you mention an article, like this one, you don’t link to your own site, you like to the article or website of the subject of said article.  The NYT has this really annoying, hypocritical habit of mentioning something or someone, yet the hyperlink goes not to the web presence of said thing/person, but to an internal index of articles on that topic/person.  Bloomberg does the same thing, but I don’t see them abuse it nearly as much as the NYT does, and let’s be honest, more often than not, Bloomberg has much better internal information than does the Grey Lady.

If we’re talking about computer programs that “read” text found in news and attempt to gauge sentiment and initiate trades based on that analysis, why not mention some of the products or talk about how this is hardly news?  I recall reading several articles over the past 5+ years on this subject, and Reuters has offered such services since at least 2007, as I learned with a 20-second google search.  Even if we’re to compare apples to apples (insofar as such a comparison is even possible with the NYT on one side), FT/Alphaville touched-upon this topic 11 months ago!  Putting aside how painfully the NYT coverage ignores their ignorance/laziness for a second, I want to look back at this particularly annoying paragraph from the NYT article that illustrates, quite clearly, just how badly the NYT just doesn’t get it, “it” being web-publishing best practices:

Tech-savvy traders have been scraping data out of new reports, press releases and corporate Web sites for years. But new, linguistics-based software goes well beyond that. News agencies like Bloomberg, Dow Jones and Thomson Reuters have adopted the idea, offering services that supposedly help their Wall Street customers sift through news automatically.

The hyperlink for “Thomson Reuters” goes to http://topics.nytimes.com/top/news/business/companies/thomson-reuters-corporation/index.html?inline=nyt-org, which looks like this:

Perhaps this is a bad example, as that NYT page about Thomson Reuters is likely a decent resource for readers totally and ignorantly unfamiliar with one of the largest news and data providers on the planet…a faux pas for which there’s really little excuse, especially for anyone who’s ever visited Times Square in New York City…

Thomson Reuters, never heard of him...

The NYT (and other MSM business sections’) management inexplicably still has this mostly-deluded idea that they need to keep eyeballs within the nyt.com domain – and certainly never ever under ANY circumstances send eyeballs to competitors – at all costs, even if it means delivering an inferior product, in this case, an article that could have been made significantly better with a few hyperlinks pointing to other websites/articles.

This is not news, nor, unfortunately, is this the most egregious example of the NYT’s utter lack of understanding of how this whole internet thing works.  Remember this, when popular object of my scorn Gretchen Morgenson proclaimed that Greece’s troubles were caused by CDS instead of FX Swaps?.  Even worse, the link in her article on CDS pointed – no surprise – to NYT’s internal page “about Credit Default Swaps,” which even in an updated version, reads as if it was written by monkeys.  Honestly, linking to Wikipedia would be a significant improvement!  Like several orders of magnitude better!  (On a side note I have to thank Gretchen, because that is the most popular post on this website!)

The point is, ladies & gentlemen, that even lowly bloggers like myself understand that best practices dictate when you mention someone/something, you link to it.  Period.  This is a simple evolution of those annoying MLA (etc) documentation standards we were all forced to use growing-up, and the rationale is the same: if you say something, back it up.  This is ESPECIALLY true when the author is not a subject-matter expert (even tangentially), but a journalist, and the subject matter at hand isn’t common knowledge, as is the case here.

I find it painfully hypocritical that the NYT (and many of its employees who hold themselves in such high esteem) claim(s) to uphold the highest journalistic standards, yet routinely and consistently makes a mockery of them.  As several journalist friends/acquaintances are keen to remind me, not every reader or viewer is an expert; on the contrary, a significant number are closer to laymen than professionals, and thus articles & television segments are published/produced with that in mind.  Fine, but there is a vast and serious difference between “dumbing it down” to appeal to/inform a wider audience and speaking with authority without actually having any.

I’m certain defenders of traditional journalism, its standards, practices, and conventions will immediately reply that there are several experts quoted in the article.  Big freaking deal.  That isn’t good enough any more.  I can easily claim to and convince several journalists that I’m an expert in several fields with which I’m only moderately familiar.  If you want to establish someone as a subject matter expert, throw in a link to their website.  For example, this article quoted a man for whom I have the utmost respect but did him a disservice by introducing him poorly and incompletely and worse, not linking to his complete bio, which is – guess what – readily available here, on his website, where readers could – had the NYT linked to it – read about Roger’s qualifications and credibility instead of taking the NYT’s abridged word for it.

“It is an arms race,” said Roger Ehrenberg, managing partner at IA Ventures, an investment firm specializing in young companies, speaking of some of the new technologies that help traders identify events first and interpret them.

Ironically, there’s another arms race going on, and its between thick-headed traditional media types and those who adapt to a shifting landscape, who understand that old paradigms are dead or dying, who embrace the ability of the Web to help them (or us, I should say) better-inform readers than ever-before.  Some people get it*.  Alas, it appears not many of them have much sway at the New York Times.

*An curious phenomenon, considering the recent expansion of the Sorkin-edited Dealbook, which while far from perfect in respect to the issues discussed above, is far ahead of the “regular” articles on the NYT website.

Wherein I Show How to Identify Baseless Political Opinion Masquerading as Economic "Analysis"

I’ve written several dozen times that I go out of my way to avoid ad hominem attacks, instead preferring to address the merits of a particular argument. Occasionally though, I read something so painfully rife with non-sequitur and logical fallacy, so absent any factual or analytical support that in crafting my reaction to it, despite my best efforts to the contrary, it’s simply impossible to respond without calling into question the author’s credibility and expertise in the topics at hand.

Earlier this week I came across one such piece, appearing in the Huffington Post entitled “Economic History Shows Clearly That Tax Cuts for Rich Hurt the Economy,” which I thought curious from the start, as the Author, Robert Creamer is cited as a “Political organizer, strategist, and author,” to say nothing of the fact that economists debate the effects of tax policy quite frequently, and consensus (if it can even be called that) is a relative word.

I’m not one to write-off an argument purely due to the apparent lack of qualifications of it’s author though, so I read the rest while trying to keep an open mind, giving Creamer the benefit of the doubt.  I sincerely hoped to encounter a well-structured, well-argued essay supporting the article’s title, unfortunately the prose which followed only served to confirm my initial skepticism.

Just to be clear, as I’ve said several times before – most recently just this past week – one does not need a degree or even work experience in economics in order to intelligently discuss the field, however, that does not excuse one from penning a thinly-veiled political spin piece under the guise of well-researched analysis, which is exactly what Mr. Creamer (herein “the author”) has done.  While a self-defeating practice, I don’t particularly mind people conflating politics and economics in their private views, but to do so in a public forum speaking as a subject matter expert is dishonest, at best.

To be sure, both Democrats and Republicans (and politicians of every stripe in between) are guilty of doing the same, but as the author himself insinuates in his article (discussed below), that doesn’t make it right.  If I may speak normatively for a moment, one’s understanding (not lack thereof) of economics and economic data should inform his/her politics, not vice-versa.  Alas, as I’ll discuss later, even Economics PhD’s allow their politics to influence their economics, even in the face of fairly clear evidence they’re views are suspect if not downright wrong.

That being said, follow me as I point out the flaws in each section of the article with the hope that after reading – as the title of this article says – you’ll be able to better separate uninformed political rhetoric from economic and demographic analysis rooted in facts and data.

**Just a note: this is not going to be a short article, if you haven’t already guessed.**

Let’s start here, which I think is an incredibly ironic if not downright hypocritical opening lede:

Just because you repeat something over and over doesn’t make it true. In fact, there is a body of empirical, historical evidence that proves clearly that tax cuts for the rich not only do nothing to spur economic growth — they actually do substantial damage to the prospects for economic growth.

As I mentioned earlier, the idea of consensus amongst economists (not politicians masquerading as them) on optimal tax policy and changes therein is a bit of a debate.  On one hand, you have guys like Arthur Laffer who appear in the WSJ Op-Ed pages and argue, for example, that tax cuts often increase government tax receipts (oversimplifying, for more detail, see here or read one of his papers), a claim that I, myself have questioned and one that runs contrary to both popular belief as well as the one promoted in the author’s article.  On the other, you have guys like Paul Krugman who, despite having PhD’s in Economics, promote more liberal economic policies than even the most bleeding-heart Legislators.  Instead of listing a series of academic papers or articles from either side of the debate, I’d like to share some quick number-crunching I did this summer on data from the BEA and IRS (also see this from the IRS for the data in MS Excel format) on the effects of changes in tax policy for “the rich” (which we’ll refer to for our purposes as those in the top 1% of incomes).

Over the past 20-or-so years, GDP has increased 87% and the amount of money the top 1% pays in Federal income taxes has increased 377%, while the average tax rate for that group over that period has decreased 32%!  So, to summarize: The tax rate on “the rich” has gone down, but the amount of money they pay in Federal taxes has gone up, as has GDP.  I’m curious to see what data Creamer analyzed prior to making the statement in the above quoted text.  It seems pretty clear that his claim is rather easily refuted with only a cursory examination of publicly-available data from the Government.[1]

Creamer’s article goes on to remind us of how rough the tax burden was on “the rich” (his definition, the meaning of which he fails to clarify) during earlier parts of the last century:

During World War II, the tax bite on wealthy Americans was close to punitive (the highest bracket was 91 percent). But that didn’t hurt the economy; far from it. By war’s end, Americans were rolling in cash. The average weekly pay rose 83 percent between 1940 and 1945. Many families had their first discretionary income.

In fact, this period — and the expansionary fiscal policy that helped finance the war — led to the longest sustained period of growth in American history and created the American middle class.

The main reason I want to highlight this excerpt, specifically the latter part of it – is because its exemplar of one of the biggest fallacies I see repeated day-in and day-out in the financial/economic/political media.  You cannot compare figures on tax rates, income, unemployment and the like from the post-war period, in which we (broadly) experienced the most significant technological and cultural revolution in a century, to the past generation or even the past decade.  There exist FAR too many confounding factors at play that affected data from these periods to draw any reasonable comparison (although most pundits and commentators will continue to do so, much to my chagrin).

The article next leaps to – shocker – ignorant praise of tax policies put in-place by a Democrat President, Bill Clinton (as an aside, I’m Libertarian, not conservative, not by a long shot):

Or we can turn to the tax policy of the Clinton administration. In 1993, President Bill Clinton proposed a budget that raised taxes on the rich. Republicans predicted that its passage would lead to economic doom. They argued that the Clinton tax increase on the rich would lead to economic stagnation and unemployment. Instead, of course, the Clinton administration created 22.5 million jobs, of which 20.7 million — or 92 percent — were in the private sector. His economic policy eliminated the federal deficit and left his successor — George Bush — with budget surpluses projected as far as the eye could see.

So history tells us pretty clearly that increased taxes for the rich don’t hinder economic growth. Now let’s look at historical evidence that the opposite proposition is true — whether tax cuts for the rich actually promote economic growth.

To see the fallacy in that argument all you have to do is go back to the Bush administration. For eight years, George Bush and the Republicans lowered taxes for the wealthy and cut back the regulation of big corporations and Wall Street — all based on the premise that these two policies would benefit the economy.

So, instead of saying that Cisco, HP, Dell, Apple, Yahoo, etc, created commercially successful products and services that created jobs in the 90’s, the author attributes those jobs to the deft tax policy moves by the Clinton Administration.  This is yet another dishonest and spurious conclusion drawn by the author to support what seems to be a clearly liberal, anti-“wealthy” bend, nothing less.   Witness (emphasis mine):

The New York Times reported last year that, “For the first time since the Depression, the American economy has added virtually no jobs in the private sector over a 10-year period. The total number of jobs has grown a bit, but that is only because of government hiring.”

In fact, in the eight years when George Bush and the Republicans in Congress passed two massive tax cuts, we saw a massive, secular decline in the creation of private sector jobs.

Of course it won’t surprise anyone that this decline was led by the reduction of American manufacturing jobs. There was a decline of 3.7 percent in overall manufacturing jobs in the United States over the last decade ending in 2009.

Why are we losing manufacturing jobs?  One significant reason is because it costs so much more to manufacture things in the U.S. than it does in many other countries, and one of the main drivers behind this is labor costs.  Around the middle of the last decade, all of the Detroit “Big Three” were losing money on every car they sold, despite the fact that much of their manufacturing and assembly was already being done in Mexico (etc), while foreign automakers with plants in the South without union labor were profitably selling cars, trucks, and SUV’s (I distinctly remember this from an article in I believe the NY Times that I quoted for an assignment in college, apologies for not having a link).  Liberals can’t complain about the loss of manufacturing jobs without acknowledging that Unions and the high wages they demand are part of the problem.

The author continues (emphasis his):

In fact, there is absolutely no evidence in the economic history of the last century that tax cuts for the rich increase economic growth. But there is evidence that they actually hurt prospects for economic growth — both in the short and long run.

Tax cuts for the wealthy function to reduce economic growth in two specific ways:

First, they amplify the tendency of income and wealth to concentrate in a small segment of the population. Throughout the entire period of Republican rule, all of the economic growth was siphoned off to the top two percent. Real wages stagnated, and continued growth in the Gross Domestic Product was fueled — for a time — by an expanding credit bubble that ultimately burst.

The problem is that to be sustained over time, economic growth must be widely shared. Otherwise, demand for new products and services stagnates; there is no incentive for businesses to invest, and economic growth itself stalls.

As we showed above, the first sentence there is simply untrue so I’m not going to re-visit that point.  To his bolded point, I’d say that’s only one piece of the puzzle.  One of the main drivers of financial success is education; another is choosing to go down an education/career path that, with lots of hard work and some luck, is likely to make one a good amount of money.  Remember, many of the people who comprise “the rich” work a lot more than 40 hours a week, and many have graduate and doctoral degrees, not just undergraduate.  In fact, as the WSJ pointed out just this week, more of “the rich” are making more of their money from working – as opposed to collecting passive income – today than ever before.  Weird how we get different conclusions when we actually do some cursory research, huh?  As you may have noticed by the way, this is not the first time the author presents only one piece of an argument without so much as acknowledging there any other factors at play.  This will also not be the last.

In fairness though, I will agree (at least partially) with the author that unless economic growth is shared across the income spectrum, it’s largely unsustainable and not the kind of growth we should pursue, but again, there’s other factors at play, like education and other demographic/societal issues; tax policy is again only one small piece of the puzzle.

To further his agenda, the author continues:

Fundamentally, economic growth is about the development of processes and technologies that increase productivity. But these do not occur when wealth is concentrated and labor prices are cheap. They occur when new growth is shared and wages are high.

A high-wage economy leads to major long-term economic dividends because:

  • It incentivizes companies to invest in higher-productivity technologies that increase overall productivity and provide real economic growth.
  • It creates customers with spending power to drive economic growth. There is a natural tendency of market economies to use low-cost labor and increase profits. That’s good for each company’s bottom line, but it kills off the goose that lays the golden egg by reducing the buying power of its ultimate customers — the people who work for all the companies in the economy combined.

This is particularly amusing because the development of processes and technologies that increase productivity generally have done so by reducing the need for manual and human labor.  Automobile assembly robots, electronic funds processing, the internet and almost all of our technological achievements over the past 50 or so years have significantly increased productivity but they have done so by largely replacing humans in the supply chain, yet we still have a not-insignificant chunk of our population that for several reasons has failed to adapt their skill sets to this more automated reality.

The point is gains in productivity from technological/procedural improvements will shift “high wage” jobs away from tasks that can be automated and towards jobs that require a higher level of customization/dynamicism.  Think-tanks and academics have written at great length about higher education and labor force make-up by skill sets so I’ll leave it to the reader to explore this at their leisure as it’s a bit tangential to my main goals in writing this.  Ultimately, though, labor cannot expect to continue to be useful (employed at the same pay rate) in the midst of societal and technological change without continuously adapting it’s skill set to be useful given those changes.  Labor and tax policies that encourage the workforce to be stagnant and cling to antiquated roles/skills (ones where they have no comparative advantage) is counter to economic growth, end of story.

Interestingly enough, the author actually touches upon some of these very ideas, except he utterly fails to do so in a fair, reasonable way (italic highlights are mine, bold are his):

Second, tax cuts for the rich starve the public sector of funds that are necessary to assure long-term growth. Tax-cut activist Grover Norquist was quite explicit when he championed the Bush tax cuts that he intended to deprive government of resources so it could be “drowned in a bathtub.”

Historically, tax cuts for the rich have been used — quite intentionally — to create deficits that make it politically difficult for government to do three things that are critical to sustaining growth over the long run:

First of all, as the table I cited above shows, while tax rates on “the rich” have gone down, tax receipts from them have gone up.  Any deficits are the result of mis-matched government spending, not lower tax rates.  Any claim to the contrary is disingenuous.

He continues (emphasis mine here):

  • Tax cuts for the rich shortchange investments in education that are the major engine of most long-term increases in productivity, and hence real economic growth. Education is the major factor that makes the workforce more productive. It underlies all of the scientific discoveries and technological advancement that boost productivity. America’s commitment to universal public education is responsible — more than any other single factor — for our economic success over the last century. And more than any other factor, the massive growth of the Chinese economy is rooted in the exponential increased level of its people’s education. The Chinese are turning out more graduate engineers each year than the rest of the industrial world combined. Starving our schools and universities will do more damage to our long-term economic prospects than anything else we could do. Yet it is a direct consequence of tax cuts for the rich.

This is a massive non-sequitur, plain and simple.  Again, liberals claim that we need more money for something – in this case education – without looking at how that money is used.  A few years ago I had arguments with some young teacher friends of mine about how the teachers’ unions are bad for education and bad for the country.  Back then, my remarks were met with staunch opposition and parroting of typical liberal defense of unions.  Fast forward a few years and municipalities are short on cash and these same young, highly-educated (graduate and post graduate degrees) teachers are in danger of losing their jobs so that older, more expensive, tenured teachers with less incentive to work hard to educate our children can keep their jobs.  Teachers unions have directly contributed to higher education costs and kept the quality of education provided from rising, despite the government throwing significant chunks of money at the problem.

Tax cuts for “the rich” have had – in the author’s jaundiced eyes – further negative effects:

  • Tax cuts for the rich restrict government’s ability to invest in new public infrastructure that is another major factor in assuring long-term growth. Roads, rail lines, airports, sewer and water systems, sanitation, public health — all of these are critical foundations for economic success. Yet over the Bush years, all of them were starved for cash — both by Bush’s wars and by his tax cuts for the rich.

Here I’ll at least agree with the author that the dual wars in Iraq and Afghanistan are not very good uses of our limited financial resources.  Is it important to fight terrorism and ensure our national security?  Absolutely, but we have to get our own house in order before we can start ordering around others’.  Aside from the money spent on the wars, again, as we’ve shown again and again, government’s budget decisions are the primary factor infrastructure improvements have been delayed, not tax cuts for the rich.

As we near the end of the author’s piece, we encounter a bit of a straw-man argument, when he says:

And just in case you hear someone say that a dollar spent on tax cuts to the rich is a good way to stimulate the economy, here’s a fact from Mark Zandi, chief economist for Moody’s.com, who was also an economic adviser to John McCain:

For every dollar spent on making the Bush tax cuts permanent, you get $.29 of increase in the GDP. For every dollar spent to extend unemployment benefits you get $1.64 increase in the GDP. In other words, a dollar spent on unemployment compensation gets 5.6 times more boost to the GDP than a tax cut for the rich.

The reason is simple. When you’re in a recession, the problem is that demand is too low, so spending that increases demand really boosts the economy, since it creates demand that entices businesses to hire people who then spend more money and create more jobs — and so on.

But when you give tax breaks to the rich, they don’t spend most of those breaks like a family that needs unemployment. They save and invest a substantial portion. But in a recession you don’t need more savings or investment, you need more demand.

Firstly, where is that Zandi quote/figure from?  I don’t see a hyperlink to a paper, press release, or speech, so we don’t know the context and related information surrounding the numbers attributed to Zandi.  Second, the argument that increased demand for goods & services will get us out of recession is an incomplete one, one that I touched-upon last week.  To quote myself, “While Per-Capita Disposable Personal Income is down slightly from where it peaked in the 2nd quarter of 2008 (in 2005 dollars; in current-dollars  it was at it’s highest point this most recent quarter), it’s certainly still a huge part of GDP, as a matter of fact, per-capita personal spending was higher in the most recent quarter (2010q3) than it was in right before the S&P 500 peaked on October 9,  2007!”

Put simply: the disposable income is there, but the existence of disposable income does not, in and of itself, create demand for goods & services.  Perhaps the author should have considered the possibility that consumers are using their money for other purposes, like paying down debt.  Since it peaked two years ago (12/2008), revolving consumer debt outstanding has decreased 19% (-16.4%  using the seasonally adjusted data) or $187 billion through October.  I feel like this is so obvious I shouldn’t have to point it out, but to be clear: a dollar of disposable income can be spent on paying-down debt or on buying goods/services, but not both.

Finally, the author concludes:

But that’s exactly what those “deficit hawks” in the Republican Party are proposing. After running around the country for months campaigning about “runaway deficits” they propose to borrow $700 billion additional dollars to finance more tax cuts for the rich. And at the same time, last week the Republicans voted in the House to block extension of unemployment benefits that really would boost economic growth. They are happy to borrow more money to make their rich patrons richer — but they refuse to borrow any money to provide unemployment benefits that not only allow middle-class families who have lost their jobs through no fault of their own to keep their heads above water, but actually do turbocharged the economy…

The Republican proposal to make the rich richer is just plain wrong. If they succeed, the price will be paid by our children, who must pay the debt. But it will also be paid by all of us today in the form of lost goods and services that will never be created because so many people who are willing and able to work can’t find jobs.

As I mentioned towards the beginning of this article, I’m neither a Democrat nor a Republican, and as such, I don’t particularly agree with either side’s “solutions” to our economic malaise.  While unemployment benefits are important part of keeping our economy from collapsing and those out of work (and more importantly those who’ve paid unemployment taxes) from having to scavenge for basic necessities, making those benefits available as cash payments for up to two years or more is a bit much, I think.

Just walking/driving around NYC and North NJ, I see A LOT of immigrants from Central and Southern America mowing laws, doing landscaping, working construction, and making deliveries yet oddly-enough, I see very few people who appear to be U.S. citizens (anecdotal experience and conversation confirm these observations) doing these jobs.  What incentive do unemployed Americans have to get off the couch and work when the Government is paying them to sit around and “look for work” do nothing?  The answer is not much, if any.  If the government wants people to get back to work it has to make sure businesses have the proper incentives to hire and employees have the proper incentives to seek work.  Pointing fingers & complaining about tax policies isn’t going to get anything accomplished; on the contrary, the longer politicians and people who fancy themselves ones ignore economic reality the harder and more painful it’ll be when it finally comes time to pay the piper.


[1] As this is not an academic paper, this data and methods of analysis are admittedly not up to the standards required for publication as such.  The fact remains, however, that the official Government #’s easily and quickly disprove a claim represented in Creamer’s article as a god-given truth based-upon some unknown and undisclosed “empirical evidence.”

"…the Answer is ALWAYS Money."

I’m not sure exactly how the Government is going to eventually define what is and isn’t “proprietary trading,” but I am certain, absolutely so, of one thing and one thing only: Regardless of how strict or lenient the rules and definitions end up, banks will find a way to game them to their benefit (and, I suppose, the benefit of their shareholders, until the next financial crisis at least).

Why am I certain of this? To co-opt a quote from sports broadcasting legend Don Ohlmeyer (attributed to him by ESPN’s Tony Kornheiser), “if you don’t know the answer to a question, the answer is always money,” and that is exactly why banks will find a way around the so-called Volcker Rule that seeks to limit banks “risky” proprietary trading.

Rest assured, there are many highly-compensated lawyers are chomping at the bit just dreaming about the cash they stand to make advising banks how keep making cash money on some form of prop trading and avoiding fees if/when the Government tries to crash the party.

 

There's a Sucker Born Every Minute…

…And this guy (or group thereof) is here to make sure that fools and their money are soon parted.  Check out this ad on the right side of the page “Wikileaks Targets Hedge Fund:”

This looks like a legitimate advertisement on the right, no?

So, where does that link lead, where we learn more about this top hedge fund trader who was so scared about his secret strategy being “leaked” by the likes of albino-crusader Julian Assange that he decided to give it away?  Check it:

If I were a successful hf manager, this is how I'd screen potential LP's...

Listen kids.  Think about this: If you were a successful trader/”hedge fund manager,” why would you be concerned that Wikileaks was going to expose your strategy?  WL’s motive at this point has been to expose fraud, illegal activity masked by “the establishment,” etc.  This ad is meant to just use current events to try to get your attention, but please, ENGAGE YOUR BRAIN BEFORE CLICKING-THROUGH!

I could write probably 20 posts/week just based off scam-tastic ads I encounter whilst doing my normal reading, but I think this one is a great example of some of the tactics scamsters and other unscrupulous “entrepreneurs” use to lure-in ignorant/gullible/greedy/easily impressed victims looking for an easy sure-thing return.

I will repeat this until my last breath, and you should too: If it seems too good to be true, it probably is.

Forget that lesson at your own peril.

I'll Take "People Who Shouldn't Be Writing About Finance or Economics" for $1,000, Alex

So this happened earlier today:

This, from a guy with 15,000+ twitter followers and a popular blog, who writes about Finance and Economics?  I remember back when the first transaction was created some non-finance people questioned this (and the non-finance media let them know), and that was one thing.  Now, two+ years later, this guy is so ignorant about basic freaking things about the Fed and its operations he has to not only take to twitter to get an answer (as if one was never given!) but then talks about Taibbi as if he’s some sort of authority?!?!

Unbelievable!

That he couldn’t even Google “Maiden Lane LLC” to get his answer makes it even worse.  Wikipedia spells it out in the 3rd sentence!

Ok, I’ll be fair: I tend to ask alot of questions on twitter, but I’d like to think I’m seldom called-out (deservedly, at least) for stuff like this.  I have dozens (and dozens…) of posts I’ve started but never finished over the years because part-way through, I realized I had no standing or expertise from which to speak authoritatively (or even intelligently) on the subject.  For other posts, really many if not most, I have to do some semblance of research, even if it’s just Googling a company to get some basic info like important dates or quotes or what-have-you.

Not to toot my own horn, but as a simple fact, those of you who’ve followed me know that I openly encourage and invite people to correct me if I say something incorrect or incomplete, and more importantly, if proven wrong have no problem admitting as much in an open forum.  (On a side note, most critiques of what I write are from people who seem to read half a post – or less – and thus miss the point entirely, sigh…)

This guy, though, doesn’t appear to have such a filter nor the knowledge to know that he does not know.  I follow him on twitter for kicks and because alot of people I follow do, but I’ve read maybe 1 or 2 of his posts to date, so I decided to go check some of his recent posts to try to get an idea of what this guy actually does – or doesn’t – know.

I try as much as possible to give people the benefit of the doubt, that I’m seeing something out of context or whatever I’m looking at represents a brain-fart or a post written while massively hungover, but here, I’m kind of at a loss.  What am I supposed to do with this post?  The title isn’t bad, and actually piqued my interest to the point where I was expecting something fundamentally sound with a creative, optimistic bend.  Unfortunately, we instead get crap like this:

But a businessman with a good idea who needs capital doesn’t need a tax cut to get that capital, he needs a loan or an equity investment. This is what we have a financial system for. Sergey Brin doesn’t need to first get rich, then finance Google out of his own pocket. He just needs to start Google and that’s how he gets rich.

Yes, all it takes is an idea et voila, Money Money Money!!!!!  Money as far as the eye can see!  One good idea and magically every good idea becomes a successful business that can employ all of our needy job-seekers.  Yes, thinks makes sense, tell me more…

The thing of it is, though, that your idea really only works if you have some customers. If everyone in Yuma, Arizona is unemployed then even a very competent proprietor of a dry cleaning establishment is going to have a hard time expanding his business. He won’t take out a loan to expand, he won’t get an equity investment to expand, and he won’t invest his own money in an expansion. You can give the guy all the money you want, and he won’t invest in expanding his business. That’s because unemployed people don’t need much dry cleaning and also don’t have much money to spend on dry cleaning.

So let’s go through the assumptions in this little scenario:

  1. You own a local business; people from far-off geographies are unlikely to be customers,
  2. Everyone, EVERYONE in your geographic area is unemployed,
  3. You had/have an installed customer base who frequented your business,
  4. Upon everyone becoming unemployed (presumably all at once?), they stopped visiting your business because they have zero interviews, zero reason to get “dressed-up,” etc,
  5. Instead of closing, selling, or trying to expand your business into other geographies (particularly natural/adjacent ones), you continue to stay open despite a dwindling if not non-existent customer base.

It’s unfortunate his assumptions are so utterly ridiculous and unrealistic because I actually agree – in concept – with his first sentence, although I’d reword it to say that “The thing of it is, though, that your idea really only works if you have some customers willing to pay enough to more than cover your expenses.”

He continues:

A guy with $0 and a good idea and a lot of potential customers will find a way to start his business. A guy with $1 billion and a good idea and no potential customers is just a guy sitting on a huge stockpile of cash.

Um, not to nitpick, but if the guy with $1bn has a good idea and no potential customers then it isn’t actually a good idea, at least in terms of how we measure good ideas in a capitalistic society.  Hell, even if its a non-profit, if there’s no target market for your service/product that still doesn’t mean its a good idea.

Look: I seldom tear-into anyone (besides Gretchen Morgenson, because she’s earned that honor), but I’m really fed-up with these quasi-intellectual usually political/philosophical liberal “free-thinking” types trying to write about Finance and Economics.  I’m not saying you need to have a relevant degree or work experience – there’s many who have neither but do fantastic work regardless – but don’t invent your own constructs and theories in the fields or ignore existing and widely-accepted ones for crying out loud!

Sure, in a perfect world every “good idea” would automatically be welcomed by the market with open arms (and wallets) and grow into a fantastically successful enterprise, but alas, this is not a perfect world; there are economic, legal, pragmatic, and other realities within which we must operate (or at the very least consider).

And lastly, he concludes:

Things like the availability of credit matter, but credit is currently available. What’s not available is customers with money and an inclination to spend it. More government spending and more money-creation will lead to more purchases, more customers, more business expansion, and more hiring. Then people with good ideas will make a lot of money and complain about their high taxes.

Sure, credit availability matters, and while lenders aren’t blindly allowing deadbeats with no income, job or assets to borrow uncontrollably anymore, credit is available, it’s just not available to everyone in unlimited amounts (this trend towards underwriting standards is for the better if it continues, by the way).  While Per-Capita Disposable Personal Income is down slightly from where it peaked in the 2nd quarter of 2008 (in 2005 dollars; in current-dollars  it was at it’s highest point this most recent quarter), it’s certainly still a huge part of GDP, as a matter of fact, per-capita personal spending was higher in the most recent quarter (2010q3) than it was in right before the S&P 500 peaked on October 9,  2007!

I’m not even going to touch the “more government…” sentence as that alone could be a series of posts, but do you see now what we’re dealing with?  People like Yglesias like to talk in vague, “theoretical” terms without any care for things like facts and data, and even more maddening, people like this are read and quoted as experts, EXPERTS, despite being easily written-off as nothing more than a hack spouting off uninformed rhetoric as truth.

Now again, in the interest of fairness, this is limited sample from which to draw any solid conclusion, so for now, I’m simply putting Yglesias on Ratings Watch: Negative, instead of downgrading him (several notches) outright to junk.

I don’t mean to hate on Yglesias, rather, I hope this post gets back to him and ideally, makes him realize that if he’s going to write whatever fun-sounding rhetoric he thinks should be the way it is, he at least has to support that view with some sort of facts or historical precedent or something, anything really.