Monthly Archives: August 2012

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Greenwald Shows How Political Campaigns Are Lacking Substance

Glenn Greenwald has an excellent piece today that shows the inauthentic nature of the presidential campaigns.  He also shows the ridiculous level to which CNN has sunk in what it thinks is journalism.  The title of Greenwald’s article is a little deceptive since he goes after both Ryan and Obama.  I addressed the same topic in a previous post, discussing some public opinion polls that show how misinformed voters across the political spectrum are.

The Real History of US Deficits

Since Republicans like to talk about their commitment to reducing the debt, a look at history should help.  The chart below displays each year whether the government had a surplus or a deficit and by how much as a percentage of GDP.  Let’s look at the presidencies of the past 30 years and see what happened.

Reagan: 1981-1989 – Deficits spiked in 1982-83 and continued to be well above the rates before Reagan.  There is a sharp reduction by 1987 and 1988, but still roughly in line with the level of deficit of the 1970′s.

George Bush: 1989-1993 – Debt levels increased again under George H. W. Bush.  Not to Reagan levels, but an increase nonetheless.

Bill Clinton 1993-2001 – The trend under Clinton is unmistakable.  Deficits steadily reduced throughout the 90′s and reached a surplus in the late 90′s and early 2000′s

George W. Bush: 2001-2009 – Another unmistakable trend.  Surpluses were abandoned and the deficit steadily increased.

Barack Obama: 2009-present – Republicans like to blame Obama for the level of debt under his watch, but there is absolutely no way anybody could expect a low level of debt after the financial crisis.  Deficit to GDP is is also larger because GDP decreased in 2009 and the recovery has been weak.   The level of the deficit has been decreasing every year of Obama’s presidency.

So over the past 30 years we have had Republicans increase deficits, a Democrat who had the first surplus since the 1960′s, and a Democrat who inherited a terrible economy but has reduced deficits every year of his term. How are Republicans getting away with portraying themselves as fiscal hawks?

(Image above from this Council on Foreign Relations article.)

Overview of the Fed and Quantitative Easing

Federal Reserve Chairman Ben Bernanke seems close to having the central bank engage in “Quantitative Easing.” A lot of people may wonder what in the world that means.  Normally I post things more opinionated, but I thought this would be a good tutorial. For the benefit of everyone, I’m going to discuss what bonds are and the role of the Federal Reserve before getting to quantitative easing, or QE, as it’s called.

What Are Bonds?

If you buy a US Treasury Bond the government is promising to pay you a fixed amount over a period of time, which can range from weeks to decades. Let’s imagine you bought a 30-year bond for $100 that pays at 5%. This means you will get $5 per year from the government for 30 years. (There are bonds that protect against inflation but that gets more complicated). You have loaned the government money and they are paying you interest.

What’s different about a bond from a normal loan is that the price of the bond can change, but your interest payment stays the same, in this case $5. The price of a bond is determined by supply and demand.  Say a lot of people wants to invest their money in bonds, so the demand increases.  You can sell your bond on the open market at say $120 instead of the original price $100.  But if I buy your bond, I still only get $5 per year, even though I had to pay more.  This means the rate of return on the bond (called the yield) will be about 4.17%   The price of the bond has gone up and the interest rate (yield) has gone down.  Likewise, if the price of a bond goes up, the interest rate (yield) goes down.  They are always in an opposite relationship.

Interest Rates

One major role of the Federal Reserve System (called the Fed for short) is to set interest rates on government bonds.  If interest rates on government bonds are really high, then people will rather keep their money in bonds than investing in the economy.  This may be good for individual portfolios, but it can slow down the economy.  So the Fed may reduce interest rates to give an incentive for businesses to invest that money rather than let it accumulate interest.  Likewise, if the economy is really booming and there are concerns about inflation (prices increasing), then the Fed may increase interest rates to give an incentive to buy bonds instead of investing money.

Quantitative Easing

At a basic level, the Fed controls the amount of money that circulates in the US economy. It does this through what are called Open Market Operations where it either buys or sells government bonds.  The Fed often does this, but Quantitative Easing (called QE for short) is when it is done on a larger scale in a major economic downturn.  For example, during QE the Fed is more likely to buy long-term bonds, while it usually only buys short-term ones.

What is most important is that during QE the Fed buys a huge number of government bonds from the public.  Banks own a huge amount of bonds, so after QE banks will now have money they can use instead of it being stored in a bond.  When the Fed buys a lots of bonds, the increased demand leads to an increased bond price, meaning interest rates (yields) decrease.  However, right now because of the poor state of the economy the Fed has already cut rates to close to 0%.  So by buying lots of bonds the Fed is not seeking to lower interest rates.  Rather it is effectively putting cash into the vaults of banks (it is all done electronically now of course), with the hope that since banks have more money on hand, they will be more willing to give out loans.  Those loans will lead to increased investments by businesses, which will hopefully get the economy going again.   Ideally, when the economy is in better shape the Fed will sell those bonds again, restoring a more normal money supply.

Republicans seem to enjoy trashing the Fed, such as Rick Perry’s somewhat famous accusation of QE being treasonous.

In any case, I hope this is helpful for people.

Unemployment Rate and Murder Rate Partially Linked

After the latest shooting today in NYC, I started wondering if the bad economy might have anything to do with the recent number of mass shootings.   What I did can hardly be called a full analysis, and as the WSJ shows the correlation-cause relationship is hard to pin.  But I found two things.  First, that there is a positive correlation between the US unemployment rate and the homicide rate for every year between 1948 and 2006.  The r-squared is 29.5% with p < .0001.  (For the non-statistically inclined, that means that 29.5% of the variation in the homicide rate is explained by variation in the unemployment rate.  The p value means that the probability of this relationship being due to chance is less than .01%)

What was also interesting is that there is a stronger relationship between the unemployment rate of the previous year and a given year’s homicide rate.  So the unemployment rate of 2004 is a better predictor of the murder rate in 2005 than 2005′s unemployment rate.   In this case for the years 1949-2005, the r-squared was 36.6%.

I don’t see how there could be a one-to-one connection here, because it would almost seem like the homicide rate drops before the unemployment rate.  But especially in the 70′s and 80′s they seem to change together.  This is fascinating. I’d love to know more about what is behind this relationship.

Charts with sources and more info below:

Unemployment Rate and Homicide Rate 1948-2006 (Homicide Rate per 100,000 people, Unemployment Rate as Percentage)

Same Year’s Unemployment (x-axis) and Murder Rates (y-axis)

Homicide Rate on y-axis, Unemployment Rate on x-axis
Homicide Rate is per 100,000 people, Unemployment is percentage;
Unemployment Source: Bureau of Labor Statistics
Murder Rate Source: Bureau of Justice Statistics

 

Previous Year’s Unemployment (x-axis) and Murder Rates (y-axis)

Homicide Rate on y-axis, Unemployment Rate on x-axis
Homicide Rate is per 100,000 people, Unemployment is percentage;
Unemployment Source: Bureau of Labor Statistics
Murder Rate Source: Bureau of Justice Statistics

 

 

The Basics on Growth and Deficits

[Update: Paul Krugman raised an important point today (which he actually got from Dave Weigel), which is that the Republican response to the Congressional Budget Office's report on the "fiscal cliff" of Bush tax cuts' potential expiration and new spending cuts contradicts their concerns about the deficit.  If the deficit was the main problem with our economy right now, then the "fiscal cliff" should be welcomed for its balanced budget effects.  But Republicans want all the spending cuts and none of the taxes.  After all, they want government in a bathtub.]

The economy is a complicated place, but sometimes the basics are not complicated.  All the concern about deficits and the debt ignores some basic facts about our current situation.  First, if we look at government outlays (what it spends) versus receipts (when it takes in) and compare it to the GDP growth rate, it becomes obvious that receipts go down and outlays go up when GDP growth is smaller than usual.  Or in the current situation, when the GDP growth becomes anemic.

Look at the following two charts and you’ll see this is true for the financial crisis and subsequent plunge in GDP growth.  But it is also true for other periods when GDP was growing, but at a slower pace, such as 2000-2003, when it was under 5%.  Receipts start going back up in 2004-2007, when GDP was 5% or higher.

What is clear is that the primary way to achieve balance in the deficit is to grow the economy.  How do you grow the economy?  The government can either cut taxes or increase spending.  Cutting taxes can help some, but in the current economy demand is so low that people will (understandably) save a good chunk of that, not helping growth much.  But if you increase government spending the tax base is broadened and unemployment insurance and other transfer payments decrease.  As a side benefit, government stimulus can promote moderate inflation, decreasing the burden of private debt among the population, which will increase consumer spending.

The most important point, though, is that deficits did not cause our economic problems.  Even if we were to magically have a balanced budget tomorrow, our economy wouldn’t necessarily get better.

 

We Should Have Supported Mubarak? Seriously?

The recent forced retirement of several Egyptian generals by President Morsi brings to light some commentary on the Egyptian situation that is quite mind-boggling.  As a case in point, Charles Rowley, professor emeritus at George Mason University, blames President Obama for supporting the ouster of Mubarak when it risked bringing Islamist militants into power.  Rowley writes of the removal of the generals:

If President Morsi’s counter-coup holds, the follow-up issue is whether The Islamic Brotherhood will then impose its own dictatorship over the Egyptian population.  If so the Coptic Christians had better run for the borders, together with the leaders of Mubarak’s former military junta.

All these issues were clearly on the table when President Obama supported the internal coup against President Hosni Mubarak, a loyal ally of the United States, during the Arab Spring.   I doubt that President Obama will find President Morsi supportive of any of his expressed goals, most especially that of preserving Israel from military attacks in the Middle East.  On the other hand, perhaps that expressed commitment  is not seriously on President Obama’s  real agenda.

Congratulations once again, Mr. President!”

First, to call the overthrow of Mubarak a “coup” is misleading.  It was not as if there was simply a power struggle between different branches of the government.  The overthrow of Mubarak was due to the courageous, awe-inspiring protests of the Egyptian people.  It is also misleading to say that Obama supported the coup.   When it first broke out in January 2011, Secretary of State Hillary Clinton said:

Our assessment is that the Egyptian government is stable and is looking for ways to respond to the legitimate needs and interests of the Egyptian people.”

This was clearly a statement of support for Mubarak, especially given the ludicrous statement regarding Mubarak’s regime looking to respond to the needs and interests of the Egyptian people.  As Amnesty International stated in a condemnation of the government’s crackdown on peaceful protests in 2011,

Undue restrictions and sweeping measures under the nearly 30 years of state of emergency have routinely been used by the Egyptian authorities to quash the legitimate exercise of the rights to peaceful protest and assembly.”

Clinton also made it clear that the US was not looking for Mubarak to leave, talking vaguely about transition to a “real democracy.”

The Obama administration later looked for a way to get Mubarak out of power when it was evident that the regime wasn’t stable after all, but the administration was hardly an enthusiastic supporter of his overthrow.  Hillary Clinton was actually greeted by protesters on her recent trip to Egypt.

So why does Rowley blame Obama?  The only plausible interpretation is that Rowley believes Obama should have done everything in his power to keep a dictatorial regime in place, because it allegedly served US interests.  This is not only profoundly anti-democratic, but rather shocking when the record of Mubarak’s record on torture and other human rights abuses is recalled.  If there is another way to interpret his post, I would love to hear it.

 

The Under(and Over)Estimation of Catastrophe

Reuters has a piece today called “Are Israelis tough enough for a long war with Iran?” Some shocking points emerge out of it. One is the following quote from Defense Minister Ehud Barak:

“Defense Minister Ehud Barak estimates 500 Israelis would die should a strike on Iran, which denies seeking to develop nuclear weaponry, turn into a regional exchange of fire.”

I’m assuming that refers only to immediate military deaths, because if war broke out with Iran, Israel would likely face another war with Hezbollah, and attacks from Hamas and other armed Palestinian groups. Violence could spill over into Shiite Iraq.  It would be a boon to al-Qaeda like groups. So we’re talking about a lot more than 500 Israeli deaths. Of course, the deaths of non-Israelis would be disastrous as well, and probably far greater in number.

A second point that is Netanyahu sees a “second Holocaust” on the horizon. Does anyone really believe that Iran is going to be so suicidal as to drop a bomb on Israel so they can go down in flames but at least being able to claim they killed all the Jews? That’s certainly not how the military sees it, as evidenced by Defense Intelligence Agency Director General Ronald Burgess’ 2010 testimony before Congress: (see the conclusion)

Iran seeks to increase its regional power by countering Western influence, expanding ties with its neighbors, and seeking a leadership role in the Islamic world. Diplomacy, economic leverage, and active sponsorship of terrorist and paramilitary groups are the tools Iran uses to drive its aggressive foreign policy. Nevertheless, internal security remains the regime’s primary focus. While it is unlikely to initiate a conflict intentionally or launch a pre-emptive attack, Iran uses its military forces to defend against both external and internal threats. (Italics mine)

Whatever threat Iran may be, it is not a genocidal, maniacal state. It is certainly a dangerous one to its own people, sharing the company of most Middle Eastern states. What does the Middle Eastern public think of Iran’s nuclear ambitions? As I noted in an earlier blog post, a Brookings Institute poll of the Arab public found that 64% thought Iran had the right to pursue a nuclear program, even though a 35% plurality thought it would have a negative impact on the Middle East. When asked what two countries were the greatest threat, 71% said Israel, 59% said the US, while 18% said Iran.

Increasing the threat level is going to drive Arab opinion even further against Israel and in favor of Iran, ultimately leading to greater violence between Iran and the Arab World and Israel. Israel will not be safe as long as it continues to exist as a Spartan island. On this point, the same poll discussed above also showed 67% of the Arab public was ready for peace with Israel if it returned to the 1967 borders.

The real potential catastrophe is what will happen to the Middle East if Israel goes after Iran. While no one should want Iran to have a bomb, a second Holocaust is just fear mongering.

Democracy Now on Paul Ryan

Ryan’s policies are scrutinized quite thoroughly here…

Mainstream Economics Anyone?

Mainstream economics tells us (quite logically I believe) that the multiplier effect of government spending is greater than that of tax cuts. That is to say an increase in government spending increases GDP more than a tax cut of the same amount. Why? Because if I have a tax cut, I am likely to save some of that money. The government can inject money directly into the economy. That obviously doesn’t mean there should be extremely high taxes and only government spending. But it does make us ask what will happen to the economy under Ryan’s budget, since he wants to massively reduce government spending.  That may not be the best idea.

 

Political Theater Is Absurd

 

Much has already been said about Romney’s pick of Paul Ryan as the VP candidate. While it isn’t even hidden that Ryan’s plan will cut services to the poor, while decreasing taxes on the wealthy, that is not what I want to focus on here. What gets me is how orchestrated these political campaigns are for public relations effect. Introducing Paul Ryan in front of a battleship? The inspirational music that keys in as he approaches the podium? It is all so phony and fake with absolutely zero political content.

Not to put this all on Republicans. When Obama introduced Joe Biden in 2008 in what was so clearly aimed at making Biden appear as a working class guy. Obama referred to Biden as a “Scrappy kid from Scranton.” Joe Biden came out to Bruce Springsteen’s “The Rising” (go to 12:50 of this video).

My concern is not just that this is corny and cheesy, which is obviously the case. What really gets me is that politics has become like any other kind of marketing, where campaigns follow the polls and say the right things at the right time and play the right kind of music, so that someone will be more likable. Trying to reach people on an emotional level like this devoids politics of content and real debate.

The reality is that the debate is complicated. For example, I have a hard time understanding all the different aspects of economic policy, whether presented by Democrats or Republicans. But we should learn about them and discuss them. Not distract ourselves with petty showmanship. This partially explains the results of a December 2010 study by World Public Opinion. 56% of voters in the November national elections said they had “encountered information that seemed misleading or false.” What’s worse is that people were misinformed on the issues. 40% thought TARP was initiated under Obama, not George W. Bush. Liberals had their own misinformation, believing that the US Chamber of Commerce was using large amounts of foreign money to fund campaigns.

The part of the study we should be most concerned about is that people who watched less news were less likely to be misinformed!!! The mass media is terrible on political theatrics, buying right into it. They will discuss image and personality until the cows come home. What if they asked candidates, “Is it really necessary to make political events so theatrical?” They could be far better gatekeepers for the public. Perfect example of terrible media coverage right here.