Drowning In Debt

The United States government is drowning in debt (so is the citizenry but that is whole other mess) and the rating agencies are finally starting to figure it out. S&P cut the US's debt outlook from stable to negative. This is recognition of our worsening federal budget situation and the impending future explosion of costs.

Such a warning may be a precursor to lowering the US's credit rating from it's currently perfect AAA unless we are able to rein in rising costs. The US national debt is expected to approach or exceed 100% of our GDP (annual economic output) by late this year or early  next year by many estimates. At this point the country is technically insolvent from a fundamental stand-point. If the US were to lose it's perfect credit rating the result would likely be a spike in interest rates since most consumer rates are tied to government bond rates which would rise if our credit risk were perceived as increased. For those of you interested click here to view debt ratios and forecasts for most countries. You can also read more about S&P's change in a Wall Street Journal article by clicking here.

The current size of our deficit is truly astounding...recently in the news was the near government shut-down over the budget battle in which one of the major arguing points was whether to cut ~$30 billion in spending or ~$40 billion. Just to put that in perspective our projected deficit is ~$1.5 trillion so our leaders spent weeks arguing over what amounts to 2% of the budget problem on the low end and 2.67% on the high end...anyone see the problem with that?

If you want to get a real-time look at lot of the economic stats check out US Debt Clock.org

Nanny State Expanded!

I ran across this article while scanning headlines and I was so disgusted I just had to post it. Apparently there are some legislators that think they need to be able to dictate every minor detail of our life including whether or not it's legal to jog with ear buds in your ear or walk while you text. It seems there is no end in sight to what politicians believe they can do better than you can.

The Power of Texas

Ever wonder how a government should act if it wants a thriving private-sector with low unemployment and a better than average budget situation over the long-term? Apparently a lot like the State of Texas. Check out this article if you want to know more. While I don't believe that TX is perfect by any means it does seem to be doing better than most. Why?

In a nutshell:

• Low taxes
• Lower average regulatory burdens
• State that works hard to maintain a balanced budget
• Government that generally leaves the private sector to do what it does best - create jobs and grow!

Mortgages a Bellweather on Property Rights?

Businessweek recently ran an opening article on the recent foreclosure debacle. The center piece of the article was focused on how the mortgage industry has been unable to effectively upgrade title record systems out of paper and into a more modern system. This was one of the major contributors to the foreclosure debacle. Another point the author comments on is how the ability to enforce and rely on property rights is critical to successful, developed, capitalistic systems.

I think the author is completely right in arguing that the current mess in mortgage re-sale and packaging has weakened the sanctity of property rights. These things changed hands so often and were so poorly documented that in some cases no one can figure out who ultimately owns what and even if they can they don't have documents proving that ownership that are acceptable to the courts.

Our government has taken steps into the private system that have only served to cloud the issue of property rights. They have weakened our rights to own and benefit from the use of property in the form of regulation, taxation, and bailouts. While some of these actions can arguably be justified (more or less) by the extraordinary circumstances of the recent financial crisis - the question we need to be asking ourselves is have we undermined the very system that made our nation great?

Strong and clear property rights, along with the courts' respect for contracts, are probably the two single most important facets of our economy and legal system and they have allowed us to grow as we have. We shouldn't be messing with them unless we have very carefully thought through the consequences...which I don't believe we have done.

Mankiw on Taxes

Dr. Gregory Mankiw recently wrote an article that ran in the New York Times. In the article he describes how taxes impact the decisions of high-income earners regarding how much work to perform. It's a simple and quick explanation, but dead on.

Can Cutting Taxes Raise Tax Revenue?

Yes! - and if you want to know more click here. This is one of the better explanations for how cutting taxes can increase tax revenues, and lower deficits if we don't increase spending at the same time, I have seen in a while. If you are inclined to check up on it the economic principle at work here is the simple observation that people can think about logical consequences. The logic goes like this if I work very hard at running my own business and take some risks I might get rewarded with $1 million in personal income, but if I know that tax rates are increasing so I get to keep less of my $1 million then I don't have the incentive to invest the money needed to earn that million because I need to protect myself from higher taxes so I work less and put money into non-productive and non-taxable investments. The result is I earn less so the tax I pay declines in dollar terms even though the percentage is higher...multiply this effect across the economy at large (and corporations not just individuals do this too) and you get a decline in the economic activity supporting the tax base and the tax base shrinks, which means that despite higher tax rates - a higher percentage collected on a lower base still yields a lower tax revenue number!

Financial Reform and a Whole Lot More

Business Week recently ran an article about the financial reform bill that passed and it included a list of little known add-ons...

No Such Things as Secrets...

At least not if you are in the financial industry. The new financial reform bill that passed includes a new research office that is part of the Treasury. It is authorized to compel financial companies of all sorts to turn over data so it can look for "systemic risks." Data that was previously confidential such as counter-parties to credit default swaps and information on individual loans - such as interest rates. This is information that these companies place a high value on keeping confidential - in fact in come cases the value of a credit default swap may only exist if the purchaser is kept confidential.

The research office is required to keep confidential information protected, but it is also required to make it's data available for public use and is subject to the "Freedom of Information Act." One of the major bedrock principles of our economy is the ability of companies or individuals to create knowledge and information that gives them a competitive advantage and the ability to protect that information. This is an assault on the very basics of a knowledge based economic system.

Obama Calls for Infrastructure Spending

Obama is planning on calling for a multi-year effort to rebuild America's transportation infrastructure as part of series of proposals to breathe life into the economy. The administration plans for the spending, $50 billion initially, to be deficit neutral by closing tax loop-holes. It seems unlikely that spending money and then taking an equivalent amount from targeted industries will be net positive to the economy. I don't know where Obama learned math.

A Window into China's Currency Reserves

The make-up of China's foreign currency reserves has long been speculated at but recent information suggests they are overwhelmingly comprised of dollars.

Obama Takes on Mortgages

The Obama administration is going to take another wack at mortgage modification. Since the previous program had so many rules and restrictions it basically did nothing to aid the housing market or underwater home owners and was a waste of taxpayers' dollars. This time they are going after people that are not yet behind on payments, but are underwater. In order to entice banks to take the necessary hair cut the administration plans for the FHA to take ownership of the newly reduced mortgages.  This will shift the risk of default to the taxpayers! Hopefully the upcoming elections will change the tune out of Washington.

Jobless Rate Hits 9.6%

The August unemployment rate is up to 9.6% from 9.5% which has many people questioning the policies the Obama administration has put in place. The administration has pursued a policy of massive spending, coupled with small targeted tax breaks, and large new social programs and regulation as its general economic strategy.

This is exactly what the economy doesn't need! All the new social programs and regulation just stifle business by forcing business-owners to try to comprehend all the new costs and hurdles they have to deal with it.

Generally, spending has some stimulative effect, but the level of debt the US has incurred is dangerous to our future and so the stimulative effects of spending may be partly or entirely off-set by declines in private spending and investment caused by fear/uncertainty.

Tax reductions would probably help, but without cuts in spending they only worsen the debt problem of our government. Also - what our economy really needs is massive tax overhaul not just minor cuts/deductions.

Debt Clock

This is scary!

The Dismal Jobs Picture

Unemployment has been one of the major problems with the current economic malaise. The government projected that the unemployment rate would hit 8% if we didn't do stimulus - so we did stimulus and the unemployment rate peaked at ~10% and now has settled down around 9.5%. The breadth and depth of job losses are hard to comprehend, but a picture is worth a thousand words:

The chart below shows the depth and length of job losses (in percentages) over the last half century. You can see the original at: http://calculatedriskimages.blogspot.com/2010/08/employment-recessions-aligned-at-bottom.html.

That is one scary picture!

Don't worry it gets worse. Obama's economic policies should have been generating 292,000 new jobs a month beginning in Feb. 2010 in order for the nation to hit a 5% unemployment rate by 2015! We are not even close to this level of job growth...in fact almost all the recent job growth was temporary Census workers. It seems very unlikely that the unemployment rate is going down anytime soon.

U.S. May Sell F-15s to Saudi Arabia

The Obama administration is planning to sell $30 billion of arms over ten years to the Saudis including advanced F-15 fighters. I think the U.S. should think very carefully about who and how it sells arms to other nations. We trained the Taliban and equipped Iraq during the cold war when we would basically give money, training, and arms to anyone that didn't like the USSR. Now we are paying the price for those mistakes. The Saudis are relatively friendly to us now, but the whole region is unstable so maybe we should stop shipping weapons there.

Students Told Not to Sing at Lincoln Memorial

Apparently singing is forbidden if you are too close to the Lincoln memorial - even singing the national anthem. The explanation the park police give is that the memorial is to remain "content neutral." I struggle to figure out how any sort of speech, song, or conversation could really be truly content neutral?

Balance the Budget - DIY

Think you know what it takes to get the federal budget in line? Then give it a try and see how you do...I managed to get debt to GDP down to 60% by 2023 - a little later than the goal of hard-core fiscal conservatives. If you try it leave a comment with how you did so others can see.

Chevy Volt

The true costs of an American-made electric hybrid are insane. The car will apparently cost just over $80k per unit by the time you factor in subsidies and grants from the federal government. The government is spending more money it doesn't have to fund an electric car as a "green alternative" to gasoline.

Except here's the catch - since about 70% of our electricity is generated from coal which is dirtier than gasoline engines we're not actually helping the environment, but possibly making it worse. Not mention the fact that our nation's electric grid couldn't support a major shift to electric cars. You never hear anyone talk about that on the news!

AZ Immigration

A federal court granted an injunction blocking the enactment of several key provisions of the AZ immigration law that was recently passed. The same judge also denied a request by AZ to have their appeal hearing date moved up. The push from the left to kill this law has so far failed, but it has certainly delayed it's taking effect and removed some of the teeth from the bill. Unfortunately for the Democrats supporting the efforts to block the law it is extremely popular in AZ leading to protests following the ruling. It's also relatively popular with the general national public and this injunction may be just one more reason the Democrats will struggle in November. At least that is a positive.

The Deteriorating State of Mexico

Our neighbor to the south seems to slowly slipping into complete chaos. Mexico's security and law enforcement continue to deteriorate - particularly along the U.S. border where drug and gang related violence have caused massive spikes in the murder rate. Corruption also plagues the government...recently it seems prison officials used prisoners as executioners. The U.S. needs to start thinking long and hard about what a lawless Mexico means for our national security.