Children at Play

My friend Joe sent this to me. It's easily one of the best articles I've read regarding our current economic, political, and societal morass. It was penned by GMO co-founder Jeremy Grantham.

If you give a damn it's worth reading.

If You Bemoan Federal Debt I Bemoan You

I am not an expert in economics. I have an undergraduate degree in it, but I'm not an expert. None the less the basic tenants of economics are being violated wholesale by our elected officials. This is part one of a basic overview of what is happening in the US right now. This is the simple stuff that if you don't understand you really shouldn't open your mouth about anything economics related. Sounds harsh? So are the consequences for saying stupid things. No one walks into a hospital and requests blood letting just as no one walks into congress and votes for reduced spending during a recession... oh wait.

What is disturbing is that our federal government is literally doing everything wrong that it can. I expect my friends and family who have never looked at an IS/LM curve or Keynesian multipliers to say ignorant things like "oh just let them default or whatever, we need to stop all this deficit spending," but for our government to act in a populist manner in this scenario is nothing short of insanity. It is wrong. It will hurt people. This is not an ethical debate. There are thousands of research papers, billions of data points, and hundreds of relevant historical examples to garner experience and guidance from. If you have a different opinion post the data because your slogan (big government is bad!) does not hold water.

Where to begin? Let's keep it basic. How much money does the US produce every year - or thought of as personal income - what is the US's salary? This is called GDP or GNP. Please read about it. It is important. Well the number is $14.1 trillion per year currently. That's 14,100 billions or 14.1 million millions.

How much is the federal government's revenue? That is, how much money does it collect in taxes? According to the CBO data (congressional budget office) it was about $2.2 trillion in 2010. That's $2,162 billion or 15% of all the money generated during a year in the US. Let's look at some data.

So how much is the deficit? It's there on the far right of 2010 above: $9 trillion. That's a lot of money and it's been growing, but why? Look at revenue on the far left in 1971 and then look at the next year and the next. See that? It goes up every year as the economy grows. Then look at 2001; it dips. Why? In 2001 and 2003 we had the Bush tax cuts. Revenue fell, nothing shocking here. After 2003 revenue continues to go up as usual until 2008 when Bush was still in office and our current mess started. Straight forward right? It usually is...

Aside: if our debt is $9 trillion and we produce over $14 trillion a year that's like the typical American who makes $32,000 (as of 2006) a year having a debt of $20,500 - sounds like a car loan (in 2006 the average cost of a car was $28,400 according the the government). Does having a car loan make you reckless, irresponsible, and broke?

Now let's look at how much the government is spending (outlays), that's the next column over. I made an Excel spreadsheet using the CBO data starting in 1990 because I'm lazy. You can see the formula I use and all the numbers. Look at the percentage change.

In the 90's federal government spending increases at about the rate of inflation. Then in 2000 spending ticks up and in 2002 it surges. Why? Well, wars are expensive. See how it's high in 1991 and 1992 when we blew up Iraq for the first time? Anyways, it jumps in 2008 and 2009 greatly because Obama is a socialist. Oh wait, no. The recession begins in Q2 2008 and lots of people are unemployed and now collect unemployment and depend on other social welfare programs. Which is what they are designed to do. That and there's the stimulus and bank bailouts in there. Then the stimulus mostly goes away in 2010 and outlays actually drops slightly.

So why is debt bad? Well, there is only so much money out there so whenever the government borrows it "crowds out" private investors and raises the cost of borrowing to some degree. Well, that does not matter right now because we are in a liquidity trap. What the hell is that? Basically, everyone is trying to pay down debt, save, and invest money. If everyone is saving then who is borrowing that saved money? When you put money in a bank or pay down a mortgage that money is lent back out again. If more people are saving than spending it makes it cheaper to borrow money because there's less demand for it. A liquidity trap is when common monetary policy (changing the federal funds rate) no longer has an effect. That is, lowering the interest rate does not spur more borrowing/growth. Well, the federal funds rate has been zero for a while.

So why else is debt bad? Because you have to pay interest on debt. What does the government pay in interest? They pay whatever investors are willing to lend them money at. That is, Treasury Bills. So what are the current rates?

Inflation adjusted rates - that is, the money investors receive after inflation, is currently negative on both 5 and 7 year treasury bills. At 10 years the government pays a "real" rate of 0.38% interest. This is not magic. There is almost nothing to invest in right now because there is so little demand and everything is so uncertain, and up until recently it was unthinkable that the US Federal Government would default on its debt. Hence, we are the safest debtors in the world and get the lowest interest rates. Let's see some data...

Look at the second to last column. Every year we pay more and more in interest until 2009. Then it drops and stays pretty low. Why? Because the federal government can pay almost nothing to acquire long term debt as explained above. Hell, people will pay them to acquire short and medium term debt (up to 7 years!).

Do we need to do something about the debt? Absolutely, but not in a depressed and now stagnant economy. So why do we need to reduce the deficit in a depressed economy? We don't. Borrowing is cheap. If I told you that you could take out a 10-year loan for 0.38% above inflation, try to make money with it, and then pay it back do you think you could? If your answer is no then keep your 9 to 5, otherwise welcome to America. Let's borrow more money so investors have something to do with all their cash that's sitting on the sidelines or in gold bars doing nothing. Let's build some bridges, fix some national parks, upgrade our research facilities, double NASA's funding, fix our schools, invest in cleaner energy, help the poor, and provide basic healthcare to all. It's an investment in our basic infrastructure and I bet the returns will be more than 0.38% over inflation.

Unemployment at a Glance

Trending of the monetary and employment makeup of the US lately has been both disturbing and interesting, but first some articles and figures:

The unemployment rate is currently 9.5% as of February 2011.

A more accurate unemployment rate, the U6 (total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons), is about 16%.

There are now 5 unemployed workers for every 1 job opening.

The unemployment rate of the young, often cited as a reason for unrest, in Egypt is 25% - in the US it's 21% (defined as 16-24 in the US and under 25 in Egypt). If you're a college grad it's more like 11% and if you're over 25 it's 4.5%.

Cutting unemployment benefits is correlated with people looking for work less.

Graduating from college now and not getting a job is detrimental to your long term prospects - that is, we're damaging a whole generation of workers.

And last but not least, the top 400 richest Americans now own more than the bottom 50% of Americans.

I'm not even sure I need to comment further. It should be abundantly clear why firing teachers - which will most likely be young and will further exacerbate the problem, cutting government spending - which will increase that 5 unemployed per job opening number, and/or cutting taxes (on the rich none the less) at this point in time makes no sense. The employed have historically high employment rates while some job postings are even requiring that you're currently employed just to apply for the job. It's as if the unemployed have become a minority group with little power and diminishing resources. Why is this acceptable?

We Need Growth and No That's Not a Bad Thing

Note: every link in here is worth reading/looking at.

A common response, especially among young liberally minded people, to my all too frequent tirades about how economic stimulus is still needed is "why do we still need growth? Do we really need more stuff?"

Of course we do - and we need it at an increasing rate. Here's why - population growth in the US is about 1% per year. Inflation is currently about 1.5% although the natural rate is more like 3 to 4.5%. Therefore, right now we need to increase GDP by about 2.5% a year just to sustain our current standard of living. Nothing tricky here just some arithmetic.

This is a table I took from Krugman here where he explains basically the same thing. This is Okun's Law by the way:

The take away from this is that an economy needs 2.5% real growth just to keep unemployment from rising and an increase of 2% of real growth to knock 1% off of unemployment.

Typical GDP growth rates are about 2.5-3.5% a year... see where this is going? Real GDP growth in 2010 was 2.6% and in the last quarter it was slightly up to 3.2% (as a part of the whole, not an additional 3.2%) so... at this rate unemployment should start to look semi normal around late 2018 or so.

Back to the point - so this sets up a system where we can only sustain ourselves through continual growth - evidence of the brutality of a market based economy!

Why not? Well population growth and inflation are a fact that must be dealt with and I don't think it's wrong that people should want employment although perhaps I think our mindset towards employment should shift to projects as opposed to a 9-5 but that's not relevant here. What is relevant is that a growing economy and an increased GDP does not necessarily mean a bigger house and an SUV. Whenever predicting how we will live in the future it's usually a good idea to look at Europe now. They've focused on increasing quality of products over tons. As Krugman puts it here:
The way I see it, by the way, is that it’s about shifting the mix away from tons of stuff to quality. You have a small electric vehicle (powered by solar-thermal) instead of an S.U.V., but it drives itself most of the time, and has a great built-in entertainment system. You live in an apartment or townhouse instead of a McMansion, but the brain-wave controlled kitchen turns out gourmet meals on demand. And if we do the GDP accounting right, this will show up as economic growth.
This is something I blogged about a while ago. I was talking about buying fewer quantity but nicer things. There's a good TED talk there too.

Conditional Payments

Mexico and Brazil have come up with forms of social welfare that pays the poor for meeting certain conditions, hence the name conditional payments (great article). These conditions can include keeping your kids in school, going to get medical checkups, going to classes on disease prevention, etc. The government figures its better to pay $1 to keep the kid in school than spend $5 to arrest them a few years down the road. The sums of money are tiny ($13 for every month a child is in school, $19 if you're 16 or over) but to a poor family it can double their income. The program is highly scrutinized and is showing very real and positive benefits. Poverty in Brazil has fallen from 22% to 7%. Mexico's version of the program has raised the numbers of kids entering junior high by 42% and high school by 85%. These are of course very real examples of direct stimulus - they're transfer payments.

I think you'd be hard pressed to find someone in America right now that thought our country was doing alright economically, and naturally one would assume that this means something should be done to correct the issue - which in this case is an unemployment rate of nearly 10% (about 4% is considered the natural rate currently).

Recently a bill passed approving 800 billion (that's 800,000 millions) in tax cuts that extended the Bush era tax cuts. This is, of course, more than the original stimulus received (which was roughly 40-60% tax cuts itself). And of course by taking away federal revenue - that's what a tax cut is - revenue declines and you go into debt if you don't slash spending. Of course that's not so easy. It turns out that if you take our defense spending, medicare/medicad, and social security you're only left with 20% of the budget. So have fun firing teachers, letting roads crumble further, and ceasing funding for scientific research. Why is any of that political? Doesn't everyone like education and roads?

Anyways, the whole point of this is that the legislative branch has two options for helping the economy. They can either cut taxes or spend more money. They both create debt so in essence they're the same thing. My complaint about tax cuts is that 70% (the bottom 50% pay 2.7%) of federal income taxes are paid by the top 10% of income earners, so if you make tax cuts guess who it goes to? When wealthy people get money they tend to save it which is not the intended outcome if you're trying to stimulate an economy.

This chart shows the percentage of Federal Income Taxes paid by each income group:

Year Top .01%Top 1%Top 5%Top 5-10%Top 10%Top 10-25%Top 25%Top 25-50 %Top 50%Bot 50%
2001 16.06%33.89%53.25%11.64%64.89%18.01%82.90%13.13%96.03%3.97%
2002 15.43%33.71%53.80%11.94%65.73%18.16%83.90%12.60%96.50%3.50%
2003 15.68%34.27%54.36%11.48%65.84%18.04%83.88%12.65%96.54%3.46%
2004 17.44%36.89%57.13%11.07%68.19%16.67%84.86%11.85%96.70%3.30%
2005 19.26%39.38%59.67%10.63%70.30%15.69%85.99%10.94%96.93%3.07%
2006 19.56%39.89%60.14%10.65%70.79%15.47%86.27%10.75%97.01%2.99%
2007 20.19%40.41%60.61%10.59%71.20%15.37%86.57%10.54%97.11%2.89%
2008 18.47%38.02%58.72%11.22%69.94%16.40%86.34%10.96%97.30%2.70%

If you give money to the less wealthy or even poor people they spend it because they have to. This of course begs the question why the not wealthy (see: the vast majority of Americans) would ever support tax cuts. I think the answer has, as it often does, to do with the perception of fairness.

To come full circle - why does America go for tax cuts that benefit the wealthy as opposed to inexpensive transfer payments that would help a greater percentage of our population and be more effective? Food stamps have long been THE most effective and efficient means of stimulus to the poor. Again, the answer seems to be the perception of fairness.

Critters Talk Macro Econ.

I just had to make one of these. There's one on YouTube right now that "explains" quantitative easing... I don't even know, it's just all wrong, but yet it has 3 million views and the comments page is filled with cheers from idiots.

Sorry that it is rather dry.

Brief Overview as to the State of World Macroeconomics II

Part one can be found here.

Here's a depressing round table with Krugman and some other huge macroeconomists. It's 55 minutes and grim.

To add to that Ezra Klein talks about pretty similar scenarios in which growth is basically stagnate for the next 10-20 years.

Almost no one, not even my most liberal friends, want to hear about more stimulus spending. Yet, government size has decreased by 350,000 jobs since Obama took office, and over the last two years government expenditures have risen a paltry 3% - well below what they were for the previous two years and far below typical economic growth rates. But year America is somehow now socialist. The point is to fill the gap in spending temporarily until it picks up again. Exact numbers are given and they're huge - the initial bill was about half the size it needed to be and 40% tax cuts. Of course it was going to have a weak effect.

The market has been doing fairly well recently and some people are calling for a correction (essentially a devaluation) of anything from very little to 90%. The Big Picture's writer, Barry Ritholtz, is guessing that about 25% is perhaps at the high end, but at the same time - do you want to make money or do you want to be right?

Staying with Ritholtz for a minute - he says we need an intervention as a nation. This is in light of the fact that the foreclosure process (great article) has recently been shown to be in tatters, or rather, businesses that serve foreclosures are falsifying documents proving ownership of a loan that courts then use to seize property. Yeah, that's illegal.

Peter Diamond and two collaborators won the Nobel Prize in Economics (I know, I know - it's not the original) this morning. Why does his name sound familiar? Obama selected him as a Fed governor but the Republicans in the Senate blocked his nomination citing his lack of relevant experience. Then why did Obama choose him? Well, besides the fact that he was Bernacke's professor he also wrote the seminal paper, which he's now won a Nobel for, on... wait for it... unemployment in a distressed market (see: America, present).

Tax receipts get proposed:

I often get asked, or rather chided, about my support for TARP. It's somewhat hard to explain shadow banking to someone who doesn't really know how a reserve ratio works. Anyways, America get its money back and may even make a profit. PLus the banking system didn't collapse... yay? Somehow I feel as if that would have led to zombie attacks... I know, it's weird.

And the real reason I wanted to write about this: "China has an unloaded water pistol at our head"

Everyone knows that we trade a lot with China. They are out second largest trading partner after Canada, but what most people don't know is that China keeps its currency undervalued on purpose in order to increase its export volume. Normally if an import country taxes a good coming in, a tariff, the country where the good originated from gets mad so almost no one does that. Trade is mostly open in the world today - as in most cases it should be. But China "sterilizes" its inflows. What does that mean? When there's a trade imbalance one countries monetary base (amount of currency in its economy) gets bigger, so every year money flows from the US to China faster than the opposite. Every year Chinese currency becomes stronger in proportion to our currency as their monetary base grows. Normally this would mean that their currency, the renminbi, would be appreciate relative to the dollar. Literally, a dollar would buy less in China. Chinese exports would cost more and the US would buy less. That's how trade usually balances itself, so why doesn't that happen.

The Chinese sterilize inflows. That means that the Chinese government uses that excess domestic currency to buy US government debt so that their monetary base won't expand which keeps prices low and exports up. This essentially allows the Chinese to put a tariff on US imports and a subsidy on exports, but most people don't understand sterilization and thus it isn't perceived that way (Krugman's explanation).

The US recently passed the Levin Bill allowing the government the power to place a tariff on any country that manipulates its currency. The Chinese are pissed. They keep saying they will let their currency float (act naturally on the markets) but they never do - they just keep stringing us out.


I read this article in GOOD that pointed towards this paper - I recommend both. It's worth really looking at and thinking about the implications of this. The basic takeaway from this is that the bottom 60% of the US populace has no stake in our country, the top 20% for all intents and purposes - own everything, and even rich republican men think the world should be more fair than it is.

Sweden seems to be doing just fine. I'd really like to see this study done throughout the world and within even more specific groups of people - by age, by neighborhood in Chicago, by education, etc.

And yet the Right and even members of economic academia that are pushing for tax cuts for the rich. Deeply troubling and disturbing is an understatement.

The percentage present between the pie charts is explained in the paper. When shown two of the charts unlabeled (didn't know what country it represented) at the same time Americans preferred the Swedish income distribution to our actual distribution. Americans also preferred the Swedish chart to perfect distribution - which in and of itself is fascinating if not surprising.