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Megan McArdle

Megan McArdle

Megan McArdle is a senior editor for The Atlantic who writes about business and economics. She has worked at three start-ups, a consulting firm, an investment bank, a disaster recovery firm at Ground Zero, and The Economist. More

Megan was born and raised on the Upper West Side of Manhattan, and yes, she does enjoy her lattes, as well as the occasional extra-dry skim-milk cappuccino. Her checkered work history includes three start-ups, four years as a technology project manager for a boutique consulting firm, a summer as an associate at an investment bank, and a year spent as sort of an executive copy girl for one of the disaster-recovery firms at Ground Zero … all before the age of 30.

While working at Ground Zero, Megan started Live From the WTC, a blog focused on economics, business, and cooking. She may or may not have been the first major economics blogger, depending on whether we are allowed to throw outlying variables such as Brad Delong out of the set. From there it was but a few steps down the slippery slope to freelance journalism. She has worked in various capacities for The Economist, where she wrote about economics and oversaw the founding of Free Exchange, the magazine's economics blog. She has also maintained her own blog, Asymmetrical Information, which moved to The Atlantic, along with its owner, in August 2007.

Megan holds a bachelor's degree in English literature from the University of Pennsylvania and an M.B.A. from the University of Chicago. After a lifetime as a New Yorker, she now resides in northwest Washington, D.C., where she is still trying to figure out what one does with an apartment larger than 400 square feet.

Will Inequality Keep Getting Worse?

Business Feb 9 2012, 2:28 PM ET
Last October, after a conversation with Chicago Booth professor Steve Kaplan, I posted this graph showing that the share of national income going to the top 1% had fallen dramatically.

Screen shot 2011-10-19 at 3.06.16 PM.png

This confirmed what I had expected--the taxable income of the wealthy generally tends to fall in recessions.  But since earlier census data had seemingly contradicted that expectation, I thought it was worth blogging.  As I explained:  

The larger question is "how much does it matter"? I doubt Occupy Wall Street will be assuaged by learning that the top 0.1% now only receive 8% of the income earned in the US, even if that number is the lowest it's been since 2003.

But I think it does matter. If we think there's a real problem, we need the best possible data so that we can understand its contours. Income inequality has been rising for so long that people have started to assume that it has just kept rising, even when the data show otherwise. We don't want to spend years focused on income inequality, only to learn that the financial crisis fixed it for us.
Tim Noah, who I believe is working on a book about the growing problem of inequality, shot back:

No, we don't. Nor do we want to spend years trying to cure cancer, only to learn that the financial crisis fixed it for us. The likelihood of that happening would be roughly the same.

. . . Barring major changes in government policy (changes I would welcome even at the expense of book sales!) I see no reason to believe that the 32-year trend in income inequality will end anytime soon, and every reason to believe the precise opposite: It will get worse.
It was a witty enough retort to something I hadn't really said (he clipped the first paragraph). I never got around to responding, though I meant to, and there, I guess I just did. 

But the reason I bring it up now is that it did get me thinking: how likely is inequality to simply keep getting worse?  It's a question that came back to mind when I saw this post from the Tax Foundation showing that inequality is now back to roughly where it stood at the beginning of Clinton's second term (via TaxProf):


But as I mentioned in this post (and the original), this may well only be temporary.  The financial crisis destroyed a lot of wealth.  Maybe we're just in another cyclical downturn that will, as Noah thinks, soon give way to the inexorable underlying trend.

What are the reasons to think that we might actually be witnessing a permanent change--a flattening of the trend, or even a reversal?  Some possibilities:

  1. If something can't go on forever, it won't.  Trends like this come to seem inevitable because they have been going on for a long time--but since inequality cannot actually rise until the 1% own everything in the world while the rest of us suck on wood chips, the longer inequality has been growing, the closer that trend must be to slowing, or reversing.  So the more you feel that inequality growth is a state of nature, the less likely this is to actually be true.  And even very smart, knowledgeable people who have read a lot have an abysmal record at forecasting these things.  Look at Karl Marx, the intellectual grandfather of mindless trend extrapolation bolstered by entirely plausible theoretical mechanisms.

  2. 2008 was a major discontinuous event.  Earlier recessions wiped out a sizeable chunk of income potential that later recovered, but they didn't fundamentally reorganize markets and institutions the way that 2008 did.  The last time that happened was 1929, which was followed by decades of declining income inequality.

    Of course, that doesn't mean that 1929 predicts our future, either; the Great Depression was worse and deeper than what we're going through, the regulatory response was more sweeping, and of course, there was that little spot of bother in Europe during the 1940s.  The point is only that 1929 is probably a better parallel for comparison than 1987 . . . which really just means that we're in uncharted territory.

  3.  Both regulatory and public opinion has turned on the banking industry.  No, we didn't gut the bankers and hang their heads on pikes outside the offices of the SEC.  But the new regulatory environment, with less leverage and more poking around in the company books, is going to make it harder to make money for many financial types.  Even if you think that it should be made harder still, I think you have to acknowledge that things like Dodd-Frank should put some downward pressure on future bank profits.

  4. Markets are getting more efficient all the time  By this, I don't mean that they approach some platonically true price.  I mean that they trade away relatively "free" opportunities to make money, by say, exploiting differences in the price of the same asset in different markets.  A few years ago, when I went to Warren Buffett's annual meeting, I talked with a lot of value investors who said that the proliferation of stock screening tools had made it much harder to find the sort of stock bargains that had driven Buffett's early success; if anything was conspicuously undervalued, other investors quickly found it and drove the price up.  That means you have to work harder (and pay more) to make wealth multiply itself.

  5. The long secular rise in asset prices is over.  A number of factors have been driving up asset prices over (broadly) the last thirty years.  Baby boomers poured more of their savings into the stock market than their parents, aided by looser regulation and cheap mutual funds.  Falling inflation, and then falling interest rates, boosted the price of bonds, meaning that bondholders got to enjoy healthy capital appreciation along with their coupon payments.  Foreign capital poured into US markets looking for high and stable returns.  All these things inflated asset prices, which now have nowhere to go but flat or down.  Ordinary savers are seeing virtually zero returns, and it's not all that much better for rich people.  Ultimately, asset growth cannot permanently outstrip the growth in the underlying cash flows.  Just look at the P/E ratio of the S&P--still near the high end of its historical average, even after the greatest financial crisis since the Great Depression.  That's not because corporate profits are growing so fast--corporate profits are the denominator.  It's because people are paying a high price for securities.
    Screen shot 2012-02-09 at 1.48.06 PM.png
  6. Globalization faces a lot of challenges.  China's having some growing pains, protectionism has grown noticeably over the last decade, and institutions like the EU are in near-meltdown.  I have a lot of issues with the "trade immiserates the poor" story, but globalization has certainly helped boost the income of the small cosmopolitan class that is well positioned to take advantage of its opportunities.

  7. Many of the other stomping grounds of the 1% are also changing.  Doctors are under reimbursement pressure from both private insurance, and governments.  Firms are looking for ways to replace those armies of expensive lawyers that help boost partner salaries.  Professional athletes (and sports teams) got an enormous income boost from the proliferation of national broadcasting, but that trend is mostly played out.  Real estate development--well, 'nuf said.  How many Facebook IPOs would it take to replace a permanent decline in surgery reimbursements?
Of course, we should also consider the reasons the trend might continue.  Globalization is still expanding.  The new economy still delivers a wage premium to people who are good at gathering and analyzing information, which is not everyone's strength.  Prolonged unemployment destroys human capital, and has been most prevalent at the bottom.  If you believe that rich people have wormed their way into the political system and used it to redirect wealth to themselves . . . well, I haven't noticed any deworming.  

And there's the simple fact that, in the short term, mindless trend extrapolation is a pretty good predictive model--assuming that growth, inflation, unemployment, etc will look about the same next quarter as they do this quarter is as good a forecasting method as anything else.

Of course, right now, that would lead us to predict that inequality would keep falling.  Maybe.  There's a lag in the data, so we don't actually know what it looks like now, only two years ago.

I think the answer at the moment is that we simply don't know--I'm not sure there's empirical reason to prefer one story or the other.  I do think that we should be wary of confident extrapolations in either direction.

Should We Restrict Food Stamps to Healthy Food?

Politics Feb 9 2012, 10:14 AM ET
Kevin Drum reacts to a bill which aims to limit the stuff that welfare recipients can buy with their food stamps:

What a dilemma. On the one hand, this bill promotes the exact same nanny-state behavior that Republicans howl about when Michelle Obama or Michael Bloomberg starts nattering on about salt consumption or fatty foods. On the other hand, it punishes welfare recipients, something that's always good for a round of applause from right-wing audiences. What's a conscientious conservative to do?
This doesn't seem like much of a dilemma, unless you think that favoring drug legalization, and selling heroin, are morally equivalent.  

Not, mind you, that I mean to imply that fatty foods are just like heroin.  But it doesn't seem like some sort of crazy stretch to believe that 

1)  People should be free to buy fattening foods without government interference
2)  The government shouldn't necessarily pay for those foods.


Myself, I think this sort of nannying is mostly pointless; if you want to help the poor, give them cash, and if you don't, then leave them alone.  But if we are going to have a food stamp program, that implies exclusions--things like laundry soap are already verboten from the program.  It's not especially crazy to put unhealthy food on the excluded list.


(Graph via Adam Ozimek)

Battle Over California Medicaid Reimbursement Is a Preview of Our Future

Business Feb 9 2012, 9:09 AM ET
Adventures in health care reform, via the Angry Pharmacist, who is very angry, and a wee bit profane:

Usual reimbursement from MediCal is our drug cost (give or take a few percent to account for wholesaler markups, etc) plus a dispensing fee of a single digit number (less than 10 bucks for those drunk at home). If I dispense, say, Fukitol, with a ballpark (yet entirely reasonable) price of $200, I can expect to make about $210 bucks. Those slow out there may be saying "HOLY SHIT, YOU GOT $210 BUCKS FOR THAT PRESCRIPTION! PHARMACY IS A GOLD MINE!" For those who think this, go work for the State of California, because you are a fucking retard. Yes, we did get reimbursed by the state a whopping $210 dollars, but unless I can wave a magic wand and make drugs out of thin air, my wholesaler wants $200 out of that $210 so he can pay HIS bills. So I get $10, which really is fucking good.

So California; despite having Silicon Valley, Google, dot.millionaire companies, San Francisco and LA (that combined pay more taxes in one second than we will all make in a lifetime) is broke. Go fucking figure. They decide to whack the MediCal reimbursement for drugs by 10% to stem the bleeding of throwing the baby out with the bath water. This first was voted into effect on June 1st. Us pharmacy and medicine peeps said "HOLY SHIT, YOU CANT DO THIS" and did what Americans typically do, tie it up in the courts (read on and you'll see why). Well, recently they lost the injunction, so the cuts happened.

Now you may be thinking "gee TAP, 10% cut in your fee isn't so bad, thats only like a buck". Therein lies the problem. MediCal didn't cut our dispensing fee, they cut THE WHOLE FUCKING REIMBURSEMENT.

Quick and Dirty:

Drug costs 200 bucks. We get paid 210 bucks. Take 10% off of that 210 bucks and you're left with 190 bucks. The drug still fucking costs the pharmacy 200 bucks. We make a whopping -10 dollars. Thats right, the pharmacy LOSES 10 dollars (in this case) with EACH FUCKING HIGH DOLLAR TRADE NAME FILL. Throw in some chemo drugs like Xeloda that costs the pharmacy THOUSANDS or HIV drugs at 600 bucks each, and you have yourself a closed pharmacy.
It is, of course, absolutely true that you can save a great deal of money by forcing providers to sell things below their cost of goods.  It is not necessarily true that this is a sustainable long-term strategy.

The cuts have been temporarily blocked by a federal judge on the grounds that they endanger access to care.

I hardly need to point out that we can expect a lot more stories like this one in the future.  Reimbursements currently have some give in them, which allows the highest-cost providers to operate, and the lowest-cost providers to make some profit.  The natural political tendency is to squeeze reimbursements to the level where the lowest-cost providers are pinched--or even beyond.  And the best-case result of this is that in the long-run, the lowest-cost providers get bigger, while in the short term, the disruptions among the higher-cost providers compromise at least some patients' access to care.

Are we willing to put up with that short term disruption?  Not so far, unless the service exclusively benefits the very poor.  Maybe we'll get more willing as the tax bite goes deeper.  But either way, with a dramatic Medicaid expansion on its way, and more and more of the rest of the health care system under the control of the government, the fights are going to get uglier.

Coffee Talk

Personal Feb 9 2012, 8:25 AM ET
It's far better to discover important truths that never leave the Ivory Tower than propagate errors that take the world by storm.



Still no deal in Greece.  A twitter correspondent suggests that maybe the Troika now think markets are strong enough to just let Greece go, and I'm starting to wonder if he's right:
A meeting among Greek Prime Minister Lucas Papademos, the parties supporting his coalition, and New Democracy, the opposition conservative party, broke up early Thursday morning without an agreement on economic overhauls sought by the European Union and the International Monetary Fund in exchange for lending an additional €130 billion ($170 billion) to the Greek government.

A single issue was the sticking point: cuts in the Greek pension system. Mr. Papademos said after the meeting that the parties would continue to discuss the issue with EU and IMF officials, aiming to reach a final deal ahead of a meeting of euro-zone finance ministers Thursday evening in Brussels.





Our national love affair with a hunk of stone:

A couple walks into a house, in any city, on any HGTV show. 
This house has four bedrooms and three bathrooms, the real estate agent tells them. It has a fenced-in back yard, lots of light, a good school district, a new furnace. It comes with a unicorn. 
This house -- she thinks they're ready to hear this news -- this house will make them lose 15 pounds from their thighs. 
Does it have granite countertops? the husband asks. 
No. 
Well, then.
A lot of things are correlated with income mobility

Which should we use to predict future social mobility in America: current inequality, projected size of population, projected export / import structure, or projected mix of religious affiliations? Surely all of these, and many more, are potentially relevant.
The difficulty of talking calmly about obesity:

The debate ended with a sensational closing-statement arms race. It began when John Stossel brandished the directions for a package of birth control pills and groused about how complicated they were, thanks to federal regulations. Then David Satcher conjured the ghost of a racist South to show that he was no stranger to government corruption. ("I've seen government at its worst, but I've also seen government at its best,'" he concluded.) Next, Paul Campos likened the pathologizing of erectile dysfunction--a natural symptom of being 50 years old, he said--to the pharmaceutical-company-fueled belief that obesity is a disease. Not to be outdone, Pamela Peeke used her two-minute closing statement to recount a story about being chased by feral dogs in a poor neighborhood, ostensibly because it showed that it's not always safe to exercise outside.

Making Money Stretch: The Semi-Renovation

Business Feb 8 2012, 2:14 PM ET
Last year, we bought a house for two main reasons: we were sick of moving, and I wanted a better kitchen.  We were living in a flip house that had been designed by a contractor with a rather spotty work ethic, and some very strange ideas about what makes for gracious living.  (Wine fridge in the kitchen--and less than three feet of total counter space.  Two jacuzzi tubs--and a hot water heater the size of a thimble.  Frightful things going on in the walls, which were revealed when the house flooded, and we had to move out.)

Any long time reader knows that for me, a good kitchen is important. And while we'd reached a sort of uneasy truce with the flip house, by dint of purchasing a kitchen cart and an island to supplement its storage, our wedding basically shattered that fragile peace.  Even before we'd sent out the invitations, casseroles and platters were pouring through the breach in our defensive lines and setting up forward positions on the book shelf that divided the dining area from the living room.  By the time of our wedding, the entire downstairs had been overrun, and it seemed to me that the soup bowls were eyeing the stairway with a thoughtful air.

So we started looking at row houses.  The husband wanted central air and habitability.  I wanted something as lightly renovated as possible; I had no intention of paying for some contractor's builder-grade kluges, and then ripping them out when they broke.  Three weeks after we got married, and one week before we were flooded out of the flip house, we found the house we wanted to buy.  It had central air.  It did not have four feet of ikea cabinets and cheap stainless steel fixtures.  It had gorgeous ten foot ceilings.  And . . . well, a very odd mix of other improvements.  

It transpired that the previous owners had purchased a wreck, and then begun renovating it, only to be transferred overseas in mid-renovation.  Their taste ran to very dark walls and very lazy contractors (though to be fair, they may not have been here when much of it happened).  Paint was slopped all over the trim, which was itself shoddily applied--when we finally painted the cave-like grey hallway, the painter's tape took the single layer of white paint off the doorjambs in large chunks.  

Thankfully, our inspector assured us that aside from one bright laddie who'd decided to cut a 4 inch chunk out of one of our floor joists in order to run some wires through, the basic work like plumbing and heating was in pretty good shape.  But the rest ran from "adequate" to "hot mess".

There were some semi-high end fixtures, like a higher end washer/dryer combo, a decent gas stove, and a claw-foot tub.  There was some remarkably low-quality work: the aforementioned paint; vents without covers, a toilet in the half bath that wasn't really attached to anything.  

There was the stuff that hadn't been worked on at all: a front yard with a crooked fence and about 70 pounds of lava rock; a back yard that is better not spoken of, except to say that the only thing wanting to complete the look is a rusted-out pickup truck on blocks.  

And there was the stuff that had clearly been slapped in at the last minute when they figured out that they were moving: a few scrawny kitchen cabinets, a foot or so worth of laminate countertops that were already peeling, one miserly drawer too small for a full-sized cutlery organizer, and a refrigerator just a half-step up from the ones we used to keep in dorm rooms.  It barely came up to my chest.

We--okay, well, I--longed for one of those lovely kitchens you see on television or in nicer homes--acres of cabinetry and counter, broom closets and drawers and six-burner stoves with hoods that actually vent smoke, rather than swirling it more briskly around the kitchen.  However,  being journalists and newlyweds, rather than 55-year old hedge fund managers, we were not exactly overburdened with the necessary. 

And really, it wasn't the worst kitchen in the world.  There are starving people in Africa, and for that matter, affluent people in Peoria, making do with less space and storage.

So we coped with the shortcomings.  The day we moved in, friends helped us install Ikea Grundtal shelves and rails, which double as potracks.  We also installed our assortment of extra kitchen islands.

Over the next few months, we did a few things that we (almost) had to do--the dishwasher broke the day we moved in, and since the appliance store offered us a decent discount, we replaced the too-tiny fridge as well. But mostly, we ignored the shortcomings.  The only sizeable change we made was when our contractor came to reinforce those improperly cut joists; while he was there, we had him move the laundry downstairs, and rip out the sloppily-built laundry-cave that had been installed just off the kitchen.  This didn't look very good--naturally, they'd installed the washer-dryer first, and painted only up to the edge.  But with a couple of bookshelves added, it at least gave us some extra storage.  And the change alleviated the funereal effect of a dark grey wall jutting out into our hallway, blocking off a great deal of light.  

We also had him run a water line for our fancy new fridge.  For the first time in my life, I enjoyed the convenience and ease of Door Ice.

But after that, I declared that I was done.  Unless something broke, we would put no more money into the kitchen until that distant day when we had actually saved enough money to renovate.  That's where we stood in January of this year.  Then our dishwasher tried to kill me, and I decided that maybe we should Do Something about the kitchen after all.

It was the day after New Year's, and the dishwasher was very full. Also, my arm was very sore, due to some unspecific, slow-healing rotator cuff injury that had been exacerbated in the frenzy of getting ready for the previous night's dinner party. I sleepily stumbled into the kitchen and opened the dishwasher so that I could unload it and put the rest of the dishes in. 

Unfortunately, as they'd informed us when they installed the dishwasher, our counters weren't level, which meant that one screw holding in the appliance was under more strain than the other.  Sometime in the winter of 2011, it had ripped out of the cheap laminate, at which point its colleague decided to go on strike too.  Every time we opened the dishwasher, it tilted towards you, and the racks slid forward.

Perhaps sensing my languor, on New Year's Day 2012, the racks decided that the time had come to finally make their break for freedom.  Just in time, I threw my aching left arm in front of the drawers, and stopped them from leaping across the floor with all our good china inside. 

I also nearly stopped my heart--I haven't felt such a sharp burst of pain since I ripped up a bunch of ligaments getting thrown into a fence by a horse. I must have emitted some interesting noises, since my husband, normally a late sleeper, came trotting downstairs.

"[Expletive deleted]" I said calmly. "We're replacing this [bleeping] counter or I will [censored]." 

But replacing the counter had Implications.  If we were taking it out, we might as well replace the annoying black sink that was impossible to clean, and put in a backsplash so that I didn't have to spend so many happy weekend hours furiously rubbing our walls with a Mr. Clean Magic Eraser.  And since we didn't want to install anything fancy in a kitchen that we eventually want to get rid of--I adhere to the principle that one should either buy expensive things that will be loved forever, or cheap things you won't feel bad about throwing away--the counters we could afford probably wouldn't match the cabinets, which meant they might have to be painted.

However, my steely resolve did not extend to tapping our emergency fund, or borrowing money.  And even if it had . . . well, the Official Blog Husband is himself a man of formidable will.  Which left us a quandary: how to do a minimalist kitchen renovation that would give us more storage, without costing more than we could cash flow?  

The answer, for those of you who are interested, is below the jump: how to do a semi-renovation for a few thousand dollars that adds space and makes the thing look sort of all right.  It wasn't exactly cheap, but it wasn't entirely out of reach of the average family, either.

I don't want to overpromise. This is not one of those $2,000 HGTV specials where, by the magic of not paying for labor, a couple gets a new-looking kitchen for practically no money.  No one is going to walk into our kitchen and ask for the name of our designer.  But it's functional enough to contain me, my mother, and my sister all cooking at the same time, without bumping into each other, or piling every flat surface high with used bowls and pans.  We have enough storage for everything.  And it looks . . . basically okay.  Intentional, even.

If you're still interested, read on . . . 

More »

Coffee Talk

Personal Feb 8 2012, 8:40 AM ET
Private equity in the doldrums, and that may be a good thing:

The mathematics of buyouts, for one, are not favorable. If a sponsor has to kick in 40% to 50% equity on a deal, it's going to be harder to earn huge returns. So financial sponsors have to be a lot more selective. In this climate, they have to make their money the old fashioned way -- improving a company's operations and growing it faster than its industry peers. That growth and the multiple paid when the sponsor sells will constitute the lion's share of the return. As one PE executive said on Friday, "In the '80s the value add was leverage; now the value add is really value add."
Why are people so resistant to persuasion about the death penalty, abortion, and affirmative action?

Finally, these three issues are ones on which it's hard to find a coherent compromise position. You can tell a persuasive story about why tax rates should be higher than conservatives say, yet lower than what liberals want. But it's hard to explain why we should adopt a policy that's somehow in between a strong pro-life position and a strong prochoice view. The same goes for affirmative action and the death penalty.
Annoying arguments about fiscal stimulus:

I'd like to nominate three more annoying pro-stimulus arguments. (4) Arguments failing to acknowledge that some level of debt is too much. What's the limit to further fiscal expansion? (5) Arguments that assume the bond market won't abruptly change its mind about the US cost of borrowing. I find it very annoying when liberals, of all people, tell me that the bond market is a wise forecaster. (6) Arguments that dismiss the tax consequences of ever-mounting debt. Yes, we will owe it mainly to ourselves, but eventually somebody's taxes will still have to rise to service the payments.
Hedging against euro collapse:

GlaxoSmithKline Plc, Britain's biggest drugmaker, has been sweeping cash on a daily basis from euro-zone banks in a bid to protect itself from potential problems in the single currency bloc, its chief executive said.

"We don't leave any cash in most European countries," Andrew Witty told reporters after presenting fourth-quarter results on Tuesday.
How to win a claw game:

It depends on the machine. Claw games can be adjusted to make the prizes either easier or harder to grab. The difficulty is controlled by setting the length of time allotted for each attempt and the number of attempts given for each quarter spent. Operators can also change the strength of the claw's grip. Given these variables, claw-game experts recommend spending a few minutes on the sideline while others play. Once you have a sense of the machine's idiosyncrasies, ask a partner to stand on one side of the machine to help you align your claw on the depth axis. If the prize is a plush toy or stuffed animal, aim for the chest, which allows for the firmest grip. If the claw has a weak grip, try knocking objects sideways into the prize chute. Experts differ as to whether it's easier to win with a three-pronged or a four-pronged claw.

Will the Government Put Money Market Funds Out of Business?

Business Feb 7 2012, 1:44 PM ET
Immediately after Lehman Brothers failed, a money market mutual fund called Reserve Primary "broke the buck"--it did not have enough money in its coffers to pay the shareholders what they'd had.  Since money market funds are essentially used as bank accounts, this was a big problem--and it triggered a bank run on the money markets, which ended only when the government stepped in and said it would backstop these funds.

Despite their major role in the financial crisis, these funds haven't attracted nearly as much attention in the press, or the wonk-world, as more theatrical financial instruments like synthetic CDOs.  Not many financial journalists own synthetic CDOs.  Most of us probably have money market accounts.

At last, the government is proposing new rules, which are supposed to make MMFs less risky.  The funds would have to raise new capital, and some minor withdrawal limitations would be imposed on customers.  They would also have to offer a floating net asset value instead of the current "guarantee" that if you deposit a dollar, you'll always get at least that dollar back.

The last is all by itself disastrous for these funds, whose main attraction is that they act like bank accounts.  As for the rest, in a normal interest rate environment, this would be onerous.  But with interest rates as low as they are, there's no way for MMFs to absorb the hit by offering a lower return; it looks to me as if the interest rate would probably have to be negative.  Which is to say, your MMF would actually be charging you for the privilege of giving you their money.

If passed as proposed, the rules would seemingly put the MMFs out of business.  And perhaps that's the point--Paul Volcker, for one, has been an outspoken critic of money market funds, which originated as a way to dodge the interest rate caps on bank accounts during the inflationary 1970s.

Though the SEC has tightened up the rules on what sort of assets the funds can hold, my understanding is that there are large gaps in the way we regulate these funds--as I understand it, in 2010 congress effectively made it illegal to bail out the funds again, but was less explicit about how to keep these funds from starting another run.  These rules are an attempt to close that gap--and for sure, if we don't have any MMFs, we won't have any darn runs on them.

But it doesn't actually seem likely that these rules will go into effect as proposed.  This is the opening bid in a long negotiation.  With another crisis looming in Europe, let's hope it isn't too long.

This post has been updated to clarify the state of rule-making.

Stealing From the D.C. Government Is Still Distressingly Common

National Feb 7 2012, 11:55 AM ET
Any large organization is prone to theft, and the larger the sums of money, the greater the temptations to theft.  (I'm told by people who ought to know that if the scale of embezzlement in the retail banking sector were generally known, people would be shocked -- the banks keep it quiet so consumers won't freak out.)

Nonetheless, DC seems especially remarkable.  Shortly after I got here, a midlevel bureaucrat in DC's tax office was arrested for masterminding a ring that stole $50 million from the city over the course of 17 years.  Several even higher-ranking officials have been arrested for smaller chiseling, and a city council member just resigned over a corruption investigation.

Today brings news of another scam: something north of 100 district employees, current and former, seem to have somehow collected unemployment checks while still working for the city. 

But this actually represents progress, of a sort: this isn't corruption, or an organized conspiracy. It's apparently just garden-variety chiseling, of the sort that happens everywhere.  It's entirely possible that they got caught simply because they worked for the city, which had relatively accessible records of when they'd actually worked:

The alleged fraud is not complicated, nor is it uncommon in unemployment insurance programs: Workers apply for checks and receive them legitimately for a time but fail to inform authorities when they go back to work.

"Some are people who come in and out of government and never stopped [receiving unemployment checks]. Some may have worked in parts of an agency where for the summer months you don't work," Mallory said. "There are no clear patterns that we can discern. It's just a matter of certifying you aren't receiving income when you are receiving income."
Of course, what allows this sort of petty malfeasance, as well as the more odious crimes, is that DC has a large bureaucracy, but very weak controls.  A series of reform mayors has made inroads in this direction, and this latest crackdown is a good sign--but obviously, when City Council members may be among the beneficiaries, it's hard to move as fast as one would like.

Coffee Talk

Personal Feb 7 2012, 8:10 AM ET
Ten things your IT guy wants you to know:

Yes, I can read your e-mail, yes, I can see what web pages you look at while you're at work, yes, I can access every file on your work computer, and yes, I can tell if you are chatting with people on instant messenger (and can read what you're typing, as well). But no, we don't do it. It's highly unethical and, perhaps more importantly, you really aren't that interesting. Unless I am instructed to specifically monitor or investigate your actions, I don't do it. There really are much more interesting things on the Internet than you.

However, speaking as a former IT person, well, if you were wondering whether the IT guys found that stash of porn you hid in the fonts folder?  Yes, yes they did.  

One benefit of civil service protections: memos like this:

O, you turkey! You pious turkey! You sanctimonious turkey!

Having belatedly discovered that the Music and Arts High School had something to do with Lincoln Center, having belatedly intervened in the planning process, having delayed construction for a year and added $3.3 million to costs - now, you worry about the Bureau of the Budget " hacking around for six months on the cost issue."

You'll forgive me I see some kinship with George Bernard Shaw's father whom GBS described as "a teetotaler by conviction and a drunkard in practice." But at least Shaw, Sr. had the redeeming characteristic of limiting both preachment and practice to his own liquor.
Greek bondholders actually being pretty reasonable, says Felix Salmon:

Of the three, the bondholders are the least of anybody's problems. In fact, almost everything they've done in recent months can be viewed as a way of showing that if and when everything goes pear-shaped, it's not their fault. They will talk to anybody, agree to pretty much anything, and be perfectly reasonable all along; it's the various governments, here, which are finding it impossible to come to terms.
You can buy caskets at Costco.

Do We Need Even Tighter Controls on Sudafed?

Health Feb 6 2012, 12:14 PM ET
Amateur meth labs are really, really terrible.  They explode.  They infuse the walls, and maybe the local water supply, with toxic chemicals.  They pose a serious threat to cops and firefighters, not to mention occupants of the houses they're in.   And decontamination seems to be rather daunting.

It's hard to tell exactly what the scope of the problem is; this DEA map unhelpfully lumps together labs, dumpsites, and the equipment used to make meth as "incidents".  And besides, lab busts are not exactly a random sample; they're going to vary by things like how much effort local law enforcement is putting into a meth crackdown. Nonetheless, I think it's fair to say that it's a large problem in the middle of the country, albeit one that has abated somewhat due to the influx of cheap meth being professionally produced by Mexican drug gangs.

The problem of meth labs has resulted in ever-increasing controls over the purchase of pseudoephedrine, aka the main ingredient in Sudafed.  That's why the stuff on the shelves is now called Sudafed PE, and to get the real stuff, you have to go to the counter and sign a book.

But it's not enough, says Keith Humphreys:

Methamphetamine cooks cannot operate their labs without easy access to the cold medicines that contain pseudoephedrine (PSE). This has resulted in a long-running political battle across the U.S. Many state legislators want to make PSE-containing medicines prescription-only, which as the Oregon and Mississippi experience shows, virtually eliminates a state's meth labs. On the other side, the cold medicine industry, which makes hundreds of millions of dollars a year selling PSE to meth cooks, opposes such a restriction

The industry's response has been to propose an electronic cold medicine purchasing system called NPLEx. The idea is that if someone tries to buy too much PSE-containing cold medicine, the system would notice and block the sale.

South Carolina put it in last year rather than create a prescription-only requirement, and saw meth lab incidents increase by 65%. Kentucky, where the NPLEx system was invented, has had it in place statewide since 2007 and seen meth lab incidents increase by 500%. Meth cooks easily thwart the system by using false ID or by hiring people to buy the cold medicine. The NPLEx system is thus worthless from the point of view of actual effectiveness.

As several people pointed out in the comments, it's unlikely that the cold medicine industry "makes hundreds of millions of dollars a year selling PSE to meth cooks".  One prescription-only advocate puts the market for pseudoephedrine products at around $600 million a year; he contrasts this with pharmaceutical company estimates that "only 15 million Americans use the drug to treat their stuffed-up noses, and these people typically buy no more than a package or two ($10 to $20 worth) a year." 

Now, personally, I sincerely doubt that the pharmaceutical industry has reliable estimates of how many of their purchasers actually have colds--or that they would share data indicating that half of their revenues came from meth cooks.  But let's say this is accurate: half of all pseudoephedrine is sold to meth labs.  That still wouldn't mean that manufacturers of cold medicines are making "hundreds of millions of dollars a year" off of the stuff--not in the sense that they end up hundreds of millions of dollars richer.  The margins on off-patent medicines are not high, and in retail, 50% or more of the cost of the product is retailer and distributor markup*.  Then there's the costs of manufacturing.

But this is sort of a side issue.  What really bothers me is the way that Humphreys--and others who show up in the comments--regard the rather extraordinary cost of making PSE prescription-only as too trivial to mention.

Let's return to those 15 million cold sufferers.  Assume that on average, they want one box a year.  That's going to require a visit to the doctor.  At an average copay of $20, their costs alone would be $300 million a year, but of course, the health care system is also paying a substantial amount for the doctor's visit.  The average reimbursement from private insurance is $130; for Medicare, it's about $60.  Medicaid pays less, but that's why people on Medicaid have such a hard time finding a doctor.  So average those two together, and add the copays, and you've got at least $1.5 billion in direct costs to obtain a simple decongestant.  But that doesn't include the hassle and possibly lost wages for the doctor's visits.  Nor the possible secondary effects of putting more demands on an already none-too-plentiful supply of primary care physicians.

Of course, those wouldn't be the real costs, because lots of people wouldn't be able to take the time for a doctor's visit.  So they'd just be more miserable while their colds last.  What's the cost of that--in suffering, in lost productivity?

Perhaps it would be simpler to just raise the price of a box of Sudafed to $100.  Surely that would make meth labs unprofitable--and save us the annoyance of a doctor's visit.

They can still buy cold medicine, protest the advocates for a prescription-only policy.  But as far as I can tell, there's really no evidence that the current substitute, phenylephrine, does a damn thing to ease congestion; apparently, a lot of it gets chewed up in your liver pretty quickly, and because the FDA only allows a low dose to start with, the resulting pills don't seem to be any better than placebo. For people who are prone to sinus or ear infections, that's no joke; one of the main ways you prevent them is by taking a decongestant as soon as you feel the first ticklings of a cold--not four days later, when your GP can finally see you.

Obviously, the suffering of someone caught in a meth lab is much, much higher--but how many of these people are there?  Should we deny millions of people a useful treatment in order to prevent a handful of fatalities?  Before you answer that, ask yourself whether you'd be willing to stop driving on the grounds that statistically, you're reducing the chances that someone will die.  Or to endorse a policy that involved punching 15,000 people in the head, hard, in order to prevent one death.

Perhaps it's unfair of me, but it seems to me that there's a lot of tunnel vision in these proposals.  People who present prescription programs as simple and obvious seem fixated on the horror of the stories they are confronted with . . . to the exclusion of the very large costs that they're proposing to impose on the rest of us.  All they're interested in is "how do we put an end to meth labs?", a question to which one can reasonably argue the answer is "better control of pseudoephedrine"**.

But no policy question is ever as simple as "How can we stop X", unless "X" is an imminent Nazi invasion.  We also have to ask "at what cost?" and "by what right?"  Humphreys sort of gestures at this in answer to critical commenters, but why isn't it in the original post?  The very large costs of these systems should be front and center in any post that seems to advocate for fairly sweeping controls.

Of course, Humphreys could fairly argue that the real point of his post is to critique the current, failed registration systems that have been implemented as an alternative to prescription-only.  But if that is indeed the central point, then I'd ask why his only complaint is the insinuation that industry is pushing these systems so that they can continue to sell to meth cooks?  The logical implication of his complaint doesn't seem to have occurred to him: if these systems don't work, then they should be repealed.  Full stop.  Regardless of what we do about making pseudoephedrine prescription-only, there's no point in spending time and money on a system that isn't doing anything.

But the meth warriors never seem to advocate repealing anything--not unless they can replace something even stricter.  This bias towards ever-tightening tends to make me somewhat skeptical when they come forward with yet another restriction that is urgently needed to make America safe.


Update: Adam Ozimek gives us a glimpse of where this ends:

Uncharacteristically for regulation advocates, he provides a glimpse into the next and final step on the slippery slope: complete prohibition.
In 2009, Mexico, which had been the source of most of the methamphetamine on the streets of the United States, went further, banning pseudoephedrine entirely. The potency of meth from Mexico has since plummeted. This is great news. But now the ball is back in our court.
You will notice not an inkling that Mexico may have gone too far. Clearly he believes that if prohibition is what it takes to reduce the potency of meth (notice he's not even promising it would get rid of it) then it's worth it.


* Not profit--retail margins are pretty slim.  But the cost of shipping the stuff, putting it on shelves, and selling it.

** Though like many of the commenters on the original post, I'm skeptical that you can extrapolate from something that may have worked in one state, to something that would work nationwide.  It strikes me that there may be a reason that the majority of our meth labs seem to be in the middle of the country, which is to say, relatively isolated from easier sources of supply.
Issue March 2012

Why Companies Fail

Magazine March 2012
GM’s stock price has sunk by a third since its IPO. Why is corporate turnaround so difficult and rare? The answer is often culture—the hardest thing of all to change.

Greeks Inch Closer to Default

Business Feb 5 2012, 9:51 PM ET
Debt negotiations usually seem to get resolved at the very last minute.  After all, the resolution is almost always that someone is not going to get paid as expected, and this gives every "someone" strong incentive to hold out as long as possible, in the hopes that intransigence will get them a slightly better deal.

But even by these standards, the negotiations over Greek debt are really pushing the limit.  It's been hard enough getting the private creditors--on whom the entire haircut looks set to fall--to accept losses which one person quoted by the FT puts at greater than 70%.  But the Greeks are also proving difficult.

Patience with Greek politicians has evaporated among its creditors. During a conference call on Saturday, eurozone finance ministers bluntly told Athens to deliver on its promises and agree to reforms or face default next month.

Jean-Claude Juncker, head of the eurozone group of finance ministers, told Der Spiegel at the weekend that the possibility of bankruptcy should encourage Athens to "get muscles" when it comes to implementing reforms.

"If we were to establish that everything has gone wrong in Greece, there would be no new programme and that would mean that in March they have to declare bankruptcy," he warned.

Mr Samaras last week threatened to veto the package unless concessions were made on private sector wages, claiming the cuts would prolong a recession already in its fifth year. Mr Karatzaferis also opposes further austerity measures.

The two sides were still far apart over projected cuts of 25 per cent in private sector wages, 35 per cent in supplementary pensions and the closure of about 100 state-controlled organisations with thousands of job losses.
On one level, this is entirely amazing.  As has been exhaustively explained everywhere, including this blog, Greece is currently running a primary deficit--meaning that even if they defaulted, their budget wouldn't balance.  And since defaulting would cut off the flow of credit, they'd actually be worse off than with almost any of the austerity plans proposed by their creditors.  And the resulting financial crisis isn't going to do much good for their economy. So watching them threaten to walk away is somewhat reminiscent of that famous moment from Blazing Saddles


And yet, in another way, it's entirely understandable.  How would you, Ms. Private Sector Employee, like to be told that you had to take a 25% wage cut because your government had borrowed too much money, and then cooked the books and lied about it?  I would be rather miffed, I think.

And when people are angry, they are not always perfectly rational.  They will hurt themselves, badly, if it means that they can also hurt other people who they feel have done them an injustice.

Talks will resume tomorrow, and I still expect that ultimately, they'll come to some agreement.  But still, it has never looked less likely.

Update:  I may have spoken to soon; Greece is now allegedly running a primary surplus.

Komen Changes Its Mind on Planned Parenthood, but Will Donors Come Back?

Politics Feb 3 2012, 11:21 AM ET
So apparently Susan G. Komen has reversed its decision to fund Planned Parenthood.  Just as it wasn't surprising that they might want to gently disconnect themselves from the abortion rights movement, it's also not shocking that once this issue became political, pro-choicers mobilized faster and harder than pro-lifers did.  For one thing, as I noted yesterday, the issue of breast cancer has long been broadly within the "women's groups" umbrella that includes abortion rights, and for another, people react more strongly to losses than to possible gains.  If Komen had never funded Planned Parenthood, it wouldn't have been a big deal . . . but once they did, withdrawing the money was a political statement.

And just as I wasn't outraged yesterday by the decision to withdraw money, I also think they're well within their rights to reinstate it if they think that doing so will best further their mission.  I doubt that this is over -- pro-lifers are now going to have their own round of outraged protest.  And to be fair, I do think that they should offer give back any money they raised over the last two days, since that was mostly coming from pro-lifers who were voicing support for the organization's decision not to fund Planned Parenthood.  But other than that, I think it's their right to decide what advances their mission--and of course, every potential donor's right to decide if that's what they want to support.

The really interesting question is this: will the pro-choice donors come back?  Or has Komen damaged its brand to no purpose? 

Coffee Talk

Personal Feb 3 2012, 8:30 AM ET
Why Your Prius Will Kill our Highways:

This isn't a new problem, but it's getting worse. Since back in the Eisenhower era, the federal government has maintained a Highway Trust Fund, paid for mostly by taxes on fuel, that helps cover the repair and construction of our country's roads, bridges, and mass transit. The idea was that drivers themselves should bear some of the cost the roads they used. Unfortunately, Congress hasn't raised the gas tax since 1993. Since then, inflation has eaten away at least a third of its value.
Why my old neighborhood wants to kill chain drugstores:

"Each block has a Duane Reade," said Kenneth Yoo, owner of Paper House, a party supplies store on Amsterdam near 73rd Street. "They try killing small business. All the stuff we have Duane Reade has, too -- and cheaper."

Stop Fixating on the Administrative Overhead of Nonprofits

Business Feb 2 2012, 2:29 PM ET
So naturally, posting on abortion has caused a swarm of very angry people from both sides to show up in my comments.  A couple of them are demanding that I "educate myself" about "the facts" on Planned Parenthood and Susan G. Komen, such as the fact that only a minority of the procedures performed at Planned Parenthood are abortions, and that Susan G. Komen spends about 20% of their money on admin and fundraising.

I'm aware of the former, but thought it was obvious that people who don't want to fund abortions probably don't want to fund any abortions at all, much less the 330,000 abortions performed at Planned Parenthood annually--nay, not even if this represents only 3% of Planned Parenthood visits.

The latter is a silly and all-too-common complaint that desperately needs refuting.

To start with, Planned Parenthood spends about 16% of its annual budget on . . . overhead and fundraising.  Now that they know, how many of the people who were angry about Komen's overhead are going to also withdraw their support from Planned Parenthood?  I suspect the number is zero, but I could be wrong.

But more broadly, the worry about charity overhead has gotten completely out of hand.  I've heard from more than one frantic foundation fundraiser who can't raise a dime for overhead--everyone wants their money earmarked for programs.  None of the donors seem to realize that even at a very well run charity, the electric bill, accountants, IT staff, grantwriters, compliance experts, investment managers, and yes, fundraisers do not actually get paid by good fairies who drop off wee buckets o' gold at the beginning of every month.  Or that unless you have all those boring-yet necessary things, you cannot actually run any programs.

Now, of course, donors should make sure that the causes they support do not simply become sinecures for the people running them.  But they should not wring their handkerchiefs when they discover that--whoda thunkit?--charities have to have offices and coffee makers just like all the places that donors work.

Nor is there one right level of overhead for an organization.  A group that provides a lot of very expensive services might have a very low central overhead rate, while a group that has a heavy legal compliance burden, or has a large number of low-cost operations to coordinate, or has a small endowment which requires constant fundraising, might have high overhead. Maybe Susan G. Komen's numbers are out-of-whack, but you can't prove it by saying that 20 cents on every dollar go to overhead.  You have to assess what they do, and how much that costs.

You certainly shouldn't use those sorts of numbers as a political club.  Unless you're very, very sure that none of the groups you support put a lot of their money towards overhead.

Why Did Susan G. Komen Pull the Plug on Planned Parenthood?

Politics Feb 2 2012, 12:38 PM ET
My colleague Jeffrey Goldberg has done some reporting on the Susan G. Komen Foundation's decision to cut off Planned Parenthood because the organization was under congressional investigation.  According to his sources, that was a pretext--the new rule was passed specifically in order to give the foundation a cover for cutting off Planned Parenthood.

Komen, the marketing juggernaut that brought the world the ubiquitous pink ribbon campaign, says it cut-off Planned Parenthood because of a newly adopted foundation rule prohibiting it from funding any group that is under formal investigation by a government body. (Planned Parenthood is being investigated by Rep. Cliff Stearns, an anti-abortion Florida Republican, who says he is trying to learn if the group spent public money to provide abortions.)

But three sources with direct knowledge of the Komen decision-making process told me that the rule was adopted in order to create an excuse to cut-off Planned Parenthood. (Komen gives out grants to roughly 2,000 organizations, and the new "no-investigations" rule applies to only one so far.) The decision to create a rule that would cut funding to Planned Parenthood, according to these sources, was driven by the organization's new senior vice-president for public policy, Karen Handel, a former gubernatorial candidate from Georgia who is staunchly anti-abortion and who has said that since she is "pro-life, I do not support the mission of Planned Parenthood."
Goldberg clearly disapproves of the decision.  Though I'm pro-choice, I don't share the outrage that was roiling my Twitter feed this morning.  It is, as Josh Barro noted, absurd to pretend that abortion is somehow incidental to Planned Parenthood's services, and since money is fungible, giving them money is probably helping to fund abortion provision.  Since I think this is a very tough issue on which reasonable people can disagree, I can see why the federal government, and private foundations, would decline to fund their operations.

Nor do I think that this is somehow fatal--indeed, the news of the Komen foundation's funding withdrawal was met by an outpouring of donations that, as of this writing, has nearly replaced the lost funds.  And I don't think that's an accident.  If Planned Parenthood didn't provide abortions--if it had decided, post-Roe, to continue doing all the contraception provision and pelvic exams, but to stay out of the abortion side of the business--many of the people who now send them large checks probably wouldn't bother.  I'd guess that a considerable portion of their donor base is making an expressive commitment to abortion rights, but of course, the flip side of that is people who make an expressive decision not to give them money. 

I do wonder what this moment means in terms of the political landscape.  It's possible that this new VP has single-handedly pushed this organization to discontinue their funding, but someone hired her knowing that she was pro-life, and ultimately it was the board that voted to do this, so presumably it must have some support beyond one former gubernatorial candidate.

This strikes me as significant.  Susan G. Komen is part of the broad constellation of "women's groups" that tend to hand together on various issues, including (maybe especially) abortion.  Why would they cut ties to a group that in past decades would have been a natural ally?

I'm tempted to credit shifting public opinion, but polling about abortion has been pretty stable over the last 15 years.  It could be a shift in the donor base, or the board itself.  Or perhaps it's a more subtle shift in opinion.  While most people think that abortion should be legal, most people don't support the current state of abortion law; polling seems to suggest that the majority either wants abortion to be illegal in all cases, or legal only in the first trimester--and even then, possibly only in the case of rape, incest, and the life of the mother.  A majority of people polled say that abortion is morally wrong.  And pro-life identification runs neck-in-neck with pro choice.

In that environment, you can see why an organization that does not itself have a mission to support abortion access would want to pull back from funding Planned Parenthood, even for related services.  Unfortunately, while they easily could have declined to fund PP without much backlash, de-funding them sends an extremely explicit message that is probably going to cost them significant public support.  Which is a pity, because early detection and treatment of breast cancer is a mission that we should all be able to agree on.

Coffee Talk

Personal Feb 2 2012, 8:31 AM ET
Greek technocrats have a hard time of it:

Greece has won strong endorsements in the past year for shoring up its economic statistics after years of fudging data to conceal its deficits and financial mismanagement, but the man who's responsible for restoring the country's reputation is now the target of possible prosecution. He's been accused of exaggerating Greece's deficits in a conspiracy to strengthen the hand of the European Union and the International Monetary Fund.
Lehman's former CFO gets married:
   
Erin Callan, the former chief financial officer of Lehman Brothers, all but disappeared from Wall Street after the collapse of the firm.

Recently, however, there was a big development in her life: She was married late last year to her long-time beau, Anthony Montella, in an intimate ceremony at a historical site in Midtown Manhattan.
Never back smug, and other lessons for investors (and voters):
 
"Politics pretty similar to backing CEO's. Newt may be smart and a good debate guy. But Newt=Smug. Never back smug," More wrote on his Twitter account (@Bobmorevc).

Given how often people harp about the need to find superb management teams for developing new drugs or devices, I followed up with More to hear his thoughts on character traits to back, and to back away from, in life science entrepreneurs.
MF Global customer money may have "vaporized"

As the sprawling probe that includes regulators, criminal and congressional investigators, and court-appointed trustees grinds on, the findings so far suggest that a "significant amount" of the money could have "vaporized" as a result of chaotic trading at MF Global during the week before the company's Oct. 31 bankruptcy filing, said a person close to the investigation.

American Airlines Wants to Terminate Its Pension Plan, Lay Off 13,000

Business Feb 1 2012, 6:43 PM ET
Details of the American Airlines bankruptcy are emerging.  And the details are that AMR wants all of its creditors to take a deep haircut, especially the workers:

The company aims to cut labor costs 20% under bankruptcy protection, and will soon begin negotiations with its three major unions. Some management jobs would also be cut.

AMR also proposes to end its traditional pension plans. The move has been strongly opposed by the airline's unions and the U.S. pension-insurance agency.

CEO Thomas Horton said the company hopes to return to profitability by cutting spending more than $2 billion per year and raising revenue by $1 billion per year.

. . . Horton said cost-cutting will include restructuring debt and aircraft leases, grounding older planes, and changing labor contracts.
This is just the opening salvo in what promises to be a bruising negotiation with the unions.  It's not clear that the company actually expects to be allowed to terminate the pension plan.  But the threat certainly gives them leverage with the unions, especially the pilots, because if the plan is terminated and taken over by the Pension Benefit Guaranty Corp, the payouts will be capped at around $50,000 a year--far less than pilots get from the current plan.

However, the PBGC is going to fight hard to keep this from happening.  Our government-chartered pension insurer is severely underfunded, thanks to congressmen who showed their appreciation for local firms by keeping pension insurance premiums low.  And to be fair, it's hard to set these premiums, because what you'd really like to do is risk-rate the premiums--force firms to pay more when their firms look especially shaky.  Unfortunately, pensions look especially shaky when the firms that sponsor them look especially shaky, and the PBGC does not really want to be in the business of tipping shaky firms over the edge of bankruptcy and then . . . will you look at that! . . . assuming responsibility for their underfunded pensions.  Nor do they exactly want solvent firms to have to pay extra-high premiums in order to compensate for their idiot competitors who poured the pension fund into jackalope ranches and fur-bearing trout farms.

And so the agency is badly underfunded, and very much opposed to taking on the burden of large, underfunded pensions, which would hasten the day when the PBGC itself is forced to apply to Congress for a bailout.  They'll fight it all the way through the bankruptcy process.

As I understand it, the judge is likely to listen, too.  Bankruptcy courts are not in the business of giving firms a "get out of expensive pension promises free" card; they exist to allocate inevitable losses among creditors.  American cannot just apply to have its plan terminated because they'd rather not pay the bill; they have to prove that they actually can't return to profitability without terminating the plan.

I have no idea how that will shake out, of course.  Hopefully the company and the union will come to some sort of reasonable accommodation, and we won't have to find out.

How Did Stainless Steel Appliances Get So Popular?

Business Feb 1 2012, 3:32 PM ET
Because I am true to my demographic, I watch a lot of HGTV.  This is maybe a little weird, because I hate virtually everything that the decorators do on HGTV.  If these shows are to be believed, our era will be defined by a style I have dubbed Contemporary Bland + Orange Pillows.

Nonetheless, I watch, because I am fascinated by our national fascination with granite countertops and lime green walls.  And the most fascinating fascination of all is the obsession with stainless steel appliances.  Don't get me wrong--there's nothing wrong with stainless steel appliances.  But it's not like stainless steel makes you cook better; restaurant kitchens use it partly for historical reasons, and partly because it stands up to a lot of abuse, like the really high BTUs their equipment puts out, better than a painted finish.  For a normal kitchen, however, modern finishes are just as sanitary, just as durable, and often just as attractive.  So why the fixation on stainless steel?

A commenter on a local blog traces the history:

Professional Grade is an odd term - I've heard the term commercial grade used more. A commercial grade stove has burners and an oven that put out a lot more heat/btus than a normal stove.

On a fairly high end GE model I saw recently, it can come with one burner that can produce 17,000 BTUs on "power boil" -and the others do varying amount less. My low end oven can do at max 12,500 BTUs. A Garland heavy duty range (commercial grade) has burners that can produce 30,000 to 35,000 BTUs. They can also come with charbroilers that produce 90,000 BTUs. These type of appliances need a special wider gas line to work. They are more powerful than anything a typical consumer (except my mother) needs. They're like Clydesdales.

Commercial grade appliances also got popular because you could beat the shit out of them and they'd continue to work. Also, as a status symbol, they signify that a) you were a serious cook, and b) you didn't just go to Circuit city to get your appliances. You were not hoi polloi with one of them. Then rich people starting liking the look, and the commercial companies started making retail versions that were more expensive than the commercial grade, not quite as durable, but a lot more user friendly, prettier and didn't require you to structurally reinforce the floor. And now everyone wants stainless steel.
In other words, stainless steel has become a status good.  That's why all those young couples on house hunting shows adamantly shake their heads when they walk into an otherwise charming fixer-upper and say "No way.  I want stainless."

And yet, it's a very strange status good.  The name of the stove is right on the outside, and anyone who actually cares can tell that your $400 Home Depot stainless special isn't a Wolf or a Viking--or even half as good as the 1972 six-burner that you ripped out when you "updated" the kitchen.

So what signal is stainless steel sending?  "I like shiny metal"?  Or perhaps "I enjoy scrubbing fingerprints off of my appliances"?

CBO: How Hosed Are We?

Business Feb 1 2012, 1:49 PM ET
The latest Budget and Economic Outlook is out from the CBO, and boy is it grim reading.  The projections continue to deteriorate, largely because the recession has been longer and deeper than the CBO projected.  We can now expect $1 trillion deficits even past Obama's first term.

Screen shot 2012-02-01 at 1.58.52 PM.png
Aha!  You want to say.  "It's mostly the fault of George Bush and his nefarious tax cuts for the rich!"

If only it were so simple.  The ten year cost of the Bush tax cuts is $2.8 trillion, but only about a quarter of that is for the taxes on high earners; the rest is for tax breaks affecting those making less than $250,000 a year.  Moreover, "extend tax policies" also assumes that we fix the AMT to prevent it from hitting middle-income voters.  That costs another $800 billion over 10 years--about the same as the "tax cuts for the rich".

In other words, the lion's share of that money is going to the middle class, not the rich.  To close the deficit, we're going to have to soak them.

Or perhaps you want to say "See!  We need to cut spending!"  But as Elmendorf pointed out, most of the extra spending comes from two things: higher temporary spending on distressed families through programs like unemployment insurance and food stamps--and the retiring baby boomers.  Early on, Rep Doggett proclaimed that we need to return to the fiscal path of the Clinton years, which sounds like an excellent idea, and as I tweeted, I am avid to hear his plan for reinflating the dotcom bubble, and preventing the Boomers from aging out of the workforce.

In other words, none of the possible changes is going to be popular, and so it's no surprise that Doug Elmendorf's appearance before Congress today was dominated by political grandstanding, as members asked extremely loaded questions designed to get Doug Elmendorf to say that we should close the hole by either raising taxes or cutting spending.  Elmendorf ably ducked these attempts to lead him, but you could see him steeling himself every time a new congressman took their turn.

There were, however, a few interesting moments to come out of the hearing.  The first was a Republican freshman who asked Elmendorf why the inflation projections were so low.  The congressman seemed to suspect some sort of Democratic, inflation-loving flim-flammery, but the answer was simple, grim, and illuminating: the CBO is projecting unemployment to stay above 8% for more than a year.  In that environment, they expect inflation to be quiescent--especially since the Fed's behavior post-crisis has indicated that they are very, very committed to a 2% inflation target.

There was also a revealing set of dueling questions from Democrats and Republicans.  "Isn't it true that deficit-financed tax cuts will depress growth?" asked a Democrat.  Indeed it will, confirmed Elmendorf; while the tax cuts boost growth in the early years, eventually the drag of extra debt claws back all your gains, and then some.

The GOP seemed to have taken a body blow until an inspired member asked what the effect of the president's stimulus would be.

The same as deficit-financed tax cuts, said Elmendorf.  More growth now, less growth later, because of the drag of debt.

Democrats 1, Republicans 1. Deficits, 2.  American public, -$5 trillion.

That's not interesting because it's a huge surprise; this is pretty much textbook macro.  It's interesting because most people who have very, very confident opinions on the subject of fiscal policy seem to be unaware of this basic lesson.  Deficits are a drag on future growth whether they are spent on supply-side tax cuts, or whizzy infrastructure.  If you believe that one is a problem, you should also worry about the other.

Of course, like most commentators on the deficit, I doubt the politicians who asked these questions were actually worried about the effect on their future.  Rather, this was a proxy for the argument they wanted to make: for or against lower taxes, for or against higher spending.

But the rest of us should care.  Our deteriorating fiscal condition is going to have far-reaching and rather unpleasant effects.  And our Congressmen are mostly focused on scoring ideological points.
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