Thursday, February 28, 2013

To Understand the Macro, Study the Micro


You can't get your mind around $17Tril of national debt.  You can only try.  Make it the equivalent of something you do understand.  Say, a new Lexus LS.  Starts at $72K but you probably want some frills, so make it $80K.  The debt would be 212,500,000 new Lexus LSs.  At last year's production numbers, that would be more than 25,000 years of production.  See?  Told you.  You just can't make these numbers real.

But you can understand a new chair.  If you knew you could buy a nice chair for $400 but your local dealer wanted $1,450 for one in inventory, you probably wouldn't buy it.  If you did buy the more expensive one, a consequence would be that you wouldn't have as much money for the rest of the stuff you want to buy, assuming a finite budget.

Segue to the national debt.  If it matters to you, you might ask "How the heck did we get there?"  We can't quite explain it.  There are all kinds of anomalies, like missing and misappropriated funds in the many billions of dollars and programs that do absolutely nothing, plus the ordinary cost of running the gummint.  Too much, too much, too darn much.

But remember that chair?  

The VA maintains a Vets Center in Eugene, Oregon.  (Full disclosure: I receive excellent PTSD counseling there for which I am grateful.)  They are a microcosm of why we are in $17Tril in debt.

Three years ago the Clinic had a year-end budget surplus, something common to many gummint agencies.  Stim money, maybe;  I don't know.  True to the maxim, they had to "use it or lose it."  So what did they do with part of it?  They bought some chairs.  

18 chairs, to be exact.  Individual chairs, black leather and brass-button-tufted.  At a cost of $1,450 each.  

That's $26,100 of your tax money for new chairs at the Vets Center.  Since the gummint borrows about 42% of what it spends, that translates to borrowing about $11,382 to buy those chairs.

And where did the new chairs go?  Prior to their recent move, some of the chairs were in employee offices and some were in a group counseling room, where the chairs they replaced were shoved to the back of the room.  

In the new location, all of the new chairs are in employee offices.  Not for the employees to sit in, mind you.  They've already got nice desk chairs and besides, the new chairs are kind of uncomfortable and they don't have casters.  No, they're in those offices for clients like me to sit in when we visit.  None of the new chairs are in the new group counseling room.

And where did the old, but perfectly good, chairs go?  Here and there, I suppose.  Some remain.  Things can get lost in a move, y'know. 

One small office in one small city;  $26,100 for new chairs that they had to buy or reduce their next year's funding.  Now multiply that kind of waste and abuse by all the budget items in all our gummint offices and installations in the world plus all our aid and give-away programs.  It's a lot of money that we didn't have to spend.  Your money.

No, you really can't grasp $17Tril of debt.  That's the macro.  But you can understand spending money on chairs.  That's the micro.  Imagine that the macro is made of a gazillion overpriced chairs that you partly paid for and partly borrowed for.  If you can understand that, you're on the way to understanding the macro, and that's what this post is all about.  

No one is minding your money.

* * * * *

"What did the taxpayers get out of the Obama stimulus?  More debt.  That money wasn't just spent and wasted - it was borrowed, spent, and wasted."
--Paul Ryan

"The fact that we are here today to debate raising America's debt limit is a sign of leadership failure.  America has a debt problem and a failure of leadership.  Americans deserve better.  I, therefore, intend to oppose the effort to increase America's debt."
--Barack Obama

"You know those movies where the people in the audience are screaming, 'Don't go in that door!' because you know the killer is in there?  Well, it is the same thing with this debt.  We know how this ends."
--Marco Rubio


Wednesday, February 27, 2013

The National Debt... and Us


I meant to post this a couple weeks ago.  I just discovered that I saved it instead of publishing it.  Oops.

------

I can't ignore the debt issue any more.  I've tried but it just keeps coming back up, so here goes.

We can't even agree that the national debt, which I'll just refer to as "debt" here, is much of a problem.  I've long had the nagging feeling that it is a problem but I haven't cared enough to find out.  Until a couple weeks ago, that is, when I picked up Glenn Beck's 2010 book Broke.  It is an eye-opener - if he is to be believed, which I do - that goes into gruesome details about national debt and deficits from George Washington to Barack Obama.

But wait, I can hear you say.  Glenn Beck?!  Yes, I know, right wing kook and anathema to the left so we can all just ignore him, right?  Well, as we hear so often, not so much.

Not being an economist or otherwise intrigued, I had no pressing interest (no pun intended) in the national debt.  I didn't understand it and my life was going just fine, thank you, debt or no debt.  Or so I thought.

I won't try to summarize Beck's book here.  I can't do it justice.  It's a shocker, to the extent applied economics can shock us.  But I wasn't really alarmed until the last couple of days, when three things got my attention and suggested to me that things are bad and the country is in big trouble.  Really, really big trouble.

Thing #1:  The gummint announced that it is "borrowing" from federal pension funds in order to pay current debt.  No, really. 

From FedSmith, Jan. 13 last:
"Treasury Secretary Timothy Geitner said that the government has begun borrowing from the federal employee pension fund (the G fund) to keep operating without approaching the debt limit. ... The move will free up $156 billion in borrowing authority while the debt limit debates proceed in Congress."
Treasury Secretary Timothy Geithner said that the government has begun borrowing from the federal employee pension fund (the G fund) to keep operating without passing the approaching debt limit.
The move will free up $156 billion in borrowing authority while the debt limit debates proceed in Congress.
- See more at: http://www.fedsmith.com/2013/01/15/government-will-borrow-from-federal-employee-pension-fund-to-avoid-passing-debt-limit/#sthash.Kok76Xzt.dpuf

Treasury Secretary Timothy Geithner said that the government has begun borrowing from the federal employee pension fund (the G fund) to keep operating without passing the approaching debt limit.
The move will free up $156 billion in borrowing authority while the debt limit debates proceed in Congress.
- See more at: http://www.fedsmith.com/2013/01/15/government-will-borrow-from-federal-employee-pension-fund-to-avoid-passing-debt-limit/#sthash.Kok76Xzt.dpuf
What could go wrong, federal pensioners?  (Full disclosure:  I am one.)  And don't worry, he's promised to pay it all back.  Crossed his heart and everything.  Yes, he's the same guy who didn't declare four years of taxable income, but he's not lying this time.

Thing #2: On Jan. 17, Paul Krugman wrote a column titled "The Dwindling Deficit" in which he told us that the deficit (not quite interchangeable with the debt, which is accumulated deficits, but close enough for now) is no big deal.  What he actually said, inter alia, was this:
"The budget deficit isn’t our biggest problem, by a long shot. Furthermore, it’s a problem that is already, to a large degree, solved."
To further quote the article, "Huh?"

Thing #3:  The Senate is holding its confirmation hearings on the nomination of Jack Lew to SecTreas.  Who?  Lew.  Who knew?  That's enough of that.  

JackieL is the outgoing director of the budget.  We're supposed to have a budget, right?  Yep, as required by the Constitution.  Thing is, we haven't had a budget under Obama in the past five years.  So, lacking a budget, what has Lew been doing to justify all the money and prestige that his job entails?  Nothing, really.

Lew also failed, for the entire occupancy of his office, to respond to annual warnings of Medicare funding problems.  No big deal to you, maybe, but a response is required by law when we're, say, underfunded.  But Medicare isn't the issue here.  Lew is.

Lew also claimed that his one budget proposal would get the country to a point where "we're not adding to the debt anymore."   Except for one little thing:  He didn't include interest on the debt which, if included, would "contribute to a growing debt."  (Thank you, Fox News)  That's not just an "Oops, I forgot".  That's a lie.

According to the same Fox News story:   "I trust his judgment, I value his friendship. I know very few people with greater integrity," Obama said. The president stressed Lew's experience in both Washington and the private sector, and particularly his role presiding over "three budget surpluses in a row".  (My emphasis.)

What the Prez didn't say was while in the Clinton-era budget office.  Three out of eight plus zero out of four.  Have we completely lost the meaning of irony?  Of proportion?  Of shame?  Of qualifications?

-- Update from six minutes ago :  Jack Lew is in as TimmyG's replacement.  Did I mention that JackieL got $900K in bonuses as COO of Citigroup, shortly after Citi received $45Bil in TARP rescue funds and right after it lost $27.7Bil and 90% of its value?  Hope that doesn't happen to us, don't you?  

The best predictor of future performance is past performance. 

Oh yeah, there's a fourth thing.  Remember that last year some credit rating services lowered the US credit rating a notch and have threatened to do it again?  And last month those services urged Obama to shrink the deficit?  Makes sense, right:  "Here's what you have to do to maintain a good credit rating, Mr. President." 

Only, um, he completely ignored the advice and our debt continues to increase at $100B a month.  So add that to the list of good advice not taken, like that of the Simpson-Bowles Commission.  

You remember Simpson-Bowles, don't you? 
"The final plan, released on December 1, 2010 reduced the federal deficit by nearly $4 trillion, stabilizing the growth of debt held by the public by 2014, reduce debt 60% by 2023 and 40% by 2035.  The deficit would be eliminated by 2035."  (Thank you, Wiki.)
 Simpson-Bowles never made it ouf committee for lack of a super-majority;  it was 11-7 in favor.  Despite having created the commission, the Prez never got behind it and hasn't implemented its recommendations.  An opportunity squandered.
  
Lots of good advice available, but none taken.  Administration lapdog PaulieK hated it.  (Hint:  That means it probably deserved to be heeded.)  Your voice and mine were never heard.  Poor us.

* * * * *

"The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy."
Milton Friedman

plus ca change, plus c'est la meme chose

Debt ... And Doubt


There are no political coincidences.  Let's start with that. 

Paul Krugman tells us that government austerity doesn't work.  You know PaulieK, right?  He's an economist, Obama adviser and Nobel Prize winner.  He has major cred with the administration, mostly because he trumpets that debt don't mean nuthin' and what the country needs is (gasp!) more government spending and more debt.  He's a Keynesian or, possibly, a Neo-Keynesian, or maybe an Obamian or a Neo-Obamian, though the difference is hard to track.

PaulieK isn't the only economic voice, though.  The late Milton Friedman was another.  MiltieF opposed Keynesian government policies, favoring the free market and minimal government intervention.  PaulieK is the stalking horse for Obama economics, MiltieF was that for Ronald Reagan.  Polar opposites, if anything.

"I’ve argued that worries about the deficit are, in fact, greatly exaggerated"  That's PaulieK on Jan. 3.  He says high unemployment is the real problem, not deficit spending, so the government needs to borrow more and spend more to get us out of our fiscal mess.  (BTW, wasn't The Stim supposed to cure high unemployment?  Just sayin'.)

The "coincidence":  On Jan. 31st last, the Tribune Washington Bureau ran the LA Times story "U.S. debt woes are not so dire."  "... (D)ebt is not even the country's biggest challenge, most experts say (my emphasis), and certainly it's not the most urgent."

So PaulieK says something and then Tribune runs an "experts say" story.  Coincidence?  I think not.  A lot more like propaganda. 

Let me translate:  "Don't you worry your little heads, citizens.  People Who Know Stuff will take care of this money thing."

Only they won't.  They are making it worse.  They are ruining us.

Friedman = Free market, less government.  
Krugman = More government controls and deficit spending, necessarily      bigger government.

Compare the Reagan/Friedman eight years (1980-1988) to the Obama/ Krugman 4 years (2008-2012).  (Thanks, Wiki):


File:USDebt.png

Some increase during the prosperous Reagan/Friedman years, soaring debt-to-GDP increases in the lethargic Obama/Krugman years.   Take a good look, factor in any other data you want, and decide for yourself whose approach works better, Friedman's or Krugman's.
"The only relevant test of the validity of a hypothesis is comparison of prediction with experience."
Milton Friedman.
You heard it here first:  We're not going to repay the national debt and states with massive debt aren't gonna pay theirs either, nor will many of their cities.  At least not with the value they borrowed.  Nope, ain't gonna happen.  Ask City of Stockton bondholders.  There simply isn't enough money or time.

There are going to be new rules, like Hillary's "re-set" with Russia.  We're going to see something like that, only with money.  It has already started.  

Remember the lenders - pensions and such - who thought they held secured debt from GM and Chrysler?  Well, quelle surprise, they didn't.  The Prez's minions made up new rules.  The unsecured unions (and some others) got paid and the secured lenders got re-set... from billions to zero.  Sorry 'bout that, pensioners and bond investors.  

Oh, there will be self-effacing explanations.  One will be "We just couldn't keep going on that way."  And no, we can't, but we know that already, we don't have to wait to find out.

And the gummint won't call it an actual bond default.  They can't.  Much like the prez's flip-flop political views, our debt repayment schedule will "evolve."  BTW, foreign nation creditors will be exempt or otherwise made nearly whole. It's just our wealth that needs to evolve. 

Let me recycle my 2009 quote from the French finance minister:
 "If the problem is an excess of debt, the cure is not adding more debt, whether that debt is public or private."
* * * * *

"If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand."
Milton Friedman