Hey, we got an email worth sharing:
Subject: Miss Your Posts
It’s been about 50 years since I studied macroeconomics, so perhaps a lot of theory has been changed. I have not heard any national politician say anything that would indicate that they have any knowledge of the subject. Does knowing anything or admitting to knowing anything disqualify one from national office? The general public certainly knows precious little. Can any of you tell me which members of Congress appear to have any qualifications in economics. Heck, do any of them know the difference between the ideas of Keynes, Hayak and Pigou? Besides a magic wand, do you have any good ideas about what we should be doing.
Thanks for the email, FC. I suppose it is time to share a little bit about why I haven’t blogged much lately.
First, economic theory hasn’t changed all that much in 50 years. Yes, theories have been refined and economists understand a whole lot more now. Trying to fine tune the economy as Kennedy, et al did in the ’60s would not be tried today (except in China, of course, which somehow seems acceptable and miraculous by the credulous). But economists remain woefully oblivious when it comes to refining other theories for current understanding. Take the fact that people are not homo economicus- that is, people are not wholly rational even when it comes to their own best interest. This fact is still widely ignored because it is both inconvenient to many theories and inconvenient for simpletons to understand. Economists seem to have fallen to the level of politicians, relying on quips, phrases and half-truths to debate instead of rigorous logic. Even 70 years later we still have a raging debate between Keynesians and Hayekians, neither side seemingly able to admit anything useful from the other side, despite there being much. So yeah, economics is better, but not great. It seems as if some sort of unified theory is just not within the mental capacity of thinkers today, despite such being an obvious truth to me.
I can’t tell you which members of Congress appear to have any qualifications in economics. To me, none appear to have a rational grasp of the field. From time to time, I get to meet many members in small rooms, sometimes as few as a dozen people and the Representative. They put on a good show and speak convincingly, just like any good salesperson, but to a careful listener they are still just campaigning. Do they really understand anything other than politics? I doubt it, and it saddens me.
I was born an optimist and find myself playing the role of curmudgeon. Frankly, curmudgeon is easier to play, but not nearly as fun. It is down right depressing to be a mid-30′s “Debbie Downer“. I wanted to blog about finance and economics- something I am passionate about and enjoy greatly- and found that most often I was tearing down an idea instead of building something. While I can easily and swiftly point to flaws and holes in ideas, it isn’t something fun and uplifting to write about. Sort of like walking around without a smile- it’s just not a great way to go through life.
When I look around, I see problems which are intractable not because the solutions escape us, but because greed and idiotic adherence to flawed ideology destroys any rational problem solving. I have plenty of rational, realistic solutions- but no one listens to such ideas (from anyone) because they are too busy being mad that our President is a Muslim, that the world doesn’t need banks, that global warming is a farce, that taxes are too high, debt/deficits don’t matter, that cold water boils faster than hot and … You get the idea. It feels as if there is currently a level of national insanity- or at least enough anger to override logical thinking. What I’d like to know is, how is this different from other times in history? Was the nation seeming insane in 1977? 1969? 1933? 1862? Will this pass (my optimistic side says definitely yes) or will the empire destroy itself unnecessarily (it might, it has to someday, but we have survived conditions worse than now, it doesn’t seem right to go down unnecessarily premature and voluntarily)?
I have also been reluctant to comment on current market conditions simply because much of it seems to be irrational. I see bubbles, mini-bubbles and speculation everywhere. The Depression wiped out speculation (particularly leveraged speculation) in financial markets for decades. Our two recent experiences, the tech and the housing bubbles and their aftermaths, seem to have encouraged even more speculation rather than extinguishing it. The 70′s bear markets also punished speculation. Have we entered a new paradigm or is there worse to come?
To appease the desire to be constructive, here are a few practical solutions, facts and thoughts destined for the dustbin:
- Taxes are low by historical standards. Very low. Currently, the Treasury is collecting just 14% of GDP in revenue. The average has been 18-20%. How can anyone realistically complain taxes are too high? Roughly half the current deficit is due to lower revenue, half due to increased spending of which most was supposed to be temporary. And the lower revenue part is in large part due to tax reductions meant to stimulative, which we might consider as ‘alternative spending’, I guess. Those are the facts.
- Longer-term, Social Security and Medicare are the budgetary problems. Social Security has some easy fixes, namely lifting in whole or in part the wage cap. No one pays the SS tax on income over $106,000, which you may be surprised to learn wasn’t always the case. Medicare is the real basket case. Unfortunately, the problem there is multidimensional:
- Too few workers supporting too many retirees. These demographics were known decades ago, but as is typical, the Boomer generation has voted in policy which directs benefits to them at everyone else’s expense.
- Obamacare solves little. It does not address the real cause of expensive health care, instead it treats some of the symptoms. Symptoms such as the fact that some 40million people can’t afford insurance; that many things we would like covered are often not; that people are often denied coverage at any price; and that we all want the best unlimited treatment and feel entitled to it. These symptoms are all a natural result of the disease which has something to do with non-transparent pricing (any idea what an xray costs before you get it?), poor incentives (do you care what the xray costs when the co-pay is just $25?; does an insurance company care if your xray is denied when by the time the complications arise, you probably work for someone else and have a different insurer? etc); and if I get sick, whether that is cancer, heart disease or a bunion, I want the best, don’t care what it costs and want someone else to pay for it! Obamacare does not address any of these root problems and it appears few want to. Until then, the Medicare situation is going to get worse.
- As Medicare gets worse, the policy prescription will almost certainly be to cut benefits and/or raise taxes, which will make us sicker and poorer as a nation still. The first change I would make is to raise the eligibility age for Medicare from65 to 67 to match the SS full retirement age. I would add a system where anyone over a certain age, say 62, could purchase coverage at a fair and actuarially true price. Eliminate Part D. Let the insurance and pharma companies figure out how to offer care economically. Let them compete with a non-profit. Remove the “economic rent” seeking that pharma and big insurers have legislated in place for them (which requires massive overhaul, but could be started incrementally).
- Inequity & Shared Sacrifice. There is something horribly wrong with today’s policy prescriptions. We are unfairly indebting future generations to benefit the Boomer retirees. Yet, the Boomers did faithfully pay into the system their whole lives. Where is the fairness to either side? It seems the country needs a sense of shared sacrifice to unify and make the big decisions. WWII gave us that for decades, but no one should have to go through that again. No wonder older folks decry aloud “what happened to my country?”
- Some sort of economic Marshall plan seems possible. Higher income taxes, but also a more neutral corporate tax policy (stop the subsidy, but encourage capital formation), public works such as infrastructure, true healthcare reform, a renewable energy “space race” complete with a new electric grid- all with definite quantifiable goals and an end in sight. If any normal family were faced with tough times, family members would pitch in. They’d do the yard work together, fix the drafty windows, give up a few luxuries, and the teens would help with the groceries until mom/dad could get a better job and sis got out the hospital. Is America a decent family or a dysfunctional one?
- I recommend paying for this economic Marshall plan with fully amortizing 20-30yr bonds – thus, they repay principal as well as interest, just like a mortgage. In conjunction with real entitlement reform, this would affirm both our commitment to practicality and confidence in our debt.
Thanks for a good opportunity to explain how I currently see things, FC. I will probably blog more again in the future, but I see no point in getting bogged down in depressing dead end discussions. I encourage the discussion in any way I can help, especially if it can be positive in nature. Any suggestions, questions and contributions are welcome (really!).
Brad Delong just posted about “Economics in Crisis” referring to current thinking in the profession. I think he’s right and recommend this article.
In case you missed it, Round 1 is here. A bit biased, but brilliant nonetheless. Enjoy.
Greenspan never saw a bubble he didn’t love. Well, apparently the Chinese feel the same way. This video expose will alarm you:
I’ve been terribly remiss in posting lately. January is the busiest month for me, with year-end wrap ups, regulatory filings and tax efforts underway. I’ll also blame the cold for slowing my metabolism down. Then again, it’s not like you were hanging on our every word here. Anyway…
Given than a New Year tends to bring thoughts of planning for the future with New Year’s resolutions and whatnot, I’m sharing an interesting piece on MBA’s from The Economist below. If the chart is to believed, many MBA’s actually earn less after acquiring the coveted credential. The article’s explanation? The author suggests those years spent in the program detracts from real world experience and career advancement.
We regularly hear certain types of commentators admonish tax policies. For example, I just read “the federal corporate tax rate is 35%, the second-highest in the world.” That statement is inevitably followed by this one “We’ll probably never know how many businesses never started up or took root in the US because tax rates are too high”. (For the record, these are real quotes but I will abstain from naming the source because although they are severely misguided on certain things, they do good, honest research on other things which I respect.)
This sort of corporate tax rate whining is ignorant and ideologically driven. It is ignorant because someone making this claim does not understand how taxes work. Alternatively, if they do understand this, then they assume their readers don’t and are using this informational sleight of hand to fool readers into supporting their agenda. In effect, their mantra is usually “anyway to lower any and all taxes, facts be damned, let misinformation fly, as long as taxes get lowered.” So, let’s examine the facts: Read more »
A short CNBC interview with Laurence Meyer, a former Fed governor.
Sorry for the link, but I couldn’t figure out how to embed the video.
Of particular note is Meyer’s honest admission, or I should say, assertion that the Fed is deliberately weakening the dollar and inflating the stock market. That sounds like desperatation to me, but the stock market has certainly obeyed by rising.
Here is what drives me nuts about international politics and politics in general: there doesn’t seem to be any no real, genuine, honest discussion between parties. Maybe behind closed doors, though there doesn’t seem to be evidence of it. If so, the people of the world are apparently deemed too stupid to handle the truth. Perhaps they are? Regardless, here is another example of blatant hypocrisy and lying. Read more »
The Fed’s big announcement yesterday has been dubbed “QE2” which short for “quantitative easing part II”. QE is Fed-speak for monetizing the national debt, otherwise known as “printing money”. It is not actually equivalent to printing money, at least until the program becomes permanent. But this post is not about the implications of QE. Rather it is about the strange trading activity around the announcement.
You see, QE2 has been rumored, floated, leaked, discussed, debated and reported on since before Labor Day. That the Fed was planning some quantitative easing was confirmed and well known before the actual announcement. Thus the only thing “new” in the announcement was the exact dollar size of the program, the exact timing and the wording of the Fed’s intensions. Even here, the size of the program was pretty well known by Wall Street. So, the financial markets expected this event with stronger than usual conviction in what it would entail. In fact, “everyone” claimed that QE2 was already “baked in to” expectations with traders having positioned themselves well ahead of the actual announcement.
Instead of a yawn, we got incredible volatility in yields. Bond yields typically don’t move much in one day’s trading session, but yields moved a week’s worth in just a few minutes. Why the surprise? To make matters even more interesting, that spike in yields reversed entirely and fell even further at today’s opening. I’m puzzled as to why the violent trading reaction took place. Have a look: Read more »
It is election time again, which means we get bombarded with so called facts. Mirriam-Webster says a fact is “something that has actual existence; an actual occurrence; a piece of information having objective reality; truth”. In other words, facts are not opinions and are not up for debate. For example, I recently provided bona-fide data debunking the claim that the “bailouts” and “stimulus” did not do anything. They most definitely did have a significant positive impact, as shown by evidence, yet that hasn’t stopped detractors from asserting their opinion that both programs “failed” or “did nothing”. You won’t hear politicians make an accurate statements such as “these programs may have worked, but they were not worth the cost in my opinion.” That statement I have no problem with; I do have a problem with saying something is black when it is in fact white. Alas, our politicians won’t let facts get in the way of a good stump speech. Read more »
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