arithmetic

Chriss Street: Dead Hand of Governent Impoverishes the Middle Class

by on May 12, 2011

Huffington Post…

Michael Spence, Nobel Laureate and former dean of the Stanford Business School, has just published a rigorous economic analysis called: The Evolving Structure of the American Economy and the Employment Challenge . The report illuminates how the unbridled growth of government consumption spending has destroyed America’s productivity leadership, driven entrepreneurs to off-shore production, and destroyed middle class wage rates. Adam Smith, 18th century English economist, pioneered the concept of the “invisible hand” to describe how capitalism through self-interest, competition, and supply and demand, more effectively allocated resources than the “dead hand” of the state; that levied punitive taxes, adopted restrictive regulations, and enforced monopolies to favor their crony allies. Smith described how English entrepreneurs flourished after their king’s feudal dominance of the economy was liberated by adopting the laissez-faire economics that allowed transactions between private parties to be free from the state’s coercion. Smith described how new wealth was rapidly created and compounded over time form the productivity gains of the Industrial Revolution that leveraged the value of workers and led to higher wages. The Spence report illuminates that from 1988 to 2008, America’s productivity dominance collapsed by 70%; shrinking from 2.5% gain per year to only .7% per year. This crash in American leadership was the result of 98% of the 27.3 million new jobs created during the period coming from the lower productivity, and thus lower wage, “consumption” sector of the economy. Higher productivity, and thus higher wage, “goods-producing” sector grew by only 620,000 jobs. The root cause of this substitution for lower productivity jobs was a 23% growth in government, to 22.5 million workers, and a 63% growth in government dominated healthcare, to 16.3 million workers. Productivity for the American goods-producing sector continued to grow by a healthy 2.3% per year, but productivity of government workers sunk by 4% and productivity of healthcare workers plummeted by 9%. In 1988 the average value added for American workers was $75,000. Over the last twenty years, America’s revolution in information-technologies helped drive up the valued added of a goods-producing American worker to $115,200 per year. But the productivity value of government and healthcare worker tumbled to $72,000 per worker; dragging down the average value added of American workers to only $90,750. That $24,450 loss of productivity explains alot about why the American middle class wages have been shrinking in the United States. Adam Smith identifies the “entrepreneur” as the invisible hand that shifted economic resources out of lower and into higher productivity activities for and greater reward. If the invisible hand is expected to be busy shifting resources from lower to higher productivity; why has America shifted resources from higher to lower productivity jobs? Welcome to the wonderful world of the “dead hand” of government. Over the last two decades the U.S. government has vastly increased punitive taxes, restrictive regulations, and enforced monopolies in favor of their crony allies. This result has been a loss of 7.5 million goods-producing jobs in the last twenty years. That trend accelerated over the last ten years with the closure of 57,000 factories and the loss of 5.5 million higher paid goods-producing jobs. Entrepreneurs are not stupid! They did their arithmetic and figured out that the outrageous costs of paying twice China’s corporate tax rate, complying with punishing regulations, and competing against cronies like General Electric over-whelmed the productivity advantage of hiring an American workers. Entrepreneurs also recognized that even though they did not benefit from the 13.7% compound growth of government spending; the congressional drumbeat to raise taxes on millionaires to pay for trillions of dollars of deficits, are “code words” for taxing entrepreneurs. The bottom line is the “dead hand” of government has diminished the productivity of American workers by changing the structure of our economy to favor of the lower wage consumption sector, at the expense of the higher wage goods-producing sector. This government coercion has resulted in the invisible hand of entrepreneurs closing U.S. factories, moving goods-production off-shore, and impoverishing middle class wages. Entrepreneurs will not build new American factories and bring back higher paying middle class jobs until our government cuts taxes, deregulates industry, and stops favoring crony allies.

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Chriss Street: Dead Hand of Governent Impoverishes the Middle Class

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Dan Solin: Foolish Advice From the Motley Fool

by Dan Solin on December 14, 2010

Matt Koppenheffer at the Motley Fool recently took issue with me for a blog I wrote called ” Ten Investing Facts You Probably Don’t Know — but Should “. Mr. Koppenheffer is a contributing writer to the Motley Fool. His biography touts his skills as a stock researcher and indicates that he is an “unabashed fan” of Warren Buffett. Before taking shots at my statement that Buffett is a proponent of indexed based investing, and touting the screens he uses to pick stock winners, Mr. Koppenheffer pointedly notes that being an index fund adviser “seems like a bit of an oxymoron” to him. Perhaps Mr. Koppenheffer’s readers are able to put together a globally diversified, risk adjusted, portfolio of fifteen passively managed funds, in the right asset allocation, with a tilt towards small and value, consistent with the Fama-French three factor model , on their own. Personally, I have never met anyone who could do this without expert advice. From there, it got worse. Mr. Koppenheffer correctly noted that the one article I referred to as support for Buffett’s views on indexing stated that, on this occasion, he indicated indexing was the best way to invest for “…small investors who don’t have time to research individual companies.” Fair point. However, as a self-styled fan of Buffett, surely Mr. Koppenheffer was aware that Buffett, at many other times, indicated his view that indexing was the best way to invest for all amateur and professional investors. Here is a fair representation of these views: ” A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money… I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard. Unless I bought during a strong bull market, I would feel confident that I would outperform… and I could just go back and get on with my work.” With his misrepresentation of Buffett’s real views in the minds of his readers, Mr. Koppenheffer offers them his stock picking advice. He likes to use screens, like valuation multiples, company performance metrics and others. He then provides a list of the stocks that some of his “favorite screens” have identified (or, as he put it “spits out.”) Why these screens would identify any mis-pricing of these stocks eludes me. All of these factors are known to millions of investors worldwide looking at the same data. It is incorporated into the price of these (and all other) stocks, making the current price a fair price. These specific stocks may increase or decrease in value, but it won’t be due to the factors identified in Mr. Koppenheffer’s screens. It will be based on tomorrow’s news, which no one knows or can predict. Mr. Koppenheffer dismisses proponents of indexing with some disdain, calling them non-investors who “…would rather watch a Dharma and Greg rerun, reorganize their closet, or go to the dentist.” Not exactly. They include William Bernstein, Merton Miller (a Nobel Laureate), Paul Samuelson (another Nobel Laureate), and Burton Malkiel, among many others. Indexing is also supported by hundreds of academic studies showing only about 5% of stock pickers beat their appropriate benchmark. William Sharpe, still another Nobel Laureate, spelled out the reasons for the failure of active management (which is premised on stock picking) in this short article entitled ” The Arithmetic of Active Management “. I urge you to read it. It is simply stated, easy-to-understand and irrefutable. Mr. Koppenheffer cites no data supporting his stock picking advice, which is not surprising. He also provides no data from which his readers can hold him accountable for his prior stock picks. The thrill of the chase is exciting. Mr. Koppenheffer and many other members of the financial media see no problem in dispensing advice that generates profits for them (by increasing viewers which boosts revenues) even though those who follow this advice are likely to be harmed by it. This is not just “foolish”. It’s irresponsible. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog. Here is the trailer for my new book, Timeless Investment Advice .

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Dan Solin: Foolish Advice From the Motley Fool

Andrew Reinbach: Gas Drilling, Politics, and Irony

August 9, 2010

The citizen environmentalists who lobbied New York’s state Senators until they passed a one-year moratorium on hydrofracking for gas on August 4th deserve praise and congratulations. Starting from nothing, they moved the needle among their upstate neighbors from “drill baby drill” to “safe drilling.” What they won’t get is what they really want — no drilling. “That’s just not realistic,” says Amy Mall, senior policy advisor to the Natural Resources Defense Council (NRDC). The NRDC supports switching America from oil to natural gas to combat global warming, and drilling in New York’s Marcellus Shale — safely — to get it. Most national environmental groups see things the same way. Instead, these hardworking activists have done an enormous favor for their opponents — especially, for the farmers and other landowners who signed leases to drill on their land as long as three years ago. That’s because right now, the gas business shows every sign of being in a late-stage bubble, and as everybody now knows, when bubbles inevitably pop, they take a lot of companies with them. So many of those leases were signed with companies that may disappear. Meanwhile, a number of those leases, signed during the boom years, may expire during the moratorium; many were two- or four-page documents and ran five years. If those leases do run out, it’ll be the best thing that ever happened to those landowners; said leases typically paid a signing bonus of as little as $50 an acre and, according to an attorney who’s seen many such, “1/8th of revenues received by the lessor — whatever that means.” By comparison, gas companies were signing leases in New York late last year at $4,000 per acre, and 30 percent off the top — something of an improvement. During the push for a moratorium many farmers, especially, panicked for fear their leases would run out before they reached that big payday. This in turn provoked a lot of hard feelings against the environmentalists. And the landowners were right; the leases they signed will run out — and many of the companies they signed with won’t exist. But the gas will still be there when the moratorium ends, regulations will be much stiffer, and you can bet the land men will be back. But the days of ripping off farmers will be over. That will be great for my neighbors. I live near Cooperstown, New York, and most of my neighbors are dairy farmers. A dairy farmer owns as much as $1 million in equipment, pays upwards of $200,000 a year in property taxes plus debt on the equipment, works 14 to 18 hours a day, 365 days a year — and based on the hours he puts in, makes less than minimum wage for the privilege. Other neighbors of mine own big tracts of land that have been in their families for 200 years or more — some of them are descended from the first Europeans to settle here, before the Revolution. They may only raise hay on that land now — but they have to pay taxes on it anyway. To give you an idea of the economics of hay: The six acres behind my house produce about 16 of those big round bales — worth $25 a bale, or $400. Taxes on a house and farmed land in Otsego County are about $500 an acre. And while some of you reading this may be tempted to dismiss these people as, well, hicks, let me tell you something: Put a country boy and a city boy together to talk a deal, and the city boy will be lucky to leave with his pants on. Country folk are not idiots; they just don’t live in the suburbs. And they’re just as concerned about the environment as any city boy — maybe more, since they live in it. Of course, you can’t say the same about the gas companies. Even if you haven’t watched that kitchen sink explode in Gasland , the news from Pennsylvania, where gas drilling has been very heavy, is disturbing to say the least. A recent report from the Pennsylvania Land Trust Association , for instance, reveals that gas companies have racked up1,435 environmental violations in the past 18 months, including: · 268 improperly built waste water impoundments; · 10 improper well casings; · 154 discharges of industrial waste; · 16 improper blowout prevention mechanisms. All those violations posed grave threats to Pennsylvania’s fields and woodlands. And in fact anybody listening to the final debate in the Senate chamber in Albany on the moratorium knows that the Pennsylvania example is a major reason — along with the lobbying from citizen activists — for passing what several senators called “a time out” on gas drilling, and stricter state regulations than now contemplated by current management at the state’s Department of Environmental Conservation. Among the measures that would be useful to keep New York from enduring such abuse: A thorough seismic mapping of the Marcellus shale deposits in the state. This would locate any fault lines that may be there — so they can be avoided. According to James Northrup, a veteran oil and gas driller, fracking a well — forcing a million gallons of water, sand and chemicals, several of them highly toxic — is like exploding an air bomb underground. “Once that thing’s gone off, it’s going to follow the lines of least resistance, and if it finds a fault in the rock, it’ll just follow it,” he says, taking with it benzene, toluene, diesel oil, and other chemicals. This could be pretty dangerous if a well was fracked near Cooperstown’s water supply — Lake Otsego. Current regulations allow a gas well to be drilled within 150 feet of the lake, he points out, and if a frack found a fault, it could poison the lake. Lake Otsego is also the headwaters of the Susquehanna River, which flows to Chesapeake Bay. You’d imagine a state would take steps to avoid an outcome like that. And yet there’s been precious little seismic exploration in Pennsylvania; if anything, it appears the pressure’s been on in the past few years to drill as much as possible — as if it wanted to catch up with Colorado, Wyoming, Texas and West Virginia. Which is where that late-stage bubble I mentioned comes in; because while it may strain the imagination, there’s no money in the gas drilling business right now. Here’s the arithmetic. Rule-of-thumb costs for producing a well are about $4.35 per MBTU (One thousand BTUs ,or British thermal units ), and natural gas futures closed on July 6th at $4.47 per MBTU . That doesn’t even include the cost of things like pipeline transmission, storage fees, or commissions. And according to the Energy Information Administration, average wellhead prices — in 2008 dollars — are expected to rise only modestly over the next ten years . Given that arithmetic — no secret to the gas industry — what’s with all the drilling? Arthur Berman, a Houston-based energy consultant who produces the Petroleum Truth Report , explains that most natural gas companies are relatively small operations — unlike Chesapeake Energy Corp., which told analysts on an August 4th conference call that it was switching its operations from natural gas to oil and liquid gas, and wouldn’t be drilling its remaining gas fields until the market improved . Many of these companies are publicly held, have little real shareholder equity, and are judged by analysts and investors on their production — not their profits. If they stop producing, he says, the share price will tank, their loan and bond covenants will be violated, the companies won’t be able to meet their obligations, and the fortunes of senior management will vanish. But said senior management keeps going because, to say the least, they’re not lacking in self-confidence. In fact, they’re the sort of people who can sleep at night even with their signatures on $500 million in personal loan guarantees. They know things are bad, and they know bad things are coming; but they believe they can pull it off, even if their competitors can’t. If they didn’t believe that, they wouldn’t be in the business. One of their hopes: Getting bailed out by selling some, or all, of the company to offshore investors — from India, for instance, which is about to begin developing major gas fields. But this is a slender reed. Most of what those offshore investors really need is expertise, and the company’s expertise goes home every night. So looked at it this way; in the end, said senior management is as human as the guy on the loading dock. It all sounds very familiar to someone like myself, who was covering commercial real estate in the late 1980s, when it was crashing. In fact, the rationales for pressing on then were exactly the same. The difference: Commercial real estate is a huge sector. When it began collapsing in 1988, it ran up actuarial losses of something like $1 trillion — 20 years ago, when that was real money. A burst bubble in the natural gas business could never have the same impact on the economy, says Richard Bove of Rochdale Securities. “It might have some impact on some banks in the southwest, but the sector just isn’t big enough to hurt the big banks,” he says. “The nation’s three biggest banks are taking loan loss reserves of $7 billion a month; the gas sector just isn’t that big in comparison.” Which is something, I suppose. Instead of taking down the economy when this bubble bursts, expect the big fish to eat the little fish — what Kenneth Austin, a VP and Senior Credit Officer at Moody’s, calls “Some consolidation in the industry” — followed by some firming of gas markets. Then, at some point, drilling will be feasible again. An EPA review of fracking and its dangers is only just getting underway, and given the realities of government studies, may not be delivered until after its 2013 deadline. Meanwhile, New York State Assembly Speaker Sheldon Silver has indicated that it might be wise for New York to wait for that report before issuing any new regulations itself. That pushes gas drilling in New York’s Marcellus shale past what the Mayans say is the end of the world in December 2012; so perhaps New York’s citizen activists will have stopped gas drilling in New York, after all. At the very least, what regulations do emerge in Albany will likely come as close as practicable, in an imperfect world, to a guarantee that gas drilling won’t poison our ground water. That may not satisfy said citizen activists, who haven’t been publicly encouraged by the big national environmental groups to keep fighting to stop gas drilling altogether, but haven’t been publicly criticized, either. It may be that the big outfits in Washington find it convenient to have the citizen activists play bad cop, so said Washingtonians can seem like reasonable negotiating partners. Politics, after all, is a practical business.

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Nicotine Skin Patch Helps More Quitters Resist Cigarettes When Worn Longer

February 1, 2010

By Ellen Gibson Feb. 1 (Bloomberg) — Cigarette smokers trying to quit who wear a nicotine patch for six months, rather than the standard two, may stay away from smoking longer, U.S. scientists said. Researchers at the University of Pennsylvania School of Medicine found that 32 percent of smokers who wore the patch for 24 weeks were smoke-free, compared with 20 percent of those who used it for 8 weeks, according to a report in tomorrow’s Annals of Internal Medicine . Participants used GlaxoSmithKline Plc ’s Nicoderm CQ. Novartis AG makes a competing product. Smoking cigarettes increases the risk for lung cancer, heart attack, stroke and high blood pressure, according to the National Institutes of Health , and adults who smoke die 14 years earlier on average than nonsmokers. Those who puff may become addicted to nicotine, and quitters often undergo withdrawal and have cravings that persist long term. “Nicotine addiction is not an acute condition that can be treated in a couple of months,” said study author Robert Schnoll , an associate professor of psychology at Penn, in a Jan. 29 phone interview. “It’s a chronic condition that needs extended therapy and we hope this research will encourage doctors to keep their patients on the patch longer.” Glaxo’s NicoDerm CQ and Novartis’s Habitrol are patches that supply the body and brain with a steady stream of nicotine absorbed through the skin. Current guidelines recommend using the patches for 8 weeks, the study’s authors said. The nicotine helps to prevent withdrawal symptoms in people who stop smoking, according to the Bethesda, Maryland-based NIH. Study Design The study was conducted at Penn’s Transdisciplinary Tobacco Use Research Center in Philadelphia in people who smoked at least half a pack a day. About half of the 568 participants received active nicotine patches for 24 weeks. The rest had eight weeks of nicotine replacement followed by 16 weeks of placebo patches. All were given behavioral counseling. At the end of six months, 89 people in the treatment group were smoke-free for seven days, compared with 58 people in the placebo group, the researchers said. At the one-year mark there was no difference between the two groups, with both having a quit rate of about 14 percent. That statistic reinforces the idea that nicotine dependence should be treated more like opioid addiction, Schnoll said, where users are sometimes given methadone, a detoxification medication, for years. No Cold Turkey The American Lung Association in Washington doesn’t recommend that smokers quit “cold turkey,” without the aid of a prescription or over-the-counter treatment, said Norman Edelman , the organization’s chief medical officer, in a Jan. 29 phone interview. Nicotine supplements also come in the form of gum, lozenges, nasal sprays, and inhalers, according to the NIH. Other treatment options are Chantix, a drug from New York-based Pfizer Inc. that works on the brain’s nicotine receptors, and Glaxo’s Zyban, which is available in generic form under the name buproprion. The two main barriers to keeping patients on the nicotine patch longer are side effects and costs, Schnoll said. Common side effects of the patch include skin redness, headache, nausea, and sleep problems. The researchers found no significant difference in the intensity of side effects between the treatment and placebo groups after the eighth week, according to the report. Safer Than Smoking “We don’t know, longer term, what effect keeping people on the patch would have,” said Schnoll. “But nicotine replacement therapy is definitely safer than tobacco use.” The additional cost per quitter was about $2,482 for the 24-week treatment regimen, the research paper said. Only 8.6 percent of health insurers cover the full cost of the patches, and only 33 states subsidize them for Medicaid patients, the study’s authors said. “If you do the arithmetic,” said the lung association’s Edelman, “you’ll find that if you live in New York City and you smoke a pack a day, you’re already spending about $300 a month.” The study was funded by a grant from the National Cancer Institute and the National Institute on Drug Abuse. The study’s senior author, Caryn Lerman , has served as a consultant for GlaxoSmithKline. To contact the reporters on this story: Ellen Gibson in New York at egibson9@bloomberg.net ;

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Krugman: Deficit Hawks Trying To Scare People With Big, Out-Of-Context Numbers

November 30, 2009

On ABC’s This Week, host George Stephanopoulos asked Paul Krugman, the Nobel Prize-winning economist and New York Times columnist, about the argument that the nation’s rising debt level may lead to “a major weakening of American power.” Krugman responded : KRUGMAN: You know, first thing to say is people are putting their money where their mouth is, which is the bond market. Things were fine. You know, the U.S. government is able to borrow long-term at 3.3 percent interest rate. So, obviously, you know, the market is not convinced. Now, the market has been wrong. But, then if you do the arithmetic, these numbers look huge. The American economy is huge. The debt burden, even after five years, is going to be well below as a share of GDP well below levels that lots of industrial countries have reached in the past, including ourselves after World War II, when we were able to handle that just fine. We’re not going to hit 100 percent (of GDP in debt) until a decade from now. And countries have gone above 100 percent. I mean, if you actually ask about the interest cost, particularly inflation-adjusted interest cost, you know, we’re now paying 1.2 percent real interest rate on federal debt. Even if you add 50 percent of GDP in debt, which I don’t think is going to happen, that’s still only a fraction of a percent of GDP in additional debt service costs. Washington Post columnist George Will, a vocal deficit hawk, pushed back: “But even unreasonably cheerful assumptions about economic growth and interest rates, we’re apt to be spending in 10 years $700 billion a year servicing our debt .” WATCH (debt discussion begins at about 12:30): On Monday, Krugman took to his blog to call Will’s response an example of “debt scare,” joking that the statistic about 700 billion dollars should have been ” read in the voice of Dr. Evil. ” I get that a lot — people who talk about the big numbers which are supposed to imply that things are terrible, impossible, we’re doomed, etc. The point, of course, is that everything about the United States is big. So you have to interpret numbers accordingly. As the graphic above shows — it’s taken from an article that managed to maintain a grim tone while reporting numbers that actually weren’t all that grim — what we’re talking about is a debt-service burden roughly comparable to that under the first President Bush. How many of the people now warning about the impossible burden of currently projected debt were issuing similar warnings back in 1992? Not many, I’d guess. As Krugman notes , debt levels today are quite low by historical standards, and even when interests rates rise, they are projected to rise to levels experienced during the 1980s and 90s. Moreover, as Huffington Post’s Ryan Grim reported recently: The focus on the deficit is also fraught with economic miscalculations. Long-term interest rates are extremely low, despite the hysteria, and the U.S. government is well positioned to meet its obligations indefinitely. The Chinese government, meanwhile, which holds a pile of U.S. debt, has little recourse other than to continue to buy U.S. bonds. The Nation ‘s DC editor Chris Hayes put it succinctly , using an old saying, in a recent column: “‘When you owe $100,000, the bank owns you. When you owe $100 million, you own the bank’ — and it aptly describes the US relationship with China, which holds approximately 70 percent of its 2.3 trillion foreign reserves in dollars.” Nevertheless, deficit hawks are threatening a dramatic move to force cost-cutting plans, as McClatchy reported on Monday . A bipartisan group of more than a dozen senators is threatening to vote against an increase in the debt limit unless Congress passes a new deficit-fighting plan. “I will not vote for raising the debt limit without a vehicle to handle this. … This is our moment,” California Democratic Sen. Dianne Feinstein said. She and nine other senators wrote to Senate Majority Leader Harry Reid, D-Nev., asking that Congress create a special commission to make recommendations that then could be decided by an up-or-down vote. HuffPost’s Jason Linkins has much more on this plan for a deficit-fighting commission HERE .

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