Crow for breakfast; the GDP numbers are in

The BEA just released its preliminary 1st quarter GDP numbers, which indicate that GDP increased slightly during the first quarter. What a stunner!

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE) for services, private inventory investment, exports of goods and services, and federal government spending that were partly offset by negative contributions from residential fixed investment and PCE for durable goods. Imports, which are a subtraction in the calculation of GDP, increased.

Assuming that the numbers hold up through revisions, they indicate that the economy has not tipped over into recession.

One note with the numbers is that they appear to be strongly affected by changes in national defense spending, which increased 6 percent in the first quarter, compared to a slight decrease in the previous quarter. Inventories also grew, adding to short-term growth. Nearly every other indicator was weaker in the first quarter compared to the previous one.

Defense numbers aside, this shows why I never made it as a macroeconomist.

Promise 'em anything and everything

During her stop in Greensboro yesterday, Sen. Hillary Clinton signed on to Sen. McCain's irresponsible and ineffective idea for a gas- and diesel-tax holiday.

The main difference between the two senators' proposals is that Sen. Clinton would close some tax loopholes, end some subsidies, and impose a windfall profits tax for energy companies. While these would offset the revenues lost from a tax break at the pump, they would also undermine the consumer benefits of the gas tax break by raising operating costs for oil companies. Thus, her proposals would be even less effective, if that's even possible, than Sen. McCain's.

As additional evidence of Sen. Clinton's generous spirit, The Hill has reported that Sen. Clinton is poised to become the Senate's earmark queen. Sen. Clinton has proposed $2.3 billion in earmarks for next year's budget--nearly three times the bounty that this year's most profligate senator was able to secure. To give some perspective, the total amount of earmarks for this year's budget was $16.9 billion.

It would be easy to dismiss Sen. Clinton's gimmicky proposals as silly and unrealistic were it not for Congress' stubborn enthusiasm for simultaneously cutting taxes and raising spending. Sadly, the longer this presidential campaign goes on, the sillier the ideas become.

Democratic negativity

While Senators Clinton and Obama continue to wrestle in the mud pit, the Democratic National Committee has decided to throw some mud toward Senator McCain as well.

It's too bad that neither of the Democrats has much positive to offer and that the negative national campaign has started so early.

Mixed economic news

This morning brought some mixed economic news. There was a glimmer of light in the insured unemployment data, as new UI benefit claims unexpectedly fell by about 10 percent from the week before. The overall number of people receiving jobless benefits also fell. Given other indicators in the economy and recent trends, these numbers had been expected to climb.

While that news is good, it's too soon to break out the party balloons. The number of people claiming new jobless benefits and the total number of people receiving benefits are both up substantially from a year ago. Also, the UI claims data were accompanied by some other negative indicators.

The Census Bureau reported that new orders for durable goods fell 0.3 percent in March, following declines in January and February. At the same time, inventories of durable goods increased 1.1 percent to their highest level since the Bureau started tracking them using the current industrial classification in 1992.

The Bureau also reported that new home sales in March dropped another 8.5 percent from the month before and were down an eye-popping 36.6 from the year before. Sales were estimated to be 60 percent below their levels from March 2005 and at a 16-year low. So despite declines in home prices and the Fed's lowering of interest rates, the housing market continues to spiral down.

The many negative reports over the last few months have been indicative of a decline in economic activity. Next Wednesday, we'll see whether that has actually occurred when the Commerce Department reports the prelimary 1st quarter gross domestic product numbers.

Pander Bears

To an economist, some policy proposals sound like fingernails being dragged down a chalkboard. That cringe-making scritch, scritch, sccrriittch came through loud and clear this week, as each of the Presidential hopefuls made awful tax-related panders.

On the left side of the chalkboard was the pledge made by both Sen. Clinton and Sen. Obama during their debate in Philadelphia not to raise taxes on middle class families.

Sen. Clinton: I am absolutely committed to not raising a single tax on middle- class Americans, people making less than $250,000 a year.

Sen. Obama: I not only have pledged not to raise their taxes, I've been the first candidate in this race to specifically say I would cut their taxes.

So the Democrats have joined Sen. McCain in making wildly irresponsible income-tax pledges. The federal government is currently running an enormous deficit and faces exploding entitlement costs for its old-age medical and retirement programs. To that, Senators Clinton and Obama would each add huge new health insurance schemes, while Sen. McCain would extend our costly involvement in Iraq.

The tax pledges are inconsistent with these other promises. Moreover, the tax pledges are inconsistent with the candidate's previous positions. So the voters now need to decide what each of them is lying about--their tax pledge, their commitments to narrowing the budget deficit, or their other big-ticket spending items.

On the right side of the chalkboard was the other whopper of a tax pander by Sen. McCain, who introduced legislation to rescind the federal gasoline tax over the summer.

The federal government already acts as an enabler to the country's gasoline addiction, subsidizing producers and setting the gas tax pitifully low. Sen. McCain's "solution" to the nation's gasoline binging and its accompanying environmental, economic, and national security problems would be to lower gas prices by 18 cents a gallon. However, this would only make the addiction worse, while adding to the deficit.

Instead of pandering to the public, the Presidential candidates need to show leadership, which begins by explaining the tough budget and energy problems that we face.

Somewhere Paul Tsongas is weeping.

Economic downturn deepens and spreads

The Board of Governors of the Federal Reserve reported that economic activity across the county "weakened" over the last few weeks.

In its previous Beige Book report six weeks ago, the Fed indicated that the economy had stopped growing and had probably begun declining. The new report is more pessimistic and indicates a deepening and spreading downturn.

From the current report:

Reports from the twelve Federal Reserve Districts indicate that economic conditions have weakened since the last report. Nine Districts noted slowing in the pace of economic activity, while the remaining three--Boston, Cleveland, and Richmond--described activity as mixed or steady.

Consumer spending, transportation services, real estate, construction, and financial services were generally weak, while tourism, health services, and agriculture were bright spots.

The Fed faces some tough choices as inflationary pressures also appear to be building, with wholesale prices up sharply, retail prices up moderately, international oil prices hitting new records, and the dollar falling. Further cuts in interest rates might stimulate the economy but could also add fuel to the inflationary fire.

Privatized tax debt collection not the bonanza that Congress thought

To the Republican-led Congress in 2004, limited privatization sure seemed like a win-win solution to the tax debt collection problem. At the time, the Internal Revenue Service (IRS) effectively "wrote off" many potentially collectable but small tax debts because of staff limitations. Staff prioritized the cases that they worked on, and time was spent on big cases that could recover large revenues.

Congress's idea was to turn smaller, "easy" cases that weren't going to be collected anyway over to private collection agencies (PCAs). The agencies would receive a commission of 25 cents for each overdue tax dollar collected, returning the other 75 cents to the treasury. This looked like a textbook case in how to increase government efficiency through privatization with the private companies profiting from the commissions, and the Federal government recovering more tax revenues.

So why is the Washington Post reporting that the program is losing money? Well, technically, the Post is wrong. It appears that the program probably brings in a small amount of money each year (I write "probably" because the IRS does not collect enough data to calculate the full costs and benefits).

According to testimony given to the House Ways and Means Committee on March 18 by the National Tax Advocate, the PCAs generated $23 million in gross revenues. The PCAs received 25 percent of that ($4.6 million) back in commissions, and the IRS spent $7.65 million administering the program. So the net return to the government was $11 million, which hardly put a dent in the more than $300 billion in tax arrears.

Even these meager returns may be overstated because they don't account for tax cases that complain or appeal and thus use additional government resources. Also, they overstate the effectiveness of the PCAs, because roughly a quarter of the cases respond to an initial letter sent out by the IRS and before ever being contacted by a PCA.

The benefits also neglect the opportunity cost of the $7.65 million that the IRS spends on administration. Suppose that the PCA program were shut down and the $7.65 million were redirected toward other under-staffed debt collection efforts. The IRS estimates that it could collect at least $13 for each dollar spent, or about $100 billion--far more than the $23 million collected by the PCAs and without paying commissions. Thus, on an opportunity cost basis, the government is foregoing about $73 million by administering the PCA program instead of directly collecting the debts.

The National Taxpayer Advocate has described numerous other problems with the PCA program.

The program originally began with three companies, but one company was let go because it mishandled taxpayer data. The PCAs have generated numerous complaints because of their heavy-handed tactics. Also, the incentives of the PCAs are misaligned from those of the government, leading to cases where the PCAs push immediate debt collection but jeopardize subsequent tax compliance. Finally, the PCAs are tightly constrained in terms of what they can do--for instance, they can't negotiate debts down and can't investigate tax mistakes.

Why then does the private collection program continue to operate? Direct campaign contributions from the companies involved to Congressional supporters might explain some of it. Good old fashioned corporate cronyism and corporate welfare are other explanations. Lastly, there is an unabiding faith by some in the wonders of private efficiency, even in situations where there is ample evidence to the contrary.

Before the next tax day rolls around, Congress should eliminate this boondogle.

Billy Yow's contribution to race relations

Guilford County has many wonderful things going for it; however, the poisonous state of local race relations is not one of those things. Several local politicians seem to thrive on putting a stick in the racial hornet's nest and stirring things up.

The following banner from the re-election web-site of Guilford County's District 5 Commissioner, Billy Yow, is a great case in point.



Yow, if you don't know or couldn't guess, is the person with the very concerned look, who is shown in color on the left. Who or what concerns him? Well, the banner shows that it's the Democrats on the commission, most especially one of the black commissioners, Skip Alston who is depicted in the background on the right.

Yow uses the standard visual tricks of a negative campaign ad. He's removed the color from his antagonists' photos to show them in black and white. The shot of Alston is tightly framed by the "Yow" lettering and the border to make it appear closely cropped. Alston is photographed at a slightly downward angle and is tight-lipped and glaring over his glasses. All of which combine to make Alston look especially sinister.

There's another strongly implied message in the visual and that is that Yow is keeping Alston in his place. Yow is clearly in the foreground, in front of the text. Alston is in the back, behind the text. Also, because we naturally read from left to right, Yow is at the beginning, while Alston is at the end. The choice of yellow even gives a sort of schoolbus framing to the picture.

The text of the page reinforces the antagonistic message. It doesn't mention any demonstrable accomplishments. Instead, Yow "demands accountability" (presumably from Alston and the other no-account Democrats), "ask(s) the hard questions," "is always willing to take on the challenge," and "isn't afraid of a good fight."

While some might think this is over-reading, Yow freely admits that the ad targets Alston. When questioned about the lay-out of the ad, he told the N&R Scoop that "When you look you see Skip (Alston) sitting over there. And without me, you see, he's a loose cannon." The Scoop reported, "Yow added that voters in his district should vote for him at least to keep Alston under control." So, there's no question about the intent of the ad.

People are generally turned off by negative advertising, and the citizens of Guilford County are especially turned off by the endless racial bickering. They deserve a commissioner who can offer them something positive. Maybe Billy Yow can grow into that positive role; if he can't, he deserves to be retired.

Innocents

In response to questions posted to Jihadist web-sites, Al Qaeda's second-in-command, Ayman al-Zawahiri, ducked out of his cave long enough to assert that "We haven't killed the innocents."

Most of al-Zawahiri's rantings are best ignored. However, his lie that innocents haven't been deliberately murdered must not stand unchallenged.

Please let me tell you about four innocents that should be with us today.


Professor Leslie Whittington was a colleague from Georgetown University, when I was teaching at George Washington. She, several colleagues and I organized a monthly workshop on population and family economics that rotated around different univerities, institutes, and agencies in Washington.

Leslie was an accomplished and productive researcher, but she accepted the demanding (and largely thankless) administrative task of an associate deanship at Georgetown. After several years in the associate dean's position, an upcoming sabbatical was going to allow her to return to her research.


One of the immense joys of academic life is the occasional opportunity to travel to fantastic places to conduct research. Leslie had found such an opportunity at the Australian National University in Canberra. She and her husband, Charles Faulkenberg, had arranged for them and their two young daughters, Zoe and Dana, to spend the sabbatical there.

That opportunity put the family on American Airlines flight 77, which was to take them from Dulles to LAX on the first leg of their trip. They perished when al Qaeda's murderers plunged their flight into the Pentagon.

There is no question that Leslie and her family were innocents, just as there is no question that al-Zawahiri, bin Laden, and the hijackers are and were their killers.

America is divided about many things, but we should never forget that the struggle against al Qaeda is a fight to eradicate the world of a horrific evil that does indeed slaughter innocents, exults in that slaughter, and promises more.