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Flipping the Exurbs

By Fester:

I spent a good chunk of yesterday meeting with some relatives and driving through the Washington D.C. exurbs.  And this is an area that is in trouble beneath the veneer of new construction, fresh paint and large neon-signs.  It is also an area that has historically voted Republican for economic grounds as it is an extraordinarily anti-urban and local educational arbitrage environment.  This is a Republican base area. 

Yet it is an area that is looking to flip because the pain is too high. 

We drove through my hosts' subdivision and it was massive but incomplete.  Almost one thousand houses at price points from the mid 200Ks in the New Urbanist portion of the 'village' to million dollar large single family detached houses with three and four car garages are in this project.  All of these houses were built in the past five years, and everyone had been on the HELOC treadmill of drawing out equity to finance current consumption.  However the project lies incomplete as the developers' financing for the next round failed.  The Home Owners Association can not afford a second pool, so there is a massive muddy hole in the ground where construction has stopped.  Seventy houses were foreclosed in the past year.  Many more are somewhere in the foreclosure process.  All of these homes have decreased in value from both the general market drop and the local negative externality of having an empty house nearby. 

The pain is widespread and real, and the second order impacts will be as large or larger than the first order impacts as the entire local/basic economy was structured on new construction with high costs that could only be justified by an increasing population with increasing incomes.  That population is not coming as the next wave of houses will not be built for another decade.  The franchises are high end franchises that are only viable once their consumer bases have taken care of their fixed costs, their quasi-fixed discretionary costs (braces for the kids, swimming lessons etc) and their core discretionary spending is satisfied.  The franchises are based on capturing the truly disposable income of the area.  The combination of fifty mile commutes in a $4.11/gallon environment, and job uncertainty has dramatically decreased local unattached disposable income.

The decline of the minor local business community and the concurrent decline in housing values will devalue the local educational arbitage of having a 'superior' sclhool district just a little bit further out.  This will be an escalating and viscious cycle.

When I had lunch with my relatives who are base Republican voters (white, middle age, self-identifying as Christian), they brought up politics and asked if I was working for any candidate this cycle as they know I had done that work in the past.  They asked how Democrats and liberals saw the primary process and what I thought about Obama and Clinton and then one announced their vote for Obama, a first time Democratic primary voter in over a decade because the pain had been too bad, and something different was needed.

I can see a lot of people coming to that conclusion in the exurbs.  Something different is needed to resolve their problems and the superstructure in which those macro problems reside.  I don't think Obama is that solution they are seeking, but in the short term, this need for something different could swing the exurbs from a dominant Republican territory with attendant massive margins that somewhat offset the urban advantages Democrats enjoy into mildly Republican districts that are insufficient to offset the waves coming out of the cities.  People are in pain, or they see enough of their social networks in pain to want to try something different.  And it is that tropism that could provide for a blowout this fall. 

British state capacity and Peak Brent Oil

By Fester:

Great Britain has been the recipient of a massive and fortunate fiscal gift for the past two generations.  It is an industrialized, modern, energy intensive nation that is also an oil exporter.  The North Sea offshore fields provided a steady, dependable counter-cyclical stream of oil revenue to the Exchequer while the mature British economy could produce returns that are comparable to returns on investment in the energy sector so the oil curse was at worse, mildly felt.  However, British oil production is in decline.  Since 2004, Britain has been a net oil importer and it has been importing in the face of record dollar and pound denominated prices.  Imports are increasing and the current account deficit is matching that increase. 

As the North Sea declines, there are fewer barrels of oil for the Government to tax, although it is receiving a much larger fee per barrel due to the price increases.  The North Sea is predicted to decline at double digit annual rates.  This will have a dramatic impact on the budget as a major revenue hole will be created that can not be papered over by higher revenues per barrel produced. 

We have looked at a similar situation in Mexico two months ago as the Mexican government receives roughly 40% of its revenue from taxation of oil production.  Mexico, like Great Britain, is seeing its major fields in serious decline.  Are these scenarios similar?

Higher prices are masking the pain at this point but Mexico is entering the Export-Land problem.  Higher local demand is keeping more of its oil off the international market and thus leading to a decline in hard currency earnings.  One estimate is that Mexican oil exports could go from a 2007 average of 1.67 million barrels per day to less than 280,000 barrels per day in 2016.  Even projecting high per barrel prices this is a net decline in overall revenue and a massive decline in revenue per capita. 

So given these trends, how much ability does the Mexican elite have to maneuver?  Not much at first glance unless they can clean up their own acts to free up resources for effective, responsive and localized public good projects that can not be matched by the drug gangs which are seeking to create a hollowed out and ineffective state. 

Great Britain is starting at a massive advantage over Mexico in that it is not the nexus of massive black market smuggling into the largest market in the world.  It also possesses significantly greater, deeper and more resilient social and civic capital networks.  However the crux of the problem remains; both governments have made very signficant promises that were significantly backed by oil revenues.  In the next few years, those oil revenues are under severe threat due to geology and physics and numerous promises may be broken as services are either not provided, or different constiuencies are taxed.  How will either government resolve the diminishment of their state capacity?

Campaign Finance, Small Donors and Republicans

By Fester:

Mark Ambinger is passing along this tidbit from a major campaign finance reformer that has me scratching my head:

On the panel, Wertheimer, who called himself a "genetic optimist," said he is confident that the new Congress will pass, and the new president will sign, a major overhaul of the public financing system for presidential campaigns, a key feature of which is a four-to-one match of small dollar contributions.

I'm trying to figure out why Republicans would agree to that change from an institutional point of view.  Even if, or espescially if they suffer the losses that US News and World Report reports that some insiders are worried about:

Some GOP insiders now predict that the Republicans will lose at least five seats in the Senate and 15 to 20 in the House, and it could get worse if gasoline prices continue to soar and the public remains in a disgruntled mood [h/t Atrios]

The remaining Republicans in this scenario are survivors from safe seats.  Furthermore the cycle of politics and seats at risk will look better for 2010 as it is a midterm where the opposition party typically picks up a few seats, and in 2012 when the GOP faces the freshmen of the class of 2006 and sees the House shift to slightly friendlier seats due to redistricting.  The Republicans who would be left are candidates who can win in very hostile environments under the current rule set.

Changing the current rule set to give a 4:1 match significantly disadvantages current Republican office holders while advantaging current Democratic officeholders.  The Democrats have successfully built a massive small donor based financing system in the past five years.  Under the current rule set Democrats can compete with Republicans by a combination of big money and a growing small money component. This rule change would swamp Republican fundraising instead of merely matching and barely beating it.  It would also allow Democrats the option of refusing some funds and become more ideologically coherent and aligned with popular interests instead of their funders interests. 

This same argument could have been written in2002 when McCain-Feingold banned national party soft money donations.  In fact it was written that McCain-Feingold was the Democratic Party Suicide Bill.  However six years later there is a Democratic majority (of what value is another issue) in both chambers of Congress, and the Democratic presidential nominee is the favorite to win the White House.  McCain-Feingold did not have a signiffcant negative impact on the Democratic Party's long run chancess.

However the Democratic Party of 2002 and the Democratic Party of 2008 are two very different creatures in its sources of support, hot button issues, activist influence and strategic direction.  And itis at this point of conflict that I have to question why Republican officials would vote for this rule change. 

The McCain-Feingold rule changes increased the power of activists, and small donors as aggregated small donors could now compete on the same playing field as large, instititutional donors.  Small donors have far less influence per person but as a unit, they can and have repeatedly demonstrated an ability to change the direction of the party by rejiggering the incentive structure through funding good candidates, funding primaries and backing up vulnerable incumbents.  This has worked as liberal activists are fairly close to median political positions.  However Republican incumbents have a good reason to fear their activists as they tend to be further from the median voters and issues positions. 

The activists with a proven ability to raise small donor money for the Republicans are the Paulites and the Christian conservatives.  When either group is the face of the Republican candidate in a barely competitive district, the  Republican probability of a win significantly decreases.  Even more importantly from an institutional power perspective is that these groups are the grunts of the Republican coalition and not its elite.  However being able to magnify their proportional influence by a factor of three or four would massively disrupt the party's power structure.  This is a fight that incumbent Republicans and their supporters don't want to wage as they have seen the costly rearguard that the Democratic establishment has been fighting against the bloggers and small donors for the past five years. 

I just don't see why Republican incumbents will vote for this bill, or allow it to pass without a filibuster vote as it is a direct inter-party threat, and more importantly, a massive intra-party institutional threat to their power. 

 

IMF Wants to Open the Books

By Fester:

According to Der Speigel, the IMF wants to open up the US financial system books and review the stress tests, algorithms and accounting methods used at all levels of the US economy. 

Officials with the International Monetary Fund (IMF) have informed Bernanke about a plan that would have been unheard-of in the past: a general examination of the US financial system. The IMF's board of directors has ruled that a so-called Financial Sector Assessment Program (FSAP) is to be carried out in the United States. It is nothing less than an X-ray of the entire US financial system.

As part of the assessment, the Fed, the Securities and Exchange Commission (SEC), the major investment banks, mortgage banks and hedge funds will be asked to hand over confidential documents to the IMF team. They will be required to answer the questions they are asked during interviews. Their databases will be subjected to so-called stress tests -- worst-case scenarios designed to simulate the broader effects of failures of other major financial institutions or a continuing decline of the dollar. [h/t the Boneheaded Compendium]

The US financial system has become disconnected with reality and the economy in general.  That could be tolerable if the US financial system was serving as a massive export for the US economy and rapidly expanding its market share within the global market, but it is actually shrinking compared to thirty years ago as new exchanges, burses, and investment banks open up and talents spread.  This disconnect is a potentially systemic risk to the global financial system. 

The question the IMF wants to be able to ask is "Can we trust the US's books?" 

Is the Federal Reserve looking at the right definition of inflation, and is it reporting it correctly?  Or do hedonic adjustments somehow make US inflation magically lower than Europe's despite a weakening dollar, lower interest rates and large current account deficits?

What the hell are Tier III assets and why should they be valued at what they are valued?

How are long run government obligations accounted for?  And how large are those potential obligations?

The IMF wants to conduct a full audit of the US financial system, and I would think that they'll find multiple red flags, lack of controls, and conflicts of interest when the audit is completed.  We will have sold our credibility for a song. 

 

More need with fewer reserves

By Fester:

Last month was another bad month for employment.  The initial non-farms payroll report shows a net job loss of 62,000 jobs.  Further revisions to the April and May data showed a loss of another 50,000 jobs.  Given population growth, the economy needs to create roughly 150,000 new jobs per month to maintain a constant workforce participation rate.  This month has a gap of 210,000 jobs between trend and actual.  The labor market has been loose for the past eight years, and now it is flapping in a mild breeze. 

Now Raw Story is reporting that the state level unemployment insurance reserves are rapidly decreasing:

Thirty-three states have funds below recommended levels, meaning they're at risk of running out in less than a year unless they're replenished as required under federal law. Nearly half the states could run out in less than six months.

The funds, totaling about $38 billion today, are in worse shape than before the last recession, when the total was about $54 billion.

I know Pennsylvania's rule when their fund is running low is to cut benefit levels while maintaining the length of benefits.  I don't know how other states manage their unemployment funds.  But this is symptomatic of the burning through of reserves and capital that produced the 'Bush Boom' mirage.  Reserves were run down at all levels, the federal government turned a surplus into massive deficits, states never rebuilt their reserve funds, and families went into HELOC hell and ran a deficit during the 'good times'.  This is going to hurt.

What good allies we have...

By Fester:

Good allies trust each other.  Good allies tell each other about major operations that are about to go off in shared battlespace.  Good allies don't devote significant national level surveillance assets that are in high demand and limited supply to watching their allies.  The LA Times has more on the relationship between Iraqi and US forces:

the United States is using spy satellites that ordinarily are trained on adversaries to monitor the movements of the American-backed Iraqi army, current and former U.S. officials say.

The stepped-up surveillance reflects breakdowns in trust and coordination between the two forces....
The use of the satellites puts the United States in the unusual position of employing some of its most sophisticated espionage technology to track an allied army that American forces helped create, continue to advise, and often fight alongside.

The satellites are "imaging military installations that the Iraqi army occupies," said a former U.S. military official, who said slides from the images had been used in recent closed briefings at U.S. facilities in the Middle East. "They're imaging training areas that the Iraqi army utilizes. They're imaging roads that Iraqi armored vehicles and large convoys transit."

The US military is saying through its actions that the Iraqis are standing up and capable of conducting their own operations or at least wants to mask those operations from the US until they are started and the Iraqi Army needs to get bailed out with airpower and artillery. And in order to not be suckered into fights the US does not want to fight but are forced to on the basis of freshly tied Gordian knots, the US is using assets that are very expensive in both cash outlays and much more importantly opportunity costs.  A satellite image analyst who is looking at the take of a KH-11 viewing areas south of Najaf can not be looking at images near the Khyber Pass.  Depending on orbital mechanics, some of the satellites may or may not have been pulled off of other missions to observe our allies.

What great allies we have and what great allies we are....

Toll Roads and Toll Bonds

By Fester:

I have been vacationing in West Virginia this week and reading the local papers and I noticed the following story that could be a precursor of future government limited obligation bond problems.  The West Virginia Turnpike system is facing some financial troubles do a combination of a declining credit rating of its bond insurer, FGIC, lower toll collections and less traffic:

Moving to counter a revenue loss prompted by a decline in Turnpike traffic and high interest on unpaid bonds, the West Virginia Parkways Authority agreed Tuesday to refinance its outstanding $59.1 million package for a smaller rate.....

June traffic plummeted by 6 percent, and that meant a 5 percent drop in toll collections, Manager Greg Barr pointed out.

Under its old arrangement with Financial Guaranty Insurance Co., interest rates were climbing because the firm ran into a quagmire in a national sub-prime trauma and its credit rating slipped from the top-ranked AAA to A3. In June, the 88-mile toll road lost some $250,000, as fewer tolls were collected at the tollgates.

The Authority is replacing its low rated underwriter with a AAA rated underwriter to save some money, however this is a one time fix.  It provides some breathing room for the authority to hope for toll revenues to rebound back to the projected trend. We have seen Americans cut back on the miles they drive
as a response to higher gasoline prices.  We may be seeing the inklings of a deceleration of the trend towards the exurbanization of settlements.  If these trends continue, the one time fix of bond refinancing will not be enough for the West Virginia Turnpike Authority or any other bond issuer that is relying on increased toll collection to back those bonds. 

This could be a wave of failures in a few years as reserves and one-time fixes are exhausted. 

Economic Reality for the bottom 95%

By Fester:

Today's New York Times:

For the first time on record, an economic expansion seems to have just ended without most families having received a raise. For the first time on record, the typical home price nationwide is falling. The inflation-adjusted value of the Standard & Poor’s 500-stock index has dropped 20 percent in the last year — and 30 percent since its peak in 2000.

I think the public has called this issue exactly right: the American economy has some real problems.

No further comment is needed. 

Problems with simple data

By Fester:

Brad Delong is looking at the expected increase in short term unemployment rates due to the passage of an additional three months of unemployment extension and forces himself to chuckle at the fact that President Bush signed a good piece of policy with severe negative political repercussions for John McCain:

The rule of thumb, IIRC, is that the average duration of an unemployment spell increases by 1/4 of the increase in the duration of unemployment benefits. Thus a 13-week increase in unemployment insurance duration should increase the average unemployment spell by 3 weeks. With current mean unemployment spell duration at 17 weeks, and with roughly 2/3 of the unemployed eligible for UI, this would produce a 3/17 * 2/3 * 5.5% = 0.6% increase in the measured unemployment rate.

It seems to me likely that--whatever happens to the economy--George W. Bush has just produced four bad unemployment-rate headlines on the Saturdays August 2, September 6, and October 4. This cannot be news that John McCain is happy to hear.

I think the unemployment benefit extension is excellent policy on multiple grounds.  First, it massively reduces stress for unemployed workers and their households.  Finding a job that replaces most of an individual's lost wages is tough right now, so extra time is valuable.  Secondly, this policy provides significant reassurance to the vast majority of people who currently have jobs but fear that they could lose their jobs.  Increasing the contingent safety net of unemployment benefits allows people to breathe slightly easier when they make a discretionary purchase that they otherwise would not have made.  Finally as a stimulus measure, unemployment benefits are targeted to people who are cash flow constrained and are very likely to spend the additional income.  This produces a very high multiplier effect which stands in contrast to the low multiplier, untargetted impacts of general rebate checks.  This is good policy.

It will have its impact in encouraging people to find a better job rather than any job.  This will increase the unemployment rate.  It also illustrates the problems of tracking a single number to describe the whole picture.  A more comprehensive and accurate look at the US labor market would look at the unemployment rate, the workforce participation rate, the number of discouraged workers, and changes in hours worked and total compensation.  This more thorough look will show a summer labor market that will continue to slacken as governments begin to cut back, manufacturers down shift as inventory is too high, and energy is poised to consume 10% of GDP.  However it will not be quite as bad as the simple headline statement of the unemployment rate will imply. 

More Municipal Finance Wonkery

By Fester:

The New York Times is catching up to the bloggers as they report the states and local governments are getting hammered and the recessionary budget cycles have barely begun. 

State tax revenues, adjusted for inflation and tax cuts, fell 5.3 percent in the first quarter of 2008 compared with the same time a year ago, according to a report to be released Tuesday; it was the third quarter in a row that total adjusted revenue declined. The first quarter revenues were the weakest among states since early 2003.

Sales tax revenues, the beating heart of many budgets, were essentially flat for the first time in six years. Corporate income taxes declined 5.1 percent from January to March compared with the same period the previous year — the third straight quarterly decline. And 12 states showed a falling off in personal income taxes, though revenue from those taxes rose 4.4 percent nationwide....

Unlike other economic downturns, when states were hurt by faltering corporate and personal income tax revenue, problems this time appear to be led by declines in sales taxes, prompted in large part by the issues with the housing market. This has been particularly painful for states like Florida and Tennessee that have no personal income tax and rely on people buying things. 

This is a harbinger as most indicators of contraction did not start lighting off until December 2007 or January 2008.  The short term response by individuals to tough times is to hunker down and use up individual reserves to smooth consumption patterns from the good times.  Those reserves were thin going into the stagnation and can not be counted on to bridge the peak to trough declines that we can anticipate. 

The next response is to cut back on truly discretionary items, and it is in this area that states will be hammered. Most states do not apply their full sales tax to groceries, medical care, some services, and fuel.  Those items are seen as necessary and fundamentally non-discretionary in family budgets.  So sales taxes often fall upon items that have higher elasticity of demand and people can do with less or without.  It is this category of goods that states tax that is seeing the fall-off as individuals react to incomes that either are falling or they fear will fall, and as dollars are shifted towards non-discretionary purchases as energy, food and healthcare costs increase. 

The states will be hammered and there will be very little that they can do as 98% have a balance budget constraint and most have already borrowed most of their prudent borrowing capacity. 

Gambling matures and declines

By Fester:

Nothing is recession proof if a recession is harsh enough.  The gambling industry has long contended that it is close to recession proof, but the Wall Street Journal is reporting on some of its problems (h/t to Johny G in Null Space comments)

Rising gasoline prices, the housing crisis and other economic troubles are prompting consumers not just to gamble less, but to spend less at the luxury boutiques and restaurants where casinos draw most of their profits. Struggling airlines are cutting service to Las Vegas. And pressures are building on casinos that cater to local residents, who have been hard hit by economic troubles.

"This is the toughest environment we've faced," says Gary Loveman, chief executive of global gambling giant Harrah's Entertainment Inc., referring to the economic challenges roiling the entire industry....

The public-debt market, spooked by four casino bankruptcies this year, reflects the concerns. Bond prices for a half-dozen casino companies, from Harrah's to small, Las Vegas-based Herbst Gaming, are trading at distressed levels, frequently below 60 cents on the dollar, on debt totaling about $5.3 billion....Credit-rating agencies have been hitting casinos hard. Moody's Investors Service, which rates $79 billion in debt at casino companies, has downgraded 17 casino companies this year. Eleven more are on review for possible downgrade,...

These debt market issues are having significant impact in Pennsylvania and Pittsburgh as the PITG group, which owns the slots parlor license for Pittsburgh, has not paid its construction crews for two months and has yet to present a final financing plan to the Pennsylvania Gaming Control Board.  PITG has taken on a new partner and is stopping construction on its casino for a short time period. 

A representative from PITG Gaming says the group has a new major investor in the Majestic Star Casino, and construction at the site will temporarily stop in the coming weeks.

Bob Oltmanns, of PITG Gaming, announced that the group had secured Walton Capitol out of Chicago as a major investor.

State and local governments, including Pennsylvania, have long counted on gambling revenues to be acyclical.  They 'never' go down as people will gamble in good times with their bonus money and in bad times with their core budget money.  Even as times worsen, the hope of a $50,000 jackpot to bail out troubles is a tangible and real dream for most people, and it could be worth the twenty bucks into the one arm bandit. 

However if gambling as a mature industry  turns out to be cyclical in that its revenues increase when the economy grows and revenues decrease when the economy stagnates or shrinks, then state and local budgets are in more trouble than previously thought. State and local governments are cycle matching financial entities.  Primary sources of government income are various income and sales/use taxes that track income and employment changes and property taxes.  Property taxes are counted to provide a slowly changing and increasing base while the more variable income and sales tax revenues are counted on to provide the marginal cash flow that determine whether a taxing body is seeing income gains or declines. 

With the real estate bubble bursting, property tax collections are stagnant or declining in most locales.  The decline in jobs, and stagnation in wages combined with higher fixed cost expenditures on fuel, energy, medical care and education, all of which have some tax advantages in most locales means that sales tax revenues are not growing.  Gambling revenues were expected to provide another source of stable to growing revenue but as the industry has matured, it is responding to the business cycle as most mature industries will.  It is declining when everything else is declining, and it is stagnant when everything else is stagnant. 

 

Puppets belong on children's shows

By Fester:

The Newshoggers encourages and seeks out active and informed commentary. This is especially true when you are coming at the issues we are discussing from a different angle.  That is one of the best ways for us to learn, or at least to re-examine our assumptions and our analysis.  However, we assume good faith and identifiability.  We fully support pseudonymity and anonymity as two of us, Fester and Cernig, have written under a non de plume for four or five years now.  We will respect consistent names. 

However we will not and do not respect sockpuppets.  Sockpuppetry is ground for an immediate ban.  It does not allow for an honest debate and conversation as the multiple 'sources' of information could have been conveyed intelligently from a single, known source; instead it is an attempt to exploit common human irrationalities of recency and primacy bias as well as herd behavior.  We do not tolerate this behavior at this blog.  We are banning an IP address for this behavior, which is a shame as the commenter has had some value to add to the conversation but has decided to break social norms to do so.

Pittsburgh Financial Implosion??

By Fester

Chris Briem at NullSpace is getting into the weeds of the new Hockey Arena's financing and notes that there could be a couple of very large problems on the horizon.  The arena has the potential of straitjacketing the City of Pittsburgh AND Allegheny County due to the bond statement's seniority arrangements AND the weak condition of the Don Barden and PITG finances.

The Pittsburgh Post Gazette has been reporting that the final financing for the casino is still not coming together:

"A combination of anxiety and curiosity has built in recent weeks surrounding Don Barden's efforts to secure $780 million in financing for the Majestic Star casino, and it could come to a head at the construction site Monday. The team of more than 20 companies erecting the North Shore casino has not been paid on time for work done in either April or May, according to the primary contractor. They agreed on one extension already at a June 16 meeting with Mr. Barden. They meet with him again on Monday, and will decide collectively what action to take if he cannot provide payment of about $10 million that is owed, said Dan Keating III, chairman of Philadelphia-based Keating Building Corp., the primary contractor."

Barden and PITG have had trouble getting financing as they have swapped principal backers and have found raising capital in the crunched credit markets much tougher than they anticipatead a few years ago.  This could have some massive regional financial impacts if the casino is either not built at all, OR if it is significantly delayed or downsized. So let's get into the weeds with Chris by reading the bond statement and working through some of the implications. The bond statement is here SEA_arenabond_2007.pdf and we'll start with Chris's analysis:

The core financing in the form of $7.5 annually is indeed slated to come from him, but he isn't really involved in building it. So who does bear the risk of the arena project.

One answer is the Sports and Exhibition Authority (SEA) because THEY ALREADY BORROWED THE MONEY. That raises lots of questions. If the Barden money stream does not start flowing in as expected, what happens? ....

the revenue backing the project are not limited to the revenues specifically tied to the arena, to include the Barden payments, rent or other sources.. but all the SEA revenue. At least that is my reading. So before these bonds could default to bond insurers it seems the holders have claims against most SEA revenue.

WARNING --- SOME SERIOUSLY NERDY FINANCIAL WONKERY AND SPECULATION AHEAD --- Read at your own risk to your mental health.... 

The Sports and Exhibition Authority currently is paying off the bonds for most of the major destination projects in the city center right now.  These include the two new stadiums, Heinz Field and PNC Park, and the Convention Center.  The Convention Center is a money losing proposition at this time that is consistently blowing a hole in the current Sports and Exhibition Authority budget.  It already drew upon the Regional Asset District's general fund of the 1% county sales tax to cover its 2007 operating deficit.  The SEA is drawing upon a wide variety of general revenues to pay its pre-existing bond obligations. 

So you can see there are significant revenue streams for the SEA from the county sales tax, hotel tax and dedicated parking taxes.  Those revenues are already assigned to pre-existing debt obligations, but I am a bit worried when I read the bond security summary from page 6 of the statement:

The Bonds are payable from, and are secured solely by, certain payments and other revenues to be received by the Authority including: (a) Special Revenues; (b) Swap Receipts; (c) Commonwealth Lease Payments under the Commonwealth Lease (each as hereinafter defined); and (d) other moneys pledged to or held by the Trustee under the Indenture for such purposes.

THE BONDS ARE LIMITED OBLIGATIONS OF THE AUTHORITY PAYABLE SOLELY FROM THE TRUST ESTATE PLEDGED UNDER THE INDENTURE. THE BONDS ARE NOT OBLIGATIONS OF THE COMMONWEALTH OF PENNSYLVANIA OTHER THAN THE COMMONWEALTH’S OBLIGATION TO MAKE ANY ANNUAL LEASE PAYMENTS TO THE AUTHORITY UNDER THE COMMONWEALTH LEASE.... THE FULL FAITH AND CREDIT OF THE COMMONWEALTH IS NOT PLEDGED FOR THE PAYMENT OF THE BONDS. NEITHER THE CREDIT NOR THE TAXING POWER OF THE CITY OF PITTSBURGH, THE COUNTY OF ALLEGHENY, OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED FOR THE PAYMENT OF THE BONDS......

What are the special revenues?  From page 27 of the entire statement and page 17 of the counted pages:

“Special Revenues” include certain rental payments expected to be received by the Authority
pursuant to the Arena Lease (its sublease of the Arena to the Arena Operator), payments it expects to receive from the entity which receives a license to operate a slot machine casino in the City (the "Casino Operator"), and payments it expects to receive from the Economic Development and Tourism Fund (“Economic Development & Tourism Fund”), a fund established pursuant to Act 71 of 2004 of the Commonwealth (4 Pa. C.S.A. §1407) ("Act 71").

In English, the special revenues are the arena lease payments, and two streams of casino revenue.  The arena lease payments are paid by the arena operator and collected from the users and tenants of the arena, including he Penguins.  The two slot streams are a $7,500,000 annual payment pledged by Don Barden and PITG, the slot license holder, and another $7,500,000 from the state of Pennsylvania.  The state money is from a bond issue backed by casino revenue.

And here is the genesis of a potential financial implosion.  The arena's financing is dependent upon the casino being built and rapidly generating revenues. The arena is already being built in anticipation of the casino running on time and on budget.  The vast majority of the SEA's ability to repay is tied to the casino.  however the casino looks like it will not be completed on time due to financing problems and more importantly, it will be completed when disposable incomes are shrinking.  Ooahhhh Shit....

Despite the bond statement limited the SEA's responsibility to only the dedicated special revenues, interest rate swaps, lease payments and insurance payments, this bond structure could turn itself into an implicit moral bond structure. 

The county and the city have authorized the SEA to perform some local government functions, including agreements to place golden handcuffs on the city amusement tax, and have allowed the SEA to borrow off the books.  If this debt is placed on the books, neither entity can handle the additional debt load strain.  Furthermore, the SEA has current claims on varying amounts of local revenue, including payments from RAD that are dedicated to rehabbing the current Mellon Arena and are due to terminate in the near future.  Local entities are counting on additional RAD funding becoming available.  IF the SEA or the city/county decide that the implied cost to their credit ratings are too high to use insurance, that RAD revenue will be eaten up and could also displace other currently funded projects.

This right now is a low probability event but as the troubles with PITG continue, combined with a slowing economy, the probability of an implosion increases.

Force Fungibility for Afghanistan and Iraq

By Fester:

The US military is pulling out the last of the surge brigades from Iraq and moving to the barely sustainable fifteen brigades in Iraq and three brigade equivilants in Afghanistan.  The five surge brigades were the US strategic deployable reserve and using them for the past year of treading political water means that the US will be operating without a deployable reserve force for the next fifteen to eighteen months.    There is no deployable US slack. 

This means that Iraq directly robs Afghanistan of deployable units, and from a certain perspective, an additional non-US soldier committed to Afganistan allows for the US to shift one man-slot to Iraq.  This was not as true when the US had a deployable reserve.  So when the US commander in Afgahnistan is calling for an extra division, US allies that support the Afghanistan mission but are opposed to the Iraq mission are seeing the US order six new brigades to Iraq and see any additional battalion or brigade they release to Afgahnistan as an enabling component of US policy in Iraq. 

Losing a Decade

By Fester:

Barry Ritzholtz at the Big Picture is noting something unusual in nominal terms is occurring in the stock market:

S&P500 investors are on the verge of experiencing something not seen for a very long time -- a losing decade. If markets continue their losing streak for a few more months, that is a realistic possibility. The S&P500 is now down 4.8% since June of 1999. To hit the decade mark, the SPX would need to be below the 1998 close of 1,229 -- less than 50 points below Friday's close of 1278.38 come December 31st. This has not occurred since the 1930s.

Yes the markets have come up off of their lows after the Dot-Com bust but a good chunk of that gain has been purely inflation.  This decade has been a lost decade in real terms for anyone who bought an index fund with low fees as the best alternative would have been to buy savings bonds or AAA municipal bonds.  You may not have gained much in real terms, but you would not have lost real value. 

This is important because it illustrates systemic risk and the problems with counting on the markets to provide for sustainable retirements which was the Bush Social Security plan, and depending on the day of the week, is John McCain's Social Security plan.  If you guess right, time the market perfectly, or at least better than the vast majority of the pros, find the perfect fund portfolio and don't need to retire due to health/age/skill degradation, then it is not that bad of a plan.  You can capture all of your upside.

However the downside is also borne as the individual investor is a momentum investor who started to buy into the stock market via their 401K after it started to take off, got hammered in the crash, withdrew to cash in 2001/2002 and then either shifted their funds to real estate or started to buy in again after the rally started and are getting told to stick around while they are getting hammered again.  Even a patient investor who got hammered in 1999/2000/2001 and figured that they could hold and wait for the decade to make them even if not ahead is still behind. 

In the long run, the market should grow by roughly the inflation rate plus the rate of real growth in the economy plus a small risk premium.  However most people's investing horizons are only their careers which means a bad decade of going sideways can't be corrected for in the long run as the smoothing happens after they retire/annuitize, or die. 

GOP Jokers

By Fester:

Wow, how will the Daily Show writers cope when they actually have to work for a living next year instead of smashing a softball like this one that Steve Benen is pitching:

Just this week, a group of Republican senators re-introduced the Federal Marriage Amendment to the Constitution, which, as we know, would ban gay marriage.....

But the funny part is looking over the list of the 10 original sponsors.... but there are two others whose names stand out: Sens. David Vitter (R-La.) and Larry Craig (R-Idaho).

Yes, two of the principal sponsors of a constitutional amendment to “protect” marriage include one far-right Republican who hired prostitutes and another far-right Republican who was arrested for soliciting gay sex an airport men’s room.

How do you respond to this besides guffawing?

More marriages are harmed by infidielty then by the fact that the couple down the street, or at your club or at the office happen to love each other and share the same items down below.  Wow, really how does one respond to this 'argument' to 'protect marriage' or at least scare up some votes.   

What people are you talking about....

By Fester:

IndigoWatcher in comments to Cernig's 15 Spines post makes a broad statement that is indicative of a normal human mistake --- generalizing from a non-random sample:

We must either cleanse the Democratic Party's leadership from within or move on to a new party that will represent the will of the people

I have absolutely no problem with the first part of the statement, changing the Democratic Party's leadership and incentive structures for what I perceive to be positive behavior.  This is a project that I have put five years in from door knocking, volunteer coordination, media outreach, policy writing, carping from the sidelines, voting, donating and agitating.  However the second part of the sentence is where I have problems.

Anyone who routinely reads this blog, or can define the terms Blue Dog, FISA, SPR, pay-go and give examples of their policy/political implications is be definition wierd.  We are political junkies/nerds, and activists.  We are not the typical voter or citizen. We devote the energy and cognitive surplus to politics and policy that other people devote to their cooking or their yet to be written novels or their golf game or their sports team.

The phrase will of the people when it is specialized to what interests a particular subset of highly active and engaged individuals is a bastardization of the term.  The will of the people is consistently to be left alone so they won't have to think too much about FISA or telecom immunity or pay-go rules.  These are high salience issues for a very small number of people. In most cases the 'will of the people' as expressed as an opinion will be a lightly held opinion.  Strongly held opinions that can not be easily traded-off or shifted from high salience are unusual. 

Mike Lux at OpenLeft noted that he is in the tank for the Democratic nominee for the last five months of the cycle because the opinion and issue space has stabilized and can no longer be influenced by dedicated activists who believe that there is a significant difference between the parties:

being able to hold a politician accountable is having the real power to actually have a negative impact on something they really care about, namely getting elected and passing legislation they want to pass (although there might be a few other smaller things some politicians might care about). Unless you have the ability and willingness to mess with a politician in a serious way on either of those things, I don't think you can hold them accountable....

Progressives hold a potential Presidential candidate accountable in the years before they decide to run because those candidates know they might need progressive support in a primary fight. We can hold them accountable all through the primary process because there's always another candidate that can be helped, or you can hurt their general standing with the Democratic voters

At this point the electoral space has removed leverage from the high information and highly motivated activist/involved voters and distributed that leverage to the general population.  By definition, the general electorate is not as motivated about politics as the activist classes that fuel the primary campaigns and primary seasons.  The general electorates' concerns are not as sharply defined and formed as the concerns addressed in the primary and pre-primary phases of the election cycle.  At this point the will of the people as expressed by voters choosing from a limited choice menu of candidates and policy preferences will not reflect exactly what any one individual wants. 

The will of the people is seldom clear cut and it is always muddy in the general election. Broad trends and a few bright take-aways can be gathered, but even then it can be re-muddied.  For instance the 2006 mid-terms could be seen as a public rejection of the Bush Administration, but that has not translated into immediate policy steps.  Instead we still have a supine Congress caving into the White House and the fear of fear itself.  Others argued that the will of the people was to check corruption and self-dealing.  The will of the people is an excellent trope, but it is much harder to dowse than a simple exhortion to follow the self-evident. 

Good Soil on Mars

By Fester:

Reuters is reporting that Mars may have better soil than my backyard garden. 

Scientists working on the Phoenix Mars Lander mission, which has already found ice on the planet, said preliminary analysis by the lander's instruments on a sample of soil scooped up by the spacecraft's robotic arm had shown it to be much more alkaline than expected.

"We basically have found what appears to be the requirements, the nutrients, to support life whether past present or future," Sam Kounaves, the lead investigator for the wet chemistry laboratory on Phoenix, told journalists.

"It is the type of soil you would probably have in your back yard, you know, alkaline. You might be able to grow asparagus in it really well. ... It is very exciting for us."

If the little green men of Mars are anything like me, they will have managed to kill off their version of asparagus several months ago. 

But this is cool as hell, and as I daydream about the future, it is becoming less and less unreasonable to think that my grandchildren could live in a Martian colony as the self-sufficiency capacity of any settlement seems to be increasing from the knowledge Phoenix has gained.  Surface water has been confirmed and now the soil would not need massive treatments/fertilization to grow local food sources.  This is pretty damn cool. 

Disarming Diplomacy

By Fester:

North Korea's announcement that of its list of nuclear activites and the US response of a vote on removing North Korea from the list of state sponsors of terrorism and easing of some sanctions is unabashed good news.  From Bloomberg:

North Korea submitted its inventory of nuclear plants and materials, a move followed by a U.S. pledge to remove the regime from its list of state sponsors of terrorism and lift some trade sanctions....

``The United States has no allusions [sic? illusions?] about the regime in Pyongyang,'' President George W. Bush said in the White House Rose Garden. ``Yet we welcome today's development.'' ...

North Korea agreed in February 2007 to disable its nuclear programs in return for normalized diplomatic ties with the U.S. and Japan and economic aid equivalent to 1 million metric tons of heavy fuel oil....

It shut down its main Yongbyon nuclear reactor, the source of its weapons-grade plutonium, in July and began disabling it in November [emphasis mine]

I completely agree with President Bush.  This is a welcome development and a positive outcome from a scumbag regime.  And this result has been the work of patient diplomacy with a clearly stated initial objective of removing nuclear weapons capability and proliferation capacity from North Korea without threatening war or demanding complete obsecience before having the talks to decide on the shape of the conference table.  This is a success, and I won't begrudge the Bush administration and at least a couple of its factions from doing the happy dance, as it this is a good accomplishment.

Now lets see if they are able to generalize successes and failures to a broader spectrum of situations adn tone down the talk/threat of war with Iran either directly or through US support of Isreal.     

A VAT for Opium

By Fester:

The Value Added Tax (VAT) is a common tax structure where the tax is levied against each stage of production on the basis of the value added by that stage.  For example, let us assume that an oil refinery bought a barrel of heavy sour crude for $110 and after they finished refining the barrel into its gases, gasoline, diesel and heavy fuel oils, they were able to sell that barrel for $150.  In this hypothetical example, the refinery added $40 of value to the barrel of oil and a VAT would be charged against this $40.  The VAT is a very common tax throughout the world. 

It is so common, it looks like the Taliban in Afghanistan is charging what is effectively a VAT tax on opium production.  The BBC reports that the Taliban tax the raw materials and receive a decent sum of money from the farmers:

The Taleban made an estimated $100m (£50m) in 2007 from Afghan farmers growing poppy for the opium trade, the United Nations says.

Antonio Maria Costa, head of the UN’s Office on Drugs and Crime (UNODC), said the money was raised by a 10% tax on farmers in Taleban-controlled areas.

As Dr. Taylor at Poliblogger notes, the Taliban is taxing and collecting fees at other points in the value chain, especially at the higher end of the chain.  The Taliban provides security in exchange for signficant pay-offs.  He makes a worrying observation:

The “FARCization” of the Taliban continues…

FARC is a Columbian guerrilla group that has been fighting the Columbian government for almost two generations now.  It is being funded primarily by its connections to the cocaine trade and resource smuggling.  And it is a sustainable model as long as there exists a massive black market for a desirable product which means the suppliers of that product must turn to non-state groups for support and security.  FARC has a similiar quasi-VAT structure on coco and cocaine production. 

It provides a predictable, multi-level revenue stream.  Predictable revenue allows for longer term planning and the provision of credible promises of support.  The Taliban and the Pashtun groups already have strong loyalty claims on some members of its population but the ability to make credible long term promises should expand and strengthen loyalty claims.  That is not good.....

Disseminating DIY weapons best practices

By Fester:

Using the global guerrillas' bazaar of violence analogy, the prediction is best practices for specific situations will be quickly spread through loose tie networks.  This occurs because global guerrillas are operating in a very rapid  Observation, Orientation, Decision, Action (OODA)loop with dozens/hundreds of different actors trying different things and seeing different responses.  Really bad ideas are not replicated because of either learning by doing or capture/death of the practitioners.  Really good ideas are adapted as everyone has an interest in being more effective to both accomplish their objectives and staying alive. 

We have seen significant evidence of this rapid dissemination of best practices and responses to changes in the operational environment at the theater level.  For instance Iraqi insurgency attack patterns followed rhythms of measure, countermeasure, counter-counter measure that sought to maximize their advantages while minimizing disadvantages.  We saw this in a rapid shift away from straight up infantry assaults against US positions to the early RPG attacks to an IED campaign of increasing sophistication that only has slowed down because the US bought out the Sunni Arab insurgent groups.  We have seen the same shifts in Afghanistan as the Taliban has moved to more sophisticated stand-off ambushes.  We have seen this in Nigeria as MEND increases their capabilities and capacity to shut-in wider stretches of Nigerian oil production.  We have seen this in Colombia as the drug smuggling cartels have become even more sophisticated. 

However we are not seeing inter-theater tinkering and information dissemination except in the broadest sense of providing a plausible premise and the basic advice of 'avoid US firepower.'  Why is this happening?  What social choke points are stopping this information flow of best practices?  For instance, why have we not seen MEND copy some of the Columbian drug smuggling submarines as stripped down WWI era boats could be effective in sea denial against the Nigerian Navy's limited capacity?  Why have we not seen the Zetas jury rig UAVs like Hezbollah?  Why have we not seen tv-guided and Iridium phone controlled DIY cruise missiles similar in concept to the German Fritz-X bomb or the Walleye? 

If the global guerrilla  phenomenon is wrong, where is the global dissemination and information sharing for high end tinkerable weapons systems that would greatly enhance the ability of non-state actors to expand their capabilities to run amazingly high return on investment operations?  Imagine what would happen to the world oil markets if a pair of 500 pound spar torpedoes were attached to the Nigerian Bonga platform AND a random tanker that had just left port fully loaded.  Why is this not happening (yet)???

[edited for clarity]

Prizes as incentives

By Fester

I have to disagree with Ron's post on McCain's proposal to award a $300,000,000 prize for improved battery technology.  It is not an inherently bad idea, and furthermore it is intellectually coherent while being reasonably pragmatic.  Prizes as incentives are not neccessarily a bad idea.  I agree with jandrewmorrison that the details matter greatly but this is not inherently a bad idea. 

One of the conservative arguments against direct government research grants is that it 'chooses winners' before there is enough knowledge to actually make a good decision.  This type of critique can be rightfully applied to ethanol policy.  More research on a bad idea can make a bad idea less bad, but at the significant opportunity cost of shutting out other good ideas.

The argument then seeks to rejigger incentives and it goes like this:  One of the problems of researching edgy technologies is the uncertainty of a future pay-off even if everything goes right.  This uncertainty makes finding initial capital difficult which discourages innovation.  Instead of direct fee for service research or royalty sharing research arrangements for basic research and application research, a guarantee of a prize of sufficient size to reduce that uncertainty. From here creative and innovative solutions will blossom. Google is adapting this approach in its Lunar X-Prize competion to get a basic private sector rover on the moon.

This approach has significant flaws when applied to basic research approaches, but when it is seeking applied technology, it is not an inherently bad idea as long as the rule sets, verification requirements and policy objectives are clear, consistent and set at a high enough level to justify the public prize.  And for McCain, articulating a policy proposal that does not contradict previous policy statements and that could actually advance a public policy objective is a step above his normal incoherence. 

 

Trade and import substitutions

By Fester

Inflation has long been contained to the non-core products.  This means if you don't need to eat, drive, heat your home, pay a mortgage, or go to the doctors, prices have been stable.  Otherwise you were screwed.  Now we can add that inflation is contained if you don't need to build anything with steel in it.  Raw material prices are doubling for some of the world's largest steel producers, as shown in this Guardian article (via Kat):

China has agreed to a 96.5% increase in iron ore prices in long-term contract discussions with Rio Tinto...

The agreement between China's largest steelmaker, Baosteel, and Rio Tinto is the largest annual price rise ever recorded

Iron ore is a low value bulk commodity.  Profitabily shipping it between continents requires low fuel costs, efficient ships, and large labor/energy arbitage differentials.  Paul Krugman is passing along an interesting working paper on the rise of vertical specialization and how raw material and transport costs impact trade.  China is producing intermediate and low value added goods from local and imported raw materials.  National profit margins are being squeezed from the higher costs of shipping goods across the Pacific to America and from the higher costs of buying raw materials such as Australian iron ore.  Fewer goods are economically viable in China under this economic regime. 

This means that American steel factories that are fed by American raw materials are now marginally more competitive and can either capture a larger market share, or improve their margins as prices creep up and their cost structure is less impacted by the decline of the dollar for domestic goods and a shorter supply chain.  This is one of the steps of balancing.   

Nowhere to go, Nothing to do

By Fester:

I have been amazed at the Gloucester, Massachusetts high school pregnancy cluster story arc:  first reported as a pact, converted into a right wing two minute hate against Juno and Knocked Up as a sign of a society that devalues the hard work of parenthood despite the fact that these movies were held up as pro-life conservative message movies last year as abortions were not chosen, and now the school saying that there was no evidence of a pact.  I just have two things to say here, one is wonky and one is intuitive. 

The wonky thing is that in any population as large as the entire universe of American high schools, a few random clusters that are three, four or five standard deviation events will occur every year.  We should expect a few high schools every year to see a bizarrely anomalous number of student pregnancies.  And we can say it is odd, unusual, and different, but we don't have enough information to attribute causation.

Secondly, on an intuitive level, Gloucester sucks for a kid.  It lost the fishing industry from the 60s to the 90s and the high tech boom has passed it by with the exception of the rising real estate prices and increasing number of commuters to Boston and the 128 Belt.  It is a lot like my hometown. 

I grew up in Lowell, a city about 30 miles away that lost its economic reason for existence in the 1960s as the cotton mills moved south.  As a teen in the 90s, the inklings of economic viability it now has and life were barely visible from my point of view as all of the action was in Boston.  There was not a whole lot to do when I could not hop the commuter rail into Boston for the day. 

Lowell, from my teenage perspective  was a beer-sex-weed town.  As I noted elsewhere on this blog, weed was never that interesting to me, and despite spending massive amounts of time and cognitive surplus on looking for sex, I could not pass my ennui that way.  So my boys and I drank and brawled as there was nothing else to do. The five of us all left Lowell as soon as we could. I lucked out, my parents had the motivation and (somehow) the resources to make sure my horizons and my sense of potential were vast, but that is not always the case.  I can understand teenagers making decisions on the beer-sex-weed triangle as there is nowhere to go and nothing to do. Occasionally sex will dominate that triage of boredom.

I now live at the edge of the Mon Valley, which used to be the Steel Valley.  The mills closed in the mid-80s and with those closures went the economic justification for places like East Pittsburgh, Duquesne, Monessan and dozens of other little riverside towns.  Now those communities are a black hole of high needs that can not be met with local resources as anyone with easy mobility has already left the region in the past generation. 

There is not a whole lot of hope of being able to do well while staying put, and there is not a whole lot of anything going on.  Beer-sex-weed dominate the entertainment choices of the youth, and since there is little prospect of easily getting out, tough decisions and life choices become a whole lot cheaper to make as the opportunity cost of having kids early in life is a whole lot lower as there aren't the opportunities to lose.

This logic applies in Gloucester, it applied to too many of my acquaintances and buddies in Lowell, and it applies in economically disconnected and disorientated towns of the Mon Valley.  It applies anywhere the prospects aren't good for teens.  It should be a clarion call for intensive education and horizon expansion interventions, but it is not. Those services and interventions are expensive and require regional/state supports and transfers and given the fragmentation and the beggar thy neighbor public choice incentives of local government, these areas are likely to be forgotten or at least the people will. 

Booming into the Bust

By Fester:

Local and state governments are pro-cyclical agents.  When times and tax revenues are good, local governments increase spending and employment levels which can contribute to the boom as high return on investment public goods can be provided.  However when times are tight and tax revenues are stagnant or falling, the balanced budget requirements of almost all state and local governments means they must cut back.  This worsens the bust as employment decreases and the spin-off jobs also disappear. 

Until the end of this fiscal year, which is next week for most local governments, tax revenues have held close enough to projections that one off fixes and minor cuts could cushion the employment blow.  However as the next fiscal year is starting next week and local and state budgets are assuming significantly lower property, and sales tax streams, government spending and government employment looks to decrease, as CNN is reporting a wave of new layoffs:

With falling revenue from sales and income taxes, and property-tax declines looming, states, cities and towns have already laid off tens of thousands of government employees. Many expect more job cuts ahead as public officials struggle to balance their budgets.

The American Federation of State, County and Municipal Employees, a public employees union, says about 45,000 government layoffs have been announced this year.

This is probably a low estimate of local government layoffs and definately a low estimate of local government job losses as it is almost certain that governing bodies will engage in attrition and hiring freeze strategies to reduce costs.  Furthermore, local governmental bodies and public service providers are not particularly well hedged or protected from rising costs.  For instance the Pittsburgh Port Authority, which runs the regional mass transit system, is in trouble as its hedge against fuel prices will soon expire:

The authority has budgeted $4.15 a gallon for diesel fuel, or $34 million total, almost twice as much as the current year, when it locked in a price of $2.28 a gallon in a long-term contract.

These are needed services that provide high value to individuals and the community as a whole.  However the pro-cyclical nature of local government financing means the money won't be there to fund net positive expenditures.  This is one of the reasons why a reasonable and economically defensible stimulas package should have contained some form of state and local government aid.  The federal government can borrow and it can save/reduce its debt so it can smooth out service flows when state and local governments can not.  But given the Congress and the President we have, we can only anticipate a pro-cyclical slowdown of state and local spending. 

Pooch Punting Kirkuk again

By Fester:

It looks like the Iraqi reconciliation process will punt again as the perpetual problem of Kirkuk comes up again. Reuters is reporting the provincial elections may be delayed because it looks like the Kurds have enough votes in Kirkuk and at least parts of Tamin Province to break that city and its oil fields away from being governed by Baghdad and towards being governed by Irbil:

Iraq's provincial elections, seen as vital for fostering national reconciliation, could be delayed because of disputes in parliament over the electoral law, several lawmakers said on Sunday....

"There are many problems hindering us from agreeing the provincial elections law. One of the main problems is Kirkuk," Jalal al-Din al-Sagheer, head of the parliamentary bloc from the ruling Shi'ite Alliance, told Reuters.

"I think it will be very difficult to hold elections on time."

The electoral commission has said the draft law must be passed by the start of July to give it three months to prepare for the polls. U.S. officials have said the elections could be delayed until November, but have not elaborated.

       

When in doubt punt.  This has been a staple play in Iraqi politics as Kirkuk was supposed to be resolved in 2004, 2005, 2006, 2007 and now in 2008.  It will also be in a position to soon decide its fate in 2009, 2010, 2011, 2012, and 2042.

As Cernig notes, this is a common play from a common playbook:

Maliki has, from necessity and probably a goodly deal of both Bush administration *and* Iranian steering, become a grand master of the ever evolving promise. He'll just keep shifting the goalposts and saying reconciliation is just around the next corner, so don't withdraw just yet.

Since 2003, the Kurds have asserted local control over Kirkuk and have helped thousands of Kurds to resettle in the city while Arab families who were relocated to Kirkuk in the past two generations are being moved out. The combination of local political control and highly probable plurality if not an outright Kurdish majority makes handling this issue near impossible as there are wildly divergent goal sets.

The problem is simple; Kirkuk is a veto point for multiple actors.  Sunni Arabs have an implicit veto over Kurdish actions by their ability to blow up the export pipelines, while they also consider  Kirkuk to be an integral part of Iraq.  The Sadrists want a reasonably strong central government that controls the oil revenue as well.  And the Kurds need Kirkuk and is infrastructure to establish a truly viable de facto state. And the Turkish government considers Kurdish control of Kirkuk for this very reason to be intolerable.  They will cloak it in concern for Turkomen rights in the city and province, but it is the viability of the Kurdish proto-state that concerns them.

So expect more punting than a Bears-Raiders game.

 

Value of Safe Seat Primaries?

By Fester:

Two years ago, in April 2006, I projected a Democratic House caucus in which I that it would be an effective governing majority.  This week's losses on FISA capitulation and the ineffectiveness of following up on Scott McClellan testimony concerning the highly probable systemic obstruction of justice in the Plame case reinforce that basic point.  I had laid out a decision checklist on backing aggressive primary challengers for 2008 in order to seek better Democrats or at the very least more pliable from a progressive angle Democrats.  I think the three major primary challengers to Democratic incumbents that netroots activists funded met my criteria.  However these challengers have not appreciably changed the incentive structure for Democratic Congresscritters and I am curious if one element of my decision matrix is wrong:

Does the incumbent come from a safe district with a high Democratic PVI advantage?

I am questioning the value of restricting the challenge list to safe seat Democrats.  Chris Bowers has the revised and expanded Bush Dog list of Democrats who voted for FISA immunity, amnesia and repeal of significant elements of the Church reforms as well as voting to fund Iraq with no strings attached.  These Democrats come from districts that range from R+18 to D+17.  The traditional techniques would be focused on the highly Democratic districts on the theory that  losing any seat would be unacceptable and areas such as Prince George County, Maryland will not elect a Republican no matter what.  This system gives a pass to swing and tough seat Democrats.   Unfortunately that is enough seats to allow for very bad laws to go through while our intelligence is insulted.  It has not worked in changing the incentive structure of tough votes. 

In 2006 we did not know if the Democratic House leadership would run the House under the majority of the majority system or the majority of the whole system.  Majority of the whole greatly favors conservative Democrats as they can credibly threaten to defect on any deal and create a second option with the Republican caucus.  We have seen this conservative governing coalition dominate the Iraq war debate.  Giving conservative Democrats from tough seats a pass enables Republican favored policies to pass the House.  We need to rethink this.

High Republican PVI districts that are represented by Democrats, especially newer Democrats who do not have long standing relationships to the area require a Democratic incumbent to line all of their ducks in a row and hope the GOP is locally screwed if they are to be re-elected.  This means the liberals within the representative's winning coalition must be willing to work their tails off for a candidate who will routinely screw them over at the local and national level.   

If we assume that all office holders base their votes on some calculus of personal principal/policy preferences and political calculation, liberal/progressive netroots activists can change the formulation of the political calculation so that soft principal votes become more calculation votes in order to maintain the liberal wing of the electoral coalition. 

Assuming Democrats pick up double digit House seats this fall to improve the cushion, the threat of losing one to five R+10 or worse seats because of liberal opposition may be a worthwhile trade-off.  As a defensive action, electing and enabling conservative Democrats was a necessary first step but it is an insufficient step to changing the political calculus and trends within American politics.  It is time to find better leaders either through new candidates supported by new nodes of power, or by changing the existing political power matrix.  And challenging conservative Democrats in conservative seats from the left will force change even at, or more truthfully, because of the highly probable net loss of seats that this type of action would force. 

Doing the Oily Hokey Pokey

By Fester:

Put one barrel in, take one barrel out, put one barrel in and you shake it all about... that's what its all about.

This is the song the oil markets are singing as any increased supply news is counteracted by news of decreased supplies.  For instance Bloomberg reports that Saudi Arabia is increasing production by 200,000 barrels per day in a few weeks:

Production will increase by 200,000 barrels a day to 9.7 million barrels starting in July, Saudi Oil Minister Ali al- Naimi told reporters in Jeddah, Saudi Arabia, yesterday....

``It is the policy of Saudi Arabia to satisfy the market need when there is a need,'' said Prince Abdulaziz Bin Salman, the kingdom's deputy oil minister.

200,000 barrels per day is not a whole lot of oil, roughly one quarter of one percent of daily global production, but since oil is an inelastic commodity, introducing just a little more supply should take away a lot of the price pressure.  Small changes in supply should lead to medium/large changes in price. 

However the following two stories have also come out this week,  the first is from  earlier this week as reported by Agence France Press:

"We shut down production at the Bonga oilfield following an attack by unknown militants this morning," Shell spokesman Precious Okolobo said.

Bonga lies 120 kilometres (75 miles) offshore and has a daily output capacity of 200,000 barrels of oil and 150 million standard cubic feet of gas

And the follow-up from Friday is via the Wall Street Journal:

Chevron Corp. said Saturday one of its Nigerian joint venture's pipelines had been breached, a disruption claimed by young Nigerian militants and said to have curtailed oil output of 120,000 barrels a day

So the announced Saudi increase in production is a Red Queen race with the supply disruptions in Nigeria.  Multi-billion dollar projects are needed to keep even with several dozen young men with speedboats and Semtex.  This is a game that greatly advantages the supply disruptors and not the producers. 

Proof for the peasants

By Fester:

In Common Law, you have to prove that you have suffered harm caused by illegal or illegitimate actions before you can collect damages.  That has been the situation for the past fifteen hundred years since the Saxons were in charge.  This week, the Motion Picture Association of America is arguing that since they are incompetent or lazy, they should not need to prove they were harmed.  Wired is reporting that the MPAA wants to collect damages on the potential to be harmed and not on any harm which is provable. 

The Motion Picture Association of America said  Friday intellectual-property holders should have the right to collect damages, perhaps as much as $150,000 per copyright violation, without having to prove infringement.

"Mandating such proof could thus have the pernicious effect of depriving copyright owners of a practical remedy against massive copyright infringement in many instances," MPAA attorney Marie L. van Uitert wrote Friday to the federal judge overseeing the Jammie Thomas trial.

"It is often very difficult, and in some cases, impossible, to provide such direct proof when confronting modern forms of copyright infringement, whether over P2P networks or otherwise; understandably, copyright infringers typically do not keep records of infringement," van Uitert wrote....

United States District Court Judge Michael Davis instructed the 12 panelists that they need only find Thomas had an open share folder, not that anyone from the public actually copied her files.

People are being presumed guilty for having a common technological configuration that the MPAA is too lazy to investigate further before they bring suit despite the stated fact in the article that it is not difficult for similar plaintiffs to capture screen shots and IP addresses of their defendants' activities. 

Wonderful, as, much like with the AP, we see another stale business model thrash about it in its death throes in actions which forget their value proposition and remember only their cash proposition which pisses off their consumers.  I know I won't download legit films and music files because I don't want to get entangled intheir restrictions and I don't download these files from other sources of unknown legitimacy because I can not even think about affording a fine that is greater than either my student loans or my mortgage.  Their tactics will lose customers like me as the MPAA sees it pie shrink while they argue that a fifteen hundred year legal standard is too burdensome for them to meet. 

Increasing the Pressure on the AP

By Fester

Extending on Cernig's remarks this morning concerning the Associated Press's assertion that they have resolved their linking matter, I want to lay out another step that should be effective in increasing the pressure on the AP to conform to standard fair use practices. 

The AP is a collection of newspapers which funds its operations and also buys its content.  And here the disconnect that underlies the AP's actions is exposed.  The AP has been looking at their cash proposition --- selling stories to interested users, instead of their customers' value proposition --- increasing the number of eyeballs that their advertisers can reach. 

The AP's core value is in providing stories to their users that are used to drive paper or electronic traffic.  Underneath that value is the assumption that the AP is a fair broker of information.  By mocking and ridiculing the core brand of the AP, one diminishes the unique value proposition that the AP offers.

As we have seen in political campaigns, people use the internet to research stories, candidates and organizations.  And here is an opportunity.  We can replicate the efforts of individuals like Chris Bower and his Searching for John McCain campaign and create a targeted Google Search Engine Optimization effort (Google Bombing) so that casual readers are easily able to see our story and argument.  Right now I propose all mentions of the Associated Press or the AP be hyperlinked to the http://www.unassociatedpress.net/ address.

Updated for grammar and readability

Resiliency Substitutes

By Fester:

Via John Robb, this New York Times story highlights the breakdown of state authority and stability in Brazil and how local militias have created a niche for themselves within the social eco-system.  The militias are seen as a dirty but effective way of controlling spaces against drug distribution networks and gangs.  However the legitimacy of the militias is based on highly devolved and localized loyalties and is easily supplanted when the state is willing/able to devote resources to a slum:

Rio's slums, or favelas, have proliferated, and now may number more than 800. The militias have multiplied with them, as battles with drug gangs have taken a toll on legitimate police forces.

Low morale and pay have prompted police officers, firefighters and prison workers to moonlight as militia members, police officers and criminologists who have studied them say.

The militias have filled a vacuum of authority by promising residents security in exchange for payments...

Militias within the 4GW context are a substitute for legitimate resiliency.  They fill a niche in the social ecoysystem when disorder and chaos dominate official capacity to respond.  Militias are locally raised, and locally motivated if they are to be effective in the 4GW or counterinsurgency system as they solve the sorting problems of traditional military forces.  The militias have the implicit knowledge of the social, cultural, familial and economic networks and ties that allows them to distinguish between people who belong there and those who do not.  That knowledge is spatially specific and has high transfer costs.  Moving a militia two hundred miles will see its effectiveness massively degraded. Even in traditional 1st and 2nd GW scenarios, militias were almost always most effective when they were fighting close to their homes, as the US troubles in raising national armies composed of local militias  showed. 

ZenPundit is raising the idea of local militias as co-opting agents of counter 4GW and scenario stabilization agents as this could apply to Mexico.  I think this is interesting but wrong for part of the reason that he alludes to:

Even the stealthy Zetas would have trouble operating in a city where the police and Army were backed by, say, 40,000 armed militiamen who were part of a national network. A loyalist paramilitary on steroids.

However, any such hypothetical popular militia will have to come from a social movement as the Mexican state no longer commands enough political legitimacy to recruit such a force to it’s side - even if it had the courage to grasp that kind of wolf by the ears...

Any state that needs to raise such a militia to fight a national insurgency can not claim the primary loyalties of such a militia that would be raised.  The central government's legitimacy and claim to power would have already been diminished and while the militias and the central government  may work towards similar goals, the ability to fragment orientations and realign outlooks exists as a strong possibility.  A strong and legitimate central government would not have the need for the resiliency and legitimacy substitution effects that a militia can provide.   

On the other hand, a weak central government that has created and attempted to co-opt friendly militias such as Columbia can not control those militias nor easily force them to shut down operations once their initial raison d'etre has ended.  The paramilitary groups then operate under the iron law of institutions.  They seek to exist to support their members and loyalty cadres.   A weak central government that has already lost a significant portion of its legitimacy can not control its creations.