Economies of Traffic Congestion

In case you missed this recent headline, Rethinking the Economies of Traffic Congestion, in The Atlantic Cities web site, the author (Eric Dumbaugh, Florida Atlantic University) proposes a thesis that traffic congestion may not really be a drag on a region’s economy

Traffic Congestion

To support this thesis, Professor Dumbaugh offers a statistical correlation between Per Commuter Hours of Annual Traffic Delay and Per Capita GDP.  And when there was a statistical correlation between the two, Professor Dumbaugh concludes that while not casual, that is traffic delays don’t cause increased production; he proposes traffic congestion is not a drag on a region’s economy. 

However this analysis has a major flaw–it is only a snapshot in time.  To really examine the impacts of congestion and to answer this question, one should examine the impacts of traffic delays over time.  Economies grow or shrink over time, and examining the change in traffic delays vs. the change in domestic product over time will yield a much better answer to the question of the degree to which traffic delays correlate with the production of goods and services. 

Luckily for us, the good professor was kind enough to cite his sources of data as The Texas Transportation Institute and The U.S. Bureau of Economic Analysis.  Going back to these sources, to answer this question was a fairly simply exercise.  When one compares the 46 largest metropolitan statistical areas in the country for the 10-year period from 2001 to 2010 using this same data set, the statistical significance virtually disappears (from an R^2 of 0.375 to an R^2 of 0.009).  That is to say, if traffic delay were a predictor of economic production, by itself it explains only about 1% of the changes in GDP.

The Virtues of High Executive Pay

Iconic Executive Donald Trump

Reading HBR blogger, Ben Heineman, Jr.’s article, The Political Case Against Out-sized Executive Pay, gives me an opportunity to discuss the virtue of high executive pay.  From his summary;

The  High Pay Commission’s [UK left pressure group aligned with the Labour Party] final report serves a valuable purpose by outlining in one place a broad political case for restraining the rate of increase of executive pay.

So let’s have a few reasons why high executive salaries can be a good thing for companies, for the economy and for society in general.

1.  Executives earn top 1% pay a limited time.  The Conference Board’s analysis of executive tenure of S&P 500 companies from 2009-2010 shows the average tenure of CEO’s is only 8 yrs and comes after 15 to 20 years with the company or in the industry.  Reducing executive pay cuts out the prime earning time of an individual, this comes only after a lifetime of effort to reach that point.  Taking away the goal line reduces the incentive to spend time in the race.

2.  Higher pay for top executive provides a target for ambitious next-level executives.  While the opportunity to lead an organization may have intrinsic value; opportunities to mentor/coach younger managers, the chance to build a healthy (job creating) company, the chance to serve vital needs and satisfy the wants of fellow humans—all virtuous goals. But limits on top pay reduce the incentive to work those long 15-20 years to get in a position to be a higher earner.  It’s not just the highest earner who is impacted; those who aspire to higher earnings themselves have an incentive to keep working hard to achieve the next level.

3.  Executives who are included in the top 1% are a subset of other occupation’s earners in the top 1%.   Katherine Rampell in her NY time article, The Top 1%: Executives, Doctors and Bankers, presents data about the occupations of the top 1% of income earners.  While executives and other managers are included the occupations, they only account for about 1/3 of the occupations.  Does anyone begrudge Oprah or Michael Jordan the pay they command? 

 Why do we have no outrage against entertainers and athletes who are in the top 1%.  I’ll concede the case of Raider’s QB JaMarcus Russell generated some outrage, but more for failure to perform than for pay itself.  Does anyone think if he’d taken the Raiders to a SuperBowl, there would be any objection to his salary?

4.  Unequal contributions support unequal pay.  The High Pay Commission makes a point to use a multiplier comparison for executives to the average pay of workers at their companies.  Why are there not the same multiplier comparisons for athletes?  For example, 156-times the top QB’s pay and the league minimum. 

Perhaps because in sports we recognize the existence of unequal contributions of talent, that is, yes, Tom Brady contributes more the team’s success than does the backup safety.  In the same way, executives and managers who earn multipliers of average workers at their firm’s wages do so in part because they contribute a multiple of times to the success of the organization than does any other one individual worker at the same firm. 

5.  The top 1% are also adversely impacted by recession.  In his excellent article, Tax Rates, Inequality and the 1%, Alan Reynolds, shows that between 2007 and 2009, the share of after tax income of the top 1% fell from 17.3% to 11.3%. 

The larger truth is that recessions always destroy wealth and small business incomes at the top….Of course, the same recessions also increase poverty and unemployment.

When is it easier to guide a company?  When time are good or in troubled times?  So perhaps, the argument should be not to limit executive pay because things are going badly in the economy, but to increase pay.

Profit (and Investment) Needed for Job Growth

With President Obama’s big speech tonight expecting to request $300M in additional stimulus spending to reduce unemployment, I’m reminded of an article, Obama’s Jobs Errors by Daniel Mitchell of the Cato Institute reminding us of the two things needed to create (private sector) jobs; profit and investment.

Mitchell’s post, published in the New York Post over a year ago, July 22, 2010, puts it succinctly,

“They [businesses] only create jobs when they think that the total revenue generated by new workers will exceed the total cost of employing those workers. In other words, if it’s not profitable to hire workers, it’s not going to happen. 

Second, it takes money to create jobs.  More specifically, labor isn’t very useful or productive unless investors are providing capital.  Truck drivers won’t get jobs unless someone has invested to buy trucks.”

 Yet, who believes the core of Obama’s speech will praise profit as a job creation mechanism?  Who thinks the president will propose making access to capital easier by either allowing business to keep more of the profit they earn by reducing the world’s highest corporate tax rate,  or by easing regulations on bank to encourage business lending? 

Over the last 4-yearsThe Tax Foundation has tracked 60 countries who have reduced their corporate tax rates, leaving the US (combined Federal and State) corporate tax rate at nearly 40%, the sad distinction of being the world’s highest corporate tax rate.

Actual vs. Projected Impact of Stimulus Spending on Unemployment

 So if these two mechanisms aren’t the core of the President’s job program, how did the last stimulus package work to reduce unemployment?  Mitchell has a great chart showing what the President promised and the actual results. 

In advance of the speech, it is useful to look at one more indication of how the bleak outlook for profits is restraining job growth, the labor participation rate.  This is the ratio of employed and those seeking work to the total labor pool.  It excludes students, retired people, stay-at-home parents, people in prisons or similar institutions, jobs with unreported income, and discouraged workers who have given up looking for work. 

This graph shows the July and August rates of 58.1% and 58.2% respectively are the lowest rates since August 1983.  This is the lowest participation rate in the modern era (the time since women’s participation in the workforce passed the 50% participation mark in 1978).

Historic Labor Participation Rates

It’s time the President affirm profit is not a dirty word, but the best catalyst for job growth.

Run out the Clock on Nominees


Richard Cordray, Nominee to Lead Consumer Financial Protection Bureau

With the success of blocking Peter Diamond’s nomination to serve on the Board of Governors of the Federal Reserve, Senate republicans have their strategy in place to oppose the nomination of Richard Cordray (registration required) to lead the Consumer Financial Protection Bureau

That strategy is made clear in a letter to the president from Richard Shelby and 44 Senate republicans (no accountability, no confirmation).  In the letter the Senate republicans make clear they will not support any nominee to the CFPB until the bureau’s structure is changed to include a board of directors instead of a single director.

As more vacancies to key financial regulators queue up, now including two governors at the Federal Reserve, two board members of the Securities & Exchange Commission, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency–the issue of who leads the regulators of major economic activity generators becomes a driving topic of the 2012 election cycle. 

In addition to running out the clock, Senate Republicans may also see more bi-partisan nominees put forward as a means to secure the consent of the senate.  Either way it’s a good strategy to pursue as long as democrats are not able to blame the slow recovery on any one of these regulators not having leaders in these key roles.  After all, who among us believe that regulators create jobs for anyone but regulators?

The Influence of Debt on Growth Rates

With all the talk of the US debt ceiling these days, I decided to take a look at the influence of debt on the ability of an economy to grow.  I compared the per capita debt load (thanks to the Tax Foundation) of States verses the State per capita GDP growth rates from 1999 to 2008 (in current dollars) from the Census Bureau.


In itself, a low per capita debt is not a guarantee of a high per capita growth rate and vice versa.  In certain States, such as Texas, a low DTI corressponds to a high per capita GDP.  In other cases, such as Tennessee, the lowest per capita debt ($773) has only a 3.2% 10-yr annuallized per capita GDP growth rate.

Another Keynesian Bites the Dust

Peter Diamond considers himself an expert in the labor market.  Let’s try a test, shall we, Mr. Diamond, when you want a job that requires you move from Boston to Chicago, do you,:

Diamond Withdraws Nomination to Serve

A.  Win a Nobel prize and claim that is a substitute for moving.

B.  Refuse to move then withdraw and complain about it in an OpEd in the NY times.

C.  Let your friends in the media whine about the unfairness of it all.

D.  Actually move to Chicago.

While Diamond may know labor theory, he had more than a year to move to Chicago, as the law requires, in order to be eligible to serve, from the Chicago district, on the Federal Reserve Board.  And yet failed to actually move.  You see, Diamond faced a decision that many real world job-seekers face–some jobs require you to move.  If you are not prepared to move, don’t apply for the job.

Of course, there are serious policy matters to consider, as Francis Cianfrocca does in her post, No, Mr. Diamond, the Fed Doesn’t Need Your Expertise.  Any nominee who can’t meet the basic statutory residency requirement should be a non-starter.  Whining about it in the NY Times only makes you a target of ridicule, as Jodi Beggs demonstrates well in her, Fun With… post.  Luckily for the US, there are five Nobel Prize winning economists at the University of Chicago.  Any one of whom is equally credentialed to Diamond, but with free-market, not Keynesian, inclinations.

Mr. Diamond there is a difference between economic theory and practice in the labor market, perhaps next time you’ll learn from this experience.

Bankers Descend on Greenville South Carolina

Furman University Tower, Greenville, SC--2011

This week 221 bankers from around the country decend on Greenville, SC for 10-days of what is described as, “Graduate School of Retail Bank Managemenet.”  Officially the attendees will say the time is spent learning new about the new bank environment, etc. 

But most, including me, will say one of the best things is getting to know your peers at other banks around the country. 

So what activities do these button-down bankers engage in while in South Carolina?  Take a look at this Furman Flash Mob to see one team-building exercise.

Statistics Reveal Operational Risk

New York State Supreme Court Building

Bloomberg’s reporting of MBIA’s win over BAC (Bank of America, Loses Bid to Stop MBIA Using Statistics in Fraud Lawsuit)  to use statistical sampling is a clear example of how BAC underestimated the operational risk it was assuming with the takeover of Countrywide and demonstrates the value of institutionalizing process controls in mortgage was underrated.

Why do I characterize this risk as operational risk instead of credit risk?  Good question.  Answer:  because the investor, in this case, MBIA, isn’t saying the it was the credit quality alone that was at issue, but that Countrywide misrepresented (presumably in its representations and warrants) to the investor that it had reviewed these loans, had QC process in place to verify and check the quality of these loans met the investor’s underwriting guidelines.

By agreeing to allow MBIA to use samples from 368,000 mortgages in 15 securitized pools, MBIA estimates it will save the $75M in costs of paying 24 underwriters for 4-years to conduct review s of the individual loans. 

If the results of the samples support MBIA’s claims of misrepresentation, it will change the playing field from one of loan-by-loan defense, to questions of operational controls and quality control methods employed by Countrywide.  It also allows MBIA to make each and every instance of any already completed loan repurchases an admission of breakdown or failure in its QC process. 

In general, the use of statistical sampling ratchets up the pressure on BAC to develop and implement a comprehensive settlement strategy.

Under the scrutiny of sampling, if those repurchased loans are included in the population there is a built in % of non-disclosed QC errors already built in, if they are not included and a random sample is used, MBIA’s lawyers can argue that, “in addition to our known errors from our random sample there are other loans BAC has already repurchased that show there are loans that were misrepresented outside of those found in the sample.” [Court Decision]  Not a comfortable position to defend if you are BAC.

Brian Moynihan, Bank of America’s CEO said on 4/14 2011 (Q1) earnings call, (listen to 10:48  BAC Q1 2011 Earnings Call) “All the business have moved back to profitability, except our mortgage business….” Well, isn’t that the market’s concern?

Pragmatism Prevails at Bank of America

Two months after telling investors, “We have thousands of people willing to stand and look at every one of these loans” (WSJ, Oct 20, 2010) BoA’s COE, Brian Moynihan, has thrown in the towel. 

Bank of America CEO Brian Moynihan Raises the White Flag for Settlement

The Jan 3rd deal with Fannie and Freddie settles many of the outstanding claims with these agencies at $2.8B.  For BOA, it appears pragmatism has prevailed.  Bluster is fine when you are responsible for your own money, but shareholders feel otherwise when it’s their money being used to back that bluster. 

Let’s consider Mr. Moynihan’s decision in terms of a quick cost-benefit analysis.  On the benefit side, even using BOA’s 2008 revenue per employee of $303,000, keeping even 2000 staffers tied up with non-income generating activities would cost $606M in foregone revenue.  But this number pales in comparison to the value created in the market from a 6% (85¢/Share) bump in share price that has been sustained in the week since the announcement—a $8.6B increase in market cap.

On the cost side, BoA and other banks benefit by delaying settlements with investors as the pool of possible repurchase loans shrinks.  Of the $1.2 trillion BoA issued MBS to FNMA/FMCC between 2004 and 2008, 40% has paid off and is out of the at-risk pool.  The bank has seen $18B in repurchase requests and indicated this was about two-thirds of the anticipated requests.  If BoA was 70% successful defending claims, and BoA realized 35% losses on the repurchased loans, the cost is $2.8B.  Accounting for the forgone revenue, the net market reaction would only need to be marginally positive (2%) to make the settlement a positive financial decision. 

Bank of America's FNMA-FMCC Settlement Cost-Benefit Analysis

BoA can now focus on minimizing the losses associated with the repurchases and shift operating budgets to revenue generation.  Look for BoA to delay settlement with private investors, to further reduce the at-risk pool and allow housing markets to recover value (reducing losses associated with REO).

Manager Relocation at All-Time Low

 According to Challenger, Gray & Christmas, Inc.,  the percentage of managers relocating for new positions is at 24-year low, with 2010 data through Q3, the rate is 7.33%.  The trailing 10-year average is 15.5%, or more than double the current rate. 

Homeowner’s equity has taken a nosedive as well, dropping more than a third from its trailing 10-year average of 54.1% to less than 40%.  (see inset chart).

With CoreLogic’s Negative Equity Report, showing 22.5% of all residential mortgages with negative equity, firm hiring and expansion plans may be impacted by managerial candidate’s reluctance to relocate over the next several years (or at least demanding to be made whole from underwater mortgages).