What Is Happening in the Economy

It’s been just over a week since the Congress and the President passed the debt ceiling bill. The fact that it was a complete piece of crap did not miss the attention of Standards & Poor (a credit rating agency) and they rightly downgraded the US’s Credit rating from AAA to AA+. This threw the stock market into a completely irrational panic (which happens often) and it has been in free fall. The amount of (virtual) wealth that has disappeared because of this would have made a substantial dent in the national debt, and precluded the problem in the first place. Of course all this panic will cause consumer spending to go down and the economic boost of “back to school” will be killed. Kinda makes me wonder what those idiots have planned for Christmas.

Of course rationality will prevail, and eventually the stock market will settle down. People will stop hoarding their cash and start spending again and this will all be a bad memory. But, for an economy that was tentatively sticking it’s toe back in the water it will slow the eventual recovery by another year. The brave will buy stock in solid companies and make some money off of the fearful, and the rest of us will struggle on. 

The sad thing is it was unnecessary for it to happen, and even so, the credit downgrade isn’t really a terrible thing. Our rating is still better than Japan’s and no one thinks they are in trouble, in spite of the disaster earlier this year. The rating simply says we aren’t being physically responsible. It’s like we were a person with a $500,000 debt, an income of $75,000, who spends $100,000 a year and wants to borrow money to pay the difference. Any bank would laugh at you, even if you had a perfect payment record. The difference is, the US has assets equivalent to $1,000,000 so the debt is safe in spite of the lousy money management. But I don’t see the government paying down the debt by selling Yellowstone park to condo developers anytime soon though.

The whole thing boils down to matching income with outgo, plus a little extra to pay off the debt. In short, live within your means. It can be done by cutting expenses or by increasing income. Neither is easy. It’s easy to say "cut expenses", but remember, that money eventually pays someone’s salary, so cutting expenses throws people out of work. To raise income means more taxes, which of course means we have less money to spend, and that throws people out of work too. It’s easy for us poor people to say “tax the rich”, but we have to remember it’s those rich that create the companies that give us our jobs. Basically, raising taxes moves workers from the private sector to Government supported jobs or welfare.

There is no good short term solution. There is a excellent long term solution, and that is to move the government’s spending to projects that will have a long term economic benefit, and try not to increase spending until the economy catches up and tax revenue increases naturally. (see my blogs on job creation and energy independence for more details). 

As an example of how screwed up the Government’s thinking is, I just saw that the President has decreed out of the blue that heavy trucks must lower their fuel consumption by 26% in the next few years. This throws a huge cost burden on an industry that is already reeling from high oil prices. This is an industry that affects the price of everything we buy, so we all are getting hit with a cost increase to satisfy his ego. Sure it sounds on the surface like a good idea. But you can’t just decree something without some knowledge that it can be done practically. In an industry whose major expense is fuel, don’t you think they are already doing everything practical to cut fuel consumption? Now if he had started a research project to seek ways of improving efficiency of heavy trucks I could be behind him 100%. But while its easy to decree things, you need to lead by showing a path to the goal. The industry would leap on a way to save 26% of fuel if it were practical. We just don’t need this kind of "say it and it will be so" Godlike attitude at this time of economic “disaster”.

Retirement Age

We hear a lot of rhetoric about raising the retirement age as a means of saving Social Security. On the surface this sounds like an OK idea. After all we are living productive lives a lot longer than we used to. Staying active and engaged keeps us alert and staves off aging so it improves our health. Boy, I can just hear the bean counters rubbing their hands together in anticipation of the savings in both Social Security payments and medical costs, as well as the extra taxes we will be paying.

Unfortunately there is an unintended consequence. Perhaps in a booming economy with a low unemployment rate raising the retirement age might be advantageous. But, we are not in a booming economy, and the unemployment rate is showing no signs of getting better. In fact if you add in the people who are underemployed, the actual figure is much higher than reported, and getting worse. The recession has enabled a lot of companies to close older less efficient plants (and lay off workers) and when the economy started to recover they expanded production by automating and/or moving operations out of the country. Those jobs are lost forever.

So we have an economy with a limited number of jobs. Given that the normal work career is about 40 years, raising the retirement age by 1 year will increase the workforce by 2.5%. (yes, I know this is a bit oversimplified, but I could do a bunch of complicated math and get an accurate figure which will still be something over 2%). Since there is a limited number of jobs to be had, that automatically raises the unemployment rate by 2.5%. During the whole economic recovery, and with all the job stimulus money spent, we haven’t lowered the unemployment rate that much. It doesn’t sound like a good idea to me.

To make it worse, the bulk of those people who enter the ranks of the unemployed will be either the fresh out of college kids looking to start a good paying career (and pay a lot into Social Security) or the older workers (who were going to keep active and healthy an extra year). So, if college graduates can’t get good jobs, whats the reason for kids to go to college? If they’re going to end their career looking for a job and burning their retirement savings it’s not much of an advantage for the older folks as well. Looks kinda like a negative snowball effect to me.

In fact, thinking about it, why not lower the retirement age? If we get 2.5% more unemployment by raising the retirement age 1 year we should get 2.5% less unemployment by lowering it. If we dropped it to 62 from 65 we could wipe out most of the current 10% unemployment in this country. Yes, Thats way simplified and paying for it might be a bitch, but someone should seriously study the economic impact, factoring in savings on unemployment insurance, welfare, defaulted student loans etc. Besides, having all those skilled, vigorous seniors at loose ends might stimulate some them to start businesses and pull this country out of the economic doldrums.