Monthly Archives: July 2010

Long-run Impact of Increased Government Deficit Spending

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Cash for Clunkers, the one-off housing credits, and the hiring for the census all boosted the economy and put dollars into it to increase AD. However, all those programs have ended. The car industry is still in a mess. There is still a 40+ month supply of houses and new home construction is very low to non-existent. Unemployment remains above 9% and would be much higher without birth/death adjustments arbitrarily placed on the figures. (One of the B/D adjustments is to automatically fudge in an increase in housing construction and hospitality jobs during the late spring and summer. Both of these increases account for almost all of the job growth in recent months. Data show that housing construction is very low and the hospitality sector is enduring a very rough season, meaning those B/D adjustments are misplaced in the jobs environment of 2010.)

What the increase in G has accomplished is, following a temporary statistical boost, no net gain to GDP, an increase in the federal government’s share of total USA indebtedness, and an increase in USG interest payment obligations. The net impact of the increased spending was zero.

That doesn’t mean the government should cut all programs: that’s a recipe for a disaster of a different sort. But so-called stimulus programs will stimulate the economy only as long as they are in existence. We saw the same thing in Depression-era programs. If the fundamentals of the economy remain troubled, as they do in the wake of severe asset devaluation recessions, no amount of stimulus spending will get the economy back on its feet permanently. Put another way, a true Keynesian solution means regulating the economy to prevent it from melting down in the first place, thereby keeping the fundamentals in the banking and finance sector sound enough to provide a foundation for further recovery. In those cases, government stimulus can help reduce the impact of a short recession.

The Benefits of Ecological Disasters

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The BP oil spill in the Gulf of Mexico remains a terrible problem and its pollution will have an impact on wildlife for decades. It’ll also wipe out competition for the major oil companies, giving the majors even more power over the US energy market. The US (and other big nations) will make stiffer regulations for pollution controls and the only players that will be able to afford them will be the major oil companies. They’re the ones that pollute the most, and they’re the ones that benefit the most from wrecking the environment. They have enough money to hire lobbyists to assist in writing the legislation that will go before Congress. They’ll get their way, all thanks to the BP disaster.

Smoking and Externalities

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On the AP Economics discussion list, a teacher mentioned how he teaches the concept of externalities – costs or benefits that happen to someone not party to an economic decision – with a discussion about smoking in public places. He mentioned he was glad that public smoking bans, when passed, are followed by a dramatic drop in heart attacks at local hospitals. He then lamented a recent repeal of such a ban.

Another person responded with praise for the repeal of the ban, indicating it to be a victory for freedom in his view. This is known as a “normative” statement in economics. Normative statements imply a value or other judgment. Positive statements in economics merely describe conditions, regardless of value. “Unemployment is at 9.7%” is a positive statement, for example.

Anyway, I had to respond to the idea of smoking as a freedom for one and all to enjoy. Here’s my response…

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Ah, the glories of the normative arguments of freedom in issues regarding externalities! But for every normative argument, there is at least one equal and opposite normative argument, so let’s explore the issue.

If the smokers aren’t paying the medical bills of the people they impact, that’s one massive externality. If the cost cannot be passed on to the smoker through increased taxes, banning the activity reduces the extent of the externality and its impact.

If I claim to get pleasure from placing unshielded high-grade uranium ore on the table in front of me (and go to www.unitednuclear.com to order your hunk today!), and then go to a restaurant and sit next you with my hunk of unshielded 31,000-50,000 CPM pitchblende, you might have one of several legal reactions:

1. You might decide it’s my right as an American to enjoy the pleasures of uranium wherever I go. You endure the beta and gamma radiation and bear an increased chance of cancer from that moment forward. If it’s a big meal, you might develop radiation sickness within a week.

2. You can decide that if I’m gonna irradiate the room, I can pay for it, as well. Results are as in 1, but we now have a civil suit regarding who pays your medical bills. Since I’m already wiped out from paying for my own treatment, your lawyers advise you to pay your own. You’re now out the cost of your combined legal and medical bills.

3. You could also go after the company that sold the uranium ore. When you go to http://unitednuclear.com/index.php?main_page=product_info&cPath=2_4&products_id=463, you discover a disclaimer that your lawyers tell you is sufficient for their coverage. Since I used the uranium in a manner inconsistent with their instructions, they’re clean. Results as in 2, but with a much lower legal bill – probably just $50 for the initial consultation.

4. You could charge me with aggravated battery. That would at least get me off the streets with that radiation rock. Assuming your case prevails over my cries of, “I didn’t know! I was intoxicated! He got cancer somewhere else! I was eating Twinkies!”, I pay an economic price for my crime of injuring you by being put in jail for a period of time.

5. You could retaliate by lighting up a cigarette and giving me a taste of my own medicine. Freedom is freedom, right?

6. You could work with other like-minded individuals to pass a law that criminalizes possession or transport of unshielded radioactive materials. I can’t even have them in my own home under the statute. I grumble about it, move to a trailer home in a remote location, put barbed wire around my home, and continue using it in solitude. The small-town cops out there choose to tolerate my activity rather than follow a path of strict enforcement. I still injure myself and, if indigent, society bears the cost of my treatment, but the law has reduced the risk to others.

Exposing people to chemicals that will knowingly injure or kill them forces them to bear the costs of an economic decision they were not party to: it should therefore be their legal right to take proper recourse to reduce their exposure to those chemicals. In so doing, they enjoy the freedoms associated with a healthier lifestyle than one impacted by second-hand smoke. And, truthfully, I think we can all be happier with the statutory option than with the nuclear one.

Now that I think about it, maybe there are a few guys out there planning the nuclear option… better start passing some laws!

I Finally Found My Neighborhood Italian Place

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Roma'sI’ve lived here almost 20 years and haven’t had “My Italian Restaurant” since Siciliano’s moved to north Garland and raised its prices. Sali’s on Garland is good, but… just not quite my entire style… Tony’s is just up the road from me, but it’s crowded and its pizza was marginally better than Little Caesar’s across the street. Rockyano’s is take out/delivery only, and I haven’t ordered there since giving them a second try about 10 years ago and not being happy with the results.

So I did the Google search for a pizza place near my house, and decided upon Roma’s, on Greenville. Picasso’s on Skillman is closer to me, but I decided against it for a few reasons. First, prices. I was going out with my family and I didn’t want to get mugged for just one pizza. Second, reviews. The good reviews weren’t specific and the bad reviews weren’t written by kooks. Third, the menu. It’s HUGE, with cuisine ranging from hamburgers to Thai food. That’s a bad sign in my book. Stick with what you’re good at and be excellent at it.

Roma’s had a few dings in its reviews, but I decided it was the one we were going to try out. It’s casual there, so we put on our sandals and drove on out.

My son ordered the “Chicken Judge’s Special” and I split a medium pineapple pizza with my daughter. Mom was at training, which is why I decided we needed to go out. I’m glad we did, and I want to go back with everyone some day.

The bread came out first. It’s unlimited rolls there, but you want to make sure you save room for the main courses. The bread is good quality, the garlic topping was flavorful without being too salty, a peril that besets many a roll. The marinara sauce for dipping had good flavor. I would have preferred more sweetness, but that’s me. I’ve had other marinaras, and this one stands on its own merits.

As we waited for the main courses, I reflected on the service (great) and the atmosphere (kinda dark). If you want a place lit up like McDonalds, sorry. On the other hand, if you like the lighting relaxed and Italian crooners singing their melodies, come on in. Me? Hey, Frankie don’t tell you no lies, capice?

The pizza and the entree showed up and, man! First, the pizza. On a scale of 1 to 100, with 1 being a cracker dipped in ketchup and 100 being the best pizza I ever ate, this place gets a solid 92. It’s got a great crust and more than once, I stopped myself from hitting my drink because I wanted to savor the flavors more. I’m giving my rating on the cheese pizza parts only. The pineapple, by the way, was properly drained so we didn’t wind up eating a swamp. The crust was thin, but not like a cracker. It had a great balance with the sauce and cheese, and the sauce had some great herb notes in it. My daughter, who’s young, was able to eat it. I like that. A real, adult pizza that a kid can approach and enjoy.

The Chicken Judge’s Special was amazing! That got a 95 or more, but I didn’t eat it, so I can only dream about it. I had a bite and I realized from the first taste that if supper was a contest, my son won it with this order. The olive oil-garlic-basil-oregano sauce on the pasta blew me away. Great aroma and my son was thrilled with the chicken. This guy knows his chicken, too, and he says this bird was all good.

The prices were all right, too. We could have overspent at some other joint, but this place has great prices that let you tip the great staff generously. I finally found my neighborhood Italian place.

Chad Is in Deep Trouble

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Chad lentil famine of 2010DISCLAIMER: This is not about my uncle Chad, who’s doing all right in California. This is about the nation Chad, which has had a very rough time in the past – and things have gotten worse there.

Those who follow my Farmville photos on Facebook know that I like to cover the Great Famines of History when I farm. I recently featured the Chadian Lentil Famine of 2010, pictured to the left. Well, Chad is also having a civil war on top of that. The civil war isn’t over anything complicated: just money. There’s actually money in Chad because it’s pumping oil. The oil won’t go to the poor people of the nation because the leaders there are stealing as much of it as they can and using the rest to buy off rebel factions. When the UN mission protecting Sudanese refugees – yes, there are Sudanese refugees there: I told you things were rough in Chad. Anyway, when the UN mission leaves later this year, they won’t be coming back and observers believe violence in Chad will return in a big way.

Oh yeah… Lake Chad is still evaporating away. Regardless of the cause of that fact, it’s going to lead to more violence as the people there kill each other over water rights. In light of all the above, I’m of the opinion that the US State Department advisory against travel to Chad is not some kind of cover-up.

Hitting Bottom and Digging Deeper

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North Korea’s getting worse. That’s the short version. Deserting North Korean soldiers are telling stories about how even the army is going hungry and that officers are either stockpiling food or planning how to flee to China. Anti-government graffiti is starting to decorate statues of the Dear Leader. Russia just started maneuvers on the North Korean border to test their preparation in the event of a mass wave of North Korean refugees coming their way. Rather than opening up, the guys at the top of North Korea are digging in deeper. My guess is if they hit bedrock, they’ll blast it so the can continue digging deeper still.

Life Imitates Sir Humphrey

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Sir Humphrey Appleby As I read the news this morning, I came across a story about how a supposedly independent government agency, wasn’t. The Prime Minister was upset about the high unemployment numbers, so five minutes before he had to face questions in Parliament, his bureaucrats redefined unemployment and submitted lower figures to him.

While this happened in England, it happens here in the States, too. One of the realities of US Government is that politicians can sometimes get the quick fix they want not through actual action, but through fiddling with the figures. That’s why I wish media would run more stories like this one. The job of journalists should be to scrutinize those in power, not to serve as proponents of ideological propaganda.

A Voice From 1841

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Mr. Walpole was almost the only statesman in the House who spoke out boldly against it. He warned them, in eloquent and solemn language, of the evils that would ensue. It countenanced, he said, “the dangerous practice of stock-jobbing, and would divert the genius of the nation from trade and industry. It would hold out a dangerous lure to decoy the unwary to their ruin, by making them part with the earnings of their labour for a prospect of imaginary wealth. The great principle of the project was an evil of first-rate magnitude; it was to raise artificially the value of the stock, by exciting and keeping up a general infatuation, and by promising dividends out of funds which could never be adequate to the purpose.” In a prophetic spirit he added, that if the plan succeeded, the directors would become masters of the government, form a new and absolute aristocracy in the kingdom, and control the resolutions of the legislature. If it failed, which he was convinced it would, the result would bring general discontent and ruin upon the country. Such would be the delusion, that when the evil day came, as come it would, the people would start up, as from a dream, and ask themselves if these things could have been true. All his eloquence was in vain.

Sound familiar? It’s a pretty smooth read and available online at http://www.gutenberg.org/files/24518/24518-8.txt. The first three chapters are all about financial panics. Great stuff.

Some Economic Rambling…

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I read an email on my AP Economics discussion list in which the writer basically expressed a negative view of Keynes and had praise for Reagan. He justified the Reagan defense deficits as having won the Cold War for the USA and the tax cuts as having spawned the booms of the last 30 years. Basically, it was the argument that less government is better: laissez-faire.

I disagree.

The boom of the 80s-00s was an extended version of the boom of the 20s and the 1900s: loose banking rules, easy credit, and profits taken from speculation on markets instead of actual production. Reading an economic history of the 20s is eerie, with all the references it makes to how Goldman Sachs and JP Morgan gamed the markets. When real estate prices peaked in 1927, the erosion in that market led to contractions in the banking system, culminating in a refusal of banks to roll over loans extended to stock market speculators. With stricter bank rules in place, we had a business-unfriendly environment, but we also had a panic-free environment. Looking at American economic history from 1800 to 1900, one sees nearly every decade punctuated with either a major war or a financial panic. That was an era of low to no government taxation or economic involvement, Civil War aside, and little or no government regulation of the banking sector. The Panic of 1907 and the Panic of 1929 were the last of the 19th-century style financial collapses. We haven’t seen the likes of them since, until banking rules were relaxed, easy credit returned, and speculation took hold of formerly stable markets.

The difference with the S&L crisis and previous ones was the willingness and ability of concerned parties to create further bubbles: tech in the 90s and property in the 00s. Krugman himself outlined the need to create a housing bubble in an article he wrote in the wake of the tech crash of 2000-2001.

The current financial situation is far from rosy. With high unemployment, income tax returns are significantly lower. I would speculate that states without income taxes may be seeing less of a financial hit because they still collect property and sales taxes – although sales tax returns remain lower than they were in the go-go days. Consumer credit spending is way down, which presents much slower growth prospects than were available in the decades since the opening up of credit markets.

Regarding Reagan… A deficit is a deficit is a deficit. For all the anti-Keynesianism in the Reagan party, his policies underlined Keynes’ main points: deficit spending will boost demand. Now for the growth of the debt: Reagan excoriated Carter for presiding over the national debt increasing to $1 Trillion. Carter’s policies increased the debt by $0.28 Trillion: By 1984, Reagan’s policies had increased the debt by $0.66 Trillion and by 1988, another $1.04. Bush I’s deficit total was $1.4 Trillion. Collectively, Reagan and Bush I increased the debt as a percentage of GDP from 32.5% to 66.1%. Clinton oversaw a large debt increase in his 8 years, which many regard as an extension of the Reagan/Bush I economic policies, totaling $1.63 Trillion, but because of overall economic growth the debt went from 66.1% of GDP to 56.4% of GDP. Bush II presided over continued growth during his two terms, but also increased the debt by $4.36 Trillion. Debt as a percentage of GDP grew to 83.4% under Bush II.

During all the economic good times, Keynes would have advocated reducing deficit spending and then paying off the debt to cool off the economy if it overheated. In that sense, all the presidents since Carter have repudiated Keynes by maintaining deficits in good times. In that sense, our policies from Reagan forward are reminiscent more of the French nobility pre-1789: massive spending on wars coupled with a continued extravagance at home.

As for the benefits of the Reagan defense spending, the Soviet economy was already well on its way to collapsing on its own. The Chinese Communists point to the political liberalizations of Gorbachev as being the final nail in the coffin of Soviet hegemony, which explains their determination to dig in their heels politically. I wrote an article and prepared a simulation in early 1991 that demonstrated the Soviet Union was facing an imminent collapse due to internal causes at a time when the US intelligence services were predicting a continuation of the Cold War and a need for massive defense spending for years to come. My article and simulation were due for publication in December 1991 – the collapse of the Soviet Union due to internal causes in August put the kabosh on that. As Americans, we never saw a nickel of the peace dividend, but *that* discussion moves more into the concept of the military-industrial complex, so I’ll pass over it for now.

I’ll sum up with saying that Laffer and Keynes are both in agreement on the stimulating effects of tax reductions, but that Minsky is even more right on the subject of the collapse of markets. Sufficient regulation of banks and other “business unfriendly” measures, while they slow growth, also prevent major market corrections, which increases long-run stability. I recall Keynes’ policies being designed to smooth out the business cycle – reducing the swing of both the boom and the bust. In recent years, our desire for bigger booms has left us vulnerable to equally big collapses.

When Government Programs Become Ponzi Schemes

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A Ponzi scheme survives so long as new buyers enter the scheme to support the skim the operator is taking and the payments to the people at the top of the pyramid. Once new entrants cease, the scheme collapses and a chase scene ensues.

Government debts require servicing, and servicing those debts with increasing government payout demands for other programs depends upon a growing economy. Economic growth depends upon two factors: productivity increases and population growth. In Europe and Japan, populations are on a reverse course overall. Birth ratios in those regions are lower than what is required to maintain a steady population. That means, as the populations decline there, their government spending programs will be unsustainable without unprecedented levels of productivity increases.

The USA has a similar situation, but immigration flows help to sustain the growth in the US population. Immigration flows bring in other issues, and the current mood among many Americans is to implement tighter restrictions on illegal immigration. Legally, that makes sense. After all, illegal immigration is illegal. Cutting it off will have economic consequences in reducing the growth of the US population and thereby reducing its overall capacity to grow.

I’m not advocating opening the borders and letting everyone just show up in the States, looking for a job. I’m just pointing out that there is a cost for everything. Restricting immigration can lead to a decline in growth, which can be a contributing factor to increased unsustainability of government programs. Cutting those programs themselves will also depress overall demand, putting a state in deeper economic woes.

Something to think about.