The Skeptical Optimist

Housing prices are NOT falling, they're still INFLATING...

...according to the October Consumer Price Index, published by the Bureau of Labor Statistics. The seasonally-adjusted annual rate of inflation for our primary, owner-occupied residences is (supposedly) 1.9%, believe it or not. I clipped the image below from page 10 of the latest CPI report, published a few days ago.

Click to enlarge:

[Red lines added by me. Web page here, pdf here.]

Either I'm missing something, or the inflation calculation is. We all know that housing prices are deflating, not inflating. The bursting of the house-price bubble is the underlying cause of the once-per-century financial crash we are now seeing all around us, according to 105% of the people who have had anything to say about it. And it's not as if nobody had been waving a red flag; the Case-Shiller housing index has been looking ugly for quite a while.

On Friday, I spoke with Harvey Rosenblum, EVP of the Dallas Fed, about the inflation calculations that serve as the foundation for many of the Fed's monetary policy decisions. Consumption goods (food, fuel, etc.) get the bulk of the attention in those algorithms, and I wondered aloud if asset prices (e.g., housing) deserved a little more emphasis. He told me the BLS (Bureau of Labor Statistics) was the keeper of the keys regarding the way they had to factor housing into the inflation number. [Their calculation translates the value of owner occupied housing into its estimated "rental equivalence" for inclusion in the CPI.] 

Undeniably, many smart economists over a long period of time have put significant effort into the way housing prices should be factored into the CPI. [Here's a link to the BLS explanation of today's rental equivalence component of CPI, here's more, and here's a link to the 1982 paper explaining the current method in detail.] But when I see one of our key inflation indicators, the CPI, apparently not yet reflecting the housing price deflation we all know is happening, it makes me wonder if the BLS algorithm is inaccurate, or not timely enough, or both. If it's inaccurate, might it have been understating housing inflation for the last several years, thereby throwing off a false signal to the Fed that it was okay to leave interest rates so low for so long, or not to require larger down payments for mortgage loans? If so, it might be time to consider modernizing the calculation to incorporate the comparatively new Case-Shiller index in some way.

Inflation/deflation is arguably the most important economic indicator we have (...unemployment is a close second, if not tied for first place). If our measures for housing inflation are inaccurate or untimely, that's a big problem that should be getting some prompt attention, one would think. On the other hand, if they are sufficiently accurate and timely, I'm curious why the October CPI report says we're still experiencing inflation in the housing category.

Either I'm missing something, or it just doesn't add up.

Free gift with purchase of toaster...

I told a buddy of mine that I'm thinking about buying a new toaster, and he promptly sent me a set of coupons he wasn't able to use. Here's the toaster promotion (...click to enlarge). Which free gift would you pick?

Corporate Welfare for Jurassic Park, Michigan

Corporate welfare for General Motors—or more generally, for the Detroit Dinosaurs—will cost us taxpayers and bond buyers tens (or hundreds) of billions, no matter what. Whether it's the corporate welfare money preferred by Michigan Senator Carl Levin, or the money it will take to keep the federal Pension Benefit Guaranty Corporation afloat in the wake of a GM bankruptcy, the price tag will be tens or hundreds of billions. GM's troubles started decades before this year's financial meltdown, but now it's too late to limit the cost of GM's life support (or mercy killing) to just the private sector.

Therefore, as a taxpayer and bond buyer, I have a few demands to submit, for consideration by the lawmakers who will be dispensing the forthcoming corporate welfare:

• Workers who choose to stay with corporate welfare companies will be required to wear to work, each day, the uniforms of national park rangers—and that includes all employees, from the janitor to the CEO.

• On each uniform will be sewn a patch above the left breast pocket, reading:
"Jurassic Park, MI: Proudly protected from competition since 1980; hungrily consuming at the public trough since 2009."

• All such employees, janitor to CEO, will be compensated according to the pay and benefit schedules of Government Service employees.

• A hypocrisy clause: any federal lawmaker who voted for federally-funded GM life support will face immediate expulsion from office for any future use of the pejorative term "corporate welfare."

Sen. Carl Levin justified his pro-corporate-welfare stance by pointing out (yesterday on NBC's Meet the Press) that "we've done it before," citing the Chrysler bailout in 1980 and the airline bailout in 2001-2. Good point, Sen. Levin; we should have implemented the park ranger uniform idea back then, but I suspect it would be illegal (ex post facto) to try to impose it on them now. On the bright side, however, there's probably still time to include employees of AIG, Bear Stearns, Fannie Mae, Freddie Mac, and several other financial companies in the ranger uniform program. Companies receiving agriculture subsidies should be on the list, too. (Feel free to remind me of any I may have forgotten.)

What we could do for the workers
The vested-interest folks like Levin keep mentioning the "one million jobs" connected to the auto industry—as if I'm supposed to think that the USA will lose that many jobs if we don't turn Detroit into a federally-funded Jurassic Park. Sorry, Sen. Levin, that scare tactic doesn't work as intended on me. Many of those valuable workers would not be willing to work for the government if we could help them through the transition to a new place of work, where their skills will not only be needed, but also utilized effectively.

Quick analysis: How many new cars will US consumers purchase in 2009, 2010, 2011, and on and on? Let's say it's "x million" cars. In other words, consumer demand will require the automaking industry to employ enough workers to make x million cars—even if Studebaker, Packard, DeLorean, and General Motors are not among the industry's employers.

Because much of our domestic automaking capacity is very competitive in the world market, especially when selling into the US auto market, most of those jobs could stay right here. One short term problem: many of the skilled, productive auto workers live in the Detroit, Michigan area, but most of the manufacturing facilities run by healthy, competitive companies are located south and west of Detroit. So, to ease the pain of transition, why not use federal funds to subsidize the cost of matching up workers with viable companies, and the cost of moving workers to their new job locations? It's true that Michigan, already losing population, would shrink even more (see below), but it would put government bailout money to better long-run use: helping productive workers get employed by viable, competitive, domestic companies—some of which would no doubt have to expand their production facilities in addition to hiring extra workers.

(Link)

Which domestic companies am I talking about? Oh yes, I almost forgot to mention them: Toyota, Honda, Nissan, BMW, and others, mostly located in the sunbelt, south and west of Detroit. When consumer demand awards them with what is now GM's market share, they and their suppliers will need more employees to handle the extra volume. What our government should do with at least some of our tax dollars and bond proceeds is make it easier for motivated, skilled auto workers—those who'd rather not wear park-ranger uniforms—to move away from Jurassic Park, Michigan. To a "sunnier climate," if you know what I mean.

I'd rather subsidize thousands of moving vans one time than thousands of hungry dinosaurs forever.

The "Socialism" debate

Our government's unprecedented interventions in the economy are evoking charges of "socialism" from people who should be just a little more careful with that word. 

Within a few days, I'll have a lot more to say about the GM bailout now being contemplated by our current and future leaders in Washington DC. For now, I just want to draw a line that apparently isn't clear to at least a few who have been carelessly tossing the word "socialism" around. Specifically, whenever one side of the GM-bailout debate says it would be "socialism" not to let GM fail, the other side says "Well, it was 'socialism' to bail out financial folks, so stop complaining." 

Good point — sort of — but let's not ignore one extremely important difference between keeping a financial firm afloat versus keeping a car company afloat. The ultimate responsibility for the integrity of the money side of our economy rests with the government; but the ultimate responsibility for the real goods-and-services side in a capitalistic free-market system is almost always the market. 

Below is a graphic illustrating the point.

Money is the lube for the real economy, and it moves in the opposite direction. (When we buy laundry detergent, the money and the Tide pass each other as they move in opposite directions.) Money soundness is the (ultimate) responsibility of the sovereign government (...because the sovereign is the only entity with the authority to define what "money" is, control its sources, and define how it's to be used). In our recent crisis, it would have been highly desirable to allow the market to punish the financial idiots and gluttons who failed to do the jobs they were hired to do — if those failures had been compartmentalized sufficiently. But they weren't, and as a result, the entire money side of the economy was threatened with collapse. 

Guess what a collapse of the money side of the economy would have done to the real goods and services side of the economy. (No hints are necessary, I hope.)

So, if "socialism" means government intervention where government really does not belong in a properly-functioning free-market system, the case for using that word is far weaker when the subject is the money side of the economy. That's a fundamental difference that should be getting more attention in the GM-bailout debate.

GOP eats wrong end of shotgun

The GOP committed suicide -- not last week, but sixteen months ago -- by employing dogmatic hysteria to oversimplify the immigration problem. Tom Tancredo and friends, afflicted with a myopia that makes Mr. Magoo look like an eagle-eyed sharpshooter, convinced enough Republicans to eat the wrong end of a political shotgun for lunch. That was in June 2007; the election last week was merely the cremation, not the suicide. 

First, an excerpt from my article of sixteen months ago:

If the Republicans kill the [immigration] bill, driven by their own irreconcilable base, they will leave it to the next president — very probably a Democrat — and two Democratic houses of Congress to pass the liberating legislation. The GOP will have delivered the largest minority group in America right into the hands of its adversaries.
-Dick Morris

Now the numbers are in. Turns out, Morris was right:

Nationwide, Hispanics voted 67 percent for Mr. Obama and 31 percent for Senator John McCain, according to Edison/Mitofsky exit polls. In 2004, Senator John Kerry won 53 percent, while 44 percent of Hispanics voted for President Bush...

Hispanics are the fastest-growing block of voters, and the GOP immigration geniuses ceded most of them to the Democrats. Bush and McCain were on the right side of the immigration issue back then, but they got shouted down by their own party.

This is good. Even though there are still those who think the only "solution" to illegal immigration is mass roundup and deportation, they won't get to hog the stage any more. Now there's a lot more room for those of us who think much of the problem is the far-too-sluggish rate at which our government allows productive people to fulfill their dream of legally becoming US citizens. Why is it that those who think "illegal" is the key word just can't seem to conceive that maybe, just maybe, it's the law itself that's flawed, instead of the all the people who broke it, or all those who couldn't enforce it?

Baby boomers should remember this: Social security checks depend on the growing output of a productive economy -- and the economy's total output equals output per worker times the number of workers. Guess what an effective, accelerated immigration law does: it increases the number of productive workers. Guess what xenophobia does: it decreases the number.

Do the math. What we should be doing is welcoming new, productive people into our economy, and at a much faster rate -- not keeping them out, or deporting those who chose not to wait in our decade-long line of applicants.  There are other, much better ways of handling those problems. And if we don't do that, we should prepare ourselves for smaller, shrinking numbers on our future social security checks.

Did Tom Tancredo and his friends think that through before pulling the trigger on the shotgun? Obviously not. In any case, it's over. Now the Democrats are in a position to craft an immigration law that -- surprise, surprise -- strongly favors those who would be likely Democratic voters; in other words, we shouldn't expect the quota on H1B visas to change much. (Might some of us independents be able to influence the outcome? Maybe, but it doesn't look good.)

RIP, GOP -- and that includes soon-to-be-ex-Representative Tom Tancredo. The voters predictably decided that, instead of rounding up twelve million "illegal" immigrants and sending them back to their own countries, it's better to send a few busloads of different legislators to Washington, DC.

Obamanomics: Which will it be?

Barack Obama will be a president with a talent for communicating and uniting that could rival or even surpass Ronald Reagan's talents in that regard. That will be an immediate gain for the USA, in a big way. I look forward to that change; it will be like night and day compared to the last eight years.

Going forward, we obviously have some big problems to solve, and many of them are economic problems. "Obamanomics" seems to be the label his economic program is guaranteed to earn — regardless of how his administration's program actually ends up taking shape. 

It seems to me there are two different umbrellas under which it could evolve: one I will support wholeheartedly, and do whatever I can to help; the other I will resist vigorously. I'll decide which approach to take as soon as I see which of two possible definitions "Obamanomics" seems to be settling on.

We can all agree that we have problems, and victims of those problems.  But we can't unite to attack the problems or help the victims until we've come to general agreement on who the problems and the victims are, can we?

Here are the two possible umbrellas under which Obamanomics could take shape, to attack our "problems" and help the "victims":

"Obamanomics" — choice 1:

The problem: Rich people.
The victims: Non-rich people.

"Obamanomics" — choice 2:

The problem: Dishonest, greedy, incompetent people.
The victims: Honest, moral, productive people.

I will vigorously support "Obamanomics" if the second version wins out over the first version; if it doesn't, I will resist. Right now, in the wake of the Obama campaign, my thoughts boil down to good news/bad news, as follows.

 • The bad news: Obama's campaign rhetoric, expertly-crafted to win votes, seemed to favor the first version of "Obamanomics";

• The good news: It was campaign rhetoric, expertly-crafted to win votes — but still "morphable" into the second version of "Obamanomics." 

Which will it be? We'll see.

Free electoral college map: one square equals one vote

I hope I never see another red-blue map of the USA depicting how many square miles each presidential candidate won in the election. It's inevitable, though; I bet we'll see a thousand versions of it again after tomorrow, depicting the vast stretches of barren, unpopulated wasteland conquered by McCain. [To my Republican friends: Try to picture a smiley-face right here at this spot.]

Here's a better map, in case you want to download it. One square equals one electoral vote. Several of us gathering at my house will be keeping track of election-night progress by coloring in each state as it's called. I think I'll use yellow and green, instead of red and blue.

Click to enlarge. Feel free to download it and send it to friends.

I assembled it in MS Excel, then turned it into a graphic file, based on a similar (interactive) map I saw at this page on the New York Times website. (Click the button that says "Electoral Votes" to switch views).

Debt Clock craziness

I get a nontrivial amount of traffic these days from debt-clock watchers, so it's time for a reminder regarding how it's maintained here. Because of our current once-per-century upheaval in the financial sector, there's a half-trillion dollar difference in the debt numbers reported in two different places at the US Treasury's website.

Here's the comparison, both from the US Treasury website as of the morning of Nov. 11, 2008:

This page estimates the day-by-day debt balances; the balance for 10/30/08, the latest day available, was estimated to be as follows ("mm" = million$):

10530.9 mm Total
 6257.6 mm Publicly held

This page, on the other hand, is the source for the Treasury's official monthly report; the September report reads as follows:

10024.7 mm Total
 5808.7 mm Publicly held

I calibrate the clock (at right) once per month, using the official report. I also estimate the daily growth of both debt and GDP based on recent trends from monthly reports. Because those numbers and trends become ancient history very quickly in today's environment, we can expect some crazy-looking numbers as the government sells huge quantities of Treasury securities, then subsequently buys many (or all) of them back as the TARP program plays itself out. 

My assessment of our federal debt situation
GDP is shrinking, debt is growing; consequently, the ratio of debt/GDP is growing more rapidly than we've seen in a while. Am I worried that we now have "too much" federal debt? No, not yet. Reason: the debt level per se will not hurt us; what would hurt is a significant increase in interest rates on Treasury securities, a jump in inflation, and a tanking dollar relative to other key currencies. But in the last several weeks, interest rates have dropped, we've had deflation instead of inflation, and the dollar has jumped in value. In short, the buyers of T-bonds and US dollars have been expressing confidence in the future of those instruments relative to their other choices, and therefore confidence in our creditworthiness. We have plenty of "borrowing capacity" as long as those conditions hold.

That's the good news. The concern is that we will soon be taking huge bites out of that "borrowing capacity" if next year's fiscal deficit comes to a trillion dollars, and if the TARP program ends up leaving an unexpected amount of new debt on the books instead of nearly breaking even.  Will those bites cause high interest rates, high inflation, or a falling dollar? Time will tell.

The only certainty is that a strong, growing economy in the long run is the only way out. It is folly to place a higher priority on "reducing the debt" or "reducing spending" than on growing the economy. The raw dollar level of debt is infinitely less important than an economy sizable enough to sustain any given level of debt. (Would you feel comfortable with $100 trillion federal debt in a $200 trillion economy? I would.)

Once again: growth is the key. I've been saying that for four years here. But these days, it should be obvious that to get back onto the growth track, we'll need to stop the bleeding first (i.e., the shrinking GDP). While we're doing that, it's nice to know that we apparently have a substantial amount of "borrowing capacity" to fall back on, isn't it?