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.

Postmortem of the Economic Collapse

We are now coming up on the third anniversary of the economic collapse. I would like to  discuss an analysis of why it happened and what the long term effects will be. I’d also like to talk a bit about what should have been done (hindsight is always better than foresight) and what we can do to fix the mess. 

The first thing I’d like to point out is the whole thing was to a large extent caused by good intentions, which were thwarted by greed, panic, and the law of unintended consequences. 

Way back in the Clinton administration it was decided that every American had the right to part of the “American Dream” of home ownership. So the government ruled that mortgage lenders had to write mortgages to people who were, prior to that, unqualified to have mortgages. A lot of these people were minorities so it was viewed as a socially responsible thing to do. In order to make these mortgages affordable to these low income people, they were sold adjustable rate mortgages (ARMs) which had really low starting interest rates for the first few years and were then subject to “adjustment” to bring them in line with normal fixed rate mortgages. The mortgages were also set up so as to require almost no down payment, which sometimes made the mortgage 110% of the value of the house, in order to cover closing costs. This wasn’t considered a bad thing in an environment of rising house values, That 10% extra would be covered in a year or so by the rising value of the property.

All went well for a few years people enjoyed their new homes and basked in the rising values. The housing boom boosted the economy and made for a lot of well paying jobs. People feeling the paper wealth of owning a asset with tens or hundreds of thousands of dollars in equity bought goods and cars with abandon. All was well till the time came to adjust the mortgage rates. At that point a lot of the ARMs had rates as low as 3% while fixed rates were around 6% (for people with good credit ratings). Here’s where greed stepped in. Instead of bumping the rate a percent or two, the mortgage lenders decided to jump them all the way to the fixed rate, since a lot of these people had not good credit ratings the interest rates sometimes jumped 3 or 4X. Since mortgage payments in early years are largely interest that made the payments go up 2 or 3 times what they had been. Most of these people were not making enough money to handle that huge increase in expenses and ultimately defaulted. 

The banks found themselves stuck with a lot of property which cut into their required cash reserves and they found themselves unable to loan people money to buy cars or homes. They tried to dump those houses on the market to recover the cash, and sent real estate prices tumbling. Ordinarily investors would have then jumped on these bargain houses and the market would have stabilized but the credit had dried up and they couldn’t borrow the money to take advantage of the low prices. 

A lot of people who had jobs and could make the payments on their mortgages had borrowed heavily on the value of their homes. Suddenly they saw their equity disappearing as prices tumbled, in a panic they tried to sell before they lost it all, which dumped a bunch more houses on the market and the whole thing spiraled out of control. 

Without that equity cushion people stopped spending. Companies couldn’t borrow money for operations cause the credit dried up, and as a final blow, oil prices went through the roof and the country’s economy caved in. The banks were going belly up with all those valueless mortgages and real estate so the government stepped in with massive infusions of money to save the banks who had caused the crash in the first place and the poor homeowners were left to hang.

Ok what should the government done? This is hindsight, but, it seemed to me at the time that the answer was pretty obvious. Since their shortsighted social program to give mortgages to the unqualified was the root cause of the problem the government should have stepped up when the first waves of defaults started and, via Freddy Mack or Fannie Mae, offered low interest mortgage loans to those people who got hit with massive interest increases. Say a 4% loan for whatever the full value of the mortgage was. This would have prevented a large percentage of the defaults. Those that did occur could have been absorbed by the market or bought up by the government to be resold to needy families at reduced rates. This solution surely would have cost far less that the hundreds of billions we sent to the banks so they could pay ridiculous bonuses to their executives and the more hundreds of billions we dumped into salvaging the economy with little thought as to how to do it effectively.

There isn’t much we could do about the oil price hike except to allow it to inspire us to set up a program to achieve energy independence (see my blog on that).

One of the major negative effects of the economic downturn is the permanent loss of manufacturing jobs, especially in the upper midwest. For years the industries in those areas, especially the automotive industry, have been saddled by outdated factories and oppressive union contracts. When the downturn came the companies shuttered a lot of those factories and moved operations to more efficient plants in other parts of the country or the world. When business returned, they expanded those factories with more automation rather than reopening the outdated ones. Those manufacturing jobs are gone forever. The good news is that now the companies are more competitive, and assuming the plants are in the US, it will help the economy. However, until we can come up with some new industries to employ all those displaced workers, unemployment and underemployment are going to be a way of life.

Government and Abortion

Few subjects fuel rabid emotional hatred as effectively as the debate over abortion. People commit murder over abortion with alarming frequency. Any time some legislation comes up that involves healthcare there is a huge outpouring of rhetoric and demonstrations on both sides. This always causes huge delays in the legislation and costs taxpayers a large amount of money while the subject is endlessly debated.

In my opinion there is only one subject that is open for debate, and that is, when does a embryo become a human baby? That subject has been legally decided by Roe vs. Wade which legalized abortion. Further debate on the subject is simply a religious issue, and the constitution forbids the government to take sides in a religious issue. Therefore, further debate and any law that specifically forbids use of government money to fund abortions is unconstitutional and therefore illegal. If someone decides to introduce a bill reversing Roe vs. Wade, and it passes, and is approved by the supreme court, then things can change. But until then it is a non-issue. The government should stop wasting time and money debating something that has already been decided.

As for my own views on the subject...Since I am unlikely to ever become pregnant it is totally irrelevant.

Gay Marriage

There has been a huge amount of rhetoric and hatred expended over the concept of same sex marriage. The religious right screams that it destroys the family, is against God’s law, and anyone who participates will go to hell. They quote scripture right and left claiming that it condemns homosexuality. In my opinion, not much of it is relevant to the subject (of course the scripture quoters do not share my opinion.)

The Constitution upholds our rights to freedom of religion and I have to admit that any religion has the right to deny marriage in their church to anyone, for any reason. that reason can include homosexuality, being of mixed races or the wrong race, not being a member of that church, being too young, being divorced, or any other thing that they can think of that offends them.

This all is beyond government control, and is completely outside of the scope of the government. The problem is that the government decided to use the same word “Marriage” to define the legal contract that a couple enters in to when they take out a marriage license. This includes joint property, the right to make medical decisions, receive certain benefits from one spouses work, such as medical insurance, and the right to inherit property. 

This confusion between two distinct “marriages” is what fuels the debate. The religious right assumes that if a same sex marriage law is passed it interferes with their right to define what marriage means in their church. The Gay community simply wants the same legal rights granted to hetro-sexual couples. I seriously doubt that any of them want to be married in a church run by bigots. 

It seems to me that the solution is to make the distinction absolutely clear between religious “marriage” and legal “marriage” by either changing the name of the legal contract to something else, for both hetro-sexual and homosexual couples, or otherwise make the distinction absolutely clear. What is absolutely not acceptable is for the government to refuse to grant those legal rights to a segment of our population simply because of who they choose to love. We wouldn’t deny it because of race, religion, country of origin, or almost anything else, because it’s unconstitutional. It shouldn’t be legal to deny any segment of our population those rights either. If the basis of that denial is religious then it’s unconstitutional as well.

How the Government Can Create Jobs and Aid the Economy

The government spent a lot of money trying to get us out of the recession. I remember reading a number of accounts of how many jobs the incentive created. I also did the simple math problem <dollars spent/jobs created> and was a bit shocked to discover that the answer (depending on whose figures I used) was between $50 and $200 thousand per job. Most of those jobs went away as soon as the subsidy ran out. I also saw several of the projects that the money created. They are easy to spot as they have a big billboard proclaiming that it was built with the stimulation funds. The ones I saw were things like improving the road to a small national park, or building a government building that really wasn’t needed, and will be a drain on the public’s pocket for years. None of them had a long term positive economic impact. Since it was paid for with borrowed money it has a long term interest charge associated with it too. This is NOT the way to stimulate the economy.

Economics in my experience is not a matter of the amount of money in the system (that never changes significantly), it is a measure of how often it changes hands, or as I call it “churn”. When times are hard people hang on to their money and the churn drops off. This makes things worse in a vicious circle. When times are good people spend because they know there is money coming in, and the churn goes up. The economy just becomes better and better. So the economy is driven, to a large extent, by emotion rather than reality. Therefore there is a psychological component to economic recovery. So having a national purpose is an important component of any recovery plan. One that has been noticeably missing in the current economic recovery efforts.

Imagine the economy like a staircase. Stimulus money is like a slinky on that staircase. Every time it flips down a step it generates economic churn. Since more churn generates more economic benefits, where on the staircase would you put the slinky to generate the maximum economic effect? The top step of course. Unfortunately, most of the “economic stimulus” projects, I am aware of, are on the bottom 2 steps. 

So how do we know what step a particular program is on? It is a very complex calculation and requires a lot of data that I don’t have access to, but in general something that has lots of spinoffs and/or generates a long term economic product sits high on the staircase. A good example of that was the space program in the 60s and 70s. It funded much research into electronics, computers, lasers, communications, even was part of the reason the internet was born. Directly it brought us international satellite communications, advances in computers, imaging, medicine, and a lot of understanding of fundamental science. Furthermore it inspired several generations of students to study science and engineering.  That was a good investment for the government to make. 

A mid-level example is infrastructure improvements, road and bridge improvements, broadband communications etc. While those have more of an impact on maintaining the status quo they enable a lot of long term benefits. The interstate highway system was created in the 50s but it eventually changed the way Americans live and work as well as stimulating a huge housing boom as people moved to the suburbs.

So, what is the answer? Some of everything, with the emphasis on the higher level projects. Of course we have to do some lower level stuff too while the economy catches up such as unemployment benefits and mortgage assistance. But spend where it’ll do the most good and insist that all the work and production takes place in the US. No sense stimulating China’s economy. We need lots of infrastructure work just to keep up and a fair portion of the money should be spent there (but in projects that help or at least maintain the economy in the long run). 

We do need a flagship project that will not only have high churn but will have a positive effect on the psychology of the country. A goal worth reaching for, that everyone can understand. I propose achieving energy independence. See my blog on that for details. Not only will that generate a high churn it’ll have a very long term economic impact, and keep dollars at home and out of the hands of people who do not have our best interests at heart.

It doesn’t take a rocket scientist, or even an economist, to understand simple economics. I just wish the president and congress did.

The Road To Energy Independence

One of the major drags on the American economy is our thirst for energy. A lot of which comes from foreign sources. This contributes a large percentage of our trade deficit and pours billions of dollars into countries who are not our friends. It is not only an economic drag but a security issue as many of those dollars end up in the hands of those who would do us harm. So the issue of reaching energy independence is vital to our country. 

We cannot reach it by drilling more oil wells or mining more coal as those have serious risks to our environment both in production and use. We must harness resources that are non-polluting, either renewable or sustainable, and economically viable. There are many options that meet those requirements. The reason we haven’t implemented them is that most of them cost more than conventional energy production or have unintended consequences.

An example of unintended consequences is electric cars. On the surface they seem non-polluting and don’t consume imported energy (i.e. oil). However the electricity has to come from somewhere and in this country it is mostly provided by coal fired plants who have minimal spare capacity. A huge surge in electric cars would bring down the grid in short order. Furthermore, is switching our cars to run on coal really the way to go? Additionally, many of the critical raw materials for the batteries come from foreign sources. Admittedly not as bad a problem as oil but still an issue.

So we need a coordinated approach to solving these issues. Since no single corporation or even a consortium can cover all the bases and there needs to be an initial investment to get it started we will have to look to the government to organize and jump start this initiative. Tax incentives, funding for basic research, and large government purchases of the final product are all needed. This initial investment will eventually lead to creation of many real jobs that last long after the government funding goes away as well as a huge boost to the economy and a new sense of national purpose and pride.

Of all the technologies for energy independence that there are, solar cells and wind turbines seem to be the closest to being viable. Wind turbines have their place, but will always suffer from high cost and maintenance issues. They are mechanical assemblies and cost reductions are harder to achieve. Additionally they do require lots of land and have environmental impacts.

Solar cells are likely the most viable short term solution. They and the associated electronics needed to couple them to the grid are for the most part subject to the drastic volume production cost reductions that we have seen in most electronic assemblies. But where do we put them? Huge solar farms that blot up thousands of acres of land..no way. Put them where they are close to the consumers of the energy, on our rooftops. A program where utility companies lease the “Sunspace” on your roof in exchange for free electricity. They re-roof your house in solar cells and you get a huge cut in your utility bills. Hey you can even have energy to charge that electric car. Furthermore, such distributed production will make it much harder for a terrorist, equipment failure, or a stupid mistake to black out a large section of the country by shutting down a critical power plant.

Solar won’t supply all our energy. There are parts of the country where it isn’t viable due to cloud cover and demand outstripping roof area as in big cities. Hybrid cars burn some gas, although much less than regular cars. It’s unlikely that electric 18 wheelers will be viable either (but hybrids seem to be worthwhile to investigate). So we will need oil and conventional power plants for the foreseeable future. However, biofuels, geothermal, water power, wind farms, and even nuclear energy can take up much of that slack. Natural gas (which we have lots of and is cleaner than coal) can power electric plants and even trucks and trains under some circumstances. One thing to remember is that we only have to cut our oil use by 40% to be energy independent. 

Of course the devil is in the details, we have to develop domestic sources for those materials we need to make all those electric car batteries and the solar cells. We need to restart the US manufacturing industry. An important thing we must do is insure that the design and production of all this stuff stays in the US. No farming out the engineering to India, or spending all the incentives to buy stuff from China. The goal is to create jobs and boost our economy as well as gain energy independence.

All this sounds complex, but it is a lot closer to reality than putting a man on the moon was in 1959. We are still reaping the benefits of that program in the form of personal computers, lasers, etc. In short it would be a sustained economic boost to the country. The seed money the government puts in will return many times over, and the security and well being of our country will be greatly enhanced.