Tuesday, August 11, 2009

Correcting misconceptions

Someone commented


Summary: unrealistic for overall driving, but very possible in a city-only environment (which is what the 230 mpg rating was, anyway)"

Using that methodology my electric razor gets infinite miles per gallon

Let's learn about efficiency, work, energy, and cars. This diagram should help clarify things: http://www.fueleconomy.gov/FEG/atv.shtml

The engine loss is thermodynamic, you are limited by carnot efficiency. Gasoline combustion engines (i.e. regular cars) are 30% efficient, the average fleet power plant (i.e. the kind that would ultimately power plug in hybrids) is 30-35% efficient. You can't exceed carnot efficiency, it is a theoretical MAXIMUM efficiency. So the 65-70% loss is there to stay. Period. Doesn't matter if you use lithium ion batteries to store electric energy or gasoline to store the chemical energy you have that loss due to thermodynamics.

Hybrids have higher MPG than regular cars because they can recover energy that would be normally lost from braking and idling. It's not because of the magical lithium ion battery or electric motor being more 'efficient.' It's because that energy is no longer being dissipated as useless heat without being harnessed to do work, because it can be STORED thanks to the battery.

So instead of putting in 100 units of chemical energy and only getting 15 units of work with 65-70 units of conversion losses and 15 units of braking and idling losses you have 25 units of work, 65-70 units of conversion losses, and 5 units of braking and idling loss. Voila, your 40 MPG honda civic now gets 60 MPG.

The only way to improve on that number is to have a more efficient engine. That means higher operating temperatures, which aren't really feasible in an internal combustion engine in a car. Hence an electric car would allow for higher efficiencies through 'economies of scale' really just very efficient large scale power plants (50%-60% efficient). Even then youre MPG would be ~120 MPG. There is no goddamn way you could get 230 MPG unless your car accelerated slower than molasses and had 30" rims that were 2" wide running on slick tires.

230 MPG + My Arse

Sorry, unless the Chevy Volt is using racing slicks as its tires or GM plans on buying 60% efficient combined cycle plants to generate all the power for the vehicle there is no way it will get 230 MPG. More like 1/2 that. At most.

Thursday, May 14, 2009

BrIC, not BRIC

An acronym thrown around recently:

BRIC countries are supposedly fast growing emerging economies that are somewhat independent of US driven demand and supposedly are going to become the dominant four economies by 2050:


Russia does not belong in this group.
Its economy is extraordinarily hydrocarbon and metals export dependent, in fact, such a huge proportion of the economy is natural resource driven that even the UAE has a more diverse economic base. Its GDP imploded in the recent economic malaise, contracting a staggering 9.5% in q1.

In fact, its economic performance has been so horrific that a recent strategic blueprint released by the Kremlin and signed by President Medvedev listed the current resource export economic structure as a major threat to Russia's future.

Furthermore, its life expectancy is abysmal, its population is on the decline, it has decreasing business transparency, and it has decreasing rule of law.

BrIC, not BRIC. Russia should be categorized with natural resource dependent nations, such as Saudi Arabia and Venezuela, not multi-faceted economies such as Brazil, India, and China.

Friday, May 8, 2009

Chavez Nationalizes Oil Services Companies Operating in Venezuela

In 2002 PDVSA's engineers and oil workers went on strike along with other unions as well as businesses to protest Chavez placing his men on the board of directors of PDVSA. In 2003 the Venezuelan NOC fired all PDVSA's striking engineers and oil workers and replaced them with Chavez cronies. In the immediate aftermath, oil production never recovered to the pre-strike value of 3 MM bbl/day and has continued its steady decline to 2.4 MM bbl/day.

Most of the oil in place in Venezuela is extra-heavy, sour (high in sulfur), and requires significant upgrading. Most of these upgrading facilities were joint ventures with international oil companies and the oil services companies were providing secondary recovery techniques to help stem the drop in Venezuelan production (Venezuela's field output is steadily degrading and require more complex secondary and tertiary extraction techniques to maintain output).

Firing the PDVSA engineers was disastrous enough, but now nationalizing the oil services companies who have been the only thing keeping production from imploding, that is an incredibly dangerous move on Chavez's part. I would gamble that Venezuelan output is going to be hindered significantly by his actions.

Tuesday, April 14, 2009

From the hall of Montezuma, to the shores of Tripoli?

From the Halls of Montezuma,
To the shores of Tripoli;
We fight our country's battles
In the air, on land, and sea;
First to fight for right and freedom
And to keep our honor clean;
We are proud to claim the title
Of United States Marines.

The US has dealt with African piracy once before, in the Barbary War at the very start of the 19th Century. We landed our Marines in Libya and destroyed Tripolitan cities. Unfortunately this approach will not work in Somalia in the present day without risking another Mogadishu, though it's being touted on Fox News.

A couple days ago I asked myself why isn't the US military utilizing killer-scout Predators and hunter-killer Reapers to deal with the Gulf of Aden Somali Pirate issue?

Deploying frigates, PT boats, amphibious assault ships (aka chopper carriers), destroyers, guided missile cruisers, even traditional aircraft carriers is more or less useless.


What is needed is situational awareness and instant strike capability stemming from the fact that the area that needs to be patrolled is the size of Texas (difficult to have constant situational awareness using traditional means with an area this size), and it is difficult to identify the pirate attack ships and motherships until an attack is under way (need instant strike capability).

The US has moved three assets there:

the USS Boxer, an amphibious assault ship (basically a huge chopper carrier)
the USS Bainbridge, a destroyer
the USS Hallyburton, a guided missile frigate

However, by the time any of these assets are aware of a developing situation or even if they become aware of an attack launched from one of these pirate motherships (these attacks are occurring over a hundred miles off the coast of Somalia) the fast attack pirate ships have already reached their targets and taken them over. Tomahawks are not suitable for destroying these small ships, and rarely are the US Naval assets aware of an attack underway until a ship is boarded. Short of dropping in a Navy SEAL team after a ship takeover, which would likely result in casualties, there is nothing to be done with the current tactical setup. The US Navy is designed to fight Russia and China, and ill equipped against insurgents or pirates (though Gates is attempting to turn that around).

What is needed is the use of the scout-killer/hunter-killer platform,designed for situational awareness, interdiction, and counter insurgent duties. The ship or base would launch and retrieve the Reapers and Predators. Possible ships are the older aircraft carriers set to be decommissioned in the next few years (might be overkill since these aircraft do not require catapult based launching), such as the USS Enterprise or USS Kitty Hawk, a converted tanker with escort, or the conversion of US use of Thumrai Air Base in Oman from refueling for B-1, C-130, and other aircraft to a launching point for interdiction Predator and Reaper aircraft.

The Predator and Reaper have over 24 hour loiter times, speeds of 150 and 250 mph, ranges of 2000 miles and 3000 miles, and can carry 4 hellfire and 14 hellfire air to ground missiles, respectively.

They can be controlled via Ku band satellite uplink for non line of sight control beyond 400 nm or to avoid radio jamming, or via C band radio uplink for line of sight control, and their hellfire missiles have a 5.5 mile operational range.

The Reapers and Predators can also be armed with guided munitions, such as GPS guided JDAM's, which might be useful for taking out the pirate motherships (but not accurate enough to take out the small attack vessels, which require the use of hellfires (which have been used numerous times to take out moving cars).

These aircraft are the ultimate in deadly persistence, think of them as instant air strikes. That is how they are being used in Iraq and Afghanistan. Merchant ship convoys, and mass patrols via ship have been proposed by the US and allies operating in the area to respond to the pirate threat, but they are ill suited for the task and would be much more costly than a couple squadrons of these craft.

What is needed is persistent situational awareness and instant interdiction capability at minimum cost and the Predator / Reaper setup provides just that. Destroyers and frigates, unless en masse, cannot provide pirate free shipping lanes. However, a squadron of Predators and Reapers in flight in the Gulf would easily be able to track all mothership vessels and obliterate any pirate attacks before they reached their targets.

Think about it, it costs $340 MM for an amphibious assault ship like the USS Boxer, $450 MM for Aegis Missile Destroyers like the USS Bainbridge, and at least $70 MM for guided missile frigates like the USS Hallyburton, all of which are totally unsuited for small craft interdiction.

A complete squadron of Reapers, consisting of 12 aircraft, the ground stations, and all other hardware runs $200 MM per squadron of 12 aircraft, while a Predator squadron runs $90 MM. For the cost of a single Aegis Destroyer, you could field a squadron of Reapers for long range interdiction (out to 1500 miles) and three squadrons of Predators (out to 1000 miles), using less fuel, fewer men, and putting no lives in harms way. You would have much much higher situational awareness and interdiction capability, assuming 3/4 of units are deployed at any given time that's 36 flying missile truck surveillance planes.

Friday, April 10, 2009

Paid Magazine Subscriptions

In my previous post I discussed using frequent flyer miles for magazines.

Miles for Magazines has a rotating selection of magazines, for example, right now they do not offer The Economist in exchange for frequent flyer miles.

Alternatively, the lowest priced subscriptions I have seen for magazines has been:

The pricing is even lower than the lowest rates available anywhere for renewals or students:
$39 for a 1 year subscription to Barron's (lowest anywhere else is $52)
$59 for a 1 year subscription to the WSJ or the FT (lowest anywhere else is $79)
$59 for a 1 year subscription to the Economist (lowest anywhere else is $77)

Miles for Magazines and Newspapers

This past September I traded in stranded airline miles on American, US Airways, and Delta, all three of which I rarely fly and have no frequent flyer credit cards for, to receive six-nine month newspaper and magazine subscriptions. The conversion rate is excellent, for example, I received a 39 week subscription to the WSJ for 3,300 miles, worth $80.00 (discount rate). After reading these magazines and newspapers for 6 months I have to say...

not worth renewing:
ESPN Magazine (Garbage, stick to Sports Illustrated)
Gentleman's Quarterly (Disappointing, I'd read it if it were free)
Forbes (Complete bastion of yellow journalism in the business world)
Business Week (Another bastion of yellow journalism)
Inc (Good...but only for small businesses)

worth renewing:
The Wall Street Journal (Must have for good micro and macro perspectives)
The Economist (Must have for excellent macroeconomic perspectives)
Barron's (Must have, many excellent trading ideas, comprehensive manager performance tables across mutual funds, hedge funds, and commodity trading advisors)
New York Magazine (Nice to have, great reviews of local culture)
Conde Nast Traveler (Nice to have, interesting destinations, well written reviews)

The links for Magazines for Miles are:

Northwest: https://nwa.mpmvp.com/magazine/choose.asp
Delta: https://delta.mpmvp.com/magazine/choose.asp
American: https://americanairlines.mpmvp.com/magazine/choose.asp
US Airways: http://www.usairways.com/awa/content/dividendmiles/usemiles.aspx
Continental: http://www.continental.com/web/en-US/apps/onepass/magazines/productList.aspx?CATID=5
United: None

Monday, April 6, 2009

Genius alert: Sun Microsystems

Picture this: you are a dying, has-been tech company, whose extinction is just around the corner, with no real long term vision and multiple failed turnarounds, with competitors eating your lunch and soon your dinner.

A successful goliath who has reinvented itself and shown ability to adapt to any environment offers you a substantial premium and synergy savings through acquisition. The acquisition isn't a drop dead slam dunk for them but it is for you (i.e. this isn't even Yahoo - Microsoft, where Microsoft absolutely NEEDS Yahoo).

Do you
a) Negotiate in good faith
b) Reject the offer outright
c) Negotiate, seemingly in good faith, and then open up the negotiations to other bidders (who don't exist) even though you know that will cause your suitor to drop their bid

Well, Sun Microsystems chose c, and is likely doomed to extinction. It should have learned from Silicon Graphics and Unisys. I'm short Sun all the way down to $2. Jerry Yang looks positively like a rocket scientist compared to Sun management...

Update: 04/20/09: Wrong call on my part, ORCL is said to be acquiring Sun in order to gain control of MySQL, Java, and Solaris, which I admit is a much better strategic fit. 35% hit on this trade.

Sunday, March 22, 2009

Pandit the Bandit

I've received mixed responses on my Pandit post, especially vis-a-vis John Thain.

I want to emphasize that I am not saying John Thain is a great guy. In fact, like many banking CEO's, he might be on a different plane of the universe when it comes to his personal (not legal) values of right and wrong. All that I am saying is that he has done the best for his shareholders of the CEO's who have been in burning banks, far better than Cayne, Fuld, or now, Pandit, whose respective performance numbers are -100%, -100%, - 95%.

Thain, unlike all these other CEO's who were in a constant state of denial, saw the writing on the wall after he was brought in to fix Stan O'Neal's mess in late 2007 and he prevented Merrill Lynch from going bankrupt thereby preventing a total wipe out of whatever brand equity and human capital it had left, saving ML shareholders, creditors, and employees in the process. What other course of action should he have taken? He took the best one available for ML. His fiduciary responsibility was to his bondholders, shareholders, employees, and customers, ML's institutional strengths were in areas that BOFA has always been weak in, e.g. Bank of America has always wanted a real brokerage arm and a real commodities operation, and he knew that it was his best bet to save the firm.

Yes, Thain spent $1.2 MM to renovate his office, two conference rooms, and a reception area in December 2007, after he was named CEO of ML from his then current post running the NYSE. Of that $1.2MM, $800,000 went to the designer, and $400,000 for the contents. In hindsight, he said it was not a good thing to do, he apologized and reimbursed the firm for the expenses. It was clearly not the greatest idea in world. But better than flushing 95% of your firms value into the toilet.

Furthermore, recent events emphasize my previous post. Pandit just announced he is spending $10 MM renovating his office while his stock is on the McDonald's dollar menu. So my point stands. Thain has had the best performance of any of the banking CEO's whose house is on fire. Pandit needs to be fired as he obviously lacks even the most basic common sense and foresight. How about learning from Thain's mistake?

I have been so aghast and so appalled at the recent behavior of many captains of industry, that I am building a new website, Greediest.com, that will contain all the gory details on this incredibly callous, often illicit, and generally distasteful behavior. It will have an action reaction pair:

Golden Parachutes
Job Losses



Stay tuned, it should be interesting.

Saturday, March 21, 2009

Bonuses bonuses bonuses

Yes, the AIG bonuses are atrocious

Yes, many of those executives do not deserve them

Unfortunately, passing this 90% bonus tax bill into law in order to recoup the bonus payment would be creating an unconstitutional law.

First off, the proposed law is an ex post facto law, a law passed after an act has been committed that acts retroactively to change the legal consequences of the act committed.

Second off, the federal government is prohibited by the Constitution from taxing property, and can only tax increases in wealth (wages, bonuses, dividends, etc..). The accession already occurred, and since ex post facto laws are illegal, modifying the law to tax the bonuses would likely result in a property tax, which is also illegal at the federal level.

Lastly, the law is clearly intended to punish a very select group of individuals without trial, namely the executives at the AIG financial unit, meaning it is likely a bill of attainder, also prohibited by the Constitution.

Besides these factors, has Congress bothered to think of the unintended consequences of their actions? Goldman Sachs and Morgan Stanley will raise capital from investors, return the necessary funds to the government to fall below the $5B threshold, and proceed to poach every last rainmaker from the four remaining large commercial banks JPMorganChase, CitiGroup, Bank of America, and Wells Fargo, effectively imploding them by grabbing their primary asset, people, thus concentrating power in these two investment banks.

Monday, March 2, 2009

The Problem with Pandit

Pandit is a design engineer who specializes in designing houses that are fire-resistant.

Unfortunately, the house he's standing in is rapidly burning to the ground.

That makes Pandit more than useless, like a design engineer whose house is in a three alarm fire.

Were Pandit running Citigroup six or seven years ago, much of what has happened the last year could have been avoided. Unfortunately, timing is everything and he is not the right person to be running Citi at this time.

That said, what do you need when your house is rapidly burning to the ground?

You need a firefighter, someone like John Thain, who will do whatever is necessary to protect the company and save it from complete destruction. Criticize Thain all you want for his $1,000 waste paper basket, but he very handedly saved Merrill from implosion.

Once the fires are under control and some sense of normalcy returns, that could be Pandit's time to shine, but until then, he's about as useful as a deep fried rotisserie chicken.

Saturday, February 21, 2009

Why Ford > GM > Chrysler

Oil and Gas Companies

Company, 2008 Market Cap, CEO Educational Background
1) ExxonMobil $366 B: Civil Eng.
2) BP CEO $133 B: Geology
3) Chevron CEO $131 B: Chemical Eng.
4) ConocoPhillips $ 75 B: Business
5) OXY CEO $ 37 B: Chemistry
6) Encana CEO $ 32 B: Petroleum Eng.
7) Devon CEO $ 32 B: Geology

Notice a common thread?

Oil and gas companies are defined by their ability to explore and produce. E&P is the lifeblood of the company. Notice how the largest oil and gas companies, integrateds and independents alike, are run by either engineers or geoscientists?

At its core, a vehicle company is defined by its vehicle engineering. I'm wondering, perhaps vehicle companies should be run by engineers?

Toyota's ascent to become a global vehicle superpower occurred under two engineers


http://en.wikipedia.org/wiki/Eiji_Toyoda (Engineer)

http://en.wikipedia.org/wiki/Shoichiro_Toyoda (Engineer)

Whereas its recent disastrous expansion into pickups as well as its construction of factories in Japan on the basis of short term currency foreign exchange rates that has contributed heavily to the first loss in dozens of years was the result of

http://en.wikipedia.org/wiki/Katsuaki_Watanabe (Economics major)

Notice how Ford has performed far better than Chrysler and GM?


http://en.wikipedia.org/wiki/Robert_Nardelli (Business major)

General Motors:

http://en.wikipedia.org/wiki/Rick_Wagoner (Economics major)

Perhaps because you have this engineer at the helm, Ford has outperformed:

http://en.wikipedia.org/wiki/Alan_Mulally (Engineer)

As soon as Alan Mulally came to the helm at Ford he mortgaged all the assets at the height of the credit boom, because of liquidity concerns, whereas the CEO's of Chrysler and GM sat on their laurels...

Speaking of Chrysler, someone at Daimler had the foresight to jettison the brand before it took down the maker of the Mercedes-Benz:

Daimler AG (Mercedes Benz):

http://en.wikipedia.org/wiki/Dieter_Zetsche (Engineer)

Oh but wait we also have:


http://en.wikipedia.org/wiki/Norbert_Reithofer (Engineer)


http://en.wikipedia.org/wiki/Wendelin_Wiedeking (Engineer)

Renault AND Nissan:

http://en.wikipedia.org/wiki/Carlos_Ghosn (Engineer)

I'm seeing a bit of a pattern here.

It would be nice if someone could do a comparative study of vehicle company management under engineers versus non-engineers.... or maybe take a different industry that has a greater number of companies, say independent oil and gas, looking at geoscientists/engineers vs. other ceos.

Friday, February 20, 2009

Reap as ye shall sow

Page A3 if you have the hardcopy:

Californians Get a Budget That Leaves Few Happy

"A broad range of Californians will feel the pain. The plan to balance the state budget -required by law - will slam the poor, as well as the middle class, some economists said. For a household earning $150,000, the tax increases will almost wipe out the $800 per couple tax credit in the stimulus package signed by President Barack Obama this week, according to California's Legislative Analysts Office. The state taxation plan and the federal credit "work against each other," said Legislative Analyst Mac Taylor."

Comment: US Senators and Congressmen, see diagram and commentary in the post below to understand what you've done. You just made huge regressive tax increases an inevitability. I know you didn't bother to read the 1,000 page bill you passed, but I've made the diagram simple enough that even you can understand it.

U.S. Aid Won't Save Big Apple Budget from Bloomberg's Ax

"Stimulus aid must be used in specific areas, such as federal education programs, Medicaid payments, and construction projects, it can't be used to cover the cost of the city's large work force....To eliminate the gap in the city's 2010 budget, Mr. Bloomberg in last month proposed cutting social services, aid for the elderl, emergency personnel and cultural activities. That could mean reductions among fire companies and firefighters; children's services, such as child care and foster care; and cutting 1,000 police officers"

Comment: I've said it before, and I'll say it again, this earmarking of funds, especially state aid, is a fundamental problem with the stimulus package. The stimulus dollars should be disbursed to the general funds of state and local municipalities so the state and local governments, such as Bloomberg and the California state legislature, can allocate the funds instead of having their hands bound to a set of earmarks.

Now we're going to have a surplus of hole diggers and a reduction in police and fire fighters in NYC. I hope those hole diggers can save me from a burning building or fight crime. I also hope they can take care of any elderly relatives, and perform CPR should any of us have a heart attack.

But hey, what do I know? I'll just let the market speak for me.

Thursday, February 12, 2009

Only took the WSJ an extra month to realize this...

On January 10th I wrote: "The economy is like a massive pendulum, it does not stop on a dime. The boost to income (or as Larry Kudlow likes to say, massive tax cut) created by the precipitous decline in crude and gasoline prices has worked its way into the economy, possibly preventing a disastrous shopping season from being the apocalypse, but there isn't much meat left in gas prices, so further boosts to disposable income from gas are not happening."

On February 12th, the WSJ publishes: Falling Gas May Be Gone as a Stimulus - WSJ.com

Better late than never.

In other news, I've included a crude representation of what a real stimulus package would look like and what our current magical stimulus package is composed of. Its added in my tirade post.

Wednesday, January 28, 2009

The $800 Billion Stimulus Package and the Critical Importance of Efficient Allocation

Stimulus spending can create (1) new real growth if it more efficiently allocates resources than would have been done otherwise.

If that is not the case, then stimulus spending will, at best, only (2) create real current growth at the expense of future growth.

The Federal Reserve traditionally manages (1) and (2) through monetary policy. In terms of (1) it attempts to create new real growth by preventing price shocks, in which damaging resource allocation can occur because of price level uncertainties. In terms of (2), additional short-run real economic growth can be boosted through monetary policy, at the expense of of future growth, given a functioning financial system, through interest rate mechanisms.

However, in the current crisis, we have variables that fall outside the Federal Reserves control that are negating or reducing the influence of interest rate policy: (3) a major divergence from Federal Reserve direct-to-bank interest rates versus interbank lending which signifies bank unwillingess to lend to ANYONE (though this has returned more or less to pre-September levels, as measured by the TED spread)

(4) an even larger divergence in secondary markets (e.g. bond markets) from Fed rates signifying investors unwillingness to lend to companies and municipalities for fear of default.

Hence, the thinking is to bring additional weapons to bear on the current economic recession, namely an $800 billion stimulus package. However, it seems very clear to me that this package will allocate the funds in a very wasteful and economically harmful way given the alternatives.

First, the budget gap in state and municipal budgets over the next three years will run from $400-$700 billion as I've outlined in earlier posts.

It makes absolutely no sense to me to leave this gaping hole in the budget from the perspective of marginal dollar/marginal utility.

What we are doing is spending an extra $700B on infrastructure and other magical elements of stimulus, for which we don't know the effect (who knows, maybe a multiplier of 0.8 due to graft, waste, purchase of foreign goods and services?) and for which the marginal utility of each dollar spent rapidly decreases (I can assure you that the last dollar spent will have very little to show for it), while leaving this gaping hole in state and municipal budgets, which is going to be closed, in part, by firing teachers, garbagemen, police, firefighters, EMT's, mental health workers, home aides, and various other civil servants, i.e. losing goods and services which have definite utility.

Think about it, the federal, state, muni, and personal balance sheets were at some equilibrium value from a spending perspective. Now we are adding $700 B to the federal market, rather than allocating the funds on an even basis, or even better, a true marginal utility basis.

The gaping hole is also going to be filled by raising state and municipal taxes, which means higher state income taxes (which have no or very limited progressive banding), higher sales taxes (which tends to burden the poor and middle class the most since their spending is a higher percentage of income and worse it discourages spending), and higher property taxes (which burden the elderly and older Americans the most, since they tend to have appreciated home values but limited incomes). In other words EXTREMELY REGRESSIVE TAXES.

So while your average American family will get a $400-$800 stimulus check, they will also pay thousands more in sales, income, and property taxes this year, due to the idiotic structure of this stimulus package.

I drew a simple diagram at lunch yesterday to explain the stimulus problem, since a picture really is worth a thousand words:

What's worse is the pork and special interest spending that will occur with the current stimulus package. That infrastructure cloud is filled with lobbyists and politicians jockeying for the $700B, so I can guarantee you the allocation will be extraordinarily wasteful.

Monday, January 19, 2009

More on the fourth horseman

Another blogger did a great job quantifying part of the fourth horseman this week, thanks for saving me the work:

Fiscal Situation of 50 States: Combined Budget Gaps Estimated at $350 Billion for 2010 and 2011

Unfortunately, this summary only covers state budget shortfalls, which amounts to a whopping $414 Billion over the next three years (2009-2011), at $89B, $145B, and $180B, but does not include municipal budget shortfalls.

Taxation at the state level is responsible for your sales tax and income tax.
Taxation at the municipal level is responsible for your property tax and municipal income tax (e.g. NYC).

Does anyone have municipal budget shortfall figures? Conference of mayors perhaps?

New York City alone has had its Independent Budget Office projecting a budget shortfall of $4 Billion for 2010, and $7 Billion for each of 2011 and 2012, or a gap of approximately 7% and 12% respectively.

With municipal bond markets still in the crapper, how oh how will municipalities and states meet their budget shortfalls? They can't borrow against future income without paying much higher interest rates than usual and risking their credit ratings given their reduced ability to service existing debt, much less new debt. Surely they will try to do some of that. But with so many bonds chasing so little capital, can we say higher income, property, and sales taxes, anyone?

Let's perform a quick thought exercise. State and local tax burdens amount to approximately 10% of GDP, or approximately 1.4 trillion.

Roughly speaking, state budgets total ~$800B for FY 2009, and for purposes of this exercise and guesstimation, let's assume inflows roughly equal outflows, leaving approximately $600B of municipal budgets. With best, intermediate, worst case budget gaps of 5%, 10%, 15%, the total municipal 3 year budget gap run $90B, $180B, $270B. So taking the intermediate case, we're looking at a budget shortfall of around $200B in municipal budgets over the next three years.

With state and municipal budget shortfalls running over $500B in the next three years, it seems like that is where the stimulus should be placed, the programs are already established, and it would be a much simpler exercise than 'infrastructure' spending. Also, I would expect it would reduce the impact of government spending crowding out new private spending as the funds would simply support programs and projects already in place at the state and municipal level. Last, but not least, state and municipal taxation tends to be extremely regressive, with little, if any, income banding/marginality and sales taxes are naturally regressive. By placing stimulus funds into infrastructure projects or other projects rather than providing funds to states and municipalities for existing projects or locked-in expenditures, the states and municipalities will have to respond by raising their tax rates, with the regressive nature of their taxes resulting in the middle class Americans that Obama says he is trying to protect, being the hardest hit.

Thus, given the nature of the currently proposed stimulus package, I expect any stimulus received by taxpayers on the Federal level to be negated by increased taxation at the state and municipal level, with middle income Americans hit the worst.