Some Thoughts on the Economy

[_Analytics]

For an Economy to be healthy, several things need to be in balance: consumption needs to be in balance with production. Personal savings needs to be in balance with government and business investment. Imports need to be in balance with exports. Government expenditures need to be in balance with tax revenues.

For the past several decades, America has been out of balance: the federal government has spent too much and taxed too little, Americans have spent too much and saved too little, and the nation has imported too much and exported too little. These trends have caused pressure to build up in the system and we are now at the point where as a society, we’ve got to pay the piper. Just as it took decades to get into this mess, it will take decades to get out. Just as immature self-indulgence got us into this mess, mature self-sacrifice is what it will take to get out of it.

Too much of America’s economic infrastructure is dependent upon borrowing: American jobs are geared towards things like selling credit-card financed Asian electronics at Circuit City and renovating houses financed by home equity loans, to say nothing about jobs like brokering mortgages or sending out junk mail for credit cards. If we’ve reached the point where people can’t or won’t borrow like we used to, our economic infrastructure needs to be retooled so that we are providing goods and services that are wanted by people with money, rather than goods and services that are geared towards people with credit cards.

Ideally, entrepreneurs would see opportunities to build and invent things that meet the needs of the new economy. If the private sector doesn’t have the vision or stomach to create enough jobs to maintain full employment, then the government should step up to the plate and figure out how to invest in the infrastructure and create jobs. If the people with the money aren't demanding goods and services but rather are hording cash, then to maintain full employment and keep the economy in balance, the government needs to borrow at the same rate that the people with cash are hording. One way or another, we’ve got to stay productive.

A major disequilibrium in our economy is the retirement age. Social Security needs to transform into a type of long-term-care/disability insurance program rather than a retirement program. Regardless of how much money people save or how much goes into a social security trust fund, the realities of America’s demographics are that the baby boomers have got to continue working for as long as they are physically capable of working. There just isn’t a way for our society to produce what needs to be produced while 30% of the population is sitting at home “retired”.

Here is an interesting blog on the state of the Economy: Turning Japanese: The Audacity of Reality

[_dartagnan]

So are you of the opinion that the recent $800 billion stimulus proposal is a good idea? This kinda took me by surprise. I never thought anyone in government would propose spending that kind of money right after a $700 billion bailout. This is all borrowed money of course, and we're essentially expecting the next couple of generations to pay it off. I mean if it had a chance of helping the economy, I could at least understand that much, but I am just trying to figure out the economic logic here. I heard Pelosi was trying to spend hundred of millions of contraceptives in this stimulus package, the logic being that if there are fewer humans, then the government will have less expenses.

I've also heard that dumpng all this money into the system will result in the value of the dollar taking a nosedive like never before.

And I couldn't agree with you more about American culture and credit cards. Americans buy just about everything on credit, and it amazes me how so many people are living the illusion of wealth. My brother-in law makes about 90k/year but he and his wife don't really own anything. The bank owns what they have. And buddy of mine who I thought was a careful with his finances, just told me that he now has three credit cards with over 12k on each, because his wife insists that they keep up with the image of being wealthy as their neighbors.

[_bcspace]

I never thought anyone in government would propose spending that kind of money right after a $700 billion bailout. This is all borrowed money of course, and we're essentially expecting the next couple of generations to pay it off.

This is why the democrats are predicting a much longer period towards economic recovery. It's just a cya because they know that redistribution will tank the economy. They're not actually interested in the economy. They're more interested in putting down intelligent and productive folks and running the world in their stead. It's a subtle Cambodia/Venezuela all over again.

[_asbestosman]

I feel sick, seriously sick. I don't buy anything on credit except my house. I have paid everything outright including for the one automobile I have. I put away about 10% gross into a 401K. While my mortgage is hard, it is still within the recommended limit for my income (30% or so I think) and I have enough savings to keep paying for half a year or so should I lose my job (would have been more if stock didn't tank). I do everything I think is responsible and then I realize that most of America doesn't work that way. Basically I'm screwed. We're all screwed. My house will probably be worth half what I paid for it when things calm down. I didn't gain any value in my 401K in the last year, and I stopped checing in November.

Why is it so hard for America to learn one simple rule: don't purchase entertainment on debt? Why i it so hard for us to bite the bullet and get ourselves out of the mess we got ourselves into?

[_Gadianton]

Asb,

It's not quite that simple. What if you hadn't put all that money away, rented, and then the markets did great? You'd be screwed by opportunity cost. Or let's say that America never bought on credit and that everyone played life very conservatively. That could be stiffling as well, and you'd probably never had been interested in mutual funds. And why is buying a house doing the "right thing"? The laws of price parity should make renting and owning equal, though I think owning would be slightly more risky. What you have been trying to do is get ahead, or, advancing your own position by the amount of someone else losing theirs.

And what if America went full on "safety", another nation went all out and got lucky, and then began inverting the power relationship? You may even be worse off than you are now. America may yet be able to stay ahead by stealing from the rest of the world for many years to come, it's hard to predict.

i don't think you need to worry too much, it's often the brightest, though most self-deprecating technical people who lay awake at night thinking their lives will be over if they ever lose their job that have the least to worry about. The truth is, if you ever lost your job, and were forced to put all your talents and concerns into making money, you'd probably be further ahead in 10 years than you will be otherwise.

[_Analytics]

The stimulus package is a good idea. First, keep in mind that the bailout wasn’t the government actually spending $700 billion—it was the government loaning $700 billion. With any luck it will get most or even all of that money back--with interest.

The economic logic of the stimulus package is that if the private sector can’t or won’t provide enough jobs to keep America fully employed, then a downward “multiplier effect” cycle could happen—people wouldn’t have jobs so they’d spend less. Then, the people that they used to buy things from would make less money, and those companies would lay people off, which would result in less spending, leading to more layoffs, leading to a long depression.

So if the private sector can’t or won’t create the jobs that the country needs, then the government should step up to the plate and create some jobs. Ideally, it would create jobs that would be investments in the future—for example building schools, bridges, and power grids, and investing in research on how to get America energy independent.

Leaving future generations with an extra trillion dollars in debt isn’t obviously worse than leaving them with a crumbled infrastructure. Further, if the stimulus package were to actually turn a long depression into a shorter recession, it could easily pay for itself in the extra tax revenue that wouldn’t have been there in the depression scenario.

In theory, the government should balance its budget over the economic cycle—if it builds roads with debt in the years when there aren’t any jobs and then pays for it in the years when there is full employment, then the budget should be considered balanced.

Regarding the contraceptives, Pelosi’s thought was that state governments would be able to balance there budgets more easily if people on welfare had fewer kids. The government could buy a lot of birth control pills just for the price of one Medicaid-funded birth. In general, are you in favor of family planning among people who can’t afford birth control pills, much less afford kids?

In any case, you’ll be happy to hear this:

FOXNews.com
Tuesday, January 27, 2009

WASHINGTON -- Democratic leaders in the House have dropped federal funding for new contraceptive services and ongoing programs to stop sexually transmitted diseases from the $825 billion economic stimulus bill due to hit the floor Tuesday.

The decision came after President Obama called Democratic leaders to tell them that the $200 million set-aside does not comport with the objectives of the job creation package.
http://www.foxnews.com/politics/2009/01 ... -stimulus/

One thing to keep in mind is that for every dollar that somebody borrows, somebody else is saving a dollar. The $36k your buddy borrowed to live his lifestyle was paid for by $36k that somebody else saved in a collateralized debt obligation. That is the big paradox of this whole thing. If people quit borrowing and actually start paying stuff off, what are the people they pay the money to going to do with it? They don’t want to spend it—they want to save it or invest it. But they can’t do that unless somebody else wants to borrow it.

And right now, people with money to save want to buy U.S. treasuries. Badly. They have tons of money to save, and they see U.S. debt as secure. They’re happy with ridiculously low interest rates. So as your buddy pays off his credit cards, the people he pays it back to will need something to reinvest in, and right now, they’d love to get their money back and put it into U.S. debt.

Here is are some quotes from an editorial in The Economist. These are mainstream views.

Most economists agree that the red ink is both unavoidable and appropriate. To prevent a steep recession becoming a depression, governments must step in to forestall financial collapse and counter the slump in private demand. Financial markets seem to agree. Yields on government bonds in most rich countries are extremely low as shell-shocked investors clamour for the safety of public debt….

Unfortunately, the political cost of bailing out bankers and the huge sums involved mean that many politicians in rich countries are loth to spend heavily. History suggests that is a mistake. Failure to mend a broken financial system quickly means a longer recession; it also renders fiscal stimulus much less potent. Contrast Japan, which had numerous fiscal-stimulus packages in the 1990s, but failed to emerge from its slump until its debt problem was finally dealt with, with South Korea in 1997, which spent 13% of GDP on a large, speedy bank-rescue package.

The fiscal costs of that error can be enormous. In a recent paper Carmen Reinhart of the University of Maryland and Ken Rogoff of Harvard University estimated that the big banking crises of the post-war period, on average, raised real public debt by more than 80% of GDP. Most of that rise came not from financial rescues but from prolonged recessions and the fiscal expansions designed to combat them. Even this year, half the deterioration of the rich world’s deficits has stemmed from economic weakness.

If fiscal stimulus is no substitute for financial clean-ups, it is an important support at a time of slumping demand. But much depends on how well the plans are structured. All the big economies foresee some tax cuts, particularly for individuals. (Only a few, including Canada and Russia, plan to cut corporate taxes.) But the focus of the global fiscal boost is on spending, particularly on infrastructure.

Economic theory suggests that makes sense. When firms and consumers are gripped with uncertainty, government spending is a surer way to boost demand. Consumers and firms might save the money. The empirical evidence, however, is less than conclusive. Economists’ estimates for the “multiplier” effect of government spending and tax cuts vary widely, with equally reputable studies showing opposite results. More important, the scale of the global slump means that historical multipliers may not mean very much. That suggests a broad strategy—involving both tax cuts and spending—is prudent.

Less sensible, however, is the distribution of stimulus between countries. America’s fiscal package, at $800 billion or more, will be by far the biggest in absolute terms and one of the biggest relative to the size of its economy. Lamentably, rich creditor countries, such as Germany, are doing much less. In the emerging world China’s boldness is laudable, and fat reserve cushions have also given other emerging economies more room. But many will find their ability to borrow constrained by investors’ flight from risk—and the surge in public debt in the rich world. In its latest estimates, the Institute of International Finance, a bankers’ group, expects private-capital flows to emerging economies of only $165 billion this year, down more than 80% from 2007.

If politicians dither over bank rescues, if countries that can stimulate safely do not do enough, and if fearful investors shy away from emerging markets, the odds of a lasting recovery of the global economy seem slim. And that, in turn, will mean far bigger rises in public debt. A multi-year downturn could easily send government-debt ratios up by 30% of GDP or more.

This need not be calamitous. Governments can work off huge debt burdens without default or high inflation. During the second world war, for instance, Britain’s gross debt burden rose above 200% of GDP; America’s topped 120%. During the 1990s, fast growth and fiscal prudence allowed countries from Ireland to Canada to cut their debt levels sharply.

The difference this time is that the rich world already faces the costs of an ageing population, which promise a fiscal burden many times greater than even the darkest scenarios for the financial crisis. Right now fiscal activism is indispensable, but the consequences will be bigger and longer-lasting than many realise.
http://www.economist.com/finance/displa ... d=13035552

[_ajax18]

How long has America been importing/consuming more than it exports? It seems like I've heard this for at least 30 years. Yet it seems we're still considered the richest nation in the world as evidenced by immigration trends and UN funding demands. I'm not saying America isn't spending too much. I'm just curious as to why the economy hasn't tanked more so and sooner than it has. When are the Japanese going to foreclose the country?

Regarding the contraceptives, Pelosi’s thought was that state governments would be able to balance there budgets more easily if people on welfare had fewer kids. The government could buy a lot of birth control pills just for the price of one Medicaid-funded birth. In general, are you in favor of family planning among people who can’t afford birth control pills, much less afford kids?

I most certainly am in favor of this. When you demand that other people shoulder the responsibility to care for your offspring, you forfeit your right to decide to have children or not. Rights must always be connected to responsibility.

As much as I like Pelosi's idea, I don't think it will work. The selfish gene is much stronger than a few government birth control pills. Passing on their genes in abundance is an innate property of every living thing including humans, whether they recognize this aspect of themselves or not. I have a hard time believing that overpopulation at the lower socioeconomic levls is due to inability to afford contraception. I think they just want to propagate and multiply and therfore simply choose to ignore the fact that this behavior is lowering the standard of living down into the gutter. So I suppose if you're willing to live life at the most meager of levels, your genes will evolve to dominate the gene pool. Maintaining a descent standard of living is just not how people are wired unfortunately.

[_dartagnan]

This has nothing to do with evolutionary principles or selfish genes (genes aren't selfish!). There is absolutely no reason to believe this.

The reason poorer people continue to have multiple children has more to do with 1) irresponsibility, 2) a lacking sense of happiness and 3) the fact that multiplying has its financial benefits to the irresponsible parent. Multiple children in lower income households means larger welfare checks. That's a simple matter of fact and it is no secret that many have taken advantage of this. The men usually don't stick around so they simply don't care whether the woman gets pregnant or not. The reason they do not use condoms has more to do with comfort and nothing to do with a mysterious desire to see one's genes spread. Again, there is no evidence for this whatsoever.

Analytics, I appreciate you taking time out to provide this thread for our benefit. I'm sure there will be more questions to come in the near future.

Incidentally, Pelosi is an absolute moron. She recently told a press conference that "500 million Americans lose their jobs" every month.: http://www.youtube.com/watch?v=x8hMJVXt09E

She makes Palin look like a genius, and yet the media is silent on her various idiotic comments and ideas.

[_cinepro]

I like George Will's take on the situation:

Stimulating Times

"The stimulus legislation is a strange response to the president's inaugural call for "a new era of responsibility." State and local governments, which in the five flush years 2003–07 irresponsibly increased spending five times faster than population growth, will get hundreds of billions. Forty-nine states have governors better than California's, but as that state sinks into insolvency (its budget deficit is 40 percent of the sum of all the states' deficits) Arnold Schwarzenegger is merrily saving the planet."

[_asbestosman]

And why is buying a house doing the "right thing"?

From an LDS perspective, having a mortgage on a house is one of the few "allowable" times to go into debt. Actually, I'm not a fan of that either, but my money isn't just mine, but my family's. If they want a house then it's unrighteous dominion for me to say no when we can afford it.

i don't think you need to worry too much,

Actually, after a good night's sleep I was feeling a lot better. I also got more perspective: I don't know beans about economics, especially the Keynsian variety. I have no idea how Japan should serve as a model for our crisis, and how we differ. Either way, there's no sense in me lying awake at night. The best I can do is just keep working while making sure I'm still employable in case my employer joins other tech companies in announcing layoffs.

One thing to keep in mind is that for every dollar that somebody borrows, somebody else is saving a dollar. The $36k your buddy borrowed to live his lifestyle was paid for by $36k that somebody else saved in a collateralized debt obligation. That is the big paradox of this whole thing. If people quit borrowing and actually start paying stuff off, what are the people they pay the money to going to do with it? They don’t want to spend it—they want to save it or invest it. But they can’t do that unless somebody else wants to borrow it.

Couldn't people save money by buying and selling stock? I admit I'm an ignormous on economics, but I thought that stock was in no way debt--that's what bonds are. Thus I would think the economy could work without debt.

Or maybe we could still have debt but on a more limited scale (no credit cards--only secured debt like houses and cars). Yet, I suppose even the limited scale would run into problems such as when housing bubbles pop. Maybe there could be some other rules about counting house prices as risky if the price is significantly greater than the usual price given the income of that area's residents?

[rant]Generally I'm fine with taking financial risks as long as it's with your own money and you're willing to live with the consequences. I'm fine with someone betting their house on a new buisness they wish to start--if they're willing to live with the consequences of failure. I'm not fine with someone racking up credit-card debt to buy a big-screen TV and then expecting me to pay their billsl. I am fine with some credit card bills used to help start or run a buisness (although I think there may be better ways to finance such things). I'm not fine with bankers who screw the entire economy over due to their own negligence in understanding the risks involved.[/rant]