Thursday, October 30, 2014

Mary, Mary: 'Quite to the contrary, I wasn't fired.'

It's just that my family re-organized the business, and my job was eliminated. So I decided to go snowboarding.

That's Wisconsin heiress Mary Burke's story, and she's sticking to it as her campaign for Governor implodes;
A former employee with the company [Trek Bicycle Corp.] told Wisconsin Reporter that John Burke, Mary’s brother and current Trek president, had to let his sister go.
The former employee, who asked not to be identified for fear of reprisal from the Burke family, said Mary Burke was made to return to Wisconsin and apologize to a group of about 35 Trek executives for her treatment of employees and for the plummeting European bottom line.
Managers in Europe used to call Burke “pit bull on crack” or “Attila the Hun,” one source said.
“She never made money in Europe when she was there Germany was gushing blood and it would take profitability from everywhere else,” the former employee said.
Sounds like the perfect Wisconsite liberal to us.

Emmanuel, help Laura out

The word she's looking for at about 39-1/2 minutes is touché. Which comes after about 20 minutes of maneuvering around the persistent Dean Rich Lyons' questioning of Emmanuel Saez and Laura Tyson, about the lack of evidence to support their theories of the damage that income inequality supposedly does.

The coup de grâce being when Lyons points out that people do move away from European social democracies that attempt too much redistribution of wealth. Thanks to Prof. J. Bradford DeLong for pointing us to the most entertaining encounter with Berkeley economists we've had recently.

Also, kudos to Laura Tyson for (later, in the Q&A) alerting a young woman to the opportunity costs of 'free' tuition at Tennessee community colleges. Of course, Tyson immediately forgets that lesson when she talks about parental leave, but...

Que ferió, Larry

From the verb FERIR, to foul up your economic analysis by fixating on interest rates (and get the POTUS you advise to believe that monetary policy has shot its wad);
Alvin Hansen proclaimed the risk of secular stagnation at the end of the 1930s only to see the economy boom during and after World War II. It is certainly possible that either some major exogenous event will occur that raises spending or lowers saving in a way that raises the FERIR in the industrial world and renders the concerns I have expressed irrelevant. Short of war, it is not obvious what such events might be. Moreover, most of the reasons adduced for falling FERIRs are likely to continue for at least the next decade. And there is no evidence that potential output forecasts are being increased even in countries like the US where there is some sign of growth acceleration.
That's Larry Summers trying to make sense out of the Obama Administration's economy.  For which, this picture is worth many thousands of Summers's words;


Which is what happens when the economists in an administration cannot shake loose from the idea that interest rates are the transmission mechanism that matters. As Summers clearly cannot;
I explain why a decline in the full employment real interest rate – FERIR, for short – coupled with low inflation could indefinitely prevent the attainment of full employment.
Let us help you, Guy; persistence of abnormally low interest rates alongside persistently anemic economic growth and persistently high unemployment, are the classic signs of an overly tight monetary policy. Which is what you should have been whispering in Barack Obama's ear, when you had the chance. As opposed to the pablum;
Rising inequality operates to raise the share of income going to those with a lower propensity to spend.
Wake us when the Obama Administration is over. Please.

RE: Catastrophe

Where else, but in Insurance Journal, would you read about hedge funds doing what comes naturally;
Hedge funds have long been big buyers of insurance-linked securities such as catastrophe bonds, which pay high yields until a disaster hits and make up more than 10 percent of the $570 billion global reinsurance market.
Some alternative fund managers are now taking the next step: setting up their own reinsurance companies to earn a share of premiums and invest the income in high-yield strategies while waiting for the next big hurricane or earthquake.
Which are supposed to be the next big thing, according to Global Warming Climate Change-mongers.
For the funds, natural disasters have the appeal of being random and usually unconnected to increasingly linked global financial markets, where returns have been low.
The new reinsurers say their ability to invest in higher-risk assets, bet on securities falling in price and leverage their bets with borrowed cash gives them an advantage over traditional reinsurers, which generally invest only in low-yielding, fixed-income assets.
 What's in a name?
Skeptics say reinsurers set up by hedge funds in lightly-regulated jurisdictions like Bermuda are not as well safeguarded as traditional big European firms like Hannover Re, Munich Re and Swiss Re....
Speaking of unlikely, but potentially devastating events, Scott Sumner is trying to set up a demonstration market in NGDP futures. Which, when one things about it, has an insurable element in it.

Wednesday, October 29, 2014

Et tu, City Journal?

We've read versions of this argument before, but not in publications that deign to be taken seriously by conservatives;
[William] Ronan understood something else: transit was never going to pay for itself, but that didn’t mean it should die, as it had been gradually doing. “It’s time to stop talking about transit deficits,” he said. “We don’t talk about a police department deficit, but we need the subways as much as the police department.”
That is Nicole Gelinas recycling urban legend economics. Contrary to Ms Gelinas, transit in NYC did pay for itself for years. Including the NYC subways, which were first built as a profit seeking investment by the financier August Belmont in 1904. As we've written before;
While the city did float a bond issue to raise the funds to pay the construction costs, the contractor and his financiers were completely responsible for repaying the bondholders and the interest payments on the bonds.  Which they did, from fare box revenue.  The city's politicians who'd made the deal were at great pains to stress to their public that that was the case, as this NY Times story of the groundbreaking ceremonies makes clear;
...at the expiration of a shorter period (fifty years [with an option to renew for another 25]) the city will own this tunnel railroad that will have cost $36,500,000, and which is the key to the rapid transit situation, without the expenditure of a single dollar for construction or interest, it having simply used its credit under carefully guarded guarantees for the time being to the advantage of the lessee, who meanwhile pays the interest as it falls due and provides for the liquidation of the bonds at the expiration of his lease."
That is, the contractor and the investors backing him would build the system for the city, but receive a lease allowing them to operate it for up to 75 years (and hopefully recoup their investment).  The 'carefully guarded guarantees' refer to the hefty sureties that had been put up by the private entrepreneurs; between $5 and $8 million of their own money.

It's easy to call that arrangement a subsidy from the private sector to the public, rather than the way Mr. [Timothy B.] Lee has it.  A subsidy, without which, there surely wouldn't have been any subway as early as 1904.
And as to that remark by Mr. Ronan about not talking about a police department deficit, that is because policing is the classic public good--i.e. one that is consumed jointly and is not excludable. Something that can not be said of private goods that are consumed by easily identified users who are excludable using prices--i.e. things like candy bars, shirts, coats and pants, and rides on a subway.

Elementary, my dear Nicole.

Fatca chance, Thomas

The economics profession's favorite French punching bag takes more assaults (this time from Michael Schuyler at the Tax Foundation);
According to Thomas Piketty, a professor at the Paris School of Economics, the main economic problem in developed countries is inequality. He believes it takes precedence over other economic concerns like poverty, unemployment, or slow economic growth. In his influential book, Capital in the Twenty-First Century,[1] Piketty argues that inequality is rapidly intensifying with no end in sight. He says a solution is vital, and he claims to have found it: extremely high income tax rates on upper-income taxpayers along with a global wealth tax.
So Schuyler uses a taxes and growth model to estimate what exactly would happen if the U.S. took up Piketty's recommendations, and finds that;
  • A wealth tax in the United States would reduce investment, wages, employment, incomes, and output.
  • Piketty’s basic tax would depress the capital stock by 13.3 percent, decrease wages by 4.2 percent, eliminate 886,400 jobs, and reduce GDP by 4.9 percent, or about $800 billion, all for a revenue gain of less than $20 billion.
  • ....
  • All income groups would be worse off under a wealth tax due to decreased economic activity; in the second scenario, the after-tax income loss for the top quintile would exceed 10 percent, but the losses for all lower quintiles would be in the 7 to 9 percent range.
 Piketty misery loves company.
Piketty’s only major concern about the viability of a comprehensive wealth tax is whether it would be enforceable. He suspects taxpayers would react vigorously and try to hide or recharacterize as much of their wealth as they could. To minimize evasion and avoidance, Piketty recommends that financial institutions be required to report much more information to governments, that governments step up tax enforcement, and that the wealth tax be imposed globally.
Regarding financial reporting, Piketty points to the U.S. government’s Foreign Account Tax Compliance Act (FATCA) as a good first step, although “insufficient.”[18] (Notwithstanding Piketty’s praise, FATCA has stirred international complaints of American heavy-handedness and bullying.[19] It has also caused enormous difficulties for Americans living abroad in finding banks willing to open accounts for them.)
Our bold in the above, and we've posted about Fatca before.

Dodge, and the Italians Dodge with you

Ferrari, and you're out on your own;
Fiat Chrysler Automobiles plans to spin off sports car maker Ferrari into a separate company, a way to unlock value in the luxury brand and distinguish it from its mass-market parent.
The company said Wednesday that spinning off Ferrari was part of a plan to raise capital to support the new merged carmakers' expansion plans. Fiat Chrysler's five-year plan calls for increasing net income by five times by 2018.
By selling more Alfa Romeos as Dodge Darts. The widows of John and Horace Dodge sold their husbands' auto company to an investment bank in 1925 for a reported 2 billion inflation adjusted dollars. That bank sold it to Walter Chrysler in 1928. Fiat acquired Chrysler when it was bankrupt in 2008.

Ironically;
The decision to break off Ferrari comes about two months after an awkward management transition at Ferrari that saw the longtime chairman Luca di Montezemolo resign after a public spat over strategy with Marchionne, who has taken over as chairman of Ferrari.
Marchionne has been vocal in his displeasure over Ferrari's long absence from the Formula One car racing winner's circle, and has pledged to get the team back to the top. The last time it won the driver's championship was in 2007.
We say, ironically, because the Dodge brothers' fortune mostly came with their roll of the dice on Henry Ford, who'd frittered away millions of (again, inflation adjusted) dollars of Detroit investors, building a race car back at the turn on the 20th century.

Ford, with nowhere else to turn for financing for his passenger car--his original Model A--agreed to give 10% of the new Ford Motor Co to John and Horace Dodge in return for their machine shop turning out the parts that Ford would assemble into the first mass marketed automobile.

Now an Italianate Dodge wins out over another race car.