Monday, January 30, 2023

What is the "Deep State"?

Trump and others have mentioned something called the deep state. What is that?

I happened across this interview the other day that I thought was both informative and helpful. It's with Dominic Cummings ... who was on track to be the next Prime Minister in the UK ... before his political career collapsed around personal travel early in the pandemic that pretty badly violated lockdown rules. So, disgraced, but if you get played by Bendedict Cumberbatch in a movie, you're probably worth listening to.

The interview is on a podcast called Manfold that seems to be free on Spotify. It's 2 hours long. Listen only if interested. FWIW: you can also get AI programs to create transcripts of things like this.

Admittedly he is talking about the UK, but the ideas carry over to the U.S.


The name and concept of the "deep state" come to us from Turkey. It described elements of the military and intelligence services that didn't really run the country from day to day, but which did keep it on what they saw as a desirable path. They did this by limiting the ability of elected officials to have their more substantive decisions put into effect.

Basically, an unelected bureaucracy that couldn't be displaced through democratic means.

The power of the deep state in Turkey was eventually diminished by the election of the pro-Islamist Erdogan, and his accumulation of dictatorial powers over the last 15 years. 

FWIW: the deep state in Turkey tended towards policies that aligned the country more closely with the U.S., western European powers, and Israel.


From Turkey, the notion of the deep state spread to other countries.

In the U.S, Trump and others also called it "The Swamp", after the steamy climate in Washington D.C.

No one has ever made a serious claim that the deep state was ever as strong here as it was in Turkey.


From the interview, as excerpted in The Epoch Times (all the emphasis is theirs).

Asked “who really runs the UK,” Cummings said he was surprised that donors have “remarkably little influence” and it was the officials that made decisions.

“COVID’s a classic example of this.”


Cummings said while the media reported disagreements among ministers over COVID-19 policies, “in fact, almost always … these ministers had absolutely nothing to do with anything important, and the decisions were taken almost entirely by officials with almost no ministerial input at all.”

He said officials, particularly private secretaries, make 99 percent of the decisions, while the prime minister and chancellor of the exchequer made few but “big” decisions.

Asked whether it’s fair to call the officials a “deep state,” Cummings said he believed it is fair in the sense that “they are a kind of deeply entrenched institutions, which actually practically controls huge amounts of what happens with zero to very little democratic insight or even knowledge and understanding.”

“That is unarguably the case,”  he said, adding that it doesn’t mean there are conspiracies going on.

Cummings believes on the one hand it’s “for the good” that “brilliant 30-year-old women who no one’s heard of and no one elected [are] actually running things” because “the quality of the elected people is so desperately bad now across Western governments.”

On the other hand, it means the institutions become “incredibly stale and self reinforcing” to the point “almost nothing can change in any way, including by the deep state itself,” he said.

N.B. In the parliamentary system in the UK, ministers are members of Parliament (a legislature) elevated to positions comparable to our executive branch. The secretaries referred to are not executive assistants (as the word is used in the US) but more like top-level permanent staff of various government departments. 


Personally, I don't care for Trump, have little interest in Cummings or The Epoch Times, and I've never heard of the podcast or interviewer. 

Professionally though, I do get that something like the "deep state" or "the swamp" exists, and that it has both benefits, but the costs are quite clearly stated in the last quoted paragraph. This is in important point for understanding why so much macroeconomic policy is lousy.



Social Security Sustainability Data and Links

This is from Mises Institute. Fair warning: that's a libertarian think tank. So their view of government programs is not neutral.

Even so, as I did, they riff off the riots in France about raising the retirement age. I recommend reading the whole thing, but here's some excerpts (BTW: I'd say their numbers are probably better/newer than mine are).

When it was being sold to the public in 1935, those promoting Social Security took advantage of sentiments that people over age 65 were essentially too old to work, and thus would soon fall into poverty. This certainly would have seemed plausible at the time. Most jobs in 1935 involved significant amounts of physical labor whether we're talking about cleaning laundry, waiting tables, farming, mining coal, or building houses. Work was also more dangerous—as historical work injury data makes clear—and workers were more likely to sustain injuries that would render one unable to work. For example, a 65-year-old simply could not safely perform much of the work required at a steel mill. (As shown in this 1944 video on the steel industry.)

Especially important to efforts at presenting Social Security as fiscally prudent was the fact that with a minimum age of 65, the number of Social Security beneficiaries would also be limited by the realities of life expectancy. In 1940, for example—the first year that pensioners could receive benefits—life expectancy at birth was only 61 for men and 65 for women. Indeed, even if we eliminate the toll of childhood diseases on life expectancy, the numbers do not change dramatically. In 1940, total life expectancy for persons over 15 years of age was 68. Moreover, in 1940 the percentage of the population surviving from age 21 to 65 was only 54 percent for males and 61 percent for females. But what about those who actually made it to age 65? In 1940, a male at age 65 would, on average live another 13 years. A female would live another 15 years. So, when looking at the work force in 1940, we can eliminate nearly half of the men and about 40 percent of the women as likely future Social Security recipients. About half of those who actually made it to 65 would then collect benefits for no more than 15 years.

Now let's contrast that with life expectancy realities in our own time.

Life expectancy at birth today is 78 years, and for those who reach age 15, it is 80. for both men and women, more than 75 percent of the population reaching 21 will survive to age 65. That's an increase of 50 percent for men, and around 30 percent for women. For those reaching age 65 in 2022, males will live another 18 years on average, while females will live another 20 years.

None of this is really about politics, but rather about designing a system that's sustainable. That wasn't done, and it's not being fixed.

And don't forget: Medicare is worse, but it won't hit until later.

Debt Ceiling Trivia

The U.S. has raised its debt ceiling 80 times since 1960, including in 2011, 2013, 2017,  2018, 2019, and twice in 2021

Note that those are almost all odd years, indicating the year after an election when a new session of Congress opens.

Sunday, January 29, 2023

Social Security vs. Pensions

After the discussion in class the other day about the political problems with entitlements for senior citizens. KT asked whether social security would be better if it was privitized like a pension.

This is an area where folk macroeconomics isn't bad, but it can be misleading.

The argument usually made is that pension funds can generate a bigger nest egg for retirees to live off of, that isn't matched by the checks sent out by the Social Security Administration. 

What I would say to that is ... that's true, but they're not the same thing, so why would you compare them at all? This makes that a form of straw man argument.


So what is a social security program (and Medicare too). These are pay-as-you-go or cash-in-cash-out systems. Collections are made from some part of the population (like workers) today, and immediately divided up and given to some other part of the population (like retirees). 

There is nothing inherently wrong with this sort of system, and it mimics how families have taken financial care of elders for much of history.

Interestingly, since there is no investment in a social security system, other than having babies that grow up to be new payers, the (gross) rate of return is roughly the rate of population growth. Since people are real rather than nominal, that's a real rate of return. 

The problem I described in class, of the relatives size of the two groups changing through electoral methods, alters that rate of return. It typically  lowers it , since most people want to get out of the paying group (reducing its rate of growth). An additional problem is that as people get richer, they tend to have fewer children, reducing the growth rate.

Some pros of this sort of system is that it can always work, and it's relatively efficient. The cons are changing demographics, and unethical voting.


On the other hand, a pension fund is one in which workers pay into an account today, that invests the money, and then pays out the proceeds many years later. That investment may have a degree of control for the investor, although that is sometimes illusory.

The "rate" of return on this sort of investment can be quite high. There are two caveats to that. One is that some people invest timidly producing lower returns to fund their retirements. The second is that most of think of these a nominal rates of return. So we need to subtract out expected inflation from the if we're going to compare to social security.

The pros of this sort of system are the higher returns, and thus higher income when old. The cons are that investments aren't always good, and returns can be stolen or mismanaged.


The takeaway from all this is that social security and pension fund systems are separate things. Why not have both? In fact, that is the case for a majority of people in developed countries. 

The common argument always seems to be to turn social security into a pension, rather than the other way round. This is usually based on rates of return. But that's just one aspect. A forgotten one is that if social security invested like a pension, the Social Security Administration would become the largest investor in the world. How do you feel about its ability to do a good job? How do you feel about it being the dominant investor in most firms, probably with a seat on the Board of Directors of every large corporation?

GDP Announcement for 2022 IV

This came out last Thursday.

These releases are scheduled in advance, but generally at 6:30 Mountain time on the 4th Thursday of the month.

GDP is collected by the Bureau of Economic Analysis ( Here's the news release.

GDP is measured as a flow, so it's never available until after the time period ends (so the flow is finished), and then after a delay (shorter delays suggest less accuracy.

The U.S. measures their GDP on a quarterly and an annual basis. Most developed countries have shifted to doing it monthly.

In the U.S., this is done like how you're supposed to write an English paper: draft, revision, and final version. What we got last week was the draft (called the Advance Estimate). The others will come out in 1 month and 2 months.

It showed a real GDP growth rate of 2.9%/year, annualized. 

It was expected to be in the high 2's, and this was a little better than expected.

Current dollar GDP for the U.S. is now $26.13 T/year, or $26,130,000,000,000/year.

Different price indices are collected and released by a number of different agencies in the U.S. The one that goes with GDP, and is used to convert (nominal) GDP into real GDP is called the PCE index. 

In the fourth quarter, (nominal) GDP increased by 6.5%/yr., the PCE increased by 3.2%/yr. The 2.9%/yr. for real GDP is derived from those.

GDP and real GDP are typically announced as annualized measures over a quarter. Price indices are often released on year over year basis, but you can find both.

Thursday, January 26, 2023

The Trillion Dollar Coin Idea Floating Around

There's been suggestions that the U.S. could temporarily solve its debt ceiling problem by having the Treasury mint a coin worth a trillion dollars, and then depositing that coin at the Federal Reserve.

If it sounds stupid ... it probably is.


Review: the debt ceiling is an issue because Congressional decisions about spending are not connected to decisions about revenue, the difference is financed by net borrowing (the deficit), the accumulation of which is the debt (or national debt), and there's a ceiling on that that isn't connected to the other two decisions. 

A more subtle issue is that Congress doesn't usually allocate exact amounts to things its spending on (particularly entitlements). Instead, it passes laws with stipulations to do some thing and worry about how much later on. It's worse with taxes, where Congress sets rates, but you and I (and the IRS) determine the amount (called the tax base) that the rate is applied to. So on spending side its mostly guesstimates and on the revenue side its all guesstimates. 


No one is worried about the debt ceiling who is also willing to just cut spending (or raise taxes). Of course, it would be helpful not to have the guesstimates to make this all easier, but it's a doable thing.

A problem with that is that much spending is on "autopilot". Entitlements are like that: they go up whether we want them to or not. Revenue is also on autopilot (most of us agree in advance on how much to have them withhold from our paychecks). But then the problem goes back to the previous section: autopilot is convenient but it doesn't fix the fact that they aren't tied together. 


The long-term issue with the debt ceiling is that Congress is undisciplined with its spending and revenue decisions. The debt ceiling is the outlet for this.

The short-term issue is that if we hit the debt ceiling, the Executive branch can only use tax revenue to fund spending that's already been promised. The practical solution is then to just make the payments that are required (interest on the debt and entitlements) and put everything else on hold. There's enough leeway that this will actually work. But it's not desirable.

And this might actually make the Executive branch look like it's the problem. It's not, but that doesn't mean they won't scheme to avoid that.


Enter the trillion dollar coin. This is an idea put forth by Jack Balkin in 2011. More on Balkin later. That suggestion (related to a debt ceiling issue then) never gained traction. 

Representative Rashida Tlaib revived the idea in 2020, and formally introduced a bill into the House to do this. More on Tlaib later.

Our currency is not backed by anything. It has its value because 1) the government prints it on there, and 2) people like you and I believe that and act upon it.

Balkin's idea is that if you say the coin is worth $1,000,000,000,000 (fulfilling # 1), then # 2 will follow.

(Parenthetically, Balkin also made the claim that they couldn't print $1,000,000,000,000 in currency and do the same thing because there's a statutory limit on printing currency. I've been doing macroeconomics for 40 years and I've never heard of such a thing. It's possible what he means is that you can't print a bill that large. That's true, and the statute is in place to make money laundering more problematic for those interested in doing it. Even so, the only reason you couldn't print up a large number of smaller bills is that it would be inconvenient to move them around).

Anyway, to make # 2 work, Balkin would have the coin deposited at the Fed, and then would withdraw smaller amounts to make payments. 

(If that seems silly, because you could just print the currency ... you're not wrong).

Another interpretation of what Balkin meant is that while the Executive branch mints coins and currency, statutorily it can't put them directly into circulation. Instead, it does have to run them through the Federal Reserve, which then puts them in circulation.

Later the idea has been covered by the journalist Izabella Kaminska (ungated version here). And this year the big pushers of the idea are Rohan Gray and Nathan Tankus. More on Kaminska, Gray, and Tankus later.


There's a lot of detail there. Let's cut to the checks and balances. The distinction between the Legislative and Executive on this is that the former does the general stuff, and the latter does the specific stuff. So the Legislative branch can't micromanage, and the Executive branch can't dictate overall totals. 

But the Legislative branch has also put a check and balance on itself, by making the spending action subject to both ex ante and ex post approval. The trillion dollar coin is a scheme for the Executive branch to get around the ex post part.


At this point, we get to something most of you understand: economics is hard.

And I'm not really trying to be Chauvinist here; non-economists can do economics, but you'd really like the economists doing this stuff. Except ...

  • Balkin is a law professor.
  • Tlaib is a Representative, with a law degree, who never really practiced law.
  • Gray is ... you guessed it ... a law professor.
  • Tankus is a ... well ... I guess you'd call him an "internet authority". And college dropout.

As budding economists, you're going to have to get used to this. Let's just say, in an analogous situation in public accounting, these people would all be jailed.

Note that Kaminska is a journalist whose just reporting what she finds out. And some of her views are sound, others just offbeat (not getting the satire in the tweet from Zerohedge she linked to) or silly (the meme included, which is way too literal).


What's being proposed here is essentially ... quantitative easing ... a policy the Federal Reserve has already pursued for about 15 years.

In quantitative easing, the Fed buys illiquid assets (often Treasury bonds) and pays for them with liquid assets (usually reserves), which can then be readily converted into money.

Most of the time, they'd buy those bonds from whoever has them. But the Federal government owns trillions of dollars of bonds issued by its own Treasury. The trillion dollar coin is like making sure those bonds are first in line for purchase. (Of course, the Fed and the government could do this any old time: the Fed would make an offer for bonds low enough that no one would take it, and the government could volunteer to take the offer). 

This all makes the trillion dollar coin ... a prop ... for people who don't understand how things already work.

Why do they need a prop? Really they don't, but my guess is that it would obscure that this is equivalent to taking bad offers to sell on what you own on behalf of the American people.

But somehow the prop is really important. Gray has even suggested that the military could be used to force an uncooperative Fed to accept the trillion dollar coin. Yikes.


All of this misses a couple of subtle points about economics.

An easy one is that money is not the same thing as currency, coins, and reserves. In my principles classes, I like to modify money with "inside", and then group the other three as "outside money". Almost all money is inside money, because the financial system isn't just banks, or the Fed ... it's all of us. And inside money is a reflection of the interactions of all of us in this system. The people who like the idea of the trillion dollar coin are hung up on the importance of the much smaller outside money. If we've learned anything with the unconventional monetary policy of the last 15 years, it's that the financial system is very inelastic with regard to changes in outside money.

The harder point is that we really don't buy things with money. We buy stuff with stuff, and use money as a convenience to do that more readily. All of us sell stuff and get money in return. So money is a memory of that stuff. Then we take the money to go buy other stuff (from someone doing the opposite of what we're doing). The government is doing the same thing. The stuff it's selling is the promise of programs that attempt to fulfill some objectives. Our taxes and loans are what it gets in return. Then it uses those to make payments on those programs. The key point is that you buy stuff with stuff, and the government buys stuff with stuff, and we both use money as a convenience: stuff in, stuff out, money in the middle. The non sequitur committed by proponents of the trillion dollar coin is that if have more money, then you can get out more stuff than goes in.

Some mathematicians, when they see something that can't work, use a really cutting phrase to describe: "that's not even wrong".

Wednesday, January 25, 2023

Some History of Congressional Budgeting

The other day I briefly touched on how the budgeting process works in D.C. This op-ed from The Wall Street Journal entitled "Congress Once Constrained Government Debt" by John Cogan covers this in more details.

In short, some members of Congress anticipated the mess we're in, and advised not going down this path. Consider why it is that you don't hear that fact trumpeted by people in government or the media.

On a related note, there's this post from Calculated Risk entitled "Short Memories". He remarks that he wrote it 9 years ago and never published. Even so, he understood then the problems we have now. 

Not much explanation here today: both links are required reading.

N.B. Don't forget that SUU provides you with a free subscription to The Wall Street Journal. If you haven't set that up, this would be a good time to do so.