Fake News Versus Dissenting Opinions

Last week I was shocked to find that Google had banned the latest PragerU YouTube video as hate speech. As a regular listener to PragerU videos I was curious to see the video that went over the edge. From my experience hate speech is definitely not PragerU’s style. The video in question, Was Born To Hate Jews, is by a devout Muslim who describes his transformation of someone who hated Jews to gradual acceptance. Some Muslims might disagree with this man’s opinion but it was not hate speech. When did one Muslim’s decision to accept that Jews are okay and do not need to be wiped off the map become hate speech to Google?

That incident led me to question the subject of ‘fake news’.  A Washington Post article, Russian propaganda effort helped spread ‘fake news’ during election, experts say, had started off this mess. In one of the great faux pas of modern journalism the Washington Post said,

One of them was PropOrNot, a group that insists on public anonymity, which issued a report identifying more than 200 websites that, in its view, wittingly or unwittingly published or echoed Russian propaganda.

Okay, let see if I understand this correctly. The Washington Post is saying that ‘fake news’ during the recent elections came from Russian propaganda efforts. This is a considerably different story than the one portrayed by NPR in their story, We Tracked Down A Fake-News Creator In The Suburbs. Here’s What We Learned. The Washington Post went one step further and relied on a list from an anonymous source, PropOrNot. I hate to complain about the lack of journalistic standards but you have to ask the question. At what point did they get a little concerned that this organization might be a ‘fake news’ site just like the ones they were complaining about?

Is The PropOrNot List ‘Fake News’ Sites?

Someone had to do this and obviously the Washington Post was not up to the task. So I went over to the PropOrNot site and took a look at the list. The first thing I noticed was that the list was not ‘fake news’ sites by the NPR standard. The second thing I noticed was that I read several of the sites on a regular basis on the list. They are:

All of these sites express dissenting opinions. Many of the sites express libertarian opinions. From a cursory review of the list I can detect at least three themes, managed economies, Anti-War, and Truth in Government.

Managed Economy Theme

The first group, Stockman’s Contra Corner, oftwominds.com site, and zerohedge.com,  are critical of our government’s attempt to manage the economy. Their writings have more in common with the old Keynes versus Hayek debate. The most famous person in this group is former Congressman, Mr. Stockman, who wrote a New York Times bestseller, The Great Deformation: The Corruption of Capitalism in America. Ironically these free market oriented writings are critical of Russia’s managed economy.

Anti-War Theme

The second group, Lew Rockwell, antiwar.com, and the ronpaulinstitute.org, probably got included on the list due to their libertarian, anti-war dissents. Lew Rockwell and former Congressman Ron Paul are Mises Institute board members who are critical of the government’s efforts at regime change. Ironically both President-elect Trump, President Obama, and most of the Democratic party are critical of past regime change policies. It is a pretty big stretch to say that this group’s complaint about regime change “unwittingly echoed Russian propaganda”.

Truth In Government

Wikileaks and several other truth sites represent the truth in government group. Wikileaks is the only  site who I might concede wittingly helped Russian propaganda. Although Russia may have been involved in getting the emails to wikileaks, the emails are not ‘fake news’.  I went to the wikileaks.org site and confirmed that the DKIM signature said that the emails had not been altered. In the greatest irony of the fake news cycle, the Podesta and DNC emails were so damaging to the Democratic party election chances because they were true news stories.

How Much Do You Need To Write About Russia To Be Included On The PropOrNot List?

Maybe sites make the list because they write a lot about Russia. It is pretty obvious why pravda.ru and rt.com made the list but why did nakedcapitalism.com make the list? Its title implies that it devoted a lot more time discussing capitalism rather than Russia. Was this false advertising? Since the site displays a topic list with the number of posts pertaining to each subject, I downloaded the list and did some calculations. Russia was 47th on the list. The Russian posts amounted to only 0.47% of the 61,907 posts. They were just behind CEO compensation and well behind Europe(28th) and China(30th). Looking at these numbers it is difficult for me to see how this site got on the PropOrNot list. Maybe this is why the folks at nakedcapitalism are suing PropOrNot.

Which macroeconomic theories will rise or fall because of Donald Trump?

Tyler Cowen wrote an interesting post, Which macroeconomic theories will rise and fall in status because of Donald Trump?, that explored the potential rise or fall of macroeconomic theories under the Trump administration. I decided to jump on the bandwagon and offer my suggestions. Here are his choices and comments.

1. “The multiplier is high.”  That seems ready to decline in status.

2. “Even wasteful expenditures can boost demand and help pull us out of secular stagnation.”  Ditto.  “We need to do stimulus right” will make a comeback.  And I see “the distributional effects of stimulus really matter” lurking around the corner.

3. “Tax cuts aren’t as good as government spending.”  That actually may rise in status, especially if Congress gets the bargain they want — lots of tax cuts — rather than what Trump wants.

4. The notion of how a credibly irresponsible leader can improve macro performance won’t get cited as much.

5. Austrian-like theories of how there can be a boom in the short run, yet with great long-run dangers, will return to prominence, albeit with modifications to the original Austrian story.

6. Criticizing countries with trade surpluses will decline in status.

7. The efficient markets hypothesis will decline in status.  It imposes too much discipline on our judgments of leaders and their policies.  The more certain we are of our own judgments, the more that evidence contradicting those judgments should be downgraded.  Right?

My Choices For Macroeconomic Rise Or Downfall

  1. Zero Interest Rate Policy(ZIRP). We have sufficient evidence to conclude that a Zero Interest Rate Policy does not stimulate the economy. ZIRP stabilizes a financial crisis when it is timely, targeted, and temporary. It is not a substitute for a good, long term monetary and fiscal policies.
  2. Financial Engineering. The zero interest rate policy encouraged many companies to borrow money to buy back stock. Now the Federal Reserve is planning to raise interest rates. How are these self liquidating companies planning to raise sales without borrowing even more money?
  3. Wall Street Bailout of 2008.  The longer we go with stagnant wages and slow GDP growth the more the bailout resembles Japan’s Lost Decade. Hopefully, if we have a recession our policy leaders will not continue to borrow failed ideas from the Japanese.
  4. All Bubbles Matter. The Wall Street bailout did not reduce the systemic risk posed by the derivatives market. Now we get to watch the European Union deal with the systemic risk posed by Deutsche Bank and multiple Italian banks. At some point we have to admit Keynesian economics is more prone to bubbles than Austrian economics.

My Two Policy Questions For Both Presidential Candidates

Two weeks ago I posted my top question for both Presidential candidates so I decided to expand on that question and post my second question.

If we have a recession in your first term, what will you as President do differently with economic policies than was done in 2008?

The reason for this question is that the economy is weak and the chance for a recession is increasing.

  •  Deutsche Bank and JP Morgan said in June that the chance of a recession in the next twelve months is between 36% and 60%.
  • The 1% GDP growth for the first two quarters of 2016 is sufficiently weak that a slight miss can easily drive the GDP negative and unemployment up.
  • Health Services Grew Almost 12 Times Faster Than Non-Health GDP.  Since 2015 the increase in health care spending has resulted in flat retail sales. This health care driven economy is different than the consumer driven economy we have experience with. The health care driven economy has very narrow benefits to the overall economy compared to the consumer driven economy. Based on the GDP numbers over the last year and a half, it looks like we can have either a health care driven economy or a consumer driven economy but not both.
  • I think after 8 years of zero interest rates the wealth given to the banks did not trickle down to the American people.

The crucial distinction between a recession in 2008 and 2017 is that there are few if any policy options left.

  • With interest rates between 0% or 0.25% there is almost no benefit from lowering rates.
  • Weakening the dollar to increase exports is a risky policy, too. It could cause capital flight and increased interest rates.
  • It has been a Chinese goal to replace the dollar with the SDR as the reserve currency. To achieve that objective China will trade in a portion of its dollar debt for SDR based debt. This will probably cause increased interest rates.
  • Can the Federal Reserve continue to expand its balance sheet in a rising interest rate environment without international repercussions?
  • Can we learn anything about potential policies addressing a 2017 recession from Mr. Trump’s casino problems in Atlantic City?

My second question is what will you as President do differently concerning health care policies than was done in the Affordable Care Act?

The reason for this question is that if the ACA cannot continue in its present form so how do we address a sustainable reform?

  • The health exchanges of the Affordable Care Act are probably in a death spiral.
  • President Obama, Mr. Gruber, and other Affordable Care Act supporters have a trust problem with the middle class. The lies they told the middle class about the Affordable Care Act may be forgiven but they are not forgotten. Lying has consequences.
  • We have two separate health care problems, a spending problem on high cost chronic care customers and an insurance problem with the healthy customers.
  • The big idea for the Affordable Care Act was to dump high cost chronic care patients on the smallest health insurance market. A smarter idea would be move to high cost chronic care patients to either Medicaid or Medicare and let the health exchange work like a free market for healthy customers. If society has a moral obligation to provide affordable health care to high cost patients than it makes sense to spread these costs across a much broader base. Making a small group of healthy customers pay society’s cost for the high cost patients is the recipe for a death spiral.
  • We have an extremely complex way of subsidizing health insurance.. The Affordable Care Act prepays health insurance subsidies to insurance companies for low income people and uses the IRS to check compliance. If we are concerned about making a more efficient health care system than a simple re-design would avoid the money spent by the IRS on compliance.
  • As a person who started work in 1976 I have always had the option of affordable health insurance. As a recently as 2011 health insurance cost me $311 a month. By 2016 my grandfathered plan had increased 76% over my 2011 premium of $311 to $547. This increase is much greater than the increase in inflation and is an extravagant increase for a person who has not filed an insurance in over 16 years. The situation in the exchanges is unfortunately much worse. The lowest cost 2016 bronze plan would cost me $1,025 a month. This is 87% higher than my 2016 grandfathered plan and far higher than the 8.05% the IRS had declared as affordable.  Despite being the perfect insurance customer I can no longer find affordable health insurance. In 2017 I will go without health insurance.
  • According to a study from the Mercatus Center the states that expanded Medicaid under the Affordable Care Act have seen enrollment higher than expected and the cost of individual enrollees has been more expensive than projected.

Did Wages Detach from Productivity in 1973?

When I saw the nice graph Curtis Miller created showing that productivity detached from wages in 1973, I was curious if I could duplicate it in FRED. Nothing against R but creating a graph in FRED is fast and easy since much of the Bureau of Labor Statistics data is available. After a little searching I found both series and indexed them to 1947.(Oops! I used the wrong series. I should have used the Business Sector: Real Output Per Hour of All Persons (OPHPBS) and Real Compensation Per Hour [RCPHBS].) The graph is similar to the one Curtis created except it pushes the date when productivity detached from wages back to the first quarter of 1970.

Although David Stockman argued in his book, The Great Deformation, that the era of sound money ended around this time, I am not comfortable with the idea that dumb spending policies should have an impact on real wages and productivity. I am not surprised but it does make me wonder. Is the adoption of fiat currencies and the expansion of the welfare state the reason we are seeing reduced real wages despite improving productivity?

Source
  1. US. Bureau of Labor Statistics, Nonfarm Business Sector: Real Output Per Hour of All Persons [OPHNFB], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/OPHNFB, September 13, 2016.
  2. US. Bureau of Labor Statistics, Nonfarm Business Sector: Real Compensation Per Hour [COMPRNFB], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/COMPRNFB, September 13, 2016.

Bull Market Blues Revisited

When I read Paul Krugman’s op-ed, Bull Market Blues, I realized I had at least three ideas that explained the bull market blues better than his idea that “stock prices reflect profits, not overall incomes”. Here are my top three ideas.

Federal Reserve’s Co-dependent Relationship With The Stock Market

By Photograph by Mike Peel (www.mikepeel.net)., CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=35730488

New York Stock Exchange Photograph
by Mike Peel (www.mikepeel.net)., CC BY-SA 4.0, and courtesy of Wikimedia

By far the biggest impact on stock prices has been the question of when will the Federal Reserve stop its zero interest rate policy. To buyers and sellers in the stock market the latest speculation about the Federal Reserve decision is far more important than either actual profits or profit guidance. Almost every week there is a financial reporter saying the market has gone up or down based on speculations about Federal Reserve actions. This link is stronger now than at any time in the history of the Federal Reserve. After seven years a large group of buyers and sellers have cynically embraced the thought that the zero interest rate policy has created a stock market bubble and is the only thing holding up higher stock prices. Although the Federal Reserve loathes to admit it, it is their fear of declining stock prices that caused their policies to devolve into this co-dependency relationship.  Now they are stuck with a policy that can written off as “trickle down economics” for banks but is increasingly necessary to keep the stock market bubble intact. It reminds me of the Federal Reserve easy money policies during the 1920s and we know how that stock market bubble ended. There is nothing that gives me the blues more than to see how quickly the Federal Reserve backs off of a rate increase when the stock market tumbles for a couple of days. It is as if the Federal Reserve cares more about the stock market than the economy.  At some point the Federal Reserve will regain its focus on the economy and all of us will have to endure the stock market blues until we can purge the market of its excesses.

The FANG Portfolio

In 2015 the S&P 500 would have declined if not for the FANG portfolio, Facebook, Amazon, Netflix, and Google. Despite Mr. Krugman’s belief that stock prices reflect profits these companies are prime examples of growth stocks that are richly valued by their expected profit growth and not their minuscule profits. They also represent the leading edge of the Unicorn Companies who have rich valuations and almost no earnings. To paraphrase former Federal Reserve chairman, Allan Greenspan, there seems to be an irrational exuberance for these unicorn companies. As an example of this irrational exuberance, Salesforce.com has almost never had a profitable quarter and presently sports a price to earnings ratio of -4,213. How does this company deserve a market capitalization of $54 billion and get its name on the tallest building west of the Mississippi?

Financial Engineering

One of the interesting trends since the last economic expansion that was based on productivity gains has been the growth in financial engineering tricks. Since financial engineering was one of the technologies that enabled the sub-prime mortgage bubble and the 2008 stock market crash, it is foolish to overlook its importance. Despite reforms from the 2008 crash financial engineering remains largely intact, profitable, and does not require many people to implement. To many companies it is more attractive than investing in productivity improving ideas such as direct capital expenses and employees. It is also one of the main reasons middle class wage increases have stagnated since 2000. In its most recent incarnation many companies have taken advantage of low interest rates to buy back their own stock in an effort to raise their stock price. The executives and stock holders of these companies realize they will be rewarded with higher stock prices despite the fact the sales for the company are unchanged. If the best investment idea for these companies is to buy back their own stock, it is also a condemnation of these executives whose primary job is to grow sales and reduce costs via new products, greater innovation, and productivity. The worst case scenario is that one of these days the Federal Reserve will be successful at creating higher interest rates and inflation and these companies will have too much debt to invest in new products and productivity improving ideas.

Eight More Reasons Why The Democrats Are Having Problems With Middle Class Voters

After eight years of benign neglect I was hopeful that this would be the election cycle that the Democratic party would get a clue about middle class problems. When you go over to the Hillary Clinton For President site you see  her “eight ways we can give American families a raise“.

  1. Cut middle-class taxes.
  2. Make college affordable.
  3. Raise the minimum wage.
  4. Support unions.
  5. Rebuild our infrastructure.
  6. Boost manufacturing jobs.
  7. Invest in clean energy.
  8. Lower child care costs.

Most of these suggestions will not help me at all. Two of these suggestions, rebuilding our infrastructure and boosting manufacturing jobs,  might help me indirectly. This is such a meh group of ideas you have to wonder what drove them away from bread and butter issues for the middle class like the economy, government corruption, jobs, immigration, and the rising cost of health care.  It just not me saying this. The most recent Gallup poll asked,  What do you think is the most important problem facing this country today? The top four issues listed were the economy in general, dissatisfaction with government, unemployment/jobs, and immigration. I hate to say it but the non-politician, Mr. Trump, seems to know the issues bothering the country and the professional politician, Ms. Clinton, does not!

Her next suggestion was to put Bill Clinton “in charge of revitalizing the economy“. The problem I have with Mr. Clinton’s economic record is that his success depended largely on the on the productivity gains from expanding the use of personal computers in the work place. By the time he left office there were no more places left where productivity would improve from using personal computers. If you look at recent year to year productivity gains, you can see that the decline in the personal computer business from 2000 to 2010 matches the decline in productivity gains. If you believe that productivity growth results in real economic growth for the middle class then you can understand why the lack of productivity gains coupled with a financialization bubble has made life miserable for the middle class. If we assume that the financialization bubble over the last 8 years is over then we are left with searching for productivity gains in an increasingly socialist economy. Something has got to give and sadly Ms. Clinton is clueless!

Not My Father’s Economy

I struggle to explain the current economy. Gone are the days of inventory-driven booms and busts. We hated the layoffs but at least the economic boom was robust and benefited everyone. It was the rising tide that lifted all boats. Now it seems that neither good or bad economic news affects the economy. We have several years of lousy retail sales growth that does not seem to matter. We are “experiencing the strongest streak of employment growth since the 1990’s” but that does not seem to matter. Almost all of our economic and job growth comes the health care sector but that does not matter. Even lower prices for gasoline do not matter. This is not my father’s economy. The doldrums we are experiencing seems to have more in common the crisis of confidence that President Carter spoke about in his “Malaise” speech but with one significant difference. Based on recent history it looks like the traditional correlation between jobs and economic growth is considerably weaker than in President Carter’s economy. I am not alone in my confusion. Lance Roberts voices similar concerns in his article, Is There A Problem With The BLS Employment Reports?

IF we were truly experiencing the strongest streak of employment growth since the 1990’s, should we not be witnessing:

  1. Surging wage growth as a 4.9% unemployment rate gives employees pricing power?
  2. Economic growth well above 3% as 4.9% unemployment leads to stronger consumption?
  3. A rise in imports as rising consumption leads to demand for goods.
  4. Falling inventories as sales outpace production.
  5. Rising industrial production as demand for goods increases.

Obviously Mr. Roberts was expecting a much stronger correlation between job and economic growth than we are seeing. The more interesting question has to be, why are businesses hiring when it looks like that hiring more people does not translate into growing sales?

Charles Smith shows in this chart the growing disconnect between jobs and economic growth has been going on for a long time.

wages-GDP5-16b

Over the last forty years we have chosen to become a country less dependent on labor. Part of this decline can be explained that global trade has encouraged countries like the United States to ship low wage jobs to countries with lower labor costs. A good portion of our textile business went over seas for this reason. Ironically this “land of opportunity” has less opportunities for low wage jobs than ever before and an even bigger problem with middle class jobs. Every developed country is desperately trying to hold on to its middle class jobs and, in some cases such as China, increase them. So if you believe financial engineering bubble is over then we are left with growing the economy in a way my father would be comfortable with, growing the middle class by encouraging product development at small and medium size businesses. The heavy hand of government regulations combined with increased cronyism seems to have been more advantageous to the firms that got most of their earnings from financial engineering rather than product development. The millennials and Hispanics need to start sifting through the policies that worked in the past and tweak them for this new generation. So if the health and wealth of America depends largely on the health and wealth of the middle class, what are the competitive advantages that will convince businesses to keep their middle class jobs in America?

 

Is Building A Border Wall With Mexico A Shovel Ready Infrastructure Project?

One of the promises of the 2009 stimulus bill was that the government would start work on a large number of “shovel-ready” projects that would generate jobs. Probably the greatest disappointment with the bill is that most of the purported shovel-ready projects got tied up in the regulatory process and never generated any jobs. Since the border wall has been on the books since the 1980s you have to think that the regulatory process is complete. If the 2009 stimulus bill was screaming for any shovel-ready project that could generate jobs, why didn’t we build the wall?

Dillian’s Loop

There is something just not right about our economic malaise. Obviously this economy is different from my father’s economy but just because it is different does not mean it is better. When I went to college in the 1970s my middle class parents cash-flowed my education. Today it is nearly impossible for middle class parents to cash-flow their kid’s college education. Is this progress? The same is true about health insurance. It was such a non-issue in the 1970s that I can only remember that I had it and did not have to pay for it. As a healthy person I get no value from my current health insurance but it has grown to be one of my largest expenses and most of the increase occurred in the last couple of years. Is this progress? We seem to stuck in a loop where we keep spending more money to get the same results our parents got for much less.  It is this value proposition that is frustrating and angering the middle class the most. Yesterday I was pleasantly surprised to read a Mauldin Economics newsletter describing “Dillian’s Loop“.  Jared described it simply by giving the following example.

  • If the regulations work, they are declared a success and they write more regulations.
  • If they don’t work, it means they need to have more regulations.

In a way it reminds me of Albert Einstein’s quote, “Insanity: doing the same thing over and over again and expecting different results“. The subtle difference is that “Dillian’s Loop” makes fun of people who continue to propose single factor answers to multi-factor problems despite getting the wrong answer or in some cases the right answer for the wrong reason. In the developed world we still cling to the belief that there are simple solutions to complex problems and we are only one smart administrator away from eventual success. This belief permeates a lot of our policy making. Many of the Affordable Care Act supporters believe that because they expanded Medicaid it is working as intended and the act only needs a little tweaking to bring affordable health care back into the Affordable Care Act. If reforming health care costs was that simple why didn’t the Affordable Care Act supporters start off with that? Do they really believe a few more regulations will fix the health care cost problem? Even if this overly simplistic belief system leads us into making bad decisions on complex problems like the Affordable Care Act, regulations, or quantitative easing, we cling to another belief that there is still time to kick the problems down the road for the next generation to fix. The problem is that our faith in these two beliefs is waning and the clock is ticking on when our problems will spin out of control. If we cannot fake till we make it, we will be screwed.

Parsing Cato’s Analysis Of Kasich’s Fiscal Record

As a resident of Ohio I was intrigued by Cato’s article on Kasich’s fiscal record. The paragraph that caught my attention was:

Just 18 months after the expansion took effect, the costs have exploded. According to a recent report from the state’s Legislative Service Commission, costs are 63 percent, or $1.4 billion, over budget. The report says the overage is because of “higher than expected caseloads and per person costs.”  The expansion population was 600,000 in June of 2015, compared to estimates of 366,000. Medicaid expenditures are 9.5 percent higher in fiscal year 2015 than they were in fiscal year 2014.

When you are $1.4 billion over budget it is kind of a big deal for states. What had me confused is why the local papers are so quiet about the budget overrun and who is the Legislative Service Commission? The second question was the easiest. The Legislative Service Commission is a nonpartisan agency providing the Ohio General Assembly with drafting, research, budget and fiscal analysis, training, and other services. They are the people who should know about budget overruns. Since Cato referenced their report, Status Of The GRF, I read it looking for references about Medicaid and the $1.4 billion dollar budget overrun. I did not find it. So I downloaded the tables for the report and looked for the budget overrun. I did not find it. So I went back to the original blog post and noticed that two of the three links refer to the LSC report. The other link refers to a post at OhioWatchdog.org called, “Ohio’s Obamacare expansion has cost $4 billion”.  It is that article that says that “Kasich underestimated the cost of the first 18 months of his Obamacare expansion by roughly $1.5 billion” and the expansion population was 600,000 compared to estimates of 366,000. Both Affordable Care Act supporters and I would agree that was not surprising. The only question in my mind was whether the state was running deficits because they expanded Medicaid and who was paying for the overrun. If you look at the first page of the LSC report you will find that the FY2015 revenues for the state($31,473.1 millions) are approximately in balance with the expenditures($31,461.5 millions). Since the “budget overrun” was a federal obligation that was paid for by the federal government, the local papers did not care.

That got me suspicious about the statement that Medicaid expenditures were 9.5% higher in fiscal year 2015 than they were in fiscal year 2014. If we look at LSC table 2 we see that the FY2015 state’s share of Medicaid expenses grew 2.7% over FY2014. This is exactly the same growth as it was for the previous year. In FY2016 the state’s share of Medicaid expenses is expected to grow 4.4%. This number is inline with budget increases for education. When we look at LSC table 3 we see that FY2015 state and federal share of Medicaid expenses grew 9.7% over FY2014. This is worse than the previous year growth of 7.6%. The scariest number I saw was a 22% growth in the FY2016 Medicaid expense. From this data it looks like the state portion of Medicaid is in control and the federal portion is out of control. Since most Affordable Care Act supporters say the bill is working as intended, it is hard to blame Kasich for the out of control federal portion of the Medicaid mess. Is anyone surprised that Ohio has their act together and the federal government does not!