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A commenter on a recent blog post says “Philip, I know you don’t believe there’s a recession” (based on the fact that the NBER declared the U.S. economy to have come out of the most recent recession in the summer of 2009). It occurred to me that maybe asking whether or not the U.S. economy is in a recession is the wrong question. Now that the world economy is so tightly linked, what does it mean for a single country to be in a “recession”? A recession implies that there is a business cycle within each country that inevitably expands and contracts. Thus if a country is “in recession”, without any changes in laws, education, tax rates, or attitudes, it will inevitably enjoy strong growth when the recession is over.

The world economy has never been in better shape than right now. You might not get that perspective from news articles, but of course they tend to focus on problem spots such as Greece, Ireland, the U.S., etc. There has been a huge amount of growth in the world economy since 2007 (chart). If a country, such as the U.S., has a smaller economy than it did in 2007, does it make sense to say that country is “in a recession” or simply that whatever conditions are necessary for growth in the current world economy are not present in that country? Does it make sense to predict that next year will be different from this year in terms of a business’s willingness to invest in the U.S.?

The existence of growth generates inequality. In a subsistence economy, most people have about the same standard of living. Growth, however, will affect different people to different extents and lead to an inequality of income and wealth. Rather than talk about recession or expansion of a particular economy, would it not make more sense to say that different regions of the world will enjoy a larger or smaller share of the world’s economy growth? Even within the U.S., the expansion periods have not been experienced equally in all regions and industries. Michigan stagnated while North Carolina grew. Investment banks grew fat while other kinds of companies at best stayed even. The U.S. recession is over and yet there are a lot of unemployed Americans. Maybe the answer is that it simply is not productive to consider the concept of a national “recession” at a time when the world economy is exploding with growth.

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Implicit in a lot of news reports about the impending August 2nd debt limit deadline is that if the debt ceiling is not raised, the federal government must necessarily default on payments to bondholders. Default would be bad mostly because it would likely raise interest rates in the future and a country that insists on borrowing 10 percent of GDP every year (and that has borrowed nearly 100 percent of GDP already, with the intention of never paying it back but simply rolling it over into new debt) should want to keep interest rates low.

Where is it written that the government must default on August 2nd if it can’t borrow more money to pay interest on the money that it has already borrowed on our behalf? What would stop the federal government from, at least temporarily, spending no more than it takes in? The U.S. government is sovereign. Nothing requires the federal government to write checks in the amounts that are currently being written. It could start paying federal workers less, reduce Social Security and Medicare benefits, lay off workers and soldiers, withdraw from our adventures in Libya, Iraq, and Afghanistan (we can always start a new war later if we need to), give up on the war on drugs, stop paying for 99 weeks of unemployment, stop meddling in K-12 education, etc.

Are there are any examples of governments spending within their means? It wasn’t easy to find too many with a Google search! Switzerland has a balanced federal budget as part of its constitution (source; IMF paper). We can infer that the countries with low public debt relative to GDP have historically been living within their means (see http://en.wikipedia.org/wiki/List_of_countries_by_public_debt; Chile is a good example). So it can be done.

Suppose that Americans don’t like the result of a federal government that has been shrunk down to match its revenues? Then they will be more inclined to accept new taxes. Given the $14 trillion in debt that we will need to refinance (clock), there would be nothing worse than a default with consequent higher interest rates. Why then do we assume that when we hit our debt limit we should automatically give priority to continued spending rather than paying what we promised to bondholders?

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During the current debate in Congress regarding whether to cut some of the planned future government spending, one of the accusations that opponents hurl at each other is that a proposed change will erode the “social safety net”. The assumption behind these accusations is that a softer social safety net is an unarguably good thing. However, I wonder if it is worth considering the possibility that the economic future for Americans overall would be brighter with a weaker welfare system.

An per-capita GDP growth rate of approximately 2 percent per year during the 20th century made the U.S. the richest country in the world in 2000. Had the growth rate been 1 percent during this period, we would have become the poorest Western country. One of the factors that leads to a higher growth rate is domestic savings, which can be reinvested in productivity-enhancing capital equipment.

Consider the public employee who knows that he or she will retire at age 50 with an inflation-adjusted pension guaranteed by a state constitution. Particularly if the pension is 90 or 100 percent of the former salary, it doesn’t make sense for that person to defer consumption today and save. Roughly the same amount of money will be coming in 20 years from now. Private-sector workers have a greater incentive to save, of course, but they don’t need to save anything for medical expenses (due to Medicare) and they can be assured of a basic income through Social Security. Workers in the high-growth Asian economies haven’t had these assurances from their governments and therefore have been saving a much higher percentage of their income (see this post, which notes that the Chinese saved 40 percent of their income during the 1990s and the number has actually risen to 45 percent more recently; this paper says the number is closer to 50 percent; the U.S. number is roughly 0 percent (source)).

To date, the U.S. has not apparently suffered too much from our lack of domestic savings (our economic growth rate right now is feeble, of course, but it doesn’t seem to be due to a lack of money to invest). A lack of stability or perceived investment opportunity in other parts of the world has led to an influx of savings from other nations. However, looking forward a few decades it seems possible that investors will have a greater range of opportunities and won’t be so keen to lend us their money at low rates. If that happens we may find that it wasn’t such a great idea to have told so many Americans that the government would take care of them.

When we hear a politician promising to enhance Medicare or Social Security, is he or she really saying “I promise to retard the future economic growth of the U.S.”?

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It is fairly common to hear about government authorities seizing someone’s personal computer and finding incriminating evidence on the hard drive. Seldom is it mentioned that the authorities needed to work to decrypt the information (though Al-Qaeda apparently adopted encryption technologies enthusiastically).

Why isn’t file encryption more popular? Are people afraid of losing the keys? Is it too cumbersome on Windows and Mac OS? Is is that people don’t have the capability already installed on their PC? (The cheaper versions of Windows don’t seem to have the option to encrypt a folder built in, though there are free ways to add encryption, such as TrueCrypt (better than what’s built into Mac OS and Windows?).)

And how does the move to mobile devices affect criminals who would otherwise use encryption? Is it easy to encrypt folders on an Android or iOS device? (A quick Google search found some Android encryption apps, but not much for iOS; is that because the feature is built into iPads and iPhones?)

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Folks:

For my software engineering consulting work I have a lot of documents that I sometimes need to review. Rather than be stuck at my desk in front of my monitor (a fairly nice 30″ LCD, but suffers from the usual lack of sharpness of any color screen) I would prefer to be able to lounge on the living room sofa or walk around or whatever. So I’d like to find a table that, given WiFi access, facilitates browsing files (Google Docs, Word, PDF) stored in Google Docs and in Dropbox.com and then downloading a file for temporary viewing. I’d like it to have a black and white eInk screen but could relax this to a less sharp LCD if there truly aren’t any eInk readers that can do the job. I can also relax the requirement to view Microsoft Word documents (I never originate documents in Microsoft Office but end up receiving a fair number of files in this format).

I don’t want to have to decide in advance which documents to view. I.e., it wouldn’t be practical to use the original Kindle because I don’t want to email stuff to myself all the time.

One obvious idea seems to be the latest Barnes and Noble Nook. It has an eInk screen and runs Android (I think). For $139 it has just 2 GB of memory, but that’s fine since I don’t need the documents to be persistent on the device. The Barnes and Noble site, however, doesn’t advertise the possibility of installing apps on the device. So I am worried that there wouldn’t be any way to install the Dropbox app. It also looks as though there isn’t support for Microsoft Office formats.

Another idea would be to abandon the tablet idea and use a Acer AC700-1099 Chromebook, despite the fact that I don’t need the keyboard. The color LCD screen won’t be sharp like eInk, but the higher resolution (1366×768) might make up for it. I am somewhat confused as to how well the Chromebook would work with Dropbox (maybe you’d just browse the Dropbox Web site and download one file at a time; no need to install an app) and Word docs.

Thanks in advance for suggestions.

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The Minnesota shutdown highlights the poor quality of journalism in the U.S.

I haven’t seen any newspaper article that provides the following information:

• how much tax revenue does Minnesota raise compared to other states? (the governor wanted higher taxes)
• how does the $2.5-3 billion/year budget gap that caused the shutdown relate in size to the total state budget? (are we arguing about 1% , 10%, or 50%?)

These numbers aren’t that hard to get. http://www.taxfoundation.org/research/topic/37.html indicates, for example, that Minnesota rakes off 10.3 percent of residents’ income, which is above the U.S. average. Tax rates are among the highest in the nation in many categories, e.g., 3rd highest for corporate income tax (consistent with their overall business environment being 43rd in the nation; neighboring South Dakota is #1). http://www.mmb.state.mn.us/budget shows that the total revenue for the state is about $2.3 billion per month, so the budget gap is about 10 percent of total spending.

The articles on the consequences of the shutdown are interesting because they show just how much paperwork and hassle the government creates, e.g., around the distribution and sale of alcohol. (see this Atlantic article).

Finally the proposed restart of Minnesota state government is interesting because they’re doing it with an Enron-style accounting scam. Instead of raising taxes or cutting spending, the politicians are going to fix this year’s numbers by delaying writing checks to school districts and pulling (tobacco lawsuit shake-down) revenue in from future years.

Minnesota, like Greece, provides evidence that democracy depends on economic growth. To ensure their own reelection, politicians ladle out so many promises to cronies and interest groups that if the economy doesn’t grow as forecast the choice becomes bankruptcy/default or such high taxes that businesses flee, taking the jobs with them, and the most capable workers emigrate.

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I bought an iPad 2 as a gift for a woman who has never been a successful personal computer user, beyond launching a web browser. I figured it would be dead-simple to set up, like an Amazon Kindle or Android phone/tablet and she could be freed from ever having to use a desktop operating system again. As soon as she unpacked it, though, she called me and said “I can’t do anything with this. It just says ‘iTunes’.” Of course, the device shipped with no manual because it is supposed to be idiot-proof. So I downloaded the 200-page user guide from the Apple web site and discovered that the iPad seems to depend on the owner also having a PC and being savvy enough to download and install additional software on that PC (i.e., iTunes). Can this really be the case or am I missing something? All that she wants to do is connect to WiFi and launch a web browser. Can’t the iPad do that out of the box?

How is the iPad the next generation of computing if it needs to lean on the technology of the 1970s (the PC)? Wouldn’t it be more accurate to call the iPad a PC peripheral?

[And does the iPad require an ongoing periodic connection to a PC in order to get software updates? Or can it get them “over the air” like a Kindle or Android device?]

[Update: the gift recipient (Harvard graduate, as it happens, with more than 10 years of experience using Windows) spent 45 minutes trying to download and install iTunes on her Windows XP laptop. She failed completely and seemed not to understand that the download process results in a program file being transferred to her computer and that, afterwards, the program would have to be run in order to complete the installation. The word “installer” was incomprehensible to her. I guess this shows that the Android/iOS one-step process of installing applications is superior for naive users than the two-step Mac OS/Windows process.]

[Update 2: the gift recipient was able to get a recent high school graduate to come over and assist with the installation of iTunes. However, they found that they could not sync the PC with the iPad unless they held the connector into the edge of the iPad. There seems to be some kind of mechanical problem either with the cable or the iPad itself. The two of them were able to get the iPad onto a WiFi network and connected to a legacy AOL email account, so now it can function as a Web browser or email reader.]

[Update 3: While the iPad debacle was unfolding a non-tech friend decided to purchase his first smart phone. He went to the Verizon store at the Burlington Mall and, before leaving the store, had his new Android phone (Samsung Droid Charge, with OLED screen and 4G LTE data; we’ll see what kind of battery life he gets!) set up with his email and was happily replying to messages.]

[Update 4: I took a tour around the iPad Web site, e.g., http://www.apple.com/ipad/features/ ; nowhere does it show the iPad connected to the dreaded legacy systems. The only mention of connecting the iPad to a traditional computer is at the bottom of http://www.apple.com/ipad/ios4/ and then it is only in the context of updating software.]

[Update 5 (about 5 days after delivery): The new iPad user was able to get to the Facebook web site. However, she was not able to log in because she said “I could not get the keyboard to appear at the same time that it was asking me for my email address and password.” She spent about 30 minutes trying to figure out how to get into Facebook and then gave up, reporting great frustration. “I can’t figure out how to get any of these things to go away,” she noted. “On Windows there is a line of commands across the top, but on the iPad there are usually only a few options.”]

[10-day update: The iPad user does not know what an “app” is and cannot distinguish between trying to connect to Facebook via the Web versus via through a “Facebook app”. It is impossible to explain the difference over the phone.]

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The June/July 2011 issue of Air Line Pilot, the official journal of ALPA, the largest U.S. airline pilot’s union, arrived in the mail. It contains a review of the preceding decade. Here are some interesting numbers:

• the peak of U.S. airline employment was in 2000, with more than 650,000 Americans working for an airline. “U.S. airlines have cut nearly 150,000 employees since the peak,” based on government statistics, leaving just over 500,000 employed
• the peak of U.S. airline pilot employment was in 2005, with 76,078 pilots. The numbers are down slightly since then, with 74,552 pilots working in 2010. There has been a gradual shift from major airlines to regional.
• passenger traffic in the U.S. peaked in 2007 and the current traffic levels are about 6 percent below the peak
• ticket prices during the decade, adjusted for inflation, went down 21 percent (they were flat in nominal terms; compared to a 117 percent rise in college tuition, an 82 percent rise in the cost of eggs, and a 46 percent rise in the cost of a movie ticket)
• jet fuel prices rose an average of 10 percent per year during the decade
• revenues for U.S. cargo-only airlines, such as UPS and Fedex, grew from $20 billion in 2001 to more than $30 billion in 2010 (down from a 2008 peak of more than $35 billion); these numbers are not adjusted for inflation and the 2001 number would be about $24.6 billion in 2010 dollars
• the last supersonic passenger flight, an Air France Concorde from Paris to New York, took place in 2003
• more than 30 percent of U.S. airlines filed for Chapter 11 bankruptcy protection during the decade (i.e., 30 percent of airline shareholders were wiped out)
• a lot of new jobs for pilots will be with “state-owned airlines”; under the headline “Rise of the Middle Eastern Airlines”, it is forecast that “By 2029, 68 percent of air traffic volume will be from the emerging economies in such countries and regions as Asia, Brazil, India, and the Middle East.”

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Listening to a government-sponsored radio news broadcast this morning, I heard Barack Obama talking about his plans for closing up the nation’s larger-than-Greece’s federal budget deficit (don’t forget that the states are also running deficits by underfunding public employee pensions) by eliminating tax breaks for corporate jet owners. I did a little research and found out that he was talking about a regulation that allows new aircraft to be depreciated more rapidly than the 7-year standard. This article explains the issue reasonably clearly. The depreciation schedule tweak was put in as a favor to aircraft manufacturers and their mostly unionized work forces. It makes new aircraft relatively more attractive than used aircraft. As U.S. companies such as Cessna and Bell lose market share to more innovative foreign manufacturers, however, many of the benefits are going to foreign or foreign-owned aircraft makers.

As I wrote in my economic recovery plan for the U.S., I’m personally in favor of allowing businesses to depreciate capital goods on whatever schedule makes sense for them. It avoids the bizarre situation of a company being cashflow-negative and still owing tax. President Obama made it sound as though the change would raise a lot of revenue for the federal government. The reality is that changing the rules wouldn’t raise an additional dime from companies that already own planes. Nor would the rule change change the total amount that a company can deduct for an aircraft used for business. Tweaking the rules means that the federal government gets tax revenue possibly a little sooner or later than it would have otherwise. With interest rates down around 1.5 percent for 5-year Treasuries, the value to the Feds of getting the money sooner is low. The final problem with Obama’s plan to raise big $$ via this rule tweak is that aircraft sales in the U.S. are very slow. Since the U.S. economy isn’t growing and aircraft last a long time, there is little practical need for a lot of new corporate jets.

Obama’s plan would help accountants and tax lawyers, but it is hard to see how it would have a significant effect on federal tax revenues. Furthermore, the way that he phrased it in his speech was misleading to citizens who would have concluded that somehow the federal government was ladling out cash for corporate jets in the same way that it does for energy efficiency, electric cars, ethanol, etc. Obama proposed to close one of the world’s largest government spending gaps by changing the depreciation schedule on a small and shrinking class of capital equipment purchases.

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I’ve been making the rounds of the ice cream shops on Martha’s Vineyard this week and my cone is usually delivered by a 20-25-year-old with a Polish accent. This did not strike me as odd a few years ago when the U.S. economy was booming. Jobs on the Vineyard are plentiful during the summer, but affordable housing is not very comfortable. It was primarily foreigners who wanted to come here, work 12 hours per day, every day, sleep in a bunkhouse and bank a lot of money before returning home at the end of the summer (there is some sort of work experience visa program that was/is commonly used for these young people; it may be that they are studying hospitality in a school back in Europe). With millions of unemployed Americans, however, it seems odd to me that the summer of 2011 would still be one in which the employers of the Vineyard would look to foreigners.

Update: I did a little more research among the managers and employees of shops in Vineyard Haven. One shop owner said that she thought that the work ethic of young Americans was, on average, inferior to that of the foreigners who were motivated to pack up and cross the ocean. The cost of the temporary foreign workers was about the same as hiring an American, but the foreigners were more effective. A couple of Russian students (from Vladivostok!) working in an ice cream shop said that they were being well paid but mostly valued the opportunity to improve their English. I also found legal workers from Turkey and a couple of recently-arrived girls from the Czech Republic who were looking for cash jobs.

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