Obama's trip to Ireland

Jedward

Some interesting presimetrics

I did some interesting "Presimetrics" yesterday - the study of the economy under various presidential administrations and the title of a book written by Mike Kimel. Since I prefer to use Real GDP per Capita as a measurement for economic success and failure (a decline in annual Real GDP per Capita being my definition of a recession) I decided to check up on how the post-war presidents have performed. I don't know if Mike Kimel did this in his book (which I have sitting in a box in my garage) so please excuse me if I have discovered something that Mike has already pointed out.

My study started with the desire to measure economic performance under Obama against GW Bush. Of course the problem with such comparisons is that Obama has not been in office for as long as Bush had been, so I had to measure according to how many quarters each president had served and divide economic performance by those quarters. The result was very interesting - Real GDP per capita under Obama has grown by 0.29% per quarter while under GW Bush it grew by a paltry 0.19%. Encouraged by this interesting result (Newsflash: Economy growing faster under Obama than Bush!) I decided to go back and compare everyone since Eisenhower. This is the result:

By way of methodology, I access the data on Real GDP, then divided that number by the population at the end of each quarter (with 2011 population data being mid-monthly) to get a Real GDP per capita figure. I then measured the change in Real GDP per Capita from the first quarter of the president's first term in office against the final quarter of his final term in office. For Johnson and Ford, I measured the first quarter in office as the quarter they became president, which means that Kennedy's and Nixon's last quarter in office was followed by the quarter in which they ceased to be president. Once I measured the change in Real GDP per Capita as a percentage, I then divided it by how many quarters the president spent in office. So what do we find?

Obama - 0.29%
Too early to tell but there has certainly been a growth in Real GDP per Capita faster than Bush II. I am predicting another recession, so I expect this number to drop over time. Moreover Obama's result has the statistical advantage of an economic trough being followed by a recovery.

Bush II - 0.19%
His presidency was bookmarked by recessions and there is no doubt that the 2008 credit crisis affected his result badly. A quick check of the spreadsheet tells me that up until 2007 Q4, Bush's performance was 0.38% per quarter.

Clinton - 0.71%
Do we miss the 90s yet? In hindsight economic growth during Clinton's time in office was based upon the unsustainable dot-com bubble. if we measure Clinton's performance to 1994 Q4 (the quarter before the bubble began to expand), growth was lower at 0.56% which is, however, a reasonably good result.

Bush I - 0.18%
GHW Bush's result suffers from a recession at the middle and end of his single term, but even if we factor that out his performance from 1989 Q1 to 1990 Q2 the result is 0.31%. I'm wondering if GHW's figures suffer from a bust from the Reagan years (though some conservatives would argue that his "read my lips, no new taxes" taxes killed it)

Reagan - 0.62%
From memory, studies into Real GDP show that Reagan's years weren't that good. Per Capita, though, the results are worth talking about. Yet while Clinton's higher growth came at the expense of a sharemarket bubble, Reagan's growth came at the expense of the public debt. In essence, Reagan borrowed against the future to boost the present. Now that the present is Reagan's future, I would argue that we are reaping now what Reagan and congress sowed back in the 1980s. Also, let's not forget Paul Volcker - killing inflation really did stabilise the economy in the 80s.

Carter - 0.47%
Malaise never had it so good. The further into the future we get the more we realise that Carter's presidency was better than what was believed. "History's greatest monster" he was not. 0.47% growth was certainly not as good as other periods in postwar history (and certainly not as good as Reagan) but is certainly better than both Bushes, Ford and Nixon.

Ford - 0.42%
Not a great sample size admittedly (10 quarters, or 2½ years) so we could probably add this onto Nixon. Certainly not a great number compared to previous years but better than recent times.

Nixon - 0.44%
What happened here? Nixon inherited some of the strongest growth on record and managed to halve it. Two recessions (1970 and 1974) damaged it severely. We also shouldn't forget the first oil crisis as well. Barring any further evidence of economic stupidity, I don't think Nixon is responsible for such low growth in this period.

Johnson - 1.00%
The postwar US economy grew fastest on a per capita basis under Johnson. This was aided by two wars - the war in Vietnam and the war on poverty. While military expenditure created a demand for labour, conscription created a shortage of it. At the same time wealth was redistributed via poverty reducing policies and the creation of Medicare. And this was done without a huge increase in public debt.

Kennedy - 0.97%
Obviously the Johnson growth had its basis in Kennedy's 11 terms in office, though Vietnam was not as prominent in calculations here. We also need to factor in the effects of substantially better transport infrastructure, thanks to Eisenhower.

Eisenhower - 0.14%
This has to be one of the most interesting results of all. It is generally believed that the 50s saw an economic boom but what we see here is something different. Under Eisenhower, real GDP grew from $2.3484 to $2.8002 trillion, a total growth of 19.24%. But per capita figures divide this by population. Under Eisenhower, population grew from 159 million to 182 million, a total growth of 14.24%. So while the economy undoubtedly grew, the sheer number of baby boomers born in that period reduced GDP per capita something severe and thus skews the figures.

Thoughts on the debt deal

This was definitely a compromise solution, but one in which each side calls the other the "winner".

I read quite a few lefty blogs, which is fine because, if you look at the graph showing my political and economic positions, I am a lefty. Now the lefty blogs are all saying that this is a victory for the Republicans. They're also critical of Obama. I've just watched John Stewart and that's pretty much what he said.

But I also check up on Redstate once in a while to look at how the other side feels and they are definitely unhappy too. "Cut, cap and balance" was their mantra and that was not achieved.

I guess the best place to check this is Wikipedia which, ironically (at least to many), has a more dispassionate and factual summary of what was achieved:

• Cut spending more than it increases the debt limit. In the first installment ("tranche"), $917 billion would be cut over 10 years in exchange for increasing the debt limit by $900 billion.
• The agreement establishes a joint committee of Congress that would produce debt reduction legislation by November 23, 2011 that would be immune from amendments or filibuster. The goal of the legislation is to cut at least $1.5 trillion over the coming 10 years and be passed by December 23, 2011. The committee would have 12 members, 6 from each party.
• Projected revenue from the committee's legislation must not exceed the revenue baseline produced by current law.
• The agreement specifies an incentive for Congress to act. If Congress fails to produce a deficit reduction bill with at least $1.2 trillion in cuts, then Congress can grant a $1.2 trillion increase in the debt ceiling but this would trigger across the board cuts ("sequestration") of spending equally split between defense and non defense programs. The across the board cuts would apply to mandatory and discretionary spending in the years 2013 to 2021 and be in an amount equal to the difference between $1.2 trillion and the amount of deficit reduction enacted from the joint committee. The sequestration mechanism is the same as the Balanced Budget Act of 1997. There are exemptions—across the board cuts would apply to Medicare, but not to Social Security, Medicaid, civil and military employee pay, or veterans.
• Congress must vote on a Balanced Budget Amendment between October 1, 2011 and the end of the year
• The debt ceiling may be increased an additional $1.5 trillion if either one of the following two conditions are met:
  
  1. A balanced budget amendment is sent to the states
  2. The joint committee cuts spending by a greater amount than the requested debt ceiling increase.

My understanding is that cuts were achieved and this was done without increasing tax revenue. This is therefore a broad conservative political victory. Conservatives, nevertheless, do not see this as a victory because it doesn't go far enough.

The reason for conservative unhappiness has more to do with their extreme ideological position. Since the onset on the Tea Party and their influence on Republican Party politics, the GOP has, amazingly, become even more ideologically conservative. Minarchism is now the default position of conservatives, which means that any form of government spending outside of military spending and law enforcement must be excised. This form of ideology, however, is backed up by a crazy form of patriotism that sees minarchism as the intended model explicitly advocated by the "founding fathers", which means that any different position (whether it be left wing or centrist) is automatically branded a threat worth "watering the tree of liberty for" (ie the blood of tyrants and patriots resulting from an armed struggle). Add to this the peculiarities of the US congressional system and the only real compromise position is the one which was passed.

As far as the effect on the broader economy, my understanding is that most of the cuts will come in after a two year period, which theoretically allows Obama some breathing space to run for a second term in 2012. The debt limit has been increased to allow for borrowing in the meantime and, all things being equal, should not require another increase until after the 2012 elections. "All things being equal" though is not a good phrase in these dark economic days. I have already predicted that the US will enter another downturn in 2012 and if this occurs the debt ceiling may need to be increased before the election, especially if unemployment ends up in the mid-teens, thus reducing government income tax revenue.

As for the Keynesian approach of pump priming the economy via deficits, this piece of legislation is of no help. My own call for a "Total War / New Deal" type economy (whereby large increases in government spending in health, education and alternative energy are accompanied by large tax increases) is even less likely to occur. Since the US economy's many structural flaws have not been addressed since the credit crunch of 2008, I thus have little faith that the free market will be able to generate jobs and economic growth in the short-medium term.

It's so gratifying to leave you wallowing in the mess you've made

Not good news:

Negotiations over a broad deficit reduction plan collapsed in acrimony on Friday after House Speaker John A. Boehner suddenly broke off talks with President Barack Obama, raising the risk of an economy-shaking default.

The epic clash between the White House and Congressional Republicans came a week before the government hits its borrowing ceiling, and set off sharp accusations from both sides about unwillingness to compromise.

A visibly angry President Obama, in a hastily scheduled White House news conference, demanded that Congressional leaders come to the White House on Saturday morning.

“I want them here at 11 a.m. tomorrow,” Mr. Obama said. “They are going to have to explain to me how it is that we are going to avoid default.”

Anyone who has played Sim City 2000 will remember the importance of maintaining a tight budget. But if your city in the game gets to a point where you're running out of money you have a number of serious choices to make in order to balance the budget. One option you have is to cut funding to roads. When you do so, this guy (your roads and transport secretary) pops up and yells at you:

What happens then? As time goes by your roads begin to crack up and become unusable. This is turn reduces economic activity and your own tax revenue even further. It's a short term solution but ends up costing you far more in the longer term. It's a sure fire way to lose to game.

Then, of course, there is that Simpsons episode where Homer becomes the town's sanitation commissioner. He manages to gain this position through an election campaign where he simultaneously lies about the incumbent (and even defames him) and gives outrageous promises to the voters, all with Bono's consent. When the scheme blows up in his face (the yearly sanitation budget is used up in a matter of weeks) he resorts to a scheme whereby funds are generated by taking the trash from various US cities and storing it underneath Springfield. This, of course, turns the town into a smelly, garbage infested hell hole. An emergency meeting is held in the town hall and the people unanimously vote for the previous commissioner (Ray Patterson, voiced by Steve Martin) to retake the job. Patterson saunters on stage to music and then says this:

Oh gosh. You know, I'm not much on speeches, but it's so gratifying to... leave you wallowing in the mess you've made. You're screwed, thank you, bye.

I have to say that part of me wants to call the Republicans' bluff and not raise the debt ceiling. To be honest with you it would be the easiest and quickest way for them to achieve their ideological ends. I have already pointed out that such an action would cut federal government spending by around 40% and represent a cut in spending from about 25% of GDP to around 15% of GDP. According to historical notes on the US budget, the last time the US government was that small was 1951 - in other words the Republicans have a once-in-a-lifetime chance to shrink the government to its lowest level in 60 years. Moreover, this would not lead to debt default, as the 14th Amendment protects bondholders.

And it's not as though such a move wouldn't be popular, at least initially. There are many in the US who claim that the Federal Government has no real input into the economy. "Let's shut her down!" some would say, confident that such a move would have no real impact upon the economy and society in general. And as for all those pesky civil servants out of a job, well they weren't doing anything really important anyway. And it's not as though we can't afford to pay them unemployment benefits since such benefits would disappear anyway for everyone once the great spending cut occurs. And with so many people unemployed and not receiving benefits, they would then be able to get off their collective lazy asses and find jobs. Then the economy would start booming again.

Of course these sentiments are nonsense. Anyone with any understanding of the complexity of economics, the effect of government programs and the problems besetting the unemployed would know that such a gigantic cut in government spending would have only a negative impact upon the US. It would cause social and economic pandemonium.

And yet part of me wants to the GOP to do it. I do admit that there is some perverse pleasure in watching an economic collapse unfolding, in the same way that people hang around and watch the aftereffects of an accident.

Nevertheless I do have a rather pragmatic reason for wanting this to occur - the disaster that it brings on the nation (and the rest of the world) will be so damaging that no one would take hard-line conservatism seriously ever again. The disaster would be so horrible that Obama would be re-elected by a landslide and the Republicans would be utterly humiliated in Congressional elections. More than that, hard-line conservatism throughout the world would be discredited in the same way as communism was discredited after the collapse of communism.

And why? Conservatives have painted themselves into a corner. They are just so angry that things like Medicare, NASA, unemployment benefits and the Department of Education exist. It's not just that they don't like big government, it's that they so strongly believe that their understanding of limited government was the same thing believed by the founding fathers that anything, anything which suggests slightly higher government tax revenue or spending is immediately cause for revolution and "watering the tree of liberty". In the words of Grover Norquist, "I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub."

Of course I see such people as not just hard-line but extremist. Their ideology has regressed so far that even Ronald Reagan, patron saint of Conservatives, would be labeled a "Republican in Name Only" for many of his policies.

And so this is why part of me wants the Republicans to follow through with the extremist ideology that now controls their party - it would allow them the chance to finally do what they've always wanted to do while simultaneously proving to the rest of America and the world the utter stupidity and unworkability of their policies. Their fate would be to disappear from the political landscape for a long, long time. The world would then become a much better place.

And as their doom descends and the party faithful shrink in horror at what they've done and seek to make amends, the voice of Ray Patterson calls out to them:

It's so gratifying to leave you wallowing in the mess you've made. You're screwed, thank you, bye.

The 14th amendment and the possible government shutdown

Oh dear:

Crisis talks on the United States' debt limit remained deadlocked overnight as negotiations led by US president Barack Obama degenerated into a slanging match.

The president is said to have stalked out of the latest debt talks, which both sides have acknowledged as the most heated yet.

"This may bring my presidency down, but I will not yield on this," Mr Obama is quoted as saying.

The prospects of politicians reaching a deal to raise the debt ceiling are still in question after fifth straight day of talks.

Some econ bloggers have pointed out that the 14th Amendment of the United States renders the "debt ceiling" unconstitutional:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave. But all such debts, obligations and claims shall be held illegal and void.

My view is that the "debt ceiling" is not unconstitutional. What is unconstitutional is to default on this debt. Let me explain.

All the "debt ceiling" does is prevent the government from borrowing any more money beyond the previous predetermined limit. Since congress has the power under the constitution to legislate borrowing and spending bills, any self imposed limit on the amount of money the federal government borrows is entirely within their purview.

So what happens when congress doesn't increase the debt limit a "government shutdown" is initiated?

All it means is that the government will have to cut spending in order to fit into the amount of money they do receive. Spending must be cut. And if we believe that the 14th amendment will be followed, then we can assume that paying back interest and principal on money borrowed will not be affected at all. Instead, spending cuts will be made to other areas of government control. Spending on health care will be cut drastically. Military spending could possibly be cut. Social Security spending cuts would only occur if the spending is not considered "government debt".

My spreadsheet tells me the following about US government debts and receipts:

So if revenue represents 16.61% of GDP and spending represents 25.29% of GDP, then any failure to increase the debt ceiling will force the federal government into spending only as much as it gets. This would mean 16% spending instead of 25% spending. In short, it would reduce the spending size of government by around two-fifths. You can imagine how devastating such an action would be upon the economy.

But what about government debt? The last time I checked, interest paid on government debt made up around 2.8% of GDP. Even after a potential failure to increase the debt ceiling, interest on treasury bonds and other debts will have ample room to be paid back.

A failure to raise the debt ceiling will most certainly shrink government spending, but it will not result in debt default. The unemployed will no longer be given payments, Medicare will grind to a halt, NASA will disappear, even social security has the potential to be scaled back... but at least those who lent the government money will get their interest - hardly a cause for celebration.

To summarise the 14th amendment on this issue: The amendment doesn't invalidate a debt ceiling, it just ensures that government debt will be paid off even if any debt ceiling isn't increased.

I like Obama and I agree with Keynes. But US government debt needs to be paid off sooner rather than later.

Despite the fact I am increasingly finding my own economic understanding being challenged and improved upon through the views of others, I am yet to change my mind over the issue of government debt. I therefore find myself in one of those uncomfortable "middle" places between ideologies and ideas in which I find myself agreeing with people whom I usually disagree with and disagreeing with those whom I respect.

This is the situation: It is my view that US government debt is a serious problem. It is the prime reason why I publish a "debt watch" every month, since hard data is essential in informing my view. Yet by holding the "debt is a problem" view I find myself aligning with populist conservative economists who deride Keynes and hate government while at the same time I find myself disagreeing with people like Paul Krugman and Obama supporters who see the stimulus as a good thing.

For the record I am not dismissive of Keynesian economics. As a non-American I have seen "automatic stabilisers" such as welfare payments and unemployment benefits being enacted by governments and have even benefited from them directly. I have no problem with government deficit spending during recessions, all things being equal of course. Yet it is that last phrase - "all things being equal" - which is the qualifier that has made me oppose the Obama stimulus package and to align with deficit hawks.

So, what is so "unequal" about the American situation? The problem is that for Keynesian economics to work over the course of the business cycle, any deficit run during recessions must be balanced out by surpluses during expansions. This causes a virtuous cycle, whereby increased tax revenues during expansions pay off the debt accrued by the government during recessions, while also creating net government savings once the debt has been paid off. These savings should then, of course, be used as emergency funds to be tapped when the economy moves back into recession. The idea is that over the course of the business cycle, government deficits are balanced out by surpluses, and the amount of debt accrued is balanced out by the amount of savings.

What is obvious though is that this process falls apart when governments act irresponsibly. Irresponsible actions in this case involve governments running deficits and accruing debt during economic expansions. Since 1981 the United States has run up huge fiscal deficits not just during recessions but during expansions. For this I blame the rise of Supply-side economics and the populist tax complainers who advocate it. The idea that reducing taxes would magically produce more tax revenue has destroyed the fiscal standing of the US government since the early days of Reagan.

Yet it seems to me that some non-supply siders have their own magical thinking to deal with. There's no doubt that the Obama stimulus has boosted the economy, but it is illogical to assume that such a boost in economic growth would provide enough increases in tax revenue to pay off the stimulus in the first place. Despite the presence of multipliers, the end result has been and will continue to be a net increase in debt levels. Those who believe otherwise are merely replicating the error of supply-side economics, except that the deficit is created by spending increases instead of tax cuts.

The fact is that public debt in the US is now just over 58% of GDP and debt servicing represents 2.7% of GDP. Just over 19% of Federal government spending is dedicated to debt servicing, an amount which easily exceeds anything spent on NASA, Education or the Environment combined.¹ Debt servicing is only exceeded in size by defense spending, health and human services and social security. Alarmingly, this amount will only increase the more the economy expands, since an expansion will create a higher interest rate environment and force the government to pay even more on money owed.

It is debt servicing which is the real killer behind running large structural deficits over a long period. As more and more debt is accrued by a government, more and more money is spent on paying interest. As time goes by this increase in debt servicing "crowds out" spending on other government programs: education spending gets cut, science gets cut, health care gets cut, environmental protection gets cut, welfare gets cut - and all getting cut without any actual decrease in government spending since these cuts are being balanced out by an increase in debt servicing. And of course who is the beneficiary of government debt servicing? Investors - households and businesses who fronted the billions of dollars in the first place to lend to the government. This is, of course, the rich, mainly. If there is one government policy that rewards the rich over the poor over the long term, it is having a structural deficit adding to increasing national debt levels.

If a household goes into an unsustainable debt spiral, they end up being declared bankrupt. Bankruptcy can also apply to businesses, but businesses also have the option of dissolving. Both the borrower and the lender in this situation are "losers". Sovereign governments do not have the option of bankruptcy or dissolution. Too much debt can be controlled through inflationary seigniorage (since the government controls the money supply) or by defaulting. Markets respond to the threat of default by dropping sovereign debt investments and thus causing a rise in bond rates (eg the recent problems with Greece).

Bankruptcy, dissolution, inflationary seigniorage and defaults are processes which cause massive economic damage. If a sovereign government inflates its debt or defaults, the pain and damage is passed on to the market and to households and businesses, who in turn are rendered bankrupt or are dissolved and the problem escalates. So while the government may survive, the people and businesses it supposedly serves ends up badly hurt.

The US is not close to defaulting on its debt, but it is closer now than at any other time in history. The reason why I believe the Obama stimulus was a bad move was not because I somehow oppose Keynes or have embraced Grover Norquist, but because US debt levels were already too high for such a stimulus package to be sustainable. One of the problems that caused the great financial crisis was lax US fiscal policy, so it seems illogical to assume that loose fiscal policy can be used to solve it. While this may seem merely axiomatic, it is nonetheless important in my thinking on the issue.

One response from stimulus supporters in the face of this complaint can be summed up in one word: Hoover. Didn't Hoover make the depression worse by cutting government spending, and didn't Roosevelt make the depression better by increasing government spending via the New Deal? My retort? I agree - but neither Hoover nor Roosevelt was lumbered with government debt the size and proportion of which Obama was lumbered with when he took office in 2009. Debt levels were already too high before the great financial crisis hit, and they have grown even higher throughout.

At some point the US must deal with its debt decisively. The government must agree to run fiscal surpluses over a long period in order to pay off the "national credit card". Supporters of Obama's stimulus argue that the economy must recover first and that any changes must occur later rather than sooner. I disagree. I can't see the US economy returning to its pre-GFC glory for some time. Financial market imbalances have gone on for too long and have messed up too much money for things to return quickly to 2005-style balance sheets. Unemployment is unlikely to drop below 7% for the next few years and there is always the threat that a second credit crunch might hit and make the current recession even worse. After all, there has been a domino effect of sorts - the subprime crisis of 2007 leading to credit crisis of 2008 leading to the European sovereign bond crisis of 2010 leading, inevitably, back to US households and businesses, a process which looks like it is already hitting with further drops in house prices being experienced.

Yet if I got my way, what would result? Let's say Obama rings me up and says "OSO, you're a wise man. Tell me what to do and I will do it." Well apart from awarding myself a few million dollars to feather my own nest I would:

• Increase taxes, especially on the rich.
• Introduce a Market Capitalisation tax to tax public companies according to their market wealth.
• Cut defense spending by 25% (Iraq and Afghanistan would be handed over to the United Nations and troops brought home)
• Leave spending levels where they are proportionally for the next five years.
  

In short, I would aim to run an immediate fiscal surplus of around 1% of GDP, and then sit back and wait as this surplus increased over time.

Of course such an action would result in an economic contraction. It would push the US into a deep recession. Yet the alternative would be an even deeper and even more damaging recession later on. Moreover, forcing the country into a recession is exactly what Paul Volcker did when he began work as Chairman of the Federal Reserve and it was he who is seen by many as the real reason behind America's 80s recovery and expansion (and not Reagan). If Volcker can cure the economy via harsh monetary medicine then so can Obama and Congress cure the economy via harsh fiscal medicine. Of course such a decision by Obama and Congress (acting on my wise counsel) would push the US into a far worse recession than Volcker ever did, but Volcker's recession resulted from, and cured, 10-15 years of monetary madness, while an OSO directed recession would result from, and would cure, some 30 years of fiscal madness.

The point is, though, that a reckoning has to occur. Had George W. Bush in his first term of office decided to keep taxes where they were and run more Clinton-inspired fiscal surpluses, the current GFC would probably be much milder, or may have never occurred at all. Had Clinton and the Gingrich Republicans in the second half of the 90s been less concerned with White House interns and more dedicated to running fiscal surpluses, the current situation would be even less severe. Had Walter Mondale been inaugurated president in 1985 on the back of fixing Reagan's fiscal stupidity with tax increases (one of his actual election promises that seemed crazy at the time but quite prescient in hindsight), we'd probably never be in this predicament in the first place.

The thing about learning from history is to ensure that we don't repeat the mistakes of the past. In 1996 Australia had 8% unemployment and government debt levels of around 20% of GDP (which at the time was quite high, but is quite low in comparison to other nations now). Despite the economic torpor of the time, the new conservative government chose to cut spending and aim for a surplus within a few years. The immediate result was predictable - the economy barely grew and unemployment increased. But as years passed the economy grew more strongly, unemployment dropped and the government began running regular, healthy budget surpluses. By the mid 2000s the Australian government was debt free.² Comparing Australia to the US has its problems, but there is no doubt in my mind that this conservative government (under PM John Howard and treasurer Peter Costello) did Australia a great favour through running constant, incremental contractionary fiscal policy. Not only did Australia manage to avoid going into recession in 2001 but it has also avoided recession throughout the GFC. The economy has expanded almost continually from about 1994 until the present and unemployment, once always lower than the US, is nearly half the US rate. There are certainly other factors involved (eg the resources boom) but even when those are factored in, there is no doubt in my mind that intelligent fiscal policy has provided Australia with a huge safety net to turn too once the GFC hit - PM Kevin Rudd instituted a stimulus package which has created the potential for economic overheating, a problem certainly NOT experienced by most western countries at this moment. The point I am making here is that Rudd' stimulus, on the back of over ten years of fiscal prudence and the retirement of government debt, was quite sustainable and probably saved the country from recession. Obama's stimulus, by contrast, was not, and will come back to bite.

If the US government institutes fiscal policy of the sort that I am suggesting, the result would be a sharp but short term contraction which, on the back of the current recession, would obviously be quite damaging. Nevertheless this is the harsh medicine that America must swallow if a) it wants to rebalance its fiscal state over the long term, and b) if it wants the government to not expand in its size. This last point can obviously change, and I would not be unhappy if the US instituted:

• A NHS-style universal health care system.
• Building enough renewable energy plants to exceed total US electricity demand.
• Massive industrial biochar production aligned with afforestation programs.
• Doubling public transport infrastructure
• More money into public education
• And other OSO-approved polices that would make me happy.

Of course I would not oppose such spending, but spending of this sort would probably double the size of the US government and for that to succeed without adding to the deficit, it needs to be accompanied by tax increases - tax increases which result in more revenue that is needed to pay for the spending increases. The issue here is not whether government spending should be expanded (I think it should) but whether a surplus should be run (which is absolutely essential). Given that the US hasn't as yet reached my own enlightened levels of social and economic understanding, whatever increases in government spending are enacted should always come second to the need for a fiscal surplus (or, more properly, the need for debt to be paid off over the long term which will, in the short term, require a reduction in the deficit).

<sup>1: MTS Report April 2010, Table 3, "Budget Outlays - current fiscal year to date": Department of Defense-Military $396,452 million, Department of Education $61,232 million, Department of Health and Human Services $503,984 million, Interest on Treasury Debt Securities (Gross) $224,414 million, Environmental Protection Agency $5,586 million, National Aeronautics and Space Administration $10,781 million, Total Outlays $1,998,847 million

2: Debt free here in a net sense. A bond market for government debt was still needed and still continues to operate. Government surpluses since the mid 2000s have been directed instead to a "future fund" which allowed government savings to eventually exceed debt levels. So Australia still had gross debt but no net debt - at least until the GFC hit and returned the government into net debt, although at a very low level.</sup>

Some predictions using real interest rates

My study of real interest rates has been continuing, though without any publishing on this blog due to data collection. There are some predictions though which I have decided to publish today.

I've broken up nations into four groups.

Group 1 - Plunging real interest rates. These are nations whose monetary conditions have dramatically changed over the previous six weeks to promote inflation. These nations are:

• Britain
• Argentina
• Brazil
• Iceland
• Switzerland
• Mexico
• China
• Russia
• Turkey
  

Now of these nations, the one with the lowest CPI is Switzerland, which means that the inflationary growth will not be as serious, while Turkey and Argentina already have high levels of inflation. High inflation levels are bad for an economy because they act to distort prices which, in turn, leads to more inaccurate "money direction" - the choices money holders have in spending or saving or investing or borrowing currency. This inevitably leads to a "peak" in growth, followed by a trough - inflation usually precedes a deflationary economic downturn.

Group 2 - Real Interest rates dropping moderately. These are nations whose monetary conditions have favoured economic growth over the previous six weeks.

• Japan
• Canada
• Euro Area
• Australia
• Ireland
• Spain
• Germany
• France
• Italy
• Sweden
• India
• New Zealand
  

While inflation may result from these monetary conditions such an increase is not likely to be serious. While these conditions do not guarantee economic growth they do act to either improve growth already occurring or to limit any contraction. Of these nations, Ireland is the only one with a contracting economy experiencing deflation, so it is likely that Ireland will experience only moderate contraction and more stable prices in the coming months. Conditions in the Euro Area are improving, which should affect the PIIGS in a positive way. While India's real interest rates have improved moderately, very high inflation continues to afflict them and there is evidence from my data to suggest that India is likely to have some form of economic contraction (ie either a downturn or lower growth rates) soon. Of the nations on this list, Japan and Germany, with price changes close to zero, are more likely to experience sustained growth.

Group 3 - Real interest rates increasing moderately. These are nations whose monetary conditions have favoured economic contraction over the previous six weeks.

• United States
• South Korea
• Poland
  

Again this is not a prediction of economic decline but a contractionary effect upon growth/decline already being experienced. I have collected more data on US CPI and interest rates than any other nation and the data suggests that conditions in the US are not improving. Growth in GDP for Q1 2010 was 3.2%, following on from 5.6% in Q4 2009, which shows that the Obama stimulus of 2009 has passed its peak and is headed on its way down. Real interest rates in the US declined considerably between July and December 2009. In fact "considerably" is too conservative a word to use - real interest rates declined from 5.7% to 0.62% over that six month period. The US would be in "Group 1" in December last year, which indicates that the US economy is beginning to slow down. Considering the speed of the decline and the growth experienced in Q4 2009 and Q1 2010, I would be very surprised if growth ended up exceeding 1.0% for Q2 2010 (which is now).

Group 4 - Real interest rates increasing substantially. These are nations whose monetary conditions have seriously deteriorated over the previous six weeks.

• Greece

Greece has suffered mainly from the market's fear of a sovereign debt crisis - and such a fear is not unfounded. With increasing austerity measures being put into place, Greece's economy looks set to contract - ie shrink - some time this year. Inflation in Greece is still running a little high (3.9%) but increases in bond rates have more than exceeded this amount. Inflation in Greece is likely to turn into deflation as soon as the economy begins to shrink. Growth in the Euro Area, though, is likely to moderate any Greek downturn (and also help Ireland stop its current economic decline).

And that's Stephan Bibrowski in the picture.

The Initial Reaction

From here. I've always felt that the "true believers" of the Right Wing represent about 20% of the population, which was why Bush's approval ratings never dropped below 20%. So it is only reasonable to view the "angry" result as being that of these "true believers" who think that the passing of the Health Bill is the beginning of the People's Democratic Republic of America headed by Chairman Obama.

This is only an initial reaction, however. How people will view this bill will change as time goes by, and I'm not ruling out any movement towards the negative.

---

Posted this at Reddit

Here: Someone was complaining (rightly) about Krugman's latest column.

There's something to be said for the axiom that any problems caused by cheap money in an economy cannot be solved by cheap money in an economy.

I have no problems with Keynesian stimuli - I just think it should be sustainable.

Here in Australia, our government completely paid off public debt, so when the time came to spend up big to kick start the economy, it was sustainable.

In the US, however, big spending stimulus occurred when public debt was already at absurdly high levels. In effect the government had been "stimulating" the economy for most of Reagan and most of Bush 1 and Bush 2. At some point the "chickens have to come home to roost" and the debt must be paid off by running fiscal surpluses (which occurred under Clinton's second term but was nowhere near enough). The longer you leave paying debt off, the harder it will be to do and the more negative effect it will have upon America.

BTW This is not like Hoover and the great depression. Keynes rightly argued that governments should run fiscal surpluses during a depression. Hoover tried to limit government spending because running large deficits was not really a policy that had been tried before. There was certainly no huge debt already there preventing Hoover from doing it.

Fast forward to Obama and the general consensus amongst more left-leaning economists like Krugman is that the stimulus was justified and it worked. I disagree, mainly because of the fact that the US has accrued too much debt already. Had Bush 2 continued Clinton's surpluses it is likely that the federal government's fiscal position would be such that Obama's big spending would be sustainable and would not come back to "haunt" America. But since the debt was already too big, the only option is austerity (the government paying off debt during a recession).

Fascism and Communism

One of the more unedifying sights in the last twelve months has been American conservatives branding Obama as a Nazi, a Fascist and a Communist. Those of us who know something about history naturally scoff at these things, yet an entire section of the American population seems to think that the three isms - Nazism, Fascism and Communism - are pretty much the same thing. Strangely enough this realisation has only come about in the last few years - due mainly I would argue to a political discourse so crass that labelling your opponents as "Fascist" or "Nazi" or "Communist" or "Socialist" has become the norm (a process which I think will result in the sort of conservative violence already experienced at Oklahoma City and the Atlanta Olympics, both of which were perpetrated by government-hating conservatives).

Fascism and communism have been studied for decades and, while the two share similarities, they are different to one another. Fascism always places political power into the hands of a dictator. By contrast, Communism is run more by a committee. Both are non-democratic. When it comes to relationships with business, the two are very different. Fascism has always been supported by a nation's rich and powerful. Industrialists and business owners were supportive of the Nazi rise to power, they were supportive of Mussolini in Italy and they were supportive of Franco in Spain. Communism, of course, opposed the wealthy class and any form of private enterprise. The Soviet Union gradually removed all forms of private enterprise from Russia and replaced it with government owned and operated factories and farms. Private property under fascism was respected (and the greater the price of the property, the more respect it gave to the owner), whilst under communism it was relegated only to personal belongings (stealing was, after all, an offence in the USSR).

The biggest difference between Fascism and Communism was seen during the Spanish Civil War. Franco and the nationalists were supported heavily by Nazi Germany and Fascist Italy during this war. Those who joined up on the anti-Fascist side and who supported resistance against the Nationalists were called the Republicans. Who sent guns and troops to fight against the Nationalists? One nation was Mexico, while international brigades (the flag of which is to your upper right) existed for any anti-Fascist from overseas who wished to fight for freedom. Oh, did I mention that the Soviet Union was right behind the anti-Fascist effort too? Hardly something a fascist government would do. But then again, the USSR was not fascist.

This is not to say that the Soviet Union wasn't guilty of oppressing people. George Orwell, the famous author (and, let it be said, a socialist), fought against the Nationalists during the Spanish Civil War. He himself criticised the Soviet Union for being just as bad as the Nationalists, an act which the Soviets didn't appreciate.

Communism is not Fascism. The two are very different. But they do share one thing: they have oppressed people. And Obama is neither a Fascist or a Communist - he's just a liberal politician.

Obama wins Nobel Peace Prize???

Huh?:

OSLO — President Obama today won the 2009 Nobel Peace Prize for "his extraordinary efforts to strengthen international diplomacy and cooperation between peoples," the Norwegian Nobel Committee said.

"Only very rarely has a person to the same extent as Obama captured the world's attention and given its people hope for a better future," the committee said. "His diplomacy is founded in the concept that those who are to lead the world must do so on the basis of values and attitudes that are shared by the majority of the world's population."

Obama's name had been mentioned in speculation before the award but many Nobel watchers believed it was too early to award the president.

The committee said it attached special importance to Obama's vision of and work for a world without nuclear weapons.

"Obama has as president created a new climate in international politics. Multilateral diplomacy has regained a central position, with emphasis on the role that the United Nations and other international institutions can play."

This is ridiculous. Seriously.

UPDATE:

Redditors have gone crazy. Here are some samples:

• Let me say sincerely: WTF
• YO OBAMA, I'M GONNA LET YOU FINISH, BUT I JUST WANT TO SAY THAT MARTIN LUTHER KING JR WAS THE BEST NOBEL PRIZE WINNER OF ALL TIME.
• Fox News is gonna LOVE this
• Fox news will simply say, "Of course he's a communist. This award was given out by a communist country."
• Well there goes all the credibility that's left in the entire nobel-thing.
• Credibility? That hasn't been there since Yasser Arafat won it.
• Eh, at least it makes more sense than that Grammy that he won.
• Now he just needs that Super Bowl Ring.
• Stop the bitching, he won it because Sarah Palin is not the vice president.
• Norway/Sweden = Socialist. Norway gives award to Obama. Obama = Socialist
• My god, there goes my monocle!
• Take that Drudge, Hannity, Limbaugh, Beck, et. al. So tell me again how losing the Olympics was an international rejection of Obama?
• yes, award the Peace Prize to a guy who won't close Gitmo, sends more troops to the sinkhole that is Afghanistan, maintains almost all the Bush military, continues to send US tax money to Israel to pay for arms while watching American jobs flood away, but allows money-losing banks to award billions in bonuses paid for by taxpayer-funded TARP. What a guy. What. a. guy.
• It's good to see the Nobel committee moving on to winners of the US Presidential election. Remember when Al Gore won the peace prize for a slide show?
• No seriously, this isn't an article from "The Onion"?

In which the incompetent are rewarded by the incompetent?

Barack Obama is in the process of reappointing Ben Bernanke as governor of the Federal Reserve. This fact has led me to wonder whether Obama is either ignorant, a fool or an industry shill. There are no other choices.

Bernanke is one of the people responsible for the current crisis. As a member of the FOMC that approved injudicious interest rate lowering under Greenspan, he is jointly responsible for the property bubble which formed. I have argued that point here.

Bernanke has reacted to the crisis badly. First he didn't admit that there was a crisis and then, when the crisis was underway, argued that it was "contained". Again, look at the link above for the details.

Once he realised that things were bad, Bernanke, a student of the Great Depression, acted swiftly in increasing the money supply at a time when the money supply was tightening into deflation. This was not a terribly hard thing to do. Even I could've done it. In fact, since I was actually aware of the crisis years before Bernanke, I would've been able to take pre-emptory actions and done a better job. Yet it's Bernanke who gets the multi-million dollar salary while myself and others bang our heads against the wall in response to the stupidity of those who control vast sums of money.

So the question is - why did Obama not know this? Is he being shielded from reality by a bubble in a similar way that Bush was? Or maybe he has no idea of how economics works and thinks Ben has done a good job. Or maybe Obama is simply having his strings pulled by industry insiders. Whichever one it is is hardly encouraging.

I'm ashamed

But I laughed at this.

Damn lies

I rarely take in much of what liberal blogs say these days. Some of it is intelligent but some of it is laboured and narrow focused. I've made it clear here on my blog about concerns I have about Obama's stimulus plan and that pretty much puts me at odds with many progressive bloggers and econ-bloggers.

But I have to say, there is something like a magnitude of difference between progressive blogs say and what the "Faithful 20%" super-conservatives go on about. Reading their blogs is sickening as they go on about Chairman Obama turning the US into America S.S.R. with his terrible, horrible no good stimulus plan and how he is going to completely wreck the economy with it.

I have been warning for years about the coming crash. Moreover, I have clearly identified the main culprits of the crash as being the Republican Party and their policies under Reagan, Bush 2 and the congresses they controlled (either partly or fully) during the reign of those two presidents.

And just to prove how nice and bipartisan I am, I'll say clearly that George H.W. Bush wasn't much to blame for this, and nor will I say that the Gingrich inspired Republican Congress between 1994 and 2000 is to blame for this mess. Moreover I'll also point out that Democrats under Reagan who helped create the national deficit are to blame as well for being stupid.

But when you look at the big picture, the main culprits are the Republicans. The Republicans ran up huge budget deficits and engaged in tax cutting voodoo economics for most of the period 1981-2006.

So when Obama starts throwing money left right and centre, the super-conservatives suddenly become all economically righteous, throwing out their pathetic chests and rattling their dull swords as they predict dire consequences for such fiscally irresponsible behaviour.

Irresponsible? To be honest they're probably right. Yet to ignore their own party's role in creating the dire circumstances the world economy is in shows up their hypocrisy and blind partisanship. From now on, any drop in the sharemarket, any rise in unemployment, any contraction in GDP, any rise in bankruptcies, can all be blamed upon Chairman Obama and his hand picked politburo in the White House, rubbing their hands in glee at America's downfall.

Intelligent conservatives would be more circumspect. They would pick holes in Obama's plans while acknowledging the damnable role that the GOP had in creating the mess in the first place. They would criticise the president without resorting to insults - not least until the president's poor record demanded it (something that progressives did to Bush).

And the sad thing is that, if things get really bad, we can probably begin to expect violence from these people. Even from some who call themselves Christians and who have drunk the super-conservative Koolaid. And they would participate in the violence with a clear conscience, motivated by the knowledge that they are fighting evil and protecting their liberty. Such is the beginnings of terrorism.

Ain't gonna happen

Part one:

President Barack Obama plans to cut the U.S. budget deficit to $533 billion by the end of his first term by increasing taxes on the wealthy and cutting spending for the war in Iraq, according to an administration official.

Obama wants to reduce the deficit because he’s concerned that over time, federal borrowing will make it harder for the U.S. economy to grow and create jobs, said the official, speaking on the condition of anonymity. The deficit Obama inherited on taking office last month was $1.3 trillion. The administration next week is to release an overview of its budget proposal for the 2010 fiscal year, which begins Oct. 1.

Part two:

U.S. Secretary of State Hillary Clinton urged China to continue buying Treasury bonds to help finance President Barack Obama’s stimulus plan.

The two nations’ economies are intertwined and it wouldn’t be in China’s interest if the U.S. were unable to sell its government debt, Clinton said in an interview with Shanghai’s Dragon Television today. China knows it needs a healthy American economy as its biggest export market, she said, adding that the U.S. must take “drastic measures” to stimulate growth.

“We are truly going to rise or fall together,” Clinton said. “By continuing to support American treasury instruments, the Chinese are recognizing” that interconnection.

America: the land of (pipe) dreams.

Back to normal - everything is stuffed

For my international readers, you may have noticed a slight drop in the quantity and (let's face it) quality of my blog posts lately. This is because Australia in January is pretty much closed down. Because we live on the upside down part of the Earth, the seasons here are the opposite of that in the Northern Hemisphere. This means that we have Christmas AND summer holidays at the same time. Add to this the fact that our convict forefathers decided to arrive on January 26th 1788 and we basically have a 4-5 week period of nothing but hot weather and holidays.

If anyone wants to invade Australia, do it during early January.

But now that Australia Day is over and done with, the kids are about to go back to school and Australia returns to normal again. My son is about to enter 3rd grade (the equivalent of "the third grade" in America) and my daughter about to go into pre school. This means that I should be able to blog better and more often.

Anyone who has been perusing the economic news lately knows that there have been some massive job cuts announced - not just here in Australia but all over the world, especially in the US. 2008 Q4 GDP will be released this Friday and I am expecting a big drop - at the very least a contraction of 1.0% or more.

I also remain convinced that the US Dollar is ripe for a crash, even though the currency has firmed in recent weeks. As I have pointed out before, there is no real reason why anyone would want to hold US Dollars at the moment - treasury yields are ultra low, the US Property market has popped and the Share Market has crashed. While the rest of the world isn't too wonderful economically either, the US is the centre of the storm and will suffer more and suffer longer than the international community. Although I am not a financial advisor (yet) I would counsel investors to invest in Euro, Yen and precious metals and sell off their US assets before the crash gets underway.

The upcoming dollar crash will be the final "event" that will plunge the US and the world into the second great depression. High oil prices (2004-2008), the bursting of the subprime bubble (2006), the credit crisis (2007-2008), de-leveraging (2007-2008) and the Bear Market (2008) were all previous events that have hit the US in the last few years.

Despite my natural relief that Bush is no longer occupying the White House I have little confidence that President Obama will be able to achieve much in the first 2 years in terms of repairing the economy. Big spending seems to be the only solution and this will frighten the markets further considering the sheer amount of debt the Federal Government has already gotten itself into before the credit crisis hit - and this fear will put downward pressure on the dollar.

Once the dollar has crashed, the only recourse will be to follow the policies outlined in The Washington Consensus, which will inflict upon America harsh austerity measures. A dollar crash will force the Federal Reserve to raise interest rates and force the Federal Government to rein in spending - the very opposite of what is currently being applied (low interest rates and lots of deficits spending).

While a part of me remains Keynesian, the Austrian part of me argues that policies and practices that created the problem in the first place should not be used to solve the problem. in other words, if America's situation was caused by unrestrained spending and injudicious borrowing, then why assume that more spending and more borrowing will solve the problem? Balance needs to be restored - and that means that America needs to save more and borrow less, to produce more and to consume less. It is therefore more important for China and Japan to stimulate domestic spending in their own countries - a process that will increase US exports and reduce imports to the US - than for the US to indulge in more spending.

This is not to say that some deficit spending may be required in the US - just not as huge an amount that is being touted.

But, the dollar will crash and no one listens to me anyway. It'd be nice if I could make money out of being right.

Hope and Bad Art

I saw these pics as I surfed the net the other day. Some I like. Many make me sick:

Not too bad. Bit of a stereotype - but he does play basketball though.




Blaggh! (Check out the unicorn!)




I like this one. Biden as Robin is hilarious.




No comment.




Actual college aged Obama pic.




No no no no...




Rainbows, unicorns, nudity. This is sickening.




For anyone who noticed.





My Favourite - Cheney as The Big Lebowski. "The Bums will always lose!"

Rod Blagojevich

Royters:

The governor of Illinois, Rod Blagojevich, was arrested on Tuesday on "staggering" corruption charges that alleged he tried to sell the U.S. Senate seat vacated by fellow Democrat, President-elect Barack Obama.

The governor also tried to extort the Chicago Tribune, one of the country's leading newspapers, into firing editorial writers who were critical of him, federal prosecutors said.

While Obama has long distanced himself from the governor of his home state -- who has been under investigation on other issues for years -- Blagojevich's arrest was a likely embarrassment to the president-elect. Obama said he was "saddened and sobered" by the news and had not been aware of the alleged efforts to sell the Senate seat he vacated.

The case shined light once again on old-style corruption in the grimy caldron of Chicago politics from which Obama emerged.

• As someone who would probably vote Democrat if I were living in the US, this piece of news is sad but not unexpected.
• All forms of political corruption must be removed from political parties.
• This is not a hit piece by a biased media.
• Given the nature of the allegations, Obama's relationship with Blagojevich must be investigated. Though I do not think Obama has any real links to the guy, if he does and if he is also involved in corrupt behaviour, then he should step down and let Biden become president.
• I'm sure all the right wing blogs are buzzing over this news. They should be.