Quantcast FiveThirtyEight: Politics Done Right: 4/18/10 - 4/25/10

4.24.2010

On Goldman

By now we're all heard the SEC is suing Goldman Sachs for fraud. I'm going to walk you through my thoughts on the complaint (here's a link to the complaint) to explain what's there and why it's important.

First, the document filed by the SEC is a complaint. The purpose of this document is to define the issues for trial. Usually, the person filing the complaint has done a lot of investigation before filing the document -- so much so that they can more or less anticipate what the defendant will do.

The government is arguing Goldman committed fraud under the securities laws. More specifically,
(a) Use of interstate commerce for purpose of fraud or deceit
It shall be unlawful for any person in the offer or sale of any securities or any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly—
(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
The second law the government is alleging Goldman broke is similar to the first:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—
(a)
(1) To effect a short sale, or to use or employ any stop-loss order in connection with the purchase or sale, of any security registered on a national securities exchange, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
(2) Paragraph (1) of this subsection shall not apply to security futures products.
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act), any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

These laws are wonderfully clear and very easy to understand. They say very clearly that your can't lie. Period. In addition, by making this a fraud case, the government is avoiding a discussion about complex financial instruments. Instead, this is a case that is essentially about one party lying to another person. Remember -- the best cases are simple stories that everyone can understand. Lying is about as basic as it gets. Finally, material misrepresentation issues are taught to everyone taking the Series 7 exam -- there is simply no way a person can obtain a securities license without knowing you can't lie to the public. It's just not possible and arguing you didn't know about that law is not credible. In addition, the government has asked for a jury trial. This is a good idea, considering that Wall Street is yery unpopular right now.

There are several points to mention here.

First, it appears as though the government has done a great deal of investigation regarding this matter. The complaint presents a specific time line of events which the government has copiously documented. There are references to emails and sales literature throughout the complaint. I don't know under what authority the investigation was constructed, but it was very thorough. That tells us the SEC has done everything they can to line up their ducks, placing Goldman on the defensive.

Second, in government based litigation, the government is going to argue more or less the same thing in a line of cases. Therefore, they usually bring their best case first to set a precedent for other jurisdictions to follow (this is what the IRS does in anti-avoidance litigation). I'm guessing this is the government's best case in this area. In correlation, the SEC is desperately trying to re-establish itself as a potent enforcement arm. I don't think they would bring a case right now unless they thought they had as close to a slam dunk case as possible.

Third, the government has brought allegations against Goldman and Fabrice Tourre, a Goldman employee who more or less was the primary mover behind the transaction in question. My guess is the SEC is going after Tourre directly to get him to flip on Goldman. The reason is two fold. First, this is probably not the only Goldman transaction to warrant a complaint, so the SEC wants more information from within Goldman. Secondly, the SEC is currently looking at other deals and having an inside person on one deal could shed light onto how other deals were put together. I have no basis in fact for thinking that, it's just he's the only person specifically mentioned in the complaint and he was intimately involved in the transaction.

Fourth, this is a civil rather than criminal case. This goes to the burden of proof. In a criminal case, the government must prove the facts beyond the shadow of a doubt. In a civil case, the government must prove the facts by a preponderance of the evidence -- a much lower burden. Basically the government has gone forum shopping -- as is a petitioner's right in any case -- and found the best forum for their case.

Fifth -- why wasn't Paulson (the hedge fund manager) named? Largely because Paulson doesn't seem to have done anything illegal. Goldman was the company that lied about the contents of sales literature, not Paulson.

Sixth -- how will Goldman defend themselves? The standard defense when two parties to securities litigation are "sophisticated investors" is to argue the parties were essentially big boys and knew the risks. That defense isn't possible in this case, largely because of the statute employed. This case comes down to whether or not Goldman lied -- period. Either they did or didn't misrepresent facts. The financial standing of the purchaser of the security is irrelevant. Goldman's only defense is to somehow demonstrate they did not lie about the transaction. Given the complaint filed, I don't see how that argument is possible.

Finally -- the complaint lays out a very easy to understand time line of events. I have no personal knowledge of the team of lawyers trying this case for the SEC, but a good trial lawyer would have a pretty easy time telling this story. It comes down to greed, hubris and lying -- all committed to essentially screw people out of a lot of money. Remember -- a trial is story that is told to the jury. If the case boils down to experts arguing about arcane points of law then at least one of the lawyers put on a terrible case. But if the SEC lawyers stay on track, keep the story simple and keeps the water clear from too much defendant laid chum, the SEC has a good case and should prevail.

The facts demonstrate the SEC's attorneys are very sharp. They have chosen a forum with a lower burden of proof which makes proving their case easier. They have chosen a great statute to apply -- a statute that focus entirely on Goldman and whether or not Goldman lied. This completely avoids any in-depth discussion about complicated and boring financial products. Finally, the SEC has done their research -- and done it thoroughly.

Let me add this personal thought. I have very high hopes that the SEC wins this case. As I mentioned above, they have a good case. But the real reason is best illustrated by a story. This year my wife and I went to opening day at Wrigley Field (which should be a national holiday). While we were walking around the streets that surrounded Wrigley we saw a group of four cops -- and I mean cops. All I could think of when I saw these guys was one of them saying to a someone, "don't make me." My guess is at least two of them were ex-football players. They were standing in a group talking and basically making their presence quietly felt. At this point I knew nothing bad was going to happen on that street. Why? Because of this group of cops -- they would make sure nothing bad happened. In essence, you felt this quiet law enforcement presence on the street. That's what the SEC needs to do -- or more importantly, needs to establish. Right now, there is no law enforcement presence on Wall Street at all. Wall Street needs to know there is a cop on the beat to deal with excesses in the system.

Over the last few years we've seen evidence of a complete breakdown in the financial system. The Congressional investigation into the Washington Mutual collapse indicates the bank was corrupt at its core. On Friday, we learned the ratings agencies were complicit in the collapse. In short, the entire financial system's integrity is gone and needs to be re-established. This case can start that process by demonstrating there is a regulator who is capable of enforcing the law.
That gives the market integrity -- which encourages wider participation and thereby ultimately lowers the cost of capital to the economy as a whole.

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4.23.2010

Senate Forecast Update: Little Chance of GOP Takeover, but Dem Position Remains Precarious

Although national trends continue to move slightly toward the Republicans -- since the start of the year, our senate model's trend estimate has them gaining ground on the Democrats at the rate of about 1 point per month in a typical race -- that momentum was offset this month by recruiting failures in Wisconsin and New York, where Tommy Thompson and George Pataki declined to run. Therefore, our simulation projects Republicans to gain a net of 4.0 Senate seats in this November's elections, a figure unchanged since last month.

However, this figure is somewhat misleading: although the model expects the Republicans to end up with 45 seats on average, it also thinks they'd end up with 48 seats if the election were held today. The reason for the discrepancy is not because the model is predicting a shift back in momentum toward Democrats before November; it makes no assumptions whatsoever about this. Rather it is because, if there were to be such a shift, the Democrats would be a position to hold or flip several seats (such as Colorado, Ohio, Missouri, Pennsylvania, and New Hampshire) that they now narrowly project to lose. A large shift could also put North Carolina, Kentucky, Nevada and Indiana into the Democratic column. The Republicans, on the other hand, are close to "maxing out" on their potential gains, other than perhaps in Illinois, California, and Washington if Dino Rossi runs there.

The Republicans now have only a 6 percent chance of an outright takeover of the Senate, according to the model. Note, however, that our simulations had also shown this possibility to be somewhat overstated to begin with; it would have required a clean sweep of all competitive races, as well as a recruiting success in New York or Wisconsin. The Republicans' best chance to flip an off-the-radar race is now in Washington state, where they have a 12 percent chance to win Patty Murray's seat overall but a roughly 30 percent chance if Dino Rossi runs. The Republicans also have a very small chance of flipping Wisconsin (5 percent), Oregon (3 percent) or New York (3 percent). The simulation does not account for the possibility that someone like Ben Nelson or Joe Lieberman would switch parties, which is perhaps their most likely path to 51 seats at this point.

A substantial shift in the national momentum could still benefit Democrats, who do have a number of opportunities to play offense, such as in Ohio and Missouri. They retain a 7 percent chance of actually adding one or more seats and restoring a 60-seat majority. In general, however, the range of possibilities has narrowed somewhat.

For the time being, the simulation does not account for the possibility that Charlie Crist will run as an independent in Florida; our belief, however, is that Republican Marco Rubio would remain favored to hold the seat even if this were to occur.

In addition to New York and Wisconsin, polls have the Democrats' position improving in Ohio and Washington. However, it is deteriorating in Pennsylvania, Illinois and New Hampshire.

There appears to be little in the way of darkhorse contests which are only now coming onto the radar screen; the closest to an exception is probably Arizona, where Democrats would have a roughly 15 percent chance of winning the seat of J.D. Hayworth were the nominee. Although some Democrats are excited by the entry of Labor Commissioner Michael Thurmond into the Georgia senate race, the model thinks he has only about a 2 percent chance of beating Johnny Isakson. There is some evidence that Republican Rob Simmons is gaining ground on Attorney General Richard Blumenthal in Connecticut; however, he is probably coming from too far behind, and a less competitive candidate, Linda McMahon, is the more likely Republican nominee there.

A complete rundown of all races follows below.



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4.22.2010

Rubio's Path Easiest, Crist's Challenging, in Potential Three-Way Race

What is liable to happen if, as expected, Charlie Crist defects from the Republican primary to run as an independent?

I'm going to rely a bit more than usual on my intuition. The numbers, frankly, aren't much help anyway, since they show anything from a 17-point Rubio lead (Rasmussen) to a 2-point Crist advantage -- and all of this polling has heretofore been based on a hypothetical. But here's my best guess.

I think that Crist is going to have a great deal of trouble holding onto his remaining Republican support. Right now, Crist is preferred to Rubio by about one-third of Republian registered voters, according to Quinnipiac. But, even though there are some moderate Republicans in Florida (38 percent of the Republican presidential primary electorate in 2008 described themselves as moderate or liberal), it's asking a lot of a Republican identifier to continue to support a candidate who has just ditched the party -- particularly when it seems to be motivated by expediency rather than ideological resolve (Crist's lack of grivatas, even when compared with someone like Arlen Specter or Joe Lieberman, will hurt him here). Plus, Rubio, already very well liked by conservatives, will get to do a bit of a victory lap as the sole viable candidate on the primary ballot, and can immediately turn his attention to broadening his appeal among party moderates. This might not even require all that much effort; Rubio's favorability rating among Republicans is 67-7 (!) according to Quinnipiac, and while quite conservative, he seems from a distance to avoid coming across as any kind of dangerous extremist.

If you play around with the "what-if calculator" that Pollster.com's Mark Blumenthal created, and give Rubio, say, 75-80 percent of the Republican vote along with a bare minimum of 25 percent of the independent vote and a few percentage points of Democratic support, he seems to have a floor of about 36 percent of the vote overall, whatever reasonable assumptions you might make about turnout. Indeed, given the mood of the electorate, I would be very surprised if Rubio wound up with less than 36 or 37 percent of the vote, unless there were some major scandal (always possible) or he ran a terrible campaign (also possible).

In a three-way race, what this means is that Rubio is guaranteed at least second place. He could still lose if the race were Crist 37, Rubio 36, Meek 27, or Meek 37, Rubio 36, Crist 27, but you can't get more than one-third of the vote in a three-way race and do worse than second.

This is advantageous, since it means that nobody much will defect from you for strategic reasons. Say, for instance, that your order of candidate preference were Rubio, Crist, Meek. If the polling at some point in late October were Meek 40, Crist 35, Rubio 25, a voter might consider defecting from Rubio to Crist to prevent Meek from being elected, thinking that his vote would otherwise be wasted. But this doesn't come into play if it's Meek 40, Rubio 35, Crist 25 -- then switching to Crist only helps to ensure Meek's election. Nor does it come into play if the polling is Crist 40, Rubio 35, Meek 25 -- then Meek isn't really in the running and you'll simply vote your first prefernce (Rubio) over your second (Crist).

By the same logic, third place is a dangerous place to be in a three-way race: then you can get into a vicious cycle where voters ditch you because they're afraid of wasting their vote, which in turn makes your problems worse and worse. This is precisely why support for third-party candidates often does tend to collapse at the end of an election if the candidate looks as though he's not going to be able to get over the hump.

In the near-to-medium term, if Crist wants to avoid falling into third place, he probably needs to start appealing to Democrats and Democratic-leaning independents almost immediately. There's a little bit more breathing room over on that side of the aisle because Kendrick Meek is relatively unknown by the electorate: just 26 percent of the electorate have an opinion of him, according to Quinnipiac, versus 57 percent for Rubio (and 84 percent for Crist). But Meek (whom -- full disclosure -- I met for breakfast a couple of months ago) is a humble and likable guy who is liable to grow on people. There are plenty of people who won't like his politics, and -- yes -- a very few people at the margins who won't like him because of his race. But Crist will need a fairly broad amount of support from Democrats and Democratic leaners in order to have a shot in a three-way race in which Rubio will almost certainly finish in at least the mid-high 30s, and his best way to achieve that is to prevent Meek from getting traction in the first place. Having denied Meek viability, he could then tact back toward the center or the center-right come the fall.

But, this isn't easy: the more Crist thrusts to the left after having being reborn as an independent, the more flip-floppy he'll look. It's quite a needle to thread and it's possible that he's simply waited too long to make this move.

We probably haven't seen the last of the fireworks here. At some point between now and November, it's possible that Rubio will go through a period of negative media attention which could give Crist an opportunity to re-gain momentum. With highly competitive races in the state for both senate and governor, featuring female, black and Latino candidates, turnout is liable to be quite high. Lastly, there are wild cards that nobody wants to bring up and which could impact the race in various ways.

But Marco Rubio certainly looks like the favorite here, and I'm not sure that Crist is particularly more likely to pull off the upset than Kendrick Meek. Going indie is likely the right move for Crist, who had no shot to win as a Republican and probably had little future in the party. The upside if he's successful, moreover, is quite high. But the more I look at this race, the more treacherous his path seems to be.

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4.21.2010

How Weak Is the GOP's 2012 Field?

Real Clear Politics' Jay Cost takes issue with the bit of conventional wisdom -- one, indeed, which I've espoused rather frequently around here and which was also put forth by Ed Kilgore in a column at Salon -- that the G.O.P. has an objectively weak set of 2012 hopefuls.

To comprehensively analyze this question would require us to compare the current Republican candidates against those from a number of election cycles in the past. It is at least fairly clear, however, that the Republican candidates are currently regarded more poorly by the public than the leading Democratic candidates were four years ago.

The chart below takes a simple average of all favorability polls conducted of Republican hopefuls within the past year, and compares it against the numbers achieved by prospective Democratic candidates in the period from April, 2005 through June, 2006. In order to be listed, candidates must have been polled by at least two different survey organizations in their respective windows.



At this point four years ago, it ought to have been clear that Democrats had some fairly promising options. Although only about half the country knew who Barack Obama was, those who did had a favorable impression of him by a 3:1 margin. None of the plausible Republican candidates -- with one arguable exception that I'll discuss below -- is anywhere in that ballpark. Democrats are obviously glad that they didn't nominate John Edwards, but he too had a very good net favorability rating (+21, the same as Obama's), substantially better than that of the most favorably regarded Republican candidate, Mike Huckabee, who is at a +9.

Hillary Clinton was more polarizing. Nevertheless, somewhat contrary to all the discussion that ensued at the time about her high unfavorables, she was safely into positive territory in most polls, and (like Edwards) had significantly higher raw favorables than any of the Republicans have been able to achieve.

The Democrats did have a couple of prospective candidates who didn't run, but who would have started out with a favorability deficit if they had: these are their standard-bearers in 2000 and 2004, respectively, John Kerry and Al Gore. Their numbers are comparable to a "recycled" Republican hopeful, Newt Gingirch.

But in general, the numbers for the Republican candidates don't match up well with those for the Democrats. Mike Huckabee and Mitt Romney are now regarded as more favorable than not by the public, but did not have the lopsided numbers that Obama or Edwards did. Meanwhile, one of the more likely Republican nominees, Sarah Palin, has famously poor numbers. And the closest thing to a dark-horse that met our standard of having been polled by at least two different groups -- Minnesota Governor Tim Pawlenty -- is at least as likely to elicit negative reactions than positive ones from those who have gotten to know him.

There is one long-shot Republican hopeful who potentially breaks the pattern: the Commander of U.S. Forces in Iraq, David Petraeus. There isn't much recent data on Petraeus, but he scored hugely favorable ratings when Gallup tested him three times in 2007, including a 61-22 rating in September of that year. On the other hand, when Public Policy Polling tested him in January without introducing him to their respondents with his military title, his numbers were much milder: 25 percent favorable, and 12 percent unfavorable. Still, he would seem to be the one prospective GOPer who could break the mold and really jump out of the starting gate with a wind at his back.

The others, though, are problematic, which is one reason why an unnamed, "generic" Republican candidate fares a lot better against Obama than any actual Republican does.

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4.20.2010

Is the Lib-Dem Surge For Real? (Part 2: Target Seats)

Yesterday we looked at the the UK Liberal Democrats' rapid improvement in momentum, legitimacy and polling numbers in the wake of last week's leaders debate, concluding that the final impact of this rally will be largely dependent on where it is focused.

If the swing manifests in marginal consituencies where the Lib Dems have an existing base of support upon which to build, they could pick up quite a number of seats. However, if the swing simply pulls away support from one of the larger parties in seats where the Lib Dems have no real shot of victory, the upshot will be for the Tories or Labour.

Now then, onto the seats themselves. Regardless of whether the Liberal Democrats perform better or worse than their national numbers -- currently about 6.5 percent swing against Labour and 3 percent swing from the Conservatives-- in target marginals, a major concern is how relatively scarce their targets are, particularly targets that take advantage of what looks to be a a weakened Labour party.

Looking at the first 42 Labour target seats for the Liberal Democrats (0-10 point swing, or 0 - 20 point net improvement for the Lib Dems) illustrates exactly how hard a road they have to pick up a significant number of seats.

Look for example at the 5th and 6th target seats on their list, first Watford and then Hampstead & Killburn. Less than a 2 point swing from Labour would deliver the seat to the Liberal Democrats, assuming that the Conservative share does not change. However, the Conservatives are poised to pull a swing of 3-5 points from Labour as well, possibly eclipsing the Lib Dem gains.

Furthermore, by the time you are halfway down the list, seats come into focus where the Liberal Democrats are currently a distant third in what really are Conservative-Labour marginals. It is possible that the Liberal Democrats may overtake both parties and win, but its as likely that their increased vote, coming at the expense of Labour, might well give the seats to the Conservatives.

Looking in the other direction, the Liberal Democrats have a significant number of potential Tory-held targets, including quite a number where Labour support is quite low.

This leads to an important point about about Liberal Democratic strength currently; overall, the Lib Dems tend to perform best in seats that are de facto 2-way,. Since the 1990s the Liberals have benefited from tactical voting, not just of Labour supporters against the Conservatives but also of Conservatives against Labour. Indeed, most seats that the Lib Dems currently hold have played out this way.

However, with Conservatives expected to improve on their 2005 totals and the Liberal Democrats expected to do the same, the question will be where the vote shifts will come from. In cases like Eastbourne and Guilford, there is little space left for tactical voting by Labour supporters.

However, the current dynamic could switch things around for the Lib Dems in Conservative-held marginals: rather than focusing on 2-way races where there is little additional tactical support to be gained, the Liberals can focus on 3-way races where Labour supporters, seeing their national numbers plummet, will go to the Lib Dems as a more palatable option.

Depending on how fervently they were to make this leap, it could turn out quite well for the Lib Dems, if the group of Labour defectors is big enough, or alternatively for the Tories, if the movement is large enough to weaken the Labour share but not enough to flip it for the Liberal Democrats.

--
This article was co-authored by international affairs columnist Renard Sexton and research assistant Daniel Berman. Please send comments or suggestions to sexton538@gmail.com

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Wrong Arguments that Sound Right

Certain bits of political analysis persist even when they have been refuted over and over. Here I'm not thinking of examples such as the Social Security budget, say, where various influential players have an interest in sowing confusion, but rather of cases where a wrong argument has a certain sort of intellectual appeal, a hook that just doesn't let go.

I'll give three examples.

Yesterday Tom trashed the ridiculous argument that the Tea Party movement is similar to that of Ross Perot supporters in the 1990s. The argument is ridiculous because, as Dan Balz explains, Perot's was a movement of the political center, whereas the tea partiers are closely tied to the right wing of the Republican Party.

How could people be confused on this point? My theory (which I'd be happy for a cognitive psychologist to look into further) is that it has just the right level of complexity to seem as if it could be right. Both the Tea Party and the Perot supporters have talked about deficits, they both seem like movements of outsiders, so people draw the easy connection without thinking further.

Another example is the familiar but oft-refuted claim that political polarization is caused by gerrymandering of congressional districts. This certainly sounds like it could be true: Congress really is more polarized than it used to be, and there really is gerrymandering. The evidence doesn't support it, but the idea doesn't die--it has just the right level of complexity to be plausible.

And here's another example:

John Lanchester writes in the London Review of Books:

Labour have an enormous statistical advantage going into the election. The simple way of putting this is to say that votes in the country are worth less than votes in the city. That's because the Boundary Commission has struggled to keep up with the historic drift of Britons out of cities into the country . . . Country constituencies are bigger, in population as well as geographical terms, than urban ones . . . Because Labour's support skews urban and the Conservatives' skews rural, this translates into a big advantage for Labour. How big? Well, this non-partisan article from the House of Commons magazine, dating from 2006 when the election was a long way off, reckoned that the Tories needed to win the election by a margin of 10 per cent in order to have any majority at all.


If you follow the link, though, it appears that (a) the boundaries were redrawn in 2005 or 2006, so the boundaries are only 4 or 5 years out of date, and (b) the "10 percent majority" thing is not coming from any imbalances in district sizes:

The Conservatives will still need a swing of about 10 per cent to win power outright . . . A swing of just over one per cent will now cost Labour its overall majority, compared to 1.8 per cent with boundaries unchanged. The changes reduce the swing needed by David Cameron to secure an overall majority from 11 per cent under the old boundaries to nine or 10 per cent with the constituencies which will be used in the next general election . . .


Got that? The effect of redrawing the district lines is estimated to be something like 0.7% of the vote, not 10%. (I'm getting 0.7% by subtracting "just over one per cent" from "1.8 per cent.") If the boundary change in 2005 or 2006 comes to the equivalent of 0.7% of the vote, then I'd expect any population shifts since then to account for less than 0.7% in partisan advantage.

Less than 0.7%. Not 10%.

The 10% is coming from the multiparty system, which has at times benefited the Labour party and at times benefited the Conservatives and doesn't seem to have benefited the Liberal Democrats at all (yet).

Again, what we have is a superficially plausible argument that goes in the right direction, and so it's easy to miss the details and go with it.

P.S. How does this post relate to the usual 538.com theme of giving you new information about politics? The connection is that we often talk about how we're right and the conventional wisdom is wrong. But when you make such a claim, it's a good idea to think occasionally about how it is that wrong ideas have such staying power. I think there's something appealing about reasonable-seeming ideas that have a certain level of technical complexity.

P.P.S Commenter Andy writes that the U.K. boundaries are based on census data from 2001, not 2005. This does not affect my main argument--the population imbalance still cannot be causing an effect even close to what is happening because of the three-party system--but I'm happy to be corrected. But the best comment of all is Grrigg's.

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4.19.2010

How Similar Are Tea Party and Perot Movements?

Here at 538 we have discussed the possibility that the tea partiers are a residual Ron Paul movement. Or that they are Glenn Beck devotees. It’s fair to say both explanations are partially but incompletely true. But what about tea partiers as political descendants of the Ross Perot movement?

On Sunday, two columnists in the Washington Post, Dan Balz and Robert McCartney, both alluded to this potential connection. I’m not sure if this is coincidence or they were sharing thoughts. Balz’ column was dedicated almost exclusively to this idea. After setting forth some key similarities and differences, Balz writes: “The biggest and most important difference, however, is the ideological makeup of the two groups. Despite the same strong anti-government sentiment and focus on the federal budget deficit, as the tea party activists today, the Perot voters were far less conservative.” McCartney only alludes to the Perot movement in the final graph of his column, where he also notes that the tea partiers' worries about the deficit is “reminiscient of” Perotistas, but with a splash of Abbie Hoffman-like theatrics.

Ok, so what to make of this? To answer this question, my mind immediately turned to my colleague Ron Rapoport of William & Mary.

Rapoport and co-author Walter Stone have tracked Perot voters for years, and their book, Three’s a Crowd, is considered the authoritative treatment of that movement, its lasting impact and its residual following. So I emailed Rapoport and asked one simple question, "How closely does the tea party movement align with the Perot movement?"

Comparing the data he has from callers to Perot's 1-800 number with results from the recent New York Times survey of tea partiers, Rapoport responded:
The Perot movement is inherently different. It was formed around a candidate during a presidential election campaign. This explains the support by Perot supporters for a third party which tea partiers at present lack. The major difference is that Perot movement was a total rejection of both parties, while the tea party movement is a total rejection of only one party--the Democrats.

Whereas only 5% of tea party supporters said that they usually or always voted Democratic, fully one-thrid of Perot supporters had voted for Walter Mondale in 1984 and slightly more had voted for Michael Dukakis in 1988.

In the New York Times survey, 54% of tea partiers rated the Republican Party favorably. Only 17% of Perot callers rated either party as “above average” or “outstanding” and 43% rated both parties as “below average,” or “poor” with 8% rating the Republicans as “above average” or “outstanding,” and 9% rating the Democrats as “outstanding” or “above average.” Sixty-nine percent rated the Republicans as “below average” or “poor,” with 64% saying the same about Democrats.

The level of favorability among tea partiers for George W. Bush is extraordinarily high—far more than in the population as a whole. Fifty-seven percent of tea party supporters rate Bush favorably, and only 27% rate him unfavorably (for the sample as a whole the corresponding percentages are reversed 27% favorable, 58% unfavorable. On the other hand Perot supporters rated both Geroge H. W. Bush and Bill Clinton unfavorably, Bush moreso than Clinton.

Perot callers were slightly right of center on the liberal-conservative scale, but on specific issues they were were not consistently conservative. They strongly favored abortion rights, national health insurance, and government controls on pollution, while strongly opposing affirmative action, gun control and the revocation of the death penalty.

But there were a set of issues important to Perot supporters on which they were more extreme than either Democrats or Republicans--economic nationalism, reform, and the budget. On these issues they saw the major parties as indistinguishable and largely indifferent. They staked out positions very different from where they perceived the major parties to stand.

In terms of demographics, Perot supporters were unobservant religiously. Only 38% attended services every week and 16% never attended services-both very different from the American public. And while 33% did not identify as either Protestant, Catholic or Jewish among Perot callers, such was the case for only 15% of tea party supporters. On the other hand the tea party movement and the Perot supporters were both about 60% male and over 90% white.
One of the ironies of the tea "party" is that it is less of a party than the Perot movement was, and yet is more traditionally partisan--i.e., Republican--in its attitudes and preferences. If it is a danger or threat to the Republican Party it is thus a danger from within, not without. And if it is a threat to the Democratic Party it is because it readily mobilizes voters who ultimately are going to vote for Republicans (or more accurately, against Democrats), not third-party candidates.

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Is the Lib-Dem Surge For Real? (Part 1: The Problem)

Last Thursday, the leaders of the three large UK political parties engaged in the country's first ever televised election debate. While most policy questions were left answered much as they had been before the event, the leader of third party Liberal Democrats, Nick Clegg, dazzled most observers with an especially strong performance.

That the Lib Dems were included on an equal footing with Labour and the Conservatives on a nationally televised debate was important in and of itself, but Clegg managed to convince many voters that the Liberal Democrats are more than a perennial protest caucus who will never hold more than 5 to 10 percent of seats in Parliament.

YouGov snap polling from Friday had the Liberal Democrats surging 7 points following the debate, from 22 to 29 percent -- trailing Labour by one and the Tories by four. ComRes showed a similar bounce from 21 to 29 percent; just two points behind the Conservatives and in this case leading Labour by a pair. ICM polling in the Guardian confirmed the national trend today, indicating a 10 point bump that puts the Lib Dems in second place nationally with 30 percent, with 33 to the Tories and 28 to Labour.

Several readers have written in, asking whether this Lib Dem surge will translate into big gains on Election Day for Nick Clegg, Vince Cable and company. The short answer is: Unlikely.

The longer answer: It depends.

Contending with an electoral system that tends to crowd out third parties, the Liberal Democrats have had to devote their energy to winning and defending a relatively small number of seats as compared to their support nationally. In contrast, the Labour and Conservative parties, while also focusing on winnable marginals as not to waste resources and votes, have far more leeway in terms of targeting more distant opportunities to flip seats.

All three parties have learned to focus their efforts in seats they can win and spend less time, effort and money on those they do not think they can.

Looking at 2005 numbers, the contrast in the parties average vote shares between constituencies they win and those they do not is quite dramatic. In seats where the Lib Dems were victorious, they won 46.1 percent of the vote -- similar to the other parties.

In fact, the Liberal Democrats were the most effective at maximizing their vote in winning constituencies, earning more than double their national share in seats they won.

However, in terms of vote efficiency, the Lib Dems were the least effective, spending far more votes to win each seat than the Conservatives or Labour. Among the traditional top two parties, Labour was better at earning votes in seats they could win, while winning less in losing constituencies than the Conservatives.

For 2010, this means that even with a surge of 10-15 percentage points nationally, the Liberal Democrats may mean a modest number of pickup chances. Earning an average of 19.6 percent in 2005 in seats that they do not already hold, the swing would have to be focused in constituencies where 30 to 35 percent can win for the Lib Dems, rather than the 40 to 50 percent that they usually need.

If the bounce simply manifests in a massive burst of support in seats that the Lib Dems already hold, along with a few nearby marginals, the end result could be a pickup of a modest 10 to 20 seats. Similarly, if it comes from alienated opposition voters in safe Labour or Tory seats (tactical/protest voters who would not vote Lib Dem over their own party), again the Lib Dem share of MPs will not budge very much.

All told, Nick Clegg and his cadre will have to play very calculated offense with the rise in support they have gotten. If they can start to turn more races into three-way affairs, and pull disaffected voters from both the Conservatives and Labour, this could get quite interesting.

In Part 2, we will look at current target seats for the Liberal Democrats and where they may become competitive where they were not previously.

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Renard Sexton is FiveThirtyEight's international affairs columnist and is based in Geneva, Switzerland. He can be contacted at sexton538@gmail.com

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Do Democrats Have a Dodd Problem?

In theory, financial reform is popular. Some 61 percent support stricter regulations on financial companies, according to a March Pew poll. ABC found a similar number, 62 percent, in a poll it conducted in February.

But support drops some, down to 53 percent, if you instead ask people about Congress's plan to legislate the financial companies, as CNN did in March. And the way that Republicans are acting -- with even moderates like Scott Brown now threatening to filibuster the Democrats' efforts -- you'd have to assume that Republicans are reasonably comfortable that they can get the numbers down further.

There hasn't been any especially recent public polling to say whether they're right. The fight is a long way from over, and it's more likely than not that some form of financial regulation will pass. But in terms of public perception, theirs isn't a bad bet. Given that there is very little agreement among economists on how to address the problem, one imagines that the general public can't help but feel a bit mystified. And the more the public is confused about an issue, the more opportunity there is for focus-grouped blather to dominate the conversation.

Still, to the extent that the Democrats are struggling to gain traction, it might reflect the messenger as much as the message. The Democrat most associated with the financial reform bill is the retiring senator Chris Dodd. This would seem to be a less-than-ideal choice. The last national poll on Dodd was conducted in March, 2009; it found that just 18 percent of the public had a favrorable view of him against 31 percent unfavorable, and that was at a time when the Democratic brand was still flying pretty high. Meanwhile, Dodd is associated with the AIG bonus mini-scandal, and with accepting some questionable loans from Countrywide. He takes a lot of money from the financial industry and comes from a wealthy state that is home to many hedge funds and insurance companies. And his manner is distinctly senatorial and patrician at a time when bare-bones populism is all the rage.

None of this is especially fair. Dodd took heat over the AIG bonus affair that was disproportionate to his actual influence, and he's now trying to repair the legacy of a distinguished career that suddenly turned sour on him.

But one wonders if the Republicans would be so bold in opposing the legislation if its champion were a scrappy populist like Sherrod Brown or Jon Tester instead, or a relative unknown like Rhode Island's Jack Reed (all of whom are on the Senate Banking Committee along with Dodd). With the public looking for navigation beacons to shed light on an area they don't particularly understand, it may just be too easy to tar Dodd with the bailout brush, and his legislation along with it.

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Double Down by the Numbers: Unhealthiest Sandwich Ever?

KFC's Double Down Sandwich, an in-your-face collection of bacon, cheese and something called Colonel's Sauce betwixt two fried chicken "buns", is making waves for its unapologetic gluttony, compelling reviews out of everyone from the New York Times's Sam Sifton to the Onion's Nathan Rabin. But is it really the caloric monstrosity that it appears?

To get this out of the way: I haven't eaten a Double Down. I probably will. And I'll probably like it. But there are so many much tastier ways to clog your arteries here in New York that it's not high on the priority list.

So instead, let's start with the Double Down's calorie count: 540 calories for the crispy "Original Recipe" version and 460 for a grilled variant. Those seem like big numbers, but by fast food standards, they're pretty mild: the Burger King Chicken Tendercrisp weighs in at 800 calories, for instance, and Jack-in-the-Box's Ranch Chicken Club will set you back 700. Calorie counts for burgers are even higher: 1,320 for a Hardee's Monster Thickburger, and 1,350 for a Wendy's Triple Baconator. Even the humble Big Mac, a lightweight by modern standards, contains 540 calories, exactly the same number as the Double Down.

But calorie counts are overrated. We all need to eat, to the tune of about 2,000 calories per day for a healthy adult. It's not the calories so much as what you do with them. Are you getting a lot of fat, cholesterol, and sodium (bad)? Or lots of fiber and vitamins instead?

Here, the Double Down's credentials are more impressive. Those 540 calories contain 145 milligrams of cholesterol (more than twice that of the Big Mac and about half of the USDA's daily allowance) -- along with 1,380 milligrams of sodium (the USDA recommends no more than 2,400 per day) and 32 grams of fat (65 will keep you slim, says the government). So, for getting only about one-quarter of the calories that you need in a day, you're exhausting about half your budget of "bad stuff".

We can, of course, be a bit more exacting about this. I've created an index based on the amount of fat, sodium and cholesterol that the Double Down and a variety of comparable sandwiches contain as a portion of the USDA daily allowance. (In the fat category, saturated fats are counted double and trans-fats are counted triple.) The index is scaled such that the Original Recipe version of the sandwich receives a score of 1.00, a measure of gluttony that will hereafter be known as The Double Down (DD).**

By this measure, the Double Down is indeed quite unhealthy, but some other sandwiches are just as bad. The Burger King Chicken Tendercrisp (1.00 DDs), which has less cholesterol but more fat and sodium, is comparably unhealthy to the Double Down on balance. The chicken ranch sandwiches from Sonic (0.94 DDs) and Jack-in-the-Box (0.98 DDs) are close. And surprisingly, some sandwiches from "fast casual" restaurants that have a reputation for healthy food do even worse. Panera's Chipotle Chicken checks in at 1.49 DD's -- it has almost 50 percent more bad stuff than the Double Down -- and Boston Market's Chicken Carver at 1.14. So do some products that stretch the definition of "sandwich". A chicken burrito from Chipotle with rice, black beans, cheese and corn salsa will cost you 1.16 Double Downs: load it up with sour cream, guacamole, and picante salsa as well and you're up to 1.69. A pack of five McDonald's Chicken Selects with a side of ranch sauce is worth 1.23 Double Downs.



But it's the burgers that dominate this category, with Wendy's Triple Baconator (2.45 DDs) and Hardee's Moster Thickburger (2.24 DDs) in a league of their own and more than twice as bad-for-you as the Double Down. Even an ordinary Whopper with Cheese (1.10 DDs) is slightly worse than the Double Down.

All of those products, however, contain more -- often substantially more -- calories than does the Double Down. They have lots (and lots and lots) of bad stuff, but some good stuff like protein, iron and fiber as well. Their calories aren't quite so empty, and they damned well ought to leave you full.

So suppose instead that we re-calibrate our metric by dividing by the number of calories that each sandwich contains. This alternate measure, which we'll call Double Downs per Calorie (DDPC), gets at the idea of how bad each product is for you on a bite-by-bite basis.



And here, things don't look very good at all for the Double Down, since for all that crap you're taking in, you're only getting about one-quarter of the calories that you need. On this basis, not only is the Double Down worse for you than any of the chicken products (Chick-Fil-A's Chargrilled Chicken Club, at 0.91 DDPCs, is the next-worst), but also all of the burgers as well -- even the Triple Baconator (0.98 DDPCs) and the infamous Thickburger (0.92 DDPCs). In fact, the only thing that beats than the Original Recipe Double Down is the supposedly healthier grilled Double Down (1.19 DDPCs), which is almost 20 percent worse for you than the signature version on a per-calorie basis.

Things would look even worse for the Double Down if we also punished it for its lack of fiber (the original recipe version has just 1 gram and the grilled version has none) and other nutrients. But fast food restaurants are inconsistent about publishing this information, so it's getting a break.

So, is the Double Down the most gluttonous fast food sandwich ever created? It depends on how you measure it. At the margins, consuming one Double Down almost certainly isn't as bad for you as a Triple Baconator, a Thickburger, or even a fully-loaded Chipotle burrito. But while those products should, in theory, fill you up for at least half the day, the Double Down might leave you hankering for seconds. It's a high bar to clear, but it's the closest thing to pure junk food of any "sandwich" being marketed today.



** To calculate Double Downs for your own favorite sandwich, apply the following formula: divide the number of mg of cholesterol by 469, the number of mg of sodium by 3,754, the number of grams of total fat by 133, the number of grams of saturated fat also by 133, and the number of grams of trans-fat by 66. Then sum the result.

To calculate Double Downs per Calorie (DDPC), take the above result, divide by the number of calories, and multiply by 540.

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4.18.2010

Selection Bias in UK Polling (Part 2): Internet Polling

Note: This article follows on to one published earlier today on cell phone-only voters in the UK.

The prominent position of internet polling outfit YouGov among UK pollsters adds an additional wrinkle to our analysis of selection bias among pollsters. In the US, internet pollsters are not highly considered, mainly because of the perceived unreliability of internet polling and because telephone polls make up the vast majority of surveys taken. However, YouGov's reputation in the UK has been bolstered by strong performances in the 2005 election and 2009 London mayoral election, and by the fact that they are the lowest cost pollster in a cut-throat market.

Among the 65-plus age group in the UK, more than 60 percent have never used the internet -- significantly down from years previously but still very significant. Not surprisingly, the youngest demographics have much more exposure to the internet, to the point where a negligible number of people 15-24 have not used the web.


YouGov deals with its heavy selection bias as most pollsters do, by weighting their polls to reflect overall societal trends. Specifically, when inviting people to take part in political attitudes polling, they ensure that representative numbers of each age group are included.

However, just weighting the responses of the relatively small number of older people who participate in the poll does not account for differences in opinion between the types of 65-plus voters who are online and those who are not. Internet usage has a strong educational (and associated socio-economic) component as well, rendering the internet sample prone to additional selection bias.

The oldest voters are the most reliable, consistently turning more than average.


Key takeaways:

1. YouGov polling may be failing to capture a panel group of non-internet 65+ voters, particularly those who are from modest backgrounds. This voting group, especially those who did not vote in 2001, are undoubtedly up for grabs this time around, and would tend to be traditional Labour or Lib Dem voters.

2. Panel effects that may result from this sort of selection bias are likely more pronounced the more targeted the sample area -- for example a particular region or consituency -- than it is at the national level. This would suggest that even YouGov's national numbers may be fairly reliable, marginal seat polls or individual consituencies -- especially those outside London -- may be suspect.
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Renard Sexton is FiveThirtyEight's international affairs columnist and is based in Geneva, Switzerland. He can be contacted at sexton538@gmail.com

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Selection bias in UK polling (Part 1): Cell phones

We discussed the issue of cell phones and cell phone-only voters here previously in the context of the 2008 US Presidential election, where Nate's analysis determined that excluding mobiles from the sample negatively impacted Obama's polling numbers by 2-3 points -- a small but significant drop.

This analysis, which compared the topline results of pollsters who included a cell-phone sample in their data with those that did not, was backed up by late 2008 data from the CDC that confirmed that more than 20 percent of US households are cell phone-only, in addition to another 14.5 percent who have a landline phone but receive "all or almost all calls on wireless telephones."

In the UK, at least 13 percent of households fall into the mobile-only category as of 2008, with lower income Britons far more likely to be mobile-only (23 percent) than wealthier people (8 percent). In addition, younger people are far more likely to live in mobile-only households, including more than a quarter of the youngest demographic group (15-24) and a fifth in 25-34 year olds.


What does this mean for voters this year? To begin with, young voters are the volatile of the voting subgroups in terms of turnout, while older voters are more consistent in voting patterns.


Since 1997, turnout among the youngest voters has fallen significantly, with the 18-24 group the only one that did not have an uptick from 2001 to 2005.

This is actually fairly different from what has been seen in the United States, where the swing in voter turnout among young voters has been even more extreme, and largely dependent on whether a presidential campaign is being waged.

Main takeaways:

1. If youth turnout continues to fall or only moderately rebounds, the impact of not capturing cell phone-only voters may be small enough not to have a significant impact in overall numbers or seat allocation.

2.
However, if youth turnout jumps by 10-20 percent and shifts hard towards a particular party, the impacts could be undercounted by telephone polls. Given the Liberal Democrats surge following the debate among young voters, this could be a realistic scenario, meaning that the Lib Dems could be in a stronger position than it seems.

3. Young American voters are a pretty volatile bunch, and overall much less likely to vote (average of 37 percent over last three elections) than British youngsters (45.5 percent over previous three elections).

---
Renard Sexton is FiveThirtyEight's international affairs columnist and is based in Geneva, Switzerland. He can be contacted at sexton538@gmail.com

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Is Deflation the Real Problem?

Last week, the FT had a very interesting column which stated:

There is a growing risk that deflation will be seen as the gravest threat to the US economy by the end of the year, warns Nick Beecroft, senior FX consultant at Saxo Bank.

He notes that the minutes of last month’s Federal Reserve policy meeting show the US central bank becoming increasingly concerned with the fall in inflation.

And the latest consumer price data will have reinforced these worries, he says. “As the year progresses, the output gap – exemplified by the still chronically weak labour market and very low levels of capacity utilisation – will lead inflation inexorably towards zero.”




In addition, the minutes of the most recently released Federal Reserve Minutes had the following observations about deflation:

Meanwhile, a sizable increase in energy prices pushed up headline consumer price inflation in recent months; in contrast, core consumer price inflation was quite low.

.....

Although rising energy prices continued to boost overall consumer price inflation, consumer prices excluding food and energy were soft, as a wide variety of goods and services exhibited persistently low inflation or outright price declines. On a 12-month change basis, core personal consumption expenditures (PCE) price inflation slowed in January 2010 compared with a year earlier, as a marked and fairly widespread deceleration in market-based core PCE prices was partly offset by an acceleration in nonmarket prices. Survey expectations for near-term inflation were unchanged over the intermeeting period; median longer-term inflation expectations edged down to near the lower end of the narrow range that prevailed over the previous few years. With regard to labor costs, the revised data on wages and salaries showed that last year's deceleration in hourly compensation was even sharper than was evident at the January meeting.

.....

Headline consumer price inflation picked up around the world over the past two months, principally reflecting increases in food and energy prices. Excluding food and energy, consumer prices were generally more subdued.

.....

Reflecting these developments, inflation compensation--the difference between nominal yields and TIPS yields for a given term to maturity--declined over the period, a move that was supported by the somewhat weaker-than-expected economic data and the publication of lower-than-expected readings on consumer prices.

.....

Recent data on consumer prices and unit labor costs led the staff to revise down slightly its projection for core PCE price inflation for 2010 and 2011; as before, core inflation was projected to be quite subdued at rates below last year's pace. Although increased oil prices had boosted overall inflation over recent months, the staff anticipated that consumer prices for energy would increase more slowly going forward, consistent with quotes on oil futures contracts. Consequently, total PCE price inflation was projected to run a little above core inflation this year and then edge down to the same rate as core inflation in 2011.

.....

Participants saw recent inflation readings as suggesting a slightly greater deceleration in consumer prices than had been expected. In light of stable longer-term inflation expectations and the likely continuation of substantial resource slack, they generally anticipated that inflation would be subdued for some time.

.....

Participants referred to a wide array of evidence as indicating that underlying inflation trends remained subdued. The latest readings on core inflation--which exclude the relatively volatile prices of food and energy--were generally lower than they had anticipated, and with petroleum prices having leveled out, headline inflation was likely to come down to a rate close to that of core inflation over coming months. While the ongoing decline in the implicit rental cost for owner-occupied housing was weighing on core inflation, a number of participants observed that the moderation in price changes was widespread across many categories of spending. This moderation was evident in the appreciable slowing of inflation measures such as trimmed means and medians, which exclude the most extreme price movements in each period.

In discussing the inflation outlook, participants took note of signs that inflation expectations were reasonably well anchored, and most agreed that substantial resource slack was continuing to restrain cost pressures. Measures of gains in nominal compensation had slowed, and sharp increases in productivity had pushed down producers' unit labor costs. Anecdotal information indicated that planned wage increases were small or nonexistent and suggested that large margins of underutilized capital and labor and a highly competitive pricing environment were exerting considerable downward pressure on price adjustments. Survey readings and financial market data pointed to a modest decline in longer-term inflation expectations over recent months. While all participants anticipated that inflation would be subdued over the near term, a few noted that the risks to inflation expectations and the medium-term inflation outlook might be tilted to the upside in light of the large fiscal deficits and the extraordinarily accommodative stance of monetary policy.


So, the obvious question to ask is this: is the US economy facing an increasing possibility of deflation? To answer that question, I will look at overall CPI, along with the largest price components of CPI -- housing (41.960%), transportation (16.685%), and food and beverages (14.795%). I will also look at the GDP derived personal consumption expenditures' (PCE) price deflators (both overall and core), to see what conclusions the data leads to.

First -- what is deflation? Deflation is a situation where overall prices decline. While this might seem like a great idea, it is in fact one of the most dangerous situations an economy can face. As an example, at the start of the Great Depression, consumers greatly reduced their consumption. Therefore, to get consumers to start buying again, retailers lowered the prices of goods in their stores. These two events -- a drop in demand and a lowering of prices -- led to two problems. First, lower demand means fewer products are sold, which lowers the supply of a variety of goods. Secondly, lower prices lower retailers' profits. Lower supply of manufactured goods and lower profits at retailers leads to lower employment, which in turn leads to lower demand. This process becomes a self-perpetuating cycle. This process is called a deflationary spiral, and economists consider it one of the most damaging events an economy can face.

Secondly, what is core CPI and non-core CPI? Core CPI is a measure of prices without including food and energy. While this may seem counter-intuitive, there is a reason why it is an important measure. Food and energy prices are volatile and in some cases seasonal. For example, a series of spring-time thunderstorms in the mid-west could delay planting certain crops for a few weeks, leading to a spike in wheat and corn prices which would then drop when planting began. Or, a political development in the Middle East could lead to a spike in energy prices.Additionally, oil prices typically rise in the spring and summer because of the "summer driving season" -- the time of the year when Americans spend more time driving longer distances on summer vacations, thereby consuming more fuel. However, in all of the previously mentioned situations, prices typically return to a statistically "normal" level. In addition, by looking at the "core" CPI, FOMC policy makers are attempting to discern if commodity price swings are bleeding into other, non-core price areas, or whether commodity prices are isolated.

Finally, a little inflation is a good thing. It indicates that either producers have the ability to raise prices, or there is enough demand to increase prices or wages are increasing, leading to increased demand and therefore higher prices -- or a combination of the preceding three events. The first situation is referred to as supply push inflation, and it occurs when suppliers or producers have "pricing power" -- the ability to increase prices without seriously impacting demand. The second situation is "demand pull" inflation, and it occurs when more and more people demand the same amount of goods, thereby pulling prices higher. How much inflation is actually good is debatable. However, some inflation indicates the economy is growing.

The charts that follow are from the St. Louis Federal Reserve's FRED system. Please click on all charts to see a larger image. All charts use seasonally adjusted data.

Let's start with a look at seasonally adjusted CPI:



While the overall price level is increasing, the rate of month to month increase is very small. That means that overall prices are increasing at an incredibly low rate.



The year over year rate of change is running around 5%. However, note that level is in comparison to a negative year over year number a year ago. In other words, the year over year number is skewed. This is especially important in relation to the very low rate of change in the first chart which shows incredibly modest price changes.

Let's turn to the core CPI (CPI without food and energy prices) levels:


Core CPI has more or less stalled -- it dropped at the beginning of this year and has since risen a bit, but the rate of increase is incredibly low.



The year over year rate of increase is still positive, but the rate of the year over year increase is falling, and has been since roughly the third quarter of 2008. While the number is still positive, consider this chart in conjunction with the first core CPI chart that shows prices are barely increasing. The year over year rate increase will most likely continue to move lower (although still be positive) in the near future.

Let's look at some of the largest CPI component price indexes in the order of the largest to the (in comparison) smallest.

Housing related prices have stalled for nearly two years. Given the current state of the housing market, this is to be expected (see the discussion on the housing market here). But housing accounts for 41.960% of the overall CPI index, leading to a conclusion that these prices are having an incredibly negative impact on overall CPI.



The year over year rate of change for housing prices is negative. This is obviously having a very negative impact on the overall price level.


Transportation costs (16.685% of CPI) bottomed at the end of 2008, but have since been rising.




While the year over year number had a large drop at the end of 2009 that lasted through about mid-2009, the number has rebounded.




Food and beverage prices (14.795% of CPI) -- like housing prices -- have been pretty stagnant over the last two years.



And the year over year rate of change dropped into negative territory at the end of last year, but has been moving up since. It just turned slightly positive.

Let's now turn to the price deflator for personal consumption expenditures, which is found in the gross domestic product report.


The PCE deflator has increased from it's late 2008 lows, but has moved sideways for the last few months.


The year over year percentage change shot higher at the end of last year, but the reason for the increase is its rise from an incredibly low level in previous years. Considering that prices were declining for most of 2009, I would expect the year over year number to continue moving lower.


The core level has started to move sideways.




In addition, the core year over year rate of change has been moving lower since mid-2008.

The data indicates that deflation is not a problem -- yet. However, there is a tremendous amount of information indicating that deflationary concerns are well-founded. Housing related prices have been under pressure for the last two years. And considering there is no evidence of a massive housing rebound, this area of the CPI index will continue to move the index lowed. After spiking in 2008, the price charts for corn, wheat and soy beans have been in a sideways pattern. The only major CPI component that might provide upward pressure is transportation prices, but some of those effects will probably be seasonal. In addition, there is little reason to think the economy will experience either demand pull or supply push inflation in the near future. High unemployment means there will be little inflationary pressure from rising wages and the low rate of capacity utilization indicates there is little possibility of supply push inflationary pressures.

In short, deflationary pressures can't be ignored.

Finally -- and completely unrelated to this article -- IBLS has published a book I wrote, titled A Practitioner's Guide to U.S. Captive Insurance Law. It is available in their April 2010 Tax Law Review. For more information on this topic. please see this website.

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