October 22, 2018

22 Octubre 2018

Note: This post first appeared on my Patreon page. Last week Roger Lowenstein had a piece in the Post about GE's hiring of a new CEO after the prior one served less than a year. According to Lowenstein, the new CEO's contract will give him incentives worth $300 million over the next four years if he does well by the shareholders. He will walk away with $75 million if he does poorly. This follows the hiring of an inept CEO who was dumped in less than a year and long-term CEO Jeffrey Immelt, who pocketed hundreds of millions of dollars during his tenure while giving shareholders returns averaging 1.0 percent annually, according to Lowenstein. This raises the obvious question: What is GE's board is doing? I haven't looked at their forms, but I am quite certain these people get paid well over $100k a year and quite possibly over $200k for a job that requires perhaps 200 to 300 hours a year of work. That comes to an hourly pay rate in the $300 to $1,000 range. The primary responsibility of directors is picking top management and making sure that they don't rip off the shareholders. How could you possibly fail worse in this job than GE's board? Yet, my guess is that there has been very little turnover in the board. As a practical matter, it is difficult for shareholders, even large shareholders, to organize to remove board members. More than 99.0 percent of the incumbents who are nominated by the board for re-election win. This is the classic problem of collective action. It is almost always much easier to simply exit as a shareholder and sell your stock than to organize and try to change the way the company operates. For this reason, CEOs are able to make out like bandits, getting pay in the tens of millions of dollars, even when they do poorly by shareholders. It is common for progressives to condemn the outrageous pay of CEOs. However, they rarely move beyond condemnation to point out that the CEOs are ripping off their companies. This means first and foremost the shareholders.

• Health and Social ProgramsLos Programas Sociales y de Salud

The Cost of Extending Medicaid Coverage in Georgia Would be Between $30 and $45 Per Person

By CEPRCEPR

October 21, 2018

21 Octubre 2018

For those who were wondering what the conflicting estimates of $300 million a year by Democratic gubernatorial candidate Stacey Abrams and $450 million a year by her Republican opponent, Brian Kemp, would mean for the people of Georgia, these figures might be helpful. The NYT article should have included something like this.

• Health and Social ProgramsLos Programas Sociales y de SaludIntellectual PropertyPropiedad Intelectual

NYT Does Some Mind Reading of Republican Members of Congress on Drug Pricing Policy

By CEPRCEPR

October 20, 2018

20 Octubre 2018

The NYT had a piece on how drug companies fear that if the Democrats retake the House, they may work together with Donald Trump to lower drug prices. At one point the piece tells readers;

“The Democrats’ proposal for the government to negotiate drug prices for millions of Medicare patients is their preferred solution. But it would also face the most opposition, from drug makers and Republicans who see it as a step toward price controls.”

It’s great we have NYT reporters who can read the minds of Republican members of Congress so that they can tell us they oppose negotiated drug prices because they “see it as a step toward price controls.” Those of who can’t read minds might have thought that Republicans in Congress oppose negotiated drug prices because it would lower the profits of the drug companies who contribute to their campaigns.

Since this piece discusses a number of mechanisms for containing drug prices, it also would have been worth mentioning a proposal that got the support of 17 Democratic senators (lead sponsors Bernie Sanders and Elizabeth Warren), which would replace government-granted patent monopolies as a mechanism for financing research with direct government funding. This would allow new drugs to be immediately sold at free market prices.

Of course, the drug companies would probably kill to prevent such legislation from passing since they are strongly opposed to a free market in prescription drugs.

The NYT had a piece on how drug companies fear that if the Democrats retake the House, they may work together with Donald Trump to lower drug prices. At one point the piece tells readers;

“The Democrats’ proposal for the government to negotiate drug prices for millions of Medicare patients is their preferred solution. But it would also face the most opposition, from drug makers and Republicans who see it as a step toward price controls.”

It’s great we have NYT reporters who can read the minds of Republican members of Congress so that they can tell us they oppose negotiated drug prices because they “see it as a step toward price controls.” Those of who can’t read minds might have thought that Republicans in Congress oppose negotiated drug prices because it would lower the profits of the drug companies who contribute to their campaigns.

Since this piece discusses a number of mechanisms for containing drug prices, it also would have been worth mentioning a proposal that got the support of 17 Democratic senators (lead sponsors Bernie Sanders and Elizabeth Warren), which would replace government-granted patent monopolies as a mechanism for financing research with direct government funding. This would allow new drugs to be immediately sold at free market prices.

Of course, the drug companies would probably kill to prevent such legislation from passing since they are strongly opposed to a free market in prescription drugs.

The Not Very Scary World of C.L.O.s

By CEPRCEPR

October 19, 2018

19 Octubre 2018

We’re still in financial crisis mania, as the business press eagerly tries to tell us how little they learned from the last crisis by trying to identify the source of the next one. The NYT’s latest contribution to the effort is a piece on C.L.O.s, or collateralized loan obligations.

The piece tells us that these are like the C.D.O.s of the last decade, debt instruments in which banks bundled many loans of questionable quality and sold them off to unsuspecting buyers. It warns that banks have little incentive to ensure their quality, since they don’t hold a stake, and therefore there is a risk of large-scale defaults.

There are two big problems with the scare story here. First, the growth in these risky instruments is not quite what the piece might have readers believe. The piece includes a chart which shows the amount of junk bonds and C.L.O.s outstanding since 2014. While the point of the chart is to show that volume C.L.O.s has passed the volume of outstanding junk bond debt, a more serious analysis would combine the two together to get a gage of the amount of high-risk corporate debt in the economy.

This combined measure does not tell much of a story. Eyeballing the chart, we go from a combined total of roughly $1.95 trillion in 2014 to $2.5 trillion in the middle of 2018. Since this is a period in which the economy has grown by roughly 20 percent in nominal terms, this indicates only a modest rise in the ratio of risky corporate debt to GDP. This is not the sort of stuff that need keep us awake at night.

But the more important point is that the 2008 crisis was caused by the collapse of a bubble that was driving the economy. This was easy to see for people familiar with Econ 101. Residential construction hit a record share of GDP far above its average in prior decades. Housing wealth lead to a consumption boom, with savings rates hitting record lows.

What is the component of GDP that is driven by loans in C.L.O.s? Investment is at very modest levels as a share of GDP. It’s hard to envision it falling very much if this market tanked tomorrow. Suppose the holders of this debt took a huge hit, losing 50 percent of their investment. That would be a loss of $650 billion in wealth, bad news for them, but hardly close to enough to sink an economy with $90 trillion. In fact, the impact would likely be trivial in terms of overall GDP growth.

In other words, for the folks looking for the next crisis, you’ll have to do better.

We’re still in financial crisis mania, as the business press eagerly tries to tell us how little they learned from the last crisis by trying to identify the source of the next one. The NYT’s latest contribution to the effort is a piece on C.L.O.s, or collateralized loan obligations.

The piece tells us that these are like the C.D.O.s of the last decade, debt instruments in which banks bundled many loans of questionable quality and sold them off to unsuspecting buyers. It warns that banks have little incentive to ensure their quality, since they don’t hold a stake, and therefore there is a risk of large-scale defaults.

There are two big problems with the scare story here. First, the growth in these risky instruments is not quite what the piece might have readers believe. The piece includes a chart which shows the amount of junk bonds and C.L.O.s outstanding since 2014. While the point of the chart is to show that volume C.L.O.s has passed the volume of outstanding junk bond debt, a more serious analysis would combine the two together to get a gage of the amount of high-risk corporate debt in the economy.

This combined measure does not tell much of a story. Eyeballing the chart, we go from a combined total of roughly $1.95 trillion in 2014 to $2.5 trillion in the middle of 2018. Since this is a period in which the economy has grown by roughly 20 percent in nominal terms, this indicates only a modest rise in the ratio of risky corporate debt to GDP. This is not the sort of stuff that need keep us awake at night.

But the more important point is that the 2008 crisis was caused by the collapse of a bubble that was driving the economy. This was easy to see for people familiar with Econ 101. Residential construction hit a record share of GDP far above its average in prior decades. Housing wealth lead to a consumption boom, with savings rates hitting record lows.

What is the component of GDP that is driven by loans in C.L.O.s? Investment is at very modest levels as a share of GDP. It’s hard to envision it falling very much if this market tanked tomorrow. Suppose the holders of this debt took a huge hit, losing 50 percent of their investment. That would be a loss of $650 billion in wealth, bad news for them, but hardly close to enough to sink an economy with $90 trillion. In fact, the impact would likely be trivial in terms of overall GDP growth.

In other words, for the folks looking for the next crisis, you’ll have to do better.

Washington Post Says that Protectionism for Its Friends is "Free Trade"

By CEPRCEPR

October 17, 2018

17 Octubre 2018

Yes, they are at it again. Expressing the usual journalistic need to waste words, the Post twice referred to trade deals that Donald Trump is attempting to negotiate as “free-trade” deals. While these deals are likely to reduce barriers in some areas (not for foreign physicians who want to practice in the US), they will almost certainly include longer and stronger patent and copyright protections.

We understand that the Post likes to see money going from the rest of us to Pfizer, Microsoft, and Disney, but that doesn’t make these forms of protectionism free trade. It would be nice if the paper could just give the facts and spare us the propaganda.

Yes, they are at it again. Expressing the usual journalistic need to waste words, the Post twice referred to trade deals that Donald Trump is attempting to negotiate as “free-trade” deals. While these deals are likely to reduce barriers in some areas (not for foreign physicians who want to practice in the US), they will almost certainly include longer and stronger patent and copyright protections.

We understand that the Post likes to see money going from the rest of us to Pfizer, Microsoft, and Disney, but that doesn’t make these forms of protectionism free trade. It would be nice if the paper could just give the facts and spare us the propaganda.

Yglesias Strikes Out in Attacking John Judis "Nationalism"

By CEPRCEPR

October 17, 2018

17 Octubre 2018

I don't especially want to defend nationalism, given the folks who wave this flag these days, but Matt Yglesias gets a few things wrong in criticizing John Judis' NYT piece earlier this week. To start with he quotes Judis: "As long as corporations are free to roam the globe in search of lower wages and taxes, and as long as the United States opens its borders to millions of unskilled immigrants, liberals will not able to create bountiful, equitable societies, where people are free from basic anxieties about obtaining health care, education and housing.” ...and then tells us "this is flatly untrue." Okay, let's take a step back. Is Yglesias really arguing that if we had open borders, so that literally hundreds of millions of people from the poorest countries on the planet could come to the US, that it would not mean a decline in living standards for the workers already here? That seems more than a bit far-fetched. Of course, we did not have open borders, so the real question is did the levels of immigration we had prevent us from having a generous welfare state? Here Yglesias would be on solid ground in saying no. Most research indicates that immigration of the level we have seen has not hurt the wages of native-born workers, although it does depress the wages of earlier immigrants, making the catch-up process longer than it otherwise would be.

NYT Says Trump Commits Really Big Number to Foreign Aid

By CEPRCEPR

October 16, 2018

16 Octubre 2018

There are a lot of people who are so stupid that they think foreign aid is a major part of the federal budget. Ever wonder why people could be so stupid?

Well, the NYT tells us at least part of the reason in a news article on a new agency established by Donald Trump to provide loans and loan guarantees as a way to help developing countries and extend US. influence. The article tells us that the bill that established the new agency, the United States International Development Finance Corporation [USIDFC], “gave it authority to provide $60 billion in loans, loan guarantees and insurance to companies willing to do business in developing nations.”

Okay, $60 billion is a lot of money, more than almost anyone other than Bill Gates and Jeff Bezos will see in a lifetime, but how much does it matter to our budget? My guess is that almost no NYT readers have a clue. Yeah, I know the NYT has a very well-educated readership, but very few of them have their heads in the federal budget.

To get a rough idea, we need to remember that this is $60 billion in loans and guarantees, it is not actual spending. And, it is a stock figure, it is a level of commitment, not an annual flow.

So let’s say that the subsidy component of the loan and guarantee averages 5 percent of the value. (That is probably high, it would mean for example that a loan that should carry a 10 percent interest rate would instead carry a 5 percent interest rate.) In this case, the subsidies coming from the USIDFC would be equal to $3 billion.

But again this is a stock figure. That would mean we hit this level of subsidy once the USIDFC has reached its $60 billion liability limit. Let’s say that takes five years, so the USIDFC is lending at its limits by 2023. At that point, the federal budget is projected to be $5.5 trillion.

This means that Trump’s new foreign aid program will be costing us a bit more than 0.05 percent of federal spending. Alternatively, we can put it at dollars per person and say that this program will be costing us a bit less than $9 per person.

This would have been useful information for the NYT to provide its readers. It would likely be very helpful the next time some right-wing politician wants to eliminate waste in the budget by cutting foreign aid.