Ponzi economics

Rod,

I think you're right on the mark. The US economy has had a hollow core for years, but the problems have been concealed by aggressive stimuli: tax cuts, deficit spending, and low interest rates, resulting in the illusion of a healthy economy. And the government response (from both parties, and from both ends of Pennsylvania Ave) is to do more of the same.

Mind you, I won't turn down the rebate if I get it. (But I won't spend it; I'll just pay down my mortgage a bit. By not buying a TV with it, am I a bad American?)

Thank you for this fundamentally conservative post, that will likely be vilified for being anti-conservative.

If we get the rebate, we'll spend it, but not on some splurge item. It will go to food (the cost of which is accelerating at a more rapid rate than gasoline), shelter and gasoline like everything else we make. I would assume that most middle class families are in the same boat, particularly if they live in a region, like Appalachia, where salaries are less than a third of what they would be anywhere else in the country.

I'm not an economist, but I'll comment anyway on a few things. First, I think we do have serious cause to be worried, esp. with regards to the savings rate and personal debt. Most people are living on the edge this way, with nothing to fall back on. Part of this is a matter of lack of personal financial discipline; part of this is the system finding a way to squeeze almost every last dollar out of folks.

Second, I wonder if something like Huckabee's tax plan doesn't make sense because of this: we tax income, which disincentivizes work and earning. What if, however, we disincentivized spending through a sales tax instead? That'd provide some incentive to save.

I hope this doesn't come across as too snooty, but I really fail to get why so much weight is given to the economic pronouncements of people who don't know anything about economics. This Deenan guy seems to think that wealth in the capital markets isn't "real". What exactly does he think is real? Gold (admittedly a good bet recently, but historically lousy). Who cares if we don't have any manufacturing? We manufacture ideas far better than any other country in the world, and the payoff for doing that is much much higher.

Sorry, Republicans weren't going to flush it down the toilet. It was going to be shrunk and drowned in the bathtub.

Grover Norquist:
Our goal is to shrink government to the size where we can drown it in a bathtub.

If that's the goal, then should we assume that there's a plan to get there? OK. Maybe not. But you aren't going to shrink government if people are under the impression that things are OK. Afterall, when Clinton left office, everyone was discussing what to do with the EXTRA money that we had lying around. So.........first get rid of the extra money(war & tax cuts), and then make a case that we can't afford all of those entitlement programs.

Rod,

Deneen explains it pretty well. If you want more colorful language, read any of your buddy James Kunstler's last few blog entries. Lots of hyperbole there, but he does get one thing right - we have a pervasive, Jiminy Cricket, something-for-nothing mentality here in the USA, 'when you wish upon a star, your dreams come true.' And while there's plenty of blame to go around for this kind of thinking, the roots of our current predicament are in Reaganomics - big tax cuts coupled with massive deficit spending.

And factor in oil use and it all makes sense. Our growth economy is like the Pro Bowl lineman who grew from an average, healthy teenager into a 380 lb. offensive monster by consuming a super-high calorie diet, high-tech drugs and training with high-tech machines. (And the occasional short of steroids when no one's looking.) And now that years of wars at the line of scrimmage have left the all-pro with bad knees, sprained ankles, and high blood pressure, all that weight is becoming his worst enemy, and the high-calorie growth regimen for every meal is clogging his arteries and raising his blood pressure. And on top of it all, the lineman is broke, and younger players are eying his job.

The way forward for the US and the lineman is to lose the weight, consume less, and find another occupation that's not predicated on dominating an opponent.

The Economy will be my #1 issue when I vote this year. It's the main reason I'm backing Ron Paul. He's the only candidate on either side of the aisle talking about making real, radical, tangible spending cuts.

Rod, have you read any of the stuff the Comptroller General of the U.S. David Walker has written about our coming economic storm? It's down right frightening. This man is our nation's accountant, and he's predicting the coming of a depression worse than what we suffered in the 30s if we don't IMMEDIATELY shape things up and radically cut spending. He's crunched the numbers and he says it's IMPOSSIBLE to tax us out of this crisis! IMPOSSIBLE! Even if we taxed 100% of everyone's income, we couldn't keep this economic crisis from happening if we maintain our current and promised (via Boomer retirement entitlements) spending. We're in $9 trillion of debt today, more than $50 trillion if you include promised entitlements to the Boomers who will be retiring en masse within the next decade. Walker has said, and I believe him, that we MUST RADICALLY CUT SPENDING if we want anything like an economically secure future for our children.

From what he and other prominent economists are saying, this is what I've gathered: WITH Ron Paul in the White House, we'll enter a recession. WITHOUT Ron Paul in the White House, we'll enter a major depression.

I encourage everyone out there to educate themselves about what's happening in the economy. Look to real sources. David Walker is at the end of a 15 year appointment, and he's as non-partisan as they come.

This reminds me of the SNL "commercial" about debt. You can see it here: youtube.com/watch?v=Q7f8M_2uDek

>>>
What is "prudent investing" these days? With the stock market all crazy and real estate collapsing, what's a small-time investor to do?

Posted by: GB | January 18, 2008 11:45 AM
>>>

Get out of debt.

So in fact we are much more willing to delay gratification (e.g. by saving for retirement) than people were in the Middle Ages.

Where's the question? That's an unsubstantiated assertion, and cold comfort at that. "Hey, we're more prudent today than in the Middle Ages! Are you gonna eat those fries?"

I totally don't understand economics. But I do understand that my generation is incredibly stupid with our money, in general.

We bought houses we could only afford because of extremely "creative financing," and because we figured that we'd sell in a few years at a grossly inflated price which would cover our insane ARM rates. Of course, everyone had the same idea so right now around here properties are sitting on the market forever, or being very heavily discounted.

We fell hook line and sinker for all the "No interest for 12 months!" "90 days same as cash!" "Low, low rates" and bought all manner of crap we don't need and can't afford.

For some reason, we thought we *had* to have granite countertops and custom cabinets, two or three new cars per family, ski vacations, Disneyland, the kids have to take ballet, flute, hockey, etc., our TVs have to be the size of the wall, we need fancy videogame systems because it's "too dangerous" for the kids to play outside in our McMansion neighborhood...

I can't tell you how many middle-class couples in my age group are complaining they can't pay their bills. Why on earth did we ever think we could live like this?

When I was growing up, it was sort of a given that most young families rented; it was a big deal when you could afford a mortgage to a house that my fellow GenXers would consider much too small to fit a family of five these days. My family had just one car; a lot of families were like that. It was normal. We didn't have fancy birthday parties with clowns and ponies and moon bounces and fifty guests; we had cake and ice cream with a couple kids invited. We wore hand-me-downs from older siblings and people with older kids; our mothers cooked food from stuff called "ingredients" because eating out was a rare treat. They cooked this food in non-custom kitchens, without the benefit of commercial grade stoves and Cuisinarts, and served it on plates that they got free with your $50 purchase at the supermarket. Our parents did not feel compelled to sign us up for every expensive activity available; we were expected to amuse ourselves (preferably outdoors) with stuff like sticks and sidewalk chalk. Our mothers did not get $150 highlights and wear $200 jeans, our fathers did not have $15,000 worth of home theater equipment. This was what normal, middle-class people were like in the late '60s and early '70s.

I don't know what the heck convinced my generation that we needed to own homes of at least 2000 square feet before we could even CONSIDER having children, that we needed not one but two or sometimes three NEW cars (and they HAD to have DVD players because heaven forbid the kids have to play license-plate-bingo or something on roadtrips), that our kids would grow up deprived if they didn't take ballet, flute, gymnastics, hockey and conversational French by the time they were six, and that we had to have state-of-the-art kitchens with every gadget and convenience for us to eat our Thai takeout in. Who are we kidding? What made us think we could afford this?

Maybe it was because we saw how our parents lived better materially than their parents, who had grown up hungry and shoeless during the Depression, so we assumed we had to outdo them somehow. I mean, if our grandparents had an assortment of cracked plates, and our parents had a matching set of cheap dishes, then WE had to have a couple "everyday" sets from Pottery Barn, plus the "good" china for all those fancy dinners we don't cook...

It is a hollow economy, and it will collapse in the none to distant future. Already people like us are feeling quite a pinch -- the ARM went up and the mortgage now takes more than half their takehome pay, the gas prices are making commuting from that megaburb unfeasible, it costs a fortune to heat that ginormous McMansion... It won't take much to knock down our houses of cards, and we have no one to blame but our own greedy selves.

Ollie,

You are right in saying that during the Middle Ages there wasn't a lot saving for retirement going on. First of all people then had to spend every penny just to survive. Second, many were also focused on the After Life where they could hardly take their savings. One would expect there to be low savings rate in very poor counrtries and high consumption rates in richer countries. The point is that our consumption doesn't necessarily only come from high incomes but from debt and is often fuelled by consumerism rather than the survival instinct.

Sorry, the above link for the Austrian economics article didn't work. Here's the correct one:
http://www.mises.org/story/2847

the ability of Britain and then the US to borrow money was a primary reason that they always prevailed in wars.

The difference between then and today is that, arguably, most of our debt today isn't paying for wars. It's paying for SS, Medicare, Medicaid, & other entitlements. If we didn't have those items in the federal budget, we could easily finance Iraq/Afghanistan out of current revenue.

we tax income, which disincentivizes work and earning. What if, however, we disincentivized spending through a sales tax instead? That'd provide some incentive to save.

IMHO, a consumption tax of some sort is an appropriate response to overconsumption on the one hand, and an abysmal savings rate on the other. However, the FairTax's probable failings - e.g., massive prebate fraud & compliance problems - suggest that a better approach might be to reform the current income-tax system. Something like the old USA Tax proposal, for instance.

If our net savings rate was more comparable to China's, I'd probably think differently.

Who cares if we don't have any manufacturing?

I care, if only for national security reasons. It's hard to build tanks or ships if you've offshored steelmaking, machine tools, shipbuilding, & vehicle manufacture to countries that are now your enemies.

I keep reading that taxes make for a disincentive to work. I don't know a single person who has ever said that they weren't going to get a job because the government will take too much money.

Well-informed "Laffer Curve" advocates nevertheless admit that the "tipping point" is probably at marginal rates far higher than the current ones.

"It's hard to build tanks or ships if you've offshored steelmaking, machine tools, shipbuilding, & vehicle manufacture to countries that are now your enemies."

You don't need to build tanks and ships (not that the US is facing an invasion by Mexican armored divisions anyway) if you can just hack their software and bring down their infrastructure.

"Could you provide a little of this "real evidence" that "seems" to show this trend in austerity?"

Real average interest rates through history. Clark shows (in Farewell to Alms) that they have come down from almost infinite (prehistoric tribal communities) to 15% in the middle ages to around 4% now...

You don't need to build tanks and ships [...] if you can just hack their software and bring down their infrastructure.

1. Hacking works both ways. See here:

www.strategypage.com/htmw/htiw/articles/20080106.aspx

2. Cyberwar doesn't seem to be working especially well in Iraq & Afghanistan right now (at least from what I've heard).

3. Aircraft didn't make tanks or battleships obsolete, nor did nuclear weapons. I see no reason why we couldn't have a cyberwar corps alongside, rather than in lieu of, our land & naval forces.

4. Oceans work both ways: It's a lot easier to prevent an enemy from invading your territory if you already rule the waves. As for land forces, see Fehrenbach's line about armed 18-year olds.

5. The utility of conventional land & naval forces is obvious from even a cursory examination of history, while cyberwar remains largely unproven. Until I see cyberwar tactics defeating an opponent on the scale of (say) Iran or North Korea, I'll remain skeptical.

6. War is not about merely inconveniencing the enemy. It's about breaking his will to resist. What if your cyberbugs take down an enemy's infrastructure, and he still gives you the finger? We "brought down" Japan's infrastructure in WWII via firebombing, and even then their surrender was a very near-run thing. Historically, boots on the ground have been a sine qua non of victory.

Military forces are often accused of "fighting the last war", but the rationale for this mindset lies in the chaotic nature of war: Immense uncertainties are inherent to warfare; and one way of reducing the incidence of such uncertainties is to stick with weapons/people/practices that have proven themselves in the crucible of combat.

I am well aware that cyberwar could theoretically render our entire military establishment obsolete, but at the present time, experimentation with such tools (e.g., via R&D, wargames, etc.) is probably more prudent than sinking the Navy, grounding the Air Force, and disbanding entire divisions of troops. Or adopting economic policies that would necessitate such measures.

Real average interest rates through history. Clark shows (in Farewell to Alms) that they have come down from almost infinite (prehistoric tribal communities) to 15% in the middle ages to around 4% now...

So, by 'middle ages,' you mean the middle of the Reagan administration when rates were about 20%. I guess that proves it, we really are an altruistic, fiscally responsible bunch.

(cue Twilight Zone theme...)

So, by 'middle ages,' you mean the middle of the Reagan administration when rates were about 20%.

Huh?

The Prime Rate was 19.5% when Reagan took office in January 1981. With the enactment of the Reagan tax cuts in Sept. 1981, rates began dropping steadily. Within a year, they were below 15% and by the beginning of RR's second term they were below 10% and remained there until after he left office. Both 1 year and 20 year bond rates declined steadily during the Reagan Administration (while the stock market increased beyond levels anyone in 1980 had thought possible).

Most importantly, inflation -- the worst economic legacy of the Johnson/Nixon guns-and-butter policies -- was defeated.

Most importantly, inflation -- the worst economic legacy of the Johnson/Nixon guns-and-butter policies -- was defeated.

No, inflation was just delayed. Balanced budgets were defeated. Deficit spending as a way of life gets legitimized in the Reagan years. Look at the charts - deficit spending takes off like a rocket during the Reagan years. And yes,to appease the partisans, feckless Democrats played a part in the spending too.

Point is, claiming that falling interest rates represents an increase in delayed gratification is a few tweaks short of a half-baked theory. Our inability to delay gratification is exactly why we have the sub-prime meltdown, record deficits, crushing credit card debt and a negative savings rate.

Salamander: don't know what the heck convinced my generation that we needed to own homes of at least 2000 square feet before we could even CONSIDER having children

Since 1950, house sizes have doubled, and the number of people per house has been cut in half. Whoever did the convincing, did it good!

re: David Walker...
in a Glenn Beck interview Friday morning, he said that our current debt is manageable but the $50 trillion in entitlements is the real problem...
and he specifically said that there is a 5 to 10 year window to fix this...
or else the consequences will surely be disastrous...
so... me thinks...
shouldn't the next president be picked on the basis of having the ability to manage this situation?
and...
of all the "real" contenders...
would the most capable manager be Romney?

help me here...

security faith hope love joy peace to all...

Please excuse me for this long post, but I'm an economist and policy wonk...

Recessions tend to resemble periods of hangover from consumers' or investors' previous episodes of irrational exuberance. I don't think the best way out of a recession is to subsidize more such exuberance, but rather to support spending on necessities, wise tax changes, and public investments of long-term value to the country.

From a social justice standpoint, people should be able to have their basic needs met if they're unable to find work; they should have access to adequate food, shelter, health care, and education. It's hard for neighbors and charities (and even state and local governments) to meet these needs when the whole economy isn't doing well. For this reason, I think it makes sense to target some federal resources on ensuring that these kinds of needs are met while still leaving people with sufficient incentive to find and keep jobs. Consider the story in Genesis 41:33-38 where Joseph instructs Pharaoh on how to set up a food program for use during lean years financed by a 20 percent flax tax that would raise more resources when the economy was doing well.

One non-bureaucratic way to help with basic needs would be to replace all major federal taxes (personal income, corporate income, and payroll) with a 20 percent flat tax on gross income plus a 20 percent value-added consumption tax, and provide refundable income tax credits of $3,480 per adult and $1,160 per child (indexed for inflation in the future). This change would be revenue-neutral in terms of the federal budget. To provide immediate assistance, the tax credits could be provided right away, while the tax on consumption could be phased in over several years to give people time to adjust. The credits would exempt the poor (and near-poor married couples) from owing any federal taxes and would ensure that everyone would have some minimum resources for necessities. There would be no work or marriage penalty to receive the credits, and everyone would face the same marginal tax rates (a combined 33 percent for money consumed, and 20 percent for money invested, paid in state or local taxes, or given to charity). This would be a form of "progressive flat tax"--one with constant marginal tax rates, but with total taxes owed relative to income rising as income went up. Because income would continue to be taxed, the system wouldn't increase the tax burden on middle-income citizens as much as the "Fair Tax" would. Also, a 20 percent value-added tax has actually been achieved in other countries (with good tax compliance), whereas a 30 percent retail sales tax ala the "Fair Tax" has not. Note that imports are subject to a value-added tax whereas exports are exempt, so adopting such a tax would promote a more favorable balance of trade and more domestic jobs.

Another way to soften the blow of economic downturns would be to adopt counter-cyclical public works programs, increasing the federal contribution to such projects (in both relative and absolute terms) when and where unemployment rates are higher. Notwithstanding all of the political corruption with earmarks and "bridges to nowhere," there are many infrastructure projects that need attention to repair or replace deteriorating roads and bridges and ease traffic congestion, and state transportation authorities should be able to identify such projects even if they can't always afford them. Increasing federal contributions to cost-effective projects when the economy is slowing down would seem to be a wise public investment strategy of buying construction work when and where private sector demand is low.

I'm not sure how politically feasible either of these ideas would be, but they strike me as reasonable from both an economic and an ethical standpoint.

I'm not an economist either but I'm thinking the market knows a flim-flam man when it sees one.

Sometimes it does. If only the market had recognized Bush for what he was in 2000.