Ape Man

Today I was faced with the age old question: Is this guy lying, exaggerating, or telling the truth?

You see, I went to an asbestos awareness training. I have gone through this training a number of times before. Normally my biggest challenge is staying awake.

This time it was different. The presenter was good at his job and he knew how to connect with a blue collar male audience (although I heard the big boss did not approve of his methods). But in addition to the same old information that we have all heard countless times, this trainer went on to tell us some things that I never heard before. And truth be told, I have a hard time believing what he told us.

He started the unorthodox part of his training by bad mouthing Canada for its asbestos policy. He talked about Asbestos, Quebec and the alleged unsafe conditions were going on there. He lead people to believe that laws regarding Asbestos were a lot different then they were here in the states.

Now I know that parts of the above are true and parts of the above are false or misleading and parts of it I have no idea. As you can see from the links above, Canada does export asbestos like it is going out of style. But its domestic laws regarding asbestos are not much different then they are here in the states. It just that they have no problem with exporting the stuff to third world countries. And I have no way of knowing if his stories about Asbestos, Quebec are true or not (he claimed that an associate of his had actually gone there on business).

So while he was talking about things that I can verify he was reasonably honest. Even in the case where he was wrong, it was probably just a case of honest mis-extrapolation by a blue collar type dude. It probably did not cross his mind that they were just hypocrites.

So what should I make of his allegations that he had first hand knowledge that big box retailers sometimes sold imported Sheetrock and other construction products with asbestos in them? What should I make of his story of a general contractor who put more asbestos back into a remodel building then was taken out because he used cheap imported products?

I could not find much supporting information using Google, but he seemed to be an honest guy.

Today I wrote this comment on one of Felix’s blog posts….

Felix,

By just focusing on sovereign debt, I think you are painting a misleading picture of the debt servicing cost that the American taxpayer is going to have to carry relative to the EU taxpayer.

That was me trying to be reasonable. The part of me that is a jerk wanted to say “What part of being like Belgium or Italy sounds okay to you?”

Today I hear a rumble. I see everything starting to shift. I think there is an earthquake coming.

Words that should scare you…

As of July 2009, California’s budget shortfall was 49.3% of its general funds. States have considered drastic options to fill such gaps.

“I looked as hard as I could at how states could declare bankruptcy,” said Michael Genest, director of the California Department of Finance who is stepping down at the end of the year. “I literally looked at the federal constitution to see if there was a way for states to return to territory status.”

From later on in the same article….

Mr. Genest estimated that, eventually, 40% of the state’s budget would go to the state Medicaid program, 40% to education, 10% to debt service and 6% to retiree medical services and pension—leaving little left for anything else, such as the state’s corrections system.

In other words, California is going to choose hand outs over maintaining public order. The lowering of crime rates over the last twenty years was achieved by throwing lots and lots of people in jail. We are going to see violent crime rates climb as states decided that they can not afford to keep people in jails.

But it is not just California…..

The real talking was done Monday, when Mr. Paterson was at his articulate, compelling best, explaining the budget crisis in terms even someone otherwise oblivious to deadlines and consequences and seemingly any pressure to confront them might still understand.

“Unless immediate action is taken, we will have challenges to our state’s finances and to our cash flow in four and a half weeks,” the governor said.

Translation: New York State is not going to have enough money to pay all of its bills in a month.

Not a surprise when you consider this…..

New York spends $2,283 per capita on Medicaid, far more than any other state and twice the national average, according to statistics compiled by the state budget division. Second is Rhode Island, which spends $1,659. The state also spends $14,884 per pupil on school aid, more than any other state and well above the national average of $9,138.

But of course, it is not just America that is facing these kinds of problems….

Chang argues that inconsistencies in Chinese official statistics — like the surging numbers for car sales but flat statistics for gasoline consumption — indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth.

Another data point cited by the bears: overcapacity. For example, the Chinese already consume more cement than the rest of the world combined, at 1.4 billion tons per year. But they have dramatically ramped up their ability to produce even more in recent years, leading to an estimated spare capacity of about 340 million tons, which, according to a report prepared earlier this year by Pivot Capital Management, is more than the consumption in the U.S., India and Japan combined.

This, Chanos and others argue, is happening in sector after sector in the Chinese economy. And that means the Chinese are in danger of producing huge quantities of goods and products that they will be unable to sell.

Today I wanted to write more on what I wrote about yesterday. But I don’t know that I will be able to to. I fought with a headache all day and I need to be going to bed. Not the best state to be in when one tries to explain rather dry economic data.

Most of what I wanted to add to yesterday’s post won’t interest anyone but myself anyway. Still, I think it is a small scandal how little the economic blog sphere has been paying attention to the increasing costs of federal debt load in real terms. Granted, the rapid rise of the total debt load in nominal terms has received a lot of attention. And I have even seen coverage of the increase in debt load as compared to GDP. But I can’t remember reading anything in recent past that looks at the rapid rise in the real cost of servicing the national debt.

To a normal person this might not seem strange. But to those who follow economic news and ideas, it ought to seem strange. After all, it did not use to be strange to read about the real cost of servicing Japan’s debt vs its nominal cost. And last year and the year before I can remember reading about how the rate of return on short term treasuries was negative in real terms.

But suddenly it seems that nobody wants to talk about the real rate of return on treasuries.

I personally think that this is because people who are favorable to the Obama administration have no reason to bring this up and the people who are not favorable to Obama are too busy worrying about rapid rise in total debt load to worry about real servicing costs. And to be fair, the real world effects of the increase in the real cost of servicing the debt load show up in the declining tax revenue (This is because inflation increase the nominal tax intake vs the nominal servicing costs of the debt and declines in inflation lower the nominal tax intake vs the nominal servicing costs of the debt).

Since there has been plenty of talk about the decline in tax revenue, you could argue that the practical effects of this issue have been well discussed. Nonetheless, I think that there are important reasons for talking about rise in the real servicing costs of the federal debt. For one thing, such a discussion focuses attention on the real opportunity costs of the stimulus package and other bail outs.

For example, supporters of the bail out often act as if no one would be investing if the government was not involved in “stimulating” things. But if this were so, why are investor demanding a higher rate of real return then they were a year ago? You would think that if they were at a loss as to what to do with their money, they would settle for a lower rate of real return. That certainly is how it played out in Japan.

Yesterday I dug into some economic source data for the first time in a long time. The initial impetus came from the need to revisit the post where I predicted what the nominal return on a 5 year treasury bond would be in a year’s time. Since the year was up last week, I figured it was time to take my medicine.

I have not been following economic stuff very closely this year. But I have kept enough of an eye on things to know that my prediction did not even come close to being true. For those that did not remember, my prediction was that the nominal return for 5 year treasuries would be 6.5%. Yesterday, 5 year treasuries had nominal rate of 2.36%. As you see, my prediction could not have been more wrong.

I wanted to write a post exploring where I went wrong. It would not have bothered me if I had not been exactly right. After all, I had admitted in my original post that my prediction was absurdly precise. But I had really expected that I would at least get the direction of the move in nominal prices right.

But what really bothered me (at least on an intellectual level) was the real return on the federal debt. If you go back and read my post, you will see that my whole argument center around proving that the Federal government was going to have to offer a 3% real return to get anyone to buy its bonds. In my argument, I had just assumed that inflation rate would hold more or less constant to arrive at my nominal prediction.

I knew that this was not a very defensible assumption (which is why my original post never really tries to justified the assumed inflation rate). But I figured that any likely fluctuations in the inflation rate would not detract from an obvious rise in real rates and so I could get away with not devoting much thought to the inflation rate.

Now I have not been following the inflation rate lately. But I no matter what it was at, I figured it had to make my real return figures look real bad. After all, to get the real rate of return you have to subtract the inflation rate from the rate of return. And it would not take much inflation at all to make 2.36% a lot less then 3%. It already had a pretty good start in that direction. And that would gut the core of the argument that I had tried to make. So I was sure my argument was going to look like total bunk in retrospect.

As it turns out, the rolling 12 month figure for CPI was -1.5. Since that is a negative number it has to be added to nominal rate of return to get the real rate of return. That would put the real rate of return at 3.86%.

I should have made my prediction in real terms and not assumed a constant rate of inflation.

Over at the Marginal Revolution, I got involved in a discussion about Obama’s stimulus plan. It got a little out of hand on my end.

I don’t have much use for Keynesian economic views. I still hold to views that I laid out here, although I would hope that if I had to write them out again I would do a better job of articulating my views. So as you might imagine, I don’t have much use for the concept of a government sponsored “stimulus.”

But I did not comment Marginal Revolution with the intention of railing against Obama’s stimulus plan. Marginal Revolution has a lot of dedicated anti-Keynesians and I don’t feel that I really have lot to add to the arguments that have already been hashed over.

The only reason I left my first comment on the thread was because I didn’t understand why Tyler Cowen felt that energy savings contradicted the goals of a stimulus. From there the conversation went far afield. It seems that some people have the idea that I am defending Obama’s plan. Needless to say, that was not what I was going on about.

As I see it, any discussion of Obama’s plan to spend money on infrastructure must consider three different questions.

The first question is whether investment in infrastructure is really necessary. I am on record as arguing that it is (see this post for an example). But that does not mean that we can just throw money at infrastructure and think that it will be spent wisely. As I point out here, Japan spent a lot of money on infrastructure and they still have critical infrastructure needs.

Just because we desperately need to start upgrading our infrastructure, does not automatically mean that all spending on infrastructure is wise.

The second question is what are the obstacles to improving infrastructure? In other words, if it needs to be done, why haven’t we done it already? I would argue that one of the key constraints is the shortage of skilled labor.

This is the argument that most people have the hardest time accepting. They see the housing boom has bust and lots of people in construction without a job, and they just can’t believe that labor shortage is a real issue.

But what most people outside of the trades don’t understand is that there is a big difference between commercial work and residential work when it comes to utilities. Moreover, there is a further division between troubleshooters and installers. People who can troubleshoot on the commercial level are few and far between. And so far, I have seen no sign that they are in danger of losing their jobs.

This has practical effects when you start talking about making buildings more energy efficient. Troubleshooting is the most important skill when it comes to making a pre-existing building more energy efficient. For example, in most cases, you can save big energy dollars simply by making HVAC controls in older buildings work properly. But to do this, you need troubleshooters and they are in short supply.

That is only one way in which labor shortages can impact how fast we can improve our infrastructure. Every trade has their own tales. For example, I hear that there is a growing shortage of Civil Engineers.

The bottom line is that almost every trade has some key skills that are in short supply. These skills limit the amount of money we can effectively throw at infrastructure at one time.

The last question that needs to be considered is how well Obama’s plan to invest in infrastructure will work as a stimulus. Since I don’t really buy the whole concept of stimulus, I don’t really have a lot to say here.

I would note that those critics who say that any infrastructure project will take too long to get off the ground are likely right. I can think of lot of exceptions in theory. But in practice, the government takes a long time to move on any project. If you want a lot of jobs next year, infrastructure projects are unlikely to meet your goals.

The Dow was up almost a 1,000 points today. Governments around the world have guaranteed with their lives that there will be no more problems. And I mean that in the most literal way possible. The sums that European Governments have thrown at the problem are out of this world. From Brad Setser….

The US and the major European central banks have effectively agreed to lend without limit to make good on their pledge to avoid a systemic bank failure. All major financial institutions in the G-10 ultimately now have access — through their national central bank — to the Fed. This isn’t quite a global lender of last resort (in dollars) but it is close. Banks are different than countries, so the analogy is imprecise — but back when emerging economies had trouble rolling over their short-term dollar debts during the crises of 97-98, the G-7 never pledged to lend “any amount” needed.

And as if that was not enough, consider this from Bloomberg…

France, Germany, Spain, the Netherlands and Austria committed 1.3 trillion euros ($1.8 trillion) to guarantee bank loans and take stakes in lenders, racing to prevent the collapse of the financial system.

In case you have forgotten how to count, that is a lot of money.

There are a lot of similar stories around. I lost track of all the things that were being done to save the world. It doesn’t really matter. The long and the short of it is that there will be no big banks failing in America or Western Europe anytime in near future. If there are any future big crises in either of those two places, it will because governments have trouble raising money at prices they can afford to pay.

No prizes for guessing whether I think there will be any future big crises. But I can’t really take any pride in being a Doom and Gloomer anymore. Everyone is doing it these days.

But one thing I do find interesting is that most Doom and Gloomer’s think that current plans coming out of Europe are a good thing. They are pleased that the US jumping on the same bandwagon. It is considered the only realistic way to restore stability to the financial world.

I find this interesting because I remember people talking about how the integration of the world’s markets was going to make everything more stable. It was argued that it would be next to impossible for one thing to go down when everything was tied together.

Back then, it was the Doom and Gloomer types who argued that this was not so. They argued that the fact that everything was tied together was encouraging people to take more risk. They argued the fact that everyone was tied together meant that the financial system was losing critical redundancy. The Doom and Gloomers argued that if you took those two things together, it was clear that the whole system was in danger of going down.

Score one for the Doom and Gloomers.

But now we find the Doom and Gloomers arguing that the government should back stop the whole system. This is the only way that it is possible to make things even more integrated then they already are. This can only make sense if the problems are not serious and mostly due to panic. If the problems are serious, then we are just guaranteeing that everything will go down at the same time.

Put it another way, in a real emergency you have to perform triage. You can’t just run around saying “I am going to save everybody.” I mean, you can say it, but can’t actually try to do it or you will just make everything worse.

Look at Iceland, for example. They have to pick and choose their battles really carefully. The government simply can’t do everything it wants to do. But it took them a bit of time to face up to that fact. Their early attempts to pretend they could handle it all simply made things worse.

In bigger and more wealthy countries the idea that the government might not be able to save everything does not yet seemed to have sunk in yet.

Switching subjects….

The reaction to Paul Krugman getting a Noble prize in Economics has been bothering me way more then it should. Nothing can ruin a good healthy dislike like having other people share it.

Look, I don’t like the guy. There are some days when I really don’t like the guy. But seeing how other people who don’t like Krugman have reacted to him getting the prize has embarrassed me to no end. Nobody has any class in this country anymore.

As far back as I can remember, everyone has known that Krugman was going to get a Noble prize for economics. Like him or not, his work has been very influential in his field. And since economics is not really a hard science, that is all you can really go by when deciding whether someone deserves a prize or not. So by the rules of the game, Krugman deserved the prize.

Spewing out insults and carrying on just because someone got what everyone knew he had coming to him is just too pathetic for words.

Sure the Swedes might have given it to him this year as opposed to some other year just to insult Bush. But so what? Since when does any red blooded American care what the Europeans think? I will give Bush this much: he does not care what the Europeans think.

Admittedly, I am not a fan of Bush. But even if I was, hopefully I would not stoop so low as to rain on the parade of a guy who got what was coming to him even if was given for the wrong motives.

Look at it this way: if they had given the prize this year to a European (like I thought they were going to this year) the prize money would have stayed in Europe. By giving it to Krugman they have injected the money into the US financial system. Given our current problems, every bit helps. In fact, I only wished they had given him more money.

This world would be a better place if every time a group of Europeans decided to insult Bush they had to give money to some American. Heck, I would be rounding up liberals for them to give money to.

Don’t get me wrong. I still want to see Krugman punished for all of his sins. That is why I hope Obama makes him Treasury Secretary.

Not likely to happen. But I can dream.