Is it time to sink the sunk cost?

Is it time to sink the sunk cost? – Former President Bill Clinton said during a panel discussion in South Africa that it may become necessary to blow up the Deepwater Horizon well that continues to spew oil into the Gulf of Mexico.  "Unless we send the Navy down deep to blow up the well and cover the leak with piles and piles and piles of rock and debris, which may become necessary – you don’t have to use a nuclear weapon by the way, I’ve seen all that stuff, just blow it up – unless we’re going to do that, we are dependent on the technical expertise of these people from BP," Clinton said.  There has been some pressure for BP to simply blow up the well, with critics suggesting the company is forgoing that option out of a desire to get as much oil as possible from the rig.  "If we demolish the well using explosives, the investment’s gone," "They lose hundreds of millions of dollars from the drilling of the well, plus no lawmaker in his right mind would allow BP to drill again in that same spot. So basically, it’s an all-or-nothing thing with BP: They either keep the well alive, or they lose their whole investment and all the oil that they could potentially get from that well."
 
 State and Local Tax Revenue increased slightly compared to Q1 2009 -The Census Bureau reported this morning that state and local tax revenues grew 0.8% in the first quarter 2010 compared to Q1 2009. This was the second straight quarter of growth compared to the same quarter of the previous year.  Individual income tax increased 2.7% compared to Q1 2009. General sales tax revenues increased 0.3%. Corporate income tax declined 5.4%. Property taxes declined 0.6% (the first year-over-same quarter decline since 2003). This graph shows state and local tax revenue on a rolling 4 quarter basis (this removes seasonality).  The three main sources of revenue are property taxes, sales taxes and personal income taxes. Property taxes tend to be the most stable, even with the sharp drop in real estate prices.  Most of the decline in revenue during the recession came from sharp declines in personal income and sales taxes.
 

Do Hungry People Take Bigger Financial Risks? –That is one possible implication of a fascinating new study, which finds that people who are hungry are more risk-seeking, and people who are sated are more risk-averse. Researchers put study subjects on different diets to affect their metabolic states, and then week after week gave them options to participate in different kinds of lotteries. Some of the lotteries were riskier than others, in terms of their expected and potential payouts. Generally speaking, when subjects were in hungrier states, they chose the riskier lottery options, and when they were full, they choose safer lotteries. The authors suggest that this means metabolic states, and the hormones associated with them, can affect our appetite for all sorts of risks. From the study:Changes in metabolic state systematically altered economic decision making …

More than yuan problem – MENZIE CHINN passes along analysis of the challenge of Chinese rebalancing from Arthur Kroeber:A major theme of recent discussions of China’s economy is the need for "rebalancing" — a shift away from an investment- and export-intensive growth model that created excess industrial capacity, big trade surpluses and bloated corporate profits, to a more domestically-driven growth pattern where consumer spending plays a bigger role.The house view on this hot topic is straightforward. We believe that China’s external "imbalance" — a current account surplus that peaked at over 11% of GDP in 2007 — mainly reflected domestic structural problems. The undervalued exchange rate that obsesses foreign analysts was decidedly secondary. The path to rebalancing therefore lies in comprehensive domestic reforms, including increased social service spending (to reduce household precautionary saving), deregulation of service markets (to encourage more private investment in non-tradable sectors), infrastructure investment (to better integrate domestic markets) and financial and fiscal reforms to discourage excessive investment in heavy industry and real estate. .

2nd Half: Slowdown or Double-Dip? – No one has a crystal ball, but it appears the U.S. economy will slow in the 2nd half of 2010. For the unemployed and marginally employed, and for many other Americans suffering with too much debt or stagnant real incomes, there is little difference between slower growth and a double-dip recession. What matters to them is jobs and income growth. In both cases (slowdown or double-dip), the unemployment rate will probably increase and wages will be under pressure. It is just a matter of degrees. The arguments for a slowdown and double-dip recession are basically the same: less stimulus spending, state and local government cutbacks, more household saving impacting consumption, another downturn in housing, and a slowdown and financial issues in Europe and a slowdown in China. It is only a question of magnitude of the impact.

 Robert Shiller Says the Depression Scare is Back (video) Cutting government spending, raising taxes, raising interest rates, and hoping the rest of the world does the same as some have called for is not the answer to the threat of a depression. If people don’t begin to see unemployment falling soon, or some strong signal that employment markets will improve soon, pessimism is going to build — the optimism some people may have felt is fading and you can feel it building now, and that’s one of Shiller’s worries. Cutting monetary and fiscal stimulus at a time when people are becoming more pessimistic about the economy’s prospects will make things worse, not better. As I’ve said before, and will continue saying so long as these misguided ideas persist, if anything, monetary and fiscal policy should be more aggressive right now.

 

Recovery Faces Tough Road, Double Dip or Not – Now, especially after Tuesday’s alarming 9.8-point drop in the Conference Board’s index of U.S. consumer confidence, the words “double dip” stand for a far less amusing idea: a return to recession. While that’s not a consensus forecast among economists, both the data and the gloom pervading financial markets suggest the current recovery will be a long, painful process.As some observers pointed out during the recession of 2008-2009, this recovery wouldn’t match the fast rebound that followed the past two recessions. Whereas those involved a traditional business cycle reversal, this one was provoked by a financial crisis and so would be dogged by the spending restraint with which consumers, businesses and governments pared down debt.

Why Auto-enroll 401(k)s May Reduce Retirement Savings – For the past decade, policymakers and pension experts have encouraged employers to increase worker participation in 401(k) plans by automatically enrolling their employees in these retirement programs. And it works. One study concludes that participation  among new hires nearly doubles—from less than half to nearly 90 percent—when workers are auto-enrolled.But important new research by the IMF’s Mauricio Soto and Urban Institute’s Barbara Butrica finds there may be a downside: While more employees enroll thanks to the opt-out design, their employers are likely to match less of their contributions. And that might actually reduce the level of overall pension contributions for some workers. No good deed, as they say, goes unpunished.  In many ways, auto-enrollment makes a lot of sense. Because inertia is so powerful, new workers often don’t bother to fill out the paperwork to participate in 401(k)s. But if their employers sign them up, few workers take the trouble to disenroll even though they are allowed to do so. The 2006 Pension Protection Act as well as 2009 Internal Revenue Service regs are intended to further encourage employers to auto-enroll their workers.

John Boehner Steps On The Third Rail – House Minority Leader John Boehner suggested in an interview today that the Social Security retirement age should be raised: He said he’d favor increasing the Social Security retirement age to 70 for people who have at least 20 years until retirement, tying cost-of-living increases to the consumer price index rather than wage inflation and limiting payments to those who need them. “We need to look at the American people and explain to them that we’re broke,” Boehner said. “If you have substantial non-Social Security income while you’re retired, why are we paying you at a time when we’re broke? We just need to be honest with people.” Boehner also proposed other changes to the Social Security System in this video:

  That’s One Way to Get Out of Student Loan Debt – So you can’t get your student loans discharged in a bankruptcy. Have you tried suing your parents instead? From The Connecticut Law Tribune:It’s But even experienced attorneys say it’s rare when the disagreements grow to a point where litigation is required. So consider the odd case of Dana Soderberg, who went to court to force her father to live up to a deal to pay her tuition at Southern Connecticut State University. After Ms. Soderberg’s parents divorced in 2004, she convinced her father to sign a contract committing to pay for the costs of her education until she reached age 25. He lived up to the deal for a while, but then stopped paying before her senior year of college began, the article says. Earlier this month the judge ruled that the father had indeed breached the contract.

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