Category Archives: News & Media

Religion, The Stock Market, and the Search for Meaning

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People want to understand phenomena.  We want explanations for what happens. Journalists, especially TV and radio journalists, want explanations that can be summarized in 1-2 sentences in a sound bite.  Randomness is pretty scary.  And anything that’s too complex to understand easily looks a lot like randomness.

So what triggered this little nugget of metaphysical social observation in an economics blog?  Reporting on the stock market!  Everyday we (those of us who read, listen or watch the news) are treated to not only reports of what the major stock market averages have done that day, but we’re always given a simple and easy explanation.  Just look at today in the NYTimes.  I’m not trying to pick on The Times, it was just the first thing showing on Google Finance as I wrote this – any source, any time and you’ll get similar simplistic explanations.

The move announced by central bankers on Wednesday to contain the European debt crisis led to euphoria in global stock markets…

Krugman posted this evening that he didn’t understand it.  But he approached it from the standpoint of “does this action by ECB make economic sense that should improve stock prices?’.  I think he’s right that it doesn’t make sense, but I think he misses a bigger point.  It’s foolish to try to attribute the movements of stock market averages on any given day to the any particular sentiment of investors or any particular logic of rational investors.

The markets are huge.  We’re talking hundreds of billions and trillions of dollars in trades. Daily volume is in the billions of trades everyday. It’s complex, folks. The reasons these trades happen and why they happened at the prices they did are really, really complex.   It’s kind of like ancient peoples trying to understand the stars and without even a telescope or any calculus! Unfortunately, like them, we want simple explanations.  So we invent them.  And like ancient peoples we make sure our explanations support and reinforce whatever religious or superstitious beliefs we have.  [readers are advised not to try to decide what my spiritual beliefs are based on that sentence - it's complicated].

There is a belief that supports much of this daily “this is what the market did and why” reporting. It’s actually based on the theory that markets are rational and “efficient”.  There’s an economic theory that holds that prices in financial markets accurately reflect the current state of all known information and news regarding the future flow of earnings and profits from firms.  It’s demonstrably false, but it has quite a following among neoclassical economists.  It cannot be proven and evidence exists to contradict the hypothesis (see Quiggin’s Zombie Economics), yet it’s taken as article of faith among many, many economists.  So much so that some non-believing economists have begun to refer to neoclassical economics as theo-classical.

The whole idea that there’s a single sentiment or key piece of news that drives the stock market each day is made even more absurd when we realize that most trading isn’t even being done by humans!  The significant majority of all trades are done by computers based on algorithms such as “buy this if the price has moved x in the last y seconds”.  Even more of the trading is done by casino-oriented short-term trading by large banks and hedge funds who are only trying to figure out what they think the other traders are going to do a few seconds before they do it. (also known as Keynes’ beauty contest).

Markets are the collective, sum judgement of lots of complex decisions.  Even if all the individual decisions were rational, there’s still no reason to believe the aggregate outcome can be represented as the decision of some hypothetical rational being.  So next time you hear or read some talking head pontificate that “the markets are saying…..”, just remember there’s little difference between that modern commentator and some ancient priest in long gown claiming that “the gods are saying….”

John Stossel Fails an Education Test and Demonstrates That He’s Economically Illiterate

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John Stossel is a Fox Business News reporter.  Stossel is an unabashed “libertarian” with a strong Austrian orientation on economics who focuses on economic issues.  He’s made a living out of being indignant and disgusted by “liberals” and “big government” which he sees as the root of all economic problems.  He’s been quite successful over the years, first at ABC News and now at Fox.   He also writes a blog to go with his Fox News show.

In other research I was doing recently I stumbled upon a post of his from Sept 15 called “Stupid in America” in which he asserts that schools have gotten too expensive and don’t deliver the goods.  In Stossel’s own words and graph:

School spending has gone through the roof and test scores are flat.

While most every other service in life has gotten faster, better, and cheaper, one of the most important things we buy — education — has remained completely stagnant, unchanged since we started measuring it in 1970.

It looks appalling right?  Scores have increased by 1% but the cost of an education appears to have increased by approximately 246% ($43,000 up to $149,000).  Except it’s very deceptive and the obvious product of an economic illiterate.  There’s two clear, elementary economic errors here.

First, he’s comparing test scores, a measure that’s in absolute terms on fixed scale to dollars spent in nominal terms over a 40 year period.  Dollars are not fixed units of measure.  They change value over time because of inflation.  If you want to compare test scores to dollars spent “buying” those test scores, then you need to use real dollars with the inflation taken out.

So let’s do that.  Using the Bureau of Labor Statistics CPI Inflation Calculator, we find that what $43,000 purchased in 1970 would require $241,660. in 2010.  Yes, inflation has changed purchasing power that much.  Inflation compounds so even a 2% annual inflation rate would more than double nominal costs in 40 years.  In the late 1970′s we had some years of inflation in the double-digits.  So really, the graph is telling us the opposite of what Stossel wants us to believe.

The second big problem is that Stossel is assuming that the all money spent on education goes to buying improved test scores in math, science, and reading.  He also is assuming that the inputs, the students being educated are the same in 1970 as in 2010.  They aren’t.  He ignores that we might be paying for something else in addition to math, reading, and science test scores.

Stossel then goes on the attribute all of the problems to education being a government monopoly.  Again, he ignores facts. Facts are inconvenient for Stossel.  Competition has been brought to K-12 education in many areas. Maybe not as much as he would like, but it’s a significant change since 1970.  As his test scores indicate, it hasn’t helped much.

Finally, I want to note that it’s poor practice to not cite your sources and more precisely define your data series.  The graph is labeled “Source: NCES”.  NCES is a huge website and archive of a lot of data.  Stossel doesn’t give a source. Is it because he wants us to take him at his word and not verify or check it out for ourselves? He doesn’t even label what the spending series is to which he refers.  I am assuming it is a “spending per pupil over 12 years” type of series.  A search of NCES for a series labeled as he has it turned up nothing.

I find it enormously ironic that Stossel would make such elementary errors as to not deflate a data series or to not label his measures precisely.  That’s what we demand in principles of economics courses.  What makes it ironic is that on August 23 Stossel takes Congress to task for being “economic illiterates” and not having degrees in economics or business.  Pretty rich stuff from a guy with only a psychology degree who makes elementary economic errors.

The Federal Government HAS Been Cutting Spending – And That’s A Major Problem

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One of the my major frustrations as a blogger and as a follower of economic news is the way in which misinformation and falsehoods get repeatedly passed around as they were facts.  For example, one common meme that we hear a lot is that the  government, especially under Obama, has engaged in a massive spending spree.  The idea is pushed that government is growing out of control.  This idea has been pushed heavily by Republicans and Tea Partiers. It is often combined with the conclusion that “stimulus doesn’t work”.  The unfortunate part is that this idea of a government spending spree is completely untrue!

Look at this graph from the FRED database at the stlouisfed.org.  This shows the annual change in real dollars in government consumption and investment expenditures.  In other words, it shows how additional spending was added each year by all layers of government in the U.S.  During the recession, 2008 and 2009, governments were spending more.  They were spending approximately $60 billion a year more.  But notice that once the “official recession” ended in 2009 (the end of the shaded bars) governments began cutting back.  By late 2010 government has cut back so much that it is now spending less each year than the last year.

It’s no coincidence that this is the same exact timing when two things happened: the Republicans asserted control over the House of Representatives and began pushing to cutting spending, and the economy began to slow again and the recovery stalled. These two phenomena are related.  Cutting government spending when there is high unemployment and a slow economy is a sure-fire recipe for an even slower economy and even higher unemployment.

A critical thinking reader might ask “how can this be true (that government spending is lower than a year ago) if the federal government deficit is so large?”.   Well there’s two explanations.  The first is that the federal government deficit in the economy is largely due to the slow down in tax collections and the tax cuts that delivered little economic stimulus since they were saved, not spent.  Second, government in the U.S. is more than Washington D.C. There’s as much state and local government as there is national government, particularly when it comes to spending (as opposed to transfer payments).  State and local governments are cutting back and cutting back big time.  The 2009 “stimulus” bill of the national government actually had a large component that involved the national government transferring money to states and locals so they wouldn’t have to cut as much.  State and local governments cannot run deficits the way the national government can (they don’t have central banks).  That’s over now.  Now state and local governments are cutting big time – over 345,000 jobs lost at the state and local government level in just the last 12 months.  Of those, the majority are teachers in education.

There Is An Efffective Way to Reduce Government Deficit: Employment. But They Won’t Take That Route.

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In the whole crazy, unnecessary debate over raising the debt-ceiling law, politicians, reporters, and commentators all spoke as if there were only two ways to reduce the government deficits.  Nearly everyone took it as an article of “serious thinking” that to reduce a deficit requires either reducing spending or increasing taxes.  But rather than being evidence of “serious thinking”, such talk is evidence of sloppy, imprecise, and ignorant thinking.  Such talk totally ignores the role of economic growth in determining government budgets and it ignores the role of the government in the economy.  It’s evidence of the government-as-household fallacy, the idea that government is just like a big household and subject to the same constraints as you and I.

There is a way to balance the budget that doesn’t require cutting major spending programs.  And it doesn’t require big tax increases.  It’s called economic growth and putting people back to work.  The major cause of the deficit is because we have very high unemployment.  We have over 9% reported unemployment.  That number rises to approximately 16% if we count all the people working part-time jobs but that desperately want full-time work and more hours.  And finally, both numbers totally ignore the fact that since we fell into this depression in 2007 well over 5% of adult Americans have chosen to drop out of the labor force altogether for now.  If we put those people back to work, they pay taxes. Government revenues will increase even without a tax rate increase.  If we put those people back to work, then government spending on unemployment compensation, Medicaid, welfare, and a host of other safety net programs goes down.  Automatically. Without cutting any programs or harming anyone.

This idea that economic growth and full employment will reduce deficits isn’t some theoretical possibility that only exists in the models of some economists.  We’ve done it before.  Other countries have done it.  In fact, everytime the U.S. has reduced it’s deficit it’s been by increasing employment.  The route to a small deficit or even a balanced budget lies in achieving full employment first, not in contrived artificial balanced budget amendments.

It wasn’t until the debt-ceiling debate was practically finished (for now – it will be back like zombie or vampire) that any in the media took notice that growth and employment is the key.  Last Sunday, July 31, as the President and the Republican Speaker announced their deal to cut spending and raise the debt ceiling, the New York Times finally runs a decent article about how growth is the real answer (bold emphases are mine):

 We wouldn’t need any of that [reduce spending, raise taxes, inflation, or default] if we could restore economic growth. If that happened, Americans would become richer and pay more taxes. Et voilà! — we’d pay down the debt painlessly.

Crazy as that might sound, particularly given Friday’s figures, the possibility isn’t some economic equivalent of that nice big farm where your childhood dog Skip was sent to run free. There are precedents.

Before its economy crashed, Ireland was a star of this sort of debt reduction. In the 1980s, Ireland’s debt dwarfed its economy. Over the next two decades, though, that debt shrank to about a quarter of gross domestic product, largely because the economy went gangbusters.

“Ireland went from being, you know, the emerging market in a European context, to a very dynamic economy,” says Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics and co-author of “This Time Is Different,” a history of debt crises.

The United States has done the same in the past, too. After World War II, gross federal debt reached 122 percent of G.D.P., the highest ratio on record. But over the next 40 years, it fell to about 33 percent. That wasn’t because some blue-ribbon panel prescribed austerity; it was because the American economy became much, much richer.

The same happened during the prosperous 1990s, which began with deficits and ended with surpluses. Former President Bill Clinton is often credited for that turnabout, as he engineered higher tax rates. But most economists attribute the surplus years primarily to extraordinarily rapid growth.

It would be lovely to repeat that experience today, and send our federal debt off to that farm with Skip…

Usually after a recession, growth snaps back quickly and the economy makes up for ground lost — and then some. That’s not the case this time, at least so far. In the 60 years before the Great Recession, the economy expanded at an average annual rate of 3.5 percent. In the second quarter of this year, it grew at less than half of that pace, putting us further and further behind where we would be if the economy were functioning normally.

Unfortunately the article still tries to give the reader the impression that growth/full employment is difficult or unlikely this time.  It tries to give the impression that the growth during the Clinton years was somehow extraordinarily fast.  It was only fast by comparison with either the Bush I, Bush II or the first Reagan terms.  In fact, the growth during the Clinton years was only average at best when compared to what was achieved routinely during 1950-1973 or even during the Carter years.  The article also falsely claims that our “aging population” will require unusually large demands on government resources.  In fact the demands of the aging baby boomers on either Social Security or Medicare aren’t any greater than the resources we devoted to educating those baby boomers in the 1950′s and 1960′s.

Nonetheless, the point of the article is right on:  growth and growth in employment is the way to go if you’re worried about the deficit & debt (which I’m not, but that’s another issue).  The deficit we have is a jobs deficit, not a fiscal or budget deficit.  That’s what we need to worry about.

Washington and the chattering political classes have it wrong.  Their “serious” talk is anything but.

What Happens If Debt Ceiling Is or Isn’t Raised – How It Plays Out (updated)

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Yesterday I took a stab at describing what the consequences of a government default might be and I added to it here.  There’s basically three lessons to take away from those questions. One, nobody knows now exactly what happens, especially in financial markets.  Two, it all depends on the specifics of a deal or no deal to raise the debt ceiling.  Truth is that many of the proposed “deals” to raise the debt ceiling will have negative consequences for the economy as bad as if we don’t raise the ceiling.  And three, regardless of the specifics in financial markets, it will have very negative consequences on GDP and the real economy where most of us live and work.  What I want to address now is less of what the disaster will be as the how the economic side of crisis will likely unfold.

Reporters and politicians are using the metaphor or image of the economy moving toward a cliff to describe how things will happen economically.  They, and the President is one of them, are conjuring up an image whereby the economy is moving along just fine and dandy and then, if we don’t raise the debt ceiling, we will just fall off a cliff into a giant abyss on Aug. 2.  They’re acting as if there’s this hard-and-fast, unalterable deadline when the machine just stops.  If Congress passes a debt ceiling increase before Aug. 2 then they act like everything will be OK.  The image that comes to my mind is one of Coyote from the old Loony Tunes cartoons racing along a plateau towards a giant cliff.  At his current rate he’ll reach the edge on Aug 2.  If Congress votes an increase before Aug 2, then a bridge will appear out of nowhere and he goes on safely.  If they don’t Coyote just falls into the abyss.  That’s wrong and it’s misleading.

The better metaphor is not of a someone racing toward a cliff. The better metaphor is to imagine thousands of people all standing around at the edge of a cliff looking over the edge. The key is the cliff isn’t made of rock.  It’s made of ordinary sand and dirt and it’s weak.  And the cliff has a bit of an overhand to it.  Nobody can see clearly over the edge.  What will happen is that gradually people will get nervous.  Some folks decide to move back from the  edge – banks, investors, and funds decide to move their money out of US T-bills. But the movement starts to weaken and shake the ground.  Some dirt can be seen sliding over the edge.  More people begin to pull back.  The earth shakes and slips more.  It turns into a mob rush to start getting away from the cliff’s edge. But it’s too late.  The ground starts sliding slowly but it gains momentum.  It turns into a landslide.  The whole cliff slides down in a massive landslide taking huge numbers of people with it.  That’s how I see it.

We’re already seeing the beginning of the movements this week.  We have reports from the New York Times that Debt Ceiling Impasse Rattles Short-Term Credit Markets.  The stock markets aren’t in full panic mode. There’s been no 3-5% decline days of panic selling like we saw in 2008. Yet.  But we’ve seen the market turn decidedly down. It’s been losing about .8% per day all week for a 4% loss on the week.  Interest rates on short-term government T-bills are up a little, indicating that a growing desire to sell by many and get out.  (interestingly, the rate on long-term bonds are actually down a bit – funds appear to still be bullish on the U.S. long-term).  Right now there’s no panic. But as JP Morgan Chase CEO Jamie Dimon said today “We’re praying. And we’re planning”.

How bad could it get?  Again I’ll turn to Jamie Dimon:

Now, here’s what really would happen.

Every single company with treasuries, every insurance fund, every — every requirement that — it will start snowballing. Automatic, you don’t pay your debt, there will be default by ratings agencies. All short-term financing will disappear. I would have hundreds of work streams working around the world protecting our company for that kind of event.

Read more: http://www.businessinsider.com/jamie-dimon-debt-ceiling-isnt-raised-and-the-us-defaults-praying-2011-4#ixzz1TX9b0ypB

Even the Aug 2 deadline itself isn’t as hard and fast as the President and Secretary of the Treasury have made it out to be.  The original projected date when new government borrowing would have to stop was in mid-May.  But when that date came, the Treasury began to implement some extraordinary measures.  Instead of making cash payments to some government employee pension funds he gave them IOU’s – promises to make it good soon.  Cash payments to many government vendors have been slowed down.  They implemented tricks that are the big government equivalent of searching the sofa for loose change, or borrowing from the kids’ piggy banks, or using the full 15-day grace period to make the mortgage payment.  At the same time, cash tax collections have a just a tick better than projected.  Eventually these tricks run out.  Right now the latest estimates I’ve seen say the real cash-drop dead date is closer to Aug 10. But it’s likely the Treasury will stop something on Aug 2.  We just don’t know what.

My point here is that it’s not like Tuesday August 2 is calamity day and everything happens then.  It might. But things might fall apart before then.  Or they might fall apart a few days later.  Or things might continue to gradually get worse but without us realizing how bad it’s getting because we’re waiting for the dramatic fall off a cliff.  By the time we realize in mid-August that it’s a real disaster, we’ll be buried in the landslide.

This is crazy.  It’s no way to run a government or an economy, but it’s clear that the Republicans and Tea Party types would rather crash the economy than compromise. Unfortunately Obama is willing to help them do it.

UPDATE:  Some indicators of possible trouble could show up next Monday when the Treasury holds a “routine” auction of T-bills for refunding purposes.  Refunding doesn’t add net debt, it only rolls-over existing maturing debt.  Treasury will also announce it’s plans for future auctions at that time.  According to the Wall Street Journal Marketwatch:

A refunding is a replacement of government debt, often debt that is about to mature, with new debt. Officials typically meet with about half of the primary dealers each quarter to discuss the refunding.

…

On Monday, Treasury plans to release estimates of future borrowing. Two days later, it will release its refunding decisions, including how much in Treasury securities will be sold.

How to Tell If the Politician or Reporter Is Ignorant, Foolish, or Has a Hidden Agenda – Part 2

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Another in the series.  See part 1 here. 

 

If the politician or reporter says something about “our grand children having to payoff the national debt”, it’s totally bogus.  The speaker is either ignorant, foolish or has a hidden agenda they want you to accept.  Sometimes they use phases like “saddle our grandchildren with debt” or “mortgage our children’s future”.  It’s all hogwash.  Future generations do not have “pay off” the national debt.  All they need do is pay the interest on the debt.  And since the economy is no doubt larger by the time they get here, it’s probably not a problem.  The baby boomers, those born from 1946 through 1965, supposedly inherited the huge national debt that was borrowed to pay for World War II.  None of those boomers, yours truly included, ever had to pay off that debt.  Again, I’ve said it before, but governments are not like households.  They don’t have to “pay-off” their debt.  Government debt is more like money that pays interest.

The latest example I’ve seen of this error came in today’s New York Times who quoted Senator John McCain:

 Senator John McCain of Arizona, one of the older generation, reflected the divide in an interview Thursday on Bloomberg TV.

“I think Eric Cantor is carrying out the mandate of last November, which was to stop mortgaging our children’s futures, while the president keeps talking about spending more money,” he said.

Private Debt vs. Government Debt

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The Great Recession of 2007-2009, which has been morphing into a Depression, has been different from most recessions of the post-World War II era.  It has been what economists call a “balance-sheet” recession.  Normally (at least since World War II), recessions were the result of the central bank (The Fed in the U.S.) raising interest rates because it thought the economy was growing too fast or that inflation was too high.  This time, though, the triggers were a financial crisis brought on by a banking and financial sector that gorged itself on risky debt: subprime mortgages, derivatives, and bizarre financial products bought with borrowed money.  The financial crisis and resulting recession then brought an end to the debt game for ordinary households.  For thirty years or so, ordinary households, middle class folks, have struggled with declining real incomes and real wages.  To maintain a middle class lifestyle, ordinary folks took on huge debts: mortgages, home equity loans, credit cards, and student loans.  As deflation and unemployment hit in 2008 and the housing price bubble burst in 2007, the debt became unbearable, driving many to bankruptcy, foreclosure, and to drastically reduced spending*.

With this backdrop, it’s no surprise that debt has become an emotionally-charged word laden with negative feelings for most people.  People who are struggling with too much debt naturally are averse to the idea of debt. People who aren’t struggling with too much debt are resentful of those who do owe because they blame the debt-burdened for the recession (strange that the lender never gets blamed).

Unfortunately, politicians and news media with a political agenda have tapped into these negative emotions about debt to push their agenda to end the modern social support services that government provides.  They have done it by drawing false parallels between households and the government. Politicians from both parties have spent most of this year (and last) agitated about government deficits and debt. Even President Obama has done this in his July 3 radio address.  But the government is not like a household. There are many reasons why financially, governments are not like households. In this context, I am speaking solely of sovereign, currency-issuing governments with floating exchange rates.  This means Greece, Ireland, Portugal, Italy and the other Eurozone countries are excluded.  I’m talking about the U.S., the U.K., Canada, Japan, Australia, Brazil, and others. There are many reasons why governments are not like households ranging from tax powers vs. wages to unlimited life. But I want to emphasize one in particular: governments are the sole monopoly issuer of their money.  Households cannot issue money, only governments can.

So what does this have to do with debt?  It means government debt is not like private debt. Government debt need never be paid off.  It can be rolled-over.  As bonds become due, they are replaced with new bonds. Households can’t always do that. Governments cannot be “foreclosed” or “repossessed”.  Households and their goods can be.  Households and private firms can go bankrupt and default.  Sovereign governments only default when they choose to do so.  Historically the only known instance of a sovereign, floating currency issuing government defaulting was Japan in WWII, but that was deliberate.  U.S. and British banks held much of the debt and they were at war.  Some Republicans (example: Ron Paul) have recently been suggesting the U.S. default, but it’s still possible that grown-ups will prevail.  Politicians and ideologically-driven economists and news media have whipped up a frenzy about government debt as being evil.  But it isn’t.  In fact, government debt is necessary to the functioning of a modern financial system. It provides a safe, interest-bearing financial asset.

So if government debt isn’t evil or bad for us, how should we think about it?  Government bonds are best thought of as currency that pays interest and can’t be used at the 7-11 store. So rather than thinking of government debt as just another form of debt like private mortgages, corporate debt, student loans, and credit cards, it’s better understood as just another form of money. It’s a holding pen for idle money.

Much is made in the media about the fact that many “foreigners” hold US government bonds.  Again, the media is trying to create a scary feeling by drawing a false analogy to private debt.  If you’re a homeowner, the bank who holds your mortgage has some power over you, particularly if you don’t make regular payments.  The media want us to feel like some how the “foreigners” have power over our government because they hold the debt.  But that’s false. The foreigners can’t repossess or foreclose on the U.S. government, regardless of whether the government makes payments or not.  Again, government debt is not like private debt.  Private debt is the result of lenders making loans at interest with the goal of making a profit. But government bonds that are owned by “foreigners” are primarily owned by foreign central banks and banks.  They are used as safe reserves, not for the primary purpose of making a profit.  US government bonds are the modern banking world’s substitute for gold.  Foreigners want US bonds because they want a safe, secure asset that earns more interest than stacks of idle paper currency.  It’s not because primarily for profit-making.  If they wanted profits, they would use the money to make loans. Instead they want security.  That’s why they accept interest rates in the 1-3% range.

When somebody tells you that government debt is bad and harmful and we must do everything we can to reduce debt, even if it means high unemployment, remember they have another agenda that they aren’t talking about. It’s scare tactics.

* remember that drastically reduced spending might appear to help make the payments on debts, it also means that somebody else loses their job because their employer isn’t making a sale.  That newly unemployed person now has debt problems too.

How to Tell If the Politician or Reporter Is Ignorant, Foolish, or Has a Hidden Agenda – Part 1

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One of the reasons my posts have been scarce* lately is because, frankly, I’m frustrated and nearly speechless at the foolish talk and nonsense that currently passes for news about the economy lately.  In particular, this year the politicians and reporters in Washington have been focused on the federal government deficits and debt.  We are being bombarded by total nonsense from politicians from both parties.  But the news reporting of the debates are even worse.  Unfortunately much of this nonsense is couched in serious tones amidst appeals to emotional triggers with people.  Result: folks are being misled.

So in a public spirited effort to help you sort out just when you’re listening to somebody who isn’t worth listening to, I’m starting a guide to How to tell if the politician or reporter is ignorant, foolish, or has a hidden agenda. This is part 1.

If the politician or reporter says anything about “reducing the government’s debt”, it’s time to stop listening.  They don’t know anything, including basic words in English.  They don’t know the difference between “debt” and “deficit” and the difference is huge.

Debt, in the context of the federal government, refers to the accumulated total of money that has been borrowed in the past by issuing bonds and T-bills.  Sovereign national debt, unlike private debts, do not have to be “paid off” now or ever.  When the bonds come due, the government issues new bonds to replace them.

Deficit, in the context of the federal government, refers to this year’s budget and whether taxes collected are less than the cash expenditures made.  If taxes collected this year are less than expenditures, the government (any sovereign government) can either borrow the difference by issuing new bonds (additional debt) or by creating new money (coins, paper currency, or bank reserves).  In the case of the U.S., the government has totally delegated the money-creation process to The Federal Reserve and promised that it would always borrow to make up the difference between taxes and expenditures.

There’s a relationship between Debt and Deficits.  The Deficit each year (assuming money creation is not used) will lead to more borrowing which will increase the total Debt outstanding.

So back to our politicians and reporters.  As official Washington tries to figure out how to politically raise the debt ceiling law (a foolish piece of legislation, but that’s for another post), reporters and politicians both have been reporting that talks are under way to “reduce the debt“.  NO!  AAAARGGGHHHH!  The debt isn’t going to be reduced, but the deficit might be.  To reduce the the debt, we would have to have a budget surplus, and that ain’t going to happen**.  What they are talking about is how to reduce the annual deficit (a foolish goal that’s doomed to failure, but right now I’m focused on the words).

At times it’s worse.  I’ve actually heard politicians (mostly Republicans) and reporters say on TV that they want to “eliminate the debt”.  Come on folks!  If you hear anybody say that, change the channel immediately.  Shield your children’s ears. A person who talks about “eliminating the debt” can’t even do first grade arithmetic.  The federal government debt is approximately $14 trillion.  The entire GDP of the U.S. is only a little more.  To eliminate the debt, the entire country, all of us, would have to produce and sell everything we’re doing now but then tax 100% of it and not consume a single thing – not even a single bottle of Coke.  

Suppose you went to your medical doctor because you thought you had an eating disorder and wanted to reduce your appetite. If the doctor said her goal was to totally eliminate your entire weight, you’d think her crazy, leave, and find an knowledgeable doctor instead of a quack.  But when politicians and reporters make equally absurd comments, we pay them and give them campaign contributions.

*neo-classical theory says they should be going up in price, but I’m still giving it for free.

** last time we were close to surplus was the last year of the Clinton administration (only time since mid-1950′s).  To have a surplus we would have to have full employment.  Even then, Republicans have shown (2001 and 2002) that they would continue to cut tax rates and tax collections faster and eliminate the surplus, putting us back in a massive deficit.

Free Speech, Free Worship, Private Property, Facts and Terry Jones

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Normally I try to keep this blog focused on explaining economic issues and concepts.  But in the past few days there’s a political issue has arisen that’s literally very close to home for me and I feel the need to speak out.

Last week, Terry Jones and his assistant Warren Sapp of Dove World Outreach Center in Gainesville, Florida came to Dearborn, Michigan with the announced intent to protest at the Islamic Center of America, a very large mosque in Dearborn. Jones and Sapp are the characters who threatened to hold a bonfire burning hundreds of copies of the Koran last September, igniting worldwide protests. The burning last September was cancelled after the Gainesville, FL fire department refused a burning permit.  At the time Jones and Sapp bowed to pressure and said they promised not to publicly burn the Koran.  They lied.  In March 2011, they held a public “trial” of book and then publicly burned a copy.

Jones and Sapp also announced last month that they would come to Dearborn on April 22, 2011 to protest the “spread of sharia law” in Dearborn. They stated they would come to the Islamic Center of America in Dearborn and burn a Koran. On the day of the scheduled “protest” Jones and Sapp found themselves in court in Dearborn with the prosecutor asking the court for Jones and Sapp to post a “peace bond”. Following a hearing before a jury, the judge ordered a $1 peace bond and ordered Jones and Sapp to stay away from the mosque for 3 years.

The national media has greatly misreported both the facts and the issues in this case. The case is close to home for me because I live in Dearborn. The media have been reporting that this is a pure free speech case and that the prosecutor was trying to keep Jones from protesting or keep Jones from saying his message.  That is simply not the case.  Let me repeat some facts that commentators not familiar with Dearborn don’t tell you.

First, to understand the need for the peace bond or restraining order, it’s necessary to know a little about the physical geography of the site.  Here’s a link to a satellite view Google map of the location where Jones had planned to protest.  Please note, there’s no public property available for assembling a protest at the site.  To hold his planned protest, Jones was threatening to trespass on private property, the mosque itself.  There is no first amendment right to free speech on other people’s private property!  

The only alternative for Jones would have been to block traffic on Altar Road.  Altar Road is a dead-end street with only access at one end. There is no free speech right to block traffic on a public street without at least getting a city parade permit first, which Jones did not do.  In fact, if Jones had implemented his planned protest on the public roadway of Altar Road, he would have blocked access to not only the mosque, but to the five other churches (all Christian) that are located on Altar Road next to the mosque. For all those who claim Jones has a first amendment right to protest and block Altar Road, I ask how does Jones’ first amendment rights trump the first amendment rights of the members of the other churches to worship?  Keep in mind that Jones was threatening to either trespass the mosque or block traffic on Good Friday when those other churches were holding services.  To claim that Jones should have been allowed to hold his protest is to claim that Jones has the right to prevent hundreds, perhaps thousands, of Dearborn residents, both Christian and Muslim, the right to worship as they see fit. 

So it’s not a clear-cut case of freedom of speech as the media would have us believe.  There’s also issues of private property and freedom of worship (another first amendment right).  But the city also had legitimate concerns for public safety.

The city’s concerns for public safety aren’t with the prospect of some crazed Dearborn Muslims rioting in the street over Jones’s presence or the burning of a Koran.  Our community is too peaceful for that.  Indeed, the Mosque was planning alternative peaceful activities to take attention away from Jones.  No, the threat comes from Jones himself and from the crazed outsiders he would attract.  It was only 3 months ago that we in Dearborn were fortunate to narrowly escape a plot to bomb this very same mosque.  A crazed man from California attempted to take a car loaded with explosives and blow up the mosque.  The attempt was only stopped by a quick police response to a tip from an alert Dearborn bartender.  We have recent experience with hate-crazed people coming from out-of-town and trying to blow up the mosque!  Forgive us if we have concerns about another dangerous hate-crazed man from out-of-town bringing guns and/or explosives.

Make no mistake, Jones is a direct threat to public safety. On the night before the planned protest, Jones recklessly discharged a firearm in public. After attending a new interview at TV station on Thursday evening, Jones got in his car and discharged his .40 caliber pistol.  Jones has a concealed carry weapon permit from Florida.  Under reciprocity rules, Michigan recognizes such a permit.  But a concealed carry weapon permit is not a license to discharge the firearm at any time or to not keep the weapon under control.  When approached by police, Jones claimed it was an “accident”.  Either Jones intended to do something else with the gun and lied when confronted by police, or Jones is an idiot who doesn’t keep the safety on his gun and doesn’t have control of it.  This guy was further threatening to trespass at a church (the mosque) the next day.  In Michigan, possession of guns is illegal on church property, even with a concealed carry permit.

Contrary to what Jones and his apologists in the media claim, Jones has not been stopped from protesting in Dearborn. In fact, the Mayor actually welcomed him and asked him to do his protest on public property in front of city hall. What Jones has encountered is a  peace bond.  It’s like a restraining order.  The essence of the order is that Jones not trespass on the mosque property for three years. That’s it.  He’s free to return and protest to his heart’s delight.  But he has to do it on public property.  He is not entitled to trespass on private property to spew hatred at the owners of the property.  He is not free to keep others from worshiping at the church of their choice.  He is not free to threaten the safety of others by violating our gun laws.

I take a back set to no one in my support for free speech and Constitution’s bill of rights.  But this isn’t a case of government trying to restrain political speech of crazy hate-filled man (see also here).  It’s a case of government trying to protect the rights of thousands of citizens to worship as they see fit and to be safe and secure on their own private property.  I know that doesn’t fit the media’s preferred drama, but that’s the facts.

On Wisconsin

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For those who are unaware, street protests have come to Wisconsin. Literally tens of thousands (a local Fox news affiliate admitted they numbered at least 70,000 on Saturday) for what is now at least 4 consecutive days of protests in Madison, Milwaukee, and other cities.  The issue that has brought them out is a proposal that recently elected Republican governor Scott Walker made and looked ready to jam through the Wisconsin legislature (Republican majority) without hearings was allegedly a deficit-reduction budget bill.  But the bill contained provisions to outlaw or severely curtail the rights of public employees to collective bargaining. It is an interesting situation. 52 years ago, in 1959, Wisconsin became the first state to allow unionization and collective bargaining by state and local employees. Now the governor wants to lead (?) by abolishing it.  For more on the protests in general see most any major news outlet.  Here are two reports: ABC News and CNN. This is a significant issue and possible turning point in American political economy.  The proposals to end public employee collective bargaining and the protests are spreading to other states such as Ohio, Indiana, Tennessee, and Nevada.

Most of the national news coverage is taking the governor’s claims at face value. In particular the assertion that the state faces a severe deficit, that public employees are “overpaid” and have too-rich benefits, that the only way to balance the budget is to cut benefits, and that only by ending collective bargaining can that happen.  As usual, the news media have failed.  The facts are otherwise.  I turn to Menzie Chinn, one of the country’s premier econometricians, who happens to be on the scene (he teaches at Univ Wisconsin Madison) for a few of his recent dispatches from the front.

First up, the governor had carefully planned this.  Including alerting the National Guard well over a week ago:

From The Isthmus:

The Wisconsin National Guard has not been activated but it is on alert.

“Plan for the worst, expect the best,” Gov. Scott Walker explained to a jam-packed press conference this morning in the State Capitol.

It was the official roll-out of his broad rollback of collective bargaining rights for unionized government employees, part of his budget repair bill, seeking to resolve a $150 million shortfall in the next five months.

Walker said he was well aware that “some union leaders will try to incite their members.”

Next, the governor and Republicans (and Fox news) are repeating ad nauseum the assertion that public workers, both in Wisconsin and in general, are overpaid and overcompensated when compared to the private sector.  The only studies I’ve seen that draw that conclusion are studies that compared the compensation per job of college-educated full-time public employees to non-educated part-time private sector employees.  Menzie Chinn (he is an econometrician) crunches the numbers and finds public workers are lower paid than comparable private sector employees:

Using the March 2010 CPS data, regression analysis controlling demographic characteristics (full-time, education, years of economic experience, gender, race, citizenship, and organizational size) confirms that total hourly compensation for Wisconsin public sector workers is 4.8% lower than for private sector (-5.1% for Wisconsin State workers, and -4.7% for local government). The differentials are bigger for annual compensation. These estimated differentials are statistically significant, as shown in Table 4. (graphs and tables at the link)

On Friday, the unions called the governor’s bluff.  They proposed to accept the benefit cuts (the financial part) if the governor would give up on the ending collective bargaining. Again Menzie reports:

From Milwaukee Sentinel Journal:

…The Walker statement was in response to a statement earlier Saturday from [State senator] Erpenbach, who said he had been informed that all state and local public employee unions had agreed to the financial aspects of Walker’s budget-repair bill. Erpenbach added in his statement that the groups wanted, in turn, for Walker to agree to let labor groups bargain collectively, as they do now.

Since collective bargaining rights do not in themselves have direct budgetary implications, then it is unclear — from a fiscal perspective — why agreement can not be made.

Local Fox news affiliate estimates the anti-bill crowd at 70,000, and tea party supporters of the governor’s bill in the hundreds.

If the governor has rejected this proposal, then it is clearly NOT about the money or the alleged deficit.  It is about power and breaking unions. It is interesting then that the governor, whose real intent is now clear (break the unions) did not try to propose and argue a change in collective bargaining on any merits of it’s own. Instead, he claimed it was necessary because of money, not because he wanted to argue the inherent rightness or desirability of ending collective bargaining. It is not surprising then that we find that even the claim of deficit and the necessity of trimming state spending was false.  In fact, while Wisconsin faces some deficit – with 9% national unemployment, all levels of government are short of revenue, it was in relatively good shape until Scott Walker came into office as governor in January.  Among Walker and his legislature’s first actions in January were to make the deficit worse by giving tax breaks to special corporate interests. The Cap Times reports how “Walker gins up crisis to reward his cronies”.  It turns out that the $137 million deficit Walker claims is the reason for breaking the unions, is actually the result of the $140 million dollar special interest tax breaks bill passed by Walker and his Republicans. As recently as January 31, the state of Wisconsin was forecasted to end the year with a surplus, not a deficit.

How this all turns out will, I think, have significant repercussions beyond Wisconsin.  The governor of Wisconsin has even managed to anger the Super-bowl champion Green Bay Packers.  I don’t think that’s a good move in the cheese state.