The Private Sector

[DRAFT] Carpe Diem posted the following chart, which I’ve seen elsewhere. I find it interesting because of the strong rightward lean of that blog.

So, we can see the Obama administration instituted a massive increase in government spending which is crushing the private sector and holding back growth! Oh wait… that’s not the story at all. To be fair, Mark Perry was not trying to make that point but I do hear it often enough. Many fair, and strong arguments can be made against big government. Many fair, and strong arguments can be made against the Obama administration. The argument that Obama has ballooned the size of government and is killing growth just simply does not hold any water.

Uncertainty vs Uncertainty

[DRAFT] “Uncertainty” plays a major role in the debate about what ails the US economy. Conservative bloggers, columnists and economists tend to emphasize the role of uncertainty and blame the sluggish recovery on government actions which may increase uncertainty. Tax policy and health care reform are the two big ones. I definitely have doubts about some of their specific claims in regards to the degree of uncertainty present in these issues, and the degree to which current policy (and the current administration) is responsible for this uncertainty. But that is not the point of this post. What is missing from the discourse is a clear agreement about what are the important causes and drivers of uncertainty for both businesses and consumers. The idea that uncertainty can have negative economic effects is not a new or controversial idea, even for those on the left. Keynes himself talked about it (uncertainty-and-the-keynesians).

The real disagreement is about the causes and drivers. Investment and spending are driven by expectations of future income, sales for businesses and wages for consumers. I personally feel (without a lot of hard evidence to back this up) that uncertainty about whether you are going to have job 6 months from now is going to hold spending back much more than uncertainty about whether the tax rate on your income will be 22% or 27%. Likewise for businesses, I think uncertainty about the ability to move future products holds back investment and growth a lot more than the possibility of increasing health care costs.

I would really like to see this argued and discussed. Instead I see the left-leaning pundits yelling “DEMAND” while the right-leaning shout “UNCERTAINTY”, without much of an agreement about terms. It’s really both.

Another household-US Gov analogy

What would you do if someone offered you a loan at a negative (real) interest rate for 10 to 20 years? Would you take it? If so, how would you use the money? Hopefully, you’d invest it in something that would give a positive return – maybe buy a house, or some other large capital investment.

For the United States government this scenario is not hypothetical. Real interest rates are, and have been negative. This is not some artifact of high inflation expectations (which would show up in a large spread between real and nominal yields). This is not some monkeying with markets. This represents the fundamental problem that due to the continued slow worldwide  economy there is a scarcity of good investment opportunities – both businesses and at this point countries in Europe (supply) , and a glut of people who are looking to cut back and save more (demand).

Yield Curve

The fundamentals demand that the government undertake long-term investments – build schools, fix bridges, invest in human capital (make money by giving grad students interest-free loans). This makes sense even ignoring the Keynesian argument for stimulus. These things need to be done, and should be done while borrowing costs are so low. But alas, politically we’re not even going to talk about these facts or these options.

Housing

I have long been a proponent of something like this (http://www.slate.com/blogs/moneybox/2012/07/25/jeff_merkley_s_plan_for_underwater_homeowners.html). While I have not been following the housing market that closely, my one hesitation is that the time for this may have passed. The bubble began bursting almost five years ago.

What we want to happen is people stay in their homes, continue to pay something. Empty homes benefit no one, due to the lack of maintenance vacant homes can have serious spill over cost to neighbors as well. The difficulty is how to price the sale from the mortgage holder to the government in such a way that neither the banks nor the American people get screwed over (though the first one is negotiable). I am not sure a method could be worked out.