Wednesday, January 28, 2009

Pelosi: Abort the Poor

When someone says something ridiculous, and then follows it up with, "I'm serious," my general inclination is to respond, "No, you're not. You're trying to be outrageous. And you have a reason."

Rarely, I'm willing to accept that they're just making a silly argument to support a position they genuinely hold. I think that's what's going on here.

On Sunday (Jan 25), the Speaker of the House appeared on ABC's "This Week," where she explained to the host, George Stephanopolous, how funding contraceptives and family planning would stimulate the economy. Let's be clear--responsible and honorable people hold positions on both sides of the "family planning" argument. Just because you disagree with the other person doesn't mean they're evil, and anway, that's not the point of this post.

The point is how she made the argument: that family planning would stimulate the economy by cost avoidance, because the children who would not be born would not need state aid. Last I checked, the children of the rich don't need that state aid, and generally don't qualify for it. So, did she think about what she was actually implying? Can you imagine the outraged headlines if, say, her neighbor, Republican Senator John Ensign from Nevada, had made a similar argument?

Now, I believe the Congresswoman holds her positions honestly, and I have little doubt she approves of family planning as a matter of principle. But, can we please not make ridiculous arguments to justify funding our pet philosophies? And, the next time her opposition says something that can be twisted unfairly, I hope she considers what headline could have been written about her on Jan 26. I wrote it here--but, then, not many people read this blog.

Tuesday, January 20, 2009

Memo to the GOP: Take Obama at his Word

Over the past few weeks, Mr. Obama (President as of today) has said we must "disagree without being disagreeable." Memo to the Republican Party: that's your key, if you want to oppose him.

Seriously, make it boilerplate. Before you start any news conference, say it, and thank him for wanting to have a serious conversation, and wanting to listen to other ideas. Then offer your ideas. If he truly wants to be (or simply appear) post-partisan, you can act like he's neither Democrat nor Republican--so your ideas should be considered just as seriously as the other party's.

"Good morning ladies and gentlemen. First, we Republicans want to express support for our President's idea that we can disagree without being disagreeable. Second, we welcome President Obama's statement that he wants to listen to everyone's ideas, without any pride of authorship and regardless of source. That's the sort of post-partisan unity that we've longed for. So, here are our ideas for [fill in the blank]."

Buzzword bingo? Sure. (Don't forget to rearrange the "first" and "second" every day or so.) But, if half the battle is getting your ideas heard, then there's nothing wrong with using a little strategy.

Monday, January 12, 2009

Money and More Money

I've been thinking about a conceptual approach for explaining (to myself) how a money supply can be increased to avoid deflation. I understand fractional-reserve lending, and I've visited Wikipedia, and other sites trying to figure out the answer to this problem.

Here's the scenario--I'll use science fiction just to keep it as a thought experiment and hopefully reduce the emotional involvement.

Suppose we have an isolated colony, far from Earth. By "far," I mean light-years, well beyond any ability to communicate real-time. Pick your reason for why it's isolated; any of a dozen books will do. This group understands the basics of market economics, and knows that money is much more efficient than a barter system--it avoids the need to find someone who has what I want and wants to trade for what I have. How would an isolated colony create more currency in order to support a growing economy and get it into the economy? Sure, they can print it or mint it--but how does it get into circulation?

The classic answer, with a central banking system, is that reserve banks obtain currency from the government by posting it against their own accounts--but that doesn't actually increase the money supply. The money supply does increase when that money is loaned, over and over. All well and good. But, what if there just aren't physically enough dollars to chase the available goods and services?

After I posted this question originally, I spent a lot of time researching, both on the web and reading economics books. I was, frankly, surprised at how poorly understood this issue was. That matters, because it also hits upon the real problem behind government borrowing affecting the money supply.

The answer, briefly, is that they would need a central bank, like the US Federal Reserve, and the reserve bank would, per the classic answer, obtain currency by posting it against their own accounts. But, its account has no limit, so it can obtain whatever amount it desires. How does it get that currency into circulation? By buying debt instruments. When the government borrows, it sells Treasury securities, which the central bank can buy. But, if there were no Treasury securities, the reserve bank would still be able to buy anything necessary to inject the currency--it could buy stock in the colony, using our current example. It could buy mortgages from the colony's commercial banks. It could simply "buy" parcels of unused land, for whatever amount seemed reasonable.

If that doesn't surprise you, you either really understand the system, or you don't understand it at all. My sense is that this is part of the disquiet people express when they argue in favor of the gold standard--you can physically control the amount of currency in that type of system, and you can physically go get more when you need it (i.e. when it makes economic sense to go mine it). When a government using a gold standard "buys" gold, it is purchasing a limited resource to get currency into the system, and the limitated nature ensures the central bank doesn't go crazy issuing money. But, in our colony, it would have to be very careful not to just buy whatever it wanted.

If it worked, that would be a very disciplined system.

Friday, January 2, 2009

Economics and the Factors of Production

Happy New Year.

I’ve been pondering, recently, what to believe about the economy. Sadly, there aren’t many reporters with enough grasp of economics to provide much of use, and most economists seem more interested in their pet positions to actually look at what’s really going on and what the real root causes are.

So, I’ve been rereading my economics books, checking out analytic pieces on both sides, and doing a lot of thinking. A lot of thinking. And here’s what I’ve come up with.

From “Economics Explained,” I recall that there are only a few things you can really do with money: you can spend it, you can save it, or you can invest it. (I had forgotten that saving and investing have a different effect on the GDP when you’re talking about consumer activity.)

If you spend it, your purchase contributes to the GDP: you bought a product or service, and in the process, used some of the factors of production—labor, capital, and land.

If you save it, your purchase does NOT contribute to the GDP: you chose not to buy a product or service, and in the process, you freed up labor and capital to be used elsewhere—especially by businesses, who will borrow your savings from your bank and use them to buy equipment, start a new business, etc. That’s a good thing if there’s a demand for labor and capital, because by making some available for businesses, you are helping to prevent inflation. (Otherwise, business demand has to compete with your demand by bidding up labor prices, interest rates, etc.) That’s a bad thing if there is little demand for labor and capital, such as occurs in a recession. All you’ve done is decrease consumer demand, which decreases GDP. In a recession, businesses don’t want to borrow your money.

If you invest your money, most of us are really just buying business ownership rights (or a claim on business debt) from someone else, unless you got in on an IPO. What effect that has on the economy depends on what the person who sold you the stock (or bond) does with your money.

So, it follows that government transfer payments don’t contribute to GDP, but government spending on stuff does contribute. Naturally, the recipients of transfer payments will probably spend them and contribute to GDP, but that money came from somewhere. That “somewhere” has less money to spend, so the economic question is which group would’ve made a better contribution. That’s key question #1 to ask.

The second key question is what happens when the government spends more than it takes in. Proponents of government spending to jump-start the economy argue there is unused labor, so putting it to work builds useful stuff (e.g. bridges) and puts money in the hands of folks who will spend it, thereby increasing demand for goods and thus helping GDP. In a recession, the capital necessary to put the labor to work is just sitting around unused, since businesses aren’t borrowing it. That makes sense as far as it goes, but I see a couple problems. First, the debt must be repaid, so the future interest payments will steal capital for decades, creating a drag on economic growth. Second, if the program creates an entitlement, then the need for funds will stretch to doomsday, and so will the economic drag. Third, if the capital is borrowed from other countries, they can’t put it to use in their own economies and employ their own labor. That seems like a problem, but I haven’t resolved it, yet. Finally, the implicit assumption of government spending as stimulus is that both labor and capital are unused. In the current financial crisis, a major problem seems to be that businesses can't get capital.

The third key question, in light of today’s never-ending government bailouts, is what that is doing to the economic need for creative destruction. The buggy whip industry had to die, and bailouts would’ve just delayed the inevitable. On the other hand, I recall an interview with Richard Branson in which he pointed out that the bank his airline uses nearly failed—and when he went to move his business’s money, he was advised to read the fine print; it wasn’t that kind of an account. He would have been in serious trouble through no fault of his own and despite the fact that his company was a solid going concern. That has me pondering…