Category Archives: Economics

Miscellaneous economy stuff

And So It Begins Anew

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Senate Majority Leader Harry Reid (D, NV) is at it again.  Interrupting his Nevada NPR host, he demanding that all talk of cutting taxes be stopped.  This Progressive does not approve of such speech, and so we have no right to hear it.  He also

said Republicans would have to agree on tax-revenue increases for Congress to achieve a large-scale agreement, but they instead have their mind set on “nothing more on revenue.”

“And until they get off that kick, there’s not going to be a grand bargain.  There’s not going to be a small bargain.

Straight from the horse’s mouth.  Never mind the $600 billion in tax rate increases he got earlier this year.  He wants more, with no spending cuts (that’s just “happy talk,” he says), or he’s perfectly willing to, once again, blow up negotiations and to threaten the viability of our economy.

All for Progressive ego.

Unemployment Payments as Stimulus

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It has been claimed—Congresswoman Nancy Pelosi (D, CA) is the most famous proponent of the theory—that unemployment payments to the unemployed are inherently stimulative: the recipients promptly spend the money.  The stimulus is assumed to come from what’s called the velocity of money.

The velocity of money is a concept in economics that looks at how many times a dollar gets turned over in a local economy: a man buys groceries and pays rent, the grocer pays his clerk, who buys…, and the landlord hires maintenance workers, who then spend on….  The velocity aspect comes from measures of how many times that dollar gets turned over before it disappears from—has been consumed by—the local economy.

There are holes in the premise that unemployment payments are stimulative; here are some.

Unemployment payments are from tax money taken out of the private sector—which means it’s money not turning over in the private sector until it’s returned as those unemployment payments.  Moreover, those unemployment payments are less than what was originally collected for the purpose—the difference is lost to the friction of government.  The amount of money that can be turned over is lessened.

Further, the unemployed don’t buy the more expensive things with their unemployment payments; they buy the low cost items in the grocery store.  These are low-margin items for the grocer, though, and so they lower, a little, the overall margins of the store.  The grocer thus has a little less money with which to do his own purchasing (and perhaps hiring).  Turnover is slowed.

On the other hand, money (left) in the private sector gets spent on a variety of things (60%-70% of our economy is consumer spending), including on more expensive items in that grocery store—which helps expand, a little, that store’s overall margin.  Turnover is greater.

Money left in the private sector, rather than returned to it as unemployment payments, also gets saved, to an extent (a large part of the remaining 40%-30% after consumer spending), or used to pay down existing debt (another significant fraction of those 40%-30%).  Saved, or returned to a financial institution as debt payment, these funds improve the credit-supporting aspect of our economy: they’re funds financial institutions can lend out to support credit card-supported purchases or to support the purchase of big ticket items like cars and houses.  More money is available to be turned over.

Savings and debt repayments also are funds financial institutions can lend to businesses for capital improvement and/or expansion and to startups to support their gutsing up or subsequent growth.  Here are jobs in the making, and an expansion of the money in the private sector—in the hands of individuals.    Here, also, is a reduction in unemployment and so of the need for unemployment payments.  More money is available to be turned over.

This is not to say that unemployment payments must never be made under any circumstances.  However, a more accurate understanding their real effect on our economy will enable us to make more efficient use of such payments.

Economic Incompetence Continues

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We must increase our debt limit so that we can pay our bills.

This is the thrust of President Barack Obama’s insistent demand that our debt ceiling be raised, and that it be done with no strings attached.  The graph below, via Zero Hedge, however, illustrates the foolishness of continually expanding our country’s debt.  It shows government debt as a percentage of GDP compared to the annualized rate of change in economic growth.

It’s hard to get any clearer than this demonstration of the inverse relationship between government debt growth and economic growth.  It’s not just that growing debt impedes economic growth; the reverse is true, also: reducing government debt (not just reducing debt growth rate) allows the economy to grow.

If you borrow money to pay your bills, you aren’t paying your bills, you’re just changing creditors.  I’ve said it before, and I’ll say it again: it isn’t sufficient simply to raise our debt ceiling.  Any raise must be coupled with commensurate real spending cuts—that is, cuts in current year spending, not pseudo-cuts in the out years.  It’s only by reducing current spending below current revenues that the current deficit can be reduced—which by itself still isn’t enough.  The current deficit must be reduced to the point it disappears, and a current surplus is generated.  Year after year.

Current deficits, after all, are current borrowings, and these only add to existing debt.  The only way we can reduce our country’s debt, and so to eliminate the need to raise the debt ceiling—the only way—is to cut current spending to levels below current income.  Any junior high student on an allowance understands that.

Naïve?

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Brian Spegele wrote in The Wall Street Journal about an accord between Great Britain and the People’s Republic of China concerning the role of the yuan in the world, or at least in the British economy.

The UK and China unveiled plans to further bolster China’s long-restricted currency on the world stage, amid a number of other deals that signal that the two countries have reset relations following a visit to London by the Dalai Lama last year, which upset Beijing.

The deals unveiled Tuesday—which include allowing British investors to plow up to 80 billion yuan ($13.1 billion) in China’s heavily restricted capital markets—demonstrate how China’s wealth and its desire to go abroad often trump political differences and Beijing’s resentment of criticism over its human-rights record.

The deals are part of a series of steps China has taken with a number of countries to increase the yuan’s role.

And

…state-controlled Industrial & Commercial Bank of China Ltd planned to issue a yuan-denominated bond in London, which would further encourage yuan use there.

This will be all well and good—until the PRC decides to “adjust,” again, the value of its yuan to match its convenience, as it’s done all along.  Keep in mind that the PRC tightly controls the exchange rate for—the value of—its yuan, the government’s rhetoric about “increasing flexibility,” or “setting more flexible exchange rate bands,” or … notwithstanding.

Food Stamps and Farm Support

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Why do we even have food stamps and farm support?  Here’s a brief, over-simplified history.  During the Great Depression, with unemployment at historic levels and mom-and-pop farms failing at a high rate (not enough income from not enough sales of produce to an unemployed population), Franklin Roosevelt pushed through Congress a pair of bills that had negative impacts on the unemployed and on those farms (and that prolonged the Depression, but that’s for a different post).

Those two bills were wage controls in the form of a mandated minimum wage that an employer could pay—or that a prospective employee could accept—and a mandated minimum price at which a farmer was allowed to sell his produce (thus, farm supports).  Think about that: in a time of enormous unemployment (Obama’s 10% unemployment in 2009 was full employment, and today’s 7.2% is Phat City compared to Depression levels), Americans were priced out of the labor market.  And at the time those Americans couldn’t get work, they had no income from which to pay those artificially inflated farm prices.

Roosevelt thought about that, and the light went off in his head: he pushed through Congress a mechanism for giving subsidies to the poor (read: unemployed) so they could afford to buy food (thus, food stamps). (It didn’t occur to this Progressive to rescind his minimum wage and price support programs so the markets could clear, folks could get work, and they could buy their own food.)

That’s the long and short of it: food stamps and farm supports are Depression-era attempts fix a failing economy.  Today, Americans pay over $14 billion annually in the form of farm support tax money transfers, and we pay nearly $80 billion per year in the form of food stamp tax money transfers (to a near-record 47 million Americans).

What to do about this?  Much has been made, especially by conservatives and by Conservatives, of States’ Rights—the 10th Amendment, and all that.  What too often gets overlooked, though, is the dual of that: States’ Obligations.  The States should be taking care of themselves on this, not taking money from the taxpayers of other States’ citizens.

My solution is in two parts.  One part is to take all money the Feds currently send to the States for farm support and food stamps and convert the funds to block grants, making the year of conversion the baseline year.  Every year after that, reduce the size of each block grant by 10% (let’s say) of the baseline amount until the money being sent to each state for each program is $0.  This gradual, but steady, forced reduction gives the States time to break their addiction to OPM and to adapt to relying solely on internal State funds for what are essentially internal State problems.  Aside from that, the good citizens of nearly bankrupt New York or nearly bankrupt Illinois have no business being forced to send their tax money to a nearly bankrupt California or a flush Texas.

The other part is to get rid of the ethanol mandates.  American refineries are required by the EPA to blend over 18 billion gallons of ethanol into their gasoline.  The primary source of that ethanol is corn, and as recently as 2011, 40% of US corn production went to ethanol rather than to food.  That elevates the price of a broad range of food, and not just corn-based food, at that.  Food that eats corn—beef and chickens, for instance, and the eggs from corn-fed chickens, get elevated prices from that diversion.  It spreads further: the prices of corn substitutes, like wheat, soya beans, and so on, are also elevated by this diversion.  The States’ problems funding their own food stamp programs (to the extent any of these programs persist when the States discover they can’t fund them with OPM) will be greatly reduced by the increase in food affordability due to the elimination of this pernicious mandate.