Time and the Cost of Waiting in a Democracy

I couldn’t decide when to write this week’s blog post. I could do it right now (Friday) and free up the weekend for dancing like Zorba and drinking like Putin.  Or I could wait until late Monday night and do it at the Varsity like my roommate Jim K did his homework back in 1965. I was never good at procrastinating and went ahead and starting writing this on Friday. That decision made me think of other timing issues. For examples see some of my favorites below and feel free to write in your own:

·        Pay our national debt now or maybe later?

·        Fight ISIS now or maybe later?

·        Allow most illegal immigrants a route to citizenship now or maybe later?

·        Turn in your elderly husband now or maybe later?

·        Discipline your child holding the screwdriver near the electrical outlet now or maybe later?

·        Vigorously attack global climate change now or maybe later?

·        Replace your 1963 Lada now or maybe later?

·        Stop Putin’s geographic aggression now or maybe later?

·        Cheat on your income tax this year or maybe later?

·        Open up a personal saving account now or maybe later?

So you get the drift, right? Isn’t it amazing how so many of our most pressing decisions and challenges revolve around WHEN to act. It is not a simple yes or no. We know acting is important but the question is when.

Luckily economists who got tired of macro and location theory pioneered a concept called the "cost of waiting". Unluckily for us, most of these models are framed in models that require an abacus and very advanced mathematical knowledge like foot stomping. So let me just outline the basics of an economist’s theory about the cost of waiting.

First, we assume that there is something that needs to be done. Let’s call that – taking your dog Rufus for a walk.

Second, we assume that we have some leeway as to when Rufus gets his exercise.

Third, there are benefits associated with waiting until later. For example, you just poured a lovely JD and you don’t want the ice cubes to melt and water it down too much. After all, the JD people went to a lot of trouble to create that lovely taste. Also, you are watching the Ellen show and you heard that LL Cool J is coming on soon wearing a short Kilt.

Fourth, there are costs associated with waiting. Rufus is walking around in circles for a good reason. He has to pee right now. Rufus cannot take himself for a walk since that violates HOA rules. And you are the only one who can clean that expensive room-size woven Persian rug.

So there you are – you are now an expert in cost of waiting models. And you realize you can make a truly objective and life maximizing decision by measuring and comparing the extra costs versus the extra benefits of waiting one more minute. Here are the three decision rules:

            If the extra cost of waiting one minute exceeds the extra benefit, then go now.

            If the extra benefit is greater than the extra cost of waiting one more minutes, then wait at least another minute.

            If the extra costs and benefits of waiting one more minute are equal, then kiss your dog, pet your wife, and say goodnight Dick.

So here is my question. Of the issues I listed above, to what extent do any of the arguments you hear and read focus on anything close to a real analysis of the costs and benefits of waiting? Or to put it another way – if the main arguments do not fit the model, then what do they fit?  This is where ideology comes in – and causes a real mess that prevents a real solution.

Let’s take climate change. Liberals want much more done right now to stop climate change. They refer to models that show dramatic negative consequences of waiting too long. Do they ever discuss the benefits of waiting? Do they assume these benefits are all zero? Or do liberals simply assume they are negligible. Maybe liberals would be more believable if they even pretended to act as if this were not another ideological preference.

Conservatives like me are pretty vocal about the national debt. We make a strong case for the possible future costs associated with waiting to reduce the size of the debt. We can be quite colorful in describing a Greek-like future for the US economy. But liberals say pashaw or dude or something like that. Dude, lots of countries have large national debts and they do just fine. Maybe conservatives in a rush to reduce the US debt should spend more time evaluating the benefits of waiting on the debt? Or are they surely zero? Maybe we conservatives would be more believable if we at least faked an even-handed analysis of the costs and benefits of waiting.

Some might say that letting the liberals and conservatives debate these issues will bring out all the sides of the decision to wait and then voters can decide for themselves. Well, it seems to me that day is over. People have already lined up ideologically. They care little for a real analysis. They just want to be on the side that wins. Is this the kind of democracy we fought so hard to preserve? Does economic analysis become useless in such a world? 

Macro and Football

A devout reader of this blog knows I love macro and JD. But what you don’t know is that I also love football. And by football as an American boy I mean that game with 11 players on each side of the ball and 11 sometimes properly inflated elongated balls. I started playing youth football at a time when helmets lacked face guards and when it was not normal for quarterbacks to have intimate touching with a player called the center. Anyway, I still love football and scream four letter words at my new flat screen TV as players fail to measure up.

So what does all that have to do with macro? It occurred to me that current dismal global macroeconomic performance can be explained by thinking about a football team. It is a pretty simple story. After a long season most players have at least several minor injuries that they endure. That is normal. What is more troublesome for a team, however, is when one of more of the key players --- the so-called stars – have significant injuries that either prevent them from playing or hamper their otherwise fluid and awesome performance. 

In such cases, it is next to impossible for that team to win against a competitive opponent. It is one thing for these players to be individually reduced – but even more importantly – it harms the many relationships among the players. The timing will be off between the hobbled QB and the pass receivers. With an injured running back, a split second slower start means the timing of the blocks may not allow for successful running plays. A hurt linebacker now needs a different kind of support from the safety.

Injuries to key players, therefore, hurt a team in many ways. 

So what is the coach supposed to do? The coach can try to inspire the players. The coach can give them a little energy pill in their Gatorade. The coach can change the playbook and the strategy. Those suggestions seem pretty lame. What the coach really needs to do is to heal the injured players. The only way to get the whole team back to its previous strength and efficiency is to get the key players back to full health. In the meantime other strategies might be somewhat helpful; but they won’t really solve the problem because the problem of team performance is really a problem of issues with one or a few players.

This is the challenge for policymakers around the globe. They pretend that we have macro problems. And therefore we use corrective macro solutions – like austerity or monetary stimulus. But the truth is that the problems in most places around the world since the last global recession derive from a few key sectors and not from anything really macro. It is easy to mistake the source of a problem. When a team fails to score a touchdown it seems like the whole team is the problem. But it is very likely that the failure to score was the result of one or two players' failures. The receiver missed the pass by an inch. The QB was tackled trying to pass because he was a tad slower and his blocking broke down.

The US knows it has failed to adequately address the financial and housing sectors. Europe knows it is sclerotic. Japan cannot hide its protectionist tendencies. China overbuilt its real estate.  Greece knows that the gyros market is in a glut. Venezuela, Russia and other oil-based economies know their oily issues. Today in 2015 we have major sectoral problems that are misinterpreted as macro. So Europe and Japan pour on the money. And then puzzle when it doesn’t solve their problems. We poured enough money into the US economy for it to be growing faster than the proverbial speeding bullet.  Yet we limp along too.

The world needs another coach – or at least a good trainer. The world is never going to experience decent growth again without attending to our sectoral issues in ways that foster healing and real growth. A pain pill won’t help. A band aid will only do so much. Macro policies will exacerbate bubbles. If we want growth and we want to help the middle class--- forget macro and get onto real cause and effect. Sounds crazy from a macro guy but a macro guy ought to be smart enough to know when macro is the problem – and when it isn’t. Now where is my JD? 

Mindless Austerity vs Mindless Irresponsibility

Some of the liberal press who favor the President’s new budget proposal’s spending increases are justifying the latter with a new term they have coined – Mindless Austerity (MA). What creativity! They definitely deserve an A+ in poetry. Apparently evil forces conspired to put us all through a time of MA and finally the President has been bold enough to stand against this harmful, debilitating process.

But I wonder about some things. First, consider the meanings of these words. Austerity is acting or doing without justification or concern for the consequences. It is authoritarian and severe. A synonym for mindless is stupid or idiotic.

What these commentators are saying is that MA that was the product of the same President’s past proposal that passed through Congress was done stupidly, without thought and with no consequences in mind. And these are the same press who supposedly think President Obama is both intelligent and a great leader. MA seems like a strange choice of words to me.

Along with MA is the idea of unnecessary suffering. Clearly the President believes that the middle class has suffered and his latest proposed policies are necessary to improve their lives. A corollary is that government needs to do more to improve their lots and so the additional government spending (and tax revenues) necessary to achieve these goals are absolutely necessary. The idea that economic growth is the only real sustained way to improve jobs and incomes for the middle class is not a major selling point of the President’s new budget proposal. Government to the rescue is. 

Another way to describe the President’s budget proposal is Mindless Irresponsibility or MI. The definition of irresponsibility is not having or showing maturity or good judgment. Adding Mindless to Irresponsible is redundant since the former means stupid. MI is stupidly not showing maturity or good judgment. It seems to me that MI is a better way to describe what the President and Congress did then and are contemplating doing now. Even though they know better they essentially put us in a no-win situation.

Notice what they did to us. First they punished a lot of people when they mindlessly put restraints on programs that might have helped people who needed help. Second, they let other programs grow and in some cases rapidly. Third, despite making some people suffer, the budget did nothing but put us in a worse condition financially.

And that’s what I mean by a no-win situation. The proper financial thing to do is to have a plan whose primary goal is to reduce national indebtedness. The proper economic thing to do is to have programs that support and enhance sustainable economic growth. But notice that while you will see bits and pieces serving those twin goals, the primary emphasis of both parties is to push for more spending and higher taxes.

This is bad for two reasons. Despite hopes and prayers about helping the middle class with “new and improved” government programs that broaden the scope of welfare and reliance on government, few of us really trust these guys to do anything that really works. It is all about them and not about us. Second, we know the President is pushing for higher taxes that are anti-growth.

Governments always promise that big expansions of government deemed necessary in recession will be removed when times get better. A quick check of the calendar shows the recession has been over since January of 2010 – a period of five years. Yet here we are in 2015 arguing about how much bigger spending and taxes have to be. No one seems to be the least bit concerned that the national debt level gets bigger each year and will get a whole bunch bigger when the next recession hits. Think Greece and by that I don’t mean Grecian Yogurt.

Do you see austerity in these tables below? Spending rose from $1.8 trillion in 2000 in $2.7 trillion in 2007 and then to $3.5 trillion in 2014. After rising by $940 billion in the first seven years spending rose by another $775 billion in the next seven. After rising by 53% total spending rose by another 28% in the second period. That is a reduction in rate but let’s face it – a 28% increase in seven years is not austerity by any definition.

Austerity was greatest with net interest. Thanks to the Fed keeping interest rates near zero since 2009, Federal net interest expense has remained stable. Estimates have this one category rising $600 billion in the future when interest rates reach normal levels. After rising by $253 billion between 2000 and 2007, discretionary military spending rose by $48 billion in the next seven years. So you might say that government spending on the military slowed considerably. The rest of the spending categories below showed increases from 2007 to 2014 ranging from $89 to $264 billion dollars. I wonder what the Greeks think of US austerity. 

Spending Levels  in billions
	2000	2007	2014
Discr. Military	295	548	596
Discr. NonMilitary	320	494	583
Social Security	406	581	845
Medicare	216	436	600
Medicaid	118	191	302
Income Security	134	203	311
Healthcare	313	567	831
Net Interest	223	237	229
Total	1,789*	2,729*	3,504*
Changes in Spending Levels in billions
	2000	2007	2014
Discr. Military	na	253	48
Discr. NonMilitary	na	174	89
Social Security	na	175	264
Medicare	na	220	164
Medicaid	na	73	111
Income Security	na	69	108
Healthcare	na	254	264
Net Interes	na	14	-8
Total	na	940	775
Percent Changes in Spending Levels in percents
	2000	2007	2014
Discr. Military	na	86	9
Discr. NonMilitary	na	54	18
Social Security	na	43	45
Medicare	na	102	38
Medicaid	na	62	58
Income Security	na	51	53
Healthcare	na	81	47
Net Interest	na	6	-3
Total	na	53	28

 * Categories do not sum to the totals since some categories are left out. 

Greece: The Tail Wagging the Dog

Human beings do not have tails but we do have animals that do. We are quite used to our pet wagging its tail especially right after we poured a large JD on the rocks and put it on the edge of the cocktail table. We are NOT used to the tail sitting motionless as it wags our dog. That would be weird and perhaps even dangerous.

All of this is relevant because in 2015 Greece has become the tail that wagged the dog.  The stories floating around this week about Greece and the Syriza Party prove it. Syriza is a left-wing radical political party in Greece. I tried to find a generic definition for Syriza but the word appears to mean nothing except for radical left-wing party in Greece. So I will make up my own definition and say it can be defined as a state of emotional chaos and intellectual vacuity.

This Syriza Party is amazing. Not even a majority of Greek voters it has done the impossible. Like David slaying Goliath, Syriza has brought the entire European Union to its knees. Syriza is threatening to not pay what it owes to the EU and has already suggested it might align itself with countries like Russia, China, and Cuba. Amazing. It is one thing for a country to use its veto in the United Nations – but for a European country to align itself with places like Russia and China is beyond imagination. As one of the smallest members of the 29 country EU, Greece is threatening to use it veto power to sway a huge economic union. If this isn’t the tail wagging the dog I don’t know what is.

If that isn’t bad enough for you, let’s say Syrzia is also evidence that a very long historical wave has peaked and is in decline. It’s like when your best friend and companion Bogie can no longer catch Frisbees in mid-air and instead retrieves the missile from the ground and limps back with catch in mouth and tail weakly wagging. You know the best is over. You fear for what is to come. You feel terrible and sad.

I am not exaggerating when I say that Greece shows that we have hit a sad turning point. The people of Greece spoke. They are tired of unfair austerity and want to move on with a new government that will restructure their debts. It seems unfair to Greek voters that they would have to pay their debts. Keep in mind that the Greeks entered into this mountain of debt willingly. Greeks were not deceived by Payday Lenders or by loan sharks in shiny suits.

Even before the crisis hit in 2007, Greece’s government deficit had reached around 10% of GDP. At that time the overall Euro area had a deficit of about 2.4%. During the crisis things got worse for all governments but in Greece the problem was catastrophic with debt to GDP reaching 19.1%.

No one made Greece join the EU. And no whips were involved when they gave up the drachma in favor of the euro. In joining this club they knowingly and willingly signed up to hundreds of agreements. Among them they agreed to keep their deficits no higher than 3% of GDP and debts no greater than 60% of GDP. The Greeks have done neither. One of the reasons for joining was to give Greece a more solid economic reputation. Being a successful member of the Eurozone gave them instant credibility and better interest rates for borrowing. But despite continued and repeated efforts to ask Greece to own up to its obligations, the Greeks made excuse after excuse and now find themselves in an impossible mess.

Austerity is too hard. Paying off honest debt is unfair. Restructuring the economy so it can compete and changing the government so taxes are normal and bribes are illegal is too much. Now the media says that other countries are watching the Greek case and will follow if they are successful in getting a huge portion of their debts written off. That anyone in the Eurozone would even listen to this nonsense is beyond credibility. 

When the Greeks threaten to not change and to not pay their debts, someone is harmed. Some of the money is owed to individual countries. If the Greeks don’t pay their taxes will have to increase in those countries. The Greeks also owe the EU government, the ECB, and the IMF. When Greece does not pay a loan,  other countries have to pay it. But the critics argue that it is still unfair. The IMF is rich. The EU is not popular among many Europeans who call themselves Eurosceptics. The ECB can print money.

But all this is nonsense.  The Greeks have to change. They have horrible habits that will devastate them in a global economy whether they are inside or outside of the EU. Sure they can get out of the EU and Eurozone. But they are still a member of the world economy. You can kick a drunk out of your club but he or she is still part of your community or town. The Greeks have to change their ways and this crisis just proves it. Okay so austerity is rough. But this is not just about austerity. It is about common-sense reforms that many European countries have already taken to make their economies more efficient and competitive.

So why don’t more people see it this way? I think it is because we have gone too far. Too many people hate markets. Too many people raise so called fairness above competitiveness. Too many people don’t see simple universal truths and instead see complex and complicated layers of excuses. We don’t care if Greece does the right thing. Our hearts ache for Greeks who will have to change their ways. Our hearts similarly pound when someone suggests we get tough on Russia in Ukraine or Bashar in Syria. 

Russia has invaded the Ukraine. Period. Bashar used gas on his own people. Period. Greece is a mess. Period. Doing the right thing will be painful. So we excuse inaction by talking about time, and layers, and complications.  This is not a one-time change in attitude. It will be hard to undo. Democracy makes it too easy for the heart to rule the head – or for the tail to wag the dog.