Are you sure about that negative savings rate?

The reported negative savings rate in the U.S. is atleast consistent with the low and declining rate reported over the past two decades. The odd thing about the reported saving rate is that it is inconsistent with a number of other elements of economic data that look pretty good. When you look a little deeper into the matter, you learn how misleading the reported number can actually be. The financial press seems to make no attempt at understanding the matter and then informing the public. Fortunately, a very good economist, Brian Wesbury, helps us out.

We are not sure which economic “old wives tale” is the most damaging. But right up at the top of any list is the idea that the US has a negative savings rate.

Yes, it is true, that the Bureau of Economic Analysis (BEA) says that US consumers spent more than their after-tax income in 7 out of the last 8 months and through November 2005, and had a savings of negative $39 billion.


There are many reasons to discount these statistics. For example, when a car, home appliance, or computer is purchased, the entire expenditure is immediately subtracted from income, even if it is paid for over time. Spending on education also counts as consumption. But, these expenditures are investments and on a set of corporate books would be treated much differently.


The best measure of household savings is calculated by the Federal Reserve in its quarterly Flow of Funds Accounts. This data shows that US households had $62.5 trillion in assets at the end of September, $11.4 trillion in liabilities and a net worth of $51.1 trillion. This is a record level and $5 trillion more than a year earlier. Of the increase, $3.3 trillion was in financial assets, suggesting that US households are one of the best savers in the world. Contrary to popular belief, the US does not have a negative savings rate.

Thanks for the help Brian!

Rubin's Revisionomics

In Wednesday's WSJ former Treasury Secretary Robert Rubin had a column titled "We Must Change Policy Direction." I thought that Rubin did a commendable job at Treasury. He's probably very bright, but I've heard him espouse an awful lot of conventional economic nonsense over the years. Don Luskin has a go at the column and frankly I couldn't do better than Don.

It's all dressed up in dramatic language about America's "sense of mission," but it's just the same old stuff -- higher taxes and more government control of the economy. And, of course, it's supported by the usual revisionist history.

It's a lie to say that the expansion "followed" the Clinton tax increases. The expansion began in March 1991 -- and Clinton didn't even take office until almost two years later (and his tax hikes weren't implemented until several months after that).

You'll see the supply-siders were dead right about the revenue effects of those tax hikes. As supply-side theory would predict, they resulted in virtually no greater tax revenues than had been expected before the hikes were conceived and enacted -- they were thus a deadweight loss to the economy.

The positive surprise versus expectations started in 1997 and the years after. What happened in 1997? A Republican congress cut the capital gains tax.

Be sure to see the link at the end of his post!

More on Rationalism and the abuse of reason

We have touched on Rationalism and the abuse of reason elsewhere on this blog. Many people have a very difficult time accepting the idea that reason is not superior to other types of knowing.

Orrin Judd takes up the subject here with crash-ax inhand and gives Rationalism more than a flesh wound. He calls upon Weaver, Hume and Oakeshott amongst others to help with the heavy lifting. I rather like his handiwork.

In short: so what if reason is itself irrational and only faith allows us to believe in its utility; faith suffices. In effect he's returned us to the pre-Rational worldview, where reason was a tool that God had given us in order to apprehend Creation. Thus is Reason cut back down to size and Faith returned to primacy.

It can hardly be a coincidence that Rationalism and Intellectualism and the theories they spawned have been far more influential, and destructive, in Descartes's France and on the European continent than they have been in Hume's Anglosphere. Having blindly clung to a metaphysic that was so clearly flawed, it's not surprising that Europeans (and American intellectuals) proved susceptible to the seductive allure of such rationalisms as Darwinism and Marxism, which offered perfectly rational explanations of how the world worked, if only you ignored the fact that we can't know it to be rational or material and that experience demonstrates otherwise. Meanwhile, in England and its former colonies -- but especially in America -- we have generally followed the example of Hume and been skeptical if not utterly hostile towards intellectuals and the claims of Reason. Perhaps that alone explains why there has never been a viable Communist party, nevermind a Marxist government in the Anglo-Saxon world and why Christianity remains so strong and Darwinism has fared so poorly in the States.

The post covers quite some ground but is worth the time.

25th Reaganomics Anniversary

As this opinion journal points out, today is the 25th anniversary of Ronald Reagan's inauguration as president of the United States:

[O]ver this 25-year period prosperity has been the rule, not the exception, for America--in stark contrast to the stagflationary 1970s. Perhaps the greatest tribute to the success of Reaganomics is that, over the course of the past 276 months, the U.S. economy has been in recession for only 15. That is to say, 94% of the time the U.S. economy has been creating jobs (43 million in all) and wealth ($30 trillion). More wealth has been created in the U.S. in the last quarter-century than in the previous 200 years. The policy lessons of this supply-side prosperity need to be constantly relearned, lest we return to the errors that produced the 1970s.

Embarrassingly, at that time I was absolutely convinced that Reagan was incredibly stupid, that he was evil, and that supply side economics was certain to bankrupt the country in short order. By the mid 1990s it was pretty clear that I was wrong on all three counts. Indeed, because I was so completely mistaken about this one person, I reconsidered my information sources and the process that I used to arrive at political conclusions. Unfortunately, that has changed my perspective radically relative to most of my college friends and there's an asymmetry to our perspectives. I usually understand exactly where they're coming from because I was once in the same place, while they can't ever seem to grasp my analysis. Frustrating, but it's a one-way street and there's no going back. Thank heavens for the blogosphere.

Priceless

In last Sunday's NYTimes Louis Uchitelle presented this column about the cost of the Iraq War. Not that there was any agenda involved...

The economics of war is a subject that goes back centuries. But in the cost-benefit analyses of past American wars, a soldier killed or wounded in battle was typically thought of not as a cost but as a sacrifice, an inevitable and sad consequence in achieving a victory that protected and enhanced the country. The victory was a benefit that offset the cost of death.

The newest research was a paper posted last week on the Web (www2.gsb.columbia.edu/faculty/jstiglitz/cost_of_war_in_iraq.pdf) by two antiwar Democrats from the Clinton administration: Joseph E. Stiglitz of Columbia University and Linda Bilmes, now at the Kennedy School of Government at Harvard. Their upper-end, long-term cost estimate tops $1 trillion, based on the death and damage caused by the war to date. They assumed an American presence in Iraq through at least 2010, and their estimate includes the war's contribution to higher domestic petroleum prices. They also argue that while military spending has contributed to economic growth, that growth would have been greater if the outlays had gone instead to highways, schools, civilian research and other more productive investment.

Actually these cost estimates run in 10-15% of GDP range including an estimate for lives cut short. A number of previous wars have been in the 30-80% range without any estimate for the cost of lives cut short. Think triple digit costs by comparable measure. Actually, here is a chart of direct costs of wars of the past.

In a paper last September, for example, Scott Wallsten, a resident scholar at the conservative American Enterprise Institute, and Katrina Kosec, a research assistant, listed as benefits "no longer enforcing U.N. sanctions such as the 'no-fly zone' in northern and southern Iraq and people no longer being murdered by Saddam Hussein's regime."

They concluded that the value of these benefits was relatively small - fair enough. What if this is an important step in defeating Islamofascism? The benefit of that would be enormous!

Anyone in denial over the Saddam - Al Qaeda connection might want to look at this column.

A three pronged approach is needed: physically defeating Islamist, playing the propaganda game, discrediting a dangerous ideology by supporting a new political example in a troubled region. It is a high risk - high reward strategy.

cost of lives cut short: $xxx
direct and indirect cost of military operations: $yyy
chance to defeat the latest flavor of totalitarianism: priceless

Inner Tyrant

When someone seems unable to resist the urge to dictate how everyone else should live, I like to say that they are intouch with their inner tyrant. This article by Joel Kotkin reminds me how pervasive this sentiment can be. By allowing people the freedom to live as they prefer we hold tyranny at bay. Most problems real or imagined arising from these choices can be adjusted to or overcome with new knowledge and technology. Here are some excerpts:

Suburbia, the preferred way of life across the advanced capitalist world, is under an unprecedented attack -- one that seeks to replace single-family residences and shopping centers with an "anti-sprawl" model beloved of planners and environmental activists.


This kind of imposed "vision" is proliferating in major metropolitan regions around the world.

All this reflects a widespread prejudice endemic at planning departments in universities, within city bureaucracies, and in much of the media. Across a broad spectrum of planning schools and practitioners, suburbs and single-family neighborhoods are linked to everything from obesity, rampant consumerism, environmental degradation, the current energy crisis -- and even the predominance of conservative political tendencies.

Planners in Albuquerque have suggested banning backyards -- despised as wasteful and "anti-social" by new urbanists and environmentalists, although it is near-impossible to find a family that doesn't want one.

Experts differ on the impact of these regulations, but it certainly has not created the new urbanist nirvana widely promoted by Portland's boosters.

This experience may soon be repeated elsewhere as planners and self-proclaimed visionaries run up against people's aspirations for a single-family home and low-to-moderate-density environment. Such desires may constitute, as late Robert Moses once noted, "details too intimate" to merit the attention of the university-trained.

But nowhere is this commitment to low-density living greater than in the U.S. Roughly 51% of Americans, according to recent polls, prefer to live in the suburbs, while only 13% opt for life in a dense urban place. A third would go for an even more low-density existence in the countryside.

It is time politicians recognized how their constituents actually want to live. If not, they will only hurt their communities, and force aspiring middle-class families to migrate ever further out to the periphery for the privacy, personal space and ownership that constitutes the basis of their common dreams.

Potent observations on non-violence, equality and culture

The last two paragraphs of this post by Orrin Judd struck me as particularly salient. Peaceful resolution of conflict is an important aspect of a free and open society, however, this is dependant upon cultural context.

Fans of Dr. King and Gandhi tend to gloss over the fact that they realized that non-violence would work precisely because those in power were not living up to their own Judeo-Christian/Anglo-American ideals. Where those ideals do not already prevail--where the Bible and Madison and Magna Carta and the Declaration and Edmund Burke and the rest are not the basis of the society--non-violence is a recipe for self-annihilation. Recall that Gandhi counseled the Jews to go willingly to their doom to teach Hitler a moral lesson.

Likewise, it was when Dr. King departed from Anglo-Americanism, when he began to insist on equalitarianism of results rather than equality of political/moral standing, that the movement he led lost its credibility. He took his power from the ideas of his culture and lost that power when he moved into opposition to that culture.

Bull's-eye!!!

Clueless Cueball

Professor John P. Palmer, an economics professor at The University of Western Ontario, wrote about teaching an introductory economics class:

"Suppose each of you — what are there? 200 of you here today? — suppose each of you valued seeing me with my head and beard shaved at, say, 50 cents each. That would mean that as a whole, you, as a class, would value seeing me completely shaved at $100. But if you tried to collect that money from each and every one of you, you couldn't possibly do so because some of you would be free riders — some of you would say it didn't matter to you whether I shaved even though you would get some value from seeing it. You would try to get others to pay your share so you could take a free ride on their activity."

What happened next was interesting. One of the students raised his hand and said, "We've raised the hundred dollars!" Turns out that six students alone were willing to put up the hundred dollars. The Professor accepted the money and shaved his head and beard. The pictures are quite amusing. Have you ever seen someone with such big ears relative to his head before?

But, the free rider problem was still perfectly illustrated. The vast majority of the class got to be free riders. I think it would have been a far better lesson if the Professor insisted that everybody in the class put in 50 cents before he shaved. Instead, I'd bet some of the students think that the free rider problem was disproven, or at least weakened. If so, the Professor cueball is not such a good teacher.

Coming to terms with The Gipper

Newsweek Editor's Book Review: Establishment Now Admits Reagan's Greatness

Atleast that's how Tim Graham characterizes things here and the review can be found here on the ggsupplement.

Meacham began by telling a story about former Treasury Secretary and Chief of Staff Don Regan realizing he was an idiot to underestimate Reagan as not very smart. But that's very much the way the liberal media treated Reagan from his arrival on the national scene until he began his descent into Alzheimer's in 1994.

...what Meacham is really admitting in this review is that Reagan was much more complicated than the Gipper of liberal media mythology.

After the Reagan presidency my questioning of the conventional wisdom and elite opinion really grew!

Deficit Obsession Disorder Watch

Daniel Altman, an economist and columnist for the New York Times recently wrote an article with the title "A Bit of Doodling About a Tax-Cut Danger". I'm not at all impressed by the article, but I suppose that Altman at least admits that it's just doodling. Some excerpts with my comments follow:

EARLY last month, without much fanfare, the Congressional Budget Office released a paper called "Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates." At a modest seven pages, it didn't elicit the same sort of interest as the budget office's budgetary and economic outlooks. Yet it may be one of the most important government publications in years.

As Douglas J. Holtz-Eakin, the budget office's director, writes in a brief summary at the beginning of the paper, most predictions of the effects of tax-rate changes "do not include the budgetary impact of any possible macroeconomic effects of tax policies." In other words, the predictions don't take into account how tax cuts could affect the overall size of the economy. It is this omission - one often cited by proponents of tax cuts, especially in the White House - that the paper tries to correct.

Perhaps, but it doesn't try very hard to correct that omission. For example, in the CBO paper, the following paragraph appears on page 4:

"In principle, the tax cut could also affect the economy by increasing the level of technological know-how. However, there is not enough evidence on how tax policy affects innovation for CBO to incorporate such effects in this analysis."

While it's probably true that there's not enough data to quantify how much "tax policy affects innovation," many economists believe that there is a significant effect. Indeed, Altman himself identifies this effect as believed to be an important piece of the puzzle by other economists (though he himself disagrees with those other economists) as shown in the following excerpt from an article from Slate that he wrote (emphasis added):

During the Reagan administration, most talk about tax cuts centered on removing disincentives to work. In the years that followed, though, academic economists began to favor a new set of theoretical models where the savings rate took a more prominent role as a determinant of economic growth. In addition, the models suggested that the pace of technological change depended on changes in the size of the capital stock, which can only grow if investors save more. The neoconomists didn't invent these models -—that was the job of theorists whose work sometimes looked more like physics than economics -—but they quickly grasped the implications for policy. They used the models to postulate the following chain reaction:

1. Government cuts tax rates on savings and wealth.

2. Saving by households -—bank accounts, stocks, bonds, etc. -—increases.

3. More money becomes available to American businesses, since they're the ones offering the bank accounts, stocks, bonds, etc.

4. Businesses spend more on machinery, software, and other capital, as well as on research and development.

5. The nation's output of goods and services grows, and technological innovation accelerates.

6. Incomes and living standards rise more quickly for several years and perhaps forever.

Note that step 5 is the step that the CBO model chooses to leave out because they can't quantify it based on available empirical evidence. Leaving out this critical step clearly changes the whole equation. Without it, tax cuts are significantly less beneficial. Sure enough, using the CBO's models without the benefit of increased know how and its corresponding positive effect on growth, Altman can confidently write:

The recent analysis by Mr. Page at the Congressional Budget Office dismisses the idea that tax cuts may actually improve the government's fiscal situation. Even in his most generous scenario, only 28 percent of lost tax revenue is recouped over a 10-year period.

Altman then goes on to write:

Recent experience corroborates this prediction. In the second quarter of 2001, just before the first of President Bush's tax cuts took effect, federal receipts from personal taxes accounted for 10.3 percent of the economy. By the end of the post-recession slump, receipts had dropped to 6.4 percent. But in the third quarter of 2005, with the economy booming, they were still under 7.5 percent - an enormous difference. In dollar terms, federal receipts from personal income taxes, at $802 billion in 2004, are still lower than they were in 1998 ($826 billion) and much lower than in 2001 ($994 billion).

The numbers are correct, and the picture painted seems at least partly correct - the tax rate cuts have cost the government money - so far. But what about that "economy booming" phrase? Might the economy be booming because of the process outlined above by the supply sider neoconomists that Altman loathes? All projections (CBO, etc.) show record federal revenues by the end of 2007, even excluding social security revenues (including social security, revenues will probably be higher this year). Might it be that the additional productivity growth due to the tax rate cuts will eventually cause higher government revenue than would have otherwise been collected without the tax cuts? The supply siders say YES! YES! YES! The socialist economists such as Altman and Krugman say NO! NO! NO! Who's right? Who knows? We'll know when we've collected enough data in about 10,000 years. In the mean time, you have to take your best guess. My best guess, based on the models I create, is that the supply siders are right.

Altman does admit to a little bit of a short term upside:

On the other hand, Mr. Page estimates that gross national product would be an average of about 1 percent higher, adjusted for prices, as a result of the 10 percent cut in tax rates. Based on the August forecast by the budget office, that extra income would come to slightly less than $1.5 trillion in today's dollars. In Mr. Page's analysis, consumers would also pay about $900 billion less in taxes. Over all, they'd have up to $2.4 trillion more to spend during the decade he analyzed.

THE tax cuts' benefits would be whatever pleasures that individuals could attain with that money. The initial costs would be the absence of whatever useful things the government would have done with the $200 billion it had to pay in interest. The later costs would be the pleasures or useful things the nation would have to forgo in the future, when it was time to pay its debts.

For many people, this may sound like a slam dunk, especially if they don't care what happens after the next decade.

But Altman ends with a rather odd conclusion:

But keep going in this direction [of cutting taxes], and pretty soon the federal government would be collecting no taxes and trying to borrow enough money to cover its entire budget. It's doubtful that many people would want to lend to a government with no source of revenue for 10 years.

Call it the Altman Curve: the total amount that people will actually lend you rises with the amount you plan to borrow, until you reach a crucial point, after which it falls to zero. The United States is now on the left side of the curve. If Congress keeps cutting taxes by more than it cuts spending, the nation will eventually move to the right side, which, of course, is the wrong side.

It looks to me that he's just saying that if the government eventually doesn't collect any taxes at all, and borrows its entire budget, it would be a problem. No kidding. But that has no relevance regarding current tax rates. Somehow I don't think that the Altman Curve is going to be anywhere near as famous as the Laffer Curve - and for good reason.

The West, Demographics and Islamism

I believe many people have some awareness of the conflict between the modern liberal West and many Muslims living in Europe. This problem goes beyond the most radical Islamists and includes unassimilated elements of the population. Witness the riots in France, the beheading of Theo van Gogh or the rape sprees depicted here and here. It might be wise to wakeup.

Writer Mark Steyn talks smack here or see excerpts below:

The design flaw of the secular social-democratic state is that it requires a religious-society birthrate to sustain it. Post-Christian hyperrationalism is, in the objective sense, a lot less rational than Catholicism or Mormonism. Indeed, in its reliance on immigration to ensure its future, the European Union has adopted a 21st-century variation on the strategy of the Shakers, who were forbidden from reproducing and thus could increase their numbers only by conversion. The problem is that secondary-impulse societies mistake their weaknesses for strengths--or, at any rate, virtues--and that's why they're proving so feeble at dealing with a primal force like Islam.


Yet while Islamism is the enemy, it's not what this thing's about. Radical Islam is an opportunistic infection, like AIDS: It's not the HIV that kills you, it's the pneumonia you get when your body's too weak to fight it off. When the jihadists engage with the U.S. military, they lose--as they did in Afghanistan and Iraq. If this were like World War I with those fellows in one trench and us in ours facing them over some boggy piece of terrain, it would be over very quickly. Which the smarter Islamists have figured out. They know they can never win on the battlefield, but they figure there's an excellent chance they can drag things out until Western civilization collapses in on itself and Islam inherits by default.



That's what the war's about: our lack of civilizational confidence. As a famous Arnold Toynbee quote puts it: "Civilizations die from suicide, not murder"--as can be seen throughout much of "the Western world" right now. The progressive agenda--lavish social welfare, abortion, secularism, multiculturalism--is collectively the real suicide bomb. Take multiculturalism. The great thing about multiculturalism is that it doesn't involve knowing anything about other cultures--the capital of Bhutan, the principal exports of Malawi, who cares? All it requires is feeling good about other cultures. It's fundamentally a fraud, and I would argue was subliminally accepted on that basis. Most adherents to the idea that all cultures are equal don't want to live in anything but an advanced Western society.


The default mode of our elites is that anything that happens--from terrorism to tsunamis--can be understood only as deriving from the perniciousness of Western civilization. As Jean-Francois Revel wrote, "Clearly, a civilization that feels guilty for everything it is and does will lack the energy and conviction to defend itself."


Well, here's my prediction for 2032: unless we change our ways the world faces a future . . . where the environment will look pretty darn good. If you're a tree or a rock, you'll be living in clover. It's the Italians and the Swedes who'll be facing extinction and the loss of their natural habitat.


And the hard data on babies around the Western world is that they're running out a lot faster than the oil is. "Replacement" fertility rate--i.e., the number you need for merely a stable population, not getting any bigger, not getting any smaller--is 2.1 babies per woman. Some countries are well above that: the global fertility leader, Somalia, is 6.91, Niger 6.83, Afghanistan 6.78, Yemen 6.75. Notice what those nations have in common?

Scroll way down to the bottom of the Hot One Hundred top breeders and you'll eventually find the United States, hovering just at replacement rate with 2.07 births per woman. Ireland is 1.87, New Zealand 1.79, Australia 1.76. But Canada's fertility rate is down to 1.5, well below replacement rate; Germany and Austria are at 1.3, the brink of the death spiral; Russia and Italy are at 1.2; Spain 1.1, about half replacement rate. That's to say, Spain's population is halving every generation. By 2050, Italy's population will have fallen by 22%, Bulgaria's by 36%, Estonia's by 52%. In America, demographic trends suggest that the blue states ought to apply for honorary membership of the EU: In the 2004 election, John Kerry won the 16 with the lowest birthrates; George W. Bush took 25 of the 26 states with the highest. By 2050, there will be 100 million fewer Europeans, 100 million more Americans--and mostly red-state Americans.


So the world's people are a lot more Islamic than they were back then and a lot less "Western." Europe is significantly more Islamic, having taken in during that period some 20 million Muslims (officially)--or the equivalents of the populations of four European Union countries (Ireland, Belgium, Denmark and Estonia). Islam is the fastest-growing religion in the West: In the U.K., more Muslims than Christians attend religious services each week.

Can these trends continue for another 30 years without having consequences? Europe by the end of this century will be a continent after the neutron bomb: The grand buildings will still be standing, but the people who built them will be gone. We are living through a remarkable period: the self-extinction of the races who, for good or ill, shaped the modern world.


…But it's not about race, it's about culture. If 100% of your population believes in liberal pluralist democracy, it doesn't matter whether 70% of them are "white" or only 5% are. But if one part of your population believes in liberal pluralist democracy and the other doesn't, then it becomes a matter of great importance whether the part that does is 90% of the population or only 60%, 50%, 45%.

Bret's New Year's Resolutions

Merry New Year and Happy 2006 and all that!!!

Here are my New Year's resolutions:

1. I will quit smoking for another year (till December 31st, 2006 at 6:00 PM to be exact). I've done this resolution successfully for the last 26 years. Before that, I wasn't able to quit forever, since, being a goal oriented kinda guy, I wouldn't know that I succeeded until I was dead. So I quit for a year at a time instead.
2. I'm in shape. Round is a shape, isn't it? Nonetheless, I'll strive to work toward a different shape. While I realize that "cut up" and "lean" are shapes that are out of reach, I'm thinking I can achieve something more modest - perhaps "oval", for example.
3. I will wish for Peace on earth and good will towards men and women: even for those I don't like; even those who are corrupt world leaders and politicians; even if it kills me. I know that wishing has little impact, but that's the best I can muster up at the moment.
4. I will help more around the house. Since it would be nearly impossible for me to help less, sheer random chance means I'm likely to succeed at this one.

Well, that's all for this year. Here's my favorite list of New Year's resolutions I've seen so far.