Like Hiring A Personal Trainer Who Is Morbidly Obese

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The Economy is an Addict, & Government Spending is the Crack

I would like to posit a theory, or perhaps make a prediction. The US will never pay off its national debt. Here's why:

Today's prevailing economic theory is that when the government spends money it grows the economy. Therefore, the government should play a significant role in making everyone more prosperous by spending lots of money. Of course, any money the government gets it must first take out of the economy through taxes. It is that feature of government spending that drives the furor over pork spending, earmarks etc. Why should my money go to fund some other state's lame pork project?

However, what's really interesting about federal spending is that they always spend more than they bring in from taxes. In other words, they run deficits. This of course drives most people even more crazy. But in reality it's done on purpose. That's right, despite all the rhetoric from all the politicians, the federal government spends more than it makes on purpose.

See, deficits mean that the government is getting and spending money it never took from you in the first place. It's basically free money. Free money which the feds use to pump up the economy, making us richer. A win-win scenario for all involved.

The catch is that the money for deficits has to come from somewhere. That somewhere is debt. It's sort of like a business taking out a line of credit with a bank. They use the available money when it's needed, and that extra cash makes it easier to expand and grow the business such that the debt is easily paid if and when it comes due.

But therein lies the problem with our national debt. As noted earlier, tax money is a deduction from the economy. If that tax money is used to pay back creditors instead of being plowed back into our economy, then the economy just got smaller. In this way we have steadily addicted ourselves to federal stimulus. Take away the spending and we'll go through withdrawal (recession). Since federal revenue relies on the strength of the economy, a recession reduces tax revenues, which, unless spending is cut, plunges us right back into deficits. Exacerbating the deficit issue further is the fact that prevailing economic wisdom is to increase government spending during recessions in order to boost the economy. Sort of like giving crack to a recovering addict.

Faith Based Economics

From Greg Mankiw

This Is Disturbing

"Because the American taxpayer now owns 80 percent of AIG, they should have full access to anything and everything they own, including their country club memberships, their recreation facilities, their built-in swimming pools"

So said Jeff Meyer, a passerby to the protests outside of an AIG employee's house.

More light reading:

NY Times on “Jackpot Jimmy”:

The words came haltingly. "You have to understand,” he said, “there are kids involved, there have been death threats. ..." His voice trailed off. It looked as if he was fighting back tears.

"I didn’t have anything to do with those credit problems,” said Mr. Haas, 47. “I told Mr. Liddy” — Edward M. Liddy, the chief executive of A.I.G., the insurance giant — “I would rescind my retention contract.”

Wall Street Journal
NY Times: Dear AIG, I Quit
WSJ
Washington Post

Does This Mean Anything?

Investors Business Daily is touting the following economic information as indicators that the economy is on the upswing. I wonder, is it true?

• A broad rally in stocks, confirmed last Thursday, continuing into this week and led by the beaten-down financials.

• A surprising 22% surge in February housing starts to a seasonally adjusted annual rate of 583,000 units.

• A back-to-back jump in retail sales ex autos, in both January and February.

• A return to profitability at several major banks, including Citigroup, Bank of America and JPMorgan.

• A doubling in the obscure but important Baltic Dry Index, a key indicator of global trade flows.

• An upwardly sloping yield curve, which Fed research suggests all but ensures a rebound by year-end.

• A Housing Affordability Index that has hit an all-time high.

• A two-month improvement in wholesale used-car prices, measured by the Manheim Index.

• A rise in Monster's Employment Index in February, suggesting a turn in the job market may be around the corner.

• A 4 1/2-year high in the dollar against other major currencies, on a trade-weighted basis.

• A sharp increase in the money supply, as measured by M2 and M1. Weekly M2 growth has averaged 10.1% year-over-year since the start of 2009, while M1 has grown at a 14.6% rate.

• A two-month rally in the Index of Leading Indicators.

• A growing body of evidence that the "liquidity crunch" is dead. Data show nearly $14 trillion in liquidity on the sidelines of the markets, ready to boost consumer spending, credit growth or further stock market gains.

This list could go on, but you get the general idea: Below the surface of gloom, there are signs of a new vibrancy.

Reports of My Death Were Greatly Exaggerated...

59% Still Believe Government Is the Problem

Rasmussen

Employee Free Choice Act

Soon to be up for consideration in Congress is the Employee Free Choice Act. According to the Huffington Post, Big Labor is "very pleased" that President Obama has been more outspoken in his support for the bill.

However, Larry Summers, Secretary of the Treasury under president Bill Clinton, and now head of the White House's National Economic Council for President Barack Obama, once wrote,

"Another cause of long-term unemployment is unionization. High union wages that exceed the competitive market rate are likely to cause job losses in the unionized sector of the economy. Also, those who lose high-wage union jobs are often reluctant to accept alternative low-wage employment."

The "Free Choice" act would make unionizing much easier because among other things it would remove the requirement of secret ballots. According to Harvard economist Greg Mankiw that means, "union organizers would be able to use strong-arm tactics to get workers to say they support a union, even when privately the workers don't."

"Causes long-term unemployment" + "strong-arm tactics" doesn't seem to bode well...

I Wonder If We Could Get Jimmy Buffet...

Las Vegas continues to get pounded because of its image. After an initial refusal to cancel their incentive trip to Vegas, Wells Fargo finally caved to public pressure:

Wells Fargo & Co. abruptly canceled Tuesday a pricey Las Vegas casino junket for employees after a torrent of criticism that it was misusing $25 billion in taxpayer bailout money.

The company initially defended the trip after The Associated Press reported it had booked 12 nights beginning Friday at the Wynn Las Vegas and the Encore Las Vegas. But within hours, investigators and lawmakers on Capitol Hill had scorned the bank, and the company canceled.

The conference is a Wells Fargo tradition. Previous all-expense-paid trips have included helicopter rides, wine tasting, horseback riding in Puerto Rico and a private Jimmy Buffett concert in the Bahamas for more than 1,000 of the company's top employees and guests.

Utah's got to be looking better and better...

The Great Depression as Seen Through the Eyes of a Child

My grandmother sent this to me last week. I've been to Monroe where she grew up, and I've seen the house she writes of here. It truly was a different world they lived in, and what's truly remarkable to me is to think that it wasn't really that long ago.

Great Depression Through Eyes of Child

Publish at Scribd or explore others: Academic Work Fiction & Literature child depression

If Obama Cuts The Deficit in Half...

That'll get us to $533 billion, or about what we had 4 years ago.

But that won't happen until 2013, after $1 trillion deficits in 2009, 2010, and 2011.

What Happens in Vegas...

Makes people not want to go there any more,

Born of carefully crafted slogans — "What happens here stays here" — and smiling, sequined showgirls, the image of a 24-hour adult Disneyland with free-flowing liquor and casino chips is making the tourist destination seem radioactive to companies keen on not appearing frivolous as they seek government bailouts.

In the past two weeks, at least four major companies canceled meetings worth hundreds of thousands of dollars — not because of costs but because of appearances.

They ought to just come to Salt Lake instead. With our "quirky", "outdated", and "unkind to tourism" liquor laws I doubt businesses would have any problems with "appearances".

AP: Obama pledges to cut deficit in half

See here.

How will he do it?

"he wants to reinstate a pay-as-you-go policy on federal spending programs, get rid of programs that do not work and end tax breaks for companies that ship jobs overseas."

Pay-as-you-go = the bill for all of the profligate spending of the last decade, and which continues today, will come due in the form of higher taxes.

What Economists Don't Really Agree On

A few days ago I posted a link to Harvard economist Greg Mankiw's blog post listing a number of economic principles about which economists generally agree. Number 4 on that list was,

4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)

What I didn't include in my post was the following from Mankiw's post:

"Note that the proposition about fiscal policy (#4) does not distinguish between taxes and spending as the best tool for purposes of macro stabilization. Maybe that question should be added in a future poll. I doubt, however, that the answer would make it onto this list of widely agreed upon propositions."

Our government isn't very good at distinguishing between taxes or spending as the best tool either. What happened during President Bush's terms was a combination of both fiscal policies. Remember, the US was already in a recession when Pres. Bush took office. That recession was exacerbated by our last "worst economic crisis in decades" brought about by 9/11. The government responded by cutting taxes, increasing tax rebates to the poor, and increasing spending like never before.

Now we have a new "worst economic crisis in decades" and our government is responding in much the same way. Huge government spending coupled with tax cuts. A strategy destined to increase our national debt like never before. Again.

To those opposed to the huge increase in government spending, many are asking where were you 8 years ago when Republicans did the same thing. First, I think it's important to point out that even Republicans don't like national Republicans right now - largely because of the spending of the last 8 years. But perhaps more educational is to say that I suppose national Republicans are now doing exactly what national Democrats did during the President Bush years. I distinctly remember our current Speaker of the House Nancy Pelosi pledging on Meet the Press that Democrats would reinstate Pay As You Go spending habits should they retake Congress. She and her colleagues were outraged (outraged!) at the deficit spending that Republicans were doing.

The pendulum of power may have swung since then, but the economic policies, and opposing party political rhetoric, haven't really changed all that much.

What Economists Do Agree On

From Greg Mankiw:

Here is the list, together with the percentage of economists who agree:

1. A ceiling on rents reduces the quantity and quality of housing available. (93%)
2. Tariffs and import quotas usually reduce general economic welfare. (93%)
3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)
5. The United States should not restrict employers from outsourcing work to foreign countries. (90%)
6. The United States should eliminate agricultural subsidies. (85%)
7. Local and state governments should eliminate subsidies to professional sports franchises. (85%)
8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)
9. The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)
10. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)
11. A large federal budget deficit has an adverse effect on the economy. (83%)
12. A minimum wage increases unemployment among young and unskilled workers. (79%)
13. The government should restructure the welfare system along the lines of a “negative income tax.” (79%)
14. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)

If we could get the American public to endorse all these propositions, I am sure their leaders would quickly follow, and public policy would be much improved. That is why economics education is so important.

Representative Jim Matheson on the Stimulus Bill

Dear Cameron,

Everyone agrees that the economy is in the worst shape since the Great Depression. A leading Utah economist says Utah's recession is the worst in 50 years. In October 2007, Utah's economy was producing jobs fast enough to rank the state 9th nationally. Just 14 months later, Utah lost 24,600 jobs. Home values are falling; health care and college tuition costs are rising. Doing nothing is not an option. Business leaders like Steve Appleton, CEO of Micron (whose plant in Lehi employs hundreds of Utahns) and the National Association of Manufacturers are calling on Congress to act. Helping people stay employed and providing more job opportunities are critical to stabilizing and eventually turning around this economic crisis.

I voted for the US House's version of the economic recovery package because I feel strongly that efforts to create jobs and cut taxes for thousands of Utahns are the highest priority. There is no easy or guaranteed way to address the severe stress facing our economy. Inaction will make the situation worse. Options must be on the table to lessen the duration of this slump for Utahns.

A centerpiece of the House bill is tens of billions of dollars for ready-to-go infrastructure projects, from new roads to school repairs. Half of the highway construction money must be obligated within 90 days and the other half within 180 days.

Utah has five National Parks. Studies show that for every $1 added to the parks budget to catch up on the enormous backlog of maintenance projects, it generates $4 for state and local economies.

The second important element is tax relief. Hundreds of thousands of Utahns, including many small business owners, stand to benefit from the tax cuts included in the proposal. Not only would Utahns keep more of their hard-earned money, the tax cuts could provide enough of a boost to businesses to avoid employee lay-offs.

I do not agree with all the proposed spending, some of which has already been eliminated. There is no such thing as a perfect answer to this crisis, but on balance it is important that Congress move the process forward.

Please take a moment to respond to the following brief survey. I am eager to hear your thoughts.



Sincerely,
Jim Matheson
U.S. Representative
2nd District of Utah

More Light Reading

A couple of interesting/good posts by That One Guy on the housing market and the economy as a whole:

Economic Recovery 101: a layman's view
One further economic thought

An Interesting Interview with Bethany McLean

From PBS's NOW program:

Layoffs - Are Business Owners Slaveholders?

I have recently written a couple of times about layoffs. In addition, I had an interesting conversation at SUMP on the same topic.

In that conversation an anonymous commenter expressed a view that one reason capitalism is evil is that employees are mere slaves to their employers. In fact, they are worse than slaves, the argument went, because slave owners paid a lot of money for their property, fed them, housed them, and clothed them. Employers in our capitalist society do none of these things, and when the employee is no longer needed they are let go.

It is an extremely jaded view, and one that predictably fails to see the whole picture.

Employers are as much slaves to their employees as the other way around. They can leave anytime they want - and many do. During the hey day of economic growth and all-time low unemployment rates employers often found themselves fighting each other for the best candidates. Candidates could pick and choose which position to take based on which offer was best for them. When that was the case, no one decried the capitalist system.

Turnover is costly. When employees leave a job for a better offer somewhere else, this results in a real, monetary loss to the original company. Generally a significant amount of time is spent on training employees - making them better at what they do. The time, effort, and productivity spent doing this is lost when they leave.

With a lost employee, the old employer has to find someone new to replace them. And this means time and money spent training the new people. New people are always slower, which results in lost productivity, which can turn profits into losses.

A real world example of this occurred in my company last year. We had an employee in one of our branch offices retire - and then go to work for our competitor. She took 1/3 of that office's business with her. We were unable to replace that business, and so we eventually closed the office completely. What was once a relatively profitable business is now closed because an employee found a better offer elsewhere.

So who really was the slaveholder here?

Tithing

"In 1936, at the height of the Great Depression in the United States, when people were struggling to make ends meet, Elder John A. Widtsoe admonished the Saints to pay their tithing because of the spiritual blessings they would receive. He said: 'Obedience to the law of tithing . . . brings a deep, inward joy . . . that can be won in no other way. . . . The principles of truth become clearer. . . . Prayer becomes easier. . . . The spiritual sense is sharpened [and] . . . man becomes more like his Father in Heaven' ("Tithing Testimonies of Our Leaders," Deseret News, May 16, 1936, Church Section, 5)."

Sheldon F. Child, "The Best Investment," Ensign, May 2008, 80-81

Layoffs - An Example

A real world example of the layoff discussion I recently wrote about:

My company let an employee go this week. As controller, I had a small part in that decision because I put together a productivity measurement for this particular division and it shows a fairly gloomy outlook for them at their current staffing level. This report measures each employee's productivity, aggregates them, and gives us a cost per unit number.

The cost per unit is too high, which necessitated the staff reduction. We looked at the employees with the worst productivity, factored in other performance issues, and selected someone to let go. This improved our cost per unit by 9%.

2008 was not a kind year to this division, and that's putting it gently. Our product is very labor dependent, so a 9% drop in labor cost per unit is significant. It allows us to keep our prices competitive in our market, as well as begin to improve our overall performance. Without this improvement, it's not unreasonable to expect our owners to contemplate shutting down the entire division. An action which obviously would affect the entire company.

But our former employee is without a job. She is now part of that unemployment rate statistic broadcast consistently in every media source. She likely doesn't know about the data used in the decision making process - nor is she likely to care. All she knows is that she was let go, and who knows what the job outlook is.

These are the dueling concerns every business faces. No one takes joy in staff reductions, but those with the data know that without reducing costs the business may not last as a going concern.