For some reason the folks at the NYT business desk are having a hard time understanding what is going on with the dispute over Argentine debt. An article today refers to the hedge funds that have forced Argentina into a second default as “holdout investors.” It reports that Argentina refers to them as “vultures.”
This hugely obscures the basic facts, which are not really in dispute. The funds that have pressed their suit in U.S. courts against Argentina did not hold its debt at the time of the default in December of 2001. They bought it up later at sharply reduced prices. Since purchasing the debt they have tried to use legal pressure to force Argentina to pay the full face value of the bonds.
This is exactly what “vulture funds” do. That is not a term that was invented by Argentina to denigrate these funds, it is a common term used to describe the type of activities that the Elliott Management Corporation (the lead actor in the lawsuit) is pursuing in this case. As a practical matter, there are almost no “holdout” investors involved in this action. Almost all of the original holders of Argentine debt accepted the terms offered by the government. Most of those who did not accept the terms sold their bonds to investors like Elliott Management.
For some reason the folks at the NYT business desk are having a hard time understanding what is going on with the dispute over Argentine debt. An article today refers to the hedge funds that have forced Argentina into a second default as “holdout investors.” It reports that Argentina refers to them as “vultures.”
This hugely obscures the basic facts, which are not really in dispute. The funds that have pressed their suit in U.S. courts against Argentina did not hold its debt at the time of the default in December of 2001. They bought it up later at sharply reduced prices. Since purchasing the debt they have tried to use legal pressure to force Argentina to pay the full face value of the bonds.
This is exactly what “vulture funds” do. That is not a term that was invented by Argentina to denigrate these funds, it is a common term used to describe the type of activities that the Elliott Management Corporation (the lead actor in the lawsuit) is pursuing in this case. As a practical matter, there are almost no “holdout” investors involved in this action. Almost all of the original holders of Argentine debt accepted the terms offered by the government. Most of those who did not accept the terms sold their bonds to investors like Elliott Management.
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William Cohan had a column in the NYT noting that the Justice Department’s settlements with the major banks over their securitization of fraudulent mortgages largely let the banks off the hook. His alternative route would have been criminal (as opposed to civil) prosecutions of the banks. While this may have led to more severe consequences for the banks and their current shareholders, it still would have allowed most of the people responsible off the hook.
In most cases, the top executives who set the course for the banks during the housing bubble years have moved on. They are either retired or employed elsewhere. Therefore they would not be affected by harsh punishments directed at their former employers. If the point is to have a sanction that will provide a serious disincentive to illegal actions then the Justice Department should have been trying to criminally prosecute the bankers themselves.
Knowingly packaging and selling fraudulent mortgages is fraud. It is a serious crime that could be punished by years in jail. The risk of jail time is likely to discourage bankers from engaging in this sort of behavior. The risk that their former employer may face serious sanctions years after they have left will not.
William Cohan had a column in the NYT noting that the Justice Department’s settlements with the major banks over their securitization of fraudulent mortgages largely let the banks off the hook. His alternative route would have been criminal (as opposed to civil) prosecutions of the banks. While this may have led to more severe consequences for the banks and their current shareholders, it still would have allowed most of the people responsible off the hook.
In most cases, the top executives who set the course for the banks during the housing bubble years have moved on. They are either retired or employed elsewhere. Therefore they would not be affected by harsh punishments directed at their former employers. If the point is to have a sanction that will provide a serious disincentive to illegal actions then the Justice Department should have been trying to criminally prosecute the bankers themselves.
Knowingly packaging and selling fraudulent mortgages is fraud. It is a serious crime that could be punished by years in jail. The risk of jail time is likely to discourage bankers from engaging in this sort of behavior. The risk that their former employer may face serious sanctions years after they have left will not.
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That’s the complaint of Steven Davidoff Solomon in a NYT column today. His complaint is that three people, who are small shareholders, repeatedly bring resolutions that have to be voted on by all shareholders. His argues that these resolutions rarely pass, however they cost the companies tens of millions of dollars a year to field votes.
There are two problems with the logic of this argument. First, we have no sense of the potential payoffs from these resolutions. Since most corporations are largely controlled by top management they able to secure pay for themselves that is two or three times what they would get working in comparable positions in countries like Germany or Japan. If a resolution can bring compensation more in line with the company’s international competitors, it can save shareholders hundreds of millions of dollars a year in excessive payments.
The other issue is whether these resolutions might result in changes in corporate behavior even if they are not passed. The study from the Manhattan Institute which provided the basis for the column did not consider this issue. If a resolution causes companies to change their behavior by calling attention to improper practices then it can have large benefits for shareholders even if it is not approved.
That’s the complaint of Steven Davidoff Solomon in a NYT column today. His complaint is that three people, who are small shareholders, repeatedly bring resolutions that have to be voted on by all shareholders. His argues that these resolutions rarely pass, however they cost the companies tens of millions of dollars a year to field votes.
There are two problems with the logic of this argument. First, we have no sense of the potential payoffs from these resolutions. Since most corporations are largely controlled by top management they able to secure pay for themselves that is two or three times what they would get working in comparable positions in countries like Germany or Japan. If a resolution can bring compensation more in line with the company’s international competitors, it can save shareholders hundreds of millions of dollars a year in excessive payments.
The other issue is whether these resolutions might result in changes in corporate behavior even if they are not passed. The study from the Manhattan Institute which provided the basis for the column did not consider this issue. If a resolution causes companies to change their behavior by calling attention to improper practices then it can have large benefits for shareholders even if it is not approved.
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The Washington Post had an article on grassroots efforts to try to influence the Federal Reserve Board’s decisions on monetary policy. It would have been helpful if the piece provided more background on the Fed’s institutional structure and decision-making process.
The Fed’s decisions on monetary policy (e.g. raising or lowering interest rates and quantitative easing) are made by the 19 member Federal Reserve Open Market Committee (FOMC). This committee includes seven governors who are appointed by the President and approved by Congress. The term is 14 years, although governors rarely serve out a full term. The chair is one of the seven governors, although their term as chair is just 4 years.
The other 12 members of the FOMC are the presidents of the district banks. These presidents are essentially appointed by the banks within the district. Only five of the 12 bank presidents have a vote. The president of the New York bank always has a vote, with the other 4 voting slots rotating annually among the other 11 bank presidents. This structure ensures that the banking industry’s concerns will get a full hearing at Fed meetings. The concerns of workers whose jobs and wages depend on the Fed’s decisions may not be heard.
At one point the article discusses public protests against Paul Volcker’s decision to raise interest rates when he was chair of the Fed in the early 1980s. It tells readers that the protests did not affect Volcker’s decisions at all. Whether or not this is true, that does not mean that the protests had no impact on the Fed’s actions. Volcker had to get the support of the majority of the FOMC to get his way on monetary policy. If the protests affected the views of other members then Volcker would have been forced to take these views into account in setting policy. For this reason the focus on Volcker badly misleads readers on the potential impact of public protests.
In assessing the potential impact of public protests on Fed policy it is perhaps worth going back to the 1990s when there were also some public efforts, sponsored by unions and community groups, to influence Fed policy. In the years 1995-1996 the unemployment rate was falling below the 6.0 percent threshold that nearly all mainstream economists considered a floor. The conventional view held that if the unemployment rate fell below this level it would cause inflation to start to cycle upward.
Alan Greenspan, who was not a mainstream economist, was chair of the Fed at the time. He argued that there was little evidence of inflationary pressures and therefore no reason to raise interest rates and slow the economy. He had to overcome the opposition of several prominent FOMC members, including the current chair Janet Yellen, who was a governor at the time. Because there were public efforts to keep interest rates down, Greenspan did not have to worry about a strong consensus in the policy world for raising interest rates. This made it easier for him to carry the day and keep interest rates low.
The benefits from this decision were enormous. By allowing the unemployment rate to fall below 6.0 percent (it eventually hit 4.0 percent as a year-round average in 2000) more than 5 million people were able to get jobs. Furthermore, the tighter labor market allowed tens of millions of workers at the middle and the bottom of the wage distribution to see sustained wage gains for the first time since the early 1970s.
And, for those deficit cultists in Washington, the lower unemployment and more rapid growth led to a large improvement in the budget situation. Instead of the deficit of 2.3 percent of GDP projected by the Congressional Budget Office for 2000, back in 1996, the government actually ran a surplus of 2.5 percent of GDP. This shift from deficit to surplus of almost 5 percent of GDP would be the equivalent of $850 billion in 2014, or to use the full 10-year budget horizon, the equivalent of almost $10 trillion in deficit reduction.
The moral of the story is first, that public pressure on the Fed can have an impact on its decisions, which otherwise are likely to be far too responsive to bankers’ concerns about inflation. The second, and at least as important, moral is that the consensus in the economics profession is often completely off the mark. This was certainly true in the 1990s when economists across the political spectrum agreed that the unemployment rate could not fall much below 6.0 percent without triggering inflation. The country would have paid an enormous price if mainstream economists had been able to determine policy back then. There is little reason to believe that the mainstream of the economics profession has a better understanding of the economy today.
The Washington Post had an article on grassroots efforts to try to influence the Federal Reserve Board’s decisions on monetary policy. It would have been helpful if the piece provided more background on the Fed’s institutional structure and decision-making process.
The Fed’s decisions on monetary policy (e.g. raising or lowering interest rates and quantitative easing) are made by the 19 member Federal Reserve Open Market Committee (FOMC). This committee includes seven governors who are appointed by the President and approved by Congress. The term is 14 years, although governors rarely serve out a full term. The chair is one of the seven governors, although their term as chair is just 4 years.
The other 12 members of the FOMC are the presidents of the district banks. These presidents are essentially appointed by the banks within the district. Only five of the 12 bank presidents have a vote. The president of the New York bank always has a vote, with the other 4 voting slots rotating annually among the other 11 bank presidents. This structure ensures that the banking industry’s concerns will get a full hearing at Fed meetings. The concerns of workers whose jobs and wages depend on the Fed’s decisions may not be heard.
At one point the article discusses public protests against Paul Volcker’s decision to raise interest rates when he was chair of the Fed in the early 1980s. It tells readers that the protests did not affect Volcker’s decisions at all. Whether or not this is true, that does not mean that the protests had no impact on the Fed’s actions. Volcker had to get the support of the majority of the FOMC to get his way on monetary policy. If the protests affected the views of other members then Volcker would have been forced to take these views into account in setting policy. For this reason the focus on Volcker badly misleads readers on the potential impact of public protests.
In assessing the potential impact of public protests on Fed policy it is perhaps worth going back to the 1990s when there were also some public efforts, sponsored by unions and community groups, to influence Fed policy. In the years 1995-1996 the unemployment rate was falling below the 6.0 percent threshold that nearly all mainstream economists considered a floor. The conventional view held that if the unemployment rate fell below this level it would cause inflation to start to cycle upward.
Alan Greenspan, who was not a mainstream economist, was chair of the Fed at the time. He argued that there was little evidence of inflationary pressures and therefore no reason to raise interest rates and slow the economy. He had to overcome the opposition of several prominent FOMC members, including the current chair Janet Yellen, who was a governor at the time. Because there were public efforts to keep interest rates down, Greenspan did not have to worry about a strong consensus in the policy world for raising interest rates. This made it easier for him to carry the day and keep interest rates low.
The benefits from this decision were enormous. By allowing the unemployment rate to fall below 6.0 percent (it eventually hit 4.0 percent as a year-round average in 2000) more than 5 million people were able to get jobs. Furthermore, the tighter labor market allowed tens of millions of workers at the middle and the bottom of the wage distribution to see sustained wage gains for the first time since the early 1970s.
And, for those deficit cultists in Washington, the lower unemployment and more rapid growth led to a large improvement in the budget situation. Instead of the deficit of 2.3 percent of GDP projected by the Congressional Budget Office for 2000, back in 1996, the government actually ran a surplus of 2.5 percent of GDP. This shift from deficit to surplus of almost 5 percent of GDP would be the equivalent of $850 billion in 2014, or to use the full 10-year budget horizon, the equivalent of almost $10 trillion in deficit reduction.
The moral of the story is first, that public pressure on the Fed can have an impact on its decisions, which otherwise are likely to be far too responsive to bankers’ concerns about inflation. The second, and at least as important, moral is that the consensus in the economics profession is often completely off the mark. This was certainly true in the 1990s when economists across the political spectrum agreed that the unemployment rate could not fall much below 6.0 percent without triggering inflation. The country would have paid an enormous price if mainstream economists had been able to determine policy back then. There is little reason to believe that the mainstream of the economics profession has a better understanding of the economy today.
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This is the issue that Andrew Biggs implicitly raises in his Wall Street Journal column highlighting the jump in the size of the projections of the Social Security shortfall since 2008. Biggs complains that progressives have responded to the economic collapse by proposing an increase in benefits that would make the shortfall even larger rather than supporting plans for eliminating the projected shortfall. While Biggs’ focus is explicitly the solvency of the program, the actions of progressives can only be understood against the larger economic context.
The calls for expansion of benefits are at least in part a response to the economic collapse.It’s worth noting that this collapse was 100 percent preventable and that it was one of the worst blunders in the history of economic policy-making in the history of the world. Unfortunately the top economic advisers in both political parties whose errors were responsible did not have their standing affected by this mistake.
As a result of the collapse, many people nearing retirement saw much of their savings disappear as the stock market collapsed, house prices plummeted and they lost their jobs during their peak savings years. This meant that millions of workers had to draw down their savings to support their families at a point where they had planned to be accumulating wealth for retirement. In addition, due to the weakness of the labor market created by high unemployment, tens of millions of workers have seen stagnant wages over the last six years when they could have expected to see real wage growth in the neighborhood of 1.0 percent annually had the economy continued on the path projected in 2008.
In short, the collapse hugely increased the need for Social Security, which is the basis for the response of progressives. Biggs is correct that the cost of additional benefits will have to be covered at some point, but there is no obvious reason that it is necessary to come up with the full plan today. Part of the cost can be recovered by increasing the payroll cap as has been proposed by people across the political spectrum.
It is likely that we will need some increase in the payroll tax at some point, but there is little reason that the exact timing needs to be pinned down today. In the decade from 1980 to 1990 the payroll tax increased by over 2.0 percentage points. In spite of this hike, many conservatives tout the eighties as an economic golden age. It is difficult to see why it would be such a disaster if there were a comparable increase somewhere over the next three decades.
Workers care about their after-tax wages which are primarily determined by what they earn before taxes. Due to economic mismanagement and trade and regulatory policies that were designed to redistribute income upward, most workers have seen very little growth in before-tax wages over the last three decades. If they get an even share of the projected growth in compensation over the next three decades, then before tax compensation will be almost 60 percent higher in 2044 than it is today. It is understandable that progressives would be more focused on ensuring that workers get their fair share of economic growth than the risk 3-4 percent of these gains might be taken back in tax increases to support their retirement.
This is the issue that Andrew Biggs implicitly raises in his Wall Street Journal column highlighting the jump in the size of the projections of the Social Security shortfall since 2008. Biggs complains that progressives have responded to the economic collapse by proposing an increase in benefits that would make the shortfall even larger rather than supporting plans for eliminating the projected shortfall. While Biggs’ focus is explicitly the solvency of the program, the actions of progressives can only be understood against the larger economic context.
The calls for expansion of benefits are at least in part a response to the economic collapse.It’s worth noting that this collapse was 100 percent preventable and that it was one of the worst blunders in the history of economic policy-making in the history of the world. Unfortunately the top economic advisers in both political parties whose errors were responsible did not have their standing affected by this mistake.
As a result of the collapse, many people nearing retirement saw much of their savings disappear as the stock market collapsed, house prices plummeted and they lost their jobs during their peak savings years. This meant that millions of workers had to draw down their savings to support their families at a point where they had planned to be accumulating wealth for retirement. In addition, due to the weakness of the labor market created by high unemployment, tens of millions of workers have seen stagnant wages over the last six years when they could have expected to see real wage growth in the neighborhood of 1.0 percent annually had the economy continued on the path projected in 2008.
In short, the collapse hugely increased the need for Social Security, which is the basis for the response of progressives. Biggs is correct that the cost of additional benefits will have to be covered at some point, but there is no obvious reason that it is necessary to come up with the full plan today. Part of the cost can be recovered by increasing the payroll cap as has been proposed by people across the political spectrum.
It is likely that we will need some increase in the payroll tax at some point, but there is little reason that the exact timing needs to be pinned down today. In the decade from 1980 to 1990 the payroll tax increased by over 2.0 percentage points. In spite of this hike, many conservatives tout the eighties as an economic golden age. It is difficult to see why it would be such a disaster if there were a comparable increase somewhere over the next three decades.
Workers care about their after-tax wages which are primarily determined by what they earn before taxes. Due to economic mismanagement and trade and regulatory policies that were designed to redistribute income upward, most workers have seen very little growth in before-tax wages over the last three decades. If they get an even share of the projected growth in compensation over the next three decades, then before tax compensation will be almost 60 percent higher in 2044 than it is today. It is understandable that progressives would be more focused on ensuring that workers get their fair share of economic growth than the risk 3-4 percent of these gains might be taken back in tax increases to support their retirement.
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That’s what can be inferred from his column calling for an end to tenure for public school teachers. Job security is part of the pay package for public school teachers. If they can expect less job security, it effectively amounts to a cut in pay. This would be expected to make teaching a less attractive career path compared with the alternative choices.
As a practical matter, there are few (if any) school districts that do not have provisions that allow even tenured teachers to be fired if they are not competent. This may not happen in many cases because their principals are too lazy to document the incompetence, or the higher ups in the school district don’t provide them the resources they would need to ensure that classes are being well-taught. These latter problems will not be addressed by the ending of tenure.
That’s what can be inferred from his column calling for an end to tenure for public school teachers. Job security is part of the pay package for public school teachers. If they can expect less job security, it effectively amounts to a cut in pay. This would be expected to make teaching a less attractive career path compared with the alternative choices.
As a practical matter, there are few (if any) school districts that do not have provisions that allow even tenured teachers to be fired if they are not competent. This may not happen in many cases because their principals are too lazy to document the incompetence, or the higher ups in the school district don’t provide them the resources they would need to ensure that classes are being well-taught. These latter problems will not be addressed by the ending of tenure.
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The Washington Post had an article reporting on the more rapid job growth in higher paying sectors of the economy in the last six years. At one point the piece tells readers:
“Even before the recession began, the economy was experiencing what academics call job polarization: growth at the high and low ends of the pay scale, but not much movement in the middle. Two major factors drove this shift: new technologies that replaced some skilled workers and increased competition from the international labor market.”
Actually this is not true. Since 2000 both high and middle wage occupations were declining as a share of total employment. Only low-paying occupations saw an increase in their share of total employment.
The Washington Post had an article reporting on the more rapid job growth in higher paying sectors of the economy in the last six years. At one point the piece tells readers:
“Even before the recession began, the economy was experiencing what academics call job polarization: growth at the high and low ends of the pay scale, but not much movement in the middle. Two major factors drove this shift: new technologies that replaced some skilled workers and increased competition from the international labor market.”
Actually this is not true. Since 2000 both high and middle wage occupations were declining as a share of total employment. Only low-paying occupations saw an increase in their share of total employment.
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The Washington Post had a major front page story reporting on scammers pushing unneeded motorized wheelchairs to seniors. Medicare pays roughly $5,000 for each chair, which allows for a large profit to suppliers as well as payments to intermediaries who would push the chairs to people who did not need or want a motorized wheelchair.
The piece is a useful exposure of a major scam operation, however it never puts the cost of the scam in a perspective that would be meaningful to most readers. At one point it tells readers that Medicare spent a Really Big Number ($8.2 billion) on these motorized wheelchairs since 1999. It would have been helpful to inform readers that this amounted to 0.14 percent of the $5.8 trillion that Medicare paid out over this period.
Of course not all of the payments were made for unnecessary wheel chairs. If 60-70 percent of the wheel chairs were not needed, then fraudulent sales would come to roughly 0.1 percent of Medicare spending over this period.
This is hardly a trivial sum, but by failing put the numbers in context readers may wrongly be lead to believe that the Medicare program is grossly inefficient because of such scams. In fact, because the program has much lower administrative costs than the private sector (@ 2 percent for Medicare compared to 15-20 percent for private insurers), the country is still saving an enormous amount of money because the government is providing Medicare rather than private insurers.
If administrative costs were at the level of the insurance industry, Medicare would have cost between $600 billion and $900 billion more since 1999. It is also worth noting that private insurers are also often victims of scams.
Note: The figure for administrative costs for Medicare refers to the traditional fee for service Medicare program. Parts C and D, which are administered by private insurers, have considerably higher costs.
The Washington Post had a major front page story reporting on scammers pushing unneeded motorized wheelchairs to seniors. Medicare pays roughly $5,000 for each chair, which allows for a large profit to suppliers as well as payments to intermediaries who would push the chairs to people who did not need or want a motorized wheelchair.
The piece is a useful exposure of a major scam operation, however it never puts the cost of the scam in a perspective that would be meaningful to most readers. At one point it tells readers that Medicare spent a Really Big Number ($8.2 billion) on these motorized wheelchairs since 1999. It would have been helpful to inform readers that this amounted to 0.14 percent of the $5.8 trillion that Medicare paid out over this period.
Of course not all of the payments were made for unnecessary wheel chairs. If 60-70 percent of the wheel chairs were not needed, then fraudulent sales would come to roughly 0.1 percent of Medicare spending over this period.
This is hardly a trivial sum, but by failing put the numbers in context readers may wrongly be lead to believe that the Medicare program is grossly inefficient because of such scams. In fact, because the program has much lower administrative costs than the private sector (@ 2 percent for Medicare compared to 15-20 percent for private insurers), the country is still saving an enormous amount of money because the government is providing Medicare rather than private insurers.
If administrative costs were at the level of the insurance industry, Medicare would have cost between $600 billion and $900 billion more since 1999. It is also worth noting that private insurers are also often victims of scams.
Note: The figure for administrative costs for Medicare refers to the traditional fee for service Medicare program. Parts C and D, which are administered by private insurers, have considerably higher costs.
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Floyd Norris has an interesting column comparing the numbers of job openings, hirings, and quits from 2007 with the most recent three months in 2014. The most striking part of the story is that reported openings are up by 2.1 percent from 2007, while hirings are still down by 7.5 percent.
While Norris doesn’t make this point, some readers may see this disparity as evidence of a skills gap, where workers simply don’t have the skills for the jobs that are available. If this is really a skills gap story then it seems that it is showing up most sharply in the retail and restaurant sectors. (Data are available here.) Job openings in the retail sector are up by 14.6 percent from their 2007 level, but hires are down by 0.7 percent. Job opening in the leisure and hospitality sector are up by 17.0 percent, while hiring is down by 7.4 percent.
If the disparity between patterns in job openings and hires is really evidence that workers lack the skills for available jobs then perhaps we need to train more people to be clerks at convenience stores and to wait tables.
Floyd Norris has an interesting column comparing the numbers of job openings, hirings, and quits from 2007 with the most recent three months in 2014. The most striking part of the story is that reported openings are up by 2.1 percent from 2007, while hirings are still down by 7.5 percent.
While Norris doesn’t make this point, some readers may see this disparity as evidence of a skills gap, where workers simply don’t have the skills for the jobs that are available. If this is really a skills gap story then it seems that it is showing up most sharply in the retail and restaurant sectors. (Data are available here.) Job openings in the retail sector are up by 14.6 percent from their 2007 level, but hires are down by 0.7 percent. Job opening in the leisure and hospitality sector are up by 17.0 percent, while hiring is down by 7.4 percent.
If the disparity between patterns in job openings and hires is really evidence that workers lack the skills for available jobs then perhaps we need to train more people to be clerks at convenience stores and to wait tables.
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