Tradeable Services, Agriculture, Manufacturing and Services

Spendaholism

As talk turns to another stimulus bill, this time under the guise of a 'jobs' bill, it is worth revisiting the moral hazard involved in believing that the economics you got taught in school is true. It isn't. A significant number of top economists believe that Keynesian stimulus as a response to economic doldrums was discredited as a theory years ago.

'The only interpretation under which the house statement is true is that "we"—the English/American people and their elective representatives—are all Keynesians now. Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behaviour. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good. And they tell consumers, who are affected by severe spending problems, that consuming is good, while saving is bad. In medicine, such behaviour would get you expelled from the medical profession; in economics, it gives you a job in Washington.' - Prof Luigi Zingales, Debate in the Economist, March 2009

Accurate Reality: The pervasive teaching of Keynesian theory misleads the US public who don't focus much on economic theory. This pervasive 'understanding' of the argument to spend in the face of economic slowdowns provides politicians with aircover to do the wrong thing and spend our money on their cronies.

Ants and Grasshoppers

The world is a serioius place.

There is the Hobbesian view. In 1651, he said, life is "solitary, poor, nasty, brutish and short."

Now he was referring to life in a state of war in England, but I think the basic viewpoint is correct. Since the dawn of man, we've struggled to provide for ourselves. In today's society, especially in places like the United States, that is much simpler and easier. The risks of societal unrest, riots, thievery, thuggery and starvation are low.

That doesn't mean it is a cinch.

Yet, even today, there is a significant disconnect between those actions that individuals take to ensure their future well being and that of their families and their actual course of action.

We remain a society with an echo of, as David Brooks put it the "baby-boomer theology," and what I call the siren song of the baby boom generation, " Follow your passion, chart your own course, march to the beat of your own drummer, follow your dreams and find yourself."

Let me know how that works out for you, will ya?

Psychology is the number one major in United States universities. Who do these people think is going to hire them? How do they think they are going to provide for themselves?

Moves are made to punish banks for lending money to people who, 'didn't know the teaser interest rate was going to go up.' What? If you don't understand what you are getting into, rent. It's not that they didn't understand, they just thought they could sell the house before the rate went up.

Unemployed people lament that they are having difficulty finding work in their fields at anything close to their former salary. They opine that they can't take lower wage work because they can't afford to pay for the 'stuff' they bought on borrowed money. This is not my problem dear. You where probably overpaid and working in an unproductive field in the first place in a job that was created or supported by government interference in some form. You should have thought of your debt load when you where buying the house or the SUV or going on vacation in Europe.

Now we are going to declare healthcare a right and pay for it collectively. We seem to have already done so with retirement. Education continues to move that way. That only leaves people to pay their own way from 21 to 67 and we'll pay for their healthcare.

Other than the fact that there isn't enough money produced by productive people to pay for all this, it seems to work pretty well.

Resentment is great among the Ants right now. We don't see why we have to give up our precious earnings to pay for the lazy and profligate ways of the Grasshoppers against our will.

USPS "Bankruptcy" - The Next Flash Point

For years, Congress has constrained the Postal Service that they theoretically made 'independent' in the early 1980s from making the changes to be financially viable. Forecasters now believe it will run out of money in late September.

Congressional Republicans backed by the Tea Party will drive to close thousands of redundant post offices and seek to abrogate the union contract which results in 600,000 - the largest single employer in the country - postal workers being paid significantly more than private sector workers.

They will use the need of the USPS for unbudgeted - note, not unexpected - funding to try to finally corral this bottomless pit.

Look for significant post office closings, significant reductions in featherbedding and significant service reductions.

All are the right thing to do in an information intensive economy.

If they had any sense at all in the post office or Congress, they would seek to create secure email boxes to which governmental and private communications equivalent to letters could be delivered securely in the same way that Congress maintains the monopoly - enforced at law - on delivery of letters to post boxes marked US Mail at residences and offices.

Cut, Act I - Nowhere Near Enough

In October 2010, I posted a series called Grow, Cut, Print and Default. In that post and a series of follow on posts, I postulated that we would have to do all of Grow, Cut, Print and Default in order to work our way out of our fiscal debauchery.

In it, I pointed out that we will take in $2,318B this year and spend $3,608B. To get to the point where we reduce the deficit, ie spend less than we take in so that we can pay back some of our borrowings, we're looking for more than $1,290B in annual spending reductions.

This is not some 10 year calculation as our politicians are talking about.

Every spending 'cut' package I've heard about recently talks of $2-$4 Trillion. That sounds big right? Well, no. It's over 10 years. $3 Trillion=$3,000 Billion divide by 10 years and annual spending is getting reduced by $300B.

Only another $1 Trillion or $1000 Billion to go. Each and every year. That would require d $13 Trillion package. Before we start paying back any of the debt we owe, which is another $14,500B (or $14.5 Trillion) (see the debt clock). If you wanted to be out of debt in 20 years, we'd need to run a surplus of $700B each and every year.

So, if you want to get somewhere, talk about changing federal spending from $3,608B to around $2,750B each year - less if you want to pay down the debt.

Below are some further thoughts on the sources of cuts and revenues, along with the possible consequences of acting insufficiently.

Accurate Reality: To get out of this mess, we've got to balance annual spending first. This means drastic changes in our expectations of the Federal government and huge cuts in expenditures. What we are seeing today is not even close, despite the media frenzy to what needs to happen. Assuming we balance the budget, then we should be able to avoid default, provided we also print and grow.

In May 2010, Niall Ferguson gave a great speech in which he explored the implications of public debt. He points out that throughout history serious political instability has resulted from public finance crises. Throughout history, national weakness and often fall has accompanied such political instability.

Without further change, it appears we are headed down that path.

We spent $1,421 Billion on Social Security, Medicare and Medicaid. 61% of all federal receipts were spent on these three 'safety net' programs.

Cutting requires electing responsible representatives to our democratic government who are willing to face changing Social Security, Medicare and Medicaid back to safety net programs; willing to reduce significant expenditures of blood and treasure on ill conceived overseas adventures; and remove the federal government from abusing its highly effective taxing capability to tax citizens and then give that money to other government entities, particularly States, to spend on programs and embarking on interceding in all aspects of American life simply because it can. Even with all these things done, cutting to a primary fiscal balance where expenditures are less than receipts probably requires additional taxation - although hopefully at the state level as the federal government exits numerous programs in many departments.

The Cato Institute has published a full page advertisement. In it they outline certain positions on cutting government spending. These positions are further elaborated at their site Downsizing Government. Their positions are a good start. I'll enumerate their positions and add a few.

Eliminate Education Subsidies. $40B. Remove the Federal Government from Education. This is a local matter. Even state intervention in order to promote equality, driven by court rulings, has been a huge mistake in ensuring quality improvement in schools. If the basic need to ensure good education is "hire the best teachers, get the most out of them, and focus hard on students that lag, quickly" then absolutely nothing needs to be done at a Federal or State level. This is all local work. If rural and poor areas have schools that are slightly inferior because they can't attract the best teachers, tough. They'll do better than they are doing now, awash in money and red tape. Quality education is not a money problem, despite what the teacher unions say. Spending has more than doubled since 1980 without effect.

Eliminate Farm Subsidies. $25B.

Reduce Military Overreach. Eliminating unnecessary overseas missions (troops in Germany and Japan?) and ending nation building in Iraq and Afghanistan could yield $225B per year.

Housing. Exiting the Federal Government from the housing business would save $45B.

Federal Worker Pay. Cato says cut 10% for $20B. I say bid all jobs to market rates and save $50B.

Energy. Cato says that ending Energy subsidies would save $20B. I support some Federal help in clearing the way for clean energy - meaning nuclear energy - by eliminating legal and regulatory roadblocks in order to free the United States from dependence on oil imports.

Heath Care. The impression in the United States is that 'Medicaid works.' Little could be further from the Truth. Household budgets work if you ignore income as well. Replacing government bureaucratic control of healthcare with consumer led buying would save $100B. This could be implemented via sending insurance back to the 'insure for catastrophe' place it should be and putting folks on the hook to pay for their own basic care. getting from today's mess to rational price transparency so that people could make informed decisions will take some work. Programs for the poor contained in Medicaid should be reimplemented in a least cost delivery model - think corner clinics, not a middle class - choose your own doctor - model.

Drug war, Privacy and TSA. Cato says returning drug policy to the states and decriminalizing certain things would save $15B. The spending going in to airline safety, monitoring telephone calls and internet messages would probably, likewise add another $15B if reduced.

Social Security. Cato wants private accounts and estimates a savings of $50B in 2020. This program was not intended to be a pension for all citizens, but a safety net for those that could not provide for themselves. This should be recast and implemented as a negative tax. It should be aggressively income controlled against a poverty level that does not include luxury items (by this I mean cable TV, phone service, etc). Living on social security should be two notches above avoiding starvation. I cannot produce an estimate of the savings.

Transportation. There should be no subsidies to states for roads beyond what is needed for national defense. $20B

This sounds pretty drastic. This adds up to almost HALF of what we need to cut, or $550B. This is on our annual spending.

On the 'tax expenditure' side - this is Orwellian political speak for tax breaks which if eliminated raise revenue, we need to just implement the AMT for everyone and create a flat tax through its gradual inflation aided implementation. This would put us on a path toward a two bracket income tax structure with rates of 26% and 28%. It would raise $112B in 2011 according to the Tax Policy Center. Combine that with eliminating the wage cap on social security payroll taxes for another $100B and you're starting to get in the ballpark.

Growth requires the rule of law and not the whim of a government of men that feel they can and should re-write the rules constantly and to the benefit of their political sponsors. A stable and reasonable tax and regulatory environment fosters growth through creating a predictable environment for entrepreneurs to operate within.

The Case for Revenue

Sides in the political debate seem to be talking past each other.

"In the current budget year, federal tax receipts will equal 14.8% of the gross domestic product, or GDP, lowest level since Harry Truman was president. In Bush's last year in office, tax receipts equalled 17.5% of GDP, just below their 40-year average." - USA Today 2/8/2010 with many many echos.

"Right now we are spending at an all-time high, close to 25 percent of our GDP [is] being spent on the federal government. But our revenues are at an almost all-time low of about 15 percent [of GDP]." - Mark Warner on Sunday, April 17th, 2011 in a TV appearance. with many many echos.

They are both correct.

However, the revenue will begin to self-correct as economic growth increases. The spending is projected to continue at very high levels and is driven by the growth of transfer payments, especially medicare. Failure to act to reduce spending will result in a continuing gap between revenue and expenses that would have to be filled by further borrowing.

Not all of the revenue gap between 15% and the more historically normal 18% is going to come from economic recovery. Some revenue tweaking will get there both faster and more reliably. The worry is that such measures are then left in place and cause overshoot above an 18% of GDP target and such 'exess' revenues are then spent without remorse or pain by progressive politicians on wealth redistribution.

Accurate Reality: There is a case to be made to tinker with taxes to get revenue back up, but its implementation is fraught with peril. There is a very strong case to cut spending by 5% of GDP or about $700 billion per year. This is about 20% of all Federal spending. Godspeed.

The Hard Math of Low Expectations

Friday 5/17/11 "Count Your Money on NPR: "You don't have to understand how to compute interest."

What? Yes, you do. What are we? A bunch of 15th century illiterate sheep herders?

“We are challenging the soft bigotry of low expectations.” - George W. Bush 1/8/2004

There are few jobs in the modern world, and fewer households where one can competently perform without an understanding of how interest works and a basic ability to compute it.

Interest computations aside, there remains a bias against Math and Science in American society. Students, Parents and Teachers think it is 'hard.' That might be because it has a right answer.

I once went to a Calculus professor in college and complained that he had given me no credit for all the work I'd done correctly on a difficult problem when I'd made a mistake in the very last computation which resulted in an incorrect answer. His response was, "The bridge fell down." He planned to graduate students that could go do things in the real world, such as building bridges, and if they got the computation wrong, there were and are real consequences.

These subjects are hard because they have more definite rightness and wrongness of answers. There is little debate and often no other interpretation. This is unlike many other subjects. This leads to more definite standards of performance and achievement. Folks think these subjects are hard, but, in reality, they are complaining about being measured.

Employers much prefer those who have studied hard subjects. Finance majors get more jobs than organizational behavior majors. Employers believe that they can put the finance major to work productively doing things with clear answers while they accumulate the experience needed to understand the nuances involved in deciphering organizational behavior.

Accurate Reality: If you cannot take the time to learn this much math and remember it, I certainly don't want the economic burden of trying to provide you a social safety net.