August 31, 2010
August 25, 2010
August 24, 2010
When Did Thrift Become Bad?
By William C. Dunkelberg, Chief Economist of the National Federation of Independent Business
Supporters of letting the “Bush tax cuts” expire, especially for those with incomes over $200,000 (the “rich”), argue that money given to the rich is mostly “saved” while money to the “poor” is spent 100%, thus stimulating the economy. We can infer from that position that the argument is that “savings” don't matter for the economy or that the rich somehow destroy the income they do not spend (i.e. save) and it has no impact on the economy. A Brookings report (August, 2010) reports “…most Bush tax cut dollars go to higher-income households and these top earners don't spend as much of their income as lower earners”. So, economic policy is to take money from the successful and savers and give it to those who will spend spend spend?
Savings is defined as “non-consumption”, if you don’t spend it (on government or personal consumption), it is saved, whether in your mattress, or in an insurance premium, or buying stocks and bonds or putting the money in a bank. Savings make up the pool of funds we use to finance “investment”, the creation of new productive assets like equipment, office or warehouse buildings, inventions, new vehicles for business purposes, things that raise worker productivity and income in the long haul.
If you don’t put money in the local bank (i.e. save and deploy the funds in the financial system somewhere), we can’t finance any of these investment expenditures. It’s that simple. We are already a nation of poor savers, with our consumer saving rate reaching near zero in the housing boom (p.s. new housing is counted as investment, a new asset, but it doesn’t have much impact on productivity). So, the notion that rich people waste their incomes by saving a significant percentage of it is so off the mark! We need savers, and policies that transfer income earned by the successful to those who will spend 100% of it and don’t save anything is a recipe for economic disaster.
Most small businesses when started are financed almost entirely with the savings of the entrepreneur and small firms grow and create jobs with earnings that are “saved and re-invested” in the firm. The Brookings report argues that ending the cuts will have minimal impact on small business growth because “Less than 2 percent of tax returns reporting small-business income are filed by taxpayers in the top two income brackets”. This “2 percent” number uses as a denominator about 29 million tax returns with schedule C business income. But most of these employ nobody, many are part-time businesses. There are only 6 million employer firms, 90 percent with fewer than 20 employees. These are the job creators and far more of them would be impacted by the expiration of the Bush tax cuts.
We have borrowed the savings of the rest of the world for years so that we could “party” and still invest in some real capital at the same time. The problem is that those lending us their savings reap the returns, not Americans, and eventually might expect to be repaid. Every time we go through these cycles, we pile on more and more debt which claims more earnings each year from investments financed by the debt (and by foreign direct and financial investment) and increases the total amount of debt that must be refinanced and repaid in the future. The longer we put off making governments and firms seeking subsidies accountable, the more devastating will be the day of “settlement”. And we all know it will come. Each “crisis” brings the day of reckoning closer.
August 21, 2010
August 19, 2010
In studying the government debt market, we have inadvertently been led to question the economic theory that most fervently justified recent government spending programs: that of Keynesian economics. The so called “beautiful theory” of Keynesian economics is arguably the most influential economic theory of the 20th Century, shaping the way Western democracies approached the balance between free market capitalism and government initiatives. Like many beautiful theories, however, Keynesianism has ultimately succumbed to the ugly facts. We firmly believe the Keynesian miracle is dead. The stimulus programs are simply not producing their desired results, and the future debt costs associated with funding these programs may cause far greater strife in the future than the problems the stimulus was originally designed to address.
.........There are a number of studies we have come across that suggest stimulus is the wrong approach. The first is a 2005 Harvard study by Andrew Mountford and Harald Uhlig that discusses the effects of fiscal policy shocks on the underlying economy. Mountford and Uhlig explain that from the mid-1950’s to year 2000, the maximum economic impact of a two percent increase in government spending was an ensuing GDP growth of approximately three percent. A two percent spending increase inevitably requires an increase in taxes. Due to the nature of interest costs, however, the government would have to raise taxes by MORE than two percent in order to pay back the initial borrowing. According to their data, this increase in taxes would generally lead to a seven percent drop in GDP. As they state in their study: “This shows that when government spending is financed contemporaneously that the contractionary effects of the tax increases outweigh the expansionary effects of the increased expenditure after a very short time.” Stated simply, ‘borrowing to stimulate’ has never worked as planned because the cost of paying back the borrowed funds surpassed the immediate benefits of the stimulus.
In a follow-on study, Harald Uhlig estimated that an approximate $3.40 of output is lost for every dollar spent on stimulus. Another study on the same subject by C’ordoba and Kehoe (2009) went so far as to say that, “massive public interventions in the economy to maintain employment and investment during a financial crisis can, if they distort incentives enough, lead to a great depression.”
If the conclusions of these studies are even close to being correct, we are now in quite a predicament – not just in the US, but across the Western world. Remember that the 2007-08 meltdown was only two years ago, and as we highlighted in April 2009 in “The Elephant in the Room”, the US government has spent more on stimulus and bailouts, in percentage of GDP terms, than it did in the Gulf War, Operation Iraqi Freedom, the Vietnam War, the Korean War and World War I combined. All that spending was justified by the understanding that it would generate sustainable underlying growth. If it turns out that that assumption was wrong, have the governments made a fatal mistake?
In the end, Keynesian stimulus ultimately fooled us all. It roped in the politicians of the richest countries and set them on an unsustainable course of debt issuance. Recent Keynesian stimulus has even managed to fool the sophisticated economic models designed by central banks. The process of accounting for massive government spending ‘confuses’ the models into calculating a recovery trajectory when it doesn’t exist. The Bank of England confirmed this with its announced £3.5 million overhaul of its current model due to its inability to generate accurate inflation and recession forecasts.
Keynesian stimulus can’t be blamed for all our problems, but it would have been nice if our politicians hadn’t relied on it so blindly. Debt is debt is debt, after all. It doesn’t matter if it’s owed by governments or individuals. It weighs on the institutions that issue too much of it, and the ensuing consequences of paying off the interest costs severely hinders governments’ ability to function properly. It suffices to say that we need a new economic plan – a plan that doesn’t invite governments to print their way out of economic turmoil. Keynesian theory enjoyed a tremendous run, but is now for all intents and purposes dead... and now it’s time to pay for it. Literally.
August 18, 2010
August 17, 2010
Most students entering college for the first time this fall—the Class of 2014—were born in 1992.
For these students, Benny Hill, Sam Kinison, Sam Walton, Burt Parks and Tony Perkins have always been dead.
1. Few in the class know how to write in cursive.
2. Email is just too slow, and they seldom if ever use snail mail.
3. “Go West, Young College Grad” has always implied “and don’t stop until you get to Asia…and learn Chinese along the way.”
4. Al Gore has always been animated.
5. Los Angelinos have always been trying to get along.
6. Buffy has always been meeting her obligations to hunt down Lothos and the other blood-suckers at Hemery High.
7. “Caramel macchiato” and “venti half-caf vanilla latte” have always been street corner lingo.
8. With increasing numbers of ramps, Braille signs, and handicapped parking spaces, the world has always been trying harder to accommodate people with disabilities.
9. Had it remained operational, the villainous computer HAL could be their college classmate this fall, but they have a better chance of running into Miley Cyrus’s folks on Parents’ Weekend.
10. A quarter of the class has at least one immigrant parent, and the immigration debate is not a big priority…unless it involves “real” aliens from another planet.
11. John McEnroe has never played professional tennis.
12. Clint Eastwood is better known as a sensitive director than as Dirty Harry.
13. Parents and teachers feared that Beavis and Butt-head might be the voice of a lost generation.
14. Doctor Kevorkian has never been licensed to practice medicine.
15. Colorful lapel ribbons have always been worn to indicate support for a cause.
16. Korean cars have always been a staple on American highways.
17. Trading Chocolate the Moose for Patti the Platypus helped build their Beanie Baby collection.
18. Fergie is a pop singer, not a princess.
19. They never twisted the coiled handset wire aimlessly around their wrists while chatting on the phone.
20. DNA fingerprinting and maps of the human genome have always existed.
21. Woody Allen, whose heart has wanted what it wanted, has always been with Soon-Yi Previn.
22. Cross-burning has always been deemed protected speech.
23. Leasing has always allowed the folks to upgrade their tastes in cars.
24. “Cop Killer” by rapper Ice-T has never been available on a recording.
25. Leno and Letterman have always been trading insults on opposing networks.
26. Unless they found one in their grandparents’ closet, they have never seen a carousel of Kodachrome slides.
27. Computers have never lacked a CD-ROM disk drive.
28. They’ve never recognized that pointing to their wrists was a request for the time of day.
29. Reggie Jackson has always been enshrined in Cooperstown.
30. “Viewer Discretion” has always been an available warning on TV shows.
31. The first computer they probably touched was an Apple II; it is now in a museum.
32. Czechoslovakia has never existed.
33. Second-hand smoke has always been an official carcinogen.
34. “Assisted Living” has always been replacing nursing homes, while Hospice has always been an alternative to hospitals.
35. Once they got through security, going to the airport has always resembled going to the mall.
36. Adhesive strips have always been available in varying skin tones.
37. Whatever their parents may have thought about the year they were born, Queen Elizabeth declared it an “Annus Horribilis.”
38. Bud Selig has always been the Commissioner of Major League Baseball.
39. Pizza jockeys from Domino’s have never killed themselves to get your pizza there in under 30 minutes.
40. There have always been HIV positive athletes in the Olympics.
41. American companies have always done business in Vietnam.
42. Potato has always ended in an “e” in New Jersey per vice presidential edict.
43. Russians and Americans have always been living together in space.
44. The dominance of television news by the three networks passed while they were still in their cribs.
45. They have always had a chance to do community service with local and federal programs to earn money for college.
46. Nirvana is on the classic oldies station.
47. Children have always been trying to divorce their parents.
48. Someone has always gotten married in space.
49. While they were babbling in strollers, there was already a female Poet Laureate of the United States.
50. Toothpaste tubes have always stood up on their caps.
51. Food has always been irradiated.
52. There have always been women priests in the Anglican Church.
53. J.R. Ewing has always been dead and gone. Hasn’t he?
54. The historic bridge at Mostar in Bosnia has always been a copy.
55. Rock bands have always played at presidential inaugural parties.
56. They may have assumed that parents’ complaints about Black Monday had to do with punk rockers from L.A., not Wall Street.
57. A purple dinosaur has always supplanted Barney Google and Barney Fife.
58. Beethoven has always been a dog.
59. By the time their folks might have noticed Coca Cola’s new Tab Clear, it was gone.
60. Walmart has never sold handguns over the counter in the lower 48.
61. Presidential appointees have always been required to be more precise about paying their nannies’ withholding tax, or else.
62. Having hundreds of cable channels but nothing to watch has always been routine.
63. Their parents’ favorite TV sitcoms have always been showing up as movies.
64. The U.S, Canada, and Mexico have always agreed to trade freely.
65. They first met Michelangelo when he was just a computer virus.
66. Galileo is forgiven and welcome back into the Roman Catholic Church.
67. Ruth Bader Ginsburg has always sat on the Supreme Court.
68. They have never worried about a Russian missile strike on the U.S.
69. The Post Office has always been going broke.
70. The artist formerly known as Snoop Doggy Dogg has always been rapping.
71. The nation has never approved of the job Congress is doing.
72. One way or another, “It’s the economy, stupid” and always has been.
73. Silicone-gel breast implants have always been regulated.
74. They’ve always been able to blast off with the Sci-Fi Channel.
75. Honda has always been a major competitor on Memorial Day at Indianapolis.
August 9, 2010
“Grace withereth without adversity.”