Friday, December 7, 2007

TECH | NYS Underperforms

How should one monitor the progress of a state's competitiveness in the stakes for future tech jobs?

One way is to look at the data for federal grants for Small Business Innovation Research (SBIR), which is a way to bring research dollars to a state at the same time as one is building a stable of ponies for future venture-capital bets.

New York City’s Silicon Alley (in conjunction with its more hardware-oriented cousin techspots up the Hudson Valley from Poughkeepsie to Albany and elsewhere in the state) likes to think of itself as #3 after Silicon Valley and Route 128, and a recent ITAC report seeks to make something out of the fact that in the total number of tech jobs, the NYC metro area ranks ahead even of Silicon Valley and Greater Boston. The sheer size of the NYC metro area is what seems to put NYC ahead on the ITAC count. It is certainly true that having a lot of tech jobs in the NYC area is important in creating critical mass for future innovation. But density of tech jobs is surely more important for creating an environment conducive to serendipity, and the other important ingredient is effective leadership from the governor's office.

These factors go a long way to explain why NY State performs so poorly on the number of SBIR awards in FY 2006. New York was in eighth place in FY 2005 as well, so the rank is not an accident of the year 2006. As expected by the conventional wisdom, California ranks #1 with 725 grants and Massachusetts is #2 with 466 grants. But between these two front-runners and NY State (with only 163 grants) are five interlopers: Virginia (221), Texas (176), Colorado (173), Maryland (169) and Ohio (167). The strength of Virginia and Maryland on this list could reflect the proximity of their Beltway components both to agency grant-makers and to the Army and Navy research labs. Texas may also have benefited from its having a former governor in the White House for nearly six years.

But Colorado and Ohio ranking higher than the Empire State? I was mystified and am grateful to my friend David Hochman for helping me understand why they are doing better than NY State. Colorado doesn't have aggressive tech programs at the state level but it has several large Commerce Department (NIST and NOAA) and DOE labs, and in addition, for a range of historic reasons a really vibrant (high-density) tech community around Boulder and Longmont. Ohio has not only the Air Force labs and a significant NASA Center but also an unusual state program called the "Third Frontier" Project, a.k.a. the Ohio Research Commercialization Grant Program (felicitously acronymed ORCGP). This program, which has no direct parallel in NY State, provides aggressive support for institutions attempting to obtain federal grants.

Between 2005 and 2006, Michigan (with Detroit in a near-depression status because of the decline of the U.S. auto industry) dropped off the top ten list and was replaced by Washington (home of Microsoft, 91 grants). In ninth place is Pennsylvania with 133 grants.

Since Governor Eliot Spitzer was not in charge in FY2006, these numbers do not reflect on his current administration. We can hope that New York moves up in the rankings in future.

Monday, December 3, 2007

Ben Stein's Challenge to Goldman

Ben Stein in Sunday's NY Times ("The Long and Short of It at Goldman Sachs"), citing Allan Sloan's research for Fortune magazine, questions the propriety of Goldman Sachs for underwriting securities representing packages of loans while simultaneously short-selling mortgage indexes. He also takes to task Goldman economist Jan Hatzius for being excessively bearish on mortgages and suspects that Goldman’s short-sellers were grateful for the negative portrait.

Stein is questioning the view that the marketplace is divorced from morality, that if someone wants to buy junk from Goldman's securitization window at overly high prices, caveat emptor and good for Goldman. Similarly, if Goldman's traders want to bet that the housing market is going to continue to deteriorate (in part because of a collapse of mortgage values), and they place their bets accordingly, what's wrong with that? If Goldman’s bets win at both windows, tant mieux.

This point of view depends, I think, on there being a wall between departments of the kind that the Glass-Steagall Act of 1933 put up between banking activities and investment banking. Is there anything left of this wall? Is there a limit on communication between Goldman's traders and the people who investigate the quality of loans that they packaged?

On the issue of excessive bearishness, I believe the Case-Shiller indexes and various estimates of the total likely losses support the idea that downward adjustment in housing markets has considerably further to go. But several factors will come into play to mitigate the impact:
1. Continuing infusion of central bank liquidity in the United States and overseas.
2. Local judicial insistence on seeing all the documents before permitting foreclosures, such as is occurring with Deutsche Bank in Ohio, which may slow down foreclosures - at some cost to the credibility of the American mortgage system.
3. Industry association assistance to mayors to help with easing the impact of foreclosures on local communities (the Mortgage Bankers are providing $100 per foreclosure to create a foreclosure database and to fund counseling services).
4. Congressional action to freeze interest rates on ARM interest rates that are about to float up.

MORTGAGES | Weak Links Exposed in Ohio

Dec. 3, 2007–The attempts by Deutsche Bank to foreclose on dozens of properties in Cleveland have turned the attention of three Ohio judges - Judges Boyko and O’Malley of Cleveland and Judge Rose of Dayton–to the paperwork behind subprime loans.

Deutsche Bank apparently owns as Trustee some 900 properties in Cuyahoga County, Ohio.

The global web of mortgage securitization seems to be missing the needed loan documents. Read this story from Callahan's Cleveland Diary.

Sunday, November 25, 2007

JAPAN | Surprise, the Nikkei Opens and Stays Strong

Nov. 5, 2007–For the last five trading days (Friday was a holiday), the Nikkei 225 headed downhill in the early hours. In broad-brush terms, the Nikkei 225 went above 18,000 in July, fell to 15,000 in August, recovered to 17,500 in October and has fallen below 15,000 in November.

Three of the last five trading days, Japan's Nikkei 225 has declined in the morning and then recovered in the afternoon. We saw this big-time on Tuesday, Nov. 20, but you can see it on Friday, Nov. 16 and Thursday, Nov. 22. Were Tokyo's traders seeing an infusion of central bank liquidity or did the afternoon upticks come from lunchtime liquidity? Unfortunately for Tokyo traders, the London Stock Exchange is not open yet when they finish their day.

So it's a change in pace today, and good news, that the Nikkei headed straight up from the opening.

Saturday, November 24, 2007

IRAQ WAR | What Has It Cost?

Nov. 25, 2007–I received an email from a fan of Rep. Ron Paul who said that Paul estimated the cost of the war in Iraq at $3.5 trillion.

That number originated two weeks ago from the Joint Economic Committee Democratic majority.  Two cost-of-war spending clocks (today they read $442 billion and $472 billion) are much lower because they represent only spending to date, whereas the JEC spending includes in addition ten more years of the war.

Looking back on the history of the cost estimates, they keep rising because:
  • The Administration wanted to keep the initial estimates as low as possible to ensure support for an invasion.
  • When the first estimates wereprepared, the war was projected to last ten years at most. Now, five years later, the war is still being projected to last 10 more years, i.e., 15 years altogether.
  • The JEC number includes a factor for payment of interest on the borrowed money.
  • Some estimates include the war in Afghanistan; some don't.
A time line of estimates is documented here and summarized below.

Baseline: $50 billion. The Pentagon originally estimated the cost of a war in Iraq at about $50 billion. Michael O'Hanlon of the Brookings Institution said this was fine as an invasion cost, but added that a U.S. occupation could cost $5-$20 billion more per year.

September 15, 2002: $200 billion. Lawrence B. Lindsey, Assistant to the President on Economic Policy, estimates the cost of a war in Iraq would be $100-$200 billion. During the next two weeks, the Democratic Caucus of the House Budget Committee concurs, with a 10-year end date (2012) and the Congressional Budget Office provides an estimate consistent with the other two

October 29, 2002: $1.6 trillion. Yale University Professor William D. Nordhaus argues existing estimates don't include enough to pay for a long occupation. He estimates the cost of a war in Iraq could be $120-$1,600 billion through 2012. Lindsey leaves the White House. On December 31, 2002, the Budget Director puts the cost of the war at $50-$60 billion. On March 20, 2003, the United States invades Iraq. On April 9, Baghdad is occupied. On May 1, President Bush, on the deck of the USS Abraham Lincoln, announces the end of combat operations in Iraq. On June 27, 2003, the various estimates converge slightly. The Department of Defense raises its estimate to $60-$95 billion. In the same month, Professor Nordhaus scales back his upper estimate and raises his lower estimate, for a range of $500-$600 billion over 10 years. On February 27, 2003, George Soros estimates the cost of the war in 2003-2004 at $160 billion. On May 19, 2005, the Congressional Budget Office estimates the cost of the war at $600 billion through 2010, i.e., at the upper limit of the revised Nordhaus range.

January 8, 2006: $2+ trillion. The Boston Globe announces a study by Professors Linda Bilmes and Joseph Stiglitz showing the Iraq war could cost the economy more than $2 trillion through 2010. The authors’ data are published a month later as a National Bureau of Economic Research working paper. The Congressional Research Service estimates the Iraq war is costing nearly $2 billion a week and then later at $12 billion per month. In December 2006, Bilmes and Stiglitz, in a Milken Institute article, specify a range of $2-$2.267 trillion as the cost of the Iraq war through 2016. On October 24, 2007, the Congressional Budget Office estimates the cost of the war at $1.2-$1.7 trillion through 2017. The report covers both the Iraq and Afghanistan wars and other activities related to fighting terrorism.

November 13, 2007: $3.5 trillion. The Joint Economic Committee, which in 2007-2009 was chaired by Sen. Chuck Schumer (D-NY) with Rep. Carolyn Maloney (D-NY) as Vice Chair, announce a new estimate of $1.6-$3.5 trillion, i.e., the economic cost of the Iraq and Afghanistan wars so far (2002-2008) is $1.6 trillion and projected through 2017 is $3.5 trillion. Minority Republican members of the committee dispute individual numbers but do not provide an alternative estimate.

If you think you can come up with a better estimate, here is an Iraq War cost calculator that allows you to estimate the cost of the war based on your own assumptions about, for example, how long U.S. troops will be required in Iraq.

More tragic than the spending is loss of life in the Iraq war with 3,874 Americans dead so far, and 28,451 U.S. wounded. A new report suggests that the wounded figure leaves out 20,000 unrecorded brain injuries suffered by U.S. soldiers. Monthly losses have, blessedly, been declining recently.
Perhaps the best take on all of this is a November 18 article in the Washington Post that lists some of the things we could have done with the money and of other priorities that might have had a better chance. These costs are much greater than the spending itself. Click here for a continuous update of tradeoffs.

Tuesday, November 20, 2007

U.S. DEBT | Foreign Holdings

Nov. 20, 2007–Watch what they do, not what they say. Based on the latest available data issued November 16, amid the posturing at the recent OPEC meetings, oil exporters have been adding to their holdings of U.S. securities over the past year, from $114 billion to $126 billion.

Japan has pared $36 billion, but is by far the largest foreign holder of U.S. dollars ($582 billion). The People's Republic of China has added $7 billion (to $397 billion). The biggest friends of the United States have been the UK, which added $204 billion (to $266 billion), and Brazil, which added $64 billion (to $109 billion). These two buyers more than account for the growth in foreign holdings of U.S. securities of $222 billion (to $2,247 billion). The top five holders of U.S. securities (counting oil exporters as one holder) account for 66 percent of all foreign holdings.

The year-over-year increase in holdings uses the dollar measuring stick. It looks differently to someone translating the dollars to yen or renminbi or the euro. The euro rose from $1.27 in September 2006 to $1.39 in September 2007, so from the perspective of someone buying most of their goods from Europe, the value of the U.S. securities fell 9 percent, canceling out what Uncle Sam is paying by way of interest.

Two caveats: (1) The numbers for November and December may have a different look–we will know in January and February 2008. (2) The U.S. Treasury International Capital reports are "estimated" based "on annual surveys ... and monthly data".

Monday, November 19, 2007

LVT | Scott Stringer on Vacant Lots in Manhattan (Updated Sept. 25, 2016)

At a Manhattan breakfast meeting this morning sponsored by the Drum Major Institute. Boston Mayor Thomas Menino spoke about his survey of abandoned buildings in Boston. Based on this survey,  through a variety of creative initiatives (not without opposition), he reduced the number of abandoned units by 77 percent.

In 2006 the U.S. Conference of Mayors recognized the Mayor's strategy as "best practice." The event was recorded in a liveblog by Corinne Ramey. I posted a comment on the following two paragraphs of her report:
  • Brad Lander, Director of the Pratt Center for Community Development, returns to the idea of approaching vacant buildings in different markets. We've only in the past few days fixed certain tax laws, he says. He says that the J51 tax abatement rules need to be fixed here, but might be slightly different in different cities.
  • Scott Stringer, Manhattan Borough President, jumps in. "Or we could sit down and figure out a different tax structure for abandoned buildings," he says. "Right now we tax buildings -- imagine if we created a system of incremental land value taxation. I don't know what the result would be, but we need to figure out the next bold move as it relates to tax policy. Let's research what's going on in other cities and other states. Land is our asset and commodity."
Clearly, the reason that Manhattan Borough President Stringer has been able to find so many vacant properties in Manhattan is that property-owners suffer no penalty for warehousing empty lots or buildings. The owners are waiting for prices to rise. Unimproved land is taxed at a much lower rate than improved land.

Some cities have attempted to solve this problem–the low taxation rate of unimproved land, encouraging speculative warehousing of land–by taxing vacant land at a multiple of the rate for improved land. Others have taxed improvements at a fraction (e.g., half) the rate of taxes on land value.

The ultimate fix is to tax just the underlying land (hence "land value taxation" or LVT) and not the improvements, so that property-owners pay the same tax regardless of improvements. The LVT concept isn't far from NYC's actual practice of encouraging developers/builders to put up new buildings with tax abatements or, more recently, fixed Payments in Lieu of Taxes (PILOTs).

But there is a problem with tax abatements and PILOTS. The bigger, and therefore the more effective/attractive, they are, the more they undermine the City's ability to pay for the service needs created by the development. These service needs include education, sanitation, police, and the annual debt service for the bond issues to pay for local infrastructure improvements.

Comment (September 25, 2016)

The use of PILOTs grew significantly during Mayor Bloomberg's administration. The impact of these PILOTs grows every year as new services are required for developments approved a few years ago.

Friday, November 16, 2007

U.S. MISERY INDEX | 8.3 Percent

Fed Chairman Ben Benanke has warned Congress both about the possibility of higher inflation and a recession in the near future. Higher inflation would arise in part from costlier commodities imports (reflecting the declining value of the dollar and the higher cost of oil). A recession could be induced by falling housing prices and the impact of foreclosures and writeoffs on credit markets.

The danger of a combined higher inflation and unemployment is stagflation, measured by the so-called "misery index", which was at its highest in June 1980 at 22 percent and at its lowest in July 1953 at 3 percent. In October, U.S. inflation was 3.6 percent at a seasonally adjusted annual rate (SAAR). The unemployment rate was unchanged at 4.7 percent. The misery index was therefore 8.3 percent.

In New York City, the unemployment rate rose in October to 5.3 percent, seasonally adjusted, an increase from 5.1 percent in September 2007. With NYC inflation at 3.1 percent year-over- year, its misery index is a relatively low 8.4 percent, just 0.1 of a percentage point higher than the nation's.

NYC is still in the early stages of a housing downturn and financial sector mass layoffs. BLS reports that third-quarter "layoffs in the finance sector were primarily in the credit intermediation and related activities industry, which reported its highest number of events and separations in program history.”

Monday, November 12, 2007

Overseas Subprime Loan Losses Large but Unclear

The status of overseas subprime loan losses is unclear, but it will be large. Several banks have declared multi-billion-dollar writeoffs. The stock prices of Barclays and the Royal Bank of Scotland, which had fallen sharply on rumors that they will have to take large subprime losses (Sanford Bernstein projected last week that the two banks would have to write off $4.4 billion of such losses), recovered somewhat today as Barclays denied that it subprime loan losses were so serious. But investor confidence in both Barclays and the RBS, which earlier were fighting over control over ABN Amro Holding NV (RBS's team won), remains weak, with their price-earnings multiples in the range of 6 to 7 whereas the average for European banking institutions is 10.

Sunday, November 11, 2007

SUBPRIME LOANS | U.S. Problems Exported

Nov. 11, 2007–Foreigners holding U.S. securities are losing money because of the decline in the value of the dollar. Now, it seems, many of them may find they are also losing money on the securities themselves.

Barclays and the Royal Bank of Scotland appear to be caught in the web of Collateralized Debt Obligations. It was an RBS analyst, previously cited, who put the magnitude of the loss from subprime debt at $250-$500 billion. A Deutschebank analyst's forecast is more precise at $300-$400 billion. These estimates are larger than the S&L losses in the 1980s. This time round, the rest of the world will be sharing the pain.

I am using several public sources to generate a side-by-side comparison of the Savings and Loans and subprime crises. It may be found here. This is a work in progress and will be updated.

Thursday, November 8, 2007

BUBBLE | Cognitive Dissonance - Equity- vs. Fixed-Income Markets

My point on October 19 about the relevance of cognitive dissonance – which John Tierney has since written about in the NY Times in a non-Wall Street context – continues to apply through two more seriously down Dows, the second of which was the 361-point decline yesterday.

The cognitive dissonance is between signals that securitized subprime losses and other bad news are fully written off/discounted and other signals suggesting that they are not. Or, as a Wall Street trader put it to me at noontime yesterday as we were listening to Fed Governor Kevin Warsh: "The equity markets have been saying one thing and the fixed-income markets another. They can't both be right." Traders make their living by surgically eliminating their preconceptions based on new truth and making swift moves in advance of other investors.

The fixed-income markets were at their most bearish yesterday since August, while equity investors have mostly been hanging on in the hope that the latest Dow drop is the last. Professionals are more wary of "catching a falling knife" by believing that what looks like the end of the bad news really is. I remember that in the summer of 2000, after the disastrous March downfall of the dotcoms, someone was attempting to sell shares in a bottom-fishing hedge fund that would pick up dotcom bargains. Well, the dotcom basement had a sub-basement and even a level B and C below that, as we found out in November 2000 if not before.

The fast-growing Royal Bank of Scotland, fifth-largest bank in the world, takes a surprisingly dim view of how much more in the way of losses remains to be declared. Its chief credit analyst, Bob Janjuah, estimates subprime losses and new accounting requirements (FASB 157, effective Nov. 15, which make it hard to mark Level 3 assets to "make-believe") will bring cumulative writedowns in the $250-$500 billion range. Up till now we have seen at most $50 billion acknowledged. So either RBS exaggerates, or the capital markets have further significant adjustments to make.

Monday, October 29, 2007

Avoiding U.S. Fiscal Ruin - David Romer in 2007

Washington’s Out-of-Control Budgets - Notes on a Lecture by Prof. David Romer. (The following report is abbreviated with his permission from notes on the lecture taken by Bill Batt, staff political scientist in the New York State Assembly's Legislative Tax Study Commission, 1982-1992.)

On October 25, 2007, Scranton University held its 22nd Annual Henry George Lecture  and Romer was the Lecturer. [Henry George was a self-taught, widely read economist who favored taxing land rather than labor; he ran with labor support for the mayoralty of New York City in 1886, coming in second, ahead of Theodore Roosevelt, and again in 1897, dying at the height of the campaign. - JTM] The city of Scranton, Pa. itself was wild that day, as it played host to fans of the NBC hit serial, "The Office", set in Scranton. 

David H. Romer is the Herman Royer Professor of Political Economy at the University of California, Berkeley. He is a member of the American Economic Association Executive Committee, co-director of the Program in Monetary Economics at the National Bureau of Economic Research, and a member of the NBER Business Cycle Dating Committee – the so-called “wise men” who decide when national business cycles begin and end.

The lecture title was "Avoiding Fiscal Ruin: Failed Strategies and New Approaches to US Budget Policies." Professor Romer posed three questions: (1) How did we get here? (2) What are the likely consequences? and (3) What are some possible solutions? He showed simple PowerPoint bullets and graphics describing the past history and looming fiscal crises the nation faces in the next few decades:

History of the U.S. Budget

  • The United States ran a small budget surplus throughout the years 1791-1929, except for support of the Civil War and World War I.
  • The U.S. budget had an annual surplus in the early 1950s, and a deficit every year since then except for the final years of the Clinton administration.
  • We are now running a $200 billion deficit, some 2 percent of GDP, which will grow enormously in the next two decades if most assumptions are borne out about health care, social security and other demographic trends. (He did not comment on the budgetary impact of the wars in Afghanistan and Iraq.)

The nation got into this position because we have in recent years stopped thinking of taxes and spending as going hand-in-hand. Moreover, beliefs about appropriate budget policy have changed. The prevailing view in the 1950s was that budgets should be in balance, at least averaged over a few years. Truman, in this regard, was a fiscal conservative, even though he favored government support of services. In the 1960s, a view took hold that balancing the budget was less important than maintaining economic growth. Hence deficits were sometimes necessary as a stimulus at certain points in the economic cycle. Nixon remarked, in 1971 [quoting Milton Friedman in 1965 - JTM], "we are all Keynesians now."

Reagan, in the 1980s, wanted to shrink government, as he believed that "government is the problem." It was possible, he argued, to do so according to a strategy of cutting back on domestic programs, called "starving the beast" [the original use of the term is attributed to David Stockman, Reagan's first budget director - JTM]. It followed to his adherents that cutting taxes would lead to a fall in government spending.

Cutting taxes doesn't have much impact on expenditure levels. Revenues, he argues, change for many reasons, and by tracing the history and motivation for tax changes, he has shown that the cause and effect relationships are very complex, and that correlation and causation should not be confused. He has looked at speeches, news conferences, reports, votes, and events such as wars and recessions, and concluded that it might even be that invoking "starve the beast" rhetoric actually leads to increases in tax and expenditure. Moreover, so many factors are involved in tax policy changes that there is typically shared fiscal responsibility – blame and credit for any policies are quite diffuse.

Problem. When the two sides, revenues and expenditures, are not viewed together it becomes difficult to focus policy. All indications are that U.S. taxes will soon need to increase, but little attention is being given to revenue designs.

With baby-boomers retiring, medical expenses increase, debt service increases, infrastructure renewal demands grow, and so on. Some leaders are already calling for such increases. But all the forecasts are necessarily based on existing law, which will need to be changed. The phase-out of tax measures in the year 2010 will lead to new initiatives, and these will call for new assumptions.

Likely Scenarios. Only three scenarios are possible:

  1. Lower national saving, which will mean less reinvestment, slower growth and a lower standard of living.
  2. A national economic crisis in anticipation of what is in reality a "Ponzi scheme".
  3. Pay off the debt, either by raising taxes or printing more dollars. His comparison with past experiences in nations in Latin America was not lost on the audience. Nor did he see the United States abandoning care for its elderly.

Solutions. Professor Romer argues that we need to:

  • Educate the public to a level where a solution is politically possible. He said that we need to link taxes and spending together once again as was the case prior to the 1960s. The political appetite for such policies are not presently on the horizon, but he suggested that perhaps some kind of "mutual disarmament pact" could be devised such as was set up earlier to address the Social Security crisis in the 1980s, and as exists now for closing military bases.
  • Improve accounting practices by the federal government and for the U.S. economy.
  • Introduce strong "pay as you go" rules such as were attempted in the Gramm-Rudman approach two decades ago.
  • More radically, introduce a stringently fashioned "balanced-budget amendment."
  • In addition, or alternatively, create a separate agency, comparable perhaps to the Federal Reserve System, that would be granted powers to impose fiscal and budgetary requirements.

Professor Romer was not sanguine that any solution was within sight, even though we are on a "potentially ruinous fiscal path." He argued that we need to contemplate major changes to address the problem.

Wednesday, October 24, 2007

Chelsea Intersection Made Safer

Problems are global, politics is local. Earlier this year in May, an elderly Penn South resident was killed by a truck as she was walking across Ninth Ave. at the south side of 23rd St. Since I overlook this corner and have witnessed the aftermath of several fatalities resulting from speeding downtown cars at this intersection, I described it as the neighborhood’s “dead man’s curve” in an article in Chelsea Now by Al Amateau.

Something has now been done about it. Kernan Huttick and the Penn South residents' council lobbied three people: Traffic Commissioner Janette Sadik-Khan at NYC DOT, City Council Speaker Christine Quinn (who lives in London Terrace on the NW corner of the intersection), and State Sen. Tom Duane (a resident of Penn South, which starts at the NE corner).

Commisioner Sadik-Khan, who came from an engineering firm and has an explicit “green it up” agenda, devised an interesting solution that is a twofer. It puts an island in the middle of Ninth Avenue so that elderly people can make the trip across Ninth Avenue in two stages if necessary. At the same time it creates a bicycle lane, courtesy of DOT's Bicycle Projects Group, described as “awesome” by Amy Pfeiffer of Transportation Alternatives. Here's a DOT slide show on the twofer innovation - creating a bicycle lane and an island for Chelsea's senior citizens.

DOT gets great credit for taking an edgy action to deal with a real and persistent problem. The improvement will certainly make it safer to cross and the bicycle lane is in use. Now we watch to see how it works in practice.

Tuesday, October 23, 2007

More on U.S. Debt

In two previous blogs I have presented U.S. national debt data showing that it is high and growing relative to other countries. In The Growing Price of U.S. Debt, I estimated the debt at $67,000 per U.S. taxpayer, with the number about six times bigger if we add unreported U.S. liabilities. In The U.S. 10-Trillion-Dollar Debt Limit I noted that the debt limit has been raised an average of $500 billion per year since President George W. Bush came to office and noted that our state and local officials don't have the luxury of running deficits. NYC Mayor Bloomberg has assailed the continuing huge U.S. budget deficits as "lunacy" in a speech to British conservatives.

My concerns focus on the fact that the debt is (1) growing fast, (2) understated, because it does not include social insurance liabilities, and (3) leaves a legacy for our children of a burden of taxes (especially, as the U.S. tax system is now structured, payroll and income taxes) that will reduce their standard of living. The other concern I have is that continuing current-account deficits mean that the debt is being financed by overseas accumulations that could be de-accumulated under conditions that will tie the hands of the United States internationally.

Now I would like to add to the pile of evidence against current practice an interesting summary of the growth of the U.S. national debt since 1938 by Steve McGourty, who takes a partisan approach - he lays the blame for the bulk of the growth of the debt at the feet of tax-cutting Republican Presidents Reagan and George W. Bush. Actual reductions in the national debt occurred in the last 50 years only under under Presidents Kennedy and Clinton (adjusted for inflation). His charts are interesting. I would be interested in seeing (1) his numbers adjusted for inflation, (2) an addition for unfunded health and Social Security liabilities, and (3) a link between the current-account deficits and the budget deficits.

Why the Safety Net Collapsed for WTC Rescue Workers

[My friend Peter F. Rousmaniere during the past nine months has been studying the problems of World Trade Center rescue and emergency workers in obtaining compensation for illnesses they contracted that may be attributable to the conditions under which they worked. I am interested in this subject because, as Chief Economist for the NYC Comptroller, I was asked to assess the economic damage of the WTC attacks for purposes of obtaining State and Federal aid. I have maintained, then and now, that there would be a longer tail than some have asserted to the economic effects of 9/11. As a risk management professional who writes frequently on occupational risks (last year I posted an interview with him on workers comp in NY State), Peter has been researching how the system has worked out for WTC workers. Peter lives in Woodstock VT, and can be reached at 802-457-9149; email]

The health problems of World Trade Center rescue, recovery and cleanup workers have been in the news. Now Peter F. Rousmaniere has produced the most comprehensive analysis to date of what actually went wrong. He says there were three independent failures at the local or state levels:

One, the City’s safety enforcement at Ground Zero was poor, well below recognized standards, and inexcusable notwithstanding the scale of the challenge.

Two, employers, insurers, the City and state regulators failed to monitor the health condition of these workers, even though it was well known that these workers were vulnerable to slowly emerging diseases. This failure greatly increased the uncertainty today about the health status of tens of thousands of workers.

Three, New York state’s workers compensation system effectively collapsed as a provider of adequate medical and disability support, thereby inflaming demands for support from the Federal Government and through the courts.

Risk & Insurance Magazine, a leading business publication, is publishing Rousmaniere's articles about his investigation. The first three installments may be downloaded. The fourth and final installment will be published on November 1.

Within a few days after the WTC towers’ collapse, it was clear that those overseeing ground zero had to implement a safety program without delay, using the best resources available in the country. But the City and its contractors in 2001 were failing to enforce basic standards of worker protection. It took well after September 2001 for officials to formalize even a basic safety plan.

It is axiomatic that workers exposed to high levels of toxic materials should be monitored regularly for their health status. The only workers who were monitored carefully were New York City firefighters. Tens of thousands of workers were allowed into ground zero without any check for their existing health status, and there was no attempt to check up on them later. Confusion today about the actual health status and prognosis of these workers can be directly linked to the absence of medical surveillance from the start.

The workers compensation system of New York was created in part out of reaction to the 1911 Triangle Shirtwaist fire. Since then, the system has restricted access to persons who acquire diseases at work, such as lung conditions and posttraumatic stress disorders. Substantial numbers of World Trade Center workers have symptoms of these diseases. Workers compensation law is expressly designed to frustrate claims arising from disasters except from those whose full time work is emergency response. It took the legislature until 2006 to amend the law to give these workers fairer access to benefits.

The lessons from this experience start with the urgent need to place disaster site control in the hands of organizations and leaders who are up to the challenge. A threshold needs to be set above which the Feds should by default be placed in charge of managing a disaster at the earliest feasible moment. The fires currently raging in southern California would be below the threshold, in part because Californian fire fighting agencies have over the years become a national model of emergency response.

Also, the Federal Government should fund and install quickly a medical monitoring system in any disaster in which it is involved. We cannot trust employers, insurers or state regulators to take on this task.

Third, because legal barriers to benefits from the workers compensation system exist in most states, the federal government should assume responsibility of administering workers compensation benefits for disaster workers. There is a sorry history of Washington having to assume workers compensation responsibilities for workforces struck by disease.

If we fail to apply the lessons from these failures, Rousmaniere concludes, we may pay the price in vastly greater death and disability among workers, for instance in responding to a pandemic in the future.

We may also find it harder to recruit emergency workers.

Monday, October 22, 2007

Slate Picks Up Turkey Recommendation

Slate in its Blog Roundup quoted this paragraph from my HuffPost blog on the Kurdish rebels: "[T]he best hope for calming this crisis," says John Tepper Marlin at the Huffington, is "a combination of a serious effort to contain the Kurdish rebels while joining the U.S. voice with that of the EU, which has also warned Turkey against violating Iraq's territorial integrity. The grave danger is that in the frayed international environment of 2007 Turkey will sooner or later respond to its very real domestic pressures and defy western wishes on the bet that they can continue to get away with going it alone."

Friday, October 19, 2007

Turkey and the Rebel Kurds: Next Move

This blog was posted earlier today on Huffington Post

President Bush's response to the Turkish Parliament's declaration of war against the 3,000+ rebels of the Kurdistan Workers Party (PKK) in oil-rich northern Iraq was muted because the United States needs Turkey. The Kurdish administration in oil-rich northern Iraq seems unable to control the small number of PKK separatists, while labeling in advance any Turkish forays to strike at PKK camps as a violation of Iraqi sovereignty. Such forays would immensely complicate the war in Iraq and destabilize the region.

Turkey's economic needs might give it pause. Prime Minister RecepTayyip Erdogan is as friendly a Prime Minister as the United States could hope for in a 99 percent Islamic country in the fifth year of an Iraq war that has allowed Kurdish rebels to build up in the north and to kill many Turks recently on the border. He was reelected handily this year because he has delivered strong economic growth.

When the United States invaded Iraq in 2003, the Turkish Parliament refused to allow U.S. troops to drive through to Iraq - a "low point" for U.S.-Turkish relations, although Turkey allows U.S. supplies through via Incirlik Air Base. For many Turks, the low point was months later when U.S. forces - from Turkey's perspective - dissed Turkish soldiers serving with the U.S. army in northern Iraq. These events were the basis for a hugely popular Turkish movie, "Valley of the Wolves Iraq," which stirred up anti-American sentiments.

Relations looked better last year when a U.S.-Turkish shared vision was mapped out. But the over-stretched U.S. military and The Kurds in Iraq are understandably concerned about having as a guest Turkey's half-million troops, the second-largest army in NATO and the largest army in Europe? No wonder a barrel of crude oil for November delivery hit a record price today of $90.07.

What might restrain Turkey is its ongoing need for full access to American and, even more, EU markets. Turkey would dearly love to become a full member of the EU, and many in the EU would like to see Turkey join. Turkey's textiles and apparel industry, which accounts for nearly 40 percent of Turkey's exports, is being squeezed by low-cost competition from the rest of Asia and by concerns of western, especially European, buyers about labor conditions in Turkish factories. The Turkish government has contributed to the problem by raising taxes on employment to levels well above its neighbors, where wages may be as low as one-fifth of prevailing Turkish wages.

So the best hope for calming this crisis would be a combination of a serious effort to contain the Kurdish rebels while joining the U.S. voice with that of the EU, which has also warned Turkey against violating Iraq's territorial integrity. The grave danger is that in the frayed international environment of 2007 Turkey will sooner or later respond to its very real domestic pressures and defy western wishes on the bet that they can continue to get away with going it alone.

DOWN DOWS | Cognitive Dissonance

Oct. 19, 2007–For the day, the Dow fell 367 points or 2.6 percent to 13,522. For the week, the Dow was down 4.1 percent. The other indexes fell by similar percentages. The day had little specific news to drive it. Initial news-service analyses didn’t make much sense, explaining the downdraft based on a few isolated weak earnings reports. The heavy buying of Treasury notes made clear that something more basic was going on – investors were worried and were looking for a safe haven, desperate not to be caught with what they were selling after the market closed on Friday.

Can we explain the week’s drop in the market? Here are two lines of thinking:

1. Investors applied rational expectations theory. The financial community has been providing a stream of information about the subprime loans and some of the information creates cognitive dissonance. Investors take into account all information available and some of the information doesn’t compute. The fact that the FOMC lowered the target interest rate preemptively by 50 points was initially seen as an effort to spur the economy. In retrospect, it can also be seen as an indication of worry on the part of the Fed about credit markets. After the major banks took heavy writeoffs for subprime loan losses, three of them got together to try to bolster the market for structured investment vehicles with a so-called Master Liquidity Enhancement Conduit. This $75 billion conduit raised more questions than it answered. Former Fed Chairman Alan Greenspan opined that the special fund might be counterproductive, contributing to rather than reducing worries about possible further losses. Further losses in the credit markets can be expected to exacerbate problems in the real estate arena, lowering values and discouraging new construction.

2. The madness of crowds and the power of superstition. Today is the 20th anniversary of Black Monday, when the Dow fell 22 percent. The Armenian genocide resolution in the House of Representatives started up a round of international hand-wringing that has raised difficult questions of alliances and allegiances. Turkey is an important friend of Israel as well as the United States. New sabers are rattling in Turkey and Iraq, including a threat by the Kurdish rebels (the PKK) to destroy pipelines carrying oil into Turkey. Add that to a seemingly endless series of U.S. current-account deficits, U.S. budget deficits, declines in the value of the dollar, and a new shifting out of dollars by Asian central banks and it would be easy to see how fears might begin to mount.

Thursday, October 18, 2007

Austin today - Albany tomorrow?

Information delayed is information denied. Texas has opened up its spending to public scrutiny. By logging onto the Texas Comptroller's window on state spending, individuals can monitor where the money goes. Sunlight is a great disinfectant, and with thousands of potential observers of the details of public spending, major abuses are less likely. Austin has a lot of techies who considered the opening up of government books a challenge. New York's reform-minded Governor Eliot Spitzer or Comptroller Thomas DiNapoli might want to emulate this. New York has techies who can do this job.

Yay PATH - Better Signals=Faster Service

PATH (i.e., its parent the Port Authority of New York and New Jersey) is upgrading its signals. Great news. New York City depends acutely on its rail transit links, both within the City and between the City and its suburban communities. The tracks can carry a lot more traffic and they will have to if fewer people are to bring their cars into Manhattan.

Better signals make possible more efficient travel - reducing headway times safely and making better use of NYC's enormous investment in the rail tunnels. NYC's subway system needs the same makeover.

Tuesday, October 16, 2007

The Mayor's Management Report - Raising the Bar

Glenn Pasanen has a good review on the Gotham Gazette web site of Mayor Bloomberg’s Mayor’s Management Report (MMR). He is critical of the lack of links between numbers and explanatory information. He is right.

I have been so happy to see positives and negatives more even-handedly reported than under Mayor Giuliani (who only stressed the good news) that I have looked no further.

The full potential of the MMR, however, is not being exploited. It should be linked to the budget. We call it the Office of Management and Budget, but the Mayor's Office of Operations (MOO) is not milked (sorry) enough for management information - at least in what is given to the public.

Some years ago when I was Chief Economist at the City Comptroller's Office I worked with the Chief Accountant to see if we could develop a prototype of a budget that would correspond to the categories of the MMR. We did it. So it can be done. I'm sure I can find this prototype if anyone is interested.

Sunday, October 14, 2007

NYC | Congestion Pricing

Traffic congestion is a costly problem for New York City residents, workers and visitors. The problem originates from inadequate pricing mechanisms for the use of roadways and railways in NYC. It is an aspect of the Tragedy of the Commons.

A new report on Alternatives to Traffic Congestion Mitigation in the Manhattan CBD, by the Committee to Keep NYC Congestion Tax Free, provides a list of alternative ways to use pricing to reduce congestion in Manhattan's three CBDs. The list is good and the opening up of options to the committee looking at these issues is even better.

A broad approach to congestion pricing and mitigation is provided in Professor William Vickrey's 12 Principles posted at Vickrey recommended maximizing use of railway tracks by upgrading signal systems to permit shorter headways between subways and using a skip-stop system for local trains to shorten travel times for most travelers with a minimum of inconvenience to a few travelers.

Thursday, October 11, 2007

WEBSITES | Best Five City/County Sites

New York City's web site - - is by far the most popular local government web site in the United States, based on visits to the sites. As of August 2007, New York City's site had a 7.3 percent market share. It is more than three times as popular as the next-most-visited site, according to Hitwise.

The next most popular was Miami-Dade County, with 2.2 percent. Next, surprisingly, is not the City of Los Angeles but rather its Sheriff's Department. The City of Chicago ranks fourth and the Maricopa County (Phoenix) court system is fifth.

Rank. Name of Locality - Web Site - Market Share
1. City of New York - - 7.32%
2. Miami-Dade County - - 2.20%
3. Los Angeles Sheriff's Department 1.65%
4. City of Chicago 1.62%
5. Maricopa County, Arizona - Superior Court of
Arizona - 1.52%
Source: Hitwise

Wednesday, October 10, 2007

NYC Speaker Quinn's Five Fiscal Reforms

The New York State Financial Control Board (FCB), created in 1975 to oversee New York City's finances, sunsets in less than a year. City Council Speaker Christine Quinn this morning addressed the City's fiscal reporting (full text here). She has a five-point fiscal-reform program. All of her points are good ones. She is making one of them effective on her own authority (#4) and is recommending the others to the Mayor, Governor, state legislature and her own City Council colleagues:

1. More accountable independent public entities. The Transit Authority, the Health and Hospitals Corporation, the Economic Development Corporation and the NYC Housing Authority have increased their reporting. Oversight should be even stronger.

2. More accountable budgeting. Short-term debt should be watched because in 1975 the City had $6 billion of it. Oversight over City borrowing should be the responsibility of the City Comptroller. In addition, the city’s tax collection and spending numbers should be reported by the Mayor to the City Council, City Comptroller and the Independent Budget Office.

3. A “rainy day fund.” Surplus revenues can be diverted in good times for use in leaner ones. years. State legislative approval is needed for this. (The averaging of property assessments over five years is in itself a form of rainy day fund. The problem with actual rainy-day funds historically is that they are tempting - they get used up fast at the first sign of morning dew. The criteria for adding to and drawing from the fund need to be automatic.)

4. Disclosure of sponsors of capital projects. Names of council members will now be disclosed along with the capital projects they sponsor. Speaker Quinn is introducing this reform on her own authority.

5. Program budgeting. Department budgets need to be informative and linked to the Mayor's Management Report. This fifth proposal is of particular interest to me. When I was Chief Economist at the NYC Comptroller's Office, I attempted a reorganization of the City's budget - with the help of the Chief Accountant - to conform to the categories of the Mayor's Management Report.

Friday, October 5, 2007

September Job Numbers

The stock market rose significantly today on the much-awaited September employment situation release from BLS, which said: "Nonfarm payroll employment rose by 110,000 following increases of 93,000 in July and 89,000 in August (as revised)." These figures are not such a drop from the first half of 2007 as was previously reported. The markets were pleased.

But the "as revised" parenthetical comment refers to a major swing in the August numbers. The BLS's August employment situation release had reported a decline of 4,000 jobs, and the revision is to a growth of 93,000 jobs. What happened?

Philip Rones, the Acting U.S. Labor Commissioner, in his accompanying statement reports the revision as follows: "The estimates of payroll employment change for July and August were revised upward. The July change rose from +68,000 to +93,000 and the August change from -4,000 to +89,000. After incorporating these revisions, average monthly job growth for June through September is 90,000,compared with an average of 147,000 for the first 5 monthsof the year. Nearly all of the August revision reflected an upward adjustment to government employment, particularly local education. As noted last month, employment estimates for local government education can be volatile, particularly during the summer months. Initial estimates of employment in local education typically are based upon a smaller percentage of survey responses than in other sectors. This lower initial response can make estimation more problematic in months when school sessions begin and end."

Agora Financial in its 5-minute report today isn't satisfied with this explanation and wonders whether the preliminary August numbers somehow landed on the weak side to help justify the September 18 cut in the Fed's target rate by 50 basis points. With such a large revision, the question is inevitable. Future revisions will surely be watched closely.

Thursday, October 4, 2007

Predatory Credit Card Issuers?

Who's at fault for the high level of credit card debt and the high fees that are being charged? The credit card issuers, who make it so easy to borrow, or we American consumers who run up five and six-figure credit card bills we can't afford, until the credit stops?

A blog posted on the Motley Fool web site says that both are at fault. Americans borrow too much, it is made too easy for them, and the implications of their borrowing are not fully understood.

This is a broader perspective on the subprime loan crisis. The predatory subprime lenders focused on housing-secured loans. Predatory credit-card issuers make up in high fees what they may lose in credit-card debt that is not repaid.

What do you think?

Monday, October 1, 2007

U.S. DEBT | If and When It Matters

October 2, 2007–Congress has just approved raising the U.S. federal debt ceiling to a tad short of $10 trillion. What happened to the virtue of thrift and foresight exemplified by the fable about the ant and the cricket? The ant works all summer to save for the winter, while the cricket just sings his heart out. Come fall, the cricket begs in vain for food and starves to death, not having figured out the America Buys on Credit solution – buy what you want and put it on Uncle Sam's credit card until it maxes out at $10 trillion.

The debt ceiling had held at under $6 trillion from August 1997 to June 2002, when after 18 months in office President Bush asked for a higher ceiling. Three more increases took the ceiling to nearly $9 trillion, which was reached on October 2, according to the national debt clock, i.e., nearly $30,000 per U.S. citizen. The latest increase raises the ceiling more than 60 percent above what it was when the President took office in 2001.

A CIA table updated as of September 20, 2007 shows the national debt of France, Turkey and the United States clustered around 64.7 percent of GDP.

Debt, External Debt and Deficits. If Americans owe $30,000 to one another, some argue, it's just a wash. Perhaps the burden of the debt is shifted to the next generation. Perhaps the debt service encumbers future budgets. Perhaps the President is setting a bad example as Borrower in Chief. That's the way Mayor Bloomberg feels: “Too many of our conservatives in the United States want to run up enormous deficits and hope that some way, somehow, someone else will pay for it. That’s not conservatism, that’s alchemy at best, or if you like, lunacy.”

On the other hand, if the money is spent for investment, the next generation is benefiting from this investment and U.S. debt itself provides the buyers with a low-risk asset. The problem is that the money is not being spent for investment. The increases are for wars in Afghanistan and Iraq that are not going well and are dubious investments. The U.S. debt has been bought heavily by foreign central banks, allowing them to neutralize the extra dollars and keep the local currencies strong, at the expense of the dollar. A weaker dollar is not necessarily bad, because it means Americans can export more overseas. It also means that imports will cost more. This could well contribute to inflation. It also provides some hope that U.S. consumers will spend a smaller share of their income of imports and the enormous annual U.S. current account deficit will start to shrink.

U.S. external debt, i.e., public and private debts repayable in foreign currencies, shows the extent of the cumulative overhang. Debt obligations are calculated in U.S. dollars at current exchange rates. While U.S. external debt is the highest at $10 trillion, it isn’t much higher than the $8.3 trillion figure for the UK.

Top Five Cricket Nations by External Debt
1. United States $10.0 trillion
2. United Kingdom, $8.3 trillion
3. Germany, $3.9 trillion
4. France, $3.5 trillion
5. Italy, $2.0 trillion
Source: CIA, The World Factbook , updated as of 9/20/07.

To rank the cricket nations on a current basis, we can use current-account deficits, i.e., a country's net imports in goods and services, less net earnings from rents, interest, profits, and dividends, and less net transfer payments (such as pension funds and worker remittances) from the rest of the world during the year, calculated on an exchange-rate basis. The U.S. current account deficit in 2006 of $862 billion is nearly 15 times the UK's $58 billion.

Top Five Cricket Nations by Current Account Deficits, 2006
1. United States, -$862.3 billion
2. Spain, -$98.6 billion
3. United Kingdom, -$57.7 billion
4. Australia, -$41.6 billion
5. France, -$38.0 billion
Source: CIA, The World Factbook , updated as of 9/20/07. The Trade Balance is the net exports of goods and services, i.e., exports less imports. Examples of services would be legal and consulting services to overseas clients. The Current Account Balance (ranked for 163 countries) is the Trade Balance + net factor income from abroad (such as interest and dividends) + net unilateral transfers from abroad (such as foreign aid, pension payments from overseas or workers’ remittances from overseas). When the trade or current account balance is positive it is called a surplus. When the balance is negative it is called a deficit.

Why Do Debts and Deficits Matter? Americans owing money to one another is not worrisome. But Americans selling public debt to foreign countries, and adding to the debt at a rapid clip, is worrisome. Those who are holding dollar securities must be noticing that the value of these securities has declined seriously.

Meanwhile, U.S. consumers must eventually pay substantially more for imports. That must put an upward pressure on the CPI. We could be back to the 1970s problem of simultaneously rising unemployment and rising inflation, and therefore a rising Misery Index. The U.S. Misery Index hit a high of 22 percent in June 1980. Right now it is down to 5.6 percent.

Postscript - October 2008. One year later, asset values have plummeted. That should take care of the inflation pressure for a while, until balance sheets of financial institutions, businesses and individuals are back in some kind of order.

Wednesday, September 26, 2007

Congestion Pricing and Parking Fees Are Linked

NYC Mayor Bloomberg's Traffic Congestion Mitigation Committee met on September 25 and the connection between parking and congestion pricing was immediately put on the table. The meeting was reported on by the NY Sun and Gotham Gazette. The Committee, which expects to hold forums in all five boroughs and Nassau and Westchester counties before wrapping up by January 31 next year, was informed that average speeds in Manhattan's three central business districts drop the speeds as slow as 6-10 mph.

Assemblywoman Vivian Cook, a committee member, worried that parts of her district in Queens could be heavily used for parking by those avoiding the congestion charges and taking subways into Manhattan. The director of NYC's Long-Term Planning and Sustainability Office, Rohit Aggarwala, responded that this problem could be remedied with a review of parking permits and meters in the area.

Her concern and the City's response show the far-sightedness of the late Columbia Professor William Vickrey, whose 1992 plan ( to address congestion in NYC linked congestion pricing to a review of parking permits and fees.

Tuesday, September 25, 2007

Bravo MTA

The MTA is thinking of having an off-peak fare, a discount for bus and subway riders in New York City. That's a good move - use the market and consumer choice to help solve the growing congestion problem on the roads and on public transit.

The problem with the discount is that it is being discussed in the context of higher subway and bus fares. The Straphangers Campaign would like to see less of the fare paid by riders and more by property-owners, and the late Professor Vickrey has argued that property-owners in NYC will benefit from cheaper public transit fares.

On the other hand, New Yorkers are paying one-fourth of the $8 fare on the London Tube for a single trip. The fare drops to $3 per trip in London if one buys an "Oyster" Card, which requires a one-time fee of $6. The structure of the fares appears to make tourists pay more.

Saturday, September 22, 2007

FILE SHARING | Evil or Harmless?

Sept. 22, 2007–Used to be a lot of tape and record stores. Now few survive. Hot CDs and DVDs are now sold in sections of discount supermarkets (the hip-hop CDs du jour are 50 cent and Kanye). For a full selection one must go to quasi-museums in bookstores or computer stores that retail classic albums to older listeners without the technology to search for and download music from the internet. The reason for the decline of the old record stores is, in a word, file-sharing.

The Recording Industry Association of America has tried to fight back against people–especially younger people, who grew up finding free music–using Napster-like peer-to-peer (P2P) file-sharing networks. Reportedly the RIAA has filed 30,000 lawsuits against downloaders. But the tape and record stores still languish. Should the government be intervening more strenuously on behalf of the intellectual property of music recordings? Or is this a victimless crime? Evidence of victims includes the shortage of opportunities for younger wannabe musicians with many fewer record-company agents ready to sign them up for big bucks.

The clothing industry has an analogous problem–knockoffs, i.e., items of clothing that are copied from well-advertised brand-name items. Some argue that knockoffs, like Napster devices, are harmless and have no victims. Possibly some knockoffs are "complements" to brand-name goods, i.e., they don't compete with them (Mom buys the real thing from Bergdorf's and as she emerges from the store she buys a copy for her teenage daughter on the street outside). But some knockoffs are substitutes, i.e., they interfere with sales. Also, the supply chain for knockoffs is unknown, raising safety and sweatshop questions, not to mention evasion of taxes for goods sold on the street or in stores that don't collect or pass on sales taxes. Any comments?

Thursday, September 20, 2007

Congestion Pricing

There is wide agreement about the high costs of congestion in big American cities. What should be done about it?

On the side of inertia is the former Executive Director of the Port Authority of New York, George J. Marlin (no relation). In a July
blog he says he was once approached by some good-government Manhattanites about introducing peak-pricing tolls on the Hudson River bridge and tunnel crossings. The idea is that tolls would rise at peak hours and fall during off-peak hours, just as they do for commuter train tickets. Marlin dismayed his visitors by advising them that peak-hour pricing is just another tax and he was against it. But if tolls are reduced in non-peak hours to offset the higher revenue from peak-hour tolls, the new pricing can be revenue-neutral. The two people who commented on Marlin's blog - Ed Unneland and Erik Engquist - both agreed with the goo-goos that peak-hour pricing might be better than the alternatives.

I spoke in favor of congestion pricing twice in July - once before a public hearing of Manhattan Community Boards 4, 5 and 6 and once before a hearing of the Borough President of Manhattan, Scott Stringer.
I noted that congestion is a symptom of popularity and therefore a good thing up to a point. In the 19th century, smokestacks were proudly shown on British city postcards as evidence of their prosperity. Better to be congested than to have boarded-up and deserted buildings downtown, as do some upstate NY cities. Hostility to the City’s congestion pricing plan in Albany might stem from upstate congestion envy. Traffic congestion also keeps down the speed of cars to levels where fatalities are less likely in the event of an accident.

The problems with congestion become very serious when traffic slows to speeds of 20 mph or slower. This wastes gas, increases pollution and creates serious stress for people stuck in traffic. Worse, it is dangerous because ambulances, fire engines and police cars can't get through to where they are needed.

Time is money, so we are already paying a tax for congestion - in unpredictable and inefficient ways. One person understood this many years ago, Bill Vickrey, a Columbia professor whom I got to know through the City Club of New York when we were both active members. Bill received the Nobel Prize in Economics in 1996 and looked forward to the increased influence the award would give to his policy prescriptions. Alas, he died within a few days after the announcement of his award, in a car on his way up to a conference of like-minded economists.

Bill was keenly interested in giving advice to policymakers in the City and testified at an economic hearing I organized in 1992 as Chief Economist to the City Comptroller, Liz Holtzman. A summary of his 12 principles of congestion pricing is posted at More of his principles are technologically manageable now than when they were first proposed, and all of them promote an efficient city. When people said that the MTA can't handle the additional burden on the subway system created by those who leave their cars at home or park outside the city, Bill Vickrey answered that the signal system could be upgraded to permit shorter headways between subways and that a skip-stop system for the local trains would shorten travel time without great inconvenience.

The City of New York has won a $354 million grant to implement some of the recommendations for congestion pricing. A State commission is also reviewing other proposals to reduce City congestion and pollution. Their work is important because the existing free-for-all cannot continue. I hope the City and State will take into account the ideas of Bill Vickrey early on in their thinking and implement what is administratively feasible.

CONGESTION | LA and NYC - Huffington Post

"The Los Angeles and New York City areas have suffered the highest total annual costs from traffic delays since 1982. And the delays are getting worse. It's no surprise that the LA-Orange County area ranks worst... The NYC metro area does much better but is deteriorating. The big surprise is that snarls at the report are not for rating LA and OC worst again, but for understating the magnitude of the local problem. ..." Read more.

Wednesday, September 19, 2007

NYC | Traffic Congestion Gets Worse

Sept. 19, 2007–Time travel would cut down on travel time. If New Yorkers could turn the clock back to 1982, their average travel time might be cut by 70 percent. But meanwhile, things are getting worse. The NYC metro area average congestion delay (per peak traveler) jumped to 16th worst in the nation in 2005 (the latest year) at 46 hours – a deterioration from 23rd worst in 2004. The cost of delay is estimated at $888 per peak traveler, 18th highest – again, a deterioration from 22nd worse in 2004.

It’s no surprise that Los Angeles is the most congested, with 72 hours per year in wasted time per traveler. On traffic-congestion delays, New York City ranks with Chicago and Boston among U.S. metro areas according to the just-released 2007 Annual Mobility Report by the Texas Transportation Institute (part of Texas A&M University). The rankings are overall but are grouped by size of each urban area.

The report provides complete information on the New York City region trend since 1982. The total delay has risen eight-fold from 68 million hours in 1982 to 384 million hours, reflective of the area’s size and growth. However, the growth in delay per peak traveler has grown more slowly than the average – reflective of the large number of people in the area who use public transit.

In the absence of a time machine, government officials at all levels need to consider the high cost of traffic congestion – a total of 4.2 billion lost American hours in 2005, the cost per city varying based on size, availability of public transit and local policies.

The report attributes two-thirds of the delays in the NYC area to incidents on the highways that delay traffic. It gives most credit in delay-reduction to “freeway incident management”–e.g., use of cameras and service patrols to incident prevention and response.

The other bright spot is NYC’s strong public transit network. If there were no public transit, the annual delay per peak traveler would jump in the NYC area by 26 hours, from 46 to 72 – ahead of Los Angeles.The total cost of congestion in the NYC area has grown, according to the report, from $649 million in 1982 to $7.4 billion in 2005. Although NYC is not nearly the most congested on an average traveler basis, its total cost remains in second place throughout the 1982-2005 period. Congestion pricing and other options deserve the attention they have been getting from Washington and New York City officials.

Tuesday, September 18, 2007

FINANCIAL PLANNING | How It Saves Marriages

This semester I am teaching Personal Financial Planning to about 40 MBA students and undergraduate seniors at Pace University. I am using Prof. Lewis J. Altfest's book on the topic, published by McGraw-Hill. Prof. Altfest was once a student of mine when I taught at Baruch College. Now he is a national expert on counseling people about their financial concerns. He and his wife Carol have created a thriving independent financial advisory firm that stresses behavioral analysis along with economic and financial analysis.

This approach makes a lot of sense to me. Those who counsel couples about marital problems often put money issues high among the causes of marital discord. It is the number-one issue in the way of intimacy and commitment, and the number-one issue leading to divorce. But, as a participant on a multicultural connections site observes: "Money is not just about money. It represents a lot of things. It represents power, self worth, territoriality..."

In other words, a good financial advisor doesn't just help people manage their money well to maximize their net worth. A good financial advisor can also help save marriages and other relationships.

Saturday, September 15, 2007

TURKEY | The Straddle Economy

Huffington Post, Sept. 11, 2007–Turkey's program of straddling its Islamic past and its economic future is being pushed, watched and challenged. It is being pushed by the government and watched by the EU, which Turkey wishes to join, and by its own army. At the same time, Turkey's employers are being challenged by low-wage competition from the country's near neighbors and European buyers concerned about labor conditions.

Americans concerned with keeping our friendship with this Islamic country need to understand Turkey's economic challenges. Although almost entirely Islamic, Turkey's citizens support Ataturk's secular state, in part because they have seen the economic benefits it has brought. Turkish Prime Minister Recep Tayyip Erdogan -- former Mayor of Greater Istanbul -- leads the Islamist Justice and Development (AKP) Party. His candidate for president, Foreign Minister Abdullah Gul, was recently elected despite the concerns of the army about an Islamic agenda.

Erdogan meanwhile continues his aggressive Thatcher-like program of privatization of public assets along with growing trade with the west. This has fueled five years of GDP growth averaging 7 percent a year. At the center of this growth is the crucial textiles and apparel industry, which accounts for nearly 40 percent of Turkey's exports. The industry is being squeezed by competition from the rest of Asia at the same time as western buyers are asking questions about labor conditions in Turkish factories.

Neighboring countries have labor costs that can be as little as one-fifth of Turkish wages. The Turkish government itself has contributed to employer costs by taxing employment heavily and land lightly. A joint initiative (called JO-IN) of international NGOs looking at worplace conditions in Turkey calculated in 2005 that apparel workers cost employers directly 594 YTL (New Turkish Lira) per month, but after payroll taxes the workers received just 350 YTL. Employers say they pay another $100 a month for lunch and travel allowances, and that costs are rising rapidly -- the Turkish minimum wage rose more than 50 percent from 2001 to 2005. Turkey's trade unions respond that the minimum wage is still far below what they believe to be an appropriate living wage. However, for most garment workers the taxes are not paid at all, because so many workers are unregistered participants in Turkey's large gray economy.

In the thick of these issues is Yesim (YEH-shim), Turkey's largest apparel employer. According to JO-IN members, Yesim is a model garment-sector employer, certified to the SA8000 labor standard. Certification has helped with western buyers, but Yesim feels cost pressures from nearby cheaper competitors.

One May morning in Istanbul's Richmond Hotel, I spoke with Yasemin Basar, Director of Social Compliance for Yesim. The company has been growing outside of Turkey, but its employment has shrunk one-third from a few years ago, to 4,000 employees. Yasemin is proud that Yesim's Turkish workplaces enjoy high standards of morale, quality, on-time delivery, retention and productivity. Still, she told me: "It has not been easy for us to bring up labor standards at our factory to satisfy western buyers and at the same time remain competitive."

Yesim and other large employers can move production to Egypt, Moldova, Pakistan, Romania and Bulgaria, where wages are 20 percent or less of Turkish base wages and where payroll taxes are much less or zero. Yesim seeks to implement the high standards of its human-resource management systems everywhere, but it is hard.

When apparel jobs leave Turkey, the displaced employees may not find new work, reducing an employment rate already low by world standards, especially for female workers. The government gives more priority to high-margin industrial sectors. But if apparel jobs leave, what are the options for the laid-off workers?

Manufacturers are responding by increasing their efficiency as well as fending off possible black-listing by socially conscious western buyers. I visited an impressive Topkapi factory, certified as meeting global norms, with thousands of looms being operated by a small number of skilled workers.

Erdogan's government meanwhile is encouraging job creation in poorer areas by waiving 80 percent of the employer's social security contribution in rural Anatolia. Hey Group, the second-largest textile employer in Turkey, has two factories in the region. Benan Vey, who works on compliance issues with Hey Group, told me that the government concessions are "very helpful."
How can Turkey reduce payroll taxes while continuing to build the country's infrastructure and still provide public services and a safety net? When the government started considering reducing the Value Added Tax on tourism and food, to 8 percent from 18 percent, the IMF expressed concern that these cuts imperiled the country loan commitments.

If more workers were registered, the rates might not have to be so high. But a more basic question is whether Turkey could better face its challenges with lower taxes on payrolls and higher taxes on land.

Comment Huff

Sunday, September 9, 2007

What Is Silicon Valley? Comparisons with NYC

New York City is commonly rated below Silicon Valley and Boston as a tech center, based on the higher density of their high-tech firms relative to other jobs or to the population. A new study by the New York-based group ITAC (full report downloadable from their web site) claims this is unfair and stresses that NYC has more high-tech workers than its major tech competitors. As a resident, fan and former employee of the City of New York, I would like to believe it, but the study appears to overstate NYC's case. These friendly comments are not meant to detract from the importance of the topic or the usefulness of the study.

Silicon Valley Includes San Francisco. The NY Times today (p. 41) reports the study as saying that the NY Metropolitan Statistical Area has "nearly 620,000 technology workers, two and a half times as many as Silicon Valley and nearly twice as many as Boston." The numbers appear in Exhibit 10 on p. 11 of the ITAC report, showing all "employment in technology":

1. New York MSA 619,881
2. Los Angeles MSA 483,706
3. Washington, DC MSA 377,144
4. Chicago MSA 356,351
5. Boston MSA 317,684
6. San Jose MSA 251,050
7. Seattle MSA 208,565
8. Atlanta MSA 188,294
9. Minneapolis-St. Paul MSA 169,449
10. New York City 169,303

ITAC uses as its definition of Silicon Valley the San Jose MSA, which excludes San Francisco. NYC was compared with Silicon Valley in the 120-page April 1999 report by the New York City Comptroller's Office (when the City Comptroller was Alan Hevesi and I was the Chief Economist), The NYC Software/IT Industry. The Comptroller's study looked only at the computer-services jobs (software) in 1997 and ranked the NYC 10-county area third using SIC-code data (based on classification of the business of employers) and NYC alone as sixth:

1. Silicon Valley 86,129
2. Boston and Route 128 55,956
3. New York City and Five Suburban Counties within NY State 46,606
4. Los Angeles 32,294
5. Dallas 31,892
6. Seattle 28,955
7. New York City 25,716

Why include San Francisco in the definition of "Silicon Valley"?
  • The Comptroller's study followed the work of AnnaLee Saxenian, who included Alameda, San Francisco, San Mateo, Santa Clara and Santa Cruz counties. (Boston was defined as Essex, Middlesex, Norfolk and Suffolk counties. Los Angeles was defined as LA County, Seattle as King County, New York City as the five boroughs, and the NYC suburbs were the five nearby New York State counties, Nassau, Suffolk, Westchester, Putnam and Rockland.)
  • PC Magazine defines Silicon Valley as: "An area south of San Francisco, California that is noted for its huge number of computer companies. Initially, Silicon Valley was confined to the Santa Clara valley and started north of Palo Alto stretching 25 miles south to San Jose. With expansion into neighboring towns, the entire San Franciso Bay area can be considered Silicon Valley." That includes San Francisco county.

Density Matters. More fundamentally, it does make a difference how specialized an area is. The ratio of computer-services jobs to all private-sector jobs in 1997 in NYC was 9 per thousand, the fourth-lowest of 15 cities, way behind Silicon Valley (40 per thousand), Boston (34 per thousand), and Seattle (33 per thousand). The argument for paying the higher cost of a higher-density city is that the opportunities for networking, selling and innovating are higher where density is higher. Density contributes to destiny.

Within New York City, of course, there are focal points for tech innovation. But the degree of cooperation among Berkeley, Stanford, local community colleges and private entrepreneurs - and the equivalent cooperation between Harvard and MIT - is still not matched in NYC, although great progress has been made over the past decade.

The nine pages of conclusions and recommendations in the Comptroller's report includes a strong recommendation (pp. 83-84) that: "A small Citywide office should be created to work on building these relationships [between educational institutions and entrepreneurs that is true in the Boston and San Francisco areas], possibly with an initial sunset life of five years or so. ... It should work with the [New York] software industry [association] (NYSIA) or the federally supported Industrial Technology Assistance Corporation [ITAC], or both."

Nine months after the Comptroller's report, ITAC published a report with recommendations for the tech industry in New York City. Before the recommendations were able to get traction, the tech sector began a long slide in the stock market and then in jobs. This is a good opportunity for New York State and New York City to look at recommendations for strengthening the tech sector and the comments here are offered in the spirit of identifying NYC's weaknesses as well as its strengths.

Friday, September 7, 2007

NYC | Just a C for Growth? (Comment)

August 31, 2007–A Business Council study compares the 2005 economy with the 1995 economy... and says NYC rates a C. The study is reported on here: New York City and State Lag in Economic Growth (NY Sun).


The Business Council has done some great work, e.g., on workers' compensation. But this study - c'mon. Who are we do believe–the Council or our own lying eyes?

Do the authors remember that the City of New York was attacked by terrorists on September 11 and the business community was on the edge of a diaspora? The fact that NYC has bounced back since 9/11 is impressive.

Perhaps NYC should be grateful to get a C since the study gives a good portion of the group to which NYC is compared (i.e., the upstate counties) an F.

But there is a deep flaw embedded in the study. It uses five variables and compares each county with the nation. Three of the five variables–population, jobs and total personal incomes–are biased against dense counties like the five boroughs of NYC, which are harder to grow from a population or jobs standpoint. It's easier for populations to grow rapidly from tiny numbers in the deserts of Arizona and Nevada counties than it is in a settled city like New York. However, NYC has its own upstate reservoir while the desert communities depend for their water on snow falling in distant states.

The value of residential and commercial real estate is one test of the City's economic magnetism. The recovery and growth of values since 9/11 speaks for itself.

What may happen in the future to Wall Street jobs and incomes and the value of real estate given the collapse of the subprime lending industry is another matter. It is as true today as it was in the 1980s that the City's economy is highly dependent for its performance on Wall Street's brains and skills. But meanwhile don't slam the City with unfair comparisons. Give it an A for its recovery from the disheartening months after 9/11.

Tuesday, September 4, 2007

Orange County's Batman and Robin Break Up

(Posted on Huffington Post September 4. See comments posted there.)

As campaigners against waste and fraud, John Moorlach and Chriss Street rode to fame as the fiscal Batman and Robin of Orange County, Calif.

The duo worried publicly that Orange County’s longtime Treasurer, the memorably named Bob Citron, had put County-managed funds (a total of about $20 billion, including funds from other jurisdictions in a pool) at great risk through investments in leveraged derivatives such as repos and floating rate notes. The County lost big time on Citron’s bets when the Fed’s open market committee raised the target fed funds rate from 3.25 percent in February 1994 to 5.5 percent in November 1994. As interest rates rose, the value of the securities fell and the County lost about $2 billion.

Moorlach ran against Citron for the Treasurer post in June 1994 and lost. In December, Credit Suisse First Boston required more collateral from the County, which filed for a Chapter 9 bankruptcy. Moorlach was appointed to succeed Citron as Treasurer, and was subsequently elected through 2006. In that year, Moorlach gave his friend Street a leg up to the Treasurer job by appointing him to the civil service post of Assistant Treasurer after posting the job for just one day.

Street was elected to the Treasurer post in June 2006, his ballot statement unabashedly tied to Moorlach’s coattails: “Orange County Treasurer John Moorlach trusts Chriss Street to replace him…” His bio reports that “Chriss Street has been among John [Moorlach]’s closest advisors.”

Moorlach was at the same time elected one of Orange County’s five supervisors. Upon taking office in December 2006, he called for more accountability for the deputy sheriffs’ funds. Orange County has an estimated unfunded pension liability of more than $2 billion, of which a big piece is for law-enforcement pension benefits. Union leaders responded that Moorlach’s interest stemmed improperly from their opposition to his campaign for supervisor.

What a difference a few months make! The Dynamic Duo has broken up. Moorlach has disowned his protégé Street in the wake of a growing series of investigations of Street’s actions before and since taking office. The Justice Department is investigating Street's previous work as a bankruptcy trustee for Fruehauf Trucking Corp. So is the Department of Labor and Pension Benefit Guaranty Corp. The Orange County District Attorney joined the investigating troops in August. Moorlach became aware of Street’s having falsified data and privately asked Street to resign. Moorlach was rebuffed and has publicly called for Street’s resignation. Street has defended himself in a videotaped press conference.

Apart from the specific charges of malfeasance, one worry is that Orange County’s $7 billion funds have again been mismanaged, for example by buying subprime paper. The troubled Countrywide Financial Corp. is the nation’s largest subprime mortgage lender and is based in Los Angeles. New Century Financial was until April the second-largest subprime lender, based in Irvine (Orange County), and has been in Chapter 11 proceedings since April. At the August meeting of the Orange County Republican Central Committee, Moorlach was asked if the County has investments in mortgage debt.

Orange County’s troubles will doubtless one way or another come to the attention of Governor Arnold Schwarzenegger, who played Mr. Freeze in the ill-fated 1997 movie version of the Batman and Robin story.