Tuesday, July 04, 2006
In Which I Get a Little Panicky
From what I’ve been reading, the U.S. is running nasty and increasing deficits at the government level, the household level, and the international level. We owe more to other countries than we ever have, and much of that debt comes from selling government securities to foreign central banks (esp. in Asia). Household debt is skyrocketing, and the interest rate increases of the last year or two are poised to nab anybody stupid enough to have taken out an adjustable-rate mortgage in the great housing boom of the last five or six years. The national debt grows apace, and has been refinanced over the last few years to progressively shorter-term loans, meaning that higher interest rates will hurt badly and quickly. Think of it as putting the national debt on an ARM, then watching interest rates go up.
Since we import most of our oil, and the price of oil keeps going up, our trade deficit is likely to keep increasing. (The folks who study ‘peak oil’ are becoming increasingly convincing.) Plus we don’t manufacture very much, so we don’t export very much. We also borrow money for wars of choice, which themselves actually interrupt the flow of oil. We borrow money to pay for causing our own supply disruptions, which is uniquely stupid by any standard.
China is keeping its currency artificially low, to keep its exports cheap. Then it lends us the money to buy those exports. It underpays its own workers so that we can have cheap stuff. How long its own workers will stand for that is anybody’s guess. I know the Chinese government isn’t exactly a champion of civil liberties, but from what I’ve heard on Marketplace, riots are becoming markedly common. The fact that the Chinese government is as repressive as it is makes the outbreak of riots all the more impressive. If it makes concessions to its workers, we’ll feel immediate inflationary pressure.
Since there are so many U.S. dollars flowing out of the country, their value is dropping on the world market. (According to the Bank of Canada website, a Canadian dollar was worth about 63 cents American at the beginning of 2003. Now, it’s about 90 cents. Rates for savings appear to be significantly lower there. Coincidentally, Canada exports oil.) The only way to entice foreigners to keep buying a depreciating currency is to raise interest rates to compensate for the depreciation. Raising interest rates kills the folks with ARMs, increases our national debt payments, and hurts the business climate. (It also pretty much wipes out the ‘refi’ market, which has been a major economic engine for the last few years.)
Although productivity has been going up, real wages haven’t. I know it’s gauche to talk about income distribution, but there’s no other way to explain how those can both be true at the same time. Corporate profits are going gangbusters, with an astonishing amount of the profits being spent on taking ‘public’ companies ‘private’ (that is, buying up their own stock). As opposed to, say, investing in productive capacity, or paying workers some small fraction of their increased productivity.
So my question to my economics-literate readers: how are we _not_ screwed? (That’s the technical term.) If China lets the yuan float, we get inflation. If the Euro starts to displace the dollar as the denomination for international trade, demand for dollars drops and we get higher interest rates, eventually tipping us into a nasty recession. (If we’re really lucky, we get a burst of 70’s vintage stagflation: inflation and unemployment at the same time. Oh, goody.) If oil stays high or goes higher and we don’t get really serious really quickly about alternative energy, we continue to bleed money. If somebody manages to blow up a key pipeline or refinery, the sky’s the limit.
I’m instinctively inclined to doubt doomsayers, so I’m thinking I must be missing something really basic and wonderful that will reduce these concerns to nothing more than blips on the screen. I don’t foresee a complete collapse, like a Weimar or Depression scenario, but something as icky as the 70’s is starting to look awfully likely.
Please tell me why I’m wrong. I’ll sleep much better if I can dismiss this as the ravings of someone who just needs a vacation.
It's why my partner and I are getting rid of all debt ASAP (c'mon, do you think Uncle W is going to pay the mortgage for you?). We've paid off the car (purchased in 2003), have no credit card debt, and are socking money away in various accounts (savings, IRAs, pension plans, etc). We've tried to drastically curtail spending on non-essentials (like eating out, catcha's, etc, not car pooling). If the crash comes, we should be OK. If it doesn't, we're way ahead financially.
BTW: The Canadians actually have a more sensible fiscal system, and progressive tax structure. They reward savings, and tax the hell out of consumption. So for example, buying groceries at the supermarket is taxed very low, while eating out will seriously cost you.
I also admire that their entire military budget for the upcoming 2007 FY is 15 billion CD.
But on spending--we have decided to discuss it, then wait, then wait some more. If we really need it, the product is usually cheaper for the wait, and if we don't, the impulse to buy has long passed.
There's so much in your original post that I'm not sure I can tackle it all, but you shouldn't be as panicky as you are.
A few quick things:
1. National debt as a percentage of GDP (which is what matters) is no worse than the early 90s or mid 50s. Balanced budgets are better, but we're not in some horrible situation. Plus, recent data suggest revenues are up and the projected deficits of the next few years are being revised downward.
2. Trade deficits are nothing to worry about. I have one with my local grocery store. Wyoming has one with California. We get lots of cheap goods, but the dollars we spend come back to us as investments in our financial and real assets. Current account deficits mean capital account surpluses. This is also why our low rate of household savings is not a huge deal - non-Americans are providing a ton of loanable funds by buying up our financial assets. And I don't care one bit who owns or makes the products I buy or the companies who make them. Citizens of the world, eh? And the trade deficit IS NOT A FORM OF DEBT.
3. Yes, rising interest rates hurt ARMs and borrowers, but they also help lenders and those invested in various finanical assets. Including all of us with retirement plans. Again, it would be better if we had less debt, but we're not at a panic point.
4. The data on real wages is not as clear as you make it seem. First of all, if you talk about real *compensation* rather than just wages, it is climbing. There are all kinds of non-wage compensation that people get (like the value of health care) and the total package has increased over the last however-many years. Add to that that the traditional measures of inflation overstate the actual impact it has on most people by not capturing rapidly falling prices in several sectors and by not accounting for substitution, and you have a better picture.
If you look in terms of consumption data, poor and middle class Americans have never lived better. The average poor US household is more likely to have a whole variety of consumer items than the average US household overall did 20 or 30 years ago. I'm happy to provide the data if you wish. This all suggests that the real value of those wages that people are earning is growing because it sure is enabling them to buy more stuff.
5. Finally, the data on income inequality is a more complicated story too. Income mobility is much greater than people believe - that is, it's a lot easier for poor folks to get out of poverty than most people think. For example of 20% of poorest households in 1976, only 5% were still poor in 1991. Recent data isn't quite as impressive, but it's still close.
There's plenty to worry about with this administration, including its problematic economic policies, but we are not at the panic point yet.
Take a vacation. ;)
On the bright side, even though the US may not make TVs or shoes or many tangible things anymore, we're still really good at making software and movies and new medicines. Yes, intellectual property can be pirated, but it's a major source of value, and a sustainable one.
But I disagree with Steve's cheery assessment that the cost of overall compensation packages is going up. I'll certainly believe that's true on average, but I bet it's because of the healthcare bureaucracy, not because workers actually experience better benefits. Most of the people at the very very bottom - minimum wage workers - don't get any benefits at all anyway.
Thinking we're in for something like the '70s sounds realistic to mildly pessimistic, certainly not doomsday thinking to my ears.
I disagree with Steve on what contitutes The Good Life. I love some of my consumer goods but that isnt' what makes the quality of my life high, and I don't think that should be a measure of happiness. Beyond a certain level of comfort consumer goods don't make anyone happy, in fact some would argue that it makes us depressed as we race to make the money for the next-best-thing. And I notice that Steve doesn't address personal debt, particularly credit card debt, which I think is fueling the consumable goods bonanza.
We have no debt except for our mortgage. We pay off our credit cards every damn month, we pay all our bills on time, we have a lot of retirement savings for people of our generation (mid to late 30s). I think we are unusual, though.
Of course, the empirical evidence is clear that, in general, wealthier is healthier. You can talk about all the non-financial/non-material good stuff you want, but societies have to have wealth to make those things more broadly available. And the poorest Americans today are much healthier and live longer lives than the middle class of 50 or 75 years ago did.
As for personal debt, again, one has to look at the whole balance sheet. It's very common to go into debt early in life and then use later earnings to pay it off (life-cycle of consumption). And for folks with huge assets in their home, carrying a significant debt burden isn't that big a problem. For poorer folks, that debt might be trouble, but again it depends on future earning power.
Plus, several recent studies have shown that the rise in credit card debt reflects consumers substituting that form of borrowing for other forms, leaving total consumer indebtedness not all that much greater than historical averages. Household debt is not, sorry Dean Dad, "skyrocketing." Here's some data: http://www.federalreserve.gov/releases/g19/Current/
Note that this is not computed as a percentage of disposable personal income, but you can find that here:
and more here: http://volokh.com/posts/1108490249.shtml
So make of all that what you wish, but let me be clear that I'm not making any claims about "the good life" other than to say that, all other things equal, wealth enables us to buy more of the non-material things that comprise many people's notion of "the good life."
Steve - I guess I took your phrase "living better" to mean The Goof Life, sorry if I was out of line. But I do think that many people make that link, if I hear one more time how great Walmart is because it means everyone can buy crap I may scream.
That's interesting stuff on personal debt. Does the fact that credit card companies charge punising rate sof interest of any consequence at all?
Our vantage point as consumers is mostly filled with TVs, small appliances, clothes, and cars. If we shopped regularly for aircraft, industrial machinery, or engineering expertise, we'd see things differently. The decline of American manufacturing is more accurately the decline of American manufacturing jobs, not exports themselves. Still sucks, but not quite the same thing.
According to data in the 2006 Economic Report of the President, total value added in U.S. private manufacturing was higher in 2004 (the last year included in these data) than it had ever been. In other words, we're manufacturing more stuff that ever before.
What's declining is the relative importance of manufacturing in our economy. Data in the Economic Report of the President show that value added in U.S. private manufacturing has declined from about 21% of U.S. GDP in 1974 to about 12% of GDP in 2004.
We're manufacturing more stuff than ever before, but other parts of our economy have grown even faster.
"1. National debt as a percentage of GDP (which is what matters) is no worse than the early 90s or mid 50s. Balanced budgets are better, but we're not in some horrible situation. Plus, recent data suggest revenues are up and the projected deficits of the next few years are being revised downward."
I completely agree with the first statement, but I disagree with the rest. The problem isn't the size of the national debt so much as the fact that we are in different demographic times. A national debt which was sustainable twenty years ago with the Boomers in full working order is unsustainable now with the Boomers looking to retire and start drawing heavily on Social Security and Medicare.
Also, I just don't trust the projections; remember when the problem was that we were going to pay off the entire national debt and have to find ways to store our huge sacks of surplus cash? That wasn't so long ago, and it was based on projections from the same folks.
"2. Trade deficits are nothing to worry about. I have one with my local grocery store. Wyoming has one with California. We get lots of cheap goods, but the dollars we spend come back to us as investments in our financial and real assets. Current account deficits mean capital account surpluses."
Which is another way of saying that we're selling our productive assets to finance our consumption. This is fine if, for example, we're in a boom period and there are more productive opportunities for investment than we can do anything with, but it's not really sensible if it continues over an entire business cycle, which is what it seems like has been happening.
"This is also why our low rate of household savings is not a huge deal - non-Americans are providing a ton of loanable funds by buying up our financial assets. And I don't care one bit who owns or makes the products I buy or the companies who make them. Citizens of the world, eh? And the trade deficit IS NOT A FORM OF DEBT."
I have to disagree; we're either selling off our productive assets or borrowing against them (in the form of foreign-owned Federal debt) to finance our consumption.
"3. Yes, rising interest rates hurt ARMs and borrowers, but they also help lenders and those invested in various finanical assets. Including all of us with retirement plans. Again, it would be better if we had less debt, but we're not at a panic point."
I have to disagree; I am genuinely concerned about a housing bubble pop when those interest-only mortgages come due and banks can't get back their investment after they foreclose. It's not the most likely scenario, but it is an extant one.
"4. The data on real wages is not as clear as you make it seem. First of all, if you talk about real *compensation* rather than just wages, it is climbing. There are all kinds of non-wage compensation that people get (like the value of health care) and the total package has increased over the last however-many years."
I agree that it's good to know that compensation isn't stagnant; it means that the American worker hasn't lost all bargaining power. But if one's entire compensation increase is eaten up by medical inflation, one still isn't any better off. And what about those who don't receive medical benefits?
"Add to that that the traditional measures of inflation overstate the actual impact it has on most people by not capturing rapidly falling prices in several sectors and by not accounting for substitution, and you have a better picture."
Heeuw. Electronics and computers get cheaper, while gas and medicine get more expensive. Which of these make up a larger percentage of consumption for working- and middle-class folks, and which make up a larger percentage for the relatively wealthy? I'd state that differential inflation magnifies, rather than ameliorates, inequality concerns.
That said, we're still a rich democracy. We've got the resources to address these problems, and we'll get around to electing sensible leadership eventually.
Here, it probably makes sense to say that the two work out the same - but, the apparent income of home renters needs to be adjusted downwards to give a true picture since it is not a true measure of disposable cash flows in the economy since it is committed (it actually shows up in the incomes of whoever receives the rent, and gets counted there).
unrelated: Canada does not, properly considered, tax consumption but production. That is, GST/VAT systems only appear to fall ultimately on consumers; they actually work through to fall on investment as well, unless adequate adjustments are made.
But these are near impossible to make properly, and if anything political distortion tends to introduce even greater burdens on working capital. Maybe it works out better in practice in Canada than here in Australia (and I haven't even factored in compliance costs).
Please feel free to visit. Thanks for your insights. See you.