Forbes Fantasies

For the past year or so, I've been receiving Forbes in the mail. I don't know why this is, but I assume someone sent me a gift subscription (can't thank whoever it is because I never found out who). And I find that it has some occasionally useful articles on various aspects of money, investing, and so forth.

But that's not why I read it. I look forward to the one-page essays near the front of each week's edition. Most of them are headlined "Thought Leaders," and they are typically quite awful, when they are not screamingly funny in their incoherence (see Schlaes, Amity). The best, though, are often those of the publisher, Steve Forbes. Today's text is his October 22 piece, "Gold Can Save Us From Disaster."

Steve's argument is that stable currency is the answer to our prayers, economically speaking, and a return to the gold standard would produce the desired stability. Here is his complaint: "An unstable dollar is wreaking havoc on our capital markets, depriving us of money for productive enterprises and future enterprises while subsidizing government debt on a scale never before seen in U.S. history." I'd like to examine that claim.

First, is our dollar unstable?

By coincidence, this piece in the Atlantic online from just last August makes the point that price stability under the gold standard is not necessarily better than under a fiat money standard. In general terms, price stability is a desirable goal, because it allows for predictability in the markets. But it is not necessarily the primary goal of economic policy.

Second, does an unstable dollar "wreak havoc" on our capital markets?

This article from the archives of the Federal Reserve provides fascinating real-world instances of how the requirement to maintain the gold standard, in the face of external pressures, threatened the capital markets --the NYSE itself was closed for four months in 1914 as a direct result of the need to maintain the gold standard; I wonder what Mr. Forbes would have to say about that sort of event. By contrast, the capital markets in the US, whether you look at stock prices and trading volumes or market rates of interest,  currently seem to be functioning well.

Third, are we "deprived of money for productive enterprises and future enterprises" (an awkward pairing; not sure what, if anything, Forbes is getting at here)?

Well, I guess that comes down to a question of who is being "deprived." Given the historic amount of cash in the coffers of American business (see here and here), it is tough to say that businesses don't have money to invest in "productive enterprises or future enterprises." So I suppose we ought to assume that the "we" actually means what it says, that is, Mr. Forbes himself, and others like him. I suspect, in other words, that he is lamenting the historically low level of interest rates, which, he says at another point in his article, punishes savers (or the wealthy in general).

Fourth, is government debt being subsidized "on a scale never before seen in U.S. history?"

Again, it's a little hard to understand what he means by this. I expect that the "subsidy" he refers to is simply the fact that, because interest rates are so low, the government can finance its historically high level of debt at a cost in annual interest that is lower than the total paid in any year during the G.W Bush administration. In other words, the cost to the taxpayer of current government borrowing is less than at almost any time in our history --which, in other circumstances, would be regarded by Mr. Forbes as a good thing (at least, to the extent that he would regard higher costs, in general, to the taxpayer as being a bad thing, which would depend on whether he really cares about "the taxpayer"). So the government is not as constrained in its borrowing as he would wish --for reasons having little to do with the overall state of the economy. Presumably, Mr. Forbes would want the government to be paying much, much more for the money it borrows. Lenders usually do.

Now, it is certainly true that, if we were on the gold standard, interest rates would be much higher: because the supply of gold is fixed, more or less, the government could not print money; and therefore the money already in circulation, backed by gold reserves, would be much harder to come by and so would cost more. And that would be good for lenders. But it would be very bad for borrowers; and borrowers are by far the majority of the people, and certainly are the portion of the population currently most in need. Also, at a time when expanded economic activity may be needed, say, to stave off recession or depression, the government, or the central bank, would not, on a gold standard, have the flexibility needed to pump money into the economy and so increase economic activity; the result would be an inability to put any brake on economic contraction of the sort we have experienced in recent years.

It seems to me that Mr. Forbes is actually (whether he knows it or not) lamenting the lack of deflation in the economy. Deflation is what we could expect if we were on the gold standard; and deflation would suit a lender just fine: it would mean that he'd be getting paid back in ever more valuable dollars. And inflation, on the other hand, is what Mr. Forbes fears; like a great many other conservatives, he appears to ignore the facts of the past 5 years and continue to expect runaway inflation any day now, just as has been predicted, over and over, for 5 years, by his ideological compatriots.

It is worth noting that, in a Chicago survey of 40 economists at the top economics departments in the U.S. academy, all of them (except for a few non-respondents) registered a "disagree" or a "strongly disagree" to the assertion, "If the US replaced its discretionary monetary policy regime with a gold standard, defining a "dollar" as a specific number of ounces of gold, the price-stability and employment outcomes would be better for the average American."

Comments from the 40 economists range from the measured "A time series plot of the price of consumption in ounces of gold, and then in US dollars, clarifies that gold is not a stable standard." to  "A gold standard regime would be a disaster for any large advanced economy. Love of the G.S. implies macroeconomic illiteracy."  to "eesh. Has it come to this?"  

Mr. Forbes, it ought to be noted, joined the magazine that bears his name (and that of his father, and his grandfather who founded Forbes) soon after his graduation from Princeton in 1971, and has never worked anywhere else.  So it should come as no surprise that his exposure to the real world, as opposed to the cloistered precincts of old money, has been minimal and awkwardly-pursued (according to his Wikipedia biography, Time magazine called Forbes's abortive 1996 campaign for the Republican presidential nomination a"comedy-club impression of what would happen if some mad scientist decided to construct a dork robot." and also described his campaign as "wacky, saturated with money and ultimately embarrassing to all concerned." But his think pieces in his family's rag, even ignoring his confident "yes, he [Romney] will win this election, despite all the claptrap to the contrary" in the article under discussion here, are noteworthy: pomposity can be easily satirized; but when it is so spectacularly ill-informed, it satirizes itself.

Euros and Dollars

Not so small a point:

The GDPs of Greece and Portugal, according to the World Bank, are each roughly two thirds that of Germany, and about 77% of the European Union taken as a whole. That is to say, Greece and Portugal are poor countries, the weak sisters of that economic bloc. So, perhaps it is understandable that Greece and Portugal should appear constantly, since the Crash, to be circling the drain. They started in last place, and are certainly in no position to compete now, with their 25% unemployment rates and persistent housing crises. Just today, a Greek woman, while the sheriff was ascending the stairs to evict her, exited her apartment via a fourth-floor window; in response to this widely-publicized suicide, Greece has put most foreclosures in abeyance for the foreseeable future, simultaneously with the adoption of stringent new austerity measures. The populace of that sad country, beset with Nazi thugs roaming the streets in search of immigrants, has virtually nowhere to turn; there's just no money to be had, even for the most basic necessities.

The GDP per capita of Mississippi is about half of that of Connecticut, and roughly three-quarters of that of the entire US, on average (link). So Mississippi looks, at least in this respect, like a Greece or a Portugal --in fact, its GDP per capita is almost exactly the same as that of Portugal and a bit less than that of Greece ($26,087 for Mississippi, vs $26,948 for Greece and $25.395 for Portugal). Mississippi is a "poor" state; it brings up the rear, in terms of the US economy, except for Puerto Rico, the Mariana Islands, and similar possessions.

Yet Mississippi's unemployment rate is 9.2%; very bad by US standards, but only about 1.5 percentage points worse than the national average. The Greeks would think they'd died and gone to heaven if they had that rate. And although, like many areas of the US, Mississippi is undoubtedly suffering in the recession, its situation is by no means noteworthy, in terms of national news coverage.

What's the difference? Why isn't Mississippi, which could be called our "Greece," spiraling out of control as that European country appears to be doing? I've pointed out previously that Greece doesn't control its own currency, and that fact puts the country in a straitjacket when it comes to controlling its economic destiny. But Mississippi, of course, doesn't have its own currency, either; so that can't be the difference.

Mississippi, in foregoing the right to have its own currency, and in surrendering the right to control its borders, gained something that Greece, in taking the same steps, did not gain: the state, unlike the country, is part of a single financial system. Unemployment in Mississippi is subsidized by unemployment compensation that originates at the national level; welfare, social security, Medicare coverage, and so forth, are all either federally provided or at least federally controlled and subsidized. And so, when Mississippians lose their jobs, money is transferred into the local economy, from other states, in the form of unemployment compensation. Elderly Mississippians benefit from Medicare, which does not depend on income earned in Mississippi.

In effect, Mississippi benefits from transfers of these kinds from elsewhere in the US. Rich states, mainly in the North and East, subsidize poor states, mainly in the South and West. It's pretty much consistently that way. Mississippi ranks 50th, and Massachusetts 4th, in the per capita amount of federal taxes paid by its residents. In terms of net contribution (all federal taxes) to the federal budget, Massachusetts ranks 11th, at about $2,133 per resident, net contribution; Mississippi ranks 49th, at a negative $6,765 per capita (link and link). So the local economy of Mississippi benefits substantially from the influx of money from outside the state; this keeps the stores open and their employees working.

We have, in other words, what economists call a fiscal union. All the states are part of the same federal budget and are subject to the same federal tax regime. And their residents all participate in the same social safety net. So it doesn't matter, for example, that Mississippi cannot coin its own money. In fact, that state and most of its neighbors benefit substantially from membership in this fiscal union.

It's ironic that, with a few notable exceptions such as Texas, most of the net contributor states are reliably Democratic, while many of the most Republican (not to say anti-federal government --whoops, I just said it) states are those which benefit most by the transfer to their people of taxes paid elsewhere. 

But back to the main point: the creation of the Euro involved a monetary union --a single currency-- without creating a fiscal union --a unified budget, tax regime, and welfare system. And this is at the heart of the problem for the poor countries of the European Union. And it is why Mississippi is not, and will not be, in the sad state of Greece and other poor members of the Euro. 

Unless certain political elements get their wish, and federal programs are devolved to the states.

The Food Stamp President

Okay, let's first just look at the history.

The first food stamp program --they were called "food scrips" then-- originated in the thirties, in response to the widespread need during the Depression. Participants could buy a defined amount's worth of "orange" stamps, which were good for any food item, and with them get a proportional amount of "blue" stamps, that could be used to purchase only surplus commodity foods. By the end of its first year the program was regarded as a success in two ways: (1) as the nation began to ramp up its military preparedness, food stamps were viewed as enabling a larger supply of potential soldiers who were physically fit, malnutrition having been a serious problem; and (2) the food stamp program provided a market for surplus agricultural products and thus kept farm prices from collapsing --the government was already concerned about maintaining robust farm production to meet the needs of what looked like a brewing war effort.

This program was discontinued in 1943; the food surplus and the unemployment problem had vanished due to the war. It was revived during the 1961 recession by President Kennedy, and made applicable only in a few coal-mining areas where changes in the economy had produced widespread unemployment (Kennedy had begun his presidential campaign with an unexpected victory in the West Virginia primary, and the program was the result of a campaign promise). The first recipient was a miner whose mine had been closed a year earlier, and who had 13 children. He got a monthly allotment of $95, which the FDA expected would cover about one-third of his family's need.

In 1964, the program was expanded across the nation as part of the War on Poverty. Ronald Reagan, in campaigning in 1976, attacked the specter of a "strapping young buck" --yes, he really said that, in Florida-- using food stamps to buy a T-bone steak; but a year later, during another recession, the program had just over 16 million participants. By the way, there were 220 million people in the USA then, compared to 314 million today).

Jumping ahead, the number of people fell in the early '80s (Reagan, again) but then grew rapidly in the '90s; there were 27 Million participants in 1994. Republican efforts during the Clinton Administration succeeded in defining the food stamp program as "welfare," thus subjecting participants to the new work requirements that were a centerpiece of the Clinton "end welfare as we know it." As a result, enrollment began to decline substantially: single mothers and their toddlers aren't good candidates for work, it turns out, nor are elderly sick people. It was estimated in 2001 that half of the eligible population no longer received food stamps. Under G.W. Bush, the program was again liberalized, though, as the price the Democratic Congress exacted for an expansion of the farm subsidy program. Under Bush, the program also dispensed with paper coupons and began using electronic benefit cards; this step, along with the program's new name, Supplemental Nutrition and Assistance (SNAP) reduced the stigma of food stamps. In 2008, according to the Food and Nutrition Service of the USDA, about 66% of the 41 million eligible persons were actually receiving SNAP benefits. Overall participation was about 20 Million people in 2000; that had grown to about 30 Million in 2009; the average monthly benefit per person in the program is currently about $125. Currently, about 47 million people receive benefits. Well over $50 million is spent annually on the program.

Now: What does it mean to call Obama the "Food Stamp President?"

Well, certainly the number of people receiving SNAP benefits has grown during Obama's administration. Unemployment has also grown, dramatically. Here are some numbers:

	Month	Jobs Lost
	Aug '08	300,000
	Sep	450,000
	Oct	550,000
	Nov	725,000
	Dec	650,000
	Jan'09	780,000
	Feb	720,000
	Mar	750,000
	Apr	500,000
	May	400,000
	Jun	500,000
	Jul	350,000

That's nearly 7 Million jobs lost in the last 6 months of the Bush Administration and the first 6 months of the Obama Administration. In only one month during 2008 and 2009 was there a net gain in employment. If the eight or nine million people who lost jobs during those 2 years had one dependent each, and if all of them applied for SNAP starting 6 to 12 months after they became unemployed, that would account for an increase from 30 million at the start of 2009 to well over 45 million, all by itself.

Of course, the overly-simplistic nature of this analysis is obvious, on several counts; but the point is just to demonstrate that the increase in people on food stamps should not have been unexpected. It's very similar to the argument that government expenditures exploded under Obama, or that government employment spiked, again, as an example of waste, growth in big government, and so on, during the first part of 2010. There are reasons for this, and they point to the proper functioning of government rather than to the excesses of our first Muslim, Socialist, America-hating president. Automatic increases in unemployment compensation payments largely account for any unusual growth in government expenditures, and government employment in 2010 spiked, in April, due to the hiring of hundreds of thousands of temporary Census workers --it dropped back to the pre-Census level two months later.

So: you can complain that Obama didn't do enough to end the recession or to stanch the bleeding, where unemployment is concerned. I agree with that. But the food-stamp situation is just an aspect of that, not a separate indictment, as if there was an Obama plot to put zillions of people on food stamps.

Small Points

For our text today, let's look at a couple of claims that were repeatedly made during the late, unlamented election campaign:

1. The US is heading towards becoming another Greece.

Greece is suffering for these reasons. It has historically ---

• been unwilling or unable to enforce its own tax laws, so tax evasion is so endemic it's become the norm.
• earned its revenues largely from a few industries: tourism, olives, wine.
• had very high public employment (as a percent of total employment)+

All this produced a low-output economy, with a low-energy (if you will) society. If you've ever spent a week vacationing on a Greek island, you probably, at this point, say, "Opaaa!!!" The Greeks have (or had) a society and a culture that was a pleasure to experience, at least as a visitor: devoted, seemingly, to a relaxed pace and an appreciation of life's little pleasures: sipping coffee or wine in the sun for two or three hours in the afternoon; slow, easy late afternoons, late dining, late rising in the morning. Sounds nice, no?

And then came the Euro. German productivity, German GDP/debt ratios, and so forth became the standard for ... Greece! Whatever you know or don't know about those two countries, does that make sense to you?

A full analysis would be long and complicated. But here is a simple fact:

• The US has its own currency and its own central bank. Greece does not.

What does this mean: First, that the US (via the Federal Reserve) can control the interest rates it pays, because those rates are set by the central bank. And when external economic pressures become too great, or creditors begin demanding interest rates that are too high, the US can also let the value of its currency float.  The pressures will drive the currency down in value, which has two benefits to the US: (1) it can repay debt with cheaper dollars*, and its exports become cheaper, thus improving thehealth of the manufacturing and other sectors that produce these exports. Greece can do neither of these things. The only thing Greece can do, and it is a slow and painful thing to do, is reduce salaries and benefits internally. This takes a long time, seriously harms the population's standard of living, and exacerbates the deficit problem because it (like the austerity that has been insisted upon by Germany, and which has further harmed every country where it has been tried) reduces the total amount of money in the economy and the resulting tax receipts.

In contrast, if the international investment community (bond buyers) decides it does not have confidence in the US economy, it will refuse to buy US Treasuries, consequently bidding down the price (which is the same as bidding up the interest rate). This is what has happened to Greece (and Spain, but Spain is a different case). Greece cannot afford the debt service on its national debt, at 6% or 7%. The US, through its central bank, can choose to let rates rise; but if it does not the value of the US currency will fall, which accomplishes the same thing in some ways.

Interestingly, even with the debt-ceiling crisis, the interest rate on US Treasuries has remained at an historic low for the past few years. Also note that there has been a steady chorus of doom-sayers predicting runaway inflation unless the US embarks on a huge austerity program. These people have been wrong for four years now; and those who made bets on higher interest rates have lost a lot of money.

But what is clear is that the U.S. bears no resemblance to Greece, and no matter how bad our debt situation becomes, a Greece-like situation is, practically speaking, not possible.

*Another way of looking at all this is that if you have your own currency, and your debts are denominated in that currency, you control your own fate. If you use a currency controlled by others, others will control your fate.

2. Obama has resolutely ignored the recommendations of his own Bowles-Simpson Commission, including the recommendation to cut individual tax rates substantially.

In fact, there was no "Bowles-Simpson Commission Report." The 18 members of the Commission were unable to agree on a report, in part because of member Paul Ryan's "no" vote on the report proposed to be issued.

This is true, Look it up. It is the reason we are facing the "fiscal cliff," at least the "sequester" part of it. If B-S (!) didn't produce a report  that would be accepted by Congress, the agreement was that Congress (through its "Supercommittee") would produce a deal itself, or the sequester would automatically occur on 1/1/13. All this was according to the Budget Control Act of 2011.