If anonymous comments from officials are to be believed, the US House has come up with a stimulus package. Any increased borrowing is reckless, but at least some of this borrowing will benefit the needy. The deal to make rebates available to the working poor in exchange for not doing anything for people with no earned income seems reasonable.
We need to step back and ask how we got in a position to need to borrow money for a stimulus package. We need a stimulus package because GDP is growing around 1% instead of around 3%. But why is 1% growth a crisis? It's a crisis only because so much of the economy operates with no breathing room.
We like to save our money in stocks because they provide higher returns than bonds or money market accounts. This additional return is a risk premium: higher returns in exchange for increased risk. Stocks are priced based on their current earnings and investors' opinion of their future earnings. If investors' opinion of future earnings goes down, we watch our portfolios sink.
This is not so bad because maybe next year things will turn around and our portfolios will grow to new highs. The problem comes when we accept the risk premium but can't tolerate the risk.
This affects consumers with little savings and who spend all the money they make even more so. If the economy stops expanding (around 0% growth for a few quarters) and that affects their jobs or businesses, they are quickly in a personal crisis.
Why have we set up our society such that if we produce the same amount as last year, it is a crisis?
It is a mystery why people behave this way. How much benefit do investors get from taking a little more risk than they should? How much benefit do consumers get from spending all the money they make instead of just 80% of it. Some commentators say there's a middle-class squeeze and people earning the median income cannot afford to consume only 80% of what they earn. These commentators should ask all the people who happen to earn 80% of the median income how they do it.
Whatever the psychology behind this behavior, it would do us good to consider the long-term consequences of our financial decisions. When the US decided to invade and occupy two countries at the same time and pay for it by borrowing, it indirectly decided not to spend as much on future endeavors like healthcare, education, or the next military action. When people borrow money, they indirectly decide to forego the option of more time with friends and family and to increase the impact of blips in the economy or in their lives.
These decisions are not bad, as long as they're recognized as decisions. Unfortunately, people have been living on the edge for so long, they don't even recognize they're making these tradeoffs. Maybe many Americans are in a precarious financial situation that justifies more borrowing, in the form of government deficit spending, to keep the whole thing going. Maybe this problem here-and-now is more important than things like shoring up Social Security and Medicare in the future.
We need to ask how long we want to keep living like this. We know markets go up and they go down. We know GDP goes up and on occasion goes down. We should plan for it, and act accordingly. It will make us happier in the good times and more resilient against any peril we may face in the future.
Thursday, January 24, 2008
Sunday, January 20, 2008
Congress Should Be Judicious with Stimulus Package
Congress should exercise restraint in any stimulus package following Fed Chair Bernake's comments last week. Any stimulus package should be small, short-lived, and focused on helping the neediest people.
I agree wholeheartedly with the logic behind Congress using fiscal policy, in concert with the Federal Reserve's monetary policy, to even out the economic cycle. It makes sense to stimulate the economy with deficit spending during a recession and to run a surplus or at least balanced budgets during expansions. The hard part to this is finding the discipline to balance the budget when the time comes instead of simply finding a new reason to borrow money.
A radical idea for the future along this line would be to create an independent fiscial policy committee, similar to the Federal Open Market Committee, that would set a value for the federal budget deficit/surplus each year. Congress would be allowed to spend as much or as little as it liked, as long as the deficit equaled the value set by the fiscal policy committee. This would prevent decisions like the stimulus package being discussed today from being overly influenced by politics. This is, of course, a radical long-term idea far beyond the scope of how Congress should respond to Bernake's comments today.
In the coming days, I hope to see Congress pass only a minimal stimulus package directed at families living near the federal poverty line. Stimulus money spent on the truly needy will help the economy more and do far more good than money directed to people earning the median income or higher.
I agree wholeheartedly with the logic behind Congress using fiscal policy, in concert with the Federal Reserve's monetary policy, to even out the economic cycle. It makes sense to stimulate the economy with deficit spending during a recession and to run a surplus or at least balanced budgets during expansions. The hard part to this is finding the discipline to balance the budget when the time comes instead of simply finding a new reason to borrow money.
A radical idea for the future along this line would be to create an independent fiscial policy committee, similar to the Federal Open Market Committee, that would set a value for the federal budget deficit/surplus each year. Congress would be allowed to spend as much or as little as it liked, as long as the deficit equaled the value set by the fiscal policy committee. This would prevent decisions like the stimulus package being discussed today from being overly influenced by politics. This is, of course, a radical long-term idea far beyond the scope of how Congress should respond to Bernake's comments today.
In the coming days, I hope to see Congress pass only a minimal stimulus package directed at families living near the federal poverty line. Stimulus money spent on the truly needy will help the economy more and do far more good than money directed to people earning the median income or higher.
Sunday, January 6, 2008
Comments on Congress's Accomplishments for 2007
Last Friday my Congresswoman, Tammy Baldwin, sent out a year in review e-mail about Congress's accomplishments in 2007. I sent her office a summary of the points made in the year-end message.
Generally I try to keep messages to politicians short and on a single point. Politicians do keep track of how their mail is running on various issues and avoid voting against the mail. Tammy Baldwin is special in that she sometimes sends non-form-letter replies addressing specific points made to her.
In this letter to Baldwin, I make an exception to my single-issue messages and comment on a range of issues.
I italicize (added for the blog posting) points that I think deviate from the Democratic Party positions.
Dear Congresswoman Baldwin:
I enjoyed reading your year-end report. I am happy the Democrats attained a majority and were able to make progress.
I did not follow the ethics package, but I know it was sorely needed. In 1994, the GOP took over Congress promising radical reforms. They gave us the same deficits, out-of-control sweetheart pork-barrel spending, and scandals that they said they would put a stop to. I appreciate any efforts for reform, including the ethics package and pay-as-you-go rules.
I have read the 9/11 Commission report, and I wondered why we hadn't implemented all its recommendations. I'm glad you passed something to correct this.
If the increased subsidy of student loan interest survives future budget pressures and is phased in as planned, it will do more for America than any other domestic policy initiative you could pass.
The Energy Independence and Security Act sounds like a good first step in the right direction. Reducing carbon emissions and thereby global warming is an investment that will save future generations from paying the price for cheap energy today. I urge you to consider nuclear power as one piece of the puzzle of reducing carbon emissions. There is much to be done in the area of conservation, but absent some revolutionary energy source, at some point we must choose between nuclear and combustible fuels that emit greenhouse gases.
The minimum wage increase is a "band-aid" to treat poverty, but it is a good first step. I would love to see the minimum wage indexed to inflation just as the tax brackets are, so we would not have to spend time debating this every few years. Real improvements in poverty will come from increased education and future efforts to protect children during their formative years.
It is unfortunate President Bush vetoed funding for SCHIP and stem-cell research. It is unfortunate, also, that you could not pass a law allowing Medicare to negotiate with drug companies. In the long-run, though, President Bush's idea of giving heathcare consumers more control through HSAs is a good one. I urge you to change your position on this and, if you have to chance, to agree to support expansion of HSAs in exchange for more funding for healthcare for the poor.
I appreciate your making Iraq a priority. I am not knowledgeable enough to know how and when we should withdraw our forces. Reckless foreign policy got us into the Iraq mess. We should be judicious about how we get out.
I hope in 2008 Congress resists the pressure to bail out borrowers and lenders caught up in the subprime lending debacle. Such a bailout would be pandering to the FIRE industries and people in expensive houses they cannot afford.
I look forward to seeing you at your upcoming birthday party. You do a great job representing our district, and I'm grateful for it.
Sincerely,
Charles J Gervasi
Generally I try to keep messages to politicians short and on a single point. Politicians do keep track of how their mail is running on various issues and avoid voting against the mail. Tammy Baldwin is special in that she sometimes sends non-form-letter replies addressing specific points made to her.
In this letter to Baldwin, I make an exception to my single-issue messages and comment on a range of issues.
I italicize (added for the blog posting) points that I think deviate from the Democratic Party positions.
Dear Congresswoman Baldwin:
I enjoyed reading your year-end report. I am happy the Democrats attained a majority and were able to make progress.
I did not follow the ethics package, but I know it was sorely needed. In 1994, the GOP took over Congress promising radical reforms. They gave us the same deficits, out-of-control sweetheart pork-barrel spending, and scandals that they said they would put a stop to. I appreciate any efforts for reform, including the ethics package and pay-as-you-go rules.
I have read the 9/11 Commission report, and I wondered why we hadn't implemented all its recommendations. I'm glad you passed something to correct this.
If the increased subsidy of student loan interest survives future budget pressures and is phased in as planned, it will do more for America than any other domestic policy initiative you could pass.
The Energy Independence and Security Act sounds like a good first step in the right direction. Reducing carbon emissions and thereby global warming is an investment that will save future generations from paying the price for cheap energy today. I urge you to consider nuclear power as one piece of the puzzle of reducing carbon emissions. There is much to be done in the area of conservation, but absent some revolutionary energy source, at some point we must choose between nuclear and combustible fuels that emit greenhouse gases.
The minimum wage increase is a "band-aid" to treat poverty, but it is a good first step. I would love to see the minimum wage indexed to inflation just as the tax brackets are, so we would not have to spend time debating this every few years. Real improvements in poverty will come from increased education and future efforts to protect children during their formative years.
It is unfortunate President Bush vetoed funding for SCHIP and stem-cell research. It is unfortunate, also, that you could not pass a law allowing Medicare to negotiate with drug companies. In the long-run, though, President Bush's idea of giving heathcare consumers more control through HSAs is a good one. I urge you to change your position on this and, if you have to chance, to agree to support expansion of HSAs in exchange for more funding for healthcare for the poor.
I appreciate your making Iraq a priority. I am not knowledgeable enough to know how and when we should withdraw our forces. Reckless foreign policy got us into the Iraq mess. We should be judicious about how we get out.
I hope in 2008 Congress resists the pressure to bail out borrowers and lenders caught up in the subprime lending debacle. Such a bailout would be pandering to the FIRE industries and people in expensive houses they cannot afford.
I look forward to seeing you at your upcoming birthday party. You do a great job representing our district, and I'm grateful for it.
Sincerely,
Charles J Gervasi
Tuesday, January 1, 2008
Financial Predictions for 2008
The housing bubble is far from finished deflating. The Fed will keep short-term rates low to prevent the bust from spreading to other areas of the economy. This will be successful and prevent consecutive quarters of GDP contraction (i.e recession).
Nothing can change the fact that more housing units were created during the boom than people to fill them, so inflation-adjusted real estate prices will continue to decline. The lower short-term rates may slow the decline slightly by providing low payments on adjustable loans. This effect will be limited, however, by underwriting guidelines that require borrowers be able to pay potentially higher payments if their loan adjusts upward.
A side-effect of the lower interest rates will be increased inflation. We are already seeing this now. The trend will continue for 2008 and beyond. This will hurt long-term bond holders and help homedebtors by masking the decline in their houses' prices.
Oil prices will decline due to a) a decrease in global GDP growth, b) increased oil exploration funded by higher oil prices, and c) increased interest in conservation and renewable energy.
Increased inflation may lead to higher yields on Treasury bills and the US Dollar declining further against the Euro. A declining dollar may decrease the US trade deficit. Higher yields on Treasury bills will force the US government to decrease its expenses and/or increase taxes. This guns or butter pressure will be favorable to Democrats, who are perceived as stronger on domestic issues. Demagoguery about the threat of international terrorist networks will decrease. A decreased trade deficit may ease the pain of increased global trade, but globalization is slowly transforming the world in a huge way. This transformation will continue for decades to come. Expect demagoguery on this issue.
In rising inflation environments, gold and basic materials tend to rise. This effect on gold, however, may be offset by how much gold has already risen in recent times and by a lack of truly negative economic news in 2008. Increases in basic materials may be offset by a slowing in global GDP growth. As a result gold and materials will not be a reliable hedge against inflation.
Healthcare will be a good investment sector because it tends to do well in an inflationary environment and because of an aging population. Market reforms in healthcare will be good for consumers and the investment sector, if healthcare providers can learn to provide better customer service. If they cannot, there may be a backlash resulting in a national healthcare plan. The effect of such a plan depends on the details and cannot be predicted at this point.
Consumer staples and utilities will do well due in 2008 to inflation without a significant recession.
There is a chance for nanotechnology, biotechnology, or alternative energy to do well because of possible and breakthroughs and because of the possibility of speculative fervor developing around one of these sectors.
Instruments that benefit from a rising Treasury yield will do well because yields are near their historic lows and rising inflation will drive it up.
The US stock market will perform lower than average in 2008 because of inflation concerns, but it will do well in coming years because the fundamentals of the US economy are strong. Inflation and the ongoing real estate bust will be something for journalists to write about over the next year or two but are not at all threats to foundation of the economy.
Note: This post represents my guesses. I have no formal training in finance. Nothing I say is intended as financial advice. Even if I were formally trained in finance, people need to consider their individual situation before making investment decisions.
Nothing can change the fact that more housing units were created during the boom than people to fill them, so inflation-adjusted real estate prices will continue to decline. The lower short-term rates may slow the decline slightly by providing low payments on adjustable loans. This effect will be limited, however, by underwriting guidelines that require borrowers be able to pay potentially higher payments if their loan adjusts upward.
A side-effect of the lower interest rates will be increased inflation. We are already seeing this now. The trend will continue for 2008 and beyond. This will hurt long-term bond holders and help homedebtors by masking the decline in their houses' prices.
Oil prices will decline due to a) a decrease in global GDP growth, b) increased oil exploration funded by higher oil prices, and c) increased interest in conservation and renewable energy.
Increased inflation may lead to higher yields on Treasury bills and the US Dollar declining further against the Euro. A declining dollar may decrease the US trade deficit. Higher yields on Treasury bills will force the US government to decrease its expenses and/or increase taxes. This guns or butter pressure will be favorable to Democrats, who are perceived as stronger on domestic issues. Demagoguery about the threat of international terrorist networks will decrease. A decreased trade deficit may ease the pain of increased global trade, but globalization is slowly transforming the world in a huge way. This transformation will continue for decades to come. Expect demagoguery on this issue.
In rising inflation environments, gold and basic materials tend to rise. This effect on gold, however, may be offset by how much gold has already risen in recent times and by a lack of truly negative economic news in 2008. Increases in basic materials may be offset by a slowing in global GDP growth. As a result gold and materials will not be a reliable hedge against inflation.
Healthcare will be a good investment sector because it tends to do well in an inflationary environment and because of an aging population. Market reforms in healthcare will be good for consumers and the investment sector, if healthcare providers can learn to provide better customer service. If they cannot, there may be a backlash resulting in a national healthcare plan. The effect of such a plan depends on the details and cannot be predicted at this point.
Consumer staples and utilities will do well due in 2008 to inflation without a significant recession.
There is a chance for nanotechnology, biotechnology, or alternative energy to do well because of possible and breakthroughs and because of the possibility of speculative fervor developing around one of these sectors.
Instruments that benefit from a rising Treasury yield will do well because yields are near their historic lows and rising inflation will drive it up.
The US stock market will perform lower than average in 2008 because of inflation concerns, but it will do well in coming years because the fundamentals of the US economy are strong. Inflation and the ongoing real estate bust will be something for journalists to write about over the next year or two but are not at all threats to foundation of the economy.
Note: This post represents my guesses. I have no formal training in finance. Nothing I say is intended as financial advice. Even if I were formally trained in finance, people need to consider their individual situation before making investment decisions.
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