Wickemt

Why do we need more farmers? What is the driving force behind U.S. Department of Agriculture policy?

Submitted by Chris Martenson via Peak Prosperity,

So let's pretend for the moment that the Federal Reserve gets everything it has stated it wants.  And even further: that Washington, D.C. gets everything it wants, too.

The credit markets are repaired, and massive new loan growth flows out the door.  Loans are made to businesses that hire gobs of new people.  Consumers borrow and borrow some more to go to school and buy homes, cars, and gadgets.

Inflation remains low and job growth explodes.  Tax receipts climb and the deficit falls.  The stock market goes higher and higher, gold falls and then falls some more, as confidence in the system, its masters, and its institutions grows.

The Fed wins and D.C. wins.

But in reality, we all lose.

It's all just a matter of timing.

Unsustainable

If we hold the view that humans are behaving unsustainably in terms of any of the 'three Es' – the economy, energy, or the environment – then any rapid resumption to a paradigm of exponential growth in our consumption of natural resources -- or in our growth of debt over income -- simply takes us more quickly to the bitter end of this story.

What good does it do to return to rapid economic expansion if we have not figured out how we are going to supply sufficient water for agriculture and basic living needs to the major population centers around the world?  What's our plan for reversing collapsing oceanic fisheries?  When do we have the substantive conversation about the long-term implications of the continuing Fukushima disaster? 

Omnipresent signs of ecosystem stress -- ranging from dying bees to increasingly chaotic weather patterns -- suggest strongly that we need to be doing things differently and with an eye towards resilience.  On the energy front, the temporary bonanza of oil and gas from US shale plays is just that: temporary.  We need to be talking about where we want to be positioned when that, too, ends.

The really big picture here is that our economy, such as it is, is predicated on ever larger amounts of stuff being extracted, refined, produced, and then discarded.  It's a model that works -- just not sustainably.

Instead of wondering where we're headed and engaging in a bit of introspection, all eyes are on the Fed to see if it can engineer higher stock prices while keeping interest rates low. So conditioned are the masses locked in this system, it's as if financial assets all by themselves are both necessary and sufficient to secure a prosperous future. 

Without understanding the actual nature of where we are in this story, there's no way to meaningfully adjust our course towards a different destination.  For now, I will constrain this analysis to the Fed and to the economy, and show that their efforts have not borne the fruit they hoped for and that it's well past time to admit that the grand money-printing experiment has not worked out as planned.

If we simply pump the economy back up at any and all costs, we will win that battle. But we'll lose the larger war.  What we should be doing instead is using this as an opportunity to address some of the hard questions about where we are, where we are headed, and what kind of world we wish to enter into (and leave behind for our progeny).

Turning Japanese

In 1999, when Bernanke was essentially campaigning for the position of chairman of the Fed, he wrote a paper that lambasted Japanese monetary officials for not doing enough to prevent a sustained period of low inflation, sluggish economic growth, and torpid credit market growth:

Before becoming Fed chairman, Mr. Bernanke led a band of U.S. academics who argued that Japanese officials weren't doing enough to jolt their economy out of its torpor. In a 1999 paper, Mr. Bernanke lashed out at Japanese officials, saying their country's woes were the result of their own "self-induced" paralysis. Japan's responses to deflation, he charged in atypically blunt terms, were confused, inconsistent and too cautious.

(Source)

The basic ideas he set forth were simply that the proper course of action for Japan (said easily enough from his armchair academic position at Princeton) was to simply do more, promise more, and not pull back from stimulus until the economy and inflation were behaving properly.

If they had, he argued, then they could have avoided a prolonged period of low growth, high unemployment, and declining inflation.

More from that same article:

At a conference at sponsored by the Boston Fed in Woodstock, Vt., that October [1999], Kazuo Ueda, then a BOJ policy member, issued a warning to the largely American audience: "Do not put yourself into the position of zero rates," he said. "I tell you it will be a lot more painful than you can possibly imagine."

Mr. Bernanke shot back that Japanese policy makers might be making the same "extreme policy mistakes" Americans made in the 1930s—being too timid about reversing deflation. A few weeks later, in a blistering research paper, he said even though conventional tools were expended, there was plenty the Japanese could do to boost consumer demand, business spending and prices.

 

Among his suggestions: Cheapen the yen by selling it in the currency markets; or buy long-term debt from the Ministry of Finance to finance tax cuts, something he said was akin to just dropping money from a helicopter.

 

One objection at the time was that Japan's economic problems weren't the result of too little stimulus by the central bank but of structural problems in Japan's banking system and in protected industries.

 

Mr. Bernanke said structural problems didn't negate the need to find ways to push up consumer demand and business spending.

 

"Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced," he concluded. "Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn't absolutely guaranteed to work."

Well, here we are: six years into Bernanke's own Japanese experiment, and the U.S. is mired in low growth, high unemployment, and declining inflation.  To be blunt, none of his ideas are working out as easily in practice as they did on paper.

The hubris, the easily rankled ego of an academic, were on high display in Bernanke's comments to the Japanese. And that brings us to the nub of the issue today: the Fed's utter failure to back up and admit that its grand strategy is simply not working as planned here.

The (Ugly) Data

The evidence that the Fed's own efforts to shock the economy back to life have failed is quite clear.  Anecdotally, pretty much everyone knows exactly what would happen to the equity and bond markets if the Fed stopped injecting $85 billion into the financial system each month: they would crater.  So even there, we'd have to give the Fed a poor grade, if not a failing one, for creating markets now over-dependent on easy money.

Let's start with employment – or rather, its inverse, unemployment – because that's the main thing to which the Fed has tied its quantitative easing (QE) program. 

At first glance, it looks like the Fed is winning the day, because even though unemployment is quite elevated by historical standards at 7.4%, it's at least moving in the right direction:

Like all U.S. government statistics, the headline number is about as fuzzy as they come, and it deserves just a little bit of inspection before we place much confidence in it.

To calculate the unemployment rate requires you to know two things: how many people are out of work, and how many can work.  But the Bureau of Labor Statistics (BLS), the government agency that calculates the employment figures, has spent decades introducing one exclusion after another in order to reduce the accounting total for people who are out of work -- each time with the effect of reducing the headline unemployment rate. 

After all, if fewer people are 'out of work', which means they are not counted, then unemployment rate will be lower.  A smaller numerator creates a smaller fraction.

Fortunately, the BLS still calculates a more rigorous definition of total unemployment (although it is still not completely accurate) that goes by the name "U-6", which they define as follows:

U-6 – Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force

This alternative measure of unemployment and underemployment stands at 14.0%, or nearly double the headline rate.  It excludes those who have not even looked for a job in the last 12 months, and there's good reason to believe there are a lot of those individuals right now.

Evidence of that comes from the labor force participation rate, which measures all those who have a job (and, yes, having a part-time job counts the same in this calculation as having a full-time job).  It has fallen to painful levels:

In the above chart, where everyone who is employed is divided by everyone of employment age, we can see that just under 59% of working-age Americans are employed.  We have to go back to the early 1980s to find a similar employment proportion, and here we'll note that it is much harder to get by on one salary today than it was in times past, indicating something of the hardship embedded in this number.

It stands to reason that a lot of people who want to work, but have not looked recently enough to be counted, are contained in the above chart.

One other way we might surmise that some people have not looked for a job in over a year is to look at how long people tend to remain unemployed once they lose their job.  Here the data is particularly grim:

Note that this chart is of the mean duration of unemployment, so roughly half of all people are out of work for just over 35 weeks, and half are out of work for longer than that.  If we imagine a nice spread to the data, perhaps a reasonable bell curve, then it's not hard to imagine that quite a few people are well over the 52-week mark and that some of them could easily fall through the statistical cracks.

If QE is helping to bring down unemployment as the Fed claims and the media carefully repeats, then it's not clear at all that it's helping to bring down the mean duration of unemployment from levels that are without precedent in the 60-year-old data set. 

One other area in which QE has failed to help is in the types of jobs created.  Of the meager few jobs created since the start of the financial crisis and recession in 2008 and 2009, respectively, nearly 4 million of them have been part-time jobs, which are counted and reported by the BLS with the exact same weighting as full-time jobs:

Here again we will note that QE is not having its intended effect if the goal is to create high-paying, full-time jobs.  Instead, all we are getting are a lot of part-time jobs (i.e., lower pay and without benefits).  Through the first 7 months of 2013, 953,000 jobs have been created. A full 731,000 of those, or 77%, have been part-time. 

Of course, it's silly to blame QE for this, because QE has nothing to do with initiatives like Obamacare, which is one of many contributing factors towards more part-time work being offered and performed.  But then again, that's the point.  It's just plain silly to tie QE to employment at all in the first place, but that's what Bernanke did, which is why we're taking such a detailed look at it here.

On the subject of GDP growth, the data is even more dismal.  The 'bounce' seen after the recession allegedly ended in 2010 is the worst on record, and GDP growth currently stands at a rate not seen outside of the context of a recession at any point over the prior 60 years:

For all of the talk of recovery and improvement and corporate earnings and such, and even with all of the statistical wizardry of the Bureau of Economic Analysis (BEA) at work, the GDP numbers here are indistinguishable from those of Japan after its bubble burst and the Bank of Japan began fighting its deflationary monster.

The other similarities to Japan are that the U.S. Fed is now stuck with a zero interest rate policy and finds itself in the business of monetizing enormous quantities of U.S. federal debt.

Like Japan, the U.S. finds its sovereign debt loads not just growing, but exploding at the fastest pace on record for six years now:

The summary here is that Bernanke, after dissing the Japanese efforts, has little more to show for his efforts than they do.  The economy remains weak, inflation is low, he's trapped in a 0% interest rate policy, unemployment remains stubbornly high, and federal debt is exploding.

In fact, he does have results.  It's just that they are indistinguishable from those of the Japanese.

In Part II: The Real Story To Focus On, we clarify the real issues we need to be dealing with if we want our entry into the future to be anything longer-lived than a kamikaze mission. 

The Fed is doing an excellent job of demonstrating how fighting the wrong battles leads to losing the war.

If we want different results (and I do) then we need different behaviors.  To get those, you either change willing through insight or else stone-hearted reality will force you to on its terms.

If we don't chose the former, the latter is a guarantee.

Click here to access Part II of this report (free executive summary; enrollment required for full access).

Last fall, voters in Los Angeles County passed Measure B, the “Safer Sex In the Adult Film Industry Act.” This measure requires the use of condoms in adult films during sexual intercourse. Vivid Entertainment, Califa Productions and porn star Kayden Kross sued. Among other things, they argued that the requirement infringed upon their constitutional right of free expression under the First Amendment.

On Friday, a federal district court judge denied the plaintiffs motion for a preliminary injunction. Although the judge agreed that the production of pornographic films is protected by the First Amendment, he found it likely that the law would satisfy intermediate scrutiny as a content-neutral regulation of expressive conduct. The judge did not reject all of the film companies’ claims, however, finding that some of the law’s administrative and enforcement provisions were too intrusive or prone to abuse.

Here’s early coverage from the L.A. Daily News and Business Insider. The opinion is here.

University of San Diego law professor Donald A. Dripps has an important new article in the Journal of Criminal Law and Criminology: “Dearest Property”: Digital Evidence and the History of Private “Papers” as Special Objects of Search and Seizure (103 J. Crim. L. & Criminology 49 (2013)).  (H/T Mike Ramsey at The Originalism Blog).  In it, he presents a powerful case that the seizure of private papers by government authorities for later perusal was considered a distinct and equal injustice as that of issuing general (nonparticularized) warrants.  As such, one’s papers merited much greater protections from seizures that one’s “effects” or personal property.  Indeed the “seizure” of one’s papers for later perusal to find incriminating information therein had the hallmarks of the evils of general warrants.  He then connects this historical analysis with contemporary debates over the seizure of digital information.  Here is a bit from the Introduction:

This Article argues that the history of seizing “papers” explains why the Amendment uses the term and offers the opportunity to ground special Fourth Amendment rules for digital evidence....

The Fourth Amendment refers to “papers” because the Founders understood the seizure of papers to be an outrageous abuse distinct from general warrants. The English courts and resolutions of the House of Commons condemned both abuses distinctly. The controversy was closely followed in America, where colonial Whigs sympathized with, and even idolized, John Wilkes, who successfully sued for damages for the seizure of his papers. America inherited the common law ban on searches for papers, adopted constitutional provisions that mentioned papers distinctly, and refused to modify the common law ban by statute until the Civil War. The one Founding-era attempt to authorize seizing papers by statute was condemned as contrary to common law and natural right and never passed into law. Although Congress authorized seizing papers to enforce the revenue laws during the Civil War, it took until the 1880s for a challenge to reach the Supreme Court. That challenge was Boyd, which remained the law for another ninety years. Boyd rightly held that “papers” deserve more constitutional protection than “effects.” Special protection does not, however, ineluctably mean absolute immunity. The seizures that aroused outrage in the 1760s were indiscriminate, expropriating, unregulated, and inquisitorial. A regulated, discriminate, and nonrivalrous process for inspecting documents is different. Indeed, the prohibition on seizing papers was never absolute. Stolen and contraband papers could be seized under warrant, and perhaps papers of only evidentiary value could be seized incident to arrest. Moreover, if the Fourth Amendment, as Story said, is “little more than the affirmance of a great constitutional doctrine of the common law,” the Amendment incorporates by reference “a great constitutional doctrine” that was dynamic on its own terms, subject to judicial evolution and statutory modification. The supposed choice between no special protection for private papers and complete immunity for private papers is a false dilemma.

This is from the middle:

Current doctrine seems premised on a supposed dilemma. If private documents do not enjoy heightened constitutional status, and the government can show probable cause to believe that one document among thousands is either contraband or evidence, the police may scan the entire lot. In some cases their suspicions will prove baseless and they will have searched thousands of innocent but private entries for no good purpose. If, on the other hand, documents do deserve heightened constitutional protection, the government has no right to pick through the haystack in search of the needle, and documentary evidence of serious crimes would, as a practical matter, become off-limits to law enforcement.... The pooling problem is not about either the lawfulness of the object of search or the particularity of a warrant. In the 1760s, libels could at least theoretically be seized; the problem was the need to look through reams of innocent private papers to find the contraband ones.

And this from the conclusion:

There are difficult questions about both the substance of structural safeguards on digital searches, and about the institutions best equipped to formulate those safeguards. All I have suggested here is that safeguards that greatly reduce the special evils that attended the seizures of papers in the 1760s might make digital-age Fourth Amendment law simultaneously more legitimate and more functional. If that turns out to be true, the time may come when structuring digital searches is not just best practice, but also the only practice that is not “unreasonable.”

The history is fascinating, and obviously germane to current cases and controversies.  Beyond its claims about the Fourth Amendment, I had a number of reactions.

1. First, the depth, quality and balance of Professor Dripps’s originalist research is what makes the article so persuasive.  Still, I find that it is common to be impressed with originalist (and other) arguments with which one is already sympathetic.  So the longer term test of any originalist analysis is how it stands up under critical scrutiny by other scholars who are knowledgeable on the subject.  ”It sounds right to me” is not enough to make one sure that it is right.  Having said this, it sounded right to me.  For sure it is an excellent start.  If you read this, you will learn things about the Fourth Amendment that are really good to know.
2. The article’s emphasis that the first federal statute altering the common law bar on seizure of private papers (that were not themselves contraband) for later perusal was a revenue act of 1863 reminded me of my co-blogger Will Baude’s superb article on the takings power, in which he shows that the federal government first exercised the power of eminent domain within a state (i.e. not in a territory or other federal jurisdiction) only after the Civil War.  (See William Baude, Rethinking the Federal Eminent Domain Power, 122 YALE L.J. 1738 (2013).)  This was news to me.  We tend to attribute current longstanding practices to “tradition” extending back to the Founding, though they developed long after.  Indeed, I have suggested we attribute certain constitutional doctrines to the New Deal Court that were actually Warren Court innovations, such as modern hypothetical “rational basis” scrutiny.  (See my essay, Judicial Engagement Through the Lens of Lee Optical, 19 Geo. Mason L. Rev. 845-860 (2012).)
3. If correct, this analysis reinforces the point I made back in 1999 that ”originalism” does not invariably lead to “conservative” results.  Indeed, some conservative originalists reach for precedent to escape the original meaning of the text.
4. This originalist analysis has a number of values.  Of course, if one is an originalist scholar, judge, or justice, it would bear importantly on one’s opinion of the meaning of the Fourth Amendment.  But apart from that, the analysis is also quite valuable just to understand the composition of the text; and it opens a conceptual position that may differ from, and improve upon, existing doctrine.  In the latter case, it is so much the better that it might move doctrine in the direction of original meaning.
5. Even where doctrine diverges markedly from original meaning, this meaning can still exert a “gravitational force” on doctrine if judges perceive that we have deviated too far from the original scheme — especially if they can see how the original scheme still makes sense under contemporary conditions.  We saw this both in Chief Justice Roberts’s opinion, and that of the dissenters, in NFIB v. Sebelius, and in Justice Alito’s nonoriginalist “substantive due process” opinion in McDonald v. Chicago.

Professor Dripps’s paper is both fascinating and timely.  I highly recommend it.

UPDATE: I neglected to mention that Professor Dripps cites with approval co-blogger Orin Kerr’s article, Digital Evidence and the New Criminal Procedure, 105 COLUM. L. REV. 279 (2005).

Following an uneventful flight from Lyons the crew prepared for a descent and approach to Strasbourg. At first the crew asked for an ILS approach to runway 26 followed by a visual circuit to land on runway 05. This was not possible because of departing traffic from runway 26. The Strasbourg controllers then gave flight 148 radar guidance to ANDLO at 11DME from the Strasbourg VORTAC. Altitude over ANDLO was 5000 feet. After ANDLO the VOR/DME approach profile calls for a 5.5% slope (3.3deg angle of descent) to the Strasbourg VORTAC. While trying to program the angle of descent, "-3.3", into the Flight Control Unit (FCU) the crew did not notice that it was in HDG/V/S (heading/vertical speed) mode. In vertical speed mode "-3.3" means a descent rate of 3300 feet/min. In TRK/FPA (track/flight path angle) mode this would have meant a (correct) -3.3deg descent angle. A -3.3deg descent angle corresponds with an 800 feet/min rate of descent. The Vosges mountains near Strasbourg were in clouds above 2000 feet, with tops of the layer reaching about 6400 feet when flight 148 started descending from ANDLO. At about 3nm from ANDLO the aircraft struck trees and impacted a 2710 feet high ridge at the 2620 feet level near Mt. Saint-Odile. Because the aircraft was not GPWS-equipped, the crew were not warned.

On a jet, the most fuel efficient way to descend is of course to stay in the optimal cruising altitude as long as possible, then cut the thrust and glide with a certain glide speed to the destination deceleratate for the approach, and, ideally you only advance throttles as far as the outermarker to spool up for go-around.

Simply put, the speed (i.e. steepness of your glide/dive ) calculation is based on economic fuel to flight time ratio (the cost index). So all you have to do is make a good decison about the top of descent point observing all the speed and altitude constraints ahead. Which is, obiously the tricky part.

For this regime the autopilot interface has a mode selector named Level Change (B) or Open Descent (A).

Should you find yourself short of the field, either you slow down (shallow your descent) - not good as you accumulate extra time on the flight, or add thrust - fuel penalty, the lower the worse.

A well thought out and written article on the Second Amendment, but it comes to a common and what I think is wrong conclusion:

This may have been fine when the Amendment was first conceived, but considering the changing context of culture and its artifacts, might it be time to amend it? When it was adopted in 1751, the defensive-power afforded to the citizenry by owning guns was roughly on par with the defensive-power available to government. In 1751 the most popular weapon was the musket, which was limited to 4 shots per minute, and had to be re-loaded manually. The state-of-the-art for “arms” in 1791 was roughly equal for both citizenry and military. This was before automatic weapons – never mind tanks, GPS, unmanned drones, and the like. In 1791, the only thing that distinguished the defensive or offensive capability of military from citizenry was quantity. Now it’s quality.

This is a pretty common argument. I’ll grant him, for the sake of argument, that the Second Amendment is primary founded on resistance to tyranny, even though our Courts seem to be more focused on the self-defense aspects of the right.

The chief mistake people make in this line of thought is to assume war is killing. That is not really the case. War is the use of force in an attempt to impose your political will onto others. Killing is just a means to accomplish that. If it were just about killing, the wars in Iraq and Afghanistan could have been settled in about thirty seconds, but they weren’t. Our goals in both cases was to impose a less outwardly militant democratic system of government on a population that had no tradition of it. When it comes to defeating an opposing army, all the things that make governments so remarkably powerful matter quite a lot. When it comes time to actually impose your political will, those things matter a lot less. A man in a tank can’t impose his will on me, he can only kill me. To impose his will he has to get out of the tank, plane, or ship, and essentially go from being a soldier to being a policeman, and at that point, we become a lot more equal. If our government ever wants to kill us, lots of us, we’re screwed. We have a much better chance resisting the imposition of someone else’s political will. It can be argued that firearms aren’t as important in that equation as other things, and I might agree with that, but such resistance is not beyond the reach of motivated individuals. The philosophies and attitudes that the right to keep and bear arms engenders in a population is likely just as important, if not more important, as the instruments of exercising that right.

On Friday, the Obama Administration released a “white paper” articulating its case for the legality of the NSA call records program under Section 215 of the Patriot Act and under the Fourth Amendment. I found the “white paper” a somewhat frustrating read, as it is essentially a brief for the government’s side with no brief coming to oppose it. Although the white paper raises some interesting points, it also fails to confront counterarguments and address contrary caselaw.

Consider the critical issue of whether a massive database of billions of records can be deemed “relevant” because some records inside the database are relevant. Here’s the key discussion of that issue from the white paper:

[C]ourts have held that the relevance standard permits requests for the production of entire repositories of records, even when any particular record is unlikely to directly bear on the matter being investigated, because searching the entire repository is the only feasible means to locate the critical documents.[FN7] More generally, courts have concluded that the relevance standard permits discovery of large volumes of information in circumstances where the requester seeks to identify much smaller amounts of information within the data that directly bears on the matter. Federal agencies exercise broad subpoena powers or other authorities to collect and analyze large data sets in order to identify information that directly pertains to the particular subject of an investigation. Finally, in the analogous field of search warrants for data stored on computers, courts permit Government agents to copy entire computer hard drives and then later review the entire drive for the specific evidence described in the warrant.

[FN7]See, e.g., Carrillo Huettel, LLP v. SEC, 2011 WL 601369, at *2 (S.D. Cal. Feb. 11, 2011) (holding that there is reason to believe that law firm’s trust account information for all of its clients is relevant to SEC investigation, where the Government asserted the trust account information “may reveal concealed connections between unidentified entities and persons and those identified in the investigation thus far . . . [and] the transfer of funds cannot effectively be traced without access to all the records.”); Goshawk Dedicated Ltd. v. Am. Viatical Servs., LLC, 2007 WL 3492762 at *1 (N.D. Ga. Nov. 5, 2007) (compelling production of business’s entire underwriting database, despite business’s assertion that it contained a significant amount of irrelevant data); see also Chen-Oster v. Goldman, Sachs & Co., 285 F.R.D. 294, 305 (S.D.N.Y. 2012) (noting that production of multiple databases could be ordered as a “data dump” if necessary for plaintiffs’ statistical analysis of business’s employment practices).

. . .

While these cases do not demonstrate that bulk collection of the type at issue here would routinely be permitted in civil discovery or a criminal or administrative investigation, they do show that the “relevance” standard affords considerable latitude, where necessary, and depending on the context, to collect a large volume of data in order to find the key bits of information contained within.

If you’re reading quickly, you might skip over the caveat “where necessary, and depending on the context” in that last paragraph. But it’s actually a significant caveat, and the white paper doesn’t discuss the precedent on the other side that complicates the Administration’s position.

A case that comes to mind is In re Grand Jury Subpoena Duces Tecum Dated Nov. 15, 1993, 846 F.Supp. 11 (S.D.N.Y. 1994) (Mukasey, J.). In that case, then-Judge (later Attorney General) Michael Mukasey quashed a grand jury subpoena that sought all computers and all electronic storage devices possessed by the target corporation. The subpoena failed Rule 17′s “relevance” standard because the computers contained so much irrelevant material intermingled with the data that was relevant to the investigation:

Government counsel have conceded on behalf of the grand jury that the subpoena demands irrelevant documents. Moreover, the government has acknowledged that a “key word” search of the information stored on the devices would reveal “which of the documents are likely to be relevant to the grand jury’s investigation.” Id. at 3. It follows that a subpoena demanding documents containing specified key words would identify relevant documents without requiring the production of irrelevant documents. To the extent the grand jury has reason to suspect that subpoenaed documents are being withheld, a court-appointed expert could search the hard drives and floppy disks.

“[B]ecause the subpoena at issue unnecessarily demands documents that are irrelevant to the grand jury inquiry,” Mukasey concluded, “it is unreasonably broad under Federal Rule of Criminal Procedure 17(c).”

Mukasey’s decision seems to cut against the Administration’s position. It blocks a subpoena for all the electronically-stored information because lots of the information to be obtained is not relevant even thought some of it is. Plus, the opinion is written by a recent Attorney General of the United States, which should give it extra prominence. And it’s a lot more significant a precedent than are Fourth Amendment cases involving warrants to search computers: Warrants do not apply the relevance doctrine while subpoenas do, so it seems odd to discuss the cases about computer warrants but not the cases on computer subpoenas. But the “white paper” doesn’t mention this case, so we don’t know if the Administration has a response to it– or if the FISC was ever alerted to it.

Granted, it’s possible to try distinguishing Mukasey’s decision. Mukasey seemed to think that a key word search would be responsive to the subpoena, so getting all the data was not necessary. There was an alternative way to proceed, namely by doing key word searches. The Administration presumably would argue that the Section 215 program is different because getting the whole database is in fact necessary: If the government doesn’t have the whole database, many of the records will be destroyed before the government can find the links it is looking for.

Perhaps that’s right, but that argument would open up a difficult question of what the frame of reference is for assessing necessity. Does the risk that customer metadata would be deleted in the ordinary course of business create a “necessity” to overcollect? Do you assume that the government has a right to get access to all metadata of every telephone user in the United States, and that overcollection is “necessary” to effectuate that? Or do you assume that the government only has a right to get access to relevant metadata that exists at the time the government identifies the relevance of that specific metadata? I’m not sure there is a doctrinal answer to that issue, but the white paper doesn’t appear to acknowledge and confront the question.

In addition to not citing contrary precedent, the white paper also cites cases that strike me as relatively weak authority for its position.  Consider the three cases cited in Footnote 7 above. In the first case, Carrillo Huettel, LLP v. SEC, 2011 WL 601369, at *2 (S.D. Cal. Feb. 11, 2011), the SEC issued a subpoena to the Bank of America for all the trust account records of an 8-lawyer firm (Carillo) suspected in misconduct involving at least 42 clients. The firm objected that getting all the account records would reveal what it was doing with the funds of 100+ clients beyond the 42 already tagged as involving misconduct. The government argued that it needed all the client records to really understand what was happening to the funds, and the Court agreed: “On balance, the Court finds the SEC has demonstrated that there is reason to believe that the Carrillo trust account information sought by the subpoena is relevant to a legitimate law enforcement inquiry. Although not every responsive document produced by BofA may be relevant, there is reason to believe that the records overall contain information relevant to the investigation.”

This Carrillo case provides at least some authority for the government’s position, but it seems like relatively weak authority. In that case, the government was investigating the records of a single smallish law firm, and it already knew that about 30% of the records to be collected involving firm clients were involved in financial wrongdoing. In that instance, it seemed plausible that most or all of the records were involved in the scheme, even if the government didn’t know it yet. And it would make sense to look through all the records to see which ones were tainted by the firm’s practices. That’s far different from government access to the records of hundreds of millions of customers to find a mere handful of bad actors.

The other two cases cited by the government seem much weaker. Both involve requests for records in civil discovery disputes. In Goshawk Dedicated Ltd. v. Am. Viatical Servs., LLC, 2007 WL 3492762 at *1 (N.D. Ga. Nov. 5, 2007), the court allowed the plaintiff suing an insurance company to get a copy of the actuarial database used to set the terms of the plaintiff’s policy. The court allowed the plaintiff access to the database because “its methodologies, policies, and practices of conducting life expectancy evaluations are themselves at the center of this litigation,” and the database was the key way to understand the insurance company’s methodology and practices. In the third case, Chen-Oster v. Goldman, Sachs & Co., 285 F.R.D. 294, 305 (S.D.N.Y. 2012), the court mentions the possibility of a “data dump” as part of the discovery process. But the case also cites Nicholas J. Murlas Living Trust v. Mobil Oil Corp., No. 93 C 6956, 1995 WL 124186, at *5 (N.D.Ill. March 20, 1995), in which the Court rejected turning over an entire database of information during discovery and seemed to agree with the objecting party’s claim that the demand was “outrageous.”

Having read Goshawk and Chen-Oster, it’s not clear to me how they are supposed to support the government’s position except in a very indirect way.   The fact that a few courts have not categorically ruled out turning over things called “databases” does not shed a lot of light on whether it is lawful here. To be clear, there’s a lot of interesting and useful analysis in the white paper. But there is also a lot that the white paper leaves out, and some of the cases cited don’t seem to offer significant support the Administration’s position.

In other news, someone brought an baby deer that had been abandoned by its mother to a no-kill animal shelter in Wisconsin.

The no-kill shelter placed a few calls, found a licensed wildlife refuge that would take the baby, and kept the animal in their fenced wooded facility for two weeks until the slot opened up at the refuge.

But, thankfully, this evil criminal conspiracy was stopped in its tracks. Thanks to brave government employees, aerial photos were taken, surveillance was performed, a SWAT team was assembled, and then nine agents of the Department of Natural Resources and four deputies "all armed to the teeth", raided the no-kill animal shelter.

And shot the baby deer and stuffed its corpse into a body bag.

Because, you see, the law forbids private possession of wildlife. And those villains at the no-kill animal shelter weren't going to send the deer to the licensed wild life refuge until tomorrow

Details.

Not that I'm criticizing. Oh, gosh, no! I am completely loyal, friend State. I would never question your dictates, second guess your wisdom, disagree with any of the tens of thousands of men and women that you equip with body armor, submachine guns, assault vehicles, drug sniffing dogs, GPS surveillance, drones, court rulings providing exceptions to the fifth amendment, and more.

My loyalty is complete, friend State.

But that baby deer? Yeah, I'm pretty sure he was a mutant. Or at the very least, potentially diseased. Better safe than sorry, friend State.

Good call.

Mutants. Secret Society members. Communists. Baby deer. © 2007-2013 by the authors of Popehat. This feed is for personal, non-commercial use only. Using this feed on any other site is a copyright violation. No scraping.

I am free. I was born that way. Free as the wind blows. Free as the grass grows. You know the song.

Each day I leave my stall and roam the field. I eat. I watch the trains go by. I swat flies.

The sun makes it bright, and the clouds make it not so bright. The moon makes it night.

I feel safe in the field and safe in my stall. I feel that way since I know the man will take care of me. I am free to need the man, and the man likes me and gives me what I need.

The man was there when I was a calf. He is still there. The man brings feed and pours drink. He takes milk from the cows. He leaves nuts here and there in the field so more grass will grow.

This is a good deal but some cows and bulls must think it is a bad deal. One day some cows and bulls were gone. (One day I saw a cow slip in the mud by the fence near the trees, but that is not the same.)

I did not see them go, but I think they walked off. Why would they do that?

Look! A bird.

I am free. Are you free? © 2007-2013 by the authors of Popehat. This feed is for personal, non-commercial use only. Using this feed on any other site is a copyright violation. No scraping.

In other words, a competent programmer can reliably parse out email addresses from the structured header fields with effectively no chance of getting user-entered content by mistake, unless the user was hand-crafting the email. All they have to do is stop reading the message at the first blank line (as I have marked in the example with a dividing line).

In order to get occasional cases where the Xkeystore retrieves "metadata" in the form of email addresses that turns out to be user-entered content instead, the NSA must be retrieving and parsing the content of the email. They may have coded their application to only show what they think are email addresses, but they are extracting those email addresses from the content, not from the headers. Which means they must be collecting and analyzing the content, not just the metadata.

It's like a pretty girl who wants to change clothes in your bedroom. Does she trust you not to look or does she find a screen or use a bathroom or closet so that you can't look? Does it matter if you promise not to look?

Clearly, the NSA has the ability to intercept email content, not just metadata; just as clearly, they are actually interceptingthe full email content and collecting it for analysis. They are asking us to trust them not to look at the content, even though they already have it. Maybe they have built their application so that they can't look without getting permission, but according to Snowden, the permission system is a joke and a rubber stamp. We already know that Homeland Security does keyword scanning of content, and I'm betting the NSA is doing the same thing with its application, and if the right keywords are there -- or the right sender or recipient, two or three degrees away from a "suspected" terrorist -- the content is flagged for a closer look. Or the NSA analyst can make up his own justification and get it rubber stamped.

And we can't see how their application works, or have any way of knowing that it does what it says it does. In this analogy, the NSA is the guy wearing a nice Google Glass device, and he tells the pretty girl in his bedroom she can strip down right there in front of him and she will be perfectly safe -- he's written his own privacy app, you see, and when it detects a pretty girl in his field of view it doesn't let him look. He's just watching you to keep you safe, you see. He's not recording the whole thing and uploading it to his friends.

Submitted by Jim Quinn of The Burning Platform blog,

Yes. The national intelligence has fallen that far. The morons in West Philly can't spell 'Cat'. At least 75% wouldn’t know the Vice President of the U.S.. More than 50% can't add 5 + 5. And 80% wouldn't know when and why the Civil War was fought.

A Bayesian network analysis stamping on a human face forever.

“Hi, NSA? This is DEA. What? You KNEW we’d be in touch? Oh, riiiight. Yeah. So, ah, anyway, let’s do lunch…”

For a long time our government has had the luxury of not even being able to know about an ocean of petty, often victimless crime. Our laws were born into benign neglect. This was not by choice, but by technological necessity. Knowing everything just wasn’t possible: If some citizen grew a few pot plants, hired a couple of illegals, kept a modest cache of unregistered weapons, or paid — in cash — for sex, probably no one would ever be the wiser. As long as you weren’t a total dumbass about it, you wouldn’t face any legal consequence at all.

Like the fish in the water, we lacked a term for our happy state of affairs. We clearly need one now, and so I’ll coin it: For many years, our government’s benign ignorance was a limiting factor in the growth of the carceral state. That may be ending. When it does, our law enforcement will look very different.

Benign ignorance permitted the rise of legislation that no one ever expected to see systematically enforced: It’s illegal to grow vegetables in your front yard in Los Angeles. You often can’t legally photograph or video a cop. There are some very easily violated laws about the mails — images of which, yes, they’re scanning now. Do magic mushrooms grow wild on your land, as sometimes happens in, like, all of North America? Uh-oh. And let’s not even get started about intellectual property rights, which everyone violates absolutely all the time. Under benign ignorance, copyright only catches the really big fish, which is probably just how things should be. But without benign ignorance? Somebody better tell aunt Francine. (“And tell her in person, you dolt! Do not call her on the phone!”)

As we all know now, the NSA has our telephone and Internet metadata. They appear to be able to get our browsing and search history as well as our passwords. They very likely have mobile phone location data. Did you turn your phone off? It doesn’t matter. And we’ve just learned that they can also read encrypted VPNs.

That means the NSA knows. They know about your bitcoins. They know about your porn. They know about your guns. They know about your drug dealer. And they know about Ashley Madison. Or Grindr. Or Bang With Friends. Or whatever it is you depraved sickos get into these days. They also know about the illegal stuff, of which the less said the better.

It’s only natural that other government agencies are going to want what the NSA now has. If they get it, things are going to change in ways that we can’t even imagine. This story of a police raid after searching for “backpack” and “pressure cooker”? Only the beginning.

Now, readers, the linked is a developing story. It’s not yet clear how things will shake out in this particular case. But whether it’s true, or erroneous, or even just a very clever hoax will hardly matter long-term. Whatever it may be, the story has legs because it’s a vision of a terrible future, one that absolutely nobody wants. And it’s coming straight for us.

As far as I can tell, the only thing standing between us and that is the NSA’s tendency to follow rules — that is, the tendency to follow rules possessed by individuals who have shown absolutely no tendency at all to follow rules. At least not when they’re inconvenient.

Benign ignorance is dead. They’re not ignorant anymore. They haven’t been for a long time. Now we know that they know — and they know that we know that they know.

So what comes next?

It could be very, very bad, depending on our political will, or lack thereof. We might get the only thing worse than losing the drug war, which is actually finally winning the drug war — as in, anyone who uses pays the full, on-paper legal price for their crime. I don’t think anyone ever expected this to happen. We can’t count anymore on benign ignorance to keep people like the young Barack Obama, the young George W. Bush, the young Bill Clinton, and the young [everyone else now in overprivileged Washington] out of prison.

Making a new crime as a mere act of political theater has always had some costs, of course, and I’ve usually thought those costs were too high. Seldom is a law entirely without teeth. But as of today, the teeth bite harder.

Which may turn out to be a very good thing, in some ways: Those in power only pay attention when the laws affect them or the others close to them. They may think twice about future bad laws.

But the end of benign ignorance could also turn out to be a very bad thing. We have no particular reason to expect that the surveillance state will be administered impartially. There might be some neighborhoods, some exclusive Internet services, or some procedures that slip the net. With official approval, of course, subject to revocation by some elite. And those gatekeepers, whoever they are, will hold the real power.

Image credit.

#111

They moved the river to build the water wheel,
Then built a wooden race to divert the current.
Sluice opened, stones ground raw grain into meal
For a hundred years, until the old mill was spent.
River turning wheel turning gears turning stone,
A devolution of mechanics all to crush a seed.
The sun burns for years to dry an animal’s bones,
And countless gallons of water won’t break a reed.
I’m reluctant to approach the mill too closely
(Its ancient timbers are desiccated, ghostly),
Hear its stoppage rasped by the river’s relentless
Passage over the shattered race’s detritus.
Away from the wreck, a little waterfall churns
Spray, wrack, and spume, and, like time, it burns.

Note: This is one of more than 125 poems after paintings or images, which can be viewed at the blog, Zealotry of Guerin.

There hasn’t been a good Jewish deli in the D.C. area in ... well, forever, as far as I know. Many years ago, someone wrote to Phyllis Richman, food critic for the Washington Post, asking where he could get good Jewish deli in the D.C. area. Richman responded to the effect of, “if you live in the D.C. area and want good deli, take the red line to Union Station ... then take Amtrak to New York.”

Since then, several “New York” “Jewish” delis have come and gone, those those remain typically feature menu items such as Monterey Chicken Paninis, Crabcake Dinners, or even maple ham steak that basically disqualify them from the category they are supposed to be in.

Which brings me to the new Attman’s deli in Potomac, in the Cabin John Mall. Attman’s is a branch of a venerable Baltimore institution, and it opened in the same strip mall as Goldberg’s Bagels a very good (and kosher) bagel place and a Judaica store. It’s storefront is the former Pomegranate Restaurant, a defunct kosher restaurant. [Aside: Kosher restaurants rarely make it in the D.C. market, the Orthodox population is too small and many observers of kashrut go to Baltimore for shopping and eating-- Baltimore being the home of the amazing Seven Mile Market kosher supermarket, billed as the largest kosher supermarket in the U.S., whereas the two kosher markets in the D.C. suburbs are small, expensive, and lame.]

Anyway, Attman’s isn’t kosher, and it isn’t even quite kosher-style, as it mixes meat and cheese on the same sandwich. But it does make a big deal of its “Jewishness,” advertising “Jewish corn beef” (from a circumcised bull?) and so on. I didn’t see any bacon, ham, or other pork products on the menu, nor any trendy sandwiches, so it seemed a bit more like a traditional “Jewish” deli than other imitators.

But, and here’s the key, how was the food? Not so great.

Attman’s is apparently famous in Baltimore for its corned beef, but my wife and I both thought our corned beef was somewhat dry. (But if you like lean corned beef, it was that, so don’t bother paying extra for lean). Not bad otherwise. Overall a 6.

Pickles were a big disappointment. Unlike a traditional NY Jewish deli, no pickles were served gratis as appetizers, nor was cole slaw. I ordered some pickles anyway. Instead of sour and half-sour, the menu called them “green” and “well-done.” After confirming that well-done was the equivalent of “sour,” I ordered a mix. The “green” were pretty good, but the well-done were pretty bad, tasting more like a Vlasic pickle than a traditional sour garlicky “Jewish” pickle. Overall a 4. If you want a good sour pickle, go to Seven Mile Market instead and buy a jar from one of Baltimore or Brooklyn’s pickle purveyors.

We also ordered a potato knish, outrageously priced at $5.00 for a small knish. That nevertheless would have been a small price to pay for true knishy goodness. But this knish was mediocre and seemed (heresy!) like it might have been microwaved. My standard for a restaurant knish is that it has to at least be better than Gabila’s frozen that you can get at the supermarket and heat in your oven. This definitely wasn’t. Another 4.

At least the rye bread was very good, the mustard was good enough, and there wasn’t any mayo to be found. Overall a 5, a 6 if you can’t get to New York regularly and have real Jewish deli. But if you’re in the Potomac area and want some good Jewish food, Goldberg’s is just a few yards away.

Does a fish know that its nose is wet? Probably not. It swims in water, and assumes that is the only way any animal lives.

We live in an economic world. Economic models that were developed years ago were created based on observations of how the economy seemed to work at the time. As time goes on, it is becoming clear that early economists missed important connections. The most important of these is the role of energy and its connection to the economy. It takes energy to make anything, from a piece of steel to a loaf of bread. It takes energy to transport anything. Humans need energy in the form of food to continue to live. Clearly, energy should have a place in economic models.

In this post, I explain some of the basic principles as I see them:

1. Humans have evolved to be dependent on external energy.

2. Humans now supplement their own limited energy supply with external energy of various types. In general, the more external energy used, the more humans are able to control their environment.

3. Over the 1 million+ years during which humans have been able to control fire, humans have generally been in situations with favorable feedback loops, due to increasing efficiency in producing goods and services required to meet basic needs. Such loops allowed continued population growth and economic growth.

4. We are now reaching limits on these feedback loops. The result is feedback loops that are changing from favorable feedbacks to contraction.

5. Part of the change in feedback loops relates to the cost of energy sources, such as oil. A rise in the price of oil tends to reduce salaries of workers (because of layoffs) as well as reduce discretionary income (because of higher price of food and commuting), contributing to the trend toward contraction.

All of this is very concerning, because in the past, adverse feedback loops of this type  seem to have led to collapse.

The Many Types of Energy

The most basic type of energy, at least from a human perspective, is human energy. This is the energy we as humans have that allows us to move our own bodies and allows us to think. Each of us is given approximately the same amount of energy, with males having somewhat more energy for lifting and pushing objects, and females having the special ability to give birth to new humans.

In order to use human energy, humans need to eat food of appropriate kinds. Most of this food is from plants and animals that we process in some way for this purpose. (This processing normally requires some type of energy.) The only food that is not from plants and animals is mother’s milk. Women need to increase their own intake of food from plant and animals, in order to produce enough milk for their babies.

Humans are able to leverage their own energy with many types of external energy. One very old source of external energy is burning wood and other plant matter. Such energy is used in keeping warm, cooking food, making sharper tools, and warding off predators. Another very old source of external energy is energy from dogs, trained to help with hunting, and from draft animals, trained to help with plowing and grinding tasks.

Humans have learned to harness various other forms of other energy, such as wind, water, and geothermal energy. In the last 200 years, the use of fossil fuels (coal, natural gas, and oil) has greatly expanded the amount of external energy available to humans.

Fossil fuels are important, not just because they can be burned directly, but because they enable the use of electricity from a wide range of sources—including hydroelectric, nuclear, and solar photovoltaic. While we think of these latter sources as non-carbon fuel sources, they are today available only within a system powered by fossil fuels. It takes fossil fuels to create metals in the quantity needed for electrical transmission; it takes fossil fuels to make and transport the type of concrete used in hydroelectric dams and wind turbines; it takes fossil fuels to purify silicon and other materials used in making solar PV.

While people talk about a system that does not require fossil fuels, no one has mapped out how the world could in fact transition from a system that uses fossil fuels to capture these types of energy to a system that would work without fossil fuels. The best we can hope for within the next 100 years is to use fossil fuels more sparingly.

One specialized form of energy is embedded energy that has been stored up in goods for the long term. Examples of early embedded energy includes heat-sharpened stone ax blades, used by hunter gatherers, and clothing, whether made by hand or machine. Today, there is much embedded energy in roads, pipelines, and electrical transmission systems. The vast majority of today’s embedded energy is derived from fossil fuels.

External Energy as a Human Need

Most animals seem to get along fine without external energy, other than the sun’s rays. They live in the parts of the world where they are adapted. They more or less live in balance with their predators. The number of a given species may rise for a while, but if the number grows too much, the species will exhaust its food supply, leading to population decline.

Humans have moved to a different model. The change came when humans (or predecessors to humans) first learned to control fire, over 1,000,000 years ago. Being able to control fire gave humans many advantages over other animals. Humans were able to cook part of their food. This had many advantages: It greatly reduced chewing time, allowing time for other activities, such as making tools and clothing. It improved nutrition, by making food more digestible. It allowed the human body to evolve in ways that used more energy for brain development, and less for chewing and digestion. [i]

The way the natural order works is that each species gives birth to far more offspring than is needed to survive to adulthood. “Natural selection” determines which of these offspring will survive. If humans had been like apes, chimpanzees, or gorillas, total population might have reached a plateau of perhaps 3,000,000, (based on historical animal populations). This limit would be reached because of competition with other species, and because climate is less hospitable outside of a narrow range.

With the help of external energy, such as the controlled use of fire and the use of dogs for hunting, humans were able to gain an advantage over other species and spread to all areas of the globe. This is what allowed population to grow, and continues to help it grow.

The natural order assures that far more human offspring are born than are needed to survive to adulthood. If humans are intelligent, they desire to extend their own lives and the lives of their offspring. The result of this dynamic is that there tends to be continual upward pressure on population.

There is a second dynamic as well. Because of humans’ intelligence, humans have the ability to over-consume at least some of the wildlife in the areas. For example, we learned on our recent visit to Iceland that when Vikings first discovered the island, there were both walruses and the flightless bird, the auk, on the island, but both disappeared soon after humans moved to the island.

Because of these dynamics, there has been tendency to need more food, and more energy supplies of other types, over time. To meet the need for greater food supply, humans began using agriculture about 10,000 years ago. With the advent of agriculture, the amount of human food available per acre was greatly increased.

The availability of agriculture added to the two dynamics noted previously for hunter-gatherers. As before, (1) population tended to increase, because the natural order provides for far more births than are needed for replacement, and because humans, with their intelligence, now had a way to provide more food per acre. Also, (2) there was a tendency of the amount of food available from a given acre of land to degrade over time, because the methods used for agriculture were less than perfect. Erosion was a problem, especially when planting was done on slopes. If irrigation was used, salt deposits often became a problem. Rising population combined with degrading resources led to a need recurring need for additional energy, since supplemental energy could indirectly add to food supply. In situations when additional energy was not found, populations had a tendency to collapse after many years of growth.

Besides the two basic dynamics of rising population and degrading resources leading to a need for additional resources, there were other forces that tended to add to the need for increasing amounts of energy:

a. Cheapest resources used first. Soon after agriculture began, humans began to use resources of other types, such as wood from forests and metals such as iron and bronze. With any of these resources, there is a tendency to use the “cheapest” (easiest to extract, closest at hand, highest ore concentration) first. If extraction is to continue, increasing amounts of energy per unit extracted are likely to be required for later extraction.

b. Increased disease transmission when population is packed more closely together. This issue can be overcome with techniques that kill germs and that keep humans separated from waste products of other humans. The need for these techniques adds to the need for external energy.

c. Deforestation. Without fossil fuels, there was a severe tendency to overuse forests. Deforestation occurred as early as 4000 B. C. E., according to Sing Chew. Historian Norman Cantor writes, “By 1500 Europe was on the edge of a fuel and nutritional disaster [from] which it was saved in the sixteenth century only by the burning of soft coal and the cultivation of potatoes and maize.” The use of coal allowed more energy per person, and took pressure off of limited forest resources.

d. Pull of Technology. The availability of fossil fuels, starting around 1800, has allowed much of what we now call “technology.” Without fossil fuels, our ability to make materials such as metals and glass is severely restricted. Without fossil fuels, we are also lacking for the basic building blocks for plastics, synthetic fabrics, and even modern medicines. Technology provided ways to use fossil fuel resources in ways that helped overcome many human limits. The desire to use more technology led to increasing use of fossil fuels in the 19^th and 20^th centuries.

Hunter-Gatherer Economies

There were no doubt many different types of economies in the over one million years when humans and pre-humans were hunter-gatherers. One documented approach is the gift-economy. With this approach, those who killed animals shared what they obtained with others in their group. Status was gained based on how much an individual was able to provide to others in the group. Members of the group played different roles—some were involved with caring for children, or too old to work, but what was available was shared with the group as a whole.

In the days of hunter-gatherers, the function of the economy was not too complicated. There was little need to “save for tomorrow,” because it was difficult to carry anything during travels. The amount of food an individual could eat was pretty much limited by appetite, so having “more food” for one individual wasn’t particularly helpful. If one person was the leader, he (or she) might have special adornment.

If population rose too high, relative to resources, this may not have been apparent in “normal” times—when weather was good, and when a particular hunter-gatherer group had an area to itself. But if there was a major weather problem or an encounter with another group needing space as well, population pressure could lead to a crisis. It seems likely that die-offs occurred from time to time, especially during natural “bottle-necks.”

A Simple Agricultural Economy

Thinking about a simple agricultural society gives us some insight as to how early economies must have operated.

Consider a simple economy in which some members produce barley; others produce fish. The fish can be salted and dried, so both the fish and the barley can be stored, if desired. The big issue in such a system is how efficient the barley and fish operation is. If in order to feed the group, half of the group must work full time growing barley, and half of the group must work full time catching, salting, and drying fish, then no matter what kind of economic system is in place, the result will simply be trading fish for barley. Everyone will continue to have to work at either producing fish or barley. The economic system will simply move some of the fish to the barley producers, and some of the barley to the fish producers.

Let’s suppose instead that the barley and fish producers are much more efficient. Suppose that with 10% of the population working at barley production and 10% of the population working at fish production, the population can provide enough food for the full population, leaving 80% of the population (100% – 10% barley producers – 10% fish producers) to pursue other activities. How the remaining 80% of the population will spend its time will depend on resources available and the desires of the citizens. Perhaps 30% of the citizens would make goods of various types (build homes, make clothing, and make furniture) and 20% of the citizens would provide services of various types (education, health, artwork, and hair cutting). This would leave 30% for government and finance. The government portion would include pay for government officials and police and transfer payments to the elderly and disabled.

The total wealth of the community is then the sum of all of the goods and services in this community. The financial system will redistribute the goods and services produced among the members of the community, perhaps allowing some “savings” for future consumption. Those producing goods and services will expect to be included in the redistribution, but so will others, if this has been the tradition in the community.

If the economy operates without fossil fuels, the quantity produced is limited by the speed with which biomass regrows. Thus, unless the community is willing to live with deforestation, it can’t use much wood each year. This puts a severe limit on the amount of goods produced. Printing more money does not change this dynamic.

In the example above, I suggested an efficient economy might need only 20% of its population for food production. In fact, the percentage of the population involved in food production varies greatly across economies. Before fossil fuels use, typically 80% of the population of a country was involved in agriculture. With so many involved in agriculture, the number who were involved in manufacturing and services of all types (including government services) was necessarily very limited, because they needed to be “squeezed into” the remaining 20% of the economy.

Figure 1. Percent of Workforce in Agriculture based on CIA World Factbook Data, compared to Energy Consumption Per Capita based on 2012 EIA Data.

If, in our hypothetical community, population rises because more children live to maturity, this adds a new dynamic. There is a need for more food, clothing, and housing for the growing population. Unless land area keeps increasing, there becomes a need to grow more barley per acre. In a world without fossil fuels, increasing grain yields becomes difficult. More farmers can be added to a given plot, but the additional yield for additional manual effort (perhaps picking off insects that might eat the crop) is not very high. This dynamic tends to lead to what we think of as falling wages of the common worker, when population becomes high relative to resources available. As I have mentioned in previous posts, based on the book Secular Cycles by Turchin and Nefedof, collapse often occurs in such situations. Governments have promised significant services, but it becomes difficult to collect enough taxes to pay for these services, with falling wages of the common worker.

The dynamic is similar if energy supplies of types other than food (such as oil and coal) does not rise as fast as population. The amount of goods produced using these energy supplies will tend to fall, unless technology advances are able to offset the decline in energy consumption per capita. Such technology is normally fossil fuel dependent. If goods per capita falls, this will be reflected in what we think of as falling inflation-adjusted wages, since it is not possible for workers to have more than what is produced.

Adding Fossil Fuels

Figure 2. World Energy Consumption by Source, Based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects and together with BP Statistical Data on 1965 and subsequent

Figure 3. Per capita world energy consumption, calculated by dividing world energy consumption (based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects together with BP Statistical Data for 1965 and subsequent) by population estimates, based on Angus Maddison data.

If metal tools can be used—say metal plows—these metal tools can greatly ramp up efficiency of farming, allowing fewer people to work in the agricultural sector. If we think about the result in the last section, this situation allows a greater proportion of the population to be employed in producing discretionary services, and thus more wealth for the community as a whole.

The problem with making metals such as iron using renewable resources is that huge amounts of charcoal are needed to make even small amounts of iron. If one wants reasonable quantities of metal, or modern alloys such as steel used in plows and trucks, a person needs fossil fuels.

If a person wants to add fossil fuels and the things that fossil fuels can make to a community that does not have fossil fuels, the question becomes how to pay for the new goods using fossil fuels. As an extreme example, if farmers have always planted barley with a stick, the amount of barley each farmer produces is tiny, and the population is likely mostly farmers. If a farmer can use a new tractor, with the latest equipment, a single farmer can perhaps feed the whole community. The tractor will provide the improved efficiency needed to free up a whole community of workers for other purposes.

The secret to adding fossil fuels (or any kind of energy source that can improve efficiency, and allow fewer people to produce essential goods and services) is debt. While the farmer cannot pay for the new tractor with his earnings from growing barley using a stick, the farmer can indeed pay for the tractor with all of the goods and services that the whole community can produce, as the result of the tractor handling work that now takes many workers to do. By growing much more grain, and selling that grain to all of the workers who are now freed up to provide discretionary services, the farmer will have enough funds in the future to repay the loan for the equipment which will allow much greater efficiency. (The problem is that the tractor requires a huge amount of embedded energy from fossil fuels. Workers who have been working without fossil fuels will not be able to earn enough to pay for this embedded energy without debt.)

Salaries of Workers

In my imaginary simplified economy, there is only one country. In such a country, the amount of salaries that workers receive then is closely related to the amount of goods and services that the economy produces. There will be part of the production that goes to the owners of factories, farms, and other sources of production, but they cannot eat any more than anyone else, or sleep in more than one place at a time. If they get paid much more than others, some of it must be in the form of “paper income” that they can theoretically use at some time in the future, but does not involve current consumption.

In general, the more goods and services produced relative to the population, the more workers will receive in inflation-adjusted salary. If the economy is so distorted that most of the goods are made with machines, the government must play a much bigger role, providing transfer payments to those who cannot find employment (unless the government is prepared to handle uprisings by citizens). If workers are not receiving adequate wages to pay the taxes, taxes will need to come from some other source–possibly from the owners of the sources of production.

To see how a rise in oil prices will affect the economy, lets consider what can be expected to happen to a manufacturing company. Suppose that for a particular manufacturer, costs are distributed as follows (the actual percentages aren’t important–just the point that wages tend to be a big piece of the total):

•  Wages 40%
• Oil products 10%
• Electricity 5%
• Raw Materials other than Oil 20%
• Rent 15%
• Profit 10%

If the cost of oil doubles and the manufacturer is not able to raise prices, the higher cost will wipe out profits. In fact, the cost of other raw materials is likely to rise as well, because oil is used in extracting and transporting raw materials. This will make the impact on profit even worse than the oil-only comparison would suggest.

To “fix” the problem, the manufacturer has to make some sort of adjustment, and the adjustment will almost certainly lead to less dollars being paid for wages. One such approach is to “make a smaller batch,” with the amount produced equal to what can be sold at the higher price. If this is done, the manufacturer will employ fewer workers. It will also cut back on oil consumption, other raw materials, electricity consumption, and rent. The result will look like recession.

Thus, a rise in oil prices, such has happened since the early 2000s, can be expected to affect feedback loops for countries that use very much oil.

Figure 4. World crude oil production and Brent spot oil price, both based on EIA data.

The Positive-Feedback Loop

When can an economy grow? If an economy can grow in efficiency—that is, fewer and fewer people employed creating the basic requirements for life, then more of the population can be employed in providing discretionary services. In total, the wealth of the economy will grow. Historically, this has happened as increasing amounts of fossil fuel energy is added to supplement human energy.

If an economy can increase its debt, and that debt can finance equipment or infrastructure that will allow greater efficiency in producing basic services, this will also allow an economy to grow.

In economic analyses, increases in population are counted as part of economic growth. The problem with population growth is that it leads to more population per acre available for cultivation, and more population relative to external energy sources of all types. This sets up a competition: can enough external energy be added to maintain (and even increase) goods and services per capita?

Economies of scale are also important as producing positive feedback loops. Once an energy investment, such as a road, is made, it can be used for an increasingly large population, often without much additional cost. Businesses also find growth beneficial, since they can build a factory, and operate it more hours, with little additional cost.

The combination of all of these favorable feedbacks leads to the pattern of growth that economists seem to think always occurs.

What Can Go Wrong?

The big “oops” that takes place happens when we start hitting natural limits:

1. The cost of oil extraction goes up, because we pulled the easy-to-extract oil out first. This means that workers start having less discretionary income, rather than more, because they now needed to spend more on commuting to work and on food. Wages tend to stagnate or decline, for reasons described above. A larger percentage of the population needs to work in oil extraction, and more fossil fuels of various types must be used in oil extraction, leaving fewer workers and less energy supplies for other purposes.

2. The economies of countries consuming large amounts of oil are disproportionately affected by rising prices, and oil consumption begins to drop in these countries, even though world oil consumption in total is still rising.

Figure 5. Oil consumption based on BP’s 2013 Statistical Review of World Energy.

3. Debt added to produce oil tends to produce fewer and fewer barrels of oil per dollar invested, as the cost of oil extraction rises. With fewer barrels of oil produced per dollar of investment, less goods are transported per dollar invested. If other energy products also rise in cost of extraction, or if the cost of making metals increases, we reach a situation where increasing debt, in general, starts adding a smaller and smaller quantity of goods per dollar of investment. (Substituting a different high-cost source of energy does not fix the situation.) Eventually, so little benefit is gained from additional debt that huge defaults occur. These huge defaults are likely to lead to higher interest rates and more layoffs.

Of course, during favorable feedback loops, the economic growth that comes with increasing energy consumption plays a major role in permitting debt to be paid back with interest. If energy consumption, in fact, starts contracting, this contraction will contribute to debt defaults.

4. As the economies of individual countries got richer and richer, the natural tendency was to add more government services. Pensions and health care were promised, based on what looked possible when the economy was growing rapidly. Now, the economy is not growing as rapidly, and increasing wage disparity is occurring. There is no way to tax the common people enough to pay for the benefits promised to people. People become very unhappy when told that the government cannot pay promised pension benefits. The tendency is toward increasing unhappiness with government status quo, perhaps even leading to new (cheaper) forms of government.

5. Because of energy limits, we find a need to conserve, but in the process discover that we are inadvertently hitting “diseconomies of lack of scale” instead of “economies of scale”. Instead of continually adding new jobs based on construction of new infrastructure, job opportunities for young people start to disappear. This adds to the dynamic of contraction, even if changes are planned.

6. All the time, natural forces are eroding the huge amount of infrastructure that has been built. Hurricanes and earthquakes cause destruction that must be fixed, if the current system is to be maintained. Lesser forces, such as freezing and thawing and roots of trees growing tend to ruin roads over time, and cause buildings to need repairs. While this has always happened, if the government is poorer, the cost becomes an increasing burden.

______

As a result of these influences, the natural feedback loop is now changing to contraction, instead of continually adding a positive increment. This is an unknown situation relative to what we are used to. There is no “reverse gear” on the economy.

We know that in the past, economies that have hit these adverse feedback loops have tended to collapse. The situation is indeed worrisome.

“National security is of paramount importance, yet the NSA’s dragnet collection of Americans’ phone records violates innocent Americans’ privacy rights and should not continue as its exists today,” Sen. Mark Udall (D-Colo.) said after the vote.

Memorial Day

Life is hard. And then you die. Happy Monday.

We’ve experienced two stock market bubbles and a housing market bubble that have burst in the last 13 years. The losses after each were in excess of 50%. The conditions today are EXACTLY the same prior to those crashes. Do you feel lucky this time?

The Road to Easy Street

John P. Hussman, Ph.D.      

In the fall of 1977, I started calculus class, taught by  Father Arnold Perham. As a junior in high school, being 14 years old was  socially awkward enough, but in hindsight, it might have helped to take up a  sport instead of joining the math team. [Geek’s Note – being on the math team  does not make you a chick magnet]. I always looked forward to Arnie’s class (as  we warmly referred to him). Enthusiastic and encouraging, he quickly became my  favorite teacher. I was fortunate to student-teach with him years later when I  got my MS in Education and Social Policy, so he also taught me how to teach.

Arnie had this stuffed buzzard, and if you got a question wrong, he would plop  it on your desk – “YOU get the buzzard. He will not be removed until you redeem  yourself.”

Of all of the remarks that he would toss out while  teaching, the one I remember most often is what he would say when my eyes went  blank with the difficulty of some new topic. He would shrug his shoulders and  say in a matter-of-fact voice, “Look, kid, I never said this was easy. The road  to easy street runs through the sewer.”

In nearly every effort worth pursuing, I think the secret to  eventual success is the same. Find a set of well-informed daily actions that  you’re convinced will produce good results if you follow them consistently.  Then follow them consistently. In a world where randomness, frustrations, and  events outside of one’s control play an enormous role in day-to-day outcomes,  the best measure of day-to-day success is whether or not those daily actions  were followed. Over time, the results take care of themselves. But Arnie was  right. There’s not a single road to easy street that doesn’t run through the  sewer at one point or another.

There are actually numerous investment disciplines that I  believe are effective over the long-term, including a buy-and-hold approach. The problem, in my view, is that investors constantly  switch their discipline when it isn’t performing well at the time. Since 2000,  a buy-and-hold approach would have required an investor to suffer through one  50% market loss and a second, distinct 55% market loss. Frankly, I think  another one of a similar order will complete the present market cycle. Over the  very long-term, buy-and-hold investors have done fine, particularly combined  with good value-conscious stock selection. But the drawdowns can be intolerably  deep from our perspective, and the full-cycle returns following points of rich  valuation tend to be particularly disappointing compensation. I expect that  this will be true over the coming decade as well.

Buy-and-hold has been wonderful if one’s attention is carefully  restricted to the advancing half of the present, extraordinary, and unfinished  cycle (or what is almost the same, the cycle-and-unfinished-half-cycle over the  decade since 2003). Just as day follows night, buy-and-hold strategies reach  the peak of their popularity at market tops, because those are the points where  every effort in recent memory to sell or reduce risk has apparently failed.  Conversely, buy-and-hold strategies are most reviled at bear market troughs,  when the full weight of losses is felt. I have no argument at all with investors whose strategy adheres to a disciplined  buy-and-hold, diversified across asset classes, over the full course of the  market cycle. In contrast, I have great concern about investors who discover  buy-and-hold at the top, and adhere to it only long enough to abandon it at the  bottom. The most important part of a buy-and-hold discipline is the commitment to remain passive even as it  experiences massive interim losses. Look, kid, I never said this was easy. The  road to easy street runs through the sewer.

Our own discipline pursues stronger returns and smaller drawdowns  than a buy-and-hold approach, but with an emphatic focus on the complete market cycle. “Bear markets”  associated with a risk-managed approach don’t necessarily overlap bear markets  in the major indices, and the combination of stress-testing in 2009-2010 and QE  distortions have certainly made this particular cycle a challenge for us. So I’ve  got the buzzard on my desk. Still, the most important part of our own  discipline is the same as for every other studied investment discipline – the diligence to follow it even at points  where it is frustrating to do so. The road to easy street still runs through  the sewer, unfortunately. I just think our sewers are shallower, and that the  road leads to a nicer place over the full trip.

Unlike a buy-and-hold strategy, our discipline does not  require us to remain passive in the face of new information. Regardless of  whether we’re experiencing success and frustration, we’re constantly looking  for ways to improve performance and limit risk, provided that the new research can also be validated across  numerous cycles throughout market history. We don’t alter our discipline just because  it’s frustrating to follow at the moment, and we don’t introduce changes that  might make us more comfortable at present if that same change would have ravaged  returns or increased losses unacceptably in prior cycles.

The easiest way to lose discipline is to measure each day by  whether it was up or down. At the end of the day, the only controllable measure  of success is the extent to which you’ve taken a studied, well-defined set of actions  that you are convinced will produce good results if you follow them  consistently. For us, that habit remains as strong as it was in the face of similarly  frustrating, mature, overvalued, overbought, overbullish conditions in 2000 and  2007.

The Quandary

Presently, we observe a syndrome of strenuously overvalued,  overbought, overbullish conditions that have marked the most notable market  peaks (and deepest subsequent market losses) in history, including 1929, 1972,  1987, 2000, and 2007. With the exception of a particularly extreme version of  this syndrome that will be recapitulated next week as long as advisory  bullishness remains at its present level, every important variant of this  syndrome already collects the present instance into a small subset of history  that we call a “Who’s Who” of awful times to invest (see the July 16, 2007  weekly comment A Who’s  Who of Awful Times to Invest for a review of similar concerns approaching  the 2007 peak, and Puppet  Show and A  Reluctant Bear’s Guide to the Universe for other discussion).

All of this presents us with a quandary. We can take a  defensive outlook based on long-term historical evidence consistently linking  overvalued, overbought, overbullish conditions to dismal subsequent market  outcomes over the completion of each previous market cycle. Or we can throw  history to the wind because these same overvalued, overbought, overbullish  conditions have been followed by oddly positive market returns during the  advancing portion of the present cycle, particularly since September 2011.

Actually, there’s not a moment of hesitation about which  choice we’ll make, but it adds a little suspense to call it a quandary.

Let’s put some data on this. Even with the additional  exclusions that we’ve introduced in recent years, since 1940, overvalued,  overbought, overbullish conditions sufficient to warrant our strongest  defensive outlook have emerged about 5% of the time. I’ve often noted that  these hostile conditions have historically been associated with average market  losses on the order of 40-50% on an annualized basis. If we examine the  performance of the S&P 500 restricted to the periods when these strong  overvalued, overbought, overbullish conditions were in place, these periods  capture a cumulative 85% loss in the index, including dividends. I’ve plotted  this on log-scale to show the consistency of these negative outcomes. You’ll  also notice the little “quandary” on the very right side of the chart.

To put the impact of the cumulative loss during these  periods into perspective, consider the effect of avoiding this loss. Since  1940, holding Treasury bills during this 5% of history and remaining invested in  the S&P 500 the other 95% of the time would have resulted in a cumulative total  return close to 7 times greater than a passive buy-and-hold strategy. Notably,  while avoiding these periods would have been of dramatic long-term benefit,  they aren’t nearly frequent enough to exclude the bulk of most bear market  losses, so one still would have suffered a 30% drawdown in the 1970 bear  market, and 40% drawdowns in the 1973-74 and 2008-2009 bear markets. Attention  to a combination of valuations and market internals would have effectively  navigated much of those bear markets, but the chart above may help to  understand why strenuously overvalued, overbought, overbullish syndromes have  historically outweighed all other considerations, including trend-following and  monetary factors.

Notice the little recovery on the right side of the chart.  It may seem insignificant from a long-term perspective, but it still represents  a 24% advance from the low. In other words, in recent years, the S&P 500  has advanced by 24% even in periods when the most historically violent market  conditions we identify have been in place. Since late-2011, the market has also  largely ignored more general conditions that have a consistent full-cycle  record of identifying awful return/risk tradeoffs historically.

One aspect of our investment discipline is constant  research, and there are certainly some findings that we’ve validated  historically and implemented (partly in response to quantitative easing), which  could have made an easier go of the most recent cycle. Even so, my perspective  is that the euphoric and overextended advance in stocks during the present,  unfinished half-cycle – despite some of the most reliably hostile conditions we  identify – simply increases the depth of the likely market losses over the  completion of this cycle.

Our investment strategy is to align our stance in proportion  to the expected return/risk profile that we estimate on the basis of prevailing  conditions. Over the full course of the market cycle, we expect that individual  instances that are better or worse than those estimates will tend to offset, on  average. This is what we’ve observed historically, and I don’t expect the  present cycle to be much different in that regard.

As usual, I have no intention of encouraging investors to  deviate from other disciplines, provided that those disciplines are  well-informed, that investors are committed to following those disciplines over  the full course of the market cycle, and that they are well-aware of the  typical return and drawdown characteristics of their chosen approach. Jack  Bogle of Vanguard is a good example – he encourages a buy-and-hold approach,  but he recognizes and is prepared for the likelihood that the coming decade  will include a number of interim market losses in the range of 30-50%. Measured  from the bottom in 2009, buy-and-hold has outperformed virtually every other  approach, including trend-following and risk-managed approaches. The relative  performance of a buy-and-hold strategy is likely to be wildly different during  the bear market portion of the present cycle, but again, my chief concern for  buy-and-hold investors is that they don’t suddenly discover the strategy today  and then abandon it only after severe market losses.

When comparing the maximum losses of various investment  disciplines, keep the effect of compounding in mind. For example, the market  cycle since 2007 has included a 55% interim market loss for the S&P 500. The  difference between, say, a 25% loss and a 55% loss is that one has to lose an additional 40% of one’s portfolio. I  doubt that 2000-2002 and 2007-2009 were the last bear markets of that ilk that  investors will encounter. Similarly, when evaluating the returns of various  investment disciplines, keep in mind that while the average bull market gain  has been something on the order of 162%, the completion of the market cycle  has typically erased more than half of those gains, resulting in an average full-cycle gain of about 79% (see The Price of Distortion).  A much larger portion of bull market gains is typically erased by cyclical bear  markets that occur in the context of a secular bear market period. Recent paper gains may seem thrilling, but I doubt that  they will be meaningfully retained by investors over the full course of this  cycle. The signals that would have moved risk-conscious investors out have been  in place for some time.

Aside from reminding buy-and-hold investors to allow for the  potential for very deep interim losses, the other concern that I would add is  that our present estimate of 10-year prospective S&P 500 total returns is  now less than 2.9% annually (nominal), and those estimates have been quite  accurate historically. Notably, those estimates exceeded 10% annually at the  2009 low, when stress-testing concerns relating to Depression-era outcomes prevented  us from responding in the same constructive manner as we did at the beginning  of the bull market in early 2003. The prospects for reasonable 10-year returns  are now long gone. I don’t think the benefit of a buy-and-hold strategy will be  commensurate with the risk from present, overbought levels. Fortunately, though,  prospective returns will also change as valuations do.

It’s clear that investors have achieved their current paper  gains by ignoring these concerns. But I emphasize the word “paper” here,  because it is doubtful that investors in aggregate (or even a material fraction  of them) will realize or retain these gains. As the Wall Street Journal asked  rhetorically in August 2000, after dot-com stocks were already decimated and a 50% general  market decline still lay ahead, I expect that investors will ultimately look back  at the present QE-induced euphoria and ask the same question: “What were we  THINKING?”

Equilibrium, Air Pockets, and Top Formations

A reminder – in equilibrium, money doesn’t move “into” or “out  of” stocks. Rather, every buyer is matched with a seller, which is why the  trading floor is called a stock “exchange.” Every investor wishing to exit  stocks has to find some other investor willing to commit funds at these levels,  and every investor wishing to accumulate stocks has to find some other investor  willing to sell their holdings. Trading volume on recent advances has been very  tepid, suggesting that recent gains have been driven by short-covering demand  being satisfied by a handful of reluctant sellers. As William Peter Hamilton  noted a century ago, a market that becomes “dull on rallies and active on  declines” is not to be easily trusted.

Given overbought conditions across the major indices, lopsided  overbought conditions on a stock-by-stock basis, overbullish sentiment, and  tepid trading volume, if a material number of existing holders attempt to liquidate,  it’s not at all clear that they will find willing demand anywhere close to  current levels. This absence of robust demand at a point where individual  stocks are uniformly overbought is what creates “air pockets” where broad  indices can decline vertically. Even signals that might eventually move  trend-following investors to exit are likely to emerge at much lower levels,  when I suspect those trend-followers will be reluctant to act on their own  discipline because prices will have declined so much already.

Meanwhile, it’s important to distinguish between the severity  of conditions and the immediacy of outcomes. A notable feature of many bull  market peaks (outside of “V-type” peaks like 1987) is an extended period of  churning over several months or even quarters. For example, the 2000 and 2007  peaks were followed by two of the worst market declines on record, yet the  apparent resilience of the market following interim corrections around those  tops produced a sense of security and complacency despite what would prove to  be profound downside risks. In short, the fact that we observe severe  conditions at present doesn’t necessarily imply an immediacy of negative  outcomes. The interim sense of security may be illusory, but it certainly contributes  to frustration and impatience if investors don’t recognize this pattern.

As for our own discipline, we’ll continue to act in proportion  to the return/risk profiles we estimate on the basis of prevailing conditions.  Those conditions will change over time. It’s certainly frustrating that syndromes  of conditions that typically move us to alarm about market risk (as they also  did in 2000 and 2007) have been followed by yet further market advances more  recently. One can roll the dice if one believes that quantitative easing has  ushered in a new world in which none of the most severe historical warnings are  worth their weight in red cloth, or that the impact of QE is not exhaustively  reflected in market prices, or that the present market cycle will provide  further gains that can be captured with some other signal that will provide an  exit in advance of millions of other investors seeking a similar exit. For our  part, we’ll continue to adhere to our investment discipline over the full  course of the market cycle. I strongly encourage other investors to do the  same, provided that those disciplines are well informed, tested over numerous  market cycles across history, and have an acceptable tradeoff between  prospective return and risk.

The foregoing comments represent the general investment analysis and economic views of the Advisor, and are provided solely for the purpose of information, instruction and discourse. Only comments in the Fund Notes section relate specifically to the Hussman Funds and the investment positions of the Funds.

Fund Notes

As of last week, market conditions remained characterized by  the most hostile syndromes of overvalued, overbought, overbullish conditions  that we identify. While similar conditions have emerged in about 5% of  historical data, including the market peaks of 1929, 1972, 1987, 2000 and 2007,  the periodic emergence of these conditions since late-2011 has resulted in no  material correction or negative follow-through for the market. The two  available conclusions, in my view, are either that these conditions are no  longer relevant despite their consistently hostile outcomes in prior market  cycles throughout history, or that the present advance represents a  still-uncorrected extreme from which awful returns are likely to follow over  the completion of the present market cycle. It seems needless to say that the  second interpretation is most consistent with the long-term historical record. It  is also the one that I expect will prove to be true.

Strategic Growth remains fully hedged, with a staggered  strike hedge that raises the strike price of the index put option side of the  hedge modestly below present market levels. Strategic International remains  fully hedged. Strategic Dividend Value is hedged at about 50% of the value of  its stock holdings. Strategic Total Return continues to carry a duration of  about 5.8 years (meaning that a 100 basis point change in interest rates would  be expected to impact the Fund by about 5.8% on the basis of bond price  fluctuations), with about 8% of assets in precious metals shares and about 4% of  assets in utility shares

"The federal government is due to book $51 billion in profit this year off new and existing federal student loans, according to estimates by the nonpartisan Congressional Budget Office. The record amount brings the government’s profit haul to nearly $120 billion over the past five years, according to CBO forecasts and Department of Education budget documents. The CBO estimates that the government will generate $184 billion in profit for new loans made this fiscal year through 2023."

Via Chris Turner,

As a reprisal, let’s revisit the financial impact from Zero Interest Rate Policy (ZIRP) as it applies to responsible savers.  From the previous post, we just need to make a couple adjustments.   To assist in charting and calculations, the following data sets provided ample information:

1. Total Savings – FRED
2. Average interest rates on savings deposits – FRED (M2OWN)
3. Interest Income – IRS tax stats, NIPA tables
4. Effective Federal Funds Rate (FRED)

The good news behind the bottom 85% of close-to-retiree status Baby Boomers that participate in the “markets” via sub $50,000 retirement money is that at some point, the voters might actually get smart and get mad at how much money has been siphoned from them.  Consult the chart below to see a historical relationship between total savings and amount of interest income earned on the savings.

Note that prior to 2001, as savings increased (blue line), interest income received increased (red line) proportionally.  However, after 2001, the interest earned stopped increasing.  The green line shows the effective interest paid on interest bearing accounts.

Scaling into the shaded area representing 1986 to present, the following chart depicts the actual Fed Funds rate determined by FOMC.

As savings increased when Fed Funds rate remained around 5%, interest income continued to rise.  However, post 2001, the interest income received stopped growing at the same rate.  With the exception of 2005 to 2008 when rates went back to “normal” in the 5% range – the interest income earned has remained stable at just under 1 trillion (Ben Bernanke is so smart).

Let’s apply some thought experiments and make a couple calculations – what would happen if the FOMC were removed and the Fed Funds rate “floated?”  Using average historical rates from the 1920’s for the 10 year note– the mean rate would sit around 5.82%.  With a floating Fed Funds rate, banks would be competing for money and providing responsible savers with some interest income.  Voila, a calculation is borne:

By calculating the estimated interest income from historical ratios (orange shaded area), we can see that as of July 2013, approximate interest income would be just over 3 trillion (1/5^th of GDP) on savings of 6.8 trillion (using the left scale).  Whereas the actual interest income reported by NIPA remained at 1.1 Trillion, the difference in interest received and lost interest equals roughly 2 Trillion.  Remember, this is interest income to SAVERS forever lost since 2001.  By aggregating the entire shaded orange area, SAVERS have missed out on a whopping 10.8 Trillion in earned interest usage.  The final chart above makes a loud and clear statement toward the beneficiaries of the low interest rate environment.

Suppose, on a reasonably competitive market, that Bob’s labor is worth at most $1/hr to any potential employer. (Suppose that this is the best Bob will be able to produce at any point in his life.) At anything over $1/hr, employers would be losing money every hour Bob worked for them.

However, suppose for Bob to lead a decent, fully human life (however some left-wing activist would like to define that), he would need to make $10/hr.

Now, suppose Bob works at fast-food chain McBurger in a competitive market economy where he gets paid his marginal product, $1/hr. Suppose that he therefore qualifies for government assistance, receiving an earned income tax benefit or basic minimum income, food stamps, and the like. Many on the Left would say that the government thereby “subsidizes” McBurger, because McBurger pays Bob less than it takes to keep him living well, and the government pays the difference. But this presupposes that if you hire someone for, say, 40 hours a week, you owe him enough money for him to lead a decent life.

I don’t understand where this presupposition comes from. If Bob is so lousy and unproductive that he can produce only $40 of value to McBurger in a 40/hr week, and if McBurger pays him for his marginal product, then this just means Bob isn’t productive enough to pay his own way in this world. Bob is going to be a net drain on the world–to keep him alive will require that he consume more than he contributes. From an economic standpoint, the world is better without Bob than with him.

Isn’t it more plausible to think that if there’s some enforceable positive duty to provide Bob with enough stuff to lead a life, that all of us, together share this burdensome duty, rather than just Bob’s employer? Why should Bob’s employer, specifically, be the one that has to bear the burden and lose all this money to keep him alive (at whatever level you consider decent)? This just seems like a kind of moral outsourcing to me. Why not instead Bob’s neighbors, parents, friends, or sexual partners? Bob does McBurger a service, and McBurger pays him for that service.

I’m not going to connect this directly to the Walmart picture above, because we can debate the empirics of whether the market is sufficiently competitive, etc., that any of this reasoning applies*. However, in reading websites and articles arguing that Walmart is subsidized by the government because many workers receive welfare benefits, it’s clear that the authors have not thought through the issue I’ve just presented. (Also, I’m definitely not applying any of this to third-world sweatshop workers, many of whom receive low wages simply because governments ghettoize them to poor countries rather than letting them travel in search of better wages. If you have been voting for closed borders candidates, then it is quite literally your fault that many third world workers receive low wages.)

Relatedly, I sometimes see arguments that go like this:

1. McBurger made $200 trillion in profit.
2. But McBurger paid many of its workers lower than living wages.
3. Therefore, McBurger underpaid its workers.

But 3 doesn’t follow from 1 and 2. We could parody this argument by saying something like, “McBurger made $200 trillion in profits, yet it only paid $1500 for the Apple laptops it bought its executives. Clearly it could afford to pay more, since it has so much profit, so therefore it should.” Again, nothing like that follows. Since McBurger has so much money, it could easily afford to pay, say, $10,000 per laptop. Let’s say McBurger values the laptops at $3k each–at $1500, it’s getting a $1500 consumer surplus from the laptops. If McBurger bought 50 laptops at $10,000 each, it would still lose $350,000. This can hold for employees, too. A company with a high profit margin might be able to afford to pay its employees more than the marginal value of those employees, but it would still be losing money on each of them.

Imagine you argued for the following principle: “If you hire someone full-time, you have to pay that person enough to lead a decent life (defined as follows…), even if that person is so unproductive that you lose money by hiring him.” That kind of moral codes gives potential employers of the unproductive two options: 1) hire unproductive people at a financial loss, or 2) refuse to hire unproductive people. It forbids the middle ground–help out unproductive people (perhaps even, in the process, helping to make them more productive) by paying them what their labor is actually worth.

*Thus, a tip to people making the Walmart subsidy arguments: your arguments would be much better if you could establish, empirically, that Walmart employees are getting paid much less than their marginal product as a result of a market failure. When doing so, please keep in mind the difference between a market and a government failure, too. So, for instance, if you showed me that the average Walmart cashier had a marginal product of $170/hr, but she was getting just $13/hr because Walmart bribed the town aldermen to forbid Target and other competitors from establishing nearby stores, then you’ve got a real case.

EDIT: A question about living wage arguments. Suppose a homeless person offers to squeegee my car window while I’m stopped at an intersection. Suppose washing my window will take 60 seconds. Suppose that having my window washed is worth very little to me–I’d lose money on the transaction if I paid more than 10 cents. However, suppose that a living wage amounts to $30/hr. Am I morally obligated (not out of duties of beneficence, but out of justice) to pay him 50 cents, and thus lose 40 cents on the transaction?

In his recent Wall Street Journal op-ed, my co-blogger Randy Barnett argues that massive-scale collection of communications metadata by the NSA violates the Fourth Amendment because it is an unreasonable seizure. Randy’s colleague Laura K. Donohue recently argued in the Washington Post that such collection violates the Fourth Amendment as an unreasonable search. Jennifer Granick and Chris Sprigman made a similar argument in the New York Times.

Are they right? Does obtaining all telephony metadata under Section 215 — and then querying the database — violate the Fourth Amendment?

In this post, I’ll start with current law, and I’ll explain why current law supports the conclusion that massive-scale collection of communications meta-data by the NSA does not violate the Fourth Amendment rights of its customers. I’ll then consider alternate views of the Fourth Amendment and explain the prospects and challenges of using the mosaic theory to get to a contrary result.

I’ll then turn to the argument Randy flags that obtaining this metadata may violate the rights of the communications providers instead of customers. This strikes me as a plausible argument, but not a certain one; I find the issue doctrinally murky, and I don’t have a strong view of it. But in this post I’ll offer the arguments for the sake of those interested in them.

I. Metadata Surveillance and the Fourth Amendment Rights of Customers

First, the facts. From what we can tell, the FISC has signed an order requiring communications providers to disclose the telephony metadata they have collected to the federal government. We don’t know exactly what records are actually being turned over, but the order indicates that it includes all non-content information, which might include numbers dialed, duration of calls, and the location information of cell-phones. The NSA is then querying the database, although it seems that pursuant to a FISC order they can do so only when they have reasonable suspicion that the fruits of the query will reveal information relating to terrorist plots and the like.

The conventional account of the doctrine would indicate that this does not violate the Fourth Amendment. When I say “conventional account,” I mean the account found in conventional sources of legal authority like Supreme Court opinions and circuit court decisions. Here’s how the conventional account would go:

(a) First, obtaining telephone metadata is not a “search” under Smith v. Maryland, 442 U.S. 735 (1979). Smith held that the number dialed from a telephone call is not protected because it is information provided to the phone company to place the call. The caller sends the information to the phone company, and the phone company uses it; the information is the phone company’s record of what it did, not the user’s property. Smith built on United States v. Miller, 425 U.S. 435 (1976), which held that a person does not have Fourth Amendment rights in their bank records. The bank records are the bank’s business records of how the account was used, Miller reasoned, so the customer has no privacy rights in the information.

Under the reasoning of Smith and Miller, metadata that is account information about how an account was used — but not call contents — is not protected under the Fourth Amendment. See, e.g., United States v. Fregoso, 60 F.3d 1314, 1321 (8th Cir. 1995) (stored telephone records not protected). Lower courts have applied the same principles to Internet metadata, too. See United States v. Forrester, 512 F.3d 500, 510 (9th Cir. 2008) (IP addresses); United States v. Perrine, 518 F.3d 1196, 1204 (10th Cir. 2008) (“Every federal court to address this issue has held that subscriber information provided to an internet provider is not protected by the Fourth Amendment’s privacy expectation.”).

(b) Under existing doctrine, the closer call is with cell-site location — location information about where phones are located — that is part of the same Section 215 order. There is pending litigation on how the Fourth Amendment applies to cell-site information collection in several circuits, and it’s not inconceivable that the issue might get to the Supreme Court within a few years. However, the predominant view in the caselaw is that cell-site location is unprotected under Smith v. Maryland. See, e.g., United States v. Skinner, 690 F.3d 772 (6th Cir. 2012); United States v. Booker, 2013 WL 2903562, at *9 (N.D.Ga. 2013); United States v. Graham, 846 F.Supp.2d 384, 389 (D.Md.2012); United States v. Benford, 2010 WL 1266507, at *3 (N.D.Ind. 2010).

(c) One difference between the existing cases like Smith and the facts of the NSA program involves the scale of the records obtained. In the criminal cases Smith, Forrester, and Perrine, the government obtained and examined the records of a single customer — the criminal suspect. Under the current Section 215 order, however, the government is obtaining massive databases of tens of millions of customers. It is then only looking through that database when it has reasonable suspicion. So it’s a big difference in the facts. But do those facts make a constitutional difference?

I think that distinction can make a difference in the analysis on the Fourth Amendment rights of the phone companies — more on that in a minute. But I don’t see a doctrinal hook in existing caselaw for why it would make a difference in the Fourth Amendment rights of their users. If obtaining pen register information on one user is not a search, the obtaining that pen register information for 100 or 10,000 or 1,000,000 or more users is still not a search. Katz tells us that the Fourth Amendment protects “people, not places,” and it’s not clear how surveillance that is not a search when provides information about one person can become a search when it provides information about many. To be sure, it’s possible to devise theories of the Fourth Amendment that would make that relevant, but it’s hard to get there just based on the conventional sources of existing appellate cases.

(d) That brings us to the last part of the picture. If the information that is in the database is not protected by the Fourth Amendment, then querying the database does not raise any Fourth Amendment issues. See, e.g., State v. Sloane, 939 A.2d 796 (N.J. 2008).

II. The Mosaic Theory and the Rights of Customers

So that’s the conventional account. The most common arguments to the contrary invoke what I have called the mosaic theory of the Fourth Amendment. Specifically, they draw from the concurring opinions in United States v. Jones, 132 S. Ct. 945 (2012) to say that the collective acquisition and analysis of information about a person over time constitutes a search even if collecting individual discrete pieces are not searches. Here’s Chris Sprigman and Jennifer Granick making the argument:

The government has made a mockery of [Fourth Amendment] protection by relying on select Supreme Court cases, decided before the era of the public Internet and cellphones, to argue that citizens have no expectation of privacy in either phone metadata or in e-mails or other private electronic messages that it stores with third parties.

This hairsplitting is inimical to privacy and contrary to what at least five justices ruled just last year in a case called United States v. Jones. One of the most conservative justices on the Court, Samuel A. Alito Jr., wrote that where even public information about individuals is monitored over the long term, at some point, government crosses a line and must comply with the protections of the Fourth Amendment. That principle is, if anything, even more true for Americans’ sensitive nonpublic information like phone metadata and social networking activity.

Laura Donohue echoes the same point:

Americans reasonably expect that their movements, communications and decisions will not be recorded and analyzed by the government. A majority of the Supreme Court seems to agree. Last year, the court considered a case involving 28-day GPS surveillance. Justice Samuel Alito suggested that in most criminal investigations, long-term monitoring “impinges on expectations of privacy.” Justice Sonia Sotomayor recognized that following a person’s movements “reflects a wealth of detail about her familial, political, professional, religious, and sexual associations.”

This argument isn’t impossible to make, but it is certainly uphill. That’s true for three primary reasons:

1) The concurring opinions in Jones are only that — concurring opinions. They are not binding law. Most lower courts have rejected the rationale of the concurring opinions. See, e.g., State v. LeMasters, 2013 WL 3463219 (Ohio App. July 8, 2013) (“While [the appellant] spends a great amount of time in his brief quoting and referencing the concurring opinions in Jones that suggest that the Fourth Amendment should be stretched to include other privacy rights, we are bound only by the majority opinion of the court, rather than questions raised and suggestions made within the dicta of concurring opinions. “) So to succeed on this argument, first you need to argue that courts should adopt the mosaic theory and apply it in cases like the NSA surveillance. I have argued that courts should reject the mosaic theory; you can read my argument here if you’d like. But even if you disagree, I don’t think you can just cite the concurring opinions in Jones and call it a day. Instead, you need to offer an argument as to why courts should adopt those concurring opinions. As I explain in my article, that’s possible but not at all easy.

2) Even if you accept the concurring opinions in Jones as controlling opinions, it’s far from clear that they should apply to the facts of the NSA program. That’s true for several reasons, but for the sake of brevity I’ll focus on just one: The key to the Jones concurring opinions was the combination of the collection of information and its subsequent analysis, and that subsequent analysis seems to be missing. Justice Alito’s opinion in Jones looked to whether a person reasonably expects others to “secretly monitor and catalog” a person’s movements. Justice Sotomayor asked “whether people reasonably expect that their movements will be recorded and aggregated” in a manner that creates the mosaic. Cataloging and aggregating are verbs that describe subsequent analysis instead of initial collection. These phrases suggest that the mosaic theory requires some step beyond the acquisition stage. In the case of the NSA program, it appears that the NSA gathers everything but then makes only very specific and targeted (and relatively rare) queries through the database. It’s not at all clear that the facts of the NSA program involve the systematic analysis of data that appears to be so important to the concurring arguments in Jones.

3) Next, even if you conclude that accessing location information is a search under the mosaic theory or some other theiry, there is work to be done to show that it is an unreasonable search. Not all warrantless searches are unreasonable searches. Indeed, there are lots of problems squaring the mosaic theory with a warrant requirement, as I explain in my article. Further, even if you say that a mosaic search requires a warrant generally, there is considerable appellate caselaw indicating that searching with the goal of finding national security information about foreign terrorist groups relaxes the warrant requirement. See, e.g., United States v. Brown, 484 F.2d 418 (5th Cir. 1973); United States v. Butenko, 494 F.2d 593 (3d Cir. 1974) (en banc); United States v. Buck, 548 F.2d 871 (9th Cir. 1977); United States v. Truong, 629 F.2d 908 (4th Cir. 1980). I don’t have a good sense of how those cases would play out in the context of the NSA program, as the facts are so different. But I flag the point just as a reminder that there would need to be some kind of analysis on what reasonableness means in this specific situation. You can’t just assume that a warrantless collective search automatically requires a warrant.

In sum, using the mosaic theory to say that at least parts of the NSA program violate the Fourth Amendment is a possibility, but it’s an uphill battle for a number of independent reasons.

III. Current Fourth Amendment Doctrine and the Fourth Amendment Rights of the Telephone Companies

My co-blogger Randy has taken a different approach to the question. Randy focuses on the Fourth Amendment rights of the telephone companies rather than the individual customers: If the provider doesn’t want to turn over the records, then does the Fourth Amendment stop the government from forcing the government to compel them? Is forcing the provider to turn over its records an unconstitutional “seizure”? To answer this, let’s start my assuming that the telephone companies do not want to turn over the records: They are only turning over the records because the FISC has ordered them to do so. Does the Fourth Amendment allow the FISC to order the companies to disclose the records?

The question raises a complex question because Section 215 orders are somewhat sui generis from a Fourth Amendment perspective. To simplify a lot of caselaw, there are two traditional kinds of legal process in Fourth Amendment law governed by two different legal frameworks. The first legal process is a warrant, which a judge issues based on probable cause. The warrant lets the government enter the place to be searched and retrieve the property described in the warrant. The second legal process is a subpoena, which is issued by a government agency without judicial supervision. The subpoena tells the recipient to hand over property it has or to come testify.

The two forms of legal process have different Fourth Amendment rules governing them. Warrants are governed by the standard found in the text of the Fourth Amendment: “no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.” On the other hand subpoenas do not require probable cause or warrant-like particularity. Subpoenas to testify are not regulated by the Fourth Amendment at all, see United States v. Dionisio, 410 U.S. 1 (1973), and warrants to compel the disclosure of property are regulated primarily by the requirement that complying with the subpoena must not be overly burdensome. See, e.g., See v. City of Seattle, 387 U.S. 541, 544 (1967).

Also, the two legal standards are enforced in two different ways. When the government gets a warrant, the government can execute the warrant and the subject of the warrant can’t object until later. In contrast, subpoenas are not self-executing. The recipient of the subpoena can move to quash it before complying; it is only enforced if a judge is called on to review the constitutionality of the subpoena and issues a subsequent ruling.

This framework creates some difficulty for analyzing Section 215 orders because it’s not clear which framework applies. Section 215 orders are like subpoenas in some ways (they are orders to compel) and like warrants in other ways (they are signed by judges). Let’s assume that ordering a company to copy information “seizes” that information from the company. That point isn’t obvious, but I have argued that it is generally the case. See Kerr, Fourth Amendment Seizures of Computer Data, 119 Yale L.J. 700 (2010). Assuming that a seizure occurred, do you determine the reasonableness of the seizure using the warrant standard, the subpoena standard, or something else? For that matter, how does the Butenko/Trung foreign surveillance impact the reasonableness of the seizure? This is pretty novel ground, and I don’t know if there’s an obvious answer in existing caselaw.

Perhaps the best argument for saying that Section 215 orders are unconstitutional is to assert that they have to fit either the warrant standard or the subpoena standard but they can’t satisfy either one. It’s obvious that Section 215 orders aren’t valid warrants. And less obviously, but also quite plausibly, you could say that under the usual Fourth Amendment standard for administrative agency subpoenas, the orders violate the requirement “that the subpoena be sufficiently limited in scope, relevant in purpose, and specific in directive so that compliance will not be unreasonably burdensome.” See v. City of Seattle, 387 U.S. 541, 544 (1967). By ordering the disclosure of the entire database of collected metadata, the argument would run, the government is obviously not getting a limited and specific directive. It is making the providers turn over absolutely everything, not just a narrow and limited set of information. And that is “unreasonable” under the subpoena precedents.

The counterargument to this could run on two grounds. First, you could argue that whether a subpoena to obtain and query an electronic database is “sufficiently limited in scope, relevant in purpose, and specific in directive” to be reasonable requires considering not just whether the order to disclose the database is limited, but also whether querying the database is limited. In other words, you could consider reasonableness over the two steps — the acquisition of the database with strict protections from it being queried, and then the subsequent permitted queries — rather than just the one step of acquisition. This isn’t a perfect fit, as the burdensomeness standard is about burdensomeness to the recipient of the subpoena; it’s not clear how querying the database has anything to do with that. But it’s a plausible argument given the unusual facts here. And it may explain why the FISC has imposed a reasonable suspicion requirement on querying the database: Perhaps the FISC has concluded that the reasonableness of the seizure of the database under the subpoena precedents allows the whole database to be obtained but only actually queried when there is reasonable suspicion. It’s hard to know.

A second counterargument could rest on the many cases indicating that searching for information in national security cases is a “special need.” Perhaps you could say that this line of cases makes the reasonableness inquiry different in the context of Section 215 orders to try to stop terror attacks than it would be in the case of a routine administrative agency subpoena issued to investigate regulatory compliance and the like. That’s a possible argument, too.

A final counterargument would go to the assumption I made earlier, that the companies are not providing the information voluntarily. This is also murky Fourth Amendment ground. In general, subpoenas are enforced only when the recipient objects. There is no public sign that the companies have objected to the Section 215 orders. Further, as I recall the history that has been disclosed, the telcos originally were voluntarily disclosing the records but then asked for orders to be issued as a CYA move (triggering statutory good faith standards, for example) when the program was revealed in 2006. I’m not sure how that plays out: Do you analyze the Fourth Amendment question by assuming that the telcos objected, or do you not get to the Fourth Amendment issues because the telcos actually are playing along? Off the top of my head, I’m not totally sure.

IV. Conclusion

Anyway, that’s my tentative take. In light of recent experience with comment threads on posts about the NSA, I think it’s best to decline to open the post for comments. I’ve been frustrated to see that recent threads have too often become fora for venting by the angry and uninformed, and there’s enough such commenting around the Internet that I don’t feel the need to add more of that here. But I did want to offer my take on the questions for interested readers.

Mrs. Borepatch: That cat is evil.

#2 Son: Feed me and you can keep your chair.

Me: Nice upholstery you got here.  It'd be a shame if something happened to it.

#2 Son: Cats: the mafia of the animal kingdom.

Wow. Not a very flattering portryal of the Baby Boomer generation. I’m sure glad all the Boomers on TBP aren’t delusional, greedy, vain, shallow, obese, sickly, unhappy assholes. I wonder how many regulars we can lose on this comment thread. I’ve thrown the hand grenade. Let’s see what happens next.

10 things baby boomers won’t tell you

The aging Me generation is still putting itself first

By Catey Hill

James Bennett

1. “Paws off, Junior. This cash is mine.”

Children of boomer parents shouldn’t expect a big inheritance, even if their parents are rich. Only about half of high-net-worth baby boomers — those with more than $3 million in investible assets — say they consider leaving money to their kids a priority, according to a 2012 U.S. Trust Survey. In contrast, nearly three-quarters of people older than boomers say it’s important to them.

Even boomers — typically defined by demographers as those born between 1946 and 1964 — who do plan to leave an inheritance may do so with strings attached. Indeed, nearly seven in 10 high-net-worth boomers surveyed by U.S. Trust said they were not fully confident that their children could handle an inheritance.

“More often than not, clients leave inheritances in trusts,” says John Olivieri, a partner at New York law firm White & Case who works with a lot of boomer clients. With a trust, a third party manages the money and doles it out at intervals that the parent has specified. “Some parents have concerns about how their kids would invest and spend the money,” Olivieri says.

2. “Make room, kids. We’ll be living with you when we’re old…”

Boomers are expected to live longer than any previous generation. At the same time, many haven’t saved nearly enough for retirement. More than 44% of early boomers (whom the Employee Benefit Research Institute defines as those born between 1948 and 1954) and 43% of late boomers (born between 1955 and 1964) may not be able to afford basic living expenses in retirement, according to a 2012 analysis by EBRI. The result? Kids could be supporting mom and dad well into their 80s and 90s.

One of the biggest drains on boomer retirement savings will be health-care expenses. Medicare pays for only about 60% of the cost of health services the typical retiree will face, estimates EBRI. A couple that is 65 today might need nearly $300,000 to cover health costs. “People who haven’t saved enough for health-care costs may deplete their assets,” says Michael Markiewicz, a partner at New York-based Fogel Neale Partners. “A lot of them may have to live with their kids or depend on them for money and care.”

If parents do move in, their kids should expect to spend an extra $6,000 to $10,000 annually on food, clothing and other basics, says Andy Cohen, CEO of Caring.com, a website that provides resources for caregivers. Add thousands more for big-ticket items like wheelchair ramps or home health-care aids. Expensive as that sounds, it’s still often less than what it would cost to move a parent into an assisted living community, about $42,600 per year, on average, according to 2012 data from the MetLife Mature Market Institute.

3. “…and we blame you for that.”

Nearly one in six people ages 45 to 64 say that paying for their kid’s college tuition got in the way of saving for their own retirement, compared with just one in 20 who say that buying a home did, according to a 2012 study from Capital One ShareBuilder.

That’s not surprising, given that the typical middle-income family will spend more than $230,000 to raise a child from birth to age 18, up 23% (in today’s dollars) since 1960, according to data from the U.S. Department of Agriculture. When you add paying for college to the mix — for tuition, fees and room and board as of the 2012-2013 school year, you’d pay an average of $17,860 per year for a four-year in-state public school, $30,911 per year for a four-year public out-of-state school or $39,518 per year for a private four-year school, according to the College Board — you could easily spend upwards of $100,000 on the basic’s for your child’s education. This means that retirement savings can really take a hit. “A lot of parents prioritized saving for their kids’ college over saving for retirement,” says Dan Greenshields, the president of CapitalOne ShareBuilder.

The reason? “Parents often equate paying for college with helping their child become successful in life,” says Deborah Fox, the founder of Fox College Funding, a San Diego-based college-funding consulting firm. That’s something they feel they have a duty to do, whether or not they can afford it, she adds.

4. “We can’t face reality.”

What boomers think retirement will be like and what it actually is like are two very different things. A case in point: The forever-young generation just can’t deal with the idea of growing old. Only 13% of pre-retirees (people over 50 who have not yet retired) think their health will be significantly worse in retirement than it is now, while 39% of retirees report that it actually is worse, according to 2011 research by the Robert Wood Johnson Foundation and the Harvard School of Public Health.

Boomers are a little fuzzy on the financial realities as well. While only 22% of pre-retirees think their financial situation will be worse in retirement, roughly one-third of retirees say that it is worse. Along those same lines, only 14% of pre-retirees predict that life overall will be worse when they retire, but a quarter of retirees report that it actually is worse. “There’s a real disconnect because your life pre-retirement is much different than your life post-retirement,” says Hal Hershfield, a professor at NYU’s Stern School of Business who conducts research on judgment, decision-making and social psychology with an emphasis on how thinking about time can alter decisions and emotions.

5. “ ‘Til death do us part’ doesn’t apply to us.”

Boomers are untying the knot at a record pace. The divorce rate for people over 50 has doubled in the past 20 years, says the National Center for Family and Marriage Research at Bowling Green State University, compared with a slight decrease in divorce overall. More than 600,000 individuals over 50 divorced in 2009, and if the rate continues to grow at the current pace, that number will hit more than 800,000 by 2030.

What’s fueling this trend? Empty nesters find they are a lot less compatible when the kids aren’t around is one phenomenon, says Toronto-based psychologist Tami Kulbatski. Another might be that boomers are more likely to have married young (boomers were far more likely to be married when they were between the ages of 18 and 30, than were members of Generation X, according to research from the Pew Research Center for People & the Press). Now, a lot of boomers are in their second, third or even fourth marriage, and these marriages are more likely to end in divorce, says Krista Kay Payne, a researcher at the center.

Divorce will likely take a chunk out of the average boomer’s already inadequate retirement funds. Lawyers’ fees alone can range from a couple of thousand to tens of thousands of dollars or more, says attorney Jeff Landers, author of “Divorce: Think Financially, Not Emotionally: What Women Need to Know About Securing Their Financial Future Before, During and After Divorce.” Add to that things like alimony and having to split up assets, and boomers’ financial picture gets even murkier.

6. “We’re unhappy …”

Boomers are the least happy of all age groups, according to a 2008 study published in the American Sociological Review journal. “The generation as a group was so large, and their expectations were so great,” Yang Yang, the author of the study, told the American Sociological Association, “not everyone in the group could get what he or she wanted due to competition for opportunities.“

Another report from the Pew Research Center came to a similar conclusion: On a scale of one to 10, boomers, on average, rate their lives a 6.2, compared with a 6.7 for older adults and 6.5 for younger adults. That may not look like much of a difference, but this pattern has held steady for the past two decades. In other words, the boomers — even when they were younger — have been consistently less happy than other generations for the past 20 years.

7. “… and we eat our feelings.”

Nearly 40% of people ages 60 and up and nearly 37% of people 40 to 59 are now considered obese, according to a 2012 report from the Centers for Disease Control, compared with less than one in three for people age 20 to 39. What’s more, baby boomers are fatter than their parents’ generation, according to a study released this year by JAMA Internal Medicine, with nearly 40% of boomers reportedly obese, versus 29% of the previous generation.

Obesity can lead to serious health problems, including diabetes and heart disease. A 65-year-old person who has been obese since age 45 personally incurs roughly $50,000 more in Medicare costs over the course of his or her lifetime than a “normal weight” 65-year-old does, according to the National Center for Health Statistics. Medicare and Medicaid end up paying for roughly half of the cost of obesity, which accounts for $190 billion in medical spending annually, according to a 2012 study published in the Journal of Health Economics.

8. “And we’re addicts.”

Maybe it’s because so many grew up in the ’60s, but whatever the excuse, boomers are drinking and drugging their way into old age at a rate much higher than their parents’ generation. The number of people 50 and over who were admitted to substance abuse treatment programs increased 136% between 1992 and 2010, according to the latest data from the Substance Abuse and Mental Health Services Administration.

Alcohol is the most common reason that boomers seek treatment, but the proportion of admissions of people over 50 for heroin abuse nearly doubled and for cocaine use more than tripled over that period. “Because of the magnitude of these changes and their potential impact, it is increasingly important to understand and plan for the health care needs, including the substance use prevention and treatment needs, of this population,” the administration writes.

Treatment doesn’t come cheap. According to the Substance Abuse and Mental Health Services Administration, the mean cost per admission for outpatient substance abuse treatment is more than $1,400 without methadone (a synthetic opioid used to treat heroin and morphine addictions) or $7,415 with it; prices can run into the tens of thousands for inpatient treatment. What’s more, Medicare will only pay about 65% of an outpatient treatment program, and it will pay for inpatient treatment only if a doctor deems it “medically necessary” and the care is in a hospital. (Medicare doesn’t fund treatment at those designer “rehab spas.” Sorry, boomers.)

9. “We will bury you in debt.”

We’re a nation in record debt — an estimated $16 trillion — and the sheer number of boomers is expected to significantly add to that in the coming years, as more begin to receive Social Security and Medicare benefits. (Social Security and Medicare spending represented 38% of federal expenditures in fiscal year 2012, and “both programs will experience cost growth substantially in excess of GDP growth through the mid-2030s,” according to the Social Security Administration.)

But in many ways, boomers have been less willing than other demographic groups to support policy changes that could trim the debt. Fully 68% of boomers oppose eliminating the tax deduction for interest paid on home mortgages, compared with just 56% of all adults, according to the Pew Research Center. Furthermore, 80% of boomers (vs. 72% of all adults) oppose taxing employer health insurance benefits and 63% of boomers (vs. 58% of all adults) oppose increasing the age one qualifies for full Social Security benefits, the study shows.

Many boomers are more opposed to these plans because “they would feel the impact more than other groups,” says Kim Parker, the associate director of the Pew Research Center’s Social and Demographic Trends Project. But without some sort of deficit reduction, future generations will be left with the dire economic consequences a massive deficit can cause, she says.

10. “We’re obsessed with (not) aging.”

Sagging skin, crows’ feet, a dull complexion — these used to be the inevitable signs of aging. But if the boomers have anything to say about it, that’s going to change. Revenue for so-called cosmeceutical companies — which manufacture cosmetics with pharmaceutical capabilities, some of the most popular being wrinkle-reducing moisturizers and creams that even skin tone — is expected to hit $5 billion this year and is expected to grow 7.5% each year through 2018, according to data from market research firm IbisWorld; people over 50 account for more of cosmeceutical companies’ consumers than any other age group.

And it’s not just lotions and serums that they’re into. People 51 and up had 24% of all surgical cosmetic procedures, like face-lifts and tummy tucks, and 30% of all cosmetic “minimally invasive” procedures like cellulite treatments, Botox injections and laser hair removals, in 2012.

It also appears that boomer men are one of the fastest-growing segments of the population going under the knife. While overall cosmetic procedures in men increased just 9% in 2012 compared with 2011, face lifts, which are typically performed on the over-50 set, increased 21%, according to data from the American Society of Aesthetic Plastic Surgery. And this will become more popular, says Jack Fisher, the president of the society, as many boomers want to look and feel young.

In the absence of IBR, law schools with bad results for most students would be forced to drastically slash tuition because few rational students would enroll in these institutions at current prices. Owing to IBR, however, these law schools can entice students by telling them that they need not fear the size of the debt they will take on because their monthly payments will be capped at a manageable level and the remaining debt will be forgiven. One administrator at a middle-ranked law school used IBR in precisely this way, saying “the loan forgiveness aspects of these plans are essentially back end scholarships.”

Law schools have smartly begun to incorporate IBR into their admissions pitch, making assertions that echo Schrag’s position. In a promotional podcast extolling the “magical Juris Doctor” degree, California Western law professor Don Smythe asserts that “$100,000 plus” debt should not worry prospective students because IBR, which he calls an “important public subsidy to all prospective law students,” insures low monthly payments and debt cancellation after 20 years. Dean Steve Smith adds, “[a]nd in a sense it is a safety net because whatever the principal is you’ve borrowed you are not going to go bankrupt; you should not be paying more than, now it is less than, 10 percent, of your adjusted gross income, your discretionary income, to repay loans. So that is a kind of safety net.” As noted earlier, the California Western class of 2011 had average debt of $153,145, the highest nationwide; nine months after graduation, only 112 out of 285 graduates had landed full time long term jobs as lawyers; the bulk of the graduates working in lawyer jobs were in firms of 2-10, which typically pay less than $60,000, far below the amount necessary to manage the average debt. Law schools like this would go under without IBR.

IBR is intended to rescue grads who find themselves drowning under large educational debt. It was not set up to be utilized by schools—fighting for their survival in the face of declining applications—as an inducement to persuade concerned prospective students to leap into risky financial waters that will leave them floundering.

We may have found our new George Carlin. Two weeks ago Russell Brand made the talking heads on MSNBC look like corporate propagandist fools. Now he scorches the blatant criminality of bankers. We need people like him to connect with the Millenials and get them angry enough to lead the coming revolution. Slowly but surely more people are awaking from their stupor and realizing we live in a corporate fascist state that is designed by the ultra-rich to benefit the ultra-rich. Wall Street bankers and Washington politicians are part of a criminal conspiracy to bilk you out of your wealth through inflation, accounting fraud, and debt manipulation. Open your eyes. Brand and many others already have.

Credibility Trap: When Only Comedy Can Dare Speak the Truth