What You Need to Know About the Oklahoma Tornado

A massive tornado swept through Moore, Oklahoma on Monday, causing severe damage and over 50 deaths. Alexis Madrigal answers a number of frequently asked questions about tornados generally and this tornado in particular.

“Moore has a deep and tragic tornado legacy. The town could probably lay claim to being the very center of Tornado Alley… On May 3, 1999, Moore was hit by one of the worst tornadoes on record.”

“The National Weather Service’s Norman, Oklahoma office says that a tornado warning went into effect 16 minutes before the storm hit. That’s three minutes faster than the current average lead time for a warning.”

“Because there was a large tornado in 1999, we have detailed information on some of the problems with the construction methods in the area… much of the construction in the area does not follow best practices for resisting a tornado’s winds.”

Jeff Masters looks at the damage and expected costs of this tornado, noting that “after the damage tally from the May 20 tornado is added up, Moore will hold two of the top five spots on the list of most damaging tornadoes in history.”

Bonus Chart of the Day

– Joe Weisenthal notes an interesting similarity between the decline in the labor force participation rate (in blue) and the fall in per capita vehicle miles driven (in red).

“As you can see, per capita miles driven peaked just before the recession, and hasn’t recovered at all… It reminds us of the chart of the Labor-Force Participation Rate (the share of workers working or looking or work), which also started sliding before the recession, and hasn’t stopped sliding at all during the recovery.”

“There’s a logical connection between the two. Not in the workforce? You’re less inclined to drive.”

Why the Shrinking Deficit Won’t Allay Conservatives’ Fears

Cullen Roche explains why recent reports that the budget deficit is shrinking will not be enough to assuage conservatives’ deficit concerns.

“The conservatives who understand the monetary system are more concerned that the growing influence of the US government will reduce the productive base of the country therefore making us less competitive and at greater risk of becoming a high inflation country in the future.  I don’t think those fears are necessarily all that valid in the present environment, but I know what the concern is and can appreciate the worry over a longer time horizon.”

“It’s the absolute size of government spending relative to the economy that worries conservatives.  To the informed conservative who is worried about the long-term impact of growing government the continued growth in the deficit is nothing to celebrate at all.”

Employers Continue Search for Low-Cost Health Care Options

“Employers are increasingly recognizing they may be able to avoid certain penalties under the federal health law by offering very limited plans that can lack key benefits such as hospital coverage,” according to the Wall Street Journal.

“Many employers and benefits experts have understood the rules to require robust insurance, covering a list of ‘essential’ benefits such as mental-health services and a high percentage of workers’ overall costs… But a close reading of the rules makes it clear that those mandates affect only plans sponsored by insurers that are sold to small businesses and individuals.”

“Larger employers, generally with more than 50 workers, need cover only preventive services, without a lifetime or annual dollar-value limit, in order to avoid the across-the-workforce penalty… Limited plans may not appeal to all workers, and while employers would avoid the broader $2,000-per-worker penalty for all employees not offered coverage, they could still face a $3,000 individual fee for any employee who opts out and gets a subsidized policy on the exchanges.”

Ignore the Bubble Doomsayers

James Surowiecki rejects the stock market bears who argue that the recent stock boom and high corporate profits are based on a speculative bubble created by the Federal Reserve.

“It’s certainly unusual for corporate profits to soar during a slow recovery. But…when it comes to the role that corporations play in the U.S. economy, the present looks very different from the past… Take taxes: one big reason that after-tax corporate profits are much higher than their historical norm is that corporations pay much less in taxes than they used to.”

“Then, there’s globalization… The global economy, even with its current woes, is projected to grow more briskly than the U.S. economy over the next decade, so corporations will continue to benefit. Finally, the decline of unions and the sluggish labor market have enabled corporations to cut payrolls, thus keeping profits high.”

FT Alphaville highlights a new forecast from Goldman Sachs predicting that the S&P 500 stock index will soar to 2,100 in 2015.

Chart of the Day

– Walter Kurtz charts the difference between total corporate debt (in black) and total net corporate debt (in gray) to demonstrate how low risk tolerance and low interest rates are combining for potential future instability.

“Corporate treasurers’ risk tolerance remains low as they prefer to hold record amounts of cash on their balance sheets… This is taking place at the time when companies have issued record amounts of debt to take advantage of ridiculously low rates. Increasingly however the proceeds of those bond sales and other borrowings sit in cash. The difference between total and net debt…is cash.”

“Markets are betting that some of this cash will ultimately turn into stock buybacks or dividends. Shareholders are certainly demanding it. Over time that will leave some of these firms more leveraged, and unless they ‘grow into’ this debt, more vulnerable to downturns.”

Government’s Student Loans Profits Just An Illusion

Despite reports that federal government is set to make a substantial profit from student debt payments, Dylan Matthews explains how that profit is all an illusion of Congressional Budget Office math.

“Just like any institution, the CBO determines the cost of loans by ‘discounting all of the expected future cash flows associated with the loan or loan guarantee…to a present value at the date the loan is disbursed.’ To do that, it needs to settle on a ‘discount rate,’ which is usually the expected rate of return on the loan in question.”

“Banks and other private institutions generally estimate that by finding loans with similar risks and maturities to the one being evaluated, and then using those similar loans’ rates of returns. The CBO does not do that. It discounts all government loans using the returns on Treasuries of similar maturity… But Treasuries are the safest bonds in the world.”

“Worse, it’s hard to say what the actual market price of these loans would be, because unlike the federal government, private lenders actually ask basic questions of borrowers.”

Will Tornado Disaster Aid Need to Be Deficit Neutral?

As the region surrounding Oklahoma City grapples with the aftermath of a destructive and deadly tornado, Roll Call reports that Sen. Tom Coburn (R-OK) “says he will insist that any federal disaster aid be paid for with cuts elsewhere.”

“ Coburn said he would “absolutely” demand offsets for any federal aid that Congress provides… It’s a position he has taken repeatedly during his career when Congress debates emergency funding for disaster aid.”

Latest Obamacare Regulations Include Pre-Existing Conditions, Insurer Profits

“Final rules written to extend access to insurance for people with pre-existing conditions and set maximum profit margins for certain providers are set to be published this week,” The Hill reports, as federal government continues preparations to implement President Obama’s health care reform law.

“Beginning in 2014, insurance providers would not be able to deny coverage for people with pre-existing conditions… The ACA also created the stopgap Pre-Existing Condition Insurance Plan (PCIP) program, meant to boost access until that provision of the law takes effect… Costs have been higher than projected, forcing the administration to freeze enrollment earlier this year. The new rule, to be published this week, sets new, lower reimbursement to healthcare providers participating in the program.”

“The administration is also finalizing a rule capping profit margins for certain health insurance plans and prescription drug benefit programs. The measure would implement 85 percent “medical loss ratio” requirements on Medicare Advantage plans and the Medicare Prescription Drug Benefit Program. In other words… Overhead expenses and profits would be capped at 15 percent.”

Could the US See Another Credit Rating Downgrade?

The debt ceiling came back into effect this week, setting up yet another round of brinksmanship over the borrowing authority of the US Treasury. National Journal reports that the credit-rating agency Standard & Poor’s, which downgraded the US credit rating from AAA to AA+ in 2011, “is again warning Congress that a credible five-year plan to stabilize the federal deficit is as necessary—and elusive—as ever.”

“S&P’s current AA-plus rating with a negative outlook means there is at least a one-in-three chance that the agency will lower America’s rating by 2014… And while S&P would not provide policy advice, there are a few things it thinks lawmakers should know. First, the sooner Congress can deal with the issue the better.”

“Next, anyone who thinks that it would be no big deal if the United States defaulted on one or two Treasury payments is dead wrong. It would not only knock the U.S. rating down another notch—it would push the rating all the way down to a D. And should any default appear likely…the rating would drop to a CCC with a negative outlook.”

Blame Slow Growth for the Jobless Recovery

Economists have offered numerous theories to explain the stubbornly high unemployment rate, but Ben Casselman rounds up new research that says we need look no further than the slow pace of economic growth.

“Various papers have attributed the slow pace of job growth to the weak housing market, the downturn in specific industries and the long-run decline in the share of the population that’s working… But critically, the entire gap is due to the unexpectedly large decline in employment during the recession — not due to weak hiring during the recovery. Indeed, the pace of hiring during the recovery has been more or less what the authors would expect based on the pace of economic growth.”

“Economists have long worried that while unemployment benefits provide crucial assistance to job losers, they could also discourage people from looking for work or from accepting jobs that don’t pay as well as their old ones… Rather, the increased duration of unemployment was due primarily to the fact that extended benefits made job-seekers less likely to give up looking for work — meaning they continued to count as ‘unemployed’ in official statistics.”

Crack Babies: A Tale from the Drug Wars

Retro Report: “In the 1980s, many government officials, scientists, and journalists warned that the country would be plagued by a generation of ‘crack babies.’ They were wrong.”

Is Obamacare the Best Way to Promote Redistribution?

“The taxes embedded in the ACA, e.g., the unearned income Medicare contribution tax, are fairly narrowly-targeted to high-earners, and so redistribution away from the highest-earners is substantial,” says Reihan Salam, who wonders whether there aren’t better ways to promote the goals of President Obama’s health care reform law.

“Yet the ACA isn’t actually transferring cash to low-earners but rather an in-kind benefit. The providers of this in-kind benefit (insurers, medical providers) will capture a good amount of the value of this transfer of resources… I tend to think that we’d be better off if more redistribution took place via conditional transfers like wage subsidies rather than in-kind transfers.”

“In an ideal world, increasing the purchasing power of low-income households via wage subsidies would make low-income individuals more attractive customers for innovative, low-cost medical providers. But betting on this outcome entails betting that low-income individuals will make good decisions in guarding themselves against the risk of catastrophic expenditures. So the push for coverage expansion is motivated not just by humanitarian gut instinct or by the narrow interests of medical providers, but also by an implicit conviction that many people (if not most) are terrible at planning ahead, or that many (if not most) would prefer not to do so.”

Supreme Court to Hear Government Prayer Case

“Returning for the first time in three decades to the constitutionality of saying prayers at the opening of a government meeting, the Supreme Court on Monday took on a case involving Town Board sessions in the upstate New York community named Greece,” reports Lyle Denniston.

“No current member of the Court was serving when the Court last ruled on government prayers in the case of Marsh v. Chambers, in 1983… The Supreme Court’s agreement to review the decision might be interpreted as an indication that the Justices could be preparing to make a major pronouncement on religion in the public sphere, but it also might be understood as an intent to focus solely on the specific facts of the practice as it unfolded in this one community.”

The name of the case is Town of Greece v. Galloway.

“No Admit” Bank Settlements Hide the Facts

Jonathan Weil argues that regulator settlements with financial institutions that don’t require an admission of liability have a distorting effect on sorting out who is to blame for many of the issues at the heart of the financial crisis.

“We don’t know whose facts to believe. Without trials or admissions of liability, the government’s allegations remain unproven. Sure, Goldman paid a big fine. That doesn’t establish anything. For all we know it paid the money just to make the SEC go away.”

“The usual criticism of ‘no admit’ settlements is that they suggest the government is soft on corporate crooks. No doubt this is often true. But there is also a flip side. Settling without admissions of liability may tempt regulators to pursue weak cases, knowing that some defendants would rather write a check than spend years battling in court.”

QE Has Not Harmed Financial Stability

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota “warned that tightening monetary policy to improve financial stability would yield ‘tangible and significant’ losses for the U.S. economy while providing only ‘speculative and slight’ gains,” the Wall Street Journal reports.

“The Minneapolis Fed chief has said he is unperturbed by fears of inflation and wants to see the unemployment threshold lowered. The current thresholds ‘dampens current stimulus,’ Mr. Kocherlakota said… Runaway inflation isn’t a problem right now, but slowing inflation is. Consumer prices rose a mere 0.1% in April.”

“While doves like Mr. Kocherlakota vocally support the $85 billion-a-month Fed bond purchases, earlier this week a handful of Fed presidents, including the heads of San Francisco, Richmond and Dallas, said they would like to see bond purchases scaled back.”

Chart of the Day

– The Los Angeles Times looks at how the national divide over the Medicaid expansion in President Obama’s health care reform law will exacerbate disparities in health care results.

“With nearly every GOP-leaning state on track to reject an expansion of the government health plan for the poor, the healthcare law’s goal of guaranteed insurance will become a reality next year mostly in traditionally liberal and moderate states. These states already have higher rates of health coverage.”

Why Europe is Stuck in a Rut

While the US remains in a sluggish recovery, much of the European Union has seen a return to recession. Scott Sumner blasts the European Central Bank, which has responded to the crisis much differently than the Federal Reserve and the Bank of Japan.

“Yes, the ECB doesn’t know that it wants a recession, but the NGDP growth it is producing will inevitably produce a recession in the eurozone.  OK, they aren’t even targeting NGDP, but the highly flawed CPI including oil and VAT that they are trying to hold well below 2% will inevitably produce the sort of slow NGDP growth that will inevitably produce recession.”

“Money is very tight in the eurozone, using the Bernanke NGDP/inflation criterion for tightness.  They don’t need new ideas, they need to adopt an easy money policy… I mean seriously, after the last 6 months in Japan, how can people still equate easy money with low rates?  Just to refresh your memory, Japan’s had near zero rates for 16 years and nothing has changed in the past 6 months… Then Japan really did adopt a slightly easier money policy, and stocks soared 70% in 6 months.”

Fusion Energy Research Funding Shifts Abroad

The Boston Globe looks at the latest trend in research of nuclear fusion technology as an energy source, reporting that a “long-running Massachusetts Institute of Technology research experiment…will shut down within a year” after federal funds dry up.

“The shutdown will leave only two fusion experiments in the United States, one at Princeton University and the other at General Atomics, a company in San Diego… The US Department of Energy is increasing its overall funding of fusion research, but is shifting money from its domestic program to a large, collaborative international project being built in France called ITER.”

“The fusion program’s funding was first cut in fiscal year 2013, from $25 million to $14 million… But the center is also dealing with the uncertainty of the sequester, the across-the-board budget cuts that began earlier this year.”

Three Banks Nearly Halt Foreclosure Sales

The Los Angeles Times reports that Wells Fargo, JPMorgan Chase, and Citigroup temporarily suspended nearly all sales of foreclosed homes earlier this month after the Office of the Comptroller of the Currency “revised their orders on treatment of troubled borrowers during the 60 days before they lose their homes.”

“The banks said they paused the sales on May 6 to make sure that their late-stage foreclosure procedures were in accordance with the guidelines… The halted foreclosures are the latest complication stemming from a settlement between 13 large mortgage servicers and their federal overseers. Banks and regulators also have struggled to distribute billions of dollars in aid to borrowers equitably as required under the settlement.”

The Ghost of Stagflation Haunts Us Still

Matthew O’Brien criticizes economic policymakers for what he terms “Volcker-worship,” or the belief among “a generation of men (and yes, they are all men) who think stagflation is always and everywhere a looming phenomenon.”

“Stagflation wasn’t supposed to happen, but it did. Economists had thought there was a stable relationship between higher unemployment and lower inflation — the Phillips Curve — that broke down in the 1970s: prices rose, but so did joblessness… It wasn’t until Jimmy Carter appointed Paul Volcker to run the Fed in 1979 that things began to turn around.”

“Volcker  decided to jack up interest rates, and keep them there, until inflation came down. It worked… inflicting pain today for a better tomorrow. It just so happened that in this case, it was the right thing to do. It’s not now. Our present problem isn’t too little inflation-fighting, but too much.”

Court Fight Over Abortion Rights Begins Anew

A US District Court “temporary blocked the enactment of Arkansas’s new abortion ban, which would prohibit the procedure in most cases after 12 weeks of pregnancy,” according to The Hill.

“U.S. District Judge Susan Webber Wright granted the preliminary injunction after a request from several abortion-rights groups who filed suit against the law… The ban is seen as a challenge to Roe v. Wade along with its even stricter counterpart in North Dakota, where abortion is prohibited after as few as six weeks of gestation.”

The Weekly Numbers

Here are the economic data highlights for this week, along with consensus predictions, via Bill McBride and the Financial Times. Highlights include testimony by Treasury Secretary Jacob Lew and Federal Reserve Chairman Ben Bernanke, as well as the release of the minutes from the last Federal Open Market Committee meeting. All times are Eastern Daylight Time.

Sunday, May 19
12:00 AM: Government borrowing limit unsuspended

Monday, May 20
1:00 PM: Federal Reserve Bank of Chicago President Charles Evans speaks on “Perspectives on the Current Economy” at the CFA Society in Chicago, Illinois.

Tuesday, May 21
10:00 AM: Treasury Secretary Jacob Lew testifies on the Financial Stability Oversight Council before the Senate Banking Committee.
11:30 AM: Federal Reserve Bank of St. Louis President James Bullard speaks on “Monetary Policy Options in a Low-rate Environment” in Frankfurt, Germany.
1:00 PM: Federal Reserve Bank of New York President William Dudley speaks on “Lessons at the Zero Bound” at the Japan Society in New York, New York.

Wednesday, May 22
10:00 AM: Existing Home Sales for April from the National Association of Realtors (NAR). The consensus is for sales of 5.00 million on seasonally adjusted annual rate (SAAR) basis… A key will be inventory and months-of-supply.
10:00 AM: Federal Reserve Chairman Ben Bernanke testifies on ”Economic Outlook” before the Joint Economic Committee.
10:00 AM: Treasury Secretary Jacob Lew testifies on the Financial Stability Oversight Council before the House Financial Services Committee.
2:00 PM: FOMC Minutes for Meeting of April 30-May 1, 2013.

Thursday, May 23
6:05 AM: Federal Reserve Bank of St. Louis President James Bullard speaks on the U.S. economy and monetary policy at the Official Monetary and Financial Institutions Forum in London, England.
10:00 AM: New Home Sales for April from the Census Bureau… The consensus is for an increase in sales to 425 thousand Seasonally Adjusted Annual Rate (SAAR) in April from 417 thousand in March.

Friday, May 24
8:30 AM: Durable Goods Orders for April from the Census Bureau. The consensus is for a 1.1% increase in durable goods orders.

Abstract of the Week

John Cook and his co-authors have a new study in the journal Environmental Research Letters digging into the significant research conducted on climate change between 1991 and 2011 to find a consensus position on man-made global warming. The full paper, as well as the accompanying video, are well worth checking out this weekend.

“We analyze the evolution of the scientific consensus on anthropogenic global warming (AGW) in the peer-reviewed scientific literature, examining 11 944 climate abstracts from 1991–2011 matching the topics ‘global climate change’ or ‘global warming’. We find that 66.4% of abstracts expressed no position on AGW, 32.6% endorsed AGW, 0.7% rejected AGW and 0.3% were uncertain about the cause of global warming. Among abstracts expressing a position on AGW, 97.1% endorsed the consensus position that humans are causing global warming. In a second phase of this study, we invited authors to rate their own papers. Compared to abstract ratings, a smaller percentage of self-rated papers expressed no position on AGW (35.5%). Among self-rated papers expressing a position on AGW, 97.2% endorsed the consensus. For both abstract ratings and authors’ self-ratings, the percentage of endorsements among papers expressing a position on AGW marginally increased over time. Our analysis indicates that the number of papers rejecting the consensus on AGW is a vanishingly small proportion of the published research.”

Chart of the Day

– Karl Smith charts just how decent the recovery in private employment (in blue) has actually been in the wake of the Great Recession.

“To beat a dead horse for just a second, there is a good chance, that the notch you see just after 2012 will be straightened out after the benchmark revision and total employment in the US will be revised higher. More importantly, this nearly V-shaped recovery in jobs is a heck of a lot better than what you saw after the Dot-Com bust.”

“The problem is three-fold. 1) This ression was just really, really bad. So, even a sharp recovery doesn’t make everything feel ok. 2) The private sector barely recovered from Dot-Com before it got whacked. So part of what you feel is the suckage of going on 12 years of sub-par job growth. 3) The public sector is a total different story.”