: Toil and Trouble

Guest Post: Eurocrisis: We knew all we needed to know… Yves here. The alternative title for this post could be “No ‘whocouldanode’ excuses for the Eurozone crisis.” Many policymakers have reacted to both the financial crisis and the recent Eurozone sovereign debt problems as though they were unexpected. This column argues that we knew more than enough to anticipate both problems, that the evidence was easily accessible, and that the institutional and political weaknesses of the Eurozone were hardly a mystery either. We have long known that financial market stability cannot automatically be achieved. There is historical evidence aplenty (Kindleberger 1989; Galbraith 1993, 1995), and adequate theoretical explanations of the phenomenon1. Scholars have long debated the costs and benefits of financial openness (Bordo et al. 2001; King and Levine 1993; Demetriades and Hussain 2006) and/or possible systems of regulation and supervision (Steil 1994; Barth et al. 2006). As I argue in a recent CEPR Discussion Paper (Underhill 2010), the writing was all over the library walls.

 Toil and Trouble – When economists and policy types and members of Congress talk about older Americans working past normal retirement age, an increasing theme of late, we tend to think they mean a few years beyond age 65, right? Working until ages 68 or 69, that is — maybe even 70, though that might be pushing it.  I was intrigued to hear from the ace data-crunchers at AARP that in the past 20 years the oldest group of workers, the 75-plus work force, has increased enormously. Seventy-five! And not only because there are simply more people that age around, but also because a higher percentage of them are participating in the labor force. Sifting through the data from the Bureau of Labor Statistics, AARP analysts found that the number of workers ages 75 and older (meaning they’re employed or seeking employment) has grown to about 1.3 million in 2009, from just under half a million in 1989. That’s still a small sliver of the population over age 75, just 7.3 percent, but a big jump from the 1989 labor force participation rate of 4.3 percent. We know that a growing proportion of this work force, almost 44 percent, are women. And a just-released Census Bureau report adds this surprising fact: of workers ages 75 to 84, more than 42 percent hold full-time jobs.

Older Workers and the Lump of Labor Fallacy – Paula Span writes an excellent piece about older workers in the NY Times: Toil and Trouble. Paula Span notes that this trend has been going on for some time, and can’t just be blamed on necessity. This graph is from my posts on Labor Force Participation Rate: What will happen? and Labor Force Participation Trends, Over 55 Age Groups  The graph shows the participation rate for several over 55 age groups. The red line is the ’55 and over’ total seasonally adjusted. All of the other age groups are Not Seasonally Adjusted (NSA). The participation rate is trending up for all older age groups.Span concluded:  So to that Wisconsin reader who grumped, “Too many older people (professors, Morley Safer, etc.) continue to work for selfish reasons, thereby taking jobs from the young and unemployed” — I’m afraid you ain’t seen nothin’ yet. That is a classic lump of labor fallacy. This is a common error people make with immigration – that immigrants displace other workers, when in fact immigration increases the size of the economy.
 
Revenue stop is big challenge for Pennsylvania budget – At first it seems like a paradox. The current $28 billion state budget is reasonably close to being in balance. State revenue growth is picking up as far as corporate taxes and sales taxes are concerned. Cost-cutting measures such as layoffs of state employees have yielded savings. So an assumption could be made that Pennsylvania’s years of fiscal turmoil are nearing an end. That’s not the case. A huge deficit ranging from $3 billion to $4 billion is projected for the 2011-12 budget, the first one for incoming Gov. Tom Corbett. The reason things are still headed south is that chunks of revenue that propped up the last two painful state budgets are disappearing. The biggest loss will come with the end of $2.6 billion in federal stimulus aid to Pennsylvania and another $750 million in one-time revenue transfers from other special state funds.It’s a predicament facing other states as well. "While state revenues are starting to pick up, the growth is unlikely to be sufficient to replace expiring ARRA (American Recovery and Reinvestment Act) funds or cover projected increases in program areas such as Medicaid and K-12 education," said the National Conference of State Legislatures in a recent report.

Bond Fund Investors Pull Most Money in Two Years – Bond mutual funds had the biggest client withdrawals in more than two years last week as a flight from fixed-income investments accelerated. U.S. bond funds experienced withdrawals of $8.62 billion in the week ended Dec. 15, up from $1.66 billion the week before, according to a release from the Investment Company Institute, a Washington-based trade group. Last week’s withdrawals were the largest since the week ended Oct. 15, 2008, when investors yanked $17.6 billion from bond funds.  Investors are retreating from bond funds after signs of an economic recovery and a stock market rally increased speculation that interest rates may rise. The selloff in Treasuries accelerated after the Federal Reserve last month pledged to buy $600 billion in assets to revive the economy. The 10-year note yields 3.35 percent, up from 2.49 percent Nov. 4, according to data compiled by Bloomberg.

 

MBA: mortgage applications down 18.6% last week – Mortgage application volume continues to decline with a huge drop last week, as interest rates remain on an upward swing and demand for refinancings plummets. The Mortgage Bankers Association said its market composite index decreased 18.6% for the week ended Dec. 17 on a seasonally adjusted basis. Unadjusted, the index fell 20% from the prior week. Refinancing applications have decreased for six consecutive weeks and volume is at the lowest point since the end of April after another 24.6% drop last week. The seasonally adjusted purchase index fell 2.5% last week. The unadjusted purchase index declined 4.9% and was 8.4% lower than a year earlier. In four-week moving averages, the seasonally adjusted market index is down 9.8%, the purchase index is down 1.2% and the refinance index is down 12.7%. The refinancing share of all mortgage applications fell to the lowest point since early June at 72.3% down from 76.7% the week earlier.

 
The United States of Disintegration – The story of the day must be Steve Kroft’s 60 Minutes segment that aired yesterday under the title “The Day of Reckoning” (see video below). While it’s sort of a shame Kroft didn’t interview, say, California’s outgoing and incoming governors Arnold Schwarzenegger or Jerry Brown, there’s still plenty of good stuff in the show, in particular his conversations with Meredith Whitney and New Jersey Governor Chris Christie.  Whitney predicts -at least- between 50 and 100 municipal and county defaults in the US within the next year. "You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars’ worth of defaults."  Christie is his usual "lovable" blunt self: "I have no money". Or this gem about public employee pension systems: “I think the general public thinks: I can’t believe anyone gets a pension anymore". And on the same topic: "If you don’t partner with me to get this done, in 10 years you won’t have a pension". Only the Federal Government can go over budget -seemingly- as much as it wants; lower levels of government need to balance their budgets. And they can’t.
 
Huh? Post-Christmas Sales Four Days BEFORE Christmas -This holiday shopping season got off to a start with Black Friday sales starting way before Black Friday, and continued with Black Friday sales lasting way after Black Friday. Based on this kind of logic, it should come as no surprise that retailers are offering after-Christmas sales well before Christmas.The WSJ reports strong retail sales as Christmas nears, thanks in large part to an onslaught of big discounts, sales, and promotions.Because shoppers are accustomed to hefty markdowns, it’s harder and harder to get consumers excited for yet another 30% off sale. So one retailer, Aeropostale, is jumping the shark by doing some time travel, offering "After Christmas Prices Now" in select styles.
Health Care: Regulatory Inconsistency – When an elderly patient is in the hospital suffering from dementia, depression or schizophrenia, the hospital nurses may administer any psychoactive or anti-psychotic drug ordered by the physician within normal protocols and practices. When the patient becomes a nursing home resident a few days later, the resident will often be denied the medication (even possibly anti-seizure meds) because the medication is assumed to be a "chemical restraint," and the facility needs time to clear the regulatory hurdles.  (The federal government assumes nurses drug residents into stupors so the nurses don’t have to work as hard, ignoring that nurses cannot administer a vitamin without a physician’s order.)

Alabama Town’s Failed Pension Is a Warning – This struggling small city on the outskirts of Mobile was warned for years that if it did nothing, its pension fund would run out of money by 2009. Right on schedule, its fund ran dry.  Then Prichard did something that pension experts say they have never seen before: it stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full.  Since then, Nettie Banks, 68, a retired Prichard police and fire dispatcher, has filed for bankruptcy. Alfred Arnold, a 66-year-old retired fire captain, has gone back to work as a shopping mall security guard to try to keep his house. Eddie Ragland, 59, a retired police captain, accepted help from colleagues, bake sales and collection jars after he was shot by a robber, leaving him badly wounded and unable to get to his new job as a police officer at the regional airport.  Far worse was the retired fire marshal who died in June. Like many of the others, he was too young to collect Social Security. “When they found him, he had no electricity and no running water in his house,” said David Anders, 58, a retired district fire chief. “He was a proud enough man that he wouldn’t accept help.”

 
Consumption, Imports and the Prospects for US External Balances – Most forecasts incorporate a resurgence in the US trade and current account deficits. This projection makes sense to the extent that the US is expected to grow faster than Europe and Japan, and the estimated income elasticity of US imports exceeds that of US exports (the Houthakker-Magee finding [0]). Here’s a summary of forecasts for the current account. The only forecast that indicates a CA deficit reduction is the IMF’s. (The Fed’s forecasting framework has similar predictions [1], [paper]) What would alter the basic thrust of these projections? Changes in the assumed income growth rate and value of the US dollar would obviously have an impact. But higher price elasticities (as discussed here), or a reduction in the income elasticity asymmetry could also imply a different path for the external accounts. With regard to the latter, a change in the behavior of consumers with respect to imported goods (see previous discussion here). So, while total real consumption has almost returned to its pre-recession peak in 2007Q4 (per capita is still below), total consumption of goods has not (it’s about 1% below peak).
  MBIA May Use Statistical Sampling in Bank of America Fraud Suit – Bank of America Corp. lost a bid to prevent MBIA Inc. from using statistical sampling to pursue repurchase demands in a lawsuit claiming it was fraudulently induced to insure $21 billion in mortgage-backed securities. MBIA asked New York State Supreme Court Judge Eileen Bransten to allow company lawyers to develop evidence using samples from 368,000 mortgages in 15 securitized pools to establish its fraud claims, rather than go through each loan. Proceeding loan by loan might lead to “a delay of several years before trial,” Philippe Z. Selendy, an attorney for Armonk, New York-based MBIA, said in an Oct. 13 letter to the judge. “The court does not find any prejudice in deciding the motion before it and allowing the use of statistically significant samples of the securitizations at issue,” Bransten ruled yesterday. She said the defendants could also choose to use their “own sampling chosen in a statistically valid manner” to rebut MBIA’s arguments.
 
Is the Mortgage Interest Deduction a “Middle-class” benefit? – Yesterday, I was on the Larry Mantle program on KPCC debating Lawrence Yun, chief economist of NAR, about the merits of the mortgage interest deduction.  He sort of dissed renters, by saying they pay only five percent of federal income taxes, ignoring the fact that they pay FICA, state and local taxes.  One would think Realtors would like renters, since they do, after all, pay rent to property owners.  But he also characterized the mortgage interest deduction as being a "middle-class" deduction.  This all depends on the defintion of "middle-class." Let me turn to Eric Toder and colleagues: The percentage reduction in after-tax income from eliminating the deduction would be largest for taxpayers in the 80th to 99th percentiles of the distribution. These upper-middle-income households would be affected more than tax units in the bottom four quintiles because they are more likely to own homes and itemize deductions and because the higher marginal tax rates they face make deductions worth more to them than to lower-income taxpayers.  The bottom 80 percent don’t benefit much, because their marginal tax rates are low, they are more likely to be renters and perhaps don’t itemize their tax deductions.  My guess is that people between the 80th and 99th percentile don’t need a lot of encouragement to become homeowners.
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