Sunday, December 07, 2003

If you want to live like a Republican, vote Democratic.

Supposedly, happy days are here again. Announcements of job gains, and a slight improvement in the unemployment rate, together with a bullish sentiment reading in a poll of manufacturers, has the major media gushing all over the Bush administration for solving the economic crisis. This is, to use James Kilpatrick's favorite word: "balderdash". I'm going to defer to Gene Sperling's excellent column at Bloomberg to lay out how bogus the story of economic recovery really is. The failure of Bush's three record breaking tax cuts and equally ill advised budget decisions to jumpstart the economy should come as no surprise. After all we've been getting the same lackluster results from GOP borrow and spend policies for decades. The raw numbers show very clearly the truth of the old saw: "If you want to live like a Republican, vote Democratic". Here's why:

Any budget policy ideas are going to transfer money and resources from one place to another place. (duh.) Thing is though, that some transfers add more to the economy than others. A dollar spent on a public works project or a social welfare check will recycle quicker and more often in the domestic economy than the same dollar spent on the military or in a tax cut redirected back to the affluent. This is because a poor person will not only spend that dollar faster than an affluent person, but a poor person is more likely to spend that dollar in turn on things that in themselves will recirculate dollars quicker. (food, shelter, heat bills versus savings, luxuries or foreign travel for example.) These relationships are pretty well known and economists can tell well enough how much growth a dollar spent on each type of activity will cause. So professional policy wonks know full well what kind of budget spending will jump start the economy and what kind of spending won't have much effect.

The problem is that the immediately obvious beneficiaries of pro-growth budget policies are all interest groups lumped together in one political party - the Democrats. Each party wants to reward their own base, so you see the Democrats spend more on social/domestic spending and the Republicans spend more on the military and on tax cuts to the affluent. The former will grow the economy, the latter will not. You can see this dynamic in the inflation-adjusted growth rate of the economy since 1950. The average yearly GDP growth under Democratic administrations from 1950-2002 is 4.4%. The average growth rate under Republican administrations over the same period is 2.8%.

Looking at party control of Congress as well as the White House show a clear correlation between Democratic Party control of government and maximum economic growth. Let's look at which party controls the House of Representatives (since the House originates the budget bills), which party controls the Executive, and average the annual inflation adjusted growth of Gross Domestic Product for each combo. Since 1950 there were 17 years in which the Democrats held the House and the Presidency. In those years GDP grew an average of 4.5%. In the 6 years where the Democratic president had to contend with a Republican House, GDP growth was a little less, averaging 3.9% per year.

There were 26 years in which a Republican President had to contend with a Democratic House. In those years GDP growth was much lower, averaging 2.9%. Finally, for those who feel that Republican spending policies would really only benefit the country when the GOP owned the House and the White House, during the four years that this was the case, growth came in the smallest of all, averaging only 1.9% per year.(My source for GDP, and the GDP deflator, when applied to GDP gives you GDP adjusted for inflation is President Bush's last Budget message to Congress, the historical tables of which are available here.)

This is very clear cut. When Democrats run the economic show, we have robust growth of the economy. Add in Republican power participation in increments and each step of the way reduces economic growth. This shows the reality of the theory of the velocity of money, explained in my previous essay below titled: "Whatever Goes Around, Comes Around".

Why is this important? Well imagine just for a moment the 2000 election. Change 275 Florida votes (and/or 1 Supreme Court vote), and change about 20,000 votes that would have given the Democrats control of the House. If the Democratic tandem delivered 4.5% economic growth the way they have before over the last 52 years and we have a completely different country right now. Given that kind of growth over the last three years, we would have seen over $900 billion more economic activity in 2003 than we had. Goodbye unemployment problem. Goodbye budget deficit. Hello stock market success. If you want to live like a Republican, vote Democratic.

Thursday, September 25, 2003

Camejo Sees It, Why Shouldn't We?

In last night's "debate", the latest chapter in the circus called the California Recall Campaign, one piece of substance was drowned out and eventually denied by the media noise and spectacle. Peter Camejo made the charge that California's poorest taxpayers pay a higher % of their income in state and local taxes than do the wealthy. Referring to figures produced by the California Budget Project and the Institute on Taxation and Economic Policy, Camejo proposed that the high income end of California's taxpayers could afford a tax hike to make the tax code fairer all around.

As far as I can see from my vantage point, this idea was either ignored or denied. In a factchecking exercise by the LA Times, the newspaper asserted that Camejo's point was "difficult to evaluate" and presented the fact that the top 1% of California taxpayers pay 40% of the income taxes.

Camejo, of course, was talking about ALL taxes we have to pay, from property, sales, excise etc. as well as income taxes. And his point was quite right. The numbers do not lie, at least when you look at the whole picture.

Doing a little bit of rough paper and pencil calculating, if we take the ITEP study above, and assume a tax structure where every California taxpayer pays a flat % of income in state and local taxes equal to the burden borne by the poorest quintile of Californians, $25 billion more revenue is raised, reducing California's budget woes to a minimum manageable level. Of course, enacting such a program in Proposition happy California will be very tough.

But think on this a minute: California's budget deficit, cutbacks, education crisis, mismanaged transportation system etc and so forth is largely attributable to the lamentable unwillingness for the state's affluent citizens to bear the same proportionate burden that the state's poorest citizens are bearing right this moment.

Therefore, whether California wises up and heeds the call of Peter Camejo (full disclosure: Peter is a friend and colleague of mine) or whether the state chooses another one of the farcical candidates being served up, Californians will get the exact government they deserve.

And if they don't heed Camejo's message, that will be a pathetic tragedy indeed.

Monday, August 25, 2003

Greens Caused the Blackout? The Latest Chestnut from the Right.

The radical right is wasting no time in branding the Northeast blackout of 2003 the fault of "greens" preventing the construction of power plants. In a characteristic article making the rounds of the right wing blogs, boards and BBS's, J. Matthew Phipps declares: "Gone is NIMBY (Not In My Back Yard), to be replaced by the BANANA Build Absolutely Nothing Anywhere Near Anything...The recent blackout in the Northeast is just a symptom of our "Green BANANA" problem." After working up a lather, he maintains that greens "are the ones that have caused this by effectively driving environmental policy for the past three decades".

The more inventive rightwingnuts have even started blaming the French heat wave deaths on environmentalists. In this formulation, the assumption is made that more, unfettered nuclear energy would have provided enough energy to cool all those unfortunate victims down and prevent those deaths. But apparently environmentalists prevented that with their insistance that water temperatures in rivers where reactor superheated water flows remain under legal limits.

Better get used to this "greens cause all the ills of the world" mantra, because like all right wing rallying cries, this one has the facade of common sense to any who fail to look at the real issues for more than say 11 seconds, (which is to say a sizable portion of the electorate.) Contributing to the legitimacy of this POV is the fact that contested, controversial power plant projects make news. Construction of a power plant that no one objects to does not. In this case, if we want to fight the reflexive "more power plants" response to the Northeast blackout, the California energy crisis, the French heat wave and even the heartbreak of psoriasis, a few basic objective facts are in order.

Fact #1: Environmentalists have not stopped the growth of electricity generation, because that growth hasn't stopped. Looking at Department of Energy figures back through the life of the environmental movement, every single year since 1965 shows an increase in the amount of kilowatt hours generated, save two: 1982 and 2001. The former was caused by the deep recession of that year. The latter was caused by the 9/11 economic slowdown and the Enron debacle. So in all the years that the right wingnuts blame greens for shutting down our electricity growth, generation growth went from 1,147,531,895 kilowatt hours in 1966 to 3,719,484,531 kilowatt hours in 2001.

Fact #2: Environmentalists have not stopped the construction of power plants. While new nuclear plants have indeed been halted (for reasons owing more to Wall Street financial worries than the power of the anti-nuke movement), other forms of generation are cropping up like hotcakes. In the first 6 months of 2003 alone, 237 new power plants went online, with a summer capacity of over 27,000 megawatts. (Don't believe me? Look at the full list.)

Fact #3: Halting the growth of energy production in California did not cause the 2000-01 electricity crisis there. Despite the findings of courts and commissions of criminal acts in the California energy debacle, many people continue to push the chestnut that "California greens" shut down the power industry and therefore caused a shortage. It too does not stand up to scrutiny. State level figures show a steady increase in electricity generated. For example, California produced an additional net 20 million megawatt hours of electrical generation from 1990 to 1999, an increase of 12%.

Fact #4: A shortage of energy generation did not cause the Northeast blackout. The facts are still be collected on this one, but initial indications point to blackout caused by multiple failures of human and mechanical error on an overworked transmission grid. Far from implicating "greens", the main culprit appears to be procedures performed by FirstEnergy, a fiercely conservative nuclear utility and major funder of the Bush campaigns.

Fact #5: None of the 10,000 deaths attributed to the French heat wave was caused by a shortage of electrical power. No power outages occurred. Even if France miraculously built 100 more nuclear plants in the days before the heat wave, not a single life would have been saved, for all the nuke plants in the world can't cool a building that doesn't have an air conditioner.

Don't let the right wingnuts control the terms of debate on energy. Basic fact checking, as usual, demolishes their case.

Sunday, August 17, 2003

Whatever Goes Around, Comes Around

Note: This article was originally written on October 1, 2000. The theme of the article, that more social spending by the Federal government creates higher economic growth (and vice versa) is actually the thing that got me backing away from the stock market in the summer of 2000. This article predicted a slowdown in economic growth based on the slowdown in social spending (as a % of the total Federal budget). Sure enough, growth in real GDP from 1997-2000 was 3.2% per year. From 2000 through 2002 growth slowed to 2.1% per year.

Whatever Goes Around, Comes Around
By Richard Torgerson

"Whatever goes around, comes around" has been a truism for years, a folksy restatement of the Golden Rule or the Law of Karma. Perhaps all of us have seen this truism at work in our own lives as we decided to give up something we valued, be it time, energy or money, only to have it come back to us in abundance afterwards. As we start to immerse ourselves in the fiery political rhetoric of the season, I thought it wise to reflect whether this truism has validity on the national economic scene. I believe it does.

One of the great debates over the last few decades has been the role of social spending and Social Security in our society. It's not my intention to analyze all of the sociological aspects of the issue, not only because I don't have the time, but I'm also not qualified to do so. Beyond those aspects though, a whole host of economic rationales have been concocted over time to favor or oppose lending more support to those in need. Those opposed to social spending have frequently argued that such spending is a drain on the economy, since higher social spending require higher taxes to pay for that spending. Looking at the actual track record of the economy and our governmental spending suggests the opposite however.

To compare the effect that social spending has on the economy, we examine the total percent of Gross Domestic Product represented by Federal government transfer payments to individuals. p;These payments to individuals include Social Security, Medicare and Means-Tested Entitlement programs (collectively termed 'welfare'.) The higher percentage of the total economic pie, the higher degree of effect those payments should have on the economy. To test the notion that bigger proportions of social spending means a bigger drag on the economy, we charted the annual growth of GDP overlaid on top of the chart of social spending (I'll post the graph soon for readers here.) The visual suggestion is clear. With a time lag of up to two years, economic growth strengthened after social transfer payments increased as a percentage of GDP, at least for the last twenty years or so.

From 1978 through 1980, social expenditures decreased as a percent of GDP primarily due to inflationary pressures driving GDP up faster than the Federal expenditures could keep pace. Gross Domestic Product growth also peaked in 1978, with growth plummeting down to -1.17% in 1983, closely following the decline in social spending. Partly due to that negative GDP growth and partly due to rapidly rising Social Security payments, the level of Federal transfer payments to individuals rose from 10.2% of GDP in 1981 to 11.5% of GDP in 1984. This rise was also followed by economic recovery, with GDP growth reaching a robust 7.73% by 1985.

Partly due to restrictive welfare policies of the Reagan administration and also due to Social Security 'reform' in that era, Federal transfer payments to individuals fell over the rest of the 80's, reaching a low of 9.9% of GDP in 1990. Economic growth patterns showed the same direction, with GDP growth falling from 7.73% in 1985 down to -0.38% in 1992. With the economic climate changing towards more support for social expenditures and also reflected by the election of a Democratic President in 1992, transfer payments to individuals rose from 1992 lows up to 11.9% in 1996. That period coincides with the modern period of economic expansion, with GDP growth advancing to a high of 4.49% in 1998. Most recently, Federal payments to individuals have been leveling off and trending down somewhat, representing 11.3% of GDP in 1999. At this point in the discussion it's no surprise that GDP growth slowed slightly as well to an annual rate of about 4.2% curr! ently.

The correlation is very strong. It does appear that as social spending on individuals rises as a piece of the economic pie, so does subsequent economic growth. How could this be? To answer this, we need to look at an old economic concept not getting much attention lately called the 'velocity of money'. This concept tries to measure the number of times a dollar changes hands in a given period of time. Each time a dollar changes hands represents an economic transaction. When I buy a hot dog from 7-11, my dollar changed hands from me to the 7-11 cash register. What I received was a hot dog, plus the value added labor of producing that hot dog and presenting it to me. Thus, each economic transaction is an opportunity for someone's labor to be converted into money, which adds a quantifiable piece of economic growth. That dollar in the 7-11 cash register will soon leap out and be presented to the employee as part of his paycheck.! Another transaction. The 7-11 employee might spend that dollar on his electric bill. Another transaction. The more times that dollar changes hands in a given time period means that dollar contributed more to economic growth.

Now as it turns out, different Federal expenditures have different 'velocities' from this standpoint. The most extreme example of a low velocity investment is the huge amount of money spent on nuclear missiles. Once constructed, these missiles get buried in the ground, with very little interaction with the economy from that point forward. The type of Federal expenditure with the highest velocity turns out to be the direct payment of cash to a poor person. Those funds, rather than being buried in an underground silo, are put back into circulation extremely fast, buying food or shelter virtually immediately. Food purchases especially have high velocity as grocery stores immediately put 99% of cash receipts right back to keeping the food shelves fully stocked and paying a large store-level payroll. Also, a very high percentage of food and shelter expenditures stay in this country longer, with very little going overseas to subtract from our own domest! ic growth.

So here is a concrete example of the virtues of tithing and of the Golden Rule. If we as a society are willing to part with a larger portion of our tax dollar pie for those in need, we are very quickly rewarded with greater economic growth enlarging the pie itself. Now none of this suggests that if we taxed people 100% and paid out 100% of that to Social Security and welfare that we would enjoy unprecedented growth. But at the same time, the hard data does show that if we have a larger pool of people with adequate income and adequate resources, it makes for larger opportunities and larger growth for the whole economy.

This has two implications for us right now. First, we can infer that if social expenditures keep sliding as a percent of GDP, then a slowing of economic growth may be more likely moving forward. That has a whole host of ramifications for our stock and bond investments over the next few years. Second, this practical manifestation of "whatever goes around, comes around" may be very instructive as we compare and contrast the claims, biases and orientations of the different folks that want to be elected President. Their stands on social spending and Social Security should be carefully scrutinized. "

Oct 1, 2000 Richard Torgerson © 2003

Sunday, August 10, 2003

The Big Government, Runaway Spending Party: The Republicans

Welcome to my blog. I've established this blog to puncture as many political and economic myths as I can. Listening to what passes as the national discourse these days gives me the feeling that we have all fallen down Alice in Wonderland's rabbit hole. That's a good analogy I think, especially since I've gotten The Matrix out to watch again. Maybe when I publish this blog publicly I'll rename it 'the Red Pill' (though that one's probably long since has been snatched up).

Let's start with one of the most basic myths of political discourse: that Republicans are more frugal than Democrats. It's long been a truism that Democrats are supposed to be big spenders who will spend America into bankruptcy. Once you look at the actual record, you will be surprised at the ease that this myth has been allowed to take hold. The fact of the matter is, if you measure 'runaway spending' as a willingness to spend the US budget into red ink, then Republicans are clearly the big spenders, not the Democrats.

To get a broad enough look, let's take every administration since 1904 through 2000. In those 96 years Democrats ruled the White House 48 years and Republicans sat in the oval office for 48. During that time, these administrations added $3,380,570,000,000.00 to the publicly held national debt. (That's 3.38 trillion, for the comma impaired.) Your taxes pay the interest on this debt today (among other things.)

Now Democrats had to contend with paying for the three cataclysmic events of the 20th century: World War I (Wilson), the Great Depression (Roosevelt) and World War II (Roosevelt & Truman). So naturally one would expect that the Democrats, even if by accident, should have added the most red ink to our tax bill. And one would be wrong. Turns out that over 73% of the whole publicly held debt added in the 20th century came from Republican administrations. That's right, 3 out of 4 dollars that we are paying interest on with our tax money is due to Republicans.

Now this is big for a couple of reasons. First off, it shows that political conventional wisdom is lying to you when the assumption is presented that Republicans are more fiscally responsible. Second, it gives you a target for why your taxes are so high and your services so low. For, if the Republicans had managed just to be no better than the Democrats at keeping overspending down, we'd be paying less than half the interest cost on the national debt than we are paying. That's about $115 billion per year, or about $875 per American citizen tax return filed. (So far my source for all of this is the Office of Management & Budget's Historical Tables of the US Budget, presented to Congress in conjunction with President Bush's FY2003 Budget. You can get these tables in Adobe Acrobat or Microsoft Excel format at OMB's Budget website.)

Democrats are also accused of building "Big Government" as much as they can. To hear some of our friends on the right tell it, Democrats will only be satisfied when "Big Government" owns every section of the American economic pie. Let's test this theory out too. President Bush's OMB report also gives us budget figures expressed as a percent of GDP back to 1940. This is the best way to test this proposition, because GDP, gross domestic product, is the overall economic pie. The percent spent by government in any given year represents the size of the pie slice demanded by "Big Government". If Democrats are really "Big Government" fans, we would see this pie slice get bigger and bigger during Democratic administrations and smaller and smaller during Republican administrations.

Once again, what you expect to see isn't what really happened. The average growth rate of the Federal budget as a % of GDP was 0.3% per year under Republicans since WWII. So while Republicans have been in office (for the last fifty years anyway), the Federal government's share of the economy grew and grew. Under Democratic years, the average growth rate of the Federal pie slice was -1.66% per year. That's right, the aggregate performance of Democrats in the White House since WWII (Truman, Kennedy, Johnson, Carter and Clinton) has been a reduction in the Federal government's share of the whole economy. This is not some isolated year skewing the results. Under 27 years of post-WWII Democratic Presidential budgets, 18 saw a reduction in the size of the Federal government relative to the economy. Under 30 years of Republican rule, the Federal government claimed an ever larger piece of the pie in 18 of those years.

So there you have it. Conventional Wisdom Lie #1: The Democrats are by a century's worth of actual experience decidedly NOT the party of runaway spending or big government. Republicans can lay claim to both titles, at least according to Bush administration figures.

Part of the reason Democrats shrunk government relative to GDP is their much better record of generating economic growth. But that's a myth to be busted another day.