The Skeptical Optimist

FQ.06.04: Favorite Quote for This Week

We appointed all our worst generals to command our armies, and all our best generals to edit the newspapers.
—Robert E. Lee

GDP growth is higher than we think

Real growth for Q4 2005 was  2.6%, not 1.1%; that’s my studied opinion, anyway.  Although I agree that the USA’s growth rate hit a pothole in Q4 2005, it was a shallower pothole than reported.  Below is the monthly table I’ve been posting, comparing the official number (based on a one-quarter trend) to the one I think is better (because it’s based on a smoother, two-quarter trend). 

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

It will take two or three months to see if I’m right, but as I explained in a post nine months ago, the alternate method has proved to be better when tested against past data. 

Jan 2006 National Debt Thermometer

Several changes this month.  The CIA Factbook has updated its country-specific debt burden numbers, and thankfully is now showing a number for Canada (instead of “NA”), so I’ve revised the Thermometer accordingly.  Several countries have traded places in the rankings, notably France and Germany—but their numbers are very close, so that’s not a significant change. 

The USA’s lower-than-expected GDP growth in Q4 2005 contributed to the half-point uptick in its debt burden; however, there was no change in its ranking relative to the other countries on the chart.  (I have more to say about the GDP growth number in a separate post.)

USA inflation, as measured by the GDP deflator, moved in the right direction: down, from 3.3% to 3.0%.  The Fed apparently continues to see inflation pressure in the economy, but the bond market is giving mixed signals about it; we’ll see. 

Click to enlarge.

Cause-effect brain teaser: Optimists, Republicans and libertarians

According to the Associated Press...

Views of the economy show sharp partisan differences, with Republicans far more likely to be optimistic than either Democrats or independents, according to the Pew Research Center for the People & the Press.

Sounds as if Pew Research is finding that optimism is highly correlated with people who lean Republican (...and, I strongly suspect, libertarian).  Although correlation doesn't necessarily imply causation, it obviously doesn't deny it, either.  Now I'm wondering, if there is causation, which direction does it go?

Although it's no surprise to me that pessimism and Democratness apparently go together (...they always seem to be hoping and searching for economic bad news, and energized when they find some), I wonder if the cause/effect for optimists is:

(a) if Republican/libertarian, then optimist; or
(b) if optimist, then Republican/libertarian. 

Food for thought, that's all.  (And before jumping to any conclusions about which label I deserve, please read this list of things I'm not.)

Bridge: Easy Intro for Baby Boomers

Bridge is an excellent game for keeping your mind in shape, regardless of your age.  (Bill Gates and Warren Buffett have donated a few million dollars to help promote it to our youngsters; some of that money supports this new section at the ACBL site, for example.)  Anyway, I figure there will soon be a lot of retiring baby boomers who would like to find a really fun way to stave off Alzheimer’s disease; that potential demand is partly why I decided to get certified as a bridge teacher two years ago. 

Preparing for my first teaching experience taught me a lesson:  To get new players hooked on trying the game (instead of scaring them away from it), I must condense, condense, condense . . . and illustrate, illustrate, illustrate.  That’s what I was forced to do in order to fit the top priority fundamentals into four hours (...two 2-hour sessions).  It was a success, and I am now working on follow-up lessons. 

As a result of that preparation experience, I changed my mind about the best introductory bridge book.  If you’re a numbers person or a puzzle-solver of any age, or a baby boomer wondering what the heck you’ll do with your time after you retire, I highly recommend Bill Root’s book below.  In fact, I recommend it to anyone who plays less than 360 bridge hands a year—and especially to anyone who has never played the game at all.  It helped me simplify and clarify many important points (about playing the cards and bidding the cards) as I prepared for that first class. 

Here’s the book:
The ABCs of Bridge, by William S. Root

The bidding system this book describes (five-card majors) is hugely popular in North America; that makes it easy to find partners who talk the “same language” wherever you go in the USA. 

Give bridge a try, and give this book a try.  (Bridge and Alzheimer's do have one thing in common: You're always meeting new people.)

==============
Loosely-related joke I just remembered:

Doctor: “You have AIDS.”
Patient: “Oh, no, that’s horrible.”
Doctor: “That’s not all; you also have Alzheimer’s.”
Patient: “Oh, well, at least I don’t have AIDS.”

sqna005: Snappy Questions Never Asked

Today’s topic:  What deficits do, or don’t do, to interest rates.

Today’s quotes are from an article by the Associated Press, titled Analysts wary of growing budget deficits:

Like a person packing on pounds, the United States keeps adding to its flabby budget deficits, endangering the nation's economic health and the pocketbooks of ordinary Americans.

Here's the worry: Persistent deficits will lead to higher borrowing costs for consumers and companies, slowing economic activity.

Snappy question never asked:

You said the USA is "adding to" its budget deficit.  Why, then, does the data published in the Monthly Treasury Statement indicate that the USA has been subtracting from its budget deficit—for at least two years? 

Follow-up question:

If the worry is higher borrowing costs, why would one of the most respected analysts out there—Alan Reynolds—choose the following ending for an article on this very topic: "In conclusion, there is no clear connection between government deficits or surpluses and long-term interest rates"?

And, more importantly, why would you—in your own article—bury the following not-so-alarming evidence twenty paragraphs after the alarming opening paragraphs you chose? 

...the size of the current budget deficits, while unwelcome, do not signal that a crisis is imminent, they said.

An important barometer is the size of the federal debt-- now about $8 trillion-- relative to the overall economy, as measured by gross domestic product. Under that measure, this debt accounts for around 63.2 percent of GDP, Bethune said.

"Generally speaking, when it is over 75 percent of GDP, then the yellow flag goes out. I would say 95 percent of GDP and over is definitely a red flag," Bethune said.

...Despite the recent string of large budget deficits, long-term interest rates in the U.S. have behaved well. In fact, relatively low long-term rates around the world have puzzled economists and spawned a number of theories.

Final question:

Do you agree with Bethune that the debt-to-GDP ratio, not yet in his "yellow flag" zone or his "red flag" zone, is a far more objective basis for discussing debt, deficits, and the USA's fiscal health?  [If so, you might want to sample what this blog has been saying for the last year.]

FQ.06.03: Favorite Quote for This Week

One seldom-praised function of competition in economic growth is that it eliminates obsolete forms of economic activity, clearing away the underbrush or, if one prefers, burying the economically dead. 
—Nathan Rosenberg

Economic expansion continues in twelve out of twelve Fed districts

Every day I see at least one new article warning me of the dark things in store for our economy—such as this recent article in The Economist, Danger time in America.  But I counterbalance that by keeping up with Brian Wesbury’s insights into why the economy is looking strong.  Here’s part of what he had to say in his most recent Monday Morning Outlook (Jan 16):

The problem with most forecasts is that they focus on all the wrong things.  Trade deficits, budget deficits, hurricanes, consumer debt, housing markets, or foreign countries do not determine the direction of the US economy.  Fed policy and fiscal policy are the true catalysts for growth and change.

...The combination of low interest rates and low tax rates suggest that the economy will continue to grow in 2006.  We also suspect that “core” inflation will move moderately higher.  In other words, it may be early, but things look particularly good right now.

How do I reconcile the viewpoints of the pessimists versus the optimists?  I read the official economic results and reports as they are published, plot a chart or two, and (typically) smile as I realize that, so far, things are still looking good—and that the supposed dark days we have in store for us have been pushed back yet another month into the future.  Sometimes I even find an explanation or two as to why those positive results are continuing to roll in. 

On Jan. 18, the Fed published its periodic summary of current economic conditions (the “Beige Book”), which confirmed Wesbury's analysis:

Economic expansion continued across the twelve Federal Reserve Districts through the last several weeks of 2005. Six--New York, Philadelphia, Chicago, St. Louis, Minneapolis, and Kansas City--characterized their economies as expanding moderately or modestly. Activity accelerated or increased at a solid pace in the San Francisco, Richmond, Atlanta, and Dallas Districts. Boston characterized activity as continuing to expand, while Cleveland reported that conditions remained reasonably strong.

However, the Beige Book begins with this disclaimer: "This document summarizes comments received from businesses and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials." 

Makes me wonder: What, then, are the views of Fed officials?  Lucky me; I quickly found a same-day speech by Fed Governor Bies (Productivity and Economic Outlook), also at the Fed's website; here's an excerpt:

...productivity growth has risen significantly over the past decade in the United States. Labor productivity gains accelerated from an average annual increase of 1 1/2 percent over 1973-95 to an average annual increase of 2 1/2 percent over 1995-2001. From the first quarter of 2001 through the third quarter of 2005, labor productivity growth picked up even more--to an annual rate of nearly 3 1/2 percent. Thus, despite a recession, a tech-sector meltdown, a stock market correction, terrorism, and corporate governance scandals, our economy has proven remarkably resilient and productive.

In short: Productivity is accelerating.  Where have I heard that before?  Oh yeah, that's what Ray Kurzweil has been trying to tell us.  It's all coming back to me now.

Moral:  I’ll continue to keep an eye on both the pessimists and the optimists—and I’ll continue to enjoy a smile each time the optimists turn out to be correct.  It’s one of life’s little pleasures for me.

FQ.06.02: Favorite Quote for This Week

There was [after two centuries of the Renaissance] a sense of progress, that life was growing better and would continue to improve.  This belief grew by what it fed on; nothing is more conducive to progress than the widespread belief that it can occur.
—Charles Van Doren, A History of Knowledge, p. 158

The Disappearing Deficit

Every month, I use data from the Monthly Treasury Statement to update the chart below.  Every month, I read headlines that say things like “Bush Priorities Will Swell Deficit .”  And every month, I wonder, "Who’s off their rocker: (1) me, as I ponder what the chart is saying; or, (2) the people writing those incessant grim-reaper headlines?" 

Sometimes I even get the strange feeling that those folks are actually hoping for doomsday-confirming bad news: slower growth, shrinking tax receipts, lower incomes, higher unemployment, shrinking trade, etc.; I certainly hope I’m wrong about that.  In any case, all I’m doing each month is updating the actual results, and projecting straight line trends off of those results.  (It’s not that difficult; if I remember correctly, the necessary math is taught in high school.)  Each month, I update two trend lines: one is for Federal Outlays, and the other is for Federal Tax Receipts.  The “deficit” is equal to the difference between those two numbers. 

Predicting outlays is usually safer than predicting tax receipts, because spending keeps growing at about the same annual rate; although the White House says we are about to experience a blip due to Katrina repairs, it should be just that: a one-time blip on the trend line.  Tax receipts, on the other hand, grow when the economy grows, but shrink when the economy runs into trouble.  Therefore, a tax-receipts trend line yields a riskier prediction than a spending trend line does. 

The chart shows that the deficit has been shrinking for the last two years.  If (...and it’s a big “if”...) the economy continues to grow at the same robust pace, the deficit will disappear within 3-5 years, depending on how big the Katrina spending effect turns out to be. 

Click to enlarge.

If we can manage not to screw anything up (i.e., if Capitol Hill goes into gridlock), the green star is a non-trivial possiblility within three years, and (dare I say) likely within five.  Is it a pipe dream to hope for gridlock on Capitol Hill for a few years?  No tax rate hikes?  No unpopular spending program cuts that perversely create a backlash of support for tax rate hikes instead of unpopular spending cuts?  Sure, maybe hoping for three years of gridlock is just a pipe dream—but it’s fun for me to contemplate.  I'm an optimist; I am hopeful that gridlock can be achieved and sustained. 

Anyway, here's the bottom line:  I have not seen enough data—yet—to feel comfortable making an actual prediction that we will reach green-star status as of mid-2008; the Katrina spending blip could push it out another year or even two.  But wouldn’t it be nice to see the deficit issue yanked out from underneath the gloom merchants, just in time for the presidential campaign?