Why Now Is Crunch Time For The "Tea Party"

I've suddenly realized the behind-the-scenes situation making "tea party" Republicans in Congress so ardent to do-everything-now, why we hear "we can't wait any longer."   It really is crunch time for the Tea Party.

You see, the problem is They've Got No Time Left.

Every economic belief they are based on is becoming like sinking ground.

And it's not about the Affordable Care Act (Obamacare).

One very uncomfortable bit of information slowly seeping into national awareness (and around the world) is that the U.S. stimulus worked much better than the experience of nations going the route of austerity.   As time passes, years now, we are doing better, and big inflation is nowhere in sight, and....  And there is something even worse for the Tea Party...(just keep reading).

But first, look at the real effect of the Stimulus.

Want to know what the U.S. would look like now without the Stimulus of 2009-2011?

To see a nation with many parallels to the U.S. consider Spain: housing boom, housing bust, rising deficits due to falling tax revenues and unemployment supports....but then an interesting difference.

What Spain did next was not a sustained Stimulus like the U.S., with support of central bank Quantitative Easing (QE).  No.

Too soon Spain chose austerity.  And Spain also wilted under the austere (and foolish) European Central Bank which acted as the U.S. Fed did in the early 1930s.  Result?  Spanish unemployment topped out around 27%, recently.....

So, little stimulus, no QE....and plenty of cutting spending results in....  A Spanish Great Depression (II).

But that's not the worst of it for the Tea Party....

The Tea Party has been a message.

They've relied on a story that our "debt is unsustainable" and that we "can't continue like this."

More than anything, this is their story, their message, their crucial one leg to stand on.

And it turns out this proposition is demonstrating itself false, and this new fact is just now becoming visible to careful observers:

As China and other nations have been selling US Treasuries on net for months this year, and interest rates have stayed low, low, low.....

Let me summarize that: massive deficit spending, years of QE, and.....very little inflation, and finally China and the world were selling U.S. debt for months (instead of buying it), and the result is....continuing low interest rates!

The tea party story is just false.

Full stop.

So, perhaps unconsciously, perhaps with some internal party alarm already send through the trenches, the tea party "conservatives" rightly know they have little time until the public begins to become aware of the complete falsehood of their main idea.

Whether it is conscious or unconscious, they feel they need to Act Now, so that they will be able to pretend or believe, later, that the amazingly low interest rates on U.S. Treasuries (our national debt) are due (after the fact) to tea party resolve to improve the budget of the U.S.

That this will be completely false will be beside the point.  (Unless an articulate someone can wake up independent voters to this fact.)

And that such a fast rate of reduction in federal expenditures actually slows economic growth is also beside the point.  Everything is beside the point.

They need to move quick, and then take credit.  It is about public perception, and keeping up appearances.

They need to keep fooling some of the people all of the time.

Europe Crumbles Due to Lack of Demand

Europe's economy is crashing in such a way that even the least objective ideologues in Germany now must begin to feel uneasy.

It is not only Greece, but now Spain also (the country that had budget surpluses before 2008) crashing into unambiguous economic depression.  Domestic demand continues to crumble rapidly in Spain, so that one wonders if the entire economy there might sag into social chaos.

But the reality isn't that some countries are in serious straights while others nations are doing fine, so that the overall situation might be sanguine....

No.

Europe as a whole is in sharp decline.

Consider the straight dope -- even as The Economist scrambles to blame monetary policy (but not the Euro!) we see the starkness of the failure of austerity:

IT IS a car crash of a data release. One simply can't look away. Hard to know precisely which part of the euro area's latest unemployment report is the most grimly compelling. The overall rate, at 12.1%? In the spring of 2010 unemployment rates in America and the euro zone were effectively the same at about 10%. There is now a gap of 4.5 percentage points. Total unemployment? In the first three years of the downturn America did far worse than the euro area, adding some 7.5m workers to the unemployment rolls to Europe's 4.7m. Since then total unemployment in the euro area has risen by another 3.2m while America reduced the ranks of the jobless by 3.5m. The euro area now has some 19.2m unemployed workers.

The reality remains that Europe is crashing due to the pan-European trade imbalances created by the monetary union (which prevents natural price adjustment and easy rebounds by sinking economies) -- this increases the job strength in Germany, and that increase specifically comes from taking most available jobs away from the weaker economies via the Euro lock on relative prices.

What is the soundest, best economy in the world right now?  Clearly that of the U.S.

Why?  Demand -- people wanting to buy goods and services in sufficient amounts for an economy to function.  The U.S. has adequate domestic demand.

Economies depend on demand and production, equally.  But production exists around the world in abundance.

Demand is in short supply.

Unlike skating-on-thinning-ice Germany, deeply dependent on exports, or China, deeply dependent on exports and on financial bubbles, the U.S. in contrast has adequate demand at home and little financial froth.

The U.S. is stronger than Europe largely as a result of the just-in-time demand in the U.S. economy created by the stimulus of 2009-2010, and since then, due to a more cautiously gradual reduction in deficit spending than that of misguided Europe.

The U.S. and Europe both have similar overhangs of excessive private household debt weighing us down.  But Europe tried rapid deficit reduction by cutting spending -- which backfired and resulted in deficits as a % of GDP rising in many Europeans countries.   Because of weak demand, cutting government spending simply started downward spirals in European economies.  Not, of course, in the European country that has had an profound pricing advantage over the others for more than a decade, locked in by the common currency (the Euro).

At this moment, U.S. strength is the sole bright spot in the global economy.

While Germany has been like a fire burning down a house (Europe), the U.S. is like a massive motor humming along.

But will it keep humming?

As China and Germany continue to force unemployment on the rest of the globe by consuming so much less than they produce, their massive trade surpluses threaten to eventually sink us all, and only a radical change towards more domestic consumption in these two economies offers any long term hope of avoiding the specter of war.

Thoughts on the Election

One has to wonder whether any smart person really wants to be president during 2013-2016.

I think that both men have had second thoughts, and at times shown real ambivalence about winning, which comes out as surprising political mistakes that could throw the election.

We shouldn't be surprised.

After all, when overall global savings looks set to exceed demand and investment -- global private savings remaining high while global governmental spending decreases -- we can expect tough times and then recriminations in 2016.

Regardless of current rhetoric and mythological language.

One might say something like "Government doesn't create jobs,"  but one actually knows, down inside, that what creates jobs is for money that is earned to be spent or invested in investments that result in increased spending.  Investments not in assets bubbles like stockpiling gold or London houses, but more traditional, normal investment -- money for new roads, buildings, science, machines, education, home renovation, capital investment in technology, all the productive things the word "investment" has meant in healthy economies for centuries.

If so much money continues to be saved (think China, Germany consuming a fraction of what they produce) so that savings considerably exceed spending and productive investment, then you have a problem.

Unless the abundant savings is all borrowed and used to build roads, educate students, improve technology, etc., then the economic circular flow of money that supports all of our jobs and income gets attenuated, constantly, until something radically increases spending (as did World War II and it's preliminary buildup)....

Regardless of rhetoric, both of these men are smart enough on some level, even intuitively, to know this, and be aware of the real situation, the real way the economy works.

So why would anyone really want to be President in 2013, when China and Germany will continue to fail to use as much as they produce, exporting unemployment around the world, while the US looks likely to reduce it's deficit spending, and thus use less of the excess global savings?

I think lately both men have come to terms with this situation, and set their own internal goals.

For Obama, I think his goal is to see through his initiatives -- green energy, education support, continued federal dollars for science, even health care reform -- things that provide a stronger future for the nation.

Even health care security helps the economy -- when workers feel more secure about their health care, they are more willing to buy a new car or tip the waiter more at a restaurant.

Essentially, when there is abundant unused savings, the strongest national economies can borrow at rates that hit record lows, because the markets are looking for any safe yield, even at 1.5% or less.

How fundamentally strong is the U.S. economy?   Many billions of free floating dollars choose U.S. Treasuries as their home.  Why?  In part because economic strength depends on market demand -- consumer demand -- and the U.S. has the most of that in the world.  Ergo, this is the most fundamentally strong and sound economy in the world.

But that doesn't mean a titanic mortgage credit bubble and collapse is easy to ride out.  It's no ordinary storm.  This ship could be steered sideways to the waves and find itself truly foundering, instead of only riding rough seas as now.

So why does Romney want to be President?

For Romney, we are forced to speculate.


Is it Power?  A vision of personal greatness and prestige?

Does he have actual beliefs, in spite of changing positions?  Actual beliefs that are passionate, in spite of the smoothness and clear acting?

He's a tremendous Story Teller, one of the best around.

While the U.S. has done far better than any other nation that suffered a major housing bubble and collapse in the last few years -- better in employment, better in the general economy, and best in the world in reducing total debt of the combined public and private debt load (private debt in the U.S. has declined far more than public debt has increased)....

Romney has made it seem, through masterful story telling, that this very good result is a real failure.

Imagine a student who does the best in a class of 20 on an extremely difficult test, scoring only 70%, and then a bystander labels that result not as a success, but as a failure, and works to convince many other people that the success is a failure.

But what is Romney really after?  What does he really want, himself, personally?

Perhaps he wants to be the Boss.  It's a theory.   To project power around the world.

Instead of walk softly and carry a big stick, it appears from his own words at times that Romney would like to walk aggressively and be quick to whack some heads when an opportunity shows up.

Is that just bluster meant to nab a few votes, or is it a real attitude?

From his description of Obama projecting weakness -- as if all the fighting and resolve we have shown becomes weakness if we are diplomatic in language abroad -- it seems Romney imagines that acting hard nosed and seeming uncompromising to some other peoples is good for security.

It is good for losing some friends and alienating some good will and losing some soft power influence, the kind that actually matters over time.

The wise know that it is better, safer even, to be loved than to be feared.

But, unlike Obama, Romney can imagine that the ease with which he exercised power at Bain Capital is a way to lead a nation and an economy.  He can imagine this because he hasn't faced the detailed information and reality that Obama has.  He hasn't been disillusioned of his delusions, yet.

Hopefully, he won't have to chance to be disillusioned in that way.

Germany -- Fortunate?

Very nice piece on Germany below indirectly tells us a lot about the seeming economic success of Germany.

Germany, see, is heavily dependent on exports, as its own citizens are not willing to spend freely enough to consume as much as they produce.

(In part this is maintained by keeping foreign goods artificially more expensive relative to wages in Germany than a free market would set them due to the German efforts to lower wages by preventing natural raises in wages for years -- Germany created a low wage rate, then locked this artificially low wage rate in place via the Euro (common currency);  this is effectively a currency peg, similar to China's export subsidy/import-controlled market via Chinese currency controls/peg.)

The result of regions in an economy consuming much less than they produce (Germany, China in the global economy) is that other regions (nations) must then consume (and/or receive in foreign investment) correspondingly more than they produce. 

The sum total of the export surpluses of trade surplus nations must exactly equal the sum total of the export deficits of trade deficit nations plus capital flows (investments in foreign nations).

Exactly.

Capital flows are only the outcome of the trade imbalances, just the result.  For instance, if China has a trade surplus of $100 billion over a period of months, during that same time it must save or invest that surplus in some manner -- some combination of  accumulating cash (savings) in foreign currencies or purchasing foreign assets or investing abroad.

So, trade surpluses depend entirely on trade deficits somewhere else.

The export "success" nations are entirely, fully dependent on the "profligate", the trade deficit nations.

Just so. They are two sides of the same coin.

I explain the why, how, and the consequences of global savings in excess of consumption/sound-investment most clearly here in a short story: The Savings Conundrum. (Also, a recent update: The Savings Conundrum Writ Large -- hitting on a global scale.)


The seemingly fortunate son (of the moment):

Watch In Greece Bail Out, Germans Eye 'Functional, Surviving Euro' on PBS. See more from PBS NewsHour.

Updated 5-18: Reverse Corruption And Breathe Easier

Some facts speak for themselves:

"Coal-fired power plants...produce more hazardous air emissions than any other industrial pollution sources....Over 386,000 tons of 84 separate hazardous air pollutants spew from over 400 plants in 46 states."

• Fine particle pollution from U.S. power plants cuts short the lives of nearly 24,000 people each year, including 2800 from lung cancer.
• The average number of life-years lost by individuals dying prematurely from exposure to particulate matter is 14 years.
• Hundreds of thousands of Americans suffer each year from asthma attacks, cardiac problems, and respiratory problems associated with fine particles from power plants. These illnesses result in tens of thousands of emergency room visits, hospitalizations, and lost work days each year.
• Power plant pollution is responsible for 38,200 non-fatal heart attacks per year.

This topic is so relevant that I prefer to update it for a while instead of rushing on to other topics.
(4-20 update at bottom of post)
(4-27 update at bottom of post)

(update 5-18: David Leonhardt at the NYTimes, and new papers on this true cost of power)


Logically, even if you are lucky enough to avoid much of this pollutant load where you live, you occasionally breathe it right into your lungs, when the wind direction happens to bring it to you. When that happens, your body takes in, among other toxins, mercury. Mercury damages the nervous system.

Understanding the true extent of coal burning pollutants will give the well-informed a lot more concern than the tiny extra radioactive particle load from Japan lately. The health effects are orders of magnitude more serious.

But no health costs created by the actions of businesses should be paid by the victims alone, while little or none of the costs are born by those making the profits from emitting these toxins.

When the utilities and businesses emitting toxins bear little or none of the costs, it is a form of corruption. And in fact, often such corruption has literally been enacted into law.

Liability limits are a prime example of such corruption enacted into law.

...

Consider whether nuclear power in the form we have subsidized and tolerated so long is a good idea to begin with.

This is a complex question, and without trying to review how we got here (but for those that wish to hear some on that: here's a good Fresh Air interview) -- we can instead apply a powerful concept to discriminate whether this kind of nuclear power, or future kinds, are really worthwhile.

It is the wisdom of the crowd combined with the maximization of utility and the internalization of externals.

Simply put, every source of electric power for businesses and consumers should have its true, full costs put into the final price the consumers of electricity pay. The same should apply to oil products like gasoline.

This would look very different than what we have now.

For example, about 45% of US electricity comes from coal, but that is in part because we subsidize coal electricity production by allowing coal burning utilities to emit harmful emissions without paying their true health and environmental costs. We subsidize coal burning profoundly.

The degree of subsidy would be a surprise to many, no doubt.

We know we have subsidized nuclear power in several ways also, including costs of emissions.

In short, we subsidize the wasting of energy by making energy prices artificially cheap compared to true costs.

The full costs of an energy source includes all the costs -- health costs such as asthma and deaths from coal burning, coal-emitted mercury contamination of soil and people, massive climate change costs of carbon burning, nuclear contamination and storage costs, the costs of naval fleets and operations in the Persian Gulf to protect oil shipping lanes, and....finally, direct subsidies.

If all the true costs of every energy source -- nuclear, coal, oil, wind, solar -- were fully included in the final prices consumers pay, then we would all be able to choose more wisely and choose how to conserve, and which source to use.

True pricing would drastically alter our energy use for the better, and greatly aid the environment, and greatly improve the lives of our children through direct health effects.

How to do this? End all subsidies of all kinds for all energy sources now, and include in oil taxes the true full costs of defense and climate change, and for coal the true costs of pollutants and climate change cost estimates directly as fees on the users (utilities) in proportion to emissions, all the costs of nuclear that haven't been included like disposal and health costs (one way to figure health costs for a reactor type is to use a global average of health costs per year to date for that reactor type), and for solar the costs of solar panel production pollutants, and for wind energy the electrical transmission build out costs. Simply include the costs in the price to each source!

Likely many existing nuclear plants in the US, having had so much of their costs paid via subsidies from taxpayers already, would be viable as they exist now. Current operational costs are low, while spent fuel storage costs for newly spent fuel are diluted due to the existing necessity to store large amounts of spent fuel from decommissioned reactors and military sources (the marginal cost for new electricity generation creating more spent fuel doesn't add much to the existing large (overhead) costs all nuclear activities have already incurred.). In short, the storage costs are already here, and a little more doesn't amount to much.

The more interesting and significant consequence would arise from including costs based on risk assessments. Risk-assessed insurance costs -- without a liability cap -- would force some reactor operators to do significant modifications to reduce risks so as to remain economically viable.

Some reactors might not be modifiable enough to sustain risk-costs and become uneconomic and get shut down. Imposing true costs would lead to a more thorough and rapid change in improving backup systems and strategies. It's one thing to be regulated, another thing to have to pay for risk-costs in actual dollars.

It's far, far stronger incentive.

Finally, as wind power transmission and storage technology improves some of the plants might become uneconomic and get shut down earlier than they would have before. True costs make this timing rational and economic.

Once we approach that true pricing, the wisdom of the crowd will take over and make wise choices. People will conserve due to higher costs becoming finally visible -- you pay in your electric bill instead of in your tax bill or in your health insurance bill.

Conservation would sharpen and quicken.

The environmental and health outcomes would amaze those skeptical of economics and markets, who typically don't realize how profound are the effects of corruption and subsidy on this scale.

------------
Update 4-20 PM:
I just visited the NYTimes and this caught my eye:

The new settlement between the Environmental Protection Agency, other plaintiffs and the Tennessee Valley Authority resolving clean air violations at 11 T.V.A. coal-fired power plants...

Under the deal, the federally run authority will close 18 of its oldest and dirtiest coal-fired boilers in Tennessee, Kentucky and Alabama, spend $3 billion to $5 billion over the next decade to install state-of-the-art pollution controls at about three dozen other units, and invest $350 million in energy efficiency and renewable energy projects.

The E.P.A. estimates that the agreement will reduce emissions of nitrogen oxides and sulfur dioxide by nearly 70 percent, preventing 1,200 to 3,000 premature deaths, 2,000 heart attacks and 21,000 asthma attacks annually.

When I started writing parts of this post earlier this month I had no idea such a negotiation was on. On one level, this is delightful. But when we compared this to the total emission load of coal burning in the US, these TVA changes will still be only a modest fraction of the problem.

That such a large step still falls far short of the overall problem shows how much benefit we would get from true pricing across the board.

Imagine if true pricing was imposed 12 months from now. Do you think it would take some large part of a decade for those modifications mentioned above? I'd bet more like 1-3 years.

-------------

4-27: NPR's Talk of the Nation goes over some of my points (listen below).

By the way, I was reading James Fallows when I was in my early twenties (in The Atlantic probably). That was 25 years ago. It seems like he's been around forever. Wouldn't it have been fun if he, say, referenced my blog. No doubt, many sources have pointed out various of these points, but it's better in a consistent economic framework, as I've tried to lay it out above. While the talk show is worthwhile, the needed insight comes across better in a broad view presented all together.

Heh, perhaps I should try to be a blogger at The Atlantic. Anyone know Fallows personally?

The Savings Conundrum -- Our Future?

Suppose you and I were young and loved the wilderness and by chance we both moved to a small, remote meadow where we lived in teepees not far from each other, bringing with us basic tools by which to get our living. Suppose not long after we arrived we found an old cache of golden stones in a nearby cave from prehistoric times, and divided them equally, so that we had 20 golden stones apiece.

Suppose you loved to garden and forage, and had tools and seeds, and that I loved to hunt and trap and fish.

Not long after we arrive, you might well begin to want some meat to go with your meals, and I would surely like to have some vegetables, fruits or nuts to go with my meat.

While the first time or two we might simply trade a few items in barter, soon it would likely happen a day would come when I had a large haul of fish and you might have only a few nuts and I might suggest that you simply give me 1 of your golden stones (a "goldie") as a token for future food which I might buy back from you on another day when you had more.

We would have an economy, not fundamentally different from the global economy, even with its exchange rates, central banks, factories and technology.

Soon we might well have typical prices for our goods. A fish might cost a goldie, and so might 2 potatoes.

Perhaps on an average day we'd exchange a goldie or two, and in a week, perhaps several would go back and forth. Eventually, seasonal patterns might show up, and over the years we might have habits of me buying more vegetables in the summer, and you more meat in the winter, so that in the summer you would have more goldies and by early spring I would have more goldies.

Now, suppose one day, after several years of a stable, productive economy, I decided I wanted to save goldies for the future. Suppose I went on a savings binge. To save, I begin buying less from you, keeping more of my goldies in the summer, and foraging some for myself.

At the end of the summer, when you would usually have had plenty of goldies to buy meat from me in the winter, you'd find you have much fewer.

You've experienced a big loss of income. And winter is coming on. You've been saving nuts and potatoes, but you know it's going to be a hungry winter.

In desperation, due to your reduced income you begin buying less meat from me during the fall.

Now my income is reduced also.

In sum:
a) I've had less vegetables than usual
b) your income was reduced
c) you are poorer, and now now must make due with less meat than usual
d) and therefore my income is now reduced also.


I saved, and no one borrowed that savings and put it back into the economy, and the result was an economic spiral downward.

You are hungrier. I am hungrier.

Unless I stop saving, or someone starts borrowing my savings and spending it, trade would decline week after week, as I withdrew more and more goldies from circulation. Most likely what would happen is that due to my reduced income, I would be forced to begin choosing whether to save another goldie or have vegetables to eat that week, or take on extra work to grow my own, so that I worked 16 hour days. Eventually, my savings rate would stall out and decline, in spite of my plan. Either I'd stop saving in order to get some rest and eat at least a few vegetables, or I'd stop saving because I no longer have any income left to save. Trade would either stop entirely or be maintained at a low, impoverished level.

This is ultimately the real thing that is behind the abstraction of the "worldwide savings glut" -- a great excess of global savings over the sum of global consumption and sensible investment.

It is economic decline, joblessness, even economic downward spiral.

The only difference between our meadow and the global economy that matters here is that in the global economy, the massive savers -- the Germans and the Chinese -- loaned their savings to the rest of the world into financial markets and mortgaged-backed securities so that the money went into house-price bubble countries whose bubbles were filled exactly by that excess of savings.

This massive credit delayed the downward spiral a savings glut must cause, but only to make the shift more sudden, so that the inevitable downward spiral was more like falling off a cliff (2009).

Unless the excess savers change course, this will touch everyone, and may well even slam those that have a lot of savings in every nation, because savings cannot earn interest or dividends of any significance unless the invested-into economies grow.

In nations like China, such investments can take many forms, including such basic needs as railways, health clinics, hospitals and schools. And in underdeveloped nations, investments could take almost unlimited forms.

Because we are afraid of the economic uncertainty, even those of us that wouldn't ordinarily hoard a great excess of savings are trying to save more rapidly now.

People in many advanced nations are demanding their governments reduce deficits at the same time that they themselves save more.

In other words, the savings glut is likely to grow again in proportion to the world economy. Conditions could soon be getting worse.

Unless good investments quickly ensue, the unused savings could indeed spiral the global economy, and that of most all nations, down into a great depression.

There is no long-term solution to this more general new psychology of hoarding short of creating renewed confidence in most nations where fear of the future holds sway. For instance in China this would take many forms, including visibly increasing the future economic security of retirees so that Chinese households would feel more confident about spending part of their large savings now.

Around the world, changes are needed now, before our global crisis deepens.

Confidence More Important Than Stimulus or Deficits

The economic stimulus of 2009 helped us avoid another great depression, but that stimulus itself will not decide our economic future.

We could still fall back into a depression, or continue this recovery, and the stimulus is only an aid, like shock paddles in an ER.

The patient will decide whether to live.

Consumer spending is the biggest part of our current nascent recovery. And that consumer spending has held up recently, neither strong nor weak. Tomorrow will show us another piece in this picture, but we already know the most important data: confidence.

Consumers have relatively more confidence in recent months than they had a year ago.

Of the handful of dominant economic factors that will push the U.S. economy up or down, confidence outweighs all other factors. Only the dollar exchange rate effect on exports comes close to confidence in determining the direction of the economy.

People decide whether to buy extra goods and services when they feel confident in their own income over the coming months. Confidence in the broad economy is decisive.

Since confidence dominates other economic factors, usual situations can arise, as now.

If you listen to any news media lately, all you hear is deficit-reduction.

The meme (idea) of medium-term deficit reduction has lately climbed to the top of the heap and dominates all other economic ideas in the broad popular imagination.

This has lead to the novel idea that reducing government spending in the future will strengthen the long run economic prospects of the nation.

People presume simply that if the nation doesn't follow the rules of budgeting that they themselves must follow in their own household, that the consequences would be similar to what would happen in their own household -- bankruptcy.

But reality is different from the popular imagination.

In reality, large nations like the U.S. do not go bankrupt. If faced with an impossible budget squeeze at some point due to debt, nations like ours simply end up printing money in some fashion, and thus inflate the national debt into a smaller relative size to their economy. In short, the holders of the national debt (treasury bonds) take the hit, in that scenario, since their bonds lose relative value.

In this way, national bankruptcy or national debt squeeze (debt burden) downturns are avoided.

But...since the American public has lately become convinced that our future economic health depends on deficit reduction over the next 10 years, the ironic fact now is that an expectation of less government spending in the future will strengthen confidence.

And that is why plans for deficit reduction actually will help the economy now.

Obama continues to smartly pilot this ship in the storm. He doesn't control the wind and the waves. But he adapts and reacts in a way that encourages me.

This may be an almost perfect storm. But we are not in a modest-sized fishing boat, and our pilot is working the rudder well.

On some level, Obama gets that expectations are the essence of an economy.

New York and Washington Will Follow

60 Minutes offers a glimpse of our real national economic reality (below), while New York and Washington remain wrapped in the insulation of Fed and federal money. Most national commentators remain inside that cocoon -- only vaguely aware of the actual economic reality beyond their circles (though some correspondents are more in touch with the actual America). We hear much commentary from those that rely on numbers or ideology that tells them little about the real dynamics of the economy. Those surprised at the housing collapse will be surprised again in the new decade, but this will be only one of several fundamental surprises for this class of talking heads.

The predominate economic theories are inadequate -- all of them. An Argentine-like future is likely, but there are many unknowns (what will happen with the Chinese currency peg? with tariffs?). Worse fates can happen -- Argentina is a nice country and its people seemed down to earth and friendly when I visited for 5 weeks in 2003. America is in for a major reset of its values.

Some of this reset is already clear -- many people have begun to look for better ways of living.

This will be a true recovery of a better kind.


Watch CBS News Videos Online

(Update) Mayo Likes a "Public Option"...But America Is Beginning to Want Something Real (65% Favor...)

Update: Mayo's own Health Policy Blog lays out the Mayo Position. See link at the end of this post.
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Searching for video of Senators talking about the markup of the Baucus bill today, I blundered into this, and don't have another source yet, but...

Senator Ron Wyden of Oregon at about 11:30 in the video: "...The Mayo Clinic, for example, said it was okay if you did the Public Option with an approach like members of Congress want...."

Now, I've always considered the "Public Option" (as normally meant, a competing, federally-run insurance plan as an option for insurance shoppers) to be a way to accelerate reform. When a big insurer, federal or private, has more incentive to find ways to innovate such as incrementally beginning a pay-for-outcome-over-time system, then needed change will happen sooner. Note that a public plan (aka public option) should be on a level playing field with private plans, and Senators say such a plan would be -- that is, it gets no subsidy at all and therefore must support itself only from premiums. The low-income subsidies to people to help them purchase insurance can be used to purchase either the public plan or a private plan. So the playing field really would be level.

But...it is not perfectly clear whether the "public option" Mayo is said to support is actually a government-run insurance plan (aka "public plan") or is instead simply a government-run exchange with private plans alone where plan evaluation tools help policy buyers choose between clear options, and none of the plans are tricky plans with clever loopholes and traps meant to fool policyholders. This kind of friendly exchange with reliable plans would be like the Federal Employees Health Benefits Program (explained here by NPR.)

Senator Wyden (who by the way is also offering a great amendment to open the new exchanges to everyone) appears at 10 minutes into the video:

Visit msnbc.com for Breaking News, World News, and News about the Economy

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Here's an NPR interview with Dr. Cortese on 9/22. He likes the idea of a "public plan" being like the government-run Federal Employees Health Benefit Program (FEHBP).


Until I read or hear otherwise, so far as I know, the "public option" Mayo supports is a friendly exchange (marketplace) like the FEHBP. (Update: See this link for Mayo's own statement on this.)

Mayo is concerned that there not be imposed price controls. That is, price cuts that are across the board, indiscriminate to the relative value of one treatment over another. As some types of treatment offer much greater value (better quality for their price), cutting reimbursement indiscriminately is un-marketlike, that is such indiscriminate pricing would sometimes throw the baby out with the bathwater.

All this said, few in Washington, or that have a household income above $90K/year may realize that there is a public groundswell just beginning (the real thing, not the fringe "teabagger" type)...because the "middle class squeeze" has been greatly intensified by rising health insurance costs, and the greater majority of Americans simply will begin to demand that there be some kind of genuine cost control on health care, of some sort or another.

If 5-10 million Americans are tea-baggers and their sympathizers, that's one thing.

If 50-60 million Americans have distrusted Government in general, that's another.

If there have been 80-120 million Americans that wanted Single Payer system, that's another.

But...

But if 140-180 million Americans start to become more restless about cost-of-living squeezes and want there to be a profound change in health costs, and start to demand some kind of major government intervention, that's another thing altogether. An animal of a whole different size.

Washington has limited time to be ineffective I think

We've lived in a bubble in a sense, since World War II. We've been a privileged nation. Now that certain of our advantages have been leveled with the rest of the world, Americans are entering into another kind of universe than the one they are accustomed to.

The old political games that the parties have played are coming to an end. A forced end.

We will become more like the rest of the world, by necessity. Or we will live in the fading glow of past glory days, looking backward in stagnation.

--------------------------
Update 9-25:

A CBS/NYTimes poll finds 65% of Americans favor the Public Option (!):

...the Times/CBS poll asked: Would you favor or oppose the government offering everyone a government-administered health insurance plan — something like the Medicare coverage that people 65 and older get — that would compete with private insurance plans? The poll question was phrased generally so that it could be asked in repeated surveys over time regardless of any specific legislative proposal.
With the question asked that way, most respondents supported the idea, with 65 percent in favor, 26 percent opposed and 9 percent offering no position.

-------------------------
Update 9-27:

Mayo lays out its position more clearly. Essentially the position I've surmised above. Granted this is Mayo's position, and should be accorded much weight....

But the best of good alternatives for the insurance part of a "public plan" (after we have the even more important, invaluable insurance exchanges, and these made open to everyone, as Wyden proposes) is a true Public Option (a government-owned insurance plan supported by premiums from policy holders alone (no other subsidies), that competes with private plans on a level playing field where the subsidies for low-income insurance buyers can be used to purchase any plan, public or private.) And, just as Mayo prefers, that this Public Plan not use a "price control" approach, but instead solicit bids as I suggest and institute paying for value as I suggest here in my description of the best way to run any insurance plan, public or private.

We are getting there. We are so close now. We have exchanges proposed. Wyden suggests we make them open to everyone, just exactly as they should be. And, finally, the most seemingly challenging part of reform -- paying for value (paying for outcome) -- itself can be done incrementally, in a way that everyone can embrace....

--------------
Update 10-3:

Mayo lays out its version of good health care reform.

The Right Way to Structure Cash For Clunkers and Other Incentives

I should have written this post back when I first had the thought a month or two ago.

Any buyer-incentive program from the Federal Government will work much better for the market, buyers, and businesses, and for the general economy, if it attenuates gradually over time.

So for example, in the Cash for Clunkers program, the correct structure would be:

A) Begin with a more modest rebate, which would be used more slowly; and

B) Attenuate the rebate gradually.

Why attenuate gradually?

The program as structured, with a huge incentive, will pull forward in time sales that would have happened in the next year or two, and thus will rob sales from the future. But it won't last long enough on the other hand to build strong economic momentum.

Instead of this structure that fails to create real economic momentum -- we could instead accomplish actual economic stimulus with simply a better structure.

Specifically, for Cash for Clunkers, the maximum rebate should have operated as follows:

$2500 (instead of $4500), set to last until an initial $1bn is used up, and then stepping down to $1500 for an additional $1bn, and finally, to $1000 which would be set to last for a defined period of time of 3-5 months.

The effect is to stretch out the program, and sustain the increase in sales, so that economic momentum begins to build over time through secondary economic effects.

It is not too late to fix the mistaken structure of Cash for Clunkers.

The correct continuation should be to offer another $1bn in Cash for Clunkers Part II at a lower level, such as $1500, followed by a final a final level of $1000 that should last a defined time period, such as 4 months.

This could be done now.

This same principle should be used for any kind of buyer-incentive stimulus program, such as the First-Time Homebuyer Credit.

Consider this sequence: First, in 2008, was a $7500 credit which was a %0 interest, 15-yr loan, which must be paid back; Next followed a simple grant in 2009 for $8000. (Remember how the 2009 "credit" was initially proposed to be an over-the-top $15000? The proposal for a $15,000 credit showed a lack of common, middle-class sense.)

So instead of attenuation we had the opposite. If you bought or sold a home in 2008 during the first incentive program, you got cheated in a sense -- you have to pay back your credit, but you also have to help foot the tax bill for the far better "credit" in 2009 other home-buyers will receive.

If you buy or sell your home after this second program ends, you get cheated since you will help pay the taxpayer cost of the 2009 credit but receive no credit yourself. (update -- an extension of the credit at a new grant level of $6500 until April 2010 was created a couple of months after this post was written.)

The program as it is now is bringing future home buyers forward in time, and when the current program ends....we will see dropping sales. The market will not have bottomed -- the temporary uptick now from the 2009 credit will suddenly disappear.

The program should have started with a grant open to all homestead home buyers, and be set to attenuate gradually, lasting through 2011 or 2012.

Again, it is possible to fix the bad structure we have now.

The correct structure now would be to extend the program as a $4000 credit for 2010 (or December 2009-December 2010), and include *all* homestead home buyers (who live in the home they buy) for fairness, followed by a $2500 credit for 2011 and a $1500 credit for 2012.

This would have an effect of actually helping the housing market to bottom out, which will take considerable time, and being more equitable to buyers of homes in 2010-2012.

Economic momentum from the program could build, and the effect of simply bringing sales forward in time would be greatly reduced.

...

What is striking about the these existing programs is how they could have been improved by soliciting and taking advice from an experienced business person who has a broad outlook.

Congressional staffs working on such legislation should invariably hire outside help from someone who has managed a small business and who has long experience and can talk about what will work for the middle class customer (there are thousands, tens of thousands of successful small business people who could and would offer good advice). Such a person would bring a superior, real-world sense of how to actually get the desired result. Such a person knows what it takes to appeal to middle-class families.

For instance, the congressional staff working on legislation could ask:
"If we run this program Cash for Clunkers at $4500 per car for say 250,000-350,000 cars, would that be about right to kickstart some circular effects of auto jobs and people buying cars and some stimulus for the general economy?"

To which the advisor would answer: "A little, but that's a poor structure."

"Why not?"

"Because that is so much money that it will only bring a rush to buy by everyone that is able to buy and wanted to sometime in the next year or two. Then, you have a let down."

"But won't more total buys happen on net, say over 4 years, than would have happened otherwise?"

"A little, yeah. But for the same federal money or a bit more, you could have instead a much larger number of sales over next few years. And that would mean more middle class jobs and a stronger economy."

"How?"

"Look, if you live in a neighborhood and your neighbor bought a Cash For Clunkers car, and you didn't buy one then you think something like: 'Oh well, I missed out,' and you adjust psychologically, and you go on being the new frugal, as you were already. But....if your neighbor gets a Cash For Clunkers new car with a $2500 or $1500 credit, and in the meantime the $1000 level is still available, you've got weeks to see that new car next door and think about that $1000 that is still available a while longer.... It's an entirely different psychology altogether. An entirely different outcome. More people will decide a new car is the way to go.

"You need something that makes people feel like the next three or four or six months is a good time to buy a car, not that only the next 8 days. You need to spread the money out, make it gradual, like a steady pull. And it has to be well-defined and clear. So that you know that if you miss the $2500 level, you can get the $1500 level. Stuff like that. Like if you miss out on the $2500 or $1500, you can still get a nice $1000 bonus for buying a fuel-efficient car, and that last chance level has to last, like months."

I for one would be glad to help correctly structure such future legislation, which I think may once again be on the table someday, once the current programs are seen to have failed.

While general confidence is the main determinate of whether we will skirt and escape a second great depression, even the recent uptick in confidence isn't yet enough to assure the outcome. As Ambrose Evans-Pritchard points out, the world is still awash in over-capacity. This moment of skirting the edge is not over yet.

Is Congress Aware the Rules Have Changed?

Normally, Congress can make laws without teeth, which have little effect.

This allows Congress to manage the conflict of public expectations on the one hand and vested special interests that make huge campaign contributions on the other.

So the routine is to legislate new laws with weaknesses that satisfy lobbyists, at the expense of the constituents Congress (nominally) represents.

The recent credit card reform is a glaring example. Usurious interest rates are allowed, while a few tricks are disallowed. In this case, much of the public probably won't expect the extra interest burdens will sink the general economy (but in combination with other problems, the extra interest burden is more harmful to local economic fabric than widely understood.) Congress can seem to have done something meaningful, since they did in fact prohibit certain practices, and in this way they can rationalize they did something meaningful, avoid a public backlash, and preserve their stream of contributions from financial institutions. Likely many members of Congress did believe they were doing the right thing voting against limiting credit card interest rates through a psychological process of rationalization -- you always can justify that which lines your pockets.

Health Care Reform, today, is different than the usual situation in two ways.

First, there is vibrant and widespread internet discussion on health care that actually penetrates to the root causes of the spiraling cost crisis. Mainstream media is broadcasting the root causes -- such as too much quantity instead of quality. Mainstream media is discussing real problems because the real problems are very serious. More than a small minority of the electorate understand real root causes of the cost spiral.

Across the nation, a great majority of Americans not only want real reform, but actually care a great deal. They understand so well that a "public option" is popular (70%+). When fake reform ideas are put forward, a great number of active citizens will quickly learn and discuss the inadequate nature of such reforms.

The issue is big enough that a majority ends up understanding the broad implications.

The political contributions from lobbies are also facts, and can be used in elections as proof of being purchased by lobbyists.

Second, health care costs are a rapidly increasing crisis as the economy is retreating from the false ground of the credit bubble. If no fundamental reform is undertaken, the health care cost crisis will only grow relative to the economy, spreading distress more and more widely. If Congress passes a reform that fails to address costs at the roots (such as this way), the crisis will grow worse, and the current Congress will reap the political outcome in November, 2010 and 2012.

So, the rules are different here. Is Congress aware of that?

The Other Shoe Begins to Drop

One thing was clear at the outset of this Debt Bubble Collapse.

Nations with huge trade surpluses are in much more economic danger than nations with trade deficits like the U.S.

Like the U.S. in 1930, leading exporters today stand to lose the most jobs with a collapse in world demand.

The possibility is continued cataclysmic collapse in trade, leading to massive downturns in GDP and jobs in the export leaders.

That's right, it's the most successful exporting powerhouses like Germany, China, Korea and Japan which are in the greatest economic danger. Much more so than the U.S.

Their only hope is to create serious domestic demand increases, which would require drastic plans to accomplish. Such plans are not visible, although China has taken a partial step.

It's not that no response at all has occurred. Germany did try a clever auto trade-in scheme for instance. China promptly developed a lending/building&infrastructure-boom, which isn't exactly consumer demand, but is better than nothing. But these, while helpful, are far from the real economic strength that would come for instance from China supporting its own growth via increasing Chinese consumer demand.

While China pressed the Keynesian stimulus button at least partly, Japan tried a new tack, Korea aimed green, and Germany begrudged a small stimulus inadequate for a nation where exports were 47% of GDP, the truly enigmatic picture has been Germany.

It only took a moment to guess why Germany was reluctant to try sizable deficit Keynesian spending (in proportion to the large downturn) months ago if you remember your history -- the hyperinflation of the Weimar Republic is their greater economic memory, not the Great Depression, which Germany quickly escaped.

But in recent months, as we watched job loss and panic around the world, the Germans seemed comfortable, busy shopping, unaffected. While German trade figures dropped precipitously, the mood in Germany seemed...chipper.

But it turns out there's a reason Germany defied economic logic for a while...

Marketplace points out why:

STEPHEN BEARD:"...rather than lay off large numbers of staff, German companies have kept them on, working a shorter week, often with a Government subsidy, in the hope of an early upturn....

SIMON TILLFORD:"The assumption that there will be a relatively robust economic recovery now looks pretty far-fetched, hence German companies are going to start laying off workers in large numbers over the next six months....

ANDREW HILTON:" ...If the U.S...bounces back, the German economy will bounce as a result...but, if the recession is prolonged in the U.S....we will see rising unemployment in Germany...focused in the export sector."

Could these strong, hardworking nations do something about their impending employment waterfall?

Sure.

But will they?

Our Great Recession Could Be Made Into A Great Recovery (Updated)

I was reading through Brad DeLong's 1997 chapter on the Great Depression, enjoying his detailed writing, when I hit the central question we face now posed in his section "The Persistence of the Great Depression." DeLong offers a consideration of long-term unemployment in his 1997 perspective, but the ultimate cause is missing. We now can say incisively a more fundamental reason the Great Depression persisted.

The reason the Great Depression persisted in such a long slump, instead of simply reversing into a typical recovery is ultimately quite simple -- debts and the necessity to pay them off, and the spread of frugality in response to the conditions. These are not primarily a question of debt service loads or interest rates -- people decide in accordance with their expectations and longer term plans whether they can borrow more or must pay down debts instead. Debts and frugality, which I laid out more fully here, explain the persistence.

The other piece I've read over a couple of times lately is Ambrose Evans-Pritchard's recent column "The depression quietly deepens" which is, of course, about here and now. This is useful for its bracing quality, to focus the mind.

With my description of the Great Depression, these three pieces together suggest a key piece of the way out of this morass.

Debt forgiveness.

In the U.S. we have two primary forms and one minor form which are often used. The two major forms of debt relief are foreclosure, which can deal with the large debts from overpriced housing that has returned to normal values, and bankruptcy, which can deal with the debts from too many (overpriced) purchases driven by the illusion of equity wealth. A minor form of debt relief is to negotiate debt reductions from unsecured creditors, such as credit card companies (which may prefer partial payments over total losses in a bankruptcy). (Update: just saw that CR has a post on this particular form of debt relief - a good sign. NYTimes source article here.)

What we fail to realize in our public discussion is the high virtue of these forms of debt forgiveness for the general economy.

We do much better for each other if we do not insist on the enslavement of many of our fellow citizens in modern debtors' prisons -- walls of debt that cannot be repaid. Debts so large that their attempted payment would ensure another Great Depression, which in turn would make their payment progressively harder and finally impossible.

Debt relief is our chance to get out of this mess by forgiving those who truly did not expect house prices and the economy to go south.

While we don't want to benefit those who knowingly took advantage, we must forgive the majority who were blindsided by forces they did not imagine.

In addition to the debt-overwhelmed group that isn't able to purchase much of anything, we also have the large group I'll call the In-Betweeners -- those who are currently able to make payments on their significant debts, but who are squeezed into sharp consumption cutbacks due to rising credit card interest rates. Their reduced spending also threatens to drag the economy into a long, long slump.

I proposed a specific way to ease the interest burdens of this group here (look for "What might help consumers pay off their non-mortgage debt faster?")

Together, these various forms of debt relief can help revive our economy.

Once the debt load of American consumers is reduced, they will be able to buy more goods and services, supporting a stronger economic recovery. The other key piece for a strong recovery is new American innovation, new American goods and services, new businesses -- and the aid of a helpful climate to allow new business to flourish, including favorable tax conditions and such aids as more economical health care.

At this point we no longer need to fear over-consumption. That trend is well and truly broken. (more here, here, and Mish's version) It was a matter of psychology, and the psychology is changed. It is a new world.

What shape would we like our New World to take? We face either Depression or radical change to escape one.

Our Great Recovery will require either a overwhelming stimulus program like World War II or...widespread debt relief.

The thing is, the faster this debt relief is brought forward, the sooner a friendly and easier economic climate can arrive.

And time is not irrelevant. Years of slump really can add up. Three or four years of a 5% per annum growth difference, for instance, would add up to a very different world. While we think rightly of issues like solvency of medicare and social security, even more drastic consequences are always possible. Imagine for example if the graph of national economies during the Great Depression in DeLong's chapter did not have an turn upward for the U.S. in the 1930s, while the 1930s German and Japanese economies soared.

Real national security comes from economic and technological capacity. The ability to arm. A "defense" plan that puts current defense spending above the economy itself profoundly threatens the nation.

But long-term security isn't the main justification for a better economic plan. We should do it for quality of life.

The thing we understand now, in 2009, that we did not know in 1933-1935, is that the nation pays one way or the other for deflating-asset debts. We will all pay regardless, one way or another. Whether we pay directly, or indirectly through a long slump.

Debt relief is a quicker way to cure this key underlying problem.

We are all in this together regardless of philosophy, and will recuperate, or suffer, together.

---------------
Update 6-18

Martin Wolf lays out the big picture for the world economy and our situation to date vs. the Great Depression in his latest article -- whether we might escape another Great Depression.

Martin writes:

The question is whether today’s unprecedented stimulus will offset the effect of financial collapse and unprecedented accumulations of private sector debt in the US and elsewhere. If the former wins, we will soon see a positive deviation from the path of the Great Depression. If the latter wins, we will not. What everybody hopes is clear....

Martin points out the exact question that will determine whether we recover -- exactly what I've addressed above:

[My explanations in dark green]:

We are seeing a race between the repair of private balance sheets [paying down large debts] and global rebalancing of demand [nations with big trade deficits, like the US, importing less], on the one hand, and the sustainability of stimulus [whether deficit stimulus spending can be maintained long enough to allow a sustainable recovery], on the other.... Robust private sector demand [consumer and business spending] will return only once the balance sheets of over-indebted households, overborrowed businesses and undercapitalised financial sectors are repaired or when countries with high savings rates [China, etc.] consume or invest more. None of this is likely to be quick. Indeed, it is far more likely to take years, given the extraordinary debt accumulations of the past decade. Over the past two quarters, for example, US households repaid just 3.1 per cent of their debt. Deleveraging [paying down debts to a lower ratio vs. income] is a lengthy process. Meanwhile, the federal government has become the only significant borrower [household and business borrowing is sharply down, which is why treasury bonds interest rates are still historically rather low]....

Here is the graphic article Martin refers to by Eichengreen and O’Rourke showing our world economic progress to date vs. the Great Depression.

-------------

(Readers may wonder if the idea of debt forgiveness was an original piece from the book I've been writing. The answer is no, these thoughts were worked out here in this blog. The book deals with more fundamental economic and life questions, which will help our nation, and ourselves individually, really thrive.)

Field of Dreams (updated)

if you build it...they will come...


A broad mythic idea lights up this movie: in America, you only have to be in the right place at the right time. They will come.

There's something about America.

We dream of striking it rich (more about this in my coming book).

There was more than only greed and speculative fever behind the housing boom. More than easy mortgages and anything-goes lending.

Many believed in the American myth of the windfall -- "making it big" by hitting it lucky. This is more than only greed. Greed is taking too many freebies from a bowl at a store, or overcharging a customer (remind you of hospitals?). This mythic American sense is more...transcendent than greed. It's being in the center of things. Being in -- with it. It isn't only money -- it's the glamour of being in the American moment -- of sharing the togetherness of the moment and the good feeling.

Many believed that more and more people would move into the desert near Las Vegas, or bid houses ever higher in California, because they were, up till then.

While we tend to focus on factors we think enabled and fed the bubble in housing, we forget that something more fundamental is at work.

Beliefs are more powerful in their economic effects than interest rates or even basic human conditions like avarice.

If people believe the economy will grow, it will grow, and if they believe it will weaken, it will weaken.

If people believe lower interest rates will create new growth, then that belief will help cause that outcome.

So long as people believed housing prices would go up, it was very likely new ways would be found to enable the continued rise.

Obstacles like interest rates or mortgage terms are less significant than beliefs. If there had been no interest-only or negative-amortizing loans, buyers would have simply found another method to fulfill their beliefs.

They might have tried joint-ownership purchases of houses in cooperative buying in order to continue the price rise -- they would do whatever it took, so long as the belief in ever-higher prices remained.

The market topped out because it stalled for lack of sufficient warm bodies in some locations (more homes were being built than there were people wanting to live in them in certain places and even speculators noticed this in time), and this scattered flattening of prices got enough media attention to spread a new belief -- that prices would flatten or even fall in many places -- then this new belief set in motion a broader outcome.

Here and now we have decided together on a modest recovery with continued job losses, but no one can truly predict the outcome 6 months from now because the beliefs will evolve and change as we go along.

Best of May

We just got back from a little vacation, but making a best of the month for May is quite easy.

One interview stood out well above others to my mind:

David Goldman being interviewed by Tom Keene
(scroll down the list to "David Goldman...")

Some thoughts:

My take on the issue of American demographics and the future economy is here (and previous more in-depth thoughts on Japan's lost decade and how to avoid it is here.)

While the middle of the interview (on Chrysler bondholders) just made me wonder whether the taxpayers put enough money into Chrysler to be able to simply subsidize the Unions more than the bondholders during bankruptcy (this question isn't addressed), the rest of the interview is good stuff.

We face an endless barrage of information and shallow analysis. When someone talks about the real issues that underlie the trends and issues of the day, this kind of interview is far more interesting.

Prognostications On The Economy (update 6-26)

Most people reading this blog will have read some prognostications on the economic future of the next 1-2 years, talking of what will happen in 2010.

These longer-term forecasts are fantasies.

While the mainstream prediction of some economic stabilization this year followed by modest GDP growth and continuing job losses makes sense, even this middle-of-the-road 6-month forecast is similar in reliability to a 2-week weather forecast during the spring or fall.

It might happen that way.

Exactly like a weather forecast, and for precisely the same scientific reasons, economic forecasts are relatively useful for a short-term outlook, and less and less meaningful for a longer term outlook.

I'm quite deliberate in this choice of language. Just as randomness changes the weather progressively more over time versus any specific scenario, the same effect applies to large economies. But while long-term weather usually follows seasonal averages with moderate deviation in most years, the long-term economy has more randomness and higher deviations.

Right now the biggest unknown is future evolution of expectations and the consequent choices individuals will make in response.

This is not at all predictable.

We can predict some aspects of the economy, such as national housing price changes, due to the highly consistent effects of supply versus demand -- when the supply of homes for sale is significantly more than 6-7 months worth, prices fall. The effect of significant supply along with significant expected shadow inventory (those with houses not currently on the market who would like to sell, and are waiting for the recession to ease) practically guarantee further price falls in many areas, and on national averages.

But some critical economic factors in the broad economy are fully unpredictable. That is, the degree of unforeseeable change is very high.

The economy is, after all, the joint decision of all of us together.

We can en masse pull back on our spending out of fear of job losses, creating a self-fulfilling outcome of continuing high job losses.

Or we can en masse gain confidence in the economy, and thus feel more secure in our jobs, and spend a little more, creating a self-fulfilling outcome of reduced job losses, and even an improving economy.

The most crucial part of the stimulus program -- the American Recovery and Reinvestment Act of 2009 -- is how it affects general confidence in the economy.

This is because general confidence will determine changes in consumer spending of greater scope than the amount of actual stimulus spending.

A popular forecast like "weak growth of 0.5% in the 2nd half of the year" is only a guess.

Fortunately, one of the greater forces in the economy has changed direction.

We can all breathe a little easier to see this news today:

Consumer confidence extended its rebound in May, soaring to the highest level since last September as more shoppers are feeling the worst of the recession is behind them....

This is no small thing.

Sufficient confidence could give the actual stimulus dollars much more traction, leading to a very different economic outcome over time. How different? Well, long-term interest rates for instance depend on investor confidence in America, which in turn depends on the American economy, which itself depends on small changes adding up over time...

-----------------------------
Update 6-26

(Reuters) - U.S. consumer confidence rose in June to the highest since
February 2008, as expectations grew that the worst economic recession since the
Great Depression may be ending, a survey showed on Friday.

Today we also learned the savings rate has shot up to 6.9% for May from 5.6% in April. New unemployment claims are still very high, ticking back up a bit.

But of all the indicators, most key are confidence and actual consumer spending (up 0.3% month over month).

These two suggest some possibility of real stabilization, instead of a downward spiral. What's unknown is how many layoffs have been delayed on hope of a bigger rebound in spending. The next 2 months will decide if this stabilization is firm, or only a pause. But I'm cautiously hopeful that this stabilization can hold, so that the economy may be at the bottom here, instead of a worse scenario. It's not certain, but it's a good sign.

Will The Recession Cause A Population/Economy Sea Change?... And What We Could Do Instead

There were absolute declines in the number of births in 13 of the 50 US states, including some of the poorest, such as Louisiana and Mississippi, while North Dakota, which showed strong economic growth due to an oil boom, had the biggest increase in births.

High house prices, which peaked in 2006, may have also played a role in discouraging couples from having more children.

And more recently, there is evidence that immigration into the US has dropped sharply, further lowering the population growth rate.

BBC--US birth-rate mirrors recession

Kids are "expensive", we hear these days. Most couples, the great majority, think twice about having a child. Many people choose not to have children, or not to have another child, because they cannot afford it.

We have focused in our national debate quite well on the general direction for our economy, such as a green technology future. But if the number of new families with kids decreases sharply, what effect will that have on our future economy?

If technology alone could drive an economy well regardless of the birthrate, one must wonder why the Japanese economy gradually fell behind the world during a period of growth in demand for Japanese exports. There are several factors, but the striking fact right now is how domestic Japanese demand for its own products is relatively weak due to an ageing population, and this lack of demand weakens the Japanese economy.

Not only are older Japanese naturally more conservative spenders than younger Japanese, but also there are fewer young Japanese to compete for Japanese investment capital, which causes the rate of return on domestic investments to be lower than it would be with a larger young population competing for that investment capital.

Having a dearth of young people weakens an economy directly through less domestic demand, but also forces an economy to either shrink or rely on increasing exports. Exports are an uncertain foundation for an economy though, as we currently are witnessing.

We are not talking here of simply a flat population. The Japanese population will shrink, as the low birthrate of recent times plays out. The same fate could begin it's first initial undramatic step right now here in America, even while it is obscured by the recent surge in births. What decisions are couples making now? Having babies has been popular in recent years, and this could change now that money seems tight.

---

What if raising kids in America was more affordable?

A few months ago after reading a post on Hedera's Corner, I calculated the increase in a family budget needed to raise 2 kids, in a detailed manner similar to the recent blog post here, where I try to be more realistic and specific than typical policy analysts. I considered what a median family could manage, with frugal choices, and arrived at a number of about $200/month extra costs during early childhood, without daycare expenses.

By my calculations, the bare minimum amount of budget help a median family would need to help them afford to raise 2 kids corresponds to a federal income tax exemption allowance of about $8000/child. For instance, if the stay-at-home mom takes a part time job after a few years, what part of the income should get taxed away? This depends on such tax detail as the exemption per dependant amount. Some could argue reasonably for more than only the $200/month extra I chose as a target increase in spending for raising 2 kids. But families typically adjust in several ways in order to afford to raise their kids -- some types of spending disappear while new types arise -- a tax break is only one piece of the picture. But it is an important piece.

"Perhaps the real way to best help families with kids is raise the federal 1040 exemption for dependents from $3500 to something more realistic like about $9000 for 1 kid, and $8000/each for more...." (my comment here)

This morning I was listening to David Goldman being interviewed by Tom Keene, and Tom brought up a point from David:

Tom: "This blew me away folks. The personal exemption on the tax form around World War II was $624 big dollars.... Now it's $3650.... You figure out that the World War II adjusted exemption should be $8000 [adjusted for inflation]. So a family with 2 kids is a $16,000 benefit which comes out roughly to around $240/week.... Essentially we could feed 2 kids in most American homes just if we got the personal exemption back to where it ought to be."

David: "The reason Japan had a lost decade is not only because their banks had a problem....their workforce has been shrinking."

By the way, this entire interview is excellent and will be in the best-of-the-month.

Now, "$240/week" (from the interview) isn't the correct result -- the actual take-home income increase from $16,000 more in exemptions at a 15% marginal federal rate (typical family rate) is $200/month, not $240/week. (Even at a much richer marginal tax rate of 25%, this result is only $330/month).

But $200/month is enough to significantly reduce the strain of feeding and clothing 2 kids, for a frugal family, as I calculated it with specific, realistic numbers. $200/month is not enough to stop being frugal. They'll need to be more frugal than they were just before they had kids -- they'll have to change spending priorities -- but that's normal.

An even better way to make having children financially feasible though would be to raise the amount of the Child Tax Credit (CTC) from the current $1000/child to $2200/child, and also make it "fully refundable" (paid fully even if a family's income taxes for the year are less than the $2200*number of children). If fully refundable, the credit would help better in real world situations. For instance, a family with significant medical expenses which lowers their taxable income drastically could lose some part of a $2200/child CTC due simply to the fact the current CTC requires the household have total income taxes after deductions that are greater than the credit in order to receive the full credit. But a family undergoing a medical crisis (and thus with significantly reduced taxable income after medial deductions) needs more tax help to keep their children clothed and fed, not less tax refund.

Here is a competent analysis of the CTC.

Readers may recall I pointed out how and why the Japanese had trouble recovering from their financial bubble, which included the decisive fact of not enough domestic demand from young Japanese people for Japanese products. Further, this implies older Japanese people will need overseas investments to have a chance to maintain income as the nation ages since the domestic Japanese economy will shrink due to demographics alone.

So...a nation normally needs enough young people to sustain its older people in retirement. Intuitively, we can understand a nation would need at least a roughly stable population to help avoid the strain of too many retirees per worker, or... otherwise they must have drastic savings and overseas investment. The latter is exactly the response the Japanese people worked out. The personal savings rate in Japan has been huge in recent decades, above 16% at times (but the total savings rate of the Japanese economy now shows a falling trend even separately from recent deficit spending, as more and more workers retire and begin to draw on their savings.)

In America our savings rate has been much less --we are relying on having enough young people, enough workers per retiree, to help in part to sustain retirement for our older people via transfer payments -- taxes on workers to help fund Social Security benefits.

But here's where a problem arises.

If our birthrate declines from this recession, while our savings rate increases, our level of demand in the nation will continue to decline. Retirement will then face a triple hit -- fewer young workers to fund Social Security, less domestic demand to drive the economy and create profits (on investment), and finally less competition for investment capital itself, further lowering returns on retirement investments.

America has had a growing population mostly due to immigration from Mexico.

Now the recession has slowed that trend, and also is likely to make Americans newly reluctant to have kids, which they feel they would have trouble being able to afford.

The projected trend in future U.S. population is likely to reverse unless the economy turns up better than expected over next few years. It's like a tipping point. As having kids remains expensive, and retirement looks less certain, families of productive age pull back further and have fewer kids. The U.S. could change onto a path for a much lower future population than previously expected, and if the change is dramatic the negative effects would be dramatic.

The concern isn't a flat population -- there are virtues in that situation. The concern is having a sharply falling population in 20 years.

This change isn't inevitable. We could simply instead change tax policy, and alter our economic future in the most profound way.

We can help solve this very serious problem by simply returning the Federal Income Tax Personal Exemption back to roughly its inflation-adjusted WWII value. Nothing more extraordinary than adjusting for 64 years of inflation, and then rounding up the number some to $8000 (or alternatively enacting a $1200 increase in the Child Tax Credit to $2200/child).

Households across the nation of child-bearing age could then easily see that having kids becomes feasible in their budgets.

Economics matter.

If this seems interesting, you'll find more interesting stuff -- economics yes, but a lot of insight that is more broad and far-reaching than economics -- in the book I'm working on. I will be providing links here for it when it is finished. The book has some new insights into the situation we face now, not available in other books, but it's more than a book about 2008 or 2010. I'm aiming for this book to be meaningful in 2020, or 2040.

Usury is OK, and Guns in Parks...

The Senate passed its version of credit card reform today. Several current tricks of credit card issuers will be out of bounds...in the future....eventually...when the rules finally come into effect. But if your card issuer just hiked your rate in a big way, well....

Current usurious rates aren't even on the table. 18%, 25% or 29.99% are all just fine.

One article mentioned that about 1/5 of card holders pay over 20%. Was that data from today?

One of our rate hike notices, which arrived a few weeks back, will raise one card of ours from 12% to about 19%. While these hikes won't affect us much at our house, it's quite easy to imagine the effect on other households. But compare this to the above seemingly reassuring statistic. Our new rate will be below 20%, and isn't in effect yet.

In 6 months, we may find that the above statistic of 1/5 has increased....

The elephant in the room is the question of the rate hikes that have just recently occurred or are on the way, since the card industry could see the new rules coming for miles. Card rate hikes are on the way, notices already sent, and these will slow the economy.

You can check out how your own Senators voted on the question of how many more of your dollars should go to the card industry right now, instead of, for instance, to local businesses where you live. If you are just now starting to pay an extra $40 or $80 a month in interest (a 12 percentage point rise in interest rate on an $8000 balance costs $80/month), will you spend the same amount on local goods and services that you have recently?

If you pay $40 a month more in interest now, will you tip the waiter the same amount? For that matter, will you cut back on eating out even further?

But, while usurious rates are OK with Congress, it's still up in the air whether the guns we need in parks can be loaded:

One amendment attached to the Senate bill by Senator Tom Coburn, Republican of Oklahoma, would restore a Bush administration policy allowing loaded guns in national parks. That provision is not in the House version, so there may be discussions between the two chambers over the issue.