by divorced one like Bush
So I check my mail today, 10/17 (been attending continuing ed this weekend) and find that as a member of the National Association of the Self-Employed (150K strong) I will now receive a news letter of sorts from a John Mauldin by receiving his latest: Muddle Through, R.I.P? Muddle Through is some interpretation of his from 2002 as to what the economy was. In a word the economy was: Yawn. Slow growth, jobless recovery.
He then gets into his real message: Deficits as far as you can see thus, we’re screwed. Here we come Japan, “Japanese Disease”, unless we can get savings and there is a way to do it. (Can you guess where he’s going?)
Mr. Mauldin starts off with some math and explanation to make his case:
GDP (Gross Domestic Product) is defined as Consumption (C) plus Investment (I) plus Government Spending (G) plus [Exports (E) minus Imports (I)] or:
GDP = C + I + G + (E-I)
(For the wonks out there, GDP is usually termed “Y”.)
This equation is known as an identity. An identity is an equality that remains true regardless of the values of any variables that appear within it. That means it is not a guess or an approximation. It is simple reality.
Thus, if there is a government deficit, there must be savings by both consumers and businesses, plus capital flows from outside the country, to offset that deficit in order for there to be any money left over for investments… There must be savings in order for there to be investment. And without investment, you do not get job growth or economic growth.
During his Japanese Disease part of the argument we get to the bottom line:
Since government deficit spending has no long-term multiplier effect, growth has been nonexistent. (By the way, that research about multiplier effects has also been done by Christina Romer, the chairman of the current President’s Council of Economic Advisors, and further explored by European economists. There is general agreement on these facts.)
He then quotes Professor Barro (do you see now where he’s going?):
“…The government problem is complicated by the fact that the tax multiplier is 3, meaning that a 1% change in taxes will change GDP by about 3% over time. More recent research (Barro & Redlick, September 2009, “NBER Working Paper 15369″) suggests that a 1% cut in the marginal tax rate would raise GDP in the ensuing year by 0.6%. With the deficit rising due to a zero spending multiplier, the tendency will be to try to raise taxes to pay for this higher level of expenditures, which will further depress aggregate spending and output.”
Yes, there it is, some Romer interpretation. But, we’re not fully there as to the solution. The banks are missing in this presentation until Mr. Mauldin asks who will buy this debt? “I think that the buyers of the debt could be US banks for quite some time…” then notes that banks are not lending and asks:
So where do banks put their cash and reserves they are not lending? At the Fed and in Treasury debt. If you can leverage capital at ten to one (as banks can) and if you get 2% (for longer-term debt) and if you only have costs of, say, 50 basis points (or 0.5%), you can make a return on equity of 15% with no risk.
Thus, they are not lending because there is no need to in order to make money which has hurt small and medium businesses by cutting off their “life blood” resulting in no job creation.
Oh, another thing, banks are taking a hit on commercial real estate so they need to save (his words are “raise capital”). Poor banks are just trying to survive and the lowly job seekers are just the collateral damage. So sorry.
Are you following? Massive government deficit is causing the banks to park their government created money in the government and it’s killing our jobs because the small and medium business can’t get a loan because the banks need to save in order to cover the commercial real estate losses.
Large government deficits choke off the very investment that we need to create jobs.
So just what would the banks do about the commercial real estate losses if the government didn’t have this massive debt to make money off of? How would they save? Does this part of his argument not suggest that the deficit is good if the goal is to save the banks? That has been the goal after all.
This get’s us to the Romers specifically. At the end of the debt bad (but good for the banks), we’re contracting Japanese Disease, banks are being banks (being savings institutions) and it is all killing the jobs we get this:
Given that the current Congress is hell bent on massively raising taxes in 2011, we are likely to dip back into recession by then, if not before. Remember, taxes have a multiplier effect of three. That means tax cuts increase GDP (over time) by three times their amount. But tax increases reduce GDP by three times the increase. That will make deficits worse, and unemployment will again start to rise from already high levels. Twenty states have already raised sales taxes, and more are raising other taxes. It is a vicious spiral.
You know what is missing from his argument which, because it is missing makes it a bastard argument? It is this:
Panel (d) shows that the point estimates for the effect of a deficit-driven tax increase of 1% of GDP on GDP are consistently positive. However, there are too few tax changes of this type for the effects to be estimated precisely. The maximum impact is a rise in GDP of 2.48% (t = 1.03). While one should be very cautious in reading anything into such imprecise estimates, the results are suggestive that tax increases to reduce an inherited deficit may be less costly than other tax increases.
You know what is another example of a bastard argument? It is the one made by the person that took some medical well baby guidelines and implemented a policy that prevented a 4 month old from getting health insurance coverage for being too fat!
Bastardization of research happens all the time by the health insurance industry. I hope there are other doc’s on Mr. Mauldin’s email list that make the same recognition of his argument. I don’t see how they can’t. We deal with it every day.
Sure glad I have the doc’s here at AB that are into economic wellness care.