Thursday, April 28, 2011
The boatswain's mate who taught me to steer emphasized that I shouldn't use too much rudder. If I did, I would be constantly chasing the course back and forth across the compass binnacle and never get it right. Even worse, the constant corrections would slow the ship down and waste fuel. If I just used a light touch, natural wave action would usually bring the ship back on course.
As it turns out, the same principal applies to the economy and inflation.
There are two kinds of inflation. There is "headline" inflation, which includes highly volatile prices like food and gasoline. This kind of inflation is notoriously seasonal and subject to temporary influences (bad weather, for example).
The other kind of inflation is referred to by economists as "core" inflation. That is the underlying inflation rather than day to day price fluctuations.
When the Fed manages monetary policy, they have found through experience that they should limit their measures to those affecting core inflation.
Core inflation right now is less than two percent. Furthermore, it is not increasing and there is no sign it will increase anytime soon.
The problem for most of us is that we spend money at the grocery store and gas station in response to "headline" inflation.
Nonetheless, it would be bad for all of us if the Fed started responding to headline inflation with a heavy hand on the helm. That would be another way to kill economic recovery. Goodness knows, the House of Representatives is doing enough on its own to accomplish that. They don't need the Fed's help.
Wednesday, April 27, 2011
"The jobless workers." Forbes.com reported, "are caught in a partisan rift over the seemingly straightforward move to change a formula for calculating unemployment benefits, allowing the federally funded program to continue for people out of work for up to 99 weeks."
Some may call it a "partisan rift," but real people are at risk. The dispute, at bottom, is over whose vision for the future of America will prevail. The issues are certainly not trivial.
Americans are increasingly reliant on government programs to meet their most basic requirements. Last year, more than 18 percent of the nation's total personal income came from entitlement programs such as Social Security, Medicare, food stamps, unemployment benefits and other programs, according to an analysis by USA Today. Wages were only about fifty percent of total personal income, the lowest share since government tracking began in 1929.
National Public Radio asked members of the public receiving government benefits to call in with their stories. The transcript of their calls is heart wrenching.
Then came the main attraction, usually a cowboy movie but sometimes a detective story like Boston Blackie.
Cowboys were the favorite and it was from those movies that we received the most influential instruction about proper conduct. Cowboy movies were far more influential than Sunday School.
The plots were always the same. The villain, a greedy, cowardly bully who sent his hired hands to do the dirty work, had devised a way to take over the town and leave the good, hardworking and honest townspeople, farmers and ranchers without an effective voice.
Then the hero rode into town. It might be Hopalong Cassidy or the Lone Ranger and Tonto, Lash Larue or Wild Bill Hickock. It might even be Roy Rogers or Gene Autry, though they sang entirely too much.
The hero quickly sized up the situation, possibly spying on the villain. Then he organized thetownspeople, pumped up their courage and led them in the effort to undo the villain's plan. There was always a fist fight, and often a gun fight, though the hero never killed anyone. He would just shoot the gun out of the bad guys' hand and "bring him to justice," which meant turn him over to the Sheriff.
It was all good fun, even though we knew it was unlikely that a real world hero could shoot a gun out of someone's hand without otherwise harming him.
Other moral lessons from these movies: greed is bad and greedy people are usually evil; people have to stick together to fight evil; honest workers who do an honest days' work for an honest days' wages are the good guys; if a deal isn't fair, it isn't right.
And altruism is good.
Not bad life lessons.
In the real world, though, it might not work to just wait for Hopalong. Sometimes we have to set things right ourselves.
During President George W. Bush's first term, there was zero job growth, while the population grew, resulting in a lower percentage of Americans employed than in 2001. By the end of President Bush's second term, the total of job increases during his eight years was 4.8 million. The Bush job increases fell significantly below the increase in population.
As soon as he became president, George W. Bush insisted that tax cuts would lead to more prosperity for Americans.
It didn't work then and it won't work now.
Why do we keep repeating failed experiments?
How is that working out? Not so well, according to the latest information from the Financial Times. While the government is touting GDP growth in the first quarter of this year, it is only 0.5%. That offsets the previous quarter's decline of 0.5% and shows the British economy essentially treading water.
Britain's opposition finds the performance unimpressive. Mr. Balls, the chancellor of the shadow (opposition) government in waiting, observed that Chancellor Osborne “doesn’t seem to understand that without jobs and growth you can’t get the deficit down. The slower growth, higher unemployment and higher inflation we now see under George Osborne means he is now set to borrow £46bn more than he was planning to. That’s a vicious circle and makes no economic sense at all.”
Regrettably, our own deficit hawks seem bent on leading us down the same path.
By the way, the "austerity will get us out of recession" hypothesis has been tested before. We tested it in 1929. Japan tested it in the 1990's. It doesn't work.
Tuesday, April 26, 2011
This is not just good news for Ford. It is good news for a particularly effective style of management, advocated by one of America's great innovators.
After a bad experience with an automobile built by one of Ford's domestic competitors, I read that Ford had hired W. Edwards Deming as a consultant on quality. Not long afterward, I bought a 1987 Taurus and have purchased Ford products ever since.
It wasn't that I thought Deming could magically and immediately bring Ford up to the quality of the Japanese auto makers to whom he gave advice not long after WWII. It was rather that I thought his hiring told me that Ford was now taking quality seriously. That meant a lot.
It turns out, Deming paid no attention to the details of Ford's quality control procedures. He examined Ford's management. It is management, he insisted, that is responsible for 85 percent of a company's problems with quality.
Problems don't lie to any significant degree with the workers, and cannot be corrected by the workers. Slogans and exhortations don't work, he insisted. Instead, he concentrated on changing the culture of management.
Good for Ford.
I'll have more to say later about some of Deming's ideas and how they might help address some of our problems in government and politics.
Early that morning east coast time, the world will be treated to the spectacle of the royal wedding of Prince William and Kate Middleton.
That afternoon, we will see the final launch of space shuttle Endeavor, commanded by Captain Mark Kelly, husband of Congresswoman Gabby Giffords, who was shot in the head last January by an attempted assassin. Congresswoman Giffords is expected to attend the launching. Oh, by the way, so will President Obama.
By far the most momentous of those events will be the presence of Congresswoman Giffords at the launch of Endeavor.
My guess is that the largest TV audience will be that of the wedding.
A question for the bean counters among us: which event cost their nations the most - the wedding or the space launch?
I have no idea.
Monday, April 25, 2011
In addition to reciting the Lord's Prayer every morning, we had other religious instruction.
The most memorable was the annual visit by an itinerant preacher, who addressed the student body on the importance of religion, the evils of smoking, and related subjects.
At one point in his presentation, the preacher asked if any student could recite the golden rule. He offered a quarter to anyone who could do so. Hands shot up, usually hands of eager boys anxious to win the quarter. The preacher would call on the boys in turn. None ever won the quarter.
The only way to win, it turned out, was to recite the King James translation of Matthew 7:12 - "whatsoever ye would that men should do to you, do ye even so to them." No variations allowed.
I don't recall that he required the rest of the verse, where Jesus is quoted as saying: "for this is the law and the prophets." That is, this is the essence of Judaism, and by implication, the essence of Christianity.
Sounds like altruism to me. Maybe those who claim to be Christians and also followers of Ayn Rand should reexamine their position.
Sunday, April 24, 2011
It is worth reading.
When I was in grade school in rural Oklahoma, we routinely recited the Lord's Prayer. This never raised any opposition, because so far as I know, all of the students came from white, anglo-saxon protestant families.
I never noticed that reciting the prayer had any beneficial effect on student conduct, but neither did it seem to do any harm in that setting.
I learned one thing from the exercise - Methodists prayed for forgiveness of their trespasses, and Presbyterians prayed for forgiveness of debts. Maybe that's why, at least in our community, the Presbyterians seemed more prosperous.
A report from the Center for Economic and Policy Research comparing major industrial countries shows we are way behind.
Why are there so many more small businesses in other countries?
The center speculates that the reason is that the other countries all have some form of universal health care, which removes an important economic obstacle to businesses.
The article is intended to be a twenty-first century replacement for George Frost Kennan's "X" article published in 1947 in Foreign Affairs. Kennan's article proposed the strategy of "containment," which dominated US strategic thinking for the next four decades. (Kennan himself objected to what he described as the "militarization" of containment).
The newly proposed Strategic Narrative suggests replacing "containment" with "sustainment." The authors describe it as follows: "The primary approach this Strategic Narrative advocates to achieve sustainable prosperity and security, is through the application of credible influence and strength, the pursuit of fair competition, acknowledgement of interdependencies and converging interests, and adaptation to complex, dynamic systems all bounded by our national values."
I'm skeptical that this new article will prove to provide adequate strategic direction for America's future, but I agree that we need to broaden our vision concerning national security beyond military power and punitive measures. I'll have more to say later.
Friday, April 22, 2011
A week ago, while I was watching Dr. Strangelove at the Old Theater in Oriental, the scene where General Jack D. Ripper described the commie plot to threaten our precious bodily fluids reminded me of an event during the first Earth Day in 1970. I remembered being told by my destroyer squadron commander that the event was a "commie plot." It was obviously a communist plot, he explained, because Vladimir Lenin was born on April 22, the day of the Earth Day celebration. Even more significantly, he emphasized, Lenin was born April 22, 1870, so the first Earth Day was in celebration of Lenin's centenary.
In fact, the first Earth Day was organized by Senator Gaylord Nelson of Wisconsin, a long-time environmental activist. April 22 was selected because that spring it came on a Wednesday, and wouldn't be a day taken off just to have a long weekend.
As for Vladimir Ilich Ulyanov, later known as Lenin, April 22 1970 wasn't exactly his birthday, either. He was born in Russia, which used the old style Julian Calendar until after the 1917 Russian Revolution. In England and America, which used the Gregorian calendar since 1752, Lenin was born on May 4, 1870. The calendar discrepancy is why the Soviet Union always celebrated the October 1917 revolution in November.
Anyhow, Earth Day never had anything to do with Lenin.
Thursday, April 21, 2011
The book, The Origins of Political Order, is said to reflect an evolution of his thinking earlier expressed in an essay, The End of History. Although I had problems with the thesis of his earlier book, I am intrigued by the new one, in which he takes issue not only with his earlier neoconservative colleagues, but also with the individualist views of libertarians.
Fukuyama views politics as a product of history and evolution, and rejects the absolutism of Lockean natural rights theory and market fundamentalism. In contrast to libertarians like Friedrich Hayek, who try to explain society in terms of Homo economicus, Fukuyama emphasizes that a strong and capable state has always been a precondition for a flourishing capitalist economy.
“Human beings never existed," he observes, "in a presocial state. The idea that human beings at one time existed as isolated individuals, who interacted either through anarchic violence (Hobbes) or in pacific ignorance of one another (Rousseau), is not correct.”
Bob has been the town's interim manager for about six months, and will now serve as the permanent manager.
This meant, among other things, that taxpayers had paid for reduced water rates for the Town's biggest water users.
Our interim town manager has recently done a more thorough examination of costs properly chargeable to the water system. His review revealed that the general taxpayer's subsidy to the water system was even higher than I had thought.
An inevitable consequence of this subsidy is that it reduced tax resources available for other town priorities. Many times over the past few years, Board members have avoided expenditures for projects that residents desired, claiming we don't have the resources. The money ($150 - $250 thousand) unknowingly spent over the past decade subsidizing the water system could have gone a long way toward meeting those needs.
Wednesday, April 20, 2011
It has been about six weeks shy of a year since the Town last had a permanent manager. During much of that time, some commissioners even disputed that the town had a council-manager form of government. It does.
The firing, last July 1, was not Oriental's finest hour. No item on the agenda that night suggested that the manager's removal would be considered. The Town had previously spent more than $20,000 for an employment attorney to "investigate," in apparent hopes that she would find some legal cause to fire the manager. Apparently she didn't.
The motion to terminate the manager's employment was made at the end of a long meeting, as a "non-agenda item," simply introduced by the commissioner who had been fetched to the meeting earlier by the Chief of Police at the direction of one of the Town's part time secretarial employees.
To say that this was an improper exercise of the Town Board's legislative and investigative powers is an understatement. The lack of proper notice was a clear violation of North Carolina's open meetings act.
The account of the proceedings that appeared on a local web site here accurately describes what I saw that night, with some additional details that the reporter witnessed personally.
Without arguing the merits of the board's decision that evening or whether the board had the power to take the action (the Commissioner who made the motion accurately asserted that the Board has the power to terminate the manager without any reason), it is also true that the Board never gave the manager the opportunity, either in closed session or open session, to confront his accusers, to be given any information as to the board's views of what he might need to correct.
In short, it was an irregular, illegal (from the standpoint of public notice), underhanded and less than courageous procedure.
It would be good in the future if the board would remove the "non - agenda item" category from the monthly agenda and follow a procedure similar to that used by the Pamlico County Board of Commissioners. The chair of that body asks the commissioners at the beginning of the meeting whether any commissioner has an item to remove or add to the agenda. If the commissioners agree unanimously, the chair then formally modifies the agenda. This procedure is used sparingly, but gives the board some flexibility to deal with last minute emerging issues.
The issue of the town manager's employment was not a last-minute emerging issue.
I hope the members who went along with this kangaroo court procedure have reflected on their actions and resolved to do better in the future.
I understand an announcement will be made at a Town Board meeting at 5:00 pm April 21.
Tuesday, April 19, 2011
Remember: if politics were an Olympic event, it would be a team sport, not an individual competition.
The most important fact to know about a candidate for public office is the candidate's political party.
Why is that?
Since the dawn of the American republic, we have had at least two political parties - one that pursued the interests of the wealthy and another that pursued the interests of the common man. (At the beginning, only men could vote, so it was accurate to speak of the "common man," which meant, of course, white men.)
Just try to imagine how the people's business could ever get done if our representatives in Congress consisted of 435 supremely confident egotists in the House of Representatives with no underlying organization. Suppose they had to form coalitions from scratch for every bill. Nothing would get done. Voters need to know what the parties stand for, because they are essential to the process.
Over the past two centuries, party labels have changed, and we occasionally had one or more additional parties, but they always shake down to two. Sometimes a candidate tries to hide the identity of his party. Two years ago, the Republican party candidate for the state house had a float in Oriental's annual Croaker Fest parade. Nowhere on the float did it identify his political party. Only that he was a conservative (whatever that means).
So when a candidate is elected and voters say, "I didn't know he was going to support..." - for example, measures to reduce funding for public schools - it shouldn't be a surprise, but it often is. Pay attention to the party and the program of the party's movers and shakers.
Just ask the voters in Wisconsin.
Monday, April 18, 2011
In fact, of all the advanced western-style market economies and democracies (what we used to call the free world), only Australia has lower taxes than the United States.
The Center on Budget and Policy Priorities has published this helpful series of charts showing how we compare.
Sunday, April 17, 2011
"Only in recent weeks has the distance traveled come into focus: France, reintegrated in 2009 into the command structure of NATO, spearheading the United Nations-backed NATO military operation in Libya; providing armed muscle to the U.N. forces in Ivory Coast; and giving its pacifist-trending ally Germany a lesson in 21st-century Atlanticism.
Adenauer and de Gaulle must be turning in their graves. Here was Germany standing wobbly with Brazil, Russia, India and China — and against its closest allies, France and the United States — in the U.N. vote on Libyan military action. And here was France providing America’s most vigorous NATO support.
This was a dramatic inversion of postwar roles. It revealed the drift of a navel-gazing Germany unprepared to lead despite its power and impatient with Adenauer’s Western anchoring. It also demonstrated France’s break under Sarkozy from the posturing Gaullist notion of a French “counterweight” to America. These are seismic European shifts."
I believe it more accurate to say that Sarkozy has come closest of any French leader to fulfilling and completing the vision of Charles de Gaulle.
From the outset of de Gaulle's efforts to defeat Germany by establishing a Free French government in England, de Gaulle sought equal status with England in the alliance with the United States. He understandably resented being excluded from the US-UK "special relationship." Beyond his personal pique, it is fair to say he doggedly pursued membership in this club because it was in the interest of France.
On D-Day, he succeeded in having French forces under a French general land at Normandy, and French bombers supporting the invasion. He succeeded against great odds in persuading the allies to have a French sector in the occupation of Germany, Berlin, Austria and Vienna.
When NATO was created, the US was given the position of Supreme Allied Commander, Europe and England received Deputy SACEUR. In fact, England received the deputy positions all the way down the chain of command. It is a well-understood principal of military organization that it is the deputy commander who actually runs things.
De Gaulle didn't give up. In September, 1958, de Gaulle proposed to President Eisenhower and to Prime Minister MacMillan that the three countries band together in defense of the free world, coordinating efforts on a global basis under an expanded NATO focus to include the Middle East, Africa, Indian Ocean, and the Pacific, as well as Europe. Eisenhower and MacMillan rejected the idea.
Only after his concept was rejected and after the new Kennedy administration in December 1962 offered to sell Polaris missiles to Great Britain, did de Gaulle move ahead with plans to withdraw from the NATO integrated military structure and develop an independent French nuclear capability, the so-called "force de frappe.".
Now, with French reentry into the NATO integrated military structure, expansion of the NATO area, NATO operations in the Balkans in the 1990's (including French aircraft), participation by French forces in NATO operations in Afghanistan, and NATO operations in Libya, we are finally seeing the fruition of de Gaulle's 1958 vision.
Saturday, April 16, 2011
It's among my favorite movies, but I had never seen it on the big screen. When the movie came out in 1964, I was too busy learning how to be a department head on a destroyer to see movies. That spring, I spent some weeks in Norfolk, Virginia learning about nuclear weapons and their control and use.
The previous fall, at 1:00 pm November 22, 1963, I had joined my fellow students in the US Naval Destroyer School at a command performance - a speech by the US Navy's Chief of Naval Personnel. As the Admiral stepped up to the podium, we muttered among ourselves wondering if he knew the president had been shot. He showed no sign of awareness. The speech turned out to be an attack on the defense policies of the Kennedy administration and, in particular, those of Defense Secretary MacNamara and his "whiz kids."
About half way through the speech, the admiral's aid approached the podium and handed the admiral a note. The admiral read it and said, "I regret to inform you that the president has died." He then completed his speech.
After that, I would have to say that nothing in the dialogue of General Jack D. Ripper, General Turgidson, Colonel Bat Guano, or any of the other outrageous characters in the movie seemed impossible. In particular, Major Kong as played by Slim Pickens, was spot on.
There was much about our national obsession with and fear of the Soviet Union and Soviet Communism in those years that was irrational. A movie like this does a great service by revealing absurdities instead of taking them too seriously.
Wednesday, April 13, 2011
Kropotkin resigned from the Army in 1867, continuing to work as a scientist and also as a revolutionary. Even after arrest and incarceration in St. Petersburg's Peter and Paul Fortress, Kropotkin continued writing important scientific papers.
Later exiled in Western Europe, Kropotkin became prominent as an anarchist, though not of the bomb-throwing kind.
In addition to his activities in anarchist circles, Kropotkin continued writing on scientific subjects.
In 1902, Kropotkin published the book, Mutual Aid: a Factor in Evolution, based on his scientific research of four decades earlier. The conclusion of his book took direct aim at Social Darwinism's claims:
"In the animal world we have seen that the vast majority of species live in societies, and that they find in association the best arms for the struggle for life: understood, of course, in its wide Darwinian sense – not as a struggle for the sheer means of existence, but as a struggle against all natural conditions unfavourable to the species. The animal species, in which individual struggle has been reduced to its narrowest limits, and the practice of mutual aid has attained the greatest development, are invariably the most numerous, the most prosperous, and the most open to further progress. The mutual protection which is obtained in this case, the possibility of attaining old age and of accumulating experience, the higher intellectual development, and the further growth of sociable habits, secure the maintenance of the species, its extension, and its further progressive evolution. The unsociable species, on the contrary, are doomed to decay."
– Peter Kropotkin, Mutual Aid: A Factor of Evolution (1902), Conclusion
In other words, Kropotkin suggests that altruism, so denigrated by Ayn Rand and her followers, plays an important role in the success of the human species.
Interestingly, recent scientific research lends weight to Kropotkin's views. A recent book, Supercooperators: Altruism, Evolution and Why We Need Each Other To Succeed , by Martin A. Nowak, examines the issues. Here is an interesting review of the book.
Even conservative New York Times columnist David Brooks has reported in a recent column about research substantiating the importance of collective achievement as opposed to individual efforts.
Tuesday, April 12, 2011
The setting was the 1925 "Scopes Monkey Trial" in Dayton, TN of a high school biology teacher who taught his students Darwin's theory of evolution.
The drama presents Bryan as a narrow-minded religious fanatic. Bryan was, in fact, a fundamentalist Presbyterian who objected to Darwin's theories as contrary to the Bible. The movie's unflattering and inaccurate caricature of Bryan misrepresented a major source of the man's emotional opposition to evolution.
In a 1905 speech, Bryan objected that "the Darwinian theory represents man reaching his present perfection by the operation of the law of hate, the merciless law by which the strong crowd out and kill off the weak. If this is the law of our development then, if there is any logic that can bind the human mind, we shall turn backward to the beast in proportion as we substitute the law of love. I choose to believe that love rather than hatred is the law of development."
In other words, what had aroused Bryan's ire was the Social Darwinism that had made such claims.
While on the one hand, Bryan was a fundamentalist, he was also a theological and social liberal. He dedicated himself to the Social Gospel, an important school of religious thought emphasizing the need for Christians to serve their fellow man, including giving their lives to public service.
In a word, he believed in altruism.
Sunday, April 10, 2011
Altruism is central to the teachings of Jesus as recorded in the synoptic gospels (Matthew, Mark, Luke and John) and central to early Christian practices as recorded in the Acts of the Apostles and the epistles of Paul. Altruism is also central to Judaism.
The wealthy and powerful have never believed in altruism. Historically, they claimed immunity due to some variation of divine will. But usually the wealthy and powerful have been big on altruism by ordinary people.
Then along came science.
In the second half of the nineteenth and the early twentieth centuries, the wealthy welcomed Darwin's theory of natural selection as expounded by certain popularizers ("survival of the fittest"). Social Darwinism was seen as providing scientific justification for why it was meet and proper for wealthy "robber barons" to have accumulated so much wealth. The 1929 crash of Wall Street rather tarnished this claim.
Ayn Rand to the rescue.
Rand (born Alisa Zinov'yevna Rosenbaum in Russia in 1905), was an atheist novelist, playwright and philosopher who immigrated to the United States in 1926. A 1924 graduate of Petrograd State University in Petrograd, Russia (later Leningrad and now St. Petersburg), she developed a following in this country for her ideas, expressed in two novels and a series of "philosophical" writings.
In short, Rand's philosophy inveighed against altruism and in favor of "rational egoism," i.e. selfishness. She has many followers, prominently including Congressman Ron Paul, Senator Rand Paul, former chairman of the Fed Alan Greenspan, and more recently most adherents of the Libertarian Party and the Tea Party movement. Her particular talent was in "her ability to turn upside down traditional hierarchies and recast the wealthy, the talented, and the powerful as the oppressed."
The wealthy and powerful responded by adopting her right-wing romantic fantasies as their own, and pursuing them as a political program. Here. in their admiring view, was an intellectual underpinning to replace Darwinism as a justification for their wealth.
Friday, April 8, 2011
The bad news is that the result is a reduction in government spending.
The worse news is that the deal is based on a lie - that the Great Recession and resulting unemployment resulted from budget deficits and national debt. The assurances that reducing spending will bring back prosperity is worse than a lie. It is a destructive lie.
Reduced spending has the potential to bring our very weak recovery to a screeching halt and initiate a new round of economic decline.
I don't like to sound pessimistic. Under normal circumstances, the budget wrangling would be very important, but not dangerous.
After all, the key issue of any political dispute is "who benefits" and "who pays?"
That is the heart of politics. And it affects everyone's welfare.
Where were the deficit hawks when Reagan and Bush I quadrupled the national debt? Where were they when Bill Clinton left behind a budget surplus and a plan to pay off that debt within a decade?
Were they not listening when Dick Cheney asserted that "Reagan proved that deficits don't matter."
Actually, no Democrat believes that deficits don't matter. It is just that there is a time to cut expenditures and a time to spend more.
If we want jobs, now is the time to spend more.
When the economy recovers, we need to reduce both public and private debt.
Professor Halm's mother, a widow, lived on a government pension. Each category of pension was paid on a different day of the week, with widows coming on Friday. By Friday, the value of the pension, which was set on Monday, had dropped out of sight. Even so, he hopped on his bicycle, collected his mother's pension at the pension office and raced around town buying as many household necessities as he could before the value of the money dropped too much farther. The operative principal was to spend the money before it disappeared.
How could shopkeepers know how much to charge? They created an informal price index system. For example, the price of a haircut was indexed to the price of breakfast rolls each morning.
Clearly it was impossible to live that way, and understandably Germans remain paranoid about inflation.
Still, they overdo it. A modest amount of inflation allows price adjustments without triggering deflation. Because of the way the Euro zone was established, the interest rate for the zone is set by the European Central Bank, which is essentially the German Central Bank. They are about to raise the interest rate in the Euro Zone to make sure there is zero inflation in Germany, despite the high probability that this will destroy economic activity in several smaller countries.
It will also place added pressure on the US economy by, among other things, driving up the international price of oil.
Thursday, April 7, 2011
According to the polls, most Americans recognize that it is the Republicans in the House of Representatives, many of whom have never served in public office before at any level of government, who are driving toward this train wreck.
My concern is not just the adverse effect of a shutdown on my personal situation (my US Navy retirement check is likely to be delayed, and possibly my Social Security check), but more importantly the damage it will do to the economy.
In fact, I am disappointed that no one is explaining that any reduction in government spending is likely to bring our weak recovery to a halt and might even start another downward spiral.
The reason is that we are in a liquidity trap. I have explained this phenomenon before.
If I were of a mind to believe in conspiracies rather than mere incompetence, I would suspect the Republicans in Congress intend to wreck the economy and blame the president.
Tuesday, April 5, 2011
Seven years ago, conservative think tanks and Vice President Cheney were arguing that deficits have no adverse effects on the economy.
Their arguments are summarized here in a 2004 Washington Post article.
What has changed?
For one thing, the real estate bubble collapsed in 2007, nearly bringing the economy to its knees.
For another, we now have a Democrat in the White House for Republicans to blame.
Managing a state, municipal or county budget is more like managing a household budget, but none of these entities has either the responsibility or the capability of controlling the national economy.
The bottom line: given our current state of the economy, reducing federal expenditures will reduce jobs and bring the present weak recovery to a screeching halt.
Why is this so?
The federal government has two principal means of managing the economy:
a. Monetary policy, which is the responsibility of the Federal Reserve System (the Fed) and;
b. Fiscal policy, which is the purview of the elected political leadership.
It is the Fed that controls the level of economic activity by managing the money supply, mostly through indirect controls of short term interest rates and open market operations. If they are concerned about inflation, they work to contract the money supply by increasing interest rates. If the economy is weak, they attempt to stimulate economic activity by decreasing short-term interest rates, which have the greatest influence on commercial activity.
It has been the case for some time that short term interest rates have been essentially zero. That means the Fed is out of ammunition. When the short-term interest rate is zero, it cannot be lowered. Further increases in the money supply will be ineffective in stimulating economic activity.
A possible way to stimulate economic activity is to increase exports. That would likely require a substantial depreciation in the value of the dollar against major trading currencies. The Fed's only tool to affect the exchange rate would be to lower the interest rate. With a zero interest rate, that won't work, either. The other factor inhibiting exports is that our major trading partners are in the same boat as we are.
That leaves monetary policy. In other words, federal expenditures. We have no choice, unless the object is to further wreck the American economy. The only thing that has kept the economy from falling into a death spiral leading to another Great Depression is the safety net put in place in the aftermath of that catastrophe.
Unemployment insurance, for example, is not just of benefit to the recently unemployed - it makes sure laid off workers can continue to purchase the necessities of life. It is a subsidy to WalMart, Food Lion, Sears, and countless property owners who continue to be paid rent.
Food stamps, Medicaid, Medicare and other "entitlements" fall in the same category.
We would have more options for dealing with the situation had we not quadrupled our national debt under Reagan and Bush I and further increased it under Bush II.
We can't put that toothpaste back in the tube, but we need to foresee the consequences of doing what the Congress seems hell-bent on doing.
There is a name for the situation we are in. Economists call it a "liquidity trap."
Liquidity traps are rare. The first one we encountered was during the Great Depression. Recently, in the 1990's, Japan experienced a liquidity trap.
Gauti Eggertsson, an economist with the New York Federal Reserve Bank, has written a recent research paper reviewing the modern understanding of a liquidity trap. The paper (here) is highly technical. It even uses calculus formulas to make several points.
Don't be put off by the calculus. It is still worth reading.
Sunday, April 3, 2011
Opening Day of Major League Baseball is a better guide to Spring than the vernal equinox.