Archive for May, 2010

If only it were Tim Geithner or Barack Obama referring to some of our Bigger Problems, but here’s Dave Cieslewicz telling the Overture Center’s lenders to cuss off:

The banks “should take a very short haircut on this,” he says, referring to the swap agreements. “They took tens of millions in interest and fees over the life of the deal. They did very well.”

Kristin Czubkowski explains at the Cap Times* why the City thinks it’s off the hook for its guarantees of Overture debt, a question that was raised in our last visit to the subject. Turns out that the geniuses who ran Overture’s finances are no smarter than (indeed slightly dumber than) Larry Summers of the Harvard presidency era: they entered into interest rate swaps which now, with rates in the basement for the foreseeable future, have added millions of dollars to the guarantors’ annual obligations relative to the “worst case” scenarios as of the Center’s refinancing. The “slightly dumber” part is that nobody here’s been willing to pay to exit the swaps.

Czubkowski hands us over to the city attorney for an explanation of why the city thinks it’s off the hook even for the $1.95 million anticipated in the refinancing, let alone the $5 million plus including the swap payments:

[City Attorney Michael] May and Cieslewicz … say the decision to draw the swap payments from the firewall violates the original contract and the city’s agreement to back some of the Overture Center loan.

The rule in Wisconsin “is that a person who is owed the money cannot change the deal and hold the guarantor to their agreement without getting the guarantor to sign onto the changes,” May told the city’s Board of Estimates Monday night. “The rule is so strong that if they make the change and it increases our risk, that it releases any obligation” to pay even the previously agreed-to amount.

As a non-lawyer, I can’t evaluate the validity of this opinion.  As an economist, the rule May is describing would be a very good idea in the event it isn’t true: it’s saying that signing someone up to cover losses on bet A doesn’t automatically obligate them to cover the losses on bet B, which certainly would tend to avoid a lot of obvious opportunities for mayhem.

Still, there may be a contract-law question underlying this: what exactly did the city agree to?  It’s not that the world doesn’t have contracts whose terms can be altered unilaterally — credit card agreements being a notorious example, though even there the notionally agreed-upon original terms expressly allowed modifications.  Plus, those involve notice and opportunity (though not necessarily a costless opportunity) to decline the revised deals, we can only assume because even contract law is not such an ass as to let people define others’ obligations with total impunity.  So perhaps someone could obtain the actual agreement and run it past a real lawyer for comment.

* A nit to pick being that in describing the Overture trust concept, Czubkowski blames the trust’s problems on the “turbulent post-2005 stock market.” In fact, the fund’s problem was that it wasn’t invested in a period when any moron (like me, with my 401(k)) could have (and did) make loads of money; it was holding more than 60% cash, plus 30% stocks and 10% Bernie Madoff, back in 2006 with a targeted return of 8.25% to meet all obligations.

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Matt Welch at the Reason blog takes credit for airline deregulation on behalf of libertarianism:

The “worldview” of libertarianism suggested, back in the early 1970s, that if you got the government out of the business of setting all airline ticket prices and composing all in-flight menus, then just maybe Americans who were not rich could soon enjoy air travel. At the time, people with much more imagination and pull than Gabriel Winant has now dismissed the idea as unrealistic, out-of-touch fantasia. They were wrong then, they continue to be wrong now about a thousand similar things, and history does not judge them harsh enough.

Mark Kleiman observes that transportation deregulation was more directly the progeny of 1970s Brookings-esque neoliberalism (though I’d grant Welch that libertarians got there first), though Kleiman doesn’t take issue with the basic claim that deregulating prices and service offerings “was, on balance, a good thing.”  This argument ultimately rests on the declines in airfares and resulting democratization of air travel that Welch cites; indeed that’s what the Brookings-esque neoliberals I know cite when they’re defending the deregulatory record.

The catch is that all such economic comparisons must be counterfactual: they must show an improvement not with respect to CAB-set fares of the late-1970s, but rather with respect to what reasonably competent regulation could have produced under the other circumstances of the deregulated era.  (This, FWIW, is one of Robert W. Fogel’s central insights into what makes economic history economic history.)  If the comparison exercise is tough by the (inappropriate) historical yardstick thanks to declines in (average) service quality and the airline industry’s trail of fleeced stakeholders, then the counterfactual comparison is going to be tougher still thanks to a couple of factors that should have produced large declines in airline costs and hence fares even in the absence of deregulation.

The factors of note are a pair of technological advancements — the development of high bypass ratio turbofans suitable for shorter-haul airliners and the demise of the flight engineer’s job thanks to cockpit automation, both of which have origins predating deregulation — and the long secular decline in oil prices through the deregulated era’s zenith prior the crash of the 1990s stock market bubble.   Since a regulator could have promoted adoption of the cost-saving technologies and passed the resulting productivity improvements and input cost decreases through to fare-payers using elementary regulatory technologies, deregulation must have produced substantial fare reductions relative to the late CAB era to have a claim to constituting a true improvement.

One of the airline industry’s problems is that it isn’t “revenue adequate” or able to recover its total costs including a normal return to investors.  If you thought airlines were incurring costs efficiently, then moving towards revenue adequacy would require more revenues and hence higher average fares.  On the face of things, that wouldn’t look good for a regulated alternative providing more secure revenues to the industry.  However, there are dynamic efficiency counterbalances to the apparent static inefficiency under regulation: revenue adequacy implies having money for efficiency-improving investments.  For instance, U.S. legacy airlines have somewhat notoriously kept relatively aged fleets in the air.  Partly, that was a deliberate strategy that blew up when the Goldilocks conditions of the late-90s ended, and partly they don’t have the money to turn over their fleets as fast as they arguably should.

The formerly regulated transportation industries shared, to one extent or another, cost structures under which an efficient carrier would go broke under econ 101 perfect competition with prices driven down to marginal costs.  So the question isn’t so much whether carriers will exercise such market power as they have in order to survive, but how.  Real firms might or might not do that better than a real regulator.  I do think there’s a good case to be made for some degree of pricing and service liberalization with regulatory policing of “excessive” use of market power; that’s a one-sentence version of the Staggers Act’s approach to the (very successful) freight rail industry.

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The Wisconsin State Journal ran a front-pager by Dean Mosiman yesterday on plans being hatched in Mayor Dave’s office for a city take-over of the Overture Center, our absolutely fabulous but debt-ridden arts facility in Downtown Madison.  The state of affairs is the result of an arrangement whereby about half of the donation was put into a trust fund that was intended to pay off a construction loan and generate additional income to support center operations.  Unfortunately, as I pointed out at Old Marginal Utility, the fund was undercapitalized and so needed to produce roughly 9% annual returns to make ends meet.  Alas, the plan was hatched in the late 1990s when this probably seemed like the height of conservatism.  A late-2005 refinancing, strongly opposed by the Mayor, reduced the required return to about 8.25 percent, but was particularly susceptible to losses in the early years.  D’ohh.

A companion piece by Mosiman doesn’t shed a lot of light on the fund’s history, but in Old Marginal Utility days I took a close look at the trust fund’s investments on behalf of our alternative weekly, Isthmus, and declared them a mess:

The interesting question is why they stayed in cash for so long post-refinancing. Pardon me for thinking that the financial geniuses behind the refinancing might have had an investment plan ready to roll upon approval. None of the obvious answers — they didn’t have a plan, the Cash Era represents an inept plan, and they chose a deliberately defensive position to avoid the political embarrassment of a quick I-told-you-so from refinancing opponents — is confidence-inspiring.

As it happened, the fund did get out of cash and into alternative investments, one of the biggest of which was the Fairfield Sentry fund.  That fund turned out to be the most consistent producer of returns.  While in April of ’08 I declared it a black box, we now know that the box was Bernie Madoff’s Ponzi scheme; had the Overture trust performed slightly better and not been liquidated in the Fall of ’08 in advance of the Madoff debacle, the refinancing scheme would have suffered an even worse collapse as nearly 20% of the trust was with Madoff via Fairfield.

I can only imagine what the crazies are saying in the madison.com comments section, but settling the remaining construction debt and turning the center over to the city is not exactly radical under the circumstances — indeed, it’s more-or-less the path not taken when the 2005 refinancing was being considered.  The City doesn’t (or, at least, shouldn’t) want a prime downtown block going dark, the center’s lenders would surely be out more than the $6 million or so cramdown that the city is looking to stick them with if they foreclosed*, and the major donor wants to limit his personal liability.  A screaming headline in the paper’s opinion section expresses strong support for a plan to redevelop the threadbare Edgewater hotel on Lake Mendota with a city subsidy of $16 million, but if resources are finite, then Overture would use of public money of a similar magnitude to the benefit of a much larger constituency.

* An interesting, and for now under-reported, part of the story is that the city claims that changes to the loan agreements when the trust was liquidated in 2008 let it off the hook for the portion of Overture debt payments it had guaranteed in the 2005 refinancing.

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Green Shoots!

There isn’t much to complain about in this morning’s U.S. employment report. I’ve been keeping my eye on a few below-the-headlines figures, and those have been solid for a few months running.

The household survey again showed increases in both the labor force participation and employment-to-population ratios; data on the reasons for unemployment attribute the uptick in the unemployment rate primarily to job market re-entrants. This is bad news for economists of the neoclassical persuasion such as Casey Mulligan who attempted to explain the last two years’ sharp decline in labor force participation as the Great Vacation of ’08-09.

Those inclined to see the glass half empty may observe that the not-well-loved Net Birth/Death Model, which tries to adjust payroll data for biases associated with the speed with which BLS recognizes the existence of new firms and the non-existence of defunct ones, added 188,000 jobs to April ’10 payrolls (before seasonal adjustment). However, this is only 62,000 more than the comparable addition in April ’09, and there is no reason to believe that conditions for Net Births, not least economic growth, are not in fact significantly better now.

This might not quite make this Morning in America, yet, but we’re getting there.

Added: Charles Wiese, whose optimistic view has kept me going the last few months, has more of the glass-more-than-half-full story.

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I am, as a rule, a fast-moving Lycra-clad bike commuter. I didn’t start out that way, but as Sammy Hagar might have sung under different circumstances, I can’t ride 12.5. At least, I discovered that it takes surprisingly great effort to limit my speeds to the point where hypothetical work clothes wouldn’t be drenched in sweat upon arrival at work. So I’ve viewed it as a basically practical adaptation to arrive at work a mess and use the provided facilities — my office had a changing room with a shower long before you could get a LEED point for it — to make myself decent. The arrangement saves me time, thanks to averted boring trips to the gym, and money. What’s not to like?

Then came Mayor Dave Cieslewicz’s The Problem With Lycra, suggesting that the cyclist “dress code” and road-bike fetishism inhibits bike commuting in the U.S., as compared to Europe where everyone rides upright bikes in their civvies. Funny, I thought the far bigger obstacles were streets that are under-maintained or given over to cars from curb-to-curb (or both), and healthy fear of the typical SUV driver, barreling along as s/he does with a cell phone in one hand and a latte in the other.

One thing that’s for sure is that Sister Souljah moments kind-of suck if you’re in the Sister Souljah position. In a different context, Amanda Marcotte makes a case, which I highly endorse, that this liberal tic is worse-than-useless:

The intention of these sentences may have been to lay fears to rest, but the result is reinforcement of the idea that “foodieness” is some wicked elitist hobby. In an attempt to reassure people that merely liking to cook doesn’t make you a bad person, the writer reinforced the idea that there’s something morally suspect about most people who like cooking. In an essay aimed at convincing people that cooking well isn’t actually that hard, this sort of rhetoric undermines the point…

I don’t know when it was that everyone in our culture universally agreed that there was something shameful about having good taste and good sense, but nowadays if you want to defend either good taste or good sense, you often feel like you have to set up disclaimers about how you’re not one of Those People, the ones that think these things matter.

Nevertheless, I had the opportunity earlier in the week to rejoin the slow-cycling movement. The choice was to hop on in work-suitable duds midday (after Suzanne and I returned home from a lunch for one of our preferred charities) or drive to the office, so I hopped. I confess that the experience points to a better world, one in which 10 minutes on a bike pedaled at a not-brisk pace gets anyone just about anywhere anyone would want to go. Under those circumstances, I’d aver — pace Mayor Dave — that the Europeans have it right in largely ditching bike helmets, as there’s only so much damage that can be suffered at such speeds provided the damned SUVs are kept at bay.

I’ll still take the long way and the accompanying exercise most days, thanks, but going slowly and still getting places quickly felt like a luxury. It shouldn’t be.

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I’ve been using Facebook as a light-blogging platform on and off for much of Marginal Utility’s inactive period, and it’s very convenient to click a “share” link and get an automatic (if not always reliable) excerpt and thumbnail image.

Moving back here is not political, even though other lapsed blogging friends have been busy pointing out Facebook’s increasingly alarming privacy issues. The central issue is the lack of an “edit” button, and a secondary issue (for the handful of people who surf here the old fashioned way, at least) is the lack of formatting control. Meanwhile I’m considering whether the serif and sans-serif font applications here are backwards. On-screen font rendering has come a long way, but not so much on my Other (Windows XP) Computer.

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Dean Baker had a bit of a press-beating flub the other day with this annoying NYT analysis piece on the oil spill, in which Jad Mouawad’s slightly buried lede was, “The country needs the oil — and the jobs.” Baker does OK on the oil part of the claim, and resists the temptation to liken the “need” for oil to certain individuals’ needs for their addictive drug of choice, but not so much on the jobs.

An accompanying info-graphic says that oil and gas exploration and production in the Gulf of Mexico employs about 35,000 people. I might think that’s big because the blotch of oil surrounding the jobs number is bigger than the blotch surrounding the 1.7 million barrel/day production figure. But the former is 0.02 percent of U.S. employment whereas the latter is roughly a third of U.S. crude oil production (though that’s a bit less than a tenth of consumption; plus the Gulf makes a decent contribution to the U.S. natural gas supply). It’s a productivity miracle! Along the same lines, EIA data show that U.S. coal production employed 86,859 nationwide in 2008 to extract 1.17 billion tons of coal. So there’s about 0.5 coal miners per U.S. city delivery letter carrier.

Clearly, fossil energy employment can do things like strain housing resources in places like Athabasca and North Dakota which have the feature of being remote and mostly empty ex-boom. Otherwise, if we were really serious about needing the jobs, then transforming the economy to get rid of the fossil fuel consumption would be a far better jobs program than increasing domestic energy production. Big programs like electrifying ground transportation, building thousands of megawatts of renewable electricity generation capacity and the systems to turn it into reliable electric supply would involve trillion-dollar-class investments, and it’s basically impossible to spend a trillion dollars actually doing stuff (as opposed to shuffling around data representing money) without creating millions of jobs.

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