Guns Versus Butter

Guns versus butter is a terminology that goes back to Nazi Germany and then to President Lyndon Johnson. And it seems highly relevant now. No, the issue is not about butter. Butter is easy for most people to identify with but the statement ought to read something like guns versus other stuff. Guns versus butter refers to a choice that society often has to make -- with limited resources do we prefer to spend more of them on national defense or on other things? 

It begins with the assumption that we can't have more of everything. Limited incomes or limited resources means that we often have to make choices. I want a new car but I also want a new condo. I can't afford both. So I have to make a decision -- a new car or a new house? 

Guns versus butter is meant to meant to relate to how we use the government's budget to attain national goals. More "guns" means more national defense. More butter means more of other things. For example, more transfer payments. 

Why bring this up today? We know all the above already. The reason is that we are now very preoccupied with how we should respond to Russian aggression in Ukraine. Some experts believe we should prepare for a war and maybe even a nuclear war with Russia. Russia's aims in Ukraine worry some folks that in the near future Russia will invade Ukraine and perhaps other areas in that part of the world. 

If we are serious about constraining these Russian ambitions, then it will take money and resources. Those resources must be pulled from somewhere. Maybe they will come from other places in the government defense budget. Or maybe that won't be enough. Maybe we will have to find the money in other government programs. Thus -- guns versus butter. 

As of 2022 this is how OMB says we spent our federal government money:

    Defense 14%

    Human Resources (Health, Education, Training, Medicare, Income Security, Social Security, etc)  72%

    Physical Resources 5%

    Net Interest 7%

    Other 2%.

Clearly, if we are to pull more money into defense it will have to come from human resources. 

Here are the annual spending numbers for national defense (in billions of dollars) for 2012 through 2027 in five year increments:

   2012   678

   2017   599

   2022   780

   2027   867

After dropping by $79 billion from 2012 to 2017, defense spending rose by $81 billion from 2017 to 2022 and then is projected to rise by another $87 billion in 2027.

If we go to war with Russia, those defense numbers will likely rise even more. 

That $867 billion or more will have to come from somewhere. Will we raise taxes that much or will we cut nondefense? Or maybe we won't raise defense spending. I guess we will have to wait and see.  

Government and Growth 2019 to 2021

The bottom line of the table shows that real GDP fell in 2020 meaning that 2020 was a recession year. The recession lasted only a single year (if we ignore quarters) and real GDP was only somewhat larger in 2022 than in 2020. 

The table shows that we experienced a tripling of the government deficit from 2019 to 2020. It is not uncommon for the government to spend more and/or tax less during a recession. Both outlays and revenues recovered in 2021 but we were left with a large government deficit in 2021. 

The national debt grew in both years -- by $4.2 trillion in 2020 and then by another $1.3 trillion in 2021. The total increase over two years amounted to a 33% over the level in 2019. That's a whopping increase in debt in just two years. Recent news shows the national debt now at $32 trillion. 

So what? We have come to expect that governments will react this way after a recession. Governments feel the responsibility to juice up the economy and they do it by increasing national debt. It seems reasonable, right? If you lose your job and you go into a personal recession, you might borrow to carry you through the lean times. 

Debt seems natural and it is. But we always have to remember that when we go deeper into debt, we take a risk. On the personal level, if you don't get another job quickly, then you might not be able to pay back the debt. There is that same risk with the government. If the economy does not recover quickly, then we may not be able to repay the debt. Creditors don't like it when they are not repaid in a timely manner and there are consequences for failure to replay.

With governments it gets more complicated. Government has the power to tax and therefore we believe that the government should and can repay. Just because the government has the power to tax and repay, however, it doesn't mean it will. With government there is the additional element of policy. If government decides not to pay down the debt, it is possible that it will incur even more debt. Government, or should I say politicians, excel at finding ways to spend the people's money. If they fail to reduce government deficits and debt, what happens next? 

The recent behavior of national inflation and interest rates might give you a clue. The picture is not so rosy. 

The table shows a large increase in debt following a recession. But will it end there? Will politicians find excuses to not reduce spending or to not raise taxes? If national debt continues to rise in the future, we will surely get higher inflation and interest rates. Is that what we want? Is that what we elect leaders to do? I think not!

Government Budget and Real GDP (in trillions)

                        2019     2020     2021

Revenues          3.5        3.4        4.0

Outlays             4.5        6.6        6.8

Deficit             -1.0       -3.1      -2.7    

Debt               16.8       21.0      22.3

Real GDP       19.0       18.4     19.4

The Fed and the Indy 500

Honey, I think Junior found a box of matches. No worry. He doesn't know how to use matches. 

Honey, I think Junior took out a match from the box of matches.  No worry. He doesn't know how to use matches. 

Honey, I think Junior is striking a match.  No worry. He doesn't know how to use matches. 

Honey. I think the match is lit. No worry. He doesn't know how to use matches. 

Honey, Junior's room is on fire. Oops. 

Reminds me of the current discussion over monetary policy. Monetary policy aimed at expanding the economy remains a discussion item despite the fact the we have expanding economic growth and rapidly rising interest rates and inflation. It is time to blow out the match. 

The title of an article in the Wall Street Journal is Fed’s Inflation Fight Has Some Economists Fearing an Unnecessarily Deep Downturn. Interesting choice of words -- Fight, Unnecessarily, Deep, Downturn. To me those are fighting words. 

It's not enough that the Fed's errant policy might induce a slowdown in the economy -- folks are worrying that the downturn is deep and unnecessary. Why does the Fed risk something that is unnecessary? Why risk a deep downturn? What is wrong with those people? Aren't they satisfied with a good old slowdown? Won't that be enough to quell this inflation fire they started? 

I guess not. As in the inflammatory remarks above, you don't wait to call the fire department until the flames are all-consuming and there is little hope of saving the building. Instead, you might allow for a little friction but stop before you start a fire -- even a little fire. But not our Fed? 

They saw the fire starting but found every excuse under the sun to ignore all the signs. How high does the inflation rate have to rise before someone at the Fed slides down the fire pole?  Has the rise in the inflation rate not equaled or exceeded past increases in inflation? 

That's where we are. The Fed sat on its hands while the blaze started and now that it is roaring -- they sit on their hands again because they fear that they have backed themselves into an inflationary corner. 

As in the first lines of this piece above. Don't let Junior have the matches. Nope. Don't let him touch them. 

The Fed? Teach the Fed to act like a race car driver. When the car veers a little too far left, then make a correction rightward. Too far right, then correct to the left. Keep on top of the movements. Lots of little corrections keeps you on course. Waiting too long to correct puts you in the stands. 

What is wrong with our current crop of Fed officials that they can't understand these simple facts? Maybe the facts don't fit their ideology? Maybe to them rising inflation is more fun than falling?

Chemistry

I am reading a book called Lessons in Chemistry by Bonnie Garmus. It was recommended to me by a friend or else I would never have chosen it. I always heard that chemistry was a very hard course and I was very successful in avoiding that course in both high school and college. I was able to take biology instead so I don't know the first thing about chemistry. Just looking at the cover of that book scared me. 

As it turns out, it is a fabulous book and you don't need to know much about chemistry to read it. And despite the title, it is really a book about feminism. Speaking for myself, the book is stellar at what it tries to do and it probably turns most of us into feminists. That is, if feminism means understanding that the deck is stacked against equality and means that women usually have a hill to climb, then the book is about feminism. 

Elizabeth Zott has the misfortune to be a chemist -- a serious one. In the 1960s that meant she was a minority. Most chemists were men. But Zott had a strong personality and was not easy to be put down. Regardless of your own sex you will find Zott to be a role model. A person you would admire and trust. Turning the pages ought to remove you from your own hang ups and turn you  into a cheerleader for people. Yes people. All people. Literature is wonderful at making you think beyond the usual stereotypes. Zott is a great human being. Period. One review of the book says the following, "A story for the smart girls who refuse to dumb themselves down." In truth, it is a story for anyone who might dumb themselves down. 

What else? I love the way chemistry and cooking are tied in a knot in this book. Even me with limited understanding of chemistry can appreciate the intersections of chemistry and cooking. I think of chemists as people who mix things together and watch the outcomes. Cooks do the same things. Zott has a daughter and is thrown into cooking and then her own television cooking show when her daughter is fed a less than healthy lunch at school. So if you like cook books and cooking, you should love this book for that part of it. 

It makes me think about what it is that creates an Elizabeth Zott. I realize that she is a book character but I have been lucky to know a few Elizabeth Zotts -- both men and women who are successful because they have strong characters and they know how to solve problems. They set goals and work towards them.