Do you think Obama's plan is going to work?

[JakeA]

I don't have a lot of faith in it. His thinking, or at least that of his advisers, is that of a sort of neo-new deal. There's a couple of problems with this.

1. The new deal didn't work. It was military spending during WWI which eventually brought the US out of the depression.

2. Our governments already spend like madmen. In terms of government spending overall, there's really nowhere to go but down if you take state government spending into account. The point is that "the stimulus" will at best merely lessen the impact of decreased state budgets.

The really scary thing about this current downturn is that it's at the END of a government growth cycle, not the beginning like there was in the 1930s.

Here's a little bit of simple math:

1. Median annual income is about $40k.

2. I would say that of that, at least $20k goes towards either debt service, foreign purchases, or commodity purchases. For instance your house or rent payment can normally be tracked to debt services, say $1200 per month. Gas is a foreign purchase, so is most of the crap you buy from Walmart.

3. If you assume 50% net non American labor producing purchases, the sort of "natural" unemployment rate is 50%. That may sound like a staggering figure, but we're kind of already spiraling down towards that. If you take into account underemployed or people who have given up looking for a job, the rate is already close to 17%.

4. This calculation is in absence of debt creation, which we all know we're massively doing right now. We can't keep doing it forever, though. Once we stop propping up the labor market with borrowing, we're going to continue to spiral down towards the 50% figure.

 

[JakeA]

After I posted the 50% labor contribution 50% unemployment comment, I thought about it for a bit. I don't think that deduction is correct.

If you have average expenditures of x and you can trace .5x of that person's expenditures to American labor, what would you expect the unemployment rate to be?

In an aggregate sense, what I'm talking about is impossible if expenditures = income. You can't have x income and .5x labor contributing expenditures because the two actually have to be equal.

One model is to look at it as people sort of "passing the buck." I spend .5x, those people spend .5x, and so on. This is an infinite series:

1/2 + 1/4 + 1/8 .. = 1, so you'd expect 100% employment under that scenario.

Does anybody know a more formal way of looking at this?

 

[Ivan Seeking]

I don't have a lot of faith in it. His thinking, or at least that of his advisers, is that of a sort of neo-new deal. There's a couple of problems with this.

1. The new deal didn't work. It was military spending during WWI which eventually brought the US out of the depression.

In an economic sense, what was WWII beyond a massive spending program? How did we benefit from all of the bombs dropped over Germany? Your argument only suggests that Roosevelt should have spent much more money.

4. This calculation is in absence of debt creation, which we all know we're massively doing right now. We can't keep doing it forever, though. Once we stop propping up the labor market with borrowing, we're going to continue to spiral down towards the 50% figure.

Coming out of WWII, our debt to GDP ratio was at 122%. This was followed by an extended period of properity like the world had never seen. Also, there is little doubt that the contributions of New Deal projects, such as roads, dams, bridges, power distribution, hospitals, schools, and even sewage treatment plants, played significant roles in bolstering the post-war properity.

Even in a worst case we don't expect the debt under the Obama plan to rise to that level. My view is that, yes, he is throwing the dice and taking a big risk [many risks], but they are risks that can't be avoided if we have any hope of a sustained recovery. The nation's infrastructure is falling apart and needs to be rebuilt,. Additionally, we need to retool for not only a global economy, but also for a sustainable economy that is compatible with other long-term goals, such as energy independence [depending on the price of crude, worth ~ half a trillion dollars of wealth lost annually to oil suppliers], and developing a workable system of health care, which will ultimately destroy the economy if not checked. Controlling health care costs is said to be a greater economic imperative than even Social Securty.

The most direct argument is that, according to some of Obama's people, we are trying to avoid an L-shaped recovery as was experience by Japan, which would ultimately lead to an even higher level of debt due to a lack of GDP growth.

 

[Ivan Seeking]

Obama calls this an opportunity and I think he is correct. We have many systemic problems that require a WWII-sized solution. Given the magnitude of recent economic events and the political imbalance in Congress, he enjoys a rare luxury of opportunity - the ability to spend historically large amounts of money - that may have come just in time; as did Obama.

 

[JakeA]

WWII was primarily 2 things:

1. A jobs program. The labor component of government spending was quite high, both for overseas troops and the domestic military industrial complex, even after the war was over.

2. After it was over a giant love fest, basically a baby boom. Babies btw are big job creators. They need schools, clothes, houses, etc. Families were having 4 of them back then, and only about 2 today.

So the demand for American labor suddenly shoots off the scale, something that could not have happened before the war. You have REAL growth, the only true growth which is population growth.

Also a note about GDP and debt. After Obama is through, I'm sure we're going to be at around 150% of GDP or more. GDP is decreasing dramatically right now, and spending is increasing dramatically. If you add personal debt, we're a complete basket case.

We have slight population growth today, but it's a totally different dynamic. In terms of economic contributory effects the growth we see today probably has a negative impact. In the 1950s, immigration was from scientists, engineers, doctors, etc. Nowadays it's completely unskilled labor that has a tremendous negative effect on scarce resources and expert labor. Same goes for population by birth. If you can run an economy with video game players and house cleaners, we're in luck, otherwise we're in trouble.

This is not 1940 at the beginning of WWII. This is 1980 when we have run out of options for our economy, at the beginning of the "Reagan Revolution." The only different now is that we've tried and extinguished all our bubbles. Reality's going to suck. We can't spend our way out of this one like we've been doing for the last 30 years.

 

[JakeA]

BTW, I'm back to my original assertion which is that if you make x and spend .5x, that will tend towards 50% unemployment, but definitely not in an equilibrium state. There are a few issues including periodicity of income, commodity purchases, investment, debt etc.

It can get complex, but the main concept is that our spending doesn't contribute enough labor demand anymore. It's the flip side of productivity. The government will tell you that productivity is good for us all, but in reality gains on productivity are sucked away by investors demanding a return on their investments and governments through taxation and inefficiency.

 

[Ivan Seeking]

WWII was primarily 2 things:

1. A jobs program. The labor component of government spending was quite high, both for overseas troops and the domestic military industrial complex, even after the war was over.

Labor a major component of the spending plan. If you build schools, insulate a government building, spur housing growth, create a sustainable energy industry, repair a bridge, etc, you purchase material and provide jobs at all levels - labor, supply, manfacturing.

2. After it was over a giant love fest, basically a baby boom. Babies btw are big job creators. They need schools, clothes, houses, etc. Families were having 4 of them back then, and only about 2 today.

That's why we have a big dirty secret: In spite of legitimate concerns over border control issues, we desperately need and therefore want immigrants. A mindful immigration policy could service this need well.

So the demand for American labor suddenly shoots off the scale, something that could not have happened before the war. You have REAL growth, the only true growth which is population growth.

As stated above.

Also a note about GDP and debt. After Obama is through, I'm sure we're going to be at around 150% of GDP or more. GDP is decreasing dramatically right now, and spending is increasing dramatically.

It should have surprised no one when Sen. Judd Gregg (R-NH) and Senate Minority Leader Mitch McConnell (R-Ky) called attention to the Congressional Budget Office announcement that Obama's program will put the U.S. in debt for $9.3 trillion over the next decade.

http://www.examiner.com/x-2547-Watc...5-Obama-turning-the-US-into-a-banana-republic

We are now at 10.9 trillion, so the worst case projections leave us with 20.2 trillion. I show that given a GDP of 14 trillion today, and assuming 3.5% growth over ten years, we would have a GDP of just over 20 trillion, which puts the ratio at about 1, not 1.5. Of course we don't see that level of growth today, but that's why we have a spending program, so you can choose to assume that the stimulus won't work and create growth, but you can hardly cite the levels during the worst economic crisis in recent history and use that as a baseline.

We have slight population growth today, but it's a totally different dynamic. In terms of economic contributory effects the growth we see today probably has a negative impact. In the 1950s, immigration was from scientists, engineers, doctors, etc. Nowadays it's completely unskilled labor that has a tremendous negative effect on scarce resources and expert labor. Same goes for population by birth. If you can run an economy with video game players and house cleaners, we're in luck, otherwise we're in trouble.

That is simply a racist statement. The children of immigrants will receive a good education and compete in the global market if we restore the education system. And we already have a university system that is the envy of the world. Part of Obama's stated objectives is to make a college education [or specialized training] the minimum requirement and available to everyone. As he does everywhere else, he wants to raise the bar for education.

 

[russ_watters]

Coming out of WWII, our debt to GDP ratio was at 122%. This was followed by an extended period of properity like the world had never seen.

I can't believe you are drawing this parallel. It is pure nonsense. WWII was a highly extreme event that involved an intense national sacrifice and unsustainable short term changes in social and economic structure to pull off. All of the resources of the country were devoted to the war effort in ways that require motivation not possible without war. Such basic parts of life, such as having children, were put put on hold until after the war. I suppose we could have all our women stop having children now and go to work instead, but quite obviously, such a situation would not be sustainable. You really should read some history about what the WWII home front really was all about (or do you support permanent suspension of labor union functionality and permanent, tight resource rationing? :uhh: ): http://en.wikipedia.org/wiki/United_States_home_front_during_World_War_II

I think I need to go look for quotes about you criticising Bush and Republicans for too much deficit spending - I'm pretty sure that was one of the major issues people had with him economically!

[edit] Here's an old thread, started by you, where you, ironically, ask "Why do Republicans always seem to favor deficit spending?"
https://www.physicsforums.com/showthread.php?t=47589&highlight=debt

Besides the statement being rediculously loaded to the point of uselessness as pointed out by several people in the thread, the irony that you now favor a massive increase in deficit spending is just breathtaking. My response in the thread was "As for your characterization, Ivan, the way I see it, Republicans want a government that doesn't do much but spends a lot more than it needs to and Democrats want a government that does a lot but spends a lot less than it can. Neither is realistic."

The Democratic side of that statement was a huge issue in the campaign, if you remember, and now Obama has the analysts scratching their heads about his math skills. In the campaign he made obviously contradictory promises about spending and costs (yet people believed him!) and now that he's in office and actually has some influence on the purse strings and is spending money, he's writing 2+2=2 and submitting it as a plan. This to me may actually be a worse problem than the plan itself: Either he's lying to us about what he is trying to do or he doesn't understand the math well enough to balance a checkbook. You can't spend $XX more money without that money showing up on your balance sheet at the end of the month. This analysis is now out of date (it's projections are low due to revisions in the plan), but it illustrates the problem:

Congressional budget forecasters said President Barack Obama's spending blueprint would produce significantly deeper long-run deficits than the White House has projected, complicating the task of enacting his ambitious domestic agenda.

http://online.wsj.com/article/SB123755932558295685.html

"Significant", btw, is double what he projected. Ironically, the judged error in his projection exactly matches the soundbyte claim about it halving the deficit.

When a plan/theory has bad logical or experimental support, that's bad. When the plan isn't even internally consistent on a most basic arithmatec level, that's really bad.

 

[russ_watters]

I don't have a lot of faith in it.

Nor I. Currently, our debt is high, perhaps higher than it should be, but not really out of line with our western counterparts (who nonetheless all have higher taxes to support their debts...), and is manageable. Doubling our national debt over the next 10 years would put us on the wrong side of a performance curve that requires a massive increase in taxes to stabilize. Since government is highly inefficient at utilizing capital, this necessarily results in a long-term reduction in productivity and GDP growth. The risk here is nothing short of an end to the American Dream of generation to generation income/quality of life increases. The promise that if you work as hard as your dad did, you should do better than him would be gone and with it America's international position.

It should scare even democrats that our much more socialist counterparts have taken issue with the socialist explosion that Obama is proposing.

 

[CRGreathouse]

government is highly inefficient at utilizing capital

I feel that way as well, but I don't think I've seen numbers behind this. You don't happen to have any, do you?

 

[JakeA]

Here's a discussion of government spending and economic growth.

http://www.heritage.org/research/budget/bg1831.cfm

Here's a question I've been pondering:

What is the impact of inefficiency on the overall employment rate?

At first glance you could come to the conclusion that requiring 2 or more people to do the job of 1 person would lower unemployment. However, when you think about it, that is probably not the case. Consider a person with a finite amount of money to spend. If that person has to spend 2X dollars to get service Y, and 2X dollars to get service 2Z, then service Z will provide more employment than service Y.

This is one of the (many) big problems with government. Government expenditures are way more expensive than the private sector, and government salaries are way higher nowadays than private sector salaries. It boils down to a class conflict system. We've developed a major bureaucratic class that scourers the landscape for blood from the private sector to put into inefficient or even worse hostile ventures.

All the stimulus will do is feed this monster bureaucracy, both in government and special interests, for another few years, doing nothing to stimulate the overall economy, more likely suppressing it.

George Soros:

http://www.stuff.co.nz/business/world/2319846/Soros-sees-lasting-slowdown

"What we have created now is a situation where the banks who will be able to earn their way out of a hole, but by doing that, they are going to weigh on the economy.

"Instead of stimulating the economy, they will draw the lifeblood, so to speak, of profits away from the real economy in order to keep themselves alive."

 

[CRGreathouse]

government salaries are way higher nowadays than private sector salaries

I think the absolute salaries are lower, not higher. They may be less productive per dollar, though: a 60,000 private-sector employee may get more work done than two 40,000 government employees.

 

[JakeA]

You don't hear a lot about it, but the few places I've read, government salaries appear to be higher.

http://www.ripoffreport.com/reports/0/257/RipOff0257838.htm
http://www.pennyjobs.com/pp/public/Articles.aspx?aid=321
http://www.worldatwork.org/waw/adimComment?id=30027
http://www.nctimes.com/articles/2007/12/05/opinion/rider/19_47_2612_4_07.txt

I know from personal experience and anecdotally that for instance I applied for a government job about a year ago. It was about 50% higher than what I make as an independent consultant and about 1/3 the work. The job was yanked in a hiring freeze, but I probably wouldn't have gotten it anyway because I didn't quite fit the bureaucratic mold. That's base pay, not even including benefits which are outright thievery of public money.

The average cop where I live makes more than 100k per year with overtime. That's also not including benefits like medical and retirement. Compare that to a security guard who makes probably 20k per year with no benefits.

I was talking to a civil engineer a while back and he said that government civil engineers make probably 20% more than private sector (not even including benefits) and they're all the worst qualified. He said that people would work for the city, county or state, but the work is so boring and you deal with such idiots not many really qualified engineers can handle it. That's what he told me.

I could list off lots more examples if you want more.

 

[CRGreathouse]

My anecdotal evidence points just the other way: the government jobs I see are poorly compensated compared to business & industry. But anecdotes are worthless anyway...

The average cop where I live makes more than 100k per year with overtime. That's also not including benefits like medical and retirement. Compare that to a security guard who makes probably 20k per year with no benefits.

Security guards aren't cops, though -- I'd expect a police officer to make more because their job is harder and requires more training.

But those numbers didn't match my experience, so I looked it up on payscale. It says (median salary, 1-4 years experience):

"Police or Sheriff's Patrol Officer": $39k
"Security Officer": $21k

This seems in line, to me, with the (large!) differences in the jobs.


I'll stick to my original line: I think government jobs are (when compared to similar non-government jobs) have lower gross yearly take-home pay. I wouldn't be surprised to see that the difference was narrowed (removed?) if benefits were included, and it seems likely that they are overcompensated in terms of productivity. But in raw pay? I don't think so. Your links didn't convince me either: the first one doesn't take into account types of jobs (more burger-flippers in the private than public sector); the second makes dubious claims about the minimum wage and self-contradicts in point #3; etc. I *could* be convinced here if you get better sources, though that seems doubtful at the moment.

 

[JakeA]

You're funny. You use an example where a comparable government job pays twice the private sector job without benefits, and then you claim that proves that government jobs pay less. Whether or not security officer or patrol officer is harder is subjective. I say security officer is harder and more intellectually challenging because security guards don't have hoards of other bureaucrats lazing around to back them up should someone look at them sideways.

The city of Vallejo, CA went into bankruptcy recently basically to break their police and fire union contracts. It's having a bit of an impact on union negotiations. For instance police and fire unions in my town agreed to concessions which amounted to foregoing pay raises so there wouldn't be layoffs. It's not nearly enough. We need drastic layoffs and pay cuts. That will put things back into sync.

Government is out of hand in American society. I defy anybody to counter that claim.