"Angels can fly because they take themselves lightly." – G. K. Chesterton

Posts tagged ‘national debt’

What I’m Reading: I. O. U. S. A.

I. O. U. S. A. has a complicated historyFirst there was a book called Empire of Debt.  That inspired a documentary called I. O. U. S. A.  Then the movie-makers felt the need for a book based on the movie.  Hence we have the book I. O. U. S. A.

In the introduction, the filmmakers acknowledge the difficulty of making a movie about the national debt, a topic synonymous with boredom for most people.  Yet they also try to emphasize that to them, the topic is very important.  Our national debt is huge and getting bigger and has the potential to bring catastrophe to the nation.  Hence they made the documentary and later the book.  The result is a work that at once serves as a good introduction to the problem and an explanation of why the problem probably won’t be solved.

On the first point, the book gives a clear summary of the debt problem for economic novices.  The authors walk us through a series of fundamental points. (1) The United States government, like almost all modern governments, spends more money than it takes in, and thus has a debt. (2) We finance our debt by selling bonds to investors, and promising to pay a certain annual interest rate on those bonds. (3) Thus we are entirely dependent on a group of investors willing to hold our bonds for the interest rates that we’re willing to offer. (4) When national debts get too big, the investors get skittish about their interest payments and start to dump the bonds.  Once this happens, it starts a downward cycle that leads to national insolvency and economic disaster.

All of this ought to be common knowledge.  It’s a tribute to the lousiness of our national education system that many people don’t even understand what government bonds are or how we pay for our national debt.

From there the book proceeds to chapters on our “four deficits”.  Besides the national deficit, there’s the trade deficit, the savings deficit, and the leadership deficit.  These chapters are also laid out with admirable simplicity and clarity, yet the long-term consequences if we don’t deal with them are not neglected.  The book wraps up with a series of interviews with major financial players such as Warren Buffet, Paul Volcker, and alan Greenspan.

So that’s the good part of I. O. U. S. A.  What’s the bad part?  The bad part is that the authors never escape the boredom trap.  They offer thunderous declarations about how important the topic is and how we can’t afford to ignore it, yet their respondes smack very much of politics-as-usual.  For example, in the opening chapter we get this: the Comptroller General “has totaled up the government’s income liabilities and future obligations and concluded that our current standard of living is unsustainable unless some drastic action is taken”.  Yet two pages later we learn of the same individual’s response: “he hosts a series of luncheons and civic meetings around the country, which he’s dubbed the Fiscal Wake-Up Tour.”

So we’ve got luncheons.  We’ve got civic meetings.  And we’re calling it by the hair-raising, pulse-pounding name of “the Fiscal Wake-Up Tour”.  What’s next?  Founding a committeee?  Perhaps even creating a task force?  The national debt certainly is a huge problem.  It’s too big to be solved by the current political system.  If the problem is to be solved, we need some innovative approach to bringing it to public attention.  This book does not offer that.

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I Really Hate Economics

My first post on the hatred of economics was here.  My feelings towards economics have not mellowed in the two months since I wrote that.  I believe that the word “hate” is badly overused these days.  There are many things that I dislike but do not hate.  I do not hate my Congressman, Eric Cantor.  I do not hate dogs that bark in the middle of the night.  But I hate economics.  I despise it.

Right now our politicians are having a debate on the federal budget.  The United States is spending some trillions more than it is taking in.  Everyone agrees this is true, everyone knows that it’s projected to remain true, everyone agrees there are dire financial consequences if the government does not change course.  The Democrats want to change course with some minor tax hikes on the rich and some cuts in spending.  The Republicans want only cuts in spending.  If they can’t reach an agreement, horrible consequences will erupt on August 2, give or take a few days.  All the political action for the past year or so has been building up to this moment.  This is the big thing.

What most folks aren’t thinking about is the fact that this moment didn’t have to happen.  It was not very long ago–eleven years back, to be precise–that the federal budget looked great.  We had a balanced budget.  That meant no annual deficit at all. The government was taking in more money than it was spending.  Projections from the Congressional Budget Office–that’s the committee in Congress whose job is to project this sort of stuff–assured us that we were looking at smooth financial sailing for years to come.  Two trillion in surpluses was forecast.  It was sunshine and rainbows and roses.  What more could you ask?

Fast forward eleven years and here we are on the verge of financial catastrophe.  What went wrong during those eleven years?  This article tries to break down the disaster.  One way to break it down is by presidential administrations.  The government racked up 7 trillion in new debt under Bush and almost 2 trillion under Obama thus far.

Alternately, we could break it down by where the money went.  The wars in Iraq and Afghanistan cost 1.3 trillion and counting.  (And that’s not including the amount we’ll spend taking care of wounded veterans for the next eighty years.)  The Bush Administration’s tax cuts reduced federal revenue by 1.7 trillion dollars.  The Medicare Prescription Drug Bill cost us 272 billion dollars, while the stimulus package in March of 2009 wrapped up another 719 billion.

Various other little things cost various other amounts.  The bottom line, however, is that when you add it all up, it doesn’t bring you anywhere close to a explanation for all the missing money.  So where did the rest of it go?

The answer is that much of the money never existed in the first place.  That is to say, much of what the CBO projected eleven years ago never actually came true.  For one thing, there projections were based on the assumption that the economy would continue doing well.  It didn’t.  We hit a medium-sized recession in 2001 and a major recession in 2008.  Because of these, tax revenues were vastly lower than expected, and much of the projected wealth simply vanished.

Of course we can now say that the CBO should have known better.  They should have planned for recessions.  They should have been aware of the risks.  We all know the saying: “Hindsight is always 20/20.”  But while we quote that constantly, we should be aware that foresight is not always 20/20.  Foresight is highly variable, depending on the people who are foreseeing.

In the Book of Genesis, Joseph advises Pharoah to store up grain during seven fat years so as to be prepared for the seven lean years to follow.  One may question the wisdom of setting national agricultural policy based on dream interpretation–I don’t think anyone would want to do so today.  But one cannot question the wisdom of preparing in case of disaster.  As we see in Genesis, the Jewish people were aware of this almost four thousand years ago.

Yet here we are today and we’ve totally forgotten about that.  Our wise masters in Congress, on Wall Street, and in economics departments around the country can’t be bothered with the wisdom that’s endured for thousands of years.  They think they know better.  They think that their models, statistics, economic projections, and so forth can cope with any possibility, so there’s no need to be prepared.  The preparations are supposedly all included in the modeling and the projections, thus eliminating any need to think about them separately.

Yet, in reality, things fail to work out as the projections say they should.  And that’s another one of the many reasons why I really hate economics.

I can explain the Republicans

The current political situation has grown so absurd that it’s hard to know what to say about it.  I like neither party but, like most folks, I can at least understand the Democrats.  Until recently I was completely bamboozled by the Republicans.  I understand why someone might be opposed to tax hikes.  What we’re seeing now, however, is Republicans who are unwilling to consider the possibility of even a tiny tax hike on very wealthy people.  In previous iterations of the budget debate, the Republicans opposed tax hikes but understood the stance as one thing in a large negotiation.  They would be willing to trade their support for the smallest tax hike they could get in exchange for concessions on other topics.  This was basic common sense.  It was how politics worked.  Now they’re just not willing to do it.

Needless to say, that’s not the only instance in which the Republicans are being inexplicable.  Their behavior with regards to spending is equally strange.  In 1995 the Pubs caused a government shutdown during budget negotiations with Bill Clinton.  The public blamed the Republicans and they lost big in the next election.  For years after that, they never considered shutting down the government again.  When it was time to negotiate a budget, they simply negotiated like reasonable people.  Then, in spring of this year, they went right back to threatening a shutdown, as if they had forgotten the lesson of 1995.  In that case they folded at the last minute, but the episode was still bizarre.

There was also Paul Ryan’s budget, which effectively gutted Medicare as a safety net for the elderly and replaced it with a privatized system.  Anyone with clear thinking ability and knowledge of the American electorate should be able to see that this is political suicide.  The Republicans have already lost one House seat because of this and they’re likely to lose many more.  They know it perfectly well.  After all, it was only five years ago that George W. Bush’s plan to privatize Social Security not only failed, but also caused the entire Republican agenda to fail and lead to a plunge in Bush’s approval ratings, eventually costing the GOP the House, the Senate, and the Presidency.  The Republican leadership surely hasn’t forgotten this.  Why on earth would they want to repeat the same thing with Medicare?  I don’t like using the word “insane” because it’s one of the most overused words in the English language at this moment.  Most people simply call anyone who they disagree with insane.  But in a situation like this, an intelligent and honest person could legitimately wonder whether Republican leaders have lost their marbles.

I was thinking along those lines until a couple days ago, when I remembered this:

The point of this amusing little episode is that there are some circumstances where it’s to your advantage to make people believe that you’re genuinely nuts even when you aren’t.  The reason lies in the obscure branch of mathematics known as “game theory”.  In game theory you have two or more ‘players’ who each make a decision.  Based on the decisions of the players, each one gets a payout.  We assume that the players are seeking to maximize their payout.  The most famous scenario in game theory is the ‘Prisoner’s Dilemma’, in which both players, by trying to get the best for themselves, earn a worse payout (longer prison terms) than if they had cooperated at personal expense.  A payoff matrix shows how this works.

There are many other scenarios in game theory, including the ‘battle of the sexes’ game.  In this one we have a man and a woman both choosing where to spending the evening.  The man would prefer a baseball game while the woman would prefer a ballet.  However, they want to spend the evening together, and the payoff matrix reflects this fact.

In this case, each side “wins” if they hold to their position while the other side caves.  However, if both of them hold strong then, in effect, they both lose.  What’s notable about this game is that it’s advantageous to be seen as hard-nosed and obstinate.  If the woman believes that the man is totally set on baseball and will never change his mind, it’s in her interest to choose baseball.  On the other hand, if she believes there’s a good chance he’ll change his mind, then she has reason to fight hard for the ballet.

Now you may be wondering what this has to do with the Republicans.  The answer is that we can view the current budget debate as a ‘game’.  The players are the Democrats and the Republicans.  Strategies are to hold strong or to cave.  If both sides hold strong, then the United States will default on its debts, a financial disaster unmatched in American history.  Both sides would prefer to hold strong while seeing the other side cave.  Needless to say, neither side benefits from caving.  So the payoff matrix would look something like this.

(I created this image myself and I apologize for the fact that it’s not as spiffy as the other two, which I downloaded.)

So we see that it fits the same general pattern as the ‘battle of the sexes’.  In other words, each side benefits if it can convince the other that it will hold strong no matter what happens.  However, in this case the consequences if both sides hold strong are so awful that no sane person would seriously consider them.  A debt default is, from a financial perspective, the end of the world–just ask citizens of countries who have done it, such as Russia or Argentina.  So if you’re going to go the strategic route of convincing the other side that you’re going to hold strong and not negotiate under any circumstances, you need to convince the other side that you actually are crazy enough to do it.  Hence the Republicans, just like Cleavon Little in the Blazing Saddles clip, are putting on a show to convince the Democrats (and the rest of us) that they’re crazy enough and they just might do it.

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