by

The Basic Problem With Reinhart And Rogoff is …

The Business Insider highlighted a tweet from @larry_kudlow:

Trouble w/ Reinhart/Rogoff debate not stats. It’s this: Growth solves debt, not other way around.Reform taxes, spending, regs,money.

I agree with Mr. Kudlow that growth solves debt but disagree with him about his subsequent statement debt and growth. The basic Reinhart and Rogoff premise is unchanged regardless of whether you look at the original or the revised numbers, GDP growth rate goes down as you increase debt load. The revised GDP number goes down less severely than the original GDP number but it still goes down compared to lower debt levels. I think where Mr. Kudlow and I disagree is our assumptions about the potential economic growth and whether debt is relevant to potential GDP growth. He assumes that the US economy has a higher potential than it is presently showing and that a little additional stimulus will result in increased consumer spending and higher GDP growth. This is the traditional Keynesian fix for the economy. In his scenario the increased debt is not relevant because the marginal gains from trying to reach this higher economic potential are so great. My assumption is that that the economic potential is lower. Reinhart and Rogoff have shown that a higher debt level is correlated with lower growth so it is logical to conclude that the economic potential is lower, too. A country’s high debt load is not the cause of lower growth but it is a symptom that shows that lower growth factors have been in place for many years just like high blood pressure can be a symptom of heart disease. As an example let us assume that GDP growth over the last thirty years is a combination of increased consumer spending via debt and good demographics from the baby boom generation in their peak spending years. Let us further assume that the economy peaked in 2000 and we have been struggling to jump start the economy with economic bubbles and more debt. Under this scenario it is easy to see a future with maxed out consumers, young people straddled with college loans, and a baby boomer generation that is retiring. This scenario looks like a high cost, slow growth economy that is unresponsive to government efforts to stimulate spending just like the last ten years. In the last ten years we attempted to stimulate the economy into overdrive with spending on fighting two wars,  a big tax cut, and a large stimulus spending package focused on infrastructure and unemployment. It did not work. With these economic results to guide us, additional debt may alleviate the short term pain but is harmful to the economy in the long term. We tried every trick in the Keynesian stimulus book and we failed to increase the prospect for long term growth in the economy and employment. In contrast to the Keynesian stimulus solution where they encourage families to buy more more stuff they don’t need now, our economy needs the government to do no harm so that family spending can expand naturally and let the markets pick the winners and losers with less political interference. Stimulus spending by definition is designed to interfere with natural family spending decisions and get them to spend their money on something they do not want to buy now. In this context it is difficult to see the difference between an economic stimulus and a financial bubble. If a family with limited income growth is responsible for their creating their own wealth, it is natural that they will assume a more traditional viewpoint concerning debt and reject the decision making that comes from financial bubble/economic stimulus spending. Yes, families are smarter than the government when it comes to spending their money. For most of them it is a back to the basics economy in which to increase their wealth they need to do more with less. We tried to accumulate wealth with increasing amounts of debt and found out that it does not work. Now we are going back to the way my middle class parents accumulated their wealth. It worked!

So let us start down the list of cost cutting opportunities and some of the problems. Our electrical bills should be going down since we have record low prices for natural gas and coal. It appears the savings are going everywhere but to the customer. It is interesting that the administration has stated that they would like carbon based electricity to go up in price to make solar and wind generation more affordable. Are we “tilting at windmills” in our battle against carbon dioxide? A similar argument can be made for gasoline and its relationship with ethanol. Why are we letting the price of gasoline get whipped about by ethanol? Another big ticket item for the family budget is the cost of health care. Every healthy family agrees that we are overpaying for our health care and Obamacare is a failure at controlling costs. If Obamacare is not helping healthy people get more affordable health care, it is a failure. You cannot completely ignore the needs of the majority. It was silly to expect a politics ridden organization using a command and control organizational structure to be effective at controlling costs. If this was true then Russia would have an economy greater than the United States. There is nothing like a stack of 20,000 pages and a long list of exceptions to Obamacare regulations to remind us that this was the wrong organizational structure to fix our health care problems. This recipe for disaster did not work for Tennessee and is a questionable success in Massachusetts. On one hand Massachusetts expanded health care and on the other hand they have one of the highest cost health care costs in the country. Any idiot can expand health care coverage without paying for it. The trick is making the system sustainable and that is where Massachusetts is struggling. It all comes back to cutting costs. Trying to promote the Massachusetts experience to the national level is an example of the Peter Principle in action. Since we do not have a tradition of cost effective, sustainable government services, what we probably need is a modern day Rockefeller or Carnegie to work with and against the health care institutions and insurance companies to reform our health care system into a more cost efficient system from the ground up. I was reminded that in a lecture recently that these two men achieved their success by using research and development to aggressively cut costs so that they could sell their products at lower costs. They also were very flexible to market conditions. A real health care reform is not much different than our present system but with a greater emphasis on cost control and a different management style. We tried to ignore costs and failed. Steven Brill’s 22,000 word article in TIME reminded us that health care cost accounting is a nightmare that is not going away. It is amusing to try and think what Rockefeller would say about our health care cost accounting. We tried the big political solutions to health care like Obamacare and failed. Throwing more politics and money at health care does not fix the rising health care cost problem. Maybe if we want a smaller, less political solution like the Cleveland Clinic to work on a national scale we have to encourage each community figure out how they can replicate the best hospital practices and get out of the way. I have a lot more faith in a local hospital trying to compete with the Cleveland Clinic that anything coming from the federal government. If a successful company like Proctor and Gamble can make effective decisions using the one page memo principle, maybe our government needs to embrace a more strategic management style rather than a micro managing style. The “I’m from the government and I am here to help” management style used by Obamacare is creating a bigger health care problem by breaking the health care system faster than doing nothing at all. Since all health care is local health care, all health care solutions are by definition local solutions. If we want a solution to our health care problems, we should look no further than our local health care providers.

by

Universal Background Check

I am surprised that Greg Gutfeld has not created a special category for banned studies. The Washington Post Fact Checker looked at the background check issue and found that the numbers that the President and many others are using come from data collected in 1994 and published in a 1977 study. The problem is that the study had two estimates for the number of people who have purchased guns without a background check, a 40% number that includes gifts and family transfers and a 14 to 22% number which does not. Since the universal background legislation does not require background checks for gun transactions between family members, the Post argues that it is misleading to use the 40% number in the debate. Here are some of the quotes from President Obama that earned him three Pinocchios.

“Why wouldn’t we want to close the loophole that allows as many as 40 percent of all gun purchases to take place without a background check?”

–President Obama, remarks on gun safety, March 28, 2013

“FACT: Nearly 40% of all gun sales don’t require a background check under current law. #DemandAction”

–tweet from @BarackObama, March 28

So here is my problem with universal background checks. It is a pretty ineffective tool at controlling guns going criminals and the criminally insane. I assume we can all agree that we are not going to get background checks on gun sales to criminals. Criminals are dumb but most are not dumb enough to complete a background check that will fail. From our recent mass murders  we can see that criminally insane people are  functional enough to acquire weapons without raising alarms during background checks. Even if we happen to create the perfect gun control legislation for the criminally insane, the criminally insane people can easily choose  other weapons of terror such as fire, poisons, and bombs to express themselves. Unless we are willing to deal with the mental health issue, it is just a matter of time until we have our next mass murder. This time it is assault weapons. Next time it might be a bomb. Universal background checks are just another burden heaped upon honest, sane people. Once again we are reminded that no good deed goes unpunished!

by

Easter and Birthday celebration at Morlein Lager House

Easter and Birthday celebration at Morlein Lager House, originally uploaded by billhuber.

I celebrated Easter and my birthday at the Morlein Lager House. I had a nice and flavorful prime rib with an excellent Over The Rhine beer. This was one of the best prime ribs I have ever had and the beer was better than the bottled version. The beer would be a nice beer for me to try and brew at home. The pan fried potatoes were good, too.

by

Spring Time in Ohio

Spring Time in OhioIt is almost April and we have snow on the ground! Where is this global warming when you need it. I am anxious to start my garden. I just received my utility bill and updated my utility spreadsheet. Like the previous bills for this year this bill is higher than last year’s bill. The primary reason is that there was a higher number of heating degree days this year. Snow on the ground at the end of March drives home that point.

I continue to be interested in solar panel projects. Anthony Watts updated his solar panel project post with new info in the FAQ. It is a nice, comprehensive post but it did not provide me with any new information. The difference between his project and mine is the available sunlight. His location gets a lot more sunlight. According to the Wunderground Solar Calculator I can expect about $850 of solar savings per year. This leaves me with a 15+ year payback. I need this payback to be cut in half and some sort of energy storage to get me interested.

Spring Time in Ohio

by

Obamacare is Where Pragmatism and Cynicism Meet

My opposition to Obamacare is where pragmatism and cynicism meet. My health insurance premiums are going up faster than my wages and I cannot do anything about it. This is pretty galling for a healthy person who has not made an insurance claim in this century. If Obamacare cannot fix the largest part of the health insurance market, Obamacare as a health care reform is a failure. It is not even a good first step! So I hope for the best and plan for the worst. For the next two to three years I think that the individual health insurance market will be a better deal than the group health insurance market as I wrote in What if Individual Health Insurance Premiums do not go up as fast as expected? According to this Milliman report on health insurance in Ohio, the two biggest cost drivers in the individual health insurance market is pre-existing conditions and community rating. If we can fix these two problems then the individual health insurance market segment will continue to be more attractive than the group health insurance market. Community rating is just another arbitrary cost shifting scheme that disguises cost pressures. If you want market pressures to help reduce health care cost increases, you do not hide the costs. Since I would prefer that we have slower health care cost increases, community rating needs to be dramatically reduced or eliminated. The individual mandate is a really dumb solution for the pre-existing condition problem. It just needs to go away. Here is a more elegant solution to the pre-existing condition from the Heritage Foundation, The Right Way to Limit Pre-Existing Condition Exclusions. Yes, this solution on one page. Work smarter not harder!

Over 90 percent of Americans with private health insurance are covered by employer group plans where existing rules governing the application of pre-existing condition exclusions are not an issue.  Before passage of Obamacare, the law specified that individuals with employer-sponsored insurance cannot not be denied new coverage, be subjected to pre-existing-condition exclusions, or be charged higher premiums because of their health status, when switching to different coverage. Thus, group market, pre-existing-condition exclusions only apply to those without prior coverage, or to those who wait until they need medical care to enroll in their employer’s plan.

These existing rules represent a fair approach: Individuals who do the right thing (getting and keeping coverage) are rewarded; individuals who do the wrong thing (waiting until they are sick to buy coverage) are penalized.

The problem is that the same kind of rules did not apply to the “individual” (non-group) market””about 9.4 percent of the total market for private health insurance. Thus, an individual can have purchased non-group health insurance for many years, and still be denied coverage or face pre-existing condition exclusions when he or she needs or wants to pick a different plan.

The obvious, modest and sensible reform is to simply apply to the individual health insurance market a set of rules similar to the ones that already govern the employer group market.

Instead, Obamacare prohibits the application of pre-existing condition exclusions under any circumstances, thus encouraging everyone to wait until they are sick before buying health insurance. These perverse incentives are a recipe for disaster. To limit the effects of that disaster (of their own making), lawmakers included an unpopular individual mandate to buy health insurance in the health care legislation.

by

The Biggest Problem with the Middle Class Is?

If we believe this video that went viral on the internet, Wealth Inequality in America, the problem with the middle class is that a CEO make about 380 times more money than the average worker. This video is based primarily on the charts created by the Mother Jones article, It’s the Inequality, Stupid. The Mother Jones charts make it pretty obvious that they think the problem with the middle class is that the rich are paid too much. Their fix for the middle class is some  income adjustment on the wealthy.

Paul Caron argues that raising the Estate Tax will curb wealth inequality and spur economic growth, Using the Estate Tax to Curb Inequality and Spur Economic Growth. In his analysis the problem with the middle class is a wealth problem. The rich have too much wealth and redistributing their wealth via estate taxes is the most equitable way to fixing the middle class.

So lets see if I understand this problem correctly. The rich are paid too much and have too much wealth. For this privilege they pay the government a disproportionate share of all the income taxes collected. Okay, I get it that everyone is in favor of taking another million dollars from Warren Buffett or Bill Gates but what does that have to do with middle class wealth and income problems? Just maybe, the problem with the middle class is not the rich. It is not the poor. The problem with the middle class is the middle class. The problem with the middle class is they made bad life style decisions. Instead of saving and investing like the rich folks, the middle class took the easy way out and used long term mortgages, permanent credit card balances, and student loans to avoid or postpone tough decisions. The results are not surprising since debt seems to encourage bad decision making. If you accept the argument that this bad decision making has been going on for at least the last thirty years, then it is logical to conclude that the primary reason the rich are so rich is because the middle class has been so dumb with their money. Ploys to increase consumer spending and bubbles seem to be the favorite tools used by policy makers to extract wealth from the middle class and give it to the rich. When these ploys inevitably do not work, the follow-up strategy is to claw back some of the success of the rich. It is a never ending circle until the middle class has no more to borrow. It is the microeconomic solution to the unintended consequences of misguided macroeconomic policies. Increased consumer spending is the solution until … it isn’t!Nowadays we call it the Dave Ramsey strategy. It requires both sacrifices and tough decisions to work up the wealth and income ladder. The goals are simple, too. It is hard for a middle class family to live beneath their means but it is necessary if a family wants to pay down their debt. It is hard for a family to pay down its debt but it is necessary if they want to save the money for retirement and their kid’s college education. With a clear vision of where you are going, the hard work translates into results the middle class can see in their bank account. It does not depend on how much we tax the rich or cut the benefits for the poor and elderly. It depends on the middle class living beneath their means, making good spending decisions, and saving for the future. For those middle class folks whose parents lived through the Great Depression, they are embracing the financial strategies of their parents.

by

Openly Practicing Equestrian

I saw @KarlRove on a ABC panel discussion this morning where he cracked a “gay” joke where he described Ann Romney as an “openly practicing equestrian”. I am not sure why she deserves to be the butt of his joke. Her public figure stature ended when the election ended and I am not sure why he needs to tell “gay” jokes. Is making jokes about a Presidential candidate’s wife and alienating gay people part of his plan for the new and improved Republican party? Talk about someone not learning from history! Unfortunately this joke makes fun of Ann and every heterosexual man and woman who rides a horse. Is Karl making a “gay” joke about equestrians in general or just dressage riders? In either case he is making a joke about me. Once a week I ride a horse and I ride dressage just like Ann Romney. You could say that I am a dressage rider with an ambition to be a cowboy someday. It is not much of a stretch to believe that he is attacking the cowboy lifestyle, too. Yes, cowboys are “openly practicing equestrians”! Through cowboy movies the cowboy lore is known and loved around the world. So in one ill advised joke Karl has not fun of Ann Romney but of the cowboy lifestyle which is as emblematic of the American lifestyle as baseball and apple pie. Oops! That brings me to my second point. Since most equestrians are women, is this Karl’s attempt to be inclusive of women? How do you spell tone deaf? R-E-P-U-B-L-I-C-A-N

by

The Only Bird Eating from my Suet Feeder

I recently put up an upside-down suet feeder and have patiently been waiting for its first customer. I have a traditional type bird feeder nearby that has quite a traffic jam in the morning. Since I have low cost access to suet I thought that a suet feeder would be a nice addition to the bird feeding scene. Below is a picture of the only bird feeding on the suet. He is doing quite a job on the suet! I think it is a male Hairy Woodpecker rather than the Downy Woodpecker because of the beak and the red feathers on his head. Here is a description from Cornell’s All About Birds page on Hairy and Downy Woodpeckers, Visual comparison of Downy and Hairy Woodpeckers.

Overall size and bill size and shape are the most useful characters for distinguishing the two species in the field. There are subtle plumage features that can also be useful when a good close up view is possible.

 

by

Why There is Wealth Inequality

There is a lot of talk about fairness and income inequality in the media as they try to make wealth redistribution policies more palatable to the public. Don’t get me wrong, I do not have a problem with taking more taxes from Warren Buffet or Bill Gates. The problem starts when they start taking money away from me and I do not believe this is helping anything! When they take money away from me, I have to cut expenses elsewhere. In my case I cut my savings rate. The extra money taken from my paycheck reduces my retirement money and more dependent on social security. It is that simple!

As a country we have long since passed the point where we have a balance between spending and saving. Our defined pension plans and 401K plans are woefully underfunded and our social security system is a sham. The problem with the middle class is not income inequality or fairness. We are stupid! We make dumb decisions with our money and how we save. You hear this all the time if you listen to Dave Ramsey. Here is a quote from a John Goodman post, Why There is Wealth Inequality.

The greatest inequality of wealth holdings is among the elderly and the primary reason for that inequality is the different saving rates of people when they are young. Here is Noah Smith:

If you do the math, you discover that in the long run, income levels and initial wealth…are not the main determinants of wealth. They are dwarfed by…savings rates and rates of return. The most potent way to get more wealth to the poor and middle-class is to get these people to save more of their income, and to invest in assets with higher average rates of return.

Pointer from Arnold Kling.

Unfortunately the key idea we get from Keynesian economics is that increased spending is good for the economy and deficits are not important. Although I am skeptical that this plan ever worked, we can see that since 2000 this plan has definitely not worked. Here is the chart I created a couple months ago to show that relationship. For those unfamiliar with Mitchell’s Golden Rule, “the private sector should grow faster than the government”. I still prefer the stronger form which states the private sector should grow faster than the growth in government debt if we want to grow out of our mess. As a country if our economic policies are working, the green line would be lower than both the red and blue lines. If we look at the country as an individual investor, we need a greater return on our investment and this dependence on debt is not working!

by

Social Security Trust Fund and the Money Supply

Bruce Krasting wrote a nice article for Business Insider about a discussion on Social Security between Senator Ron Johnson and Paul Krugman. That triggered a few questions in me about the Social Security Trust Fund and the money supply. Is the Social Security Trust Fund already part of our money supply and how will the government monetize the financial obligation? Here is the explanation from the Wikipedia Social Security Trust Fund page. Obviously this is a completely different funding mechanism than most pension funds and is an almost polar opposite of the funding style used for the Post Office employees in which they are required to prefund the pension plan for the next 75 years!

It is instructive to note that the $2.5 trillion Social Security Trust Fund has value, not as a tangible economic asset, but because it is a claim on behalf of beneficiaries on the goods and services produced by the working population. This claim will be enforced by the United States Government although the precise monetary mechanism of enforcement is yet to be determined. In order to repay the Trust Fund, the United States government has three options, which may all be pursued to varying degrees.

(1) The government may issue debt by selling treasuries. Thus, $1 in debt to the Social Security Trust fund is replaced with $1 in debt to a different lender. This scenario would increase the tax burden on future generations if the interest rate is higher on the new debt. If the new debt is more expensive and government revenues do not increase sufficiently either through taxes of economic growth, the government would be forced to cut spending on other programs (such as Defense, Education, Research) or else default on all or part of the debt.

(2) The government may raise taxes. If taxes are raised across the board, ironically, by reducing take home pay for workers, the government could make it harder for the younger, working generations to invest and save for retirement. However, if taxes are raised only on those whose earlier tax cuts were partially offset by these excess FICA contributions, namely those taxpayers whose marginal rates were reduced from 74% to as little as 28% during the Reagan Administration, the younger, working generations will not lose any ability to save or invest.

(3) The government may monetize trust fund obligations by transferring the treasuries held by the Trust Fund onto the Federal Reserve balance sheet. In such a transaction, the bonds would become "assets" on the Fed’s balance sheet, and the Fed would create money "out of thin air" to purchase the bonds from the government. Under such a scenario, the bonds are converted into cash, which would then be used by the government to cover social security payments. This scenario would likely lead to increased inflation, as it would inflate the money supply without directly increasing the amount of goods and services produced by the economy as a whole.