Considering the rapid approach of this year's World Cup in South Africa, Blawgconomics thought the timing was right for a posting on some of the notable economic and legal issues in global football today. Loyal readers will recall a few postings in the past on footie-related topics from fan ownership stakes in their clubs to how tax regimes could impact the competitive balance of the sport in Europe. We have even managed to get a posting translated into German. However, with today's post, we are taking a more Snippets-esque approach, allowing for coverage of a few topics of interest...
UEFA, the governing body of the sport in Europe, announced a new set of austerity measures aimed at reducing debt and evening the playing field between small and large clubs. The restrictions on using debt to cover losses and the severe penalties for breaking the rules may indeed mean that the heady days of $130 million transfers will be short-lived.
However there is real concern among some that, rather than increasing fairness, the measures could actually increase the gulf between haves and have-nots as the big clubs with big revenues may continue to dominate, albeit in a slightly reconfigured system. It is probably going to be a case of not knowing the outcome until it actually happens. However, it is becoming increasingly clear that the debt situation in football is untenable. Fair or not, some steps toward financial health are necessary.
One such team in debt, Manchester United, is likely to remain in the hands of American Malcolm Glazer for the forseeable future. Apparently, the self-named and strongly-backed fan group The Red Knights found Glazer's asking price of $1.5 billion a little too rich for their blood. This is probably sensible as it was becoming increasingly clear that the consortium was going to have to take on significant debts to meet the asking price, which would have ironically put them in the same situation they disparage Glazer for.
Less than a week after leading Italian club Inter Milan to a Champions League Final victory, coach Jose Mourinho proved that employment contracts are not really agreements, but more starting points for negotiations. In engineering his move to Real Madrid, themselves hungry for Champions League glory and vindication of their historically expensive team, the 'Special One' managed to get the Spanish club to foot a 14 million euro buyout clause payment. Though not disclosed, the payment was presumably made to keep all of the parties out of court on a breach claim, and should ironically leave Inter with more free time and funds to pursue Mourinho's Madrid predecessor, Manuel Pelligrini.
In an interesting, though likely anticipated, development, The International Authentication Association has claimed that counterfeiters in South Africa are costing official suppliers millions in knock-off sales. Though Blawgconomics supports copyrights and legal regimes that reward the innovation of developers and fruits of production, it seems unlikely that suppliers are suffering as greatly as the IAA claims. It is probably more likely that people purchasing the counterfeit goods would not have bought the official gear due to pricing, and therefore the sales of the fakes are not predatory, but simply supplementary, to official sales.
We at Blawgconomics would like to believe that we are not so feeble-minded as to be impacted by the Jedi-esque mind tricks of contemporary marketing campaigns. However, it would be foolish to deny the home run Nike has hit with its 'Write the Future' campaign. It is a must-see for football fans, marketing students (and most marketing executives for that matter), aspiring filmakers and anyone else with a pulse.
Finally, it is not too often that indecent exposure finds its way onto this page. However, if that is the only way to get this story into this post, so be it...
5.30.2010
5.27.2010
Economics for Lawyers (aka Dummies): M3 Money Supply
Pop the search term M3 into the Google toolbar and you are more likely to have images of the latest BMW returned than an explanation of economic theory. This is partly because people like high-performance sedans more than economics. Another reason is that this particular measure of the money supply has been out of use in the US since the mid-2000's. However, some interesting analysis out of the UK based on underlying Fed data is pointing to a decrease in the M3, a possible signal of deflation and therefore possible economic problems in the future.
In technical terms, this is because a decrease in the M3 indicates that there is less money in the economy. Less money chasing the same amount of goods increases the value of that currency (deflation) which is often a signal of a shrinking economy as investors and corporations will tend to hoard money when its value is increasing.
M3 is the broadest measure economists use to define the money supply in an economy. Although what, exactly, is counted in the category varies from country to country, it typically includes everything from currency to savings accounts and institutional money market funds. Although economists disagree over the usefulness of the measure due to its tendency to fluctuate significantly in the short-term, long-term trends can point to wider trends in an economy.
In the case of the US post-financial crisis and as the government attempts to increase jobs, home sales and GDP, a shrinking M3 should be viewed as a negative sign as it indicates that less money is available in the economy for investment. Though there could be many explanations for this, the most plausible one at this time is the proliferation of regulations on banks which has caused them to both increase reserves and decrease lending. Though this was to some extent necessary to stem the tide of the crisis and end the circle of bad loans, it has lead to further problems.
The greatest among these has been the government's response. If banks aren't doing the job of banks in an economy where companies are holding back on investment and hiring, and the government wants to increase economic activity, it has the option to step in with stimulus. The US government has done this in a historic way over the past year and a half under both the current and the former administration. Economists can and do argue all day, every day about what the impact of these programs has and will be.
However, the fact remains that it has meant both the printing of money and uncertainty about what this will lead to. Indeed, the situation as it stands is remarkably similar to what occured in Japan in the 1990's. For readers who aren't students of economic history, that is not a positive statement. Some believe that the only reason more cracks have not shown in the armor of the US is the fact that our currency, serving as the global reserve and currency of global trade, has been artificially floated.
If the M3 is indeed decreasing, and the US government continues to utilize Keynesian policies in an attempt to stabilize the economy, it is possible that it could lead to more problems in the long-run than it solves in the short. Combined with other issues, such as slowing global growth, present and future pension issues, and increasing financial industry regulation, it is not unrealistic to think that the long-term growth prospects of the country are as dire as they have been in generations.
In technical terms, this is because a decrease in the M3 indicates that there is less money in the economy. Less money chasing the same amount of goods increases the value of that currency (deflation) which is often a signal of a shrinking economy as investors and corporations will tend to hoard money when its value is increasing.
M3 is the broadest measure economists use to define the money supply in an economy. Although what, exactly, is counted in the category varies from country to country, it typically includes everything from currency to savings accounts and institutional money market funds. Although economists disagree over the usefulness of the measure due to its tendency to fluctuate significantly in the short-term, long-term trends can point to wider trends in an economy.
In the case of the US post-financial crisis and as the government attempts to increase jobs, home sales and GDP, a shrinking M3 should be viewed as a negative sign as it indicates that less money is available in the economy for investment. Though there could be many explanations for this, the most plausible one at this time is the proliferation of regulations on banks which has caused them to both increase reserves and decrease lending. Though this was to some extent necessary to stem the tide of the crisis and end the circle of bad loans, it has lead to further problems.
The greatest among these has been the government's response. If banks aren't doing the job of banks in an economy where companies are holding back on investment and hiring, and the government wants to increase economic activity, it has the option to step in with stimulus. The US government has done this in a historic way over the past year and a half under both the current and the former administration. Economists can and do argue all day, every day about what the impact of these programs has and will be.
However, the fact remains that it has meant both the printing of money and uncertainty about what this will lead to. Indeed, the situation as it stands is remarkably similar to what occured in Japan in the 1990's. For readers who aren't students of economic history, that is not a positive statement. Some believe that the only reason more cracks have not shown in the armor of the US is the fact that our currency, serving as the global reserve and currency of global trade, has been artificially floated.
If the M3 is indeed decreasing, and the US government continues to utilize Keynesian policies in an attempt to stabilize the economy, it is possible that it could lead to more problems in the long-run than it solves in the short. Combined with other issues, such as slowing global growth, present and future pension issues, and increasing financial industry regulation, it is not unrealistic to think that the long-term growth prospects of the country are as dire as they have been in generations.
5.25.2010
Snippets...
Welcome to Snippets, Blawgconomics' semi-regular attempt at covering a lot of topics in a little time. Some would call this lazy; economists prefer the term 'efficient.'
- In a widely anticipated ruling, the Supreme Court held yesterday that each NFL team is a separate entity for intellectual property purposes. In other words, the league does not have antitrust protection the way that Major League Baseball has. The decision can be found here.
- Due to stimulus dollars, unemployment benefits and retirement income, the proportion of income Americans receive from private business shrunk to its lowest ever level during the first quarter.
- North Korea displayed what is merely the latest example of its penchant for irony as it cut off all ties with its southern neighbor.
- Reuters has some interesting thoughts on the worst-case scenario for the US if the Greek debt crisis were to have a lasting trickle-down effect on trade and/or consumer spending.
- Meanwhile, Reuters plays its own game of point/counterpoint with Treasury Secretary Geitner's claims that America is well equipped to handle the worst Europe can throw at it.
- In perhaps related stories, gold has been spiking and oil has been falling recently in global trading.
- Though few would argue that BP has done a great job of dealing with its issues in the Gulf, some in the legal and business communities might take exception to the idea that jail should be the ultimate destination for company executives. Then again...
- Finally, I am not sure of any relation or lack thereof, but loyal readers can be certain to see a mention of it anytime there is a Sturtevant in the White House...
- In a widely anticipated ruling, the Supreme Court held yesterday that each NFL team is a separate entity for intellectual property purposes. In other words, the league does not have antitrust protection the way that Major League Baseball has. The decision can be found here.
- Due to stimulus dollars, unemployment benefits and retirement income, the proportion of income Americans receive from private business shrunk to its lowest ever level during the first quarter.
- North Korea displayed what is merely the latest example of its penchant for irony as it cut off all ties with its southern neighbor.
- Reuters has some interesting thoughts on the worst-case scenario for the US if the Greek debt crisis were to have a lasting trickle-down effect on trade and/or consumer spending.
- Meanwhile, Reuters plays its own game of point/counterpoint with Treasury Secretary Geitner's claims that America is well equipped to handle the worst Europe can throw at it.
- In perhaps related stories, gold has been spiking and oil has been falling recently in global trading.
- Though few would argue that BP has done a great job of dealing with its issues in the Gulf, some in the legal and business communities might take exception to the idea that jail should be the ultimate destination for company executives. Then again...
- Finally, I am not sure of any relation or lack thereof, but loyal readers can be certain to see a mention of it anytime there is a Sturtevant in the White House...
5.21.2010
Welcome to America's Pension Nightmare
Actuaries all fairly anonymous folks most of the time. But they are awfully good with numbers. And many of them, using simple data like population growth, life expectancies and guaranteed payout projections, believe that the nation's pension system is unsustainable. While this may, in a flash of inspiration and/or dumb luck be remedied by someone on Capitol Hill before the prophecy comes to pass, it is far more likely that the pension system of the nation is on an unsustainable path to failure. A great contemporary example of the pain that the nation at-large is destined for is provided by Yonkers, New York, specifically its police department.
Blawgconomics would be the first to acknowledge the difficulties and dangers of the law enforcement profession. The last thing we would ever want to suggest is that some of our greatest public servants, people who put their lives on the line, should not get their fair shake. However, that does not mean that the politicians who have created an unsustainable system which appears to be set up to ensure that it is gamed should be let off the hook. By definition, they are answerable to us all.
In Yonkers, in what is, granted, a fairly egregious example, one 44 year old officer is fully retired and makes over $101,000 per year. For life. He was able to do so by inflating his average earnings with overtime hours as a member of electric company road crews, something that the state courts have held is illegal, but which nonetheless appears to be encouraged by individual municipalities. In all likelihood this officer will receive pension benefits for longer than the 20 years he was on the force. With good health, much longer. And with laws that protect beneficiaries from benefit reductions, and therefore foreclose future corrective remedies, this unsustainable path could well lead to bankrutpcy for Yonkers and other localities in the same position. There are other problems. For example, in Yonkers, the annual payments into pension funds which high payouts have necessitated have reduced budgets for services, including police and fire, which local governments can no longer afford.
The biggest surprise here is not that the officer did anything wrong, however. On the contrary, he fulfilled his end of the bargain that was made with the city twenty years ago. Granted, the police department shares some blame for arguably playing outside the rules as far as the overtime details, but the politicians are much more at fault for both putting the system in place and allowing subsequent developments.
This scenario can easily be extrapolated out to the federal government level. Granted, it is unlikely that anyone in the Department of Transportation, for example, is allowed to work road crews to pad their stats. However, many of the normal pension liabilities that are being created today will need to be paid tomorrow. And, they will need to be paid to a growing retired population by a shrinking workforce. This is true of both the pension liabilities of federal workers themselves and the state pensions which will almost certainly need to be bailed out by the federal government.
Individual states, and more broadly the nation, are currently resting below the guillotine of future pension liabilities. Unfortunately, many of the politicians currently in power will be gone and forgotten before the blade falls. Fortunately, there may still be time to increase funding and stop the cycle of promising unsustainable levels of payouts. If it takes a few more Yonkers for people to see this, it is unfortunate. However the lesson needs to be learned before its too late.
Blawgconomics would be the first to acknowledge the difficulties and dangers of the law enforcement profession. The last thing we would ever want to suggest is that some of our greatest public servants, people who put their lives on the line, should not get their fair shake. However, that does not mean that the politicians who have created an unsustainable system which appears to be set up to ensure that it is gamed should be let off the hook. By definition, they are answerable to us all.
In Yonkers, in what is, granted, a fairly egregious example, one 44 year old officer is fully retired and makes over $101,000 per year. For life. He was able to do so by inflating his average earnings with overtime hours as a member of electric company road crews, something that the state courts have held is illegal, but which nonetheless appears to be encouraged by individual municipalities. In all likelihood this officer will receive pension benefits for longer than the 20 years he was on the force. With good health, much longer. And with laws that protect beneficiaries from benefit reductions, and therefore foreclose future corrective remedies, this unsustainable path could well lead to bankrutpcy for Yonkers and other localities in the same position. There are other problems. For example, in Yonkers, the annual payments into pension funds which high payouts have necessitated have reduced budgets for services, including police and fire, which local governments can no longer afford.
The biggest surprise here is not that the officer did anything wrong, however. On the contrary, he fulfilled his end of the bargain that was made with the city twenty years ago. Granted, the police department shares some blame for arguably playing outside the rules as far as the overtime details, but the politicians are much more at fault for both putting the system in place and allowing subsequent developments.
This scenario can easily be extrapolated out to the federal government level. Granted, it is unlikely that anyone in the Department of Transportation, for example, is allowed to work road crews to pad their stats. However, many of the normal pension liabilities that are being created today will need to be paid tomorrow. And, they will need to be paid to a growing retired population by a shrinking workforce. This is true of both the pension liabilities of federal workers themselves and the state pensions which will almost certainly need to be bailed out by the federal government.
Individual states, and more broadly the nation, are currently resting below the guillotine of future pension liabilities. Unfortunately, many of the politicians currently in power will be gone and forgotten before the blade falls. Fortunately, there may still be time to increase funding and stop the cycle of promising unsustainable levels of payouts. If it takes a few more Yonkers for people to see this, it is unfortunate. However the lesson needs to be learned before its too late.
5.20.2010
Ease of Heists Suggests Failed Cost/Benefit Analyses
Perhaps the biggest surprise arising from last night's high profile art heist in Paris isn't the theft itself, but the facts that this happens so often, that it happens so often in modern times, and that it is apparently easier to break into museums than most apartment buildings. In this latest example, a real-life Thomas Crown might have been embarrassed by the lack of elegance required to pull off the job.
It stands to reason that museums utilize sophisticated cost/benefit analysis techniques when determining what level of security is necessary, particularly after-hours. One would imagine the calculations including items like insurance payments, alarm system costs and pay for guards on one side, and such factors as odds of recovery and insurance payoff on the other.
Then again, maybe museums don't hire economists. In addition to losing out on what are often significant pieces in their collections after heists, there are other lingering costs that museums don't seem to factor in, such as the inevitable hit to their reputation and the possible lack of future contributions from those who fear for their property. If such things are factored in, it is shocking to think that many museums with billions of dollars worth of art and artifacts still have less security than the average suburban home.
Most museums receive donations, charge an entrance fee and/or are privately funded. Some even receive public funds. Though there are certainly day to day administrative costs and utility bills to pay, it seems that many institutions need to rethink their costs and put more money into security. Making off with half a billion Euros worth of goods shouldn't be as easy as climbing a fence and breaking a window. Every time this happens, it is merely another opportunity lost for those who could otherwise be protecting the great collections of the world.
It stands to reason that museums utilize sophisticated cost/benefit analysis techniques when determining what level of security is necessary, particularly after-hours. One would imagine the calculations including items like insurance payments, alarm system costs and pay for guards on one side, and such factors as odds of recovery and insurance payoff on the other.
Then again, maybe museums don't hire economists. In addition to losing out on what are often significant pieces in their collections after heists, there are other lingering costs that museums don't seem to factor in, such as the inevitable hit to their reputation and the possible lack of future contributions from those who fear for their property. If such things are factored in, it is shocking to think that many museums with billions of dollars worth of art and artifacts still have less security than the average suburban home.
Most museums receive donations, charge an entrance fee and/or are privately funded. Some even receive public funds. Though there are certainly day to day administrative costs and utility bills to pay, it seems that many institutions need to rethink their costs and put more money into security. Making off with half a billion Euros worth of goods shouldn't be as easy as climbing a fence and breaking a window. Every time this happens, it is merely another opportunity lost for those who could otherwise be protecting the great collections of the world.
5.19.2010
J.P. Morgan: England to lift the Cup
J.P. Morgan analysts have used statistical modeling to predict that England will win the World Cup for the first time since 1966 in South Africa this summer. Unsurprisingly, the team arriving at this conclusion is based in London.
Though the analyst team's location is known, it remains unclear whether it spent any time in the past making predictions about less useful things such as the crash of the CDO market or the decline of the Greek economy. Without knowing such details about possible past predictions, Blawgconomics will withhold its endorsement of the team's analysis...for now.
However, if it were discovered that the Londoners were recommending, say, shorting the Euro right now, we just might be inclined to open a Ladbrokes account and put a few quid on the Three Lions.
Though the analyst team's location is known, it remains unclear whether it spent any time in the past making predictions about less useful things such as the crash of the CDO market or the decline of the Greek economy. Without knowing such details about possible past predictions, Blawgconomics will withhold its endorsement of the team's analysis...for now.
However, if it were discovered that the Londoners were recommending, say, shorting the Euro right now, we just might be inclined to open a Ladbrokes account and put a few quid on the Three Lions.
New Regs In Germany Show the Downside of Flying Solo
Germany's 'Iron' Chancellor Angela Merkel believes that further regulations on short-selling are required in the EU to alleviate downward pressures on the Euro. The currency has been falling against benchmarks as fears of credit crisis contagion have gripped the continent.
Short-selling is the practice of borrowing securities from a broker and then selling them at today's price in the hope that the price will be lower in the future. This decline would allow the investor to buy the securities at a lower price than they were sold, allowing him to return the borrowed shares to the broker, and profiting on the difference. This is a widely accepted practice in the market, and many investors employ this strategy as a hedge or even as a standalone.
However, some investors 'nakedly' sell securities, or sell them without ever actually borrowing them. This allows for almost unlimited selling and therefore risk. This strategy can lead to large profits, but also carries the risk of huge losses if the security does not decline in price. The lack of actual borrowing before the security is sold can sometimes lead to dramatic swings if a particularly large investor is behind the selling or if a number of different investors are employing the strategy simultaneously.
This naked short-selling and the resulting systemic pressure it leads to is the practice and scenario which Merkel has focused on as she is concerned that speculators will be able to 'gang up' on the Euro via sovereign government debt, selling instruments naked, and creating artificial downward pressure on the currency. As the nation others often look to for help in an economic or currency crisis (see Greece in the past few months for example) Germany has an interest in ensuring that the Euro remains strong and that the credit crisis does not spread. Political pressures against further intervention have been mounting in the Republic as well.
Merkel is not too far off base in her analysis or conclusions as recent history has seen the result she is seeking to avoid. For example, though it is a bit different than what we are talking about here, George Soros managed to sell the pound down to the point that the England had to withdraw from the European Exchange Rate Mechanism, gaining him the (in?)famous moniker of The Man Who Broke the Bank of England. In that scenario, the short sales were actually backed by borrowed pounds. In the scenario Merkel is hoping to avoid, it is possible that if a large enough speculator (or group of speculators) with a big enough appetite for risk employed the same strategy but sold the securities naked, the impact could be amplified dramatically.
Merkel has already curtailed the practice in Germany, now she wants to do the same in the whole EU. However, it seems unlikely, based on very public comments, that others will follow her lead. Therefore, all she has done is reduce the trading that can be done in Germany without solving the root problem, meaning that German brokers will lose out on profits while the risk to the EU of naked short-selling remains. Talk about a fang 22...
UPDATE: Reuters' BreakingViews has some similar views on this topic as well as some further clarification on the exact instruments that the ban will extend to, including shares in large German financials.
Short-selling is the practice of borrowing securities from a broker and then selling them at today's price in the hope that the price will be lower in the future. This decline would allow the investor to buy the securities at a lower price than they were sold, allowing him to return the borrowed shares to the broker, and profiting on the difference. This is a widely accepted practice in the market, and many investors employ this strategy as a hedge or even as a standalone.
However, some investors 'nakedly' sell securities, or sell them without ever actually borrowing them. This allows for almost unlimited selling and therefore risk. This strategy can lead to large profits, but also carries the risk of huge losses if the security does not decline in price. The lack of actual borrowing before the security is sold can sometimes lead to dramatic swings if a particularly large investor is behind the selling or if a number of different investors are employing the strategy simultaneously.
This naked short-selling and the resulting systemic pressure it leads to is the practice and scenario which Merkel has focused on as she is concerned that speculators will be able to 'gang up' on the Euro via sovereign government debt, selling instruments naked, and creating artificial downward pressure on the currency. As the nation others often look to for help in an economic or currency crisis (see Greece in the past few months for example) Germany has an interest in ensuring that the Euro remains strong and that the credit crisis does not spread. Political pressures against further intervention have been mounting in the Republic as well.
Merkel is not too far off base in her analysis or conclusions as recent history has seen the result she is seeking to avoid. For example, though it is a bit different than what we are talking about here, George Soros managed to sell the pound down to the point that the England had to withdraw from the European Exchange Rate Mechanism, gaining him the (in?)famous moniker of The Man Who Broke the Bank of England. In that scenario, the short sales were actually backed by borrowed pounds. In the scenario Merkel is hoping to avoid, it is possible that if a large enough speculator (or group of speculators) with a big enough appetite for risk employed the same strategy but sold the securities naked, the impact could be amplified dramatically.
Merkel has already curtailed the practice in Germany, now she wants to do the same in the whole EU. However, it seems unlikely, based on very public comments, that others will follow her lead. Therefore, all she has done is reduce the trading that can be done in Germany without solving the root problem, meaning that German brokers will lose out on profits while the risk to the EU of naked short-selling remains. Talk about a fang 22...
UPDATE: Reuters' BreakingViews has some similar views on this topic as well as some further clarification on the exact instruments that the ban will extend to, including shares in large German financials.
5.18.2010
SEC Proposals Will Likely Alleviate Future Flash Crashes, But Come With a Cost
In the aftermath of the so-called 'Flash Crash' of May 6th, the SEC has announced that it will propose new circuit breakers in an attempt to alleviate pressures on the system when high periods of volatility threaten investors and the overall market. Circuit breakers, or trading curbs, are a means of temporarily halting trading during dramatic sell-offs to allow market participants time to respond. According to CNBC, quoting 'multiple sources,' 'The SEC and exchanges are considering circuit breakers that would halt trading in a company's stock if the stock fell more than 10 percent in five minutes...' Though circuit breakers already exist, they didn't come into play on the 6th. Additionally, while existing curbs currently kick in when entire indices, such as the Dow, fall by certain amounts, the new proposals would impact trading in individual securities, a key change.
Putting aside for the moment any arguments over the merits of government regulation of trading curbs, the proposed rules would seem to alleviate some of the pressures which exacerbated selling on the 6th. Though regulators and pundits alike seem to be at odds over what all of the factors were, Blawgconomics has good information that one such pressure point was the mass execution of stop loss orders (see #2 in this very well-written Seeking Alpha piece for explanation). Without digging too far into the links, the problem can be summarized as follows: investors often place orders for stocks to sell automatically when they reach a certain price to protect against downside losses. However, if a stock is really crashing, the next bid, or selling price, after the triggering price may be significantly lower than the seller intended...sometimes even pennies on the dollar. On the 6th, the execution of stop loss orders led to more stop loss orders being triggered, a vicious circle which apparently led to the temporary shutdown of certain brokers' trading platforms.
Curbs make sense in certain circumstances. After the Flash Crash, it was hypothesized that one of the triggering events was large, incorrectly entered orders. This happens, and it makes the already-existing curbs on trading when indices plummet sensible. After all, there are systemic risks in such a situation, and it is very unlikely that an entire market would plummet with no plausible explanation, even a rumor, that investors could adjust to. However the proposed single-stock curbs are a different creature and may have a downside. Often in individual securities a dramatic drop reflects new information such as poor earnings or a CEO change, or even a rumor, such as an M&A transaction, that the markets are adjusting to. This is a healthy function of the market as all information should be utilized in determining the price of a stock, and therefore a company. However, due to the restrictions on trading the SEC intends to put into place, it seems that these new curbs would have a detrimental effect on the ability of the market to serve this function.
Perhaps this would be the appropriate point of entre into the discussion of government intervention that was avoided above...but we can save that for another day. For now, it is probably enough to note that the proposed curbs will probably do what they are intended to do, albeit at a potentially significant cost.
UPDATE: Reuters has some different perspectives on these proposed curbs, along with some solid quotes from market participants.
Putting aside for the moment any arguments over the merits of government regulation of trading curbs, the proposed rules would seem to alleviate some of the pressures which exacerbated selling on the 6th. Though regulators and pundits alike seem to be at odds over what all of the factors were, Blawgconomics has good information that one such pressure point was the mass execution of stop loss orders (see #2 in this very well-written Seeking Alpha piece for explanation). Without digging too far into the links, the problem can be summarized as follows: investors often place orders for stocks to sell automatically when they reach a certain price to protect against downside losses. However, if a stock is really crashing, the next bid, or selling price, after the triggering price may be significantly lower than the seller intended...sometimes even pennies on the dollar. On the 6th, the execution of stop loss orders led to more stop loss orders being triggered, a vicious circle which apparently led to the temporary shutdown of certain brokers' trading platforms.
Curbs make sense in certain circumstances. After the Flash Crash, it was hypothesized that one of the triggering events was large, incorrectly entered orders. This happens, and it makes the already-existing curbs on trading when indices plummet sensible. After all, there are systemic risks in such a situation, and it is very unlikely that an entire market would plummet with no plausible explanation, even a rumor, that investors could adjust to. However the proposed single-stock curbs are a different creature and may have a downside. Often in individual securities a dramatic drop reflects new information such as poor earnings or a CEO change, or even a rumor, such as an M&A transaction, that the markets are adjusting to. This is a healthy function of the market as all information should be utilized in determining the price of a stock, and therefore a company. However, due to the restrictions on trading the SEC intends to put into place, it seems that these new curbs would have a detrimental effect on the ability of the market to serve this function.
Perhaps this would be the appropriate point of entre into the discussion of government intervention that was avoided above...but we can save that for another day. For now, it is probably enough to note that the proposed curbs will probably do what they are intended to do, albeit at a potentially significant cost.
UPDATE: Reuters has some different perspectives on these proposed curbs, along with some solid quotes from market participants.
5.17.2010
Economics for Lawyers (aka Dummies): Understanding Deflation
Many I have met in the the legal world appear to be completely ignorant (blissfully or otherwise) of the most simple of economic concepts. This is unfortunate in and of itself, but it also symptomatic of the same problem spread broadly among the general public. Blawgconomics is therefore happy to provide loyal readers with a public service announcement on a hot economic topic that, for many reasons, can be difficult to understand; deflation.
Many people understand inflation. Very simply, when aggregate demand for goods outstrips supply, ceteris paribus, prices go up. Oil prices a few years back, or food prices during a drought are good everyday examples. Though extreme inflation is often villified, and rightly so, by economists and pundits, low level inflation is a sign that an economy is growing. This is because it indicates that businesses and consumers are demanding a large amount of goods.
It is true that rising prices in an economy mean that its currency is worth less. However, if an economy is growing overall, and inflation isn't due to short-term factors such as energy spikes, this is not largely concerning because wages and income will typically rise at a commensurate level. There are many other factors impacting inflation, not least of which is the money supply, and rampant inflation can certainly derail an economy incredibly quickly. However, for purposes of this discussion, the key takeaway is that some inflation is natural and good as it points to economic growth.
Fewer people seem to be able to grasp the inverse of inflation, deflation, perhaps due to its rarity in modern times. Even fewer understand why it can be so bad. Deflation is an increase, not of goods (though this can be a factor), but in the value of money. At first blush, increasing the value of money might seem to be a pretty good thing. And it can be, if you are an individual holding a surplus of cash or are a large creditor owed cash payments in the future. However, on the balance, deflation can be very damaging to an economy, for, among other reasons, the negative impacts it has on borrowers and on spending, and because of the propensity of these factors to lead to deflationary spirals.
A simple example may prove helpful. If you owe a bank $10,000 on a loan, and you have $10,000 now, you can pay it off and be done with it. However, if you are making fixed payments, and the value of each dollar you are paying back is increasing as time goes on, you as the borrower are losing out. This has tremendous implications for both consumers and businesses who will be loathe to borrow knowing that they will face the duel costs of interest and currency losses in the future if they do. Therefore, the impact of deflation on borrowers is that it decreases their propensity to borrow. This has implications for everything from the housing market to small business start-ups to large corporate operations.
In addition to impacting borrowing, deflation has a negative impact on spending. If the value of currency is rising, many, savvy businesses in particular, will hold cash rather than spend it on projects and therefore employees. This is because they anticipate that the cash they are holding will continue to increase in value, creating an opportunity cost in spending it. This increased cost, factored into investment decisions, causes many projects that would otherwise be funded to be put off. This predictably causes growth to decline until the opportunity cost of initiating projects, in other words the deflation, declines.
Many people understand inflation. Very simply, when aggregate demand for goods outstrips supply, ceteris paribus, prices go up. Oil prices a few years back, or food prices during a drought are good everyday examples. Though extreme inflation is often villified, and rightly so, by economists and pundits, low level inflation is a sign that an economy is growing. This is because it indicates that businesses and consumers are demanding a large amount of goods.
It is true that rising prices in an economy mean that its currency is worth less. However, if an economy is growing overall, and inflation isn't due to short-term factors such as energy spikes, this is not largely concerning because wages and income will typically rise at a commensurate level. There are many other factors impacting inflation, not least of which is the money supply, and rampant inflation can certainly derail an economy incredibly quickly. However, for purposes of this discussion, the key takeaway is that some inflation is natural and good as it points to economic growth.
Fewer people seem to be able to grasp the inverse of inflation, deflation, perhaps due to its rarity in modern times. Even fewer understand why it can be so bad. Deflation is an increase, not of goods (though this can be a factor), but in the value of money. At first blush, increasing the value of money might seem to be a pretty good thing. And it can be, if you are an individual holding a surplus of cash or are a large creditor owed cash payments in the future. However, on the balance, deflation can be very damaging to an economy, for, among other reasons, the negative impacts it has on borrowers and on spending, and because of the propensity of these factors to lead to deflationary spirals.
A simple example may prove helpful. If you owe a bank $10,000 on a loan, and you have $10,000 now, you can pay it off and be done with it. However, if you are making fixed payments, and the value of each dollar you are paying back is increasing as time goes on, you as the borrower are losing out. This has tremendous implications for both consumers and businesses who will be loathe to borrow knowing that they will face the duel costs of interest and currency losses in the future if they do. Therefore, the impact of deflation on borrowers is that it decreases their propensity to borrow. This has implications for everything from the housing market to small business start-ups to large corporate operations.
In addition to impacting borrowing, deflation has a negative impact on spending. If the value of currency is rising, many, savvy businesses in particular, will hold cash rather than spend it on projects and therefore employees. This is because they anticipate that the cash they are holding will continue to increase in value, creating an opportunity cost in spending it. This increased cost, factored into investment decisions, causes many projects that would otherwise be funded to be put off. This predictably causes growth to decline until the opportunity cost of initiating projects, in other words the deflation, declines.
Could SCOTUS Ruling Mean Life Sentences for Sex Offenders?
The Supreme Court today held as constitutional in U.S. v Comstock a law allowing federal officials to indefinitely hold inmates who are sexually dangerous in a 7-2 judgment, handing a victory to the government in a case that was argued by Supreme Court nominee Elena Kagan.* The dissenting opinion, interestingly penned by Justice Thomas and uninterestingly joined by Justice Scalia, centered on the idea that the Constitution does not expressly vest in Congress the power to enact a civil commitment regime. Though such an argument fits nicely with their strict constructionist credentials, it is nonetheless at odds with the public's perception that the respective dissenters are nothing more than Republican lackeys.
Taken to its logical end, it is possible that the ruling could leave the door open to a lifetime behind bars for sex offenders. Going back to first year criminal law brings back flashes of deterrent v. punishment debates and the possible arguments for and against such penalties for inmates in this situation. However, for those who commit such crimes, it may be true that no deterrent could ever be strong enough to curtail their actions, nor any rehabilitation effort effective enough to prevent them in the future. If this prevailing thought process is true, it might be that the holding of the Supreme Court, though perhaps controversial, is the best way to keep the population safe.
*Her involvement, however, does not provide any new partisan-important insights for purposes of 'Kagan Watch '10' as the law, originally signed by President Bush, has since been invoked by the Obama administration.
Taken to its logical end, it is possible that the ruling could leave the door open to a lifetime behind bars for sex offenders. Going back to first year criminal law brings back flashes of deterrent v. punishment debates and the possible arguments for and against such penalties for inmates in this situation. However, for those who commit such crimes, it may be true that no deterrent could ever be strong enough to curtail their actions, nor any rehabilitation effort effective enough to prevent them in the future. If this prevailing thought process is true, it might be that the holding of the Supreme Court, though perhaps controversial, is the best way to keep the population safe.
*Her involvement, however, does not provide any new partisan-important insights for purposes of 'Kagan Watch '10' as the law, originally signed by President Bush, has since been invoked by the Obama administration.
5.15.2010
Blawgconomics...The Intersection of Socialists and Conservatives?
General discontent over the state of political affairs in the US has been making strange bedfellows of wannabe pols during a time when many state parties are going through pre-fall election primary cycles. Though 'small government' has often been a rallying cry (if not necessarily a phrase to live by) for conservatives, it has also apparently become an area of mutual agreement between elements of the far-left and the right.
Though such disparate groups may fall short of agreeing on, say, cutting entitlements, they are seemingly at least in agreement that Congress should be sharing the pain that Real Americans are feeling. Two of the more interesting ideas being floated, with an emphasis on equal opportunity...
- Republican hopeful Andy Goss believes that lawmaker pay should be cut by 40% to $104,400 per year. He also believes that all members of Congress should live in a military-style Capitol Hill barracks.
- On the other side, Nicholas Nix, a Socialist in Texas, proposes even more austere measures. Mr. Nix believes that lawmakers should be paid no more than the federal minimum wage of $7.25/hour.
Putting aside for a moment the notion that such pay cuts have approximately 0% chance of occuring, that these types of ideas have some resonance with voters right now is definitely telling. Cutting congressional pay will not solve the deficit or fix healthcare. Additionally, paying the minimum wage would have the possibly unintended consequence of attracting only the destitute and super-wealthy to run for Congress. However, America is mad, and it is almost a certainty that 'change' is on the way come November.
Though such disparate groups may fall short of agreeing on, say, cutting entitlements, they are seemingly at least in agreement that Congress should be sharing the pain that Real Americans are feeling. Two of the more interesting ideas being floated, with an emphasis on equal opportunity...
- Republican hopeful Andy Goss believes that lawmaker pay should be cut by 40% to $104,400 per year. He also believes that all members of Congress should live in a military-style Capitol Hill barracks.
- On the other side, Nicholas Nix, a Socialist in Texas, proposes even more austere measures. Mr. Nix believes that lawmakers should be paid no more than the federal minimum wage of $7.25/hour.
Putting aside for a moment the notion that such pay cuts have approximately 0% chance of occuring, that these types of ideas have some resonance with voters right now is definitely telling. Cutting congressional pay will not solve the deficit or fix healthcare. Additionally, paying the minimum wage would have the possibly unintended consequence of attracting only the destitute and super-wealthy to run for Congress. However, America is mad, and it is almost a certainty that 'change' is on the way come November.
The List: The Decline of the WASP
This Journal article helpfully provides some statistics pointing to the decline of the WASP as a political and social force on the American landscape. Though I only partially qualify for membership to the club (what letter(s) of the acronym are missing will be left up to readers to figure out) and therefore am an 'outsider,' this development is at least a little disheartening. After all, white shoes look damn good with the right suit...
Snippets...
Due to general malaise, lack of time, or what some might describe as a dearth of creativity, Blawgconomics often comes across interesting stories from the legal and economic worlds that never stimulate the penning of a complete post and thus never appear on this page.
This new column, a quick-hitting compilation of sorts, is an attempt to remedy this. Some may accuse me of pilfering (aka Viswanathan-ing) the idea from the much more popular Above the Law's Non-Sequiturs section. In the blawgosphere we prefer the term 'homage.'
Unfortunately, in searching for a name for the column, the aforementioned Non-Sequiturs lodged itself ever more firmly in the mind the more attempts to push it away were made. Luckily, inspiration came in the form of Snippets. Notably, the definition about small scraps and not small or insignificant people was intended....
- The 'Kagan For Scotus' campaign may hit another speedbump as the NRA unsurprisingly dislikes her liberal stance on the Constitutional rights of gunowners. However, this is yet another issue which is unlikely to make an overall difference in the confirmation process.
- Waddell & Reed Financial has been (fat?) fingered as the brokerage house whose trades sparked the 'Flash Crash' last week.
- Speaking of the Flash Crash, The Wall St. Journal has helpfully provided a guide on profiting on such volatile times in the future.
- Long-running legal drama Law & Order was cancelled due to low ratings. No word on how this might impact Sam Waterston's status as TD Waterhouse spokesperson.
- More from the WSJ; some of the Obama administration's recent comments and actions pertaining to the European debt crisis might be more self-serving than brotherly....US banks have big exposure to some of the European economies most at risk in a potential domino-effect situation.
- The FT does a great job perpetuating some national stereotypes about attitudes toward gold as it explains recent price volatility and short-term highs in the precious metal. They somehow missed the...ahem...golden opportunity to bring the Dutch into the conversation.
- Finally, though Your Editor prides himself on having at least some common sense and can claim decent grades in a few upper-level film courses in the past, he nonetheless missed the fact that Gordon Gekko was intended to be a villian until casually browsing IMDb. About a month ago. Unsurprisingly, great reviews of Wall Street 2: Money Never Sleeps from Cannes have left Blawgconomics nothing short of giddy...
This new column, a quick-hitting compilation of sorts, is an attempt to remedy this. Some may accuse me of pilfering (aka Viswanathan-ing) the idea from the much more popular Above the Law's Non-Sequiturs section. In the blawgosphere we prefer the term 'homage.'
Unfortunately, in searching for a name for the column, the aforementioned Non-Sequiturs lodged itself ever more firmly in the mind the more attempts to push it away were made. Luckily, inspiration came in the form of Snippets. Notably, the definition about small scraps and not small or insignificant people was intended....
- The 'Kagan For Scotus' campaign may hit another speedbump as the NRA unsurprisingly dislikes her liberal stance on the Constitutional rights of gunowners. However, this is yet another issue which is unlikely to make an overall difference in the confirmation process.
- Waddell & Reed Financial has been (fat?) fingered as the brokerage house whose trades sparked the 'Flash Crash' last week.
- Speaking of the Flash Crash, The Wall St. Journal has helpfully provided a guide on profiting on such volatile times in the future.
- Long-running legal drama Law & Order was cancelled due to low ratings. No word on how this might impact Sam Waterston's status as TD Waterhouse spokesperson.
- More from the WSJ; some of the Obama administration's recent comments and actions pertaining to the European debt crisis might be more self-serving than brotherly....US banks have big exposure to some of the European economies most at risk in a potential domino-effect situation.
- The FT does a great job perpetuating some national stereotypes about attitudes toward gold as it explains recent price volatility and short-term highs in the precious metal. They somehow missed the...ahem...golden opportunity to bring the Dutch into the conversation.
- Finally, though Your Editor prides himself on having at least some common sense and can claim decent grades in a few upper-level film courses in the past, he nonetheless missed the fact that Gordon Gekko was intended to be a villian until casually browsing IMDb. About a month ago. Unsurprisingly, great reviews of Wall Street 2: Money Never Sleeps from Cannes have left Blawgconomics nothing short of giddy...
5.13.2010
Dredging for Details
Because she has never served on the bench at any level, either trial or appellate, reporters have needed to be a little more creative in their search for clues on Supreme Court nominee Elena Kagan's judicial philosophy. While many have viewed her as more moderate than some of the other potential nominees, mostly due to her ability to play politics with both sides of the aisle as the dean at Harvard Law, Ms. Kagan undoubtedly shares many of President Obama's political beliefs; otherwise he would not have selected her.
Determining just how closely they are politically aligned however can only really be attempted by piecing together clues via a montage approach; for example, reading her brief memos while clerking for Justice Thurgood Marshall in the late eighties. Another source is her arguments before the Court in her role as Solicitor General.
However, while most of these sources have affirmed Ms. Kagan's liberal credentials, they can also be a bit misleading as in the former case, she was working for a liberal Justice, and in the latter she was representing the opinions of the government. While her opinions undoubtedly impacted her work product (and indeed her ability to get such jobs in the first place), such sources may not accurately represent her overall philosophy on every issue. More importantly, none have proven to be a bombshell or the proverbial smoking gun which would turn the tide against her. In other words, they are more fodder for News Entertainment shows and Senators trying to make names for themselves than cause for alarm out of the White House.
Anything can happen between now and the potential confirmation of Ms. Kagan to her lifetime post. Additionally, some fireworks during confirmation hearings can be expected. However, if Blawgconomics had an intrade.com account, we would probably find more interesting places to put our hard-earned student loan money than betting against confirmation.
Determining just how closely they are politically aligned however can only really be attempted by piecing together clues via a montage approach; for example, reading her brief memos while clerking for Justice Thurgood Marshall in the late eighties. Another source is her arguments before the Court in her role as Solicitor General.
However, while most of these sources have affirmed Ms. Kagan's liberal credentials, they can also be a bit misleading as in the former case, she was working for a liberal Justice, and in the latter she was representing the opinions of the government. While her opinions undoubtedly impacted her work product (and indeed her ability to get such jobs in the first place), such sources may not accurately represent her overall philosophy on every issue. More importantly, none have proven to be a bombshell or the proverbial smoking gun which would turn the tide against her. In other words, they are more fodder for News Entertainment shows and Senators trying to make names for themselves than cause for alarm out of the White House.
Anything can happen between now and the potential confirmation of Ms. Kagan to her lifetime post. Additionally, some fireworks during confirmation hearings can be expected. However, if Blawgconomics had an intrade.com account, we would probably find more interesting places to put our hard-earned student loan money than betting against confirmation.
5.10.2010
Kagan Nominated, Confirmation Process Begins
After a short interview process that was widely viewed as a formality, President Obama nominated Elena Kagan to fill Justice Stevens' Supreme Court seat. Kagan, currently the Solicitor General, nearly missed out on joining the Court the last time a seat was open. However Sonia Sotomayor was nominated and then confirmed to fill that vacancy.
Viewed as relatively moderate, it should not ultimately be difficult for Kagan to get through the confirmation process. However, that does not mean that she will be able to entirely avoid some difficult questions from Republican Members, particularly in an election year.
Viewed as relatively moderate, it should not ultimately be difficult for Kagan to get through the confirmation process. However, that does not mean that she will be able to entirely avoid some difficult questions from Republican Members, particularly in an election year.
5.09.2010
Europe Unites Ahead of the Global Open
Some are speculating that the latest agreement between the Eurozone partners to stabilize the Euro was sparked by fears that traders around the globe were ready to pounce on the currency. With violent protests in Greece, continuing fears of problems spreading to fellow Mediterranean adjacent Spain and its Iberian neighbor Portugal, and distant memories of what George Soros and friends were able to do to the Bank of England, it would be no wonder.
The deal appears to be centered on a potential $645 billion lending facility which would allow nations with sovereign debt troubles and borrowing needs to avoid falling into the same hole Greece has. This would both allay fears of a wider contagion and stem the tide of bets against the Euro in global currency markets, a cause which the European Central Bank would otherwise have had to eventually undertaken on its own.
Though Greece itself remains in trouble as angry citizens have not taken any steps towards embracing difficult austerity measures, the lending facility and the backing of the EU member nations which it enjoys is likely the first step in a difficult process to ensure that the troubles do not spread. The European Central Bank and individual European finance ministers don't always share views, but in this case, they may be able to share a sigh of relief.
UPDATE: It looks like the package has had its desired effect as Europe has rallied today.
The deal appears to be centered on a potential $645 billion lending facility which would allow nations with sovereign debt troubles and borrowing needs to avoid falling into the same hole Greece has. This would both allay fears of a wider contagion and stem the tide of bets against the Euro in global currency markets, a cause which the European Central Bank would otherwise have had to eventually undertaken on its own.
Though Greece itself remains in trouble as angry citizens have not taken any steps towards embracing difficult austerity measures, the lending facility and the backing of the EU member nations which it enjoys is likely the first step in a difficult process to ensure that the troubles do not spread. The European Central Bank and individual European finance ministers don't always share views, but in this case, they may be able to share a sigh of relief.
UPDATE: It looks like the package has had its desired effect as Europe has rallied today.
"Superbugs Require Super Drugs: An Examination of Why Existing Incentive Programs Have Failed the Antibiotic Field" (Part 2 of 2)
Today's post 'Superbugs Require Super Drugs: An Examination of Why Existing Incentive Programs Have Failed the Antibiotic Field' is Part 2 of 2, and is adapted from a larger thesis of the same name.
In her last post, Ms. Alissa Fideli described some of the problems created by the current patent system for antibiotics. Today, more intriguingly, she provides some solutions.
The most controversial provision of the treaty would provide that the parties to it agree to conditionally reduce the term of patent protection for new antibiotics. The reduction is conditional on managing, or at least tempering, antibiotic resistance in bacteria. The treaty would reduce the term of patent protection until the governing body finds a substantial decrease in antibiotic resistance. Once this reduction in resistance is achieved, the treaty would allow an incremental increase in the patent term for antibiotics. The governing body would develop a sliding scale of patent protection that prescribed an initial shorter term of exclusivity with the potential to increase the term as resistance declined; the duration of exclusivity would be based on the collection and analysis of data on antibiotic resistance in the member states.
The rationale behind this provision is that if antibiotic resistance continues to increase along its current trajectory, bacteria will continue to mutate and develop resistance and science will continue to play catch up, always lagging behind. In this scenario, twenty years of patent protection is unnecessary; a long patent term could ultimately become a loss if it is made obsolete by rapidly mutating bacteria. Further, the cost of obtaining and enforcing a patent on such a product would far outweigh its short-term benefits. Additionally, market exclusivity is ultimately about recouping costs and making a profit. The incentives of tax credits, grants, patent extensions and promised markets will allow companies to recoup the losses that they otherwise could not with patent protection alone. This provision also encourages members to fully commit to prudent use and prohibition on misuse of antibiotics; the more vigilant they are about preventing new resistance from emerging, the better chance they have at obtaining increased patent protection.
In her last post, Ms. Alissa Fideli described some of the problems created by the current patent system for antibiotics. Today, more intriguingly, she provides some solutions.
Proposal
Antibiotic efficacy is akin to a natural resource that is threatening to run out; in order to preserve and rehabilitate this natural resource, global cooperation is necessary. My proposal is a treaty that would deal exclusively with encouraging research into new antibiotics and managing antimicrobial resistance. The treaty would require a certain measure of commitment to research and development into priority antibiotics from member states. It would employ a credit system, whereby member states would be able to acquire credits, through conducting certain valuable types of research or through providing technology transfer to developing countries that they could then use to meet their commitment targets. 1 The treaty would also provide a framework of potential incentives that members could employ, such as tax credits, public funding or grant options, guaranteed market and/or advance purchase commitments, and transferable priority review vouchers. 2 The treaty would require mandatory granting of “wild-card” patent extensions for companies engaged in research to combat any of the top five priority bacteria. The extension would be applicable to any preexisting patent and would serve as a strong incentive for private pharmaceutical companies.The most controversial provision of the treaty would provide that the parties to it agree to conditionally reduce the term of patent protection for new antibiotics. The reduction is conditional on managing, or at least tempering, antibiotic resistance in bacteria. The treaty would reduce the term of patent protection until the governing body finds a substantial decrease in antibiotic resistance. Once this reduction in resistance is achieved, the treaty would allow an incremental increase in the patent term for antibiotics. The governing body would develop a sliding scale of patent protection that prescribed an initial shorter term of exclusivity with the potential to increase the term as resistance declined; the duration of exclusivity would be based on the collection and analysis of data on antibiotic resistance in the member states.
The rationale behind this provision is that if antibiotic resistance continues to increase along its current trajectory, bacteria will continue to mutate and develop resistance and science will continue to play catch up, always lagging behind. In this scenario, twenty years of patent protection is unnecessary; a long patent term could ultimately become a loss if it is made obsolete by rapidly mutating bacteria. Further, the cost of obtaining and enforcing a patent on such a product would far outweigh its short-term benefits. Additionally, market exclusivity is ultimately about recouping costs and making a profit. The incentives of tax credits, grants, patent extensions and promised markets will allow companies to recoup the losses that they otherwise could not with patent protection alone. This provision also encourages members to fully commit to prudent use and prohibition on misuse of antibiotics; the more vigilant they are about preventing new resistance from emerging, the better chance they have at obtaining increased patent protection.
Op-Ed: The Illegal Immigrant Debate: A Potential Framework
Editor's note: A few weeks back contributor Pat DeCourcy discussed some of the potential political implications of the oft-discussed idea to provide amnesty to the illegal immigrants currently living and working in the United States. Pat noted, correctly in my mind, the fact that citizenship, and therefore voting rights, for illegals would be likely to favor the Democratic Party. Though Democrats are undoubtedly motivated by other factors in this debate, it is also probably true that the potential to gain votes is a factor that is not lost on them or their pollsters.
In my introduction to that piece, I almost offhandedly noted that, though his analysis was interesting, Pat had not attempted to provide any solutions. I am happy to say that in today's post, he has. Immigration reform is a very difficult topic politically. The demographics of the nation are changing rapidly, with many estimates suggesting that the population of whites with European bloodlines will be in the minority sometime in this or the next generation. This has led to interesting and often heated debates regarding the best policies for reform. Not everyone will agree with all of Pat's solutions, but they are a starting point, and have a little more meat on their bones than many polticians have had the nerve to chew on thus far. As always, comments and feedback are appreciated.
In my last guest post, though I discussed the electoral implications of immigration reform, I did not suggest any solutions to the illegal immigration problem. Today I aim to remedy this.
The last time amnesty was given was in 1986 by Ronald Reagan (which should put to rest the progressive talking point that Republicans oppose reform because of inherent racism and intolerance). Here is a listing of the general provisions of the bill that was passed. Most notably according to Wikipedia, 'The Act made it illegal to knowingly hire or recruit illegal immigrants (immigrants who do not possess lawful work authorization), required employers to attest to their employees' immigration status, and granted amnesty to certain illegal immigrants who entered the United States before January 1, 1982 and had resided there continuously. The Act also granted a path towards legalization to certain agricultural seasonal workers and immigrants who had been continuously and illegally present in the United States since January 1, 1982.'
Those provisions are all good and great, but there is a huge one that was missing from this bill; BORDER SECURITY. Why lawmakers didn’t tackle this issue at the time is beyond my scope of knowledge, but they critically didn’t, making the law a quick fix rather than a long-term solution. This is why the GOP is digging in this time. A lot of the same provisions above were actually part of the failed McCain/Kennedy immigration bill, and similarly, that bill made no attempt at improving border security. Therein lies the outrage from conservatives; they are not opposed to immigration reform, per se, but they want border security before they debate over what to do with the illegals already here. It is not realistic to deport 10+million people, so compromise will have to be sought, but conservatives will not compromise unless some of the “magnets” causing illegal immigrants to break the law and gravitate toward the USA in unsustainable numbers are addressed.
That being said, the following would be a framework I would endorse. Though it’s similar to the 1986 framework, it also includes some added provisions which are aimed at solving the problem for good, not just for the next 10 years:
In my introduction to that piece, I almost offhandedly noted that, though his analysis was interesting, Pat had not attempted to provide any solutions. I am happy to say that in today's post, he has. Immigration reform is a very difficult topic politically. The demographics of the nation are changing rapidly, with many estimates suggesting that the population of whites with European bloodlines will be in the minority sometime in this or the next generation. This has led to interesting and often heated debates regarding the best policies for reform. Not everyone will agree with all of Pat's solutions, but they are a starting point, and have a little more meat on their bones than many polticians have had the nerve to chew on thus far. As always, comments and feedback are appreciated.
In my last guest post, though I discussed the electoral implications of immigration reform, I did not suggest any solutions to the illegal immigration problem. Today I aim to remedy this.
The last time amnesty was given was in 1986 by Ronald Reagan (which should put to rest the progressive talking point that Republicans oppose reform because of inherent racism and intolerance). Here is a listing of the general provisions of the bill that was passed. Most notably according to Wikipedia, 'The Act made it illegal to knowingly hire or recruit illegal immigrants (immigrants who do not possess lawful work authorization), required employers to attest to their employees' immigration status, and granted amnesty to certain illegal immigrants who entered the United States before January 1, 1982 and had resided there continuously. The Act also granted a path towards legalization to certain agricultural seasonal workers and immigrants who had been continuously and illegally present in the United States since January 1, 1982.'
Those provisions are all good and great, but there is a huge one that was missing from this bill; BORDER SECURITY. Why lawmakers didn’t tackle this issue at the time is beyond my scope of knowledge, but they critically didn’t, making the law a quick fix rather than a long-term solution. This is why the GOP is digging in this time. A lot of the same provisions above were actually part of the failed McCain/Kennedy immigration bill, and similarly, that bill made no attempt at improving border security. Therein lies the outrage from conservatives; they are not opposed to immigration reform, per se, but they want border security before they debate over what to do with the illegals already here. It is not realistic to deport 10+million people, so compromise will have to be sought, but conservatives will not compromise unless some of the “magnets” causing illegal immigrants to break the law and gravitate toward the USA in unsustainable numbers are addressed.
That being said, the following would be a framework I would endorse. Though it’s similar to the 1986 framework, it also includes some added provisions which are aimed at solving the problem for good, not just for the next 10 years:
5.07.2010
"Superbugs Require Super Drugs: An Examination of Why Existing Incentive Programs Have Failed the Antibiotic Field" (Part 1 of 2)
Editor's Note: One of the great pleasures of running a site like Blawgconomics has been the opportunity it has afforded me to collaborate with incredibly talented guest contributors who often have interests and knowledge far outside my (self-proclaimed) areas of expertise.
Today provides a very special example of this as I have the honor to introduce not only the 200th posting to the site, but also Ms. Alissa Fideli's premiere as a contributor. Ms. Fideli is a fellow student at GW Law, and focuses primarily on intellectual property law. Her contribution below, 'Superbugs Require Super Drugs: An Examination of Why Existing Incentive Programs Have Failed the Antibiotic Field' is Part 1 of 2, and is adapted from a larger thesis of the same name.
Though the underpinning of Ms. Fideli's article is IP law, the economic considerations and implications of her analysis are tremendous. Though it is true that pharmaceutical companies exist to make a profit, it is also true that their products serve a public interest. Indeed, this is the foundation of the current drug patent regime in states such as the US; governments try to serve the public interest by ensuring R&D and production of drugs via the promise of monopoly profits for protected periods.
However, the world is ever-changing, and the realities of today are not being properly reflected in the current patent incentive regime. The things that make us sick are simply too short-lived and too effective at beating the drugs we have developed over the long-term to make exclusive, long-term patent protections an effective stimulus for R&D in many cases. In addition, the proliferation and ease of global trade and travel have perhaps lead to a point where global cooperation in IP laws for drugs has become necessary. Ms. Fideli addresses these problems below; Part 2 focuses on solutions.
Introduction
Mariana Bridi da Costa was a 20-year-old Brazilian model who came to the hospital complaining of kidney stones in December of 2008. 1 Mariana was released from the hospital that day and returned four days later, exhibiting life-threatening hypotension; she was suffering from septic shock caused by a Pseudomonas aeruginosa infection in her urinary tract that had subsequently spread through her bloodstream. 2 Doctors did all they could to treat the young model; they administered intravenous antibiotics and also amputated her hands and feet and removed her kidneys in an attempt to stem the spread of the infection. 3 Unfortunately, their efforts failed and she died just days later. 4The bacterium that infected Mariana was P. aeruginosa, a Gram-negative bacterial strain that has recently emerged as an important culprit in life-threatening nosocomial infections. 5 Much like methicillin-resistant Staphylocccus aureus (MRSA), which haunts hospitals as one of the most prominent and dangerous nosocomial infections, many Gram-negative and Gram-positive bacteria are becoming increasingly resistant to multiple antibiotics, making these infections nearly impossible to treat. Some estimates state that tens of thousands of hospital patients die annually from antibiotic resistant bacterial infections. 6 Gram-negative bacteria are particularly problematic because they are inherently more difficult to kill; they have an additional cell membrane that makes it more difficult for antibiotics to permeate the cell, and often produce enzymes that are capable of breaking down antibiotics when they do permeate the cell, or harbor pumps in their cell membrane that eject the antibiotics from the cell. 7 Pharmaceutical companies are not focusing their efforts on creating new antibiotics; there are currently no antibiotics in Phase II testing or beyond, and this is one of several factors that contribute to the lack of R&D investment in this field. 8
Various incentives exist to encourage R&D in rare diseases and other routinely neglected pharmaceutical areas, such as orphan drug and fast track designations, hatch Waxman exclusivities, and run-of-the-mill patent protection. All incentives provide some form of market exclusivity, which is typically the most valuable and most sought after incentive, and some provide tax credits or other monetary incentives. But regardless of the presence of incentives, pharmaceutical companies are still reducing their R&D in antibiotics and some are withdrawing from antimicrobial research completely. 9 This retreat is due to a combination of several factors.
5.06.2010
The List: Preliminary British Election Results
Several polls are pointing to the Tories, as expected, gaining the most overall seats in today's Parliamentary elections. However, it appears that they are short of a majority, which would lead to a hung parliament and some potentially interesting alliance possibilities. In any case, Gordon Brown's tenure as Prime Minister appears to have ended.
UPDATE: As expected, the Liberal Democrats, though polling third, currently occupy the position of kingmakers as the Conservatives were unable to gain a majority in last week's electoral contest. This has put the two idealogical rivals in bed together, though their mutual desire to tackle the current financial conundrum in the UK should provide some stimulus for a union. Whether it holds or not is another matter, as some are predicting a potentially destabilizing second election later this year.
UPDATE: As expected, the Liberal Democrats, though polling third, currently occupy the position of kingmakers as the Conservatives were unable to gain a majority in last week's electoral contest. This has put the two idealogical rivals in bed together, though their mutual desire to tackle the current financial conundrum in the UK should provide some stimulus for a union. Whether it holds or not is another matter, as some are predicting a potentially destabilizing second election later this year.
5.05.2010
The New Face of Greek Tragedy
Three, including a pregnant mother, died in rioting in Greece today. The drama in the southern European state has its roots in the financial crisis and the resulting austerity measures being embraced by the Greek government as a prerequisite for EU aid.
While this result is sad and unfortunate, it is easy to feel sympathetic toward the estimated 100,000 Greek citizens who have taken to the streets. Unlike so many governments around the world (whether realistically or not is a different matter) theirs is promising not prosperity, but belt tightening, and that for the foreseeable future. It is also difficult to throw stones from the glass house known as America where life-ending disturbances have been known to break out over events as trivial as a sports contests, seemingly as often in victory and as in defeat.
However, it is difficult to envision what could result from the ongoing riots in the Mediterranean other than more injuries and unfortunate deaths. Unfortunately, while Greeks don't like the idea that benefits are going to be cut, the country will likely cease to function without the aid money, leaving the nation truly stuck between Scylla and Charybdis. Though painful, the major budget cuts which are being protested, accompanied by aid monies, seem to be best of poor options.
The old heroes of Greek tragedy were God-like in power and had lives marked by epic deeds. Unfortunately, in modern times and in the midst of a financial meltdown, the new face of Greek tragedy is the common man. Hopefully Greeks, though understandably angry, will soon acknowledge the lack of options available to their government. This will ease the transition from reactionary rioting to the initiation of the rebuilding process. Austerity may be painful, but it unfortunately seems to be the only route to a brighter future.
UPDATE: It looks like there is no end in sight to the violence as resistence to austerity measures gains steam.
While this result is sad and unfortunate, it is easy to feel sympathetic toward the estimated 100,000 Greek citizens who have taken to the streets. Unlike so many governments around the world (whether realistically or not is a different matter) theirs is promising not prosperity, but belt tightening, and that for the foreseeable future. It is also difficult to throw stones from the glass house known as America where life-ending disturbances have been known to break out over events as trivial as a sports contests, seemingly as often in victory and as in defeat.
However, it is difficult to envision what could result from the ongoing riots in the Mediterranean other than more injuries and unfortunate deaths. Unfortunately, while Greeks don't like the idea that benefits are going to be cut, the country will likely cease to function without the aid money, leaving the nation truly stuck between Scylla and Charybdis. Though painful, the major budget cuts which are being protested, accompanied by aid monies, seem to be best of poor options.
The old heroes of Greek tragedy were God-like in power and had lives marked by epic deeds. Unfortunately, in modern times and in the midst of a financial meltdown, the new face of Greek tragedy is the common man. Hopefully Greeks, though understandably angry, will soon acknowledge the lack of options available to their government. This will ease the transition from reactionary rioting to the initiation of the rebuilding process. Austerity may be painful, but it unfortunately seems to be the only route to a brighter future.
UPDATE: It looks like there is no end in sight to the violence as resistence to austerity measures gains steam.
Potential Foreign Candidate for the Solar REIT Structure
In an earlier post, it was noted that allowing solar developers to take advantage of the REIT tax regime could benefit both investors and the solar industry in the US and abroad. Its aggressive goals for large-scale solar development combined with rapidly approaching expiration dates for financial incentives make Italy a very strong potential candidate in the latter category. The Italians notably already have a REIT-like structure in place, the Società d’Investimento Immobiliare Quotate (SIIQ).
An Investment-Driven Solution to Green Development Problems: The S-REIT (Part 5 in a Series)
This post is Part 5 in a series and is excerpted from a recent thesis on the applicability of the REIT tax structure to large-scale solar development. Parts 1 through 4 may be found at the following links: Part 1, Part 2, Part 3, Part 4.
Because solar energy production does not require inputs the way that coal, natural gas or even nuclear facilities do, increasing solar energy’s percentage as part of the overall energy mix would result in a decreased emphasis on fossil fuels required for energy production. This, in turn, would produce security, safety and environmental benefits. With a reduction in the demand for foreign sources of fossil fuels would potentially come a reduction in reliance upon dictators and unfriendly governments. This has obvious policy implications, and, taken to its logical end, could lead to a reduction in the necessity for foreign entanglements in the future. Additionally, unlike nuclear facilities and the constant, though debatably valid concerns regarding terror and safety, no such concerns exist with respect to solar arrays. Finally, the reductions in emissions, fuel spills in the transport process and strategies such as surface mining for coal that would come with a reduction in demand for fossil fuels make the increased use of solar energy particularly attractive from an environmental perspective.
The impact of an S-REIT structure on the environment could extend beyond some of the obvious ones noted above and into the policy realm. For example, utilities could embrace this type of solution as part of their state-mandated renewable portfolio standards (RPSs). Renewable portfolio standards are one mechanisms that states are increasingly using to increase the proportion of renewable energy purchased in their jurisdiction. 2 RPSs typically place requirements on utilities to supply a portion of their load with renewables. 3 Though RPSs have been introduced into Congress on several occasions, most of the regulations now in place are mandates put into place by state legislators and utility regulators. 4 If a cheap source of renewables were available due to the S-REIT structure, it would help utilities meet these standards.
In addition to investment, safety, security and environmental benefits, the S-REIT structure could provide a prototype development model for other renewables. The closest parallel could be drawn to wind power. Wind could be a strong candidate for inclusion in the REIT structure for a few reasons. Though solar can be a very effective and steady fuel source, there are geographic limitations on where it can be most effective. And, though the electric network is being upgraded across the US, there are limits to how far electricity from any source, including solar, can be efficiently transported. Fortunately, many of the regions where solar would be least effective have great potential as production sites for wind-generated power. Allowing wind developers to take advantage of the REIT structure would allow energy supply gaps to be filled and could factor heavily into a more comprehensive plan for the future of energy production. There are additionally benefits in areas of geographic overlap. Most notably, wind could potentially be blowing 24 hours a day, while there are some fairly obvious restrictions on how many hours in a given day solar could be relied upon. Also, the same inclement weather that could render a solar array useless might generate more than enough wind to compensate for deficiencies in solar production during any given time period.
Implications and Potential Benefits of the S-REIT Model
As noted, an S-REIT regime would provide numerous investment benefits to participants including steady returns and as a portfolio diversification tool. It would also provide an outlet for those interested in investing using a socially-responsible strategy. There are, of course, other benefits to the structure as well. Although it would be naïve to overstate the immediate impact that the S-REIT structure could have on energy policy by itself, in the long-term and as part of a more comprehensive energy strategy, it could lead to subsidiary benefits which are worth discussion. 1Because solar energy production does not require inputs the way that coal, natural gas or even nuclear facilities do, increasing solar energy’s percentage as part of the overall energy mix would result in a decreased emphasis on fossil fuels required for energy production. This, in turn, would produce security, safety and environmental benefits. With a reduction in the demand for foreign sources of fossil fuels would potentially come a reduction in reliance upon dictators and unfriendly governments. This has obvious policy implications, and, taken to its logical end, could lead to a reduction in the necessity for foreign entanglements in the future. Additionally, unlike nuclear facilities and the constant, though debatably valid concerns regarding terror and safety, no such concerns exist with respect to solar arrays. Finally, the reductions in emissions, fuel spills in the transport process and strategies such as surface mining for coal that would come with a reduction in demand for fossil fuels make the increased use of solar energy particularly attractive from an environmental perspective.
The impact of an S-REIT structure on the environment could extend beyond some of the obvious ones noted above and into the policy realm. For example, utilities could embrace this type of solution as part of their state-mandated renewable portfolio standards (RPSs). Renewable portfolio standards are one mechanisms that states are increasingly using to increase the proportion of renewable energy purchased in their jurisdiction. 2 RPSs typically place requirements on utilities to supply a portion of their load with renewables. 3 Though RPSs have been introduced into Congress on several occasions, most of the regulations now in place are mandates put into place by state legislators and utility regulators. 4 If a cheap source of renewables were available due to the S-REIT structure, it would help utilities meet these standards.
In addition to investment, safety, security and environmental benefits, the S-REIT structure could provide a prototype development model for other renewables. The closest parallel could be drawn to wind power. Wind could be a strong candidate for inclusion in the REIT structure for a few reasons. Though solar can be a very effective and steady fuel source, there are geographic limitations on where it can be most effective. And, though the electric network is being upgraded across the US, there are limits to how far electricity from any source, including solar, can be efficiently transported. Fortunately, many of the regions where solar would be least effective have great potential as production sites for wind-generated power. Allowing wind developers to take advantage of the REIT structure would allow energy supply gaps to be filled and could factor heavily into a more comprehensive plan for the future of energy production. There are additionally benefits in areas of geographic overlap. Most notably, wind could potentially be blowing 24 hours a day, while there are some fairly obvious restrictions on how many hours in a given day solar could be relied upon. Also, the same inclement weather that could render a solar array useless might generate more than enough wind to compensate for deficiencies in solar production during any given time period.
5.04.2010
Financial Reform(ation?)
Anyone with a pulse and access to a newspaper over the past year and a half should not be surprised that the political cause du jour is financial market regulation. The housing crisis and unemployment numbers alone have provided more than enough fuel to feed the reform fire. Democrats who hold majorities in both houses and sit behind the Presidential desk have provided the gasoline. However, like so many other reactionary movements in US history, financial reform is looking more a complete reformation of the financial system based on a populist overreaction rather than an attempt to fix the root causes of the crisis. By way of analogy, it is almost as if prettier flowers are being planted in an unmanaged garden without killing the roots of the weeds. The neighbors will certainly be happier to see the more colorful inhabitants of the flower bed, but within a season or so, the dandelions and ragweed will undoubtedly have returned to choke out the usurpers.
Though there were certainly many factors which played into the current economic malaise, most economists and market observers agree that an overhot housing market stimulated by overextension of loans was the main problem. In this light, it might be surprising to hear that there are no provisions regarding mortgage underwriting in the financial reform legislation the Senate is currently working on. This may be a small oversight, and it is something that might be fixed via amendment. However, the lack of legislation addressing the commonly agreed source of the current troubles is conspicuous by its absence, leaving a nagging question begging; are the powers that be more concerned with fixing the financial system or in reshaping a scapegoated banking sector to appeal to a scorned public? It appears more and more that the answer can be found in the latter half of the question.
This is because much of the proposed legislation seems to center on a thinly-veiled return to the Glass-Steagall banking regime. For financial history novices, this would mean splitting up the investment and commercial operations of banks. This idea is not without merit, and it certainly has appeal to those who are upset that a bank should be doing something so louche as make money in a recession (See Sachs, Goldman). Above all, it would go some way toward solving the 'too big to fail' problem that has been introduced to the system. In other words, the government would not have to step in to save a bank in the future whose collapse would otherwise cause a shock to the system. However, the government caused this problem in the first place when it interfered with the system and used certain banks as tools to put its vision into place during the crisis. For example, it worked closely with banks on a number of occasions to buy assets of others, 'gently' pushed others into changing their structures to facilitate liquidity in the system and ultimately played the hero as an anti-Schumpeterian financial system EMT. Though some of these measure were laudable at the time, it appears more and more that they may have been the first move in a wider game of financial reformation chess.
The current posturing is also curious because there are much less intrusive yet equally effective ways to reduce the concerns of regulators. For example , legislators could introduce stronger controls between the two sides of banking houses and eliminate the ability of banks to insure and receive emergency funds in relation to investment banking and trading operations. This would put safeguards on the system while allowing banks to continue taking risks for shareholders, providing liquidity and acting as counterparties in the trading system. However, recent Congressional hearings involving current whipping boy Goldman Sachs both made it clear that those in power have a poor understanding of how these operations work, and underscore the political gamesmanship that is now omnipresent.
Like death and taxes, financial system reform became inevitable somewhere in between the firesale of Bear Stearns and the collapse of Lehman Brothers. However, what is happening in the halls of Congress right now looks very much like a reformation in the most destructive sense of the word aimed at satisfying populist bloodlust rather than a reform solution with a logical link to the problems it is looking to solve. Interestingly, the changes Congress is looking to make have no more relation to the problems they are attempting to solve than housing prices did to their underlying values in 2007. This risks both damaging the system in the short term and leaving it on shaky legs in the long. Unfortunately, it seems that the lessons of history are often lost upon those best placed to learn them.
Though there were certainly many factors which played into the current economic malaise, most economists and market observers agree that an overhot housing market stimulated by overextension of loans was the main problem. In this light, it might be surprising to hear that there are no provisions regarding mortgage underwriting in the financial reform legislation the Senate is currently working on. This may be a small oversight, and it is something that might be fixed via amendment. However, the lack of legislation addressing the commonly agreed source of the current troubles is conspicuous by its absence, leaving a nagging question begging; are the powers that be more concerned with fixing the financial system or in reshaping a scapegoated banking sector to appeal to a scorned public? It appears more and more that the answer can be found in the latter half of the question.
This is because much of the proposed legislation seems to center on a thinly-veiled return to the Glass-Steagall banking regime. For financial history novices, this would mean splitting up the investment and commercial operations of banks. This idea is not without merit, and it certainly has appeal to those who are upset that a bank should be doing something so louche as make money in a recession (See Sachs, Goldman). Above all, it would go some way toward solving the 'too big to fail' problem that has been introduced to the system. In other words, the government would not have to step in to save a bank in the future whose collapse would otherwise cause a shock to the system. However, the government caused this problem in the first place when it interfered with the system and used certain banks as tools to put its vision into place during the crisis. For example, it worked closely with banks on a number of occasions to buy assets of others, 'gently' pushed others into changing their structures to facilitate liquidity in the system and ultimately played the hero as an anti-Schumpeterian financial system EMT. Though some of these measure were laudable at the time, it appears more and more that they may have been the first move in a wider game of financial reformation chess.
The current posturing is also curious because there are much less intrusive yet equally effective ways to reduce the concerns of regulators. For example , legislators could introduce stronger controls between the two sides of banking houses and eliminate the ability of banks to insure and receive emergency funds in relation to investment banking and trading operations. This would put safeguards on the system while allowing banks to continue taking risks for shareholders, providing liquidity and acting as counterparties in the trading system. However, recent Congressional hearings involving current whipping boy Goldman Sachs both made it clear that those in power have a poor understanding of how these operations work, and underscore the political gamesmanship that is now omnipresent.
Like death and taxes, financial system reform became inevitable somewhere in between the firesale of Bear Stearns and the collapse of Lehman Brothers. However, what is happening in the halls of Congress right now looks very much like a reformation in the most destructive sense of the word aimed at satisfying populist bloodlust rather than a reform solution with a logical link to the problems it is looking to solve. Interestingly, the changes Congress is looking to make have no more relation to the problems they are attempting to solve than housing prices did to their underlying values in 2007. This risks both damaging the system in the short term and leaving it on shaky legs in the long. Unfortunately, it seems that the lessons of history are often lost upon those best placed to learn them.
5.03.2010
The Economic Impact of a Surprise First Round Exit
America loves an underdog, particularly when it comes to sports. This is one reason why teams such as the Yankees and Cowboys are so polarizing. It also explains why an upset, especially in a series format, is often so celebrated. However, there is a downside to upsets, in particular the most surprising ones where very low seeds beat very high seeds in early rounds. This downside is mainly in the form of economic losses which occur due to the premature exit of the favored team.
Interestingly, many of the biggest upsets seem to occur in hockey. A recent example of this phenomenon provides a suitable case study. Last week the Montreal Canadiens, this year's eighth and final seed in the NHL's Eastern Conference, won game seven of their first round series against the Washington Capitals, a team boasting the best record, and arguably the best player, in the entire league. Tomorrow night, the Canadiens will suit up for a second round matchup against the Penguins while the Capitals' most intimate experience with Lord Stanley's Cup this year will occur courtesy of their cable boxes.
While long-suffering Caps fans are undoubtedly still nursing their wounds, the greatest impact of the Caps' first round exit could be the economic loss it has led to, both locally and nationally. As the top team in the league, the Caps were expected to go very deep into the playoffs, if not win the Stanley cup. This would have meant weeks of home games, excited fans and a boost to the local economy as well as higher sales and sponsorship revenues nationally. Instead, the area hosted four home games, and the league has lost its best player for the remainder of the season. What does this mean in economic terms?
The impact is very difficult to estimate in dollar terms, but a quick rundown of the effected parties and a little common sense should be enough to draw some conclusions. Let's assume that the Caps would have made it to the Finals. Since they had home ice through the playoffs, any long series would have resulted in four games at home. For the sake of argument, lets assume that there would be at least three home games played every series. This means that, after the first round, there would have been another 9 to 12 games played by the Caps on home ice at the Verizon Center. Taking these games off of the schedule impacts a number of people directly linked to the operations of the facility, such as janitorial staff, ushers, and ticket takers. It also impacts the outside vendors of food and alcohol and their distributors. Then there are the individuals in ticket sales, both of the legitimate and black market variety, that are missing out on revenue. There are probably more than a few local police officers who are missing out on overtime pay as well. These only represent the front lines, however.
Interestingly, many of the biggest upsets seem to occur in hockey. A recent example of this phenomenon provides a suitable case study. Last week the Montreal Canadiens, this year's eighth and final seed in the NHL's Eastern Conference, won game seven of their first round series against the Washington Capitals, a team boasting the best record, and arguably the best player, in the entire league. Tomorrow night, the Canadiens will suit up for a second round matchup against the Penguins while the Capitals' most intimate experience with Lord Stanley's Cup this year will occur courtesy of their cable boxes.
While long-suffering Caps fans are undoubtedly still nursing their wounds, the greatest impact of the Caps' first round exit could be the economic loss it has led to, both locally and nationally. As the top team in the league, the Caps were expected to go very deep into the playoffs, if not win the Stanley cup. This would have meant weeks of home games, excited fans and a boost to the local economy as well as higher sales and sponsorship revenues nationally. Instead, the area hosted four home games, and the league has lost its best player for the remainder of the season. What does this mean in economic terms?
The impact is very difficult to estimate in dollar terms, but a quick rundown of the effected parties and a little common sense should be enough to draw some conclusions. Let's assume that the Caps would have made it to the Finals. Since they had home ice through the playoffs, any long series would have resulted in four games at home. For the sake of argument, lets assume that there would be at least three home games played every series. This means that, after the first round, there would have been another 9 to 12 games played by the Caps on home ice at the Verizon Center. Taking these games off of the schedule impacts a number of people directly linked to the operations of the facility, such as janitorial staff, ushers, and ticket takers. It also impacts the outside vendors of food and alcohol and their distributors. Then there are the individuals in ticket sales, both of the legitimate and black market variety, that are missing out on revenue. There are probably more than a few local police officers who are missing out on overtime pay as well. These only represent the front lines, however.
The List: The AP Stress Index
Apparently the AP has managed to come up with a method to determine and rank the economic stress levels of US counties. Not surprisingly, many of the most economically stressed areas can be found in California. A bit more interesting is the list of the least economically stressed counties, which seems to have a very firm footing in 'Real America.' I will let the readers draw their own conclusions about why that may be. In addition to the list above, the data can be viewed visually via heat map.
An Investment-Driven Solution to Green Development Problems: The S-REIT (Part 4 in a Series)
This post is Part 4 in a series and is excerpted from a recent thesis on the applicability of the REIT tax structure to large-scale solar development. Parts 1 through 3 may be found at the following links: Part 1, Part 2, Part 3. Part 5 may be found here.
Creating an Immediate Impact – Using the Tax Structure to Stimulate Development
Assuming, arguendo, that an S-REIT tax regime becomes a legal reality, whether by administrative declaration or legislative changes to the tax code, it is not clear that this would be enough to ensure optimal short-term development of solar facilities. It is true that such a structure could entice some first-movers to action. Additionally many in the industry believe that solar could become competitive on a large scale anywhere from 5 to 15 years from now. 1 Having the S-REIT structure in place ahead of such technological advances could certainly prove helpful. However, In order for the S-REIT regime to have its highest present impact, it will be necessary for changes to be made to the incentive structure for solar developers. Though under an S-REIT plan, investors would provide some capital which could be used to finance projects, the costs of solar energy without subsidy are still currently too high to be competitive with cheaper forms, so long as fossil fuel sources continue to receive federal and state subsidies. The current solar regime, which includes investment tax credits, evens the playing field somewhat and allows developers to start projects with a lower risk level than would otherwise exist. But ITCs and rebates have proven to be inadequate tools to fully stimulate solar development. Further, there are the negative incentives noted above for developers to game the system in certain circumstances, focusing on smaller, more expensive installations to the detriment of both energy production and progress. Finally, it is not entirely clear that the current investment tax credit structure would be allowed to co-exist with an S-REIT model. 2
Because stimulus in addition to investor capital will be required, and because the current ITC regime has proven to be an ineffective and inefficient means to provide this stimulus, a new structure will be required to ensure that the S-REIT can meet its full potential. Although it is possible that this stimulus could come in one of many forms depending on what legislators determine the best route may be, this paper proposes the enactment of a refundable production tax credit (PTC) for large-scale solar projects, available only to developers organized under the S-REIT structure. Though PTCs have been explored in the past, the lack of early stage incentives lead to ineffective results. However, the up-front capital provided by REIT investors could go some way toward facilitating this later stage tax benefit.
In order to be most effective while remaining palatable for legislators and their constituents, a PTC would need to be well-structured. This paper proposes the following:
5.01.2010
An Investment-Driven Solution to Green Development Problems: The S-REIT (Part 3 in a Series)
This post is Part 3 in a series and is excerpted from a recent thesis on the applicability of the REIT tax structure to large-scale solar development. Parts 1 and 2 can be found here and here. Parts 4 and 5 can be found here and here.
Although the REIT structure, with its ability to attract a broad base of investors, could be a very attractive tool for solar development, it is not clear that solar developments could, at this point, qualify for REIT status. There are some aspects of the REIT tax structure which would present little to no barrier for a solar developer. For example, the organizational and distributive requirements of REITs could effectively be satisfied with very little planning. Indeed, many solar developers likely satisfy many of the requirements already, such as having directors and transferable shares, inter alia. Additionally, it is not difficult to envision a solar developer satisfying the asset test as property is typically a significant category on many developers’ balance sheets. However, because of the novel approach of a solar development utilizing a REIT tax structure, whether or not an S-REIT could satisfy the income test as it is currently configured is less clear, and could be the largest hurdle to the S-REIT structure.
As noted in discussion of the REIT structure, an entity must earn 75% of its income from rents. There is also a provision that part of this, 15% of total income, may come from personal property related to the real property. Since the income gained by solar developments is in the form of payments based on a power purchase agreement linked to energy produced by solar panels, which could possibly be considered personal property, it is unclear whether all the income from a PPA could qualify as rents from real property. 1, 2
I.R.C. 856 is silent in regard to solar development. Additionally, the IRS has not made any published rulings on whether income from a PPA would qualify as rent. 3 However, it is possible to find some support for the proposition that PPA income could qualify as rent from real property. As noted above, it might appear that solar panels are personal property. This would be problematic as rents gained from personal income can only contribute 15% to gross income. However, this personal property rule typically pertains to moveable property used in connection with broader business activities. For example, one retail mall was able to claim rents from baby strollers under this clause. 4 Immoveable solar panels, which serve the purpose of income generation, and not just add-ons to broader corporate activities, would not seem to fit into this category. A more appropriate comparison might be to the assets that railroads use to generate income, such as tracks and bridges. Therefore, a broad reading of ‘interests in real property’ that includes income gained from solar panels would likely be appropriate.
However, despite these possible avenues it would not be appropriate or financially prudent for a solar developer to move forward on claiming REIT status without determining first whether this broad definition of interests in real property was shared by tax authorities. Because of the lack of statutory clarity on the topic and with no past rulings on point, it would be therefore be necessary for interested parties to gain a revenue ruling on whether income from PPAs would qualify as pure rents from real property. There would be two possible avenues to request the Secretary to issue a favorable revenue ruling. One would be for a Congressional Committee to request one. This would be the more effective route, as the tool of political pressure could be used to ensure that the issue received prompt attention. However, the support of a Congressional Committee may be difficult to gain, or at least may not be as prompt as solar developers would want. A second route would be for solar developers and or industry groups to apply for a revenue ruling. Though this could be done much more rapidly, it is also true that such a request would carry less political weight than one issued by a Committee.
Alternatively, a valid claim could be made that solar development should be afforded safe harbor status under the tax code, similar to the benefits given to healthcare REITs and REITs in the hotel business. This makes intuitive sense when one considers the functions of a traditional REIT as opposed to these newer forms. For example, an office REIT gains income from renting space to corporations and individuals. A warehouse REIT rents out space to companies which require large areas to hold or transfer goods. An apartment REIT makes most of its income from tenants. Each of these is a clear example of a company earning rental income from real property.
A Proposed Solar Development Framework for Tomorrow: The S-REIT
The commercial real estate sector has experienced strong growth and efficiencies due to the structure provided by the REIT regime. Whether or not the solar industry could benefit from a similar structure depends, at least in part, on whether the appetites of investors and the attitudes of politicians would allow the idea to thrive. This section is dedicated to proposing a framework which could prove successful.
Although the REIT structure, with its ability to attract a broad base of investors, could be a very attractive tool for solar development, it is not clear that solar developments could, at this point, qualify for REIT status. There are some aspects of the REIT tax structure which would present little to no barrier for a solar developer. For example, the organizational and distributive requirements of REITs could effectively be satisfied with very little planning. Indeed, many solar developers likely satisfy many of the requirements already, such as having directors and transferable shares, inter alia. Additionally, it is not difficult to envision a solar developer satisfying the asset test as property is typically a significant category on many developers’ balance sheets. However, because of the novel approach of a solar development utilizing a REIT tax structure, whether or not an S-REIT could satisfy the income test as it is currently configured is less clear, and could be the largest hurdle to the S-REIT structure.
As noted in discussion of the REIT structure, an entity must earn 75% of its income from rents. There is also a provision that part of this, 15% of total income, may come from personal property related to the real property. Since the income gained by solar developments is in the form of payments based on a power purchase agreement linked to energy produced by solar panels, which could possibly be considered personal property, it is unclear whether all the income from a PPA could qualify as rents from real property. 1, 2
I.R.C. 856 is silent in regard to solar development. Additionally, the IRS has not made any published rulings on whether income from a PPA would qualify as rent. 3 However, it is possible to find some support for the proposition that PPA income could qualify as rent from real property. As noted above, it might appear that solar panels are personal property. This would be problematic as rents gained from personal income can only contribute 15% to gross income. However, this personal property rule typically pertains to moveable property used in connection with broader business activities. For example, one retail mall was able to claim rents from baby strollers under this clause. 4 Immoveable solar panels, which serve the purpose of income generation, and not just add-ons to broader corporate activities, would not seem to fit into this category. A more appropriate comparison might be to the assets that railroads use to generate income, such as tracks and bridges. Therefore, a broad reading of ‘interests in real property’ that includes income gained from solar panels would likely be appropriate.
However, despite these possible avenues it would not be appropriate or financially prudent for a solar developer to move forward on claiming REIT status without determining first whether this broad definition of interests in real property was shared by tax authorities. Because of the lack of statutory clarity on the topic and with no past rulings on point, it would be therefore be necessary for interested parties to gain a revenue ruling on whether income from PPAs would qualify as pure rents from real property. There would be two possible avenues to request the Secretary to issue a favorable revenue ruling. One would be for a Congressional Committee to request one. This would be the more effective route, as the tool of political pressure could be used to ensure that the issue received prompt attention. However, the support of a Congressional Committee may be difficult to gain, or at least may not be as prompt as solar developers would want. A second route would be for solar developers and or industry groups to apply for a revenue ruling. Though this could be done much more rapidly, it is also true that such a request would carry less political weight than one issued by a Committee.
Alternatively, a valid claim could be made that solar development should be afforded safe harbor status under the tax code, similar to the benefits given to healthcare REITs and REITs in the hotel business. This makes intuitive sense when one considers the functions of a traditional REIT as opposed to these newer forms. For example, an office REIT gains income from renting space to corporations and individuals. A warehouse REIT rents out space to companies which require large areas to hold or transfer goods. An apartment REIT makes most of its income from tenants. Each of these is a clear example of a company earning rental income from real property.
The List: Largest Foreign Holders of US Debt
Among pundits and policymakers, any proper discussion of China would be incomplete without a mention of its status as America's largest creditor. However, while it is true that China remains the largest holder of US debt securities, it has also been reducing its stake since the middle of last year, putting some of the other large holders more in focus. For example, Japan was rumored to have taken the top spot at one point, while the group of oil exporting countries has increased its stake over the same time period. The full list can be found here.
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