Bush Deficits and Projections

The Bush-era deficits were bad. I know. I spent eight years complaining about the president’s lack of fiscal responsibly (here and here for instance).

First, while President Obama is fond of promoting what he calls a "new ethic of responsibility"—in fact he named his first budget, for fiscal 2010, "A New Era of Responsibility"—that is a misrepresentation of his actual budget plan. For each of Obama’s years in office, the deficit is projected to be larger than any year during Bush’s terms.

Second, Obama is right to note that he inherited a large deficit in fiscal 2009. But as we can see here, he is responsible for growing the deficit beyond expectations in fiscal 2009 and thereafter...

Third, Obama’s deficits are frightening but they promise to get worse. Each month that goes by the president adds spending to the deficit. The August 2009 projections for instance, do not include any of the president’s healthcare reform spending and they assume that the “temporary” stimulus spending will not be prolonged past fiscal 2011. Finally, they also assume that the economy will recover soon and that it will grow enough to generate increasing tax revenue, in spite of the president’s plan to impose new taxes and regulations on the private sector.

read the essay

The Economics of Cheating

The obvious reason why people cheat is that they gain some kind of benefit from it...

So why not cheat all the time? Because with these benefits come costs. Let’s examine what these costs are. The most obvious cost that people think about is punishment for getting caught. So when people consider cheating, what they consider is the perceived chance of getting caught multiplied by the perceived punishment.

I use the word “perceived” here to emphasize that this is probably the area that potential cheaters are the most likely to misjudge. It is a known fact that people are very bad at judging probabilities...

Another cost of cheating is opportunity costs. Cheating often takes effort, and such effort could otherwise be used for other pursuits...

The final cost of cheating, and the most interesting because it’s the least rational, is the moral pain people feel when doing something wrong. Because of the moral pain involved, people will often avoid cheating even when the benefit of cheating far outweighs the opportunity costs and there is zero chance of getting caught.

When society tells you that something is wrong, you internalize the moral lesson and feel moral pain, or guilt if you prefer to call it that, while doing and after doing a wrongful deed. Some people feel moral pain more strongly than others...

In conclusion, we learned that a person’s net benefit from cheating is equal to the benefit he gets from cheating, minus the opportunity costs, minus the perceived probability of being caught times the punishment, minus the social stigma, minus the moral pain. A person will cheat if the net benefit exceeds zero. But because people have differing abilities to correctly ascertain the probability of being caught and because people have differing sensitivities to moral pain, when faced with the same cheating temptation not all people will behave the same way: some will cheat and some will not.

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Cheating is not socially efficient. Those cheating consider only the costs and benefits to themselves. They ignore the external costs they impose on others. And others are harmed. Non-cheating students suffer by comparison on exams, and taxpayers, who are paying much of the financial freight of education, end up with graduates who are less knowledgeable than advertised.

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Cartoon: Michael Moore's Hypocrisy

47% of Households Have on Federal Income Tax Burden

When considering federal income taxes in combination with payroll taxes, the percent of households with a net liability of zero or less is estimated to be 24% this year, according to the Tax Policy Center's estimates.

A key reason why there is a zero-liability group at all is because the U.S. tax system is progressive. Those who bring in more money pay more than those lower down the income scale to support government functions such as national defense and social safety nets like Medicaid for those in need. That progressivity can be dialed up or down.

read the CNN story

Cartoon: Too Big to Fail

Obamacare

Keynes, Pharoahs, and the Economy

On one side, are the forces of a natural market correction…following a long, long period of expansion. The easier money gets, the more people tend to misspend and mis-invest it. Then, inevitably, their mistakes must be corrected. That’s what bear markets and recessions are for.

But the feds don’t like bear markets or recessions. And at least since the Keynes outlined his general theory back in the early 20th century, they’ve believed that they don’t have to put up with them. Keynes took a page from the Old Testament. Government should act like an enlightened Egyptian Pharaoh, he didn’t say, but should have. It should run surpluses in the fat years and deficits in the lean years…thus flattening out the pattern of boom and bust.

Pharaoh was no dope. He stored up grain for seven years, when the harvests were bountiful. Then, when the seven lean years came, he released the grain to the people. Problem solved.

Keynes believed that modern government could do the same thing. But Pharaoh was not running a democracy. He had no voters to answer to. So, if he wanted to store grain in the fat years, he could do so.

In theory, the US government could do the same. But, in fact, it never runs significant surpluses. There are too many people who want too much bread and too many circuses. And you don’t win votes by denying the voters what they want. So, in practice, the feds run deficits even in the fat years!...

But Bernanke didn’t see the famine coming. Neither did Geithner. Or Greenspan. Or any of the other savants Pharaoh interpret his dreams. None of them expected hard times. None of them warned the public. None of them encouraged the government to save money for the recession. Nassim Taleb asks why Bernanke was reappointed after he clearly failed the most critical test.

read the entire essay

What Causes a Depression?

…how does it all work? We’re doing some serious thinking this week. What is it that actually causes a depression? A stock market collapse? Or too much debt? How come government can appear to cure the problem sometimes – 2001-2007 – but not other times? How come the Japanese were not able to increase consumer prices? Even now…Japan’s inflation rate is negative. And why is it, despite the most massive effort at monetary inflation ever undertaken, the US bond market still forecasts an inflation rate of less than 2%?...

A friend made the mistake of asking us what to expect from the economy. We said it would go do down.

“You mean, you expect a W-shaped recovery,” he said… “A double-dip recession?”

“No…we expect no recovery at all. It’s a ‘W’ without the last stroke…”

Of course, we were exaggerating. But not much. We do not think that the economy of the Bubble Era can ever be revived. It will never recover…because it is dead....

“But when will it come to an end?” you ask.

“When it is over.”

A depression ends when it has done its work. It must correct mistakes. It must punish errors. It must destroy the bubble economy…and the mindset of the Bubble Era. Only then can new real, sustainable growth begin again...

Here’s how it works. The Fed lends the bankers money. Then, the bankers turn around and lend it back to the feds. The banks are happy; they’re making money on a risk-free trade. The regulators are happy; what could be safer in a bank’s vault than US Treasury bonds? Investors are happy; it looks like the financial sector is making money again. And the feds are happy; they’re able to finance their deficits.

Who’s not happy? So far, so good. But hold on…

“This is not a sustainable recovery,” says fund manager Crispin Odey in The Financial Times.

read the entire essay

Cartoon: Retirement Planning

Cartoon: I'm Not Green, I'm Lazy

Cartoon: Naps and Chocolate

Health Care Solution: Do Nothing

The second-best solution for the health-care crisis? Do nothing.

Of course, that drives the interventionists crazy. “Do nothing?” they cry! “Don’t you realize that we’re in a crisis? We can’t afford to do nothing!”

What they fail to realize is a fundamental principle about interventionism: It produces more crises. Therefore, any new health-care intervention, whether termed “reform” or “modification” or “improvement” is only going to make things worse than they already are. New interventions will produce new and bigger crises, thereby producing calls for more “reform” in the future.

What ultimately happens is that as the crises and interventions grow in number and intensity, people get so frustrated that they end up supporting a complete government takeover of that particular segment of society. In fact, that’s already happening in the health-care debate...

That, of course, leads us to an opposing diagnosis — that it’s not freedom and free enterprise that have caused America’s health-care crisis but instead the socialism and interventionism that have infected every aspect of the health-care field...

Thus, the prescription is obvious: radical surgery by removing all of this cancerous material from the body politic. No reform. Simply an immediately repeal of Medicare, Medicaid, health-care and insurance regulations, and medical licensure. End all government involvement in health care. Given the positive power of the free market and the enormous resiliency of human beings, the body politic will immediately begin recovering.

read the entire essay

Cartoon: Regulation and Taxation

Cartoon: Health Care Reform

The Fed on the Economy

The Federal Reserve kept interest rates near zero on Wednesday and said the economy is improving. But the Fed also pointed out ongoing job losses could dampen a recovery.

At the conclusion of its two-day meeting Wednesday, the Federal Open Market Committee said that the government's stimulus and economic rescue actions have helped to stabilize the financial markets, which will help generate economic growth in the future.

"Economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased," the Fed said in a statement. It was the first time since August 2008 in which the FOMC said the economy had improved from its previous meeting.

Meanwhile, the Fed said consumer spending is stabilizing, but that rampant job loss and tight credit has restrained overall household consumption. The Fed added that although the housing sector has begun to make a comeback, home sales and new home construction are coming off of historic lows.

As a result, the Fed kept its federal funds rate, an overnight lending rate that guides rates on various consumer and business loans, in a range of 0% to 0.25%. Rates have been at that level since December.

read the CNN article

Fed Funds Rate and Unemployment

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To Serve, Protect, and Generate Revenue

A new study to be published in next month's Journal of Law and Economics finds statistical evidence that local governments use traffic citations to make up for revenue shortfalls. So as the economy tanks, motorists may be more likely to see red and blue in the rearview.

Study authors Thomas Garrett, assistant vice president at the Federal Reserve Bank of St. Louis, and Gary Wagner from the University of Arkansas Little Rock, examined 14 years of revenue and traffic citation data from counties in North Carolina. They found that the number of traffic citations issued goes up the year following a revenue drop.

"Specifically, a one percentage point decrease in last year's local government revenue results in roughly a 0.32 percentage point increase in the number of traffic tickets in the following year," Garrett and Wagner write.

That number may sound small, but it's a statistically significant correlation, the authors say.

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Cartoon: The Great Recession

Cartoon: CEO Summit

Cartoon: The Economy and Tough Times