Wednesday, October 01, 2008

Rambling thoughts on...

Storm Lessons

-- Electricity is a very, very good thing. I've heard rumors that people actually lived in Houston before the days of air conditioning, but surely those aren't true. Or those people were insane.

-- There are a few catalysts in life for making people's true colors shine through. Things that help you see right to the core of a person. One is stress. Another is when a stoplight blows away and a major intersection becomes a four-way stop. I used to think our city was metropolitan and "with it". Now I've seen the true colors and realize that we have millions of idiot savants who can somehow have the profession to afford a nice car, yet can't figure out when it's their turn to go through an intersection.

-- When the heat is on and food/ice are scarse, life gets real simple. Put another way, the mind doesn't ponder the deeper mysteries of existentialism when it's busy finding a way to make sure the body continues to exist.

-- Whomever thinks that the hurricane put Houston back in 1940s-era lifestyle is forgetting about cellphones.

-- Most people are good. We saw lots of helping hands and selfless acts, and very few angry line-breakers.

Economic Theories

Some people have asked me what I think about the current market volatility, bank failures and federal bailout plans. I practically had a double-major with economics and International Business in college, and my MBA had a lot of training in economics as well, so I know at least a little about what's going on. But I'm by no means an expert. Not that it matters, because not even the experts can predict something as complex and multi-faceted as our economy. And I'm not objective either and I'm perfectly willing to admit that.

Most of my education and training was in the "Chicago style" of economics, the free-market spirit of Milton Friedman. In other words, when it comes to the economy I was trained by fiscal libertarians, people who think the market almost always works better, faster and cheaper than any government entity we might try to use to accomplish things. For the most part I still agree with that. So now you know my bias.

I look at our current situation and think of the rule of the harvest. We reap what we sow. The seasons are the seasons -- we can't change them and must work within them. And if we don't plant our crops in the spring, there won't be any food in the winter. No shortcuts or well-wishing can change it. You can't grow a crop in a week. The rule of the harvest.

I look at our country's economy and see that the inflation-adjusted income of 95% of Americans has fallen consistently for over a decade. Yet the average size of homes continues to increase. So we keep making less yet buying bigger houses. Our national savings rate is negative, and has been for some time. Add up all our citizens and we spend more than we make, at a personal level.

No surprise that the same is true at the government level. Our national debt is over $4.5 Trillion to outside countries/investors, and we owe another $5 Trillion to ourselves in future expenses that are coming, mostly in Social Security and Medicare. So that's almost $10Trillion in the hole. To put that in perspective:

-- The entire Gross Domestic Product of our country is around $15 Trillion. That's the value of all goods and services all of our citizens produce in a year. So if no American eats or buys anything and sends every penny of income to pay for Uncle Sam's debts staring January 1, 2009, we can finally pay things off and have our first meal nine months later.

-- There has never in American history been a period of such high government spending with such low tax revenues. The past several years are unprecedented. We've added another $500 billion to our debt each and every year for the past few years. The government's spending money it doesn't have. And how do they react? In February of this year they gave us all a big tax rebate and asked us to spend it to wake up the economy! They increased the deficit even further at the national level, and encouraged low savings at the personal level!

-- To cheer you up more, analysts estimate that the Iraq war is costing us almost $15 billion a month. 50 bucks per month per man, woman and child in the country, and it adds up pretty quick. In the end we'll probably have spent at least $3 trillion on the war.

The rule of the harvest says that at some point this will end, and it will be very, very painful. Eventually the balance will shift and we will be forced to reach equillibrium. It's called contraction, recession, even depression... whatever, our economic growth over the past decade has been largely illusional and driven by money we don't actually have. So we have to pay for today's growth with tomorrow's money. And with the news coming in lately, tomorrow might have arrived.

What's it mean in real terms? Our taxes will go up. Period. Doesn't matter which party wins the election, taxes have to go up, because we just can't cut a lot of the government expenses. Yes, I know the candidates talk about "pork barrel spending bills" and how they'll cut them, but the fact is that over 50% of federal spending is categorized as "mandatory", and that percentage continues to grow rapidly. In other words it's locked in and we can't touch it. Thirty years ago less than 30% of the federal budget was locked in. So we're more inflexible than ever. Think of Uncle Sam as a household -- his mortgage is getting bigger and bigger while his income is dropping. He can cut the kids' clothing expenses and maybe buy cheaper food, but the biggest expense, the house payment, is fixed.

So 53% of the budget is alreadly locked in. Oh yeah, and 9% this year went to pay interest on all that national debt I mentioned earlier. So less than 40% of our federal budget goes to all the "discretionary" activities. Things like education, transportation, the justice system, environmental research and veterans' benefits. Which ones do you want to cut? Now you see why the candidates keep dodging this question in the debates. The rule of the harvest. We bought things with money we didn't have, and now it's time to pay. With interest. It's going to hurt, but there's no sense complaining or finger-pointing. Let's just knuckle down and admit that it's going to hurt.

The economic crisis is not a surprise -- Henry Paulson (Treasury Secretary) said last week that the bailout plan is something they've been working on for months. I'm sure they were hoping for it to pop after the election, but not even they can control the market timing that well.

Which brings me back to the beginning, and the role of government intervention in the economy. I've been trained to believe that the market is smarter than the government, and I still believe it. So Mr. Paulson can keep his bailout plans -- I don't like them. If a business took on too much risk and might fail, let it fail. Let the price be paid by them, not the taxpayer. If there is value to be had in these banks on the brink, then a private buyer will show up. The market is smart. Warren Buffet just invested $5 billion in Goldman Sachs -- that's infinitely better than a government bailout. If a bank is in trouble but has inherent value, a buyer will show up and see the opportunity. If a bank is in trouble but has no inherent value, it needs to crash and burn. A government bailout is too expensive both monetarily ($700 billion?) and ethically (hey, go ahead and run a bad business and we'll step in to save you).

Rule of the harvest. If you didn't sow good seeds, then the reaping will suck. Sorry. No shortcuts.

How's that for a ramble?

In my next post I'll write about the true root of our economic problems. Hint: it's not the government. Or banks.

13 comments:

Debby said...

Welcome back. Let me guess, could it be our own self indulgent natures, our sense of entitlement, our certainty that we should have it all?

Just a hunch.

Didn't think the post was rambling. It tied together quite nicely.

~aj~ said...

(Sorry, had to fix that pesky typo)


I can admit to knowing next to nothing about the economy. I didn't take a single business class in high school or college. Heck, I don't even watch the nightly news.

What I do know has mostly been explained to me by your brother and I can tell you that we are in total agreement with you.

P.S. More of your teaching skills shining through in this post. I'm thinking a philosophy/religion/business position with a comedy schtik on the side?

Redlefty said...

debby, that's certainly part of it, and then I'll show a way that those issues play out in terms of chosen professions. It's something I don't see anybody else talking or writing about.

AJ, you're too sweet. And let me know if you hear of any job openings that fit that description!

Bob Barbanes said...

Michael, I'm with you on the Chicago economics thing - and so is Obama by the way, so I guess I know who you and I will be voting for.

I think we've learned conclusively that Reagan's "trickle down" theory did *not* work. Increasing tax breaks for the wealthy does not benefit the general economy (i.e. the poor and middle class) in any meaningful way.

But you're right, of course, taxes are going up, no denying that.

I have to laugh though at the timing of Bush's $700 Billion bailout. You know...I mean you just KNOW that he did not want to leave office with the economy on the verge of collapse (or in it, if we can believe Bush himself). He's already going down as one of our worst presidents ever.

On the other hand, I'm sure he would've loved to have left things for Obama or McCain to handle and clean up. The telling thing was that even his own fellow Republicans didn't like his (or should I say Bernanke's) "bailout." I think too many people assume that Bernanke is just trying to protect his old friends-in-high-places.

The incredible instability of the stock market is astounding. There's truly no telling what the economy is going to do. Gonna be interesting though!

Redlefty said...

Bob, that's the great irony of the past 20 years -- the "fiscally conservative" Republicans (Reagan and both Bush presidents) have run up massive deficits while the "high-spending liberals" (Clinton) actually had a surplus that started to cut into the national debt.

On paper, my fiscally libertarian views are more Republican than Democrat. But we haven't seen a Republican president or candidate actually work for small government in a long, long time. They're taxing like Republicans but spending like Democrats, and it's a guaranteed recipe for economic turmoil. Korea, Mexico, Argentina... this has happened plenty of times before in other countries and we've witnessed the impact. But I guess we need to learn the hard way.

Reagan's ideas were excellent but even he had to admit it wasn't working, which is why he ended up raising taxes two years after the massive cuts. It didn't get back to the original levels, but he had to do it. The first Bush did the same thing and it killed his re-election because people said he was reneging on a promise (read my lips, no new taxes).

I see it differently -- he did the right thing, even though it was unpopular and even though it broke a previous commitment. I can respect that. He took in information that didn't fit his expectations, then changed course to right the ship. It was unpopular, but it was just what the country needed.

Bob Barbanes said...

Ah, Papa Bush's infamous "no new taxes" promise. I laughed when, after raising taxes, he tried to weasel out of the backlash by saying, "Look, these aren't actually new taxes. They're just new rates on *old* taxes!" And you know, technically he was correct. But the American people thought they'd been duped. They thought GHWB meant, "no tax increases AT ALL." Sorry! That's not what he meant. If it was, he would have said, "NO TAX INCREASES!"

There is a certain amount of economic inertia that carries over from one presidency to another. Some of the results of Clinton's policies came to fruition during GWB's term, so we can't blame Bush for everything, as much as we might like to. Trouble is, Bush's economic policies haven't exactly worked like a charm either. I think we should probably increase the term of the President to a maximum of three.

Finally, you are absolutely, positively right about one thing: When was the last time we had smaller government under either a Democrat or Republican president?

Don said...

Excellent! I right with you on this one. It's like ripping off the old bandaid. We know it's gonna hurt and we don't want to do it. But, you are right, it has to happen. Some day it has to come off and IT'S GONNA HURT!! I just hope the equilibrium to comes with out destroying too many of our precious lives. We are reaping the results of self-indulgent, self-righteous natures. I constantly discuss the depression with my Mom who lived through that era. It wasn't pretty. IT HURT! Ask any senior citizen who experienced it. The good thing is most survived it and learned from it. I hope the same thing for us. That we learn from whatever results.

MamaRose said...

TOO BAD they can't have YOU--or someone who knows the SAME THINGS--SPEAK to CONGRESS BEFORE 'the vote' this FRIDAY!!!!!!!!!!!!!!!!!!

I don't know NEARLY as much as YOU do on this subject, but I DO FEEL that this 'bailout' is NOT 'the answer' & is going to get us, as a COUNTRY into even MORE DEBT & 'trouble'!!!!!!!!!!!!!!!!!!!!!!

MAYBE they WON'T 'pass' it, AGAIN--HOPEFULLY!!!!!!!!!!!!!!!!!!!!!!!!

And, NO ONE wants to talk about 'REAPING WHAT WE'VE ALREADY SOWN'--but, SOMEONE SHOULD!!!!!!!
Because it IS going to happen--sooner or later, I feel!!!!!!!!!

THANKS for another GREAT POST, BUD! LOVE YOU ALL!!!!!!!!!!!! Mom

MamaRose said...

Referring to AJ's comment about WHAT KIND of TEACHER you'd be BEST at: I TOTALLY AGREE & KNOW where 'just that KIND of position' opened up when the man, RANDY PAUSCH, who wrote/made the 'movie' of 'THE LAST LECTURE' was employed--since he died, TOO YOUNG--at CARNEGIE MELLON--and, he was/started out as a 'COMPUTER SCIENCE' Professor.

AND, they ALREADY have your NAME--from when you were LOOKING for a UNIVERSITY to go to--they offered you a SCHOLARSHIP 'back then'!!!!!

I bet HARDING would LOVE to have you, too--either in the Business or BIBLE Departments!!!!!!!!!!!!!!

Keep learning, so WHEN you DO start teaching, for money--well, no teacher gets paid what they're WORTH, sadly--you'll BE READY!!!!!
And, have ALL YOUR GUNS FULL!!!!!!
LOVE YOU BUNCHES!!!!!!!!!!!! Mom

t.k.foster said...

Earlier this year there was an article by Krugman from the New York Times that stated that Americans needed to re-evaluate how we look at taxes - they are not negative, rather positive.

The condition I will add to this is that if the government spends our money wisely (war is not wise; bailing out Wall Street executives is not wise), then I do not have a problem. I want to see that money, however, invested in positive things like education and health care, not on ridiculous policies like that last few years have been.

But yes, taxes are going to go up with irresponsible people in office. People wonder why I prefer Sweden with a higher tax bracket and it's simply that their government (of the people unlike the U.S. which is of the corporations) does responsible work with their citizen's money.

Bob said...

Good thoughts. The House just passed the bailout plan. I have numerous misgivings, many of which you articulate here (much better than I could), but I am hoping it works. You are so, so right -- we reap what we sew.

Bob said...

We are now a week post-bailout and look where we are. The smart guys are telling me to be patient, this was mainly for credit to ease, etc. I am monumentally pissed off.

FishrCutB8 said...

Jeez your kids are cute!