Tuesday, February 28, 2012

Piecemeal Policy is Populist and Perhaps Ponzi

After I wrote about federal spending last week, the press was filled with new ideas about tax change and tax reform. On one level that sounds good. Many of us have been harping about a lack of attention to the tax side. On another level, this cornucopia of tax ideas warns of a continued breakdown in Washington and the increasing potential for a fiscal meltdown.

Consider the guy who gets in a car accident and damages his 1988 Vanagon pretty badly. He takes his pride and joy to his favorite mechanic, Claus. Claus wrings his hands and tells the guy, let’s call him Jason for fun, that the bill will be large because he has to fix everything from the brakes to the rolled and pleated cream and crimson upholstery. Jason luckily is covered by the Deutsche Hefeweizen Car Insurance Company and tells Claus to go ahead and do the work.  Imagine how Jason felt when Claus called him and told him the car is ready. When Jason arrived he found that the front end was fixed but nothing else. Claus explained that if Jason is satisfied, he would work on the rest of the car. Imagine that Claus and Jason go through this same thing each time Claus fixed one more part of the car. Finally Jason, usually a mild-mannered and thoughtful fellow, began screaming at Claus – DO NOT CALL ME AGAIN UNTIL THE WHOLE D___CAR IS FINISHED. I CANNOT EVALUATE YOUR WORK AND KNOW MY CAR IS FIXED UNTIL ALL PARTS ARE WORKING AT THE SAME TIME.

I think you get the point. Claus might take great pride in his brake work but Jason cannot really evaluate the brakes until he can actually drive the car forward and step on the brake pedal. It would also help to check the brakes after the steering system is fixed and he could see how the car braked while turning.

A sequential method is good for building a house. First you dig the hole then you lay the foundation, etc. But some things are best done and understood simultaneously. I think our fiscal system is broken. It behooves some politicians to amaze us with one partial solution after another. But the truth is that you cannot really evaluate a spending plan without knowing how you are going to finance it. Think of all the fiscal policies that have been dribbled out by the President or Congress lately. We fix employment one day with a continuing payroll tax reduction.  We make markets more efficient the next day by reducing corporate tax rates. We raise the tax on dividends and capital gains another time. One policy is all about fairness. Another one is about efficiency. Another pretends to impact growth. Hollow words talk about medium-term budget restructuring. All these policies have implications for national fiscal health in the near-term. All will impact it in the long-term. We cannot evaluate the brake fix without the steering. We cannot know the impact of a spending plan without a revenue fix and tax reform.

I can just see those politicians sitting around their favorite watering hole in DC drinking $20 Manhattans laughing with each other about how stupid we voters are. Let’s hit the voters with housing reform on Tuesday, says Senator 1. Yes, and then on Wednesday we will save the planet from killer bees chortled Senator 2. Senator 3 chuckled that Thursday should be when they publish the three million page document on fair taxes. They toast the voters and then text their chauffeurs to take them to the next stop for donuts. 

Okay I make fun but the sad truth is that this piecemeal approach is about nothing except the manipulation of us by politicians. They divide us and we happily line up in our respective camps while they go to the bank. 
Talk about a Ponzi scheme. These politicians vote for schemes that have done nothing but make things worse. I don’t care whether you talk about the war on poverty or on Afghanistan – the policies are not raving successes. Then they pit us against each other when it comes to another round of policies that don’t work. When the last round of policies clearly don’t work, they play a game of blaming each other and gain even more power to do equally bad policy. The game is nearing the end and we citizens are left with a mess.
I can hear you now. Larry – get real. You expect these politicians to actually sit in one place long enough to come up with a comprehensive economic plan for the economy? You want them to deal simultaneously with a number of the most important fiscal tools that could make progress towards advancing our goals for employment, economic growth, poverty, energy, and security? You want them to stop playing the bait and switch game?

I agree that what I am saying sound really crazy. I want our politicians to have a plan to improve our country. I want our politicians to recognize that there are tradeoffs when it comes to making progress on important goals like growth and poverty and environment.  I want our politicians to stop playing cheap games that artificially create animosity between the rich and the poor, the young and the old, and the wage earner and the owner. I want our politicians to lead in a way that raises our aspirations and creates realistic hope that we can succeed in an increasingly competitive global economy.

Okay, so maybe I am engaging in some early morning JD with my raisin bran. But we do need to recognize that the current approach to policy during an election year is just going to make things worse. Worse yet is what has happened to our expectations. Notice that it sounds crazy when I propose that our politicians act as leaders and statesmen. Have we really come so far (down) that we can only expect crass and selfish behavior of our political leaders? This is a great country with great people. We should expect more.
More should not be so much to ask for. Most of it we know already.  Below I will try to prioritize some things that most of would agree with. If you don’t agree that gives you something to comment about.

(1) Send a signal to ourselves and the world that our temporary deficits and debt position must be confronted immediately. That means we must reduce spending and increase tax revenues. We could always sell the Grand Canyon to the Chinese but I am not suggesting that yet. 
(2) Don’t let a solution for deficits/debt jeopardize our fragile growth position. By that I mean that too much austerity too soon might be a bad idea. So restructure the budget numbers in a gradual way. They can argue about the speed of the solution. But at the end of the day come up with a temporal plan.
(3) Ask the appropriate czars to move more quickly to finding ways to deal with housing issues, with reducing excessive leverage, and with using the legal system to penalize the bad guys.
(4) When dealing with government spending and tax revenues, leave no stone unturned. Allow no sacred cows. Spending restraint will not get anywhere if Social Security, Medicare, and Medicaid are taken off the table. Similarly tax revenue enhancement cannot be done unless the entire realm of tax rates, deductions, loopholes, and credits are reviewed together.
(5) If we evaluate the efficiency or the fairness of every change individually we will never take the first step. Instead we should take everything together – all the ideas above – and then make a summary statement about the overall impact on employment, growth, poverty, income distribution, etc. If one multifaceted plan fails to muster enough support, then they should adjust the plan until they get something that appears to be better when it comes to employment, growth, poverty, income distribution, etc.

If some of you have gotten this far you might be screaming – Larry – are you crazy or drunk? Can you really expect Washington to do something like this? Humbly I beg you to notice that the piecemeal approach does not work. It is taking us to the vigilante’s abyss. America does not face an inevitable decline because of the external meanness of China, PIIGS, OPEC, Terrorists, etc.  As Pogo said, “We have met the enemy and he is us.”

We have the firepower to adopt a comprehensive plan. We already believe nothing will get done this year because it is an election year. Wouldn’t it be nice if some folks in Washington took this year to work hard on a perhaps flawed but comprehensive plan that addresses our real problems? Isn't that what we pay them handsomely to do? 

Tuesday, February 21, 2012

The Obama Budget -- Ornaments or Armaments?

President Obama presented his 2013 budget to the nation last week. It made me feel the same way I feel when my irrigation system starts all my sprinklers going in the middle of a rain storm. I feel like screaming at the controller box – IT’S RAINING OUTSIDE. STOP SPRINKLING.

Mr. President, we have a government deficit problem. Stop spending money like a lottery winner at Walmart. Many of you reading this will notice that I once again am harping about federal government spending and you want me to talk about taxes. But as Betty will tell you, I can do only one thing at a time. Let me just say that I agree that tax revenue enhancement is important and necessary. I promise to get to that topic another time. So grant me a reprieve to focus only on spending right now.  

Luckily the Office of Management and Budget (http://www.whitehouse.gov/omb/budget/Historicals ) estimates the impacts of Presidential proposals so we have oodles and oodles of tables at omb.gov that shows how the President thinks his proposal will affect spending between 2013 and 2017. Of course his proposal would have to be passed by Congress to have an impact but it is instructive to see what’s in this plan for federal government spending. Surely it is revealing as to what the President thinks is necessary and good for the country. I read and my son affirms that like the presidential proposal of this or any other president, this first version envisions that much will be changed before Congress is finished. In fact, it is possible that nothing gets done in the coming year with respect to the 2013 budget. Nevertheless it is good to look at what he is proposing.

The following table comes from Table 1.1 Summary of Receipts, Outlays, and Surpluses or Deficits (from the above link). I have abstracted just the information about government spending or outlays for the years indicated below. I added defense spending from Table 3.2 Outlays by Function and Subfunction.

                        Average Annual Percentage Change in Federal Government Spending
On-Budget          On-Budget          Off-Budget
Total                      Defense             (Mostly SSN)
1990 to 2007          1.4                       5.0                          13.0
2007 to 2011          9.1                       7.0                            2.5
2011 to 2017          3.1                     -2.8                            12.1

The story from the rates of growth is pretty simple. The 1990 to 2007 data are provided for benchmarks – or to register some degree of normality. On-Budget Government spending during that 17 year period grew by an average of about 1.4% per year. On-Budget includes most items in the budget and defense spending but not social security outlays. Notice that the defense spending part of On-Budget grew by 5% per year – faster than overall On-Budget. Spending Off-Budget was the fastest with an average annual increase of 13% per year.

The second line of the table calculates annual average percentage change over a four year period that includes the recession and the following slow growth years. This period mostly coincides with Obama’s tenure. Notice that SSN spending slows greatly during  these years while On-Budget spending rises by 9.1%. On-Budget spending increased from $2.3 trillion in 2007 to about $3.1 trillion in 2011. A more normal increase during that time period would have found it growing to about $2.43 trillion. Thus we see On-Budget government spending growing by about $670 billion more than normal.

There was a recession and because of the recession we found On-Budget government spending about $670 billion higher than the amount it ordinarily would have increased. Since the recession is now over it might be reasonable that sometime after 2011 or sometime in the future, that extra or excess spending could be removed. A normal spending amount for 2011 should have been $2.43 trillion. So reducing the actual amount of $3.1 trillion back down toward $2.43 would be reasonable. The spending was meant to be temporary. Temporary means you add it when necessary and then remove it when not necessary.

Here is where the English language really creates problems for us. Getting rid of spending that is in excess of what would be normal is called a normalization by some people – a horrendous cut by other people. In my mind, you can’t call it a cut if it was meant to be tempory and if you are letting the normal progress of government spending rise. Government spending was $2.3 trillion in 2007 and normalization would imply spending of about $2.43 trillion in 2012 or thereafter. That is not a cut – it is an increase -- so long as we let spending rise towards $2.43 trillion.

Okay so some of you think I am being draconian. But let’s see what the President’s budget estimates for spending after 2011. Do we see anything bordering on a cut from the bloated levels of 2011? Absolutely not. The table shows SSN spending going back to its double-digit increases.  On-Budget spending is estimated to grow by an average annual rate of 3.1% per year from 2011 to 2017. Notice that is not only NOT A CUT but that growth rate is EVEN HIGHER than what prevailed during the 17 years from 1990 to 2007. In fact the average annual rate after 2011 is more than double the normal rate of the past. President OBAMA is not suggesting a cut – he is taking a bloated level of spending of $3.1 trillion and raising it over the next six years to $3.7 trillion.

This reminds me of someone gaining 50 unwanted pounds in February deciding to gain only 40 pounds in March. That’s quite a cut, right? Would it be so crazy for this person to plan to lose 1 pound next month?  While losing more than that would seem more effective clearly no one would consider gaining 40 pounds a cut.
If any politicians boldly tries to use this perverse Presidential logic to stop the increase – for example if anyone dares to cut the increase to only $3.6 trillion by 2017 they will be pointed out and ridiculed and called mean-spirited souls who care not for those who receive government spending. But this is crazy politics. Only a King with No Clothes could get away with calling another $600 billion increase on top of a temporary and bloated figure a cut in spending.

You might notice that almost nothing is being cut – except On-Budget Defense which goes from $705 billion in 2011 to $589 billion in 2017 – a cut of $117 billion. Yes – there is a real cut in Obama’s budget and it is Defense spending.But alas, this cut is not used to cut or slow spending since it is more than made-up with more ornaments for the Christmas Tree called Non-Defense On-Budget spending. 

This amounts to the lunatics running the institution. Those of you who think I focus too much on spending and not enough on taxes read on a little farther. If this budget were passed and if we do want the budget deficit to decline over time, this proposal  requires EVEN MORE tax increases to move in that direction.  We already need a large tax revenue infusion to cover the deficit from the recession years. Obama’s budget asks us to fork over even more each year through 2017. Clearly he has no plan to cut the national deficit through spending reductions. 

Tuesday, February 14, 2012

Keynesian Wolves, Life Boats, and Cruises

The Keynesian wolves never get enough chickens. They keep circling the hen house long after their tummies are full. I just read the editorial page of the New York Times (Feb 7). This is not something I normally put myself through but I am on an island and do not have easy access to my usual propaganda. But it is not like the NYT is alone. The President said recently after the good news of the last employment report – “Get it done.” Get it done now. Bernanke chimed in to say this was not the time to upset the markets with worries about high interest rates and fiscal austerity. The clear implication is that we need more fiscal and monetary stimulus.

I have been writing about this unflinching attitude toward stimulus since the beginning of the recession. The biggest problem with monetary and fiscal policy is that it never knows when to end the party – and we end up going from the frying pan to the fire. Ouch. It happens over and over and over. Decade after decade. Century after century.  The wolf goes to Farmer Bernanke and says – you have way too many chickens. Just let me and a couple of my helpful friends inside the fence. Give us a couple of JDs and we promise to take only a few of the older chicks and then we will go back to the woods and leave you alone. I don’t think so.

It seems strange to me is that these Keynesian voices get louder and louder the better the economy performs. How can you explain this? It seems simple to me – that their concern is totally focused on politics. They continue to support an invested ideology of populism that almost guarantees election.

I sound extreme and political myself. But I hope to suggest otherwise. It is sort of like the guy who sells insurance or life rafts to cruise customers. It is easy to make a case for insurance and life rafts before the cruise. There is plenty of uncertainty before the cruise. But does it make sense to sell this stuff after the bloated and sunburned cruisers have completed their journeys and are back on the dock? I think not. 

Under absolutely no measure of any macroeconomic indicator is the US economy in a recession or headed towards one. The boat is back at the dock. It is true that we are frustrated with the improvements in employment. We hear estimates that approximately 15% of the nation’s labor force are without work, without adequate work, or have simply given up. That is too much. The human tragedy is unacceptable. There should not be any debate about this. But there is plenty of evidence that additional Keynesian stimulus at this stage will not quickly improve employment opportunities and that it is possible that a slow and steady recovery in employment is the best that we can hope for.

I have written continuously about the fact that the past recession and our slow growth were the result of a perfect storm of negative economic shocks. This deep hole was worsened by the chickens coming home to roost – too much borrowing and consumption by the private and government sectors for decades and decades finally hit the wall. This is not an easy hole to dig out of. In the very beginning, our policy leaders should have been more forthcoming about this but instead these populists wanted to sell you a life jacket and raise your expectations to unrealistic levels. The reality is clearer today. We see that all those trillions of stimulus we spent could do no more than fill in the bottoms of a few holes and we are left with the residue of perhaps 60 years of excessive spending. We are growing but the path to high employment is slow.

Let me advance one more point about not engaging in more stimulus now. I think we are excessively worried about a double-dip. The economy is stronger than we think. If we don’t want to do the frying pan-fire dance, then we need to let the forces at work play out. These forces will not create a fast remedy for employment but as I argue above, nothing is going to do that anyway. But easing off the accelerator will still leave us going forward at a decent rate. Here is why. Just as the economy was showing some decent growth at the end of 2010 the world got smacked with some new shocks. What happened in 2011 was not the direct result of our inability to escape the recession. It was more the result of earthquakes, tsunamis, and then the recognition of the worsening of the European sovereign debt crisis. It is testament to the underlying flexibility and strength of the US economy that this second round of body blows did not send us back to recession land. It did slow the US but as we begin 2012 we are seeing the dissipation of the residues of the original and then the secondary shocks.

But even better than this end of the shocks is the expected expansionary impacts of the spending multiplier in 2012. Many critics have blasted the Keynesian multiplier when it came to past stimulus. And this criticism was for good reason. Stimulus policies that created negative expectations meant a small multiplier for past stimulus. But macroeconomics also attaches a spending multiplier to non-policy shocks that propel the economy. When, for example, improvements in wealth caused confidence to increase, wealth effects are having multiplier effects. We are already seeing this in 2012 and the confidence effects will continue to build as more good news reinforces more good news. Spending is broadening across many sectors.
Confidence and spending are building in the system. Not only is the US growing but China is doing better and resolutions for the European crisis are more likely. 

This is not the time to top these effects off with more stimulus. There is no quick solution to our employment problems and too much medicine is going to make the patient wobbly. Clearly the risks are present that too much stimulus will do nothing but slow the economy. We saw a quick reminder of this when interest rates started to rise at the end of 2010. Let world growth pick up a little more in 2012 and we will see long-term rates rising and inflation creeping above target values. Rising interest rates will be bad for the recovery and could create dire results for government budgeting.

The economy is on the right path. We might be surprised with the results if we just show a little restraint at this critical time. Resist temptation. Keep those Keynesian wolves at bay. 

Tuesday, February 7, 2012

Class Warfare or Inexperience?

I was watching the recent speech the President made concerning a new policy for housing. In this blog I have often argued that no real recovery will sustain until we have good policy attacking the real issues in the housing and financial markets. Watching the speech I could not help but think that this might be a case of doing something that moves in the right direction but which might be enunciated wrongly or positioned inappropriately. As such, it will probably fail. Then I thought a little while longer (ie downed another JD) and it occurred to me that what bothered me about this speech was similar to the indigestion created by previous Obama policy speeches.

His strongest political opponents might rail that despite Obama’s protestations, he relishes in class warfare. They might worry that this new housing solution (which makes it easier for people to remain in their homes and is financed by increases taxes on banks) pits the poor against the rich. That’s a viable option but in this posting I am going to try to convince you that the real problem with Obama’s policies is simple inexperience.  

A good way way to summarize his experience is as a community organizer. He is a speech maker and a rebel rouser. He got a degree at Harvard in law and the closest he came to an MBA degree or an economics course is when he made a wrong turn on his way to the theatre building. There is nothing wrong with this. He is what he is and someone with those kinds of skills could be a great president. But let’s face it – in his case it is the words he chooses in his speeches that belie his real knowledge and experience.

What am I blathering about? Let’s take a funny pill that makes this moment not a presidential election year. Let’s suppose we are simply interested in defining some things as they are. What is a bank? What is a university? What is a pipeline? What is a pharmaceutical company? What is a ________ (you fill in the blank)? What is a bitter and why do people put them in perfectly good drinks?

Let’s consider these companies for a moment – bank, pipeline, pharma,university, etc. Companies exist to produce a good or service for a customer. These companies I mentioned above exist to serve real and important needs for people who want an education, a safe place to put their money, to receive in their home town oil or gas that was produced on the other side of the country, or to take a pill that makes them dance like James Brown (yeow). Okay Prince and Michael could dance okay too.  To serve these needs these companies find investors or savers who would like a good return and use the proceeds to buy or pay for real estate, equipment, materials, workers, and other means of production. Image how hard all that is – especially when other companies are competing with you and try to beat you to the consumers.  And of course these companies have to deal with theft and weather and regulations and all sorts of factors. It is pretty dicey. The closest I came to all this was a Kool-Aid Stand in the summer of 1962 and it gave me so much stress I turned to a life of economics and JD.

Okay, some of you want me to put away the violin and crying towel. But it is true – big or small, there are companies in every country that assemble people and resources every day who take risks and work hard to meet our needs. Owners, managers and employees of these companies also are major sources of charitable giving, community arts programs, political parties, and more. Charities in my community take this support and give money and/or services to the elderly, to people for food, they build houses for the poor and they contribute to the Boy’s and Girl’s Club and many many activities that are good for all of us.

Sorry if the above seems too naive but that is the truth. It is also the truth that some companies – large and small – take advantage of their workers, their customers, and their investors. And that is why I am an economic conservative. Look in any principles of economics text book and you will find a chapter that sets out numerous good and accepted reasons why government needs to exist to police and regulate private enterprise. When small or large companies break our laws or when they simply take advantage of us in legal ways, I believe it is up to government or other organizations to expose and prosecute them.

So when I hear my President’s speech I am offended and disappointed that he neither understands nor seems to care a lick about the difference between good bankers and bad ones. Go back and carefully listen to his words as he labels them all monsters. These monsters make you read small print. These monsters do this to trick us so they can earn unlimited profits. These monsters are smart people who know that the rest of us are dumb. The President waved in front of you a simple mortgage document. Why? Because mean and evil bankers create complicated forms to confuse you and hurt you. All of them do it. Right? There is apparently no other reason for a long and complicated form. 

I don’t think so. What is wrong with this supposedly educated and intelligent President is that he thinks that he knows how to serve the needs of the customers better than thousands of bankers who have been legally and helpfully doing business for decades and decades? Why is it that these folks who day in and day out support their customers, employees, and communities can be called monsters that cannot do their jobs appropriately without the President looking over their shoulders at every detail of their business? Why in his remarks does he aim his poison darts directly at bankers and mortgage lenders (and college presidents, and pipeline executives, and drug makers...) when most experts already admit that a major share of the housing and financial collapse had roots in (1) expansive monetary policy which kept rates too low for too long, (2) government agencies that promoted risky lending, (3) selfish and greedy individuals who took money knowing that with even small changes in their economic situations they could not afford to pay for the money they borrowed, and finally (4) people making what they thought were prudent decisions but not believing that the housing bubble would burst as soon as it did.

In other words, while bad bankers might have some share in the blame, clearly the housing problem was much more complicated than our leader eluded when the cameras started rolling. There are several hypotheses about why an intelligent President could ignore all this. First, Obama really does not have enough knowledge and experience to understand the difference between a good company and a bad one. The second possible explanation relates to the huge number of Is in his speeches. Is he an egomaniac who must be able to solve all the problems of all people all the time? Third, is he simply too lazy to do the real research into what caused problems between companies and their customers – to dig into the facts about bankers, for example, who did break the law and who did purposely swindle people out of their hard earned money. 

Does he really think that a simpler mortgage document is going to help banks make better loans? Will his one page document help prevent banks from making bad loans? Fourth is that Obama is simply playing to his base – a base that is already prejudiced against companies and will take any opportunity to impugn not only the companies but the market system in which they operate. When playing to his base does he not understand that all banks and financial institutions have already faced new and tighter regulations and have been asked to reduce leverage and keep more capital available for future bad times.

It is quite possible that some form of bank tax is necessary to support solutions to the housing and financial crisis. This ought to be on the table. But it ought to be on the table with a true examination of all the facts and causes and all the appropriate ways of funding his solutions. And of course, pointing his boney finger once again at companies in unrealistic, misleading and inflammatory ways is nothing but a prelude to his own downfall.  Just as the Tea Party arose to protest his unreasonable actions in his first two years, he stands to inflame and irate many rational voters if he continues to paint dangerous stereotypes that harm innocent people. These and other companies always have and always will be the institutions that create the sustainable employment opportunities. This is not class warfare – this is just ignorance bad politics.