The Skeptical Optimist

GDP revised downward for Q1 2007

Everybody is commenting on the downward revision, so I'll just post the usual chart, then give two links to what I consider to be the most sensible take on it.

Here's what Brian Wesbury's organization has to say:

• 1st Quarter GDP
• Economic Bears Being Left Behind

Taxpayers "on the hook for $59 trillion." Wait; is that a big number, or a small one?

USA Today's reporter Dennis Cauchon knows how to sell newspapers: just put a huge-looking number like "$59 trillion" in a headline about how much US taxpayers will have to come up with to cover social insurance programs.  Here's the article that got so much attention yesterday. 

Conspicuously absent was any mention about how much time taxpayers would have to come up with the money, or the estimated tax receipts that would flow into the government over that time period. 

I hunted and hunted in Cauchon's article for a reference or link to those (and other) important assumptions behind the $59 trillion; no luck.  Then I hunted and hunted for Dennis Cauchon's email address or telephone number, so I could ask him directly; no luck there, either.

I hope he sees this article, so he can send me an email explaining those important little tidbits behind their analysis.  Reason: Just as any mortgage holder plans to pay the mortgage gradually over a period of years out of future income—instead of coming up with the money tomorrow—so does the federal government plan to pay the social insurance costs gradually over a period of years out of future tax receipts—instead of coming up with the money tomorrow.  The scary-sounding "unfunded promises" really means "future costs to be funded out of future tax receipts"—although the article doesn't explain that. 

Just for fun, I added up how much tax revenue the federal government would collect between now and 2052 (the approximate timeframe it looks like USA Today's analysis covered), for various productivity growth scenarios.  After verifying the timeframe, all I'll need to know is the discount factor USA Today used on the way to their $59 trillion result.  After that, we can see what portion of future tax receipts will be required to pay the future social insurance costs.  For reference, it takes 15% of tax receipts today. 

If anyone knows Dennis Cauchon's email address or telephone number, please send it to me via private email.  My gut feel is that $59 trillion will look small compared to tax receipts over the same time period, using reasonable assumptions about productivity growth, but I can't confirm or disprove that without some help from him. 

Until then, I'll have to file this story in the folder I titled "Single Entry Accounting."

It's productivity, stupid.

Which economy will our grandkids inherit from us: Doomsday, or Easy Street? 

Here's a hint, inspired by a successful political campaign mantra designed to keep the candidate on-message throughout the 1992 campaign:

It's productivity, stupid. 

This article is a follow-up to "The Baby Boom Crunch" I posted last week.  Click on the thumbnail below to watch a movie about the effect productivity will have on our grandkids' economy—in spite of boomer retirements and Medicare cost escalation. 

FQ.07.21: Favorite Quote for This Week

Productivity isn't everything, but in the long run it is almost everything.  A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.
—Paul Krugman

The Baby Boom Crunch, part 1

According to the doom peddlers and their faithful scribes in the popular press, Medicare and baby boom retirements will be the one-two punch that puts our grandkids in the poorhouse.  If I remember their message correctly, our grandkids' tax rates will have to be a hundred percent or so just to cover the interest on the debt; there won't be anything left for national defense, education, or social security—let alone for building walls to keep people out, or for subsidies to automakers for reducing CO2 emissions.  In short, it sounds bleak.  And it's all my generation's fault... supposedly, anyway. 

So, I decided it was time to look into this topic, too.  [Whenever I do that, surprises invariably surface.]  This article is the first of two or three (TBD); It's just a concise depiction of the demographics problem everyone has been fretting about.  The two charts below show that, when we baby boomers retire, we will automatically increase the percentage of social-insurance-collecting retired people, and reduce the proportion of FICA-paying working-age people. 

The US Census Bureau has projected the population two ways: total including net immigration, and total assuming zero cross-border migration.  The boomer crunch happens largely between 2010 and 2030.  If zero migration is assumed, the crunch is more pronounced—obviously because there would be fewer working-age people to produce the goods and services necessary to support my generation in our retirement years (to the degree we so richly deserve). 

Contrary to what we hear from the popular press, the important question is not "How much will we have to raise taxes, assuming GDP growth of 2.5%?"  The important question is, "What kinds of productivity growth, income growth, and taxation structure would make this problem go away?" 

I'll be ready to tackle that question in a few days.

Switched to the Mac

Eleven weeks ago I mentioned I might switch to the Mac.  After a lot of mostly successful experimenting with my new MacBook, I went back to the Apple store last week and purchased a Mac Mini for my desktop.  The Mini is powerful, but its dimensions are just barely larger than Adam Smith's 1776 book, An Inquiry Into the Nature and Causes of the Wealth of Nations.  (In other words, it's small enough to fit unobtrusively on, or under, the desktop.) 

The PC is now unplugged; the main thing I'll miss about it is the street mapping software (...that's a hole in the Mac software suite that Google maps does not fill).  I wonder how Microsoft would respond if I asked them when they plan to make MS Streets & Trips available for the Mac. 

(Actually, I had a great run with PCs, but I made myself a promise back in 1982 that I'd switch platforms every 25 years.) 

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Coming soon...

Is economic doomsday just a decade or two away?  If so, is my generation the culprit?  I'll have a better idea in a few days.

After finishing a few more cleanup tasks on the switch, I'll finish digging into the baby boomer demographics question, which I've had in the works for a while now.  (As you may recall, that problem is supposedly going to crater the economy and force our grandchildren back to subsistence farming, according to our fear-peddling politicians and journalists.)  I'm approaching it from a different angle: instead of figuring out how much everyone's taxes will have to increase, I'm figuring out how much productivity-driven growth it would take to make it a non-problem.  The doomsters tend to bury their economic growth assumptions, I've noticed; but I'm making growth and productivity the centerpiece.  Should be ready in a few days.  (Graphics and fonts will look a little different from now on.)

The candidates and the issues: a concise summary

It's still early in the campaign; nonetheless, I'm forming a tentative picture of how the presidential candidates are sorting themselves out.  They fall into three camps: left-leaners, right-leaners, and Rudy Giuliani. 

Here's a concise status sheet I've assembled to summarize where each camp stands on several issues.  It's my assessment; yours may vary.  If so, let me know why.

I'm thinking Bill Richardson and possibly even Mitt Romney might belong in the same camp as Rudy; if so, I'll have to think of a more generic name for that one.  (Fred Thompson might belong there, too, but he's not in the race yet.)  In any case, I give priority to the issues of national security and economic growth, as you can probably tell.  I'll revise this mental picture as the campaign unfolds, but this race is distinctly different in one respect from all the others I can remember: it's maturing earlier than ever before.  We should have a good idea who the two nominees will be by November of this year. 

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End note:
I pulled the plug on my PC today, so I'm 100% Mac now.  Assembling the graphic above was a good exercise in how to jump around in OS X apps.  I'll write up my 2-month "switching" experience in more detail sometime soon.

FQ.07.20: Favorite Quote for This Week

Economic growth is unlikely to occur unless the economy is so organized that those who can bring about growth have incentives for doing so... But it has become evident more than incentives are needed.  Incentives cannot enable a community to do what it does not know how to do.  Knowledge, and an institutional structure which gives knowledge room to grow and incentives room to operate, are at least as important.
—Nathan Rosenberg

A follow-up question for Senator Conrad

Kent Conrad, chairman of the Senate Budget Committee, appeared on CNBC's Kudlow & Co. two days ago.  Conrad is not a fan of the 2001 tax rate cuts, and has this to say about it at his website:

Sadly, the massive 10-year tax cut of 2001, benefiting primarily the wealthiest, left the nation ill-prepared to deal with the economic downturn and war on terrorism that would follow. We now again face deficits as far as the eye can see.

Also at Conrad's website is a notice that the "Senator's Budget Puts Nation on Path to Fiscal Responsibility"—presumably because Conrad's budget supposedly moves into balance in 2012, five years from now. 

In the interview, Larry Kudlow asked Sen. Conrad a good question.  The answer Conrad chose was intriguing.  Here's a snapshot of that segment of the show, followed by the Q&A.

Click to enlarge:

Kudlow: It looks like there’s a decent chance the budget could come into balance next year [2008].  If it ain’t broke, why fix it?

Conrad:  Well, there's no chance it will come into balance next year.  I don't know what numbers you're looking at.

At that point, Kudlow put up a familiar-looking chart.  Click to enlarge [I added the note to the image]:

If revenues continue growing at an annual pace of about 12%, and outlays continue growing at about 6%, it is a mathematical certainty that the budget would balance in 2008.  Those are the numbers many of us have been looking at.

So here's the follow-up question:

Senator, if you found out that the budget would in fact come into balance next year without any help from Congress, what changes would you recommend to your current version of the budget?

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End note:
If the chart above doesn't ring a bell, click on this thumbnail:

Hoping for six-dollar gasoline

I sure hope gasoline prices keep rising.  I’m keeping my fingers crossed for six dollars a gallon—although I’ll admit that I’d be happy with $4.50 for this year.  Currently, we’re only at $3.10 per gallon, so we have some ground to cover—but we still have seven months to to achieve $4.50. 

The table below shows the gasoline cost per year at various combinations of fuel efficiency, miles driven per month, and fuel price per gallon.  The blue circle is about where a typical personal-transportation vehicle comes out.  [I arbitrarily decided the color coding, based on the amount of hysteria coming from politicians and the mainstream media for various gasoline price levels.  Today’s hysteria level places the typical personal vehicle in the yellow category, by my estimate.] 

Note that a pump price of $4.50 per gallon would move most of us 25mpg-or-less drivers close to the red “pain” category, if not inside it.  And that’ s the point: Pain is what we need.  The higher the price, the sooner we’ll achieve Oil Independence Day.   

I want to see us achieve oil independence in my lifetime, and fuel efficiency mandates won’t get us there; that’s politics, not economics.  It’s little more than putting lipstick on a pig.  Oil independence will require a new technology that leapfrogs the internal combustion engine.  My best guess is that a quick-recharging superbattery will be the breakthrough, but I’ve been wrong before, and I’d love to see something else at least as effective emerge.  Whatever the breakthrough turns out to be, it could turn the USA from an oil importer to a transportation energy technology exporter.  [Also, recharging the superbatteries using wind-, solar-, or nuclear-generated electricity would dramatically reduce CO2 emissions by all countries, not just the USA—and that in turn would yield the biggest benefit of all: a dramatic reduction in political hysteria about CO2 emissions.] 

Pain is what we need.  That’s why I hope gasoline prices keep rising.  Why do our politicians reel in horror at high gasoline prices?  It's because they're parroting what they're hearing from their constituents; but we, their constituents, are the culprits—because we like to drive as many miles as we please, in powerful cars, with access to cheap gasoline.  Something's gotta give if we are serious about oil independence: the price.  Finding a way to keep gasoline prices low is a dead end—a strategy similar to slowly boiling a frog: in the end, the frog dies.  Given that we are the frog, I’d rather we got shocked into jumping out of the water before we boiled to death, wouldn’t you? 

Would it be going too far for me to envision wistfully a few big freighters scuttled in the Strait of Hormuz?  I suppose it would.  Maybe a federal surtax on gasoline that sets a floor price of $6 per gallon would be better, with the proceeds going into the GI-Bill fund.  That should get things moving a little faster towards Oil Independence Day. 

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End notes:
(1) With Congress' approval rating lower than the president's, they won't be doing anything to raise the price of gasoline any time soon.  We'll just have to rely on market forces to get the price up where it needs to be.

(2) The frog-boiling story is apocryphal, but it’s a good metaphor.