The Skeptical Optimist

FQ.06.52: Favorite Quote for This Week

The real voyage of discovery consists, not in seeking new landscapes, but in having new eyes.
—Marcel Proust

Fifteen Stubborn Ironies for the New Year

The week between Christmas and New Year’s Day typically conforms to the 80/20 rule: it’s mostly used for reflecting on the past year, even though a few brave souls venture a prediction or two for the upcoming year.  Nonetheless, with apologies to Vilfredo Pareto, I’m throwing his rule out the window.  This will be a brief reflection on 2006, followed by a substantial prediction for 2007—and I’m 99% certain that my fifteen-part prediction will come true.       

What I relearned in 2006:
Most blog visitors like posts that are short and to the point.  They do not like lengthy dissertations.  Example: The most-visited page by far, in the two-year history of this blog, is the Pie Chart of Who Owns the National Debt.  I’m guessing it’s because it blows away, with one simple picture, the popular misconception that China’s share of our national debt is a mile-high tsunami headed our way.  In any case, one picture is worth a thousand words. 

Prediction for 2007:
Liberals and conservatives will take many positions bristling with irony and self-contradiction, and they’ll do it without batting an eye.  The reason I’m 99% confident it will happen is because it’s already been happening for a long, long time, and there’s still no end in sight. 

Today, while pondering the state of political and economic rhetoric, I ended up making a list of things that strike me as ironic.  As it turns out, the list is fifteen ironies long: five are typical of liberals, five are typical of conservatives, and five are nondenominational.  I had intended to explain all fifteen, one at a time, in this article, but then I remembered what I relearned in 2006 (see above)—so I decided to turn it into a series of five articles that will cover three ironies each.  Five bite-size chunks, one per week, is my plan.  To immunize myself against any accusation of bias or unfairness, each of the five articles will pick on liberals and conservatives in equal measure.  [Good thing I’m not running for office; this is no way to become big-man-in-caucus.] 

I’ve already thought of a title for each of the fifteen stubborn ironies, as well as a numbering scheme to help me keep them straight.  Each week, I’ll explain one irony from each category, and will target Monday or Tuesday for publication.  Here they are, grouped by category (L=liberal, C=conservative, N=nondenominational):

Fifteen Stubborn Ironies that will persist in 2007:

L1 - Intelligent Design Liberalism
L2 - Pro-poverty Liberalism
L3 - Pro-corporate-greed Liberalism
L4 - Anti-Keynes Liberalism
L5 - Pro-corruption Liberalism

C1 - Anti-defense Conservatism
C2 - Anti-America Conservatism
C3 - Pro-government Libertarianism
C4 - Anti-finance Conservatism
C5 - Anti-investment Conservatism

N1 - The Savings Bond Paradox
N2 - The Math Bias
N3 - The Forgotten Goal
N4 - Sanctifying the Forecast
N5 - Buying Off the Beast-around-the-corner

Look for the first in the series early next week.  In it, I’ll cover Intelligent Design Liberalism, Anti-defense Conservatism, and The Savings Bond Paradox. 

In the meantime, Happy New Year to you, your family, and your friends.  Notwithstanding what we keep reading in the headlines, we truly have a lot to be thankful for and optimistic about—largely because of investments and sacrifices made for you and me by Americans of the past.  I was reminded of that when I visited the Reagan Library last week; here’s a souvenir I brought back.  Click to enlarge.

Diversity/Inclusion Breakthrough in American Airlines'€™ Sky Mall Magazine

At last, the science of cartography has ended its questionable, centuries-old practice of ignoring dyslexics.  The booming new consulting industry known as Diversity and Inclusion appears to have made an impression even on cartographers, according to an ad in American Airlines'€™ Sky Mall magazine. 

While returning from a holiday vacation yesterday, I found the updated world map on page 17 of my free copy of Sky Mall.  The supply and demand curves for the inclusive map apparently cross at a hundred-fifty bucks, according to the ad.   

Click to enlarge. 

[...or maybe this is just the view from earth's core.  In any case, it's innovative.]

Dec 2006: USA GDP growth, Q3 final

Not much change in the GDP growth estimate for Q3.  The two-quarter trend is still showing a higher growth rate than the BEA's one-quarter method.  Brian Wesbury sees the pace picking up for Q4 '06 and for 2007. 

Here's the usual chart. 

Merry Christmas, happy holidays, and happy new year. 

FQ.06.51: Favorite Quote for This Week

The market is a wonderfully powerful engine for economic growth, but it runs much faster when the government turbo-charges it with strong financial and institutional support for education, science, and the free dissemination of ideas.
—Paul Romer

Grow or Die

There are only two kinds of problems in business: (1) growth problems; and (2) liquidation problems.   I read that a quarter century ago, and ever since then, I’ve never found a single exception to that truism.  Every problem I’ve encountered in business falls under one of those two headings.  And I can now add another tidbit of wisdom: Without exception, solving the growth problems is a lot more fun. 

Grow or die.  Expand or liquidate.  Or, as Red reminded himself (after leaving Shawshank):

Get busy livin’—or get busy dyin’.

Early in my career, I was extremely fortunate to have joined a company that, as the leader in its industry, was growing its market share—in a market that was growing rapidly.  A growing share of a growing market; it doesn’t get much better than that.  We had growth problems galore; we were profitable, we were working hard to keep up with the growth, and we were having hectic fun. 

Costs were growing rapidly—but that was good news, because revenues were growing even more rapidly, and it takes money to make money.  Sure, we found ways to improve the cost structure, but that, too, was a lot more fun because of the growth problem.  Bottom line: The stockholders loved the revenue-driven profit growth we delivered, year in and year out. 

There’s one thing about stockholders, though: they keep demanding profit growth, whether or not revenue is growing.  They have a real funny thing about that.  And guess how profit growth is delivered when revenue is stagnant (or worse, shrinking): cost-cutting, that’s how.  In a no-growth environment, cost-cutting problems tend to become more than “productivity” programs; they tend to be liquidation problems.  Cutting fat is always a good idea; cutting meat and bone is hardly ever a good idea.  In a no-growth environment, though, it’s easy for management to mistake investments in the future for discretionary costs—and sometimes the "solution" to the liquidation problem only accelerates the downward spiral.  Liquidation problems must be solved, but that doesn’t make them as fun as growth problems.

In any case, stockholders demand growing profits no matter what; it’s management’s job to deliver that; and, of the two ways to deliver profit growth—growing revenues or cutting costs—the only sustainable strategy in the long run is to grow revenues.  Here are two charts that illustrate the difference.  Profit growth through revenue growth is open-ended; profit growth through cost-cutting eventually runs into a dead end.  (That’s why most successful companies place significant emphasis on developing new products and services.)

I hope those are self-explanatory.  Those two pictures are a condensed summary of hundreds of individual experiences on both the “growth problem” and “liquidation problem” sides of the business management coin.  They are the microeconomic examples illustrating the principle of “Grow or Die.”

I have one last chart depicting how the “growth problem” scenario works for our economy as a whole.  As I’ve said before, a growing economy causes federal tax revenues to grow; the green and blue lines below show that relationship.  Another thing I’ve said before is that a measured, prudently managed deficit is also sustainable indefinitely.  (See this article, in which I suggest how to define “fiscal responsibility”—something the doom peddlers consistently shy away from doing.) 

Growth solves a lot of problems.  Not only is it the seldom-mentioned third alternative to the false-dilemma of cutting spending or raising tax rates, growth is an imperative for our macroeconomy, too. 

Wouldn't it be nice to hear some growth ideas from our politicians and doom peddlers for once? 

Red said it best: Get busy livin’—or get busy dyin’.

--------------

[And if you haven't watched The Shawshank Redemption recently, I strongly recommend writing that in at the top of your "to do" list.]

Concord in Seattle, Part 2: How to ignore the needle in the haystack

Part 1 was about the doomsday-is-near message delivered in late November by Concord to a Seattle newspaper editorial staff.  It’s preserved in a podcast; while listening to it, I was surprised by the disappointing lack of hardball questions from the staff.  All I could picture was an audience of wide-eyed editors, agape in agreement, nodding their heads like compliant robots, for the entire 52-minute financial Armageddon sermon.   

The exception was the ten-second needle in the haystack, at 24:50 into the podcast.  It was just about the only positive message in the entire meeting—and it was easy to miss, because nobody from the newspaper staff pursued it with any follow-up questions.  It was a statement by Alison Fraser, Director of Economic Policy Studies at the Heritage Foundation:

It's one thing to raise taxes that make it harder on all Americans, and it's another thing to do fundamental tax reform that makes the economy grow faster and get more revenues.

What?  Did she say an economy that “grows faster” is an alternative to painful tax rate increases that hurt all Americans?  At the very least, I expected somebody to say, “Hey, if you really believe that, then I’ll have whatever you’ve been smoking!”  That would at least have started the ball rolling.  But the only thing that happened was an immediate change-of-subject.  Why didn’t anyone from the Seattle Post-Intelligencer ask her any follow-up questions? 

Even though close to half of the feedback I get comes from teachers, engineers, scientists, and financial people, I find it impossible to believe that nobody else—including journalists—can understand the irrefutable fact that higher tax revenues do not necessarily require higher tax rates.  Taking in 18% of a $20 trillion economy is more tax revenue than 18% of today’s $13 trillion economy.  Where are the questions or ideas about how to get to $20 trillion economy faster? 

Anyone who ever got a raise or promotion, then examined their paycheck afterwards, should understand it easily, because their tax withholding dollars and their take-home pay dollars both go up simultaneously.  That’s a big microeconomic hint about what happens to the whole economy when millions of people get raises and new jobs.  [That’s what economic growth is: millions of people get raises or promotions for becoming more productive, many get new jobs in new industries, new jobs keep replacing old jobs, and the median standard of living keeps increasing because of all that growing productivity.  Add it all up to a grand total; that’s what “economic growth” means.]

Has nobody at the Seattle Post-Intelligencer ever received a raise or promotion?  If they have, did they examine their subsequent paycheck and maybe think about the dynamics—maybe just a little?  If so, then why didn’t they ask Alison Fraser to explain in more detail why the economy would deliver “more revenues” when the economy “grows faster”?  Or how policy changes, such as tax reform, might help the economy “grow faster”?  Why didn’t they ask at least one of a million other possible growth-related questions? 

Alsion Fraser is a Director at the Heritage Foundation, one of the few think tanks that actually understands (and analyzes, and publicizes) the dynamic effects of economic growth.  Why does nobody raise questions along those lines?  Why is the false-dilemma doomsday message (cut spending or raise tax rates) so effective at overwhelming the audience’s imaginative powers?  I just don’t get it, even though I see it happen time and time again.  The meeting in Seattle was no exception. 

Please do not mistake this article as my tacit agreement with all of the Heritage Foundation’s conclusions about the future.  Let’s face it, when it comes to forecasting, any group of ten experts will yield at least twelve opinions, each with a plausible justification, about future outcomes.  (Heck, I can envision at least 540 different scenarios all by myself, as I wrote a year ago; see this link.) 

However, please do take this article as my 100% approval of the message Heritage attempted (unsuccessfully) to communicate to the editorial staff of the Seattle Post-Intelligencer: Tax reform would boost growth; and growth, all by itself, increases the government’s tax revenues.  All by itself, without tax rate increases.  (Sufficiently?  Maybe, maybe not; but why oh why aren’t we at least talking about it, for crying out loud?)

And if you know anyone who finds the growth story hard to swallow, tell them to take a look at the real-live demonstration the economy is giving us right now, right before our eyes: Growth is the reason federal tax receipts are trending towards a balanced budget within two years—just in time for the next big election. 

Growth is overwhelmingly important.  Nonetheless, with very few exceptions, it is universally ignored by our country’s talking heads, and by the gaping groupies of the doomsday stump speech. 

FQ.06.50: Favorite Quote for This Week

The computer, like the steam engine, produced an economic revolution, and for precisely the same reason: it caused a collapse in the price of a fundamental input into the economic system, allowing that input to be applied to an infinity of tasks that previously had been too expensive or simply impossible. 
—John Steele Gordon, An Empire of Wealth: The Epic History of American Economic Power

Interest rate inversion is deepening

I’m not sure how long this can last, and I’m still not in the business of forecasting interest rates.  Here’s the usual chart, showing the deepening inversion.  Click to enlarge.

How to keep inflation in check: 60% annual deflation

By accident this week, I discovered that the deflation rate (yes, deflation, not inflation) on at least one important product has been 60% per year for the last six years.  On top of that, it looks to me as if the quality of the product in question has improved as well. 

Six years ago I paid $300 for a popular WYSIWYG HTML website editor.  Yesterday I paid zero for a brand new (better) one—Nvu, pronounced “n-view”.  But let’s say I paid $1, just so we can calculate a deflation rate.  That comes to sixty-plus percent deflation per year. 

I like it when that happens to stuff I want to buy.  (By the way, podcasts are priced right, too: free.)

With enough excellent products doing that in key sectors of our economy, we wouldn’t need to worry about inflation.  (I wonder if WYSIWYG HTML editors are in the Commerce Department’s inflation basket.)