Category: Uncategorized

Don't even bother. From today's local paper:

Piermont -- Fifteen years after starting their dairy farm above the Connecticut River, Lisa Knapton and Hal Covert milk 104 cows every day with the help of one hired hand. Life at Moonstruck Farm has not been easy, but along the way, Knapton and Covert have had some help: The couple received about $360,000 in federal farm subsidies from 1995 through 2006.

Much of it helped offset low milk prices and fund construction of the Piermont farm's environmentally friendly manure pit, boosts for Knapton and Covert as they faced the challenges of Northern New England's dwindling dairy industry. But a substantial portion was money the couple never asked for -- and that Knapton says they didn't deserve.

That's because, like many other dairy farms in the Upper Valley, Moonstruck Farm is entitled to collect federal subsidies intended to help growers cope with low prices for corn, despite the fact that corn grown on the farm is never sold. Instead, the federally subsidized crop is shredded and fed to cows.

“I think that's a joke,” Knapton said in a recent interview, referring to the corn subsidies Moonstruck Farm has received, about $73,000 from 1995 through 2006. “We don't deserve that. We’re going to plant corn anyway. We don't do anything for (the money). We just get it.”

Moonstruck Farm is not alone. In what appears to be one of many costly quirks in the nation's sprawling system of agricultural subsidies, Upper Valley dairy farms have collected millions in corn payments since 1995. When the price of corn fell, subsidies to dairy farms here went up, even when -- as was often the case -- none of the farms' corn went to market.

It does seem odd that a farm that is designed to be a consumer of corn gets more money from the federal program when corn prices fall.

Quite literally. Here's Alpha Magazine's list of the ten hedge fund managers with the highest personal earnings in 2007:

Rank	Name	Firm Name	2007 Earnings*
1	John Paulson	Paulson & Co.	$3.7 billion
2	George Soros	Soros Fund Management	$2.9 billion
3	James Simons	Renaissance Technologies	$2.8 billion
4	Philip Falcone	Harbinger Capital Partners	$1.7 billion
5	Kenneth Griffin	Citadel Investment Group	$1.5 billion
6	Steven Cohen	SAC Capital Advisors	$900 million
7	Timothy Barakett	Atticus Capital	$750 million
8	Stephen Mandel Jr.	Lone Pine Capital	$710 million
9	John Griffin	Blue Ridge Capital	$625 million
10	O. Andreas Halvorsen	Viking Global Investors	$520 million

*Earnings include managers' shares of fees as well as gains on their own capital.

So how did they do it? This article in The Washington Post explains:

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[John] Paulson's feat was even more astonishing because he started 2007 managing $6 billion, not a massive pool of money by hedge fund standards. Over the course of the year, one of his funds earned a whopping 590 percent return, and another soared 353 percent, according to Alpha. By the end of December, his funds' assets were worth $28 billion.

He amassed his winnings by "shorting" securities linked to subprime mortgages. In a short sale, the investor borrows securities -- in this case, subprime mortgages that were widely held by banks, brokerages and other investors -- and sells them to another buyer. Later, the investor must buy those securities back and return them to the original lender. As the subprime market collapsed, the value of the securities fell, and Paulson was able to pocket the difference. The lenders were stuck with the losses.

Several hedge fund managers, including Philip Falcone, who has been challenging the board of the New York Times Co., also profited from the mortgage crisis by betting that subprime debt securities would plunge in price. Falcone earned $1.7 billion last year. Others made fortunes by betting that the prices of commodities such as oil, sugar and corn would rise.

As I've blogged before, the returns to being confident, contrarian, and accurate can be extremely large. I don't begrudge them a dime of their earnings, but there is no excuse to have their fees treated as capital, rather than ordinary, income for tax purposes.

Yesterday, the Treasury released its fourth in a series of issue briefs on reforming Social Security. As the title indicates, this one was focused on making sure that Social Security surpluses are used to increase the ability of future generations of taxpayers to support the benefits claimed by future retirees. It uses the LMS plan as an illustration and emphasizes the constructive role that personal accounts can play in safeguarding Social Security funds for Social Security benefits.

Here's an excerpt of the discussion about pre-funding future benefits, with my emphasis added:

Pre-funding is an effective financing strategy provided that the near-term surplus revenues are safeguarded in a way that allows them to be used to pay for future benefits. The present Social Security system has its surpluses accumulate in the trust fund. These surpluses will increase the government’s capacity to pay benefi ts in the future only to the extent that they result in smaller amounts of public debt issuance than would occur if there were no surpluses. This is because reducing near-term public debt issuance would increase the government’s capacity to issue debt in the future to help pay benefits when the bonds in the trust fund are redeemed.

Many analysts believe that Social Security surpluses under the present system do not increase the government’s capacity to pay future Social Security benefits. Under this view, Social Security surpluses are offset in the rest of the federal budget by some combination of higher non-Social Security spending and/or lower non-Social Security taxes. To the extent that this is true, Social Security’s surpluses do not increase the government’s capacity to pay future Social Security benefits. The future benefit payments that would have been financed with public debt issuance had Social Security surpluses truly been saved must instead be financed with lower non-Social Security spending and/or higher non-Social Security taxes. In this case, the existence of the near-term Social Security surplus causes the non-Social Security budget to be more profligate, and the future Social Security cash deficit will require future non-Social Security budgets to have either higher taxes or lower spending than would have been the case had today’s surpluses resulted in true pre-funding. Under this scenario, an attempt to make Social Security fair to future generations by accumulating near-term surpluses in the trust fund would be undone by a non-Social Security policy that is less fair to future generations. Rather than resulting in resources that provide future benefits, running a Social Security surplus today would instead lead to more debt outside the trust fund that must be paid off by future generations, leaving them with no net gain.

The part I've highlighted is the reason why I favor an explicit target for the on-budget deficit. Read the whole thing.

The surprising thing about the Delta/Northwest merger announcement is the statements about not closing any hubs. As this New York Times article points out, the merger will be strongly opposed by the pilots of at least one of the carriers (Northwest). The issue is seniority, which determines which pilots get to fly which routes on which planes. I am hard pressed to think of why this would really be an issue if there weren't expected to be big reductions in the amount of flights in the newly combined airline. (If all planes continued to fly to roughly the same cities, then very few flight assignments would have to change in substantive ways.)

So if reductions are coming, where will they be? As the article points out, the likely hubs to see diminished activity are Cincinnati in favor of Detroit and Memphis in favor of Atlanta. Congress and the Justice Department are likely to consider this problematic. They shouldn't. Those are genuine opportunities for operating improvements, and they will open up gates at the two airports for other carriers.

I am a huge fan of Southwest Airlines, from the design of the business model down to the details of its implementation. (The specific reasons why were the subject of one of my first blog posts.) Imagine how much better off the good people of Cincinnati and Memphis will be when they are out from under the thumb of these two carriers that go in and out of bankruptcy. (Look at Southwest's route map to see the possibilities.)

Go ask the people of New England, who now have many good opportunities to fly Southwest out of Manchester, Providence, and Hartford instead of having to get themselves to Boston, about how much better it is to have Southwest in your area. Go ask the people of Philadelphia, who now have more options and more traffic with Southwest at their airport.

The Delta/Northwest merger is simply one of the ways that firms with the old business model will shrink in response to intense competition from Southwest (and others, like Jet Blue) that have a better business model for domestic air travel. As Stan points out, it seems to be a feature of the way airlines conduct themselves these days that despite enormous pressure, they don't raise prices as an outside observer might expect them to. Even so, if the regulators wanted to make sure the merger adds value for the consumer, despite the possibility of higher prices, they could stipulate some relinquishing of gates at some of the hubs.

I've been on the road this week for the Samwick family sorta-annual trip to the Bay area. The trip out here, originally scheduled for a Boston to San Francisco nonstop, would read like one of those Fortunately/Unfortunately stories we remember from childhood. It is amazing that the airline industry survives in any form with fuel costs as high as they are and fares as low as they are.

Let's run the numbers:

4 seats x 2700 miles/segment x 2 segments = 21600 seat-miles

21600 seat-miles / 60 seat miles per gallon (here or here) = 360 gallons

360 gallons x $2.60 per gallon (here) = $936

That's about 60% of the total cost of the tickets, leaving no more than $600 (including the taxes) for anything but the fuel tank in getting the four of us to and from our destination. All of the people, all of the airport services, ... everything. If you are feeling pretty frustrated about air travel these days, perhaps you are getting what you are paying for.

For an earlier run of the numbers, with an eye toward implications for reducing CO2 emissions, see this earlier post.

I think we have our first CG&G gentlemen's bet. I agree with Stan that Clinton or Obama will run as VP if asked. That's why I think neither will be asked in a public enough way to force acceptance.
I think there has already been too much animosity (which will only continue to grow). Beyond that, I don't think that the electoral advantages here are all that large.

This has been a dispiriting week for observers of public schools across the nation. It seems like a few things need to be cleared up.

1. The parents of these kids need to start shopping for school supplies in a different part of the Wal-Mart.
2. The sign on the door of this class should say Art, not Martial Arts. Apparently, it was just one of several such incidents.

I'm just saying.

Via the Real Time Economics blog, Daniel Gross makes the point from my recent post on the profligate vs. the prudent better than I did in his Moneybox column on Monday, "A Tax Break for Bubble Heads." His vehicle is the legislation moving through Congress to provide tax breaks and assistance to the housing industry. Here's the key excerpt:

The proposed tax break [an extended tax-loss carryback] is hard to justify for several reasons. It does nothing for slow and steady companies that keep their heads and simply rack up profits year after year—and pay their taxes accordingly. Rather, it rewards the most reckless participants in the bubble. If you borrowed a ton of money to build spec houses in Miami and reported $2 billion in profits between 2002 and 2007 but gave up all those profits by notching a $2 billion loss this year, the extended carryback has a great deal of value. If you've been building affordable housing in Wichita, Kan., and booked $300 million in profits in those years, and then, through careful management of costs, managed to eke out a $5 million profit this year, it has no value. The big public homebuilders, whose shares rallied on the news of this potential tax break, didn't pay any windfall taxes on the bubble-era earnings. Why should they get an extraordinary post-bubble windfall?

The question answers itself, to anyone outside of the industry and Congress. What ever happened to promoting the general welfare? I also like the way Gross followed up on this thought:

Homebuilders argue that they need relief because their sector, which provides a great deal of domestic employment, is on the ropes, and they're finding it more difficult to raise capital. Which is as it should be. After bubbles pop, those who screwed up really badly fail and get taken over by creditors or opportunistic investors. Those who have sound underlying franchises but merely got a little carried away can survive if they take painful restructuring moves. This is what is known as market capitalism. For all the talk of a credit crunch, capital is still available—it's just not available on the easy terms managers had come to expect during the late Greenspan years.

And that is as it should be. Read the whole thing.

Stan doesn't think his "Fiscal Fitness" column was choreographed to coincide with the Hubbard/Cogan op-ed in today's Wall Street Journal. But a smart guy like Stan can always rely on a ready foil on the WSJ editorial page.

I object to many parts of the op-ed, but two in particular. <!--break-->First, the expiration of tax cuts that were legislated to be temporary is now described as:

This would be the largest increase in personal income taxes since World War II.

How might such a change in taxes have been avoided? Perhaps by not ramming through such budget-busting tax cuts in the first place. Perhaps by not letting them persist for so long, running up deficits during business cycle peaks in the intervening years. Until Hubbard and Cogan are willing to commit to a responsible budget policy, of which tax policy is one component, it is impossible to take an op-ed like this seriously. (A responsible budget policy is balance in the federal budget over a complete business cycle or no trend in the debt/GDP ratio over time. More on this below.)

Second, picking up on Stan's point about the problems in using historical comparisons, the following statement from the op-ed completely undermines any responsible action on entitlement reform:

By historical standards, federal revenues relative to GDP, at 18.8% last year, are high. In the past 25 years, this level was only exceeded during the five years from 1996 to 2000.

Note that the 18.8% includes the Social Security surplus. So according to Hubbard and Cogan, that money is available to be spent on current government expenditures, rather than used to repurchase government debt, which would make the Social Security Trust Fund a legitimate savings vehicle. (Yes, this is the same Cogan who laments that Trust Fund accounting doesn't work because the government just spends the money. I wonder whose op-eds they use to justify their reckless behavior.)

Returning to Stan's point, we should have a higher tax/GDP ratio today because we should be using the Social Security surplus to prefund a portion of the retirement benefits of the Baby Boom generation.

Returning to my point about a responsible budget, not only should the budget be balanced over the business cycle, it must be the on-budget parts (i.e., excluding the Social Security surplus) that must be in balance. Not only must there be no trend in the debt/GDP ratio, it must be the ratio of total debt (i.e., including the Social Security Trust Fund) to GDP.

I agree with much of Stan's post on the vanishing role of personal responsibility. But there are people out there, maybe you know some, who have been trying to behave responsibly with their finances. They didn't enter into a mortgage contract for a house they couldn't afford. They didn't speculate wildly to buy financial assets based on dubious promises. What has been their experience?

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I think it has been twofold:

1) When they try to save, they face intense competition from people in other countries to get a decent return on their savings. There has been a global savings glut for a number of years--the payoff to saving for the future is being held down by global factors.

2) When they look to spend their money, prices are being increased by the behavior of debt-crazed people in this country. Their neighbors' willingness to borrow to the hilt to live beyond their means keeps prices high for everyone.

That's a tough spot--squeezed on the saving side and the spending side. So where does it end?

As they say, it's not the speed that kills, it's the sudden stops. We are in the midst of that deceleration now. As that process unfolds and after, we would expect those who have not been imprudent to be in a position to pay less for what they consume and to be able to pick up the assets from their profligate neighbors at a sweet price.

But now the government intervenes, providing assistance to those who have been borrowing beyond their means. They do so at the expense of the prudent, directly via taxes to fund the bailouts and indirectly by propping up the prices of the goods that the profligate have purchased.

The guiding principle for any government intervention should be that the prudent come out ahead of the profligate--that the government's actions serve to make the profligates understand that they should have been behaving prudently all along. These interventions don't have that feel to them.