Time magazine for April 25th has a cover story about the national debt written by James Grant. The cover of the magazine itself says much about what Grant is saying. It says each man, women, and child owes $44,998.12 (or per capita). That is about $13.9 Trillion divided among about 320 million people. Scary, isn't it.
How are we ever going to pay off this debt. Many people like Grant believe that this will ruin our economy eventually. However, we can put a little common sense into this.
Consider the typical person, they earn an income and have debts. Many people own homes with mortgages that far exceed their annual incomes. Say for example, you own a home with a $250,000 mortgage and make $50,000. At a 4% interest rate, a 20 year mortgage means you pay $1,515 per month. That is not a big burden for someone with a mortgage 5 times (500%) their annual income.
Nationally, personal income per capita for 2015 was about $48,600. That means the debt per capita is only 93% of personal income per capita. If people can afford mortgages 5 time income, how id this national debt so scary? The truth is, it is not.
That does not mean we should ignore responsible financial management, at the personal level OR at the national level. But let's not get wacky.
Friday, April 15, 2016
Monday, February 22, 2016
Donald Trump's Appeal
As Donald Trump continues to establish himself as the front runner, the fears and trepidation about him winning the Republican nomination grows. Some see him as another Hitler or relatable to him (an example here).
I don't see Trump in a Hitler kind of light. The Nazis and Hitler were focused on destroying the Jews by playing to the anger and frustrations of working class Germans. Trump is using working class frustrations to become president, but for all his bluster, I don't think he will send illegal immigrants to concentration camps.
He is touching a nerve. Working class Americans, particularly white high school graduates face a world where they will be worse off than their fathers and mothers. Like generations before, they fear those who compete with them (Blacks, Latinos) and when demagogues like Trump promise to "make America great again" it it their parent's America they see. That is why even though Trump takes positions the Republican orthodoxy rejects, it fits with those Americans. Lower taxes for the rich - we want good paying jobs, Planned Parenthood is bad - that is where me (as a woman) or my wife or my daughter can go for healthcare, not an abortion.
Personally, I don't think that the other Republican candidates can embrace these fears and concerns. However, the Democrats can. Democrats have a history of fighting for working class Americans through union support. But it is not limited to unions. Trump is right to stand up and say people are getting a raw deal. Bernie Sandersa is right to say the same. Even Charles Koch in a recent op-ed piece agreed with Sanders. Mr Koch says that both Republicans and Democrats try to pick winners and losers, what I would call special interests. If reasonable men and women can come together and listen and compromise, then progress can be made. That is where Donald Trump and demagoguery loses.
I don't see Trump in a Hitler kind of light. The Nazis and Hitler were focused on destroying the Jews by playing to the anger and frustrations of working class Germans. Trump is using working class frustrations to become president, but for all his bluster, I don't think he will send illegal immigrants to concentration camps.
He is touching a nerve. Working class Americans, particularly white high school graduates face a world where they will be worse off than their fathers and mothers. Like generations before, they fear those who compete with them (Blacks, Latinos) and when demagogues like Trump promise to "make America great again" it it their parent's America they see. That is why even though Trump takes positions the Republican orthodoxy rejects, it fits with those Americans. Lower taxes for the rich - we want good paying jobs, Planned Parenthood is bad - that is where me (as a woman) or my wife or my daughter can go for healthcare, not an abortion.
Personally, I don't think that the other Republican candidates can embrace these fears and concerns. However, the Democrats can. Democrats have a history of fighting for working class Americans through union support. But it is not limited to unions. Trump is right to stand up and say people are getting a raw deal. Bernie Sandersa is right to say the same. Even Charles Koch in a recent op-ed piece agreed with Sanders. Mr Koch says that both Republicans and Democrats try to pick winners and losers, what I would call special interests. If reasonable men and women can come together and listen and compromise, then progress can be made. That is where Donald Trump and demagoguery loses.
Tuesday, February 16, 2016
Morning in America - Reagan vs. Rubio
Here is Ronald Reagan's 1984 Morning in America campaign advertisement
https://www.youtube.com/watch?v=EU-IBF8nwSY
Then there is Marco Rubio's version
https://www.youtube.com/watch?v=Lp80DfHgJ8k
For President Reagan, it was a positive message, and in fact very true. Employment had grown, inflation was down. However there were record budget deficits and as a result, debt exploded.
For Marco Rubio, Morning in America is negative and false.
Millions in jobs created under Obama, the deficit reduced significantly. The opposite happened under George W. Bush. Things are better than they were eight years ago, but Rubio ignores that. Instead he uses Reagan's positive view for negative means.
https://www.youtube.com/watch?v=EU-IBF8nwSY
Then there is Marco Rubio's version
https://www.youtube.com/watch?v=Lp80DfHgJ8k
For President Reagan, it was a positive message, and in fact very true. Employment had grown, inflation was down. However there were record budget deficits and as a result, debt exploded.
For Marco Rubio, Morning in America is negative and false.
Millions in jobs created under Obama, the deficit reduced significantly. The opposite happened under George W. Bush. Things are better than they were eight years ago, but Rubio ignores that. Instead he uses Reagan's positive view for negative means.
Monday, February 15, 2016
I'll be happy to borrow money from you... if you pay me.
Recently, in the New York Times Upshot, Neil Irwin discusses the issue of the recent strategy by central banks such as the European Central Bank (ECU) to charge negative interest rates (currently -0.3% for the ECU). This is a novel strategy for central banks and even the Federal Reserve is looking at it.
From a monetary policy view, this is simply charging interest to banks for keeping funds (excess reserves) on deposit, rather than paying them interest. The idea is to incentivize banks to lend the money out rather than holding excess reserves. The graph below shows recent history of excess reserves.
Up until 2008, excess reserves were very small. From 1990 to 1996, excess reserves averaged about 4.64%. Between 1997 and August 2008, the percent rose to an average of 16.97%. However, from September 2008 to January 2016, the percent of excess to total reserves grew to an average of 97.87%. Bank reserves are broken into required reserves and excess reserves. For the layperson, required reserves are funds banks are required to hold to cover deposits. If the Federal Reserve pursues an easy money policy (increasing the money supply) then it buys treasury securities and deposits the proceeds in bank reserve accounts. Banks normally have an incentive to lend out those reserves leading to an increase in the money supply and stimulating the economy.
However, the situation changed due to factors such as the financial crisis. This is part of the reason Quantitative Easing had limited effect. Another reason is since October 2008, the Federal Reserve banks pay interest (currently 0.5%) on reserves, both required reserves and excess reserves.
If the Fed were to now start charging interest on excess reserves, we would expect banks to be incentivized to use those funds to make loans. However, banks may decide to make more loans, but would there be more borrowers? Consider the fact that corporations are sitting on cash, estimated at over $1.5 trillion. There are many reasons for thesecash holdings including some of the cash being from foreign income and the unwillingness of firms to repatriate it for tax reasons. However, as noted in an article in the Regional Economist, a working paper by Lee Pinkowitz, René Stulz and Rohan Williamson challenges the tax reason. As a result, firms may have little incentive to borrow. For consumers, the prospects may be better, but households have spent years reducing their debt burden. Here is a graph from the FRB FEDS Notes showing the ratio of household debt to Personal Disposable Income (DPI).
While the ratio of household debt to DPI has been declining, it remains significantly above historical averages. Households may be reluctant to increase borrowings since they have been saving more to return to more sustainable debt-to-DPI ratios. This means households will likely continue to save more even if they pay for it. So given the current household situation, negative interest rates may have a minimal effect on driving consumer economic stimulus.
The decision by European central banks to lower bank lending rates to negative levels reflects the continued economic malaise they face. While the US seems in better shape, we are not immune and part of our slow growth in in part the European situation. We now have a live experiment as to what the effects of negative nominal interest rates will have. My hypothesis is that negative interest rates will not help much.
From a monetary policy view, this is simply charging interest to banks for keeping funds (excess reserves) on deposit, rather than paying them interest. The idea is to incentivize banks to lend the money out rather than holding excess reserves. The graph below shows recent history of excess reserves.
Up until 2008, excess reserves were very small. From 1990 to 1996, excess reserves averaged about 4.64%. Between 1997 and August 2008, the percent rose to an average of 16.97%. However, from September 2008 to January 2016, the percent of excess to total reserves grew to an average of 97.87%. Bank reserves are broken into required reserves and excess reserves. For the layperson, required reserves are funds banks are required to hold to cover deposits. If the Federal Reserve pursues an easy money policy (increasing the money supply) then it buys treasury securities and deposits the proceeds in bank reserve accounts. Banks normally have an incentive to lend out those reserves leading to an increase in the money supply and stimulating the economy.
However, the situation changed due to factors such as the financial crisis. This is part of the reason Quantitative Easing had limited effect. Another reason is since October 2008, the Federal Reserve banks pay interest (currently 0.5%) on reserves, both required reserves and excess reserves.
If the Fed were to now start charging interest on excess reserves, we would expect banks to be incentivized to use those funds to make loans. However, banks may decide to make more loans, but would there be more borrowers? Consider the fact that corporations are sitting on cash, estimated at over $1.5 trillion. There are many reasons for thesecash holdings including some of the cash being from foreign income and the unwillingness of firms to repatriate it for tax reasons. However, as noted in an article in the Regional Economist, a working paper by Lee Pinkowitz, René Stulz and Rohan Williamson challenges the tax reason. As a result, firms may have little incentive to borrow. For consumers, the prospects may be better, but households have spent years reducing their debt burden. Here is a graph from the FRB FEDS Notes showing the ratio of household debt to Personal Disposable Income (DPI).
While the ratio of household debt to DPI has been declining, it remains significantly above historical averages. Households may be reluctant to increase borrowings since they have been saving more to return to more sustainable debt-to-DPI ratios. This means households will likely continue to save more even if they pay for it. So given the current household situation, negative interest rates may have a minimal effect on driving consumer economic stimulus.
The decision by European central banks to lower bank lending rates to negative levels reflects the continued economic malaise they face. While the US seems in better shape, we are not immune and part of our slow growth in in part the European situation. We now have a live experiment as to what the effects of negative nominal interest rates will have. My hypothesis is that negative interest rates will not help much.
Thursday, September 3, 2015
Kentucky's Kim Davis and God's Authority
Today Kim Davis, county clerk for Rowen County in Kentucky, was jailed for contempt of court. She argued that God's authority prevented her from issuing marriage licenses to gay couples. The court, of course, disagreed.
Conservatives argued that Ms. Davis was being persecuted for her Christian faith. Rand Paul, the Kentucky senator and presidential candidate agrued for ending states issuing marriage licenses and have religious institutions do it.
Here's the thing. Our form of government was designed to prevent any religious authority to dictate to others how they should conduct their lives. The Puritans, Quakers, Catholics, and others came to America to escape the authority of the Church of England.
We have a secular government for this reason. While Ms. Davis may be bound to her religious beliefs, she cannot bind her believes to others. Under our system government, as a representative of the people, she must respect all be!iefs and perform her duty under the law. She should consider this. Suppose when seeking a marriage license for her second marriage, the county clerk refused stating that under God, she was married to her first husband 'until death do us part.' Would she agree with that?
Conservatives argued that Ms. Davis was being persecuted for her Christian faith. Rand Paul, the Kentucky senator and presidential candidate agrued for ending states issuing marriage licenses and have religious institutions do it.
Here's the thing. Our form of government was designed to prevent any religious authority to dictate to others how they should conduct their lives. The Puritans, Quakers, Catholics, and others came to America to escape the authority of the Church of England.
We have a secular government for this reason. While Ms. Davis may be bound to her religious beliefs, she cannot bind her believes to others. Under our system government, as a representative of the people, she must respect all be!iefs and perform her duty under the law. She should consider this. Suppose when seeking a marriage license for her second marriage, the county clerk refused stating that under God, she was married to her first husband 'until death do us part.' Would she agree with that?
Saturday, April 23, 2011
A picture is worth a thousand misleading statements
I am always amused by graphs such as this
John Taylor asserts that President Obama's budget plan is continuing the spending bridge of the last several years while the Ryan budget removes that binge. Of course, this simple chart does not take into account that GDP has not returned to a full-employment level which is was when the share of government spending was below 20%. Mr. Taylor also does not acknowledge that the Ryan budget achieves this lofty goal bu shifting the burden to consumers, especially the poor and middle class. However, it is a solution.
let's do a thought experiment. Suppose you are at the top of the grand Canyon and want to get to the bottom. You have two choices; you can drive or you can jump of the cliff. The following chart shows the time it takes to reach the bottom.
As we can see, it takes significantly less time to reach the bottom by jumping rather than driving. If we apply Taylor's logic, jumping is the preferred strategy. Of course, there is a downside.
Let's consider the Ryan budget. Shifting the costs of Medicare and Medicaid to the poor and future retirees will help reduce the budget, but there is a downside. A major downside. Simplistic arguments such as we are hearing on the right generally do not address them or assume unrealistic conditions such as those health insurance companies will magically decide to compete on price, driving down costs and prices. It has not happened yet. Nor should we expect this miracle to occur anytime soon. Therefore, the cost of health insurance will rise (as the Congressional Budget Office has concluded) and future seniors and the poor will be hard hit.
John Taylor asserts that President Obama's budget plan is continuing the spending bridge of the last several years while the Ryan budget removes that binge. Of course, this simple chart does not take into account that GDP has not returned to a full-employment level which is was when the share of government spending was below 20%. Mr. Taylor also does not acknowledge that the Ryan budget achieves this lofty goal bu shifting the burden to consumers, especially the poor and middle class. However, it is a solution.
let's do a thought experiment. Suppose you are at the top of the grand Canyon and want to get to the bottom. You have two choices; you can drive or you can jump of the cliff. The following chart shows the time it takes to reach the bottom.
As we can see, it takes significantly less time to reach the bottom by jumping rather than driving. If we apply Taylor's logic, jumping is the preferred strategy. Of course, there is a downside.
Let's consider the Ryan budget. Shifting the costs of Medicare and Medicaid to the poor and future retirees will help reduce the budget, but there is a downside. A major downside. Simplistic arguments such as we are hearing on the right generally do not address them or assume unrealistic conditions such as those health insurance companies will magically decide to compete on price, driving down costs and prices. It has not happened yet. Nor should we expect this miracle to occur anytime soon. Therefore, the cost of health insurance will rise (as the Congressional Budget Office has concluded) and future seniors and the poor will be hard hit.
Sunday, October 3, 2010
How much government do we want?
A guy walks into a car dealership. The dealer shows him a car that looks nice and assures the guy it is perfect. The guy drives out of the lot and a half mile down the road, the transmission falls out. When the guy goes back to the dealer, the dealer says "caveat emptor man."
Alternate scenario. A guy walks into a car dealership. The dealer shows him a car that looks nice, but standing next to the dealer is an agent from the National Car Consumer Agency who tells the guy he cannot buy the car. "We have determined it is not the right car for you."
I think we all would agree that neither scenario works. However, it seems to me this is the either/or argument we are debating. Progressives oppose the first scenario and conservatives oppose the second yet neither seem to look for the common ground. An overly regulated society leaves no room for innovation and progress, but an underregulated society leads to instability as the financial crisis demonstrated.
A tea-party type person told me he doesn't like taxes, but then how do we pay for roads, police, and national defense? Many Tea-Party-backed candidates have called for the elimination of the Department of Education at a time when we are in an education crisis.
The fundamental question goes back to the Declaration of Independence. We have unalienable rights and "That to secure those rights, Governments are instituted among Men, deriving their just Powers from the Consent of the governed..." (Thank you Cato Institute). We must have government to protect us and our property, and we determine how much power government should have. The question is simply how much power do we want government to have.
A final point, we can increase or reduce that power as the need requires. During World War II, we gave the Executive Branch increased power, but after Watergate we reduced it.
Alternate scenario. A guy walks into a car dealership. The dealer shows him a car that looks nice, but standing next to the dealer is an agent from the National Car Consumer Agency who tells the guy he cannot buy the car. "We have determined it is not the right car for you."
I think we all would agree that neither scenario works. However, it seems to me this is the either/or argument we are debating. Progressives oppose the first scenario and conservatives oppose the second yet neither seem to look for the common ground. An overly regulated society leaves no room for innovation and progress, but an underregulated society leads to instability as the financial crisis demonstrated.
A tea-party type person told me he doesn't like taxes, but then how do we pay for roads, police, and national defense? Many Tea-Party-backed candidates have called for the elimination of the Department of Education at a time when we are in an education crisis.
The fundamental question goes back to the Declaration of Independence. We have unalienable rights and "That to secure those rights, Governments are instituted among Men, deriving their just Powers from the Consent of the governed..." (Thank you Cato Institute). We must have government to protect us and our property, and we determine how much power government should have. The question is simply how much power do we want government to have.
A final point, we can increase or reduce that power as the need requires. During World War II, we gave the Executive Branch increased power, but after Watergate we reduced it.
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