Practice Good Theory

Falling off a roof, I'd rather have a soft landing than a hard one; but, does the metaphor translate to economies? Example: Imagine two countries -- Redland and Blueland -- both with  unemployment around 5%. Next, imagine unemployment shoots up to 14% in " Blueland " while " Redland " has a far milder rise to 8%. However, the rate of unemployment comes back to 5% much sooner in Blueland, while it lingers at a 8% for a while in Redland. Is there any reason to think  Redland is better off in this example? Even if we accept the notion that governments can and may engineer a soft-landing, it is far from clear that a shallower recession is a good thing, if it means extending its duration . Think of individuals: Would you rather be unemployed for 1 year or for 3 years? It's a no-brainer! A laid-off dad from my son's school told me his savings could last him six months before he starts getting desperate. For him, a short sharp downturn would ...

Background: This is the third post in a series looking at U.S. government debt. In previous posts I considered the official U.S. Federal debt and the "off balance sheet" liabilities for "entitlements" . In summary, the debt owed to public is about $10 Tr. and the amount owed on entitlements will be about $6 Tr. for the next 12 years (3 presidential terms). Together, this is larger than the annual GDP of the U.S. And there's more: Besides these, the U.S. Federal government has taken on other obligation. For example, Fannie and Freddie guarantee about $5 Tr. worth of mortgages, and even though the government long insisted that it was not liable for these, when push came to shove the government stepped in to support these "government-sponsored entities". With these guarantees, one can know the maximum possible liability, but the actual liability is difficult to estimate. Thankfully, the actual liability will be lower . For instance, Fannie and F...

Low savings rate:  The " personal savings rate " was  10% in the 70's; but, it fell to a low of 2% recently. "Wealth Effect" / Confidence in the future: Take a closer look at the chart. The savings rate rose  a bit in the 1970s, compared to the 1960s. The 70's were an economically-troubled decade. When people feel less certain about their future, and when they feel their wealth has been eroded, they try to save more. This is a rational response. Perhaps this explains the slightly increased savings rates of the 1970s'.  The chart then shows a drop in the savings rate starting in the early-1980s. Could this be because people felt better about their wealth and about their future? This second chart also shows Personal Wealth as a multiple of current GDP. I chose this as a very rough proxy for how wealthy the "average person" feels. In the early 1960's wealth was over 3 times GDP ( see the right-side axis ). By 1975, wealth had dropped ...

In a previous post , I looked at the U.S. Federal debt. In this one, I look at "unfunded" liabilities for "entitlements". Some people unfunded liabilities for entitlements by assuming an "infinite time horizon" ; such estimates are  over $50 trillion . The trustees themselves use a 75-year horizon, and come up with lower numbers, which are still mind-boggling: around $19 T . This chart from my previous post shows that the U.S. Federal debt is $10 trillion, if one excludes the $4.5 T officially owed to "Trust Funds". So, the  $19 T (the 75 year estimate) is twice what the U.S. government owes on everything else. Trust-funds are an obscuring fiction:  Readers here know that the "entitlement trust funds" are an accounting fiction. About 30% of the costs of entitlement programs are already funded from general funds, not from the payroll tax (roughly 10% is "interest" the government pays on the "trust funds" and abo...

In 2011, payroll taxes were 13% of wages instead of the usual 15%. Obama wants to reduce it to 12% for 2012. I think this is stupid, short-term thinking. I'd be happy to see payroll taxes stopped entirely if the system is being wound down.  We could pay existing retirees from general taxes; pay people near retirement some amount too; phase it out somehow or the other... but it makes no sense to keep the whole system in place and merely take in less taxes. Cut spending stupid:  If we're not cutting spending, reducing taxes simply means more government debt. Essentially what the government is doing to the average wage-earner is saying: "Keep an extra $1,000 every year, and we'll take on an extra $1,000 of debt in your name." I do not want that. First cut the spending! If the government comes up with a credible plan to cut spending over the long term, I wouldn't even  mind a short-term tax hike. I will not cheer lower taxes today when it means higher taxes t...

The Daily Show Get More: Daily Show Full Episodes , Political Humor & Satire Blog , The Daily Show on Facebook ( Link, in case the video above does not play ) In the video above, the Daily Show slams the Fed for giving banks $7.7 trillion in secret. This is a gross misrepresentation that started with a shoddy Bloomberg story and was later echoed elsewhere in the Blogosphere. Simply put, the Fed did not lend anywhere near $7.7 trillion . It was closer to $2 Trillion. Secondly, this total was widely publicized at the time. (What was kept secret was the details about which banks got funds and how much. Everyone knew the details were not being disclosed, and some politicians were quite vocal asking for the details.) The Fed responded to Bloomberg's article, and Bloomberg says they "stand by their reporting", but the details of their clarification show that they were at least guilty of writing in a way that readers might easily be misled. As much as I woul...

Reading von Mises a while ago, I was surprised to see him speak against the Quantity theory of Money, but what he said made a lot of sense. A recent Facebook comment sent me back looking for the source, and I decided to blog a few choice quotes, because others may find it interesting. My summary of von Mises's position is as follows: The supply of money is an important factor in its value. This is the element of truth in the Quantity Theory However demand for money is the other factor. The quantity theory gives short shrift to demand for money. (One must look to individual decision-making processes and their objective context to understand the demand for money. One cannot start with the aggregate demand for money.) Even if supply were the only factor, it is wrong to assume the value of money will change in direct proportion to the change in supply It is also wrong to assume that an increase in supply of money changes all prices generally and similarly A good the...