Tuesday, December 31, 2019

Healthcare 2020 in America by guest blogger Bruce Gingles of Cook Medical

Here’s a macro thought as we prepare to turn out the lights on 2019.  High healthcare spending is vexing many economists and hospitals.  Mature wisdom has suggested that enormous prosperity enjoyed by developed countries following the industrial revolution and later the Information Age, resulted in big piles of cash that could be spent on sick people.  Delivery of expensive medical interventions has increased quantity (and quality) of life by 30 extra years since 1900 (1).  As remarkable, life expectancy in the US has increased a full decade since 1950, years and in some cases even generations after the discovery/implementation of vaccination, penicillin, x-ray, public sanitation and apothecary-quality Jack Daniels (2).

In our justified pride for extending life, we should remember the other side of the wealth-health equation.  Nearly as important as the extra life gained from spending innovation dollars may be the enormous increase in wealth that resulted from living longer.  With the exception of Bill Gates, Mark Zuckerberg, LaBron James and a few European soccer stars, most wealth is owned by old people and for one very practical reason: compound interest and ROI (rate of return on investment).  It takes a long time for a $100 sitting in an index fund or savings account to grow to $1B but because we are living to archeological ages, we can be patient.  Average life expectancy for males in the US in 1900 was about 47 years (1).  That’s not much time to build a fortune considering we don’t walk for a full year and grad school can eat up 10% of the total. We now have almost too many billionaires to count and not just in China.  

Back to healthcare, people are beginning to complain that hospital and CVS bills now consume 18% of GDP.  America’s health bill in 2018 was $3T (yes, trillion) (3).  Even if that seems like a lot, imagine a country being able to fork over that amount and still be under 20% of GDP.  The US can and does spend more each year on healthcare than the total GDP of Great Britain, France, Italy or Brazil. (4)

Let’s raise our glass to the capital appreciation Americans will enjoy in 2020 just by making it to the end of the year.   It’s nice to know that almost a fifth of the total will support continued exploration, validation and adoption of new cures and therapies, and contribute to a virtuous wealth and health cycle.  Space prevents examining the “America spends the most for only average health outcomes” red herring which always seems to follow conversations about healthcare costs.

Bruce Gingles is vice-president of Healthcare Policy and a 40 year employee of Cook Medical.  

Tuesday, December 24, 2019

Christmas Eve

Dear friends,

By now you are sick of at least two full months of Christmas carols on your car radio, and how many freaking emails can stores send you in one day? I long for those good old days when Christmas meant drinking large quantities of JD and saying nasty things to friends and family.

But there is no sense being overly romantic when you know your Visa card bill is on its way, and you will soon be serving time for record-setting spending amid fewer tips from all those angry customers who you failed to serve properly as you had daydreams of escaping to a Caribbean Island.

Tomorrow will come and your grandchildren will awaken you before sunrise and your hearts will be filled with joy and love as they open several hundred carefully wrapped packages with crazed and wild abandon while never even glancing at who those gifts were from. Of course, you did none of the wrapping or buying as you were much too busy watching your favorite sports team lose to New England. Luckily, someone else did all that ordering on Amazon and the Forbidden Sex Shop online.

As the haze of all that love and giving love wears off, and the children are gulping their cereal and M&Ms, you can recede to your private room and smoke a dooby in your brand new underwear and socks. How do you spell dooby?

Anyway, I hope you are having a wonderful holiday.

In that spirit I would like to strongly urge you to buy a wonderful new book that is now on the market. It promises to fascinate and more likely to generate a really sound nap. The main author (me) needs the money, and the other two monkeys will never know if you just send the money directly to me. If you want a real copy of the book, the link is:


Macroeconomics for Business

Tuesday, December 17, 2019

Employment Cheer at Christmas?

I wanted to write something about December and Christmas and as usual I wanted to use macroeconomic data to illustrate something -- this time something about the US economy during the holidays. The obvious thing is that we spend a lot of money for gifts at the end of the year. Ho Ho Ho.

In looking at monthly spending series, I wasn't happy with what was available so I decided to try monthly employment. I wanted to better understand what happens to US employment over the holidays. The first thing I did was chart the numbers, and that chart is found below. It is hard to see end of year employment patterns on a graph like that, but it does underscore the dramatic and continuous growth of employment over a long period of time.

It is easy to see the many times when one month's employment fell, but the thing that screams at you from the graph is how persistently employment in the US has increased since the days before World War II. We've gone from about 30 million jobs to almost 160 million. That's quite a streak.

If you look at just the last 21 years -- employment went from 129 million at the end of 1998 to about 154 million at the end of 2019. That's a rise of about 25 million jobs in those years.

But that is not what I wanted to write about today. Hidden in all those data points is what usually happens in December of each year. The table below the chart shows you some information about monthly changes.

I will summarize it here.

Among the information collected from the Bureau of Economic Analysis:

          Employment rose each month, on average by about 390,000 jobs from 1998 to 2018. Multiply that number by 12, and you get how much employment increased over the course of a whole average year from 1998 to 2018.

          With respect to the end of each year, the average change in each month over those 21 years was:
          November      294,000 per month
          December      -214,000
          January       -2,860,000
          February         729,000
          March             705,000

If you take those five months as a block, US employment averaged a decline of about 1.4 million jobs over those five months each year. But all the job loss was found in December and January of each year.

The wonderful holiday season with all that spending found employment drastically declining in December and January of each year. Even if you add in the strong snap backs in the following February and March (and the increase in November), you still get a strong decline for those five months on average each year.

Isn't that crazy! Each year jobs rise by an average of 390,000 each month despite the fact that in those five winter months employment declines by 1.4 million jobs. Those other seven months carry quite the employment load.

Looking at individual months supports the general view. In 2017-18, for example, employment change in the five winter months was -832,000 while the change from November to November was 1,265,000. Similarly in 2018-19, the numbers were -989,000 and +1,481,000.

When thinking of why this occurs, many things come to mind. We call these months holidays for a good reason. People often take time off from employment during these months. It might also be true that it takes employment in production in the months before December to create all the goods that will get sold in December and January. So production and employment cycles may be geared to working harder in the months before the holiday.

Finally, I purposely used data that was not seasonally adjusted. Much of what we read about has already been smoothed by seasonal adjustment factors. I wanted to see the real swings in the data.

What else could explain these crazy swings in employment in the USA? I am no expert on monthly employment changes, and even with the above reasoning, it blows me away to see these wild changes.

FRED Graph Observations
Federal Reserve Economic Data
Link: https://fred.stlouisfed.org
Help: https://fred.stlouisfed.org/help-faq
Economic Research Division
Federal Reserve Bank of St. Louis
PAYNSA All Employees, Total Nonfarm, Thousands of Persons, Monthly, Not Seasonally Adjusted
Frequency: Monthly
observation_date PAYNSA
Employment  CHG
1998-11-01 128290 403
1998-12-01 128459 169
1999-01-01 125708 -2751
1999-02-01 126696 988
1999-03-01 127409 713 -478 2027
1999-11-01 131510 461
1999-12-01 131646 136
2000-01-01 129005 -2641
2000-02-01 129667 662
2000-03-01 130764 1097 -285 2209
2000-11-01 133614 365
2000-12-01 133555 -59
2001-01-01 130681 -2874
2001-02-01 131348 667
2001-03-01 131942 594
2001-11-01 132155 -189
2001-12-01 131773 -382
2002-01-01 128890 -2883
2002-02-01 129362 472
2002-03-01 129969 607
2002-11-01 131667 121
2002-12-01 131259 -408
2003-01-01 128577 -2682
2003-02-01 128994 417
2003-03-01 129490 496 -2056 -1068
2003-11-01 131565 164
2003-12-01 131385 -180
2004-01-01 128726 -2659
2004-02-01 129337 611 -2064 -153
2004-03-01 130378
2004-11-01 133649 251
2004-12-01 133418 -231
2005-01-01 130713 -2705
2005-02-01 131536 823
2005-03-01 132376 840 -1022 882
2005-11-01 136174 557
2005-12-01 135973 -201
2006-01-01 133320 -2653
2006-02-01 134245 925
2006-03-01 135226 981 -391 1637
2006-11-01 138234 385
2006-12-01 138124 -110
2007-01-01 135334 -2790
2007-02-01 136026 692
2007-03-01 136923 897 -926 783
2007-11-01 139510 312
2007-12-01 139297 -213
2008-01-01 136268 -3029
2008-02-01 136787 519
2008-03-01 137378 591 -1820 -352
2008-11-01 136761 -681
2008-12-01 135732 -1029
2009-01-01 132042 -3690
2009-02-01 131808 -234
2009-03-01 131675 -133 -5767 -6239
2009-11-01 131236 48
2009-12-01 130690 -546
2010-01-01 127820 -2870
2010-02-01 128255 435
2010-03-01 129089 834 -2099 -2770
2010-11-01 131947 306
2010-12-01 131641 -306
2011-01-01 128778 -2863
2011-02-01 129592 814
2011-03-01 130499 907 -1142 287
2011-11-01 133893 335
2011-12-01 133718 -175
2012-01-01 131113 -2605
2012-02-01 132067 954
2012-03-01 132971 904 -587 1256
2012-11-01 136039 390
2012-12-01 135964 -75
2013-01-01 133081 -2883
2013-02-01 134120 1039
2013-03-01 134918 798 -731 1064
2013-11-01 138543 524
2013-12-01 138292 -251
2014-01-01 135488 -2804
2014-02-01 136229 741
2014-03-01 137187 958 -832 1264
2014-11-01 141331 465
2014-12-01 141326 -5
2015-01-01 138511 -2815
2015-02-01 139343 832
2015-03-01 140099 756 -767 1774
2015-11-01 144066 421
2015-12-01 144063 -3
2016-01-01 141088 -2975
2016-02-01 141919 831
2016-03-01 142814 895 -831 1531
2016-11-01 146482 433
2016-12-01 146270 -212
2017-01-01 143393 -2877
2017-02-01 144423 1030
2017-03-01 145078 655 -971 1169
2017-11-01 148774 574
2017-12-01 148526 -248
2018-01-01 145428 -3098
2018-02-01 146665 1237
2018-03-01 147368 703 -832 1265
2018-11-01 151375 522
2018-12-01 151203 -172
2019-01-01 148295 -2908
2019-02-01 149148 853
2019-03-01 149864 716 -989 1481
2019-11-01 153624 622
November 294
December -214
January -2860
February 729
March 705 -1073 390
Total Nov to Mar -1413.6

Tuesday, December 10, 2019

Politics and Solutions

This post is all about politics, policy, and problem solving. Policy is so dominated by politics and ideology, I thought I would take a step back from all that noise to think about what we are really dealing with.

At a personal level, we spend our lives encountering challenges and figuring out how to deal with them. While ethics or ideology might enter some of these decisions, many of them are determined by the objective pluses and minuses. Should I buy a SUV or a two-door sedan? Should I go to Indiana University or Purdue? Should I turn left here or turn right? Is it time to replace my furnace? A logical process for finding the best solutions to these and many other questions aids us every day.

Why don’t we do the same thing in the public arena? Should we have a national policy to reduce income inequality? If so, then what is the best policy to achieve significant and lasting improvements? How can we effectively reduce poverty? What do we do to have a strong national defense? How can we have an efficient national infrastructure or successful immigration policy, or how can we make sure enough JD is produced each year?

I realize that when it comes to the public arena, the elements of an objective analysis might get more complicated, but does that mean we have to abandon all logic and start screaming ideology at each other?

We might not agree fully on which problems government should try to solve, but we generally agree it is appropriate for government to try to resolve some of them. Despite this agreement, there are some well-known hazards to consider. Not sure our friends in Washington are capable of the process. But clearly you should agree that this sort of simple logic should not be impossible to muster.

Below I list 6 common-sense steps to approach any national problem.

            Where is the pain center? Can we be specific about the nature and extent of the problem? Seems obvious to me that one should begin by clarifying the nature and extent of the problem. What is it? Who gets affected? How big is the problem?

  Where did it come from? While a problem might be highly visible and impactful, do we know what the source or cause of the problem is? That is, do we have a clue as to what to treat? If the sources are multiple, can we list the causes of the pain and perhaps rank them by size of impact?

How should we treat the problem? Monetary policy is often used because the Fed believes that government either doesn’t know how or is incapable of handling the real sources of a problem. So the Fed often changes monetary policy simply because it observes a potential threat to the economy even if the actual problems have absolutely nothing to do with interest rates or money. Wouldn’t it be nice to aim our policies at the actually sources of our problems, and then use a remedy appropriate to the problem?

Balloon management. Push in the bubble on a balloon and another bubble forms. I learned balloon management when I was a student at Georgia Tech. The bubble on the balloon is like a problem we are encountering. The solution is to get rid of the bubble. Pushing on the bubble will reduce that problem but inevitably when you push one bubble in, you create another one. The trick to good management or problem-solving is to make the second bubble smaller than the first one. Good managers realize they will always create a second bubble, and the trick is to make it smaller than the original one.

            Long term consequences. Sometimes the second bubble does not show up for a while. We have plenty of experience and theory that explains why a policy that overheats the economy will eventually cause interest rates to rise and a crowding out of private investment spending. Balloon management suggests taking this long-term result into account when we use fiscal policy to stimulate the economy.

Unintended consequences. When you try to solve a problem, the action creates other outcomes you might not have anticipated. Balloon management is about expected consequences. But sometimes we get surprised by the eventual impacts of a policy introduced today. Tariffs on Chinese goods might sound practical but how will the Chinese respond?

These last three points underscore how important it is to acknowledge these spillovers as we make our decisions. Ignoring them is to bring peril.

            Where does ethics and/or ideology come in? Try as we might we all have either explicit or hidden ideologies and biases. They are there. We can’t escape them. But we can try to bring them to the surface and try to make sure they play a proper role in any decision. We can try to make sure they don’t dominate every decision. 

So that's it. Whether at the personal level or the national level, it makes no sense to use name-calling and shouting to solve our problems. We will never be perfect when it comes to a complete, objective, and totally effective approach but we probably could do a lot better for ourselves if we  followed some simple decision-making rules. 

What is it about government these days that makes such an approach seems so impossible?

Tuesday, December 3, 2019

Don't Destroy What Makes America Great by Guest Blogger John Manzella*

When I crossed through Checkpoint Charlie from West Berlin to East Berlin nearly 30 years ago, the failures of former East Germany were immediately obvious. The grey unkempt landscape and dilapidated buildings looked as though that country hadn't been repaired since American and Soviet tanks faced off yards apart decades earlier in one of the most tense nuclear showdowns.

While there, I witnessed the dismantling of the Berlin Wall and observed the first free parliamentary elections held in that region since 1933. Although these historic events marked the end of Soviet-dominated Communism, that system began collapsing several years earlier.

Michael Novak, the author of dozens of books on the philosophy and theology of culture, stressed that checks and balances are to the political order what competition is to capitalism. The former Soviet Union, East Germany and other Soviet-controlled countries did not have a system of checks and balances or real competition, and failed miserably.

Even today, China has not designed a system with these critical functions. Consequently, its brand of one-party capitalism is undergoing difficulties that are likely to become more severe in the years ahead.

The American system of checks and balances is part of a critically important formula that prevents any one group from permanently imposing its will on others. It shepherds constant changes — some good, some bad — but always allows for self correction.

Combined with American free-market capitalism, which promotes dynamic and healthy competition, as well as a brilliant Constitution, the rule of law, and separation of church and state, these factors have improved the lives of millions of people. They also have attracted the world’s brightest entrepreneurs, engineers and scientists, and empowered people to unleash their creativity, take risks, and start new businesses.

But to continue to succeed, this American experiment also requires trust in important American institutions, like good government, a well functioning electoral system, a fair judiciary, and sound property rights that protect investments. And herein lies a big problem: faith in many American institutions is declining, especially in government.

Stated in a recent report by the Pew Research Center, “Long running surveys show that public confidence in the government fell precipitously in the 1960s and ‘70s, recovered somewhat in the ‘80s and early 2000s, and is near historic lows today.” The report also indicates that only 37% of those interviewed have at least a “fair amount” of confidence in elected officials to act in the best interests of the public, and 63% have “not too much” or “no confidence at all.”

According to the report, “Why Institutions Matter for Economic Growth,” published by the World Economic Forum, a Geneva-based non-profit organization best known for its annual meeting in Davos, Switzerland, institutions play an important role in a country’s economic health. When trust declines, economies can fail.

A country’s institutions, sometimes referred to as rules of the game, shape behavior. If, for example, citizens don’t believe the legal system will protect their farm or company from being stolen, then their incentive to work hard and invest in a farm or company will be limited.

Only 25 miles apart, there are many differences between San Diego and Tijuana, Mexico. One has a relatively high standard of living, the other doesn’t. One big factor is the strength and level of trust in the institutions they operate under. For a simpler example, look no further than North and South Korea. One country has a vibrant economy, the other can barely feed its people. One has relatively strong institutions, the other doesn’t.

How do we reverse the decline in trust in our institutions? The answer isn’t simple. But support for American institutions — not today’s constant assault on our electoral system, the independent judiciary, the rule of law, and the media — would help. Although the erosion in trust began years ago, it needs to be addressed before the damage mounts.

Many Americans say they are happy with the performance of their stock portfolios and the U.S. economy. But keep in mind that declining trust in American institutions is tantamount to chipping away at the building blocks that make America great and support our wealth creation model. And for me, this brings images of Berliners chipping away at the Berlin Wall.

*John Manzella, founder of the ManzellaReport.com, is a speaker, author and nationally syndicated columnist on global business and economic trends. Contact him at JohnManzella.com.

This article was nationally syndicated by Tribune News Service.

Tuesday, November 26, 2019

John Boquist: An Oak Tree Passed

John Boquist was an Oak tree. He was one of a kind. He passed on August 28th and he will be missed by many. One ceremony has already been held and I am sorry to say I missed it. I would have loved to have been there.

Below is a link to his beautiful obituary but I wanted to say a little more here today.
Like the biggest Oak tree in your neighborhood, you could not miss John. He was a big, tall Swede with messed up hair and a booming voice.

And like a tall Oak tree he was strong against the biggest winds and he sheltered the rest of us from the elements. He was tough and honest and despite sometimes holding views that everyone might not share, he was universally loved and respected. You always knew with John when he was pontificating about this or that – that his words came from a huge heart and from an even bigger brain. You might disagree with him, but you always thought he was fair.

I met John when I started at the Kelley School of Business in 1976. John had already been a young finance prof for a few years before I got there. We both drew the short straw and were required to drive to the business school’s Indianapolis campus  to teach one course a year. That was a wonderful way to get to know each other. We’d drive up to Indianapolis from Bloomington together, teach our respective classes, would find a restaurant/bar for dinner after class, and then drive back to Bloomington. Often there were other colleagues driving with us – Buck Klemkosky and Vic Cabot come to mind. 

We drove back from Indianapolis one night in the middle of one of the biggest snowstorms to hit central Indiana. As a lad from Miami I was glad to have a Michigander with me who could drive on snow.

I was honored to get to know John in those early days and to remain family friends and colleagues for all these years. John and Jean were always fun and interesting. John always had an opinion about everything. You had to be ready to discuss or he would crush you with his research and logic.

I miss seeing his face a lot. It is one of those faces that immediately brings a smile to your face. But much of the reason for wanting to write today has more to do with the special talents that John brought to academia. We hear a lot of criticism about academics. One is they do esoteric research in very fancy academic journals and know little about the real world. Another is that they get paid handsomely for that research and care little for students. John was an academic with a PhD from Purdue. But John was the antithesis of what people complain about.

Professors are graded on three scores – academic research, teaching, and service. Tenure, pay, and continued employment are evaluated each year on those three criteria. Most of us are lucky to do okay on one of the three. But John maxed out on all three. I won’t go into details on all that because you can read about it on the attached excellent obituary.

John might have been the best and most beloved teacher in all of Indiana University. He was that good. He wasn’t the guy to buy off the students. He was tough as nails. But John intertwined incredible knowledge with a gift of caring communication few of us ever achieved. His research was both academic and applied. He wrote articles in a variety of outlets for anyone interested in corporate finance and investments. If that wasn’t enough, John made major contributions to the life of the school. He ran the Executive Education Program for years. He knew how to manage things in ways that most academics will never know. He turned programs into successes for the school because he knew how to create, staff, and manage programs.

Finally let me say that all that work at IU never deterred him from being a friend, a husband, a father and later, a grandfather. There were no tradeoffs for John. He worked, he played, he loved, he fathered. Not sure when he slept but this guy did it all. He is remembered by so many of us in the way that we all wish we too could be remembered. 

John Boquist was the tallest Oak tree.

Tuesday, November 19, 2019

The US Economy as of September 2019

The US government reported the most recent statistics for national output or what is called real Gross Domestic Product (GDP). Much of the attention, as usual, focused on the numbers for the most recent quarter. In October, the main news was about the third quarter of 2019. The Bureau of Economic Analysis reports the latest updates for the previous quarters as well.

This report is, therefore, news, and it get a lot of attention. Like when a runner hits the third lap of a four lap race, it can be very critical how fast she runs that third lap. That might tell you a lot about how fast she will run the last lap and therefore how she might finish the race.

But "might" is the key word in that last sentence. Maybe she ran too fast in the third lap and is going to poop out. Or maybe she ran a fast third lap and is accelerating.

And so it goes with real GDP. We examine the third quarter for signs that we are pooping out or accelerating or maybe just in a holding pattern.

It is fun and exciting to look at those three quarters for patterns. But try as you might, you cannot really forecast the fourth quarter and the year with those three numbers. It is a fool's game, really.

So today I want to take a slightly better approach. Let's just average the three quarters we know about 2019 and compare that to what happened to 2018 for signs of what might come.

The table below takes data from the BEA report and organizes it for my purpose. The first column has the average number for all four quarters of 2018. There you see that US real GDP rose by 2.9 percent in 2018. Then you see the next three quarters of change in 2019. After those columns is the average of the first three quarters of 2019 or 2.3 percent.

The final column shows you how much slower (negative sign) or how much faster (positive sign) real GDP grew in 2019 compared to 2018. The -0.6 says GDP has been growing about a half a percent slower in the first three quarters of 2019 compared to the four quarters of 2018. That might be something to fret about -- slower growth. But it is not a huge decline and is clearly not a recession. I looked up the numbers for 2016 and 2017 and it turns out real GDP averaged 2.0 percent in those two years.

So just concentrating on real GDP -- the big picture -- it does not look like much has changed after we received third quarter 2019 numbers.

The remainder of the lines contain the data for the main components of real GDP. Notice that all the numbers in the last column that showed increases were in the federal (defense and non-defense) and state and local government areas. Government spending grew faster in 2019 compared to 2018.

In contrast, the private sector did worse in 2019. PCE or consumer spending barely declined but notice what we call national investment was almost 6 percentage points lower in 2019. Of course, thanks to a trade war, both imports and exports slowed considerably in 2019.

Many things could happen to make the fourth quarter of 2019 quite different from the first three quarters. The comparison of 2019 to 2018 might be quite different when we learn about the fourth quarter in January. But for now there seems to be a pretty clear picture of change.

Overall growth is down because firms and households have decided to invest less in equipment, structures, and new housing. And a trade war is harming exports and imports. I will meet you back at the pass to see if any of this changed in January.

2018 2019 2019*
Q1 Q2 Q3 Avg Diff**
GDP 2.9 3.1 2 1.9 2.3 -0.6
PCE 3 1.1 4.6 2.9 2.9 -0.1
GPDI 5.1 6.2 -6.5 -1.5 -0.6 -5.7
 Exports 3 4.1 -5.7 0.7 -0.3 -3.3
Imports 4.4 -1.5 0 1.2 -0.1 -4.5
Defense 3.3 7.7 3.3 2.2 4.4 1.1
NonDefen 2.4 -5.4 16.1 5.2 5.3 2.9
S&L 1 3.3 2.7 1.1 2.4 1.4

Real GDP Statistics from Bea.gov
* Average of first three quarters
**2019 average minus 2018 

Tuesday, November 12, 2019

The Fed and the Fourth Interest Rate Reduction

I keep trying to find intuitive language or stories that can help us to understand how terrible the leadership is at the Fed. It is not that this is funny. And it is not that this is a continuing thing. Sure, I have never loved Fed policy but it is one thing to disagree with a specific policy – it is another to realize that the Fed’s leaders are simply delusional. I know they wear nice suits and shine their shoes, but these people are leading us down a very scary path.

So here goes: Mom, my head hurts. Okay, honey, take some aspirin. Mom, now my foot hurts. Okay, honey, take some more aspirin. Mom, now my stomach hurts. Okay, honey, take some Tylenol. Do I need to go further? Whatever the ailment is, a pain killer seems to be the solution. But maybe you fell on your head and wrenched your neck on an icy street. Maybe you broke your foot trying to moonwalk on Earth. Maybe your stomach hurts because you have an ulcer.

In all these cases, it is clear if one took a moment to investigate the source of the pain, they would approach the problem in a different direction that attacked the source of the problem. Aspirin is fine for many things, but it does not work for others. 

How long does it take for the Fed to realize that the problem for the US economy is not that interest rates are too high? Sheesh, interest rates are not high at all. So maybe the Fed understands that the problem is China, or the problem is slow growth in Europe, or the problem is tariffs, or the problem is a low annual supply of JD. Clearly, the problem for the US economy is NOT anything the Fed has any control over. Yet, the leaders of the Fed stick their faces into a camera and say it is of the utmost importance that they reduce the interest rate.

Part 2 is even creepier. What did they say this time? Okay, folks, we are reducing interest rates a third and last time. A THIRD AND LAST TIME! Okay, they admitted that if things really fell apart then they might entertain a fourth time. Tuna, do not stay out after midnight. How many times have I told you not to stay after 12? Tuna, don’t push me. If you stay after 12 tonight, I am going to tell Peter and then there will be hell to pay. Do not under any circumstance stay after 12. Do you believe Tuna’s lady? Of course not. Tuna will stay out after 12 all he wants and the Fed will lower rates whenever it wants to save the day.

Part 3: Why would it be okay for the Fed to lower rates three times and not a fourth? What logic exists in the Fed’s mind that three rate reductions are hunky dory but four is not. Maybe the truth is that two or even three was already risky and the fourth is even riskier. But alas, they don’t say that! They are quite happy with the third one. 

Part 4 is related to Part 3. If two rate reductions didn’t work, as evidenced by a marked slowdown in economic growth and a drastic decline is business spending on plant and equipment, then why in the world would the third one be the charm? But not the fourth one? 

Okay my dear friends. Please help me to understand this Fed. Interest rates are clearly not our problem. The Fed has zero credibility with respect to having one more rate decrease. One more rate reduction won’t do any more than the third one and even if we had a fourth one why would it save the day?

Tuesday, November 5, 2019

Being Human: Government Finances 2019

We fully understand that we must make good choices with our time and money. Many of those choices require us to forego a pleasure today for a feeling of security about tomorrow.
  • People don’t eat that last Twinkie because they know it might affect their waistline.
  • People buy insurance for house, health, and so on because stuff happens, and it helps to be able to pay for repairs.
  • We use some of our spare time to volunteer for worthy causes in our neighborhoods.
  • The list goes on…

While we might fully understand the right thing to do, we don’t always do it. That’s what it means to be human. Last night I could not resist the urge to eat that last slice of pepperoni pizza in the box.

So, it is easy to understand why collectively we do the same thing. We cave to the moment and we risk the future. We elect folks to create budgets for us. They decide how much to tax us and then how to take those proceeds and spend them for us. We want them to be prudent with our money. We want them to make good expenditures for us. We understand that if we spend too much today that there might be negative consequences in the future.

The government budgets for fiscal years. FY 2019 was over as of the end of September 2019. The numbers are in. Collectively, we spent a trillion dollars more than we collected in taxes. Okay – the actual number was $984 billion but it is soooo much more fun to call it a trillion. Even Scrooge McDuck cannot imagine spending that much money.

As the table below shows, in FY 2019 we collected $3.5 trillion in taxes and spent $4.5 trillion on various items like Social Security, Medicare, and so on. Yes, total spending was $4.5 trillion but of that amount, $1 trillion had to come from something other than taxes.

Where did it come from? No, the government did not use the printing press to make a bunch more Benjamins. What they did was borrow the $1 trillion. The government can print bonds and notes – so they printed a bunch of bonds and notes and sold them to Tuna, Nolan, and a bunch of banks. Yes, foreigners bought their share, too. The trillion dollars of bonds added to the trillions we already borrowed in the past and have not yet repaid. The sum of all those bonds is called the national debt. I won’t even write out that number. It is so big it makes me cry. (You can look it up. Just Google “US national debt”.)

Who cares if the government has a huge debt? It’s the government, right? Can’t they just abolish the debt? Can’t they have the Fed buy all those bonds? Our country is large and strong, can’t we just keep paying off the debt over time? Can't they cause inflation and reduce the pain of the payoff over time?

True, the government has a lot of options, but they aren’t very good ones. Like the list above, you can always not buy insurance today or not save for retirement. Honey, let’s go to Vegas with our kid's college account. We can put the money back next year after I get that big raise. Yes, I have a case of JD you can buy for a dollar.😊 Maybe I can sell you the Brooklyn Bridge?

Once you get a large debt, your options get limited. Look in the table – the interest on the national debt was $376 billion in FY 2019. Without a debt, we would have had $376 billion more each year we could have used for education, infrastructure, and a lot of other things.

But the worst thing about that debt is what happens if confidence in the US economy sours. What happens if we go into a recession? What happens if our recession is worse than recessions in other countries? What happens if investors at home and abroad decide that the US government might do something drastic – perhaps not pay all the interest on the debt? It’s called an investor stampede. As they sell our bonds, stocks, and JD casks, it won’t be pretty. And as the prices of all those things fall and our wealth decreases, then the depression spreads to all kinds of goods and services we might have bought when we felt wealthier.

Having a trillion dollar deficit and a growing national debt during relatively good days is very risky. No, the worst has not happened yet. But we shouldn’t fool ourselves. We have put ourselves in that place between the rock and the hard place. Now is the time to loosen the rock. It won't be fun later to say "I told you so."

Table FY 2019 Budget Figures

Income Tax          $1,718 billion
Corporate Tax           230
Payroll Tax             2,243
Estate Tax                   17
Customs Duties           71
Other Revenues        184
     Total Revenue  $3,462

Social Security       $1,044
Medicare                     651
Defense Dept              688
Interest on Debt          376
Other                        1,688
     Total Spending   $4,447

Deficit                      $   984

Tuesday, October 29, 2019

Politics Today and Marginal Analysis in Economics

Those of you who took a course in economics remember the idea that to establish any optimal decision, it usually took the intersection of marginal this or marginal that. 

Probably the most famous of these marginal analyses relates marginal cost to marginal revenue. When MR=MC, we know the firm is producing the output that yields the maximal amount of profits. If MR>MC, then you know you can make greater profits by producing more. If MR<MC, then producing another unit would raise cost more than revenue so you would not produce more.

We have marginal equalities that guide just about all important economic questions –among them are how much to produce, how many workers to hire, how much to pay workers, and where to set your price.

So when we hear so much commotion these days about government spending and taxation, it might be good to remember that most of what we know in economics is all about marginals. The word marginal means “at the edge of something”. Or in terms of most economic applications, it means a small change from a given starting value. 

When we talk about marginal cost we ask, how much will costs change if we produce one more unit of output? We don’t say, how much will costs change if we go from producing 1 car to producing 10,000 cars….or a million cars? Or if we are producing 16 million cars today then we might ask, how much will total costs change if we produce 17 million cars?

Marginals are about small changes for good reasons. It is much easier to think of a small change in output as having known and quantifiable cost changes associated with it. A small change in output probably means more or less the same factory space, with the same utility costs, with same property taxes, and so on. Yes, a small output change might require more worker hours but the relationship between a small change in output and the change in employment ought to be well known.  Contrast that to someone who says, let’s increase output from 1 million cars to 100 million cars. Wow. Estimating the costs of a large change like that could be a lot more complicated and uncertain.

The above is why I am getting nervous about the coming election. Many of the viable candidates on the Democratic side are making a case for non-marginal change. They want big changes. And who can blame them? We have big and enduring problems, and these might require major policy changes. I am not saying that it is wrong to want to make large changes. What worries me, instead, is the confidence that these politicians seem to have about how these large changes will benefit us and how much they will cost. I don’t care if one takes the side of the Ds or the Rs in this context of billions and trillions of dollars. The trouble is believing any of them when they start throwing around trillions of dollars like Jack Daniels mini-bottles on an Alaska Air flight.

One source of these estimates is a group called the Committee for a Responsible Federal Budget http://www.crfb.org/blogs/would-medicare-all-require-middle-class-tax-hike .
With respect to Medicare for All, they estimate a bill of about $27 to $35 trillion dollars. That’s a lot of JD. That amount for one program is equal to 100% of GDP and is larger than the national debt. I don’t know how we can be sure of that amount as we switch millions of people out of their own insurance policies and into the government program. In fact, since private premiums would go down, it is unclear how much more we will pay. Of course, I don’t know how anyone could estimate how much more healthcare we will consume when the price for so many people will go down.

The candidates, of course, have very different opinions about who should pay for this program. One candidate thinks the rich will pay the full amount. Do the rich really have an extra $30 trillion just hanging around? Other candidates think the middle class will have to pay a bit of the price tag. They have not told us how much they would pay. 

Maybe they don’t really know!!!! Private estimates are all over the place. One source saying that tax burdens will double for millions of us. Another says the vast majority of workers will pay less for healthcare. Your politics might have you leaning one way or another. But be honest – these folks are pulling this out of their butts. I’d suggest a colonoscopy.

I won’t belabor the point by adding to this discussion all the other programs being debated on the campaign trail including free education ($2.4 trillion), a write-off of past educational loans ($1.6 trillion), the Green New Deal ($93 trillion) … and free JD. While there is much debate about who exactly would pay for this (rich, middle class, military budget reductions), the truth is that if any of these numbers for spending are even close, it is going to be a very major hit on the country.

The point remains. With extremes running the political process how can we believe any of this? Large changes have got to be tough to swallow regardless of these estimates. Why can’t we go back to marginal changes? Is the risk of causing incredible havoc really something we want to face? Why can’t we just go back to the smaller changes of a marginal analysis? Maybe that is too boring?