15 December 2011

Power to the People

According to Time Magazine, 2011 is the “Year of the Protester”.  We have the so-called “Arab Spring” effectively demonstrated in Tunisia, Egypt, Yemen, Libya and Syria.  We have Wall Street Occupiers everywhere from Lower Manhattan to UC Davis.  We have protesters in Greece, Spain and now Moscow.

The Arab Street is protesting repression by their dictatorships – ones that have been around for a while.  Ben Ali assumed power in Tunisia through a coup d’état in 1987.  Then-Vice President Mubarak became President of Egypt in 1981, after then-President Sadat was assassinated.  Saleh has been Yemen’s President since 1978.  Gaddafi ruled Libya since 1969 after a military coup.  Bashar al-Assad succeeded his father Hafez (both Ba'athists) to rule Syria in 2000, after his father had ruled for 29 years until his death.  Each ruled with an iron-fist for most of those years.

The so-called Wall Street Occupiers are protesting income and wealth inequality in the US – an inequality that is always present to some degree, and has been building now for decades.  European protests are a reaction to the measures their stressed governments have undertaken to reduce spending and get their budgets in order, going on now for over two years.  The recent protests near the Kremlin in Moscow are about alleged election-rigging – as if corruption in Russia just showed up last week.

So why now?  Any of these regional issues have basically been going on for some time.  But that’s just the “what” of it.  It is not really the “why”.  The particular “whats” might be disparate, but the “why” is shared.  The “why” is plain old economics.

Most people don’t get up every day trying to figure out what to get pissed off at and take to the streets about (or at least after some coffee).  They mostly just want to live their lives in as peaceful a manner as possible with the ones they love and care about.  Aside from a minute amount of agitators that live for this stuff, most people don’t publicly protest unless they're really upset, think it's their last option, and, that it might have an impact.  Having no job gives you a lot more free time to talk yourself into it.  Having no food gives you no choice.

Headline unemployment in the US has been over 8% for three years now; our duration of unemployment at an all-time high, double the worst previous post-World War II recessions and still rising.  As the world's greatest economic engine, our weakness touches every quarter of the Earth.  And so do our inflationary efforts to pull away from deflationary depression.

The Arab countries are the largest net importers of cereals in the world.  Food inflation there has been rising at ~5-25% annually in recent years.  With so many in that region living at subsistence level – where food consumption is 40-65% of their weekly budget – small increases in food prices basically have large consequences on millions there, not very different from the social effects of famine.  The Greeks have been grappling with significant cuts in their pensions and other social subsidies – a very large part of their incomes over there.  Russians are dealing with both a weak global economy and inflation as well for years.

And there is also the “how” of it.  It’s pretty simple – the Internet.  With more than 800 million users on Facebook, 300 million “tweets” per day, almost 700 million Skype users, 170 million blogs, a cell phone (most camera-enabled) for every 1.4 people on the planet out there…  Effectively, none of that existed just five years ago.  As a result, people today are more aware than ever about everything - and that includes that others too get occasionally upset with their plight.  This empowers and emboldens those like-minded.

Although it is finally starting to change, how much more different might China be today for example, had all that existed in 1989?  Having said that, it is shocking to me how precious few Chinese in their twenties understand Tiananmen Square to be nothing more than maybe a nice place in Beijing to eat during their lunch break, due to state-level information control.  (And also sad that most Americans in their twenties likely never heard of it either, as they have no excuse not to have.)

But as prolific as these protests seem to have become all of a sudden - except for maybe the Arab Spring - their near-term results will be ineffective, in my view.  To the extent I can understand them, the Wall Street Occupiers are directing their anger at the wrong places.  Greeks may have ousted their Prime Minister, but they will still have to take their medicine one way or another, and no matter who is in charge there.  A decade of popular support for Russia's strong man Putin serves his ego more than his power – so its withdrawal will do nothing more than perhaps make him grumpy (со всем должным уважением).

But here the protesters are.  And if it’s true that they will be inconsequential in effort, that merely dismisses the “what” of it.  It does not dismiss the “why”, and certainly not the “how”.  Either way, their presence should be taken as a message; a writing on the wall.

We conventionally consider the age of great monarchical empires to have fallen away in the early 20th Century – China’s in 1911, Russian Romanov in 1917, Austro-Hungarian Habsburg and German Prussian both in 1918 (Britain’s only exists today nominally).  They were dismantled through popular revolution.

In their place in Europe, rose socio-economic bodies that put the power in the hands of the people.  Radical political ideals competed for their hearts and minds.  Communists fought for the classless equality of the proletariat; Fascists for nationalist identity.  Both were radical, totalitarian-themed and hostile toward free thought, cultural diversity and form of expression - the sanctum of the individual.  And both have since failed as well.

What remains largely today are the empires of representative democracies.  I use the word “empire” very loosely, but because I believe despots can rule in a democracy as well, not just in monarchies or other totalitarian states.  They just take the form of party, rather than king or commissar.  And if those despots continue to care more for their own power than the will of the people, this latest form of rule will become challenged as well – harbingered by The Protesters against such regimes.

Our representative democracy here in the US will now come to face an existential question.  Can a representative democracy do the right thing when there are no longer any good options?  Can we make the tough choices necessary to sustain the prosperity of the people, when it might come at some cost to the prosperity of the individual?

Despite its obvious imperfections along the way regarding equality for race, creed or gender, it seems to have worked reasonably well on the way up.  When America has no foreign competition, because all those that would be, have literally been destroyed by fighting World War II on their own soil.  When the standard of living as a result increases by leaps and bounds, year after year.  When opportunity awaits the motivated, persistent, hard-working and talented who reach out for it.  When all of that creates so much wealth, our politicians can promise everything to everyone – purchasing our votes with our own wealth, and as if to suggest our successes actually had anything to do with them.

But what about when that upward arc begins to flatten out?  When we have real global competition for the first time?  When that bleeds away our standard of living into other quarters of the world, no matter who we vote for?  When there’s no more fat for politicians to carve off and sell back to us?  When we now must make adjustments, sometimes hard choices; real decisions?

Suddenly it’s not so fun anymore – not necessarily being the undisputed “number one”.  Suddenly it starts to feel and look a lot more like yet another aging empire.  That’s when people’s true character starts to come out.  When it comes down to survival, it’s suddenly every one for themselves once more; so characteristic of all heretofore societies in their last days that collapsed under their own weight.

And then the radical ideas don’t seem so radical anymore.  And then the people might actually be willing to deal with the devil that they don’t know.  And then revolution is in the air once more.  Dangerous words – the spark of so much war, so much blood, so much suffering in the past century.  So dangerous, because they speak of something so real and, from time to time, so present.

In a representative democracy, if the political leader is unwilling to give us the spinach we need instead of the ice cream we want if you will, it is because the electorate is unwilling to eat spinach – no different than a spoiled child.  After all, how can even the well-intentioned politician do good, if he can’t get reelected?  And what is to become of that representative democracy, when its governance must rely on the consent of the spoiled?

It prevails as every child, once spoiled, ultimately must – through discipline.  There simply is no other way.  Yes, we have become spoiled.  I can say it, because I’m not running for public office.  But whether I was or not, I would also remind us of the following…

We are a great society – I believe the greatest that can be found in the history books.  But we are at a crossroads.  If we want to continue to flourish with many more days to look forward to, it is up to us individually and collectively.  If we want serious politicians to make the serious decisions required for further prosperity, then we the people must get serious, be disciplined, grow up.

Because, right now, we don’t have any politicians acting serious – that’s for sure.  Even the ones that want to.  And that is nothing more than a reflection of those who would vote for them.  We are going to have to try something new now.  We the people are going to have to vote for the politicians that tell us what we don't want to hear.  They do exist.  They're just hiding right now, because they want to keep their jobs.

Being serious means we must ask for less right now.  Not because it is ignoble to strive for that great society on the hill, but because the latest generation has misspent our treasure, allegedly trying to get us there, and we have to be the responsible ones now and pay for their folly.  With taking less, we will also have to give more.  That is if we claim to care a lick about everything we have built, and the children who we would pass it on to.

We must remember to rely on ourselves, and ourselves alone, while at the same time be mindful to care for our sister and brother when they’re down.  The sanctity of the individual – of individual achievement, expression, success, dominion – must be preserved at all costs.  And part of preserving that means we must be charitable and remember to safeguard the individual sanctity of our neighbor.

Never have we been better situated to succeed in that endeavor.  Because we stand at a moment in history – as the richest and most powerful nation to have ever existed on Earth – where we can learn from the lessons of all others that have tried and failed.

The only thing left we need is a little resolve and discipline.  And the smallest reminder that this great nation was built by great people – was built by us – I believe is all it takes to evoke that which is already within us.

For if we don’t rise to the occasion, all we ever will have been in the annals of history, is someone else’s lesson of what not to do.

And that is what The Protesters are telling you.

22 November 2011

And the Sun Also Sets...

“Throughout our nation’s history, Americans have found the courage to do right by our children’s future… We cannot play games or put off hard choices any longer… If the U.S. does not put its house in order, the reckoning will be sure and the devastation severe… After all the talk about debt and deficits, it is long past time for America’s leaders to put up or shut up…”

Above is excerpted from the preamble of the so-called Simpson-Bowles report on deficit reduction – a report subtitled, “The Moment of Truth”.  That moment of writing was now a full year ago.  The commission that produced the report was instituted by Presidential executive order, after Congress failed to enact legislation proposing its formation in January 2010.

Its 19 authors (16 Commissioners, one Executive Director, two Co-Chairmen) proposed a six-part plan to improve our fiscal health.  It contemplated I) $4 trillion in deficit reduction through 2020; II) reducing the deficit to 2.3% of GDP by 2015 (presently ~8.4%); III) sharply reducing tax rates and abolishing the alternative minimum tax; IV) capping revenue at 21% of GDP (presently ~15.5%) and getting spending down to 21% (presently ~23.8%); V) reforming Social Security to preserve it, enacting cuts that don’t kick in until 2037; and VI) stabilizing the debt by 2014, reducing it [debt held by the public] to 40% of GDP by 2035 (presently ~67%, up from ~35% four years ago).*

By the commission’s own admission, “None of us likes every element of our plan, and each of us had to tolerate provisions we previously or presently oppose in order to reach a principled compromise… We do not pretend to have all the answers… We offer our plan as the starting point for a serious national conversation…”

That “serious national conversation” took the form, culminating four months ago, of holding-hostage raising the debt-ceiling in order to enact deficit reduction.  The result afforded us ultimately a $900 billion higher ceiling – an amount that would last us about eight months (from then-August) at our current rate of spending and income.  With that came ~$900 billion in cuts over ten years and another potential ~$1.5 trillion in the same time – a total amount equal to less than one-fifth our current over-spending.

Two-thirds of those reductions (the $1.5 trillion) depended on a “super-committee” (which I yesterday heard referred to as Congress’ “Minnie-Me”) coming up with a plan as of tomorrow, 23 November.  Otherwise, “draconian” automatic cuts would kick in – as I’ve written, not until 2013 after the elections, and can be spread and back-loaded over a decade’s time.

As you likely heard by now – and are probably not shocked by – the “super-committee” has announced effective failure, giving up before even reaching their official deadline.  Both parties are blaming the other’s obstinacy as political maneuvering while we approach an election year, calculated to make the other appear to blame for the mess we’re all in.

And the President, the only seeming adult at the time when he formed the Simpson-Bowles-led commission, has yet to consider seriously any of its proposals; choosing instead to let Congress lead the way to, at what is at best, ineffectual or insufficient results.

Whatever the motives, both parties actually seem to believe that they can get away with this course.  That is because the bond markets have, thus far, been giving us a pass.  This is despite a credit downgrade – the direct result of political paralysis over these fiscal issues.  Despite behavior that runs the very real risk of causing our interest rates to rise not insignificantly.

Our interest rates, for now, are at generational lows and not rising for several major reasons.  Some of it is about capital running away from Europe’s debt crises; away from a China that is much more a house of cards than appears on the surface.  Running to the only place left to run to – in a world challenged seemingly at every corner, to the relative “safe haven” of US government bonds.

And some of it is our Federal Reserve, with its virtual unlimited ability – so long as the dollar does not collapse – to hold shorter-term interest rates at artificially low levels to stimulate the economy.  They have been doing this now for four years.  The economic result thus far – only about one-quarter of jobs lost in the 2008-09 recession recouped.

This has led bond market participants to conclude that the risks of being in some kind of potentially deflationary depression (good for bonds, at least initially, by lowering interest rates) are greater than the risks of causing inflation (bad for bonds) with overly-stimulative, low interest rates.  (And, in my view, bond markets get it right earlier than stock markets do.)

This is the Japan scenario.  They’ve been in some kind of depression for a couple decades now.  If we don’t count Zimbabwe (and we shouldn’t), Japan’s public debt is the highest in the world – ~200% of GDP – the result of two decades worth of government overspending as a cushion for economic malaise.  That’s ~40-50% more than Greece’s.  Greece’s short-term interest rates are presently over 100% as a result of their fiscal ineptitude.  Japan’s, although also run by inept and corrupt politicians in my view, have been near-0% for over a decade.

So, so long as bond markets are convinced America remains in the zone of some kind of depression, we will not reap the consequences of fiscal inanity through skyrocketing interest rates – which is not my recommended plan of action.  And this is what our politicians, I believe, are thinking to themselves (to the extent they actually think about these things at all).  It seems to me, they figure the US can continue with very low interest rates, despite their shenanigans and fiscal impropriety, because Japan has somehow gotten away with it for years themselves.

That is a risky game to play.  But that they would even dare, should demonstrate to us the seriousness of the hole we are digging.

But we have not reached that “event horizon” yet; that point from which we can no longer escape.  Yes, over the past few years, we have almost doubled our debts.  Having said that, debt size actually does not matter.  Nor does running deficits.  Government can run deficits forever – and that can actually become a competitive advantage over other nations.  Just run deficits that grow your debts less than the real growth rate of your economy, and you’re fine.  But with deficits 8-9% of GDP, and only 2% real GDP growth, right now that obviously is not the deal.

It is the interest paid as a factor of revenue available to our government that matters.  If that gets too big, it crowds out being able to fund everything else the government is supposed to do in the first place (just ask Greece).  Fear of that happening begets higher interest rates.  Higher interest rates beget more crowding out.  More crowding out begets more fear.

And that occurs precisely how a Hemingway character once put it – “gradually and then suddenly”.  At which point, they just devalue the dollar, effectively cutting their debts – at the cost of dramatically slashing our entire standard of living overnight.  One way or another, it gets paid for.

Right now, with 67% public debt to GDP, our Federal government pays ~$230 billion in interest annually, which is about 10% of what it takes in.  Even though that debt has doubled in the past several years, that is still rather manageable.  But, with ~8-9% annual deficits, we are clearly on the highway to the danger zone.

It’s simple math.  Greece thinks it will take in 53 billion euros in tax revenue for 2012 (and good luck with that).  Greece has about 330 billion euros in debt.  Greece’s market interest rates – the rate at which it would be charged to borrow new funds to pay off having borrowed old ones – are an eye-popping 30% to 110% right now.  Being charged annually “just 30%” on 330 billion, when you only have 53 billion to pay for it – and everything else for that matter – doesn’t really work, does it?

Japan has roughly 955 trillion yen in gross debt (US$12.4 trillion).  Japanese can fund in the market at rates that range from almost-0% to 1%.  Even at a “nose-bleed” 1% interest rate level, it would cost them 9.6 trillion yen a year in effective interest.  The Japanese government’s annual general revenue is ~160 trillion yen.  So their debt servicing is only ~6% of their revenue, using those numbers.  They have far more debt [to GDP] than Greece or us, yet Japan’s burden is a comparatively smaller portion of their ability to fund. Hence, the bond markets have allowed them to enjoy very low interest rates.

But God forbid their interest rates ever go up a few points.  If their rates went from 1% to 4%, their debt service would suddenly consume one-quarter of their budget, instead of just one-sixteenth, using my back of the envelope numbers.

The same dilemma we are currently building for ourselves.  Our effective interest rate right now is about 2.4% ($230 billion in interest paid in the past twelve months, divided by an average $9.7 trillion debt held by the public in that time).  As I wrote, that’s 10% of our current government revenue.  But suppose our rates went from 2.4% to 5.4% – a level the effective interest rate was at, about a decade ago, when our debt was only half the size it is now.  Now the interest burden suddenly is $540 billion on the current $10 trillion net debt outstanding, which is presently growing $1.3 trillion annually.

Suddenly that’s 24% of government revenue, not “just” 10%.  Suddenly just the cost of paying for money already borrowed exceeds all Medicare outlays.  After just another three years of $1.3 trillion deficits, a 5.4% interest rate on our subsequent debt would equal the amount of all current Social Security outlays.  And what if 5.4% rates were 10%?

To be fair, a 5.4% effective average interest rate would really entail years of much higher interest rates to raise the average blend from 2.4% to 5.4%.  But I think you get the point.  And the example is not nearly out of the realm of possible, especially since US rates have been 15-20% in the early 1980s – on a much smaller debt burden threat then.

At that point, then what do our politicians [not] do?  Who is left to blame that on?  Democrats?  Republicans?  Unwashed Occupiers?  Over-zealous Tea Parties?  Evil Wall Street bankers?  No… just a government of the people, by the people, for the people.

Ultimately, it’s our fault.  Yours.  Mine.  Individually and collectively.  Because we let them get away with bad behavior.

So if you want your elected representatives to roll up their sleeves and actually do something about this, make it clear to them that the penalty for doing nothing and seemingly avoiding criticism – holding their breath and hoping this does not blow up in all our faces one day – far outweighs the penalty for doing something bold that does not please all of us, all the time.

Fearing less the consequence of action, than the consequence of inaction is what it means to lead.

As I opened with Simpson-Bowles, I will close with some more of my favorite Hemingway – “If you’re any damned good at all, everything is your own damn fault.”

* I recommend you read the report yourself.  In my view, it has several good ideas worth seriously exploring.  You can find it at their website: http://www.fiscalcommission.gov/ .

09 November 2011

The Real Story?

A question I got (paraphrasing):  What is the “real story” while our attention is being diverted by so many issues out there?

“Arab Spring”, Japan’s earthquake, tsunami and nuclear meltdowns; millions starving from drought in the Horn of Africa; Sudanese genocide; uppity Iranians; a decade-long, and counting, confused mission in Afghanistan; America’s diminished role in the world; wild energy price swings; mega winter storms, hundreds of Midwest and Southern tornadoes, massive river flooding, a 1,500-mile-wide Alaskan storm; BP oil spill; Somali pirates; Ground Zero “mosques”, Qur’an burnings; Miss Teen South Carolina so succinctly defining the future of our youth (just Google it) and, of course, Lindsay Lohan violating her probation…

 Aside from that, all is well.  What are you talking about?  Oh – do you mean…

US sovereign credit downgrades, almost defaulting on our debts; European debt crises; the 6.5 million person remaining job hole; Wall Street “bailouts”, Tea Parties and the “Occupiers”; taxes “too low”, government spending “too high”; income inequality; public union assaults in Ohio and Minnesota; a completely dysfunctional, Tweedlee/Tweedledum government, not-so-sweeping financial regulation; Bernie Madoff; home prices cut almost in half; the worst global recession and financial crisis in a generation’s time leading to the effective failure of GM, Chrysler, IndyMac, Wachovia, WaMu, Merrill, Lehman, Bear, AIG, Fannie, Freddie and Countrywide?

Is that what you mean?

Greece and Europe?  Greece is a pimple.  Its entire economy is the size of the greater Boston metro area – it’s debts ~1.6 times that.  Its headline value – like Russia defaulting in 1998 – is much larger.  Its contagion to economies that actually matter in Europe – like Spain or Italy… France and Belgium – has always been the real threat.

And with Teflon-Don, Italian PM Berlusconi finally stepping down (one day after Greece’s), due to upset from “austerity” measures deployed to right-size its budgets; with Italian government bond yields now skyrocketing past 7% this morning; and Greece’s over 100% – here you go.  Like Zeno’s Paradox, the next largest economy in the world – Europe – is now about eight cm (~3”) away from hurdling into that brick wall at 160kph (~100mph), it was 50m (~20’) away from, two years ago.  (And you can take that stupid metric system with you.)

American politics?  The public is slowly, finally waking up to the fact that they have only let the same-old two parties run things now for nearly 160 years.  Out with the old?  Dissent grows on the right, within the Republican Party, in the form of Tea Parties, causing an existential conflict there.  Dissent grows on the left with the unions and also with the Occupiers – except they haven’t realized that they should be upset with Democrats too, as they are as in bed with Wall Street and big business as Republicans are.  But they’ll figure it out eventually – unless they get a job.

Both are similar to Teddy Roosevelt’s Bull Moose revolt from the Republican Party in 1912.  Teddy’s platform was completely the opposite of the Tea Parties, in the sense that he broke with Republicans to promote things like a national health service; social insurance for the elderly, unemployed and disabled; and income tax.

But it was exactly like the Tea Parties and the Occupiers in that his main theme was really going after business interests that dominated political parties.  He wanted limitation and disclosure of campaign contributions, lobbyist registry and a public record of Congressional committee proceedings.  Sound familiar?  Well, 100 years later, we’re still waiting for such glasnost.

Slow economy?  What slow economy?  As the questioner alluded to, business is booming in Fargo, North Dakota.  All you need is about 10 billion barrels of proven oil reserves under your house and a crash course in wildcatting – and boom – structural unemployment solved.  Next?

What is the real issue?  They are all real issues.  But they are also really just trees in the same forest.  I can’t speak to acts of nature beyond man’s hand in them, but all this unrest and social frustration, from Akron to Athens, is born from the same thing – fallout from a crippled global economic system.

If we did not have the worst employment situation in the US since 1937; if we did not have extreme belt tightening hanging over southern Europeans, ultimately to really be paid for by northern Europeans – none of the above would matter.

We wouldn’t notice or care that Republicans and Democrats are self-serving entities that act for the voters on the day before Super Tuesday, and for themselves for the other 364.  There would be no Tea Parties, no Occupiers.  Republicans wouldn’t dare to strip public unions of their right to collectively bargain.  Democrats would never have been able to pass health care (and even that is in limbo now).

We would still have deficits and debts.  But they certainly wouldn’t be the scary size they are today.  And both parties would be allowed to continue to borrow or tax to secure the funds they need to, one way or another, purchase votes from the electorate, year in, year out.

Anyone who cares that income has been growing less equal – really for four decades now – no one would pay attention to.  Really?  It’s like – all of a sudden in 2011 we’re shocked and appalled that there’s growing income inequality in America?  How'd that get in here?!  An ever increasing value of a home that was virtually wrapped in a bow and left on your stoop (the one you built, of course, before the house arrived), or that rising stock portfolio; would obscure the notion that the value of goods and services that you need to buy every year is getting away from the amount of dollars that you are actually compensated for your hard work.

I guess the real story is, we’re in one big pickle.  And all this various social tension is really just our collective reaction, our collective frustration, manifesting itself globally in one manner or another.

It just adds up to – this is what being in a depression feels like.  We can argue ‘til we’re blue what a depression might look like.  But what it does is it makes us notice, makes us feel, the bad side of everything just that much more.  And maybe that’s a good thing – a wakeup call.

To the extent that we control our nation’s democratic destiny, I guess the thing that this should remind us all – the “real story” – is, at the end of the day, it’s all our collective fault.  Not just Wall Street or big business.  Not just unions, or whatever people think socialism is.  Not just our decaying infrastructure or neglected class rooms.  Not just politicians.  Who elected them?  Us.  Who lets them get away with anything they might upset us with?  Us.

But you come up with 6.5 million more jobs – and all of the above goes away.  All of it.  And with that, our desire, or will, to maybe fix it right for real, while we still have the chance.

08 November 2011

Will Work for Votes

From a jobs point of view, we are in a depression.  And the only two parties we seem capable of electing to run this country, since at least the 1850s, have now both staked their latest re-election prospects on creating jobs.

Both parties are failing us - miserably.

When Democrats had absolute power (January 2009, until 2011), it seems they pushed the health care agenda while they could (no, I’m not dismissing the 2009 Act; just read on).  And at least since the Republicans have had the House, it appears they’ve been more focused on either saying “no” to anything a Democrat might suggest; that, or maybe passing anti-abortion legislation.

And now that we enter this election cycle with dissent brewing both on the left with the “Occupiers”, and on the right with the Tea Parties; now after at least three or four years of continued malaise, our elected representatives might finally be starting to focus on actually helping the private sector create a job or two.

Let’s review our current job environment.  One aspect of depressions is, deeper than normal job loss with far slower than normal recovery.  This current period is exactly that.

In the post-World War II era, there have been 11 recessive periods (splitting 1980-82), including this current one.  In all but two (our current one, where jobs declined during 2008-10; the other, 2000-03), the private sector jobs lost were recovered in 7-15 months, or just under one year on average.  Of those periods, the average private jobs lost as a percent of the pre-decline peak was 3.6%.

Defining recessive periods by private job loss and the time it takes to recover, this current one began in January 2008 and bottomed out in February 2010.  Using last Friday's jobs report, which updates us through October 2011, we are now 20 months out and still not recovered - well beyond the more typical 11.6-month average recovery.

Despite approaching twice the normal recovery time, we are not even close to actually recovering.  We lost 8.8 million private jobs in this current period.  That's 7.6% of the number of jobs we had before the decline – more than double what is typical.  Over the past 20 months through October 2011, only 31% of those private jobs lost have since been recovered (26% of total jobs, which includes government).

The next slowest post-World War II recovery period was after 2000-03.  However, 20 months into that, 83% of jobs lost had been recovered; all just three months later.

The job recovery time, as a ratio of the loss time, for all previous ten recessive periods averages a little over 1.0.  In other words, it took on average 12 months to recover from 12 months’ worth of job loss, no matter how deep or shallow.  On a graph, it would look like the "V-shape" that some people characterize normal recessions as - as fast out, as in.  This current recessive period experienced 25 months of job loss.  So a normal looking, V-shape recovery would have all those jobs made back by May 2012 – around a half-year from now.

To date, we have recovered only 2.8 million of the 8.8 million private jobs lost.  Twenty months in, that's an average recovery rate of 138 thousand jobs per month (104 thousand were reported for October 2011 last Friday; consensus guess was 125 thousand, per Bloomberg).

At the 138 thousand monthly rate, it will take another 44 months from October 2011 – or by around June 2015 – just to make back all jobs lost in this current recessive period.  That would be a total recovery time of 5 1/3 years, over five times the average duration of post-World War II recoveries.

On top of that, while we will have spent potentially three-quarters of a decade either losing 8.8 million jobs or trying to make them back, we will not have even begun to address the ~10-14 million more jobs we would need to create in that time simply to address population growth.  There are 154 million people in our civilian labor force.  Just to keep up with population growth (~0.9-1.2%), we need to generate 115 to 150 thousand jobs each month.  Therefore in a sense, at these current rates, we will never effectively recover.

It looks like job loss during in the Great Depression bottomed out around the end of 1933.  The unemployment rate, pre-1929 Crash, I believe, was around 4%.  By 1933 it was around 25% (with under-employment in the zone of 35-40%, depending on how you measure it, as they didn’t keep consistent records back then).  And it appears that it took around ten years, through 1943, to get back to a 4% unemployment rate.

That was aided in no small part by war-time production.  The US added over five million private jobs in just about a year, from mid-1940 through mid-1941 alone (taking ~5-7% off of by-then ~15-17% unemployment).

Our current situation is by no means as bad as the 1930s.  But it is clearly many multiples worse than every other post-World War II recessive period, and the closest one on record that we might dare to compare to the 1930s.

If we are on track to take more than five years to recover the jobs lost in the course of about two, it means our current recovery time will be over 2 ½ times the loss time.  This would be equivalent to the Great Depression’s, four years down, ten years out ratio.  The total loss and recovery period then would be only two-thirds the duration of the Great Depression’s – but almost 3 ½ times the duration of the post-World War II average.

And it’s not just the number of people without jobs.  It’s also the amount of time each person spends out of work.  As of October 2011, the average duration of unemployment was around its peak, at 39.4 months.  So far, this is double any highest previous peak of the post-World War II recessive periods.

I think we all know by now that the headline unemployment rate hovers stubbornly around 9.0%.  As well, the underemployment rate is 16.2%e - sometimes referred to as the real unemployment rate, as it includes things like people who want to work full-time but can only find part-time gigs.  These levels are about double what they should be in non-recessive times.

Not in over a generation’s time has the job situation been so bleak; has there been a greater need for our government to proactively and aggressively tackle this one issue.  So what’s on the plate at the moment?

Well we have what’s left of the President’s ~$450 billion job proposal, revealed last September.  I guess as expected, it was voted down in the Senate last month.  Now he pitches bits and pieces of it.  Basically, over half of it was tax cuts and job/investment-related credits and benefits.  The rest was investment/spending.

I feel that Keynesian-styled government spending is a necessary evil, only when the private sector is too nervous to invest and expand.  But I also feel that timing in life is everything.

The government, at best, is grossly inefficient, and therefore should spend the least possible, whenever possible.  The occasional impact of their spending stimulus is best deployed in hard times as a psychological inducement to encourage the private sector to invest again.

The window for effectiveness to that end is small – when people are at their most fearful.  Wait too long, and the psychological utility of its impact diminishes, as the atrophy of malaise sets in.  That moment would have been about three years ago.  And the government did spend in a rather big way then.  Their remedies, it turns out in hindsight, although big, just weren’t bigger than the actual problem.

I support the President’s proposals for lower taxes and offering job and business investment related tax credits while the economy is soft – even if it’s kind of “pushing on a string” right now.  And I do support his infrastructure spending proposals – primarily because we have to do that anyway.

But throw the consumer a bone also (I know their lobby isn't as big, but try).  We might also want to explore, as well, allowing personal interest (on credit cards, or auto loans for example) to be deductible for personal income taxes, if we can find an offset to pay for it.  This would transfer stimulus to more efficient private consumption – the by far largest component of GDP.

After all, businesses only invest when they need to – when they see that they have more sales than they know what to do with.  Increasing private consumption generates that “good problem” for business.

Some might worry that could get the household back into too much debt – part of what caused our problems in the first place.  I argue that we are effectively going there anyway, via our public sector rising debts.  And, after several years of that, to what benefit, really?

Ultimately, the best job creator is promoting, nurturing innovation and technological advancement.  For many decades, we have both publicly and privately led that charge.  The rest of the world is now catching up, but I wouldn’t count us out.

I will conclude by paraphrasing what I heard former President Clinton state in an interview on MSNBC’s “Morning Joe” today.  He said, when he was younger, it was the Soviets that were going to “bury” us in advancement.  Then in the 1980s, it was the Japanese.  Now, apparently, it’s supposed to be the Chinese.

He said it’s been a money-loser every time to bet against the US.  Our job is to make people lose that bet once more.  I agree with him.

We’ve done it before.  We’ll do it again.  And that’s the good news.

Now if we could just get those pesky politicians out of the way.

07 November 2011

99% Plus 1% Still Equals 100%, Right?

It was only three months ago that our elected representatives signed into law the Budget Control Act of 2011.  Remember that embarrassment?  At the center of it all was whether we should or should not raise the debt ceiling – a limit that began to be imposed in 1917 by the Legislative on the Executive’s ability to issue debt to pay our Federal government’s bills.

The Act, signed 2 August, was the culmination of what became a many months long, intense and emotionally charged debate in our nation – one likely to continue for some years.

At the core of that conversation is a question that still needs an answer.  If you will, if that question were a mythical beast in need of slaying, it would be a hydra – many heads, but of one body.  Should the US Federal government continue spending as much as it has been?  Does it need to raise more revenue?  Are our deficits out of control?  Are our debts one day to become a Greek tragedy?  Should we use the debt ceiling as a lever to discipline our fiscal habits?  And who is going to pay for all of this anyway?*

Many questions; really just one quandary.  Questions that should start surfacing once more in our media’s consciousness, as we approach 23 November.  That day is the deadline for Congress to produce legislation that would enact at least $1.2 trillion in Federal spending cuts before 23 December, or else face “consequences”.

Federal expenditure (for the trailing twelve months through September 2011) is now $3.6 trillion a year, or 24.1% of GDP.  It has averaged 21.1% over the past few decades.  Unfortunately, Federal receipts (for the same period) are only $2.3 trillion, or 15.4% of GDP, versus its three decade average of ~18.0%.

This leads us to our present (through September 2011) Federal funding deficit, which is 8.7% of GDP. That’s down by almost 2% from about two years ago. It’s decrease is certainly not from any tax increases, but instead from the natural, albeit anemic growth of the economy. Even at this below-2009-peak-level of deficits, we are still at the highest it’s been for the post World War II period.

Those deficits pile up over the years as our debt. Presently, there is about $10 trillion in net Federal debt “held by the public” (meaning, not counting the debt held by other Federal entities, because that effectively becomes an inter-agency elimination). Gross Federal debt (which includes some of that debt held by other agencies, mostly the Social Security trust funds) is about $15 trillion. All of that excludes the total liability for social insurance and other entitlements, estimated to be another $30-50 trillion in present value (depending on your assumptions).

Our Federal gross debt is now in the zone of 100% of GDP. You can add another ~15% for state and local’s $2.2 trillion of debt, which is more “apples-to-apples” to include, when comparing to other nations. That ~100% is up from ~60%, five years ago. Our current level is now roughly approaching the World War II related peak, achieved two years after war's end, in 1947. Also, according to the IMF, this now tops the Euro area which is 91%, up from ~70% five years ago.

So we have a $1.3 trillion annual hole in the budget. We might spend far less compared to the Europeans still (their governments’ expenditure is more like ~45% on average for the last five years, whereas ours, including state and local, is more like ~35%, according to IMF data).  But we spend too much, at least in relation to what we take in. It is so out of hand at this point, that the only fix will ultimately have to come from both less spending and more revenue.

After combing through the fiscal 2010 Federal budget (year-ended 30 September, 2010), I estimate about 65% of all expenditure, or $2.3 trillion, is some form of social subsidy. About 21%, or $710 billion, is Defense and Homeland Security related (which excludes $160 billion in Veterans’ Affairs, military retirement, military health care and other military benefits; which are all a form of “social subsidy”). Only about 1%, or $35 billion, (of the stuff they show us) is related to foreign affairs.

So most of the real cutting will ultimately have to come from entitlements and defense, as opposed to from the more discretionary or “pork” or “eliminating waste, fraud and abuse” that not-really-serious people trying to get elected constantly refer to.

Even with sizable cuts to those programs, it appears at this point that taxes will have to go up too. And it’s going to have to go up for everyone – for both the “1%”, as well as the “99%”. They just don’t want to tell you that before November 2012.

For fun, I’ve rather unscientifically fiddled with data supplied by the Tax Foundation (which has been criticized by left-leaning CBPP, but their data I used is source IRS, for what it’s worth). I calculate, all else equal (excluding avoidance, for example) if you raised the effective tax rate by 10% on the top 1% income tax filers in the US, that would raise ~$130 billion in revenue annually (just very simply because they collectively had adjusted gross incomes, or “AGI”, of $1.3 trillion for 2009). That would still leave a ~$1.2 trillion current Federal budget deficit. If done to the top 10% filers, it would raise a total $340 billion annually – still a cool, $1 trillion to come up with.

Raising it 10% on everyone, including now the other 90%, would raise a total of $780 billion annually (the data states that all 138 million filers had combined AGI of $7.8 trillion in 2009). That would still leave an over $500 billion annual deficit at our current levels. All we would need to do at that point is cut everyone’s subsidies a mere one-fifth [place your favorite cynicism emoticon here].  (The more recent numbers will look a little better as the economy has improved, but really not that much.)

Having said all that, government revenue can go up simply by growing the economy too – as it has in the past couple years, for example. So if we won’t cut spending enough, the only solution is not necessarily just higher income tax rates, or value-added taxes, etc. It could be much more effective to promote new technologies that form new businesses that need to hire – just like what the digital boom of the 1990s did for us.

And look at those Clinton Administration years, for example – so often praised for balancing the budget, purportedly through higher than predecessor tax rates and spending cuts.

By December 1992, Federal expenditure was $1.4 trillion, about 22.5% of 1992 average GDP.  Revenue was $1.1 trillion, or about 17.4%.  The budget deficit was $327 billion, about 5.2%.

I calculate that, if we froze revenue at 17.4% of GDP back then – in other words, didn’t raise taxes – and grew expenditure at consumer inflation rates, the budget would have balanced itself simply from the organic growth of the economy by the first few months of 2000.

Instead, the President and Congress raised the top rate on inflation-adjusted incomes of $388 thousand – which is in the zone of our cut-off to be in the top 1% incomes today – from 31% to 39.6%. Also, inflation-adjusted incomes over $178 thousand went from 31% to 36% – they would be in the zone of today’s top 5% cutoff. (All filing as “Single”, which, with today’s divorce rates…).

Instead the budget was balanced in the first few months of 1998 – a whopping two years earlier, than had we done effectively nothing.  Is this what the proponents of the time are so proud of?  Dare I suggest, might we give some credit to the hard work and innovation of little-old us showing up for work every day in the actual economy?  A little credit for expanding the economy by over $3 trillion in those six years ended December 1999; what the government leeched off of to balance their books?

Again, my method was very simplistic, my math “back of the envelope” but (and pardon the argumentative fallacy) it can’t be worse than any given politician’s – and at least I’m not running for anything.

So here we go again.

The 2011 Act raised the debt ceiling immediately by $400 billion (subject to further, goal-based increase) – something we’ll burn through in under four months, counting from three months ago.

The Act contemplates cutting a total of $1.5 trillion over ten years. If Congress does not enact at least $1.2 trillion in spending cuts by this coming 23 December, it puts in motion a series of what have been characterized as severe spending cuts not subject to negotiation. Not so highlighted in the public discourse, however, are those cuts don’t commence until 2013 (read, after the architects’ presumed re-election) and are spread out and back-loaded all the way to 2021 – easily buried in a subsequent decade of fiscal noise.

Even if they come up with the spending cuts, that’s $1.2 trillion over a decade – so it’s only $120 billion annually, or less than one-tenth of our current budget shortfall. Even with our hypothetical taking of 10% from everyone that actually works for a living, it would still leave a hole over $300 billion.

So we’re all going to have to pitch in and pay our share – whether it’s “fair” or not. We’re all in this together – all 100% of us. I am very aware of the income inequality issues that have been in the works, really for some decades. We absolutely need to address those issues as well. I think it starts with education – but that’s a whole ‘nother conversation we need to have, and another post for me, for another time.

The solutions for our present fiscal mess are going to have to come from all quarters, high and low, left and right. From the 1%. And from the 99% too. And the sooner we can stop pointing fingers at each other, in the midst of yet one more election cycle, the sooner we can actually get down to some real business and fix this pickle.

* Answers: No, yes, yes, we’re certainly heading there, no and all of us.