Category Archives: Economy

Great Retirement Scams: GOP pins hopes on Primerica Testimony?

GRANNY retirement As of 2013 the Census Bureau counts 13.7% of Nevada’s population as aged 65 or over.  The handy Plastic Brain tells us that amounts to 382,435 people.  Unfortunately, there’s a chunk of the 2,839,099 (2014) people in Nevada who have some silly and alarmingly self-serving ideas about how retirees should plan for those Sunset Years; and, more egregious ideas yet about how those under 65 should be planning for their retirement.  These would be the people in the “privatizer and opportunist” category. Let’s take a look at both. First, a quick review of the privatizers and Social Security (and by extension any public retirement program), and then a gander at the opportunists as exemplified by the unfortunate choice of champions brought to us by Senate Republicans.

The Great Scam

FALSE: “Social Security is Going Broke!”  Underpinning the Great GOP Retirement Scam shuffle is the notion that somehow Social Security “isn’t going to be there for young people…” and therefore younger Americans should pile their retirement funds into private sector wealth management schemes.  “But, but, but,” blubber the privatizers, “the Trustees Report and the CBO agree it will be b’b’b’..bankrupt by 2042 or 2052.” [CNNNo they didn’t.

They reported that in order to provide promised benefits for elderly people  the Social Security Administration will have to tap into the reserve fund – it is not – repeat not – going bankrupt. Nor, will those receiving benefits from the reserve funds live forever, thus at some point the system will stabilize. Tapping into the reserve fund – which was put in place to deal with the Baby Boomers – is not the same as “going bankrupt!”  There are some basic facts (of life) to deal with at this point.  The Census Bureau report, An Aging Nation, (2014) explains carefully: 

“In 2050, every age group is projected to be larger than it was in 2012. This is not the case between 2012 and 2030 or between 2030 and 2050. For instance, the number of men aged 48 to 58 and the number of women aged 47 to 58 in 2030 are projected to be smaller than those in the same age groups in 2012 (see Figure 2). This is because large cohorts of baby boomers were in these age groups in 2012, and smaller and younger cohorts will have replaced them by 2030. Similarly, the number of women aged 66 to 77 is projected to peak in 2030 and be smaller in 2050 than it was in 2030, as the smaller birth cohorts born in the late 1970s moves into these age groups.” [Census pdf]

A “smaller” cohort means that once the baby boomers die off, and they will do that because they are human beings, there will be less demand on the system for benefit payments.  That’s what the entire idea of the Trust Fund was based on, the knowledge that the system needed a “savings account” to get past the baby boomer generation.   “But, but, but..” sputter the privatizers, “there won’t be enough young people paying into they system..” Nonsense.  Take a look at this chart from the report on aging: (figure 2)

age structure us population chartSeriously, does anyone really think there are going to be more elderly retired people than younger workers in the foreseeable future?  If someone believes that then I guess I would try to sell them some scammy retirement savings plan!  I could also try to sell them an automatic kitchen gadget that “Cools your water in an instant! No Ice Cubes Required!”

FALSE: “Social Security won’t guarantee your retirement…”  this is right so far because Social Security was never meant to be an entire retirement program – it was meant to keep elderly people out of abject poverty.  However, the rest of the privatizers’ pitch gets more dicey, “therefore we should privatize the system and let people have a Choice…”  There’s a reason Social Security is called a Social Safety Net. It’s the safety net in case all else fails and an elderly person has little else to fall back on.  That we have a Social Security system to keep people from falling into an abyss of poverty doesn’t mean that people can’t choose to augment their retirement plans with pension plans, savings accounts, equity accounts, and all manner of other savings vehicles.  The privatizers would like for us to forget that we already have (and have had for decades) alternative savings plans for retirement!  The privatizers would be perfectly pleased to get all the money that’s paid into Social Security funneled into the hands of Wall Street traders… now there’s a thought that should lower one’s body temperature, or raise the blood pressure?

And now we get to the good part wherein the privatizers and scammers walk the halls of Congress to promote those alternative and supplemental retirement savings financial products.

retire savingsHowever, some of the plans are a dream for some and nightmares for others.  

The Smaller but Painful Scams

Consider:

“Sen. Elizabeth Warren (D-Mass.) on Tuesday embarrassed Primerica President Peter Schneider, who Senate Republicans had invited to testify against a new regulation designed to protect retirement savings from dodgy investment managers. The Obama administration estimates that Americans lose $17 billion a year from investment professionals who manage retirement accounts by prioritizing their own financial interests over those of their clients. It has proposed a simple solution: making that illegal.” [HuffPo]

Hmm, the Senate Republicans INVITED Primerica’s testimony against a fudiciary responsibility standard? And, what was Primerica testifying against?

“In February, the President directed the Department of Labor to move forward with a proposed rulemaking to require retirement advisers to abide by a “fiduciary” standard—putting their clients’ best interest before their own profits. And today, the Department of Labor is taking the next step toward making that a reality, by issuing a Notice of Proposed Rulemaking (NPRM) to require that best interest standard across a broader range of retirement advice to protect more investors.” [DoL] (emphasis added)

Thus, we could assume that the Senate Republicans are in favor of allowing retirement advisers to put their own profits AHEAD of consideration for their client’s best interests?  Okay, so what can happen when an investment adviser steers a client into territory which is not in the best interest of the client but really bolsters the firm’s bottom line?

“A system where firms can benefit from backdoor payments and hidden fees often buried in fine print if they talk responsible Americans into buying bad retirement investments—with high costs and low returns—instead of recommending quality investments isn’t fair. A White House Council of Economic Advisers analysis found that these conflicts of interest result in annual losses of about 1 percentage point for affected investors—or about $17 billion per year in total. To demonstrate how small differences can add up: A 1 percentage point lower return could reduce your savings by more than a quarter over 35 years. In other words, instead of a $10,000 retirement investment growing to more than $38,000 over that period after adjusting for inflation, it would be just over $27,500.” [DoL]

Actually there was more bad news from the Council of Economic Advisers in its report on the Effects of Conflicted Investment Advice on Retirement Savings (2015 pdf).   There’s this conclusion: “A retiree who receives conflicted advice when rolling over a 401(k) balance to an IRA at retirement will lose an estimated 12 percent of the value of his or her savings if drawn down over 30 years. If a retiree receiving conflicted advice takes withdrawals at the rate possible absent conflicted advice, his or her savings would run out more than 5 years earlier.”  And, if this weren’t bad enough, there’s another item: “The average IRA rollover for individuals 55 to 64 in 2012 was more than $100,000; losing 12 percent from conflicted advice has the same effect on feasible future withdrawals as if $12,000 was lost in the transfer.”

Thus, in general terms, retirees are losing an aggregate of some $17 billion from conflicted financial advice, losing a potential of five years worth of retirement savings value, and dropping 12% “in transfer” because of conflicted advice in the process.

And, to dispute this the Senate Republicans hauled in the CEO of Primerica? Oh, what a tangled web we weave when first we practice to deceive?

Let’s begin our Primerica Story in Florida in 2002 with a classic case of privatization:  

“Primerica’s legal battles stem from a change to Florida’s retirement system in 2002. It gave employees the option to switch from a traditional pension plan, in which they would receive lifetime benefits based on their salaries and years of service, or convert the value of their pension to a lump sum payment which they could invest in mutual funds and other securities offered through the state retirement system.”

Primerica told potential investors that they could put their pension money into an account which could (note Could) earn more than their pension benefits, and could be inherited by family members unlike standard pension benefits.   What Primerica sort of forgot to tell the state employee  investors was that the market could also go down. South. Pear-shaped. In the commode… And thus it did in 2007-2008.  By July 2013 Primerica was fighting off lawsuits in Florida and allocating $3.9 million to defend its claims in court cases and arbitrations. [Reuters]  As of January 2014 the amount set aside to settle various and sundry complaints against the company climbed to $9.3 million. [BfH]  The 2015 figure for fighting off the litigation was up to $15.4 million. [HuffPo]  And THIS was the company Senate Republicans thought would be a good source of testimony against the fiduciary responsibility rule?

So, what did the Senate Republicans get for their efforts to include Primerica’s CEO Peter Schneider on the witness list?

bamboozalah The Big Bambooza-a-lah began with Schneider’s written testimony:

“We are believers in educating the households we serve about fundamental financial concepts. Our investment education and philosophy is geared toward the needs of middle‐income households, who often are new or less experienced investors.  In that regard, we produce easy to understand educational pieces teaching fundamental investing concepts including the critical importance of taking the steps needed to start along the path of financial security.”

Uh, if your investment education process is “easy to understand” then why the escalating amount of funds the company is plowing into defending the itself  in some 238 cases?  When your defense fund increases by 295% in two years it’s pretty clear someone didn’t have a solid grip on “investment education” or “the fundamental investment concepts.”

Having wailed on about how Primerica was serving the Middle Class, a reference tossed in at just about every possible location in the testimony, Schneider got down to his real complaint “Guv’mint Regulations,” and the favored GOP buzzword, “burdensome.”

Those wonderful, admirable, Middle Class customers would be cheated of their opportunity to invest with Primerica because the rules for investment advice would be too “burdensome.”  Here comes the “Daze and Dizzy:”

“We draw this conclusion first and foremost because the Department’s expanded definition of fiduciary turns into a fiduciary act almost every conversation about an IRA that a financial professional might have. ERISA and the Internal Revenue Code prohibit fiduciaries from receiving commissions and other traditional forms of variable compensation in connection with a covered benefit plan such as an IRA unless what is known as a “prohibited transaction exemption” applies and provides relief.  Effectively, the DOL’s expanded definition of fiduciary makes an exemption from the prohibited transactions rules necessary to continue to effectively serve individuals investing in IRAs. Unfortunately, the exemption the Department has proposed to preserve the commission‐based services for IRAs – the Best Interest Contract Exemption (BIC) – is not operational.”

Translation: A conversation including investment advice for an IRA  would be covered unless there is an exemption, and the “best interest contract is not operational.”  We can take it that “not operational” means it won’t work.

This is followed by more “Daze and Dizzy” as Schneider attempts to explain, and at this point we need to parse the testimony carefully:

Instead, our primary concern is that the requirements and uncertainties of the BIC exemption are so complex and burdensome that the exemption is neither administratively nor operationally feasible. (1)  The trouble is that, from start to finish, the BIC exemption fails to offer certainty.  In operating our business, “certainty” with respect to regulatory compliance matters is critical because a failure to satisfy the proposed exemption may result in steep prohibited transaction penalties, including the forfeiture of compensation and excise taxes, as well as consumer lawsuits for breaches of contract, and potentially even class action lawsuits. (2)   Critically, the technical implementation of the exemption promises to be a substantial burden, and to cause a significant disruption of services to our clients, with no true added benefits in the way of investor protections. (3)

(1)Complex and burdensome,” could any phrase be more illustrative of any and all Republican complaints about consumer protection rules, product safety regulations, clean air and water standards?  This is standard GOP rhetoric, and no more probative because it is repetitive. Nor does this explain WHY the rule, and the exemption, would be a burden to a company intent on supervising its employees and representatives in such a way as to insure they properly represent the risks and rewards of their products.

(2)Creates uncertainty,” and again we have good old reliable Republican boiler-plate.  The well worn phrase has been applied often  to banking regulations (somehow the banks are still with us and doing quite well.) Once more the testimony doesn’t explain WHY anyone should be uncertain – IF the firm were providing the best financial advice it could in the most educational way possible.  If, however, the company was prone to, say, wrap backdoor payments and hidden fees in the fine print then they might be “uncertain” about how much they could get away with.   The fact sheet from the Department of Labor is really clear, for a technical document, about what constitutes investment advice.

(3) More boiler-plate. Now the implementation is a “substantial burden.” Not just any old regular garden variety burden, it’s substantial!  It’s interesting how many investment advisors there are in this country who don’t seem to have any trouble offering investment advice without selling products with hidden fees and backdoor payments.  In this instance old fashioned capitalism works, the firms sell products that people understand, and know both the rewards and the risks involved, then people recommend these firms to their friends and relatives – and so it goes.   If providing clear and honest investment advice without playing backdoor payment and hidden fee games is a “substantial burden,” then perhaps the business isn’t worthy of its clientele?

Then comes the “threat.” Consumers will lose their “freedom” to choose their investment advisers:

“This shift to advisory services is likely to cause millions of small balance IRA owners to lose access to the financial professional of their choice, or any at all. Those with enough investments to meet the account minimums will face higher costs and experience losses in retirement savings. These resulting losses by some estimates could be as high as $68‐$80 billion each year.”

Please. Let’s look at this from the consumer’s perspective – no one chooses to be ripped off. And, if one’s investment advisor is playing games for the firm’s bottom line at the expense of the retiree’s retirement savings then that future retiree should not be prey for the predators.   Is Mr. Schneider serious that NO brokerage firm will consider a small IRA or other investment?  That our little Middle Class man or women will be left shivering in the cold, facing the closed door of Merry, Berry, & Itch LLC, with $1,000 in hand?   Trust me, that money will go somewhere, and if it doesn’t meet Merry, Berry, & Itch’s minimum it will certainly find its way into a money market account at the local bank. If, the amounts do meet the minimum, would there be “higher costs?” Maybe, but they wouldn’t be hidden. Do private retirement accounts invested in equities lose money? Yes, again, but why shouldn’t the customer, the consumer, be made aware of this very fundamental fact?   However, we should observe in Mr. Schneider’s testimony that he presents no substantiation for his assertion that the costs will be higher and the losses any greater, other than his un-sourced “some estimates” phrase.

Senator Warren was correct to make an example of Mr. Schneider and his business model.  It should be noted that (1) the privatizers with their claims of insolvency for both Social Security and state retirement programs are doing a national disservice with false claims intended to frighten people into putting both the social safety net and public pension programs into the hands of the players in the Wall Street Casino; (2) private firms which utilize questionable business practices which involve lots of fine print hiding fees and management charges and which engage in back-door payoffs are not functioning in the customer’s best interests; and (3) trying to pass off clichéd, stale, and trite boilerplate as Congressional Testimony is unhelpful in the legislative process.

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Filed under Economy, financial regulation, Nevada politics, privatization, public employees, Social Security

Income Inequality Matters for Nevada’s Children

child poverty

We ought to be embarrassed.  The Kids Count Data Book 2015 edition is out, and the numbers aren’t pretty.

“Nevada ranks 47th among states in overall child well-being, up one spot from last year. The study found that Nevada ranks 43rd in family and community development indicators, like children living in high-poverty areas; 46th in health statistics, like low birthweight babies; 46th in economic well-being, including parents lacking secure employment; and 50th in educational achievement, including 69% of Nevada’s children not attending pre-school.” [LVSun]

Yes, there we are, ranked down there with Louisiana, Mississippi, and New Mexico.   Overall, things aren’t looking up for children, and there’s an explanation:

“Although we are several years past the end of the recession, millions of families still have not benefited from the economic recovery,” Patrick McCarthy, president and CEO of the Casey Foundation, said in a statement. “While we’ve seen an increase in employment in recent years, many of these jobs are low-wage and cannot support even basic family expenses.” [LVSun]

And why might this be a correct assessment of the situation? There has been income growth since the end of the Great Recession, but the recovery has benefited those at the top –thus much for anything trickling down:

“The states in which all income growth between 2009 and 2012 accrued to the top 1 percent include Delaware, Florida, Missouri, South Carolina, North Carolina, Connecticut, Washington, Louisiana, California, Virginia, Pennsylvania, Idaho, Massachusetts, Colorado, New York, Rhode Island, and Nevada.” [EPI]

Nevada has made some improvements – if bouncing off the bottom is an indication of progress – in health, for example, 5% fewer children are without health insurance, and education in which 69% of our kids aren’t attending pre-schools, up from a previous 72%.  But, the economic picture is bleak at best.  23% of the youngsters live in poverty, 34% are in families experiencing what’s euphemistically called “employment insecurity,” and 39% of the kids live in a situation in which housing costs are eating up the family budget.  [AECfnd]

If we tread deeper into the income inequality waters we can see why the numbers for Nevada youngsters didn’t improve. Here’s the answer: “In four states — Alaska, Michigan, Nevada and Wyoming — average income increased exclusively for the top 1% and declined for the bottom 99%.” [247Wallst]  So, in the Silver State, not only did all the income growth get sucked up by the top 1% during the recovery, but the bottom 99% actually saw their incomes decline.

Most analyses get the first part right.  In the last downturn the bottom fell out of the construction sector in Nevada; the housing bubble burst, and employees were laid off.  Laid off employees have less discretionary income to spend, and less income equates to fewer purchases.  Fewer purchases yield less economic activity in the community, and everyone starts to go down hill.  When we get to the middle part of the explanation some analysts start getting fuzzy.

First Law of Staffing

The question in the middle is how to encourage more employment.  For the umpteenth time here’s the answer:  There is no rational reason to hire anyone to do anything unless the DEMAND for goods and services is greater than the capacity of current staffing levels to provide an acceptable level of customer service.  Amen. Again.

The Small Business Chronicle offers some very sound advice which expands on this generalization.  Their five step process asks: (1) Are your projects or other business activities getting done on time? If yes, then you probably don’t need any additional employees. If no, or the business is thinking of more marketing to drive up revenues then ask (2)  if you were to increase your marketing efforts could your present staff handle the additional work load? The next step (3) is to look at your overtime records. One sure sign that the business is understaffed is increased overtime from current employees.  In the first step the business owner gauged the project or work time, in the next (4) step it’s important to look at the issue from the customer or client’s perspective – if the business is monitoring customer wait time and it seems (or is reported to be) excessive, then the business is understaffed. Finally, in Step (5) a savvy business owner will determine if the increases in demand are continual or seasonal. If seasonal, then temporary employee hiring may be the solution.

What’s not under consideration here?  The advice offered above didn’t include a question about whether Nephew Lester needs a job. Familial ties are wonderful, but they don’t constitute a reason to hire an employee.  Hiring veterans is a healthy business practice – but again, no matter the benefits, if his or her skills aren’t necessary to get things done or made on time, and if a barrel of overtime isn’t on the current books, there’s no rational reason to make a new hire.  Tax breaks for hiring the unemployed are fine – but just as in familial or socially beneficial cases, there’s NO reason to hire anyone for any tax break if there is insufficient good old fashioned demand for the products and services.   It’s at this point that the conservative, trickle down, no new taxes, barrage of talking points becomes almost ludicrous.

tax incentives accounting There is a wonderful leap of logic, stretching that term to its extrapolated limits, in asserting that more tax incentives, tax breaks, tax forbearance, tax limits, tax deductions, and tax treatments will magically yield more employment.   What is required is to believe that if a company is more profitable it will automatically hire more people.   Yes, a more profitable firm is capable of hiring more but NOT if there is no increased demand for the goods or services.  A more profitable firm has the potential for more hiring – but not if it is corporate policy to put more effort into mergers and acquisitions than into actual plant expansion. A more profitable company may hire additional workers but not if the firm has decided that it will put its revenue into stock buy-backs, dividends, or management compensation. Potential may be a powerful argument, but unless it is translated into a realistic appraisal of company or corporate intentions and vision it’s as ephemeral as a fruit fly.  And it’s not really useful for putting food on the table for the kids.

And, now we return to the economic problems of children. If the jobs available for their parents are seasonal, temporary, or permanent but low wage then all the job “expansion” in the nation isn’t going to improve their prospects.

Seasonal employment is relatively easy to understand.  It’s everything from harvest time to Christmas sales.  The sector of the labor market into which more parents are finding themselves is the temporary work force.  About 75% of Fortune 500 firms are relying on third party logistics companies to handle their warehousing, and employment in transportation and materials moving and production now accounts for some 42% of temporary hiring. [NELP]   The advocates of temporary hiring note that only about 3% of the workforce is on temporary status, which is true but doesn’t include the fact that temporary employment grew from just a bit over 0.5% in 1983 to over 2.5% as of 1999. [BLS] Further, the trend is increasing as this graphic from Staffing Industry illustrates in YOY growth from 2013 to 2015:

temp jobs trendsAs this sector of the labor market increases the “employment security” of parents becomes more tenuous.  As long as this trend continues we’ll likely find more youngsters in that “parents lack secure employment category.” 

There’s no reason to believe that corporations in Nevada are functioning any differently than those in the rest of the country in terms of staunch adherence to the Shareholder Value Theory of Management, the interest in mergers and acquisitions rather than plant expansion in general, and the interest in utilizing temporary labor for logistics, warehousing, and service jobs.

In sum, there’s no rational explanation for hiring (temporary or permanent) which doesn’t relate directly to demand – and there’s no reason to expect demand to increase if the jobs created are temporary, low wage service or retail sector, and with reduced hours or misclassification of employees. Meanwhile the kids need housing, clothing, food, medical attention, and school supplies.

We ought to be embarrassed, but we probably won’t be until we can shake the 1% awake to the fact that profitability doesn’t necessarily equate to employment. To the fact that potential employment isn’t actual employment. To the fact that temporary employment isn’t secure employment, and to the fact that taxation has precious little to do with hiring the parents of Nevada’s children.

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Filed under Economy, family issues, Nevada economy, Nevada news, Nevada politics, poverty, Taxation

SLABS: How to make money off someone else’s private student loan

SLABS

SLABs, and no we aren’t talking about the stuff of which patios are made, or the tiles that can be laid on kitchen floors. Nor, are we talking about some Silicon Valley laboratory firm.  Let’s focus on Student Loan Asset Based securities.  Yep, “securitized” assets – like mortgages, auto loans, credit card receivables, etc.  We do remember the mortgage thing? Right?

SLABs were hot in 2013. [WSJ]  In fact, see if you can make sense of the following description:

“Student loans are souring at a growing rate—and investors can’t seem to get enough. SLM Corp., the largest U.S. student lender, last week sold $1.1 billion of securities backed by private student loans. Demand for the riskiest bunch—those that will lose money first if the loans go bad—was 15 times greater than the supply, people familiar with the deal said.” [WSJ]

Why would investors be banging on the doors for those loans which are the most likely to go into default?  I think we’ve seen this movie before, and the ending (2007 – 2008) wasn’t pleasant for anyone.

The Basic Materials

Once upon a time Sallie Mae or SLM, was a government sponsored lending firm specializing in student or educational loans.  That was the case until 2004 when Sallie Mae went private and it’s now a publicly traded private sector corporation. SLM securitizes private education loan by selling them to the SMB Private Education Loan Trusts. The Loan Trusts (2014 and 2015) show “issuance details” online (here’s 2014-A)  There was $382 million in the August 7, 2014 records; divided into five categories with varying rates of return. Scrolling down we find the ‘master servicer’ as Sallie Mae Bank, the sub-servicer as Navient Solutions, Inc., the indentured trustee being Deutsche Bank National Trust Company, and the underwriters Credit Suisse and the Royal Bank of Scotland. [SLM]   Navient Solutions, Inc. is simply the name adopted in 2014 for Sallie Mae’s loan management, servicing, and asset recovery operation. [Bloomberg]  An ‘indentured trustee’ is:

“A financial institution with trust powers, such as a commercial bank or trust company, that is given fiduciary powers by a bond issuer to enforce the terms of a bond indenture. An indenture is a contract between a bond issuer and a bond holder. A trustee sees that bond interest payments are made as scheduled, and protects the interests of the bondholders if the issuer defaults.” [Investopedia]

The underwriters, in this instance Credit Suisse and RBS, are the firms which act as sales personnel for the bonds bases on securitized private student loans.  So, we have SLM issuing the bonds, Deutsche Bank National Trust acting as the agency responsible for bond registration, transfer, and payment of bonds, while Credit Suisse and RBS are the ones selling the bonds.   Sounds impressive, however those private loans comprise only about 8% of the total student loan market – the remaining 92% are Federal Stafford and PLUS program loans.  But – the numbers are still sufficiently high to interest SLM, Deutsche Bank, Credit Suisse and RBS, because there’s about $92 billion involved in the private student loan market. [PSL]

Slabs without much mortar

Recall for the moment what got Wall Street in major trouble during the Housing Bubble.  Investment firms issued bonds, and then played with derivatives based on those mortgage based bonds, without being all that sure the loans were going to be paid off.  Thus, it was extremely difficult, and in some instances impossible, to calculate what the bonds were actually worth. Enter the credit rating agencies who (for a nice fee) stamped AAA+++ on what should have been recognized as piles of garbage; the investors couldn’t get enough of these, so even more garbage piled up as the investment houses bet on whether or not the assets were worth anything.  Enough garbage was included in the piles of paper that the whole pillar of paper crashed.

What’s saving us from the prospect of another bubble of epic proportions is that the market in private student loans is very small – that $92 million is a drop in a very large bucket of corporate and commercial debt. [Atlantic]  Another bit of good news is that because of the Dodd-Frank Act there is more transparency required in dealings in asset based securities.  [SEC]  [WSJ] The bad news is that Republicans in Congress have been wailing for the repeal of the Dodd-Frank Act as “burdensome regulation” of the banking industry.  Or, “make the SEC back off and let us get back to trading asset based securities like we used to in the Good Old Days.”

Who’s holding up the scaffolding?

Another bit of bad news is that while lenders are looking for new customers (students willing to take on private loans) we’re not tracking some important information about those loans.  For example, the default rate for Harvard is less than 2%, while the default rate for the Arizona Automotive Institute is nearly 42%.  [Bloomberg] Interestingly enough, there’s a long list of for-profit educational institutions with default rates higher than 28%. What we don’t need to see are more for-profit training schools encouraging more private student loan debt, debt which someone somewhere hopes will be hedged with private loans more likely to be paid off – because at bottom the funds to pay investors have to come from students paying off the loans.

Don’t panic yet, yes – there’s a hungry market for student loan asset based securities (perhaps in part because some old Federally backed loans were in the pipeline originally) and the market is relatively small albeit subject to some of the valuation mistakes of the Old Investment Houses – the ones who went bust in 2007-2008.   There’s another reason for hope: The Consumer Financial Protection Bureau – the agency the Republicans can’t seem to wait to dismantle. [DB 7/30/14]

One of the provisions of the Dodd-Frank Act was the creation of an ombudsman for student loans which is part of the CFPB.  In the 2014 annual report (pdf)  it’s of interest to note that the biggest problem area was NOT repaying student loans but in getting financial institutions to cooperate with repayment programs and dealing with servicers and lenders (57%). If this sounds like a reprise from the Mortgage Meltdown Days it might be because some of the same actors are involved, at least in terms of complaint volume: JPMorganChase up 56% from 2013; Sallie Mae Navient up 48%; Wells Fargo up 8%.  The annual report indicates problems in the following areas: (1) There is no clear path to avoid default. (2) Proactive outreach from borrowers was too often unsuccessful. (3) When repayment options are made available they are too often too little too late. (4) In some cases repayment options were allowed only after the loan went into default. (5) Short term forbearance options were often associated with processing delays, unclear requirements, and unaffordable fees. (6) Many lenders force a choice between staying in school and repaying the loans.   There is a reason for the Ombudsman’s concern. The Sallie Mae Settlement.

The FDIC announced a settlement with Sallie Mae on May 13, 2014 in which Sallie Mae was charged with (1) inadequately disclosing its payment allocation methodologies to borrowers while allocating borrower payments across multiple loans in a manner that maximizes late fees; (2) misrepresenting and inadequately disclosing in its billing statements how borrowers could avoid late fees; (3) unfairly conditioning receipt of benefits under the SCRA upon requirements not found in the act; (4) improperly advising servicemembers that they must be deployed to receive benefits under the SCRA; and (5) failing to provide complete SCRA relief to servicemembers after having been put on notice of the borrowers’ active duty status.

The Structure

As long as the private student loan market remains a small part of the total structure we can breathe a bit easier about its effect on capital markets. Secondly, the private student loan market has relatively low yields and thus doesn’t get included in most structured derivatives.  Third, the old ‘recourse loans’ (for those with really low credit scores) are a thing of the past, most private loans now take higher scores into consideration. [QuoraWhat will continue to keep investors whole?

  • Continued monitoring of the private student loan market by the CFPB so that loans taken out will continue to be loans paid off, even if this means some reduction in the revenue streams for the bankers.
  • Continued oversight by the SEC and FDIC under the terms of the Dodd-Frank Act so that we don’t return to the Wall Street Casino of old should there be changes in the private student loan market.
  • Improvement in the servicing of private student loans such that there are clear pathways to avoid default; effective and efficient communication between borrower and lender regarding repayment options; and, that this communication happens in a timely manner.
  • Requiring lenders to make all the term of the private student loan clear at the outset including forbearance conditions, and any and all fees associated with deference, late payments or defaults.

The Foundation

From a Wall Street perspective private student loan asset based securities are a niche market, with some revenue potential – enough to keep the big banks interested – however, not with enough total clout to cause major financial displacement should the Quake happen.  And yes, there are some institutions making nice fees for making student loans, selling student loans, securitizing student loans, servicing student loans, and collecting payments on student loans.  Capitalism works, the trick is to keep free market capitalism from becoming casino capitalism and/or financialism.

A more existential question is how to maintain a system in which students are burdened with so much debt (Federal program/Private loan program) that they are deferring consumer purchases which would contribute to the growth of the overall economy.  Deferred student loans can impact mortgage qualifications. [credit.com]  We know this because the  rate of homeownership among those with student debt is 36% below that of unencumbered home buyers, and we’re losing about $6 billion annually in new car buying capacity.  [Forbes]  And, this is not an inconsequential problem:

“Student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008. Balances of student loans have eclipsed both auto loans and credit cards, making student loan debt the largest form of consumer debt outside of mortgages.” [NYFed]

Given some of the trends reported by the NY Federal Reserve’s study of educational loans, how do we make sense of an economic system in which wages and salaries are stagnant while it is taking those from lower and middle income backgrounds longer to repay student loans?  How do we sustain an economy when 29% of borrowers are paying off their loans, while 34% are making regular payments but the balance is increasing, and 20% have reported credit related problems, with another 6% delinquent and 11% in default?

These are not simply economic issues, they are also political as well. Is there the political will to make post secondary education more affordable for more people?  Are we headed toward the privatization of our public institutions of higher education and post secondary training, and is this trend combined with the rising level of student indebtedness creating cracks in our economic foundations?

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Filed under consumers, Economy, education, financial regulation, privatization

The Forced Choice Fallacy: Employment and Education

NV Employment by Industry 2015 The Background: There are 1,418,000 Nevada residents in the state’s civilian labor force, and 7% of them are looking for work. The state has 1,254,300 individuals in the non-farm wage and salary category, up 3.4% since last year.  28.11% are employed in a single sector – Leisure and Hospitality. 5.41% are employed in construction related jobs.

Category  % of employment  change YOY
Leisure Hospitality 28.11% +5.1%
Trade, Trans, Utility 18.97% +3.8%
Prof Bus. Services 12.68% +2.8%
Government 12.13% 0%
Education/Health 9.68% +5.2%
Construction 5.41% +8%
Financial Activities 4.59% +0.7%
Manufacturing 3.33% +0.7%
Other Services 2.89% +3.7%
Information 1.12% -5.4%
Mining & Logging 1.08% -5.6%

(Source: Department of Labor, BLS)

The first table shows the situation at the present. Projections from NDETR estimate what employment will look like as of 2022.

Category Number of openings from Growth to 2022
Construction 24,580
Food Preparation/Service 23,100
Office & Admin Support 16,990
Transportation 12,640
Sales Related Occupations 12,120
Personal Care & Service 11,700
Management 8,660
Healthcare Practitioners  & Assts. 7,780 (+3,680 Support positions)
Business Financial Occupations 6,850
Production Occupations 6,530

*There are projected to be another 6,500 jobs in the Installation, Maintenance, and Repair occupations category; and, about 4,840 jobs related to Education, Training, and Library personnel positions. Of the 24,580 jobs in “Construction and Extraction” only 80 openings are projected to be in the “extraction” category related to “growth.”  In short, the Nevada economy of 2022 is projected to be much like the Nevada economy of 2015.

False and Forced Choices

Now that we have some hard data, and some rationally projected data about employment opportunities in Nevada extending to 2022, it’s time to take a gander at some of the policy decisions which need to be made about how to create expansion in the economy.

Here’s a classic example of how NOT to approach the issue:

“The left claims they’re for American workers, and they’ve got lame ideas, things like minimum wage. We need to talk about how we get people skills and qualifications they need to get jobs that go beyond minimum wage.”

Scott Walker, yesterday  [h/t Angry Bear]

First, the most recent entry into the GOP Candidate Bus separates “skills and qualifications” from issues about raising the minimum wage.  This seems to be an artificial forced choice – either one supports the minimum wage increases or one supports more education and training to become qualified for better paying jobs.  (Not that Governor Walker’s slashing of the higher  education budget makes his position comprehensible?)   It is humanly possible to support both increasing the minimum wage AND support additional resources for our post secondary educational institutions.  And, there are some practical reasons this would make sense for Nevada.

Secondly, let’s look at the minimum wage issue as a practical matter in Nevada.   Retail sales worker positions account for 7,450 of the 12,120 projected job openings due to growth in the NDETR estimations for 2022. Food and beverage service positions account for 13,260 of the total 23,100 food preparation and serving jobs estimated to be available by 2022.  What would punch up the economy of Nevada faster? Leaving the minimum wage at current levels for the expected positions in retail and hospitality sectors of the Nevada economy? Or, increasing the minimum wage for those 20,710 jobs?

A person earning $7.25 per hour working 40 hours per week for 50 weeks per year would earn $14,500.  A person earning $10.00 per hour working a 40 hour work week for 50 weeks would earn $20,000 annually.  If you are keeping score with your calculator – that’s a difference of some $113,905,000 available to be pumped into the local economy from those 20,710 jobs.  Since we know from the research that lower income workers spend more on basic household expenses, that’s an additional $114 million for groceries and supermarkets, clothing stores, housing and furnishings, and for transportation.  One more time – The GDP formula:

Gross Domestic Product Formula Remember, that “C” in the formula is Consumer Spending.  And, I can keep hauling out this graphic until it hits home that increasing consumer spending is an essential feature of what drives growth.

Now, about those “qualifications and skills..”

Where does one get additional training for higher paying jobs?  If a person did not intend to stay in a minimally paying food service job, or a low paying construction job, or a low pay office job, then where are the training programs for advancement?

Let’s assume for the first argument that an individual wants to advance in the same field as his or her entry level position.  Nevada has both public and proprietary post secondary educational programs available. [NVps pdf] On the public side, a person wanting to move up in the office might want to consider an associate’s degree in bookkeeping? Management?  The community colleges offer these programs throughout the state.  And, yes, a person earning more than a minimum wage might be better able to take advantage of the post secondary training available from the Nevada system.

How about a move from one occupation category to another?  What if our hypothetical prospective employee wants to move from a retail job into the field of medical or health information technology? There’s a program for that at Southern Nevada College.

In short, the most efficient and cost effective way to provide career pathways for economic improvement is to invest in our community colleges and technical education institutions.  These are also the best ways to assist older workers who are moving from declining fields to those in which some growth is expected.

What did the President have to say about community colleges?

“As the largest part of the nation’s higher education system, community colleges enroll more than 6 million students and are growing rapidly. They feature affordable tuition, open admission policies, flexible course schedules, and convenient locations. Community Colleges are particularly important for students who are older, working, or need remedial classes. Community colleges work with businesses, industry and government to create tailored training programs to meet economic needs like nursing, health information technology, advanced manufacturing, and green jobs.”

So, yes, it makes sense to provide support for post secondary education in Nevada.  Those “qualifications and skills” have to come from somewhere, and what better way than to expand the capacity of our post secondary programs to enroll and instruct those who want to advance in a chosen field or become qualified for employment in a new one.

Meanwhile, we have to acknowledge that a preponderance of the growth in this state is still in occupational categories such as retail sales and food service which are relatively low paying jobs, and from which we could expect much more robust economic growth by requiring if not a living wage of $15.00 per hour then at least an increase to $10.00.

No forced or artificial false choices are required: We really can do two things at once.

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Filed under Economy, education, employment, Nevada economy, nevada education, Nevada politics

Our Thirty Five Years of Mythological Economics

trickle down economics

The only problem with this cartoon version of  Trickle Down economics is that the bird at the top should be getting larger as the years extend.  Likewise, the birds in the middle range should be getting more stressed as they attempt to stay on their middle income perches.  It’s a nice touch that the background is in blue, suggesting we’re about to be washed up in a tide which only serves those who are perched high enough to avoid drowning.

Meanwhile, the  best response to the sentence “A rising tide lifts all boats,” is “Where Are The Customers’ Yachts?”  For those who have not yet read this 75 year old classic – it’s still available, and still germane to American economics.  It was true then, and true now.  The problem is that the financial sector has hijacked significant portions of our economic thinking, in ways that have left us prone to being bedazzled by BS.   Thus, we’d prefer to rail against the Wall Street Casino rather than believe we’ve been following some very foolish advice offered, in turn, by some very foolish, and very self serving,  people. And, there are people challenging the BS rendition of American capitalism.

Those who missed Mrs. Clinton’s speech at the New School (NYC) on our economic challenges can view the C-SPAN broadcast here. (55 minutes)

The initial response from journalists was “Hillary’s bashing Wall Street.” [Reuters] This makes for a convenient headline – Beltway Shorthand for her support for regulation of Wall Street investment bankers’ transactions – however, it doesn’t come close to adequately summarizing what both candidates Clinton and Sanders have been saying about financialism in American economics. The Beltway Media is missing the point, perhaps because it doesn’t fit neatly into a template predetermined by editorial policy, or a simplistic code for easy lead paragraphs.

The point is that we have had 35 years of what President George H.W. Bush called Voodoo Economics (although bless his heart he promoted it like any good Republican), and it doesn’t work in the real world. Why? Because the mythology violates the simple principles of American capitalism:

”So here’s an idea worth spreading. In a capitalist economy, the true job creators are consumers, the middle class. And taxing the rich to make investments that grow the middle class is the single smartest thing we can do for the middle class, the poor and the rich.” [LAT]

With this basis in mind, let’s tackle some of the mythology and deal with a bit more economic reality.  We might as well start with the “job creators” sound bite.

#Job transference is not necessarily job creation.  Yes, Home Depot has about 340,000 employees. [USAT]  However, in order to achieve those numbers, how many local hardware stores went out of business, or had to shave employment numbers, because they were hard pressed to compete with the Big Box Stores?  Of the 340,000 Home Depot employees only 21,000 were salaried, the rest were working on a temporary basis or for hourly wages.  The average hourly wages for employees in the retail sector are $14.36 per hour. [Monster] Further, we know that about 1/3rd of all retail sector employees are working part time. If we take a closer look we find that the median wages for retail employees (full time) in building materials and garden equipment were about $12.21 per hour. [BLS]

So, we have to ask ourselves, if a Big Box Store moves in an puts a local supermarket or hardware store out of business, does that translate into “job creation” or simply the transference of personnel from one job into another – possibly lower paying – job?

#Low wages make stocks attractive and the overall economy weaker.    The largest fast food chain in the U.S. has approximately 440,000 employees. [USAT]  And, what do food service preparation employees earn?  About $19,300 per year, or approximately $9.28 per hour. [BLS]  The average weekly hours for all employees are currently estimated as 25.8 per week, and for nonsupervisory employees at about 24.6 hours per week. [BLS] Significantly, before we fall into the hype-vat argument about the “kid’s first job,” only about 30% of fast food workers are teenagers, another 30% are between the ages of 20 and 24, and the remaining 40% are 25 years of age and older. [CEPR]

From the shareholder perspective it makes perfect sense to keep wages low, employee turnover high, and continue to appeal to those who have a “quarterly value” vision of America.   From the perspective of other business owners in the area, those low wages translate to minimal disposable income, which means fewer customers for their products and services.  In short, the yacht at the top is sailing along while the little boats bounce around the rocks.

#Wealth created from indebtedness doesn’t trickle anywhere.  Median household earnings are slowly, very slowly, emerging from the last Recession.

real median household income If we find more jobs transferred from, say, smaller local firms to larger national ones, or more jobs are being created in sectors like food and beverage service with notoriously low wages, then we might expect to find household incurring debts to maintain a middle income life style.

Consumer indebtedness, which was down to 4.88% of disposable income in the fourth quarter of 2012, is now back up to 5.30%. [Fed]  There are a couple of ways to see this, first as an indication that people are feeling better about assuming credit card or personal debt because their incomes are more stable, or secondly that while they’re feeling a bit better, the credit card has become a way to keep afloat.  However, those debts are the basis for altogether too much of what constitutes Wall Street wealth accumulation.

Household debt Whatever amounts of these debts are securitized means that they’ve gone into the Wall Street Casino to be used as the basis for hybrid financial products.  So, what’s been happening to the securitization of auto loans?  It’s “coming back strong” but not at “pre-crisis levels.” Translation: It’s not a bubble. [FRB ATL]  It’s lovely to know the Federal Reserve doesn’t consider the securitization of auto loans at the Bubble Level, but it’s also a bit worrisome to note that what is gained from that securitization isn’t trickling down anywhere near the automobile product consumer.

Nor is there much happy news about securitization and the student loan business.  ZeroHedge offers this gloomy prospect:

“So just as we have been warning about for sometime now: an underestimation of the impact of deferral and forbearance and weakness in the job market is likely to trigger defaults on billions in student loans and because these loans comprise the collateral pool backing ABS sold to investors, the ripple effect is magnified and we wonder if the July 2007 moment for the student loan-backed ABS market may come sooner rather than later.”

The ‘wealth’ produced on Wall Street is based on the loan the students took out to pay for educational expenses, securitized, tranched, sliced, diced, and repackaged for the ‘benefit’ of the investors – those who may very well get burned in this round of Securitization Bingo.

Evidently lost on the Sultans of Securitization is the simple fact that an asset based security requires someone to be able to afford the purchase of educational services or automobiles, or the other stuff on the credit card – the original assets.

It’s one thing to announce that “middle class incomes” are back where they were in 1995 – and another thing entirely to notice that the costs of college tuition are up 61% since ‘95; that home prices are up 13%; that the price of gasoline is up 94%; and that Big Mac is up 28%. [moneyCNN] These numbers aren’t the sort to make anyone comfortable who’s taking out the student loan or buying the house. Eventually, even Wall Street may have to take notice of the fact that no matter how much revenue it can generate in terms of ABS and the hybrids related thereto, if American consumers can’t generate sales – and jobs – then investors are caught trying to ride the bubbles.  Bubbles always pop, that’s why they’re bubbles.

The ‘wealth’ from the sales, and hedges, and bets, on asset based securities, again, trickles down nowhere near the average home owner or car buyer.  However, no one is arguing that ABSs don’t have value.  They are a way to spread the risk around, and that’s positive.  They are negative when we see them mask intrinsic cracks in American capitalism, and negative when we see that the revenue generated never quite manages to trickle back down to the local economies perhaps in the form  of better roads, better schools, better parks, better libraries, and better public services like broadband.

Candidates Clinton and Sanders aren’t “bashing Wall Street,” they are simply trying to point out that the lurch from one bubble to the next isn’t a productive way to run an economy, and lunging from one volatile market to the next isn’t the way to insure that the capacity of the average consumer to purchase the assets on which the securities are based remains steady and profitable for everyone.  If Wall Street can’t divest itself of its 35 Year Investment in imaginary economics, and can’t restrain itself from short term financialist thinking, then someone has to be the adult in the room.  The adult is called reasonable regulation, and that’s all they are asking.

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It’s All Greek

Greece Parthenon When Greece joined the EU back in 2001 it was economically speaking the weak sister of the regional organization, and life didn’t get better for the Greeks after the Recession of 2007-08 – it got significantly worse.

Background

“Greece has a capitalist economy with a public sector accounting for about 40% of GDP and with per capita GDP about two-thirds that of the leading euro-zone economies. Tourism provides 18% of GDP. Immigrants make up nearly one-fifth of the work force, mainly in agricultural and unskilled jobs. Greece is a major beneficiary of EU aid, equal to about 3.3% of annual GDP. The Greek economy averaged growth of about 4% per year between 2003 and 2007, but the economy went into recession in 2009 as a result of the world financial crisis, tightening credit conditions, and Athens’ failure to address a growing budget deficit” [theo]

Here we go again – back to the perpetual phrase in DB’s assessment of things financial — “one man’s debt is another man’s asset.”  And, Greece has plenty of debt.  By way of contrast, the United States’ public sector accounts for only about 23.1% of our  GDP.  [World Bank] Several factors made the Greek level of indebtedness problematic:

  • Greek levels of public employment appear to have been artificially high.  In a stronger economy this might not have been a serious difficulty, for example the UK’s public sector is about 42.1% of its GDP, but Greece did not have a “strong economy.”
  • The extent of Greek indebtedness was masked by dealing with Goldman Sachs, which created a “financial instrument” allowing the Greek government to push its health care costs far into the distant future, roughly analogous to a family taking out a second mortgage to pay off credit card debt.  [NYT]
  • Previous private investment assistance included disguising loans as “currency trades” which further obfuscated actual levels of indebtedness. [NYT]
  • The solution to the financial anxiety of 2010 was alleviated by having the European Central Bank, IMF, et. al. consolidate Greek debt. This, it appears, got the private investment firms off the hook but shifted the problem to the international banking institutions.

Fiscal Hyperthermia

What gives Wall Street the jitters is exposure, otherwise known as risk, especially when that risk threatens to go into default.  Investors, private and sovereign, have gone to elaborate lengths to reduce their risk (exposure) to defaults.  Ever more esoteric financial instruments (paper products) have been created – and continue to be created – to spread the risk as far and wide as possible.  When the risk is widespread so is the “exposure.”

(1) While interest rates are low investors can borrow to invest in these risk-spreading products, betting that their investment returns will cover their costs. (2)  Or, while interest rates are low the higher yielding Greek paper looks very attractive for short term investors.  When terms like “default” get tossed around the  bankers get anxious, and when they get anxious we’re told they are fearful of global “exposure” to Greek default.  Translated down to an oversimplification: Bankers are afraid that they won’t get the return on the investments they made in Greek paper. Lower returns = lower revenue; lower revenues = lower profits.

Risky Behavior

There is no such thing as zero risk. That’s why bonds pay interest.  The higher the yield, the greater the risk – assuming that higher rates of interest are the price of getting someone’s investment, anyone or any thing’s investment.  Until and unless bankers find it more profitable to be honest with themselves and others about the levels of risk, we’ll keep seeing these manufactured crises in financial institutions.  However, as the creative products for hedging their bets become ever more elaborate and opaque, the banks are essentially papering over their “exposure.

Meanwhile, the Greeks have asked for a last minute “2 year” agreement to restructure debt, extend terms, and make policy changes.

“There are big questions over whether the eurozone would consider Greece’s request. While European officials have said that a new aid program would be possible, it would require Mr. Tsipras to accept the policy overhauls and budget cuts he has so far rejected. Many officials also don’t trust Mr. Tsipras and his government to implement these measures.” [NakedCap]

And all of this to avoid “haircuts.”

Buzz Cuts

“A haircut, in the financial industry, is a percentage discount that’s applied informally to the market value of a stock or the face value of a bond in an attempt to account for the risk of loss that the investment poses.” [FinDict]

If the players in the Greek debt game willing to take a “hair cut,” we could get these headlines into the archives in short order.  Obviously, they are not.

The problem may be that the Greek debt is simply not recoverable in the foreseeable future?  Now, we circle back to “exposure.”

“The merest hint of bank collapses sends fear through financial markets. Then there is the prospect of contagion, that other European nations could follow Greece and fall foul of repayment commitments.” [abcnetAus]

In a world connected by hazy, mistrusting, and expensive financial deals, the fear of contagion is very real for the investment bankers.  Who’s next? The Portuguese? The Spanish? The Italians?

The impasse over Athens is taking on the appearance of an argument over how everyone can win and nobody loses.  The Greeks, billionaires included, need to pay their taxes, and probably more taxes than they’ve been wont to pay previously.  Some government services may need to be scaled back, but unrestrained austerity would only serve to further reduce their GNP. For their part, the bankers may need a quick to the barbershop.

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Filed under Economy, financial regulation

Cost Benefit Analysis Scramble

Cost Benefit Analysis

One of the dark clouds on the week that was in the U.S. Supreme Court was the decision in Michigan v. the Environmental Protection Agency, one portion of which reads:

“Our reasoning so far establishes that it was unreasonable for EPA to read §7412(n)(1)(A) to mean that cost is irrelevant to the initial decision to regulate power plants. The Agency must consider cost—including, most importantly, cost of compliance—before deciding whether regulation is appropriate and necessary,…”

Important Distinctions

First, let’s differentiate between a CBA (a cost benefit analysis) and a Cost Effectiveness Analysis (CEA).   There are two important functions of a CBA: (1) To determine if an investment or a decision is justifiable or feasible. (2) To provide a way to compare and contrast alternative projects or proposals. Additionally, “In CBA, benefits and costs are expressed in monetary terms, and are adjusted for the time value of money, so that all flows of benefits and flows of project costs over time (which tend to occur at different points in time) are expressed on a common basis in terms of their “net present value.”

The most common use of the CEA is found in the health sector.  In a CEA  the outcome is expressed as a ratio.  The denominator is the quantified gain, while the numerator is the cost associated with the gains.  For example, we know that sterilized surgical theaters yield quantifiable positive results for patients, therefore the costs associated with sterilization far outweigh the costs of sanitizing the facilities.

Another analysis which gets folded into the mixture is the analysis of the Social Return on Investment, or abbreviated SROI.  There are four elements considered: Inputs (investments), Outputs (products), Outcomes (benefits), and Impact (difference between the policy or practice change and what would have happened if nothing had been done.) [Investopedia]

There are other formats for analysis:  Cost/utility analysis; Risk/benefit analysis; and the Economic impact/analysis.  The definitions and descriptions of these forms are readily available from online sources.

The problem is that the CBA isn’t a static form of analysis.  Just as each problem in both the public and private sector has unique factors, the CBA may take on some elements from other formats – the CEA, the SROI, and the others.  Often the term “CBA” is used with great precision, i.e. it returns a study yielding a net present value.  There are other examples illustrating how the term CBA in common parlance and news reporting is an admixture of individual studies speaking to the CEA ratios, or the SROI elements.

As in so many other unfortunate instances, the cost/benefit analysis has come to mean what the partisan advocates want it to mean. One of the pitfalls involved in being a good consumer of news and political rhetoric is that the listener is required to sort out precisely what analysis is being described or advocated. The most common source of confusion comes when a CBA is conflated with an Economic Impact Study:

“One industry’s outputs are inputs to other industries, and vice versa. Input-output analysis measures all of the linkages and flows within the matrix (the economy). Based on these linkages and flows, the cumulative effect of any given stimulus (or change) can be derived. This is how multipliers are calculated.” [Decision Analyst Ser]

A public sector example might be that of a decision to build a public broadband access system.  This would trigger spending for infrastructure necessities for the system, which in turn increases employee and contractor income, causing (in sequence) more disposable spending for the local (or national) economy.  If we study the “linkages and flows” as the the project impacts the community we can calculate the cumulative “economic impact.”

So, when politicians speak to the necessity of doing cost/benefit analyses on government regulation it’s important to pin them down on precisely what form of analysis they are advocating, and how the form of the analysis can influence the reported results.

Good news Bad news

The bad news from the Michigan v. EPA  decision is that the EPA is required to perform a cost benefit analysis on emission regulations promoted by the EPA.  The slightly better news is that the decision doesn’t do what corporate radicals want – dismantle the EPA. Nor does the decision declare that the EPA may not issue rules on carbon or other pollutant emissions, granted that it does constitute another shackle on the Agency’s attempt to clear the air.

One way to support the efforts of the EPA to enforce the provisions of the Clean Air and Clean Water Acts might be be advocate for more, not less, study – studies which incorporate the CEA elements (health benefits included) and SROI quadrants which incorporate social benefits.

The argument that government regulations should hinge upon the notion that private sector operations should agree that the regulations are “not too expensive,” is a narrow, corporatist, perspective, and one which would all but insure no regulation of exploiters and polluters.  A better approach is to take into consideration the cumulative economic impact of regulations and the social returns we can make on our national investments.

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Filed under ecology, Economy