Investing Curiouscatblog

Category: Economics

  • Bangalore’s Boomtown Blues

    Bangalore’s Boomtown Blues:

    The hi-tech industry has also introduced a new phenomenon in Indian life for those who are on-the-up – the weekend break. Previously, everyone spent six days a week in the office, but the high-paid IT workers only do five.
    …
    Bangalore’s public infrastructure has lagged woefully behind the pace of private sector investment. Every Bangalore IT company has to have a private generator and uninterruptible power supply to cope with the daily power failures of the grid.

  • State of the nation? Broke

    State of the nation? Broke:

    If you want to correct for the $185 billion collected by Social Security as surplus cash flow in 2006 — that is, the taxes came in today to pay for benefits promised in future years — then you have to look at the on-budget deficit, which Walker calls the “operating deficit.” The on-budget deficit came to $434 billion in 2006. The on-budget deficit shrank from 2005 to 2006, just as the unified budget deficit did, but the drop was much smaller: to $434 billion in fiscal 2006 from $494 in fiscal 2005.

    Both of these still understate the size of the deficit. The Bush administration has been adamant about keeping certain costs out of the budget figures. Spending on the war in Iraq, for example, has been included not in budget resolutions but in special emergency spending bills. They are “off budget” in the language of Washington. That spending, estimated by the Congressional Budget Office at $360 billion overall and $95 billion in the fiscal year that ended in October 2006, aren’t in either of these two budget figures. And Iraq funding for fiscal 2007 won’t be included in the budget the president will introduce next month, either.

  • World Saving Glut – Effect of Oil Price Declines

    Do lower oil prices mean the end of the saving glut?:

    I am not sure whether there is a global savings glut or a global drought in non-residential investment or a bit of both. But I am quite confident that there is a savings glut in China. Savings seems to be above 50% of China’s GDP – which is nuts. And most of that isn’t household savings. There is no investment drought in China.

    There is also clearly a savings glut in the oil exporting countries. Lahart – drawing on work by Higgins, Klitgaard and Lerman of the New York Fed – notes that the oil exporters saved about ½ the surge in their oil export revenue over the past few years. The result: the current account surplus of many oil exporters surged to over 30% of their GDP.
    …
    The oil exporters seem to have gotten noticeably less frugal over time. They were very frugal in 2004. A bit less frugal in 2005. And even less frugal in 2006.

    As usual a good post by Brad Setser. The details of understanding the “savings glut” get complicated but essentially the idea is that huge savings from China, OPEC countries… create huge sums looking for investments (and fund the huge USA debts – public and private). And to some economists create the market for the debt (for example, without the savings glut their belief is there would not have been money to finance the huge questionable mortgage market over the last few year). As stated in, The Global Savings Glut:

    Generally, the flow of surplus global savings to the United States has caused Americans to spend more and save less. In recent speeches, Bernanke — a member of the Federal Reserve Board and nominated as head of the White House Council of Economic Advisers — has shown how. In the 1990s, some of the savings surplus went into the hot U.S. stock market, boosting prices further. Feeling wealthier — because their stock portfolios had fattened — Americans decided they could save less and shop more.

    And nearly all economist agree the “savings glut” creates the very low interest rates we have seen the last few years around the world.

    Related: The Global Saving Glut and the U.S. Current Account Deficit by Ben Bernanke – Savings Glut (The self-serving explanation for America’s bad habits) by Daniel Gross – Global Savings Glut Revisited – The Savings Glut

  • Social Security Trust Fund

    The Washington Post really doesn’t like Social Security … by Brad Setser

    Best I can tell, Social Security is in the best financial shape of any federal program. It is in far better future shape than Medicare. And it is in way better shape than the portion of the government that isn’t financed by the payroll tax. That part of the government has a $434 billion deficit. Social Security, by contrast, has a $185b cash flow surplus. Social Security’s revenues exceed its expenditures – and will continue to do so for several years. Its financial assets are growing – they will top $2 trillion at the end of this year.

    This is not the way the story is normally told. Social Security is actually in good shape for at least 30 years. That doesn’t mean it is not a big problem after that but Brad Setser makes a good point that the huge increase in the rest of the debt has really made that problem seem minor. The main point? We need to fix the rest of the budget mess, and while I still think Social Security needs adjustment really that is not as important as fixing the rest of the spending money the government doesn’t have.

    Related: Estate Tax Repeal

  • Minimum Wage Example

    For $7.93 an Hour, It’s Worth a Trip Across a State Line

    Just eight miles separate this town on the Washington side of the state border from Post Falls on the Idaho side. But the towns are nearly $3 an hour apart in the required minimum wage. Washington pays the highest in the nation, just under $8 an hour, and Idaho has among the lowest, matching 21 states that have not raised the hourly wage beyond the federal minimum of $5.15
    …
    the state’s major business lobby, the Association of Washington Business, is no longer fighting the minimum-wage law, which is adjusted every year in line with the consumer price index. “You don’t see us screaming out loud about this,” said Don Brunell, president of the trade group, which represents 6,300 members. “It’s almost a no-brainer,” Mr. Brunell said, that the federal minimum should go higher. Association officials say they would like to see some flexibility for rural and small-town businesses, however.

  • When the lowest pay rises, what happens?

    When the lowest pay rises, what happens?

    Still, when all the effects are tallied up, economists say that the lowest-wage workers do get a real pay raise.

    No kidding. Other effects are a bit trickier but that one is not tough to figure out.

    His model suggests some of the complex ripple effects – and the possible magnitude of changes. The study predicts that, two years after the minimum of $7.25 goes into effect, total employment in the US would fall by 0.17 percent. That’s roughly the loss of one job in every 600. The pay gain for workers affected by the wage hike might approach 8 percent.

    It is true jobs can be lost but at low rates that effect is very small. As the unemployment rate rises the job losses would increase with similar raises in the minimum wage. Raising the minimum wage to $7.25 now is a good idea – it should have been raised earlier.

  • What Do Unemployment Stats Mean?

    Economic statistics, like all data, needs to be defined. The way to collect data (economic data or any other type) is to operationally define the terms. Statistics don’t lie. Statistics can be faulty, when those collecting the data fail to use good operational definitions and the data quality is poor (without a definition people make guess…). People can also just make up false number. And people can try to mislead by stating statistics in a way that seem to indicate something that is not the most accurate way to view the whole situation.

    The way to cope with such problems is to understand statistics and data. The data can be wrong. So you have to access that possibility. And the data can mean something different than you assume (and often the data is not presented with the operation definitions). When that is the case be careful about your assumptions (with financial and economic data and other data too). But don’t decide to just ignore data because then you condemn yourself to ignorance of the many things which data shed light onto.

    In, What ‘Unemployment’ Really Means These Days, the unemployment data is explored. The post does a good job of showing how you can get different measures of the “unemployment rate” depending on how you define what you will measure. I happen to believe the existing measure is best but you need to understand that it doesn’t factor in underemployment and people giving up completely… I believe the best way to deal with those weaknesses is to have supplementary measures that enhance your understanding of the unemployment rate. And too view it as only one measure of economic health. Look also at median wages, health care coverage, hours worked, vacation time…
    (more…)

  • Investor Protection Needed

    In an instant, retirement savings vanish by Bob Sullivan:

    With hacking of brokerage accounts increasing, the legal gap facing DeSmidt and other victims has regulators and critics debating the need for new consumer protections.
    …
    Few consumers appreciate the fact that, unlike credit card and checking account transactions, there are no federal consumer regulations specifically protecting consumers in the event of brokerage account hacking
    …
    Both credit card transactions and electronic account transfers, such as online banking payments, are governed by Federal Reserve regulations that strictly limit consumers’ losses from theft. Consumers who report credit card fraud are only liable for $50
    …
    Despite the lack of legal compulsion, some investment firms have taken to offering broad consumer protections anyway. Both e-trade and Charles Schwab offer credit-card style guarantees. Money stolen from Charles Schwab’s Web site will be returned to consumers as long as the theft is reported in a timely way, said Schwab’s Greg Gable.

    This risk is something the government should address. The risk is to the economy at large, as well as having extreme consequences for individual investors. We need to do as much as possible to encourage retirement savings. Not providing government backing (such as provided by FDIC…) is a mistake. The funding should be similar to that for FDIC where member banks are assessed fees to cover the costs of the program based on the risks seen in that institution.

    FDIC has done a great job of creating an environment that gives individuals confidence in the system and encourages economic development. Securities Investor Protection Corporation is another possible model but for something so important to the economic security of the country (and individuals lives) direct government involvement makes sense to me.

  • Kiva: Microfinance Loans

    Friday Entrepreneurs: Premal Shah, Kiva.org

    Kiva.org is a new website that allows individuals to make small loans to low-income entrepreneurs in the developing world (microfinance). In this way, people like you can help provide affordable working capital for the world’s poor — money to buy a sewing machine, livestock, etc. — empowering them to start a business and earn their way out of poverty.

    The usual loan terms are 12 months and over the course of your loan, you’ll receive periodic repayments which you can then re-invest in another entrepreneur or withdraw. In addition, you receive real business updates on the entrepreneur you’ve sponsored. So far, we’ve had a 100% repayment rate and we’re expecting at least a 96% repayment rate over time.

    We think of Kiva as facilitating a kind of ‘grassroots capitalism’ — people here in the U.S. lending – not donating – a small amount to low income entrepreneurs in the developing world. For the low income entrepreneur, small amounts like $25 or $100 can provide the working capital needed to explode their small business growth, create a sustainable livelihood and enable them to repay you as an investment partner.

    As I have said before, I really like helping people help themselves.

  • Manufacturing Data – Accuracy Questions

    re: Myths of Manufacturing Productivity

    Output counted should only measure the value added – it should not count the entire value (not the same thing exactly but similar – when a HDTV is sold by the plant to a wholesaler and then the wholesaler sells it to a retailer and then the retailer sells it to a customer the economic data does not add those 3 purchases together to get the total value of HDTV sales). The measures are suppose to be the amount added at the point of measure. So the output of the local plant does not count the total value of say the car but the value added at the plant. Obviously, like with most economic measures, this data has plenty of room for error.

    While they intend to measure the added value as far, this is not easy and there can be reasons to distort the data (taxes, bonuses…). The VAT, used in Europe, is helpful illustration (both of the concepts and some of the measurement difficulties).

    I keep looking for better data (I am actually surprised how sparse the data is given the importance). I would not want to make economic policy with the very incomplete data I have been able to find. Still, my belief is real global manufacturing output is up. And global manufacturing jobs are down. If those statements are right, productivity increase is the only reason – by definition.

    When trying to look at country specific measures it does get more difficult – to find data that is obviously clear. Still, based on the data I have been able to find it seems that the USA continues to increase manufacturing output and decrease jobs. This seems right to me though I do agree the data I have seen still leaves questions. Previous posts I have made on the topic include: Manufacturing Value Added Economic Data – Manufacturing Jobs Data USA, China and globally, even manufacturing jobs data can include data quality issues but it is probably cleaner than most of the rest of this data. The data from this Clemson study shows the USA has lost a lower percentage of jobs than most every other country – Global Manufacturing Data by Country

    Global data sources certainly still has data quality issues but you can be reasonably certain huge double counting is not going on. If so you would see the global totals increasing hugely. If a GM car was manufactured with 50% Mexican parts and the GM counted 100% of the value and Mexico counted there value then you would have 150% of the total value counted. Which would then mean the global figures would be counted not just increased output but also going up as the countries “over-counted” their output. And remember, in this example Mexican output could include (40% of their 50%) from Brazil…