Friday, November 19, 2010

Keeping the focus where it belongs

“In sum, on its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years,” he will say. “As a society, we should find that outcome unacceptable.”

-Ben Bernanke

26 comments:

  1. What are you worried about, specifically?

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  2. when, and in what context, is this quote from?

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  3. Increasing gap between rich and poor. The ever present threat of finding oneself without health insurance.

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  4. Samuel,

    Those are things to be worried about, for sure. Health insurance is tough. I am self-employed and so it's around $400-$500 a month for my family to have really crappy insurance - just enough to keep us from going broke if we run into major health expenses!

    Good luck to you on that! And yeah, I think the gap between rich and poor is one of the greatest threats to the security and stability of our country - not to mention the toll on individual lives.

    John,

    This was from Bernanke's recent speech (Thurs.?) where he responded more forcefully than usual to the intense criticism of the most recent round of quantitative easing. I think he's really, really right to focus like a laser on getting unemployment down and the economy growing more quickly. Inflation is not a problem right now, so why pretend it is?

    As Tolkien says, "The orc that one fears is better than the wolf that one hears."

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  5. It's an incredibly challenging venture when one is faced with today's statistics in unemployment versus te potential impact of tomorrow. It saddens me to know that so many are faced with real, seemingly insurmountable hardships and I think the notion I've heard of "suck it up and get a job at McDonalds if you have to" is one given by people who seem to have lost the ability to empathize; however, there is some value in this idea that has gone unrecognized by too many on the other side. We've been far too eager to "help" people in recent years going back to the last few years of the Bush administration. There is a reason sales of "Atlas Shrugged" have been off the charts in the last five years... people recognize that redistribution of wealth can be more dangerous than allowing failure. When the government makes the decision to be charitable, there is a real problem we must face: where do the funds come from? Someone will always suffer the penalty.

    There is the added problem of potentially perpetuating the problem. When we look to a system of government that implements this idea in an unmitigated manner, we can see clearly that the whole society suffers as a result. Work ethic can go down the tubes is the possibility of failure is removed entirely.

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  6. Randy,

    You make some good points, but we are talking about the inability of the private sector to maintain full employment right now.

    When aggregate demand falls off sharply, as it has in recent years, then the economy begins operating underneath its full capacity. And what is more, there is little incentive for the economy to grow without proper stimulation. Corporations and banks are sitting on large amounts of liquidity which are not moving, not being invested, etc. They have little incentive to do so as uncertainty drives a lack of investment which drives uncertainty, etc. It's a cycle.

    Fiscal stimulus, through direct government spending and through manipulation of interest rates, is the attempt to get the private sector and the productivity of the American people moving again.

    A large percentage of unemployed people is a huge waste of resources. Not employing them is like not planting crops. It reduces our productivity. It is a waste.

    And worries about the deficit are secondary. The US has sovereign control over its own money supply. We will always be able to pay our obligations because they are in the currency that we print and control.

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  7. Steven,

    I appreciate that you are attempting to identify the problem and to suggest that we create a solution to THAT problem. Yes, unemployment is a problem, and yes, employment is a solution. There are two keys to implementing this solution, though:
    1. We can't create jobs for the sake of creating jobs. This would be catastrophic in the long term.
    2. Unemployment should not be employment. In many states, extending unemployment benefits has become something of an occupation for a significant percentage of the out-of-work population. This very notion is insanity defined.

    The overarching problem we run into when the govenment extends programs and expands its scope is increased overhead. The term "government efficiency" would be seen as a joke by most; yet, we continue to witness expanded government. It seems an odd paradigm to me. In general, I'm against inflating the government's role for this very reason.

    If you disagree, I'll issue a challenge to you: Cease whatever charitable giving you currently take part in. Instead, when you file your taxes, check the box where it asks if you wish to give more than what you owe. Let the government allocate those funds as it sees fit. Unsettling? if so, perhaps you should ask yourself why.

    In short, I agree that we need to tackle these problems. I just think Uncle Sam is the wrong man for the job. My personal preference would be to find the non profit you believe best addresses the problems you view as the most consequential then give generously. They tend to do the job far better with much less overhead and there is no shorage of worthy organizations. In fact, as in any business, the cream of the crop tends to thrive while the rest go by the wayside. This cannot be said for government.

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  8. While I am a strong believer in a system which rewards creativity and hard work, I disagree with your dim view of government.

    It's the only system that makes trade even possible as we rely on it to enforce rules so that we can trust our increasingly anonymous business partners in everyday transactions. It also needs to foil the private sector, whose natural tendency is to merge and merge again, until we have behemoth, "too big to fail" organizations who then must be the recipients of bail-outs and cannot be allowed to fail.

    We can create jobs for the sake of creating jobs. That is fine. It is better than people not working. But this is not the case. We need people to improve schools and infrastructure, and so much more. The private sector creates jobs simply for the sake of creating jobs all the time. We don't strictly need many of these goods and services at all.

    Unemployment benefits are not as good as putting people to work, but a social safety net that is reliable is essential for risk-taking, creativity and all the other virtues of the "private" sector we wish to encourage.

    I don't see government efficiency as a joke. I think government can be very efficient, and it can be very inefficient. The private sector can also be extremely inefficient, choosing personal luxury items over items for the greater good time and time again. (this is speaking generally in economic terms)

    As far as taxes, there is little reason to pay more than is due. Taxes are not used directly by the government for spending. Rather, taxation is a way to drain the system of capital in relation to government spending (which floods the system with capital). The government can, and will, spend what it likes, regardless of taxation. Public deficits turn into private savings. Taxes are a way to manage potential inflation and to redistribute wealth - something that is essential in a private system which naturally tends to concentrate wealth into the hands of the very few.

    What we need is a balancing act between public institutions and private business. Finding that balance is a challenge, but neither side does well without the other!

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  9. I should add that Keynesian government action is meant to simulate and encourage the private sector, not replace it.

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  10. One might see the financial crisis of the last couple of years as a huge mess of inefficiency. Capital was diverted in to instruments (mortgage backed securities) which were meant to fail, in order to realize greater rewards from insurance against those instruments (credit default swaps).

    Financial instruments, stocks, bonds, etc. which cease to organize actual, real goods and resources, but rather seek only to reward the managers themselves (Wall Street) are extremely inefficient. And the private sector has a tendency this way - though of course, it offers many goods as well.

    Of course poor governance and poor leadership at the fed by Greenspan are to blame as well. But an argument against poor governance is not an argument against governance. We all hate poor governance.

    and yes, the government can be less efficient without the accountability of the market. But once again, so can the private sector. Why do companies advertise? To manipulate people into buying products that the don't see that they need in any immediate way. This is inefficient - a use of propaganda to make up for inefficiency.

    Why did Cisco just buy back billions of dollars of its own stock, trying to boost its price? Is this an efficient use of company dollars to enhance the public good with more research and development and innovation? No.

    But of course the private sector can be super efficient too, when individuals have the freedom to think outside the box. No question! But we need an adequate social safety net so that entrepreneurship and quality risk-taking can flourish. It's tough to start a business when you have to stick to a boring, inefficient job for the sole purpose of keeping your health insurance.

    But non-profits can be a great place to give money, no question about it.

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  11. I think there is some confusion on the issue at hand and it's partly my fault. In no way do I believe government should be abolished or that we should not have government checks on business. Some of the ideas imparted here,though, don't make a ton of sense to me. You intimated for instance that we could basically print our way to success without somehow devaluing the dollar. The dollar is not impurvious to failure and this idea seems dangerous in a global economy.

    You said that govenment could be efficient, but I think we have practically demonstrated otherwise... could it be? Pehaps in theory, but in practice, it has been demonstrated to be bloated and inefficient. We do have checks on private industry and charities... the chief check, though, is the one that government does not allow for itself: failure.

    This idea that we cannot allow failure is detrimental to numerous aspects of society. We have seen it in schools and we are beginning to see it in industry. We can have checks, but let us tread carefully when involving government. We can encourage industry without borrowed capital. Whatever happened to cutting spending? How about increasing the writeoff for charitable giving? Can't we think of ways to infuse the economy without adding ridiculous amounts of overhead?

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  12. Well I would write about the economy but I noticed Randy said something.... "the chief check, though, is the one that government does not allow for itself: failure."

    If an elected official is a failure they can be voted out. Of course most people just vote incumbents back in time and time again anyway.

    If anyone is to blame it's the American people.

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  13. "You intimated for instance that we could basically print our way to success without somehow devaluing the dollar."

    No, inflation should be a focus, but when unemployment is high and inflation is basically zero, like right now, then unemployment is the problem to be fixed. Inflation is needed right now, because nominal interest rates are really low, but they can't become negative. There is little necessity to actively invest. However, if inflation kicks in, then REAL interest rates will go negative - it will be too expensive to keep excess liquidity sitting around - and companies and institutions will be forced to invest.

    But inflation will not occur in a lagging economy. That's why only fiscal stimulus can break the downward spiral.

    Cutting spending (austerity) will only drive down demand further right now. If we cut spending then there is less purchasing power in the system. Why would companies expand when there is no demand? And where will demand come from if companies do not expand? Right now, austerity would be like applying a leech to a sickly patient.

    The key to "efficiency" is to really decide what it means. Does it mean to achieve a specific business goal with the least amount of cost to ownership? Or to workers? Or to the society at large? Slave labor is probably the most efficient if the focus is solely on ownership. Of course no one thinks efficiency is worth that cost. If efficiency means to provide the greatest good to the most people, then the private sector needs help - as evidenced by the growing concentration of wealth in fewer and fewer hands.

    But once again, Keynesian economic intervention is about helping the private sector. It's a very capitalist economic system, it just thinks that the natural, unfettered business cycle can be super dangerous without checks and without an government that is willing to act. The economy is a powerful tool that needs focus.

    And I believe that not allowing failure is a symptom of private enterprise run amuck. The natural way for private business is to merge and merge, creating greater rewards for management and lesser rewards for workers. Then the institution becomes "too big to fail."

    GM may be a good example (maybe, I haven't studied it much yet) of intervention done right. The company's management, stockholder and bondholders all lost everything. They were definitely allowed to fail. But the company's infrastructure, intellectual capital, and workers were allowed a second chance through bankruptcy. Now the company is profitable and publicly traded again, and the loss to the public sector is currently minimal and may be reversed soon.

    However, I respect your worries about government institutions not being allowed to fail. There is an aspect of government that is sort of permanent, like the military. We should be very careful about government intervention, it's true. However, Samuel is right that in a democracy, there are real consequences to incompetence. FEMA's incompetence during Katrina has hopefully led to a more competent organization in the wake of the political consequences of the subsequent two elections.

    I also understand that conservatives and liberals have the same goals - full employment, equitable distribution of wealth and continuing technological innovation. The difference is simply in SOME of the methods we need to employ to achieve this.

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  14. I have really enjoyed reading the dialogue between Steve and Randy. Really interesting comments. You guys would be great on a debate team.

    Couple of thoughts. In my job clients are constantly looking for better interest. The more they worry about inflation, the more they invest in equities. Also, the lower the interest rates on cd's and bonds, the more they invest in equities. So, inflation concerns caused by pooring money into the economy lead investors to provide public companies with funding for growth. The lower interest rates on Treasury yields, the less people want to own them, no matter how guaranteed they are. There comes a time when yield triumphs for just about any investor.

    Also, Randy, I like your idea about a bigger deduction for charitable giving. In a way, that is happening right now (kind of). With the estate tax exemption going down to a million bucks per person in 2011, wealthy individuals will begin to leave more of their hard earned wealth to charities (to avoid having that money taxed heavily via the estate tax) than they would have in previous years (for almost a decade the estate tax exemption has been 3.5 million, so fewer people were looking for charities to donate money to so they could avoid giving it to the government). Anyway, letting the estate tax exemption go back to 1 million bucks per person would DEFINITELY encourage wealthy people to change their estate plans to leave more of their money to charity. I know this isn't the tax deduction you meant, but it is something that poors money into charities and out of the federal government. Fyi, so far there hasn't been a change to this legislation, but some people think the government will push it back to maybe even 3.5 million again, which would suck for charities, but rock for the kids of the wealthy.

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  15. to add to my comment, having the estate tax exemption go down is, in my view, a great idea as it will give more money to the government via estate tax dollars for those who do not have proper estate planning (as Steve said previously, taking money out of citizens' hands can limit the risks of inflation - the estate tax is a big way to do this) . Also, for those people who DO proper estate planning, they will either be paying the government their taxes via life insurance death benefits OR they will be giving their assets to charities. People who are concerned about their kids inheritance being hit hard by estate taxes get the life insurance, and people who are concerned about the government getting a dime of their money will allocation some to charity. Warren Buffet, Bill Gates -- these guys are giving their money to the Bill and Melinda Gates foundation.

    I do wonder if a $1 million exemption is too low though. They might make it $2 million. We'll see. The government goes back and forth on it and no one has proposed a change yet (similar to the personal income tax situation where it is about to go back to how it used to be)

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  16. I get the Keynesian idea and I think it's a nice sentiment on paper. There is a practical consideration, though... there is a stickiness to government programs that is not inherent to the private sector. When the government gives, the most hated politicians are those who want to rescind the programs... a necessity for true Keynesian economics. So, instead they stick. Government again inflates and the private sector takes the hit (stil having to pay for inefficient programs). It is a poor cycle. The best prescription in my mind for long term success is the possibility of short term failure.

    The people certainly have their share of the blame, but if the people are the addicts, the government has played the role of enabler. Perhaps it's time for an intervention. The church, too, is to blame... probably a later topic.

    John,

    Great comments. My ignorance is preventing a well thought response.

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  17. Two points I forgot to mention:
    1. I think we're talking around each other some with regards to cutting spending. What I meant was that the government has the ability now to infuse the economy (tax cuts, redistribution of wealth, etc) without borrowing against the future. There exist programs today which are far less important than unemployment. Nix them.
    2. Government is just as susceptible to too-big-to-fail syndrome. We don't get rid of the problem by moving it from the private sector to government. In fact, I would argue that this concept is magnified in government.

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  18. Thanks for that insight, John. Yes, super low tax rates on giant incomes and estates encourage investment in personal luxury items and the continuation of dynastic family wealth.

    I think you have found a brilliant way to give people control over their money, but to require them to put it into the greater public good through non-profits. And of course, it's not like a wealthy family doesn't still keep a large portion of its wealth.

    Randy,

    I agree that one should be very careful with government intervention. But it has to be done at the right times. Speaking of stickiness, when aggregate demand falls dramatically and interest rates are already low and a crisis of confidence sinks in, there is a downward spiral for the economy. Shrinking demand creates shrinking employment which further shrinks demand which creates shrinking tax revenues, etc. Something has to intervene to break the self-perpetuating cycle of the private sector's inability to make use of its resources.

    The business cycle is something that happens, but Keynesian economics simply thinks that government action, in its proper place, will help the private sector make better use of its resources over time.

    Of course deficit spending and fiscal stimulus are needed to even have a modern economy, as all net financial assets in the private sector were created by deficit spending by the government. The government must buy goods through deficit spending in order to put dollars out there. Of course, banks create money too through lending, but there is no NET increase, because each loan is offset by the liability of that loan (this is something I recently learned).

    Once again, efficiency is a term that has many faces and requires a balanced understanding of the overall goals of our society. I mean, weekends are super inefficient, but we are glad we have them. But yes, the private sector often has more flexibility in seeking new ways of doing things. That's why it is important to support it through proper government action.

    All that said, I do support pushing back the age of receiving Social Security benefits and cutting back on the military.

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  19. "What I meant was that the government has the ability now to infuse the economy (tax cuts, redistribution of wealth, etc) without borrowing against the future. There exist programs today which are far less important than unemployment. Nix them."

    Surely there are programs which need to be cut, but there is a remarkable lack of ideas here. The military, Medicare and Social Security are the big ones. Other spending which accomplishes little should be cut, but it doesn't amount to too much.

    Any significant tax cuts will increase the deficit, so I am not sure what you mean here. However, I certainly would like the Bush tax cuts extended for those making less than a million a year. And I am fine with extending them all for another 2-3 years, though I favor a strong increase in the top tax rates at some point, because that would favor keeping more money invested in business and less invested in mansions.

    As far as "borrowing against the future", I am not sure we should worry too much yet. People will always be able to consume the amount of goods and services they produce. As the economist Warren Mosler says, if our children produce 20 million cars in the future, they won't have to send 5 million of them back in time to repay the society of 2010. Money is a game that is played to stimulate production or actual assets (goods and services).

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  20. I'm thankful for monopoly legislation, bankruptcy (especially the newer version), and many other acts that keep industry in check and mitigate failure. I think, though, that this is where the effort should be focused. This type of legislation serves to keep things steady. When government "lends a helping hand" on the massive scale we're witnessing, it serves to transfer the problem rather than to resolve the problem. I would argue that we've transferred the problem to an entity that is often ill-equipped to handle it.

    You don't just give money to a gambling addict. Lack of funds is rarely the real problem... rather, it's the addiction itself. Likewise I worry that we're making it far too easy to remain jobless or to do the bare minimum. We seem to be patching the tire when the real problem is the plethora of potholes. It costs the individual to dig himself out of unemployment. But let's not underestimate the value gained in doing just that. The struggle can make a man great.

    I'm not against aid, but I think the manner in which we're delivering it serves to destroy the wills of its recipients. Like gambling, welfare can become a disease. We can unintentionally create a diseased society if we're not careful.

    I appreciate your insights and I realize that we may not be able to try the cold turkey approach... I don't pretend to hold the answers, but I think we can still identify those instances when the cure is worse than the disease without knowing for certain what the prescription should be. I'm not advocating a callous approach. I do think, though, that we should be more aware of the side effects of our current course of action. I feel sometimes that our elected officials fail to think beyond the immediate... perhaps there is a bigger hole in the whole system.

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  21. I think we agree on many essential roles of government.

    I am curious as to what the "helping hand" is that you object to. Is it the continuation of unemployment benefits? This is a tricky issue and one that I have not studied enough. I do know that I would prefer a kind of job guarantee program where people actually perform work for the public good, rather than simply receiving payment. It makes more sense. And incentives to move back to the private sector would remain strong if done correctly.

    As far as what the problem is, it seems that the problem right now is a lack of purchasing power in the system. A lack of demand. And therefore a lack of jobs. and therefore more of a lack of demand.

    If the private sector is in a state of massive de-leveraging, paying down debts, then massive amounts of purchasing power are disappearing into thin air. And all the while, resources are being bled and wasting away, mostly in the form of unemployment. This is a massive inefficiency.

    This lack of current investment is actually what is threatening the future, not dollar numbers on a computer screen.

    One last thought - I am learning about this stuff, because I think economic illiteracy is very, very dangerous right now. However, I know very little. The one point I am really understanding though is that the macroeconomics of the United States, a country which creates its own sovereign currency, is NOT analogous to household economics. It's a different beast to be studied on its own terms. And I think that is the main problem with public misunderstanding about how things work. People have great common sense about what's financially responsible in their own household (whether they do it or not), but they have no idea that federal spending is completely different.

    Good discussion! And I thought I was just doing a super short post......

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  22. You're absolutely right in that macroeconomics is a wholly different animal; that does not, however, prevent us from assessing whether government programs impact citizenry in the same way that smaller scale acts may. I equated welfare to enabling a gambler. I did so to emphasize the idea that numerous government programs, despite often great intentions, are a detriment to the individual and therefore to the society.

    I'm not certain whether I should condemn the government's actions with regrds to GM. Like you, I'm largely ignorant to the big picture. I can, however, assess the fruitfulness of unemployment programs and extended welfare. These programs are costly and inefficient (just think of the time and energy involved in processing documents, case reviews, etc and the extraordinary gap in employee qualifiations). We pay workers who often don't care and who are often vastly underqualified to lend support to those in desperate need...

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  23. ...and we allow the benefits to be accepted over and over again for often a ridiculous duration.

    What's the product? Huge beurocracy, workers with litle incentive to perform, and recipients whose job is to "work the system." One common sense idea that CAN be incorporated from personal finances and experiences is the idea that if we free resources from one area, we can devote those resources elsewhere: program research, charitable incentive programs, education reform, etc.

    Another idea that works on both levels is the idea that work can make a man. Yet another: setting the bar low yields low results. There are programs in place in the private sector or in foreign governments that we know are far superior to what we have. If we truly want to aid those in need, throwing money and resorces at the problem without a clear vision is detrimental in every way. We help no one by enabling people to continue in their poverty (financial and ethical).

    Might there be immediate consequences to revamping our entire system? Almost certainly. But what we're doing now is widening the gap and extending it for generations to come. Let's make a plan then act.

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  24. "Let's make a plan then act"

    That is the Keynesian idea. The completely "free" market idea is to make no plan and see what happens.

    Also, your ideas on jobs seem to operate from the assumption that there are many jobs available right now that people are refusing to perform. Rather, there is a huge lack of jobs. There are many, many applicants for every job opening. While there are always opportunities (going out and raking leaves for money, etc.), an emphasis on personal responsibility does not excuse systemic responsibility.

    Unemployment benefits are a pittance. Those benefits plus a trip to the local food bank are hopefully enough to keep people from the street. I appreciate your worries about creating a sense of entitlement, and it is definitely relevant. But there is a balance between that and the moral hazard, and economic disaster, of allowing people to be on the street (further driving foreclosure rates), hungry, fearful of the financial disaster that any health problems at all can cause.

    There is a balance to be had, and the idea that we are currently distributing too much wealth to the poorest among us seems absolutely incorrect right now. There are no jobs. Mcdonald's has all the help they need right now. Because demand is too low. How is that remedied without the aid of something that can actually act in a fashion that is counter to the business cycle?

    A decent social safety net is essential, not only to prevent moral hazard, but to insure that demand does not collapse further.

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