Month: August 2010

–A solution for unemployment

The debt hawks are to economics as the creationists are to biology.

The single most contentious subject in our economy is unemployment. Everyone is against it, but there is scant agreement about how to reduce it. Most of the suggested efforts involve federal spending of some sort, but there is widespread agreement among politicians, economists and the media, that the federal deficits and debt should not be increased.

So countless hours have been spent trying to find just the right combination of targeted spending and tax increases, that would reduce unemployment in a “revenue neutral” way, the belief being that some government spending and some tax cuts reduce unemployment while other spending and tax cuts do not.

As to which does which is not known by anyone, though ample, strong opinions are rife. So we offer this graph:

The above graph shows one of the more remarkable correspondences you will find in economics. Most of the time, when deficit growth goes up, unemployment tends to go down, and vice versa. Though one may argue that correspondence does not equal cause/effect, it certainly is suggestive. And what it suggests is this: Increases in federal deficit growth help prevent and cure unemployment, while decreases in federal deficit growth help cause and increase unemployment.

Yes, there are yearly exceptions. Unemployment is complex and there are no perfect correlations in economics, but the tendency is clear. The two lines are almost mirror images, save for recessions, when unemployment rises and federal debt rises to cure the recession.

Importantly, the graph doesn’t differentiate among different causes of deficit growth, nor does it identify where money is spent, nor whether tax decreases (if any) played a role. It merely shows that deficit increases — any deficit increases –reduce unemployment. This tells me that all the conversation about “revenue neutral,” or which taxes can be cut, or where money should be spent are not germane to unemployment, and merely reflect blue sky speculation by self-anointed experts.

In short, the graph seems to say: “Increase federal spending — any federal spending — and decrease federal taxes — any taxes, and stop all the mindless debate about things you know not.” Although I personally favor the immediate end to FICA taxes for Ten Reasons , I would accept seeing personal taxes reduced or eliminated.

And while I favor a simple stimulus in which a total of $1 trillion or more is sent to each state according to its population, I’ll settle for any equally ample spending idea. In short, deficits cure unemployment, so let’s have the deficits, now.

In 1971, we went made ourselves a monetarily sovereign nation, let’s not waste the opportunity this effort gave us.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity

–Which is more serious: Inflation or deflation?

The debt hawks are to economics as the creationists are to biology.

Which do you feel is more serious – inflation or deflation? The term “more serious” can refer to frequency of occurrence. Or it can refer to difficulty in prevention or cure. Or it can refer to its affect on the economy.

Stated simply, deflation is the opposite of inflation. As with inflation, deflation is expressed as a comparison of demand vs. supply. It is a reduction in the demand for, vs. the supply of, goods and services compared with the demand vs. supply of money.

Supply is a self evident concept. Demand is based on risk and reward. When applied to goods and services, the risk is further deflation. The reward is the inherent reward for obtaining the goods or services. When applied to money, the risk is inflation and the reward for owning money is interest.

In brief summary, deflation can occur when:
1. Money is perceived as becoming more valuable: The supply of money goes down and/or interest rates (reward) go up, while the perceived risk (of inflation or non-payment) goes down. The more likely combination is reduced money supply together with increased interest rates.

2. Goods and services are perceived as becoming less valuable: The supply of goods and services goes up, while the reward (quality) goes down, and or/the perceived risk (of deflation) goes up.

Put all these possibilities together and the most likely, deflation-causing combination is excess supply of goods and services compared with reduced money supply.

Inflation is fundamentally the opposite of inflation, so most of the causes of each tend to be opposites. The key difference relates to the supply of goods and services. In this world economy, it virtually is impossible for a broad number of goods and services to be in worldwide short supply, if money is available to buy them. For that reason, inflation rarely is the oft-mentioned, “Too much money chasing too few goods” – with one exception. Energy. Because energy costs and availability impact nearly every product and service, there is a modern historical relationship between oil prices and CPI.

All of the above leads to one interesting conclusion: While deflation can be caused by a shortage of money, inflation rarely is caused by an over-abundance of money.

If, in comparing seriousness, we mean frequency of occurrence, clearly inflation would be considered more serious. Deflations are rare, having occurred perhaps three times in U.S. history. Inflation is an annual occurrence.

If, in comparing seriousness, we mean difficulty in prevention or cure, I believe deflation is more serious. Inflation easily can be prevented and cured by raising interest rates, which increases the demand for money. There is no limit to how high interest rates can be raised.

By contrast, trying to use interest rates to prevent deflation runs into the obstacle of zero rates. Though negative rates may mathematically be possible, it is difficult to imagine many borrowers accepting negative rates. Thus, the sole prevention for deflation is increasing the money supply, which the debt hawks have made difficult.

If, in comparing seriousness, we mean affect on the economy, I believe deflation is far more serious. Modest inflation can be stimulative, in that it encourages consumers to buy today, rather than waiting for tomorrow. Deflation encourages delaying purchases, which negatively impacts the economy, and can cause a feedback loop of lower and lower prices, longer and longer delay.

All of the above considered, I suggest deflation is far more serious than inflation.

Interestingly, debt hawk commentators, who are fixated on easily-prevented, easily-cured inflation, seldom mention deflation as a threat. The reason may be that there is no debt-hawk prevention or solution for deflation, as the sole solution (increased federal spending) is considered out of the question. Yet here we are, struggling against deflation, while Congress and the media preach against the one action that can prevent it.

Next time I’ll discuss stagflation, every mainstream economist’s nightmare.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity

–John Mauldin spreads the old myths

The debt hawks are to economics as the creationists are to biology.

You may have heard of John Mauldin, self described “investment writer/analyst.” He distributes an E-letter in which he discusses economics. I assume he has many readers who believe what he tells them. More’s the pity, because Mr. Mauldin seems to know little-to-nothing about economics.

Recently I received one of his E-letters, this one titled, “The Dark Side of Deficits.” Here are some direct quotes: “The research of Reinhardt and Rogoff demonstrates that when the government debt-to-GDP level gets to about 90%, trend growth seems to drop by about 1%. They do not offer an explanation, just an observation. My speculation is that it might be government spending and debt crowding out private savings, not leaving enough for productive private investment.”

Perhaps neither Reinhardt nor Rogoff offers an explanation simply because there is none. As readers of this blog know, the federal debt/GDP ratio is totally meaningless. “Federal debt” is the total accumulation of all federal debt for every year since the beginning of this nation; GDP is a one-year measure. Anyone quoting this ratio should stop, immediately. It is a nonsensical apples/oranges statistic.

At last count, Japan’s debt/GDP ratio was 210%, and according to a June, 2010 Associated Press article, “Earlier in the month, Japan upgraded its economic growth in the January-March quarter to an annualized pace of 5 percent from 4.9 percent in a preliminary report.” That’s with a 210% for the phony debt/GDP ratio!

Further, there is no economic mechanism for “government spending and debt to crowd out private savings.” The exact opposite is true. Federal deficit spending, which adds money to the economy, increases savings. The “crowding out” myth is so outrageously wrong, I never know whether to laugh at the ignorance or cry at the result of such beliefs.

Further quoting Mr. Mauldin, “. . . if we do not get control of our deficit spending, we (in the US) risk putting our growth in jeopardy.” Deficit spending adds money to the economy, and this economy is starved for money, but Mr. Mauldin suggests reducing the amount of money coming into the economy. Talk about putting our growth in jeopardy!

And here is a hint about the fundamental cause of Mr. Mauldin’s confusion. He says, “There are those among us who are like teenagers, wanting to make the easy choice and avoid the pain today, not worrying about the consequences down the road.” He seems to adopt the puritanical belief that anything easy or painless inevitably will have dire consequences. So he opts for the most painful solution to our recession — presumably some combination of painful tax increases and painful reduced federal support for things like Medicare, Social Security, infrastructure, environment, defense and education. I assume he has his teeth filled without novocaine.

Note to Mr. Mauldin: When someone is starving, the easiest, least painful choice is to feed them, not to remove food as you suggest. Money is the food of our economy, and adding money to a starving economy is the only sensible act.

But, of all the foolish comments in Mr. Mauldin’s E-letter, perhaps the most frightening was this one, describing his travels: “. . . back to Dallas for a speech to the local Tiger 21 group. Then, starting September 11, I fly to Amsterdam for the International Broadcasting Conference, then to Malta, Zurich, Mallorca, Denmark (speech open to public), and London, home for one day, and then off for a speech to Cambridge Brokers on the 24th. Then I’m in Houston on October 1 for another public speech.”

Good heavens, the man is going to innoculate and indoctrinate all those people with nonsense, and those people will tell others, who will tell others, and soon a huge number will believe they know something about economics, when in fact, they know less than nothing. They know wrong.

If you read Mr. Mauldin’s writings, just for laughs, then enjoy. But if you read for his economic analyses and his market predictions, be cautious.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity

–A wonderful book you will enjoy.

The debt hawks are to economics as the creationists are to biology.

Let me tell you about a wonderful book. It’s short, simple and educational. It’s written in an easy, interesting style. It’s sure to be controversial. You can read it in an hour, and you never will forget it.

The title is Seven Deadly Frauds of Economic Policy, by Warren Mosler. Frankly, I’m not too crazy about the title. Sounds a bit dull. But I promise you, the title is the only dull part of this terrific book, that reads more like a novel than a text.

Yes, its an economics book, but not like most economics books. No formulas. No economics jargon. Just straightforward English, rational discussions that clear up some of the biggest, counter-intuitive mysteries about our economy. Learn how to cure the recession, how to save Social Security and Medicare, how to pay for universal health care, how to end federal debt problems — all kinds of good stuff.

You can read it for free, online by going to the above link and clicking: “Seven Deadly Frauds of Economic Policy (June 17, PDF Link).” Go ahead, do it. You absolutely will not regret it.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity