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.