Quotulatiousness

October 25, 2014

Destroying the “too big to fail” meme

Filed under: Britain, Economics — Tags: , , , — Nicholas Russon @ 10:09

In the Telegraph, Allister Heath makes a case for the looming end to the economically disastrous notion that certain entities are “too big to fail”:

Bank bail-outs have been a cultural catastrophe for those of us who support free markets, low taxes and enterprise. During the 1980s and 1990s, much of the British public came to accept and even embrace capitalism, in return for a simple deal: profits and losses would both have to be privatised. Clever entrepreneurs, savvy traders or brilliant footballers would be encouraged to make money; but companies and investors that placed the wrong bets would be allowed to fail, with no pity.

Not only did this trigger an explosion in prosperity, it also helped shift the British mindset towards a much more pro-enterprise position. The rules of the game felt fair: risk and reward went hand in hand. The government would serve as an umpire, not a supporter of vested interests.

But the crisis of 2007-09 put an end to this implicit bargain, at least in the eyes of vast swathes of the public. They saw large institutions bailed out at great public expense, and with substantial amounts of taxpayer money put at risk. It started to look as if — when it came to the banking industry at least — risk had been socialised while profits remained private. To many members of the public, it was a case of heads you win and tails we lose. Profits were retained by a small elite, while losses were spread much more broadly — or so it felt.

Needless to say, the reality was more complex. Shareholders of bailed-out banks often lost everything. But bondholders were rescued, institutions survived, staff contracts were not ripped up and the process of creative destruction was severely derailed. And while big beasts were kept afloat, many smaller firms went bust and many ordinary folk lost their jobs. This is one reason — together with an incorrect narrative of the causes of the crisis which wrongly absolves governments and central banks — for increased support for punitive tax and government meddling in prices and wages.

So why did governments turn their back on capitalism and suddenly refuse to let market forces do their work? The uncontrolled failure of a major financial institution has a much broader, system-wide impact than the uncontrolled failure of a hair salon. Under traditional bankruptcy law, however, both would be treated in the same way, which simply makes no sense. One needs a different approach to tackle the failure of major banks or insurers — a proper Plan B. With the right institutions in place, there need not be such a thing as “too big to fail”. With the correct planning and tools, even the largest of financial firms can be dismantled sensibly without wiping out millions of depositors and triggering another Great Depression.

October 2, 2014

On national defence, don’t listen to Harper’s words – watch his actions

Filed under: Cancon, Government, Military — Tags: , , , — Nicholas Russon @ 09:28

At The 3Ds Blog, Jack Granatstein explains why the Canadian Forces are once again being starved of funding:

A few years ago I wrote that no government since that of Louis St Laurent in the 1950s had done more to improve the defence of Canada than Stephen Harper’s Conservatives. The St Laurent Liberals built up the armed forces to deal with the war in Korea and with the defence of North America and western Europe in the face of Soviet expansionism. At its peak, the defence budget took more than seven percent of Canada’s Gross Domestic Product, and the army, navy, and air force had as many as 120,000 men and women in the regular forces.

No one could expect any government in this century to spend on that scale, but the Conservative government did treat defence well in its first years in power. The commitment to the Afghan War, never very popular, was handled capably, and the troops received everything they needed — helicopters, new artillery, upgraded armoured personnel carriers, and tanks, not to mention new transport aircraft. The number of regulars rose slowly and slightly toward 65,000, and the government presented a schematic Canada First Defence Policy in 2008 that listed a range of objectives and equipment acquisitions. The budget projections were colossal, almost $500 billions to be spent over the next 20 years.

But that was then, this is now:

The result was that the defence budget was cut, in substantial part because deficit reduction and a budget surplus were more important than “toys for the boys.” From a peak of $21 billion in 2009-10, the defence budget in this fiscal year is $18.2 billion, about a 13 percent reduction in dollars made worse by inflation. The percentage of GDP spent on defence is now hovering at one percent, the lowest since the 1930s. In 2009, it was 1.3 percent. Making matters even worse, the Department of National Defence somehow cannot spend all the money it gets, returning almost $10 billion to the Treasury since 2006.

Despite Harper’s tough talk on the international stage, his government’s active neglect of the needs of the armed forces means we can’t back up his pugnacious rhetoric with any serious military effort: a frigate in the Black Sea, four CF-18s in the Baltic, a couple of transport aircraft shuttling supplies into Erbil, and a small special forces contingent helping the Kurds … and that’s about our current limit for overseas deployment. The Royal Canadian Air Force is still waiting for new helicopters (after more than 20 years of stop-go-stop procurement disasters) and a decision on replacing the CF-18. The Royal Canadian Navy just announced the immediate retirement of four ships, with no replacements available for years (if ever), and the Canadian Army is struggling to maintain equipment and keep up training schedules due to budget constraints.

And, as Granatstein points out, if the Liberals or NDP win the next federal election, the situation will get worse, not better, as neither party sees the military as any kind of priority — quite the opposite.

Update: Speaking of cheeseparing “economies”, here’s the Department of National Defence’s most recent “saving”.

National Defence slashed its annual order of ammunition this year to save money — a revelation that raised fresh questions Wednesday about just how prepared Canada is to do battle with militants in the Middle East, Murray Brewster of the Canadian Press writes.

More from his article:

The 38 per cent cut was large enough to cause other government departments, Public Works and Industry Canada in particular, to sit up and take stock of the impact, internal documents obtained by The Canadian Press show.

One such document, a memo to Public Works Minister Diane Finley dated Feb. 5, 2014, indicates her department tried to convince defence officials to either abandon the cut or at least spread it out over a couple of years.

Defence officials said that would be impossible, because “they would not allow the department to meet its financial targets.”

As a result, the 2014 ammunition budget was reduced to $94 million from $153 million.

During the early phases of the Afghan war, National Defence was caught similarly flat-footed and had to rush an order through General Dynamic Ordnance, particularly for artillery shells.

The memo surfaced on the same day Prime Minister Stephen Harper told the House of Commons that the cost of deploying special forces to northern Iraq is being taken out of the department’s current budget.

September 23, 2014

“Rock star economy” leads to first majority government in New Zealand since 1996

Filed under: Economics, Pacific, Politics — Tags: , , , , — Nicholas Russon @ 08:06

Anthony Fensom reports on Saturday’s election results in New Zealand:

New Zealand’s “rock star economy” helped center-right Prime Minister John Key achieve a thumping election victory. But with major trading partner China slowing, are financial market celebrations premature?

The New Zealand dollar, government bonds, and stocks gained after Key’s National Party romped to power in Saturday’s poll, securing its third straight term and the nation’s first majority government since proportional representation was introduced in 1996.

Despite “dirty politics” claims and a late attempted campaign ambush by internet entrepreneur Kim Dotcom, the incumbent National Party won 61 of 121 parliamentary seats and 48.1 percent of the vote, the party’s best result since 1951.

In contrast, the main opposition left-leaning Labour Party, which pledged an expansion of government, secured only 24.7 percent of the vote for its worst performance since 1922. The Greens won 10 percent and New Zealand First 8.9 percent as pre-election predictions of a closer race proved false.

Key pledged to maintain strategic alliances with the Maori, ACT and United Future parties, which won four seats between them, further strengthening his parliamentary majority.

[...]

“Like [Australian Prime Minister] Abbott, Key as a new prime minister inherited a budget and an economy in deep trouble…Six years later, the budget is in surplus, unemployment at 5.6 percent is falling and the economy is growing so strongly the New Zealand Reserve Bank became the first among developed countries to raise interest rates to deter inflation,” noted the Australian Financial Review’s Jennifer Hewett.

“Not only did the Key government cut personal and corporate tax rates, it raised the goods and services tax to 15 percent while steadily reducing government spending over years of ‘zero budgets,’” wrote Hewett, who urged Abbott to “learn some sharp lessons” from Key’s electoral successes.

Key’s party has pledged to cut government debt to 20 percent of gross domestic product (GDP), reduce taxes “when there is room to do so” and create more jobs, aiming to undertake further labor and regulatory reforms as well as boosting the supply of housing.

September 2, 2014

British government “austerity”

Filed under: Britain, Economics, Media — Tags: , , , — Nicholas Russon @ 14:29

Theodore Dalrymple explains why changing the name of something does not actually change the thing being described, no matter how much politicians or journalists wish it did:

… some errors are important, and one sees them more insistently the older one grows. For example, the other day I read an article in Le Monde about the forthcoming referendum in Scotland on independence from the United Kingdom. The author of the article was clearly sympathetic to the cause of independence, but that was not the cause of my irritation with the article, nor the fact that he quoted an old man, a former trade union militant, who said that he was in favor of independence, among other reasons, because the United Kingdom was the fourth most unequal country in the world. If old men in Scotland can be as ignorant of the world as that, it is an interesting sociological observation; and the author of the article is almost certainly right that those in favor of Scottish independence favor a state even more extensive in the name of equality than the one that they already have.

No, I was irritated rather by the fact that the author of the article accepted that the policy of the present British government can properly be described as one of austerity. What the alleged austerity amounts to is this: that in the current year the government will borrow only one in six of the pounds it spends instead of one in five, as it did last year. As to the reasons for this less than startling decline in its borrowing requirements, it was not because the government was spending less but because it was receiving more taxes, from the speculative housing bubble which it has done much to fuel. If that bubble should burst, the borrowing necessary to maintain current levels of expenditure (already very high) would rise again, possibly higher than ever.

This is not a question of whether the economic policy followed by the government is the right one or not: perhaps it is and perhaps it isn’t. It is a question of the honest use of words. One would not say of a man who passed from smoking sixty cigarettes a day to fifty that he had given up smoking, or that he had exercised great self-denial. And one would not, or rather should not, say of an organization that had balanced its budget once in fifty years (the British government) that it was practicing austerity merely because it had to borrow a slightly lower percentage of what it spent than it did the year before. This is to deprive words of their meaning.

But does this matter? As the philosopher Bishop Butler once said, everything is what it is and not another thing. A budget deficit is a budget deficit, whether you call it profligacy or austerity. A thing is not changed by being called something different.

Unfortunately, matters are not quite as clear-cut as that. In human affairs, words matter, as much because of their connotations as of their denotations. Austerity means stern treatment and self-discipline. It means harshness and astringency. Needless to say, harshness in their government is not what most people look or will vote for. If reducing the rate at which you overspend and accumulate debt is called austerity, no one will dare go any further in that direction, though it were the right direction in which to go. Words, said Hobbes, are wise men’s counters but the money of fools: so that many men will take the name for the thing itself. Whether more active attempts to balance the budget would be advisable I leave to economists to decide (they can’t, of course).

July 30, 2014

QotD: Balancing the budget

Filed under: Economics, Government, Politics, Quotations — Tags: , — Nicholas Russon @ 00:01

… it sounds like a sober and centrist position. I mean who believes in deficit financing? Well everybody but you’re not suppose to admit it out loud. Like dwarf porn. Many watch but few will say so. What it means in practice is one of two things. If an actual conservative uses the term it means that the public service is getting taken to the tool shed. There being few actual conservatives in politics what it usually means is that we’ll keep spending until someone makes us stop.

That’s when the bond market vigilantes step in. Then everyone blames the bond market for ending the party. The kind politician would love, absolutely love, to spend more money on “X” but those evil Gordon Gekko types won’t let him. In truth the bond market traders are no more responsible for a government going broke than a doctor is responsible for giving an alcoholic DT.

The state, observed Bastiat so many years ago, is the great fiction by which everyone tries to live at the expense of everyone else. Politics is the lie that this can go on indefinitely. Voters complain about the low levels of honesty in politics. But a dishonest political class is the product of a dishonest electorate. If people want something for nothing, they’ll get the lying louses they deserve. Fool me once, shame on you. Fool me a hundred years in a row and the shame is very much on the ordinary bitchin’ voter.

Richard Anderson, “Transparent Lies”, The Gods of the Copybook Headings, 2014-07-28.

May 25, 2014

The case for reparations

Filed under: Economics, History, USA — Tags: , , , — Nicholas Russon @ 09:34

Another discussion that seems to have taken centre stage recently (at least in some US publications) is the argument that reparations are owed to the descendents of African American slaves:

Ta-Nehisi Coates has an excellent essay about the historical treatment of African Americans over the centuries, the legacy of slavery and Jim Crow and all that. And more specifically he addresses the problem of what African Americans have had stolen from them over that period of time. All of which leads various economist types to try to put a value on the theft of that labour. Tyler Cowen thinks that non-slaves have lost as much (or, given their greater number, cumulatively) or more thus there is no amount of reparations possible. For slavery itself means that current society is poorer than it would have been without slavery. If we leave that argument aside there’s another way of calculating what reparations might or should be. And it has been done rather cleverly here. However, I think we still end up in roughly the same sort of place. Which is that even if reparations for slavery are logically or morally due, the actual amount is still going to end up being pretty much nothing.

[...]

Thus today’s value of what was stolen from the slaves is that $1.75 trillion. Which is, when you look at it, a formidable sum of money. Except, actually, it isn’t. The net wealth of the entire country is around $80 trillion or so. So it’s a trivial percentage of the national wealth. Or we could look at it another way. There’s 42 million or so African Americans (defined as having some possibly slave and black antebellum ancestry) so the capital sum would be some $40,000 for each of them. Which, while a nice enough sum to receive isn’t the sort of life changing sum some might think might be due in reparations.

And we can also break it down another way. Think of that as the capital sum and then apply that 4% return to it. That would be an extra $1,600 in income per year to each and every descendant of slaves. Or, in total, something like $70 billion a year. Which, in the context of a $15 trillion economy is pretty much next to nothing. About, in fact, the size of the food stamp or SNAP program.

Even if slavery reparations are righteously due they would amount to around and about the current cost of food stamps. Which is, as I say, around and about nothing given the size of the entire economy. And, I would also wager, not an amount that anyone at all thinks is going to fix the problems that beset parts of American society today.

April 13, 2014

Reason.tv – Glenn Reynolds on the Future of Higher Education

Filed under: Economics, Media — Tags: , , , — Nicholas Russon @ 10:48

Published on 10 Apr 2014

“It’s kind of a weird thing that’s happened with American society — this idea that you have to have a college degree to be a respectable member of the middle class,” says Glenn Reynolds, professor of law at the University of Tennessee and purveyor of the popular Instapundit blog. Reynolds’ latest work, The New School: How the Information Age Will Save American Education From Itself, looks at the higher education bubble and how parents, students, and educators can remake the education system.

Reynolds sat down with Reason TV‘s Alexis Garcia to discuss why Americans are spending more for a college education and how students are responding to increasing tuition costs. “Given how expensive it is to go to college, there has to be a return sufficient to make it worth the time and especially the money,” Reynolds states. “You’re seeing declining enrollment in some schools and you’re seeing much more price resistance on the part of both parents and students.”

The discussion also includes Reynolds’ take on school choice, the upcoming elections, the current state of the blogosphere, and whether or not both political parties are necessary. Nearly a decade after Reynolds published An Army of Davids: How Markets and Technology Empower Ordinary People to Beat Big Media, Big Government, and Other Goliaths, the blogfather still remains optimistic about technology’s ability to empower the individual and inspire grassroots movements.

March 29, 2014

The “Lehman Sisters” wouldn’t have been more risk-averse, actually

Filed under: Business, Economics, USA — Tags: , , , — Nicholas Russon @ 10:56

Tim Worstall looks at the occasional claim that if Lehman Brothers had actually been “Lehman Sisters” (that is, an organization with much higher female participation), then they would have taken on less financial risk and therefore not have been the trigger to the financial meltdown:

… there’s very definitely an element of truth to this: but the final story is rather different from what is commonly assumed. It’s only if financial organisations are completely female, or completely male, that risk is reduced. Adding more of either gender to an organisation actually increases risk.

[...]

Mixed gender environments increase risk tolerance in both men and women. So adding women to an all male institution increases, likely, the risk that organisation will tolerate. And so does adding men to an all female one. Not just because the men sway the average but because both men and women become more risk tolerant in the presence of the other sex.

Thus it would be correct to say that Lehman Sisters would have been less risk tolerant than Lehman Brothers. But the reality of what there actually was at the firm was that it was a mixed gender environment and so more risk tolerant than either of the single gender hypotheticals would have been. It is gender diversity itself that increases risk tolerance, reduces risk aversion.

Which leads to an interesting thought. Everyone generally agrees that banking as a whole has become more risk tolerant, and thus more fragile, in recent decades. These are also the decades when women have made significant inroads into that area of professional life. Which leaves us with something of a conundrum. We generally believe that fragility in the banking system is a bad idea. We also all generally believe that gender equality is a good idea. But that gender equality of women going into finance and banking seems to increase the fragility of the system given that rise in risk tolerance from a mixed gender environment.

February 24, 2014

Argentina reported to be increasing military spending

Filed under: Americas, Military, Politics — Tags: , , , , , — Nicholas Russon @ 08:09

The Argentine government has announced it will be increasing spending on their armed forces by a third in the coming year. While this report in the Daily Express takes it seriously, it fails to account for the overall sorry state of the Argentinian economy … it’s not clear if there’s any actual money to be allocated to the military:

Buenos Aires will acquire military hardware including fighter aircraft, ­anti-aircraft weapons and specialised radar, as well as beefing up its special forces.

The news comes months before drilling for oil ­begins in earnest off the Falkland Islands, provoking ­Argentina’s struggling President Cristina ­Fernandez de ­Kirchner.

Last month she created a new cabinet post of Secretary for the Malvinas, her country’s name for the Falklands.

Meanwhile, Defence Secretary Philip Hammond has refused to confirm that Britain would retake the Falklands if they were overrun by enemy forces.

The extra cash means Argentina will ­increase defence spending by 33.4 per cent this year, the biggest rise in its history. It will include £750million for 32 ­procurement and modernisation programmes.

They will include medium tanks and transport aircraft and the refurbishment of warships and submarines. The shopping list also ­includes Israeli air ­defence systems, naval assault craft, rocket systems, helicopters and a drone project.

As reported earlier this month, the economy is suffering from an inflation rate estimated to be in the 70% range, the government has expropriated private pensions and foreign-owned companies, and is unable to borrow significant amounts of money internationally due to their 2002 debt default. Announcing extra money for the military may well be the economic version of Baghdad Bob’s sabre-rattling press conferences … just for show.

On the other hand, military adventurism is a hallowed tradition for authoritarian regimes to tamp down domestic criticism and rally public opinion. Being seen to threaten the British in the Falkland Islands still polls well in Buenos Aires.

February 1, 2014

Argentina’s economic end-game

Filed under: Americas, Economics — Tags: , , , , — Nicholas Russon @ 09:19

In Forbes, Ian Vasquez looks at the plight of the Argentine economy:

Argentina’s luck is finally starting to run out. It devalued its currency by 15 percent last week, marking the beginning of a possible economic crisis of the kind Argentina has become known for. Argentina’s problem is that it has followed the logic of populism for more than a decade and President Cristina Kirchner is showing no interest in changing course.

In the 1990s Argentina combined far-reaching but sometimes flawed market-reforms with irresponsible fiscal policies, culminating in its 2002 default on $81 billion in debt — the largest sovereign default in history. The country delinked its currency from the dollar, experienced a severe economic crisis, and initiated its current period of populist politics.

Those policies included price controls on domestic energy, reneging on contracts with foreign companies, export taxes, more pubic sector employment and vastly increased spending. When you don’t pay massive debts, you get temporary breathing room, so growth resumed. High commodity prices and low global interest rates that lifted demand for Argentine exports also helped produce Argentine growth.

But the government’s appetite has consistently grown faster, and, with little ability to borrow abroad, it has turned to other sources of finance. In 2008, Kirchner nationalized private pension funds worth some $30 billion, and has since nationalized an airline and a major oil company. As it drew down reserves, the government turned to printing money to finance itself, falsifying the inflation rate it says is about 11 percent, but which independent analysts put at about 28 percent. Economist Steve Hanke estimates it is much higher at 74 percent

January 13, 2014

An independent Scotland and the UK’s existing debts

Filed under: Britain — Tags: , , — Nicholas Russon @ 08:56

Robert Peston examines the question of whether a post-referendum Scotland would be debt-free or would have a share in the existing debt obligations of the United Kingdom:

This morning’s statement from the Treasury that the UK will stand behind all its sovereign debts, whether or not Scotland’s people vote for independence, is in a way a statement of the bleedin’ obvious.

That debt, all £1.4 trillion of it, is an obligation of the National Loans Fund.

And nothing can change that — whether Scotland were to decide to secede (or, to pick an unlikely corollary, in the event that the People’s Liberation Army of West Sussex, miffed about fracking, were to declare UDI).

So why has the Treasury chosen to say that the UK will honour its debts, whatever Scotland does?

Well, it is because investors — whom we may think of as sophisticated and informed (ahem) — have been increasingly asking the Treasury and the Debt Management Office for clarification of the status of the UK’s financial obligations in the event of a fracturing of the United Kingdom.

[...]

Who would not vote for independence if an autonomous, separate Scotland would be set free from the burden of UK debts currently equivalent to 76% of GDP or national income (on the latest estimates by the Office for Budget Responsibility)?

Except that even Alex Salmond and the Scot Nats don’t believe that an independent Scotland could, in practice, walk away from its fair share of the UK’s debts — even if they would have the legal ability to do so.

January 5, 2014

Excerpt from Glenn Reynolds’ new book

Filed under: Bureaucracy, Economics, USA — Tags: , , , — Nicholas Russon @ 10:19

The Wall Street Journal has an excerpt from The New School: How the Information Age Will Save American Education From Itself, the latest book by the Instapundit himself:

Though the GI Bill converted college from a privilege of the rich to a middle-class expectation, the higher education bubble really began in the 1970s, as colleges that had expanded to serve the baby boom saw the tide of students threatening to ebb. Congress came to the rescue with federally funded student aid, like Pell Grants and, in vastly greater dollar amounts, student loans.

Predictably enough, this financial assistance led colleges and universities to raise tuition and fees to absorb the resources now available to their students. As University of Michigan economics and finance professor Mark Perry has calculated, tuition for all universities, public and private, increased from 1978 to 2011 at an annual rate of 7.45%. By comparison, health-care costs increased by only 5.8%, and housing, notwithstanding the bubble, increased at 4.3%. Family incomes, on the other hand, barely kept up with the consumer-price index, which grew at an annual rate of 3.8%.

For many families, the gap between soaring tuition costs and stagnant incomes was filled by debt. Today’s average student debt of $29,400 may not sound overwhelming, but many students, especially at private and out-of-state colleges, end up owing much more, often more than $100,000. At the same time, four in 10 college graduates, according to a recent Gallup study, wind up in jobs that don’t require a college degree.

Students and parents have started to reject this unsustainable arrangement, and colleges and universities have felt the impact. According to a recent analysis by this newspaper, private schools are facing a long-term decline in enrollment. More than a quarter of private institutions have suffered a drop of 10% or more — in some cases, much more. Midway College in Kentucky is laying off around a dozen of its 54 faculty members; Wittenberg University in Ohio is eliminating nearly 30 of about 140 full-time faculty slots; and Pine Manor College in Massachusetts, with dorm space for 600 students but only 300 enrolled, has gone coed in hopes of bringing in more warm bodies.

Even elite institutions haven’t been spared, as schools such as Haverford, Morehouse, Oberlin and Wellesley have seen their credit ratings downgraded by Moody’s over doubts about the viability of their high tuition/high overhead business models. Law schools, including Albany Law School, Brooklyn Law School and Thomas Jefferson Law School, have also seen credit downgrades over similar doubts. And now Democrats on Capitol Hill are pushing legislation to give colleges “skin in the game” by clawing back federal aid money from schools with high student-loan default rates. Expect such proposals to get traction in 2014.

October 23, 2013

Perhaps the “starve the beast” plan is working

Filed under: Cancon, Economics, Government — Tags: , , , — Nicholas Russon @ 07:05

In Maclean’s, Stephen Gordon provides an updated look at the Harper government’s ongoing “starve the beast” policy:

Canadian federal government revenues and expenditure, 1960-2013

Canadian federal government revenues and expenditure, 1960-2013

As I’ve written before, the Conservatives have applied the “starve the beast strategy“: First, cut taxes; second, cut spending in order to match lower revenues; third, obtain a balanced-budget for a smaller government. As the red line in the chart shows, the Harper government was temporarily thrown off this past by the financial crisis, which required emergency stimulus spending. They are, however, back on track.

Once again though, we need to be careful to see that the government’s revenues are back above expenditures (so the yearly deficit has been reduced over time), but the government’s outstanding debts are still quite substantial: $892 billion for 2012-13. As long as interest rates stay low, the debt should start to decline, but if-and-when interest rates rise, so will that big pile of accumulated debt.

October 21, 2013

The US debt iceberg

Filed under: Economics, Government, USA — Tags: , , — Nicholas Russon @ 09:53

Jon Gabriel has put together a clear, understandable way to show the relationship between the US government’s revenue, deficit and debt numbers:

When Washington raised the debt ceiling this week, the Beltway media breathlessly reported that the fiscal crisis had ended. Lawyers danced in hallways, bureaucrats twerked on the Metro, congressional aides kissed strangers in the streets — the Tea Party has been defeated! It was like VJ day for wonks.

As our political class exchanged high fives and reporters praised a return to “sanity,” I wondered how these odd creatures defined insanity.

America’s fiscal crisis is not that our debt ceiling was too low, the fiscal crisis is that our debt is too high. When I mentioned this to left-leaning folks, they seemed indifferent. “Obama lowered the deficit.” “I think Bush spent more.“ “It’s Reagan’s fault!”

So I made this infographic:

US debt iceberg

Since most graphs look like this, I focused on just three big numbers: Deficit, revenue and debt.

The analogy is imperfect, but imagine the green is your salary, the yellow is the amount you’re spending over your salary, and the red is your Visa statement. Then imagine your spouse runs into the room and shouts, “great news honey, our fiscal crisis is over. We just got approved for a new MasterCard!” Your first call would be to a marriage counselor or a shrink.

H/T to Nick Gillespie:

What is it that Hemingway always used to say? That thing’s not loaded? Or something about how the “dignity of movement of an ice-berg is due to only one-eighth of it being above water.” Yeah, well, the horrors of federal finances is pretty undignified just looking at the amount of spending versus revenue we do and then it gets really sloppy when you look at the huge amount of debt below the waterline.

September 25, 2013

Redefining “austerity” (again)

Filed under: Economics, Government, USA — Tags: , , — Nicholas Russon @ 07:51

At Coyote Blog, an illuminating comparison of “austerity” measurements, responding to a piece in Mother Jones by Kevin Drum:

He uses this graph to “prove” that our fiscal response to this recession is weak vis a vis past recessions. The graph is a bit counter-intuitive — note that it begins at the end of each recession. His point is that Keynesian spending needs to continue long after (five years ?!) after the recession is over to guarantee a good recovery, and that we have not done that.

Government spending after recessions

[...]

I took roughly the same data and started each line two years earlier, so that my first year is two years ahead of his graph and the zero year in my graph is the same as the zero point in Drum’s chart. His data is better in the sense that he has quarterly data and I only have annual. Mine is better in that it looks at changes in spending as a percentage of GDP, which I would guess would be the more relevant Keynesian metric (it also helps us correct for the chicken and egg problem of increased government spending being due to, rather than causing, economic expansion).

Here are the results (I tried to use roughly the same colors for the same data series, but who in the world with the choice of the entire color pallet uses two almost identical blues?)

Government spending before and after recessions

That second image tells a radically different story to the first one, doesn’t it? Hard to make that fit into the traditional definition of the word “austerity” though…

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