China Is # 2

China is reported to have passed Japan to become the 2nd largest economy in the world last year, and the Japanese have admitted as much.

I am of three minds about this:

1) China will eventually have a larger economy than the U.S., and will be # 1 for a few decades before it is overtaken by India (whose population is already larger than China’s).

2) I wonder how much of Chinese growth is real. Closed bureaucracies have this thing they do called … LYING … and they have a habit of doing it with economic data (e.g., The Soviet Union). If China were systematically lying – liked Bernie Madoff did – I tend to doubt anyone would catch on. Graphs like this one bug me; this is from the CIA’s data (you know … one of those closed bureaucracies that’s good at LYING), and it shows Chinese growth rates consistently rising (not the level of its GDP). This seems implausible:

3) Americans tend to view China as monolithic. It isn’t. There are lots of ethnic divisions, and dissatisfied minorities. But, even if all of them secede peacefully, the rump of Han Chinese China will still be the world’s second largest economy a century from now.

Anyway, The Wall Street Journal  produced this chart on February 14th (you must click through to see it). Note that the vertical axis is precisely the one I told you not to use because it distorts perceptions.

On the other hand, it does use the exchange rate rather than purchasing power parity to compare GDP. But then get this whopper:

By that measure, China passed Japan as No. 2 in 2001, according to International Monetary Fund statistics. Mr. Subramanian calculates that China's GDP as measured by purchasing power has already edged ahead of the U.S.'s, though the IMF doesn't expect that to happen before 2016.

This is wishful thinking, or perhaps the result of wishful drinking. We have pretty solid numbers of the value of Chinese exports to the rest of the world’s paying customers. High GDP estimates for China require that many times that amount of goods be sold internally, to a society that is sorely lacking in visible purchasing power.

A Long View of the Federal Budget

This is not a perfect diagram. It’s also hard to see, so I recommend going to the source article, "Deficit Would Stay High for Years to Come" from the February 15th issue of The Wall Street Journal.

Do note that this projects out a few years into the future.

There are four salient points:

1) Note that government spending was essentially uncut during the Reagan administration. This is the popular perception.

2) Note that the surpluses towards the end of the Clinton administration (and Bush was lucky to get one of those, although it was a holdover) are mostly from tax increases.

3) Note that we’re hardwired now for increases in tax revenue every time the economy booms – we’re much more dependent on those booms to make things right than we used to be. This is a big problem if we follow the recipe of many states, which is to crank up spending because tax revenue has gone up.

4) Note the big increases in “other” under Obama. This is more fully “Other Non-Discretionary Spending”. This is all the increases in social services associated with the Great Recession (that’s not bad) that may not have been well thought through – like repeatedly increasing the length of unemployment benefits.

The Problem with Baseline Budgeting

No one, outside of business schools, think The Wall Street Journal might support the D.C. status quo.

And yet … they fall for the baseline budgeting nonsense too. Consider this diagram from the February 15th edition:

The source for the diagram is a bit hard to find. Try “GOP Denounces Absence of Entitlements Overhaul”.

This is for Obama’s budget proposal, and it makes it look like he’s going to make some cuts (and in truth, he does propose some). Even so, the diagram is a stinker.

Look at the small label for the middle column, that appears only in the first (i.e, Education) row. It notes that the calculations are done relative to the 2010 budget. This is the budget enacted after a full-year of the Obama administration and a Democratic Congress. Yep … one of the budgets near the top of the hump in this chart:

This is the sort of smoke and mirrors that baseline budgeting is used for.

The Third Rail

The metaphor of the third rail means something that politically can’t be touched.†

Gerald Seib uses this metaphor in the (print-only) version of his Wall Street Journal column from February 15th.

… The new Obama budget encapsulates this picture perfectly. The budget envisions that spending on all the programs Congress argues about and votes to fund every year—including defense programs—actually will decline slightly over the next 10 years.

Meanwhile, the budget estimates that spending will rise 71% for Social Security, 72% for Medicare and 115% for Medicaid over the same period, with the increases getting bigger after that. These programs are on autopilot, and will keep eating up tax dollars unless changed.

† The metaphor comes from subways; while electric trains and trams often have have a wire overhead carrying the power, subways often have a third rail on the far side of the train that carries power (enough to kill you if you touch it).

How Bad Is Utah’s Fiscal Situation?

We grouse a lot about this, and the news out of the legislature hasn’t been good for a few years, but compared to other states, we’ve been doing OK.

This is one big diagram, from a February 14th Wall Street Journal  piece entitled “Public-Worker Unions Steel for Budget Fights”, but I’m most concerned about the bottom panel (with all the little circles):

I’m not too concerned about the whole article, just about the fact that Utah has taken none of the drastic measures that are common in other states.

Brief History of Congressional Budgetary Restraint

Most students in 2011 don’t know that Congress has been trying to control its spending for 30 years, and that there have been some successes.

The February 17th Wall Street Journal piece entitled “For Congress, a History of Effort to Enforce Budgetary Restraint” is a good starting point.

Interestingly, it asserts the most success to the Budget Enforcement Act of 1990. This is interesting because in 1988 Vice President Bush ran a successful campaign for President around the slogan “No New Taxes”. This act was bundled with others as part of the larger “omnibus” bill that included the tax increases that encouraged people not to vote for Bush’s reelection in 1992 because he reneged on his promise.

Voters Are In Denial About Social Programs

What percent of people getting aid deny they are getting aid?

I’ve gotten 3 of those. My immediate family has gotten 4. I was raised middle-class, and it’s fair to say I’m upper middle-class now. But, I’d freely admit to getting government aid, and be able to label it as such. How is it that so many other people can’t? Is it because I’m an economist, or is it because outside of economics recognizing government aid for what it is does not qualify as politically correct?

The chart is draws from David Wessel’s February 17th column in The Wall Street Journal. It’s about the bipartisan deficit cutting commission that Obama established:

If the strategy was to give the president cover to offer his own plan after the election, it failed. The president and his team decided any specifics they offered would have been shot down by Republicans. So they didn't offer any big ones in his budget.

P.S. Have you noticed that 25 years ago we started treating interest payments differently for firms and households? Firms get to deduct them before paying taxes. Households used to be able to. But, then they changed it so that only mortgage interest could be deducted. And then people started taking out home equity loans as a way to deduct their credit card interest, and everyone became interested in owning a home whether or not they could afford it. And then … well … you know how it turned out.

Romer On Charter Cities

This is a topic for late April, but it was written up in Mary Anastasia O’Grady’s column in the February 14th issue, and David Wesse'l’s column in the February 3rd issue, of The Wall Street Journal.

We’re going to talk a lot about Paul Romer in March and April – he’s the focus of Warsh’s book that we’re reading together, and of parts of newer growth theory.

Romer has moved away from academic economic theorizing, and now tries to sell his idea of “charter cities”.

Basically, he thinks you need to go into places – like Egypt – with lousy laws and political systems, and get them to hand over a location to build a new city. The new city would have new laws to separate it from the rest of the country. The archetype of this is Hong Kong.

It now appears that Honduras may be the first country to volunteer to charter a city. Naysayers nay say that Honduras can’t pull this off, because Honduras can’t pull this off (yes, that sentence sounds silly, but that’s my intention to illustrate the depth of the counterargument):

Japan and Chile were once proclaimed culturally incapable of development. He also argues that history is on Honduras's side. Separate legal systems inside cities generated untold prosperity as far back as the 14th century in Northern Europe's Hanseatic League and more recently in places like the Chinese city of Shenzhen.

Of course, you can probably envision this viewpoint:

"This is a country in which most people want to pursue the American Dream," says Octavio Sanchez Barrientos, chief of staff to Honduran President Porfirio Lobo. "And they have to leave the country and move to the U.S. This offers the possibility that, in the long run, they'll have that opportunity here."

A Honduran Ph.D. student of mine said the same thing to me – about 15 years ago. He lives in Longview now … Stetson can tell you all about where that is.

BTW: Honduras is also the country the Obama administration chose to bully about 18 months ago: their elected President made moves that people thought were dictatorial, these were ruled to be illegal, and he was chased onto a plane headed for exile. Apparently, having elections is more important than gutting your electoral system once elected.

Cities, Thick Markets, and Egypt’s Development

The economics of this applies later in the semester, so it is not required for Exam 2. But it is current right now.

David Leonhardt’s February 16th New York Times piece entitled “For Egypt, a Fresh Start with Cities” cites this astonishing fact:

It is the only large country to have become less urban in the last 30 years …

That’s amazing. We bitch and moan a lot about cities, and in the US it’s becoming easier not to live in them. But in a developing country, they are the places that have the thick markets that lead to development.

We’ll spend a good chunk of March and April talking about the economic insights of this guy:

“Being around other people,” says Paul Romer, the economist and growth expert, “helps make us smarter.”

And, both the revolutions occurring this year, and the terrorism of the last couple of decades, is being driven by educated people who feel that their skills are stifled:

A 35-year-old urban Egyptian man with a high school education who moves to the United States can expect an incredible eightfold increase in living standards, the researchers found. Immigrants from only two countries, Yemen and Nigeria, receive a larger boost. In effect, these are the countries with the biggest gap between what their workers can produce in a different environment and what they are actually producing at home.

BTW: Leondardt links to the huge database of development indicators available through the World Bank.

Endangered Jobs

In the February 17 issue of The Wall Street Journal, Andy Kessler  talks about the future of jobs – an important topic for college students.

For the most part, the satirical content of this piece is not required. The general idea is required.

My reason for linking it is that he is aware of, and, uses the JOLTS data we discussed in class.

So where the heck are all the jobs? Eight-hundred billion in stimulus and $2 trillion in dollar-printing and all we got were a lousy 36,000 jobs last month. That's not even enough to absorb population growth.

You can't blame the fact that 26 million Americans are unemployed or underemployed on lost housing jobs or globalization—those excuses are played out. To understand what's going on, you have to look behind the headlines. That 36,000 is a net number. The Bureau of Labor Statistics shows that in December some 4,184,000 workers (seasonally adjusted) were hired, and 4,162,000 were "separated" (i.e., laid off or quit). This turnover tells the story of our economy … [emphasis added]

Egypt’s Military and Crony Capitalism

Crony capitalism is the name given to the faux capitalism practiced in many developing countries, where the “capitalism” is mostly about tax and regulatory breaks for politically connected enterprises.

It’s not politically correct in the U.S. to say this, but this is essentially the system that the Nazis practiced in Germany, and Fascists everywhere tried to ape.† Unfortunately, such systems are capable of delivering real economic gains, and are often politically popular because of that. Case in point: the Nazis were politically popular in Germany until Allied bombers started showing up over core German cities in mid-1943.

Around the world right now, the big crony capitalists in the news are China – where Red Army officers often get lucrative positions and kickbacks, and Iran – where the Revolutionary Guards are the biggest producers of stuff.

Which brings me to the Egyptian Army, as explained in the article entitled “Egyptians Say Military Fights Open Economy” in the February 18th issue of The New York Times:

… It also runs day care centers and beach resorts. Its divisions make television sets, jeeps, washing machines, wooden furniture and olive oil, as well as bottled water …

… The military pays no taxes, employs conscripted labor, buys public land on favorable terms and discloses nothing to Parliament or the public.

Do you think this might have anything to do with why the people in the streets complain about a lack of opportunities?

† This economic system is distinct from the Fascist political system. It’s become trendy over the last decade to throw around the term Fascist with regard to political decisions in developed countries. There may be problems with those decisions, but they really don’t fit the Fascist mold, so this name-calling is more akin to prejudice.

U.S. Imports and Exports

This graphic came from an article entitled “Emerging Markets Fuel Export Growth” from the February 12th issue of The Wall Street Journal. The bands show the relative size of imports and exports from different countries at 3 points in time.

The real story is the huge increase in both imports and exports over the last 20 years. The secondary story – emphasized by the bright red shading – is the growth of imports from China.

Students also don’t have a decent idea of what we import and export, and the graphics accompanying the article spell that out a bit:

Notice that a lot of this is two-way trade: there are two classes of “refined products …” and two classes of cars is in the top 9 of both imports and exports. This is the sort of trade that could not be explained with the 3 traditional reasons: monopoly, concentration of factors (the Hecksher-Olin-Samuelson story of trade), or comparative advantage (Ricardo’s explanation). So in the late 1970’s, Paul Krugman pioneered a fourth explanation, based on increasing returns to scale and monopolistic competition. This theory comes up in Warsh’s book, and is also in part what Krugman won a Nobel Prize for.

Charles Plosser

Macroeconomists had been kicking around at the idea of a very long propagation mechanism through the 60’s and 70’s – the techniques were hard, and not many believed the results.

The big paper that got everyone’s attention was Nelson and Plosser’s piece in the Journal of Monetary Economics in 1982. Nelson was, and still is, at the University of Washington. Plosser was at the University of Rochester, but he’s now President of the Federal Reserve Bank of Philadelphia, and this year he’s a voting member of the Federal Open Market Committee (the Federal Reserve System committee that decides monetary policy).

They tested a variety of macroeconomic data for unit roots, and concluded that most of the series had them. A unit root means that the sum of the coefficients on the lags in an autoregression is one (i.e., a unit), and it implies that impulses to that series have permanent effects. The spreadsheet work I did in class last Wednesday is an extension of what they did.

There’s an interview with Plosser, and what he thinks about macroeconomic policy in the February 12th issue of The Wall Street Journal.

How Long Will It Take Unemployment to Go Down to Something More Like Full Employment?

Jimmy was asking about this after class last week.

It also came up in a Brad Schiller piece in the February 9th issue of The Wall Street Journal.

And, I’ve mentioned in class that it is either a 1) stunning political blunder, or 2) magical thinking, that led Democrats to suggest that they could reduce the unemployment rate relatively quickly.

If it’s a political blunder, it comes from not listening to economists. No matter how bad they though Bush and the Republican were, and how good Obama and the Democrats are, it’s a fact that the unemployment rate doesn’t drop as fast as it rises.

If it’s magical thinking, it’s supported by a willful ignorance of the history and data. All they had to do was look at some graphs.

Here’s Schiller:

… We would need monthly job gains of 460,000 to achieve full employment in time for the 2012 presidential elections.

We created that many jobs one time in the last four years (May 2010). That fact should be scary for Democrats.

The White House keeps hoping for monthly job gains of 250,000. But even gains of that magnitude—more than double the average gain last year— would not get America back to full employment until 2018.

I crunched some numbers for you guys to get a sense of the scale of the problem. They are on the G drive too.

I downloaded the unemployment rate from 1948 to 2011. Then I took 2 month intervals and classified them as either the unemployment rate going up or down. Then I pulled out the change in the unemployment rate, and divided by two.†

What I found was that the average rising month went up by about the same as two average dropping months (0.16% to -0.09%).

Now, basic probability tells us that even if the unemployment rate went up steeply in this recession, that this is water under the bridge. There is no reason to expect it to come down steeply in the recovery, and in fact we ought to expect it to drop at its historically average rate: about 11 months to drop 1%.

The unemployment rate peaked at 10.1% in October 2009, so a rough estimate would be about 56 months to drop to 5% (that’s summer of 2014), and 67 months to drop to 4% (that’s summer of 2015).

Of course, the great problem in making this kind of forecast is what happens if there’s another recession before we get to those levels? There’s no reason why there can’t be (this was the problem in the 1970’s and early 80’s). Getting to summer of 2014 without a recession would make this expansion one of the longest in peacetime (although we’ve been having long expansions for 50 years now, so that wouldn’t be surprising).

A second problem is our experience with structural unemployment in the 1980’s. There, the unemployment rate peaked at a higher level, and dropped dramatically, before slowing down quite a bit: 10% to 7% looked easy, but 7% to 5% took a lot longer. This is usually attributed to that range being composed of hard cases: structurally unemployed people who became convinced, only slowly, that their old job and lifestyle were not coming back. To the extent to which we have a lot of structural unemployment in this recession, we may be faced with the same problem in a few years.

Jimmy was also curious about how the policies of extending unemployment benefits would affect this. I don’t think anyone really knows for sure, but no one suspects that it would speed up the process of getting the unemployed back into jobs.

† The reason for doing it 2 months at a time is that there are some months of no change, that are hard to classify as up or down – and there are enough of them to be problematic. Using the average over 2 months got rid of most of those.

Is It 1983 All Over Again?

I do not advocate expecting patterns to repeat in macroeconomic data. But, I’m open-minded about it.

Floyd Norris, in the February 4 issue of The New York Times notes how similar the unemployment situation is right now, to that at the start of the Reagan expansion.

The unemployment rate declined four-tenths of a percentage point in one month. There had not been a monthly decline that large in many years, but economists were unimpressed. After all, the decline was caused in no small part by a surprising reduction in the labor force, which could be an indication that more workers were discouraged and no longer looking. That would hardly be an encouraging development.

Anyway, it was said, the unemployment rate is based on a survey of only 60,000 households, some of whom cannot be reached in any given month. It can be volatile, so you should not pay much attention to it. The president took heart from the figures, but critics said there was no real improvement.

The above describes what happened a month ago …

… Those paragraphs also describe the situation 28 years ago. In January 1983, with President Ronald Reagan reeling from his large setback in the midterm elections the previous November …

Property Rights

Over the last 20 years, Hernando de Soto has built a case that a big cause of poverty around the world is poorly defined property rights.

He’s Peruvian, and his research started there. Basically, he argues that people may “own” a business or a home, but do not have clear title to it. If they don’t have clear title, it makes less sense to improve it, and further it may not be possible to leverage it to build a bigger operation.

Why don’t they have clear title? Because the legal system is intentionally clouded to protect vested interests.

More recently, he’s been funded to study this problem around the world, and in the February 3 issue of The Wall Street Journal he has a piece about Egypt. He reports that the largest employment sector is the underground economy, that over 90% of owners don’t have clear title to their homes, and that the value of undocumented wealth is 30 times larger than the market value of the entire Egyptian stock exchange.

Why? Here’s a few reasons:

To open a small bakery, our investigators found, would take more than 500 days. To get legal title to a vacant piece of land would take more than 10 years of dealing with red tape. To do business in Egypt, an aspiring poor entrepreneur would have to deal with 56 government agencies and repetitive government inspections.

Small Cuts

Utah’s Jason Chaffetz has gone on the record in the February 16 issue of The Wall Street Journal as favoring process over results.

Specifically, he argues that it is important to make small cuts, where possible, in the Federal budget.

He claims these add up. I would say they don’t add up to much, and that he is using the same political ruse that Obama is using: citing large numbers for the cuts without perspective. This just exploits the widespread innumeracy of the public.

N.B. Having said all that, he mentions a piece of trivia that I mentioned to Jeremiah when he first asked me about military spending and prosperity. The problem with subsidies, tax breaks, and so on, is that once created, they don’t get revisited and affirmed as still useful. Some of these are military in origin, and the dumbest one is the mohair subsidy. We devote a million dollars a year in subsidies to harvest mohair off the chin of goats for potential winter use, because it was used in World War II. Better synthetics have been around for decades. But the subsidy remains.

A Picture Is Worth … Stimulus Package Edition

Congress invited 2 of the big name White House economists who shepherded the stimulus package to testify in its defense. They didn’t show:

Christina Romer left her White House position a few months back, so I'd think she'd have time for this sort of thing.

Jared Bernstein still is in his position as Chief Economist and Economic Policy Advisor to Vice President Biden. Of course, given that his degrees are in music, social work and two in social welfare, he may not feel that he has sufficient expertise in economics to have a meaningful position.

Photo via Café Hayek.

Military Spending as Stimulus

Jeremiah asked after class the other day if military spending is related to prosperity.

The evidence on this is mixed, but definitely overrated.

I think the first thing to recognize is that if it was that easy to be prosperous, then everyone would do it. Of course, everyone does have some military spending, but in relative terms it’s declined just about everywhere over the years, decades and centuries.†

A second thing to consider is that if it was that easy, the U.S. economy would have gone through the roof in the last decade. Also, if military spending is a big deal, a decline in it would be associated with the most recent recession. It isn’t.

A third thing to consider is that the list of places that we associate with militarism leading to prosperity are ones where the private sector wasn’t doing much to begin with: so there was a big open role to step into. A good example here is Nazi Germany.

A fourth factor is if military spending is big enough to have much influence. If we take Keynesian theory at face value, what counts is purchases of goods and services – and weaponry is a good example. But most military budgets are actually compensation … which are tantamount to a transfer program and would net out of Keynesian arguments.

Lastly, most of the people selling arms are already selling everything else. The list of the world’s largest arms exporters reads like a list of real GDP. The ones that should be troubling because their export rank is higher than their GDP rank would be Russia, Spain, Israel, the Netherlands, Sweden, Switzerland, and Ukraine. That’s not great, but not exactly a rogues gallery either. The ones that then seem to be less warlike are China, India, Brazil, the UK, Mexico … probably not the list you expected. Maybe we should worry about the buyers rather than the sellers: neighbors India and Pakistan, neighbors Singapore and Malaysia, neighbors Greece and Turkey, and so on.

I think there are 3 reasons for the confusion of military activity and prosperity.

1) The U.S. is the biggest economy, has the biggest military, and is the biggest exporter of arms. But, correlation is not causation. Also, we have a volunteer military, which has much higher compensation relative to soldiers in other countries.

2) A lot of people attribute the end of the Great Depression to World War II. I’m OK with this one, but there have been a lot of people chipping away at this argument over the last decade or so.

3) There’s some wishful thinking too – it’s easy to forget about the military spending that did not lead to prosperity. In the Soviet Union, the high rate of military spending growth didn’t translate into comparable real GDP growth, while in postwar Japan, lower military spending growth rates were swamped by private sector growth.

† I put this at the bottom because it requires a more detailed argument. It is possible to find sites detailing increasing international military expenditures. There’s one at the top of this page at Global Issues. But … look closely … it does precisely what I recommend that you don’t do: plot growing data without taking logs (it is in real dollars though, which is great). It shows spending going up by about 60% over 11 years, at what looks like a steady rate. That’s roughly 4% per year. Is that a lot? Compared to what? It would be a lot in a developed country. But, a good chunk of the world isn’t developed, and is growing a lot faster than that. China has grown about 200% over that period, Now consider the fact that the chart is approximately of constant slope in this period. That won’t happen with compounding unless the rate is declining each year – which I’m quite sure is not the takeaway they’d like you to absorb. A last thought is that given the huge size of the U.S. defense budget – both because of scale and the expense of arming in the U.S., that most of this runup is actually the wars in Iraq and Afghanistan. Look again … most of the upswing is from 2001 onward.

National Debt as a Road Trip

Shaulauna recommends this visual metaphor:

I had my doubts before watching it, but I liked it too.

Three caveats.

1) Without a link to the background numbers, it isn’t clear if the author has done the essential things they’re supposed to – like adjusting for inflation, or netting out all national debt that is owed to people who can be taxed by the Federal government. My guess is that he didn’t, since most people don’t with National Debt figures. It’s also not clear if he did the reasonable things like adjusting for size of the economy or size of the population (i.e., why can’t or shouldn’t a bigger richer country have more debt).

2) There is a huge sense in which National Debt is a pointless measure. Looking at debt in isolation from national assets is just asking for trouble. But, national assets are difficult to measure; unfortunately, the response of most people to that fact is to just ignore them completely.

3) By calling this national debt, we miss half the story. Yes, there is a national debt, and it shows up on the liabilities side of the balance sheet if we look at the government as an investment project. But, there is an alternative view of government that we must entertain at the same time. From the perspective of public finance, national debt is like a receivable: it’s a bill that is owed (and which will be paid with taxes) for services that have already been rendered.

Relative Size of Country’s Economies

Jeremiah e-mailed me about this map from The Economist (it’s interactive, so you need to click through the link).

It shows U.S. states labeled with the name of a country whose economy is of comparable real GDP; Utah is relabeled as Ukraine.

This has been floating around the blogosphere for a few weeks. I didn’t post about it because there have been earlier versions of that meme.

The original maps from around 4 years ago are linked at voluntaryXchange.

Later, I put up some lower quality version on this SUU Macroblog post.

Stadium Debt

This is only required in the sense that you should read the article and understand the general argument.

The February 3rd issue of The Wall Street Journal  contains a piece entitled "The Price of Football that Even Nonfans Pay". It's about funding, or lack thereof, for sports stadiums.
The dirty little secret of professional sports is that many cities are still paying for stadiums that have been torn down and replaced with new stadiums (that they're also paying for).

How does this happen? Here's an example from New York:

... The old Giants Stadium cost $78 million, yet the outstanding debt more than 30 years later is $110 million. How did this happen? Simple: The politicians spent the money that was originally intended to pay off the debt on other things. It's a common problem. Revenues get diverted to other programs and the stadium debt gets refinanced.

"If I buy a house with a 30-year-mortgage and 20 years later I refinance it so that I can buy a yacht, is that house debt or yacht debt?" asks Mr. deMause. "Cities are using these revenue streams to pay for all sorts of stuff, and playing bookkeeping games."

This sort of nonsense goes on at all levels of government, and then people have the b***s to say things like "the country is broke". It isn't. It's not close. It is overcommitted to nonsense that can be changed anytime we like.

Baseline Budgeting

The February 3rd issue of The Wall Street Journal has an editorial about the first budget Governor Cuomo has put forward for New York.

One issue that relates to the previous post about Brent not getting why government isn't focused relates to baseline budgeting. Cuomo is confronting this in New York where some programs have spending increases of 13% for the coming year that were previously scheduled. This means that if he proposes a 12% increase, he will be accused of cutting spending.

This also applies to the new Republican majority in the House of Representatives. The editorial's opinion blames the recent Democratic majority, but the truth is that baseline budgeting has been a problem for decades; decades where the Democrats have been dominant in Congress, but also decades where Republicans have not taken their swings at this issue when given the chance:

There's a vital lesson here for House Republicans because the same baseline games have long prevailed in Washington. The Democrats who wrote the budget rules also built in formulas that increase spending each year before Congress even takes a vote. Those same Democrats are now lying in wait for Republicans to propose their budget, and they will describe even increases in spending as brutal "cuts." The media will dutifully play along.

The really scary thing for people like Brent, who care about these issues, but are just learning the gory details of the process is that the new Republican majority may just wink and nod:

Republicans ought to follow Mr. Cuomo's savvy lead and blow the whistle on this rigged process early and often. Alas, we fear too many Republicans want to brag about their "cuts" to impress the tea party even if they come from an inflated baseline.

Reasonable, but Probably Naive, Questions

Brent e-mailed me this the other day:

Why is discretionary spending causing an uproar when it comes to saving money?  Why aren't we looking at ways to fix the structural problems associated with Social Security, Medicare, Medicade [sic] , etc?  It's like we're more focused on saving pennies instead of saving dollars.

This is very reasonable position - from either side of the political spectrum.

Unfortunately, this is not a new thing. It has been a dominating and persistent issue in American politics since Jimmy Carter ran as an "outsider" in 1976.

After that length of time, I think it's also reasonable to infer that either "they" can't or won't address those questions.

"Can't" would mean that the political system is broken with respect to economic priorities.

"Won't" would mean that the political parties are broken with respect to economic priorities.

So, without offending Brent, I think perhaps we should view posing this question as naive. We work under the assumption that the political system and parties are capable of addressing problems of current concern. If they can't or won't do so, then the appropriate question is not why they don't do this, but how do we change the system so that they might be able to begin.

More on this as we go through the course; it's an ongoing problem.

Global Manufacturing Growth

I mentioned in class on Wednesday that, in spite of the “Great Recession”, global growth was stronger in the past decade than ever before.

And. it’s ramping up again.

The piece entitled “Manufacturing Gains Circle the Globe” from the February 2, 2011 issue of The Wall Street Journal has an excellent graphic showing manufacturing growth that has been sustained for going on 2 years now in a wide selection of countries.

The data source used for that is an interesting one. It’s put together by the Institute for Supply Management. It is an index of the sentiment of supply managers about the current business climate: it comes out monthly and is scaled so that above 50 is good and below 50 is bad. At least in manufacturing, they assert that the economy hasn’t been this strong since 2004.

And … the article briefly mentions that global manufacturing strength is contributing to inflationary pressures coming from commodities.

The U.S. Corporate Tax System

Our corporate tax system is a disgrace that is a macroeconomic problem of unknown scale.

It’s a disgrace because we now have the highest official corporate tax rate in the developed world. Yet, our system is full of loopholes for politically connected firms.

It’s a macroeconomics problem because corporations have gotten so good at shifting their taxable income to lower tax locations. Most of this shifting of income does not entail shifting of jobs, but some of it does (FYI: SUU has placed 2 economics majors in high paying jobs in this field in the last 5 years).

It’s a problem of unknown scale because the system is such a mess that it isn’t really possible to compare it statistically to an alternative: it’s so bad we can’t tell how bad it might be.

Some of these issues are touched on in David Leonhardt’s column this week in The New York Times entitled “The Paradox of Corporate Taxes”.

Obama Exploits Public Innumeracy

Tyler Stillman shared this video with me.

Innumeracy is like illiteracy, except with numbers. Many people are simply not good at understanding the scale of numbers that come up commonly in macroeconomics. And that probably effects policy choices …

Just Wonderin’

In a generation, is this going to be a serious explanation of the most recent recession?

N.B. The legend is a cute touch.

Via I Love Charts.

Technorati Tags: bermuda,triangle,lost,productivity

FYI: Chinese Censorship

China is now blocking Twitter users from searching for tweets about Egypt.