Category Archives: Economics

Miscellaneous economy stuff

Overreaction

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This is one such. The headline and subhead say it:

The Days of Set-and-Forget Investing Just Ended for Many Americans
President Trump’s economic policies are sending investors out of US stocks and into cash, bonds, gold and European defense stocks

The newswriters illustrate their claim with this anecdote:

For years, Yoram Ariely hadn’t touched most of his investments, preferring to ride the stock market’s ups and downs. Last Tuesday, he decided he had enough.
The 82-year-old unloaded almost half of his stock investments, fearful of the effects of President Trump’s economic agenda, and tariffs in particular. He may get rid of more still.
“The decisions are changing daily,” said Ariely, a retired business owner in Longboat Key, FL.

Therein lies the problem with this sort of reaction. Buy and hold—set and forget in newswriters’ lexicon—has always been a fine, if not flashy, way to build wealth when it’s done from a young age and continued through retirement/geezerdom. That includes riding through the ups and downs, including corrections and bear markets. Some investors, who change the stocks (and/or bonds, real estate, gold and silver with their reputation as inflation hedges, etc) occasionally (over weeks to months), will do better and others worse than buy and holders. Some traders, who change their vehicles on a more frequent basis, down through daily trades, also will do better and others worse. Slow but steady produces, over the long term, steady and favorable results, if without the flash and the heady rush.

And that’s the key: over the long term, which takes lots of patience and an emotional willingness to ride through the inevitable downturns, corrections, and bear markets, even more to add to holdings during those down turns. Worries about the disruptions and dislocations associated with President Donald Trump’s (R) economic and political moves are overblown in the sense that these are just another of those inevitable disruptions. Buy and hold remains a viable, middle of the road wealth building technique.

On the other hand, buy and hold has never been the right path for those of an age—those retired geezers—for whom there’s little time left in their lives in which, and reduced steady income with which, to recover from a sharp or relatively deep (or deep) market downturn. For those folks, preserving the wealth, the capital, that they have accumulated becomes more important than continuing to try to increase their wealth. The latter entails more risk than is optimal for those with shortening remaining life spans and reduced regular income.

Trump’s moves are just another of the disruptions inevitable in an investing environment; they present no reason for anyone to change their investing style.

A Modest Proposal

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The Wall Street Journal editors (I seem to have been picking on them lately…) have a modest proposal regarding student debt and forgiveness.

Congress created the Public Service Loan Forgiveness Program in 2007. It lets borrowers who work for government or tax-exempt organizations get unpaid debt forgiven after 10 years of payments. Its supposed goal was to help government and nonprofit employers compete with private businesses that can pay more.

The editors correctly note that in the years since its inception, the program has become badly abused and used to reward[] a politically favored group of workers and can make it harder for private businesses to compete. Based on that, the editors recommend the Republican-majority houses of Congress repeal the program altogether.

They’re correct in that, but I’d go a ways farther. Congress should make student loan relief available through our existing bankruptcy laws. Additionally (critically additionally), Congress should take the Federal government out of the student loan business altogether: no more Federal government student loans and no more Federal government guarantees of other lenders’ student loans.

And one more step: require colleges (including junior and community colleges) and universities and trade schools to publish the regionally average salaries and wages for each major the school offers or each trade certification program the trade school offers at the five-years employed mark. Associated with that, those schools should be required to be the ones extending the student loans or be either co-signers or guarantors of other lenders’ loans to their students.

Without the ability to hide behind Other People’s Money in the form of purely third party or Government loans, the abuses likely would screech to a halt.

Why Would They Want To?

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The lede says it all, even if the article is a bit dated now.

The leader of Senate Democrats moved to take the threat of a government shutdown off the table, following a grueling intraparty fight in which lawmakers struggled with how best to resist President Trump’s fast-paced efforts to slim down federal agencies.

Why would the Progressive-Democratic Party object to slimming Federal agencies and making them more efficient?

Oh, wait—this is the Party that insists Government knows better than us poor, benighted and ignorant average Americans, and that the way to make Government more efficient is to grow it in both financial and physical size and give it more control over our lives.

Circular Pseudo-Logic

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William Galston had this bit of circularity in his Tuesday op-ed in The Wall Street Journal:

Economists studying past tariffs have found that their effects endured even after the tariffs were removed. … Further, the Federal Reserve Board is concerned about Americans’ increased inflation expectations, which could trigger a damaging price spiral.
The American people smell a rat. In a recent poll by the Economist/YouGov, 68% said that higher tariffs mean higher prices and that consumers will bear a large share of the burden.
They’re right. Tariffs are import taxes paid in the importing nation.

It couldn’t possibly be that we Americans poll that way because that’s what we’re told by a steady stream of news writers, including a plethora of them who cite “economists” or who cite named economists without also citing those economists’ data.

Instead, these news writers just make their bald, unsubstantiated claims, providing no data at all.

It may well be true that tariffs, by their nature, are inflationary. That certainly seems plausible. However, plausibility isn’t fact, and it would be good to see the evidence—including evidence indicating how inflationary tariffs are, if they are, and under what circumstances.

“Austerity”

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I do not think this means what some news writers think it means. In a Wall Street Journal article, the news writer used the term this way:

A budget deficit contributes…by injecting more demand into the economy via spending than it subtracts via taxes.
…
But deliberately shrinking the budget deficit, via fiscal austerity, or expanding it, via fiscal stimulus….

What he’s talking about here is reducing government spending as austerity. Government spending is one component of the overall spending that is the demand component of GDP; the other component of demand at the GDP level is consumption spending by us citizens. But reducing government spending, while reducing that overall component of demand, isn’t austerity. That reduction simply reduces the level of competition between government on the one hand and us citizens and our private enterprises on the other hand for the same goods and services. That reduction in the government’s side of that competition at the very least reduces upward pressure on the price we citizens and our businesses face for those same goods and services, even eliminates pricing pressure in some areas, and in some few areas, allows prices to fall.

That’s not austerity, that’s an early step in prosperity.

The news writer again misused the term:

Fiscal austerity does the job with much less collateral damage than tariffs. Inflation goes down instead of up. Trading partners don’t retaliate. There’s no special-interest lobbying or corrosive uncertainty over who gets hit with tariffs for how long.
Austerity’s main drawback is that it slows growth.

Reducing government spending isn’t the only path to private prosperity, and done by itself can be decidedly reductive of that. Taxes directly take money away from both us citizens and our private enterprises. Some taxation is necessary for our government to do the things we hire it to do—pay our national debt, see to a defense capability adequate to the threats we face, and satisfy our nation’s general welfare in the ways delineated in our Constitution. Leaving taxes alone—or raising them—whether in isolation or in order to fund spending unrelated to those three purposes takes money away from us and our businesses that we’re better situated to allocate to our actual needs and wants.

Those taxes are the source of austerity inflicted on us by government. Reducing those taxes to the more minimal level needed to satisfy those three Constitutional requirements reduces austerity far more directly than reducing spending: every dollar left in our and our businesses’ pocketbooks and not taken by government is a dollar we can allocate more efficiently than government is capable of doing.

Reducing government spending—the news writer’s definition of austerity—actually indirectly facilitates prosperity if not actually increases it, and reducing taxation—not addressed at all by the news writer—directly increases prosperity by reducing real austerity, the taking of money from private coffers and putting it in government coffers. Doing both in concert with each other—that’s the far opposite of austerity.