Archive for the ‘Economics’ Category
Nope, don’t think so.
Although I don’t think the stimulus package is overly harmful, it would have been better to not pass it than to give the government the opportunity to take credit for the recovery it has less than nothing to do with. This is what they’re saying now:
“We always knew we were not going to get all that much fiscal impact during the first five to six months. The big impact starts to hit from about now onwards,” Romer said.
How utterly convenient! The big impact of the stimulus coincides with the consensus economic recovery. I hope we don’t let them get away with that. So, they passed this stimulus super fast so it could help when the economy is already ramping up? This is always the problem with stimulus: the argument for it is to be counter-cyclical by having the government spend money in the troughs of the economy. What ends up happening is by the time any of it kicks in, the economy is already in an upswing, so the stimulus becomes pro-cyclical, making the peaks and troughs more extreme. It is political genius to continually change what the original intent was, thereby making you right in the end. I’m afraid there are many people out there who are ready to except this outcome at face value and there are so few who are willing and able to call the administration on it. We can’t let them fool us!
I mentioned last month that it’s likely the economy bottomed. I still think that’s true, though we won’t see blinding evidence of this for quite some time, but there are strong indicators that it’s already happened. My biggest concern is economic growth, because the faster the economy grows, the faster our lives get easier and more stable. How do we measure economic growth? One of the most widely used indicators is GDP or Gross Domestic Product. It’s the value of everything we produce in the country. Another way to look at it is the sum of all of our incomes. So GDP is basically the nation’s yearly salary. Currently, it is about $13.86 trillion. A year ago, it was well over $14 trillion if I remember correctly. So, GDP is a good piece of data to look at, but unfortunately, it doesn’t tell us what’s happening up to the minute. Lets take a look at how GDP is reported.
GDP growth is calculated for a three month period, or quarter, and released at the end of every month on an annualized basis. The first month after each quarter (Q1: Jan.-Mar., Q2: Apr.-Jun., Q3: Jul.-Sep., Q4: Oct.-Dec.) we get an advanced reading, which has a lot of estimates since the data isn’t all out that soon after the end of the quarter. A month later, we get a revision called “preliminary GDP” and then in the 3rd month we get “final GDP.” We end with the best estimate for economic growth for the previous quarter at the end of the following quarter, but these are still subject to revisions in the months (and years) ahead. Still, it is a useful measurement for how much our economy improved.
So, at the end of July, we will have the preliminary GDP reading on the 2nd quarter (Apr. – Jun.). I expect 2nd quarter GDP to end up between -1.0% and 0.0%, and I’m hoping for as close to flat as possible. The consensus forecast is -1.5%, but luckily(?), they are often pessimistic. Since Q2 contains the end of the recession and the very early start of the recovery, the average of the two will determine how positive or negative the quarter is. What this means though, is that all of Q3 will be positive, and it could be hugely so, in the 3% region. The down side being we won’t actually get the first real positive number until late October.
You’ll be hearing for many months to come that the economy is doing poorly, but just keep in mind that it’s already hit bottom and doing better. The media thrives on bad news and isn’t brave enough to admit the recovery until it is completely obvious.
On a related note: I believe the economy would have rebounded now whether or not the “Stimulous Package” was made law. The stimulus will do something (good or bad no one can really know), but it hasn’t had a chance to do much of anything yet. This won’t stop the government from taking credit for every good data point though, so when they do, try to take it with a grain of salt.
The government just passed a law requiring a huge increase in the fuel economy of cars. Sounds great on the surface, but it gets complicated fast and opens the doors to a Catch 22. The arguments for more efficient cars include: 1.) even though cars will cost more, we’ll make it up with savings at the gas pump. 2.) we’ll save the (always soon to be doomed) planet by burning less fuel. These two arguments contradict themselves and the first contradicts another proposed government program, “cap-and-trade.”
A small majority of people are all for more efficient cars, at least when the question is posed where the only trade off is a more expensive car. Turns out there are other costs, like loss of human life. The main way car companies meet fuel standards is by making cars lighter, but this graph shows lower car weight means more people die.
I wonder if just as many people would be for more fuel efficient cars if they knew thousands more would needlessly die each year. I like small cars, but after learning this, if cars are made too light and less safe, I might start buying Volvo’s and just paying whatever extra tax they impose.
So, even though more people will die, at least we’ll be saving money, oil, and CO2 emissions, right? Well, that’s another problem. If cars get better mileage, gas prices will go down. When gas prices drop, people drive more, offsetting the increase in mileage. That’s why, despite ever increasing standards, we have continued to use more oil. That’s the “awful” thing about Economics, it causes people to change their behavior in response to the current situation. Thus, the second reason for increasing fuel economy, global warming, will not be helped. Not only will we drive more, offsetting any gains, but driving only accounts for 1.5% of CO2 emissions. So any savings would be negligible anyway.
Now that I have refuted the arguments themselves, I will explain how the lower cost argument contradicts the “cap-and-trade” system. Cap-and-trade is also supposed to save the planet, and it is really just a fancy and complicated way to tax carbon (to make fossil fuels cost more). It is more politically favorable than a tax because it is so opaque, and because it gives the government another way to play political favorites by controlling another facet of the economy. People can’t easily see the tax being levied because it’s buried in the cost, so it’s harder to notice it, except by the fact that it costs more. The same way you know you’re paying income taxes, but you just see what ends up in your bank account, you don’t really feel how much money was taken out before hand.
So, to sell the current fuel efficiency regulations, they told us we are going to save money by using less and driving down the cost, allowing us to use more. But someday soon they are going to say they need to greatly increase the cost of gas and other forms of energy so that we use less. So which is it? Do they want gas to cost less or more? Do they want us to drive less or more? Politicians make these over simplified arguments all the time. They know most people won’t stop to think of the second and third consequences of government action. They know most citizens aren’t versed in economics and thus don’t always remember that people respond to incentives! I believe most politicians know this truism, but they only invoke it when it is favorable to their goals.
I ran into this document on “Freedom in the 50 States”. It’s very interesting, and not surprising, Ohio was near the bottom of the list.
Ohio (#32 economic, #46 personal, #38 overall) has much to improve. Adjusted government spending is over a standard deviation higher than average. Ohio is higher than average in every spending category except transportation. Gun control laws are relatively poor, though not in a class with Illinois, New Jersey, and others. Marijuana laws are liberal overall, but cultivation and sale sentencing could be reformed. Most gambling is illegal. Private and home school regulations are unreasonable, including teacher licensure and mandatory state approval of home school curricula. Asset forfeiture rules are appropriate. Eminent domain reform has not gone nearly far enough. Draconian smoking bans are in place.
It’s not a perfect document. I would probably have weighted things differently and even determined the criteria differently, as anyone would, but it gives you a general idea of freedom levels in the different states. The conclusion ends with a statement I really enjoy.
As Americans grow richer in future years, quality of life will matter more to residence decisions, while the imperative of decent employment will decline by comparison. As a result, we should expect more ideological “sorting” of the kind Charles Tiebout foresaw. High-quality information on state legal environments will matter a great deal to those seeking an environment more friendly to individual liberty.
This says that as time goes on, American’s will become so rich, that we won’t have to let employment be a major determining factor in where we live. We will go to the place where we think we’ll be most happy, meaning we’ll live near people who think similarly to us. Unfortunately, this will mean more political polarization, but it will also be the realization of one of the founding theories of the United States. We have states so that there are a bunch of different country-like territories experimenting with ideas. In the modern world it will be easy to determine who’s ideas are successful and other states can follow suit. And if your state is stubborn, then just move to one of the states that “get it” until your previous state has such little income they are forced to change.
I would say most people who have an opinion believe they do. It is the cornerstone of many arguments against government spending. Unfortunately, data for or against this postulate is hard to come by, at least using the top couple hits on Google. So I decided to do my own very rough study to get some idea of the correlation between government deficits and inflation. Below is a graph of both going back to 1947 (the earliest I could find the deficit data). I graphed the deficit as a percentage of GDP because it is only meaningful in relation to the size of the economy.
My personal statistician and fiancé ran the numbers not knowing the outcome I was looking for. She found a correlation of no more than 4% for the data using the same years and by lagging the inflation by up to 5 years. She tells me this is insignificant, meaning you could probably find this correlation by picking two random data sets with nothing in common. To be fair, if you look at the range from 1982 to 1994, there is a correlation of 39%, a moderate amount, but this is the best is gets, and it’s not the best idea to cherry-pick data like that.
Steve Conover, over at the Skeptical Optimist, has told me that real economists have tended to find no correlation and even negative correlation between inflation and deficits. He also published an interesting graphic showing that eras of debt pay down have been followed by recessions.
So, if it’s not deficits, what causes inflation? This is at least one whole post by itself, but the short answer is that printing money faster than economic growth causes inflation, period. Government deficits don’t cause inflation because deficits by themselves don’t create new money, they borrow it from the economy, so it’s effectively just moved around.
You can hate government spending for a lot of reasons, but inflation is not the best reason and it is not a good argument against spending. Unfortunately, that doesn’t mean it hasn’t been effective rhetoric.
Update: Steve Conover just did a similar post on the correlation of deficits and interest rates. It was slightly negative.
(This was originally posted on April 15, 2009.)
Read this article by Brian Wesbury, I think it’s amazing. It does a fantastic job of explaining the two major economic worldviews.
If one view sounds like is shown a cheerier light than the other, maybe it’s because those who hold that view tend to be much more cheery and optimistic people. Comments are welcome. 🙂
It’s been a little quiet lately, at least as far as dealing with the subjects I am comfortable bringing up here. The low key atmosphere is a welcome relief from the past several months where there seemed to be a blockbuster news story about the economy each day. An unfortunate thing is that the government is accused of falling asleep at the wheel if they are not actively doing something to improve the state of the economy. I think it’s time for the government employees to all take a variant of Hippocratic oath and first do no harm. That being said, we will probably determine that a few things the government did were beneficial, though some things that are not will probably effect us for far too long.
I hope and believe we are at the turning point. That the market bottomed at the beginning of March. The quarter we just started will possibly be flat, meaning no or very little decline in GDP, followed by strong positive GDP growth in the second half of the year. The Fed is printing money as fast as they can, the economy is floating on a sea of cash, and Mark-to-market accounting rules have been adjusted favorably. The unemployment rate will likely increase for the rest of the year, but hopefully it will not travel far into double digits, or stay there for long. That is a recipe for social upheaval, and no one would benefit from the consequences of that.
So, things are looking up, and I imagine the rapid recovery we will likely experience for the rest of the year will make the doomsayers appear foolish once again.
Well, tonight’s South Park took on the economic collapse. If that’s not a sign of the market bottom, I don’t know what is!
You may or may not have heard that the Fed is doing something it hasn’t done in about 40 years or so. They are going to buy long term Treasury bonds straight from the Treasury. This sounds crazy: why is the government buying something from itself, what is that going to accomplish?
I would be disingenuous to suggest I fully understand. But here is what I do know. The Fed is scared of deflation, probably because Ben Bernanke (the fed chief, see picture) is a student of the Great Depression. One of the many mistakes that made the Great Depression so “great” was that the fed was too “tight” with the money supply. This means that they did not print enough money to satisfy the number of goods and services in the economy. This creates deflation (drop in prices). At first glance, deflation may sound like a good thing since everything becomes cheaper. The problem is, when people expect prices to be less in the future they stop spending money while waiting for prices to drop further. This crushes the economy, and eventually we would have to settle for smaller paychecks. People generally don’t care for shrinking pay, therefore, the Fed tries to keep inflation small and positive to give them enough buffer against deflation.
In the current crisis, people stopped spending money out of fear and the lack of available credit. This drop in “velocity” also can cause deflation since retailers will be forced to drop prices to keep selling their wares. The only way for the Fed to counteract this is to print more money. Usually, they do this by dropping their target Fed funds rate and then buy and sell treasuries (US bonds) on the open market to keep the rate at that level. The lower the rate, the more new money gets into the economy. The rate in currently near zero, so the Fed is pumping money as fast as it can using the market. Since it would like to put more money in it’s only avenue is to “monetize” the debt. This is where it gets fuzzy for me.
Monetizing the debt means it buys treasuries straight from the Treasury (follow?). Then the Treasury uses the money like it would any other money it raised from selling bonds, to finance the government. Instead of taking money out of the economy by selling bonds to people, the bonds are bought with newly printed money from the Fed. Thus, the newly issued debt is turned into new money and the new money is put into the economy. This, I believe, is where the term monetizing the debt comes from – turning debt into money.
Now, this opens a whole can of worms I can’t get into in this post as to whether this is a good or bad idea and what the consequences are. I wrote this, first, to see if I understood it, and second, to try to relay the information to those even more layman than me. Here is how I see it as of now. There are many people who are not worried about deflation as much as the Fed, and some who are much more worried about inflation (which happens when the Fed prints too much money). The Fed is definitely printing a TON of money. The likely outcome is we will avert deflation easily and economic growth will resume in the about another three months. The Fed will not be able to soak up all the extra money as well as it needs to (something it promises to do) and inflation will be high over the next couple of years. This is a hit we will just have to deal with because a little too much inflation is a much better outcome then even a little deflation.
I hope this is fairly clear to most, but if there are any questions please leave a comment. I’d be happy to update it.