29 July 2011

Recovery Still Not Complete

The U.S. GDP is still not back to pre-recession levels after adjusting for inflation. Per capita GDP is even further behind and will take even longer to return to pre-financial crisis levels.

Arpit Gupta notes that incomes fell significantly below consumption about a year and a half before the financial markets collapsed. Borrowing against inflated housing bubble home values postponed the time of reckoning for this excess consumption for a while, but not indefinitely.

27 July 2011

Property Rights In Water Working In Colorado

Colorado Public Radio, today, has an interesting story on the phenomena of "buy and dry" in the state, in which farmers sell their water rights (often for millions of dollars from farms that are marginally productive agriculturally and have no clear successors to farm them) to municipal water systems that need to water to support expanding urban populations.

The practice has virtually ended farming in some rural counties. Initially, there was a concern that simply cutting off water without considering the environmental impact of doing so would lead to swaths of infertile dirts that were a blight on the state and cause rapid economic collapse without warning in rural communities. More recent legislation in Colorado has mandated that the buyers of water rights in buy and dry transactions must establish and fund a thirty year mitigation plan that returns the previously farmed land to a state where it is a sustainable prairie and provides payments in lieu of taxes to the impacted governmental units to reflect the revenue losses that they experience as a result of the lost agricultural economic activity.

On balance, it is an example of property rights, accompanied by reasonable government regulation, protecting the legitimate interests of all involved while putting our arid state's scarce water resources to their highest and best uses.

26 July 2011

Peak Dirt

One of my father's favorite sleeper environmental issues is top soil erosion, a.k.a. "peak dirt." FT Alphaville has a lengthy post discussing the subject in the context of limits on sustainability.

An uneven wealth recovery

The wealth gap between whites and minorities widened during the financial crisis, quite the opposite of what many people, including me, had expected. Why?

The financial crisis was preceded by and largely caused by some regional housing bubbles (mostly in states that had mortgages perceived as non-recourse (California and Florida) or housing markets driven by investment from those states (Arizona, Nevada)). Measures of economical fundamentals in the housing market, like inflation adjusted housing prices and price to rent ratios have now returned to pre-bubble levels. So the wealth created by housing appreciation in regional housing bubble markets is gone and mostly likely gone for good. These regions are disproportionately Hispanic (wealth down about 66%) and Asian (wealth down about 50%).

The financial markets, meanwhile, which crashed on the housing bust, have largely recovered, because the financial markets weren't in nearly as much as a bubble as non-financial markets. Those assets are owned disproportionately by whites (wealth down about 16%).

I'm still surprised. While these results make sense for working class to upper middle class families, I'm surprised that the blows suffered by the upper class, who are disproportionately investing in investments like subordinated bonds and investment bank shares that were crushed in the financial crisis and have not recovered, and by stock options, which also seem not to have recovered, somehow weathered the financial crisis with surprisingly little long term harm to their net worth. Perhaps their investments in hedge funds, which did worse than billed but better than almost anything else in the financial markets, helped.

25 July 2011

Norway's Tragedies

A couple of observations about Norway's horrible tragedy.

1. Not all terrorists are Muslim. This fellow was more of a conservative nationalist, more Timothy McVeigh than Osama bin Laden.
2. Bombs are not inherently more deadly than guns. The bombing killed seven. The shooting, from a single gunman, killed sixty-eight.

End The Debt Ceiling

The truth is that the United States doesn’t need, and shouldn’t have, a debt ceiling. Every other democratic country, with the exception of Denmark, does fine without one. There’s no debt limit in the Constitution. And, if Congress really wants to hold down government debt, it already has a way to do so that doesn’t risk economic chaos—namely, the annual budgeting process. The only reason we need to lift the debt ceiling, after all, is to pay for spending that Congress has already authorized.... For the U.S. to default now, when investors are happily lending it money at exceedingly reasonable rates, would be akin to shooting yourself in the head for failing to follow your diet.

From James Surowiecki at the New Yorker via Calculated Risk.

I totally agree with Surowiecki's analysis. Alas, Tea Party Republicans, rather than grown ups, are in charge in the House of Representatives and they could care less about responsible government, the nation's credit rating, or the well being of our country, and are blinded by a less taxes, less spending agenda, reality and reason be damned.

22 July 2011

GOP Getting More White, Democratic Party, Less So

Race has come to be a bigger factor in party identification from 2008 to 2011.

Whites have become more likely to ID as Republican. A majority of whites in every adult age group, and every income group of $30,000 per year+ is majority Republican. Low incomer income whites are still more likely to identify as Republican than Democratic, and have seen GOP party ID leap by ten percentage points in three years. GOP identification has also risen by ten percentage points among whites aged 18-29. Overall 52% of whites are Republicans and 39% are Democrats now. GOP identification rates are increasingly similar across all ages and income groups for whites.

There was a small increase in black GOP identification (from 6% to 8%), but that may be simply a statistical blip that is a produce of modest sample sizes; 86% of blacks identify politically as Democrats. Also, the two percentage point gain in blacks is still smaller in percentage point terms than the four percentage point gain for the overall population for Republicans: voters overall are 43% Republican and 47% Democratic in their political identity.

Republican identification among Hispanics has dropped six percentage points to 22% Republican and 64% Democratic. (The numbers don't total to 100% because one can be independent or affiliate with a third party.) The situation with Hispanics is really more complicated than it appears because on important Hispanic subgroup, Cuban-Americans, which is significant mostly in Florida, accounts for a disproportionate share of Hispanic Republicans.

This source doesn't have a regional breakdown. My suspicion is that Southern whites are Republicans at much higher rates than other whites. It may be the by far dominant party for Southern whites who are also more likely to vote the party line, while whites outside the South may be fairly evenly split between the political parties and less reliable in voting for their political party.

The apparent shift in party ID may mostly be a product of conservative white Democrats in the South (Dixiecrats) either dying, becoming Republicans (perhaps in response to President Obama's Presidency) or aging out of younger age brackets, while their children and grandchildren identify as Republicans from the start. In other words, it may be just one more manifestation of the continuing process of "realignment" in which the Democratic party becomes more purely politically liberal, and the Republican party becomes more purely politically conservative, rather than a shift in political opinion by race.

In terms of brand identification, realignment is great. It is easier than every to know what each party stands for and inform one's vote accordingly. But, since elected officials run on major party tickets, it may be harder than it used to be for a political moderate to get elected on either major party ticket. And, an absence of political moderates can produce the political deadlocks we see today.

21 July 2011

Economic Inequality In USA At 43 Year High

The gap between the rich and poor, and between the rich and the middle class, is today wider than at any other time in the past four decades. . . . From 1947 to 1968, the U.S. experienced increasing equality in the distribution of incomes. Since 1968, however, inequality has steadily and inexorably grown.

From here.

The Tax Code and Systemic Risk

Simon Johnson at the New York Times discusses whether tax reform could make the financial system safer, for example, by reducing tax incentives to favor debt over equity which increases leverage in the economy and makes firms more vulnerable to economic downturns as a result. The topic is near and dear to my heart as I presented on May 29, 2009 at the Law and Society Conference in Denver entitled "This Financial Crisis Was Brought To You By The Internal Revenue Code" on essentially the same subject.

Some key points of my paper were these:

1. Aggregate tax rates don't have much influence on economic growth, but incentives to engage in one kind of economic activity rather than another good economic substitute for that kind of activity are extremely influential. For example, historically very specific provisions of the law regarding which kinds of charitable giving are entitled to tax deductions have profound influences on the porportion of taxable gifting made by that means. A wig tax destroyed the wig as a fashion accessory. Tax policy has a strong influence on home ownership levels in mortgage loan to value ratios in Europe and was an important factor in the housing bubble in places like California that lead to the financial crisis.

2. Another important but subtle difference was the tax distinction between obtaining a second mortgages for the non-conventional part of a mortgage loan (i.e. beyond 80% loan to value), and private mortgage insurance. Both protect the first mortgage holder in the same way. But, tax law favored second mortgages over private mortgage insurance during the housing bubble. This was problematic, because the insurance regulation model was much better at regulating systemic downside risk than the mortgage securitization market that governed underwriting of second mortgages.

3. The intense systemic losses that flow from systemic biases towards leverage in the financial sector was illustrated by the history of repeated cycles of mass bank failures during recessions as a result of industry-wide overleverage by investor owned banks until commercial banking was subjected to FDIC regulation, while mutual banks, which gave control to depositors who are a form of lender, effectively transforming them into equity holders, did not experience this frequency of bank failures in economic downturns. Management and ownership downside loss relative to upside gain incentives turn out to be pivotal in the degree of risk that businesses take on in the absence of direct government regulation of capitalization.

4. I also illustrated how a change in government policy in 19th century Japan that changes a system of equity based land finance to a debt financed system of land finance produced a mass wave of foreclosures then.

5. I explored how overleveraging made the housing bubble possible, how that overleveraging was facilitated by non-bank lenders who has strong incentives to in turn leverage their own balance sheets which the FDIC regulation of the commercial banking sector was not there to stifle.

6. The investment banking industry, in turn, poured money into these non-bank lenders making risky decisions in their investing decision because they had turned from an equity financed partner owned structure with a brokerage model to a highly leverage investor owned structure investing on their own accounts, and because they had heads I win, tails you lose incentive stock option and bonus based compensation structures. The shift in the investment banking industry business model was driven in part by the strong tax incentives for debt over equity that drove the investment bankers to seek the deregulatory measures that allowed them to restructure in this fashion.

7. This culminated in every major stand alone investment bank in the United States either going bankrupt or reinventing itself as a regulated commercial bank, in Lehman Brothers, one of the oldest investment banks on Wall Street, which was a key financier of mortgage backed CDOs and credit default swaps, going bankrupt, in the government purchase an 80% stake in the major insurance company AIG, in order to prevent defaults on credit default swaps it issued from destroying the financial sector, and so on. Commercial banks which were barred by the FDIC from acting on tax incentives to overleverage, in contrast, failed at an only slightly elevated rate relatively to other recessions.

8. I explore the fact that one of the reasons that this spread to the real economy with the GM and Chrysler bailouts that followed, was because these firms were vunerable because they were overleveraged. Defined benefit pensions (which look like debt obligations to corporations unlike defined contribution plans) and reliance on bonds rather than stocks for capital were both key factors here.

9. The key culprits in the tax code, in the end were: (1) the corporate tax law debt-equity distinction and incentives, (2) incentive stock option compensation tax incentives that encourage excessive risk taking by public company executives, (3) the home mortgage interest deduction and in particular the detail that it allows deductions up to the full value of the house for second mortagages and vacation homes but not for private mortgage insurance for first mortgage holders who have a greater incentive to be cautious in underwriting.

The take away lessons were that while we have never been successful at preventing recessions from happening, that tax code reform that ends tax subsidies of debt relative to equity and that would encourage executive compensation and entity financing approaches that give decision makers a reason to fear downside losses would lead to a more resiliant, less risk biased economy.

Eliminating the bias that favors debt over equity in combined C corporation and shareholder income taxation has been a darling of academic economists and tax lawyers (for good reason) for decades, particularly after the General Utilities doctrine removed the best tool for circumventing the distinction. Incentive stock options have always been a concern of those worried about unfairly low tax rates for the rich but also have impacts important the systemic risk in the economy on corporate executive decision making by removing downside risk while rewarding upside gain for executives. There is more than one way to reduce the incentive to overleverage residental real estate and not unduly favor buying with a mortgage over leasing a residence, but restraining the incentives where they are doing the most harm, even without total reform of that area of tax law, would have major stablizing economic effects for the nation.

20 July 2011

Fiscal Choices of Evils

Dorf echoes my previous post on the subject, and that of other legal pundits, in analyzing a failure to increase the debt limit as a choice of evils for the President and then observing that while every option is unconstitutional that some options (like imposing taxes unilaterally) may be more unconstitutional than others (like ignoring the debt ceiling).

the President's menu of options looks very interesting. There's no way he can comply with all three laws: 1) Taxing to raise revenue X; 2) Borrowing to raise Y; 3) Spending in the amount of Z > X+Y. (I'm assuming that other means of raising revenue, such as selling Alaska back to Russia, or invading Saudi Arabia and selling its oil to China, have been rejected as preposterous.) So:

1) Taxing beyond X would amount to an unconstitutional assumption of the power of Congress to tax;
2) Borrowing in excess of Y would amount to an unconstitutional assumption of the power of Congress to borrow;
3) Spending substantially less than Z would violate Section 4 of the Fourteenth Amendment.

Under these circumstances, I read both Professors Tribe and Buchanan to be saying that number 1) is somehow worse than 2) or 3), while I read Professor Tribe to also be saying that number 2) would be worse than number 3), while Professor Buchanan is saying that number 3) is worse than number 2). I'm less interested in the specifics of their agreement and disagreement than in the shared assumption that runs through all of this--namely, that where a President's only choices are all unconstitutional, some of these choices are more unconstitutional than others.

That strikes me as probably right, but it's worth noting that there's nothing in the text of the Constitution itself that states this principle. Moreover, I am not aware of any well-developed case law, historical practice, or scholarly literature addressing the question of which constitutional violations are worse than others. Maybe the generation of careful thinking about this question will be a beneficial side-effect of our government driving the economy over the cliff.

In my view, the question comes down to whether appropriations bills are mandatory or merely grant permission to spend, which may vary from bill to bill, and the time order in which the debt ceiling and appropriations bills were passed. The concern about raising taxes relative to the other options has something to do with the notion that this involves a less bounded form of discretion than the other options.

Blog Traffic Report

Wash Park Prophet has about the same amount of traffic as measured by either visitors or page views, as the Wills, Trusts and Estates blog, which is the 20th most visited law prof blog. Moreover, while many of the most frequently visited law prof blogs are the efforts of a group of regular contributors, this is a one man show.

Everybody Has A Special Talent

Statisticians are special because, deep in our bones, we know about uncertainty. Economists know about incentives, physicists know about reality, movers can fit big things in the elevator on the first try, evolutionary psychologists know how to get their names in the newspaper, lawyers know you should never never never talk to the cops, and statisticians know about uncertainty. Of that, I’m sure.

From here.

19 July 2011

There Are Still Idiots In Local Government

The City Council in Gould, Arkansas wants a police state, constitution be damned. More here, which restates pertinent parts of the ordinance adopted contrary to the recommendation of the Mayor and the City Attorney:

The Mayor of the City of Guild shall not call special meetings to discuss City business without two thirds of the City Council’s vote to do so.

The Mayor nor City Council members shall attend or participate in any meetings with any organization in any location without City Council approval by two thirds [vote].

The Gould Citizens Advisory Council by passage of this ordinance is hereby banned from doing business in the City of Gould.

That the said Council is, in effect, causing confusion and discourse [sic] among the citizens of Gould and as a result is contributing to the friction not only between the Mayor and Council but also among the citizens who deserve a cooperative government.

[N]o new organizations shall be allowed to exist in the City of Gould without approval from a majority of the City Council.

Link List Updated

Many links, most of which were temporarily stripped from the sidebar, have been restored.  A few new links have been added, while a few links to sites that have not been recently updated were not restored.

18 July 2011

How Much Do Bondholders Recovery In Chapter 11?

A recent study by Wei Wang looked at payouts to bondholders for a complete sample of recent Chapter 11 bankruptcies involving companies with assets of $100 million or more.  Unsurprisingly, subordinated debts (where bondholders agree to receive payment only after all other debts are paid in bankruptcy) had payouts of next to nothing, while secured debt (i.e. debt backed by collateral) usually received full or near full payouts.  Ordinary unsecured bonds received an average of 41 cents on the dollar, although the median recover of 22 cents on the dollars was much lower. The results:

Variables (N) Mean Median

Senior Secured (35) 77.53% 100.00%

Senior Unsecured (278) 41.01% 21.82%

Both Senior Classes (313) 45.09% 28.00%

Senior Subordinated (59) 18.87% 5.28%

Subordinated (52) 11.34% 0.35%

Both Subordinated Classes (111) 15.34% 1.00%

All (424) 37.31% 21.52%

Stockholders receive nothing in 80% of Chapter 11 bankruptcies.

Higher Education Overmanaged

John Hawks notes that the number of full time faculty per college administrators has gone from 3 to 1 in the time period from 1975 to 2008 in the California State University system. "[T]he number of full-time faculty in the whole CSU system rose from 11,614 to 12,019 between 1975 and 2008, an increase of only 3.5 percent. In the same time period the total number of administrators rose 221 percent, from 3,800 to 12,183." In the same time period, within the category of college administrators, the "managerial and professional" category "has bloated extremely," while "clerical, service/maintenance, and technical jobs . . . have actually declined significantly over the same period."

I suspect that one missing piece of information that clarifies the picture is that the number of part-time faculty, and the number of graduate student instructors not counted as faculty, has ballooned, but I can't confirm that fact.

Legal Waivers Incomprehensible

You will be shocked to find that:

[C]onsent forms provided to volunteers for HIV/AIDS research in the United States and abroad about study procedures, risks and benefits has found that the forms were extremely long and used wording that may have been complex enough to hinder full understanding. . . . lead investigator, Nancy Kass, Sc.D., deputy director for public health at the Johns Hopkins Berman Institute of Bioethics [said], "While we were familiar with many fairly long consent forms for several different types of studies. . . we were honestly surprised to see that the median length was 22 pages, and the median length for adult forms was a full 27 pages. . . . commonly misunderstood research concepts -- namely, randomization and placebos -- seemed to be explained with far less attention. For instance, whereas confidentiality sections had a median length of about two pages, randomization was treated to just 53 words. . . . institutional review boards recommend that consent documents be written at or below the eighth-grade level. But the majority of the forms that Kass reviewed required readers with at least a ninth-grader's comprehension. . . . Almost half of Americans read at or below the eighth-grade level[.]

Yet, John Hopkins scientists say this is true (underlying source: Nancy E. Kass, Lelia Chaisson, Holly A. Taylor, Jennifer Lohse. Length and Complexity of US and International HIV Consent Forms from Federal HIV Network Trials. Journal of General Internal Medicine, 2011; DOI: 10.1007/s11606-011-1778-6).

We wait with baited breath for the stunning revelation that legal documents other than informed consent forms which ordinary people are expected to sign have been "extremely long and used wording that may have been complex enough to hinder full understanding."

15 July 2011

Too Many And Not Enough Drugs Are A Critical Factor In Insane Violence

Severe mental illness is greatly reduced as a risk factor for violence in people who are taking their meds, and greatly increased as a risk factor for violence in people who self-medicate with illegal drugs.

The severely mentally ill make up only a minor share of violent crime perpetrators (and are often victims themselves), so treatment of the severely mentally ill isn't a major driver of violent crime, but they do, overall, have an elevated risk of committing violent crimes living in a world that deals with several mental illness the way that our society does. Also, they do represent a population for whom there is a fairly clear path to reducing violent crime commission risk. Moreover, some of the most sensational and shocking crimes in our society involve instances where severely mentally ill individuals run amok, even though these crimes are very rare and are difficult to predict or prevent.

[S]everely mentally ill people account for only 3 to 5 percent of violent crimes in the general population. . . . we refer only to severe mental illness—meaning schizophrenia, bipolar disorder or psychotic depression. . . .

In a 2009 meta-analysis, or quantitative review, of 204 studies exploring this connection, psychologist Kevin S. Douglas of Simon Fraser University and his associates found a slightly greater likelihood of aggressive behaviors among those with severe mental illnesses. Yet this connection is much weaker than the public seems to believe it is and does not necessarily mean that these serious disorders cause violence. The causation could be in the reverse direction: engaging in chronic aggression (stemming from some other source) may create stress that triggers the illness in those predisposed to it. Alternatively, a third factor could spawn both a psychiatric condition and violence. . . .

[T]he MacArthur Violence Risk Assessment Study in 1998, sociologist Henry J. Steadman of Policy Research Associates and his colleagues reported that almost a third of severely mentally ill patients with substance abuse problems engaged in one or more violent acts in the year after they left the hospital. For discharged patients who did not abuse drugs, the corresponding figure was only 18 percent. . . .

In its meta-analysis, Douglas’s team also flagged drug abuse as one of several factors that contributed to the connection between mental illness and violence. In addition, it found the link was even stronger for patients who suffered from delusions, hallucinations or disorganized thinking. Thus, a mentally ill person is more at risk of committing an act of aggression when that individual is also abusing a drug and shows particular symptoms. . . .

In the MacArthur study, Steadman’s team found no difference in the prevalence of violence between the severely mentally ill who were on their medications and mentally healthy people, whereas unmedicated patients lashed out at significantly higher rates. . . . improving adherence to treatment may lessen the chances that severely ill people will behave violently.

From Scientific American.

I am not quite as optimist as Hal Arkowitz and Scott O. Lilienfeld, who are the authors of this Scientific American article. For instance, individuals who have been hospitalized for mental health conditions (generally, because someone determines that they pose a risk of bodily harm to themselves or others as a result of one or more prior specific incidents), clearly pose a much greater risk to the public than individuals who have received merely outpatient mental health treatment. An 18% risk of engaging in violent acts is on the same order of magnitude as the risk that a felon about two years out of prison without incident will do so and is fantastically elevated relative to someone who has neither a criminal record nor a record of commitment to an institution for a mental health condition. A 33% risk of engaging in violent acts is on the same order of magnitude as the risk that a felon just release from prison will commit a new crime.

The claim that "severely mentally ill people account for only 3 to 5 percent of violent crimes" also fails to reflect that a much larger percentage of people whom the criminal justice system deems it necessary to incarcerate have moderate to several mental health issues. The number of mentally ill people in jail and prison vastly outnumbers the number of mentally ill people who are in civil institutional settings.

This account also fails to dissect the overall problem of mental health issues adequately. There are multiple very different paths linking mental health issues and crime.

One common path links traits like impulsivity, novelty seeking, and weak anger management capacity with "heat of passion" crimes, often under the influence of alcohol and aggravated by the possession of weapons. These traits do not mitigate guilt in the criminal justice system but often are considered in mitigation of a sentence for a crime.

A second common path links the concept of psychopathic absence of conscience, with pre-meditated crimes like first degree murder, serial rapes and fraud. The violent crimes seem to usually involve a plus factor of impulsivity with pscyhopathy. The white collar crimes and immoral but not illegal business practices tend to fit psychopaths who are at the opposite end of the conscientious to impulsive dimension of personality. Psychopathic traits, rather than being mitigating circumstances, are generally aggravating circumstances in the criminal justice system and closely overlap with circumstances justifying the death penalty.

The third common path is the one focused on in the article - the delusional, and also manic or depressed individual who goes amok, a path where illegal substance abuse greatly elevates the risk and taking prescribed meds

Fourth, a significant share of people who commit serious crimes are not mentally ill, per se, but are developmentally disabled, i.e. they have IQs so low that they are considered mentally retarded. In the extreme, a low IQ can affect guilt in the criminal justice system, but more often it mitigates a sentence and heightens scrutiny of the veracity of the individual's confessions to law enforcement officers, their capacity to carry out the crime, and their vulnerability to being framed or participating ineffectively in the criminal justice system. 

Fifth, a certain share of people who commit serious crimes do so in response to traumatic circumstances, extreme stress, abuse and manipulation, in a form of extended self-defense, in the form of poor judgment in connection with the mental breakdown of a not congenitally mentally ill individual, or in the form of an inability to resist the pressure from a dominant person in their life to commit a crime. Criminal justice responses to these circumstances are all over the map, sometimes producing leniency from one district attorney or judge or jury, while producing draconian responses from another just a few miles away.

14 July 2011

Do Governments Matter In Economic Development?

Does government policy drive economic development? Or, does ethnic culture matter more (in a Protestant work-ethic sense)?

A new study with a clever methodology favors ethnic culture over government policy as a driver of economic development in Africa (emphasis added).

Divide and Rule or the Rule of the Divided? Evidence from Africa

Stelios Michalopoulos, Elias Papaioannou

NBER Working Paper No. 17184 Issued in June 2011

We investigate jointly the importance of contemporary country-level institutional structures and local ethnic-specific pre-colonial institutions in shaping comparative regional development in Africa. We utilize information on the spatial distribution of African ethnicities before colonization and regional variation in contemporary economic performance, as proxied by satellite light density at night. We exploit the fact that political boundaries across the African landscape partitioned ethnic groups in different countries subjecting identical cultures to different country-level institutions. Our regression discontinuity estimates reveal that differences in countrywide institutional arrangements across the border do not explain differences in economic performance within ethnic groups. In contrast, we document a strong association between pre-colonial ethnic institutional traits and contemporary regional development. While this correlation does not necessarily identify a causal relationship, this result obtains conditional on country fixed-effects, controlling for other ethnic traits and when we focus on pairs of contiguous ethnic homelands.

Minnesota Running Out Of Liquor And Tobacco

The government shutdown in Minnesota means not just that state parks are closed, but also that licenses to purchase wholesale liquor and tobacco are expiring and impossible to renew. The result is that stores across the state are rapidly exhausting their inventories of booze and cigarettes. Licenses for hundreds of establishments have expired.

Glasses Half Full For Russian Passengers

John Hawks tweets:

In praise of dog not barking: Russian passengers break into applause after every perfectly ordinary landing.

From here (July 13).

12 July 2011

Keep The 19th Century Journalist Style Alive

Who knew that the writing habits of 19th century newspaper writers would resurface on the Internet today at a blog called Wonkette. Consider this headline and lede:


Wisconsin Becomes Orgy of Chaos As Recall Elections Begin

by Kirsten Boyd Johnson

1:41 pm July 12, 2011

The forces of good and evil resume their bilious clouded swirl over the state of Wisconsin today as primary voters go to cast votes in the state’s recall elections against six of Scott Walker’s senate puppets, and it is already just an orgy of dead fetuses and robots.

The last time I read such stirring words was in a progressive Denver rag's obituary for Colorado Supreme Court Justice Steele, on display in my child's school, from the turn of the century.

Flying Cars Are A Bad Idea

I'd don't agree with Steve Sailer on much, but I do agree with him, for substantially the reasons that he identifies, that flying cars are basically a bad idea.

Brighton Police Covered For Wife Beating Fireman

Randy Cleveland, is a "Brighton[, Colorado] firefighter faces more than a dozen charges, including sexual assault, domestic violence and child abuse, after allegations of years of attacks on his wife."

Cleveland is an abusive husband straight from central casting. He physically and emotionally harms his wife, he sweet talks police officers into doing nothing out of respect for his position as a firefighter, he stalks his wife in a motel where she had fled from him, he threatens to kill puppies.

Police took no action in response to at least three 911 incidents when they responded to the house.

[The wife] called Brighton police last Oct. 15. That day, she alleged, arriving officers "high-fived" Cleveland, and after she told the officers that the abuse that day was verbal, not physical, they decided to have her stay in a hotel for a couple of nights. No charges were filed.

The first contact that was made with the Adams County DA's office also trivialized the allegations. Eventually, an uninvolved prosecutor in the DA's office learned of the case from the wife at church, intervened, and managed to get the case turned over to Boulder's District Attorney acting as a special prosecutor, who is prosecuting the case vigorously.

Brighton police initially took the case to the Adams County district attorney's office, but no charges were filed then either. According to District Attorney Don Quick, the investigating Brighton officer portrayed the allegations as a situation of "he said, she said."

"At the time, there were not injuries apparent or made note of by the officers," Quick said.

Later, however, the woman told another of his prosecutors about the abuse during a conversation at church, and Quick asked Garnett's office to investigate.

A Boulder investigator took over the case May 11, and eight days later a magistrate judge signed an arrest warrant for Cleveland.

It is a little hard to tell if the Brighton police are solely at fault in this scenario, or if at least some deputy DA in the Adam's County DA are also at fault from the facts reported so far.

It bears all the marks of a police cover up, which John Bradley, the spokeman of the Brighton Police denies emphatically with about as much credibility as Gaddaffi's absurd broadcasts from Tripoli claiming that everything is peaceful and happy, and that he is in control.

Adams County has previous brought us instances of gross corruption in road contracts managed by the county commissioners, improperly adjustments of property assessments for contributors to the county assessor, and improper diversion of funds by the treasurer of the county's Democratic party organization. Adams County is a blue colar, Democratic leaning Northern suburb of Denver and Brighton is the fast grown Levittown style suburb that is the county seat.

Still, Adams County is hardly exceptional. Corruption is bipartisan in Colorado. Republicans in Jefferson County (a middle class suburb west of Denver) have been a hotbed of questionable conduct and resulted in the prosecution of its treasurer for kickbacks (IIRC he was acquitted after a mistrial the first time around), Republicans in Araphahoe County brought us neopotistic, sex crazed Tracy Baker as Clerk and Recorder, and a DA who has been sanctioned by unethical conduct while in office by the state supreme court and made other negative headlines for questionable conduct like conviction incentives for prosecutors. The former Larimer County Republican Party chair was just arrested on a felony county related to management of their monies. The DA in Montrose County faces charges related to improper conduct towards his ex-girlfield that are being handled by a special prosecutor from the Attorney General's office, and their unqualified coroner set off political sparks by declaring a routine organ donation by a local hospital to be murder based on inaccurate information on the Internet. Castle Rock's police ignored urgent pleas from a women with a restraining order that produced a pile of dead bodies and a Supreme Court case establishing that police have no affirmative duty to try to protect anyone, even if state restraining order laws say so. This list is hardly exhaustive.

Keeping local government officials out of trouble is a never ending full time job.

The good news is that a judge, who owes nothing to local government because he is not an elected official and not appointed by local officials, eventually issued a restraining order in the case, and a special prosecutor (who may end up charging the bad cops as well as the abusive husband) was appointed based on a strong norm in Colorado for doing so in cases where there is a potential for local law enforcement officials to be at fault; the case involving the DA for Montrose similarly had a smooth hand off. Notably, in both cases, the investigation was handed off to a special prosecutor of the same political party as the DA taken off the case.

Since law enforcement is handled locally and the judiciary is part of state government, there are clearer heads at the state level to keep local corrupt officials in line.

The bad news is that the Brighton Chief of Police, like almost all law enforcement management types, has denied that his men did anything wrong, even when the evidence that they did is very convincing. He should have thrown the bad officers under the bus, immediately suspending them while an investigation was pending, and didn't. The city council and mayor and if there is one, a city manager, could step in and intervene, but so far, they haven't done so. Denver is still struggling to reach acceptable ways of handling cases of police misconduct and finally starting to make process after a decade or so of trying. Brighton apparently isn't there yet.

11 July 2011

Principal Reductions In Mortgage Modifications Follow Pattern

Banks will sometimes modify mortgages to reduce principal if they are already shown at a discount on their books due to an acquisition from another bank, especially if the mortgages are currently not in default, but not if the write down will produce an accounting loss for the bank.

It seems that Wells and JP Morgan are happy to do principal reductions only on the mortgages they bought at a discount from Wells Fargo and WaMu respectively; Bank of America, meanwhile, which inherited a bunch of these loans when it acquired Countrywide, is not doing principal reductions, and I don’t think it’s a coincidence that the Countrywide loans were bought at very close to par.

The behavioral psychology here is very easy to understand. No bank wants to admit that it wrote idiotic loans, and write down its own assets from par. Meanwhile, it’s much easier to write up an acquired asset, if the amount you reduce the loan is less than the discount you bought the loan for in the first place.

Economically speaking, however, what the banks are doing here does not make sense. Either writing down option-ARM loans makes sense, from a P&L perspective, or it doesn’t. If it does, then the banks should do so on all their toxic loans, not just the ones they bought at a discount. And if it doesn’t, then they shouldn’t be doing so at all.

The truth is, of course, that banks should be doing principal reductions, and they should be doing them on lots of their loans, rather than just the ones they bought cheap. And the fact that they’re already doing this, entirely voluntarily, on some of their loans is the best possible indication that it makes perfect economic sense to do so on all of their loans. Even if doing so might involve admitting that the subprime crisis still isn’t fully over.

The implication is that the financial accounting reform may be a key to responding more rationally to the current and future asset bubbles.

The results also shed doubt on the prevailing assumption that banks act in an economically rational way, which makes reforms, like cramdowns in bankruptcy, that force lenders to act rationally rather than based on the reputational effect of a decision for actors in the organization look attractive.

Government Spending Stimulates The Economy

Econometric analysis over a wide range of circumstances shows that government spending and investment generally produce somewhat more economic benefits to the economy than the amount of the spending itself (which is called a "multiplier effect"), although the benefits are fairly modest and rarely as much of a full dollar of economic gain in addition to the government spent dollar.

Critics of government spending restraint during bad economic times, of the kind prevailing at the moment, compare this policy to the policies of Herbert Hoover, whose lack of leadership contributed to the Great Depression and compare this approach unfavorably to the Keynesian economic policies of FDR. They note, for example, that weak job growth at the moment is substantially due to government layoffs.

Life Sucks In Much Of The World

Much of Africa, Afghanistan, Iraq, Haiti, Yemen, Pakistan, Bangladesh, Sri Lanka, North Korea, Nepal and East Timor all made the 2011 top sixty failed states list of Foreign Policy magazine. A nation generally finds it way onto this list with dire poverty, political violence, and poor public health.

Judge Determined Death Sentences In Alabama

Of the 34 states with the death penalty, Alabama is the only jurisdiction where judges routinely override jury verdicts of life to impose capital punishment. Since 1976, Alabama judges have overridden jury verdicts 107 times. Although judges have authority to override life or death verdicts, in 92% of overrides elected judges have overruled jury verdicts of life to impose the death penalty.

Twenty-one percent of the 199 people currently on Alabama’s death row were sentenced to death through judicial override. Judge override is the primary reason why Alabama has the highest per capita death sentencing rate and execution rate in the country. Last year, with a state population of 4.5 million people, Alabama imposed more new death sentences than Texas, with a population of 24 million.

Override is legal in only three states: Alabama, Delaware, and Florida. Florida and Delaware have strict standards for override. No one in Delaware is on death row as a result of an override and no death sentences have been imposed by override in Florida since 1999. In Delaware and Florida, override often is used to overrule jury death verdicts and impose life -- which rarely happens in Alabama.

From the Equal Justice Initiative via the Sentencing Law and Policy Blog.

The study will, very likely, be the basis of court challenges to and efforts to legislatively change the practice.

Iqbal Almost Doubled Likelihood Of Motion To Dismiss Grant

The most controversial decision in civil procedure in recent history was the Twombly/Iqbal decisions of the U.S. Supreme Court that made it easier to dismiss a case on the face of the Complaint filed in federal court for failure to state a claim in certain kinds of cases (the applicable rule is 12(b)(6) in the federal rules of civil procedure). Under the previous rule, these kinds of motions to dismiss, which are sometimes described as "so what" motions because they argue that even if everything alleged is true that no legal remedy is available, were extremly hard to establish.

The latest statistics confirm that these decisions did indeed matter:

The results indicate that even taking out the pro se cases, the odds of a court granting a 12(b)(6) motion, at least in part, as compared to denying the motion, were expected to be 1.79 times greater under Iqbal than under Conley (p = 0.002), all other variables held constant.

Second, I used only the cases in my database from 2006 (Jan to Dec) and from 2010 (Jan to May 18), and otherwise limited as described above (no pro se, no magistrate judges). Here, the results indicate that even leaving out the pro se cases, the odds of a court granting a 12(b)(6) motion, at least in part, as compared to denying the motion, were expected to be 1.92 times greater in 2010 than in 2006 (p = 0.013), all other variables held constant.

Run of the mill cases are largely unaffected. The main category of cases where Iqbal and Twombly make a difference are cases where the harmed party must show some kind of behind the scenes activity by defendant insiders which is merely circumstantially established at the outset and then, in past practice, revealed if present during the discovery process. The doors to the federal courthouse are now largely closed to such cases without a whistleblower or some form of domestic espionage. The ruling does not directly apply to state courts.

These motions remain rare, affecting something on the order of 1% of cases on the federal docket, and are granted about three-quarters of the time (up from about two-thirds of the time under prior law).

Distressed Sales Dominate Las Vegas Real Esate Market

In Las Vegas, "47.2% of the sales in June were bank-owned properties, and another 21.6% were short sales." Combined, 68.8% of Las Vegas real estate sales in June were distressed, with sales going forward basically only to the extent that banks decide that they will. Given that a significant percentage of homes for sale in the market at any given time are owned free and clear, the percentage of sales of mortgaged homes for sale that are distressed is much higher.

Thirty-Four Years Of Stagnant Hourly Incomes

Among two-parent families, median earnings did rise by an inflation-adjusted 23% from 1975 to 2009. But the parents’ combined hours worked increased by 26% during the same period–accounting for most of the income gains.

Via Tyler Cowen.

Demographics other than two parent families (including single parents) in many cases saw hourly income declines. The two parent case also conceals declining income for men matched by rising income for women.

The Limits Of Written Communication

VC offers up a joke that makes clear the limits of trying to communicate in writing.

08 July 2011

Sentencing As A Subnational Federalism Issue

In California, "state prison overcrowding is due in large part to county decisions about how to deal with crime. . . data from 2000-2009 [show that] . . . California’s counties use state prison resources at dramatically different rates, and, moreover, that the counties which use state prisons the most have below-average crime rates. . . . incarceration in state prisons is one policy choice among many, not an inexorable reaction to violent crime.

Counties can and do make different choices about how to respond to violent crime, including the extent to which they use prison. . . . [L]ocalities are crucial - and critically underexamined - contributors to state prison populations. Decisions are made at local levels about prosecution, investigation, plea bargaining, and sentencing, and these decisions are made by officials who are either elected locally (such as DA’s, judges, and sheriffs) or appointed locally (police and probation officers). Local policies and policymakers affect the state’s corrections budget, even though the state has no say in designing or implementing these policies."

From the abstract to "Tough on Crime (on the State's Dime): How Violent Crime Does Not Drive California Counties' Incarceration Rates -- And Why it Should" by W. David Ball.

The notion that criminal justice decisions have budget implications that work like an entitlement program, mandating spending with little regard to the amount appropriated by the state budget for the purpose, is familiar. The notion that local exercises of discretion in the criminal justice system can be as important as the text of the state criminal code in driving incarceration rates is not unfamiliar, if less commonly observed.

But, the notion that disparities in criminal justice discretion are a distributive justice issue between local governments, with excessive incarcerators imposing burdens on other state taxpayers who have no say in those decisions is a conceptual breakthough.

The article linked looks at these issues in California, but they also come up in Colorado, where suburban Denver's Arapahoe County's notorious prosecutor exercises discretion to impose longer and more expensive sentences of similarly situated defendants than prosecutors elsewhere in the state, such as the neighboring urban City and County of Denver. But, I'm not aware of anyone that has done a study looking at the issue from the frame that Ball does in Colorado, even though all or almost all of the relevant data are fairly easily available online in government statistics.

The high sentences sought in Arapahoe County in the criminal justice system impose fiscal burdens on other Colorado taxpayers in a way similar to, but less transparent than the efforts of the exurban Denver area Douglas County school board to unilaterally establish a voucher plan that would give students attending private (mostly religious) schools a partial share of the per student state funding that the district receives (and no local money) if it can succesfully make the case that voucher students count for school funding formula purposes. In other words, both proposals are to a significant extent money grabs at a scarce state general fund by affluent communities led by politicians who have a strong public ideological opposition to taxes and government spending.

Framing sentencing law as a fiscal issue rather than a human rights issue has produced a major withdrawal from war on drugs and tough on crime politics driven long sentences for relatively minor crimes in a variety of conservative leaning political jurisdictions. Perhaps a focus on considering local sentencing discertion in a fiscal frame could elicit further reforms that address abuses of discertion by local political actors in this process, where traditional liberal and academic arguments for sentencing reform have not.

Jobs Situation Still Dismal

Job losses in this recession remain, by far, greater and longer lasting than in any economic downturn since the Great Depression. While economic data from before the Great Depression aren't as precise, the financial crisis that began in late 2007 is still in the running to be the second worst economic downturn in U.S. history from a jobs perspective. Only one U.S. recession since the Great Depression has had a higher peak unemployment rate, the early '80s recession with a peak of 10.8 percent, but it was a short sharp shock that quickly bounced back by comparison.

In June, the private sector created about 57,000 jobs, about half the number neeed to keep the unemployment rate constant. But, those gains were muted by the loss of 18,000 public sector losses.

The unemployment rate increased from 9.1% to 9.2%, and the participation rate declined to 64.1%. Note: This is the percentage of the working age population in the labor force.

The employment population ratio fell to 58.2%, matching the lowest level during the current employment recession. . . . [a] measure of labor underutilization that includes part time workers and marginally attached workers, increased to 16.2%, the highest level this year.

The BLS revised down April and May payrolls showing 44,000 fewer jobs were created than previously reported.

The average workweek declined slightly to 34.3 hours, . . . "average hourly earnings for all employees on private nonfarm payrolls decreased by 1 cent to $22.99. Over the past 12 months, average hourly earnings have increased by 1.9 percent." . . .

Through the first six months of 2011, the economy has added 757,000 total non-farm jobs or just 126 thousand per month. There have been 945,000 private sector jobs added, or about 158 thousand per month. This is a better pace of payroll job creation than last year, but the economy still has 6.98 million fewer payroll jobs than at the beginning of the 2007 recession.

There are a total of 14.1 million Americans unemployed and 6.3 million have been unemployed for more than 6 months.

Despite the dire situation, nobody in Washington is talking about stimulus and public sector layoffs killed 188,000 jobs in the first half of this year at a time when the economy needs more job creation, not less. The number of people working part-time because they can't find full time jobs and the number of people unemployed for more than six months are at near record highs.

Jobs have been below their peak for 42 months and are nowhere near returning to where they started. The longest previous post-war recession in jobs terms (the decline and recovery 2001 tech bust) created jobs to replace those lost in that recession in 48 months. But, that jobs slump was much more shallow; at its worst point 2% of payroll jobs were lost, while we are still 5% below peak now and we 6.3% below peak at the low point.

NPR noted this morning that GDP has actually been increasing for two years now, but the jobs situation is not catching up. Businesses are hoarding cash instead of investing. Interest rates remain remarkably low, but that isn't spurring more spending and borrowing. The leading economic indicators are negative, suggesting that we might even face a double dip recession.

This is happening at a time when the immigrant population of the United States is shrinking or constant. Inflation remains modest.

Politically, we are about six to eight months from the point at which the state of the economy starts to influence the next Presidential election. More pressingly, the U.S. will break though its debt ceiling by August 2 if corrective action isn't taken, possibly triggering a constitutional crisis or a default of the U.S. national debt that could have catastrophic economic consequences for the nation by driving up the interest rate that Treasury bond holders are willing to accept at a time when U.S. bonds have been a safe haven as many other developed nations are having to restructure or default on their sovereign debts and crisis after crisis looms on the horizon.

07 July 2011

Congressional Partisanship At Record High

The partisan divide between the Democrats and Republicans in the United States Congress is currently at an all time high. Partisan divides were lowest in the mid-20th century, but are higher now than they were in the late 19th century and early 20th century.

Posed less negatively, the Democratic and Republican party are more distinct than every before rather than being blurred by politicians who don't fit either party's mold, in part, due to "realignment" with one time Northeastern moderate Republicans now identifying as Democrats, and one time conservative Southern Democrats now identifying as Republicans in federal elections.

Deadlock isn't always a bad thing when the country is divided. A deadlocked nation may be one that shouldn't be making major changes from the status quo in the law. But, deep partisan divisions and divided government may make action entirely unachievable even on issues that necessarily call for some action to keep the institution of the federal government functioning, like the debt ceiling, appointments to bureaucratic posts, or approval of a federal budget.

The Innocence Effect

[S]hadow-of-trial models [of plea bargaining] commonly pay little attention to defendants’ culpability per se. To wit, innocents – who may well face a higher average probability of acquittal at trial – are expected to demand a more lenient sentence in return for their guilty plea. However, if the plea offer is accurately adjusted to defendants’ probability of conviction, innocence in itself plays no role in the defendant's decision. This assumption, which is jointly held by both parties to the plea bargaining debate, is false. . . .

[I]nnocent defendants are significantly less likely to accept plea offers than their guilty counterparts, even when these offers appear objectively attractive in light of the evidence against them and the expected sanction at trial. . . .

[T]he implications of the innocence effect and its underlying causes for the plea bargaining debate . . . requires both camps to reevaluate their policy prescriptions and offering some new proposals of our own to minimize false convictions, better to protect the innocent, and improve the plea bargaining process. . . .

As a result of the innocence effect, plea bargains probably do not increase the rate of wrongful convictions, as argued by some of the plea bargaining opponents, but also do not promote the interests of innocent defendants as argued by the plea bargaining supporters. . . .

One way to reduce the negative effect of plea bargaining on the sentences of wrongfully convicted defendants is to limit size of the plea discount. The law can instruct judges not to approve a plea bargain if the post plea sentence is significantly lower than the sentence expected after a jury trial conviction. If the prosecution’s ability to offer significant sentence discount in plea bargaining would be limited, defendants requiring considerable discount in exchange for their guilty plea would not bargain. Since the innocent demand, on average, significantly lighter sentences than guilty defendants, the proportion of innocent defendants among those who plead guilty will be smaller. . . . Restriction of the guilty plea discount will minimize the gap between the sentence imposed on those who opt for a trial, including relatively many innocent, and that of those who plead guilty, most of whom are guilty. The innocent defendants who will be convicted in jury trial will still be sentenced for longer terms than the guilty pleaders, yet, the difference will be smaller. . . .

When it comes to sentence bargains, it is not a particularly difficult task. Courts can be instructed to reject plea bargains if the proposed sentence is substantially lower than that imposed in similar circumstances after a trial. Limiting charge bargaining is much harder, but it might still be a possible task. . .

Another alternative to plea bargaining can be bargaining for a simplified criminal process. The law can encourage parties to replace plea bargains with agreement on shorter and simplified process in return for a sentence discount. Parties can agree on a bench trial instead of a jury trial, agree that the defendants will be the first to testify, before the case for the prosecution is presented, or make other stipulations which allow a cheaper trial for the prosecution.

True, in such a simplified process, the risk of mistake might be larger. Yet, innocence defendants in such process can gain a discount for the agreement without pleading guilty – something which they are reluctant to do. Moreover, defendants in such simplified proceedings will maintain the right to contest the case, and, if successful, gain an acquitted, a right they waive in regular plea bargaining. Innocent defendants who may be reluctant to plead guilty, would often prefer a simplifies process in which they are not required to plead guilty, are able to avoid the damaging consequences of prolonged litigation and benefit a lenient sentence in exchange for saving judicial time.

True, the defendant in such a simplified trial might have a smaller chance of acquittal. As a result, it is possible that defendants who would have been acquitted in a full trial may be convicted in a simplified trial. Nevertheless, it can be said in confidence that the advantages of the simplified procedure outweigh its disadvantages.

First, the proposed procedure will promote the interest of the innocent defendants by allowing them to benefit from a real legal process which is aimed at finding the truth while benefiting from a sentence discount. Indeed, the cost of this procedure is higher than that of a guilty plea, but the gap between the two is not so big when it comes to substantially simplified process. Additionally, most of the guilty defendants who plead guilty today will continue to do so even when offered a simplified process is an option because in order to be acquitted in such a procedure, they would have to lie to the judge. In most cases that involve conclusive evidence, defendants will find it psychologically difficult to lie to a judge; mostly due to the fact that it probably will not help their case. As shown above, guilty defendants tend to plead guilty simply because they are guilty.

Therefore most of those who plead guilty will continue to do so even when they can get a similar discount in a simplified process. Furthermore, some of the defendants, who in the absence of an alternative procedure would choose a full trial, would now choose the simplified procedure. As a result, judicial resources will be spared and could be channeled towards the implementation of the simplified process. In light of this, the simplified procedure could advance the interests of the innocent without the need for additional resources.

Second, the procedure may also reduce wrongful convictions. Despite the reluctance of innocent defendants to plead guilty, some of them succumb to the desire to quickly end the proceedings or to the fear of a wrongful jury trial conviction, and thus plead guilty. The simplified procedure could provide these defendants an opportunity to challenge the charges against them. In light of all of this, we believe that the benefits of the proposed procedure, in view of innocent’s reluctance to plead guilty, outweigh its disadvantages. Moreover, even in cases where a person might be mistakenly convicted in a simplified process, the moral gravity of such conviction will be smaller because it will be reached after an honest judicial attempt to find the truth. Studies on procedural fairness even indicate that defendants who are not satisfied with the outcome of the trial tend to accept it if they were given an opportunity to argue their case before an impartial arbiter before the verdict. Simplified procedure might be better in allowing the defendant a saveopportunity to present his story, than the adversarial jury trial.

From here.

The process bargaining elements of the authors proposals are expressly a part of the U.S. military justice system, in which a defendant can sacrifice due process protections in exchange for a lower maximum sentence, if the prosecuting authority files a charge that permits that process to be used.

One procedural tool to limit charge and sentencing bargains would be to allow defendants to make a post-sentencing motion to reduce their sentence to some multiple of the worst case scenario that the defendant would have faced under any plea deal offered by the prosecution prior to trial.

Another reform that might be important is to review particular proposed or currently available criminal procedure protections of criminal defendants to determine which do the most and the least to help innocent defendants.

Gains From Economic Growth No Longer Shared. Why?

The U.S. economy, and European economies as well, have seen a massive increase in the extent to which the gains from economic growth are concentrated in a few, rather than shared widely by all in the economy.  This is mitigated in Europe, and to a much lesser extent in the United States, by a combination of tax policy and social welfare benefit systems.  But, the fact that the new trend has endured for a generation across dozens of countries suggests that it is not simply a matter of policies of particular administrations. 

The folks behind the poster at the top of this post probably have roots in the union movement, and more widely shared gains from growth were found in an era when unions were rather strong.  But, there is room to question the cause and effect relationship in that era.  Were unions strong because workers were in a good bargaining position, or were workers in a good bargaining position because they were unionized?  There is good reason to thikn that the later was true, at least to some extent.

One interpretation is that the technological foundations of our economy have made work traditionally done by less skilled workers more efficient and hence reduced demand for these workers.  For example, e-filing of legal pleadings has gutted the demand for copy room workers and couriers for law firms and reduced postal service volume.  Any one of these changes individually may be insignificant, but one change after the other for decades could have this kind of effect.  Meanwhile, more skilled jobs that are not succeptible to automation have not been eliminated but benefit from the greater productivity that technology has imparted to less skilled workers.  More productive low skilled workers have not been able to reap the full value of their labor in this scenario because the number of people who can do the work greatly outnumbers the number of people needed to do the work.  This hypothesis is behind the characterization of the past few decades as an "information economy" or as an economy where gains are concentrated among "knowledge workers" or a "creative class."

A close variant of this theory suggests that much of the post-war boom was a matter of retooling a wartime economy to meet long unmet domestic demand and shortfalls in the productive capacity of the rest of the war ravaged world, so that not much innovation was required to see record growth at first, but that this situation was exceptional and vanished as routes to greater productivity had to be invented rather than simply being restored or imitated.

Another, somewhat similar analysis would suggest that capital has become a more important factor, relative to labor, in producing economic value.  Physical and monetary capital is much more unequally distributed than human capital, and hence those who have it have benefited greatly, while those who do not have not shared in the wealth.  This fits with the fact that the end of the 1979-2008 time period identified is one where the financial sector had huge profits and much higher compensation levels relative to the "real economy."  But, it also challenges that assumption that efficient markets allocate capital through lending and equity investment transaction to people whose ability to put those assets to work is greatest; an analysis that would seem to mitigate inherited wealth biases.

Of course, it certainly isn't impossible that elite levels of knowledge and skill and great amounts of capital are both necessary for growth and hence share in it, while the relative economic importance of those who are not exceptionally smart or skilled or rich has declined.  Thus, we might have a bifurcated ruling class split between the capable and the wealthy, that leaves out everyone else.

These theories, because they are rooted in economic fundamentals, have the unfortunate tendency to be rather fatalist.  Without further elaboration about what exactly the economy needs in terms of skill sets and how we can broaden the base of people who have those skills, it suggests that there are not any good short to medium term policy fixes to these inequalities in initial market allocations of wealth and that even long term policy fixes rely on assumptions about returns to education and training and other economic policy fixes that are at best unproven and may not work.  If economic value has more to do with IQ and personality than with the value added by education which serves as much as a sorting device as an activity that makes someone more useful economically, public policy may have little capacity to redress gaps in human capital value between the bright and the less bright except through redistributive policies.  Policy may be able to have more impact on the availability of capital, but Americans have historically been skeptical, frequently with good reason, of the returns that result from investment decisions made by government investments in the private sector relative to results produced by the private financial markets.  Government investors tend to be more forgiving of failure than the private sector to a fault.

A third interpretation is rooted in terms of competition both with foreign firms and domestic immigrants.  In this theory, foreign firms in less developed economies have lower labor costs and less costly regulations and taxes, giving them comparative advantage in markets where it is practical for work to be offshored and their less skilled workforces to compete with workers in the U.S., for example, in labor intensive manufacturing enterprises.  Similarly, immigrants to the U.S. from less developed countries, many undocumented, may be willing to work for lower wages on less favorable terms because they are still favorable relative to the labor markets in their homelands, and this competition drives down the market price for all workers, native and immigrant, who compete in the same markets.

A fourth interpretation sees union busting facilitated by weaker labor laws, and pro-big business economic policies as important in this trend.

Both these theories argue that economic policices have promoted cheap labor.  These theories are intuitively attractive, not least of which because their roots in government policy rather than economic fundamentals suggest straight forward solutions to our woes: restrict free trade, limit immigration, and strengthen protections for unions.

But, I am not very comfortable that the cheap labor theories are correct.  Growth in pre-tax, pre-social welfare benefit incomes have not been much more equal in heavily unionized France and Germany than they are in the United States which is much less labor friendly.  Countries like Germany and Japan have continued to have heavily manufacturing oriented economies despite compensation levels of manufacturing workers that far exceed their foreign competitors without having profoundly different international trade regimes than those of the United States.  Econometric studies of the impact of immigration on the wages earned by native born workers have shown the effects to be surprisingly modest and limited to fairly narrow subsets of the workforce.  Economic immigration has been drive to a great extent by the existence of opportunities that native born workers are not filling well for whatever reason.

Economists widely share the view that freer trade in goods and services tends to increase economic output, suggesting that restrictions on free trade and strict immigration laws may do more harm than good.  Unions clearly have some impact on the distribution of profits from enterprises, but it isn't obvious that they have much of an impact for better or for worse on overall economic growth rates.

Japan seemed to be following more of a shared growth model than its competitors, but has been so hard hit by deep recessions that there hasn't been much growth to share in recent decades, so it is hard to confirm that hypothesis.  But, this too could be a product of an economy that, at first, was thriving on imitation rather than invention of more productive technologies and economic institutions, much like the U.S. in the post-war, post-Great Depression era.

Whatever the cause of rising inequality in incomes, there is also the question of what to do about it.  We could follow the European model of redistributing income to make up for the underlying economic trends, or could continue on our current track of treating the market allocation of wealth as presumptively legitimate.  Neither approach seems to be particularly favored empirically in determining the productivity or economic output of a society.  The wealth of nations is indifferent to even significant redistribution of wealth if done well and gradually.

Our future may be that of Japan, a "great stagnation" in which economic growth declines dramatically as all of the low hanging fruit of ideas that could improve productivity are picked, and innovations become more scarce.  The seemingly inevitable end of a global economy based on "cheap oil" is also not very encouraging.  We could move from a regime of unequally shared growth to one in which there is no growth to share.

Is it any wonder that economics is called "the dismal science?"

05 July 2011

Six Years of Wash Park Prophet

Wash Park Prophet has its sixth anniversary last Sunday.  Not long ago, I split it into two parts, Dispatches from Turtle Island (see the sidebar) and this blog, with the former covering mostly scientific topics and in general everything which involves things that transcend things local, political and legal.  There were 5,448 posts in the first six years at this blog.

African and Near East Update

* South Sudan less than two weeks from becoming a new nation. There is still unfinished business and conflict, however. Nuba, which is geographically in North Sudan, but ethnically and politically more like South Sudan has seen continuing violent conflict within the last month and sees itself as stranded on the wrong side of the border. Ethiopian peacekeepers have moved into an oil rich contested border region that has seen recent clashes (also on the wrong side of the proposed border). Darfur (essentially all of Western rump Sudan) remains a powder-keg of disaffected people, if not the full fledged genocide in progress that it was - but independence won't necessarily help because the oppressed populations there are a minority. South Sudan also faces the challenges involved in having a tremendously uneducated people with an economy left in tatters by decades of war.

* Morocco has passed a new constitution that in theory turns the nearly absolute monarchy into a constitutional monarchy a bit like that of the British monarch in the period between that when the monarch was absolute and the one when the monarch was purely symbolic. The military and foreign affairs remain royal perogatives, but the elected legislature has a greater say in domestic affairs and the courts are supposed to be more independent. The Moroccan king is fairly popular at the moment, so in the short term it may not matter much.

* In Yemen, the beginning of the end of the dictatorship seems near as the ruling dictator is in exile, but violent unrest in the divided country continues as a new regime takes shape.

* The civil war in Libya, in which the Western powers have united against the outgoing regime is not at a stalemate, but the outgoing regime is seeing its power slip away slowly and domestic politics in the U.S. aren't strongly mobilized in favor of our halfway involvement.

* Sudan's reform protesters have been among the least successful of the Arab spring who were facing mere dictators rather than monarchs. They regime has not hestitated to kill many hundreds of protestors and to apprehend every able bodied man and boy in some villages. Refugees have poured into Turkey and Lebanon. In some cases, refugees first fled Iraq and now must flee again. Reform proposals have been half-hearted and not won popular support.

* Dissent was crushed in Saudi Arabia and in Bahrain (with Saudi support). There is discontent in these places, but it is only the usual boil, not of Arab spring proportions.

* Egypt seems to be struggling to consolidate the revolution. The old regime is gone, but the successor is not entirely clear. There were riots when police were acquitted for actions taken during the uprising.

* In Palestine, even elections for posts such as medical society board of directors have partisan contestants.  The Israeli imposed embargo of Gaza also increasingly appears to be counterproductive overkill as a relatively educated and healthy population is denied the means to import basic building supplies for civilian projects which must instead be smuggled into the area.  Greek forces headed off a high profile publicity boat mission there by human rights activists, but situation remains, as ever, unstable.

 * Vile suicide bombings continue in Afghanistan.  Iraq has been comparatively quite lately as the U.S. prepares its departure from the region.  Related to Afghanistan, militant leaks in the Pakistani security complex have been released and an apparently military linked hit killed a reporter who revealed those leaks.

Post-Long Weekend Observations

* Denver's Mayor-Elect Hancock will be sworn in on the 18th of July. Bill Vidal, the outgoing interim Mayor has done a better than expected job in the interim since outgoing Mayor Hickenlooper took the Governor's office, in terms of the budget and police discipline. He's benefited from not owing anything to anyone and not having to run for re-election.
* Byers School, which has sat vacant since the Denver School of the Arts left for the old University of Denver music campus near Stapleton has a new tenant lined up, a new Denver School of Science and Technology charter school set to open, if I understand the matter correctly, in the 2013-2014 school year. This fills a huge hole in the West Washington Park neighborhood with a wonderful bit of infill, adds a good new educational choice to the Denver Public Schools, and makes a large number of people, my family included, who lobbied for it happy.
* My Fourth of July weekend found me at the Renaissance Festival in Larkspur, Colorado. A certain number of paid models and Renaissance Festival enthusiasts dress in costume - not strictly of any one historical period and often veering into fantasy. Among the most striking, because they come across as quite natural at first glance, were the little devil horns that some people wore, and the furry tails that a number of people (mostly women) affixed to their outfit as if they were natural. Also eye catching in general are other forms of headgear like garlands and fairy antenna, full back angel wing tattoos, and crows masks which are surprisingly frightening.  Genuine wings of angelic, fairy, and birdlike varieties were also in evidence, but rather less effective.  Opponents of weapons control will note that there are few other events where so many people openly bear arms (some fake, but a significant number of the genuine stainless steel and deadly variety).

* The Greeley Stampede, which I also made my way to this weekend, was more notable for the very strong presence of the National Guard, a lot of cliche Western Art, fried twinkies, alligator wrestling, and mutton busting.

* Aurora, Colorado is proposing major tax breaks and zoning accomodations for a Gaylord entertainment sponsored convention center project that, IMHO, is the last thing that the metro area needs right now.

* I don't recall if I mentioned the major new water compact reached this spring under Governor Hickenloopers guidance.  It diverts water from the Western Slope to the Front Range in exchange for giving the Western Slope more control of future diversion plans and other compensation.  The diversion plans include new hydropower for the state.

* Disney already has a radio station, a television station, multiple international destination amusement parks, a movie studio and a major line of characters.  How long will it be before they have a newspaper and sports leagues as well?