How soon we forget.
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.
Tuesday, April 5, 2011
Why the Government Must Increase Spending
Managing the Federal Budget is not like managing a household budget.
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.
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
Spring Has Sprung
Spring has finally arrived. How do I know for sure? Last Friday I watched the opening day game between the Washington Nationals and the Atlanta Braves.
Opening Day of Major League Baseball is a better guide to Spring than the vernal equinox.
Opening Day of Major League Baseball is a better guide to Spring than the vernal equinox.
Thursday, March 31, 2011
Wednesday, March 30, 2011
Is It a War or a Squirmish?
The former half-term governor of Alaska has apparently blessed us with another coined word.
Just as a reminder: the first United States military action against Tripoli began in 1801 and continued for the entire first term of Thomas Jefferson. We did not declare war, though Tripoli did. The only military forces we deployed in this First Barbary War were the Navy and Marine Corps.
Was that a war or a squirmish? For that matter, what do we call our two-year long conflict (1798 - 1800) with France under our second president, John Adams? Historians frequently refer to it as our "quasi-war" with France. Is a quasi war something like a squirmish? Both words have a "qu" in them.
From the beginning of our republic in 1788 until after World War II, we have often dispatched the Navy/Marine Corps team abroad to deal with crises, many times for extensive, protracted engagements. We never declared war in any such case.
March 8, 1965, my ship's guns (I was Weapons Officer of USS Higbee (DD-806)) stood by at Danang, Viet Nam, to provide gunfire support (if needed) for 3,500 Marines who went ashore there. These were our first combat forces, later reinforced by another 20,000 Marines.
Had our intervention remained at that level, using the Navy and Marine Corps, we would probably have been better off.
Twenty years later, using the Navy/Marine Corps team was no longer an option. Not that they couldn't have handled Panama and Grenada just fine, but the policy of the day required that it be a "joint" operation, whether needed or not. So the Pentagon jumped through hoops to find something for the Army and the Air Force to do.
Let's not go down that path in Libya.
Just as a reminder: the first United States military action against Tripoli began in 1801 and continued for the entire first term of Thomas Jefferson. We did not declare war, though Tripoli did. The only military forces we deployed in this First Barbary War were the Navy and Marine Corps.
Was that a war or a squirmish? For that matter, what do we call our two-year long conflict (1798 - 1800) with France under our second president, John Adams? Historians frequently refer to it as our "quasi-war" with France. Is a quasi war something like a squirmish? Both words have a "qu" in them.
From the beginning of our republic in 1788 until after World War II, we have often dispatched the Navy/Marine Corps team abroad to deal with crises, many times for extensive, protracted engagements. We never declared war in any such case.
March 8, 1965, my ship's guns (I was Weapons Officer of USS Higbee (DD-806)) stood by at Danang, Viet Nam, to provide gunfire support (if needed) for 3,500 Marines who went ashore there. These were our first combat forces, later reinforced by another 20,000 Marines.
Had our intervention remained at that level, using the Navy and Marine Corps, we would probably have been better off.
Twenty years later, using the Navy/Marine Corps team was no longer an option. Not that they couldn't have handled Panama and Grenada just fine, but the policy of the day required that it be a "joint" operation, whether needed or not. So the Pentagon jumped through hoops to find something for the Army and the Air Force to do.
Let's not go down that path in Libya.
Saturday, March 26, 2011
Inherently Safe Nuclear Reactors
A few days ago I mentioned that China is proceeding with an inherently safe nuclear reactor design called the "pebble bed" reactor.
Today's New York Times has an article with details and illustrations of the design here.
But China isn't putting all their energy pebbles in one basket. They are building more conventional reactor designs and moving ahead vigorously with other energy alternatives as well, including wind and solar.
A further benefit of the pebble bed reactor design is that it operates at much higher temperature than the boiling water reactors like the ones in Japan. The higher temperature is not only more efficient for generating electricity, it may also be used to produce vast quantities of hydrogen - sufficient for fueling automobiles. This could free the automobile from dependence on petroleum, while abolishing exhaust pollution. When you burn hydrogen, the only waste product is water.
Critics of each of the above approaches often complain that "[fill in the blank]" isn't the answer. China seems to say, "no problem - we'll just try them all."
Who do you suppose has the best chance of leading the way into the world's energy future?
Today's New York Times has an article with details and illustrations of the design here.
But China isn't putting all their energy pebbles in one basket. They are building more conventional reactor designs and moving ahead vigorously with other energy alternatives as well, including wind and solar.
A further benefit of the pebble bed reactor design is that it operates at much higher temperature than the boiling water reactors like the ones in Japan. The higher temperature is not only more efficient for generating electricity, it may also be used to produce vast quantities of hydrogen - sufficient for fueling automobiles. This could free the automobile from dependence on petroleum, while abolishing exhaust pollution. When you burn hydrogen, the only waste product is water.
Critics of each of the above approaches often complain that "[fill in the blank]" isn't the answer. China seems to say, "no problem - we'll just try them all."
Who do you suppose has the best chance of leading the way into the world's energy future?
Tuesday, March 22, 2011
Why Not Declare War?
Earlier today I watched talking heads debate whether President Obama exceeded his authority by committing US forces to military operations in Libya.
This is a continuation of what seems a perpetual argument over executive authority and the provision of the US Constitution granting Congress the authority to declare war.
The contention that the president must get a declaration of war before commencing military action is as bogus as the contention that the Second Amendment grants individuals the personal right to own firearms. In fact, there is a long-forgotten connection between the two provisions of the Constitution.
Since 1798, the United States has intervened with military forces in overseas conflicts or potential conflicts about 250 times. The US Navy History Center provides a partial list here. Of those conflicts, only in five instances did the United States issue a declaration of war.
Our first armed conflict overseas was our quasi-war with France from 1798 to 1800. The action was mostly at sea, but we landed naval and marine forces on some Caribbean islands of France.
Our second overseas military action was the First Barbary War (against Tripoli) from 1801 to 1805. ("From the halls of Montezuma to the shores of Tripoli....")
So why was there no congressional declaration of war in either of these two conflicts, both undertaken under presidents who were founding fathers? The answer is so simple and obvious, you may think it can't possibly be true.
From the beginning of the American Republic, we had two military departments: the Department of the Navy (including the Marine Corps) and the War Department. If the military action required significant forces from the War Department, there was a declaration of war. If it could be handled by the Department of the Navy by itself, there was no declaration of war.
There was a logic to this. From our founding in 1789, Americans had a deep distrust of standing armies. We based our defense policy on state militias consisting of "the people" trained to bear arms - or at least all white males aged 18 to 45 years. All members of the militia were required by federal law to provide uniforms, weapons and powder at their own expense. Procedures were first spelled out in the Militia Act of 1792.
One of the purposes of the first federal census of 1790 was to determine, state by state, how many citizens there were of military age.
With a small standing army, the only way to mobilize for an expeditionary force was to call up forces from the state militias. A formal declaration of war laid the foundation for such a call up.
This was done for the War of 1812, the War with Mexico, the Spanish American War, World War I and World War II.
Now we have a large standing army and a national guard integrated with that standing army into the "total force concept." The struggle against a large standing army, reflected in the Second Amendment, has been lost. Is it time to rethink our constitutional arrangements for defense?
This is a continuation of what seems a perpetual argument over executive authority and the provision of the US Constitution granting Congress the authority to declare war.
The contention that the president must get a declaration of war before commencing military action is as bogus as the contention that the Second Amendment grants individuals the personal right to own firearms. In fact, there is a long-forgotten connection between the two provisions of the Constitution.
Since 1798, the United States has intervened with military forces in overseas conflicts or potential conflicts about 250 times. The US Navy History Center provides a partial list here. Of those conflicts, only in five instances did the United States issue a declaration of war.
Our first armed conflict overseas was our quasi-war with France from 1798 to 1800. The action was mostly at sea, but we landed naval and marine forces on some Caribbean islands of France.
Our second overseas military action was the First Barbary War (against Tripoli) from 1801 to 1805. ("From the halls of Montezuma to the shores of Tripoli....")
So why was there no congressional declaration of war in either of these two conflicts, both undertaken under presidents who were founding fathers? The answer is so simple and obvious, you may think it can't possibly be true.
From the beginning of the American Republic, we had two military departments: the Department of the Navy (including the Marine Corps) and the War Department. If the military action required significant forces from the War Department, there was a declaration of war. If it could be handled by the Department of the Navy by itself, there was no declaration of war.
There was a logic to this. From our founding in 1789, Americans had a deep distrust of standing armies. We based our defense policy on state militias consisting of "the people" trained to bear arms - or at least all white males aged 18 to 45 years. All members of the militia were required by federal law to provide uniforms, weapons and powder at their own expense. Procedures were first spelled out in the Militia Act of 1792.
One of the purposes of the first federal census of 1790 was to determine, state by state, how many citizens there were of military age.
With a small standing army, the only way to mobilize for an expeditionary force was to call up forces from the state militias. A formal declaration of war laid the foundation for such a call up.
This was done for the War of 1812, the War with Mexico, the Spanish American War, World War I and World War II.
Now we have a large standing army and a national guard integrated with that standing army into the "total force concept." The struggle against a large standing army, reflected in the Second Amendment, has been lost. Is it time to rethink our constitutional arrangements for defense?
Saturday, March 19, 2011
Radiation is Scary - But It's All Around Us
Like most folks, I've been watching the TV reports of the disaster in Japan. I'm in awe of the courage and persistence of the nuclear plant workers. They didn't give up, despite the hazards, and they seem to be gaining the upper hand. And the populace hasn't panicked.
What about those face masks so many Japanese are wearing? They won't do any good against gamma rays, but they can be very effective against alpha particles. You don't want alpha particles to get inside your body.
Does all this mean we must abandon nuclear power?
No.
How hazardous is nuclear power?
Today's Dot Earth blog on the New York Times site addresses the issue of "Dread to Risk." The article is worth reading. The most interesting link is to a chart comparing radiation dosage in various circumstances. It shows, for example, that eating a single banana exposes one to more radiation than living for a year in the vicinity of a nuclear generation plant. Living near a coal powered generation plant exposes you to three times as much radiation as living near a nuclear plant. Take a look at the table.
The risk is low. But clearly not zero in case of a major disaster such as an earthquake and tsunami.
The present disaster in Japan is a result of the 40-year old design, which requires a very complex cooling system with backups.
What this suggests is that we should investigate other types of nuclear reactors. The most dangerous kind of reactor is the graphite moderated reactor of the Chernobyl variety. Next most dangerous are the boiling water reactors like Three Mile Island and like those used in Japan. A better reactor type is the pressure water reactors like many of our newer reactors.
All of these reactors require intact and functional cooling systems to insure safety.
China is moving ahead with an ambitious plan to mass produce an inherently safe reactor design, known as a pebble bed reactor. There are other candidate designs that will not overheat and explode if cooling fails.
It is past time to invest in safer designs.
One thing to remember: there is no risk-free way of producing and using the large amounts of energy needed for modern civilization.
Each year, about 2500 Americans die in residential fires. Many of these happen in winter and result from use of kerosene heaters.
Let's put our hazards in perspective.
What about those face masks so many Japanese are wearing? They won't do any good against gamma rays, but they can be very effective against alpha particles. You don't want alpha particles to get inside your body.
Does all this mean we must abandon nuclear power?
No.
How hazardous is nuclear power?
Today's Dot Earth blog on the New York Times site addresses the issue of "Dread to Risk." The article is worth reading. The most interesting link is to a chart comparing radiation dosage in various circumstances. It shows, for example, that eating a single banana exposes one to more radiation than living for a year in the vicinity of a nuclear generation plant. Living near a coal powered generation plant exposes you to three times as much radiation as living near a nuclear plant. Take a look at the table.
The risk is low. But clearly not zero in case of a major disaster such as an earthquake and tsunami.
The present disaster in Japan is a result of the 40-year old design, which requires a very complex cooling system with backups.
What this suggests is that we should investigate other types of nuclear reactors. The most dangerous kind of reactor is the graphite moderated reactor of the Chernobyl variety. Next most dangerous are the boiling water reactors like Three Mile Island and like those used in Japan. A better reactor type is the pressure water reactors like many of our newer reactors.
All of these reactors require intact and functional cooling systems to insure safety.
China is moving ahead with an ambitious plan to mass produce an inherently safe reactor design, known as a pebble bed reactor. There are other candidate designs that will not overheat and explode if cooling fails.
It is past time to invest in safer designs.
One thing to remember: there is no risk-free way of producing and using the large amounts of energy needed for modern civilization.
Each year, about 2500 Americans die in residential fires. Many of these happen in winter and result from use of kerosene heaters.
Let's put our hazards in perspective.
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