The Skeptical Optimist

FQ.05.52: Favorite Quote for This Week

If we can make the choices that increase the rate of growth of real income per person to 2.3 percent per year, in 50 years we can get extra income per person equal to what in 1984 it had taken us all of human history to achieve.
—Paul Romer

Reflections on 2005, and a list of things I’m not

A nation that is successfully growing its economy is, by definition, putting more and more distance between its citizens and poverty, in the aggregate—and that is just as true for the USA as it is for any other country.  Giving that message a little more attention was one of the main reasons I started this blog a year ago.

Economics—or, more specifically, the overwhelming importance of economic growth—is what this blog is about.  Why?  Because sufficient, robust growth would diminish or eliminate the (potential) economic problems that continue to grab all the headlines; those potential problems include the growing national debt and the looming challenge of financing Social Security and Medicare. 

The feedback I've received in the past year has been encouraging.  Ninety-five percent of it (nineteen out of every twenty emails) has been positive, gracious, constructive, and motivating.  Some of it is leading to new acquaintances and even new friendships; I will soon be traveling to Chicago, Washington DC, and California to meet a few of these folks.  Interacting with all of my responders has been a two-way street, too; I've gained some new perspectives from several insightful questions and comments that forced me to think a little harder about several things.  This group has been objective, open-minded, and constructive.  What a pleasure that has been. 

The remaining five percent of the feedback came from people whose approach was the opposite of objective or open-minded.  These people already have their political minds made up, and they behave accordingly.  They include Bush-haters, debt-haters, big-government-haters, big-corporation-haters, Republican-haters, Democrat-haters, immigration-haters, FDR-haters, Reagan-haters, military-haters, social-spending-haters, and even growth-haters.  Many are experienced at demonizing perceived opponents by slapping a label on them, then attacking the label.  Their favorite weapons are bumpersticker-mentality name calling, pre-cooked dogma, oversimplifications, mischaracterizations, and personal attacks.  Their top priority is "who" is right, not "what" is right (...and because they already have their minds made up, they already know who’s right and who’s wrong, of course).  Although I have little use for their tactics, I figured out a long, long time ago that politics trumps economics. 

Therefore, even though I prefer to spend most of my writing time converting my understanding of economics into plain talk, I decided to use this year-end post to explain my politics—or, more specifically, to explain why my views don’t fit neatly within any of the conventional-wisdom political categories. 

As you’ll see below, there are a lot of things I’m not.  I’ll finish with what I am.  (And if you’d rather skip all that, allow me to wish you a happy new year now.)

Why I’m not quite a “supply sider”
Although I am a growth advocate, the term “supply-sider” doesn’t quite fit me any more, because conventional wisdom has oversimplified its definition as “one who always advocates tax cuts, no matter what.”  One critic found my old website, found the Capitol Hill presentation I gave in Feb 2001, read the last two slides, concluded that I’m a supply-sider, and proceeded to discredit the label he’d picked out for me.  His only mistake: he was five years too late.  Back when I was advocating tax rate cuts, the government’s tax “take rate” was 21% of GDP—far too much, in my opinion.  Subsequently, tax rates were cut, to my delight.  Now, for more than a year, our economy's growth rate has been accelerating (as have tax receipts), also to my delight.  (Coincidence, or true cause-effect?  In either case, we are in a very nice circumstance today.)  Currently the government’s tax “take rate” is around 17% GDP, and the economy is growing at a brisk pace; I like those conditions very much... but I would need more convincing before I'd become an advocate of yet-deeper cuts.  [I love the idea of growth-friendly tax simplification, though.]  Bottom line: I’m not quite a supply-sider under today's distorted definition of that term, because I’m not quite convinced that today’s 17% isn’t a low-enough, growth-maximizing, debt-burden-minimizing take rate. 

Why I’m not quite a “libertarian”
Libertarians think a lot like I do—but we also have some differences.  For example, I don’t think deficits and debt are necessarily burdensome or inflationary (...they can be, but don’t have to be, as long we stay inside the guard rails of growth-oriented fiscal management).

Another example: I think the idea of going back to a gold standard, in this day and age, is not a good one.  A good friend of mine, Dr. Rick Boettger, put it succinctly when he said: “Using gold to back up money is like using old poker chips to back up new ones... Gold is nothing but an old-fashioned form of money.”  Consider this: What if the real economy could grow at a 6% rate, but we could only expand the gold supply at a 3% rate?  Answer: The gold standard would stifle growth, that’s what would happen.  And that’s why I do not favor going back to a gold standard.  We have better ways of preventing inflation that wouldn’t stifle growth.   

Why I’m not a “left-wing Democrat”
Income redistribution is their goal, class warfare is their schtick, rich Republicans (but not rich Democrats) are their hated enemy, name-calling and oversimplification are their weapons, dogma and bumpersticker slogans energize their minions.  To them, growth is an unpleasant, environment-unfriendly result of cold-hearted fat-cat greed.  But that kind of thinking is politics, not economics; emotion, not objectivity; revisionism, not history.  Please, please count me out of this group, thank you very much.

Why I’m not a “right-wing Republican”
I find it ironic that many quintessential capitalists—who got rich in the private sector by utilizing prudently-managed leverage (“other people’s money”) to maximize their firms’ microeconomic growth—find it difficult or impossible to admit that the government, too, can benefit from prudently-managed leverage to enhance their country’s macroeconomic growth. 

Also: I will have a hard time forgetting the embarrassing episode of 1995, when a tiny group of powerful Republican politicians chose to play a political game of chicken with the Clinton administration—by placing our nation’s creditworthiness at risk(!).  Thankfully, Robert Rubin found a way to stymie Newt Gingrich’s game plan, and averted an unnecessary default on our nation’s debt instruments.  It was one of the few times I have ever cheered an action by the Clinton administration.

Why I’m not anti-government
Big military, big intelligence-gathering capability, and big civil defense proficiency are all part of “Big Government.”  All of those put together are called “National Security.”  When we oversimplify our political battle cries by railing against “Big Government,” we have only ourselves to blame when our opponents give us what we asked for.  That is precisely what the Clinton administration did in the 1990s: they (and Congress) felt our pain, and reduced military spending from 4.6% GDP (1992) to 2.9% GDP (2000).  In retrospect, it was a really, really dumb idea to do that—wouldn’t you agree? 

Why I’m not anti-FDR
Franklin Delano Roosevelt reunited the country, except for an intractable contingent of right-wing partisans.  In my judgment, his convictions and his leadership probably prevented an overthrow of the United States government—and because of that, I think he was one of our greatest presidents.  The debt that accumulated during his presidency to produce that result was worth every penny, and more.

Why I’m not anti-Reagan
Ronald Reagan reunited the country, except for an intractable contingent of left-wing partisans.  In my judgment, his convictions and his leadership probably prevented a thermonuclear war—and because of that, I think he was one of our greatest presidents.  The debt that accumulated during his presidency to produce that result was worth every penny, and more.   

Why I am a growth advocate
I’m a poverty-hater, and “growth” means “escape from poverty.”  It’s that simple. 

Last but not least:
Happy new year to you, your family, and your friends.

FQ.05.51: Favorite Quote for This Week

The primary economic conflict, I think, is between people whose interests are with already well-established economic activities, and those whose interests are with the emergence of new economic activities.  This is a conflict that can never be put to rest except by economic stagnation...  The only possible way to keep open the economic opportunities for new activities is for a "third force" to protect their weak and still incipient interests.  Only governments can play this economic role. 
—Jane Jacobs

Dec 2005 GDP, National Debt Thermometer

Robust GDP growth has been driving tax revenues higher (and the deficit lower) than I had been forecasting all year.  Consequently, my forecast for the debt burden (debt-to-GDP ratio) has been too high; it will come in very close to 64.8% GDP, not the 65.2% I had been forecasting. 

No problem, I don’t mind being wrong in that direction. 

A word of caution, however: Inflation is edging upwards.  The GDP deflator now says inflation was 3.3%.  That’s getting into the yellow zone on my meter; I'd much prefer to see it begin edging back downwards, because inflation is not the proper way for a nation to reduce its debt burden.  Real growth is the proper way.  So far, real growth is the main reason the debt burden dropped, and we need to keep it that way. 

Below are the monthly graphics. 

[UPDATE: Click here for a brief, explicit summary of the math.]

Click to enlarge.

Click to enlarge.

Which National Debt is the real National Debt?

Since I started publishing the National Debt Thermometer (monthly, as soon as the BEA publishes a new estimate of GDP), I’ve received several emails making the following point:

“Steve, why are you including trust-fund debt?  It’s our ‘Debt to the Public’ that really counts; Intragovernmental Debt should be excluded from the debt burden calculation.”

Tomorrow (Dec 21), the BEA will publish a new GDP estimate, and shortly afterwards I’ll publish a new Debt Thermometer.  Here are the two reasons I will continue to use “Total Debt” for the debt-to-GDP calculation:

Point 1. Intragovernmental Debt (B) is destined to become publicly held debt (A) within a few decades (see table below); and...

Point 2. Politicians and journalists have already “educated” the public to recognize “$8 trillion” (C) as our National Debt. 

Bottom line for me: When I designed the Thermometer, Point 1 above made me decide not to swim upstream against the conventional wisdom that has resulted from point 2.  (It was the correct decision, too; take a look at how the partisans-posing-as-economists jump all over anybody who bucks the conventional wisdom.) 

Below is a table I excerpted from the Bureau of Public Debt website; I hope I’ve made it self-explanatory, but questions are welcome, as always.

Click to enlarge.

FQ.05.50: Favorite Quote for This Week

Do not be too timid and squeamish about your actions. All life is an experiment. The more experiments you make the better. What if they are a little course, and you may get your coat soiled or torn? What if you do fail, and get fairly rolled in the dirt once or twice. Up again, you shall never be so afraid of a tumble.
—Emerson

Nov 2005 trends: The deficit, and the interest burden

The Monthly Treasury Statement was issued a few days ago.  The deficit is still shrinking, but not at last month’s rate.  If the trends in outlays and receipts (using the most recent 12 months) are sustained, the budget wouldn’t come into balance until election day 2008.  Too bad; last month it looked like it would happen in time for the conventions that summer. 

Click to enlarge.

Below is the “interest burden” chart.  Although it’s still in good territory, I don’t like the November results.  Could this be just a blip, or is it the beginning of a trend?  The December results (due in January) should start to clear that up for us. 

Click to enlarge.

Both of these charts deserve scrutiny in the upcoming months.  Tax receipts need to continue growing at a faster rate than outlays—otherwise I’ll have to join the chorus on cutting the growth of spending.  That’s okay, I’m ready with a few ideas, but I’ll see what next month’s numbers bring. 

Sorry this is a few days later than usual. 

FQ.05.49: Favorite Quote for This Week

Growth is a form of change.  Change implies innovation; and the Western system of innovation has depended upon wide diffusion of the power to undertake and use innovations, coupled with ample rewards for success and penalties for failure. 
—Nathan Rosenberg

Our Grandchildren's Debt Burden in 2050: 540 scenarios

Last weekend I was leaning over the kitchen sink eating a turkey sandwich, and contemplating several gloomy articles I'd just finished reading.  All had mentioned the economy our grandchildren "could" inherit.  All scenarios were bad news, and were, of course, our fault for not being “fiscally responsible” today.  Some were written by people with economic perspectives I highly respect; others by analysts with skills I highly respect; others by journalists or politicians with economic knowledge that commands little to none of my respect.  But the common thread was the terrible scenario that “could” come about. 

The key word is “could.”  The use of that word in all those articles implied that maybe, just maybe, there might be some other scenarios, not so gloomy, that also “could” come about.  So I decided to spend a few evenings testing the possibilities. 

Sure enough: It turns out that in many plausible scenarios, the future’s so bright I gotta wear shades. 

Rather than bore you with the methodology details, I’ll summarize how I did it, then show the results.  First, I combed several articles—some gloomy, some not so gloomy—by people whose perspectives I respect.  Here are just a few examples: • Alan Greenspan (Fed) on fiscal risks; • Brian Riedl (Heritage) on the looming fiscal disaster; • John Ince on the debt time bomb; • Kane & Hederman (Heritage) on growth; • Alan Reynolds on immigration; • Steve Forbes on immigration; • Arnold Kling on growth.

Then I found the US Census Bureau’s projections of population by age group through 2050.  Click on the little thumbnail at right to see a chart I assembled from the data.

Then I set up a sensitivity analysis model, using a “Red-Yellow-Green” matrix to help illustrate, in compact form, how the economic outcomes of a complex economic model shift favorably or unfavorably for hundreds of possible combinations of key inputs.  In this analysis, the model calculates what our economy “could” be like in 2050, based on a range of possible results for several key inputs from those articles I combed.  I chose the Debt-to-GDP ratio as the key output measure for each of hundreds of combinations of the key inputs; there are others we could choose—such as "interest as a percent of tax receipts"—but anyone familiar with this weblog should be very familiar with the Debt-to-GDP statistic by now.  (It's widely accepted by economists as a measure of a nation's debt load, and it compresses a significant amount of economic performance information into one single statistic.)

That’s enough of the boring background; below is the “Debt-to-GDP 2050” matrix that resulted from this week's analysis.  (Quickly: I assumed 3% inflation, 13% GDP on-budget tax receipts, and off-budget tax receipts per worker growing at a smidgen more than inflation; remaining assumptions are explained below the matrix.  See end of this article if you'd like to challenge any of those assumptions.)

It’s immediately obvious that productivity growth (input #4), the key driver behind GDP growth, is of overwhelming importance; look how green it gets as we move to the right in the matrix.

Click to enlarge.

It’s also obvious (...to me, anyway) that the pessimists and political ax-grinders like to dwell on the lower-left, bright red portion of the matrix—all those bad, ugly scenarios that “could” happen (...unless, of course, we vote their political group into power so they can fix things right up for us). 

Let’s be honest: Could one of the scenarios in sections A, B, C, or D come true?  Of course it could, especially if we develop collective amnesia about what made the USA the rich country it is today.  But let’s tell the whole truth for once: Could one of the scenarios in sections E, F, G, H, or J come true?  Of course it could.  It depends on many things, but especially on the growth results our economic system is able to produce.  (Note that if Ray Kurzweil is correct about growth taking off exponentially, as Arnold Kling’s article points out, the economy in 2050 will be about a mile to the right of section “J” on the diagram above.)

Here's one last graphic, comparing the doomsday lower left corner with the happy-day upper right corner:

Note that the best scenario in the analysis, shown above, is an economy 45 years from now that's running a fiscal deficit of $10 trillion, paying interest on the debt of $4 trillion, and carrying a public debt of $101 trillion.  I bet the debt phobes and political ax-grinders will have a field day with those numbers—and I also bet they’ll conveniently forget to mention the $1 quadrillion economy that turns those numbers into chickenfeed.

Comments are open on this post; anyone and everyone willing to mind her manners is welcome to participate.  Same applies to any man willing to mind his manners. 

================

End note, for those who want to dig into the assumptions:

Please send me an email if you have some questions about the assumptions I made, or think any of them could be improved, including productivity growth, tax receipts, incremental immigration, interest on the debt, on-budget spending, or the growth rate of social insurance cost-per-old-age-person.  I am happy to get questions, and I answer every email I receive.

However, please don’t bother trying to convince me that National Security spending should be lower.  [“National Security spending” is defined as the sum of intelligence, diplomacy, defense, homeland security, and civil defense spending.]  In this model, it will remain pegged at 4½% GDP; anyone who disagrees with that should feel free to build a different model on their own, and should be prepared to defend it publicly. 

In this model, National Security spending will remain pegged at 4½% GDP, for two reasons:

(1) I’m assuming we learned our lesson after allowing it to drop to 2.9% during the regrettable late 1990s period of surplus-worship; and

(2) My granddaughter’s security is nonnegotiable.

FQ.05.48b: Favorite Quote for This Half-Week

I have said fifty times that the budget will be balanced for the fiscal year 1938.  If you want me to say it again, I will say it either once or fifty times more. 

—Franklin D. Roosevelt, just before the 5 percent decline in real GNP and increase in unemployment from 14.3% to 19.0% from 1937 to 1938.