Thursday, September 29, 2011

Stimulus, FDR, Myths

Every time stimulus spending is advocated or the name of Maynard Keynes is mentioned, free market ideologues roll out what has become a firmly-rooted myth. It is that Franklin Delano Roosevelt’s stimulus spending had had no effect—and that real recovery required World War II—or some say the post-war period. Here is such a statement, plucked at Google-random from the American Thinker (link):

Exhibit A: The massive deficit spending of Franklin Roosevelt in the 1930s didn’t stop the Great Depression. In fact, despite FDR spending more money in his first five years in office than all 31 prior presidents combined, his Secretary of the Treasury Henry Morgenthau stated in 1939 that “[w]e are spending more than we have ever spent before and it does not work. ... I say after eight [sic] years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!”
Let’s take a look at this statement, so oft repeated. First of all, technically, anyway, the Great Depression had actually ended in the very month when FDR took office. The dates of that depression are August 1929 through March 1933. Let’s next deal with Morgenthau’s statement quoted by our source. When FDR took office, unemployment stood at 25.2 percent of the civilian workforce. In 1939, when Morgenthau spoke, unemployment stood at 17.2 percent. Ouch, you might say. But it was 8 points lower. Morgenthau’s frustration is understandable, but his statement isn’t accurate.

Herewith a graphic showing both GDP in constant dollars and the civilian unemployment rate in percent for the 1929 through 1950 period, with FDR’s time in office shaded in.

If our free market priesthood would bother to put up charts like these, clearly showing that stimulus did work—both in dollars and in lowering unemployment—their readers would start making faces. The numbers don’t support the statements. The priesthood doesn’t show such graphs for a really good reason. They can’t get away with what they’re saying.

Will a repeat of that past performance produce the same commendable results—sure as the sun shall rise? That may not necessarily follow. But that there is precedent for the anguished demands of Paul Krugman and company, that is certainly true. What lingers in the back of my mind is that fundamentals may have changed since FDR’s time. One of those is globalization. Another is the point I made a while earlier on this blog. Namely that a perpetual motion, as in an economy that forever grows at a greater rate than population, may not be possible forever to maintain. But the stimulus hawks are backed by history. It may turn out that God does exist but that the Hidden Hand does not.

My GDP data come from this BEA table. The earliest unemployment data come from this BLS source, the later numbers from this one.

Saturday, September 24, 2011

Rogue Trader at UBS

An article on the New York Times’ Business Page this morning deals with one Kweku Adoboli who lost $2.3 billion in so-called rogue trades. The thrust of the article, by James B. Stewart, is to blame the UBS for failing to supervise Adoboli. All right. I managed to learn, but somewhere else, that a rogue trader is “Someone who makes trades that haven’t been authorized”; thanks for that Julia Felsenthal (link). My informant also adds that if the “rogue trader” happens to make profits, and especially very big profits, we usually do not hear about such unauthorized events. To qualify as a rogue trader de facto rather than merely de jure, you have to lose lots of money.

What Stewart’s article omitted, however, were the really interesting features of this story. Adoboli, who is 31, graduated from Nottingham University in 2003 with a degree in Computer Science and Management. He got his job at UBS in 2006, thus around age 26. His initial job at UBS was to assist in programmed trading; specifically he provided tech support for algorithms. Presumably his expertise lay in adapting trading algorithms to trading goals, these latter expressed in mathematical terms. Sometime in or before 2008 he became a trader, but I cannot find any press mention of the date of his transition from trainee to trader.

Now anyone who’s ever been involved with playing with algorithms knows the temptation of trying out this or that variant to see what happens. If a trend is going left and up, will it keep on going up more if you tweak this variable? Now in the usual test environment, no harm is done. But if you have to make a trade to test your brilliant insight, the results may be serious. That’s what seems to have happened here.

This story started looking much more complicated when I got this far. A young, relatively immature, and possibly already successful computer trader—computer emphasized because Adoboli obviously had no genuine trading experience or history—makes mistakes and then compounds them by trying to cover them up. He was the one who confessed—a bit late, to be sure. Add to that now that the very essence of such trading is speed, that computer trades are triggered by split-second changes in indexes—and that it would take equally smart computer algorithms to ride herd (thus “authorizing”) such trades—and now a much richer story is in front of us.

It’s lessons are that there is a problem in (1) appointing inexperienced people to engage in computer trading; how does the supervising senior trader know if a particular small change to an algorithm is good or bad? Has he been trained in computer science too? There is a problem (2) in computer trading as such. There is a problem (3) in taking someone out of college with a computer sci degree and setting him to work advising on algorithms. Programming is an experiential activity. It is a craft you learn by doing. It takes years. Algorithms, alack, alas, are weird, if abstract, but still structures. They have odd dynamisms. They are just like maddening reality. They very often produce the unexpected unless you know the terrain.

James Stewart’s column in the NYT is encouragingly labeled Common Sense. It would have been of some service to me to have been told the above, which is not, repeat not framed anywhere in press reports. Well, amateurism to the rescue.

Wednesday, September 21, 2011

Hospitals? Resistant!

One of my persistent themes here is that “Demography Rules.” A post on Market Size (link) reminded me of this again today. If we look at hospitals through the Great Recession, the year-to-year revenue streams of hospitals show not the least sign of any economic down-turn. Here a graphic depicting it, based on a table obtainable here (the table I’m using is the second one under Annual Benchmark Report for Services through 2010). As the population is aging, and as the baby boom generation enters that stage when for its members hospitals start looking like a second home, the health care systems, of which hospitals are surely the most prominent institution, reflect a demand for services that has not flagged in the least. Demand is what it’s all about.

Monday, September 19, 2011

Growth in Perspective

Arguably the first industry in the modern sense was textiles and dates to the eighteenth century. Sophisticated machinery appeared for spinning and for weaving; the manufacturing activity moved from homes and small shops into factories; then steam power came to be applied to move that machinery. Ever since waves of innovation have created new industries and transformed the old ones: iron and other metals, steam, canals, rails, electricity, oil, telegraph, lighting, telephone, radio, automobiles, petrochemicals, air travel, atomic power, television, plastics, computers, Internet, and now cybernetic miniaturization.

All depending on where we date things from—say the invention of the flying shuttle (1733) or of the spinning jenny (1765)—we’ve had either a 278- or a 246-year cycle of development.

This development has significantly depended on access to fossil fuels augmented by atomic power. They’ve represented “found wealth” in the sense that we did not have to produce, by human or animal labor, the energy in the coal, oil, gas, and uranium we’ve simply harvested. But while we admire human ingenuity and give it all the credit, the industrial age is unthinkable without found wealth—and has made the exploitation of our innovation possible in the first place. But this process has also distorted our sense of what an economy is. Our economies have developed a dynamic of their own. The growth that we’ve experienced has come to demand new waves of innovation, the creation of new markets. In part this has been necessary because our innovation, combined with our use of found wealth, has also reduced the need for people. We’ve replaced human labor with machines running on fuels. Therefore, to keep pace with the artificial growth to which we have become accustomed, we desperately need the new simply to maintain it. With an absolutely diminishing demand for labor, thanks to automation—but with a growing population—we need the waves to continue unabated in order to accommodate increasing numbers.

We need growth because, to maintain our style of life, we must all continue to consume—and all of the products and services that we’ve already created. Mature markets—thus those that have come to depend on the population’s growth rate, which is lower than that of our economies—don’t contribute to growth. But we must maintain them. Thus the base keeps growing while also shedding jobs. But our need for greater-than-population growth is still there.

Now it is interesting to contemplate that we’re now in an age of miniaturization—and that that miniaturization process is itself beginning to feed on older, mature industries—as e-books are feeding on books. Each recent wave of industrial development has had a similar character. Each has improved functionalities while requiring fewer and fewer people to produce—but the same and growing number of people to consume.

In a word, we’re beginning to run out of legitimate markets. Not surprisingly, our services sector has become the largest sector. It is still absorbing people, but artificial intelligence, perhaps the next wave, will get rid of those people too—but not as the greatly desired customers.

At the risk of beating a dead horse—but in this day and age it might be necessary—let me put all of the above into a simple slogan:

The economy needs customers but has no use for employees.
So what is next? Cybernetic devices implanted in the body to replace organs that will presumably work much better than those that nature has produced? I do not, folks, have my tongue in my cheek. But I have decent eyesight. The solution is coming at us. It is the fossil sunset.

But when I hear the wise men agonizing over the economy, and wanting it to kick into gear again, to resume that growth we desperately need, I wonder if they fail to see what seems patently clear to me. This can’t go on forever. We must return to a situation of equilibrium again—where, as in the hoary past, growth was dominated by population growth—and that growth was limited by the fertility of nature.

Saturday, September 17, 2011

The Information Age Up Close and Personal

It turns out that the AT&T modem, which we use to get our access to the Internet, has an “issue” (as they call it) with it power cord. You know the kind I mean—with a little transformer that feels warm when it’s plugged in. When this “issue” arises, the modem fails. Good-bye web. The quick solution is to zip off to your AT&T outlet to buy a new one for $10 and change. But before this happens, you have to know the cause. You need information. The power cord remains warm to the touching hand.

So this actually happened to us yesterday. We lost our connection. But then, a short while later, it came back. And again. And yet a third time. Eventually it went away for good. Our modem’s power light began to blink green; then it turned a steady red. The DSL light went off altogether.

Our AT&T bill has a phone number to call for Internet support. The person you get to talk to, however, is called Mr. Recorded Voice. He takes you through a series of questions to which you are supposed to answer, as in by voice: Living Voice answering Recorded Voice. Way, way, way down a long network of linking chains, you will at last get switched to Technical Support—where a real voice answers. By that time you’re on you second call, because you interrupted the first call to reset the machine and to unplug the modem.

During my second call, suddenly, the Internet was back. I told the Ms. Live Voice about that. She was glad. But I asked her. Had there been some kind of outage? She said she’d check. While she checked I grooved out on some popular but nameless orchestral music. At last she returned and said that Yes, there had been an outage, but it had been put right already. Well, thank the stars, etc., I said, and we parted.

Alas, 15 minutes later the red light was back. And this time it stayed that way. Late last night Brigitte made the third call—but after I’d already gone to bed. She was told that the modem had to be taken in to the store or, alternatively, AT&T would schedule a visit. But this being then the first hour of Saturday, Brigitte couldn’t do much. She also failed to write me a note, hence, awakening this morning…

… I made the fourth—and also the longest—call. It lasted the better part of an hour. I too eventually got the message that the modem needed to be “taken in.” Ms. Living Voice this time—who again materialized, if that’s the word, after I endured the overly friendly Mr. Recorded Voice—diagnosed the problem as hardware. But this time—and that’s why it took so long—her back-up people actually determined (1) that there was (and continued to be) a massive outage in Detroit; (2) that I lived about three blocks from the border of Detroit, (3) that my network was not part of the massive outage, (4) I was getting a DSL signal, but that, and finally, (5) my modem wasn’t getting it, which Ms. Living voice inferred from the way the buttons were lit or not lit. And she also gave me the phone number and address of the nearest AT&T store. I called that number when the store opened, went through another session with Mr. Recorded Voice II, got a technician. “It’ll be the power cord,” he said. “That’s it nine times out of ten.” And when I got to the store twenty minutes later, that was, indeed, the case. He escorted me to the door. “There is an issue with those things,” he said. Another twenty minutes later, we were up again.

Now this made me think about the Information Age. Had my first call reached a knowledgeable person, I would have got that cord yesterday already. But such is the nature of this age—and companies so love their profits and therefore so hate to pay real people to provide real services—that we spent several hours trying to discover that this modem had a problematic power cord easily replaced at the nearest Radio Shack—although AT&T thought it best to go to the source.

Wednesday, September 14, 2011

Poverty Table 2010

New poverty thresholds were released by the U.S. Bureau of the Census (link). Once more I reproduce the table below. It is not very legible, so clicking on it is necessary to see it properly. The 2009 poverty table is on this blog (here), the 2008 table on LaMarotte’s earlier version (here). Just to save you some time in making a quick comparison, the rate for a family of four (two adults, two children) was $21,834 in 2008, $21,756 in 2009, and $22,113 in 2010. More on this in a moment. Here is the new table:

What poverty actually means, in the context of this measure, is that the individual who or family that falls below the figures shown is considered to be in poverty. People who earn the numbers shown are on the threshold—but not yet poor. One of the reasons why poverty measurements are sometimes said to be arbitrary is because here a single dollar one way or the other makes all the difference. It is no joy to earn right at the threshold.

To help you read a little, the first two columns of the data in the full table are presented in enlargement here.

As my earlier listing shows, the four-person threshold (family with two children) isn’t all that different, year to year. The difference between 2008 and 2010 is an increase of $279. These adjustments have everything to do with inflationary price changes. Therefore the Census Bureau’s announcement of the table is not what made the news. The news was in the fact that more people have fallen below these thresholds than in the past. In 2010, 2.6 million more people were in poverty than the year before. The total number for 2010 was 46.18 million individuals, an all-time record. But let's not forget that 2009 was also a record. To see an historical view of poverty in the United States, look at this earlier post.

World Poverty

The publication of new poverty measures for the United States yesterday made Brigitte wonder what other country’s rates might be. I was dubious of being able to find such data—which tells you how “retired” I have become. Of course there are such data. Of course. Just ask the CIA. Herewith is a map that shows the poverty rates across the world as derived by Wikipedia from the 2008 CIA Factbook.

The data shown here are based on official rates in place in the countries shown. Clicking on the image will, of course, enlarge it. A tabular presentation of very similar data from CIA and other sources is on Wikipedia (link), the same place where I obtained my map.

The striking features here are the roughly similar poverty rates across the north of the globe—and high rates of poverty overlaying the southern latitudes of the earth. These poverty rates, of course, apply in their own countries and in the context of those countries. You will notice that China’s poverty rate is better than that in the United States (2.8%). In China the official line is drawn at income of $125 per annum, defined as “low income”; anyone who falls below that is considered to be poor; those who fall below $90/year are considered to be in “absolute” poverty. Poverty has a different meaning all depending on where you are. Some European countries also do better than we do—but there the income thresholds, of course, are much higher than in China.

Some countries did not have data for 2008. Japan is one of them. The rate there in 2007 was 15.7 percent; the Japanese, therefore would have been colored blue, like we are.

I will bring the U.S. data soon, thus updating the earlier tabulations already found on this blog.

Tuesday, September 13, 2011

New Entrants to Workforce

The Bureau of Labor Statistics has some interesting data on the employment of youths in two categories: those aged 16 to 19 and those aged 16 to 24 (link). I thought I would reproduce the BLS chart on LaMarotte. In my monthly posting on employment gains, the talk is always about recovering jobs lost in the Great Recession. Not often mentioned is the fact that our young people are growing up and reaching that time when they want to get jobs for themselves. This graphic tell us how easy it has been for them, beginning in 1950, most recently in 2010—and in the period between.

In this period, the employment level of the older sub-group never dropped below 55 percent except in 1963 and 1964. The latest descent began in 2002—thus ahead of the recession—and looks like it will stay down there. The somewhat younger subgroup, and this includes all those who want to go to work out of high school (if they’ve gotten that far) is worse.

Recovering millions of adult jobs lost in the recession is one thing. Inability to employ our young is in another category of seriousness. It erodes a generation’s perceptions of what is possible.

Monday, September 12, 2011

Debt Crisis ABCs

Debts so large that a country can’t repay them may be erased in three ways. One is a transfer of cash (a bailout), another is the purchase of the debt by the country’s central bank (printing money), the third is outright default. Most countries print money—thus to repay numerically fixed debt by cheapened money. The consequences are dire but ultimately, self-correcting. Among them is that the country’s exports, priced at inflated rates, becomes less desirable. It cannot sell its debt except at increasingly high interest rates. Eventually its currency is devalued. That in turn results in very high costs for vital imports, like oil. Money tends to flee the country, thus stifling development. Countries tend to run deficits because it is easier to increase services and to cut taxes than to tax their industry and public.

When the country is part of a larger entity, such as the European Monetary Union, the temptations remain but the painful consequences are shared by others. Members of the EMU will be inclined to use a bailout rather than suffer the consequences in an inflated Euro—and this especially if their own banks hold the bonds of the offender. Thus the first option comes into play. Some label this the moral hazard of monetary unions: incentives are present to enjoy the benefits of bestowing goods while others help with the paying of the bills.

In Europe Greece is the offender, and a Round One bailout has been approved—alongside a handful of demands for reform. Greece has not delivered on the reforms, hence Germany now opposes Round Two. And thanks no doubt to strong German signals, the European Central Bank (ECB) has drawn back from the second option, namely printing Euros with which simply to buy the outstanding debt of Greece, Spain, and Italy—thereby restoring “confidence.”

Whose confidence? Ordinary people’s? Paul Krugman’s? Krugman today vented his displeasure in the NYT with the ECB’s refusal to print money—and labeled Germany’s and others’ pressures as “moralizing.”

The moral problem that here arises is the tendency of governments to skate on the thin ice of deficit finance, hoping that the future—or more disciplined agents—will bail them out.

That in the EU individual states, like Germany and France, have to undertake bailouts (and sell them to their own people) arises from the EU’s limited powers. It’s not a nation but something short of that (see last post). Bailouts in this country are undertaken by the nation as a whole, thus by Congress. Those actions are also often dubious—the consequence of letting shady actions proliferate. Indeed the only reason why Germany and others have voted for bailouts is because they are themselves endangered by an inflating Euro if the ECB does the job instead of them.

The holders of the debt, in Greece and elsewhere, are investors, banks. They too, I suspect, winked a little when they lent to Greece, more freely surely than they should have, knowing that now, in defense of the mighty Euro, their money would be safer. Default? Everybody shudders. Ultimately it would result in a credit crisis. And if it is large enough, the walls of almighty Capitalism might begin to shake, rattle, and roll. But wouldn’t that be, like, the End of the World?

A Not Quite United Europe

During my time in the Army in Europe (we’re talking the 1950s), I had a chance to visit the High Authority of the European Coal and Steel Community in Luxembourg (ECSC—also called, and remembered by me as, the Montanunion).

The ECSC was the forerunner of the European Union. It had been founded in April of 1951 by the then French foreign minister, Robert Schuman as a means to prevent further war in Europe. The idea was to place coal and steel—vital in defence activities—under a single and transnational High Authority, the two old enemies, France and Germany, both participating in what was originally a six-country arrangements; others were Belgium, Italy, Luxembourg, and the Netherlands. The institution, however, was, from the very beginning, also seen as the first step to a European federation of states, and those of us visiting Luxembourg circa 1956 were mostly presented with a glowing picture of that future.

Indeed, the concept was most seductive. That’s where I first heard the word Grossraumwirtschaft, produced by one of those linguistic maneuvers so common in German that weld multiple nouns into a new one, this one literally meaning large area economy. Here the word had been, as it were, cleansed of its origins in the Nazi era—where it meant that the conquests of Poland, France, Russia, etc., would create such a thing. (I discovered later, by the way, that if you aspired to standing in economics, you did not deign to translate that word. All those in the clan were supposed to know it.) Anyway, back then, in Luxembourg, we were told that the exemplary Grossraumwirschaft in the world was the United States of America, and our presenters had maps and statistics showing that if Europe’s states all got together, joined the Montanunion, extended its reach beyond coal and steel to encompass the totality of the economies, Europe would become an economic power at least equal to the United States and, in some particular categories, greater!

And, listening to the enthusiastic presentations, looking at vividly colored posters put on stands one after the other, it all seemed entirely doable, indeed excitingly inevitable.

Sometimes we get to watch history. Slowly but surely, the EU was formed (1993) and a single currency introduced (1999). The EU is certainly an economic union and entirely comparable to, indeed in some categories greater than, the United States. It has 500 million people (the U.S. has 312 million), its GDP is $15.2 trillion (ours $14.8 trillion); but it has less territory, 1.7 million square miles versus our 3.8 million. The significant difference is that the EU is not really a political union (although it labels itself as such). Its states retain genuine sovereignty. They can withdraw from the EU—as Texas cannot quit the United States. They can declare war on others, as California certainly cannot. The European Union as a legislative and executive body has severely limited capacities. Its equivalent of a legislature is not like our Congress; its executive is not like ours.

To make this plain, the U.S. Congress could vote $1.5 billion to bail out the state of Nevada, to pick the state with the worst projected deficit in FY 2012. If the votes are there and the President doesn’t veto the bill, or Congress overrides the veto, Nevada would get its dollars. Such a process is impossible in the EU. There every bailout—say of Greece or Spain, for instance—would require member countries’ legislatures to vote the money, e.g., Germany, France, others. This would be equivalent to saying that Nevada would only get its funds if the Texas and California legislatures would vote the money and their governors would sign the bills.

In Europe we’re looking at a union all right, but it has limited scope. In the European Monetary Union (those using the Euro) we’re looking at an international monetary union. It functions just like our own national monetary union, but there is a nation here, no nation there.

The consequences of this I’ll cover in the next post.

Saturday, September 10, 2011

The Restoration of Confidence

The restoration of confidence—based on just plain common sense—requires a clear diagnosis of what went wrong, a plan to implement corrections, and then a disciplined working of the plan. What doesn’t work is treating symptoms. And letting nature solve the problem is, in effect, to abdicate.

In our present situation the causes of our crisis are (1) failure to regulate the financial system so that a mortgage bubble could arise; (2) globalization which drained jobs from the domestic economy while flooding it with cheap goods; and (3) fighting expensive wars overseas while cutting the taxes that should have paid for them. Have I left out something basic? I don’t think so. There are all kinds of bad theories behind the wrong-headed decisions, but that’s another story. The worst of these is giving market forces free rein in the belief that they will invariably produce optimal results. Markets must be regulated—much as farmland must be cultivated to yield crops. Nature will not do it left to its own devices.

If we heard this diagnosis from the highest levels—and necessary changes proposed to correct the wrongs as soon as ever practicable—confidence would then return because all of these things are self-evident, common sense, and the public would immediately sense some comfort.

The solutions are very drastic regulation of the finance sector. This would include limiting speculation, prohibiting computer trading and all kinds of derivatives markets, mandating high reserve retentions in every kind of banking and insurance, including investment banking. The solutions are protecting domestic employment by consistently and rationally-framed tariffs. By “rationally-framed” I mean that goods or services imported from overseas should cost, after the tariff, the same as those manufactured or provided domestically. We need to raise taxes, and such tariffs would help. The solutions are to increase taxes so that what government spends it also pays for by current levels of taxation.

Now, having spelled it out, I’ve also made the difficulties clearly visible. Is such a program possible? Functionally? Yes. Will it take time? Yes. Will it be difficult? Yes. Will it mean withdrawing from various international compacts? To be sure. What it would require is vast public support—because it would be painful, here and there—but largely for the financially swollen fifth quintile of the population only.

Until I hear something like this articulated forthrightly by some credible segment of our leadership, the crisis of confidence will not be solved. It might eventually seep away as nature takes its course. But in the aftermath a much larger percentage of the population will have sunk beneath what we are still happily calling the middle class.

The Anatomy of Confidence

In a column in today’s NYT, columnist Gail Collins suggests that our leaders have finally discovered whom to blame for the lousy economy. It is the people—and their negative attitude. She cites Ben Bernanke saying that households are “exceptionally cautious,” IMF’s Christine Lagarde speaking of “a crisis in confidence,” and President Obama urging us to “shake off all the naysaying and the anxiety and the handwringing.”

All right—but Collins is actually over-reaching. In effect Bernanke is right. We are cautious. So is Lagarde; this is a crisis in confidence. The excerpt from the President’s speech is more of an interpretation, or a kind of characterization—but not of what people say. He is objecting to the media’s chatter-scribble instead. It would indeed be almost good news if the problem really was just attitude. But it is more than that. Bernanke’s characterization is the mildest. Lagarde’s is accurate. Confidence. That is the problem.

Confidence arises from two factors. One is an individual’s conviction of his or her own powers, knowledge, and capacities. The second comes from looking out at the environment. In the very best of times, a crisis of confidence would certainly erupt if we all woke up one fine morning and discovered one of our limbs paralyzed, one of our eyes gone blind, and our brain unable to produce three coherent sentences in sequence. That would be the failure of the first factor. But that’s never the case. Most of us wake up each morning fully functional and our capacities in place. Crises of confidence arise because the environment—the over against—has become unreliable.

Children are most frightened, indeed terrified, indeed go into hiding when their parent suddenly start acting crazy. And it need not be that bad. They just need to fight viciously and disagree about most things—and all the children hear, even through walls, is shouting, harsh thumping sounds, and the sound of breaking glass. Confidence is shaken when Dad packs his bags and leaves the house—or Mom does not come home from work but, when she does, late at night—seen through a cracked door from a dark bedroom—she is drunk and in the company of a grinning man they’ve never seen before.

Confidence fades when the house the couple agonized so long to buy, fearing the huge increase in expenses over rent, suddenly loses 40 percent of its value—but they still owe that lost 40 percent as part of a 30-year mortgage. Confidence ebbs when a colleague is clearing out her desk—and it seems that talk of layoffs is true after all—and your husband’s already home, having lost his, and you might be next.

To tell the people to e-mail, fax, telephone their Congressman, might be like telling the children to e-mail, fax, tweet, and face-book-comment Dad after he leaves the house to shack up with Floozy-Woo at work. Getting a fifty-dollar check from Grandma at such times does not restore the child’s lost confidence. The model train, at such times, is forgotten. The fifty bucks is nice—but last night, going to the toilet, you saw Mom at the kitchen table, all alone, and she was just shaking, shaking, shaking with sobs.

Naysaying, anxiety, handwringing? A negative attitude? Fixed with a little get-up-and-go, American competitiveness, the can-do spirit? If it was just attitude, folks, that would be nice. That would be fixable. But a real crisis of confidence is about as easy to fix, over-night, as the second layoff in a two-income household or the shatter of a family which, in effect, destroys, and not just for the child, the whole settled order of the world.

Thursday, September 8, 2011

The Shape of Consumption

I’ve recently suggested in a tongue-in-cheek manner, but not really kidding about it, that our consumption culture may itself be a bubble. I called it a Superbubble, maintained by a no longer justified confidence in the future, encouraged by advertising, easy credit, and other features of the Me-Me-Me society. But has that bubble been pricked by the mortgage bubble’s pop—and the financial meltdown that followed? I thought I would look for some indicators. The data graphed here comes from the Bureau of Economic Analysis (link). If you want to keep me honest, follow menus until you locate Table 2.3.6.

The table offers data on consumption in chained 2005 dollars; inflation is thus removed. The major categories of consumption are then broken down further. The first chart looks at the big picture, total consumption and its three major parts:

The colored lines show actual dollars. The straight, thin, black lines are the trends of each curve. Trends in these series are, of course, dominated by the 1995-2005 decade, thus by results obtained before the Big One came. Thus it is interesting to see how close or how far away we are from the trend in last years of these series, thus from 2008 through 2010. On this graph the top line shows total consumption; the trend shows that we are underperforming it in recent years. Looking at the components that make up the total, we see that we fall below trend least in the non-durable goods category (where food, clothes, and gasoline reside); the gap widens a little more in durable goods (autos, refrigerators), and most in household services (here we have housing, health care, recreation, subscriptions, and the like).

One way to read this is that in the basic categories we hew close to trend, in discretionary categories we are easing off on our purchasing—thus changing the trend downward. Put another way, the more voluntary the purchase is, the more we have fallen behind the decade-plus trend formed by these data. Now let’s see how further disaggregation illustrates what we are seeing thus far. Let’s start with stuff we need on a more-or-less daily basis, the nondurables category.

We fall beneath trend in every category. The gaps from least to largest are food, gasoline, and clothing. The biggest gap appears in the miscellaneous category, “other” nondurables; in tht category, possibly, our discretion is greater. We have to eat; we have to fill the car.

In this chart, tracing the shape of Durables, we see the most dynamism—and a surprisingly sharp growth curve. Notice that gaps between actual expenditures and trends are rather dramatically higher—especially in the largest category (until 2006)—automobiles and parts. A big gap exists in furniture and equipment; “equipment” here includes refrigerators, dryers, disposals, and such. The small gap in the “other” category, unfortunately, is not explainable—precisely because we have no data on what all that bin holds. The surprise comes when we look at recreational durable goods and vehicles. This category has not only displayed a fantastic growth in the period but it is also—never mind the Great Recession—right on track with its own head-spinning rise. When it comes to boats, dirt bikes, snowmobiles, and yachts—No is not an Answer!

The last graph of the day shows all kinds of household services. Recall that this category showed the greatest gap between actual and trend on our first chart. This graphic shows us the detail. Every category underperforms its trend. The lowest gap, again, is found in the category where discretion is least: in healthcare. The medical profession wants to use “health care consumer,” but consumer we are not; not in the sense of voluntary. Food services and accommodation are also largely on trend; that speaks to our habits; we are habituated to our Big Macs or our Burger Kings. Another low gap comes in recreational services. Recreation seems to trump any impulse to save our dough in honor of the Great Recession. The biggest gap appears in financial services. People have stopped or cut back on their investment activities. That’s not surprising. Housing and utilities—and that one is important because it is the largest category of expenditure—shows a deviation downward. So does “other” services—but we can’t easily discover what all that includes. I further note that people buy fewer airplane tickets, bus tickets, or both.

I wish we had data with better resolution. The question I have posed but cannot as yet answer is: Are people waking up, finally, scared to death by the mortgage melt-down and the evaporation of employment so that they will stay frugal? As in permanently? Or is this just the bottom of a Krazy-Ride-Rollercoaster and soon, to a collective sigh of relief, the little cart will start zooming to the sky again—only to come hurtling down once more? There is a paradox here, of course. We seem to require the Mad Consumption way of life to employ everyone. Unless we’re willing to kiss globalism by-be-bye and fall in love with tariffs again. As Market Size blog showed a day or so ago, the Paper Clip People have managed to get tariff protection. The Paper Clip People? Why not the rest of us?

Tuesday, September 6, 2011

Sextant: The Modern Astrolabe

An elegant, accurate instrument using mirrors became the modern version of the mariner’s astrolabe around 1730. Its first version was called the octant, thus named because its measuring surface for angles was one eighth of the circle. The sextant, the modern instrument, has a measuring arc of a sixth of a circle. The two simultaneous but independent inventors of this device, intended to measure the angle between a celestial object and the horizon, were an English mathematician, John Hadley (1682-1744) and an American glazier, Thomas Godrey (1704-1749). Isaac Newton (his name looms large) tends to be credited with inventing the principle of using mirrors in such an instruments, but while he wrote down the idea, he did not publish it.

The best way to convey the use of the sextant is by demonstration. Pictures are better than words, animations even better. Herewith the first image of an award-winning series produced by Joaquim Alves Gaspar called “Animation of the use of a marine sextant to measure the altitude of the sun”. You can see the animation by clicking on this image. It comes from Wikipedia (link).

As we can see, the user can locate the sun (in this case) and then, while watching the horizon through half of image provided by the visor, cause it to overlay the horizon line precisely by moving the index arm. Modern sextants come with filters so that looking at the sun does not endanger the eyes. When the sun is precisely on the horizon, the reading of the index arm against the arc below provides the exact altitude—exactly the same service that the astrolabe provided; in the animation that altitude is 40°. That number, can then, by means of an equation I discussed in the first post on this subject, provide the exact latitude at which the sighting was taken.

Latitude provides one of two (the horizontal, east-west) coordinate needed to locate ourselves on this planet. Longitude (the vertical coordinate, north-south) required high-precision clocks—at least before satellites rose into the sky. I’ll summarize that history in a future post.

This is the second of two posts in a series. The first is here.

Post Office in Constitution

Fellow blogger Brandon, gentleman and scholar, put a finger on another aspect of the Post Office in a comment to yesterday’s post: “To establish Post Offices and post Roads” is one of the powers granted to Congress in Article I of the Constitution (Section 8). It is refreshing to read that section and to discover there that the Post Office is on a par with powers such as laying and collecting Taxes, borrowing Money, coining Money, declaring War, raising and supporting Armies, providing and maintaining a Navy—among others.

Part of the problem with written constitutions becomes visible here. Market extremists might interpret the phrasing of Section 8 to mean that there is a huge difference between post offices, armies, and navies. In the case of post offices, Congress is empowered to “establish” but not explicitly to “maintain” or to “support.” Therefore, on the face of it, defunding of the Post Office—or failing to raise postal rates high enough to support it (we have one of the lowest rates in the world)—is perfectly legal.

Brandon also mentions the spirit of the law. Yes. There is the written aspect and then there is the spirit. Different people will have different views of the spirit of the law. I think I know what the Founders’ spirit was—but others are free to disagree.

Monday, September 5, 2011

Post Office Constituency

More negative news on the supposedly horrendous costs of the Post Office are ahead. How do I know? The newspaper of record makes my Labor Day by telling me that as a little encore to shutting down the whole government, Congress may give us shutting down the Post Office this winter. Why? Later this month the agency must make a payment of $5.5 million and hasn’t got the money. On top of that, the $5.5 million is needed to finance the future health care of its retirees. Doesn’t that almost guarantee Congressional refusals to help. Such vast amounts of money? For people? Worse yet, for health care? Even worse for the uselessly retired? A pledge never to vote Yes for the Post Office will soon be circulating.

Yet I think I’m absolutely right to think that the Post Office has a huge and supportive constituency. Oddly enough it is the very same people who go to the Post Office, wait in lines, look at each other and roll their eyes because the lines are so slow. And the people who change when it is finally their time at the counter. I am one of them. When I have to mail something registered, or mail a gift, or send money by that route—that’s one of my least favorite chores. Nevertheless, I don’t want any politician messing with the Post Office. Indeed, Brigitte and I have already signed a private pledge never to vote for any politician who votes against the Post Office. Do we ever get anything in the mail that we want? Most days we don’t. But some days we do: magazines we value, car registrations, insurance certificates to use with the car, Christmas cards, packages from friends, purchases from—enough so that we want it. We know our postal carrier by name. We wave to her when we see her across the street. We smile. She smiles.

This constituency also knows perfectly well that the Post Office costs the nation just a few billions a year, still in single digits. In 2010 the loss from operations was $8.4 billion. Most of the agency’s total expenses ($75.4 billion) were met by its revenues ($67.1 billion). According to a March 29, 2011 report by the Congressional Research Service (link), expenditures on Afghanistan are running $6.7 billion per month, expenditures on Iraq $6.2 billion per month. And don’t let me get into the bailouts of the Too Big to Fails.

One of these days we, the people, will get our way. If we don’t, believe you me, I am ready to sign up for a tour of service, even at my age, with the Michigan Militia. But let me end on a less “immature” note. There is that motto on the James Farley Post Office in New York City, derived from a statement in Herodotus’ Histories celebrating one of mankind’s earliest postal services, the Persian:


Nor, one might add, beady-eyed tax cutters in Congress—if we can help it.

Sunday, September 4, 2011

This Could Be Big

It might be possible to split water into oxygen and hydrogen using solar energy for the process and a relatively inexpensive semiconductor material. The hypothesis was published in Physical Review B on August 1 of this year. My source is Science News (link). The researchers unveiling this most seductive hint were Professors Mahdu Menon and R. Michael Sheetz, University of Kentucky’s Center for Computational Sciences and Professor Mahendra Sunkara and Graduate Student Chandrashekhar Pendyala, University of Louisville Conn Center for Reneable Energy Research.

The field to which they made their contribution is photoelectrochemical water splitting. The innovation here is the substitution of an inexpensive semiconductor material for much more complex materials used as the base of current experiments. To quote my source, the team at University of Kentucky “demonstrated that an alloy formed by a 2 percent substitution of antimony (Sb) in gallium nitride (GaN) has the right electrical properties to enable solar light energy to split water molecules into hydrogen and oxygen.”

This could be big. But the Big Caution here is that this was a theoretical discovery, not a physical, experimental demonstration. Thus the researchers were modeling chemical outcomes on a computer.

Splitting water into its components using established methods is very energy-consumptive; it uses a lot of electricity. Indeed the energy balance is not favorable; therefore current industrial ways of obtaining hydrogen start with hydrogen-rich methane (4 hydrogen atoms to one carbon). But if we could tweak cheap semiconductors to do the job—with sunlight supplying the external energy yet—that would be a MAJOR breakthrough.

There’s many a slip twixt modeling and demonstration—but I certainly hope these guys are on to something real! To use water (in effect) as the source of fuel—with the exhaust from the engines being water, again, why that would save our high-energy culture—and Fossil Sunset would not be quite so threatening as it is now.

Saturday, September 3, 2011

Causing Giraffes to Dance

On the eve of President Obama’s much touted Jobs Speech, a few basic observations.

Not that an ant addressing a thunderstorm is likely to be heard—or that any kind of observations, sage or not, will influence anyone in Congress or the White House. Those people need help, not advice. The Madness has them in its thrall. Rather, I say these obvious things just to remind myself that sanity still rules. And others, reading this, might feel mildly better, thinking: Well, at least I’m not alone.

U.S. Presidents are elected to “take Care that the Laws be faithfully executed.” The Constitution does not make the President responsible for the economy. It is minimally a sign of growing collective irrationality to assume that rulers are divine and therefore responsible for the weather, be that physical or economic.

The only way to create a job is by hiring somebody. The President can only do so by persuading Congress to vote him the money to hire federal workers. He hasn’t got the votes. He knows that. We know that. So what is this gesturing all about? Another way he could make jobs is by persuading Congress to vote money for the States specifically earmarked to hire state workers. He hasn’t got the votes. Etc.

Giving people money (about $75 per month if they are working and if they are earning at least $45,000 a year)—hoping they will spend it and that that spending will cause others to hire—that’s not “job creation.” And if that money is taken from Social Security, won’t that just increase the deficit? Nor is easing air pollution rules—hoping that companies will have more profits and will spend that profit on new jobs—that’s not “job creation.” Nor is giving businesses further tax cuts—if they hire workers. If they’re not hiring workers now, why would they do so for a tax cut? And wouldn’t yet more tax cuts cause more government layoffs?


If you want to teach giraffes to dance, deploy a lot of people with electrical cattle prods into the zoos of America. Let them teach those giraffes to jump around funny. You won’t succeed by planting low trees next to high trees with foliage giraffes happen to like—hoping that in reaching high and reaching low, the giraffes, as they feed, will perform the kind of squat-jumps you happen to have in mind.

Our policies are like that.

Pic credit is Wikipedia (link).

Employment: Update August 2011

According to the Bureau of Labor Statistics’ monthly report on the Employment Situation, in August the Economy neither added nor lost jobs in the aggregate. Just to maintain the continuity, I’ve updated my month-by-month bar chart and provide it here once again. The absence of a bar colored red, meaning new, simply means that no change has taken place.

If we look at changes in greater detail, however, we see seven sectors gaining employment (83,000 jobs)—but six sectors also losing jobs (also 83,000). Net result is no gain, no loss. The picture, however, is artificially distorted in August. Verizon communications workers were on strike. This action caused most of the biggest single sectoral loss in August, in the Information sector. Striking workers are not counted as working. The strike ended on September 2.

Worth noting in the August report is that, once more, private sector jobs were lost in two of the three basic industries, Construction and Manufacturing; Mining showed a small gain. Bigger gains were shown in services, the largest in education and health services, which is mostly health (34,000): Thanks aging Baby Boom. Government shed jobs again (17,000), but not as dramatically as last month (37,000). In effect, the strike aside, the economy would have gained a modest number of jobs. The Verizon strike will also distort next month’s numbers by showing an artificial gain.

The data for these charts comes from the monthly BLS press release (link).

Friday, September 2, 2011

The Astrolabe

Measuring and calculating instruments have always fascinated me, hence they’ve appeared on this and the earlier version of LaMarotte before (here, here, and here). During a joint vacation recently, John Magee mentioned the astrolabe. A friend of his is the navigational officer on board of an aircraft carrier. John asked him a while back if he had ever used an astrolabe. The man had not. This got us talking—and left behind an intention to look into the subject. The impression in my mind, when we were talking, was of a round sort of thing sailors had once held up toward the sky—and a vague knowledge that these babies were extraordinarily complex instruments.

Well, herewith a little introduction to the subject. It can’t be summarized in a single post, not even a dozen. The astrolabe is thought to have been invented by Hipparchus of Nicea (190-120 BC; the place is now in Turkey) around 150 BC, thus early in the Hellenistic (read the “modern, scientific”) era of Greek culture. Hipparchus was an astronomer, geographer, mathematician and also thought to be the originator of trigonometry. You now have the flavor of the thing. It turns out that the astrolabe was perhaps the earliest kind of ultra-sophisticated slide rule. The Persian astronomer, Abd al-Rahman al-Sufi (903-986) described more than a thousand uses for it, not least astronomy, time calculation, navigation, and as a trigonometric table.

Here I’ll deal narrowly with the simplest kind, known as the mariner’s astrolabe—and a single use of it, determining your latitude at sea from a single reading of the sun’s angular position. But it is well to described the actual device. It consisted of four components, a base plate known as the Mater (mother), a rotating structure above it called the Rete, a Plate that fit between the two, and a rotating ruler-pointer called the Alidade. An excellent diagram of these parts is shown on the website, The Astrolabe (link). Note that the Plate could be changed. Commercially available versions come with eight different plates one can insert depending on the application.

Herewith a picture of the front and back of a traditional astrolabe produced and sold by Norman Green (link). This one costs $180. The site shows others as well. The rete is the grayish structure on the first, the gold is the mater. The alidade, used in detecting the sun’s altitude, is shown on the second picture; it has visible sighting slits. The front has an additional pointer-ruler.

From the same page comes this simplest of astrolabes, the mariner’s ($195). It consists of a mater and an alidade and is used for obtaining one’s latitudinal position on earth.

How this instrument is used is illustrated by this cartoon taken from Wikipedia (link).

The user suspends the astrolabe (it shouldn’t actually be held in the hand as shown) and then aligns the alidade until the sun (or star) is visible through both slits. For navigation, the sighting should take place when the sun is at its highest point that day.

Latitude and longitude? Lines of latitude are horizontal lines drawn on globes and mark degrees of latitude (width—from Latin latus, wide). Why are they called degrees? The following graphic will illustrate that.

The globe, with the two poles marked as 90°, the equator as 0°, is divided into four triangles as show in blue. As the graphic shows, latitude 45 is a 45° degree elevation above or declination below the equator. If you draw a line from the 45° point of the eastern to the same point of the western triangle in the northern hemisphere, you get a line of latitude. Similarly in the southern hemisphere. By convention, therefore, latitudes are marked N or S or the southern equivalent is rendered as a negative number. The largest latitude circle is at the equator. The circles grow smaller as we go north or south and they vanish into a single point at each pole.

I show this globe at a tilt by way of emphasizing that the earth’s axis is tilted with reference to the sun’s—by 23.5°. This becomes important in finding our latitude using the astrolabe. The earth’s tilt causes our seasons; thus the sun’s altitude changes daily throughout the year. If the earth’s axis were not tilted, the angle we detect using the astrolabe would suffice, by itself, to serve as a simple indicator of our latitude; to get latitude, we would simply deduct the observed angle from 90. This becomes evident from the following graphic (courtesy of this tutorial). It shows the ecliptic, or the path of the sun, in relation to our orientation north to south. This means that in each hemisphere, the sun is beneath or above the equator depending on the time of the year:

The angle we measure using the astrolabe must be adjusted by this ever-changing declination of the sun relative to our equator. The point where the ecliptic crosses the equator twice a year is known as the equinox. At that point the declination is 0°. The sun is directly above the equator; night and day are therefore the same length. At other times the declination is positive (sun is above the equator), maxing out at 23.5° at the summer solstice, or negative (sun is below the equator), maxes out at -23.5°, at the winter solstice. In this field the word declination is used; to be sure, it is actually (as shown above) a declination followed by an inclination, but one word is used and the perceived direction of this apparent solar movement is indicated by positive or negative numbers—or zero for the equinoxes.

The navigator using an astrolabe, having correctly identified the angle of the sun, its altitude, must next calculate the declination. For this he or she will need to know the day of the year, thus have a good calendar, and use an equation. The calendar should be such that it informs the person of the number of the day. August 31 this year, for instance, was day 243. The equation to calculate the declination is the following:

declination angle in radians = 23.45 * pi/180 * sin(2*pi*((284+day)/365.25))
To render this for Excel, pi would be rendered as PI(). If we substitute 243 for the day, the result of this is 0.143834 radians. To rendered this into degrees, multiply by 180/pi. The result is 8.241088°. This is the sun’s declination on August 31.

Supposing that our astrolabe reading was 55.5. Having that and the declination of the sun for the date, we can calculate the latitude. The formula is:

latitude = 90 - (altitude - declination)
If the declination comes out negative, which it will do from the autumnal to the vernal equinox, the declination is added to altitude rather than deducted.

When we insert values for the words in the equation, in our case 55.5 and 8.24, the latitude for that sighting is 42.74° Is that correct? Well, I’ve come close. My actual latitude here is 42.4243°—but that’s not too bad when measuring the solar altitude with bits of cardboard rather than a fancy $195 astrolabe from Mr. Norman Green.

Longitude? In a word, you need a very accurate timepiece keeping Greenwich, England time—and one of the more muscular astrolabes able to calculate local time. But as for details, not this time. I all worn out with latitudinal astronomy, radians, degrees, declinations, and inclinations. My own inclination is to have lunch.