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I didn’t pay a lot of attention to the debt ceiling debate in Congress or its ultimate resolution, which was to borrow more money and promise that a group of future politicians would raise taxes and/or cut spending at some point between the year 2013 and never.

A more thorough analysis was the cover story of Business Week for July 27: “Why the Debt Crisis Is Even Worse Than You Think”.

There is a comforting story about the debt ceiling that goes like this: Back in the 1990s, the U.S. was shrinking its national debt at a rapid pace. Serious people actually worried about dislocations from having too little government debt. If it hadn’t been for two wars, the tax cuts of 2001 and 2003, the housing meltdown, and the subsequent financial crisis and recession, the nation’s finances would be in fine condition today. And the only obstacle to getting there again, this narrative goes, is political dysfunction in Washington. If the Republicans and Democrats would just split their differences on spending and taxes and raise the debt ceiling, we could all get back to our real lives. Problem solved.

Except it’s not that way at all. For all our obsessing about it, the national debt is a singularly bad way of measuring the nation’s financial condition. It includes only a small portion of the nation’s total liabilities. And it’s focused on the past. An honest assessment of the country’s projected revenue and expenses over the next generation would show a reality different from the apocalyptic visions conjured by both Democrats and Republicans during the debt-ceiling debate. It would be much worse.

…

Even in the late 1990s, when official Washington was jubilant because the national debt briefly shrank, fiscal-gap calculations showed that the government was quietly getting into deeper trouble. It was paying out generous benefits to the elderly while incurring big obligations to boomers, whose leading edge was then 15 years from retirement.

Mostly using numbers from the Congressional Budget Office, an analysis shows that the U.S. government is about $211 trillion short (i.e., the $14 trillion headline debt is the least of our worries). The article doesn’t link to the analyses that it cites, so it is tough to know what assumptions went into them [this article by Kotlikoff is the closest that I’ve found]. It seems reasonable to conclude, however, that the shortfall would be much larger than $211 trillion if our economy doesn’t grow as expected and/or if Americans begin to live longer than expected.

The debate worth having is how we are going to divide America’s income between the working and the non-working and how much of America’s income we want to put into health care, military adventures, and other overhead areas that will not produce a return on investment. Our Congress, at any rate, is not having this debate so it probably isn’t worth anyone’s time to pay attention.

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http://economix.blogs.nytimes.com/2011/08/05/length-of-unemployment-continues-to-break-records/ says that the average length of unemployment is the longest ever recorded, up to more than 40 weeks (compared to less than 15 weeks in the downturn of the late 1940s). According to http://www.census.gov/hhes/www/housing/census/historic/ownrate.html , home ownership rates have been growing gradually since 195o, as has the duration of unemployment.

Let’s look at a couple of reasons that increased homeownership could lengthen unemployment periods. Let’s consider mobility. There is a large variation in demand for labor across states and regions. Homeowners are crippled in terms of mobility compared to renters. The homeowner, especially in a state with a shrinking number of jobs, may need months or years to sell a house and move. He may delay the move for months in hopes of landing a local job that will spare him the pain of paying a 6 percent real estate commission. A renter can pack up, tow a U-Haul, and be on the other side of the country within a month.

A renter may feel more urgency about earning enough money to make monthly payments. A landlord can get a non-paying tenant evicted, in most states, in a matter of weeks. Now that the mortgage industry has combined 21st Century financial engineering with 19th Century methods of handling paperwork, and therefore nobody can say who owns anything (we’ve turned the U.S. into the kind of informal economy that we once derided), it might take years to foreclose on a homeowner after he or she stops making payments.

So it may be that the more we encourage homeownership the more we engender long-term unemployment. Perhaps therefore the trillions of dollars that we’ve poured into subsidizing homeownership (mortgage interest deduction, propping up Fannie Mae, etc.) were ill-considered. In a fast-growing global economy, maybe a big competitive advantage for a nation is a mobile workforce of renters.

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Folks might enjoy this New Yorker article on Bridgewater Associates, supposedly the world’s biggest hedge fund. The founder has an unusual management style, e.g., “One rule of radical transparency is that Bridgewater employees refrain from saying behind a person’s back anything that they wouldn’t say to his face” leads to inviting a worker into a conference room where top managers discuss whether or not he is qualified for a promotion.

The founder, Ray Dalio, has some interesting ideas about investing, e.g., “One says that, over the long run, the price of gold approximates the total amount of money in circulation divided by the size of the gold stock.” (i.e., since the world keeps getting richer, gold will keep going up, up, up (though at any moment it might be mispriced))

The article doesn’t have a lot of practical advice except maybe to avoid holding assets in U.S. dollars:

Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said. … “I think late 2012 or early 2013 is going to be another very difficult period”

 

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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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