Houses agrees to raise debt ceiling, plan still sucks.

[Broomstick]

If I recall (and it's a vague pull out of my memory, so yes, there may be errors - confirmation or correction welcomed) right after WWII the US had something like a debt of 125% of GDP. Which, according to today's wisdom, should have been disastrous. It wasn't. The late 40's through 1950's were a massive economic boom to the US.

Of course, there were things like the GI bill, which represented a massive investment in actual education (not the bullshit "jobs training" nowadays). The US still made stuff, which they exported to other countries. And everyone else's economies were wrecked, so we were ahead of the general crowd.

Today, however, things are very different. Education funding is dropping. Manufacturing is either no longer done, or being sent overseas. And everyone else is on an equal or greater economic footing.

THAT is why, right now, the debt level is such a bad thing - it's not just the debt, it's our prospects for paying it off. Just after WWII the US was like someone who has a lot of debt, but also a solid job and rising prospects. Today, we have a lot of debt, might soon get laid off, and we ain't getting a raise in the foreseeable future.

However - cutting off the lifeline (tattered as it is) to tens of millions of Americans who depend on things like social security or their paychecks they get from working for the government is no solution. It's like using the food money to pay off the credit cards. Yes, the credit cards get paid... and you're starving. That's not a stable situation.

What will happen August 3rd? I don't know. Last time there was a Federal shut down was in 1995 and, due to the timing (middle of the month) hardly anyone noticed. Also, it backfired on the Republicans and got fixed in a hurry. On the other hand, it's a very different group in Congress right now, many of the most extreme folks are first-time representatives and thus inexperienced in how things actually get done, and the timing is awful - the first week of the month is when a LOT of benefits go out, and if they don't, people are going to notice immediately. Between that and possibility of a global economic crash things could be much, much more ugly this time. Too many, though, are saying "well, it's never been a disaster before". Well, as they say with so much financial stuff "past performance is no guarantee of future results".

My very crude (and probably not wholly accurate) number crunching says between 50 and 100 million Americans could be feeling great distress within two-three weeks of a genuine government shut down. By "great distress" I mean unable to pay for shelter or food. Back in 1995 we didn't have 1 in 6 Americans on food stamps - we do now. Back in 1995 it was possible for senior citizens or the out of work to go to several different agencies and get temp work to make ends meet - such agencies now turn applicants away, there is not enough work for the people they already have. We didn't have nearly so many people teetering on the edge of foreclosure or eviction, where a single missed paycheck (remember all those government employees and contractors) could tip them into homelessness.

Even if the rest of the world shrugs and doesn't notice (which, personally, I doubt given how much they've noticed already) there will be repercussions on a domestic level if a shutdown lasts more than a week or two. I think a lot of people who bought the "small government is best" line of bullshit will suddenly discover just how damn useful government actually is to them.

[Surlethe]

...

Does the official process control for this properly?

I do not know. I suspect that since this criticism is obvious enough for a couple of physicists to discuss on an internet message board, professional economists have considered it. I also suspect that any actual degradation of quality over time is largely anecdotal.

[Starglider]

Does the official process control for this properly?

No; in fact the current push to introduce the 'chained CPI' will make it worse. It's not as if there aren't plenty of professional economists objecting to this; as usual the decision is being made for political reasons (in this case, a minor reduction in the rate of increase of social security payments).

Oh, I see. They have a problem with the notion that people might substitute out of the consumption basket when relative prices change.

That is a major problem - the 'if prices force you to change from steak to hamburger you standard of living doesn't change' fallacy, which Simon just explained. The end result is people on social security being forced to eat cat food, while economists claim that this is completely fine, it's just 'rational substition'. However from a statistical viewpoint this is not the big issue. The dishonesy comes from changing the basis for the index yet continuing to engage in historical comparisons. If the current methodology was applied to the pre-Reagan era US GDP growth would appear much higher through the middle of the 20th century, and the relative drop since 1980 would be almost as bad as the graph above. Unfortunately we don't have the raw data to do this accurately.

If I recall right after WWII the US had something like a debt of 125% of GDP. Which, according to today's wisdom, should have been disastrous.

I don't think any economist or even reasonably intelligent person for that matter is going to claim there is an immutable, context-free threshold for sustainable debt/GDP. As you say there are a whole slew of reasons why the US is in a much worse position now than in 1945 - in terms of debt sustainability the US is in a significantly worse position than even contemporary Japan.

[Broomstick]

The key, of course, being not how much debt you have, but can you pay it off? Can you manage the interest payments?

Focusing on OMG 4 TRILLION!!!! or whatever number misses the point. It's OK to owe 100 trillion if you can pay it back in a reasonable time frame. Of course, it might be better to only owe 50 trillion, or 1 trillion, or only a half million - unless important things aren't getting done due to a fanatical reluctance to borrow.

That's why I'm opposed to the balance budget amendment crap being proposed - don't tie the hands of government to borrow in times of need. What nonsense! There is NOTHING stopping Congress from proposing balanced budgets other than their own pig-headedness. Because none of them had the balls to say "if you want X you have to pay for it - yes, that means a tax increase" we're now in this mess. Passing a constitutional amendment - as if that could be done in a week! - will not fix the source of the problem. My god, what would have happened during the 1930's and WWII if the US government had refused to spend more than 18% of (a seriously depleted) GDP and been unable to borrow to finance WWII? All the lend-lease, the supplies, the troops, the transportation, the aid to rebuild Europe afterwards... most of that never would have happened.

Now, I sincerely hope nothing on that scale happens again, but it might... Doesn't even have to be war - what if the US experienced a natural disaster comparable to what Japan went through in March? "Nope, sorry, can't help you - we already spent our budget, borrowing is evil, you can just freeze to death under that ragged tarp, sorry, no food or water for you, here's a bucket for your pee and poo and, oh yes, we have half a band-aid left for that grievous wound of yours." Seriously, that's a lot of what the Tea Party bullshit boils down to in the event of a national emergency.

As dire as my own finances are, my household maintains a line of credit for emergencies. Paying off such a borrowing after an emergency does impose significant hardships, but being able to borrow is very important in today's world. That is also true for governments, who need to be able to borrow to deal with critical situations. The balanced budget amendments as proposed would cripple the ability of the US to do that. Saying the Founding Fathers would be against borrowing is bullshit and ignorance - they borrowed heavily to finance the early nation. VERY heavily. It's like selective Bible quoting, twisting words until they say what you want instead of what the authors actually meant. Just because borrowing got out of hand (or rather, we got lax about paying back) doesn't make borrowing inherently evil. Banning it won't solve our problems.

[Simon_Jester]

Does the official process control for this properly?

I do not know. I suspect that since this criticism is obvious enough for a couple of physicists to discuss on an internet message board, professional economists have considered it. I also suspect that any actual degradation of quality over time is largely anecdotal.

Does the official process control for this properly?

No; in fact the current push to introduce the 'chained CPI' will make it worse. It's not as if there aren't plenty of professional economists objecting to this; as usual the decision is being made for political reasons (in this case, a minor reduction in the rate of increase of social security payments).

See, Surlethe, this is what makes me worry. In most of the sciences, you aren't dealing with the fact that the people responsible for making a measurement have a vested interest in how you make the measurement. We don't entrust the job of measuring the Hubble constant to people whose job would be easier if the universe were steady-state.

Whereas official economic statistics are subject to a lot of political pressure, and you can find a school of economists deranged and impractical enough to believe nearly anything, and sign off on it. It makes the jobs of many government officials easier if GDP is (officially) booming and inflation is (officially) very low; there's a dangerous incentive to massage the data to get the desired result.

Oh, I see. They have a problem with the notion that people might substitute out of the consumption basket when relative prices change.

That is a major problem - the 'if prices force you to change from steak to hamburger you standard of living doesn't change' fallacy, which Simon just explained. The end result is people on social security being forced to eat cat food, while economists claim that this is completely fine, it's just 'rational substition'. However from a statistical viewpoint this is not the big issue. The dishonesy comes from changing the basis for the index yet continuing to engage in historical comparisons. If the current methodology was applied to the pre-Reagan era US GDP growth would appear much higher through the middle of the 20th century, and the relative drop since 1980 would be almost as bad as the graph above. Unfortunately we don't have the raw data to do this accurately.

Yeah, that too. What I'm trying to address is why the statistical method itself might well have bugs- and bugs which are themselves criticized by people with credentials who aren't part of the government agency releasing the statistics.

To take another example, unemployment statistics no longer count people who have given up looking for work because it's impossible for them to find a job in this economy. How many such people are there? For purposes of the health of the economy, it makes a huge difference whether 1%, 5%, or 10% of the able-bodied workforce has given up trying to find a job because the jobs aren't there. For purposes of official unemployment statistics, it doesn't.

How can this not lead to perverse results in the official statistics that mislead us on the state of the economy?

[Surlethe]

That is a major problem - the 'if prices force you to change from steak to hamburger you standard of living doesn't change' fallacy, which Simon just explained. The end result is people on social security being forced to eat cat food, while economists claim that this is completely fine, it's just 'rational substition'.

It's not a fallacy. I hope I don't have to explain why.

However from a statistical viewpoint this is not the big issue. The dishonesy comes from changing the basis for the index yet continuing to engage in historical comparisons. If the current methodology was applied to the pre-Reagan era US GDP growth would appear much higher through the middle of the 20th century, and the relative drop since 1980 would be almost as bad as the graph above. Unfortunately we don't have the raw data to do this accurately.

I am skeptical that the raw data are unavailable. I'm also skeptical that this change in measurement has not been addressed in the econometric literature.

[Surlethe]

See, Surlethe, this is what makes me worry. In most of the sciences, you aren't dealing with the fact that the people responsible for making a measurement have a vested interest in how you make the measurement. We don't entrust the job of measuring the Hubble constant to people whose job would be easier if the universe were steady-state.

Whereas official economic statistics are subject to a lot of political pressure, and you can find a school of economists deranged and impractical enough to believe nearly anything, and sign off on it. It makes the jobs of many government officials easier if GDP is (officially) booming and inflation is (officially) very low; there's a dangerous incentive to massage the data to get the desired result.

See, what makes me worry is that this is precisely the same argument used to denigrate data that show global warming. Perhaps a bias exists. I'd need to see some pretty compelling evidence that it is wrong, and not merely sometimes misinterpreted. Preferably, I'd like to see some peer-reviewed literature demonstrating this bias.

To take another example, unemployment statistics no longer count people who have given up looking for work because it's impossible for them to find a job in this economy. How many such people are there? For purposes of the health of the economy, it makes a huge difference whether 1%, 5%, or 10% of the able-bodied workforce has given up trying to find a job because the jobs aren't there. For purposes of official unemployment statistics, it doesn't.

Actually, this is not true. There are six measures of unemployment released by the BLS, and the most expansive, U6, includes not only marginally attached workers but also workers in part-time jobs who are searching for full-time employment.

Why do I address an example instead of your point?

How can this not lead to perverse results in the official statistics that mislead us on the state of the economy?

Because it seems that the misleading is not a result of statistics but a result of misinterpretation of statistics.

[Starglider]

Focusing on OMG 4 TRILLION!!!! or whatever number misses the point. It's OK to owe 100 trillion if you can pay it back in a reasonable time frame.

Paying it back isn't even under consideration for government debt, and hasn't been since the Keynesian con-artists (actually even calling them Keynsians is an insult to Keynes himself) insinuated themselves as the politically approved economic orthodoxy. All you hear about now is debt sustainability, i.e. can the nation continue to make the interest payments. The average debt maturity of the US is approximately 60 months. The current yield on 5 year US bonds is at a historic low of 1.5% (there's a lot of issue to issue variation right now due to the debt ceiling issue). This is close to the absolute all-time bottom (of 1.2%) that was reached in 2008. The previous record low of 1.87% was hit in 1952. In between those dates, the average yield was 6.4%. If the US merely returns to historical average interest rates, never mind the double digit figures seen in previous financial crisis, debt service costs will quadruple, from 6% to 25%. Without revenue increases that means debt service on existing debt would consume the entire discretionary spending budget. Obviously raising the debt ceiling and borrowing more will make it worse.

Will interest rates rise? If the US loses its AAA rating, the only way to prevent them rising will be monetisation on an even larger scale than the recently completed QE2 program. Of course you might be tempted to ask, if the US is creating money out of thin air and risking severe inflation anyway, why is that printed money on the books as debt to a private organisation (the US Federal Reserve) which will have to be repaid with interest? Why doesn't the US government just create money directly? Bankers really don't want you to ask that question, especially when arbitrage of the treasury monetisation process has accounted for such a big chunk of US investment bank revenue and stock market bouyancy recently.

That's why I'm opposed to the balance budget amendment crap being proposed - don't tie the hands of government to borrow in times of need. What nonsense! There is NOTHING stopping Congress from proposing balanced budgets other than their own pig-headedness.

Sure, but it has zero chance of being passed anyway and its proponents know that. It's just another bit of political theatre.

I am skeptical that the raw data are unavailable. I'm also skeptical that this change in measurement has not been addressed in the econometric literature.

Argument from incredulity is silly at the best of times, but are you really saying you expect the government to be absolutely honest and impartial in generating the figures that determine perceptions of the economy and its own competence, not to mention how much it has to pay out to a whole raft of inflation-linked programs? Shadowstats is simple and independently verifiable; it doesn't invent new metrics or originate data, it just applies the methodology the US government used from the 1920s to the end of the 1970s to publically available data.

[Broomstick]

To take another example, unemployment statistics no longer count people who have given up looking for work because it's impossible for them to find a job in this economy. How many such people are there? For purposes of the health of the economy, it makes a huge difference whether 1%, 5%, or 10% of the able-bodied workforce has given up trying to find a job because the jobs aren't there. For purposes of official unemployment statistics, it doesn't.

Actually, this is not true. There are six measures of unemployment released by the BLS, and the most expansive, U6, includes not only marginally attached workers but also workers in part-time jobs who are searching for full-time employment.

Funny, though - whenever the PotUS or Congress quotes unemployment, they use the significantly smaller and less scary U3 number. Why is that? Couldn't possibly have anything to do with self-interest, could it?

[Broomstick]

Focusing on OMG 4 TRILLION!!!! or whatever number misses the point. It's OK to owe 100 trillion if you can pay it back in a reasonable time frame.

Paying it back isn't even under consideration for government debt, and hasn't been since the Keynesian con-artists (actually even calling them Keynsians is an insult to Keynes himself) insinuated themselves as the politically approved economic orthodoxy.

Oh, please - it goes WAY farther back than that, all the way to the initial Continental Congress in 1776. The nation borrowed under the Articles of Confederation with no means to effectively tax for government revenue. At one point Alexander Hamilton bailed out the nascent US. Don't blame it on Keynes.

[Zaune]

Now, I sincerely hope nothing on that scale happens again, but it might... Doesn't even have to be war - what if the US experienced a natural disaster comparable to what Japan went through in March? "Nope, sorry, can't help you - we already spent our budget, borrowing is evil, you can just freeze to death under that ragged tarp, sorry, no food or water for you, here's a bucket for your pee and poo and, oh yes, we have half a band-aid left for that grievous wound of yours." Seriously, that's a lot of what the Tea Party bullshit boils down to in the event of a national emergency.

Worse. By their logic, this is absolutely fine. Either NGOs and private donors will take up the slack, or the victims will sort themselves out with nothing but true grit and rugged individualism and need no outside help at all. And that's the viewpoint of the people in the movement who sincerely but incorrectly believe that theirs is the path to making the country a better place for everyone. Others take a more... Social Darwinist view.

[Broomstick]

I can't help but think those people have never been anything other than comfortably middle-class or better.

[Starglider]

Oh, please - it goes WAY farther back than that, all the way to the initial Continental Congress in 1776. The nation borrowed under the Articles of Confederation with no means to effectively tax for government revenue. At one point Alexander Hamilton bailed out the nascent US. Don't blame it on Keynes.

You yourself said that the problem is not government borrowing, it's government borrowing without either the intention or the capability to pay it back. Up until the 1970s the US always had a reasonable intent and expectation of being able to pay the debt, and were usually successful. It is only in the last fourty years that the idea of borrowing then rolling the debt indefinitely, without ever paying back the principal, has become acceptable.

[Broomstick]

The initial union under Articles of Confederation failed in part do to inability to pay debt, which lead to the current constitution. The idea the US never defaulted or went bankrupt is untrue, it just hasn't happened for a long time.

[Starglider]

The idea the US never defaulted or went bankrupt is untrue, it just hasn't happened for a long time.

Yes, that was implied by

and were usually successful.

so what is your point? Although thank you for agreeing with me that a contemporary US default is neither unthinkable nor impossible. Given human psychology that's fully half way to 'inevitable'.

[Simon_Jester]

Oh, please - it goes WAY farther back than that, all the way to the initial Continental Congress in 1776. The nation borrowed under the Articles of Confederation with no means to effectively tax for government revenue. At one point Alexander Hamilton bailed out the nascent US. Don't blame it on Keynes.

You yourself said that the problem is not government borrowing, it's government borrowing without either the intention or the capability to pay it back. Up until the 1970s the US always had a reasonable intent and expectation of being able to pay the debt, and were usually successful. It is only in the last fourty years that the idea of borrowing then rolling the debt indefinitely, without ever paying back the principal, has become acceptable.

Even up to about 2000 the idea of being able to pay back the debt was still there- remember the Clinton surplus?

I'd argue that the US didn't de facto commit itself to a policy of never being able to pay off its loans until the second Bush administration.

[J]

However from a statistical viewpoint this is not the big issue. The dishonesy comes from changing the basis for the index yet continuing to engage in historical comparisons. If the current methodology was applied to the pre-Reagan era US GDP growth would appear much higher through the middle of the 20th century, and the relative drop since 1980 would be almost as bad as the graph above. Unfortunately we don't have the raw data to do this accurately.

I am skeptical that the raw data are unavailable. I'm also skeptical that this change in measurement has not been addressed in the econometric literature.

The data is available since it was one of the first projects I undertook for my current employers. Available to the public and easy to put together? Well, to say it's a nightmare would be an understatement. We had a research team combing through the national archives along with our company records (we're a bank) to determine what all the real numbers are. I don't think it's something which can be done by anyone outside of university researchers, certain people in government or those in the finance industry. And yes, this is addressed in various papers, however, opinions are shall we say...conflicted.

[Zaune]

I can't help but think those people have never been anything other than comfortably middle-class or better.

Undoubtedly.
Of course, if the Teabaggers get their way then a lot of them are going to learn the hard way that private charity can do a lot of good, but the degree of centralised organisation and funding it takes to alleviate a major downturn in the economy is beyond the scope of anything but a national government. A default will probably result in so much poverty, suffering and despair-fuelled civil unrest that the US ends up going socialist out of sheer desperation.

And frankly, after seeing and posting this, I can no longer bring myself to argue that that's too high a price to pay.

[The Romulan Republic]

Honestly, I doubt the US will go socialist, at least not without large-scale violent resistance from the Teabaggers. We're talking millions of people who've been indoctrinated to think that "socialist"="Hitler plus Stalin".

I suspect socialism in the US will become practical only when the old people who make up much of the Tea Party die of old age, or after a civil war.

[Mr Bean]

Honestly, I doubt the US will go socialist, at least not without large-scale violent resistance from the Teabaggers. We're talking millions of people who've been indoctrinated to think that "socialist"="Hitler plus Stalin".

I suspect socialism in the US will become practical only when the old people who make up much of the Tea Party die of old age, or after a civil war.

If it's one thing you should have learned by now RR is that people in the United States love socialism and socialist programs as long as you don't CALL it socialist. The US will never in two hundred years become a Socialist state but it sure as hell could become a National American Investment Zone or Maximizing US Growth Brigade. Just dress it up with a new bow, call it something different and present it and people will support socialist policies.

[Surlethe]

Argument from incredulity is silly at the best of times, but are you really saying you expect the government to be absolutely honest and impartial in generating the figures that determine perceptions of the economy and its own competence, not to mention how much it has to pay out to a whole raft of inflation-linked programs?

Of course not, and I doubt you'll be able to quote me saying this earlier in the thread. Meanwhile do you have any evidence that the government is actually cooking its books, as opposed to putting out easily misinterpretable statistics*? (From the econometrics literature, preferably.) Or even any evidence that the "government" is some monolithic entity which acts in unison and responds to one single set of incentives, as your characterization implies?

* In fact, I would suspect that coming up with statistics that are easy to misinterpret, such as core CPI or the various measures of unemployment, and not going out of their way to clarify what they mean is partially due to biases you cite, and partially due to smart person "I-know-what-these-mean-they-should-be-obvious-to-everybody" syndrome. But that's hardly in the same league as data falsification.

Funny, though - whenever the PotUS or Congress quotes unemployment, they use the significantly smaller and less scary U3 number. Why is that? Couldn't possibly have anything to do with self-interest, could it?

Oh sure. But U6 is publicly available if it better suits someone's point, POTUS/Congress are not the BLS or BEA or Fed, and I don't believe that anybody would support the idea that the U3 data are actually wrong.

[Surlethe]

PS- Forgive me for referring to myself as a physicist earlier. That's an exaggeration; I put it in because it was concise and made the paragraph sound good.

[aerius]

Funny, though - whenever the PotUS or Congress quotes unemployment, they use the significantly smaller and less scary U3 number. Why is that? Couldn't possibly have anything to do with self-interest, could it?

Oh sure. But U6 is publicly available if it better suits someone's point, POTUS/Congress are not the BLS or BEA or Fed, and I don't believe that anybody would support the idea that the U3 data are actually wrong.

Yeah, but how many people even know that U6 exists, let alone what it is and where to find it?
I remember a while back when you derived the correlations between the various unemployment measures and posted it on this board, pretty much everyone except you, J, and Broomstick went "what the hell is a U6, and what on earth are you talking about?" I'd imagine that it's even worse in the general population of the US.

It's true that a lot of the key stats and numbers are out there and publicly available, but tracking them down and making sense of them is a complete pain in the ass. Even more fun is when the numbers seem to contradict each other, such as when weekly unemployment claims go up but the unemployment number goes down. How is that possible? Then you dig a little deeper and find out it's because people are falling off the unemployment rolls since they've been without jobs for too long so they're no longer counted as unemployed.

[Simon_Jester]

Funny, though - whenever the PotUS or Congress quotes unemployment, they use the significantly smaller and less scary U3 number. Why is that? Couldn't possibly have anything to do with self-interest, could it?

Oh sure. But U6 is publicly available if it better suits someone's point, POTUS/Congress are not the BLS or BEA or Fed, and I don't believe that anybody would support the idea that the U3 data are actually wrong.

What's problematic is that the government seems to behave as if it believes the 'less scary' numbers, with little or no regard for the more scary ones. This plays into the hands of people who want to pretend that everything is normal and that the existing policies are working. Unfortunately, it also plays into the hands of people who will cheerfully wreck the whole system.

PS- Forgive me for referring to myself as a physicist earlier. That's an exaggeration; I put it in because it was concise and made the paragraph sound good.

Close enough. It's not as if your argument would be made weaker by saying "two almostphysicists" or "two quasiphysicists" or whatever. The entire point of the exercise is that even not being an economist, you can still say X.

[Patrick Degan]

If it's one thing you should have learned by now RR is that people in the United States love socialism and socialist programs as long as you don't CALL it socialist. The US will never in two hundred years become a Socialist state but it sure as hell could become a National American Investment Zone or Maximizing US Growth Brigade. Just dress it up with a new bow, call it something different and present it and people will support socialist policies.

As with everything in this county, it's all in the branding.