Government Spending: Low and Falling

Just a quick note about an article by Paul Krugman that appeared on his blog today.

Krugman posits that the increase in government spending is mainly due to two factors.

1 - Since the economy has contracted, government spending is going to make up a larger percentage of GDP. Pretty straight forward.

2 - More people are unemployed and are thus collecting from various social safety nets: unemployment, medicaid, food stamps, etc.

The blue line is government (at all levels) spending as a percentage of GDP, so in the last 25 years it was fairly consistently was between 31%-34% of GDP. I'll also note it fell under Clinton and rose during W, although not by too much. Today it's 36%, actually not that high, relatively speaking. The red line is this same measure but as it relates to potential GDP. Basically, what our economy can and should produce. This number is about 34% which is much closer to the trend for the last 25 years.

Source: Paul Krugman's Blog: The Conscience of a Liberal

So there has been some increase in government (again, this is all levels of government, not just federal) spending, but a large portion of it is clearly due to our economy contracting (red line). If one considers #2 from above then it becomes clear that our government, sans safety net programs, has actually contracted in the last several years. This is extremely troubling. 

Politics and our general inability to come together as a nation and implement our hard won knowledge (see Great Depression) has prolonged this recession and harmed many lives in the process. This isn't "oh we just don't have quite as much money..." This is more young people committing suicide, high school students skipping college, older workers not being able to retire when they planned to (even when working class people's life expectancy has stagnated. Source: 1, 2), and increasing rates of depression that are no doubt related to the inability to find a decent paying job. Bad things happening are a fact of life, but watching them happen when they're largely preventable is tragic

Links for May 13th

First, some background music, Irene by Beach House (hat tip: Chris).

The first several Boeing 787's are going into service. Why is this interesting? There are two main airline manufacturers in the world: Boeing and Airbus. They've both moved to composite materials to reduce weight and increase the range their planes can travel. This changes the routes airlines can fly - it's game changing; new hubs, longer distances, smaller cities being connected, more diffuse growth in general. Where they differ is in size. Airbus went huge with the A380 and Boeing downsized with the 787. In my opinion, one of the lessons of recent history has been to downsize: smaller baseball parks, smaller cars, smaller laptops, smaller homes, smaller cameras. I'm betting on Boeing but to be honest I think the contest will mostly just be awash.

It's no longer illegal to tape record police officers in Illinois. How anyone thought that police officers being immune to public scrutiny in this manner benefited citizens I will never know. In my opinion every police officer should be wearing a camera at all times. Tiny cameras that can fit in sunglasses already exist. Why shouldn't we be allowed to see the activities of those who have been entrusted with such immense power and responsibility?

Apparently being unemployed is bad for people. No shit? Among other negative side effects, people commit suicide more often when unemployed. So yes, in the long run the economy will fix itself, but by sitting idly by we are in fact collectively allowing an entire generation of young (and old) Americans to suffer. Krugman on the matter (sort of).

Oh, and college is expensive. Colleges response: “I didn’t think a lot about costs. I do not think we have given significant thought to the impact of college costs on families.” - the president of Ohio State University

Unemployment at a Glance

Trending of the monetary and employment makeup of the US lately has been both disturbing and interesting, but first some articles and figures:

The unemployment rate is currently 9.5% as of February 2011.

A more accurate unemployment rate, the U6 (total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons), is about 16%.


There are now 5 unemployed workers for every 1 job opening.


The unemployment rate of the young, often cited as a reason for unrest, in Egypt is 25% - in the US it's 21% (defined as 16-24 in the US and under 25 in Egypt). If you're a college grad it's more like 11% and if you're over 25 it's 4.5%.

Cutting unemployment benefits is correlated with people looking for work less.


Graduating from college now and not getting a job is detrimental to your long term prospects - that is, we're damaging a whole generation of workers.

And last but not least, the top 400 richest Americans now own more than the bottom 50% of Americans.

I'm not even sure I need to comment further. It should be abundantly clear why firing teachers - which will most likely be young and will further exacerbate the problem, cutting government spending - which will increase that 5 unemployed per job opening number, and/or cutting taxes (on the rich none the less) at this point in time makes no sense. The employed have historically high employment rates while some job postings are even requiring that you're currently employed just to apply for the job. It's as if the unemployed have become a minority group with little power and diminishing resources. Why is this acceptable?

We Need Growth and No That's Not a Bad Thing

Note: every link in here is worth reading/looking at.

A common response, especially among young liberally minded people, to my all too frequent tirades about how economic stimulus is still needed is "why do we still need growth? Do we really need more stuff?"

Of course we do - and we need it at an increasing rate. Here's why - population growth in the US is about 1% per year. Inflation is currently about 1.5% although the natural rate is more like 3 to 4.5%. Therefore, right now we need to increase GDP by about 2.5% a year just to sustain our current standard of living. Nothing tricky here just some arithmetic.

This is a table I took from Krugman here where he explains basically the same thing. This is Okun's Law by the way:

The take away from this is that an economy needs 2.5% real growth just to keep unemployment from rising and an increase of 2% of real growth to knock 1% off of unemployment.

Typical GDP growth rates are about 2.5-3.5% a year... see where this is going? Real GDP growth in 2010 was 2.6% and in the last quarter it was slightly up to 3.2% (as a part of the whole, not an additional 3.2%) so... at this rate unemployment should start to look semi normal around late 2018 or so.

Back to the point - so this sets up a system where we can only sustain ourselves through continual growth - evidence of the brutality of a market based economy!

Why not? Well population growth and inflation are a fact that must be dealt with and I don't think it's wrong that people should want employment although perhaps I think our mindset towards employment should shift to projects as opposed to a 9-5 but that's not relevant here. What is relevant is that a growing economy and an increased GDP does not necessarily mean a bigger house and an SUV. Whenever predicting how we will live in the future it's usually a good idea to look at Europe now. They've focused on increasing quality of products over tons. As Krugman puts it here:

The way I see it, by the way, is that it’s about shifting the mix away from tons of stuff to quality. You have a small electric vehicle (powered by solar-thermal) instead of an S.U.V., but it drives itself most of the time, and has a great built-in entertainment system. You live in an apartment or townhouse instead of a McMansion, but the brain-wave controlled kitchen turns out gourmet meals on demand. And if we do the GDP accounting right, this will show up as economic growth.

This is something I blogged about a while ago. I was talking about buying fewer quantity but nicer things. There's a good TED talk there too.

Brief Overview as to the State of World Macroeconomics II

Part one can be found here.

Here's a depressing round table with Krugman and some other huge macroeconomists. It's 55 minutes and grim.

To add to that Ezra Klein talks about pretty similar scenarios in which growth is basically stagnate for the next 10-20 years.

Almost no one, not even my most liberal friends, want to hear about more stimulus spending. Yet, government size has decreased by 350,000 jobs since Obama took office, and over the last two years government expenditures have risen a paltry 3% - well below what they were for the previous two years and far below typical economic growth rates. But year America is somehow now socialist. The point is to fill the gap in spending temporarily until it picks up again. Exact numbers are given and they're huge - the initial bill was about half the size it needed to be and 40% tax cuts. Of course it was going to have a weak effect.

The market has been doing fairly well recently and some people are calling for a correction (essentially a devaluation) of anything from very little to 90%. The Big Picture's writer, Barry Ritholtz, is guessing that about 25% is perhaps at the high end, but at the same time - do you want to make money or do you want to be right?

Staying with Ritholtz for a minute - he says we need an intervention as a nation. This is in light of the fact that the foreclosure process (great article) has recently been shown to be in tatters, or rather, businesses that serve foreclosures are falsifying documents proving ownership of a loan that courts then use to seize property. Yeah, that's illegal.

Peter Diamond and two collaborators won the Nobel Prize in Economics (I know, I know - it's not the original) this morning. Why does his name sound familiar? Obama selected him as a Fed governor but the Republicans in the Senate blocked his nomination citing his lack of relevant experience. Then why did Obama choose him? Well, besides the fact that he was Bernacke's professor he also wrote the seminal paper, which he's now won a Nobel for, on... wait for it... unemployment in a distressed market (see: America, present).

Tax receipts get proposed:

I often get asked, or rather chided, about my support for TARP. It's somewhat hard to explain shadow banking to someone who doesn't really know how a reserve ratio works. Anyways, America get its money back and may even make a profit. PLus the banking system didn't collapse... yay? Somehow I feel as if that would have led to zombie attacks... I know, it's weird.

And the real reason I wanted to write about this: "China has an unloaded water pistol at our head"

Everyone knows that we trade a lot with China. They are out second largest trading partner after Canada, but what most people don't know is that China keeps its currency undervalued on purpose in order to increase its export volume. Normally if an import country taxes a good coming in, a tariff, the country where the good originated from gets mad so almost no one does that. Trade is mostly open in the world today - as in most cases it should be. But China "sterilizes" its inflows. What does that mean? When there's a trade imbalance one countries monetary base (amount of currency in its economy) gets bigger, so every year money flows from the US to China faster than the opposite. Every year Chinese currency becomes stronger in proportion to our currency as their monetary base grows. Normally this would mean that their currency, the renminbi, would be appreciate relative to the dollar. Literally, a dollar would buy less in China. Chinese exports would cost more and the US would buy less. That's how trade usually balances itself, so why doesn't that happen.

The Chinese sterilize inflows. That means that the Chinese government uses that excess domestic currency to buy US government debt so that their monetary base won't expand which keeps prices low and exports up. This essentially allows the Chinese to put a tariff on US imports and a subsidy on exports, but most people don't understand sterilization and thus it isn't perceived that way (Krugman's explanation).

The US recently passed the Levin Bill allowing the government the power to place a tariff on any country that manipulates its currency. The Chinese are pissed. They keep saying they will let their currency float (act naturally on the markets) but they never do - they just keep stringing us out.

Making Jobs Obsolete

This is going to be one of those posts that I trudge through unable to explain many of my thoughts. I don't think I have a single friend that agrees with me on this subject. The subject is of course getting rid of unneeded professions from the labor force. That is, putting people out of work! Go to hell Logan. This seems to upset almost everyone I've ever brought it up with. I think technically it would be somewhat akin to structural unemployment.

This is the article that got me thinking about this. It talks about how a large group/organization of graphic designers is upset because companies are more and more holding design competitions for logos; that is, crowdsourcing. The result is one winner who makes very little, and everyone else gets nothing. The professional graphic designers are upset because this cuts into their work and what they can charge for work. Dear graphic designers, these competitions are not evil. They merely make the market more efficient by bringing together people with needs (companies who need logos) and designers willing to give it to them. All participants are willing and if the professionals design is really so much better then they will continue to have a niche somewhere in the marketplace.

There is often this (misguided) feeling in society that putting someone out of work because their job is no longer relevant is a terrible thing. I'm not talking about cyclical unemployment. That is, unemployment that fluctuates according to the business cycle. That should be avoidable, at least theoretically, and it has been to some degree for the last 25-30 years... let's not get into why that is. What I'm talking about is jobs that no longer need to exist. The example I always give is that of a blacksmith. Back in the day that was a highly regarded job, now they barely exist. Why? Because it is more efficient to let a machine do that work. In the short term sure that person is out of work and they need to change careers, but in the long run that person can become more useful to society by doing something else. I'm not discounting the pain that this brings on the individual. I'm merely saying that the pain imposed on the individual is less than the "pain" felt by society for allowing that person to keep their obsolete job. Milton Friedman, who right now is taking a beating (which I think is somewhat unfair in that his ideas are actually quite liberal), used the famous example of loom operators in India (near the beginning, interesting read too).

I have mixed feelings on unions. I like that they raise wages for me. Although overall I think the practice of it is a form of collusion which is illegal. That and it artificially limits the number of people who can get jobs. A union's best quality is that they act as a collection of trade professionals who train apprentices. They essentially act as a trade school. This alone may justify their existence. One of the problems I see with unions is that they sometimes employ construction techniques that purposely take more time and are not necessarily better. As an example, in Chicago you have to use conduit (conduit can have some advantages but it also adds enormously to the cost) around all electrical wire instead of romex, and copper tubing (which goes bad over time and is expensive) must be used for water over pex, a plastic form of piping that never goes bad. Both of the unused examples are employed in the South where unions are more or less nonexistent.

Protecting jobs by passing on the cost to consumers doesn't really help anyone. It hurts demand for the product and doesn't allow as many people to consume the good. If putting in pex saves installation time, is cheaper, and requires less maintenance then wouldn't using it over copper pipe allow plumbers to service more homes thus lowering the cost of plumbing... allowing more people to have it? The point is that people should be put to use in an area where their work is of better use to the collective good. Essentially, in this example technology has made it possible for one person to do the work of many, but for various reasons we hold back this technology to keep people employed. The result is expensive plumbing. Plumbing shouldn't be a luxury. It improves people's health and makes needless labor unnecessary. The problem is what to do with those unemployed plumbers. Ideally they would get retrained at another career. Possibly even something similar, but reality isn't always that nice.

Now my mixed feelings. As I talked about a while ago things change faster now (it's near the end of the post), so its not crazy to think that people's jobs could become obsolete just a few years after starting them. The Department of Labor doesn't really know (boring) how often people switch careers. They do however know that they tend to change jobs about ten times between the ages of 18-38. The point is that I'm not sure where all this is going. It could be the case that someone spends more money on their education than they could possibly make by working in that field while it exists. In the plumbers example it could also be the case that twice as many plumbers exist but they take half as many hours; essentially a reduction in work and pay. That's all good and fine, but then you have to compete with "hungry" people who are willing to work 60 hour weeks.

I found this passage by Andre Gorz in the Wikipedia article on structural unemployment, "The connection between more and better has been broken; our needs for many products and services are already more than adequately met, and many of our as-yet- unsatisfied needs will be met not by producing more, but by producing differently, producing other things, or even producing less. This is especially true as regards our needs for air, water, space, silence, beauty, time and human contact..."

Now, how to employ that in the free market... (hint: you have to change the lifestyle, opinion, and general habits and thoughts of the "average" person)