No, you're wrong

I was not thinking about this until I saw an article about the Social Security "freeze." For those of you that don't know, Social Security benefits are indexed to inflation (the CPI). I will not get into the messy details of how the CPI is calculated, but the basic idea is that if the cost of living rises 5%, Social Security benefits will rise by 5%. For 2010, there will likely be no increase since we are currently experiencing deflation and the purchasing power of dollars is increasing. However, the law does not allow for a reduction in benefits if there is deflation. I see it again and again -- people do not understand real purchasing power versus nominal dollars.

That means a freeze in Social Security payments will translate into a drop in real purchasing power for many seniors, said Jo Wiejahn, a senior citizen in South Bend, Ind.

“Any time the ... income stays the same but everything goes up from the groceries, car maintenance — everything — you are actually going backward,” Wiejahn said. “Even though I work, the fact that my Social Security is going to stay the same is tough, because that’s basically the money I depend on.”

http://www.msnbc.msn.com/id/32544620/ns/politics-more_politics/

Actually, since there is deflation right now, everything isn't going up. Since there is deflation right now and the law prevents a reduction in benefits, the purchasing power of social security benefits is rising -- but don't tell that to Rep. Phil Hare D-ILL

U.S. Rep. Phil Hare, D-Ill., called it "unconscionable" that Social Security recipients won't get a cost-of-living increase next year.

He said he would support any congressional action aimed at reversing the decision, including introducing legislation if necessary.

http://www.qctimes.com/news/national/article_49734f92-91cc-11de-8c31-001cc4c002e0.html

In the interest of fairness, some do make the point that healthcare costs are still rising and the elderly disproportionately spend on healthcare. While this does illustrate a problem with the CPI in general (consumers have different baskets of goods they buy), my main point is that everyone needs to understand their real purchasing power, not the nominal they have.

Speculator, you say that like it's a bad thing

I guess you would say I'm a speculator. I have some assumptions about the world and I look for pricing that differs from those assumptions. If I win, I get to keep my profits. If I lose, I don't get bailed out by anyone. (The same can't be set for some major investment banks with proprietary trading arms)

Speculators have been blamed for rises in oil prices, driving down stock prices through short-selling, market crashes, etc. The reality is that we need speculators able to act on their beliefs, to buy or to sell. Politicians often judge that one price is too high or another is too low. I think it would be foolish after what we have seen over the last couple years to say that the market always get the "right" price at every point in time. However, the alternative is the government setting prices, which I have far less confidence in than the market.

A restriction on the activity of speculators would severely reduce liquidity in markets. Information would travel slower and those with the best estimates of the future would be less able to bring a market back to equilibrium.

Real Change

These are two photos I took from the Jefferson memorial. I really liked the quote in the second photo.

Newspeak

This weekend I downloaded real page turner. (And the summary)

From the summary:

The Health Choices Commissioner specifies the benefits that must be made available in each year – including a requirement that each participating plan provide one basic plan in each service area in which they operate. It is then optional for the plan to offer one enhanced and one premium plan. The differences between the three main plans (i.e. basic, enhanced and premium) are the levels of cost‐sharing required, not the benefits covered. The Commissioner shall establish a permissible range of cost‐sharing variation that is not to exceed plus or minus 10% with regard to each benefit category.

The Health Choices Commissioner sounds like Newspeak to me. We'll get the choices that the allow for us to have, no more no less.

Since reading this is clearly too much of a task for one person if you're not being paid to do it, I would be open to any insights that readers of this blog happen to have.

The Public Option

I have a healthy degree of skepticism that the public option might not compete on a level playing field with private insurers. I found a publication from the American Academy of Actuaries that explains some criteria for a public plan that would compete on a level playing field.

I just can't be too surprised

If you liked the first stimulus, you'll love the second one. Politicians, particularly Obama and Congressional Democrats are nervous that the stimulus is not enough. First, look at some basic facts and reasonable judgments.

A Few Points

A small proportion of the stimulus has been spent - A $100 billion just isn't what it used to be. In addition, a majority of the $110.3 billion was spent in the month of June. Other articles, I've seen show that even less has been spent.

Economists say that only 10 percent of stimulus dollars have been spent and the president's plan has been criticized for not creating enough jobs.

Most agree that there is a lag - The economy is a complex system and nobody expected the stimulus to work instantaneously. Given that little spending out of the total has occurred and a majority was spent last month, it is too early to know what's working. Pushing the button again won't help in the near term.

States are using the money for short-term needs - People were promised grand projects to increase efficiency and build American infrastructure. However, much of the money has been used to close short-term budget gaps.

Cash-strapped states have used federal stimulus dollars to close short-term budget gaps and avert major tax increases but generally have not directed the money toward long-term expansion, according to a new report.

I had a few other observations, but these are the most important ones that I have for right now.

How else could it have been done?

Drop it from helicopters
If you remember the great economist Milton Friedman, he proposed that we "drop money from helicopters" in the event of a liquidity trap. This bypasses the slow and often inefficient process that we face in finding "shovel-ready projects" (or the latest phrase we want to use). If individuals receive money they are limited to a few broad options to dispose of the money.

• Spend or invest
• Save
• Pay down existing debt

If you believe that deficit funded fiscal stimulus can stimulate the economy, spending or investing the money obviously helps matters. In this particular economic downturn, there are serious issues with the banking system. If individuals don't spend or invest, they can save put their money into banks. The banks would have a larger deposit base and less issues with liquidity. However, the best result may be that individuals pay down their high debt levels. Finance author and perhaps philosopher, Nassim Taleb, argues that the global economy needs $40 to $70 trillion in deleveraging.

Grant it to the States on based upon a simple formula
Much of the money is being administered by states for projects or being used to prop up state budgets. If we want to have the States administer the funding for projects or simply prop up their short-term budgets, a simple approach would be to transfer an amount calculated in proportion to population, state product, taxes to the Federal government paid by its citizens, or some other available measure. The Congress does not have a tendency to be succinct, and a stimulus bill on one a sheet of paper is not likely to happen (or at least short enough to be read).

Some combination of individual stimulus and grants to the States
Combining these two approaches should not result in a stimulus bill so long that you would fall asleep reading it. The approach that Congress actually used has not been shown to actually focus on long-term, high return investments. A quickly enacted and carried out stimulus that simplistically dropped money from helicopters to the States and/or individuals would likely pack more of a punch. (If you grant the initial premise that deficit spending will stimulate the economy)


I will be continuing to research this issue with the following sites:
Stimulus Watch
Recovery.org

Thanks for reading, tell your friends.

California IOUs

The largest banks in California including Well Fargo and Bank of America have accepted the IOUs in the past. Now, some banks have said they will stop accepting the IOUs at the end of the week.

From this, a market is arising for California IOUs. If you look on Craigslist in San Francisco, there are dozens of ads for "IOUs Wanted."

This raises a few issues

1. Is this a state-issued currency? It is used just like a currency, except that there is an explicit interest bearing feature. If it is a currency, that runs into constitutional issues.

No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.

2. What are they worth if the state does go bankrupt? I have some idea about what happens with a corporation goes bankrupt, but I don't know much about the equivalent for a State.

3. Banks are accepting the IOUs and some may continue to accept them after this week. How do they impact the bank's capital and what does the US Treasury have to say about it?