The Skeptical Optimist

Does it taste like chicken?

Here's one government's new idea for feeding its people.  I wonder if it tastes like chicken; someone should try it and let me know.

Two myths: Paying off family mortgages, and paying off the national debt

Families have to pay off their mortgages; why is the national debt any different? And besides, why compare debt (or deficits) to GDP instead of tax receipts?

I could hammer away at the answer to those and similar questions for as long as I decide it might do some good to keep hammering away at them. So far, I’ve racked up eleven years doing it. I’ve also made several new friends, which is good, and an enemy or two, which is immaterial for now.

I’ve noticed that the objections to debt and deficits tend to come mostly from supporters of the party that does not occupy the White House. In 1995, Gingrich and friends tried to shut the government down to embarrass Clinton over the debt issue. (In the process, they shot themselves in the foot; it was a well-deserved wound). A few years later, the White House changed hands, and now it’s the other ideological camp peddling the fear that exceeding the debt ceiling will doom our grandkids to debtors prison.

Shouldn’t recent history be a big clue that maybe, just maybe, national debt fear-peddling is driven more by politics than by economics?

Will a “debt burden” of 40% (publicly-held debt %GDP) bankrupt our grandkids? How about 80%, or 120%? Oops, wait a minute, 120% debt is what my grandparents’ generation bequeathed to their future grandkids in 1946. Well, I became one of those grandkids, and here we are sixty years later: not only has the debt failed to eat us alive, but we’ve run it back down to 40% of GDP—not because we reduced the debt, but because we grew the economy.

That doesn’t faze the ideologues, though. Count on them to surface and become obnoxiously vocal about deficits and the debt, just as soon as their party loses control of the White House. They remain perennially fond of showing us hockey-stick charts of debt rocketing skyward—keeping carefully hidden the hockey-stick charts showing our economy rocketing skyward at a similar pace. And of course, it’s all the president’s fault. Debt is always “inherited” from the previous party; surpluses are always “squandered” by the subsequent party. Polarization is what politics has been all about, and politics is what the deficit/debt debate has been all about. It won’t change any time soon.

Families pay off their mortgages, don’t they?
No, as a matter of fact, they don’t.  My family’s outstanding mortgage balance, starting back in 1925 when my grandfather borrowed money for his first house, has done nothing but grow, grow, grow. That’s eighty-three years of family mortgage debt that’s done nothing but grow. But guess what else grew: the family did, and so did the aggregate family income, and consequently, so did the family’s aggregate ability to carry mortgage debt. As one generation finished paying off their mortgages, the bankers kept rolling their loans over to the next generation of home buyers, who were more numerous and had larger incomes than the previous generation of borrowers.

Bottom line: No, the typical family has most definitely not been paying off its mortgages; it's a false analogy.  The typical family has been growing its aggregate income, assets, and mortgage debt.  But the false analogy makes plenty of political hay, doesn’t it?

Why debt-to-GDP, instead of some other comparison?
I agree; I think there’s a better indicator that’s more to the point. Unfortunately for me, economists worldwide, on all points of the ideological spectrum, are virtually unanimous that the ratios of debt- and deficit-to-GDP are the key, cross-country indicators of nations' debt loads. Several economists have confirmed it to me personally, and the European Union has used it in their treaties to help constrain member nations’ economic policies. Debt-to-GDP is here to stay.

Too bad. I think the portion of tax receipts it takes to pay the net interest (interest on publicly-held debt) is more to the point. It’s affected not only by the size of the debt and the size of the economy, but also by interest rates. In the last ten years it has dropped from 15% to its current level of 10%. I think it’s more to the point, but economists have been using debt/GDP as their preferred indicator.  That’s why I’ll keep using debt/GDP; the numerator is a reasonable proxy for interest payments, as the denominator is for tax receipts, so it works for economics discussions.

Unfortunately, most discussions about the deficit and debt are political, not economic.  Any ideologue who makes the mistake of talking about the federal debt as a ratio that does not scare the audience (40% of GDP)—instead of a big number that does ($9 trillion)—becomes at best a duck out of water, if not a laughingstock. She would deserve a big fat 'F' in Spin 101. That’s why debt/GDP and deficit/GDP won’t become part of the political vocabulary for a long time.

Count on the talking points of the White House wannabees sticking with debt ceilings and debt dollars for the indefinite future (…and it won’t matter which party is the wannabees). And count on the public at large properly ignoring such political theater every time it happens.

Too bad; a debt ceiling of, say, "80% GDP" could spark the substantive debate we’ve needed for a long time.

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End note:
This was lifted from the comments. Grodge asked some good questions, and I decided to answer them up here instead of down there.

US Energy policy: Who’s-on-first?

Everybody hates $4 gasoline. Everybody wants to be independent of foreign oil. Two no-brainers in a row.  Here’s the brain teaser: What’s the preferred solution?  This is where the political rhetoric gets downright laughable…

Q: Why is the oil price so high?
A: Because of those greedy speculators.

Q: To get the price down, should we drill more in our own territory?
A: No, of course not; that wouldn’t yield oil for years.

Q: But wouldn’t that new policy cause the speculators to start bidding the oil price down?
A: There’s no guarantee it would drop immediately.

Q: Is there a guarantee is wouldn’t drop immediately?
A: The only guarantee is that energy from wind and solar is cleaner than energy from oil; shifting to wind and solar power is the right energy policy.

Q: Will wind-generated electricity be available for powering our cars sooner than gasoline from increased domestic oil production?
A: If we don’t start a bigger push for wind and solar power now, we’re just prolonging our dependence on oil.

Q: But if we don’t change oil drilling policy now, won’t we just prolong higher than necessary oil prices?
A: Forget oil, we need to kick that habit.

Q: But isn’t today’s pressing problem the high price of gasoline?
A: You don’t get it, do you? We won’t NEED gasoline if we switch to wind and solar power.

Q: Gasoline is a liquid fuel that goes into my gas tank; each tank gives me 300 miles worth of driving. If I shift from gasoline to electricity from the grid, how will I store that much electricity in my car?
A: In rechargeable batteries, dummy; plug-in cars. Where have you been?

Q: But today’s best batteries take up a lot more room than my gas tank, only give me a hundred miles of driving, take hours to recharge, wear out with usage, and make the car cost thousands of dollars more. Not many of us consumers can afford all that money and hassle. Can’t we just drill for more oil here, using current technology, to give consumers a break on gasoline prices?
A: No, we need to kick the oil habit. What we need is a breakthrough in new technology--a superbattery of some kind that’s as affordable and safe as a tankful of gasoline, yields the same mileage per tankful, and recharges quickly from the power grid.

Q: Okay, okay, we need a superbattery, and we need it quickly. Could government energy policy help reduce the time it would take to get us to that breakthrough?
A: Of course it could; how long have I been trying to tell you that government should be doing a lot more to force us to kick our addiction to oil? Sheesh.

Q: How much would it be worth to our economy if a superbattery breakthrough eventually displaced our need for foreign oil?
A: Hundreds of billions per year, even trillions of dollars. And, we could become a superbattery exporter instead of an oil importer.

Q: Okay, I get it. But if we’re going to give consumers a break from high-priced gasoline, and we’re not going to allow any more drilling, we’ll need that superbattery as soon as possible, won’t we?
A: Duh.

Q: But to encourage entrepreneurs, scientists, and companies to get moving a lot faster towards that superbattery breakthrough, the government will need to set up some kind of new incentive, won’t it?
A: Of course; I’ve been trying to tell you all along that government energy policy needs to change in a big way.

Q: How about something like an “X-prize” for a new superbattery?  Maybe a few hundred million dollar prize for the first entrepreneur, or company, or group of scientists to come through with the new technology?
A: Uhhh… No, no, we couldn’t do that. Uhhh… that’s McCain’s idea… obviously just a “gimmick” (...according to these talking points they sent me...). 

Q: What’s your solution, then?
A: Don’t worry. Obama promised “change.”  He’ll figure it out, just trust him.

Q: Could you please get a little more specific?
A: Sorry, I’m out of time.  Gotta go fill up my car before gasoline goes higher.

Motherhood, Apple Pie, and Government Waste

"Wasteful government spending" is one of America's favorite whipping boys.  Wouldn't it be just dandy if we could eliminate most (or all) of it?  Then we could balance the budget, cut taxes, pay down the debt, get government off our backs, reduce unemployment, reduce oil imports, cool the globe, eliminate obesity, shore up motherhood, and enjoy a lot more apple pie.  Nirvana would be at hand, if only we could eliminate our nemesis: "wasteful government spending."   

That's what our politicians apparently think we think, anyway.  In short, they seem to think we're idiots. 

I dislike waste as much as anyone else does.  Whenever a baseball pitcher gives up a hit, every pitch thrown during that at-bat turns out to have been wasted.  No doubt about it: all baseball pitchers are wasting their arms on a high percentage of their pitches. 

Whenever a tennis player loses a game, every stroke in it was wasted; likewise, losing the set wastes every game in it, and losing the match wastes every set. Both winning and losing tennis players are wasting a large portion of their energy and talent, aren't they? 

Tiger Woods has finished out of the money in a few tournaments now and then.  Think of all those strokes he just plain wasted. Every year I've watched, the NFL team that wins the Super Bowl wastes several plays during the course of the game.  I haven't been involved in a car accident in years, yet I keep paying money every month for car insurance; what a waste. 

Think how much money and time Edison "wasted" on failed experiments during his search for a light-bulb filament.  How much did Jonas Salk and his peers waste during their search for a polio vaccine?  How much have you wasted on food you've bought that eventually got thrown out (stale bread, etc)? 

The federal government is no exception when it comes to wasting things.  Since 1944, how much federal spending on the GI Bill has been wasted on the small percentage of GIs who ended up not finishing college with the money they were allocated?  How much money and time do weather satellites waste watching calm seas and balmy weather?  How much Head Start money is wasted on the portion of kids who don't turn out to be productive citizens, let alone the next Newton, Einstein, or Mozart?  How much Homeland Security money is wasted checking inbound containers carrying harmless goods?  How much money is wasted on university research grants that don't yield an incremental step towards energy independence?

Sheesh, waste is everywhere!  If only we could eliminate all of it.  If only.  That's the way shallow thinking works, anyway.

The problem with shallow thinking is that in most cases it's impractical or impossible to eliminate the waste, and in many other cases we shouldn't want to eliminate it.  Why?  Because much "waste" is inextricably built into a process that yields overall positive results. 

Tiger Woods has wasted a lot of strokes, holes, and tournaments; so what?  Roger Clemens wasted a lot of pitches; so what?  Thomas Edison wasted a lot of materials and time on unsuccessful experiments, the NY Giants wasted several plays in the Super Bowl, Roger Federer has wasted a lot of points and games at Wimbledon, Jonas Salk wasted materials and time on unsuccessful anti-polio experiments, you and I have wasted money letting partial loaves of bread get stale or moldy, and Cheerios that don't make it into the kids' breakfast bowls get thrown into the trash every morning all over America. 

But the question remains: So what?

Why is the much ballyhooed word "waste" getting so much more more attention than the good news that typically accompanies it?  Woods, Clemens, Edison, Federer, Salk, and the NY Giants did some very good things for many of us, in spite of what they wasted.  You and I fed our families quite well, thank you, in spite of the bread we allowed to get moldy.  And kids all over America get a sufficient breakfast in spite of the Cheerios that hit the floor instead of the bowl.

And what about "government waste"?  Here's my judgment: If Head Start allows one or more Einsteins, Newtons, or Mozarts to break out of the pack, Head Start is worth it in spite of the so-called waste.  If the GI Bill continues to educate and transform generations of GIs returning to the private sector, the GI Bill is worth it in spite of the few who don't finish.  If a weather satellite eventually spots a brewing hurricane in plenty of time to save hundreds or thousands of lives, it's worth it in spite of all the time it "wasted" beforehand, watching balmy weather.  If Homeland Security detects a single dirty bomb hidden inside a shipping container, it's worth it in spite of the vast majority of benign containers it took time and money to check.  If research grants to universities somewhere yield a breakthrough in non-fossil-fuel energy technology, it is worth it, in spite of the research grants that yielded unsuccessful experiments. If we had spent sufficient extra money on intelligence gathering and coordination to prevent 911, it would have been worth it in spite of the dent it would have put in America's political golden calf, the almighty surplus. 

If (McCain's) proposed millions in government prize money offered for energy innovation someday yields a paradigm-shifting superbattery, it would be about as far from a "gimmick" as you can get – (Obama's) obligatory, election-year political rhetoric notwithstanding. 

Conclusion
Spending so much time talking about government "waste" is a waste.  We should expand government experimentation within its areas of accountability – which, according to Adam Smith, are (1) national security, (2) justice, (3) education, and (4) infrastructure, while maintaining (5) a stable currency.  Borrowing money from willing lenders to get better at any or all of the first four is what those lenders are looking for, and it would therefore not undermine our creditworthiness (i.e., our ability to maintain a stable currency). 

Don't get me wrong: waste that can be eliminated without any undesirable side effects should be eradicated without hesitation.  But I'll add this: the wasted dollars we save should be matched one-for-one by tax cuts or by reinvestment in appropriate extra experimentation.  That would leave borrowing unchanged, which would be perfectly acceptable, because eliminating waste increases the portion of spending that's productive.  And, as we all (should) know, borrowing money for good investments is sound financial practice (…ask any banker). 

Let's eliminate waste that we can isolate from productive spending.  Let's cut taxes -- or increase productive spending -- by one dollar for every dollar of waste eliminated.  And let's invest in experiments that might yield better security, more equal justice, the emergence of an extra bunch of Einsteins and Mozarts, and the incentives and technical infrastructure required to discover new paradigms in energy technology. Let's invest in the future, and trust ourselves to pull it off.

Let's give the positive, unpredictable surprise every chance to emerge.  Let's stop worrying about government borrowing for that purpose, let's stop wasting time spewing hot air about  waste (most of which would cost more to eliminate than to accept as a cost of progress), and let's stop propagating the falsehood that every wasted dollar was borrowed (instead of taxed) from the public.  Let's spend and borrow as necessary to encourage the positive Black Swans and to prevent the negative ones. As the GI Bill demonstrated, one big success will more than pay for all the borrowing it took to fund the experimentation, as well as the "waste" that goes with progress.

We need a paradigm shift, and all such progress generates some degree of "waste."  Why not focus on the former instead of the latter?  Larry Kudlow correctly keeps reminding us of what Reagan used to say:

Okay, you showed me the manure. Now show me the pony. 

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End note:
I think it was Descartes who apologized to a friend for a lengthy letter he wrote, saying that he just didn't have enough time to make it shorter.  I know what he meant; I usually spend a lot of time trimming the number of words it takes to get the point across -- but this time I don't have the time.  Maybe next time.

Five ways to fight global warming, ranked worst-to-best

Although I’m still not sure whether the cause of global warming is due more to humans than to the sun, I keep an eye on the science.  (I enjoy keeping up with the science—but pure GW science is a rare find. GW news is too frequently contaminated by confirmation bias, belief preservation, and rehearsed political dogma.  I stop reading as soon as I detect any of that, which means I skip a lot of GW “news.”) 

I was glad to see Freeman Dyson’s recent review of William Nordhaus’s new book about several possible policies the world could choose for mitigating global warming, and each policy’s estimated effect after 100 years. Nordhaus’s analysis netted the worldwide cost of each policy against its worldwide benefits over 100 years—using $1 trillion as the base unit of measure.  A negative result means the policy in question would make our great-great grandkids worse off than doing nothing; a positive number means they’d be better off.  Nordhaus used a discount factor of 4%—an assumption that’s perfectly reasonable to most of us, but highly controversial to those whose pet policies end up looking ugly as a result. [What a surprise.]

For fun, see if you can match each policy to its outcome, before peeking at the answer.  Here’s the set of policies and outcomes:

Give it your best shot before you go to the rest of the article below.

 

Interest on the debt: What we get for it

I estimate that 99% of the voting public believes we get absolutely nothing for the interest we pay on the federal debt.  Okay, 99% plus-or-minus one percentage point, anyway. It's a false belief, and false fear of that false belief is played like a fiddle during campaign seasons.

Before I explain the important benefit we get from paying the interest, let's look at how we are faring on the indicator I consider the best indicator of "debt burden": the portion of tax receipts it takes to pay the net interest on the debt.  (It's more to the point than the debt/GDP ratio.)  As the chart shows, the debt burden (9.6% of tax receipts today) is still significantly lower than it was in the mid 1990s.

It's good to know our debt burden has improved, isn't it?  I wonder when The USA Today will start reporting that fact. Click to enlarge:

Some will recognize this indicator as the inverse of "times interest earned" -- commonly used as a measure of creditworthiness in the private sector. And that's a hint. Interest payments are not a waste of money; they buy something valuable (creditworthiness), and they prevent something catastrophic (default). 

Good credit enables us to employ a mix of tax and debt financing to fund both the government spending we like, and the spending we hate. We like the GI Bill, we like national security, we like the Head Start program, and we like beefed up embassies safe from terrorist bombs.  We hate government waste; if only we could isolate it, we could cut it out while simultaneously cutting taxes by the same amount. In any case, what's left is spending we like, plus waste we have no hope of cutting out, the total of which must be financed by some combination of taxes and borrowing.  Our ability to borrow is better known as our creditworthiness.  Our creditworthiness is dependent on our steady, reliable payment of interest to those who have chosen to park their money in "risk-free" US Treasury securities.

Next time someone is wondering what we bought for the interest, I wish they'd also wonder what we bought with the principal that interest is supporting.  Although it's impossible to pinpoint, I bet we have a Nimitz carrier, a few intelligence assets, several thousand more college-educated GIs, and a few more Head Start activities in the works because of the principal we were able to borrow -- all because we have been steady and reliable in paying interest on our debt.

It's not being wasted, it's buying something valuable: creditworthiness and default-avoidance.

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End note:

If you know anyone who still thinks interest payments are pure waste, suggest a fact-finding experiment involving their own budget for personal expenditures: tell them to stop paying the interest portion of their mortgage, their car loan, and their credit cards -- then observe the consequences their creditors will bring about. 

I predict they will conclude that creditworthiness and default-avoidance are valuable benefits of paying interest on the debt they had utilized to acquire desirable assets early.

FQ.08.25: Favorite Quote for This Week

[In 1952] the Los Angeles County Democratic Central Committee considered endorsing [Ronald] Reagan for an open congressional seat but declined to do so on grounds he was "too liberal" . . . Reagan's vision of America as a free society that drew its strength from the courage and bloodstock of its immigrants was then considered a liberal view.  Liberals in those days celebrated the American "melting pot" rather than the diversity of its human ingredients.  The genius of America was not that it perpetuated differences but that it obliterated them and created a new being: an American.
—Lou Cannon, Governor Reagan: His Rise to Power

Yippee! Six-dollar gasoline is in sight!

Wow, is this encouraging: Gasoline demand for motor vehicles in the USA is dropping like a stone.  Take a look at this chart I assembled using the most recent data from the Energy Information Administration:

If we can keep gasoline demand headed in that direction, it will accelerate the arrival of oil independence day—which I still hope to see in my lifetime.  How encouraging! 

I credit this good news to the rising price of gasoline.  It's $4 per gallon and climbing.  With luck, $6 gasoline is right around the corner!

I can hardly wait.  How about you?