In keeping with my rule to blog only when my thought isn't yesterday's news, memo to Geraldo Rivera and Michael Steele: your argument on whether to raise taxes on the "rich" completely misses the point. (Some would say you're accepting their premise, but that's not my point, either.)
This isn't about philosophy; it's about economics. Philosophically, we can argue all day about whether the "rich" can "afford" to pay more, and where the line should be drawn. Wrong argument. Cutting taxes on the middle class increases demand, because they'll spend the money (or so the theory goes). Ditto for cutting taxes on the poor. (Oops, they don't pay income taxes. Withdrawn.) Cutting taxes on the "rich" increases investment. And, no, I don't mean, "Let's go buy some stock." I mean capital investment, as in, "I think I'll open that new store this year. I think I'll buy that new machine this year. I think I'll invest in Bob's new idea. I hope there's labor available, because we'll need five more workers."
It's an old saw, but I really never have seen a poor person create a job. You need "extra" money for capital investment--you have to pay your rent, pay your employees, pay yourself, and pay your taxes. Then, if you have some income left over, you can expand--and create jobs.
Republicans haven't made this argument yet, but they need to. When the President says, "We can't afford to give this money to the rich!" they need to cut them off with economics, not ideology. The ideological response is, "Mr. President, it's not your money. It's theirs. You're not giving them anything; you're choosing not to take it. Let's cut spending, instead." Good answer, but not the winning one. The correct, winning response is, "We can't afford not to. Your idea, sir, is that government spending will create jobs. We've tried that. It failed (again). The only way to create jobs is for the private sector to do it--and they can't do it if you take away their capital."
Showing posts with label economy. Show all posts
Showing posts with label economy. Show all posts
Friday, November 12, 2010
Sunday, June 14, 2009
The Fallacy of Stimulus
Like many people, last year’s collapse of the financial system led me to take another look at the economics I learned in college. In earlier posts, I’ve mused about the notion that we’re all missing something—that there’s some subtlety that it takes a Keynes or a Krugman to figure out.
I’ve changed my mind. This plan is ridiculous, and it takes nothing more than common sense and experience to see that.
Over the last six months, the Obama administration and Congress have poured trillions into the economy in an attempt to avert more serious recession. The idea was that Roosevelt didn’t ‘spend enough, fast enough,’ and that was a major contributor to the Great Depression. My gut and my study of history told me that was wrong—it's pretty obvious that Roosevelt's tax policies prolonged the Great Depression, and only World War II pulled us out. Moreover, I’ve worked in government, and with government, so I was immediately suspicious of the concept of “shovel ready” projects. No one—no one—plans, designs, and approves a project knowing they don’t have money for it. Oh, sure, you can find the one exception, but even money says that “exception” is actually a project that was funded that lost its funding.
The crux of the problem came home last week when Vice President Biden made a comment that the government would have to reinvigorate its efforts to get the stimulus money spent—that only some $40 billion or so of the $787 billion authorized had actually been spent. For me, that was the alarm bell that finally made me realize all those (mostly conservative) pundits were right—most of this “stimulus” won’t be spent until 2010, well after it could do any good. In fact, it will be spent just in time to help with the 2010 elections, and if the incumbents are lucky, just before too much money in the system sparks inflation. (Although the President has a plan to curb inflation—he will be raising taxes in 2010, by letting the Bush tax cuts expire.)
The simple truth is that governments cannot spend billions extra in a matter of weeks. The system just doesn’t work that way. Even after the money is authorized by Congress, it takes months just to get it obligated on a contract. It takes more months to get it expended—and until it’s expended, it isn’t stimulating anything. And, while “months” is really, really fast when you’re building something, it’s far too slow to have any relevance to the business cycle.
I don’t know if the Keynesians just don’t understand the reality of bureaucracies, or if their faith in theory has simply blinded them to it. I do know that common sense tells me there are two ways to get money into the economy rapidly: 1) cut taxes, 2) hand out cash.
It has become popular to argue that this collapse has “proven” supply-side economics doesn’t work. I have yet to see anyone actually make that case with anything other than partisan talking points, and I don’t think they can. Instead, they rely on the populist argument that cutting income tax only helps the rich—because half of Americans pay no income tax at all. Um, okay—I thought we were talking economic stimulus? When did we switch to social policy? We can certainly have that discussion, but conflating the two issues suggests the redistributors have a not-so-hidden agenda.
But, if you’re worried about getting money into everyone’s hands, it isn’t just income tax that can be cut. Slash the corporate income tax, and 1) companies can cut prices; which 2) makes goods more affordable; which 3) increases demand; which 4) increases the need for labor. It isn’t just shareholders who benefit—everyone does. But, of course, that’s not popular to say in these populist times. (And shareholders benefiting just creates stimulus, too--because they either spend or invest their profit, and if they invest it, that just gives it to someone else to spend. Stimulus all around.)
This leads us to consider option two: handing out cash. That will certainly get money into everyone’s pockets, but there’s an obvious problem—for the 50% of Americans who pay no income tax, you’ve simply taken capital out of the system, because you have to borrow that money to pay them off. (And, please, spare me the argument that these folks pay Social Security taxes—they will get that back fivefold when they retire, and again, we aren't talking social policy here.) So, you may get a very short term stimulus from the demand, but you’re choking the engine that will ultimately create more jobs.
Finally, that brings us to the ultimate Keynesian argument—that deficit spending is okay in a recession, because the capital you’re borrowing isn’t being used, anyway. While that might be the case in some recessions, it certainly is not the case now—the major argument the populists are making against the banks is that they aren’t lending. Of course, they aren’t lending because they’re scared to death about what's next and what's really on their balance sheets, so they are keeping higher reserves. How, exactly, does government stripping those reserves out of the system improve confidence? It doesn’t, of course.
Which is why I am, just now, starting to worry about stagflation.
I’ve changed my mind. This plan is ridiculous, and it takes nothing more than common sense and experience to see that.
Over the last six months, the Obama administration and Congress have poured trillions into the economy in an attempt to avert more serious recession. The idea was that Roosevelt didn’t ‘spend enough, fast enough,’ and that was a major contributor to the Great Depression. My gut and my study of history told me that was wrong—it's pretty obvious that Roosevelt's tax policies prolonged the Great Depression, and only World War II pulled us out. Moreover, I’ve worked in government, and with government, so I was immediately suspicious of the concept of “shovel ready” projects. No one—no one—plans, designs, and approves a project knowing they don’t have money for it. Oh, sure, you can find the one exception, but even money says that “exception” is actually a project that was funded that lost its funding.
The crux of the problem came home last week when Vice President Biden made a comment that the government would have to reinvigorate its efforts to get the stimulus money spent—that only some $40 billion or so of the $787 billion authorized had actually been spent. For me, that was the alarm bell that finally made me realize all those (mostly conservative) pundits were right—most of this “stimulus” won’t be spent until 2010, well after it could do any good. In fact, it will be spent just in time to help with the 2010 elections, and if the incumbents are lucky, just before too much money in the system sparks inflation. (Although the President has a plan to curb inflation—he will be raising taxes in 2010, by letting the Bush tax cuts expire.)
The simple truth is that governments cannot spend billions extra in a matter of weeks. The system just doesn’t work that way. Even after the money is authorized by Congress, it takes months just to get it obligated on a contract. It takes more months to get it expended—and until it’s expended, it isn’t stimulating anything. And, while “months” is really, really fast when you’re building something, it’s far too slow to have any relevance to the business cycle.
I don’t know if the Keynesians just don’t understand the reality of bureaucracies, or if their faith in theory has simply blinded them to it. I do know that common sense tells me there are two ways to get money into the economy rapidly: 1) cut taxes, 2) hand out cash.
It has become popular to argue that this collapse has “proven” supply-side economics doesn’t work. I have yet to see anyone actually make that case with anything other than partisan talking points, and I don’t think they can. Instead, they rely on the populist argument that cutting income tax only helps the rich—because half of Americans pay no income tax at all. Um, okay—I thought we were talking economic stimulus? When did we switch to social policy? We can certainly have that discussion, but conflating the two issues suggests the redistributors have a not-so-hidden agenda.
But, if you’re worried about getting money into everyone’s hands, it isn’t just income tax that can be cut. Slash the corporate income tax, and 1) companies can cut prices; which 2) makes goods more affordable; which 3) increases demand; which 4) increases the need for labor. It isn’t just shareholders who benefit—everyone does. But, of course, that’s not popular to say in these populist times. (And shareholders benefiting just creates stimulus, too--because they either spend or invest their profit, and if they invest it, that just gives it to someone else to spend. Stimulus all around.)
This leads us to consider option two: handing out cash. That will certainly get money into everyone’s pockets, but there’s an obvious problem—for the 50% of Americans who pay no income tax, you’ve simply taken capital out of the system, because you have to borrow that money to pay them off. (And, please, spare me the argument that these folks pay Social Security taxes—they will get that back fivefold when they retire, and again, we aren't talking social policy here.) So, you may get a very short term stimulus from the demand, but you’re choking the engine that will ultimately create more jobs.
Finally, that brings us to the ultimate Keynesian argument—that deficit spending is okay in a recession, because the capital you’re borrowing isn’t being used, anyway. While that might be the case in some recessions, it certainly is not the case now—the major argument the populists are making against the banks is that they aren’t lending. Of course, they aren’t lending because they’re scared to death about what's next and what's really on their balance sheets, so they are keeping higher reserves. How, exactly, does government stripping those reserves out of the system improve confidence? It doesn’t, of course.
Which is why I am, just now, starting to worry about stagflation.
Friday, March 27, 2009
"A Time for Crisis"
What an interesting Freudian slip. At least, I assume it was a slip. I certainly hope it was.
At an address to the U.S. Conference of Mayors on March 20th, President Obama thanked the mayors for indicating they wanted to cooperate with his plans, and warned them that taxpayers were skeptical, particularly since federal money had been “frittered away before.” He insisted that taxpayers wanted to see their money spent “efficiently”—interesting that he chose that word, instead of “effectively.” Efficiently can imply ‘without waste,’ but it can also imply ‘without delay.’ Even the ‘without waste’ interpretation only suggests government overhead costs should be minimized. It certainly doesn’t imply spending money on the right things—but that really isn’t surprising, since at the Democrat’s Congressional retreat, the President insisted that stimulus is all about spend, spend, spend.
But, then came the interesting turn of phrase. “There’s little room for error here, especially in a time for crisis.” For? Not a time of crisis? For.
If President Obama was not so renowned an orator, I might just accept it as a misspeak. If he weren’t on a teleprompter, I could accept it as stream of consciousness. But, then there’s that nagging little phrase from Obama’s chief of staff, Rahm Emanuel, “You never want a serious crisis to go to waste.” And Obama does use a teleprompter. So, I have to wonder—what did the prepared remarks say? And regardless of that answer, what does it tell us that he called this, intentionally or not, “A time for crisis”?
I’m not a conspiracy theorist, but I can add. 2+2 usually equals 4. If it doesn’t, then there’s another number in there somewhere. A lot of commentators, on both sides of the aisle, have been calling on the President to stop being so negative, that he’s making the situation worse. Obviously, the left thinks he’s just making a newcomer’s mistake; the right thinks he’s doing it deliberately.
But, as I look at the arguments from both sides, I can’t help but wonder if, just maybe, Obama agrees with his chief of staff—and that some of this hyperbole really is part of a plan. It hasn't happened yet, but I predict this phrase will come back to bite him.
At an address to the U.S. Conference of Mayors on March 20th, President Obama thanked the mayors for indicating they wanted to cooperate with his plans, and warned them that taxpayers were skeptical, particularly since federal money had been “frittered away before.” He insisted that taxpayers wanted to see their money spent “efficiently”—interesting that he chose that word, instead of “effectively.” Efficiently can imply ‘without waste,’ but it can also imply ‘without delay.’ Even the ‘without waste’ interpretation only suggests government overhead costs should be minimized. It certainly doesn’t imply spending money on the right things—but that really isn’t surprising, since at the Democrat’s Congressional retreat, the President insisted that stimulus is all about spend, spend, spend.
But, then came the interesting turn of phrase. “There’s little room for error here, especially in a time for crisis.” For? Not a time of crisis? For.
If President Obama was not so renowned an orator, I might just accept it as a misspeak. If he weren’t on a teleprompter, I could accept it as stream of consciousness. But, then there’s that nagging little phrase from Obama’s chief of staff, Rahm Emanuel, “You never want a serious crisis to go to waste.” And Obama does use a teleprompter. So, I have to wonder—what did the prepared remarks say? And regardless of that answer, what does it tell us that he called this, intentionally or not, “A time for crisis”?
I’m not a conspiracy theorist, but I can add. 2+2 usually equals 4. If it doesn’t, then there’s another number in there somewhere. A lot of commentators, on both sides of the aisle, have been calling on the President to stop being so negative, that he’s making the situation worse. Obviously, the left thinks he’s just making a newcomer’s mistake; the right thinks he’s doing it deliberately.
But, as I look at the arguments from both sides, I can’t help but wonder if, just maybe, Obama agrees with his chief of staff—and that some of this hyperbole really is part of a plan. It hasn't happened yet, but I predict this phrase will come back to bite him.
Friday, February 13, 2009
Does Congress Hate Workers?
This week, Congressman Sherman (D-CA) called on Wall Street CEO’s to sell their corporate jets in order to raise capital. Last week, when Senator Levin (D-MI) said basically the same thing, I started wondering, “Why do these guys hate workers?” Levin represents a state that practically identifies itself by its blue-collar roots (“the working man”). So, why does he want to put blue collar workers on the street?
I mean the folks who build the jets. Do you think they come from a magic jet fairy? They are built by blue collar workers. They are fixed, flown, and fueled by workers. They cost about $2000 per hour to fly. Where do you think that money goes, Senator? Congressman? It goes to pay the salaries of the people who keep them in the air. So they have jobs. Jobs our President wants to save, as I recall.
Oh, but it’s a terrible perk and sets the wrong example? Ah, like luxury boats—the kind President Clinton put a tax on? And then people realized they were putting the boat builders out of business? Selling that jet also means one less jet the workers need to build. Oops.
And let’s look at that “perk.” Let’s say your CEO earns $10 million per year—a lot less than most of them, but I think most people could agree that a successful CEO might be worth that. That works out to $5000 per hour, assuming a 40 hour work week and 50 weeks per year. (Certainly they work more, but let’s assume they just do the extra pro bono.)
By my math, if they fly commercial—or drive, like the idiots from Ford, GM, and Chrysler—then every hour, they are stealing $3000 in value from the company. They’re stealing from me, their stockholder. (The jet costs around $50 million, but it lasts 10 years and flies lots of suits at once, so let's not do more math.)
The head of my own company (which, let’s just say, is REALLY big) recently mused at a gathering that perhaps he should’ve driven down from corporate headquarters, instead of flying. It would’ve taken him 4 hours instead of 1 hour, each way. I know he was trying to be considerate, and I didn’t want to be rude, so I bit my tongue. What I really wanted to say was, “Sir, respectfully, if you don’t have something better to do with your time than spend 4 hours driving here, we have the wrong boss.”
We need to get past the idea that CEO’s fly on corporate jets because it’s fun, or fashionable, or chic. They do it because their time is really that valuable. If they screw up the company, then fire them. But that doesn’t change the fact that the company needs someone whose time is really that valuable. America is an egalitarian society, so we don’t like to think like that. But let’s get serious for a minute—that’s what we say we want in our nation’s leaders. Why would businesses want someone who’s just mediocre? Who, exactly, do we expect to end up in the cabinet?
I mean the folks who build the jets. Do you think they come from a magic jet fairy? They are built by blue collar workers. They are fixed, flown, and fueled by workers. They cost about $2000 per hour to fly. Where do you think that money goes, Senator? Congressman? It goes to pay the salaries of the people who keep them in the air. So they have jobs. Jobs our President wants to save, as I recall.
Oh, but it’s a terrible perk and sets the wrong example? Ah, like luxury boats—the kind President Clinton put a tax on? And then people realized they were putting the boat builders out of business? Selling that jet also means one less jet the workers need to build. Oops.
And let’s look at that “perk.” Let’s say your CEO earns $10 million per year—a lot less than most of them, but I think most people could agree that a successful CEO might be worth that. That works out to $5000 per hour, assuming a 40 hour work week and 50 weeks per year. (Certainly they work more, but let’s assume they just do the extra pro bono.)
By my math, if they fly commercial—or drive, like the idiots from Ford, GM, and Chrysler—then every hour, they are stealing $3000 in value from the company. They’re stealing from me, their stockholder. (The jet costs around $50 million, but it lasts 10 years and flies lots of suits at once, so let's not do more math.)
The head of my own company (which, let’s just say, is REALLY big) recently mused at a gathering that perhaps he should’ve driven down from corporate headquarters, instead of flying. It would’ve taken him 4 hours instead of 1 hour, each way. I know he was trying to be considerate, and I didn’t want to be rude, so I bit my tongue. What I really wanted to say was, “Sir, respectfully, if you don’t have something better to do with your time than spend 4 hours driving here, we have the wrong boss.”
We need to get past the idea that CEO’s fly on corporate jets because it’s fun, or fashionable, or chic. They do it because their time is really that valuable. If they screw up the company, then fire them. But that doesn’t change the fact that the company needs someone whose time is really that valuable. America is an egalitarian society, so we don’t like to think like that. But let’s get serious for a minute—that’s what we say we want in our nation’s leaders. Why would businesses want someone who’s just mediocre? Who, exactly, do we expect to end up in the cabinet?
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, economics.about.com 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.
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…
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…
Monday, December 22, 2008
Upside Down Mortgages
Today’s paper mentioned some 14% of Americans are now upside-down on their mortgage—that is, they owe more than the house is worth. I’ve been reading about this for some time. I’ve vaguely wondered whether my house, bought in the heady days of 2006, might be one.
And then I realized—who cares? Seriously—unless you’re planning to sell, being upside down on your mortgage is irrelevant. I bet a lot more than 14% of Americans are upside down on their investments, yet how many financial advisors are recommending we bail out now and take the 40% loss?
Sure, if you are planning to sell, being upside down sucks. And, having to sell because your company just reassigned you sucks, too. (If you’re one of those folks whose company will buy your house, good for you, but that’s not the point.) And, if you're in that situation where you bought for $400k and your house is now worth $250k, believe me, I feel sympathy, even if I can't feel your pain. I have a good friend who was assigned to, and then from Las Vegas--I never had the heart to ask him how badly he was hurt in the sale.
But, let's also be realistic. Anyone who ever bought a house using a VA or FHA loan started out upside down—you can finance all those fees, plus a little more in order to make improvements. I didn’t get my loan and immediately think, “I owe more than it’s worth! I should just walk away!”
About 10 years ago, my Dad sold a house at a $30,000 loss when he found a better job across the country. He said it really hurt writing a check as the seller—but the market had dipped, and that was that. When I moved in August 2001, my goal was to make a small profit when my house sold. On September 12, my goal changed to “I don’t want to write a check at closing.”
The point is that you have to live somewhere. Either you own, or you rent. Being upside down doesn’t change either fact—it just means you’re renting from the bank instead of yourself for a while.
Of course, if the house you’re upside down in isn’t your primary residence, but a rental or an investment property, that’s different—but not in the way you might think. It’s different because now you’re a businessman (good for you) and you have a business decision to make. You shouldn’t be lumped in with other homeowners in order to make the statistics look worse.
And then I realized—who cares? Seriously—unless you’re planning to sell, being upside down on your mortgage is irrelevant. I bet a lot more than 14% of Americans are upside down on their investments, yet how many financial advisors are recommending we bail out now and take the 40% loss?
Sure, if you are planning to sell, being upside down sucks. And, having to sell because your company just reassigned you sucks, too. (If you’re one of those folks whose company will buy your house, good for you, but that’s not the point.) And, if you're in that situation where you bought for $400k and your house is now worth $250k, believe me, I feel sympathy, even if I can't feel your pain. I have a good friend who was assigned to, and then from Las Vegas--I never had the heart to ask him how badly he was hurt in the sale.
But, let's also be realistic. Anyone who ever bought a house using a VA or FHA loan started out upside down—you can finance all those fees, plus a little more in order to make improvements. I didn’t get my loan and immediately think, “I owe more than it’s worth! I should just walk away!”
About 10 years ago, my Dad sold a house at a $30,000 loss when he found a better job across the country. He said it really hurt writing a check as the seller—but the market had dipped, and that was that. When I moved in August 2001, my goal was to make a small profit when my house sold. On September 12, my goal changed to “I don’t want to write a check at closing.”
The point is that you have to live somewhere. Either you own, or you rent. Being upside down doesn’t change either fact—it just means you’re renting from the bank instead of yourself for a while.
Of course, if the house you’re upside down in isn’t your primary residence, but a rental or an investment property, that’s different—but not in the way you might think. It’s different because now you’re a businessman (good for you) and you have a business decision to make. You shouldn’t be lumped in with other homeowners in order to make the statistics look worse.
Sunday, December 21, 2008
Update: Gas Prices
Gas prices are now down to $1.42 per gallon. I'm told of stations offering $1.29 if you buy a car wash.
A few people have noticed the dropping oil prices: http://www.msnbc.msn.com/id/28223004/
Unfortunately, they seem totally focused on how this will hurt the bad guys, and completely unaware that maybe, just maybe, we could take advantage of the situation here at home. I guess that would require some knowledge of economics...and maybe the ability to analyze root causes.
Originally posted on my personal blog Dec 14.
A few people have noticed the dropping oil prices: http://www.msnbc.msn.com/id/28223004/
Unfortunately, they seem totally focused on how this will hurt the bad guys, and completely unaware that maybe, just maybe, we could take advantage of the situation here at home. I guess that would require some knowledge of economics...and maybe the ability to analyze root causes.
Originally posted on my personal blog Dec 14.
Good News About the Recession
This morning, I paid $1.89 a gallon for gas. Just five months ago, I was paying $4.02. More than anything else the government is likely to do, this is effectively a tax cut for millions of Americans—and specifically, it is targeted at lower and middle income families that both political parties claim to want to help. Set aside all the arguments about “progressive” tax policy, free market versus regulation, and everyone paying their “fair share,” and this is a tax cut that benefits everyone—fairly.
A question worth asking, then, is what the government might do to keep prices low. It’s too late for John McCain to argue it, but before Congressional Democrats start talking about raising gas taxes (oops, too late), they might want to think about what this means for a slowing economy. Barak Obama might even want to argue it.
The unfortunate aspect of these falling prices is that they are the direct result of reduced demand, first sparked by consumers reaching their personal tipping point at $4.00 a gallon; then further cratered by the collapsing financial markets. When America sneezes, the world catches a cold, and it was worldwide demand, as much as the United States’, that was causing the record prices earlier in 2008. The specter of extended recession has the whole world hesitant to buy anything—and if goods aren’t purchased, they don’t need to be transported, nor raw materials hauled to the factory.
But, as the saying goes, there’s good news and bad news. Or, more specifically, there’s good news, great news, bad news, and then more good news.
The good news is actually the very fact that the original high prices were caused by increasing demand—demand from countries such as China and India. Never mind whether or how much to regulate free markets. The Communist Chinese government needs capitalism to employ and feed its billion people, and it isn’t exactly a laissez faire organization. Globalism and the market are here to stay.
The great news is that those same markets, once we begin to climb out of the recession, will eventually earn a standard of living that makes them not just producers for the developed world, but consumers, as well. No longer are the Vietnamese content to ride bicycles or motorcycles—they want cars. Now, in my best William Shatner voice, imagine, if you will, a billion Chinese and a billion Indians wanting cars. And computers. And airplanes. Detroit, are you listening?
The bad news is that before we get to the great news, there’s going to be a recession—maybe a pretty deep and pretty long one. That will be painful. But, it will also keep those oil prices down, which will ease the pain a little. It will also buy us time.
The good news about all this is that we now have a breather. In June 2008, when gas was topping $4.00, every politician worth his or her salt was talking about what we needed to “do” vis-à-vis energy. Offshore drilling will take 5 years—or 7, or 10, or whatever. Wind will take 3 years—or 10, when people discover they don’t really like those loud turbines in their backyard (or even spoiling the view off their shore). Nuclear will take 10 years—or 50. Solar has been on the edge for 20 years. We don’t even talk about fusion anymore. So, nothing we can do will help for at least a couple years. But, we now have a couple years, if the government will do the right thing.
In this case, doing the right thing doesn’t even cost anything. It just means encouraging, and voting to permit, all those plans we liked when gas was $4.00 a gallon. At this moment, we have two choices—celebrate that prices have fallen, pretend the problem is gone, and react in shock 2 or 3 years ago when China decides to buy oil again or…or get busy with that program that sounded so good just a few months ago. Get busy offering long term incentives to develop all those things that will either bring us energy independence or a carbon-neutral life, depending on your politics. It’s one of the few areas that “why” doesn’t even matter.
There are a lot of specific things government actually can do, effectively. For starters, it can decide what things are going to be fast-tracked through the regulatory process. Until 2012, that will be President Obama’s responsibility to push, but if he plays his cards even reasonably centrist, he’ll have huge bipartisan support. There are even a few things that government can actually help get done. Compressed natural gas is an interesting technology, but without a nationwide infrastructure of CNG stations, most people aren’t going to buy one. So, Detroit won’t make them. So, no one will build a CNG gas station. See the problem? That is the sort of thing government can help with, just as governments sponsored exploration 500 years ago, and pushed space technology 50 years ago. Governments can incentivize gas stations to offer CNG (yes, it’s a subsidy), can incentivize purchase of CNG vehicles (because the more that are purchased, the sooner the price comes down), and while we’re at it, maybe should even subsidize the on-board nav system with a database of every CNG station in the country. As a free-marketeer, government involvement causes me shivers, but if we truly believe this is a social good, there are ways to bootstrap adoption without picking winners and losers.
Electric cars? Hey, I love technology, but I’m not paying $5000 extra for a car that only goes 75 miles on a charge, won’t last beyond 100,000 miles without replacing $10,000 worth of batteries, and will save me $3000 over its expected life. I leave it to electric proponents to come up with a logical incentive plan for that—but I bet it isn’t that difficult. As a crazy suggestion, how about all government buildings have electric plug-ins right next to the handicapped spots (i.e. close to the door) and the juice is free? (Let’s be clear—the juice is actually bought by the taxpayer, but that’s the whole point of social policy). If the plug-in spots are all full, then put in more. As adoption becomes more widespread, then some of them require payment. (An incentive for the suckers who have to show up at 6:30 a.m.)
While we’re at it, both the electric and CNG ideas require a build-out plan. Governments love build-out plans. Just as Amtrak only has Acela trains in the northeast corridor, perhaps these (and maybe California?) are the areas best suited to CNG stations and plug-ins. Only when sales warrant do we extend the infrastructure to the rural west. (Note to rural west: you don’t really want to pay for CNG stations every 100 miles along Nevada’s Highway 50, do you? Check a map.)
These are just two ideas picked randomly from items in the news. There are many more. The key is that, collectively, we have an opportunity to get ahead of our energy problem, a problem we all say we want to solve. We can do this, not by subsidizing foolish activity, but by thinking through the second and third order effects of every incentive, examining where a market jump-start offers a high payoff, and then acting swiftly to provide the incentives and cut through the bureaucratic red tape.
If there was ever a time to make lemonade from lemons, this is it.
Originally posted on my personal blog Nov 12.
A question worth asking, then, is what the government might do to keep prices low. It’s too late for John McCain to argue it, but before Congressional Democrats start talking about raising gas taxes (oops, too late), they might want to think about what this means for a slowing economy. Barak Obama might even want to argue it.
The unfortunate aspect of these falling prices is that they are the direct result of reduced demand, first sparked by consumers reaching their personal tipping point at $4.00 a gallon; then further cratered by the collapsing financial markets. When America sneezes, the world catches a cold, and it was worldwide demand, as much as the United States’, that was causing the record prices earlier in 2008. The specter of extended recession has the whole world hesitant to buy anything—and if goods aren’t purchased, they don’t need to be transported, nor raw materials hauled to the factory.
But, as the saying goes, there’s good news and bad news. Or, more specifically, there’s good news, great news, bad news, and then more good news.
The good news is actually the very fact that the original high prices were caused by increasing demand—demand from countries such as China and India. Never mind whether or how much to regulate free markets. The Communist Chinese government needs capitalism to employ and feed its billion people, and it isn’t exactly a laissez faire organization. Globalism and the market are here to stay.
The great news is that those same markets, once we begin to climb out of the recession, will eventually earn a standard of living that makes them not just producers for the developed world, but consumers, as well. No longer are the Vietnamese content to ride bicycles or motorcycles—they want cars. Now, in my best William Shatner voice, imagine, if you will, a billion Chinese and a billion Indians wanting cars. And computers. And airplanes. Detroit, are you listening?
The bad news is that before we get to the great news, there’s going to be a recession—maybe a pretty deep and pretty long one. That will be painful. But, it will also keep those oil prices down, which will ease the pain a little. It will also buy us time.
The good news about all this is that we now have a breather. In June 2008, when gas was topping $4.00, every politician worth his or her salt was talking about what we needed to “do” vis-à-vis energy. Offshore drilling will take 5 years—or 7, or 10, or whatever. Wind will take 3 years—or 10, when people discover they don’t really like those loud turbines in their backyard (or even spoiling the view off their shore). Nuclear will take 10 years—or 50. Solar has been on the edge for 20 years. We don’t even talk about fusion anymore. So, nothing we can do will help for at least a couple years. But, we now have a couple years, if the government will do the right thing.
In this case, doing the right thing doesn’t even cost anything. It just means encouraging, and voting to permit, all those plans we liked when gas was $4.00 a gallon. At this moment, we have two choices—celebrate that prices have fallen, pretend the problem is gone, and react in shock 2 or 3 years ago when China decides to buy oil again or…or get busy with that program that sounded so good just a few months ago. Get busy offering long term incentives to develop all those things that will either bring us energy independence or a carbon-neutral life, depending on your politics. It’s one of the few areas that “why” doesn’t even matter.
There are a lot of specific things government actually can do, effectively. For starters, it can decide what things are going to be fast-tracked through the regulatory process. Until 2012, that will be President Obama’s responsibility to push, but if he plays his cards even reasonably centrist, he’ll have huge bipartisan support. There are even a few things that government can actually help get done. Compressed natural gas is an interesting technology, but without a nationwide infrastructure of CNG stations, most people aren’t going to buy one. So, Detroit won’t make them. So, no one will build a CNG gas station. See the problem? That is the sort of thing government can help with, just as governments sponsored exploration 500 years ago, and pushed space technology 50 years ago. Governments can incentivize gas stations to offer CNG (yes, it’s a subsidy), can incentivize purchase of CNG vehicles (because the more that are purchased, the sooner the price comes down), and while we’re at it, maybe should even subsidize the on-board nav system with a database of every CNG station in the country. As a free-marketeer, government involvement causes me shivers, but if we truly believe this is a social good, there are ways to bootstrap adoption without picking winners and losers.
Electric cars? Hey, I love technology, but I’m not paying $5000 extra for a car that only goes 75 miles on a charge, won’t last beyond 100,000 miles without replacing $10,000 worth of batteries, and will save me $3000 over its expected life. I leave it to electric proponents to come up with a logical incentive plan for that—but I bet it isn’t that difficult. As a crazy suggestion, how about all government buildings have electric plug-ins right next to the handicapped spots (i.e. close to the door) and the juice is free? (Let’s be clear—the juice is actually bought by the taxpayer, but that’s the whole point of social policy). If the plug-in spots are all full, then put in more. As adoption becomes more widespread, then some of them require payment. (An incentive for the suckers who have to show up at 6:30 a.m.)
While we’re at it, both the electric and CNG ideas require a build-out plan. Governments love build-out plans. Just as Amtrak only has Acela trains in the northeast corridor, perhaps these (and maybe California?) are the areas best suited to CNG stations and plug-ins. Only when sales warrant do we extend the infrastructure to the rural west. (Note to rural west: you don’t really want to pay for CNG stations every 100 miles along Nevada’s Highway 50, do you? Check a map.)
These are just two ideas picked randomly from items in the news. There are many more. The key is that, collectively, we have an opportunity to get ahead of our energy problem, a problem we all say we want to solve. We can do this, not by subsidizing foolish activity, but by thinking through the second and third order effects of every incentive, examining where a market jump-start offers a high payoff, and then acting swiftly to provide the incentives and cut through the bureaucratic red tape.
If there was ever a time to make lemonade from lemons, this is it.
Originally posted on my personal blog Nov 12.
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