Ready, Fire, Aim

Something doesn’t make sense. The process is askew. Shouldn’t aim come before fire? The media and Congress are operating today, based on their actions, as though a debt crisis is our great national problem. The people don’t believe that; poll after poll find jobs and the economy are more important than the federal deficit. We are constantly told that Congress went against the wishes of the people when they voted for health care reform. The same polls tell Congress that jobs matter more than the deficit; where is the drumbeat for action on that front?

I can hear folks thinking already; the people say jobs, but what do the professionals say? Economists have been beating the drums for real stimulus for over a year now. The collapse of the housing bubble blew a $2 trillion hole in the economy; a hole that resulted in precipitous falls in state and federal income tax and local sales tax collections. Better than half of our current federal deficit is a direct result of the recession; a fact which means once people go back to work, that potion of the deficit will no longer be an issue. The professionals are calling for federal action on jobs, the people are calling for federal action on jobs, the media are being led like sheep towards the false idol that is debt crisis.

Taking a cue from the majority of economists not employed by Wall Street, I have written often on the false debt crisis and its real goal; the elimination of Social Security and Medicare. The sheer scope of the numbers associated with the federal budget is enough to get most folks blood boiling; added to the often poorly reported news about Greece’s financial difficulties, and one can understand the fears. But it is the media that accelerate and misdirect those fears and assumptions. The debt crisis in Greece is a real phenomena, but it is not related to social structures like schools, health care, pensions, and unions. The crisis in Greece is due to structural factors that are similar, not to our federal budget, but to state budgets.

Greece, like a U.S. state, can’t take structural steps during a downturn like the federal government. The United States can restart an economy by the very act of deficit spending; U.S. states and countries in the Euro-zone (like Greece) cannot. The risk for deficit spending is not national insolvency, it is inflation. As an economy begins to move towards full employment, the pace of spending picks up. All of the extra money in an economy (injected by deficit spending) begins to overwhelm the supply. Inflation is, by definition, too much cash chasing too few goods and services. Deficit spending might very well inject too much cash into the economy, but with 9.7% unemployment, it isn’t chasing anything.

As an economy moves towards full employment, the United States (through the Fed) will begin to slowly soak up the excess cash via open market processes. Inflation should be taken seriously, but economies do not restart on their own. It is important to get people back to work first. For these reasons, the Senate’s move to kill job-creation because it would add to the deficit were both ridiculous and dangerous. Spending freezes in a household addicted to credit cards make sense; spending freezes at the federal level just make Great Depressions. We need to use federal deficit spending to fund state shortfalls in education, police protection, and health care. We need to use the lower prices of the down economy to jump start clean energy infrastructure building. We need to get the economy moving, then use tried and true currency policy to head off inflation down the road. Ready, Aim, Fire…that is the correct order friends.

The Rational Middle is listening…

9 thoughts on “Ready, Fire, Aim

  1. Jeff, your basic understanding of GDP is fine, but your interpretation of the effect of debt on GDP is simply incorrect. As evidenced by the late 1990’s, when President Clinton’s budgets (pursuant to the Deficit Reduction Act of 1993) paid down debt dramatically, GDP continued to expand. Additionally, GDP experienced robust expansion throughout the 1950’s and 1960’s while debt from WWII was paid off. GDP IS the measure that ALL economists use to describe the entrance into and exit from periods of recession and depression.

    Since the advent of the modern calculation for unemployment, GDP measures of economic activity have been highly correlated with unemployment, so like it or not, GDP is a solid tool. It measures the sum total of all economic activity in the nation. Now to your point about government spending and the rise of GDP; unfortunately, you are wrong again. The point of Keynesian Stimulus spending, is that it has a margin (if you will forgive the crude analogy).

    Referring again to BEA statistics for the Great Depression; government spending in 1933 was $87 billion, while the GDP was $564 billion. In 1934, government spending rose to $105 billion, but the GDP rose to $660 billion. So goivernment spending increased by $18 billion, and GDP increased by $96 billion. This pattern is repeated over and over again throughout history. I really would encourage you to go to this site, and view the tables for yourself. http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1929&LastYear=1942&3Place=N&Update=Update&JavaBox=no#Mid

    As to the energy question, you are absolutely correct that it is a costly provision to move into clean energy now…but your point about China having more plans for nuclear plants is intriguing. Why is it that China is investing so heavily in nuclear? Why is it that firms in Texas interested in developing open ranch-land for dual-use (grazing and wind-farms) have to get capital from Chinese firms? When you look out 100 years, now is the least expensive moment to move into the energy sources that can power America 200 years from now.

    I am interested in a legacy for America that lasts a long time, and oil won’t be around for our 4th centennial celebration. It is an interesting, and I might say, apolitical argument to have at any rate.

  2. While I will that depending only on unemployment (today or yesterday) is not the correct method of determining a countries health, I would hope that you would also agree that determining a countries “health” on GDP is also an incorrect process. GDP is calculated (as I understand) by adding together;
    -consumer spending
    -Government spending
    -sum of all of a countries businesses spending on capital
    -and the total of all of a countries exports (exports minus imports)
    The problem that I see with this is that government spending is in the calculation and not government debt. From an “average joe” perspective this tells me that if we are wreckless with our spending and go into debt to increase our GDP to show that we are “healthy” then when we finally look at the overwhelming debt that we are racking up year after year, our GDP will begin to fall when we start to pay off the debt! No business that is operated well would ever have a balance sheet that did not include debt. That does determine health.

    As for the wind turbines and a new power grid…the beauty of a capitalist system is that when it is economically feasable to build and use them…we will. Right now it is not economically feasable to use them. I don’t understand why people push so hard to “force” companies to do “green jobs” when they have to commit to subsidize those same companies. Oh wait, if the government subsidizes (spends money) a company then the GDP rises! WOW, I think that I am getting smarter by the minute. ;) Or is that dumber? 4 bil for a nuclear reactor? WOW no wonder we are only doing 2 and china has plans for 132.

    Is the rational middle still listening?

  3. Thanks for coming in Jeff; here is the second semester Hank. :) On the value of stimulus and other effects; here is a link to the Senate testimony of Mark Zandi, the Chief Economist from Moody’s Analytics; http://www.economy.com/mark-zandi/documents/Senate-Finance-Committee-Unemployment%20Insurance-041410.pdf.

    On recessions; you are of course, quite correct when you write that “it has a necessary ebb and flow”; this is commonly called the inventory cycle, dips of which were the cause of recession in 2001 and 1992. We are most assuredly NOT in a recession caused by the inventory cycle. It is caused by disappearance of the wealth effect pursuant to the collapse of the asset bubble. Your firm Jeff, and its franchisees, will not begin hiring until THEY the return on investment of those new employees. Bodies through the front door dictates new hiring.

    As to the Keynesian approach and the Great Depression; the effects of the New Deal aren’t debated in the economics community at large, only within the smaller community of economists and pundits interested in slamming Roosevelt for current political gain. I can write that with confidence, because I know that you recognize the measures economist use to determine recession and depression. GDP is the determinant of recession and depression. The following is based on searchable data at the Bureau of Economic Analysis.

    GDP in 1929 was $1.036 Trillion. GDP in 1933 (Roosevelt took office in March of that year) was $564 billion. By 1937, GDP had climbed to $919 billion. Now Jeff, I bet you would get to do a case study on the NCC with a 63% increase, wouldn’t you. :) In 1937, Roosesvelt was pressured to scale back spending, and the Supreme Court ruled one program unconstitutional. The GDP in 1938 FELL to $861 billion (not a coincidence Jeff, that CATO and others always choose that year’s unemployment data to highlight). But with renewed spending, the GDP climbed to $922 billion (1939), and $1.014 trillion in 1940.

    In 1941, President Roosevelt (over the strident objections of the then isolationist Republicans), pushed for greater military spending, and forced the Lend-Lease Act through Congress. The combination led to a GDP surge to $1.267 trillion in 1941. Wartime spending, which kicked in during the middle of 1942, sent the GDP up to $1.619 trillion 9turning isolationist Republicans into believers of defense spending:)).

    Please note that unemployment data, as we know it, wasn’t collected until 1948. Estimates on unemployment are all over the map from the period of the Depression; GDP numbers are well charted. My statements on government spending, as well, can be supported from the same chart. Federal spending fell in 1931, 1932, and 1933 (Hoover’s last three budgets). Federal spending fell as well in 1937 pursuant to the factors I described above.

    CATO focuses analysis on unemployment benefits and direct government jobs/contracts. But most of the spending in the stimulus is through block grants distributed by states; Davis-Bacon does not apply. CATO was instrumental in creating the straw-man argument against the stimulus bill, arguments targeting spending patterns that don’t exist in that piece of legislation.

    As to your last paragraph Jeff; I wonder how many oil-workers would do equally well installing wind turbines and building a new power grid? I believe and expansion of nuclear plants would be beneficial, and so does the President. The $8 billion set aside for the construction of the first two nuclear turbines in the nation in 30 years is proof of that. THAT is what I would like to see more of; that spending has a clear ROI.

    The politicians that designed the stimulus did do ROI calculations, some of which you can discern from the Moody’s piece linked above. Well, I hope that helped!

  4. Mike, If I may chime in. First, I appreciate the fact that you guys (you and Hank) are challenging me to have to look deeper into some of this than I ever have before…so here it goes…
    You say…”I would tell you, except you already know, that most major companies ( and most small ones for that matter), use debt capital to fund new products, expansion, repair, etc.”
    Very true. Many companies both large and small use short and long term capital loans to do these things but I would venture to say (since I have worked for many of them) that they do study the possible return on investment (ROI) and make sure that the ROI is such that they can repay the loan that they have drawn. I would also venture to say (just an educated guess at this point) that our government on both sides of the aisle spend very little time doing such planning.

    You say…”I would like to see more infrastructure spending. Stimulus money marked for infrastructure (like the $12 billion in stimulus that went to military barracks and hospital refurbishment) are carried out by contractors, not government agencies.”
    Again I would have to dissagree. According to Thomas J. DiLorenzo an adjunct scholar of the Cato Institute, “much of the money extracted from taxpayers does not go toward wages of previously unemployed workers, but rather toward financing the government jobs program bureaucracy” and “public works projects must comply with the federal Davis-Bacon Act, which stipulates that wages paid must be the “prevailing wage” in an area, usually the prevailing union wage. The jobs that are “created” are therefore relatively highly paid, regardless of whether the workers are productive enough to command such wages on the open market.”. In the same paper he states that “The federal government’s Office of Management and Budget (OMB) has studied the question of how much money earmarked for jobs programs goes toward its primary purpose–wages for the unemployed–and how much is eaten up by the bureaucracy. In evaluating the Local Public Works Program of the 1970s, OMB concluded that “only 12 percent of the jobs generated by the Local Public Works Program–and only 2 percent of the funding– actually went to persons previously unemployed.”
    You said…”When you experienced slow-downs in your firms, you had to look at your labor force as a variable cost.”
    I agree 100% but this is not only a fact (however painful) but it is a necessary ebb and flow. Economies DO NOT continue to grow. It is greed that expands economies to the point of a “recession or depression” and it is the same that resets the economy. We learn nothing by having our parents keep us in the house and giving us everything that we need and protecting us from those evil bullies. If I never have to deal with a bully when I am a kid, how do I learn to deal with it when I am an adult?
    You said…”Tax cuts (or rebates) generally return about $0.40 on the dollar to the economy; infrastructure spending returns about $1.50″, I would be very interested to see where that comes from. I couldn’t find it…not saying it isn’t there. :)
    You said…”FDR applied it to get us out of the Depression (and his second guessing in 1937 almost put us back in). Reagan applied it in 1982. The Gipper TRIPLED the debt, almost immediately, and all of that cash that got pumped into the construction firms and contractors buzzing around military bases was SPENT in the economy.”
    This is a debatable statement that has been healthily debated for years. You can look at it from a Keynesian side or from a Monetorism (Friedman) side. As for FDR…There were more people enrolled in federal jobs programs in 1938 than in any other year of the depression, yet the unemployment rate was still 17.2 percent in 1939–higher than it was in 1931, a year before Roosevelt was elected to office and two years after the stock market crash. I would say that Keynesian stimulus has not worked and that it has only prolonged the periods of time that we were in either a depression or recession. Our government needs to do the simple things that would help (not hurt) the jobs in the US. The current Moratorium on off-shore drilling has or will cost 38,000 oil worker jobs (according to the National Ocean Industries Association). It would be hugely benificial to expand our nuclear power plants in the US but the cost of doing so is so high because of “unnecessary” bureaucracy. The amount of “commissions”, “departments” and “offices” that anyone wishing to do this is incredible.

    Just a thought or two from a High School educated, non-economic, redneck.

  5. Actually Hank, I know you aren’t stupid, so I will attempt to cover your questions. First, I am not saying we are broke. Is a company or household broke because it carries debt equivalent to 60% of its annual productive power? That is the U.S.’s current position. I would tell you, except you already know, that most major companies ( and most small ones for that matter), use debt capital to fund new products, expansion, repair, etc.

    Second; I am not upset that the Government did not create more government jobs; I would like to see more infrastructure spending. Stimulus money marked for infrastructure (like the $12 billion in stimulus that went to military barracks and hospital refurbishment) are carried out by contractors, not government agencies.

    Third; your point on unemployment benefits is both noted and appreciated. There is a percentage of people that are slower to return to work. But the notion that unemployment insurance is a significant factor slowing recovery in a majority of households is not supportable. Employers aren’t hiring, Hank, because of a loss in demand. When you experienced slow-downs in your firms, you had to look at your labor force as a variable cost.

    The gap in demand has to be filled by something; businesses don’t start spontaneously rehiring for kicks, and you know that. The housing bubble was about $8 trillion large; economists recognize a wealth effect of about $2 trillion associated with that bubble. That is construction, home improvement, real estate, and all of the value chain functions in support of those elements. With the underlying wealth gone, those jobs are gone until something takes their place

    Republicans (because of habit really), suggest that spending freezes in support of tax cuts can fill the gap; but theirs is a theory with no support. Several (non-liberal) sources have studied the effect of different stimulus in economies. Tax cuts (or rebates) generally return about $0.40 on the dollar to the economy; infrastructure spending returns about $1.50. This is also supported by history Hank.

    Keynesian economics is not a Marxist plot ot invention of NBC News; FDR applied it to get us out of the Depression (and his second guessing in 1937 almost put us back in). Reagan applied it in 1982. The Gipper TRIPLED the debt, almost immediately, and all of that cash that got pumped into the construction firms and contractors buzzing around military bases was SPENT in the economy.

    I am not suggesting an untried policy; Keynesian stimulus has worked. It is the deficit hawks who advocate for a policy that has CONSISTENTLY failed throughout our nation’s history. And just because I don’t like hyperbole…the stimulus bill was $787 billion, with almost a third coming in the form of a tax cut. By the time the tax streams are analyzed the total may rise or fall, but referencing a “multi-trillion dollar stimulus” is, just a tad, over the top.

  6. Okay Michael. Pretend I’m as stupid as most think I am. What I understand you to be saying is: Essentially, we are broke. But the way to remedy our insolvency is to spend money that we do not have in order to employ more people which in return, will boost the economy. So, you are upset that the Government didn’t create more Government jobs, which it looks like to me would have further exacerbated our insolvency by increasing Government Payrolls for essentially what amounts to “make busy” work..

    I’m not even going to begin to pretend to be smart enough to understand why it would have been a good idea to appropriate more money to pay people to NOT work through extended unemployment benefits.

    I am giving you credit for being level headed enough and…well…rational enough to understand there is a large segment of the unemployed that is quite satisfied to be unemployed and will remain so as long as they can get paid to do so. While working side jobs for cash to supplement their unemployment benefits, further robbing the tax coffers.

    I’m 59 years old and have owned my own businesses all my life. I have never heard one person drawing unemployment state he would try to find a job as quickly as possible. Instead, they say why look for a job until their unemployment runs out. Instead of taking a logical approach and NOT waiting until their backs are against the wall and they have nothing if and/or when they do not find that job. I’ve personally observed people go over 7 years without taking a job, depleting their unemployment, loans from friends and family and all other sources of support, while trying every knuckle headed trick known to get rich quick!! Except for taking on some sort of gainful employment. I’ve seen dogs sleeping with cats!!!

    (Deep Breath)

    Okay, what happens if you are wrong? What happens if further deficit spending does not have the desired effects? Where are we as a nation financially then? Another multi trillion dollar stimulus plan based on the “Crossed Fingers” theory of success??

    Please, and I’m not being confrontational or disrespectful. But what you say doesn’t make a lot of sense to me. And I honestly want to understand how you feel this is a recipe for success. I may still disagree with you, but I would like to understand.

    So please, how about The “Cliff Notes – Economics for Dummies” so I can at least understand why I disagree with you!! :-)

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