This is one of my favorite jokes. I think I’ve told it here before but it deserves repeating.

A mathematician, a lawyer, and an accountant were the final three candidates for the job of CEO of a large company. The board of directors interviewed each candidate in turn and asked each a single question: “How much is 2 plus 2?”

The mathematician responded immediately. He said “2 plus 2 is 4; it always has been 4 and it always will be 4”. The directors thanked him for his time and told him they’d be in touch with him when they’d made their decision.

The lawyer responded “2 plus 2 could be 4. Or, if one of the 2s was a negative 2 it could be zero. Or, if both of the 2s were negative 2 it could be -4. Or if the 2s were side by side it could be 22. I think that exhausts the possibilities.” The directors thanked him for his time and told him they’d be in touch with him when they’d made their decision.

The accountant started scribbling furiously. Several hours later he’d filled several yellow pads with notes. After a while he looked up over his eyeglasses and said “What number were you looking for?”

I think that joke is funny but it’s also revealing. As we’ve learned from the Enron, a bit of creative accounting (and some colusion from your auditor) can make any company look profitable. Take the financial statements with a grain of salt. Look at other evidence.

And, importantly, and this is the real point of the joke, although the question remained the same the viewpoint of the respondents were critical to their answers.

Last September the NBER, the scorekeeper in such matters, announced that the Great Recession began in December of 2007 and ended in June of 2009, now a year and a half ago. Despite the best efforts of the Federal Reserve and the federal government it certainly doesn’t feel much like a recovery.

An article over at Minyanville by Jim Quinn may help explain why that is so. Mr. Quinn’s answer is that it doesn’t feel like a recovery because there is no recovery.

Harvesting data from the Bureau of Labor Statistics, the Bureau of Economic Analysis, and the invaluable Shadow Government Statistics, Quinn notes the following:

• The labor force in 2010 is 7.1 million smaller than it was in 2007 and it has grown smaller in each successive year.
• The unemployment rate has been stuck around 9.8% since the first quarter of 2009. That’s U3, the official unemployment rate. The broader U6 is around 17% while the more intuitive SGS alternative is around 23%.
• The U. S. GDP in 2008 of $14.5 trillion has only grown to $14.8 in the last two years due to federal government borrowing.
• Private investment is $216 billion lower today than it was in the third quarter of 2008.
• Exports are $80 billion lower today than they were in the third quarter of 2008.
• Although personal income has increased over the last two years private industry wages have declined over that period. The increase is entirely due to increases in government wages and transfer payments.
• Consumer credit has declined from $13.9 trillion in the first quarter of 2008 to $13.4 trillion today. Over that period banks have written off $600 billion since the first quarter of 2008. Consequently, no deleveraging has taken place.
• Retail sales stood at $4.5 trillion in 2007 and are roughly $4.4 trillion. Those are not adjusted dollars. In real dollars there’s been an even sharper decline in retail sales

I’ll add to that a couple of other lugubrious statistics. Housing prices are down about 30% from their peak in 2007 and have been flat since 2009. And, while oil prices aren’t as high as they were in 2008 they’re now at the highest point they’ve been since the 2008 peak.

As I’ve said before as long as oil prices are rising, housing prices are flat or falling, and unemployment doesn’t come down, I see no way that a recovery can be sustained.

As to the recovery that is being reported to us, what number were you looking for?

Felix Salmon shows us a bar chart illustrating how the percentage of working families making less than 200% of the poverty level (that’s $44,100 for a family of four) has grown over the last seven years. The obvious observations are that the scale of the graph hides the fact that number has grown by 10% over the period and that the statistics is meaningless unless normed by cost of living in various parts of the country. $44,100 for a family of four isn’t much in New York City. It’s half again the median income in Jackson, Mississippi.

To cast a little light on this subject let’s drill down a bit and look at the characteristics of those earning minimum wage. The average person earning minimum wage is 24 years of age or younger, is white, works in the food service sector (e.g. McDonald’s), and, typically, lives in the South. More than half have at most a high school education and nearly a quarter don’t even have that while about a third have some college or an associates degree. Indeed, 75% of those earning the minimum wage have a high school diploma or above.

The conclusions I’d draw are these:

1. There are no policies currently in place that are likely to do much for those who don’t graduate from high school. Education policy won’t reach them.
2. Graduating more from college alone won’t do much about the situation, either. If policy focused more on real, marketable skills, maybe. The way it is now? Fuggedaboutit.
3. Poverty isn’t solely a factpr of race. It is in part but race is not the only factor or even the most important factor.
4. 150 years after the American Civil War the South remains blighted.

You may recall that I’ve been saying for some time that our problem isn’t that government should do more or do less but do differently. While I was out walking the dogs through the three inches of snow that fell last night, just down the street from us I saw an example that might illustrate what I mean as well as explain why a billion dollars doesn’t seem to result in as much infrastructure building and repair as you might think

About a block down the street a crew of seven was working on something that I presume was repairing a problem with a gas line. A more accurate characterization might be that five men and a woman were standing around chatting with each other while one man was operating a large piece of road equipment. Judging from the medallions on the trucks and the insignias on the jackets by my reckoning five were employees of Chicago’s Department of Streets and Sanitation while the other two were People’s Gas employees.

I suspect that the reason that so many were involved and were so idle was work rules. One to operate the road equipment, two to drive the trucks, two to turn off the water from the nearby main, one to work on the gas line, one to check the work on the gas line.

I suspect that none of the workers had more than a high school education (what was being done certainly doesn’t require a college education) and it was quite possible that some didn’t even have that. Judging by Chicago city wage scales they’re probably all making more than the city median income. And people wonder why so many young people in America don’t think that they need a college education.

BTW, both trucks were idling. Keeping two ten ton truck idling for a half day can chew up a lot of diesel. I suspect that’s work rules related, too.

I’m hoping to enlist your aid in figuring out this op-ed, written by California’s treasurer and the director of the Center for Continuing Study of the California Economy. In the op-ed Messrs. Lockyer and Levy rise to the defense of California:

California no doubt faces serious challenges. But our obstacles are not insurmountable.

Fiscally, we have to get smarter, think longer and stop hoping for a miracle. Californians have to assume more responsibility for deciding what they want government to do and how much they’re willing to pay for public services. We have to design a saner system for financing public schools.

We will meet these challenges. California has the most diversified economy in the country. It has the most diverse population, and the youngest. These are huge advantages. But we also possess the unmatched imagination and entrepreneurship of our people and their abiding frontier spirit. A few insults aren’t going to get us down.

The gist of their op-ed isn’t that California isn’t really in that poor shape.

How can this op-ed be reconciled with the many contradicting stories in the media? With the manifest problems in the state? In virtually any state a decline in the construction sector will have serious consequences. In California, where real estate and construction accounts for a quarter of the economy and has for decades, it’s catastrophic. As I’ve written here before if energy costs rise, housing prices are flat, and unemployment remains high, it’s hard for me to see how the nation’s economy recovers. That’s especially true of California.

Can somebody explain the op-ed to me?

One final note: how many employees does the Center for Continuing Study of the California Economy have and where does it get its funding? I’ve done some quick searching and based on that it’s possible that Stephen Levy is its only employee. That doesn’t mean what he says can’t be true. I’m just curious. (I was working on the “the longer the name of the organization the less its significance” theory of organizational analysis.)

I want to draw your attention to a post by one of my favorite political and historical writers, Walter Russell Mead. This post continues his series on the evolution of today’s opposing political views in the United States. Dr. Mead sees the two forces arrayed against each other as developments of two differing strains of liberalism.

In this view today’s progressives’ views are a development of FDR-style New Deal liberalism which he terms “Liberalism 4.0” while today’s conservatives’ views are a development of the more individualistic style of liberalism sometimes called “Manchester Liberalism” and which he associates with Macaulay and terms “Liberalism 3.0”. I suspect a closer association might be with Walter Bagehot.

Both of these ideologies have problems—they’ve run out of gas:

A fundamentalist return to the 3.0 liberalism of the 19th century won’t work; here I agree with the 4.0 liberals. The American economy of the 19th century depended on conditions that we can’t reproduce today. For one thing, the economy was largely agrarian; most Americans earned their livings on family farms. In its prime the family farm provided Americans with high living standards compared to the rest of the world and gave independent farmers a sense of dignity, independence and worth. This system began to fall apart as technological progress made big farms with expensive equipment more productive than small ones; rising agricultural production here and around the world led to a long term decline in farm incomes and drove millions of Americans into the cities. The family farm no longer provided a good living — and the humiliating loss of the homestead and the migration to the city threatened to rob Americans of their dignity as well.

The industrial system of the 19th century is also not replicable today. On the one hand we had extremely high tariffs against foreign goods; on the other the national attitude toward immigration was completely laissez-faire. Through most of the nineteenth century if you got here you could stay here.

Trying to rebuild those trade walls today would lead to massive dislocations, depressions and quite likely wars around the world – not to mention wrecking the American economy and bankrupting many of both our banks and our biggest corporations. Recreating 19th century immigration policy would bring tens of millions of immigrants to our shores each year – something that few Americans are willing to contemplate.

But if 3.0 fundamentalism can’t bring back the agrarian utopia or the industrial conditions of the 19th century, blue fundamentalism won’t help us either. There is no going back to 1962. The Blue Social Model of 20th century, the great achievement of 4.0 liberalism, was rooted in conditions that we cannot replicate today. Between World War One and the 1970s – the years in which the Blue Social Model took shape and rose to power and success – the world economy was in an unusual state. International financial and trade flows were much lower than before 1914 and after 1970 due to the disruptions of the two world wars and the Great Depression. And the United States was so far ahead of the rest of the world in manufacturing (especially after almost European and Japanese factories were destroyed in World War Two) that few American companies (or workers) had anything to fear from foreign competition. Capital was much less mobile; it was much easier to tax high earners without driving savings and investment out of the country.

Where I think his post is strongest is in his characterization of what most Americans want:

1. Physical safety
2. A rising standard of living
3. Honor (meaning a feeling of being free, equal and in charge of their own lives)
4. Believing that America is “fulfilling its mission” (variously even contradictorily defined)
5. Integrity (meaning that the four other goals are working together)

Where I think it’s the weakest is in his failure to recognize that there are strains in both of today’s prevailing American political ideologies that are profoundly illiberal. On the progressives’ part the strain is represented by technocracy: the notion that we can solve our problems by putting experts in charge. Unfortunately, some of today’s conservative thought preserves the intolerant ideas that were part of the old Manchester Liberalism.

I agree with Mead that the prevailing political ideologies are both largely sterile, incapable of dealing with today’s problems and look forward to his views on the nature of the synthesis that might break the logjam.

Certainly food for thought and debate.

It seems like only yesterday that Arthur Andersen, then the largest accounting firm in the world, was found guilty of colluding with its client, Enron, in the latter’s falsification of its financial statements which Andersen, as the company’s auditor, was legally and ethically required to reveal. Now Ernst & Young, Lehman Bros. auditor, is facing civil action for its role in Lehman’s collapse:

New York prosecutors are poised to file civil fraud charges against Ernst & Young for its alleged role in the collapse of Lehman Brothers, saying the Big Four accounting firm stood by while the investment bank misled investors about its financial health, people familiar with the matter said.

State Attorney General Andrew Cuomo is close to filing the case, which would mark the first time a major accounting firm was targeted for its role in the financial crisis. The suit stems from transactions Lehman allegedly carried out to make its risk appear lower than it actually was.

Lehman Brothers was long one of Ernst & Young’s biggest clients, and the accounting firm earned approximately $100 million in fees for its auditing work from 2001 through 2008, say people familiar with the matter.

By law publicly held companies must be audited by outside auditors. As would seem obvious the auditors are paid by the companies being audited for this service. This creates an irreconcilable conflict of interests.

Once upon a time people spoke of the Big Five Accounting Firms. When the largest of these firms, Arthur Andersen, collapsed as a consequence of its criminal fraud conviction following the revelation that Enron had been cooking its books, the Big Five became the Big Four.

The purpose of the audit is to instill confidence in the veracity of publicly held companies’ financial statements. It ain’t working.

As I was performing my regular Saturday errands I tuned into This American Life on NPR, as I frequently do. They were doing a Christmas-themed program and I was non-plussed to hear Ira Glass assert that there were no Christmas jokes.

Perhaps it’s my Irish heritage or the fact that my mom and grandparents were in vaudeville but I am blessed with quite a trove of Christmas jokes. Heck, I even know a Hanukah joke.

Here’s an example of a Christmas joke. An American and his wife were hosting one of their Russian friends in their hotel room back in the Soviet era. Rudolph, the Russian, looked out the window and announced that it was raining. The wife looked out and said “No, that looks like snow”. At which point the husband said “Rudolph the Red knows rain, dear.”

Here’s my Hanukah joke. Do you know what the best thing about Hanukah is? There’s no barking dogs version of Draydl, draydl, draydl.

Now because you’ve been such a great audience, I’m going to repeat my all-time favorite Christmas joke. It’s a bit off-color but I think you can take it.

It was Christmas Eve at the end of the most stressful, hectic Christmas season that Santa could remember. The elves had gone out on strike. The reindeer had diarrhea. Mrs. Claus had been, well, grouchy (if you know what I mean).

As Santa tried to finish the last details before getting into his sleigh a little angel came running up. “Santa Claus, Santa Claus! Whaddaya want me to do with this Christmas tree?” Santa responded tiredly, “I’m too busy for this, Little Angel. Go ask the Head Elf”.

A few minutes later the little angel returned even more excited than before. “Santa Claus, Santa Claus! Whaddaya want me to do with this Christmas tree?” Santa, restraining himself mightily, said to the little angel “Little Angel, I told you before: I’m too busy to answer you now. Go ask Rudolph.”

A few minutes later the little angel returned still more excited. “Santa Claus, Santa Claus! WHADDAYA WANT ME TO DO WITH THIS CHRISTMAS TREE?” So Santa told the little angel exactly what he should do with the Christmas tree.

And that, my dear children, is why, when we decorate our Christmas trees, we place an angel at the very top of the tree.

Please leave your own favorite Christmas jokes in the comments. Keep it clean, please. This is a family blog.

While we’re on the subject of income inequality, I wanted to draw your attention to the graph above, courtesy of Bruce Krasting who derived the information on which the bar chart is based from the IRS (the annotations on the chart are his).

In my discussions of income inequality I’ve made it pretty clear that I’m as concerned about the concentration of income among the top 3% of income earners as I am concentration in the top .1% of income earners. I wouldn’t consider the chart above as corroborating evidece so much as offering a potential explanation for why, although income inequality (as measure by, say, the Gini coefficient) has been increasing for the least 30 years, we’re rather suddenly hearing a new chorus of whinging about it.

The ongoing economic slowdown is unique in that many of “the rich”, defined as those making more than $250,000 and less than $1 million in income per year, have been touched by it. Don’t be too surprised if the proposals you hear for dealing with income inequality are more effective at redistributing form the top .1% of income earners to the next couple of percent down the ladder than they are in redistributing from the top 3% of income earners to the bottom 20%.

I continue to wonder what degree of failure it would take to discredit the notion that if the federal government were larger and taxes were higher all of our problems would be solved. After all it worked so well in the Soviet Union and Mao’s China. Today Robert Reich writes a jeremiad bemoaning the small scope and meager taxes of our present system:

For three decades, an increasing share of the benefits of economic growth has gone to the top 1 percent. Thirty years ago, the top 1 percent got 9 percent of total income before taxes. Now they take in almost a quarter. Meanwhile, the earnings of the typical worker have barely budged, adjusted for inflation.

As a result, America’s vast middle class no longer has the purchasing power to keep the economy going. (The rich spend a much lower portion of their incomes.) The crisis was averted before now only because middle-class families found ways to keep their spending up even though their wages flattened – by women going into paid work, by working longer hours and finally by using their homes as collateral to borrow. But when the housing bubble burst, the game was up.

The solution is to reorganize the economy so the benefits of economic growth are more widely shared.

As I’ve written before I’m skeptical about Mr. Reich’s proposed solution to the problems of income inequality, which concerns me, too. Will raising the marginal tax rate for those earning $1 million or more in income to 70% actually increase revenues? Would whatever revenue is derived actually reduce income inequality? Or would it just re-distribute from the ultra-rich to tax lawyers and tax accountants, probably reasonably characterized as “the rich” (those making more than $250,000 but less than $1 million per year)?

I’m equally skeptical about his proposed plan for increasing employment: a new WPA.

The old WPA funded a wide range of projects, everything from roads, dams, and public buildings to the WPA Writers’ Project (I’ve got a dozen or so of the guides to the states that the project produced). From its beginnings in 1936 until 1943 the project spent a little over half of the money it spent on what are now referred to as “infrastructure” projects. However, at that time most American workers were farmers or factory workers and a road was built by collecting gangs of unskilled or semi-skilled men armed with shovels and other hand tools. Nowadays roads are built by qualified companies who employ smaller teams that use power equipment.

Relatively few people are involved in direct production than there used to be. We don’t have nearly as many farmers, laborers, and factory workers. Most people are employed in retail sales or indirect production with jobs named things like administrative assistant, accounts payable clerk, and customer service representative.

What would a WPA for administrative assistants look like and should we be funding such a thing?

Let me a propose a radically different direction for increasing employment: more new companies. Most new hiring isn’t done by old companies or by small companies it’s done by new companies whether large or small. And IMO what new companies need most is less support for old, established companies.