Stimulus and Recession in Simple Terms

I studied Economics in University, though my marks would indicate that I didn't attend many classes or read much of the material.  Nonetheless I find myself reading economic reports on a daily basis as a part of my job.  I often wait with bated breath for various reports that are released at 830 am.

This brief issued by the non-partisan Congressional Budget Office makes for some sober reading.

http://www.cbo.gov/ftpdocs/116xx/doc11659/07-27_Debt_FiscalCrisis_Brief.pdf

To make a long story short, soaring deficits may cause debt to reach crisis levels.

At this point I think that its helpful to simplify things so that the dimmer lights who occupy all parts of the political spectrum can understand.

If we borrow $100 to 'stimulate' the economy through tax cuts, infrastructure spending, etc, etc.......there comes a time when we need to pay it back.  If it's in one year then we will need to pay back about $102.  If its in 5 years we will need to pay back $110.  (I have assumed away compounding to keep it simple, and assumed an interest rate of 2%).  Paying that back means increasing taxes by $110 or cutting infrastructure spending by $110 or reducing social services by $110.....or some combination thereof.

The math is very simple.....to "stimulate" the economy with a $100 deficit means reversing the stimulus by more than $100 since we will need to pay interest.

This example makes some very poor assumptions that are helpful to the arguments for deficit stimulus spending.

1. I have made the bad assumption that $100 of stimulus will actually result in $100 of 'value' and that none will be lost due to inefficient allocation.  This is a very poor assumption.
2. I have made the ridiculous assumption that there is no compounding of interest.  The reversal of stimulus would be much greater if interest is compounded.
3. I have made the assumption (nay fantasy) that the deficit will be repaid in 5 years.....an appalling bad assumption.  Just how bad would the pro-deficit argument look if we assume that it takes 30 years to pay it back?  Even 30 years is a very rosy assumption.
4. I have made the assumption that there is no "crowding out" effect where government spending incents the private sector to spend less.
5. I have made the assumption that the expansion of the government into a greater share of GDP does not result in inefficiencies.  

Despite all of these very rosy assumptions that are helpful to the pro-deficit view, we are left with the simple math that says that $100 of stimulus will result in a reversal of $110 of negative stimulus over the next 5 years.

I have ignored one giant elephant in the room and that is the multiplier effect.  It is the idea that when the economy is stimulated by $100, it actually results in increased economic activity of a number greater than $100....say $160.  If this is uniformly true then the argument for stimulus is stronger.......except that I have never understood why the multiplier effect doesn't also work in reverse when the stimulus is withdrawn.

I once heard a saying that the only role of Economic Projections is to make Astrology look respectable.  (I would provide the citation if I could remember where I saw it.)  If we can't accurately predict the path of GDP, then I don't understand how we could possibly predict a secondary derivative like a multiplier effect.

If the multiplier effect is valid, I also don't understand why we don't favour ever higher deficits as the path to endless prosperity.

To borrow a phrase from George H.W. Bush....a lot of this is Voodoo Economics.  The truth is that our current deficits are just a way to pay for the standard of living to which we have become accustomed by raiding our children's education fund.  

Our leaders have failed to speak some basic truths to the people.  Hard times are necessary.  Recessions are bad and so is death......but both are necessities in the grand scheme of things.  No society has ever achieved 100% employment and no society ever will and it's not necessarily a good thing to strive for.

After 9-11, George W. Bush implored people to go shopping and enjoy life because otherwise Al Quada wins.  I can't recall another time in history when a nation went to war and simultaneously went out for dinner and a movie.  That attitude still permeates society.  

Hard times build character.  I treasure the memories of a childhood without material excess.  I recall eating a piece of (what I now know was terrible) cheese on a plane as we immigrated from Korea.  I realize now that our diet in Korea must have been very very low in fat.  I declared that cheese the best thing I had ever tasted!!

I couldn't possibly bring myself to impose a false poverty on my son so that he can learn about what life is like for so many.  However I do feel sad that he will probably never have such experiences.  Although if we keep spending money we don't have, then he and many other children of today will have those experiences in reverse...and that would be tragic and represent a failure on our part.

GM Again

Today GM announced that it was going to spend $3.5 billion to purchase a sub-prime car lender.  CEO Ed Whitacre said that the lack of a financing arm (since GMAC was sold off in 2007) put GM at a competitive disadvantage with buyers who had trouble getting credit.

I've read over the stories a few times and am completely stunned.  A few points to consider:

1. GM seems to have trouble producing cars good enough to sell at a profit.  Since they've shown that they are a car company that is not very good at producing cars, what makes them think that they are going to be so good at evaluating the creditworthiness of those who have been deemed to be not worthy of credit....and hence are subprime borrowers?
2. What will happen if the economy turns south again and these sub prime car borrowers stop making payments?  Will GM suffer losses that will require another bailout?
3. If GM has $3.5 billion kicking around in the bank, perhaps they should pay back some of the $40 billion that is still outstanding to the taxpayers?
4. Was there another buyer for this sub prime lender?  If so why is a taxpayer owned entity trumping a private sector bid?  If not, then isn't this just another bailout one step removed?

We will soon see another absurdity.  The government will divest itself of GM via, what may be, the largest public offering of stock in history.  To do this GM will engage several banks (some of which have been bailed out by the taxpayers).  GM will pay an underwriting fee to the Investment banks.  So the car company that got bailed out by the taxpayers will be paying an enormous fee to the banks that got bailed out by the taxpayers.

The depressing thing about this whole thing is that it just seems to keep getting more absurd.  The seeds for the credit crunch were sown during the Clinton Administration.  George W Bush became a tax and spend Conservative who created a moral hazard with an orgy of bailouts.  Barack Obama has followed in their footsteps.  At each step the policy decisions seem to get worse and worse.

Captain Robert Semrau

By all accounts Captain Semrau is a good soldier, a family man and friend to many.  He has been convicted of Disgraceful Conduct and faces 5 years in jail.  He is the first Canadian soldier ever convicted due to the act of shooting an unarmed combatant.

Many have called his act of killing a wounded Taliban fighter an act of mercy and in keeping with the soldier's code to end the suffering of a combatant.  The facts as presented by the prosecution state that after a Taliban ambush, a wounded insurgent was found with severe wounds that were too severe to treat in situ.  There are accounts that state that the situation was too hostile for a medevac.  One of his legs was blown off, the other nearly severed and his entrails were hanging out.  The consensus view is that this insurgent would surely have died anyways and that it was only a question of how long he suffered before succumbing to his wounds.  Apparently, Captain Semrau eliminated the question by shooting the man twice.

I recall an episode of Law and Order where the point was made that if a man jumps off a tall building and is plummeting to a certain death, the act of shooting him in mid air is still an act of murder as it hastened his death.  This is consistent with a discussion in a Criminal law class I attended however it is really Ivory Tower mental masturbation.

Obviously I was not in court to hear the evidence but it seems to me that he did the humane thing by ending the suffering of this wounded human being.  The fact that he was an enemy combatant and a member of the Taliban does not negate his status as a human being deserving of compassion.

Capt Semrau's motivations then are to be commended. However the jury was right to convict him of Disgraceful Conduct.

The Geneva Conventions state that a wounded enemy combatant ought to receive the same standard of care as a wounded friendly combatant.  I don't know if Captain Semrau would have committed the same act of mercy if the wounded man were a member of his Regiment (which is also my old Regiment).  However that is irrelevant really.  The Geneva Conventions are always inconvenient and at times impractical.  In coming to the conclusion that I did, I ignored the Geneva Conventions.

The problem I have with his act of mercy is that allowing it as an exception would set a precedent that could too easily be abused.  When thousands of soldiers die on the battlefield, a coroner does not conduct autopsies on each corpse to determine the cause of death and the likelihood of survival after the fact.  In many cases (including this one) the body is simply unavailable.

It is a myth that soldiers are trained and disciplined to such an extent that their emotions do not factor into their reactions.  If soldiers were merely such automatons, the words "troop morale" would scarcely be uttered.  The truth is that soldiers in battle experience intense feelings of fear, rage and hatred.  How would you feel if your buddy was killed in an ambush?  How would you react if you had a chance to exact some revenge?  Allowing an individual soldier to pass sentence and allow "mercy" to be a defence that could result in exoneration is a loophole that many body bags would pass through.

As an officer he needs to maintain good order and discipline.  His actions were prejudicial to good order and discipline.  However, I still feel nothing but sympathy for Captain Semrau.  He served in Afghanistan in the British Army and then with the Canadian army.  He was a volunteer who was serving his country.  Most of us never encounter a situation that presents such moral dilemmas and so we can sit back in our comfortable chairs and pass judgment on this man who risked life and limb to serve in a faraway land.  The truth is that I feel sick to my stomach for saying that what he did was wrong.  What he did was right in so many ways.

I think that Captain Semrau is a better person than most .  What he did might have been humane and deserving of some praise but he must now accept that he must accept punishment.  Perverse as it may seem, it might be the case that he was right to do what he did and it is right that he was judged guilty of a crime.

King Lebron, CB4 and Dwayne

Much of the North American sporting world spent the middle of this week digesting the most important news since the resurrection of Christ.(or so it seemed).  The three big name free agents in the NBA chose a team.  Lebron James of Cleveland, Chris Bosh of Toronto and Dwayne Wade have all agreed to sign with the Miami Heat.

Sportswriters (has there ever been a more useless profession?) have been yakking up the airwaves expressing their views of whether Miami can win the NBA Championship.

To the cacophony of voices, I shall add my own.

Miami will NOT win the NBA Championship.  Right now its not even clear if they would make the finals.  Boston's big three might be as good as Miami's and they have a better supporting cast.  The LA Lakers had a big four when Karl Malone and Gary Payton joined Shaquille Oneal and Kobe Bryant in LA 8 years ago.  They did not win.

The Miami Heat have instantly become the most hated team in the NBA with their arrogance and predictions of championships.  Still it is a team game and their egos will clash and they will be knocked out by a team with fewer stars who play as a team.

Lake Toews

This Sunday, the Manitoba Legislature will have a ceremony to name a lake north of Flin Flon after Jonathan Toews.

So what did this 22 year old do to earn this special recognition?  Well in his third season in the National Hockey League, he played for the Stanley Cup winning Chicago Blackhawks.  Apparently he is also an avid fisherman.

Premier Greg Selinger says that the young Mr Toews has earned the right to have a lake named after him like the many war heroes who earned this recognition posthumously.

I'm not sure where to begin.  Shall I begin with the waste of tax dollars in holding a ceremony in the Legislature? Shall I wonder whether Premier Selinger has weightier matters to attend to?  Shall I wonder if the lake will be renamed if Jonathan Toews should become an athlete at the centre of a scandal?  (a remote possibility given the stellar rap sheets of other millionaire athletes.

This one is too dumb to spend too much time on.  A team of 20, or so, individuals wins the Stanley Cup every spring.  Each year 20 young men achieve something worthy of the consideration of a Provincial Legislature.

Should Wayne Gretzky have a lake named after him for each of his four Stanley Cups?  For that matter perhaps Larry Murphy should have four lakes named after him.  Larry who?

The truth of the matter is that Jonathan Toews is a great young hockey player.  Each and every paramedic or emergency room doctor in Manitoba is more deserving of an honour like this than the young Mr Toews.  Each and every soldier serving in Afghanistan is more deserving.  The average citizen in a run of the mill job is as deserving of Jonathan Toews.

I hope that Jonathan Toews goes on to live a great life filled with many accomplishments.  I hope he does so that he can point to Lake Toews with pride and not embarrassment.