A few notes before I start.? This last month was probably my sickest month in 30 years.? I’m on the upswing, but not up to 100%.? Makes me grateful for how healthy I have been most of my life, and also how healthy my large family has been — this was a rare time when we were all sick.
Note two: I ‘m going to be in Chicago on 3/15, and NYC on 4/11.? Those who might like to talk with me should e-mail me, and we can discuss it.? Note: I am frequently in western Pennsylvnia — those from there who would like to speak with me can email me anytime.? Beyond that, I know that I will be in central Indiana in late June, and San Diego in early July.? Want to meet with me?? Let me know.
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I’m afraid tonight’s topic is too plebeian.? Because I don’t think in “budget cut” terms the way DC does, I am not impressed with what is being discussed in DC, and in most of the states where there is a shadow of budgetary furor.? Also, because I don’t think about budgets in the “cash” accounting terms that so many do, I am not impressed with what so-called radicals are proposing.? We need to start thinking in full-fledged accrual “net present value” terms with discount rates in the 4-5% range.
To me the Democrats and Republicans are Frick and Frack.? There is little true difference in what they are proposing.? Until I begin to hear real proposals on Medicare and Medicaid, or lesser proposals that are shocking: “We propose to end the departments of Interior, Agriculture, Commerce, Labor, HHS, HUD, Transportation, Energy, Education, Veterans Affairs, EPA, and Homeland Security.? The other departments will be cut in half at minimum, including Defense.”? (There has not been a war I have been in favor of in my lifetime.)
I believe in shared sacrifice.? I would accept the Bush tax cuts being sunsetted.? The budget holes are so big on a long-term basis, that if real cuts aren’t proposed, much less made, that there is no way that the budget will come into balance in the long run.
Cuts like this would result in large job losses in the short run, while in the long run, intelligent labor would get released to more productive uses, leading to far more growth in the long run.? Face it, when so many work for the US Government, it is no surprise that the economy grows so slowly.
So many radical and rational decisions founder because there will be job losses.? I say look past the initial troubles, and think of Eastern Europe.? The nations that took the pain recovered the most rapidly.
Even as our monetary policy has been messed up for over 25 years because central bankers thought we couldn’t take any pain, so should fiscal policy assume that we can take pain.? It is troublesome in the short run, and beneficial in the long run.? One weakness of many macroeconomic models is that they don’t take account of the long-term resilience of economies, but focus on short-term losses, as if that were all that goes on.
When the budget is this far out of balance on a net present value basis, every sane proposal sounds insane to those who think the past should continue.? And many insane proposals sound sane, thinking that the past is prologue.
Okay, who is willing to step up, and balance the budget in the long run?? Who?
The silence deafens.? Maybe we will get some who say it never has to be balanced, or that we just have to get deficit growth below nominal GDP growth, or that we can do an external default that sabotages the rest of the world, while we get our house in order.
Sadly, our time of flexibility has escaped us.? Aside from the concept of an external default, or creating a dual currency, things are probably so bad that we are simply waiting for the crisis to hit, and that there are no measures that can prevent the crisis now.
(Still, the easy way out is eliminate Medicare and Medicaid.? But who would have the guts to try that?)
David,
Glad to hear your health has been improving. A few questions
1. What do you mean by “dual currency”?
2. In your view, what are the investment/portfolio implications of what appears to be the inevitability of nothing meaningful getting done on fiscal policy until the crisis hits with full force. Seems to me many, even highly intelligent people, believe we can put off adjustments for another day down the road.
http://oldprof.typepad.com/a_dash_of_insight/2011/03/constructive-postponement.html
3. In your post about managing a fixed income allocation, I had a comment with some questions/points. I highly respect your views on fixed income/bonds so I hoped you might still address those, and correct me if you think I am not correct.
Thanks, and get well!
David:
One of my pet-peeves is conservatives who think families, companies, and governments should have similar-looking budgets. They can’t and they shouldn’t.
Ed Prescott showed that a growing economy with a relatively young workforce that attracts immigrants *should* run a deficit. The optimal level is 1-2% (not our 7-9% now). And social insurance is *always* pay-as-you-go on a country-wide basis.
So the SS Trust Fund is useful as a way to run surpluses during the boom years, but in the end it is an accounting fiction. Society must supply the goods and services that retired folks need, and the only meaningful way to “save” for that is to invest in ways to be more productive–education and infrastructure. That takes time.
Which speaks to Mike’s comment above. Saving and investing takes time. Impatience is the mark of the immature.
“Which speaks to Mike?s comment above. Saving and investing takes time. Impatience is the mark of the immature.”
Not sure how to interpret this.
Anyways, aspects of this remind me SO MUCH of the last cycle particularly 05-07. Anyone with half a brain recognized there were problems with housing and the credit buildup yet there were some presumably smart people with their heads buried in the ground like ostriches.
This time around it is sovereign debt buildup in many of the developed nations. Like last time, it won’t matter until it does, and then all the people who didn’t see this coming and advocated the do nothing approach will try to sweep under the rug that they got it all wrong.
Which is why I am just really interested in thoughts about portfolio implications
“things are probably so bad that we are simply waiting for the crisis to hit, and that there are no measures that can prevent the crisis now.”
If this is the case, then I would support the government becoming even more fiscally reckless. It would bring forward the time when economic models and government scope are forced to change.
We are very unlikely to have sustainable economic growth until these get fixed, so why not bring it forward?
“1. What do you mean by ?dual currency??”
Perhaps he’s referring to something along these lines:
Open Source Currency
http://rushkoff.com/articles/the-feature/open-source-currency/
Personally, I think alternative (unforeseen) currency is likely as so many rules of currency have been broken and/or forgotten. I’m not so sure it will take the form(s) Rushkoff suggests.
I agree that the Dems & Republicans are like Fric & Frac. If you believe in Keynsian economics then budget cutting like even the Dems are proposing will result in a 2nd dip for the recession. This has been a jobless recovery so far so unemployment going back to 10% from the current 9% will hardly be noticeable. As for our three major entitlement programs cutting the benefits of any of the three of them will mean a lot of tragedy amongst the poorest of our neighbors and probably economic difficulties for all but the upper middle class and the rich amongst the 65+ crowd. I think all three programs could be more efficiently managed but with the impasse between the parties I imagine nothing will happen. I think the biggest problem with our country is no one wants to pay taxes, especially the rich, and everyone wants to collect on government benefits.