Animated Hip Hop Breakdown of US and Chinese Economics

I’m not vouching for the content of what’s in this video, only that somebody took the time to combine animation, economic theory, dancing pandas, and hip hop into a 4 minute music video.  I love that it incorporates Bretton Woods, the New Hampshire town famous for hosting the first international monetary policy setting forum.  Also make sure you watch long enough to hear the “We’re frenemies, not enemies” chorus.

Why is Life so Hard

So there you are.  Debt.  First you got the clothes that the fashionable people have.  Then you splurged on the catered birthday party because the boss had one.  Next thing you know you’re divorced and bankrupt.  And everyone around you in middle class land is suffering the same fate.  You wonder, this can’t just be me. Well, it isn’t.

Cornell economics professor Robert Frank says it’s inequality baby.

What’s income inequality?  Why should I care?  Income inequality is the income difference between the highest earners and the lowest earners in a society.  Frank argues that it’s the bedrock of a lot of our modern day issues.

In the US, the rich are getting richer faster than the middle classes ability to keep up.  That doesn’t stop the middle class from trying to keep up though.  Instead, they use debt and second jobs to maintain a standard of living of the person just above them.  Frank calls this expenditure cascades.

The rich have been spending more simply because they have so much extra money. Their spending shifts the frame of reference that shapes the demands of those just below them, who travel in overlapping social circles. So this second group, too, spends more, which shifts the frame of reference for the group just below it, and so on, all the way down the income ladder. These cascades have made it substantially more expensive for middle-class families to achieve basic financial goals.

But what makes this article great is that Frank has looked at 100 countries and he finds concrete evidence that in countries where inequality is getting worse, there are higher rates of all forms of stress: marriage stress (more divorce), financial stress (bankruptcies), and driving stress (longer commuting times because of affordable housing).  

And yet, even though income inequality is such a driving force to many of today’s social woes, it hardly gets talked about as an economic issue. 

When Fox News screams against taxing the top 1% of the rich, remember that it’s not because Democrats don’t like rich people.  It’s because lower income inequality is a major economic force.  And when Sarah Palin yells freedom, we should take into mind that policies that favor income equality may actually lead to more freedom (freedom from stress) than policies which say that the government shouldn’t do anything. 

As we head into the polls next month, people are angry.  But I can guarantee the policies of hands off, let the rich get richer will do nothing for us.  Except make life harder.

Hmmm … those Crazy Tea Partiers

I read a post today by James Kwak (what a horrible name for a serious economics author).  In it, he looks at a book called Winner-Take-All Politics and argues that the rich have been accumulating power in Washington since the 1970s to the detriment of the middle class and the historic Democratic party.  The post is worth a quick read but here’s a couple of highlights:

Hacker and Pierson cite studies showing that public opinion on issues such as inequality has not shifted over the past thirty years; most people still think society is too unequal and that taxes should be used to reduce inequality. What has shifted is that Congressmen are now much more receptive to the opinions of the rich, and there is actually a negative correlation between their positions and the preferences of their poor constituents (p. 111). Citing Martin Gilens, they write, “When well-off people strongly supported a policy change, it had almost three times the chance of becoming law as when they strongly opposed it. When median-income people strongly supported a policy change, it had hardly any greater chance of becoming law than when they strongly opposed it” (p. 112). In other words, it isn’t public opinion, or the median voter, that matters; it’s what the rich want.

That shift occurred in the 1970s because businesses and the super-rich began a process of political organization in the early 1970s that enabled them to pool their wealth and contacts to achieve dominant political influence (described in Chapter 5). To take one of the many statistics they provide, the number of companies with registered lobbyists in Washington grew from 175 in 1971 to nearly 2,500 in 1982 (p. 118). Money pouring into lobbying firms, political campaigns, and ideological think tanks created the organizational muscle that gave the Republicans a formidable institutional advantage by the 1980s. The Democrats have only reduced that advantage in the past two decades by becoming more like Republicans–more business-friendly, more anti-tax, and more dependent on money from the super-rich. And that dependency has severely limited both their ability and their desire to fight back on behalf of the middle class (let alone the poor), which has few defenders in Washington.

The culmination of these years of moneyed influence is clearly the financial fallout and Great Recession.  

So what about the tea party?  Related to many of their core constituency, I have the ability to put a first person perspective on the group.  And what appears as a libertarian fringe group may actually be the lower middle class revolting against the culmination of this high-end power grab.  A quick scan of their crowds shows an older, more uneducated cohort clearly more disenfranchised by recent economic conditions than the rich.  In their ideals, we see the lower class protest.  They firmly can’t stand Washington, they want economic laissez faire policies (really just a return to prosperity of a time ago), and the roots of their discontent are sown in job losses from the Great Recession. 

If this is true, how did the Democrats lose this group?  How have Republicans, whose leader Boehner is a well known country club congressmen who openly loves lobbyists, come to represent the lower middle class struggling for better income equality?  Could it be that the rich have learned to completely manipulate this group united in its lack of education and conservative social values (think Fox News).  Any party who can openly support tax relief for the top 1% while openly not supporting policies that help the middle class deserves credit for a well oiled brain washing machine.  Its historical parallels are likely the yellow journalism machines of the late 19th century.  How funny is it that those times were marked by immigration issues and high rates of technology growth.

Anyways, here we sit at the election of 2010 and the lower middle class is about to topple the very government working in their favor.  Ironic.  When will the emperor's clothes come off?

Nate Silver, Hero to Geeks

If you use to follow fivethirtyeight.com and wonder now where it went, Nate inked a deal with the NYTimes to incorporate the blog. Ok, interesting enough.

In his latest post, Silver argues that all of the inflated journalism surrounding the lowered GDP estimates is more playing to the double dip narrative and less fact.   If you haven’t followed the news, the latest estimate for GDP quarter growth was reported as less than stellar.  In fact, some looked at it and said it was indicative of a double dip recession.  Reporters were practically drooling to release the news as it played to the Obama isn’t doing enough story.  What Silver argues though, is that the numbers are skewed by two factors.  Overall, demand is up and most factors are positive.

So what is the truth behind the revision.

1) State and local government spending is down.  This we knew.

2) Imports are up dramatically.  In fact, most of the increase in domestic demand is being fed by imports, which are cheaper.  And imports minus exports is an adjustment to GDP.  But why the surge in imports?  US manufacturers have been trimming their inventories and their capacities in the wake of the Great Recession.  And foreign importers are lowering prices to keep and attract buyers.  So with cheap foreign goods available, distributors are looking overseas to restock their inventories.

What this means is that gross domestic product might be down, but demand is healthy. 

So don’t panic yet.  And say something nice to a geek today. And make sure you check behind the curtain.

Moving back to a Producing Economy

This article by The Financial Times lays out the Great Recession and steps the US could take to transition from consuming to exporting.  It’s an interesting, easy read written from a worldly viewpoint.  (some articles require a FT account, not sure if this is one of them).

Can anyone see the irony in reading this article?  Bonus points if you write it in the comments.

Am I Hot or Not

Simplyhired.com lets you enter a job title and see its trend over the last 18 months.  Looking up for baristas, down for missile defense people, and kind of hit and miss for steamboat pilots.

Missile Defense, Barista trends

Missile Defense jobs | Barista jobs

Steamboat Pilot trends

Steamboat Pilot jobs

Good Stuff

http://www.nytimes.com/aponline/2010/07/15/us/politics/AP-US-Financial-Overhaul-Highlights.html?hp

Jim and His Article

When Jim was in middle school, the US debt, like Jim's grade, was relatively low. World War II debts had been largely dwarfed by growth in the 1950s and 1960s and federal spending during that time roughly matched revenue.

Deficit spending in the 80s and the 90s increased that debt so that now it nearly equals the yearly economic output of the US.

The current, more accepted argument says put the house in order, trim spending, raise taxes, but basically start working on controlling the growing debt. We'll call this Jim's mom's plan because basically we're pretty sure she wanted Jim to put his middle school house in order, study more, and goof around less.

On the other side we have Jim's plan, which when applied to our current house roughly says "deficit spending is money that is fueling growth; kill it and economies will crash". A solid rational of this, courtesy of Jim, is explained on Ezra Klein's blog. And even Kensyians believe the retraction of spending in the 1930s refueled the Depression . In Jim's world, this is akin to "Mooommmm ... if I stop hanging out with my friends, I'll never develop social skills and my big brother will beat me up."

Greece is currently heralded as an example of what happens when the house is not in order, but there seems to be general agreement that the analogy between the US and Greece doesn't work well because Greece, unlike the US, couldn't print it's own money (if you're a country and you're not in the European Union you can print your way through overspending and you're not at the complete mercy of bond markets, so goes the thinking).

So we're left with ... 1) do high debts lead to panic? 2) how high is high? and 3) did Jim really have middle school friends?

Ignoring the last one, we can look at this unbelievable dense paper first which basically says that if debt goes up then the interest rates on the treasury securities go up. Debt becomes more expensive. What we pay on interest shoots up. People flee US securities. We print money like Mary Peck Butterworth. In general, bad things happen.

But Klein/Galbraith counter that the long term US treasury rates are low, so maybe the market accepts the current situation. After all, almost all first world countries are in the same position.

Do we spend? Do we cut back? There seems to be truth to either scenario. Bond markets may not be reflecting the true risk of high debt (I mean, do you really trust Wall Street to recognize an impeding disaster?). And cutting back will definitely sting the economy. In between, the most likely scenarios are that countries with their houses in order are most likely to benefit. Not over leveraged, their abilities to invest and nimbly set fiscally policy aren't burdened by the difficulties of cutting services or raising taxes. A kind of gloom and doom but interesting analysis by Jon Markman of MarketWatch reiterates this:

While even countries that were prudent could not avoid the worldwide meltdown and recession in 2008, Drill observes, their financial systems withstood the stress. Traditional monetary and fiscal stimulus proved effective, enabling financial institutions to transmit public policies efficiently to private business and household activity.

As the result of a quick return to economic growth, Drill notes that several of these countries have already begun to withdraw their stimulus programs: Interest rates are being raised in Australia, Canada, Norway, China, and India, all of which stand out as countries that should be able to generate above-average growth and gain market share. From an investment view, companies that operate in or sell products and services to these countries should be leaders.

In addition, as the dollar declines US industries are more ripe for purchasing and our abilities to purchase cheap goods overseas diminish. Even short of world cataclysmic disaster, a house with no order invites others with better management skills to outshine. Jim may have not followed his mom's plan to the t, but he trimmed where he had to to get into UMizz and seems to be doing well. We should do the same.