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Russian automobile manufacturers and workers (similar to their counterparts in America) wish their country's consumers would buy more cars manufactured by their homeland companies. To make that happen, they slapped an import tariff on imported cars, which come mostly from Japan. Russian consumers are now finding out just how serious their government is about enforcing their corporate welfare program. Here's the breaking news in Vladivostok.
American consumers, however, have one advantage over their Russian counterparts: Most of the "foreign" cars Americans have been purchasing are already manufactured in America by Americans, so an import tariff wouldn't be nearly as effective. Corporate welfare here for government-preferred companies takes a different form: the government lends them money, and funds it by taxing or borrowing it from us.
In the end, though, I guess it works pretty much the same: the government will come after us if we don't pay our taxes.
Have you heard this story?
You've heard that sob story, right? If you haven't heard at least one or two variations of it somewhere on the internet, I presume you were holed up incommunicado in Antarctica for a couple decades. I just heard it again two days ago as I read an article by one of my critics. (Article synopsis: I'm a government-loving lapdog worshiping at the altar of fiat money, according to this critic.)
But this time, I decided to stop letting the trite sob story go unchallenged. It's a sly play on emotions, it relies on the listener's buying a half-truth, it's single-entry accounting in disguise, and it deserves to be squashed like a bug.
Here's the misleading chart; can you spot the not-so-subtle play on emotions?
What we're supposed to think: "Ohmygod! The dollar has depreciated by a factor of twelve since 1929! A five-cent 1929 bag of oats now costs twelve times that much — how will I feed my horse? It's the Fed's fault! Yeah, that's it; let's go string 'em up!"
Okay, just wait a minute. Before we abolish the Fed based on the evidence above, shouldn't we at least think about it a little harder? Isn't there more to the analysis than just the amount of money we paid for the stuff we bought?
Hint: Shouldn't we give some thought to the amount of money we got paid for the work we did (or for the capital we invested)?
Yes we should. But that doesn't jump out at us when we see the chart above, does it?
What would help is a year-by-year comparison of what we really earned, versus what we really bought with what we really earned. For that, we need both income and expenditures to be in constant dollars, not inflated dollars. The good news is, the Department of Commerce has done most of the work for us. They publish the information we need, and it goes all the way back to 1929. "Real disposable income per capita" is the amount of real, constant-dollar income the average person had left to spend or save (after taxes and transfers); "real personal consumption expenditures per capita" is the constant-dollar value of the real stuff the average person bought.
If our standard of living deteriorated during that time span, both lines would slope downward between 1929-2007; if it stayed the same, both would remain horizontal. Which was it? (Before we string up the Fed governors, we should at least understand how badly their supposed money mismanagement affected our real well-being.)
So, using the Department of Commerce numbers, I plotted the result. Here it is.
Well, well. Not only did we earn more than enough real income to pay for the real goods and services we bought in most years since 1929 (in spite of the dollar's depreciation), we also earned about 5 times more real income (and bought 5 times more real stuff) in 2007 than in 1929. Our standard of living didn't get worse, it got a lot better!
It's true that the value of the US dollar depreciated an average of 3.2% per year between 1929 and 2007. But there are three parts to the whole story: (1) The things we bought in 1929 required 12 times more nominal dollars in 2007; (2) the paychecks we got in 1929 would have been 12 times as big in 2007 nominal dollars; and — more importantly — (3) we were able to buy 5 times as much real stuff in 2007 than we were in 1929.
The purchasing power chart (first one above) doesn't tell us the whole story, does it? Even if we figure out that the factor of 12 applies also to income, not just expenditures, the chart gives no clue that our labor now buys 5 times as much as it did 80 years ago. It gives no clue as to our improved standard of living, our real growth. That's because it's a half-truth scare chart.
The whole truth: we've obviously been doing something right. If deflation is avoided and inflation is kept low and predictable — which is the Fed's goal and their track record (with a few exceptions, especially early on, and again in the 1970s) — we should stop wasting so much time debating the nature of money, and spend it instead debating how to enhance real growth in our standard of living. But don't expect to hear that from the anti-Fed fringe. They peddle fear, and can't allow the rest of the truth to dilute their propaganda; after all, some of them have committed large portions of their adult lives to it.
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End notes:
(1) Because many of the anti-Fed fringe have a gold fetish, the next experiment I have in mind is to compare (as best I can with the same databases) the difference, if any, in the real value of the surplus of income over consumption expenditures, 1929-2007, if we'd been paid in gold instead of nominal dollars. I'll work on that in the next few days, as time permits.
(2) The factor of 12x is the overall aggregate effect of the 3.2% average annual inflation. The oats by themselves don't really cost 12 times as much in 2007 vs 1929; agriculture productivity has skyrocketed.
(3) Links to the Dept of Commerce numbers:
I've been listening to much of the hot air from all sides of the discussion regarding bailing out the Detroit auto companies, and it struck me that nobody is asking (or answering) the correct quesions. Mostly I'm hearing tactical questions from the politicians, and answers that amount to short-term incrementalism. How much do you need now? Umpteen billion. Will you need more later? Can't tell yet, it depends. Are you tightening your belts? Oh, yes, we are giving until it hurts, and then some.
Frankly, I'm more interested in hearing the so-called leaders (management, union leaders, and boards of directors) fess up as to how they and their predecessors let down all of their employees, workers, creditors, and stockholders — slowly and steadily over a period of at least thirty years. It didn't happen this year, try as they might to convince us that the recent financial crisis was what did them in.
Why aren't the CEOs or union leaders being asked to explain the quality and reliability of the cars their firms have been making? All I've heard along those lines is a comment or two about how the cars rolling off the assembly lines today are somehow "at parity" with their competition. No follow up questions, such as "Oh, really? How many years ago did your management team and your union decide that quality and reliability of your firms' products deserved at least as high a priority as your job banks, your gold-plated medical plans, your bonuses, and your corporate jets? Was it one month ago? A year or two ago, maybe?"
It's too late now, but the union leaders, CEOs, and boards of directors have had some big, important clues available to them for at least three decades, if not more. One highly-visible source for clues has been Consumer Reports magazine. I made a special trip to the bookstore yesterday to get the latest copy of the issue providing extensive, multi-year ratings on the quality and reliability of almost all of the car models we consumers are driving. (It's only seven bucks for a wealth of objective information on car quality; what a bargain. Pick up a copy of it next time you're at a magazine stand.)
No surprise: the results this time look similar to those I've been seeing for many years. I decided to borrow four examples from the magazine to assemble a simple little quiz, to illustrate my point. Here's the quiz — and it's open to anyone, including union leaders, CEOs, and senior executives of bailout-hungry auto manufacturers.
Three-question quiz
Let's assume you are in the market for a car assembled in America, made with at least 70% US-or-Canada-sourced parts. You saved enough to pay cash for your new car. Using the latest Consumer Reports magazine, you've narrowed it down to the four popular models shown below. After examining the ratings, and without peeking ahead, answer these three quiz questions:
Now click on the following graphic to see which cars you picked...
It is no mystery to me why General Motors is asking for bailout money. They can't convince enough of us to willingly exchange our money for their products, so they're asking for the government's help in getting our money.
Conclusion
In my opinion, a high-priority infrastructure project for the Obama administration should be wider highways leading away from Michigan — towards the states where a lot more skilled auto workers will be needed after the ineffective companies and unions at last go out of business.
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End notes, Q&A:
• Will national defense needs require us to bailout Detroit anyway?
Well, General Dynamics is effective at making the armored vehicles GM used to make; why not turn the remaining assets in question over to GD as well, or to some other competent firm?
• We bailed out financial firms; why not car makers?
Reason: the government has ultimate responsibility for the soundness of our economy's money system; it is NOT responsible for the soundness of the economy's passenger-car manufacturing systems. Money flows in one direction, real goods and services flow in the opposite direction, as explained here. The government must (reluctantly) step in as necessary to prevent the collapse of the nation's money system; private sector nonfinancial firms succeed or fail within that system.
Because of the growing hysteria over the growing federal debt, I've decided it's time to introduce a new, objective measure for our debt burden — or, more accurately, for our federal government's ability to afford the federal debt. [Believe it or not, it's more affordable today than it was ten years ago.]
The publicly-held debt has been increasing rapidly because of recent actions by the Treasury and the Federal Reserve, and it will continue to increase rapidly until we get our economy moving again. The question is this: Can we afford all this debt, on top of the debt we already had on the books?
Well, that begs the question, How should we measure "debt affordability"—also known as "creditworthiness"? Few of the hysterical debt-phobes ever seem willing to answer that important question. Although ex-Comptroller General David Walker offered a ray of hope by touching briefly on the debt/GDP ratio in his doomsday movie, IOUSA (see my review here), my hopes were dashed when he devoted most of his film to the more sensational debt numbers ending in lots of zeroes. Too bad, but that's symptomatic of debt phobes — especially those who'd rather peddle fear, for personal or political gain, than solutions for aggregate economic gain.
Anyway, I think I've come up with a simple little number that could help steer the conversation away from hysteria, back towards objectivity: I call it the "TIT Ratio," which stands for "Times Interest Taxed." (I mentioned it at the end of my review of Walker's IOUSA movie.) It's simply the number of times our federal tax receipts covered the interest obligations on the publicly-held federal debt.
I like it a lot better than the debt/GDP ratio because it's more to the point. In debt/GDP, debt (a "stock") is just a crude proxy for interest payments because it ignores the interest rate, and GDP (a "flow") is just a proxy for tax receipts. In contrast, the TIT Ratio is a coverage ratio that directly measures interest payments and tax receipts (both "flows"), and it's more timely. It's similar in concept to "Times Interest Earned" used in private sector finance as one gauge of a firm's creditworthiness. Here's a chart of the USA's TIT Ratio since 1998. [I plan to take it back to at least 1980, if I can get the Treasury folks to point me to their older reports.]
Click to enlarge:
[source: Monthly Treasury Statement]
Notice that our current ability to afford the federal debt is better than it was at the end of 2000 — even though we've been adding debt at a fast pace recently. (Reasons: our economy has grown, and the interest rates have dropped.) The good news today: we have lots of room to borrow because there are plenty of investors willing to buy Treasury securities at low interest rates (near-zero rates, in fact). The bad news: nobody should interpret that to mean we have infinite borrowing capacity (as opposed to merely a comfortable cushion with no near-term limit in sight).
Federal debt: the principal, the interest, and the market
Keep in mind that (1) we'll never, ever have to pay back any of the principal on the debt if we just keep rolling it over (see this article); (2) the interest is the "debt service" we must never, ever, ever, ever default on; and (3) maintaining our status as the large, reliable, predictable borrower supporting the large, liquid, worldwide market for US Treasury securities should always be one of our top financial priorities. To maintain the bond-buying public's confidence that we'll always be able to afford to pay them their interest in stable-value dollars, and to roll the debt over into a large market full of willing buyers, the proceeds from the taxing power of the federal government must comfortably cover our interest obligations. Hence the TIT Ratio.
Growing the economy
Federal tax receipts grow when the economy grows, even when tax rates do not change at all. That's why "growing the economy" is so important for our future, and why getting it back on track is so much more important than worrying about short-term increases in the debt level. [Along those lines, I'm glad to hear Obama and his team now giving "growing the economy" a lot more emphasis than increasing anyone's tax rates; tax hikes for the rich now appears to have been merely tax talk for the votes—at least until 2010. I find that very encouraging.]
So far, the USA's declining TIT Ratio is saying that the debt we've added, in spite of the ratio's downward slope, is more easily affordable today than our debt level was a decade ago. [That's worth repeating: "The debt level is more affordable today than a decade ago." Try to think of anywhere else you've heard that besides this blog.] We should expect the decline to continue for months, but we should patiently understand that it's necessary to get the economy back on the growth track, and that it's therefore not yet cause for alarm, let alone doomsday talk.
In short, it's a level-headed, objective measure. For me, that's a nice respite from the caterwauling of the hysteria peddlers.
[I'll begin publishing the TIT chart once a month, soon after the Monthly Treasury Statement is available. Also, it's safe to assume that, for now, a bigger TIT is a better TIT, but don't forget that too much of a good thing is bad, not good. If the TIT ratio approached infinity, as it would if we eliminated the debt, we would be grossly underleveraged, and would be stifling economic growth.]
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Last and possibly least...
Two years ago, I posted the graphic below in an article I wrote responding to the fear peddlers' road show. [You'll get the joke if you saw the movie Bill and Ted's Bogus Journey; if you missed it, that's too bad, because it was one of Keanu Reeves' finest performances.]
Anyway, David Walker and the Concord folks never gave me any feedback on it, so I guess they didn't think it was funny.
Here's the Bill & Ted graphic, just for fun.
Someone I know read an article in the Wall Street Journal a week ago—an article that pushed him beyond the limit of his patience. He wrote a letter to the editor, waited a week, and was not surprised that it apparently ended up in their email bitbucket, never to be seen again—that is, until I offered to post it for him on the world wide web.
Here it is: One homeowner's Christmas wish...
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Each morning for several months I've patiently read the latest ideas reported in the WSJ regarding how to solve our financial crisis. A growing plurality of experts seems to agree that the government should buy up home mortgages, directly or indirectly, and give the homeowner a break on the principal amount owed.
The latest expert-of-the-day was Columbia economist Charles Calomiris (11/26/08, page C3), who said the solution for mortgages "isn't complicated": by golly, just write them down to 40 cents on the dollar, share the loss, and presto, it's all fixed in a jiffy.
Who will "share" the loss? The government, of course; "we the people." Well, I'm not only one of those, I'm also a member of a teeny-tiny minority that has until now been completely ignored. My patience having run out, I'd like to submit a little reminder for all of the financial experts in government and academia, as well as one small request.
Some of us—a tiny fraction of us—followed our parents' advice. We dutifully paid our taxes, we bought savings bonds, we chose houses and cars we could afford, we spent within our means, and we managed our finances so that we were debt free in time for retirement. We now own our houses free and clear.
But now we find out that our decades-long financial discipline was necessary not only to secure ownership of our own homes: it will now be tapped by "the government" to secure home ownership for other mortgage holders, too. My teeny-tiny minority thought we were all finished paying mortgages; turns out we were dead wrong. Because we have no mortgages, we will NOT be among those who will get 60% write-downs; on the contrary, we will be the ones FUNDING those write-downs.
Don't get me wrong; I do understand the gravity of the crisis. The financial system must not be allowed to collapse. Unprecedented action is required, and I will dutifully do my part by continuing to pay my taxes and by purchasing a few extra government bonds. I strongly prefer to use my money that way (to help prevent a collapse), than trying to use it later to buy ammunition and survival gear AFTER a collapse. If those are my two choices, it's no contest.
But, on behalf of the tiny minority of us who (a) had no part in causing the problem, but (b) will dutifully fund its solution, here's my small request of the financial whizzes in government and academia, and the homeowners who will be getting big, after-the-fact discounts on their mortgages:
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