The Biggest Mistake of Our Generation

I haven't posted much on economics in the last year or so. The news is overwhelmingly depressing and I feel exasperated on the subject. The missteps of our politicians, most of which were entirely preventable, continue to cause enormous suffering on the parts of millions of people - especially young workers looking to start their careers. The cumulative effects of these errors will be felt for decades. People's lives are being destroyed and few seem to consider it a big deal.

The worst part of it all is that many people truly believe that there must be suffering for the situation to improve, but this is how people felt during the Great Depression too. "The weak must be culled!", but there's an aspect of moralization to that argument that I'm uncomfortable with. This is macroeconomics, not metaphysics. The Great Depression can largely be explained as a money supply problem (there wasn't enough money/liquidity in the economy much like the babysitter co-op problem); an answer which makes many uneasy as it's a somewhat simple technical fix. People believe that it must be more complex, but it simply isn't.

This morning the New York Times ran this piece: Defecit Reduction is Seen by Economists as Impeding Recovery. No shit? Every respectable economists knows that reducing government expenditures during an economic downturn is inadvisable and they've been saying so all along. The article goes on to rationalize what happened. This is what's been so frustrating over the last five years, giving credence to ideas that have been proven demonstrably wrong - repeatedly. Few people will step up and say "Yeah, I've focused on the national deficit and reduced government spending but it turns out I was wrong. Let's focus on unemployment." Not going to happen, so they obfuscate with rhetoric and the suffering continues.

In the meantime the American public thinks there's an actual debate going on. There isn't one. Textbook New-Keynesian economics has been validated. We've all been screwed and my generation is fucked. If anything this is an understatement.

The data that's been coming in over the last five years is in line with typical macroeconomics textbooks that any econ 101 student is exposed to. If the following were a test question to me in undergrad:

The current economic indicators are as follows (May 2013): 

• Unemployment: 7.6% 
• GDP Growth: 1.7% (2011) 
• Inflation: 1.5% 
• 10 Year Treasury Bill: 1.8% 
• 10 Year Treasury Bill Inflation Protected (TIPS): -0.5% 
• 30 Year Treasury Bill: 2.98% 
• 30 Year Treasury Bill Inflation Protected (TIPS): 0.62% 

Describe the most advantageous course of action which a central government could, through fiscal and monetary policy, increase GDP growth and lower unemployment in both the short and long run.

My answer would be something along the lines of:

Short answer - The government should borrow money and invest in itself because there are many idle workers, slow economic growth, and financing costs are zero or negative (!). Although politically it may be unpopular to borrow money to spend, no other entity is large enough to assume this role, so the federal government must.

Longer answer - Monetarily the Fed should reduce rates (done, it's at 0%) and increase the money supply (done) while the Federal government should increase its expenditures (it's done the opposite) and encourage state and local governments to do similarly (they've been the worst). Although it would be advantageous to spend on infrastructure, education, and other areas that produce long term benefits, where the money is spent is somewhat irrelevant (although politically unpopular, Keynes burying money in jars). This spending can be financed by the historically low interest rates (negative rates on a 10-year bond, who wouldn't want to get paid to borrow money?). Further, the federal government should reduce taxes on those who are most likely to spend additional income, the poor, as the multiplier effect is larger  (it's done the opposite). To add to the last point, social safety net programs should be expanded (they were for a while but they're being cut back now) as those with little money are most likely to spend any additional income which would create a larger multiplier effect.

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

Keeping It Victorian: Part I

This is part 1 of a series that will take a look at what I percieve as problems with the way housing is dealt with in the US.

It bothers me that the vast majority of people buy large cheaply built homes that are neither beautiful nor thermally efficient. If your house is going to be ugly at least make it energy efficient, and if it's going to be energy intensive then make is beautiful. Yet people choose the third option, big, over all others. Research shows that large houses do not make you happy (source - interesting paper by the way). The purpose of this post is to explain, mostly to myself and in a very mechanistic manner, why houses are a certain size, cost, and quality. I'll be looking at the Midwest since that's where I live.
My argument is this:

1 - Housing is generally the most expensive thing most people ever buy.
2 - Most people are not well informed as to what they are buying.
3 - Banks/financiers have a large influence on what is built.
4 - Our cultural values in the US specify a certain housing type.
5 - Money is the biggest constraint in the housing industry (and probably everything).

The median square footage of a home completed in 2010 was 2,200 square feet (SF), in the midwest it was 2,000 SF, and 30 years ago the median for the US was 1,600 SF (source).

Note: the average in 2010 was 2,390 SF but I'm not going to use that. My logic is that housing typically can only get so small, whereas the very wealthy often build huge homes which skews the data. Hence, I'm using the median.

Note 2: how closely correlated is home size to GDP per capita? This is a fun idea for a stats based blog post in the near future. For now though I took GDP in 1980 ($2,778 billion) divided by 1980 population (226.6 million) adjusted for inflation ($12,300 becomes $32,100), then compared to 2010 GDP per capita ($47,100) which is a growth of 46.6% in real terms (actual goods you can purchase). In that same 30 year period (1980-2010) the median home size went from 1,595 SF to 2169 SF, a growth of 36.0%. That's pretty close. If I were running a regression analysis I'd work in a Gini coefficient (change in level of inequality). I have a feeling that'd explain a decent amount of the difference. You would then be able to extrapolate how much larger houses should be if the level of economic equality had remained at 1980 levels. Conversely, you could estimate how much more energy efficient homes could have been with the added money and then translate that into any number of things like possible savings in carbon emmisions, barrels of oil, square miles of coal etc.

The vast majority of people take out a loan when purchasing a home and increasingly that loan tends to be of the 30 year variety, which corresponds roughly to most people's working careers (if you buy a home/loan it makes it harder to leave your job and the region, which decreases your bargaining power over wages, which makes your firm more profitable/competative, which gives local banks more business -- surely they have no vested interest in helping people secure loans for housing right? This is why companies pay you more money initially if you move to their city and buy a home in the area). Typically it is recommended that most people do not take out a loan that is more than 28% of their gross income (why do people rarely live below their means?) or 36% of their total income after other debt obligations. The median income in the Midwest in 2010 was $48,500 (source). Using the 28% figure on a median income of $48,500 we get $13,580/year or $1,130/month. Using an amortization table that comes out to about a $190,000 loan over 30 years at 6.00% interest. Interest rates are currently around 4% but I'm not sure who you have to kill or what god you have to dance to during a full moon to actually get that rate.

I'm going to assume a 20% down payment because it's conservative and you can avoid paying loan insurance at this rate. This comes to $47,500 + $190,000 = $237,500 and we'll round to $240,000. That's what the typical family in the Midwest can afford; a $240K home that is 2,000 SF and who pays a little over $1,100 per month on thier mortgage.

$240,000/2000 SF = $120 a square foot in total cost. That's what people pay, not what it actually costs to construct, but construction profit margins are razor thin so it's probably close to that minus land costs and what not. This is why no one is building right now. Construction costs in Chicago right now will probably run you in the $150/SF range which makes sense given that it's a major metropolitan area and the cost of living is higher. It costs more to build a new building than it does to buy an existing building, hence the current housing situation. This is a fairly fundamental reason why buying housing right now may not be a bad idea. You can not physically build new things cheaper. I think #1 on the list is well established so let's look at #2.

Most people do not know how a building is built, and that's fine, why should they? The problem is that the person selling you the building doesn't know either, and the bank only cares in so much as they have confidence that the building will make them money. They accomplish this by doing the same thing repeatedly. This is why the construction industry is so conservative; construction costs a lot and no one wants to "lose their ass" so to speak. The only person who does truly understand what's happening is the architect and contractor. Most market rate housing doesn't have an architect so now it's down to the contractor. This gets interesting because one doesn't need anything particularly to become a contractor. If you have tools, know how to build things, have financial backing, and sometimes insurance, you can be a contractor. Not to say that there aren't excellent contractors out there. I'm just saying that it varies greatly and these people are not always well versed in things like thermal heat bridges, structural calculations, etc. Their main goal is to stay in business, make money, and not get sued -- much like anyone I suppose. They're not exactly trying to buck the system and do something extraordinary. Let's take a closer look at the banks role, #3 on the list.

Banks are (or should be) in the business of taking deposits, providing money (liquidity) to those who need it, and managing the risk in between by charging a competative interest rate. In short, they want to be assured they will be paid back. Since the bank is typically providing 70-90% of the money in a project they get a lot of say. As in, if they don't like what you're building they won't give you any money, so unless you have all your own money to build whatever you want you're going to have to build fairly conservatively or be excellent at selling ideas to bankers. This is a large part of the reason why most buildings in the US look pretty much the same. In all fairness this is beneficial as it keeps people from doing unproven things that fail. On the other hand it keeps people from taking risks that advance the industry. None the less, this situation leads us to build homes much in the same way as people did in the Victorian era.

This brings us to #4. Simply stated, bigger is better. If you spend some time researching properties you find that housing in a general area tends to be the same price. Buildings are a lot like cars. There are class sizes, standard features, upgrades, and general price ranges. They're just not that unique for the most part. It also means that some features do not make sense at certain price points. I insist that certain things should be standard on all housing. Good windows, thick insulation, good structure, etc. I think that should be standard, but it doesn't work that way. Cheap housing gets cheap windows, expensive housing gets decent windows, and everyone gets thin insulation. You wouldn't expect wood grain in a Ford so why should the average person expect thick walls... or so goes the logic.

While researching for a project last spring I found that the price for new market rate condos in the South Loop of Chicago tended to be around $199/SF. From building to building this varied very little. We're talking $2-3 tops. Everyone had the same counter tops, same cabinets, same square footage etc. The thing that would set one place apart from another would be something like a really nice appliance or a computer nook. Maybe they spend an extra $1,000 on a big refrigerator and over a 1,000 SF apartment that raises the cost $1 SF, or maybe you get a balcony you rarely use. That's how tight construction budgets are. Buildings differentiate themselves with small perks generally in the 0.5%-2% of total price range. Why would anyone pay 10% more for a well built home? You would price yourself out of the market. The alternative is to build smaller but higher quality... think that's going to happen in America? That's #5.

In summary, people tend to buy the most expensive house they can afford, the construction type is determined by what banks and contractors are comfortable building, since banks and contractors do not have to live in the houses themselves they build cheaply, since buyers are not well educated on construction they tend not to value well built homes, add to this American's inherant preference for size over quality and you get the ubiquitous 2,000 square foot  $240,000 home with 30-year loan. This is how our incentives are aligned and this is the result they produce; huge homes with a corresponding loan for all.

Why is Europe different? They charge more for energy, pass laws and codes regarding energy useage, their code officials tend to be less stringent, they have less land, and tend to prefer well built over size. I would also argue that they have better taste in general but that's probably just my personal bias.

For the Kids

Every time you hear a politician mention that we need to slash spending "for the next generation" be reminded that of current generation:

1 in 6 is working full time
3 in 5 live with their parents
3 out of 4 say they need more education, but only half plan to enroll in classes

Source: this NY Times article. Here's a PDF to the actual study.

One of the themes of this depression is that those with the power to do anything are entirely insulated from any of its effects much in the same way that Washington DC has one of the lowest unemployment rates in the country. "Everything is fine. what is everyone talking about?"

I'm in my 20's and more or less all my friends are underemployed or unemployed. We're talking middle class to privileged and highly educated people. Very few people my age are able to find jobs in the fields they studied in college or grad school. I'm talking law, architecture, accounting, industrial design, etc. - not just history and philosophy majors. We're destroying an entire generation of our populations workforce in a way that it will never recover from. But hey, gotta watch that deficit for the future generation (the ultimate irony being that we'll owe ourselves the money).

Recommended Reading

The universe is immensely large.

To try imagining how big, place a penny down in front of you. If our sun were the size of that penny, the nearest star, Alpha Centauri, would be 350 miles away. Depending on where you live, that’s very likely in the next state (or possibly country) over.

In our ever expanding knowledge of: animals are basically just like us. Rats appear to have empathy. Also in the article, rats will share food and give up chocolate in order to help another rat.

Who are the 1%? They tend to vote Republican even if they aren't more conservative. They tend to have far more education with a simple caveat - being highly educated doesn't guarantee vast membership in the top 1%:

This is not to say that college degrees guarantee vast wealth. To the contrary, only a small fraction of all Americans who report having a postgraduate education (1.5%) or an undergraduate degree but no postgraduate education (0.8%) fall into the top 1% category.

And Some videos in order of educational - funny.

Via Freakonomics:


Via GOOD:

Income Inequality Addendum

The CBO (Congressional Budget Office) just released a report showing growth in incomes and growth in income as a share of overall income.

This first one shows growth in income over the last 30 years among the various quintiles (each 20% of the income spectrum). The gains were as follows:

275% for the top 1 percent of households,
65 % for the rest of the top quintile
< 40% for the second, third, & fourth quintile
18 percent for the lowest quntile

So everyone's income grew, that's good, but here are the gains as a whole (taken from Krugman).

Not so pretty. Also, that top 1% could be broken down further. I like to think of this as market share. Basically there's a pool of something - customers, income to be had, etc. - and there are entities vying for control of that pool. Well, the 99% is losing out.

Occupy is Right, Stop the Skepticism and Apathy

I've been unexpectedly alone among my friends in my support for the OWS movement and it's bothering me quite a bit. I'm convinced that most people are completely unaware of just how one sided our society is. Further, all the critiques I've heard of OWS is the same utter crap that the news media (see: owned by rich white conservative men) spouts. Here are the three main gripes I hear about the Occupy Movement:

1- "They don't have a clear message."

Yes they do. OWS is fighting against economic and political inequality. They want everyone to pay their fair share. And they're right. The system is broken and unfair.

2- "There's a bunch of weirdos at their protests."

There always is. In the 1960's there were a lot of LSD dropping and free-sex having protestors, but out of it came the civil rights movement, women's rights, and anti-war protests. Does that invalidate them?

3- "They're just bitching. They/we don't have it that bad. Plus, nothing is going to change."

That's utter apathy and it misses the point. Sure, a lot of us live quite well in the bottom 99%, but even as our country has grown richer in the last 30 plus years our share has not increased. Study after study shows that wealth inequality is bad for just about everything in a society from crime rates to levels of happiness. Even the richest are better off in a more fair society.

Evidence:

First, here's the past 100 years or so of income distribution in the US as given by the New York Times:

Currently the top tax rate is 35% for any income made over $379,150 and that doesn't include capital gains (money made on stocks, interest, etc.) which is currently taxed at 15% (really low). It is common to hear people saying that high taxes are bad for an economy. Yet, during America's greatest economic growth, post WWII to somewhere in the 1980's, the top marginal income tax rate was between 70-94% and included capital gains. So no, high taxes are not bad for an economy (see: Northern Europe).

It has come to my attention that the chart that was once here contained some incorrect information. I will repost this when they release the new data (hat tip: Joe). The chart showed varying effective tax rates among similar income earning groups compared with various levels of income earners. The point was that a percentage of the very wealthy pay a very small effective tax rate.

Income Inequality is bad for EVERYONE.



The more a country taxes the rich the happier its people. It's really just a small part of that video from above.

Also, the top 1% is misleading. It's more like top 0.1% (both of these graphs are taken from Krugman's analysis of CBO data):

The top 20% of income earners haven't gained any income share since the late 1970's while the top 1%'s share has grown from about 8% to about 17% - or more than doubled.

The top 1% minus the top 0.1% share of income has grown from about 5% to 8% - a 60% increase - not bad, but the top 0.1% of earners went from 2.6% to about 8% - about a 300% increase. It truly is the super wealthy who are making all the income gains.

Solutions:

There was a study done a little over a year ago that I wrote about before where people of all ages and political affiliations were asked who had the wealth in America.

Of course, everyone was totally wrong. Reality was far more unfair than they had realized. In fact, when asked what the division of wealth should be, people overwhelmingly responded that it should be more fair than what they thought it was - which was to generous to begin with.

So how do we fix our system?

Simple, see that bottom line in the graph? That's what people want. That's the society Americans say they want to live in. To accomplish this first we have to elect people who will represent our interests - fairness. Now the fun part, Congress will set goals as to what percentage of the total national income any group is allowed to keep as income. Say the top 0.1% gets 5% of earnings, top 1% gets 5%, etc. Whatever we choose. Next, the IRS and CBO changes the marginal rates (which now include capital gains taxes) of those income tax brackets every year to bring the targeted goals to within range. It'll take a few years to settle out, but eventually the tax brackets will stabilize. If you think that's too socialist or whatever then simple... just lower your targets and let the rich get richer. This is already what we do, we just don't set goals. We just set arbitrary numbers that mean nothing.

My guess is that the vast majority of people would pay less in taxes, more income brackets would be created near the top end, and those really high end brackets rates would be close to 70 plus percent.

Parting Thoughts:

The top 400 wealthiest people in America have more than the bottom 50% (about 155 million people). That means one person has as much as 390,000 people. That's like getting rid of Chicago and replacing it with 7 people.

"No country, however rich, can afford the waste of its human resources.  Demoralization caused by vast unemployment is our greatest extravagance. Morally, it is the greatest menace to our social order." -FDR

Paul Krugman

Liberal or conservative, anyone I espouse Krugman's ideas to gets uncomfortable/mad. Which is interesting because his track record on macro is the best of anyone out there. That and he offers actual solutions. Here's one of his latest.

Children at Play

My friend Joe sent this to me. It's easily one of the best articles I've read regarding our current economic, political, and societal morass. It was penned by GMO co-founder Jeremy Grantham.

If you give a damn it's worth reading.

If You Bemoan Federal Debt I Bemoan You

I am not an expert in economics. I have an undergraduate degree in it, but I'm not an expert. None the less the basic tenants of economics are being violated wholesale by our elected officials. This is part one of a basic overview of what is happening in the US right now. This is the simple stuff that if you don't understand you really shouldn't open your mouth about anything economics related. Sounds harsh? So are the consequences for saying stupid things. No one walks into a hospital and requests blood letting just as no one walks into congress and votes for reduced spending during a recession... oh wait.

What is disturbing is that our federal government is literally doing everything wrong that it can. I expect my friends and family who have never looked at an IS/LM curve or Keynesian multipliers to say ignorant things like "oh just let them default or whatever, we need to stop all this deficit spending," but for our government to act in a populist manner in this scenario is nothing short of insanity. It is wrong. It will hurt people. This is not an ethical debate. There are thousands of research papers, billions of data points, and hundreds of relevant historical examples to garner experience and guidance from. If you have a different opinion post the data because your slogan (big government is bad!) does not hold water.

Where to begin? Let's keep it basic. How much money does the US produce every year - or thought of as personal income - what is the US's salary? This is called GDP or GNP. Please read about it. It is important. Well the number is $14.1 trillion per year currently. That's 14,100 billions or 14.1 million millions.

How much is the federal government's revenue? That is, how much money does it collect in taxes? According to the CBO data (congressional budget office) it was about $2.2 trillion in 2010. That's $2,162 billion or 15% of all the money generated during a year in the US. Let's look at some data.

So how much is the deficit? It's there on the far right of 2010 above: $9 trillion. That's a lot of money and it's been growing, but why? Look at revenue on the far left in 1971 and then look at the next year and the next. See that? It goes up every year as the economy grows. Then look at 2001; it dips. Why? In 2001 and 2003 we had the Bush tax cuts. Revenue fell, nothing shocking here. After 2003 revenue continues to go up as usual until 2008 when Bush was still in office and our current mess started. Straight forward right? It usually is...

Aside: if our debt is $9 trillion and we produce over $14 trillion a year that's like the typical American who makes $32,000 (as of 2006) a year having a debt of $20,500 - sounds like a car loan (in 2006 the average cost of a car was $28,400 according the the government). Does having a car loan make you reckless, irresponsible, and broke?

Now let's look at how much the government is spending (outlays), that's the next column over. I made an Excel spreadsheet using the CBO data starting in 1990 because I'm lazy. You can see the formula I use and all the numbers. Look at the percentage change.

In the 90's federal government spending increases at about the rate of inflation. Then in 2000 spending ticks up and in 2002 it surges. Why? Well, wars are expensive. See how it's high in 1991 and 1992 when we blew up Iraq for the first time? Anyways, it jumps in 2008 and 2009 greatly because Obama is a socialist. Oh wait, no. The recession begins in Q2 2008 and lots of people are unemployed and now collect unemployment and depend on other social welfare programs. Which is what they are designed to do. That and there's the stimulus and bank bailouts in there. Then the stimulus mostly goes away in 2010 and outlays actually drops slightly.

So why is debt bad? Well, there is only so much money out there so whenever the government borrows it "crowds out" private investors and raises the cost of borrowing to some degree. Well, that does not matter right now because we are in a liquidity trap. What the hell is that? Basically, everyone is trying to pay down debt, save, and invest money. If everyone is saving then who is borrowing that saved money? When you put money in a bank or pay down a mortgage that money is lent back out again. If more people are saving than spending it makes it cheaper to borrow money because there's less demand for it. A liquidity trap is when common monetary policy (changing the federal funds rate) no longer has an effect. That is, lowering the interest rate does not spur more borrowing/growth. Well, the federal funds rate has been zero for a while.

So why else is debt bad? Because you have to pay interest on debt. What does the government pay in interest? They pay whatever investors are willing to lend them money at. That is, Treasury Bills. So what are the current rates?

Inflation adjusted rates - that is, the money investors receive after inflation, is currently negative on both 5 and 7 year treasury bills. At 10 years the government pays a "real" rate of 0.38% interest. This is not magic. There is almost nothing to invest in right now because there is so little demand and everything is so uncertain, and up until recently it was unthinkable that the US Federal Government would default on its debt. Hence, we are the safest debtors in the world and get the lowest interest rates. Let's see some data...

Look at the second to last column. Every year we pay more and more in interest until 2009. Then it drops and stays pretty low. Why? Because the federal government can pay almost nothing to acquire long term debt as explained above. Hell, people will pay them to acquire short and medium term debt (up to 7 years!).

Do we need to do something about the debt? Absolutely, but not in a depressed and now stagnant economy. So why do we need to reduce the deficit in a depressed economy? We don't. Borrowing is cheap. If I told you that you could take out a 10-year loan for 0.38% above inflation, try to make money with it, and then pay it back do you think you could? If your answer is no then keep your 9 to 5, otherwise welcome to America. Let's borrow more money so investors have something to do with all their cash that's sitting on the sidelines or in gold bars doing nothing. Let's build some bridges, fix some national parks, upgrade our research facilities, double NASA's funding, fix our schools, invest in cleaner energy, help the poor, and provide basic healthcare to all. It's an investment in our basic infrastructure and I bet the returns will be more than 0.38% over inflation.

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.

Conditional Payments

Mexico and Brazil have come up with forms of social welfare that pays the poor for meeting certain conditions, hence the name conditional payments (great article). These conditions can include keeping your kids in school, going to get medical checkups, going to classes on disease prevention, etc. The government figures its better to pay $1 to keep the kid in school than spend $5 to arrest them a few years down the road. The sums of money are tiny ($13 for every month a child is in school, $19 if you're 16 or over) but to a poor family it can double their income. The program is highly scrutinized and is showing very real and positive benefits. Poverty in Brazil has fallen from 22% to 7%. Mexico's version of the program has raised the numbers of kids entering junior high by 42% and high school by 85%. These are of course very real examples of direct stimulus - they're transfer payments.

I think you'd be hard pressed to find someone in America right now that thought our country was doing alright economically, and naturally one would assume that this means something should be done to correct the issue - which in this case is an unemployment rate of nearly 10% (about 4% is considered the natural rate currently).

Recently a bill passed approving 800 billion (that's 800,000 millions) in tax cuts that extended the Bush era tax cuts. This is, of course, more than the original stimulus received (which was roughly 40-60% tax cuts itself). And of course by taking away federal revenue - that's what a tax cut is - revenue declines and you go into debt if you don't slash spending. Of course that's not so easy. It turns out that if you take our defense spending, medicare/medicad, and social security you're only left with 20% of the budget. So have fun firing teachers, letting roads crumble further, and ceasing funding for scientific research. Why is any of that political? Doesn't everyone like education and roads?

Anyways, the whole point of this is that the legislative branch has two options for helping the economy. They can either cut taxes or spend more money. They both create debt so in essence they're the same thing. My complaint about tax cuts is that 70% (the bottom 50% pay 2.7%) of federal income taxes are paid by the top 10% of income earners, so if you make tax cuts guess who it goes to? When wealthy people get money they tend to save it which is not the intended outcome if you're trying to stimulate an economy.

This chart shows the percentage of Federal Income Taxes paid by each income group:

Year		Top .01%	Top 1%	Top 5%	Top 5-10%	Top 10%	Top 10-25%	Top 25%	Top 25-50 %	Top 50%	Bot 50%
2001		16.06%	33.89%	53.25%	11.64%	64.89%	18.01%	82.90%	13.13%	96.03%	3.97%
2002		15.43%	33.71%	53.80%	11.94%	65.73%	18.16%	83.90%	12.60%	96.50%	3.50%
2003		15.68%	34.27%	54.36%	11.48%	65.84%	18.04%	83.88%	12.65%	96.54%	3.46%
2004		17.44%	36.89%	57.13%	11.07%	68.19%	16.67%	84.86%	11.85%	96.70%	3.30%
2005		19.26%	39.38%	59.67%	10.63%	70.30%	15.69%	85.99%	10.94%	96.93%	3.07%
2006		19.56%	39.89%	60.14%	10.65%	70.79%	15.47%	86.27%	10.75%	97.01%	2.99%
2007		20.19%	40.41%	60.61%	10.59%	71.20%	15.37%	86.57%	10.54%	97.11%	2.89%
2008		18.47%	38.02%	58.72%	11.22%	69.94%	16.40%	86.34%	10.96%	97.30%	2.70%

If you give money to the less wealthy or even poor people they spend it because they have to. This of course begs the question why the not wealthy (see: the vast majority of Americans) would ever support tax cuts. I think the answer has, as it often does, to do with the perception of fairness.

To come full circle - why does America go for tax cuts that benefit the wealthy as opposed to inexpensive transfer payments that would help a greater percentage of our population and be more effective? Food stamps have long been THE most effective and efficient means of stimulus to the poor. Again, the answer seems to be the perception of fairness.

Critters Talk Macro Econ.

I just had to make one of these. There's one on YouTube right now that "explains" quantitative easing... I don't even know, it's just all wrong, but yet it has 3 million views and the comments page is filled with cheers from idiots.

Sorry that it is rather dry.

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.

Plutocracy

I read this article in GOOD that pointed towards this paper - I recommend both. It's worth really looking at and thinking about the implications of this. The basic takeaway from this is that the bottom 60% of the US populace has no stake in our country, the top 20% for all intents and purposes - own everything, and even rich republican men think the world should be more fair than it is.

Sweden seems to be doing just fine. I'd really like to see this study done throughout the world and within even more specific groups of people - by age, by neighborhood in Chicago, by education, etc.

And yet the Right and even members of economic academia that are pushing for tax cuts for the rich. Deeply troubling and disturbing is an understatement.

The percentage present between the pie charts is explained in the paper. When shown two of the charts unlabeled (didn't know what country it represented) at the same time Americans preferred the Swedish income distribution to our actual distribution. Americans also preferred the Swedish chart to perfect distribution - which in and of itself is fascinating if not surprising.

Monday Reading

China becomes the worlds second largest economy (as measured by country) passing Japan. China's economy is still 1/3 the size of the US's.

Wind power manufacturing in the US is growing... fast. The cost of transporting the large components too far means that domestic manufacturing is here to stay and grow.

Portable lightweight housing that can be erected in a day with nothing but a screw driver. Here's a somewhat more established non-profit manufacturer, World Shelters, of a similar product that has humanitarian and individual sales in mind.

Roosevelt Island near New York has an island wide trash sucking system... no more garbage cans. Photos.

Secretary of Defense Robert Gates is slashing the Pentagon's budget which has increased unabated since late 2001 - in fact in nominal terms it has doubled in the last decade. This isn't small stuff. He's talking about almost trillion dollars over 9 years. Lots of this has already happened.

^ Speaking of a trillion only 21% of Americans knew how much a trillion dollars was relative to a million. It's a million millions. There are 1000 millions in a billion and 1000 billions in a trillion.

Greenspan calls for an end to the Bush tax cuts! But for all the wrong reasons... he thinks the deficit is too big and the (to use Krugman's coinage) the invisible bond vigilantes could strike at any time. Yet somehow bond rates hit a record low yesterday.

Best story ever? Wikileaks, after having embarrassed the military by releasing some 77,000 classified transcripts from Afghanistan, says it wants to release another 17,000. The military is coyly threatening them, so what did wikileaks do? It distributed an encrypted torrent through Piratebay.org that has a large file size. They say the classified information in the torrent is much more damaging that what is already out there. So... if the government does anything, they tweet the encrypted torrent passwords and tens of thousands of people around the world unlock their classified torrent. Brilliant.

NYT story on purple martins - the bird that eats a ton of insects and relies on humans for its housing. We had one in my backyard when I was growing up that still exists.

All sorts of old people are missing in Japan, or rather lots of them have died and their children hide their death in order to collect their pensions.

Ecosystem engineering - I'm curious to see the results of this test. If it's at all promising it could mean huge gains for the natural world.

One of the most famous daguerreotype series recently went under restoration efforts which found that they have a degree of detail that is - utterly shocking. Basically at 30x magnification the plates don't lose detail. That means the series of 8 - 6.5"x8.5" plates could be blown up to 170' by 20' without losing any detail. The irony is that photography in its early stages often produced images that are in many ways more detailed, fine, and artistic than modern cameras are capable of producing. How powerful would your digital camera need to be? Oh, 140,000 megapixels.