Saturday, February 25, 2012

2 + 2 = ?

Here is a joke about economists:
A mathematician, an accountant and an economist apply for the same job.

The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."

Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."

Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?

Economists (and very few others) find this joke funny because it is very revealing about how economists are used in the real world. Working for the Congressional Budget Office (CBO) is one of the rare jobs in which politicians ask economists to provide a complete analysis of an issue. In most cases, politicians hire economists to provide evidence to support pre-existing narratives. For example, a colleague worked as an economist for the State of Wisconsin when Tommy Thompson was its governor. There was some discussion among legislators about increasing the minimum wage. Rather than going to the staff economists and asking for a complete analysis of the proposal (seeking the pros and cons of the issue), Governor Thompson's staff asked simply for economic arguments against raising the minimum wage. The governor had decided his position on the issue without having full information. Indeed, he did not want a complete analysis. He just sought support for the belief he had formed without all the facts.

This is typical of how politicians across the political spectrum use economists. They treat them as hired guns, rather than the objective analysts they are capable of being. This is one of reasons why economists in the media may seem to contradict each other. They may be presenting different sides of the issue. But neither is providing the whole truth. One of my primary goals as a teacher is to help people to see "the truth, the whole truth, and nothing but the truth" about macroeconomic issues.

Thursday, February 23, 2012

Baby Boomers - The Most Selfish Generation

The Greatest Generation” is a term coined by journalist Tom Brokaw to describe the men and women who served or supported the United States during World War II. Their willingness to personally sacrifice for the greater societal good was highlighted in Brokaw’s 1998 book of that same name.

Unfortunately, the baby boom generation – my generation – may not be remembered so fondly. An appropriate description for those of us born between 1946 and 1964 might be “The Most Selfish Generation.” I say this because of the wreckless fiscal irresponsibility we have demonstrated over the past 31 years.

Take a look at the red graph below.

At the end of 1980, the U.S. public debt was less than 1 trillion dollars. That means from the creation of this nation through 1980, the entire net accumulated amount of money borrowed by the U.S. federal government was less that 1 trillion dollars.

In 1981, about the time that baby boomers became leaders in both the public and private sectors, public policies were implemented that have led to a current public debt that exceeds 15 trillion dollars. So in the past 31 years, while baby boomers have been running things, the U.S. public debt has increased by more than 14 trillion dollars. In other words, over the past three decades, the United States has consumed 14 trillion dollars of government services we have not paid for and that we will pass to future generations.

For those of you who were born after 1964, I have two words for you …. You’re welcome. …. 15 trillion dollars of debt (and still counting) … that’s our gift to future generations.

To be fair, money borrowed today does not have the same purchasing power as the dollars of the past. So let’s take a look at the purple illustration below.

When the public debt is adjusted for inflation, the diagram illustrates my case even better. In the first 200 years of U.S. history, the federal government paid its bills (for the most part). In some years we ran modest deficits (you can see the big bump to pay for World War II), but we usually paid our bills. This changed in 1981 when taxes were cut under the leadership of President Ronald Reagan, but there was NOT a corresponding decrease in government services. The ultimate irony is that in his 1981 inaugural address, President Reagan warned of the dangers of public debt, saying:

For decades, we have piled deficit upon deficit, mortgaging our future and our children's future for the temporary convenience of the present. To continue this long trend is to guarantee tremendous social, cultural, political, and economic upheavals.

Yet, Reagan helped create a culture of hypocrisy in which we complain about public debt, but seem to continually demand further tax cuts while steadfastly refusing to sacrifice any of the government benefits we expect.

The military conflicts of the past decade in Iraq and Afghanistan are the first time in U.S. history that we have cut taxes in a time of war. When men and women of mostly younger generations are sacrificing their lives for our country, we – the baby boomers – refuse even to pay the financial costs of supporting them – choosing instead to pass the costs to our children, grandchildren, and future generations. And let’s not forget that while reducing federal government revenues through the Bush tax cuts of 2001 and 2003, we also greatly expanded the size and scope of the U.S. federal government through the implementation of Medicare Part D which subsidizes the costs of prescription medications.

The diagram above illustrates the U.S. public debt as a percentage of gross domestic product. It shows our debt in relation to our income. Richer countries and richer people can afford more debt than poorer ones. But even by this measure, the wrecklessness of baby boomer public policies is evident.

You may notice in this graph, as in the previous two illustrations, that there is a decrease in the U.S. public debt in the late 1990s. It is natural and normal for there to be ups and downs in economic activity over time. Economists call this the business cycle. And the surpluses of the late 1990s correspond to being in a properous part of the business cycle. But these budget surpluses were primarily the result of the short-term willingness of Congress to impose on itself pay-as-you-go (PAYGO) rules that require any new spending to be funded by increased revenues or offset by reductions in other expenditures. But as yet another example of baby-boomer selfishness, these rules were abandoned in 2001 (fiscal year 2002) to allow for the popular tax cuts and the subsequent increases in government expenditures.

A June 10, 2009 New York Times article, "America's Sea of Red Ink was Years in the Making," and an accompanying diagram explain and illustrate how U.S. budget surpluses became deficits. The major components and their relative magnitudes are illustrated by the downward arrows. The contributing factors were:

(1) The early 2000s recession caused reduced tax revenues and increased government assistance (- $291 billion a year)

(2) The Bush policies (tax cuts, Iraq war, Medicare prescription drugs) (- $673 billion)

(3) The late 2000s recession (Dec. 2007-2009) also reduced tax revenues and increased government assistance (- $479 billion)

(4) Wall Street Bailouts (begun under Bush & continued under Obama) (-$185 billion)

(5) Other programs supported by both the Bush & Obama administrations, such as the Iraq war and a patch for the alternative minimum tax (- $232 billion)

(6) Stimulus spending (- $145 billion), and

(7) Other Obama programs (- $56 billion).

A July 2011 diagram (above) from The New York Times series, "Charting the American Debt Crisis," shows (on the right) how much of the $14.3 trillion debt (at the time) was accumulated under each U.S. President and (on the left) who holds the debt.

This should NOT be a partisan issue. At a fiscal forum at Jacksonville University on January 26, 2012, former Republican Senator Mel Martinez joined JU alumnus David Walker, the former Comptroller General of the United States and the founder and CEO of the Comeback America Initiative; and Robert Bixby, the executive director of the Concord Coalition; to convey a similar message: federal revenues [as a percentage of gross domestic product (GDP)] are the lowest they have been and expenditures (as a percentage of GDP) are the highest since 1950. (See the diagram below.) Collectively, U.S. citizens need to pay more in taxes and receive fewer government benefits. But that is NOT a message that we want to hear.

And it is worth noting that most of those who are raising the alarm about this debt issue, are not proposing solutions that involve sacrifice by baby boomers. Indeed the refrain is that those of us at or near retirement will not receive any reduced benefits from Social Security or Medicare. The proposed reforms will reduce benefits for younger people.

Once again, I say to people born after 1964 … You’re welcome!

There is one notable exception among the voices for fiscal reform who offers a chance at redemption for baby boomers, if you want to call it that.

David Stockman, President Ronald Reagan’s budget director, advocates a one-time surcharge on the wealthy. He explains the idea in an interview he did for 60 Minutes in October 2010. Click the link above to find the interview or simply search for “David Stockman 60 Minutes.”

Sunday, February 5, 2012

Obama's Job Creation Record

The full chart can be seen at

The Obama administration feels the President's jobs record is being distorted by his Republican opponents. The Democratic Party distributed this information to try to set the record straight. The data are from the U.S. Bureau of Labor Statistics (BLS), the government agency that calculates and publishes the official record of labor market activity.

Note that this graph is for private sector jobs. If you take a closer look at the monthly labor reports you will see that government employment has been decreasing during much of this period. In other words, if the number of federal government jobs were not decreasing, the employment situation would be even better.

There is a legitimate debate to be had about the extent to which current policies have helped or hindered economic recovery. The Congressional Budget Office (CBO), the government agency of professional economists who advise all members of Congress about the impact of proposed policies, has consistently reported that recent government stimulus spending has aided the economic recovery and has improved U.S. employment from what it would have been in the absence of such spending. It is not a popular message with the opponents of the President. But it is consistent with mainstream economic theory.

Friday, February 3, 2012

Employment Situation - January 2012

The latest Employment Situation news release has been posted on the BLS website at and also archived at Highlights are below.

Payroll employment rises 243,000 in January; unemployment rate decreases to 8.3%

Nonfarm payroll employment rose by 243,000 in January, and the unemployment rate decreased to 8.3 percent. Job growth was widespread, with large gains in professional and business services, leisure and hospitality, and manufacturing.