Category Archives: The Fisc

Back Of The Envelope

I saw this post on zero hedge. It has obvious weaknesses – it confuses flows and levels, and ignores the change in private sector debt which is no different than public debt.

So with the help of FRED, I did a few numbers on the period 1/1/1997 to 1/1/2017. For that period, the increase in debt level contributed about 26% of the increase in GDP. I included consumer debt, corporate debt and government debt. I simplified to a linear increase in GDP. Bottom line, if debt had held steady, GDP would be reduced by about 15%.

All this says is yup, government deficit spending and easy credit pump up the economy. Until the defaults start, anyway.

Universal Basic Income

The left continues to be fascinated with the idea of re-distribution. It believes that the whole notion of some people being paid more than others is fundamentally unfair, that they must have had some advantage – skin color, parents, brains, whatever – which was just a matter of luck. “You didn’t build that,” as Obama famously said.

So the latest brainchild of this idea is the notion of a monthly check from the government that is sufficient to provide a comfortable lifestyle regardless of whether or not the recipient chooses to work.

A single program that replaced the myriad of transfer payment programs, from welfare through Social Security, would save an enormous amount of administration costs at all levels of government and help to pay for the program. The “poverty trap” would be eliminated as the payment could be “universal” that is, not means tested. Minimum wage laws would need to be abolished, of course, since the “living wage” would be redundant. Might not work, but there seems to be some potential anyway.

But that is not what is proposed. In general, it seems that this would be yet another program which would be funded by even more government borrowing. This, it is claimed, would “grow the economy by $2 trillion.” Please.

There are only two ways to grow the economy. One of these is to increase labor utilization, the number of hours worked in a given period. The other is to increase the productivity of that labor, that is the amount of output produced for each hour of labor. That’s it.

Existing programs already provide a major disincentive for work – the “poverty trap.” This would add another. Productivity is improved by investment – in technology, skills, infrastructure, etc. More spending on consumption would not help this, but would certainly provide more inflation, which would act to deter investment. If you want to see the outcome of this kinf of program, just check the news from Venezuela.

 

 

DACA

The Trump administration announced the end of the DACA program, that allows undocumented immigrants who arrived as children to obtain work permits.

The administration’s point is that the program, established by the Obama administration, was a direct violation of black-letter law and exceeded the President’s authority. Like many other immigrant-friendly policies, of course. True enough, but one can reasonably hope that Congress will act to change the law and the administration has provided time to allow that to happen, if it will.

The good reason for acting is that these people are the innocent victims of their parents’ bad acts and should not be penalized for them. Many have little or no connection with their country of birth and may not even speak the language. The bad reason for acting that is being bandied about is the resultant shortage of workers for low-wage jobs. The shortage has nothing to do with immigration and everything to do with the “welfare trap,” which makes it foolish for many Americans to seek employment because the withdrawal of benefits will more than offset any wage income they might receive.

To fix the shortage, the government needs to remove the trap.

Government Shutdown?

Many voices are being raised to warn of the danger of a government “shutdown” should Congress fail to raise the debt limit.

Why, one might ask, is this so dangerous? It is simply the fact that U.S. Federal deficit is still running about 3% of GDP. Cut Federal spending back to match its income and recession will certainly ensue.

Of course, the steady accumulation of debt is even more dangerous, but less immediate. So the voices hope.

A “shutdown” would not need to be anything more than a modest 15% reduction in run rate. Inconceivable.

Extreme Crazy

I was going to say Peak Crazy, but we all know things can always get crazier. Some things that spring to mind.

Political craziness: Mob violence on left and right, blatant defiance of federal law by city politicians, attempts to rewrite or at least deny history, demonization of Trump, Putin and anybody associated with them, and so on. Immigration in Europe – it’s that 4.7 kids per woman in Africa that nobody dares to talk about. Not to mention the crazy fat kid.

Fiscal craziness: Federal funding of runaway price increases, notably in university tuition, prescription drugs but also many other subsidized goods and services. Gross under-funding of state and local pension schemes even under ludicrous assumptions about future returns.

Monetary craziness: Central banks threatening to tighten but pumping away, consumer credit at record highs in US and elsewhere (Canada, that’s you I’m talking about with highest household debt in the world), government deficits keep growing. Subprime crdiet still gowing while defaults rise. Most of all, ICOs. People pouring money into blockchain-based tokens. Really?

Market craziness: Housing bubbles in China, Canada, Australia, UK and some US cities. Massive (record) risky speculation in many markets – short vol, long crude for example. Setups (risk parity) similar to portfolio insurance (remember 1987?).

I could go on. But I won’t. I’m just grumbling while I wait.

The Economy In One Chart

Source: WSJ

A Bit Of Math

Simon Mikhailovich of Tocqueville Bullion Reserve reminds us of the deadly numbers with a sobering tweet:

A bit of math. With the global debt / GDP ratio at 320% and the cost of average debt service at 2%, it takes 6.4% growth per annum just to service the debt. Not happening.

Why I Like The Dutch

Mario Draghi visited the Dutch parliament today and received an “unenviable grilling” from Dutch MPs for nearly two hours which, as the FT said, left the usually implacable Italian confrontational and riled up as tempers flared.

At the end of the meeting, the Dutch gave Draghi a gift – a tulip.

At least someone still has a sense of humor.

Consumer Prices

Everybody has a bias when it comes to measuring price inflation. Reports like the Devonshire one come out quite frequently, usually complaining that the government indexes understate inflation. They all say, well the numbers don’t reflect reality. The problem is, they don’t know what reality is any more than the government does. My reality and the next person’s are completely different because we buy different things. Cheap loans have allowed universities to raise prices in an outrageous fashion – but our kids have long since graduated so it doesn’t affect me, although anyone putting kids through college is being eviscerated. Consumers react to prices. Technology changes. Quality changes. Fashions change. And so on. All these things make any index pretty much useless, except for making political arguments. So one has to ask, in the famous words of Ms. Clinton – “What difference does it make?”

If you ask someone in Venezuela right now, of course, you would get an expletive for an answer. There is massive consumer price inflation because there are not enough consumer goods to meet demand, and so people are going hungry and without toilet paper. They are driving up prices, trying to outbid one another to compete for what little supply there is. But even in that desperate situation, there is no agreement on what consumer prices actually are, even by disinterested parties. The only way to fix the problem in Venezuela is to get goods back on the shelves. If the Venezuelan government can do that, then consumer prices will reflect the value of the bolivar and general world price levels.

There’s your clue. If you want to measure consumer prices, it is easy. Just use the Big Mac, as the Economist does. It works. 2016 USA Big Mac price inflation was 2.6%. Venezuela Big Mac prices in bolivars:

July 2014: 75

December 2014: 245

July 2015: 485

December 2015: 940

December 2016: 3550

Looks like a pretty decent metric. It tells you what you need to know – there’s a big problem.

But the economy does not run on Big Macs, and I’m interested in the inputs, not the outputs so much. And those are labor and energy. Nothing else much matters.

Nobamacare

The repeal or gutting of Obamacare is apparently back on the table.

This US system of so-called health insurance is a joke. The principle behind all insurance is that you pay the statistical or actuarial cost of your protection, based on your personal risk exposure. To over-simplify, the idea is that you can afford to pay 1% of the cost of a condition that you have a 1% chance of getting, and if your number comes up, the insurance company can afford to cover your costs because of the 99 other people paying, who don’t get the condition.

In the case of health “insurance”, this simply doesn’t work for everyone because many people can’t afford to pay, especially those with known conditions. So they are denied coverage, either explicitly, at any price, or implicitly by prohibitive premiums.

Many countries simply say, well that’s no good, so we’ll throw out the insurance model and simply pay for everyone’s healthcare out of tax revenues. This is better than one might think because getting rid of the insurance companies saves enormous amounts of money, and controlling the pay of health care providers saves even more.

Obamacare took a different tack, which was to say we’ll keep the insurance model but make healthy pay insurance premiums which are much higher than their risk to subside the cost of care for the sick. In effect, this gave the worst of both worlds – a tax paid to the “insurers”  and out-of-control costs of care. The insurers liked this because they could charge what they liked, the providers loved it because the insurers had no motive to control costs.

Unfortunately for this model, a loophole was left where healthy people could pay a relatively small penalty and avoid paying the “tax” – excessive premiums. So they did. and the insurers were left with a client base of sick people who could not afford to pay the cost of their care. In order to avoid complete collapse, President Obama took the profits from Fannie Mae and other government lenders and funneled them to the insurance companies as a sub-rosa subsidy. President Trump can stop this with a stroke of his pen.

Personally, I think we should get rid of the insurance companies and fall in line with everyone else. This is not likely to happen, because the insurers and the providers will bribe Congress to continue their largesse.