Where We Go From Here

In the recent election a strong message was set to the US Government.  That message was not that the Republicans should return to power or that the Democrats should be removed from power.  That message, I believe, was that Democrats and Republicans need to stop playing the same game that they have been playing with each other and with the public.  When it comes to fiscal policy, both parties agree that there should be a balanced budget, but for both parties it is a much lower priority than their other financial plans. 

Republicans want to decrease taxes or at the very least not raise them.   Democrats want to expand services or at the very least not cut them back.  Each party has been ever more willing, especially in recent years, to rack up large deficits rather than go against their preferences.  That is what has to stop.   We are no longer in a position to keep compromising by just building up debt.  Services need to be cut and taxes are going to have to increase.  For too long we have been compromising by increasing debt.  That policy needs to end.  What I, and I believe most voters want is for this country's leadership to show some fiscal responsibility for a change.   We didn't have that under the Bush administration and we don't have it under the Obama administration.  

Democrats have been arguing that their spending programs will help the economy recover.  They believe that without government spending things would be worse.  They might even be correct.  Experts wildly disagree on the subject.  What they don't disagree on, however, is that large scale deficit spending is very harmful.  Our current policies have been trading certain future wealth for a possible short term gain.  While the idea is to take from a plentiful future and help ease a troubled present, there are no assurances.  We don't know that we can afford to take from the future.  We don't know how much the spending will help the present.  Worst of all, we don't know when or how things will change.  How long can or will the spending go on?  How many of the jobs created by unsustainable spending will be temporary?  Will the economy recover in time to take up the slack for decreased spending or will this spending only postpone and possibly worsen a recession?  Many negative effects are likely or certain, but the positives appear to be highly speculative.

Many Republican plans are no better.  Cutting taxes might help the private sector to grow the economy, but it will certainly result in increasing deficits now which leads to all of the same negatives of the Democrats plans for all of the same reasons.   We don't have any more certainty that the positive effects of providing more money to the private sector will outweigh the costs than we do that direct spending will.  Either way we are betting probable short term positives against certain long term costs.   That is a poor investment.

Instead, we need to show fiscal restraint and responsibility.  Even a good investment is not a good investment if we cannot afford it.  There is always an element of risk and if you cannot afford to lose you should not play.  Some deficit spending is worth the risk, as you can often have investments which pay out higher than the cost of borrowing to invest.   Taking that too far, however, leads to disaster. 

Both parties have worked to bring us where we are today, which is with massive debt which is growing at an astonishing rate.  We have been living too far beyond our means for too long.  The unfortunate reality is that we have been gambling that we could continue to outgrow our current debt with future revenues for far too long.  We have lost sight of financial responsibility and have instead grown accustom to living outside our means.  We need to correct that, and it isn't going to be pleasant. 

For some time, I have been advocating that while compromise in politics is often a good thing, that it is also often very bad.  I have applauded the fact the Republicans refused to be bargained into most of the spending programs for the past couple of years.  As I saw it, the current administration was going down the same spending path as the previous one, only faster.  I felt it was the wrong direction and so I encouraged an end to compromise to stop the out of control spending.

In that, I have been wrong.  It had been bothering me for a bit, because I don't like the idea of not working in cooperation to make things better.  I like the idea of compromise in most situations where people disagree and yet I was seeing a lot of damage come from compromises made between the parties.  The problem is not compromise, the problem is the type of compromise.  Rather than compromise by each party pursuing its primary fiscal goals, we need to compromise first on pursuing the shared goal of limited deficit spending and reducing the debt.   Working within that shared goal we need to make sacrifices in our non-shared, but individually higher priorities.

Taxes need to be raised.  Spending has to be cut.  We need to shift away from the compromise of double spending and instead compromise on double cutting.  Our government cannot afford to offer all of the services we enjoy at the tax rate we have.   Increasing taxes will only get us so far, cutting services will eventually be far too harmful.  It is in this that we need to compromise with each other and work opposing each other in the details but together in the common goal of bringing this country back into a fiscally responsible path.

That is the message I believe the voters have sent in this recent election, and it is a message that I hope both parties come to hear.  We are willing to have fewer services if it means more financial responsibility.  We are willing to pay more taxes, if it also comes with more financial responsibility.  We are not willing to let the parties gamble with our futures with the costly and risky plans that they have been proposing and implementing so far.  There may be some short term pain, but it is largely a cost of letting things get so far out of hand for so long.

We can get this country back on track, and the answer isn't to follow the ideological path of either party, but rather to shift the give and take of compromise which cause us each to sacrifice a little for the sake of financial responsibility rather than each of us gain a little borrowing against our future.

How do you Stimulate an Economy? Part 4 - Taxing to Spend

In light of my previous post on the benefits of government spending, you might wonder why I claim that reducing taxes is the better option in an even earlier post.

The problem is that both are necessary for a healthy economy.  Government spending is beneficial to the economy, but low tax rates are also beneficial.  The problem is that one requires the opposite of other (though you can delay the taxation by increasing debt).  So if you increase government spending (good), you have to increase taxes (bad) or if you decrease taxes (good) you have to decrease spending (bad).  Either extreme is bad so it isn't a question of which is better for the economy, the question is what is the correct balance point.

In both cases the benefit is diminishing as you increase the levels.  Increased spending when spending is very low has a much higher benefit than it does when spending is high.  The same is true for taxes, the lower the rate the less benefit you have from lowering it further.

For me it is less a question of which is better and more of a question of where the balance point is.  There have been times when using spending would offer benefit despite the necessary raise in taxes and others where the reverse is true.

As for where we are at in the US today, I don't believe that increased spending is going to have an overall positive effect.  The outstanding debt is far to high and is rising far too quickly in an unsustainable way, which means taxes will have to increase to cover the cost.  The concern on what that increase will be, who it will affect, and when it will happen is having a hugely detrimental effect on the economy already. While there are many positive aspects to the spending programs which have been put in place in the past year, they also come with that significant negative.

That negative is compounded by the uncertainty of how the deficit will be handled, especially in light of how much debt the US has and how quickly it has risen.   The ability of the US government to continue spending on credit has a limit and there are signs that limit is approaching.  Further spending is going to exacerbate the problem even as it provides the benefits I have mentioned.

If the US had limited or no debt, then spending might be a good answer, though it does come with some risk.  With spending levels already high and debt levels very high, I believe that the overall effect of increased spending not only doesn't help the economy, but I believe there is overall harm being done.

How do you Stimulate an Economy? Part 3 - How Government Spending is Good for the Ecomony

So far with only me posting things have been a bit one sided.  I do, however, have points that I can make on both sides of most issues.  While I believe that economic stimulation from the government should mostly be based on reducing taxes (which I detail here), there are many benefits to using spending as a stimulus.

Government spending allows for development in areas which are either not directly profitable, or which will show profit only after too long of a term to make it a palatable investment for the private sector.  Just because the initial venture isn't profitable, however, doesn't mean that there isn't substantial economic gain to be made, sometimes that venture will lead to others which turn a profit.

A clear example of this from the past is the space program. In the 1960s and 1970s building craft and systems capable of exploring the solar system, launching satellites, and putting people on the moon were not economically viable programs.  While today that has changed, much of what has enable private industry to begin looking to outer space is a direct result from what NASA has already done.  Indirectly there were advances in technology made to overcome the challenges of NASA's missions which where helpful for hundreds of other industries (NASA calls them spinoffs and has over 1600 of them in a database they also have a flash driven summary).  In any case, there have been thousands of products which would have been either impossible to make, much more expensive, or vastly inferior had it not been for the space program.  The space program significantly contributed to the economic growth which resulted from these products being developed cheaper, faster and better.

A current example that most people support is energy research.  Alternative energy sources are mostly not economically viable for the private sector because they require too high of investments in the development of new technologies to make them either feasible or economically competitive with existing energy generation methods.  If the initial investment is not made by government spending then the growth of these industries will be very slow.  Government funding into this area, however, could result in a huge boost to the economy as new technologies are created to solve problems of energy creation.  Even if none of the primary objectives are successful there are bound to be both short and long term benefits through technological advance and short term job creation.


Since government spending is not used to create direct profit, it can be used on areas which do not create a direct financial return on the investment, but also on programs which increase the quality of life, and therefore the wealth, of people.  Examples of this are the creation of roads, power grids, and other infrastructure type projects.  While there is little direct return expected from these ventures, and therefore little incentive for the private sector to get involved, these projects also allow for economic development.  Increasing roadways allows for reduced transport times and therefore costs which not only helps business with delivering goods, but also people by reducing their travel costs.  Less time commuting, shopping, driving kids, etc. results in more time for people to use to enrich their lives.

Finally, the government is run by people who can be held directly accountable to the people.  Politicians have to act in the interests of most people or risk the loss of their position.

So government spending is necessary to a healthy economy.  It drives stagnant industries forward when long term investment is required and creates short term boosts to the job market by creating a demand for products and services to overcome challenges which the private market is not yet willing to take on.  It also allows for more indirect wealth creation since it is not limited to direct profitability.  For all these reasons, we need to have a healthy amount of government spending to strengthen the economy.

The Increasing Income Gap Between the Rich and the Poor

It is often cited with concern that the gap between the rich and the poor is widening.  Usually this comes as a preface to some plan on how to either limit the income of the rich or to increase the income of the poor.  Basically this gap is seen by many as a problem which needs to be addresses.

Is this gap really growing?  The answer, of course, is yes....and no.  Like most things with statistics, it depends on what you are really measuring.  If you are looking at dollars of income then, of course, this gap is growing.  Is that, however the meaningful measure?  I would say that it is not.  Rather, the meaningful statistic that should be considered for this type of analysis is quality of life.  It is less often used, because it is much harder to define and since dollar income is a strong indicator for quality of life that is much easier.

The problem with looking only at dollar income is that, the dollar's contribution to quality of life is not linear it is a diminishing curve.  What I mean by that is that for someone who makes $20,000 a year giving them an extra $1,000 has far greater impact to their quality of life than giving someone who makes $1 million an extra $1,000.  (I would say that the curve is sharper than even an inverse geometric curve or that giving someone who makes $1 million  and extra $50,000 would also be less impacting than giving the $20,000 earner an extra $1,000, but that is both debatable and not as much to the point).

The problem is that, especially as the high end of spending, there is a very diminishing return for spending.  Take cars, for example.  You can buy a nice, reliable, new car for under $20,000.  On the other end of the spectrum you can pay easily over $400,000 for something like a Ferrari 599 (that's not even including the exotics like the Bugati Veyron which costs over $1.4 million, though I'm also ignoring that you can get a very reliably quality used care for under $10,000).  So yes, a wealthy person can easily spend 20 times as much to get a new car.  Does that translate into a twenty-fold increase in quality of life?  Not even close.  Don't get me wrong, Ferrari's a beautiful cars and I would love to drive one personally, but it doesn't hold near that value to me or, I would argue, to very many.

Perhaps cars are not a fair comparison.  What about food?  Meals at the top-end, first class restaurants can average over $175 per person and that's not including wine which can drive it up to $300 per person  (again, that's not including the extreme cases such as the $30,000 meal in this article. or having a $2 per person low-end home cooked meal)  On the other end of the scale you can get a meal at a low end restaurant (such as fast food) for under $7.  Certainly, the top end meal is far better, and as a one time thing, it might even be the 25 times better that it costs.  But we aren't talking about one time, we are comparing what wealth can buy.  For that we are talking about normal living.  Even if we talk about looking at the cost difference only of dinner now you are talking about a difference of $1,176 a week or over $60,000 a year.  If you include high end wines you can double that easily.  Now, if I make over a $1 million a year, then spending over $60,000 on food doesn't seem crazy,   as percent of income it is the same as the person making $20,000 spending $1,800 on food for the year.  Still, does increasing the quality from the type of meal you can get for $7 to the type of meal you can get for $175 really count as 25 times better? Again, don't think so.  If you aren't convinced then look at the middle ground.  An $80 per person meal is amazingly better than a $7, if not nearly 12 times as good, it might be close.  However do you think that the $175 meal is over twice as good as the $80?  Better, yes, but that much better?

You can look at nearly any area of quality of life measure and find the same thing.  While the rich have many more dollars, as you spend more and more money on things you get rapidly diminishing increases to the quality of life for each dollar spent.  At the same time, I would say that the difference between the middle top and the middle bottom end of quality of life items available is shrinking.  Even low income families have access to entertainment options which rival those of the wealthy.  Sure you might have to watch the Super Bowl  at home on a mid-size TV as part of your $50 a month cable bill and have it catered by Subway for about $6 per person instead of a $15,000 luxury game suite, but you are still watching the same game.  Yes the rich live better, even far better than the poor.  But the relationship is certainly not accurately portrayed by just looking at the dollars of income.

How do you Stimulate an Economy? Part 2 - Why Aaron prefers Tax Cuts

In part 1 I discussed how difficult it is to even know what is the correct course of action to take to help improve an economy.  The is both a remarkably complex system and one in which seemingly small events can have massive impact.  Mathematically speaking it is a chaotic system, which makes it very hard to predict much less guide and control.

That is the primary reason that I prefer using tax cuts to stimulate the economy. While I don't think businesses are inherently any more competent or less corrupt than politicians, the bottom line is that there are many more of them and their methods produce success or failure much more directly for them and much more quickly.  This leads to a system in which many different plans are attempted and ones which lead to success are emulated and refined while ones that lead to failure are discarded.

Now of course, on major drawback is that these plans are not designed for the benefit of the economy, but rather for the benefit of the company, or the company owner/shareholder.  Such actions, however, almost always also increase the overall economy.  Making businesses successful is the key driver in making the economy healthy.

The plan of using the government spending, provides more direct control of things into the hands of fewer decision makers.  That can be a good thing, especially when there is a clear case of something that needs to be done.  A good example of this, and something good that is in the current US stimulus is funding research into non-hydrocarbon energy generation.  While I have some disagreements with the details of how it is being done, overall it is a good program to use government funding to promote this research.  However, that is because even if it isn't something that will directly help the economy overall in the near term (it in help in many ways and hurt in many others) it is something that, if successful, will help the economy greatly in the long term by reducing the costs (either political or economic) of energy.  Because it is clearly beneficial to the economy and may be too long term to be correctly promoted by business it is a good candidate for government funding.  However, those cases are, I believe, limited in number. 

It is far more often that we don't know what the best path to promoting the economy is and when that is the case I prefer, to steal the term from Glenn Reynolds, an Army of Davids to the management of a Goliath.  As we decrease tax burdens it increases profitability and therefore incentive for new players to enter with new ideas.  Yes, we also get old players with old ideas, but failing ideas lead to either abandonment or failing business, successful ideas lead to emulation.  

So while I think that both spending and tax reduction can and to stimulate the economy in some ways and depress it in others, overall I prefer tax reduction because it empowers larger numbers of solutions to a problem that we don't understand well enough to have all the answers for.

How do you Stimulate an Economy? Part 1

How do you stimulate an economy?  Sadly this is a question that few people seem to ask, rather they are intent on experimenting with their chosen answer.  In the US we have the Democrats who largely support using government funding to stimulate economic growth, and the Republicans who largely support lowering taxes to do the same.

The problem we face is that there isn't a clear answer.  Which answer works?  Answering that is similar to asking if a volcanic eruption in Africa will affect the weather in Asia.  The answer...we don't really know.  Like the weather the economy is a very complex system and while we are fairly good at prediction both in short time periods, it is far more difficult to point to specific actions and accurately predict their results.  It is sadly, also very difficult to look back into the past and knowing the result point to what was the primary cause.  There are simply too many factors which have too many effects for us to track.

In theory we should be able to look at a hurricane and trace all of the weather patterns back to determine what were the primary causes and use that information to accurately predict them in the future (or possibly to either create them or prevent their formation).  In practice, there is too much information and we have to use computer models which necessarily simplify many factors based on our understanding of how important they are.  This causes our models to be only somewhat accurate and reliable at even predicting what is going to happen, which makes it very difficult to point to how.  The economy is much the same.  There are several schools of thought because we cannot model the system accurately enough to determine even the causes of why things happened in the past.  That, however, doesn't stop people from having beliefs and opinions.

That said, let's look at the two solutions above.

The idea behind a government spending stimulus is that the government can step in and provide demand for goods and/or services which will stimulate businesses to meet that demand.  As businesses expand to meet the new demand, they stimulate the general economy as all business growth does (job creation, innovation, etc.)  This temporary demand can either hold the economy steady through a recession or even eliminate the recession and restore healthy economic growth.  Or at least, that is the theory.  Does it really work?  We don't know. And we don't know because there are other factors that come into play when you take such an action and those factors can also have a significant impact on the economy.  

To look at just one of these factors, consider where the money spent on the stimulus comes from. Government spending on a significant enough scale to increase demand will also impact the economy in other ways.  If the money is borrowed (as it has been with our current stimulus) it will reduce capital available to businesses, as the government is either borrowing more and competing with businesses for credit, or it is lending less and therefore not providing as many loans to businesses. To avoid reducing capital availability you could alternatively increase taxes, tariffs, or other sources of government revenue, but they all have drawbacks as well.  Increasing taxes reduces profitability for businesses which can lead to either stagnant growth or price increases.  Increasing tariffs can cause reprisal increases on US goods which would also lead to reduced revenues.  Is this negative effect enough to overcome the positive effect of the stimulus.  Probably not, but is only one factor.  There are a host of other factors, both positive and negative and there are certainly many that I am not aware of.  On the balance it is difficult to know if it will be successful or not.  

The tax cut plan has similar difficulties. It is certainly true that by decreasing taxes you will provide more capital to business through private investors and you increase business revenues by reducing their tax burden.  At the same time you are reducing government revenues which will decrease government created demand which affects overall demand and can cause a stagnating effect. You also increase consumer demand since a tax reduction provides more revenue to people.  On the other hand, making any changes to the tax codes can cause a vast number of unintended consequences as you are altering a system that has been tailors over the years to promote or discourage various financial practices.  As with the spending plan, the complexity grows over many factors very quickly.

Is it possible to add all of these factors up for each side and determine which course is better, or perhaps if there is a better course of action?  Someday, perhaps.  But right now, if it were possible to model the economy with that precision, we would not have the debates and arguments we currently have.

Yet, at the same time, how often are we just supporting the practice we prefer and justifying our belief by focusing on the positive indicators that do exits in our preferred plan?  Increased government spending helps to promote and support many other things that Democrats want to support.  It shifts power away from wealthy corporations and individuals and into a government which they can hold more directly accountable for their actions.  Tax reductions, on the other hand, align more with the values of the Republican party, by pulling power away from government agencies and administrators who are often not directly affected by their decisions and actions.  

Personally, I do believe more in the tax cut plan than I do in the stimulus, but only to a limited extent and not for any of the reasons outlined so far in this post.  Part of my support probably comes from my desire for a smaller, less powerful government, but more of it has to do with what I believe is a better path to finding the optimal solution to a problem.  That, however, is another post and one that I promise will appear soon.

The Stimulus (pulled from a Facebook discussion)

This is something of a summary of my thoughts which were originally in response to a Facebook post started by Levi.   His posting linked to an article (link) discussing how President Obama's recent stimulus is having an effect, but it is perhaps a slower one than people expect.  His comment from reading the article was that turning around anything the size of the American economy would take time and that the large numbers of Americans who see the stimulus as a failure are being too impatient or perhaps not realizing that this is going to be a slow process.

In response, I argued that most of that problem is not so much with the American people as it has been with the messaging and communication of the White House and Congress on the issue.  We have been given dozens of projections which have consistently been very overly optimistic.  There have been regular communications of how things are getting better soon.  When the stimulus was passed, the projections of how bad things would be without it turned out to be better than reality, and the projects of how things would look with the stimulus looked to be wildly optimistic at best.   We are just leaving the time labeled by the administration as "Recovery Summer".  Though there have been some remarks from the President that recovery would take time, the overriding message for most of the year has been announcing that change is here and that things will be better soon.

The actual merits of the specific stimulus as well as the concept of using large scale government spending is something that my co-blogger and I very much disagree on and will certainly be a discussion in the near future here.  Regardless of the merits of the stimulus, however, the messaging from the White House has been terrible.  While I agree that we are, by and large, an impatient people, we are much more so when speed is part of the selling pitch.  I don't expect to sit down at a nice steakhouse and be served immediately, but if I were in McDonalds and had to wait for 20 minutes to get my food I would be pretty upset.  If you want to sell me on a long range plan for turning around the economy, fine, I'm wiling to listen and judge the plan on that merit, but when we emerge from the "Recovery Summer" program and there are very few positive economic indicators, can you really blame me for starting to doubt your plan?