Proper economic indicators

Well it's official.  We're in a recession.   SURPRISE!  With unemployment consistently rising over the past year, including a record number of jobs lost in November, stocks falling, foreclosures rising, etcetera, I don't think anybody was.  The possible exception of our fearless leader.  

Unemployment has been in the news a lot recently, and so many have been paying attention to how the BLS calculates unemployment.  Some details on their calculation available here.  Many people (like Mish) take the government unemployment rate, add in part time and discouraged workers and count them as the same as unemployed, and call that your measure.

Personally I think that's a bit ridiculous.  It's just trying to get the highest number you can.  I think discouraged workers should be counted as unemployed, because they want a job.  Part-time workers, though, you shouldn't just count them the same as unemployed.  By hand-calculations (using this data), the average part time worker works about 22 hours/week.  Compare that to an average worker, 42 hours.  

So here's my measure of unemployment: (Unemployed + marginally attached* + (0.5) x part time workers)/(unemployed + marginally attached + part time workers + full time workers)

As a rough guide, this would be halfway between U-5 and U-6, or 10.1% in Nov. 2008.

Okay, so this was a pretty simple indicator.  What I've really been thinking about is GDP, the gross domestic product.  My primary problem is that it's gross, and not net.  For instance, if a lot of people lost their arms it might increase a countries GDP because of all the new medical care provided.  The lost productivity from all these lost arms would likely show up, so this case isn't so bad.  Much worse are the destruction of natural resources showing up as a positive.  

People have proposed alternatives, like the Genuine Progress Indicator.  But I would like something more like Net Domestic Product, but also including the cost of labor and basic non-renewable materials.  The trouble is properly accounting for the costs, since labor costs are actually a positive in GDP.  Still, it would be a very useful indicator.

-Enginerd

*From the BLS:

Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

What's so bad about junk mail

A mailman in North Carolina was recently convicted and sentenced for failing to deliver several years worth of mail:

Padgett, 58, was given probation this week in federal court for failing to deliver pizza fliers, menu advertisements and store discount notices.

Padgett, who has diabetes and heart problems, said he started burying the junk mail in his yard and hiding it in his garage because he was overwhelmed by the amount of direct advertising mail he was supposed to deliver, said his attorney, noting not one customer on Padgett's route ever complained of missing the junk mail.

Well, customers wouldn't complain if they never knew they were supposed to get the mail.  But even after they were informed, nobody seemed to care.  

I've never understood the animosity towards junk mail.  If one has no need of the products being peddled, throw them out.  No harm, no foul.  Environmentalists have reason to hate it then (waste of paper and trees), but not consumers.  And the hatred of junk mail predates any significant public environmental movement.

No, I think people don't like junk mail because they know it works.  They know that they'll buy some of the stuff being sold, even though it's not strictly necessary.  So by being prevented from even knowing about the goods, one can't buy.  It's a case of people wanting to be protected from theselves.  The person doing the protecting is either the mailman, or themselves.

-Enginerd

PS Anybody else using Chrome?  I've been testing it out.  It's alright, but the focus on ease of use means a severe lack of customizability.

The true cost of the bailout, once we're paid back

The media likes big numbers. The government has been more than obliging in this regard, committing billions upon billions of dollars to failing banks, bank holding companies, insurance companies, so much so that some companies are buying up banks to get in on that action. One ofter hears about the $50 trillion in credit default swaps, and occasionally about the $1 quadrillion dollars in derivatives.

But these numbers are misleading. The $50 trillion in CDS would only change hands if all swaps were activated, but for that to happen the insurers themselves would have to go under. Plus, it doesn't include any off-setting amounts. The derivatives number is worse. It values an option to buy 100 shares of company XYZ at the share price x 100, even though the option itself is traded (re: valued) at far lower of a price, and will more than likely expire worthless and un-exercised.

The most recent fad has been the bailout. EconomPic Data has a neat graph showing the governments outlay as about $3 trillion, some like to include the $5 trillion of exposure represented by Fannie and Freddie. But what's likely to be the true cost? Nobody knows for sure how much of this money we're going to get back, but I haven't seen anybody even take a stab at it. So I'm going to.

Listed in (my memory of) chronological order:

Bear Stearns takeover by JP Morgan (Fed loan): $30 Billion.
Guess at recovery: $30 Billion
Net Expense: $0
Justification: The Fed loaned JPM money to buy Bear Stearns, and agreed to bear any losses beyond that. However, JPM doesn't have the option of defaulting and screwing the Fed on purpose, and they're likely to come through the crisis with fewer competitors. So yeah, this loan will be paid back.

Fannie/Freddie Injection: $200 Billion. Total exposure: $5 Trillion
Guess at Recovery: $0. Maybe less (seriously)
Net Expense: $200 Billion
Justification: The GSEs only had a capital base of 1-2% of their liabilities. Latest mortgage default rates are close to 10% (source, .doc), and with house prices falling and unemployment rising, that could increase. If it stayed flat, a recovery rate of 40% would make the losses equal $200 billion. That's possible, maybe even a bit conservative. But default rates will likely increase. At this level of leverage small changes make a big difference, that's why it's hard to know.

AIG bridge loans: $150 Billion.
Guess at recovery: $10 Billion.
Net Expense: $140 Billion.
Justification: They're going down. The government might recoup some losses at liquidation.

Paulsons Folly The TARP EESA: $700 Billion
Guess at recovery: $700 Billion.
Net Expense: $0
Justification: So far, the government has been buying preferred shares, the bulk of them to major banks. These companies are not going under. Economic bubbles represent a transfer of wealth, they they are the ones to whom the wealth is being transferred. They get cheap financing, so the cost to the government is market-distortion, but not loss of principal.

HOPE for homeowners: $300 Billion.
Guess at recovery: $270 Billion.
Net Expense: $30 Billion.
Justification: I used a 10% net default rate here, which I think is reasonable. Say maybe 20% defaults, with 50% recovery.

Other Fed loans: ~$2 Trillion
Guess at recovery: $1.9 Trillion
Net Expense: $100 Billion
Justification: Most of these are short term loans being made under the TAF, TSLF, PDCF, CPFF, ABCP MMMF LF, and so on. All loans are collateralized, though sometimes with junk, loans are always over-collateralized. So a 5% loss rate is a bit arbitrary, but I think conservative.

Total outlay: $3.38 Trillion
Total guess at recovery: $2.91 Trillion
Total expense: $470 Billion

To put that in perspective, some past government bailouts are available here and here. On bailouts of the railroads and Chrysler, the government actually earned a profit. The EESA certainly gives the government some possibility of upside, but Fed loans and HOPE do not. All in all, the only past bailout which even comes close is the S&L bailout back in '89. How exactly is the financial industry so good for the US?

-Enginerd