shot in the arm
10 Feb 2005 05:16 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
kaigouHere's where we get into economics.
The first thing to bear in mind while reading economics terminology is that the labels for things are not value judgments. These are simply the terms used; to say something is 'weak' or 'strong' does not necessarily mean 'bad' and 'good', respectively. It's just what it's called.
So, let's start with where we are right now.
We are operating in a deficit, and have a very weak dollar. Both stimulate the economy. A somewhat weak dollar does not--and I cannot emphasize this enough, because it's a common misunderstanding--mean that our country is failing. It simply means when compared to a stronger currency, the USD purchases less; it doesn't mean that the USD is in 'bad shape' or that being 'weak' is something we should avoid. In fact, being marginally 'weak' can be a positive. During times of weak USD, it's cheaper for external sectors (like Japan and China) to purchase exports: finished goods, Federal bonds and equities, even internal resources like factories, businesses, and real estate. These countries want the Federal bonds and equities for the same reason SSA (and regular American citizens) invests in them: because there is nothing more stable, on this entire planet, than our Federal bonds and equities. And when the dollar is weak, these equities (along with other resources and exported products) become more affordable, which means more people and governments will invest in our economy.
A (minor) deficit stimulates the economy as well, for simple reasons. The Fed Govt takes in, say, $1K, and spends $2K. If the Fed Govt were to pay for all its expenditures with incoming, that would mean people would be taxed for the other $1K. But they're not - which means we, collectively, have $1K more to spend in the open market. Meanwhile, the Govt is also spending in the open market, with that extra $1K it's got. We're all spending. Market is happy. Spend, spend, spend, strong economy...with a rising federal deficit. So you can see there's good in some level of deficit, and this is why in short-term economic bad points, the govt will cut taxes. It lets people have more disposable income with which to spend, thus boosting the economy, and we're pulled out of the short-term dark spots.
The important key is 'short-term.' The use of a temporary overspending point is an old trick that's been repeated many times, and not just by our government. Here's a microeconomics example (micro meaning it's on the personal, household level). Let's say your job sucks, but you don't have a car. If you did have a car, you could commute and then you could work a better job that's a little farther away. So many people will then go purchase a car, put the debt on credit--effectively, temporarily putting themselves way in the red (on paper)--and then go out and get that job. Once the job situation has improved, the debt of purchasing a car before one has all the cash in hand is now resolved because one's income is higher. It's a temporary overspending to achieve more incoming down the road. If, on the other hand, you don't get a new job for whatever reason, you're looking at a much higher debt than you can pay on your current salary. You'll either need to get rid of the car, come up with additional income to pay for it, or watch it get repossessed early one rainy Tuesday morning. Go you.
The second element of 'weak dollar' and 'minor deficit' is that both, to be effective, must be relatively small. You don't want a huge deficit--only a slight amount. This isn't like pregnancy where you are or aren't pregnant; it's possible to be 'a little weak' or 'a small deficit'. But it's also possible to be 'a little strong' or have 'a slight surplus'. In economics, the danger zones are those areas farthest away from the point of balance. A huge surplus holds just as many dangers for an economy as a huge deficit (if in different ways). Imbalance is bad, except in moderation, you could say.
For instance, when Reagan began his first term by dropping taxes back in 1981, this was a tested economic move. It stimulates the economy by letting more money circulate, with the hopes that things will pull back together. Once the situation's improved, taxes can go back to their regular level and the economy will continue to flourish. Note that when Clinton entered office, one of the first things he did was to raise taxes, despite a number of doomsaying predictions this would crush the economy. In fact, the economy flourished like it hadn't in nearly twenty years. That's the other important thing about economics: nothing is really black and white. You could say raising taxes is bad, but from an economic standpoint this isn't always true. The only true influences are precendent (has it been done before, where, how, when, and why), and timing (what's the situation right now).
When Bush lowered taxes at the beginning of his presidency, we had a grand surplus, a huge surplus. We were seriously high on the hog, in some ways. But the dot-com bust (and ensuing cascade failure)--and then 9/11--slammed into our economy, and the idea was that by cutting taxes, the economy could be jump-started back to its normal level--just like you or I buying that car so we could commute to a better job. However, two things happened: the economy didn't bounce as much as expected, and the taxes were never raised back to their normal level. In personal terms, this is much like saying: you didn't get the new job, and you kept the car. When Bush continued to increase spending to the point of eating that entire surplus, this was much like saying not only did you keep the car, you went and bought a new house, a new boat, and a new home theater system--all while still on your original measly income.
Keep in mind that the surplus from Clinton's years cannot entirely be laid at Clinton's feet. It's a combination of technology hitting the market at the right point, the economy's interaction with foreign markets, people's own impressions (which lead to more or less spending as they become more or less comfortable), and a whallop of some wise economic practices from Clinton. His administration did not play the 'tax and spend' like traditional Dems, but raised taxes and did not raise the government size to balance. Instead, the goal was to knock down the deficit that had grown over eight years of Reagan and four years of Bush Sr. In eight years, the administration not only lowered the deficit, but came in with a surplus. So Clinton's years weren't just successful at, say, in saving $1,000, but in also paying off the $1,000 owed previously. If you start at $1,000 in the hole, you'd have to earn $2,000 to get up to a positive point of $1,000. It's simple math, but you can see just how productive we were as a nation for eight years. We pretty much ruled the planet on an economic level. We were going gang-busters.
However, it's five years later, and we've now not only used up that entire surplus--moving in the opposite direction--but sit here with an account deficit in the billiions. Four years to undo eight years of work. We've also got a trade deficit that's larger than ever (but this trade deficit has been growing; we were in a trade deficit to some extent even during the Clinton years--remember, a slight trade deficit=weak dollar=can be good for economy). Our economy is starting to sag under the weight of the twin deficits. We're slowing down on growth--we just can't reasonably sustain the level we'd held for so long because at some point we will max out. And our job situations aren't getting much better, either. Our dollar is weakening to the point that foreign sectors are starting to see us not as a good investment but cheap and possibly heading towards worthless.
The next question, then, is where we go from here, in an economic sense.
One thing to remember about life with a large deficit: the bigger the deficit, the higher the risk that inflation will become an issue. Think of it this way: if you make $20K in one year, but spend $40K, you're spending double your income. Banks are going to look at you as a bad risk, and will raise your interest rates. Your money--the reliability of the principle on your debts--is in question. So the banks want to make sure they get their money for their loan to you, covering their costs. Your previous good credit may have gotten you interest rates at 9% on your plastic, but any new loans will have higher rates, because you're a risk. 15%, 20%, even higher. While macroeconomics (national economics) operates with slightly different mechanisms, the idea is pretty much the same. The more money you owe, the more you're going to pay in interest and the more inflation looms on the horizon.
Clinton's approach--adapting the traditional Repub fiscal conservative path--was to raise taxes while keeping government's costs steady. Like taking a second job, this begins the work of paying down the debt. Decreasing our deficit does have positive impact on an economy. In a sense, it's like improving your credit, so interest rates can go down, inflation goes down. It's not the easiest way to get there (and no fun for us taxpayers) but in a manner of speaking, we had already spent the money via our government. To complain about higher taxes to pay our debts is somewhat akin to purchasing a car and then whining when you get your monthly statement.
The contrast with Clinton's approach is Reagan's approach, back in 1981, when we hit one of the worst recessions since the Great Depression. I know a lot of people who read my journal might not have even been born in 1980, and I wasn't exactly in the working world myself, but believe me, the news each night was pretty dreary. My parents bought their house in 1980 with an interest rate of fourteen percent--and they had excellent credit, with a fat downpayment from the sale of our house in Alabama. I learned later that my parents were thrilled to achieved such a low interest rate. When I bought my townhouse in 2000, I recall fussing about getting an eight-point-five percent interest rate. Man, that was high! Why hadn't I bought a year or two earlier? I could've gotten seven, six, even five! But fourteen percent!? Yeah, well. That's one example of the difference between a recession and good economic times. When Reagan entered the White House, the economy was tumbling downhill, but he had a plan to fix it.
Supply-side economics.
It failed, but it's important to know how it failed, and to understand the theory, so you can recognize it when you see it. Using your personal household as an example, supply-side economics is when you put money into the economy via the suppliers, not the, err, demanders. Giving a tax cut to private citizens would be demand-side economics; that is, you're putting more money in the pockets of the people who spend the money, in the hopes that they'll go out and use it. Giving a tax cut to businesses who supply things is supply-side economics.
The analogy would be if you're a grandparent with two grandchildren. The kids are each looking at going off to college. If you practice the usual 'demand-side' economics, you'd send each kid a check (or start a trust fund, or something) where the money goes to the kids and they control it. If you practice 'supply-side' economics, you'd send the money to their parents. The hope is that the parents will apply this money judiciously, and the kids won't squander it on video games or bowling shoes. Most people would see this as a reasonable paternal attitude: the parents are more experienced, and should be in control of the monetary situation. The kids don't know enough to know where the money should go that won't be wasting it.
But you can see the drawbacks, can't you? What if the parents decide, in their infinite wisdom, to spend 75% of the money on one kid, and only 25% on the other kid? Or to put it all into savings and tell the kids to work their way through college? Or give the kids half the money, and take the other half and visit Tahiti?
The same drawbacks exist in supply-side economics. The theory is that by giving businesses and producers (goods suppliers) tax-cuts and/or incentives, that these businesses will expand their supply, make more, fill their shelves, extend their businesses. To a certain extent, with tax-cuts, businesses will do just that. But there are two flaws. One is the assumption (as demonstrated beautifully in the dot-com mindset) that 'if you build it, they will come.' With the possible exception of the Internet and venture capitalists, most business know this ain't necessarily so. It only compounds this fundamental business adage--that it's possible to over-supply against demand--when the tax-cuts arrive during a time of economic instability. Had someone given my shop a $3,000 tax cut, and we'd been operating in this economy, I'd have to say I'd doubt I would have spent it all on the business. We would have viewed it as a windfall, certainly, but in an iffy economy, business owners are the ultimate conservatives. We have to be; we count every penny. And even unexpected pennies get counted and guarded as jealously as the expected ones. At most, we might have put half into the shop, for the most pressing issues, and the other half into savings.
Reagan's years proved this is pretty much what happens when you try to use supply-side economics to stimulate the economy. Businesses, in a time of iffy economy, don't want to spend. They'll take that windfall and use it to shore up their businesses so it's one more protection against what'll happen if the economy gets worse. And when there's not a lot of money floating through the general population--or interest rates are high, and inflation is up--businesses aren't stupid. They're not going to supply if there's no chance for a demand.
See, businesses want more demand and less supply. Think of the two as the two lines in an X. One is the market's demand; the other is the market's supply. Each version of the X is based on a price, that is: one line measures the demand as related to price, and the other measures the supply as related to price. Let's say I can make 10 Gizmos for $100. So I want to sell them for a good profit, at $20 each, leaving me with $100 profit. But if the market's demand line shows that demand is low at $20, then I'm going to sell fewer Gizmos. If I drop the price, then I'm cutting into my profits, but I'm getting closer to matching the price consumers are willing to pay. And if I price the Gizmos at $15, maybe twice as many people will buy it, and I can cut my costs by producing in bulk. The balance between demand (consumers' willingness to pay) and supply (my willingness to sell) is the meeting point of the X, and the basis for nearly all price wackiness in the market. Each producer/retailer is trying to find that happy point between how much it costs to produe an item versus the highest profit manageable versus how much will be sold.
If there are three thousand Gizmos flooding the market to the point of saturation--and every household now has a Gizmo or three--then demand will fall. Supply is still high. To sell those last Gizmos, the price has to come down, until it finds a point where it balances with what people are willing to pay for something they see as having enough of, already. And there's the other way around, which plenty of businesses use to their advantage at holidays. Those stupid talking Elmos? Yeah. Demand was unbelievably high, and people were willing to pay any amount of money. Nintendo boxes or Playstation, whatever it was; same deal. If supply were doubled, the price would fall, because people wouldn't see it as such a valuable commodity. By keeping supply artificially low, businesses hope to force demand high (because our emotions play a big role in this, and people will spend money for something they see as 'exclusive' or 'valuable' by virtue of being 'rare').
The diamond importers play this game, and have for a long time. They convinced the American public a hundred years ago--when diamonds were just seen as one more semi-precious stone--that diamonds are the ultimate semi-precious stone to have. DeBeers has warehouses upon warehouses of diamonds; if all those were to flood the international market, the price of diamonds wouldn't be much higher than the cost of tumbled stones. This isn't a criticism of capitalism or free market, either. It's just the plain facts of some wise business choices, and sometimes that includes recognizing that if you keep supply low, and demand remains high, you can talk people into paying some ridiculous prices. But it can also happen accidentally, like with Mini Coopers and the hybrids in California--where the suppliers didn't expect the demand, and the demand far outstripped the supply. The new VW Beetle had the same situation, when it first came out: people were willing to pay (and therefore, businesses had no compunction charging) astronomical amounts of money.
That's supply and demand. Pricing one's supply is a fine art, to the point of being an almost esoteric thing in and of itself. I recall one time in the shop when a Deadhead came by with a bag of hand-woven bracelets. All he wanted, he said, was money to put gas in his tank to get to the next show. $25 should do it, he figured. All told, the bag held a lot: bracelets, necklaces, anklets. Beautiful work, too. We gave him $30, sent him down to Sammy T's for lunch, and I figured out the price for each. Doing the math, I decided that with our regular markup of 100% on non-book items (called a New York rate or a Cornerstone rate), the bracelets should go for 75 cents each.
I didn't sell a single one.
For two months, the stupid things sat there. I finally got frustrated and packed them away for a month. When I brought them back at the start of the summer season, I priced them at five dollars--and that was for the two-color ones. The six-colors? Eight bucks.
I sold out in about five weeks.
That's supply and demand. Because people won't buy something 'too expensive'--if they don't believe it'll add value to their life, or be an increase in their social status (which is where people will spend way more than they can afford on houses, cars, clothes), or if they don't think it's 'worth' the price because the quality isn't good, whatever--but people also won't buy if something is 'too cheap'. It must not be very important, it must be something expendable, it must be cheap and badly made. So a business raises the prices, just a little, and sees what happens. They raise a bit more, rinse, and repeat. Same thing happens in the opposite direction, and moreso if the market's become saturated. There's also stuff about loss leaders but I won't go into that here; that's business, not economics, though the two interact in some ways.
So you can see the drawbacks of supply-side economics--also known as 'trickle-down' economics. The money goes to businesses, with the expectation that this money will then be used to create a larger supply, which people will then buy. But what makes people buy (or even be interested in shopping) is far more complex than whether there's stuff on the shelf. It's also a matter of 'is this what we want?' and 'does this make me feel good to buy this?' and 'can I afford this against what I actually need to purchase?' The complexities of Why People Spend Money are truly intricate, beyond any simple 'put money here' versus 'put it there' schema.
And in the eight years of Reagan's White House, supply-side economics was proven to be a dismal failure. It just didn't work. Businesses weren't willing to risk increasing supply because they weren't confident people would spend the money. And they weren't willing to risk increasing supply because they weren't confident about the economy any more than consumers. Businesses put the money in savings, or stuck it under their mattresses. Rich people, the other half of the supply-side theory, didn't start spending money hand-over-fist in the economy like expected; they socked the extra cash away, or spent it in foreign markets, or invested it. Of the huge wealth expected to trickle down to us working peons...you guessed it. Nope. Never really showed up. The vast majority stayed in the pockets of the wealthy and the business world.
Which brings us to the truly ironic element in this entire post. Guess who termed the phrase 'voodoo economics'?
Give up?
Bush Senior.
No kidding! During the 1980 primaries, when he was debating against Reagan for the party nomination, Bush took one look at Reagan's economic ideas: reduce taxes on the rich and businesses in hopes they'll spend more on the economy--and flatly said it wouldn't work, that it was a bunch of hooey. He ended up as Reagan's vice-president, natch, and from what I recall quieted down his criticism but he certainly didn't keep Reagan's policies once he was in office. He didn't have the time or the oomph or the economy in the right place to turn things around, but he wasn't stupid about the flaws in supply-side economics.
That makes it particularly funny (in a 'if I don't find it funny, I'll bash my head in' way) that Bush Jr. is operating on a supply-side plan.
And what the hell does all this have to do with Social Security, you're probably asking. I'm getting to it.
First, we've got a system that's not in crisis at this point but will be, if we don't do something about it. No arguments there; we're okay for the next two decades but we will eventually hit a point where it's a 3-to-1 ratio on support. However, we're also attempting to fix things at a point when our Govt is in a bad way with its debts. So let's assume Social Security gets whacked with Bush's intended economic plan.
Step number one: reduce debt against Social Security. This lops off a chunk of the Federal Debt, which will (on paper) improve the appearance of our federal budget. It's all funny money in some ways, but funny money impacts economies, too. Since most people don't really grok the intricacies, I'd say it's safe to say that if the Fed Govt announces it's sliced our deficit in half, a lot of people will cheer and get hopeful (which increases spending because people spend more when they're confident in their economy)--even while not realizing the cost we paid to get that announcement.
Step number two: start transferring funds into private accounts. There's a lot of details in this step.
Someone asked Bush, in Florida, who'd be managing the accounts:
In 2002, SSA took in 552.9 billion dollars (not counting Disability Insurance), and paid out 404.7 billion. It was left with a surplus of 1,365.8 billion dollars--which includes unpaid funds from previous years, of course. (From SSA facts & figures.) Let's pretend that all other factors being equal, one-eighth of the folks move their money from the traditional system. So:
$550b ÷ 1/8 = $68.75b
But since employees only contribute 50% of the FICA tax, we have to divide this again:
$68.75b ÷ 1/2 = $34.75b
And now, to get the maximum amount of 4% that can be moved into the stock market, which would be (roughly) 2/3rds of the 6.2% paid in FICA:
$34.75b ÷ 2/3 = 21.92b
But let's be conservative and say on average, people only put in 2% of their FICA payments, whether because they're being conservative or because that maxes them out on how much they can allot. That still leaves us with approximately $11 billion dollars.
Now, granted, $11 billion is only 2% of the total SSA intake (with 2002 numbers). On the other hand, $11 billion dropped into the stock market is a MASSIVE amount of money. You get a cookie if you remember my explanation on how bubbles work, and if you're feeling a bit uneasy right now. And even assuming that the percentage to these 'regulated' non-government managers is only, oh, .5% (ridiculously low but if it's a large fund, believeable, I suppose) - that's still $55,000,000 - that's $55 million - going into private pockets.
Lotsa money flooding our economy, eh.
That's supply-side economics, and for those of you not old enough to remember the failure the last time around, go read some articles on it. It doesn't work. It puts money in the pockets of the very rich, it puts money in the pockets of the corporations--need I also mention that our private accounts would be buying stocks and bonds in a great many corporations?--and it doesn't actually help the economy. In fact, it can damage it, and thoroughly, if not outright devastate it. And we're not exactly going into this with a surplus any more; we're operating on a massive deficit. We don't have the money to be screwing around with our economy.
But once again, there's more!
Not only will this gut Social Security in the strictest sense (through removal of our own funds, and through reneging on the debt), but it will also cost the government money. Lots and lots--and did I mention lots?--of money. Like Bush said in the quote above, we will have to pay people to create, manage, and transfer the accounts. We'll be paying people to measure, analyze, and determine which stocks and bonds to select on our behalf. We'll be paying people to do a crapload of things. But we'll also be paying to replace that money in the current system.
Right. Because we're using that money--remember, $550 comes in currently, $400 goes out. But that $550 is expected to drop, and the $400 expected to go up. Losing $11 may seem like peanuts, but it's still peanuts we'll have to replace. Which means the government is going to be borrowing more, to cover the gap.
In summary! The current White House SSA reform/dismantling, combined with the current proposed budget, contains the following economic maneuvers:
1. A massive amount of cash will infuse the stock market over the next decade.
2. Budget spending will remain steady or possibly rise.*
3. Tax cuts will be made permanent.
4. The Fed Govt will be borrowing massive sums to cover shortfalls.
Frankly, if I tried to run my household accounts like this, I'd already be in default on the house, have no car, and probably be living at my mother's house hoping she'll loan me $5 for gas--and I'd be hiding from creditors determined to force me into declaring bankruptcy. And if you think of what that does to personal credit, it's a thousand times worse on a macroeconomic level.
*Budget spending will go up because the current proposed budget is incomplete. Yes, incomplete. The proposed budget amount does not include the cost of Homeland Security or the Iraqi Conflict (or any other potential conflicts); it also does not include the expected costs for the SSA reform. The explanation given by the White House for the first omission is the same as in their last budget, that is, that the cost of a war cannot be estimated beforehand. That doesn't wash with me. If I tried to present a fiscal budget at work with big gaps of nearly 25% of the budget's expenditures missing and claimed that this is because one can't reasonably be expected to come up with a cost of that project, my bosses would only have one answer: "Go back and try." The same goes for the SSA reform, which is disturbing given that I've seen estimates--from the White House, from Cheney, from Bush--that the costs of the SSA reform will possibly cost a trillion. Oh, maybe two. And that's just over the next decade.
Which means: our current proposed budget that's on the table right now--that appears to be only 6% larger than the last one, with all these programs frozen or deleted (and very few increased)--is not actually a complete budget. That statement of 'only a small increase in spending' is patently false, because we can't make that statement without knowing the entire budget.
Yes, Social Security is facing a crisis down the road. And yes, we should start now to look at ways we can fix it, and turn it into something that will do the work it's done. I won't argue that in the least. But I will argue that it's possibly the worst economic decision to flood the market with cash and cut taxes and increase military spending and borrow a trillion dollars just for SSA reforms at the same time that we have an account deficit of $428 billion and a trade deficit of $167 billion.
Our country just doesn't have the cash.
And getting the cash--and reducing the deficit--should be our top priority. Because if our economy goes, it won't matter about a war in Iraq or our Social Security system when we retire. We won't have the money to pay the soldiers, and we won't have the jobs that will help us invest in 401Ks. The situation down the road may be dire, but if we don't start acting with some sort of fiscal and economic responsibility, our situation in the next five years could make 2042 look like a freakin' walk in the park.
*sigh* And here I told myself I'd not lecture...but them's the economic facts. Be sure to check back if you're dubious (or post here with questions), because I'll be having my favorite international economist look this over, too. I'm pretty sure I covered most everything, but I'll revise any parts that are inaccurate or need more explication to be truly fair to the issues. If you post with questions, I'll make sure either someone with credentials answers, or I'll track the answers down myself and return 'em with reasearchable citations.
So the third part? Coming in a few days: some of the proposals about Social Security, and how each of them might help or hurt, based on where we currently stand.
The first thing to bear in mind while reading economics terminology is that the labels for things are not value judgments. These are simply the terms used; to say something is 'weak' or 'strong' does not necessarily mean 'bad' and 'good', respectively. It's just what it's called.
So, let's start with where we are right now.
We are operating in a deficit, and have a very weak dollar. Both stimulate the economy. A somewhat weak dollar does not--and I cannot emphasize this enough, because it's a common misunderstanding--mean that our country is failing. It simply means when compared to a stronger currency, the USD purchases less; it doesn't mean that the USD is in 'bad shape' or that being 'weak' is something we should avoid. In fact, being marginally 'weak' can be a positive. During times of weak USD, it's cheaper for external sectors (like Japan and China) to purchase exports: finished goods, Federal bonds and equities, even internal resources like factories, businesses, and real estate. These countries want the Federal bonds and equities for the same reason SSA (and regular American citizens) invests in them: because there is nothing more stable, on this entire planet, than our Federal bonds and equities. And when the dollar is weak, these equities (along with other resources and exported products) become more affordable, which means more people and governments will invest in our economy.
A (minor) deficit stimulates the economy as well, for simple reasons. The Fed Govt takes in, say, $1K, and spends $2K. If the Fed Govt were to pay for all its expenditures with incoming, that would mean people would be taxed for the other $1K. But they're not - which means we, collectively, have $1K more to spend in the open market. Meanwhile, the Govt is also spending in the open market, with that extra $1K it's got. We're all spending. Market is happy. Spend, spend, spend, strong economy...with a rising federal deficit. So you can see there's good in some level of deficit, and this is why in short-term economic bad points, the govt will cut taxes. It lets people have more disposable income with which to spend, thus boosting the economy, and we're pulled out of the short-term dark spots.
The important key is 'short-term.' The use of a temporary overspending point is an old trick that's been repeated many times, and not just by our government. Here's a microeconomics example (micro meaning it's on the personal, household level). Let's say your job sucks, but you don't have a car. If you did have a car, you could commute and then you could work a better job that's a little farther away. So many people will then go purchase a car, put the debt on credit--effectively, temporarily putting themselves way in the red (on paper)--and then go out and get that job. Once the job situation has improved, the debt of purchasing a car before one has all the cash in hand is now resolved because one's income is higher. It's a temporary overspending to achieve more incoming down the road. If, on the other hand, you don't get a new job for whatever reason, you're looking at a much higher debt than you can pay on your current salary. You'll either need to get rid of the car, come up with additional income to pay for it, or watch it get repossessed early one rainy Tuesday morning. Go you.
The second element of 'weak dollar' and 'minor deficit' is that both, to be effective, must be relatively small. You don't want a huge deficit--only a slight amount. This isn't like pregnancy where you are or aren't pregnant; it's possible to be 'a little weak' or 'a small deficit'. But it's also possible to be 'a little strong' or have 'a slight surplus'. In economics, the danger zones are those areas farthest away from the point of balance. A huge surplus holds just as many dangers for an economy as a huge deficit (if in different ways). Imbalance is bad, except in moderation, you could say.
For instance, when Reagan began his first term by dropping taxes back in 1981, this was a tested economic move. It stimulates the economy by letting more money circulate, with the hopes that things will pull back together. Once the situation's improved, taxes can go back to their regular level and the economy will continue to flourish. Note that when Clinton entered office, one of the first things he did was to raise taxes, despite a number of doomsaying predictions this would crush the economy. In fact, the economy flourished like it hadn't in nearly twenty years. That's the other important thing about economics: nothing is really black and white. You could say raising taxes is bad, but from an economic standpoint this isn't always true. The only true influences are precendent (has it been done before, where, how, when, and why), and timing (what's the situation right now).
When Bush lowered taxes at the beginning of his presidency, we had a grand surplus, a huge surplus. We were seriously high on the hog, in some ways. But the dot-com bust (and ensuing cascade failure)--and then 9/11--slammed into our economy, and the idea was that by cutting taxes, the economy could be jump-started back to its normal level--just like you or I buying that car so we could commute to a better job. However, two things happened: the economy didn't bounce as much as expected, and the taxes were never raised back to their normal level. In personal terms, this is much like saying: you didn't get the new job, and you kept the car. When Bush continued to increase spending to the point of eating that entire surplus, this was much like saying not only did you keep the car, you went and bought a new house, a new boat, and a new home theater system--all while still on your original measly income.
Keep in mind that the surplus from Clinton's years cannot entirely be laid at Clinton's feet. It's a combination of technology hitting the market at the right point, the economy's interaction with foreign markets, people's own impressions (which lead to more or less spending as they become more or less comfortable), and a whallop of some wise economic practices from Clinton. His administration did not play the 'tax and spend' like traditional Dems, but raised taxes and did not raise the government size to balance. Instead, the goal was to knock down the deficit that had grown over eight years of Reagan and four years of Bush Sr. In eight years, the administration not only lowered the deficit, but came in with a surplus. So Clinton's years weren't just successful at, say, in saving $1,000, but in also paying off the $1,000 owed previously. If you start at $1,000 in the hole, you'd have to earn $2,000 to get up to a positive point of $1,000. It's simple math, but you can see just how productive we were as a nation for eight years. We pretty much ruled the planet on an economic level. We were going gang-busters.
However, it's five years later, and we've now not only used up that entire surplus--moving in the opposite direction--but sit here with an account deficit in the billiions. Four years to undo eight years of work. We've also got a trade deficit that's larger than ever (but this trade deficit has been growing; we were in a trade deficit to some extent even during the Clinton years--remember, a slight trade deficit=weak dollar=can be good for economy). Our economy is starting to sag under the weight of the twin deficits. We're slowing down on growth--we just can't reasonably sustain the level we'd held for so long because at some point we will max out. And our job situations aren't getting much better, either. Our dollar is weakening to the point that foreign sectors are starting to see us not as a good investment but cheap and possibly heading towards worthless.
The next question, then, is where we go from here, in an economic sense.
One thing to remember about life with a large deficit: the bigger the deficit, the higher the risk that inflation will become an issue. Think of it this way: if you make $20K in one year, but spend $40K, you're spending double your income. Banks are going to look at you as a bad risk, and will raise your interest rates. Your money--the reliability of the principle on your debts--is in question. So the banks want to make sure they get their money for their loan to you, covering their costs. Your previous good credit may have gotten you interest rates at 9% on your plastic, but any new loans will have higher rates, because you're a risk. 15%, 20%, even higher. While macroeconomics (national economics) operates with slightly different mechanisms, the idea is pretty much the same. The more money you owe, the more you're going to pay in interest and the more inflation looms on the horizon.
Clinton's approach--adapting the traditional Repub fiscal conservative path--was to raise taxes while keeping government's costs steady. Like taking a second job, this begins the work of paying down the debt. Decreasing our deficit does have positive impact on an economy. In a sense, it's like improving your credit, so interest rates can go down, inflation goes down. It's not the easiest way to get there (and no fun for us taxpayers) but in a manner of speaking, we had already spent the money via our government. To complain about higher taxes to pay our debts is somewhat akin to purchasing a car and then whining when you get your monthly statement.
The contrast with Clinton's approach is Reagan's approach, back in 1981, when we hit one of the worst recessions since the Great Depression. I know a lot of people who read my journal might not have even been born in 1980, and I wasn't exactly in the working world myself, but believe me, the news each night was pretty dreary. My parents bought their house in 1980 with an interest rate of fourteen percent--and they had excellent credit, with a fat downpayment from the sale of our house in Alabama. I learned later that my parents were thrilled to achieved such a low interest rate. When I bought my townhouse in 2000, I recall fussing about getting an eight-point-five percent interest rate. Man, that was high! Why hadn't I bought a year or two earlier? I could've gotten seven, six, even five! But fourteen percent!? Yeah, well. That's one example of the difference between a recession and good economic times. When Reagan entered the White House, the economy was tumbling downhill, but he had a plan to fix it.
Supply-side economics.
It failed, but it's important to know how it failed, and to understand the theory, so you can recognize it when you see it. Using your personal household as an example, supply-side economics is when you put money into the economy via the suppliers, not the, err, demanders. Giving a tax cut to private citizens would be demand-side economics; that is, you're putting more money in the pockets of the people who spend the money, in the hopes that they'll go out and use it. Giving a tax cut to businesses who supply things is supply-side economics.
The analogy would be if you're a grandparent with two grandchildren. The kids are each looking at going off to college. If you practice the usual 'demand-side' economics, you'd send each kid a check (or start a trust fund, or something) where the money goes to the kids and they control it. If you practice 'supply-side' economics, you'd send the money to their parents. The hope is that the parents will apply this money judiciously, and the kids won't squander it on video games or bowling shoes. Most people would see this as a reasonable paternal attitude: the parents are more experienced, and should be in control of the monetary situation. The kids don't know enough to know where the money should go that won't be wasting it.
But you can see the drawbacks, can't you? What if the parents decide, in their infinite wisdom, to spend 75% of the money on one kid, and only 25% on the other kid? Or to put it all into savings and tell the kids to work their way through college? Or give the kids half the money, and take the other half and visit Tahiti?
The same drawbacks exist in supply-side economics. The theory is that by giving businesses and producers (goods suppliers) tax-cuts and/or incentives, that these businesses will expand their supply, make more, fill their shelves, extend their businesses. To a certain extent, with tax-cuts, businesses will do just that. But there are two flaws. One is the assumption (as demonstrated beautifully in the dot-com mindset) that 'if you build it, they will come.' With the possible exception of the Internet and venture capitalists, most business know this ain't necessarily so. It only compounds this fundamental business adage--that it's possible to over-supply against demand--when the tax-cuts arrive during a time of economic instability. Had someone given my shop a $3,000 tax cut, and we'd been operating in this economy, I'd have to say I'd doubt I would have spent it all on the business. We would have viewed it as a windfall, certainly, but in an iffy economy, business owners are the ultimate conservatives. We have to be; we count every penny. And even unexpected pennies get counted and guarded as jealously as the expected ones. At most, we might have put half into the shop, for the most pressing issues, and the other half into savings.
Reagan's years proved this is pretty much what happens when you try to use supply-side economics to stimulate the economy. Businesses, in a time of iffy economy, don't want to spend. They'll take that windfall and use it to shore up their businesses so it's one more protection against what'll happen if the economy gets worse. And when there's not a lot of money floating through the general population--or interest rates are high, and inflation is up--businesses aren't stupid. They're not going to supply if there's no chance for a demand.
See, businesses want more demand and less supply. Think of the two as the two lines in an X. One is the market's demand; the other is the market's supply. Each version of the X is based on a price, that is: one line measures the demand as related to price, and the other measures the supply as related to price. Let's say I can make 10 Gizmos for $100. So I want to sell them for a good profit, at $20 each, leaving me with $100 profit. But if the market's demand line shows that demand is low at $20, then I'm going to sell fewer Gizmos. If I drop the price, then I'm cutting into my profits, but I'm getting closer to matching the price consumers are willing to pay. And if I price the Gizmos at $15, maybe twice as many people will buy it, and I can cut my costs by producing in bulk. The balance between demand (consumers' willingness to pay) and supply (my willingness to sell) is the meeting point of the X, and the basis for nearly all price wackiness in the market. Each producer/retailer is trying to find that happy point between how much it costs to produe an item versus the highest profit manageable versus how much will be sold.
If there are three thousand Gizmos flooding the market to the point of saturation--and every household now has a Gizmo or three--then demand will fall. Supply is still high. To sell those last Gizmos, the price has to come down, until it finds a point where it balances with what people are willing to pay for something they see as having enough of, already. And there's the other way around, which plenty of businesses use to their advantage at holidays. Those stupid talking Elmos? Yeah. Demand was unbelievably high, and people were willing to pay any amount of money. Nintendo boxes or Playstation, whatever it was; same deal. If supply were doubled, the price would fall, because people wouldn't see it as such a valuable commodity. By keeping supply artificially low, businesses hope to force demand high (because our emotions play a big role in this, and people will spend money for something they see as 'exclusive' or 'valuable' by virtue of being 'rare').
The diamond importers play this game, and have for a long time. They convinced the American public a hundred years ago--when diamonds were just seen as one more semi-precious stone--that diamonds are the ultimate semi-precious stone to have. DeBeers has warehouses upon warehouses of diamonds; if all those were to flood the international market, the price of diamonds wouldn't be much higher than the cost of tumbled stones. This isn't a criticism of capitalism or free market, either. It's just the plain facts of some wise business choices, and sometimes that includes recognizing that if you keep supply low, and demand remains high, you can talk people into paying some ridiculous prices. But it can also happen accidentally, like with Mini Coopers and the hybrids in California--where the suppliers didn't expect the demand, and the demand far outstripped the supply. The new VW Beetle had the same situation, when it first came out: people were willing to pay (and therefore, businesses had no compunction charging) astronomical amounts of money.
That's supply and demand. Pricing one's supply is a fine art, to the point of being an almost esoteric thing in and of itself. I recall one time in the shop when a Deadhead came by with a bag of hand-woven bracelets. All he wanted, he said, was money to put gas in his tank to get to the next show. $25 should do it, he figured. All told, the bag held a lot: bracelets, necklaces, anklets. Beautiful work, too. We gave him $30, sent him down to Sammy T's for lunch, and I figured out the price for each. Doing the math, I decided that with our regular markup of 100% on non-book items (called a New York rate or a Cornerstone rate), the bracelets should go for 75 cents each.
I didn't sell a single one.
For two months, the stupid things sat there. I finally got frustrated and packed them away for a month. When I brought them back at the start of the summer season, I priced them at five dollars--and that was for the two-color ones. The six-colors? Eight bucks.
I sold out in about five weeks.
That's supply and demand. Because people won't buy something 'too expensive'--if they don't believe it'll add value to their life, or be an increase in their social status (which is where people will spend way more than they can afford on houses, cars, clothes), or if they don't think it's 'worth' the price because the quality isn't good, whatever--but people also won't buy if something is 'too cheap'. It must not be very important, it must be something expendable, it must be cheap and badly made. So a business raises the prices, just a little, and sees what happens. They raise a bit more, rinse, and repeat. Same thing happens in the opposite direction, and moreso if the market's become saturated. There's also stuff about loss leaders but I won't go into that here; that's business, not economics, though the two interact in some ways.
So you can see the drawbacks of supply-side economics--also known as 'trickle-down' economics. The money goes to businesses, with the expectation that this money will then be used to create a larger supply, which people will then buy. But what makes people buy (or even be interested in shopping) is far more complex than whether there's stuff on the shelf. It's also a matter of 'is this what we want?' and 'does this make me feel good to buy this?' and 'can I afford this against what I actually need to purchase?' The complexities of Why People Spend Money are truly intricate, beyond any simple 'put money here' versus 'put it there' schema.
And in the eight years of Reagan's White House, supply-side economics was proven to be a dismal failure. It just didn't work. Businesses weren't willing to risk increasing supply because they weren't confident people would spend the money. And they weren't willing to risk increasing supply because they weren't confident about the economy any more than consumers. Businesses put the money in savings, or stuck it under their mattresses. Rich people, the other half of the supply-side theory, didn't start spending money hand-over-fist in the economy like expected; they socked the extra cash away, or spent it in foreign markets, or invested it. Of the huge wealth expected to trickle down to us working peons...you guessed it. Nope. Never really showed up. The vast majority stayed in the pockets of the wealthy and the business world.
Which brings us to the truly ironic element in this entire post. Guess who termed the phrase 'voodoo economics'?
Give up?
Bush Senior.
No kidding! During the 1980 primaries, when he was debating against Reagan for the party nomination, Bush took one look at Reagan's economic ideas: reduce taxes on the rich and businesses in hopes they'll spend more on the economy--and flatly said it wouldn't work, that it was a bunch of hooey. He ended up as Reagan's vice-president, natch, and from what I recall quieted down his criticism but he certainly didn't keep Reagan's policies once he was in office. He didn't have the time or the oomph or the economy in the right place to turn things around, but he wasn't stupid about the flaws in supply-side economics.
That makes it particularly funny (in a 'if I don't find it funny, I'll bash my head in' way) that Bush Jr. is operating on a supply-side plan.
And what the hell does all this have to do with Social Security, you're probably asking. I'm getting to it.
First, we've got a system that's not in crisis at this point but will be, if we don't do something about it. No arguments there; we're okay for the next two decades but we will eventually hit a point where it's a 3-to-1 ratio on support. However, we're also attempting to fix things at a point when our Govt is in a bad way with its debts. So let's assume Social Security gets whacked with Bush's intended economic plan.
Step number one: reduce debt against Social Security. This lops off a chunk of the Federal Debt, which will (on paper) improve the appearance of our federal budget. It's all funny money in some ways, but funny money impacts economies, too. Since most people don't really grok the intricacies, I'd say it's safe to say that if the Fed Govt announces it's sliced our deficit in half, a lot of people will cheer and get hopeful (which increases spending because people spend more when they're confident in their economy)--even while not realizing the cost we paid to get that announcement.
Step number two: start transferring funds into private accounts. There's a lot of details in this step.
Someone asked Bush, in Florida, who'd be managing the accounts:
They'll be from providers. We don't want the federal government making stocks and bond decisions. (Applause.) They'll be private -- private sector, people who get paid to do this. And the fees, by the way, will be -- we'll make sure that you don't get gouged. I mean, obviously, what we want is people's money going into their personal account, not going into big fee structures. And so there will be a -- it will be regulated to that extent. In other words, there will a certain sense of regulation, you can only invest in certain kinds of stocks and bonds to be -- and the funds will be managed by people whose job it is to manage them, outside of the government.It's not just that money will be removed from pay-as-you-go accounts and put into private accounts, but that funds will also be going into the pockets of those Wall Street brokers, too. In other words, Bush Jr. is pulling a fast move. He's not giving tax-cuts to the rich or to businesses. Instead, he's effectively sending them the money directly.
In 2002, SSA took in 552.9 billion dollars (not counting Disability Insurance), and paid out 404.7 billion. It was left with a surplus of 1,365.8 billion dollars--which includes unpaid funds from previous years, of course. (From SSA facts & figures.) Let's pretend that all other factors being equal, one-eighth of the folks move their money from the traditional system. So:
$550b ÷ 1/8 = $68.75b
But since employees only contribute 50% of the FICA tax, we have to divide this again:
$68.75b ÷ 1/2 = $34.75b
And now, to get the maximum amount of 4% that can be moved into the stock market, which would be (roughly) 2/3rds of the 6.2% paid in FICA:
$34.75b ÷ 2/3 = 21.92b
But let's be conservative and say on average, people only put in 2% of their FICA payments, whether because they're being conservative or because that maxes them out on how much they can allot. That still leaves us with approximately $11 billion dollars.
Now, granted, $11 billion is only 2% of the total SSA intake (with 2002 numbers). On the other hand, $11 billion dropped into the stock market is a MASSIVE amount of money. You get a cookie if you remember my explanation on how bubbles work, and if you're feeling a bit uneasy right now. And even assuming that the percentage to these 'regulated' non-government managers is only, oh, .5% (ridiculously low but if it's a large fund, believeable, I suppose) - that's still $55,000,000 - that's $55 million - going into private pockets.
Lotsa money flooding our economy, eh.
That's supply-side economics, and for those of you not old enough to remember the failure the last time around, go read some articles on it. It doesn't work. It puts money in the pockets of the very rich, it puts money in the pockets of the corporations--need I also mention that our private accounts would be buying stocks and bonds in a great many corporations?--and it doesn't actually help the economy. In fact, it can damage it, and thoroughly, if not outright devastate it. And we're not exactly going into this with a surplus any more; we're operating on a massive deficit. We don't have the money to be screwing around with our economy.
But once again, there's more!
Not only will this gut Social Security in the strictest sense (through removal of our own funds, and through reneging on the debt), but it will also cost the government money. Lots and lots--and did I mention lots?--of money. Like Bush said in the quote above, we will have to pay people to create, manage, and transfer the accounts. We'll be paying people to measure, analyze, and determine which stocks and bonds to select on our behalf. We'll be paying people to do a crapload of things. But we'll also be paying to replace that money in the current system.
Right. Because we're using that money--remember, $550 comes in currently, $400 goes out. But that $550 is expected to drop, and the $400 expected to go up. Losing $11 may seem like peanuts, but it's still peanuts we'll have to replace. Which means the government is going to be borrowing more, to cover the gap.
In summary! The current White House SSA reform/dismantling, combined with the current proposed budget, contains the following economic maneuvers:
1. A massive amount of cash will infuse the stock market over the next decade.
2. Budget spending will remain steady or possibly rise.*
3. Tax cuts will be made permanent.
4. The Fed Govt will be borrowing massive sums to cover shortfalls.
Frankly, if I tried to run my household accounts like this, I'd already be in default on the house, have no car, and probably be living at my mother's house hoping she'll loan me $5 for gas--and I'd be hiding from creditors determined to force me into declaring bankruptcy. And if you think of what that does to personal credit, it's a thousand times worse on a macroeconomic level.
*Budget spending will go up because the current proposed budget is incomplete. Yes, incomplete. The proposed budget amount does not include the cost of Homeland Security or the Iraqi Conflict (or any other potential conflicts); it also does not include the expected costs for the SSA reform. The explanation given by the White House for the first omission is the same as in their last budget, that is, that the cost of a war cannot be estimated beforehand. That doesn't wash with me. If I tried to present a fiscal budget at work with big gaps of nearly 25% of the budget's expenditures missing and claimed that this is because one can't reasonably be expected to come up with a cost of that project, my bosses would only have one answer: "Go back and try." The same goes for the SSA reform, which is disturbing given that I've seen estimates--from the White House, from Cheney, from Bush--that the costs of the SSA reform will possibly cost a trillion. Oh, maybe two. And that's just over the next decade.
Which means: our current proposed budget that's on the table right now--that appears to be only 6% larger than the last one, with all these programs frozen or deleted (and very few increased)--is not actually a complete budget. That statement of 'only a small increase in spending' is patently false, because we can't make that statement without knowing the entire budget.
Yes, Social Security is facing a crisis down the road. And yes, we should start now to look at ways we can fix it, and turn it into something that will do the work it's done. I won't argue that in the least. But I will argue that it's possibly the worst economic decision to flood the market with cash and cut taxes and increase military spending and borrow a trillion dollars just for SSA reforms at the same time that we have an account deficit of $428 billion and a trade deficit of $167 billion.
Our country just doesn't have the cash.
And getting the cash--and reducing the deficit--should be our top priority. Because if our economy goes, it won't matter about a war in Iraq or our Social Security system when we retire. We won't have the money to pay the soldiers, and we won't have the jobs that will help us invest in 401Ks. The situation down the road may be dire, but if we don't start acting with some sort of fiscal and economic responsibility, our situation in the next five years could make 2042 look like a freakin' walk in the park.
*sigh* And here I told myself I'd not lecture...but them's the economic facts. Be sure to check back if you're dubious (or post here with questions), because I'll be having my favorite international economist look this over, too. I'm pretty sure I covered most everything, but I'll revise any parts that are inaccurate or need more explication to be truly fair to the issues. If you post with questions, I'll make sure either someone with credentials answers, or I'll track the answers down myself and return 'em with reasearchable citations.
So the third part? Coming in a few days: some of the proposals about Social Security, and how each of them might help or hurt, based on where we currently stand.