Creating poor incentives: "The Startling Rise of Disability in America"

National Public Radio (NPR) has a terrific article (and graphs!!) on the rise in the number of people receiving Federal Disability Compensation.  It is quite eye-opening.

Seems like this program has resulted in TONS of un-intended consequences.

People have an incentive to lie and they are enabled to do so by government and other self-interested parties (read the part about the "disability-industrial complex"). 

It creates a lack of respect for a well-intentioned program and causes the rest of the population to be more cynical about government than is necessary.    

"...The federal government spends more money each year on cash payments for disabled former  workers than it spends on food stamps and welfare combined. Yet people relying on disability payments are often overlooked in discussions of the social safety net.  

People on federal disability do not work. Yet because they are not technically part of the labor force, they are not counted among the unemployed.

In other words, people on disability don't show up in any of the places we usually look to see how the economy is doing. But the story of these programs -- who goes on them, and why, and what happens after that -- is, to a large extent, the story of the U.S. economy. It's the story not only of an aging workforce, but also of a hidden, increasingly expensive safety net...."  NPR. "Unfit for Work: The startling rise in disability in America"

I encourage you to read it.  It is important for understanding the citizen-to-government relationship and how a breakdown in this relationship (mainly a lack of respect) is very harmful to the nation.

Very short lesson on what might happen in a few hours in the US Treasury market if a debt deal is not made (or even if one IS made)...

The Federal government borrows money by issuing US Treasury notes/bills---basically IOU's. I am going to use a very simple example to show how the market for US Treasuries may be affected by the failure to raise the debt limit. Keep in mind these numbers are NOT reflective of true market prices. The math is easier for me that way...

If the govt wants to borrow money they issue one of these Treasury Notes/Bills.  Assume the face value of this Treasury is $1,000 and the current market price for this Treasury is $900 (remember, this does NOT reflect the REAL market AT ALL!).  You buy this bond for $900, so the government in essence has borrowed $900 to spend on whatever they want to spend it on. When you redeem it at maturity you earn $100 over what you paid for it.  Your effective interest rate then was 11.11% ($100/$900 x 100). 

Now, assume the debt limit is not raised and there is perception/eat that the US govt will default on its debt obligations. What is going to happen to the price of US Treasurys now and in the future? We should expect the price to DECREASE as the Demand for them DECREASES. 

Now, for the govt to attract borrowers they will have to LOWER the price of the Treasury to entice people to buy one.  Assume the price is now $800 for a $1,000 Treasury.  So, now the effective interest rate is 25% ($200/$800 X 100)!!

This is what it means when you hear that the borrowing costs for the US government might increase if a deal is not reached.  They will have to accept LESS for each bond issued and pay MORE when they are redeemed.

I hope this helps when the stuff hits the fan in a few hours. The first thing that will be affected will be the price of US Treasuries in the market. 

Note: The demand may fall as I described for US Treasuries BUT the Supply of Treasuries already in circulation could (will ) increase as investors dump them. If the supply increases it has the same effect as demand decreasing, hence the same downward pressure on the price and effect on borrowing costs...

My explanation as to why Social Security Checks WILL go out regardless of what happens with the debt limit. Man, we are gullible!!.

When you (and all other workers subjected to payroll taxes) work, 12.40% of whatever you earn goes to the Social Security Trust Fund (you pay 6.2% and your employer pays 6.2%). For years this amount has exceeded what was needed to pay retirees Social Security checks. The difference in what was brought in and paid out was the then "borrowed" by Congress to spend on wars, bridges, tax breaks, whatever...The S.S. Trust Fund took US Treasury Bonds ("IOU's) in exchange for loaning the surplus money to Congress. This is known as an "Intergovernmental Transfer"--government borrowing from itself. The Trust fund has lots of these bonds, roughly $2.5 Trillion (yes, that is right) worth. They can redeem them as needed.

Assume the debt limit of $14.3 Trillion is met with no extension.  There have been threats that granny may not receive her Social Security check next month.  Let me show you how this is not possible, unless political leaders "choose" (not forced) to do so.

This $2.5T owed to the SS Trust fund is part of the $14.3T national debt accumulated by Congress. If a deal is not reached, EXCLUSIVE of any decision about what to spend or not spend on out of the Federal budget this is what the SS Trust fund can do.

Little less than $60 Billion is paid out in Social Security checks each month.  The SS Trust fund CAN "cash in" $60 Billion of the $2.5T in bonds they hold. The US Treasury is required to take those bonds and credit the SS Trust fund with the proceeds.  The Trust Fund can now cut checks and granny can go to the bingo parlor with no worries...Because the those bonds have been paid off and they were a part of the $14.3T national debt, the national debt DECREASES by $60 Billion BELOW the debt limit.  Now, Congress can borrow $60 billion MORE to meet other obligations and NOT be over the legal debt limit...Rinse and repeat next month...

This is not a long term solution.  The first question that comes to mind is WHERE did the US Treasury get the money (or electronic credits) to pay off the bonds?  Well, they printed/pressed a button.  Inflationary, you say? Perhaps, but inflation is not the biggest problem we face right now.  (Yes, this is kicking a can down the road, but just a DIFFERENT can...)...

The Federal budget problems have to be addressed, but they don't have to be at granny's expense. 

So, when you hear a politician or a talking head on TV tell you Social Security checks won't go out, they are either not informed or they assume you are not and will believe anything...Don't let it be the latter...

Please read this editorial by Thomas Saving that I base this blog entry on...He is not responsible for any of my misinterpretations of his work... :)

Disney Trademarks "Seal Team 6"---I CANNOT wait for THAT interactive exhibit at DisneyWorld!!

Disney Trademarks “Seal Team 6″

""In a perfect example of a big media company looking to capitalize on current events, The Walt Disney Company has trademarked “Seal Team 6,” which also happens to be the name of the elite special forces team that killed Osama Bin Laden. The trademark applications came on May 3rd, two days after the operation that killed Bin Laden… and two days after “Seal Team 6″ was included in thousands of news articles and TV programs focusing on the operation. Disney’s trademark applications for “Seal Team 6″ cover clothing, footwear, headwear, toys, games and “entertainment and education services,” among other things.""

What is the World's Worst Dictator biggest crime against humanity? Genocide? Torture? No, it is an economic term that harkens back to the 1970's...

This came from Parade Magazine. They profile the World's Worst Dictators.  They give a one line overview of their "crimes against humanity".  As a teacher of economics, I am glad to see that Stagflation is number 1 on the list of high crimes...

Where Wall Street Money is going this campaign season...Well, Mr President, you did not actually think they would be grateful...did you???




Source: WSJ

 The trend prior to 2010 is interesting and probably not what people would guess. Hedge fund managers and their employees have been relatively more generous to the Democrats than Republicans over time.  Does Wall Street know something we don't?? (Rhetorical question, I already know the answer...)

Donald Trump will get tough with China on Trade...Hmmm...then who is going to make his signature shirts and ties?

Donald Trump has said he will get tough with the Chinese on trade. He believes they take advantage of the US and plays us for chumps. Is he going to get tough BEFORE or AFTER they make the shirts with his name on them...just askin'...

Source: HT Carpe Diem

Need a reason to personally fret about the situation in Egypt? Check gas prices in the next few days...

WSJ: Crude Jumps 4.3% on Egypt Protests

 ""Egypt produces roughly 673,000 barrels a day, according to the Joint Oil Data Initiative, a global oil database, ranking it 21st among the world's oil producers. Still, the country is home to two of the world's key energy supply routes: the Suez canal, a transit point for oil and fuel shipments from the Persian Gulf to the Western Hemisphere, and the 200-mile-long Sumed pipeline, an alternative transit route to the canal. About one million barrels of oil per day was shipped through each route in 2009, according to the U.S. Energy Information Administration.""

""The Suez Canal is located in Egypt, and connects the Red Sea and Gulf of Suez with the Mediterranean Sea, covering 120 miles. Petroleum (both crude oil and refined products) accounted for 16 percent of Suez cargos, measured by cargo tonnage, in 2009. An estimated 1.0 million bbl/d of crude oil and refined petroleum products flowed northbound through the Suez Canal to the Mediterranean Sea in 2009, while 0.8 million bbl/d travelled southbound into the Red Sea. This represents a decline from 2008, when 1.6 million bbl/d of oil transited northbound to Europe and other developed economies.""Source HERE

The Presidents State of the Union Address and how it relates to the Production Possibilities Frontier---I told you I could do it!!

Here is how some of Pres. Obama's statements relate to the Production Possibilities Frontier.  I highlighted the key "buzzwords" I asked students to look out for.  All suggest an Allocative Efficiency decision to allocate more resources towards "Capital Formation"--moving to the production/development of more Capital/Infrastructure to create the conditions for true economic growth. On the graph below, we first have to move from Point "A" to Point "B" on the PPF (There is no such thing as a free lunch--Opportunity Costs!), before we can experience economic growth, illustrated by a shift to the right of the PPF. Economic growth is an increase in our potential to produce more goods (and services), both Capital and Consumer Goods.  Currently we are operating BELOW our potential, at a point inside our PPF.  It is important to remember the distinction between GDP growth, which is what we need to just get back to the PPF, and Economic growth, which I just described above as a shift to the right, or an increase, in our productive capacity.

""Meanwhile, nations like China and India realized that with some changes of their own, they could compete in this new world. And so they started educating their children earlier and longer, with greater emphasis on math and science. They’re investing in research and new technologies. Just recently, China became home to the world’s largest private solar research facility, and the world’s fastest computer.""

We know what it takes to compete for the jobs and industries of our time. We need to out-innovate, out-educate, and out-build the rest of the world.

But after investing in better research and education, we didn’t just surpass the Soviets; we unleashed a wave of innovation that created new industries and millions of new jobs.


We’ll invest in biomedical research, information technology, and especially clean energy technology – an investment that will strengthen our security, protect our planet, and create countless new jobs for our people.


Maintaining our leadership in research and technology is crucial to America’s success. But if we want to win the future – if we want innovation to produce jobs in America and not overseas – then we also have to win the race to educate our kids.


Our infrastructure used to be the best – but our lead has slipped. South Korean homes now have greater internet access than we do. Countries in Europe and Russia invest more in their roads and railways than we do. China is building faster trains and newer airports. Meanwhile, when our own engineers graded our nation’s infrastructure, they gave us a “D.”

We have to do better. America is the nation that built the transcontinental railroad, brought electricity to rural communities, and constructed the interstate highway system. The jobs created by these projects didn’t just come from laying down tracks or pavement. They came from businesses that opened near a town’s new train station or the new off-ramp.

 Over the last two years, we have begun rebuilding for the 21st century, a project that has meant thousands of good jobs for the hard-hit construction industry. Tonight, I’m proposing that we redouble these efforts.

We will put more Americans to work repairing crumbling roads and bridges. We will make sure this is fully paid for, attract private investment, and pick projects based on what’s best for the economy, not politicians.

Within 25 years, our goal is to give 80% of Americans access to high-speed rail, which could allow you go places in half the time it takes to travel by car. For some trips, it will be faster than flying – without the pat-down. As we speak, routes in California and the Midwest are already underway.

All these investments – in innovation, education, and infrastructure – will make America a better place to do business and create jobs. But to help our companies compete, we also have to knock down barriers that stand in the way of their success.


To reduce barriers to growth and investment, I’ve ordered a review of government regulations. When we find rules that put an unnecessary burden on businesses, we will fix them.

Map of the World at Night and of the Korean Peninsula...Quite dramatic.

The World at Night. One of my favorite visuals of all time.  There are many things to observe on this map that says alot about geography, culture, economics, politics, etc in a country and region.  What do you see when you view the first map? The second map shows the Korean Peninsula in two different time periods, 1992 and 2008.  The South has changed considerably and in the North it is pretty much status quo---quite sad. (Source Aidwatchers)

Aidwatchers

Why has the number of MD's produced by the nations medical schools been flat for 20 years?

Why has the number of Medical Doctors produced each year by the nations medical schools been relatively flat for 30(!) or so years?  This question is raised by Professor Mark Perry at Carpe Diem.

From USA TODAY: ""The marketplace doesn't determine how many doctors the nation has, as it does for engineers, pilots and other professions. The number of doctors is a political decision, heavily influenced by doctors themselves.  Congress controls the supply of physicians by how much federal funding it provides for medical residencies — the graduate training required of all doctors.
The United States stopped opening medical schools in the 1980s because of the predicted surplus of doctors. The Association of American Medical Colleges dropped this long-standing view in 2002 with the statement: "It now appears that those predictions may be in error." Last month, it recommended increasing the number of U.S. medical students by 15%. ""

He who controls the supply can dictate the price (Isn't this what the oil cartel OPEC does with oil prices?). What organization is a generous supporter of Federal elected officials and has one of the most powerful lobbying groups in the US?  The American Medical Association (AMA)...The Central Planners at the AMA who have input into the opening of new medical schools failed to predict the market need for Doctors...hmmm...I suppose only the AMA can perform surgery on an invisible hand and declare the patient healed.

What do Tunisia, The Declaration of Independence and Malcolm Gladwell have in common?

The change in government in Tunisia resulting from a "popular up-rising" made me think of the importance of this passage from the Declaration of Independence:

""Prudence, indeed, will dictate that governments long established should not be changed for light and transient causes; and accordingly all experience hath shown that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same object evinces a design to reduce them under absolute despotism, it is their right, it is their duty, to throw off such government, and to provide new guards for their future security.""

This is the "Big Picture" view of events in Tunisia, but there was also a Small Picture element that may have been "The Tipping Point" that resulted in the overthrow of a long established government.

"The Tipping Point" is a great book by Malcolm Gladwell.  The general thesis of the book is why does it sometimes take a seemingly innocuous event to push enough people to act more boldly than they otherwise would in a given situation.  In Tunisia, many/most people were well aware and tired of the corruption but not to the point where they were incensed enough to do anything about it--remember the above line in the Declaration:

""Prudence, indeed, will dictate that governments long established should not be changed for light and transient causes; and accordingly all experience hath shown that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed""

In this article in the NYTIMES: Slap to a Man’s Pride Set Off Tumult in Tunisia, Gladwell may have material for one more chapter:


""SIDI BOUZID, Tunisia — Mohamed Bouazizi spent his whole life on a dusty, narrow street here, in a tiny, three-room house with a concrete patio where his mother hung the laundry and the red chilis to dry. By the time Mr. Bouazizi was 26, his work as a fruit vendor had earned him just enough money to feed his mother, uncle and five brothers and sisters at home. He dreamed about owning a van.

Faida Hamdy, a 45-year-old municipal inspector in Sidi Bouzid, a police officer’s daughter, was single, had a “strong personality” and an unblemished record, her supervisor said. She inspected buildings, investigated noise complaints and fined vendors like Mr. Bouazizi, whose itinerant trade may or may not have been legal; no one seems to know.

On the morning of Dec. 17, when other vendors say Ms. Hamdy tried to confiscate Mr. Bouazizi’s fruit, and then slapped him in the face for trying to yank back his apples, he became the hero — now the martyred hero — and she became the villain in a remarkable swirl of events in which Tunisians have risen up to topple a 23-year dictatorship and march on, demanding radical change in their government.""

Sometimes we have to look beyond the grand rhetoric and look to a simple explanation.  I am sure the  history books will note the revolution in Tunisia, but will not remember Mr Bouazizi' role...Something to think about...

Take this 33 question Civic Literacy Test...A little govt, history, economics...How did you do???

Take the test HERE...I missed only one... :(

""Are you more knowledgeable than the average citizen? The average score for all 2,508 Americans taking the following Civics test was 49%; college educators scored 55%. Can you do better? The 33 questions on this Civics Quiz were taken from the 2008 Civic Literacy exam""....Source Carpe Diem

Is Thomas Hobbes going to be the next President of Haiti?

New York Times

Well, not the REAL Thomas Hobbes (1588-1679), but a philosophical surrogate perhaps..."Baby Doc" Duvalier, a former dictator in Haiti, arrived unexpectedly in Port au Prince over the weekend (NY TIMES).  He inherited power from his father, "Papa Doc" Duvalier. This family ruled Haiti from the 1950's to 1980's. 

Haiti could be a modern day example of the Hobbesian view of man in the "state of nature" and why the return of Baby Doc may be no mere coincidence.
Kind of a dim perspective, isn't it? The "common power to keep them all in awe" refers to the choice of government people will choose to avoid the above conditions.  In Hobbes view, the social contract people would/should choose voluntarily is rule by a "single sovereign or assembly of men"  who would use unconditional power to maintain law and order. The people would cede all rights, including the right to rebel, to this sovereign power in return for protection against those who would do them harm. 

If you view this Frontline documentary on post-earthquake Haitii, one could see how the power vacuum in Haiti may set the conditions for the rise of a single-power sovereign like Duvalier.  At this point, are the people of Haiti ready for some law and order provided by another dictator? I certainly hope not, but the inertia seems to be pushing that way...

"During the time men live without a common power to keep them all in awe, they are in that conditions called war; and such a war, as if of every man, against every man.


"To this war of every man against every man, this also in consequent; that nothing can be unjust. The notions of right and wrong, justice and injustice have there no place. Where there is no common power, there is no law, where no law, no injustice. Force, and fraud, are in war the cardinal virtues.


"No arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death: and the life of man, solitary, poor, nasty, brutish and short."

Political Attack Ads, Circa 1800---If you think it is bad today...

Al Gore is my NEW HERO! He expresses regret for his support for ethanol/corn subsidies... Brrr...It is cold here in Hades!

U.S. corn ethanol "was not a good policy"-Gore From Reuters:

Former U.S. vice-president Al Gore said support for corn-based ethanol in the United States was "not a good policy", weeks before tax credits are up for renewal...

"It is not a good policy to have these massive subsidies for (U.S.) first generation ethanol," said Gore, speaking at a green energy business conference in Athens sponsored by Marfin Popular Bank....

"First generation ethanol I think was a mistake. The energy conversion ratios are at best very small....

"It's hard once such a programme is put in place to deal with the lobbies that keep it going."...

He explained his own support for the original programme on his presidential ambitions.

"One of the reasons I made that mistake is that I paid particular attention to the farmers in my home state of Tennessee, and I had a certain fondness for the farmers in the state of Iowa because I was about to run for president."...

A food-versus-fuel debate erupted in 2008, in the wake of record food prices, where the biofuel industry was criticised for helping stoke food prices....

Gore said a range of factors had contributed to that food price crisis, including drought in Australia, but said there was no doubt biofuels have an effect....

"The size, the percentage of corn particularly, which is now being (used for) first generation ethanol definitely has an impact on food prices....

"The competition with food prices is real."

Nice interactive graph on key mesurements of US economy, demographics, politics...

Nice Interactive graphic on the US from The Economist...

http://www.economist.com/blogs/dailychart/2010/11/us_interactive_guide

""AMERICA as a whole has just endured its sharpest recession since the 1930s, and the recovery is still fragile. But as our interactive map reveals, the pain has been spread very unevenly. The hardest-hit state, Nevada, has an unemployment rate more than three times as bad as that of North Dakota, the state that has done best on that measure. Unsurprisingly, perhaps, there is a close inverse correlation between growth rates and unemployment.


But what of politics? On the whole, the states with the worst unemployment levels tend to vote Democratic, and those with the best are in the Republican camp. Politicians will argue furiously about which way round the arrow of causation ought to run.
Interestingly, America's ethnic composition seems to have little consistent economic impact. States with large numbers of Hispanics (by far the fastest-growing ethnic group in America) include low-growth/high unemployment states like California and Nevada, as well as good performers like Texas and New Mexico.""