Tuesday, September 26, 2017

Happy Birthday to the National Debt

Let’s call her Natty. Natty just reached 20 -- $20 trillion that is. Okay, it’s not a birthday but it is a milestone and one that bears a little time and attention.

There are so many things to say that I don’t know where to begin.

Let’s think first about the words “national debt.” Natty is most definitely not a measure of all the debt of the nation. Households have many kinds of debt and none of them are included in the $20 trillion national debt. Borrowing money for houses, cars, JD, and college are not part of Natty. All that credit created by slipping your credit card into a little machine is not included in Natty. That loan to Uncle Chuck isn’t part of it either. And when companies large and small borrow from banks or sell bonds or find other means to finance their acquisitions of plant, equipment, and software – none of that is included either.

So what is included in Natty? Natty is simply the debt owed by the federal government. Notice that Natty does not include any borrowings of your state and local governments. Natty’s $20 trillion pile of debt includes only that which the US federal government borrowed.

Why does the government owe any money? Doesn’t the government have the power to tax us? Surely there are plenty of federal taxes. The truth is that the government owes money because, like the Tuna, it loves to spend money and hates to ask us taxpayers to pay the whole deal. Take 2016 for example. The government collected $3.3 trillion in tax revenue. On Social Security, Medicare, defense, and many other programs, it spent approximately $3.9 trillion. Thus the government had to borrow $585 billion to meet the difference.

Why did the government have to borrow that money? Doesn’t the government have the power to print money without limit? In most countries, including the USA, a central bank exists and it is allowed to print money. But budget deficits must be funded by government borrowing through bonds. Clever governments ask central banks to buy their debt and that eases the process. But as we will see below, most of the debt is held by private investors.

In 2016 the government borrowed $585 billion. That’s a long way from $20 trillion. How did the debt get so large? The answer is that the US government is addicted to debt. In the 49 years between 1967 and 2016, the US had a surplus only five times. Thus we had deficits and we added to the debt in 44 of those 49 years. That’s how the debt got so large. We piled up almost $8 trillion of the $20 trillion in the nine years since the great recession started in 2008. While the additions to the debt have been somewhat less lately, we had at least three years in which the annual deficits were well over $1 trillion per year.

Who holds the national debt? I heard China has a lot of it. Let’s start with the 2016 national debt of $19.6 trillion. Of that amount, $5.4 trillion was money that some parts of government owed to other parts of government. So we call the public debt the remaining $14.2 trillion. Of that amount, the Federal Reserve owned $2.8 trillion. That left $11.7 trillion for private investors. Of that amount, Chinese and other foreigners owned $6.2 trillion. 

Is that $6.2 trillion enough for foreigners to push the US around? I doubt it. But in the event that foreigners decided to quickly sell all their US bonds, that could throw us for a loop. But keep this in mind, if any investors in US bonds decided they are a risky bet – it doesn’t matter whether the sales come from foreigners or US citizens – the results could be terrible.

This leads us to the big question: Does the $20 trillion debt put the US in a risky position? The government is a pretty big cat; is $20 trillion a lot of money? Here is where an example might be helpful. Suppose you have debt of $100,000. Is that risky? It depends on your ability to pay it off. Maybe you have a savings account of $3 million. Not so bad. Maybe you have an annual income of $300,000. Not so bad. But if instead you have no money in the bank and you have a very low income, then your bank is going to worry about your ability to repay the $100,000.

Similar ideas apply to countries. How do you measure the ability of a country to repay its debt? We might look at foreign reserves they accumulated to pay foreigners. We might also look at tax revenues. Those tax revenues are driven by the strength of the economy and the soundness of the financial system. If a country is about to implode, it worries a lot of people – including people who hold that government’s bonds.

Is $20 trillion too much debt for the USA? Probably not at the moment. But psychology moves quickly. If we seem unable to restrain our future debts because we spend too much and tax too little that will not make bondholders happy. If our economy grows too slowly or if a recession threatens even worse economic outcomes, that realization will make things scarey. At that point the $20 trillion will seem like a very risky burden.

Ask other countries about how quickly a difficult situation can turn into a crisis. One day you are the darling of the world. The next day people are selling your assets and your currency and you are the basket-case of the world.

We manage debt to be prudent. A modest debt load is normal. A larger amount of debt won’t necessarily undo you but it does raise the risk of some very bad things happening. It is time our US government acted as if they knew this valuable truth.

Tuesday, September 19, 2017

Lesson 19 Tax Reform and Simultaneous Organization

Who is up next? I am. My name is Tax Reform. My friend healthcare already struck out. Budget, debt limit, and immigration will be up in future innings or maybe in future games. I don’t know.

No, government policy is not a baseball game. But it sure seems like one as policy deliberations and decisions flow sequentially from one month (inning) to the next. 

What other choice is there? While it seems almost crazy to mention, a better choice is to do it all at once – simultaneous instead of sequential.

We seem to be focused now on tax reform. But we are already hearing that you can’t do tax reform until you settle healthcare. Or you can’t get much accomplished with tax reform until you settle the budget or change the debt ceiling. It’s all related. Who came first, the chicken or the egg?

There must be a prize in government that is awarded to the people who make simple things impossible. People make budgets all the time. So do companies and churches and drug dealers. We plan and make budgets because this activity produces better results. Instead we could wake each morning and make a new decision. It’s Tuesday so maybe I will buy a TV. It is Wednesday so I might sell some shares of stock. It is Thursday, and I will get a job and earn some money.

Sound stupid? It should. But this is the way government works each year. The main reason that sequential budgeting does not work in government is that each policy affects many aspects of our lives. A given policy helps Nolan while is hurts Jenny. Of course, Jenny and her friends scream bloody murder. The next policy helps Jenny but not Nolan. Nolan organizes his kindergarten buddies, and they throw rotten eggs at guilty politicians. The upshot is that sequential decision making gets nowhere because EACH decision has a natural resistance.

Better would be a more simultaneous approach. Let’s take five different areas of policy and find the best solutions. Policy 1 helps one group. Policy 2 helps another group. Policy 3 might help both groups. If you decide and then announce all five policies at once, it is harder for resistance to form. For one thing, figuring out the net effects on people might not be easy when summing up all the pluses and minuses of all the policies. For another, it might be the truth that most of us benefit from the whole package, warts and all.

The above is too abstract. Think next how this might play out in the real world. Good planners begin with a statement of problems. Once the problems are known they can then think about the remedies. What are our national problems?

Low labor participation
Low capital spending 
Slow economic growth
Unequal distribution of income
High government debt
Inefficient tax system
Too little/too much government spending
Too much/too little government regulation of business
Pimples, JD, and other

We can argue about these problems and their order of importance but it seems possible that a fruitful beginning step by national policymakers would be to list these problems according to some definition of priority or importance. Ties are permissible. Just rank them, damn it.

Then they would produce a list of policies that might address one or more of those problems. Such policies would include tax reform, tax cuts, government spending changes, reforms to healthcare, immigration policies, and so on.

Assign every policy a positive or negative number as to how that policy might impact each and every problem listed. Note that a tax reform policy might help the rich more than the poor in dollar terms. A government spending policy might do the opposite. Do not try to make every policy help every problem and every person. Each policy should have an intended benefit though with side effects.

Summarize the positive and negative impacts of each policy on each problem area. The first round of this simultaneous approach will find some policymakers do not approve of the results. Go back at it and adjust each policy so that the net result of all the policies is acceptable. No set of policies will make everyone happy. This approach has a chance of finding a solution that recognizes that not every policy will make everyone happy but that the sum of all the policies generally improves things.

Every major organization works this way. The board approves a comprehensive plan whose purpose is to best meet the goals of the organization – be they marketing, finance, or human resources. They do not go from day-to-day making decisions willy-nilly. Call me a dreamer for believing that government can be thoughtful and goal focused. But that just shows how we have come to accept idiotic and failed approaches to our very important problems and goals. Or maybe, like watching a good fist fight, we revel in the blood and guts. Government policy is pure entertainment. In that case, we deserve what we get. 

Tuesday, September 12, 2017

Happiness in 2017

It is nearly impossible to be among people and JD (or other forms of alcohol) and not get into a fierce debate about politics. People are energized by the current political scene in ways I have not seen since I first went to Disney World and Lego Land. Otherwise gentle and thoughtful folks look as if their heads are going to blow off standing next to the appetizer table. Red-faced and sweating, they speak in loud voices and won’t put up with hearing things that defy their own opinions. We don’t mind telling our dear friends that if they hold a particular view, they are lower than the slime on the belly of reptile.

So in the spirit of making things horribly worse, I decided to do a little research. If this is the way people want to spend their evenings, I wanted to try to understand how this behavior fits into well-recognized theories about happiness. Let’s be clear: I am not trying to change you, and I am not taking sides. But I do wonder why we want to spend our precious time on this planet screaming and yelling at our friends, relatives, and pets.

What’s important? What makes us happy? I admit that the quotes and summaries I display below leave out some critical aspects of happiness. But this topic ain’t macro and it ain’t football -- in other words, I did the best I could. Maybe you can see in the philosophies below why so many of us seem to be happy being ugly. Or not.  

Abraham Maslow, in his 1943 paper “A Theory of Human Motivation”, set out what people now call Maslow’s hierarchy. The hierarchy of wants is often shown as a triangle in which the base represents the most basic human needs to stay alive. Once one level of the triangle is satisfied, the human moves upward to satisfy higher needs with the highest level called self-actualization. My interpretation of this is that things like eating, breathing, feeling safe, having loving family and friends, are among the key things that make us happy each day.

Confucius (according to a blog I found (https://www.linkedin.com/pulse/confucius-happiness-suzana-aleksic )
Confucius believed that anyone could change themselves regardless of social status and financial situation. In other words, happiness was not reserved for aristocrats. For Confucius, happiness had nothing to do with financial situation of a person; it depended on a person's level of self-development and virtue attainment. In addition to this, Confucius emphasized action over thoughts. He stated that to reach happiness, it was not enough to think well; one had to act on these thoughts. Similarly, doing good deeds without good intentions did not count for Confucius. To advance on the "happiness path", one had to think good and then act on those thoughts. This great philosopher stated that the "reciprocity" is what should lead people through their lives, as "what you do not want done to yourself, do not do to others."

According to Aristotle, happiness consists in achieving, through the course of a whole lifetime, all the goods — health, wealth, knowledge, friends, etc. — that lead to the perfection of human nature and to the enrichment of human life. This requires us to make choices, some of which may be very difficult. Often the lesser good promises immediate pleasure and is more tempting, while the greater good is painful and requires some sort of sacrifice. For example, it may be easier and more enjoyable to spend the night watching television, but you know that you will be better off if you spend it researching for your term paper. Developing a good character requires a strong effort of will to do the right thing, even in difficult situations.

A quote from Ayn Rand (from For the New Intellectual): Happiness is not to be achieved at the command of emotional whims. Happiness is not the satisfaction of whatever irrational wishes you might blindly attempt to indulge. Happiness is a state of non-contradictory joy—a joy without penalty or guilt, a joy that does not clash with any of your values and does not work for your own destruction, not the joy of escaping from your mind, but of using your mind’s fullest power, not the joy of faking reality, but of achieving values that are real, not the joy of a drunkard, but of a producer. Happiness is possible only to a rational man, the man who desires nothing but rational goals, seeks nothing but rational values and finds his joy in nothing but rational actions.

10 Commandments (It is debatable among Christians if following all the commandments is the key to happiness and salvation but they do express a view of what the Bible says God wants from his followers.
1.  You shall have no other gods before Me.
2.  You shall not make idols.
3.  You shall not take the name of the LORD your God in vain.
4.  Remember the Sabbath day, to keep it holy.
5.  Honor your father and your mother.
6.  You shall not murder.
7.  You shall not commit adultery.
8.  You shall not steal.
9.  You shall not bear false witness against your neighbor.
10.You shall not covet.

The Four Noble Truths:
1.  All things and experiences are marked by suffering/ disharmony/ frustration (dukkha).
2.  The arising of suffering/ disharmony/ frustration comes from desire/ craving/ clinging.
3.  To achieve the cessation or end of suffering/ disharmony/ frustration, let go of desire/ craving/ clinging.
4.  The way to achieve that cessation of suffering/ disharmony/ frustration is walking the Eightfold Path.

The eightfold path to the cessation of suffering:
1.  Right Understanding of truth suffering impermanence and separate self as an illusion.
2.  Right Determination to give up what is wrong and evil;
3.  Right Speech: Abstain from telling lies and harsh speech or language
4.  Right Action: Moral, peaceful, honorable conduct
5.  Right Livelihood: Abstain from making your living from an occupation that brings harm and suffering to humans or animals, or diminish their well being.
6.  Right Effort: Foster good and prevent evil; work on yourself—be engaged in appropriate self-improvement.
7.  Right Mindfulness or wakefulness: Foster right attention.
8.  Right Concentration: Developed by practicing meditation and/or mental focusing.

Here are some interesting quotes from Martin Luther King:
  • Darkness cannot drive out darkness; only light can do that. Hate cannot drive out hate; only love can do that. 
  • The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy. 
  • In the End, we will remember not the words of our enemies but the silence of our friends. 

It is tempting to summarize at this point but infinitely more enjoyable to have you tell me if and how any of this makes heated argument a good thing! 😊

Tuesday, September 5, 2017

Lesson 18 Inflation

The posts in my blog space named “lessons” are meant to provide some background on concepts I throw around like fish at a Seattle fish market. Some of my readers are not economists, and they often send me emails requesting that I try to better explain macro concepts. I sometimes direct them to my online resource called MacroNotes (http://macronotesmba.com/ ) but that’s a little like sending someone who wants to taste a little pho to Hanoi when our local Vietnamese restaurant, Rush Hour Station, has perfectly good pho. So instead of going to MacroNotes for more information about inflation ( http://macronotesmba.com/lessons/inflation-and-unemployment/ ), I will post today on that topic.

Inflation isn’t an easy topic and therefore deserves some attention. And inflation is a very important topic these days for several reasons. First, it is growing slower in the USA and that makes us wonder about it. Second, it seems to be associated with economic growth forecasts that are less than rosy. Something is going on out there that makes lower inflation a sign and maybe even a cause of slower economic growth. And third, our policymakers see the lower inflation rates as a reason to keep pouring fuel on the economy.

Inflation will never be as exciting as a Confederate War Memorial or an Indiana University football game, but inflation is pretty interesting these days. So what is inflation?

Let’s begin with this definition: inflation is the rate of change of prices. For you math buffs, this definition is basically an equation. I can talk about the inflation rate of weed prices in Colorado. Suppose a sack of weed went from $2.00 to $2.20 in the last month. Applying the formula, we can say that the inflation rate of weed during that time period was 10%. Anything that has a price has an inflation rate associated with it.

Applying this concept of a rate of change means that inflation of something could be positive, negative, or zero. If it is negative then we call that deflation as it means prices are falling. If the calculation is positive then we simply call that inflation. If the calculation is zero we have no name for that. We would say inflation is zero. Once a teacher called me "zero" but that had nothing to do with inflation. 

We also have terms to describe how the inflation rate is changing over time. If the inflation rate goes from 2% to 1% we say inflation in decreasing or we say we call this disinflation. A rising inflation rate is called reflation.

The inflation rate we are discussing today is the inflation rate of a nation. In the USA each day, we not only buy weed but we buy silly things like cars and doctor visits and Uber rides. Our Labor Department defines someone called the typical Urban Consumer. Let’s call her Jaden. Jaden buys stuff each month at Target, Kroger, and of course Amazon. Since she is the typical Urban Consumer, the Labor Department tracks what she pays for all the goods and services she buys. She hides this information from Chuck but that is another story. 

The idea is that the Labor Department can get a number that represents what she paid for all the stuff she bought in any month, say for example, December of 2016. We would call that number the CPI for December 2016 for the USA. Let’s say that number is 200. We collect that same price information in January of 2017. Suppose the number for January turns out to be 210. We would use our formula and conclude that the inflation rate in January was 5%. If that rate kept up for every month in 2017, then we would say the annualized rate of inflation in January was 60%. But the inflation probably won’t keep up at that rate and the 60% is just a way to express what happened in one month.

Suppose you don’t spend exactly like Jaden. Perhaps you really like Cuban black beans and you eat that with rice a disproportionate number of times per day. Aside from certain gastrointestinal issues that we won’t cover here, your own personal inflation rate might be different from the national rate. But us macro people do not care about you – we are more interested in how much the average of all of us is paying for goods and services. So when you read something about the CPI in the USA you need not feel concerned about your own cost of living, as it tells you only about the cost of living of the average person.

The CPI is not the only measure of prices in the USA. So sometimes you will hear about inflation as measured by the Personal Consumption Deflator or the GDP Deflator. Maybe you will read about Producer Prices. The truth is that there are many indicators of inflation but here is the main takeaway. For most of us, the CPI is just fine. And second, while the others are different in various ways they usually tell a similar story about inflation.

One more fun fact. Food and energy prices are notably erratic. They bounce around like a 4-year-old in a bounce house. To get a better reading of all prices, the Labor Department publishes the CPI without food and energy prices. If you are trying to understand the general trend of all prices over time, this CPI Less Food and Energy is your baby. Finally, stocks and bonds and other financial assets are not goods or services -- and therefore the prices of these assets are not included in the usual measures of inflation. 

So why is inflation of so much interest? For one thing it might have relevance to your own situation. For another it might tell you something about the national economy. It might influence your optimism or pessimism about future inflation, jobs, and income.

Here is where it gets a little complicated and even controversial. When inflation is high, the immediate message is that prices are rising at a faster pace. Most of us frown when that happens. But prices do not rise in isolation. Prices are part of a bigger macroeconomic scene. It depends very much on some of those other things as to how a rise in inflation impacts you and me and the nation.

Suppose we are living through a time of great optimism and growth. Jobs are plentiful and wages are rising. In that environment, a rise in the inflation rate doesn’t seem ominous. Okay the price of eggs went up, but I have a great job and my earnings are growing faster than prices. In that case, inflation is just part of a very positive economic situation.

Instead, suppose we are living through a time in which inflation is rising but people are losing jobs and/or wage growth is stagnant. That is the kind of time when inflation really hurts. Such times are not frequent but do happen and are usually the result of business productivity rising at a slower pace than business costs. Some of us geezers remember the 1970s when the price of energy was rising so fast that business costs were crippling many companies. Stagflation is a term coined to describe this kind of inflation.

Inflation can be part of a successful economy or the result of a very negative scenario. Since the national economy is not simple, different experts can look at the economy and come away with different opinions. Today the inflation rate is very low and some policymakers see this as a very negative sign. They want to use policy to bring the rate up. Others believe the macro economy is not so bad and attempts to engineer a higher inflation rate will come back to haunt us. So stay tuned.