Author: bill

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Did The Tail Wag The Dog In The First Quarter GDP Report?

I am puzzled why health spending had such a large impact on first quarter GDP report. I thought the Affordable Care Act impacted the health care expenditures for only a small part of the population. Other people are puzzled, too. The best article that I have found that partially explains the impact of health care spending on first quarter GDP is, “Health Spending and First Quarter GDP: What Happened?“, but it fails to explain why such a small component of the GDP had such a large effect.

When I get puzzled with economic data, I go over to FRED and plot some data. So if we follow Tyler Durden’s lead of plotting quarterly changes for health care expenditures and include the Real Gross Domestic Product series we get this graph. You can see that the quarterly change in GDP dwarfs the health care expenditures and it is hard to see much of a correlation between these two indices. Unless we are willing to believe that the tail can wag the dog, we have to conclude that the 2.9% decline in the economy was for economic reasons other than health care expenditures. The impact of changes in health care expenditures is still a minor factor in the GDP growth. The Affordable Care Act taxes are probably holding the economy back a little bit but if we want to grow the economy we have to do it the old fashion way by making things bigger, better, faster, or cheaper.

FRED Graph of Health Expenditure and GDP Quarterly Changres

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Is Lois Lerner Corrupt Or Stupid?

LoisLernerI was chuckling to myself while reading Patrick Howley’s article on the Daily Caller, “Issa to IRS Commissioner: Lerner’s Lawyer Contradicted Your Testimony… Want To Try Again?”. In that article he says that Ms. Lerner’s attorney claims “that Lerner did not know she was supposed to comply with federal law.” According to Wikipedia, Ms. Lerner “is a member of the Massachusetts bar having earned her juris doctorate from Western New England College School of Law and graduating cum laude. She completed her undergraduate studies cum laude at Northeastern University.” She sounds like a pretty smart student. Before her stint at the IRS she was the lead counsel for the Justice Department and Acting General Counsel for the Federal Elections Commission. It sure looks like the Justice Department and Federal Elections Commission thought she has a pretty sharp legal mind. Now we are being asked to believe that she did not know that she was supposed to comply with federal law? So let me see if I understand this correctly. Her lawyer asserts that she made an innocent mistake by not complying with the Federal Records Act and due to an unfortunate disk drive crash the evidence that would have proven her innocence of illegally targeting conservative organizations is now missing. These circumstances are way too convenient for me to believe Ms. Lerner and the IRS were that stupid. According to a recent Rasmussen poll, “71% Think IRS Likely to Have Destroyed E-mails to Hide Guilt”. Most of the people use a different standard concerning government corruption. They will assume the IRS and Ms. Lerner are corrupt until the IRS finds her missing emails. It may be unfair but it is hard to tell the difference between government incompetence and corruption. If we want to change future outcomes we have to stop treating government incompetence as a kinder, gentler form of corruption.

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Who Would Have Thunk We Would Get A 2.9% Decline In GDP?

The latest report from Bureau of Economic Analysis is out and it was a shocker. I don’t think anybody except BizzyBlog saw a 2.9% decline. I was curious how fast the economy was growing on an annualized basis. Some folks expect the economy to grow at a robust 3% rate in the second half of the year. The Federal Reserve is slightly less optimistic and recently cut their estimates for 2014 to between 2.1 percent and 2.3 percent. Considering how big a hole the first quarter GDP decline put us in, it looks like we need three quarters of a 3.8% of compounded growth to get to the low end of their estimates. Based on recent history that looks difficult to achieve. Based on this same history I am in the 1.5% annual growth camp. When I look at the economy, it looks like more of the same to me. If my calculations are correct then three quarters of 3% compounded growth will overcome the first quarter and get us a positive 1.5% growth for the year and match last year’s growth rate. The nightmare scenario for the Administration and Democratic candidates is if we do not see 3% growth for the remaining three quarters of 2014. That rarely happens during an election year but you never know. This economy has been anything but predictable.

Table 1.1.3. Real Gross Domestic Product, Quantity Indexes
[Index numbers, 2009=100] Seasonally adjusted
Bureau of Economic Analysis
Last Revised on: June 25, 2014 – Next Release Date July 30, 2014
Line   2012 2013 2014 2014 vs 2013 2014 vs 2012
I I I
1 Gross domestic product 106.683 108.087 109.753 1.5% 1.4%
2 Personal consumption expenditures 106.145 108.138 110.324 2.0% 1.9%
3 Goods 109.298 112.928 115.923 2.7% 3.0%
4 Durable goods 119.195 127.379 133.093 4.5% 5.7%
5 Nondurable goods 104.988 106.762 108.661 1.8% 1.7%
6 Services 104.616 105.818 107.618 1.7% 1.4%
7 Gross private domestic investment 129.269 131.521 136.421 3.7% 2.7%
8 Fixed investment 114.569 119.467 123.408 3.3% 3.8%
9 Nonresidential 116.551 119.318 123.458 3.5% 2.9%
10 Structures 93.345 93.09 97.601 4.8% 2.3%
11 Equipment 139.204 143.175 147.134 2.8% 2.8%
12 Intellectual property products 108.83 112.648 116.698 3.6% 3.6%
13 Residential 106.359 120.123 123.35 2.7% 7.7%
14 Change in private inventories — — —
15 Net exports of goods and services — — —
16 Exports 122.576 123.781 127.308 2.8% 1.9%
17 Goods 125.88 126.126 130.47 3.4% 1.8%
18 Services 115.719 118.961 120.767 1.5% 2.2%
19 Imports 120.475 120.584 124.361 3.1% 1.6%
20 Goods 123.394 123.098 127.109 3.3% 1.5%
21 Services 108.248 110.197 112.96 2.5% 2.2%
22 Government consumption expenditures and gross investment 95.863 94.117 92.682 -1.5% -1.7%
23 Federal 100.115 96.315 92.523 -3.9% -3.9%
24 National defense 97.769 91.731 87.434 -4.7% -5.4%
25 Nondefense 104.409 104.74 101.873 -2.7% -1.2%
26 State and local 93.096 92.672 92.766 0.1% -0.2%
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How Many Years Of Ms. Lerner’s Emails Were Online When The Disk Crashed?

mail128For old IT guys like me the interesting question is why wasn’t most of Ms. Lerner’s emails online?  If you have the last three to five years of emails online then a disk crash becomes a minor issue. I get the impression that very few of her emails were online. To an IT guy or gal the difference between online and offline storage is how fast you recover from an event like a  disk crash or theft. Online storage also lowers the cost of email discovery. In the vast majority of scenarios online storage is the low cost solution and offline storage is the high cost solution. So why did the IRS choose the high cost solution?  The letter from Leonard Oursler, IRS, to Senators Wyden and Hatch provides their explanation but in turn opens the IRS to second guessing. According to the letter “the average individual employee’s mailbox is limited to 500 megabytes, which translates to approximately 6,000 emails”. Prior to 2011 the limit was lower. To support Ms. Lerner’s 67,000 emails from 2009 to 2011 it would have required about 5.3 gigabytes of online storage or approximately .003% of the 170 terabytes the IRS said they had available for online email storage. If management wanted they could have solved this problem by instructing the Exchange administrator to set her quota much higher. The cost for this solution is zero.

To put the email storage requirement into historical perspective here is an announcement from 2007 where Yahoo announced that it was offering unlimited email storage. I believe that Hotmail also offered unlimited email in 2007 but I am little fuzzy on whether Google offered 5 GB or 15 GB for their free email accounts. So if Yahoo, Hotmail, and Google can offer email storage greater than 5 gigabytes for free, what is the problem with the IRS?

First I looked at possible Exchange 2007 restrictions. Harold Wong says in this post that Exchange 2007 supported an unlimited database size. It doesn’t look like the software was the problem.

Then I looked at the cost of disk space. At work we use HP Proliant servers with SCSI drives which I assume the IRS is using, too. In 2009 we purchased a 300 gigabyte drive for about $230. If they were running servers with smaller disk drives then It would be easy to swap out drives and expand the database. In this scenario it would have cost the IRS about $7 to put her 5.3 gigabytes online. At this cost level a compliant email retention policy with 5 to 50 year retention schedule for staff personnel looks like a no brainer. If we go to the other extreme and accept the estimate provided by the IRS that “it would cost well over ten million dollars to upgrade the IRS information technology infrastructure in order to save and store all email ever sent or received by the approximately 90,000 current IRS employees”,  you have to recognize that the IRS has already spent more than that on this investigation then they would have by upgrading the email system. The IRS policy to limit the employee’s mailbox to 500 megabytes was not only a costly mistake but it was not even a good faith attempt to comply with the federal email retention requirements. One hard disk drive crash could be explained as bad luck. When you have seven hard disk crashes and you are unable to reliably produce the emails, you have just made an argument for a massive policy failure. Why did they do it?

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The Perfect Platform For A Plausibly, Deniable Attack On A Political Enemy Is The IRS

KoskinenEvery time I watch the heated house hearing on the IRS targeting scandal video I am struck with how Mr. Koskinen reminds me of Colonel Jessup in the movie, A Few Good Men. When Mr. Camp asks for an apology we get a smug almost arrogant smile. When he gets in the verbal brawl with Mr. Ryan I keep expecting him to yell,

You can’t handle the truth! The IRS has always been the political weapon of choice for the party in the White House and always will be. You see the missing emails as a fault in the system, I see it as the IRS adapting to modern times. You create laws requiring email retention, we find a way around them. As soon as the emails are transferred to the local disk drives, they are as good as gone!  Whether Ms. Lerner deleted them or a disk drive crash made them unavailable, what difference does it make now? How else can we protect these political operatives who in turn protect our budget?  We won, you lost! In three years your party may be in charge and you will want our help.

For a trip down memory lane here is the clip from A Few Good Men.

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The Five Who Made It

DSC02157aMany geese have been born on our property but very few have flown away. I suspect all of them became someone’s meal. The five geese in the middle were born several weeks ago and a couple of days ago I saw them with adult feathers. So I ran, got my camera, and took this shot to commemorate the five who made it.

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Reconstructing Ms. Lerner’s Mailbox

mail128Here is a Yahoo news article called Congress to probe how IRS emails could go missing that provides a bit more information about the IRS efforts to reconstruct Ms. Lerner’s mailbox. Since the IRS does not appear to have printed copies of her emails as required by IRS policy they had to go around to 83 computers in the IRS to find the emails. Is this enough? Due to the “very weak policy for email archiving and retention” at the IRS I think the investigation is obligated to go through the emails, identify any people who might have been emailed by her in departments other than the IRS, and subpoena those mailboxes. It is crude and rude but the IRS policies for email archiving and retention have consequences on the functioning of the rest of the government, too. Hopefully the other departments are not as stupid as the IRS. Although this might sound counter-intuitive the investigation’s actions are in the best interest of the IRS. The IRS crashed the family car while texting and under the influence of alcohol. If our son or daughter did this it would be a long time for them to regain our trust. This is the same situation faced by the IRS. Here are the statements from the news article I found most interesting.

“If they knew there was a problem in 2011,” said Henry, now president of CrowdStrike, a security technology company, “they could have or should have been able to recover it.”

The IRS told Congress last week that recovering emails has been a challenge because doing so is “a more complex process for the IRS than it is for many private or public organizations.”

The IRS was able to find copies of 24,000 Lerner emails from between 2009 and 2011 because Lerner had sent copies to other IRS employees. Overall, the IRS said it was producing 67,000 emails to and from Lerner, covering 2009 to 2013. The agency said it searched for emails of 83 people and spent nearly $10 million to produce hundreds of thousands of documents.

At the time that Lerner’s computer crashed, IRS policy had been to make copies of all IRS employees’ email inboxes every day and hold them for six months. The agency changed the policy in May 2013 to keep these snapshots for a longer, unspecified amount of time. Had this been the policy in 2011, when at least two of the computer crashes occurred, there likely could have been backups of the lost emails today.

The chief executive for an email-archiving company, Pierre Villeneuve of Jatheon Technologies, said most public and private sector organizations keep emails for several years, not six months, because of financial regulations and inexpensive computer storage.

“To have a large agency like the IRS have a very weak policy for email archiving and retention is quite shocking,” Villeneuve said. “If this were a private enterprise and they couldn’t produce this information on demand, they’d be in trouble. They’d either be fined or accused of hiding information.”

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Where Are The Lois #Lerner Printed Emails from 2009 through 2011?

mail128I was reading the letter from Leonard Oursler, IRS, to Senators Wyden and Hatch and wondered where was the printed copy of Lois Lerner’s emails from 2009 through 2011. Here is what the document says on page 3:

In addition, if an email qualifies as an official record, per IRS policy, the email must be printed and placed in the appropriate file by the employee.

If Ms. Lerner was following IRS procedures then she should have printed a copy of every email that qualified as an official record whenever she moved it from the online storage to the archive. I am guessing that this is the IRS version of a redundant system backup.

Here is another question I have from the document. An email in this document dated June 13, 2011, says her disk drive crashed. If the emails from 2009 through 2011 are lost that implies that she archived them. Why did she archive the 2009 through 2011 emails so quickly? The only answer I can come up with is that she was automatically archiving the emails that are older than a month or two. If she followed this practice than it is unlikely she ever complied with the IRS procedures for printed copies and it explains why electronic discovery is so arduous since the online system contains only the last couple of months of emails. The IRS appears to have deliberately chosen an email retention policy that was prone to both error and abuse. Now they are complaining that searching for Lois Lerner’s emails is so difficult and expensive. I find their whining in the letter to be entertaining especially the part where they complain that more “than 250 IRS employees have spent over 120,000 hours on compliance”. All of these problems disappear if the IRS had chosen to operate a compliant email system in 2011. They have enough money for bonuses to IRS employees who are delinquent on their taxes but not enough money to meet email compliance requirements required by law. Maybe we should postpone all bonuses until they get compliant and fix the Ms. Lerner email problem. They own these problems.

This leads me to my last question. The Inspector General and GAO should have flagged this system as non-compliant. From an electronic discovery standpoint, this email system was born to fail. It is such a bad system you have to wonder why did the Inspector General and GAO look the other way?

For those into conspiracies you have to wonder whether Ms. Lerner knew that the IRS flagged groups with titles including “tea party,” “patriot,” and “9/12 project” for deeper review prior to June 29, 2011 and would likely cause a serious political scandal. This is pretty darn close to June 13 and in hindsight it looks like a very convenient time for a disk crash if you want to cover your tracks.

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Richard Nixon – “I’m not a crook”

All of this talk about possible corruption at the IRS had me thinking about President Nixon. When I watch this clip and think about the IRS scandal, it is déjà vu all over again. Things are spiraling out of control at the IRS and they have no clue of the predicament they are in. Maybe Lois Lerner or Commissioner John Koskinen will make one more inadvertent remark and complete the circle.