The Stan Kenton We Didn't Know

About one month ago, the Wall Street Journal reviewed two books (here) about orchestra leader Stan Kenton. The review described Kenton's music as "...essentially, art music." However described, it was great modern jazz, as the clip above demonstrates.

Until details of Kenton's private life were revealed in "Love Affair," the book by Kenton's daughter Leslie, Stan Kenton was thought to have been "...buttoned down and conservative." Evidently, he was neither.

Bailouts and Business Confidence

In a previous post (here) I discussed the right-wing fixation with business confidence (no regulation, no taxes, etc.), credibility (austerity) and its relationship to the current debt crisis in the U.S. (the Subprime mortgage crisis or the Great Recession).

Right now, I'm reading Too Big To Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System--and Themselves by Andrew Ross Sorkin. Here's an interesting quote about the relationship between bailout (the TARP program) and business confidence. In the quote below, Hank Paulson is addressing the CEOs of the nine largest US banks in a private meeting at the US Treasury prior to modification of the TARP program (discussed in the video above).

"Through our new TARP authority, Treasury will purchase up to $250 billion of preferred stock of banks and thrifts prior to year-end," he [...Hank Paulson, Treasury Secretary at the time...] said, with the gravity due the unprecedented measure. "The system needs more money, and all of you [...the CEOs of the major US banks...] will be better off if there's more capital in the system. That's why we're planning to announce that all nine of you will participate in the program."

Paulson explained that the money would be invested on identical terms for each bank, with the strongest banks in the country taking the money to provide cover to the weaker banks that would follow suit. "This is about getting confidence back into the system. You're the key to that confidence."

The implication seems clear: what the right wing wants is austerity, deregulation, reduction in tax rates and bailouts to generate business confidence. Someone else can pay for government services necessary to run businesses (infrastructure, police protection, border security, national defense, education, basic R&D, etc.) and the negative externalities created by a free market (environmental damage, unemployment, poverty, financial crises, etc.). That someone else, of course, is consumers who are also being squeezed multiple ways by the debt crisis (loss of jobs, loss of income, loss of homes, etc.).

A good definition of political power is "...the capacity to restructure actual situations..." so they work out in your favor.

Confidence and Credibility

John Taylor is an economist at the right-wing Hoover Institution. His specialty is monetary policy. He is best known for proposing the Taylor Rule, a simple rigid formula for how the central bank should change its nominal interest rate based on departures from targeted inflation rates and differences from potential GDP.

The purpose of the Taylor rule is to systematically reduce uncertainty and increase the credibility of future central bank actions to foster price stability and full employment. In the video above, Taylor extends his uncertainty-credibility analysis beyond the central bank to all areas of government policy, to include fiscal policy, health care policy, regulatory policy, etc.

The extended generalization hinges on whether uncertainty-credibility are at the root of our current financial crisis. Taylor thinks that business would be hiring if the government was "credible" (instituted austerity programs) and business had "certainty" (business can be certain that they can do whatever they want without regulatory interference).

The Keynesian response to the "business confidence" argument (stated here and critiqued here) is that actual demand is more important to investment. What's the point of investing if there is no demand? In the current financial crisis where investment has been chocked off with the evaporation of liquidity, we're in a situation where consumption (C) and employment (L) are at low levels consistent with the downturn in GDP. We might hope that exports (a positive balance of payments, BOP) might help, but that's unlikely because the world system is also in recession.

Eliminate "Investment" and "BOP" from the graph above and you are left with government expenditure (deficit spending) as the only way to increase consumption and employment. You can lower the interest rate as much as you want and it won't stimulate investment because (1) current capacity is not being fully utilized and (2) the interest rate cannot go below zero.

John Taylor's arguments about uncertainty-credibility make sense in a business-as-usual environment when inflation and GDP are near their targeted values. To make these arguments during the Great Recession, when inflation and GDP are well below targeted values doesn't even make sense using Taylor's own formula (see below).

THEORY: The Taylor Rule is roughly i = i* + a(P - P*) + b(GDP-GDP*) where i is the interest rate, P is the price level, GDP is gross domestic product, and the starred values are desired, equilibrium or attractor levels. If P* and GDP* are a lot greater than P and GDP, respectively, the interest rate becomes negative, the dreaded zero-bound when the Taylor Rule no longer applies.

Analyzing the Taylor Rule would, by itself, be an interesting topic for a future post. For me, the key issues here are how to specify the dynamic attractors for inflation and GDP and how well changes in nominal interest rates would lead to price stability and full employment. The fact is that central banks do not use the Taylor rule so its application is purely counterfactual.

Reforming Fannie and Freddie

The graphic above is from a Wall Street Journal analysis of the housing market (here). What the graph shows is that the market share of Fannie and Freddie declined rapidly during the housing boom as privately issued (questionable?) mortgages came to dominate the market. The market share reversal is also mentioned in the Treasury report on reforming Fannie and Freddie (here).

In both the WSJ and the Treasury analysis, the recovery in market share from 2006-2008 is seen as the problem and it is asserted that "...Fannie Mae and Freddie Mac pursued riskier business to raise their market share and increase profits". Does this graph point the finger at Fannie and Freddie?

Purely from the standpoint of causal analysis, the finger has to be pointed at the private sector that was taking market share away from Fannie and Freddie. Consider this causal counterfactual: Why couldn't the market have stabilized at 40% Fannie/Freddie and 55% Privately Insured? It couldn't stabilize because the privately insured mortgages being written were garbage.

Fannie and Freddie's private-side drive for profit allowed them to be played by the private sector who dumped all their toxic assets back on Fannie and Freddie after 2006. At the end of all this, Fannie and Freddie are back to their 1992 levels of market share (70%), the private sector is down to almost nothing and government-guaranteed mortgages are up to 30%. In other words, the government and the public-private GSEs ended up holding the bag for actions taken in the private sector.

And, now the Treasury is trying to roll things back to 2006 (here) and replay history with good oversight. But I'm confused. Until 2003, Fannie and Freddie evidently were not a problem. How does reducing Fannie and Freddie's market share solve a problem that was created in the private sector after 2006? At least the Treasury recognizes that "Fannie Mae and Freddie Mac's profit-maximizing structure undermined their public mission." A big question in my mind is whether the private sector (who created the problem in the first place) is going to be a trustworthy player.

One point in favor of eventually winding down Fannie and Freddie is that any large pot of money or assets sitting somewhere close to the government is going to create problems. How to make sure originators can write sound mortgages without having to keep the entire mortgage (some percentage of each mortgage might be a good idea to keep their skin in the game) is going to be the challenge.

Governor Walker, Politicians and The Truth

When a politician says that "something isn't about something," you can be sure that it is precisely about that thing. When Wisconsin Governor Scott Walker says that his budget repair bill (which strips public sector unions of collective bargaining rights) is not about collective bargaining rights, he means that it is precisely about ending collective bargaining rights (you can read more here and here) .

Governor Walker is a master of Orwellian Doublethink and has used it effectively even to reprogram union members who supported him in the last election. One sympathizes with members of the Tea Party Movement who feel that they cannot trust politicians to tell the truth. But they also have been reprogrammed into accepting contradictory ideas such as "respecting public sector workers" involves taking away their collective bargaining rights .

It's interesting that almost 100 years after Eric Blair (George Orwell) wrote his satirical novels about totalitarianism, the right wing of the Republican party has aligned itself with business interests, mastered Orwell's writings and effectively risen to power--all this after the worst economic downturn since the Great Depression.

Causation, Correlation and Alzheimer's Research

The popular press has picked up on another questionable research result and used it to raise hopes of preventing Alzheimer's disease (AD). For example, CBS news ran a piece titled "Alzheimer's self-defense: Are two languages better than one?" (here) discussing findings from a study by Ellen Bialystok, a psychologist at York University in Toronto.

The original research (here) confuses correlation with causation, a distinction that gets lost in the popular press. Essentially, the researchers took whomever showed up at their treatment center in Toronto with AD symptoms, determined whether or not they were bilingual (this is of course interesting to the Canadians given that French and English are both the national languages) and determined how rapidly AD progressed over time for the two groups.

Epidemiological studies studies of intact populations have been a source of most ideas about AD prevention and most of the ideas have turned out to be wrong when tested by clinical trials. Consider (taken from Szekely et. al. 2007) life style factors (Mediterranean diet, physical activity, cognitive activity, etc.), neutraceuticals (Vitamins E and C, ginko biloba, Huperzine A, Folic Acid, and Curcumin) and pharmaceuticals (NSAIDs, hormone replacement therapy, anti-hypertension drugs, statins, immunotherapies, thiazolidinediones, arundic acid, etc.); none of them have proven effective in delaying the progression of AD. All were suggested by epidemiological studies.

The problem with epidemiological studies is that they do not control alternative causal explanations the way a correctly conducted randomized clinical trial would. Consider the factors implicated in AD from the causal diagram above (click to enlarge). Lifestyle factors, diet, education, genetic differences and bilingualism are all thought to affect cognitive reserve, that is, other parts of the brain's ability to deal with impairment. However, AD is thought to be a result of disease history (hypertension, diabetes, etc.), risk factors, cognitive reserve and random factors. None of these factors is controlled when we look at a non-random sample of patients who enter a Canadian clinic for AD treatment. What's especially important here is that Canada is supposedly a bilingual country but many citizens only speak English. That choice alone my define different populations with different risk factors.

Now, Ellen Bialystok is a respected researcher who specializes in the psychological study of bilingualism. Given her specialty, she probably feels compelled to report any conferred advantages of bilingualism. Unfortunately, just like all the many other dead-ends generated by epidemiological studies, the result is unlikely to replicate. That's how science works: results that don't replicate are forgotten.

What is unfortunate is that the distinction between correlation and causation is lost on the popular press and is probably lost on most of the readers. As statisticians, although we might have succeeded in teaching students how to calculate a correlation coefficient, we have evidently failed to successfully communicate (even to the editors of medical journals) the difference between correlation and causation.

Bob Berg/Mike Stern: Take What We Can Get

Jazz saxophonist Bob Berg playing with jazz guitarist Mike Stern are two high energy players we'll have to enjoy from what we have. Bob Berg died in a freak auto accident in 2002. Mike Stern is still playing strong but there was something magic about the two of them together. Although there's no mistaking Bob Berg as a strong post-bop jazz sax player, some listeners hear more rock in Mike Stern's approach. Although the heavily chorused, solid-body guitar sound is rock, the lines are jazz--Mike Stern's innovative contribution.

Jim Rotondi's Cool Groove

Trumpeter Jim Rotondi has been around for a while but I'm starting to hear more of his music and I like his approach to songs. What first caught my ear was "We Can Work It Out," a Beatles tune that illustrates Rotondi's treatment of an over-played classic (hear a clip here). It's from the 1000 Rainbows album. The video above is from the studio session for the album Four of a Kind.

Interestingly, at least on "We Can Work It Out," Rotondi is using both piano and vibraphone in the group. Looks like vibraphone is catching my ear (see my last post on Mike DiRubbo here).

New Young Jazz Talent: Mike DiRubbo

What's new on the Jazz scene? How about Mike DiRubbo! Mike emerged during the mid-1990's but I just heard him for the first time on "Repercussion" (preview some cuts, particularly "Reprecussion," "Too Late Now," and "Nelsonian" here).

What's different about the "Reprecussion" album compared to "Keep Steppin" (above) is the use of vibraphone (veteran Steve Nelson, see "Nelsonian" here). It's a little unusual to replace the piano in a jazz quartet (although guitar is becoming pretty mainstream) but the effect of the vibraphone is to open up the sound and give the other players more room to speak. Beautiful! Does it catch your ears?

What Is Blinky?

The video above shows one of my current favorite incomprehensible commercials. The first time I saw the Cisco commercial above, I thought that the kids were playing video games. Obviously, they weren't controlling a real submarine diving at 4000 meters.

Then, I found out by accident what is supposedly going on here. The thing they encounter "deep sea diving," the thing they want to call "Blinky," is a Dumbo octopus (Grimpoteuthis), not a monster from Namco's Pac-Man (if you don't remember it, see the game here). Maybe I'm just dating myself, but the "deep learning" involved in this video escapes me even after I know what the students are supposed to be doing. What's that guy in the side-screen supposed to be doing? Running the Pac-Man console? Have fun kids, Cisco's "human network" has got your back (Cisco's stock, CSCO, hasn't been doing that great since the dot-com bubble around 2000).

You Never Outgrow Your Need For Sugar (or Corn Syrup)

Give me a break, indeed! This is my favorite whining-business-interests-masquerading-as-consumers advertisement. From their website (here), Americans Against Food Taxes is billed as a "coalition of concerned citizens." In the list of coalition members no "citizens" are listed only the National Supermarkets Association (profitable sugary soft drinks), Archer Daniels Midland (corn syrup), the Associated Food and Petroleum Dealers (yummy!), Automated Petroleum (even more yummy), Bella Salon & Spa (work off the sugar buzz), Salt Institute (sugar and salt, just what Americans need more of), Yum! Brands (they had to tell us it was supposed to be good), etc.

They have an electronic petition you can sign (here) that supposedly has 95,283 signatures but that list of "supporters" is not revealed on the web site.

Oh, well. What fun would a Tea Party be without sugar?

Fixing Capitalism

The McKinsey Global Institute recently published a piece on Capitalism for the Long Term (here). There were a number of interesting topics:

• The misguided practice of earnings guidance
• The link between profits and organizational performance
• How institutional investors should step up as owners
• Communicating with the right investors
• Investing in sustainability

What do you think about what these four executives (in the video above) have to say? Interestingly, they didn't mention taxes, deficits or government policy. Can you believe: "Companies with a strong social mission will, in the long run, be most successful". Can any of these guys be Republicans?

Jack Lew on the Deficit and the 2012 Fed Budget Overview

President Obama is about to deliver his budget proposal to Congress and Jack Lew, OMB Director, appears in the video above to explain how the administration plans to get the deficit under control. In a prior post (here), I looked specifically at the deficit (the topic of Jack Lew's first white-board presentation) and deficit dynamics.

Mr. Lew goes on, in the second white-board exercise, to talk about the debt/GDP ratio. When the Obama administration took office, it was high (approaching ten percent). The intention of the budget that is about to be unveiled is to bring it down to around two percent of GDP.

Looking at the US budget deficit as a percent of GDP from 1900 to the present (above) it's clear that the major World Wars created deficits far larger than either the Great Depression, the Vietnam War period or the current Great Recession. In any event. Mr. Lew expects the deficit to decline to historically sustainable levels in the future.

Essentially, Mr. Lew has a business-as-usual (BAU) model in mind when making his deficit forecasts. The BAU forecast above suggests that a more reasonable GDP percentage for the deficit might be around three percent (somewhere between two and four percent). Mr Lew's forecast is at the lower end based on historical data and political calculation.

What's also somewhat interesting about the graph above is the comparisons of actual deficits (the black line) with the dynamic attractor (red dashed line) and the 98% prediction intervals. The period from 1950-1975 had improbably low deficits (if deficit hawks want to point back to this period, they'd be cherry-picking the data). Also, the Clinton surplus period around 2000 (Jack Lew was director of OMB in 2001!) was an improbable surplus given historical experience (Democrats would be cherry-picking the data to point to this period in defense of their ability to generate surpluses or control expenditures). The current deficit is quite improbable given experience since 1950 but not, as we saw above, given the entire Long Twentieth Century.

Mr. Lew's BAU model, however, might not be the best way to actually forecast the deficit. The forecast above predicts the US deficit as a percentage of GDP using trends in the state of the U.S. Economy. The forecast uses the USL20 model. The model predicts that as a result of economic performance (particularly the effects of globalization), deficits will increase in the future regardless of what Democratic or Republican administrations might attempt to do about it.

For me, these forecasts provide a counter point to Mr. Lew's optimistic, business-as-usual scenarios.

IN THEORY, you might expect the US Federal deficit to be a random walk, D(t+1) = D(t) + V, where this years deficit depends on last year's deficit and any economic shocks that might necessitate deficit spending or debt retirement. Or, a business as usual model for the deficit might be D(t+1) = a + b D(t) + V where the coefficient b captures some inertia in retiring debt and a=0 meaning that the average debt should be zero in the long-run. One last idea would be that the deficit should related to the state of the US economy, D(t) = a + b D(t-1) + cS(t-1) + V. That is, the deficit should respond to secular and cyclical trends in the economy.

British Austerity: Is the Pain Worth the Gain?

Economists are arguing! That's not news but the argument is over Great Britain, the home of John Maynard Keynes, and that is interesting. One group of economists (the neoliberals) argue that (1) cuts to government expenditures (austerity) should being right away (here) and (2) since Britain has done just that, they are on the right path. Another group, the Keynesians (here) have argued that the math is unequivocal: Y = I + C + G + (X-M). If investment (I) and consumption (C) fall as a result of the subprime mortgage crisis and the balance of payments (X-M) is in balanced, national income (Y) will decrease unless government expenditure (G) fills the gap. The neoliberal argument is that austerity is necessary to restore confidence in the markets and in business. The Keynesian argument is that any decrease in national income is unlikely to instill any confidence.

Why should we care about the British experience and the arguments of economists? Some commentators (here, here, here and here) think that the British experience (positive or negative) provides a glimpse of the U.S. future.

My question is a little different: Was the British austerity experiment really necessary?

I can't answer the question of whether it was necessary to establish confidence since I can't directly measure confidence. But, I can determine whether British government expenditure was too large and whether it needed to be cut in the first place. The way I can do that is to use the WL20 model to establish the level of British government expenditure warranted by growth in the world economy. The red dashed line in the graphic above is the dynamic attractor for British government expenditure.

The black solid line in the graphic is actual British government expenditure. From 2000 to almost 2010, government expenditure was above the dynamic attractor. By 2010, however, expenditure was back on the warranted growth path. If you accept the model predictions, the Brits are fighting the last war. Yes, expenditure was too high. Do we need drastic cuts and austerity programs? No. We just need to allow the world economy to get back on course and not do anything stupid while we're waiting (the real lesson for the U.S.).

If you don't accept the predictions of the WL20 model, then I would ask to see the model you are using to decide that British government expenditure is too large. If the model is based on investor confidence rather than the path of the world economy, you have a pretty weak model.

Being Bernanke

Whatever you think about Ben Bernanke, chairman of the U.S. Federal Reserve, you have to be a little sympathetic. Put yourself in his shoes and try to answer this barrage of disconnected questions and comments from Rep. Ron Paul, R-Texas in the video (above).

I'll just state this list as questions but Rep. Paul actually asks very few questions: (1) Is the Fed monetizing the debt? (2) Are Fed actions hurting mortgage holders? (3) Is the Fed funding the IMF? (4) Are bank examiners new or already on the payroll? (5) Are more bank examinations required or is the problem really the Fed easy money, low interest rate policy? (6) Do low interest rates rig the markets and give bad information to investors? (7) Can capital come from a printing press rather than savings? (8) Does an easy money policy reject every notion of free-market capitalism? (9) Why is the IMF asking for more money to bail out Greece? (10) Who pays money to the IMF? Where does the money come from? Will this all come out of the printing press once again? Are we expected to bail out the world? (11) Is the US bankrupt? (12) What are we going to do when a state "gets under the gun" and needs to be bailed out? Are our States approaching the situation Greece is in? (13) Can Congress find out what the Fed is doing? (14) Can the Fed do anything it wants and create as much money as it wants?

Chairman Bernanke gets to answer about three of these questions.

With Ron Paul now saying that Bernanke is "cocky" (here) and with Ron Paul now chairing the House Subcommittee on Domestic Monetary Policy (an obscure committee Paul wants to turn into the Fed watch dog), Ron Paul is Ben Bernanke's worst nightmare.

It's really too early to say whether the Fed performed better during the current financial crisis (the Great Recession) when compared to Fed performance during the Great Depression. What can be said about Ben Bernanke is that he studied the Great Depression and was convinced that the Fed made mistakes during the Great Depression (here) and was intent on not repeating those mistakes during the Great Recession. Whether you agree or not with his analysis and conclusions, he does have a reasonable basis for the way he has conducted himself in public life.

Rep. Paul Ryan Gets an Economics Lesson from Prof. Bernanke

The new chair of the House Budget Committee, Representative Paul Ryan (R-WI), held his first hearings today and his first witness was Federal Reserve Chairman Ben Bernanke. It was a learning experience for the young congressman.

Yesterday on CNBC (here), Rep. Ryan commented that he learned economics from Milton Friedman. I'm just going to guess here that what he meant to say was that he read Capitalism and Freedom, one of Friedman's philosophical tracts, because Prof. Bernanke had to correct Rep. Ryan's economics.

Rep. Ryan thinks that commodity market inflation in Egypt is something the U.S. Federal Reserve should be worried about and also thinks that the term structure of interest rates is a measure of inflation. Prof. Bernanke corrected these misunderstandings.

Unfortunately, and here's the embarrassing part for Wisconsin, Rep. Ryan went on to publicly worry about inflation that doesn't exist and the things that might happen when the non-existent inflation starts to hurt us. It's almost as if he wanted the Fed to do something stupid so that economic recovery could be postponed until after the next election. Maybe Rep. Ryan should stick to conservative philosophy where he is clearly a shining beacon of hope for the Republican Party.