The Cynical Economist

From The Telegraph
by James Kirkup and Christopher Hope

Spain’s economy was thrown into chaos on Thursday when its credit rating was cut, sharpening fears that Britain may suffer a similar fate.

The turmoil came just a day after Greece’s rating was cut, increasing concerns of a Europe-wide financial crisis.

The euro fell sharply and the interest rates European governments pay to borrow money jumped after Standard and Poor’s, a credit ratings agency, downgraded Spain.

Last night the government in Madrid appealed for calm, promising an “austerity programme” to cut spending.

But economists fear that events in Spain show that financial “contagion” is spreading from Greece, as investors are scared off investing in any European country with significant government deficits.

Britain’s government deficit this year will be bigger than that of either Greece or Spain, and some City analysts believe the UK’s AAA credit rating could be cut, driving up interest rates and raising the prospect of Britain being bailed out by the International Monetary Fund.

Yesterday David Cameron, the Conservative leader, suggested Britain could follow Greece into crisis. “Greece stands as a warning to what happens if you don’t pay back your debt,” he said.

David Miliband, the Foreign Secretary, accused Mr Cameron of “economic illiteracy”. Lord Mandelson, the Business Secretary, insisted that Britain was in a “very, very, very different situation” from Greece, because the UK retained its AAA rating.

But Neil Mackinnon, an economist from VTB Capital, said it was “a mystery” that Britain had not yet been downgraded.

Angel Gurria, the head of the Organisation for Economic Co-operation and Development, said “contagion has already happened”, likening the crisis to the flesh-eating bug Ebola.

“When you realise you have it you have to cut your leg off in order to survive,” he said, telling indebted countries to start cutting spending.

Arizona’s law, according to Obama, may violate civil rights. But several years ago,  according to Obama, we have laws and they have to be followed no matter how painful would be for a person to be deported because she is illegally here…

So, I guess the laws are only enforced when King Obama wants them to be enforced

From NPR
by Jacob Goldstein

1. The crisis could mean fewer U.S. jobs.

The crisis could hurt U.S. exports to Europe, which in turn would mean fewer U.S. jobs. When the euro falls against the dollar, American products get more expensive in Europe. What’s more, if the debt problems spill over into Europe’s broader economy, Europeans will buy less stuff overall — including less American-made stuff. About a fifth of our exports go to Europe.

2. The U.S. is the biggest funder of the IMF, so taxpayers are on the hook for a chunk of the IMF bailouts.

Rep. Mark Kirk, who worked for the World Bank during Mexico’s 1982 debt crisis, now sits on the House Appropriations Committee that oversees IMF funds. He’s called for Congressional hearings on the IMF’s ability to handle a broader European collapse, this morning’s New York Times reports.

3. Europe’s problems are a reminder that, sooner or later, the bell may toll for us.

Here’s how the economist Ken Rogoff put it on All Things Considered yesterday:

We Americans, you know, love to borrow. And Greece was doing that merrily for years, and then wham, they got hit. And I don’t think our day of reckoning will look like this, but it will come when we have to face higher interest rates, we have to tighten our belts, and we might think it’s not so easy when it happens to us.

Rogoff also talked about this issue when he was on the Planet Money podcast back in February.

“If the United States thinks this can’t happen here, think again,” he said. “When the investment community loses faith in you, it can happen so fast.”

From The Market Ticker

Read my previous Ticker.

Then watch this, and make it viral.

Want Too Big To Fail to go away?  For real?

We can make it happen.

We must make it happen.

Read The Legislation (all 20 pages of it – it will take you ten minutes), watch the video, send it around.

This is the opportunity; if we don’t force this legislation through we have nobody to blame but ourselves for the consequences.

AMERICANS ARE ONCE AGAIN BAILING OUT BANKS VIA GREECE

From Financial Post
By Phil Green

Phil Green is a statistician, president of Greenbridge Management Inc. and author of the upcoming book misLeading Indicators

Scared that 9% inflation might return? It’s already here. The statisticians are just fiddling the numbers

The Bank of Canada declares on its website, “One indication of the success of Canada’s monetary policy is that inflation — the rate of change of consumer prices as reflected in the consumer price index (CPI) — is much less newsworthy today than it was during the 1970s, when it was often a headline issue.”

Indeed, since governor John Crow introduced inflation targeting in the late 1980s, the bank has been pretty good at keeping headline inflation low, according to the official inflation numbers. Inflation targeting in other advanced economies has produced similar outcomes since the nightmares of the 1970s and early1980s.

But was it just sound monetary policy that knocked it out of the news? Something else happened around the time that inflation targeting was introduced — and that was wholesale changes to the way government statistical agencies around the world measure inflation, led by the U.S. Bureau of Labor Statistics (BLS). When inflation is measured the old way, February inflation in the United States came in at an eye-popping 9.4%.

Inflation is not a concrete phenomenon and cannot be directly observed, so we talk of the consumer price index is if that was inflation. But the CPI is also the measurement instrument. It is thus the thing being measured, and the instrument to measure it, melded into one, then wrapped in technical language and arcane procedure.

Central to the struggle to measure inflation for more than 200 years has been the vexing issue of how to deal with changes in the composition, proportion, and quality of the goods in the basket that makes up the CPI.

In 1812, Arthur Young realized the importance of changes in quality. Young had developed a basket of agricultural goods, coal, timber, and manufactured products. He observed that if horses, through breeding, are improved, “it would be a strange mode of showing a depreciation of money, by discovering that a better horse sells at a higher price.”

In 1822, Joseph Lowe developed an index which laid the foundations for the modern CPI, for which he is generally recognized as the father of index numbers. His efforts were borne of distrust of government. He said that “the interest of government, the greatest of all debtors, [is] to prevent the public from fixing its attention on the gradual depreciation of money.” With ballooning government deficits today, that warning is as pertinent as it was then.

Lowe calculated the proportion of expenditures of the British public on various items, including wheat, barley, oats, meat, woolens, cottons, linen, silk, leather, hardware, sugar, tea, “sundry specified articles” and a “multiplicity of unspecified articles.” He used the proportions as weights to calculate his index.

For the last 150 years, most of the changes in methods to measure inflation involved fine-tuning on the three themes of quality, proportion and composition. That changed on October 17 1973, with the OPEC oil embargo. The surge in the price of oil had a striking effect upon inflation in the industrial nations.

Arthur Burns, who was then the chairman of the US Federal Reserve, asked the Fed’s economists to strip out energy prices from the CPI so he could get a measure of the “underlying trend” in prices, unaffected by what was then believed to be a temporary price shock. When food prices then rose sharply, they stripped those out — followed by used cars, children’s toys, jewellery, housing and so on, until around half the CPI basket was excluded because it was supposedly “distorted” by exogenous forces. This led to the development of “core inflation,” which is the CPI less energy and food prices.

The BLS made further major changes in 1978, 1987, 1995 and 1998. Government statistical agencies around the world copied them. It’s not hard to see why.

The BLS introduced a technique known as “hedonic regression” to account for quality changes, as in the Greek word “hedon” for pleasure. The idea is to remove that part of an increase in price that results from an increase in quality (or pleasure) rather than inflation. When goods in the basket of goods become unavailable the Bureau tries to match them with similar goods, and then regresses out the difference.

In one such case, both new and old models of 27-inch televisions were priced at $329, but the bureau decided the new flat screen was worth $135 more because of its increased viewing pleasure. The Bureau lowered the reported price of the television to $194, to account for the supposed increase in viewer pleasure, and put the lower priced “hedonically regressed” television into the basket of goods it uses to calculate the CPI. The consumer, however, cannot ask for the hedonic price at the cash register, and must still fork out $329.

As hedonic regression has grown, so has the controversy about it. The bureau itself admits the technique relies on “strong assumptions.” It assumes that pleasure-giving characteristics are quantifiable and ignores the influence of demand and supply on these characteristics. Hedonic methods make subjective changes to the measuring instrument in response to changes in the thing that the instrument is measuring.

Now the goods in the basket are substituted to reflect consumer substitutions. This is turning the CPI into a cost of survival index, rather than a price index. If the price of steak goes up too much for me to afford it, inflation — my inflation, that is — does not follow. I need to eat, so I’ll substitute steak with chicken, or maybe tofu. My quality of life, however, goes down, and does not get hedonically regressed back up. Another change was to switch to geometric from arithmetic means in the calculation of average prices of goods in the basket. Surprise: Geometric means are less than arithmetic means.

Economist John Williams runs a website known as Shadow Government Statistics on which he publishes his “Alternate CPI” using the methodology the BLS was using in the early 1980s, before the gimmicks were introduced. The two inflation measures have slowly but steadily diverged — so much so that William’s measure has been running about 7% higher than the official CPI.

Williams does not measure an alternate CPI for Canada. But StatsCan, which measures inflation in Canada, is also using hedonic regression, geometric means and the other tricks. That’s one reason inflation is lower, and less newsworthy today, than it was during the 1970s.

Financial Post

From WSIL3 Southern Illinois
By: Christen Craig ccraig@wsiltv.com

WILLIAMSON– A Carterville mom says she was denied medical care for her children because the state isn’t paying its bills.

As the Illinois budget crisis drags on, it’s impacting more and more people.

Now, some doctors in southern Illinois are limiting services for patients employed by the state or is asking those patients to pay up front.

It is a vicious cycle. The state isn’t paying the insurance companies, so insurance companies aren’t paying doctors, and the doctors are forced to make changes some families don’t like.

Ashley Wright of Carterville says one of the main reasons she and her husband decided to work for SIU was for the benefits.

Now it seems the most important perk – health insurance – is being compromised.

“On one point, I want to be mad at the doctors because I feel like they have a moral obligation to hang in there and not bail on us when times get rough,” says Ashley.

During a recent check-up, Ashley’s four month old son Noah was denied immunizations by his pediatrician.

The doctor said Ashley’s insurance provider wasn’t paying its bills. Ashley doesn’t know how to fight back.

“We can’t go after the doctors, they’re not being paid. We can’t go after the insurance company, they’re not being paid. But how do we fight the state?” she asks.

At one nearby doctor’s office, they’re now requesting state employees pay out of pocket to later be reimbursed.

They say it’s because the explanation of benefits used to say payment would come in four to eight weeks, but now it says “as state funds become available.”

“It could be a year, two years, three years. I mean how do we know when the money is going to become available,” says Cathy Paul, office manager for a Carbondale doctor.

The office is just now being paid for last July, and they fear the back log will only get worse.

“If you’re not getting reimbursed from the insurance company, how do you keep paying your bills?” asks Cathy.

It’s an argument Ashley can understand.

“They’re jumping ship because they’re not being paid. I wouldn’t work for free either,” she says.

Noah will have to find somewhere soon to get the shots to stay in day care. His mother is not happy about it.

“It’s wrong! I’m paying my insurance, they’re supposed to pay our doctors and now my kids are suffering,” says Ashley.

SIU employees aren’t the only ones who may be affected.

This could apply to any state worker from the Department of Transportation to the Department of Corrections.

It depends on the insurance selected and your doctor.