Thursday, May 31, 2012

Mayor Bloomberg and the Nanny Staters strike in NYC

I'd much rather have Magoo
than Bloomberg.
Mayor Bloomberg and his compatriots of nannies are at it again with yet another attempt at meddling in the lives of ordinary Americans. He wants to ban soft drinks over the size of 16 ounces, which he claims will help fight our obesity epidemic, within the municipality of New York.  The measure still has to pass the Health Board, but considering they are all appointees of the mayor, and likely share his paternalistic sentiments; the measure could very well pass.  Ignoring how this is the very much an example of socialism outside of an economic concept; one needn't think very long and hard how absurd this entire measure is and how it will do nothing whatsoever.

First off this is only a ban on soft drink sizes larger than 16 ounces, which means it will likely have no affect on overall consumption. There is nothing stopping an individual drinking 32 ounces of soda in a single sitting if they want outside of convenience stores, movies, or games (even at there if someone was so inclined as to buy multiple beverages instead of a single one).  A lot of things make a person fat, not just soda consumption; but for the sake of argument lets assume that soda is the primary reason, and not just one of many, that contributes to our rising obesity.  The simple reality is that those individuals are consuming multiple beverages a day, be it large 32 ounce big gulps from 7-11 or 8 cans they bought at the store.  But we all know this, save for the leaders of New York City, so there isn't a real need to hash this out.

Secondly, the law does nothing to address the many other calorie, and potentially weight gaining, laden items such as milk, alcohol, juice, or diet soda.  Some of these items are even worse for you from a health standpoint. Yet, the law will not ban someone from chugging 20 ounces of booze, milk, or fruit flavored fructose corn syrup mixed with water.

 It doesn't take much thought to come to the conclusion that this law will have no effect on obesity. The law is nothing more than another checklist for the feel good brigade and to satisfy the need for paternalists to tell others how to live.  It's not surprise the New York city has helped contribute to the negative migration rate of New York State this last decade and an economic loss of $ 45 billion over that period.

Saturday, May 26, 2012


I have long stated to my friends, and anybody who cared to listen, that the Greeks are going to leave the EU; voluntarily or otherwise. It is only a matter of time; as fiat currencies are bound to fail. And the Euro is not only a fiat currency, but one that doesn't have a unified economy behind it. It is a mismatch of various wealthy and developing economies, each with their own aims and ends that are very different from one another.  There is no central government, despite the efforts of Brussels, that can dictate policy to the member states. This severely hampers the European Unions ability to manage financial catastrophes.  Moreover, this isn't the first time European nations have tried a monetary union, it also failed.  The only reason why Greece hasn't elected to leave, or that Germany hasn't forced them out, is one of fear.

Greece fears the short term chaos that will result from being forced from a stronger currency, with lower interest rates, into a weaker currency, with much higher interest rates. Their government is already at the point where they can no longer cover their deficit spending through borrowing.  The Greek government would like the wealthier nations to help foot the bill with continued bailouts; whose the stipulations attached to them the Greeks have no intention of honoring. However in the long run, either the wealthier nations will become so aggressive trying to enforce their stipulations, or the Greeks their is no saving the system. That they will have to cut government spending; and the only way to make it tolerable is to foster economic growth. And as long as the Greeks are a part of the Euro they cannot grow.  They ultimately need a weaker currency, because it will give them a competitive advantage over German and French goods.  Reinstating the drachma will allow the Greeks some measure of control over their situation, they have none currently.

The Germans are afraid that the exit of Greece from the Euro could have unravel a system that has profited them. The Germans are a net exporter of capital and the EU has allowed them an avenue to grow by making it cheaper for other European nations to buy their goods.  Nations like Greece, were able to borrow at lower rates than they would otherwise have gotten with their own currency.  This leads to a growth of both private and government spending, which Germany, and other nations like Germany, were often the beneficiary of.  This system has worked very well, until now.  Now that these nations cannot sustain their borrowing habits Germany finds itself in the unenviable position of covering the tab.  The Euro also benefited Germany as it is the strongest member of the union, allowing to do economically what it could succeeded in doing militarily; and that is control  the currents of Europe.  If Greece leaves the Euro it could very well threaten this economic system.

By itself Greece is rather insignificant. It's GDP is $ 300 billion, which is less $ 200 billion less than the cities of Paris or London.  What the Germans fear is that this could cause a ripple affect amongst the larger, but still economically, shaky nations like Italy or Spain, whose GDPs are each over a trillion dollars. If Greece opts to go its own way then Italy and Spain could decide leaving is an option for them as well.  This could result in a currency collapse. A collapse of the Euro would hurt Germany, however, its economy is strong enough that in the long run their economy would be fine. Ultimately the real reason why the political leadership of Germany doesn't want the Euro to collapse is because it doesn't want to risk a fracture of the EU.  Neither does the political elite of France, Brussels, Italy, and many other nations.

 The elite of Europe truly believe that patriotism, or nationalism as they would derisively call it, is bad for Europe.  They see the EU as the best chance to refocus the world back onto Europe, reinstating the world order as it had existed before the fall of the Berlin wall.  And perhaps make Europe, and not America, the pivot point on which the world turns, as it had prior to World War II. What the elite wants to do above all else is save the EU.  It looks like the European elite are starting to circle the carts.

If there is one reason to read the Telegraph its Daniel Hannan

I am a huge fan of Daniel Hannan, he has a far better understanding on the constitution and its importantce than 95% of our own American politicians.  Here he is giving it to the European MEPs, MEP stands for Member of European Parliament in case you were not aware of that.

Friday, May 25, 2012

Garbage Statistics

At least this gives us bacon
Why is it that so many individuals try to put lipstick on a turd?  Here is an article by a Forbes columnist saying that Obama is the smallest spending president since the end of the 70s. Why this was written is beyond me.  This segment alone floors me
"So, how have the Republicans managed to persuade Americans to buy into the whole “Obama as big spender” narrative?
It might have something to do with the first year of the Obama presidency where the federal budget increased a whopping 17.9% —going from $2.98 trillion to $3.52 trillion. I’ll bet you think that this is the result of the Obama sponsored stimulus plan that is so frequently vilified by the conservatives…but you would be wrong."
Here's the thing that needs to be reiterated, but I cannot understand why this is so.  When it comes to debt it doesn't matter that if Obama has slowed his spending ways since his stimulus, the fact is that he passed the stimulus.  He increased spending by nearly 18%, and why would we credit the president for not spending as much during later years?  I mean is it such a stretch of the imagination to think; that perhaps the only reason why he has slowed his increasing in spending was because a significant segment of the populace sent his fellow democrats packing?  Does anybody in America truly believe, and I mean deep down inside themselves, that if Obama got a green light to increase spending by another 18%,  that he wouldn't do it?

But lets get all statistical to blow this out of the water.  What really matters is if GDP growth is growing faster than debt.  Looking at this chart, compiled by using data from the Department of Treasury and the Bureau of Labor and Statistics,  we see that since 2000, and probably Lyndon B Johnson's presidency, GDP growth has not outpaced the growth of Federal spending.  But lets further eviscerate the authors line of argument, by looking at the little green bars, and please forgive the sloppiness of the chart as I threw this together during a coffee break, we see that the difference between the growth of debt and GDP growth has not been below 10% during Obamas presidency. 

To summarize, for every way you can find to try and make our current situation look better, or somehow make our president a model of fiscal responsibility; others like me will find many more that show those assertions to be nothing more than the desperate lies that they are. And it only took a coffee break.

The first brick in the wall comes out.

Chinese ghost city middle of the day
in what is supposed to be a
 major thorough fair
Even the large media centers are reporting on China's slowing economy.  While it's still growing, the fact that Chinese developers are laying off construction workers does not bode well.  As large as the real estate bubble was in the United States, it is many magnitudes larger in China than it was in America.  The reason being is that the Chinese government has placed all its chips on economic growth; in order to stave off unrest and possible rebellion.  The Chinese economy needed, and by needed I mean the CPC needed, to have near maximum employment versus profitability, which how the American economy has traditionally operated.  This results in a lot of redundancy and projects that have no real long term economic value.  China has used three tools to growth their economy. 

The first is one that everyone is familiar with, and that is China's export economy.  China has effectively become the producer of goods for Europe and the United States. However, this means China is vulnerable to currency valuation changes, stability of the ocean seas lanes that are controlled by a foreign power, and demand by foreign markets.  This effectively means that a large portion of China's economy, and economic health, is not in control of China; and change in anyone of these items could severely hamper their economy.  Moreover, according to Stratfor, if it were not for generous subsidization by the state then many of their exporting industries would have negative return rates.

The second tool China has used to grow, and one which many are not as aware of, is internal spending.  China has more control over domestic GDP growth, and large infrastructure and development spending are ways to do this; at least on paper.  As I have said in the past, infrastructure spending doesn't always yield a net positive return if the money is squandered on projects that do not make sense. Moreover, China has many real estate projects, in some cases entire cities, that are near empty. This means millions of dollars, perhaps even billions, are used in the maintenance and debt servicing of 'assets' that do not yield a financial return. China's residential real estate economy has been on life support for a while as well.  The Rutgers article is there more to illustrate how long they have had this issue versus how severe or not the real estate contraction would be.  Many American financial rags also speculated a rather mild decline, they were wrong.

Lastly we have Government money. The Chinese government long used funds to direct the growth of their economy, and after their stimulus, which as a percentage of GDP was larger than ours, has only grown more intertwined.  It's hard to estimate how much bad government money is floating around plaque in the arteries of China's economy.  But its a lot, and for a long time China has been trying to paper over the fact that many municipalities are drowning in debt.  Eventually this will all have to be paid, and that is perhaps when the final domino will fall.

What historically tears China apart isn't so much popular revolts against the leadership, as it is regional governments begin to ignore or outright rebel against the dictates of the central government.  This happened to the Nationalist Government, the Qing Dynasty, and virtually every Chinese dynasty that collapsed.  The very system China puts in place to ensure stability also ensures poverty, and the measures China puts in place to try and counter the unrest that poverty causes, by increasing economic growth that is directed by the central government, causes its fracture.  China could beat this cycle, but that would entail truly free markets; and the acceptance of a short time of instability that free markets sometimes cause.  My friends, we might be seeing the first brick that is, and will,fall out of the great wall that is Communist China.

Friday, May 18, 2012

Part two: What makes a nation prosperous?

A cartoon from an era
when people really believed
government could stop, and not be a source
of corruption
While looking at the statistical data I had collected on the least corrupt and most economically prosperous nations; I had decided that corruption mattered more than levels of democracy.  This isn’t to say that democracy isn’t important when it comes to economic prosperity, but that corruption mattered more.  A nation could be democratic but so corrupt that it negates any advantages that having a democracy would possess; Argentina would be an example. While a nation with low democracy that was very uncorrupt, like Singapore, would fare very well economically.  Now it just so happens that corruption levels and democratic levels tend to go hand in hand.  Very uncorrupt nations tend to have high levels of democracy
Corruption also matters on GDP, though the lower levels of corruption an nation the benefits from further decreasing corruption are minimal. It appears that having corruption levels three or below severely hampers a nations economy.  These low levels include nations like Venezuala, with a corruption level of 1, and Greece, with a corruption level of 3. As corruption lessens, economic prospects grow.  It appears to matter less around level 8, though the trend line indicates that if all else is equal, nations with lower corruption will have a higher economic stature.

Knowing this I decided to take a look at the Human Development Index. The HDI is essentially a measurement of how developed your nation is.  Anything over .8 and you could consider that nation as developed.  Anything above a .9 and there is no question that paticular nation is a member of the first world.  I choose this index, rather than say the OECD, because the OECD predominately focuses on European and North American nations, though there are a few Asian nations and only two South American nations. It also tries to present the findings in data form rather than simple membership.  Most OECD nations will be developed nations, or at the very least highly developing ones.  I also decided to include median income in the chart because a few resource rich nations, like Qatar, skew GDP PPP nations upwards. 

What we see here is that there might be some correlation to development level and GDP PPP.  What is interesting is that around HDI .82 to .84 there are higher levels of GDP PPP than we would expect. The average income bar chart shows average incomes to be equal to, or greater than, the most highly developed nation. Look deeper into the data and you will see that it’s because there are a few very resource rich nations like Qatar, Brunei, and the UAE that skew incomes.  Also, it appears that the more developed the nation becomes; the less of an impact it has on GDP PPP. For example, Japan and Switzerland are nearly identical when it comes to levels of development, however, Switzerland's GDP PPP is greater than Japans by 10,000 dollars.  Why is this?
The reason is that not all development relates to economic activity. Roads and freight rail assist in economic development, because goods and materials are moved to and from locations; high-speed rail, despite the protests of many, does not. It isn’t easy for me to say that, considering that I used to be a big proponent of high-speed rail, but those systems add little value towards economic development. It may be nice to have another option to travel than by bus and car; yet high speed rail lines are very expensive, and sadly, rarely ever used to their full potential. Moreover, other infrastructure projects that might be useful, in the wrong locations or circumstances can be a net drain to the economy.  Japan learned this lesson after enacting so many stimulus projects in an effort to renew their economic growth. California is intent on ignoring that same one. That lessons is:  If you build it, they don’t necessarily come if there isn’t an existing need.  History has shown this to be correct, only two highspeed rail lines in the world have recovered their capital costs, skip to 2:15 of the video.
We also see on this chart that typically, nations with lower levels of corruption have higher levels of development. There are a few ways we could take this. One, is that less corrupt nations do a better job of maintaining the infrastructure that is needed to maintain well-functioning economy, specifically items like railways, electrical systems, pipelines, information systems, canals, freight lines, and roads. The other, is that nations that aren’t as corrupt, tend to have better economies, which then means that the nations then have more funds to fund infrastructure projects that there is a demand for.  It all depends on what you think about infrastructure, does it facilitate economic growth, or is the growth of infrastructure dependent on the growth of the economy? I tend to favor the latter idea, but you will find plenty of individuals that would argue for the former.
We also see that while there is some variance in corruption between the HDI nations that the general trend for a developed economy is to not be below a 6.  The few nations below this number, that are considered developed economies, have GDP per capita much lower than those nations with lower corruption.  We now know from the data presented, that a nation with low corruption typically will be richer and have better development. The question is how do you foster a society that isn’t corrupt? That is a difficult question, since democracy alone doesn’t prevent corruption; and no matter how many seminars a bureaucrat takes it won’t affect his behavior.  The real way to fight corruption is accountability.  There are plenty of ways you can do this, but one of the least intrusive and resource consuming is to look at what developed nations are the least corrupt.  And what we see from the chart below is that nations with smaller population bases tended to be less corrupt.
This largely results from the fact that members of parliament or congress are less removed from their voter base.  For example there are around 36,000 New Zealanders for every Member of Parliament, whereas in the United States there are a half a million Americans for every member of congress.  What this means is that a person’s and a community’s voice has more sway in New Zealand than it does in the United States. I will probably do a more extensive post on it at a later date, but looking at the least corrupt nations the average ratio of legislators to citizens is around 75,000.  Remember, the United States has ratio of almost 600,000 to one, it makes one wonder if part of the reason our corruption levels of risen so much might be in part due to this.  What we do see is that some trends are developing. Rich nations, more often than not are highly developed, free from corruption, democratic, and tend to be small.  This gives us an idea on what the United States should do to become more prosperous, but that is a post for a latter date.

I hate modern art.

I consider myself a very cultured person; I mean my name and blog title are in Latin! But one thing I will not pretend to understand or like is modern art.  I went to a little event with the girlfriend this week; she volunteers at an art museum and got invited to an after hours soiree.  The first thing I see when I walk in is this.

The name escapes me but
I know this is made by some
'great artist' from China
It's a bunch of cars suspended in midair with LED tubes sticking out of it at various angles. I suppose when viewed as a sequence it would look like an exploding car flipping over itself; and I won't deny there is a slight 'cool' factor. But this is somehow great art worthy of being placed in a mueseum in a good sized metropolitan center?

Anyone with the proper tools and time can do this. Granted, this would be far more difficult than what the majority of us could do. But that seems to be the impetus of modern art these days, foisting crap upon the public and proclaiming its greatness.

Carboard stuck to a wall. If card
on a wall is great art. Then I got louve worthy
material at one of the buildings I help faciliate.

A bunch of barbed wire and some electroluminescent light.
I'm sure this is a modern citique of American capitalize and beneath the lights of prosperiety lie
the ever oppresence of conformity.
This stuff is just mundane and pedantic, not even the worst of the bunch.  In this art museum, admist the modern art section, there is a Jesus flipping the bird holding what looks to be a joint. It's offensive for a variety of reasons, none the least of which is it insults an important deity that billions of people round the world worship; and it wasn't even well made.  And that is the worst thing about modern art. It fails to elicit any sort of emotion response, and from a technical standpoint, its terrible. 

Go to any art museum and you will see and an Ancient Greek and Roman section.  Now at our museum, sadly, the Greek and Roman section only encompassed a solitary wall.  One of the greatest artistc epochs of our history warrants a paltry space.  Now granted, the museum may only have few items on hand, though I have been told the museum has more in storage. This is in contrast to the modern art section that got an entire floors worth of garbage, literally, some of the art was garbage!

Here are two examples of Roman sculpture and art.  One thing I found interesting was that the Romans and Greeks were masters when it came to carving lifelike statues; yet their painting seemed not up to the same level as their sculptures.  Not that it is bad mind you, but there is a noticeable discrepancy with the proportions.  But either way, when you compare ancient Roman art to say Egyptian, Sumerian, Etruscian, Celtic, and Babylonian, you notice that the Romans were simply head and shoulders above them in terms of quality.  None of the aforementioned civilizations were bad; the Romans and Greeks were just that good.   Then you move on to Medieval art.

Not to pick on all artist during this period, as there were certainly some skilled ones. But over all the art just isn't up to the same level of quality that existed.  Makes sense, considering that the Medieval period was a time when the west was just picking itself up after the chaos caused by the collapse of a great civilization.  Walking through the art museum I had this deep sense of loss while wandering through the medieval art section.  The west had truly lost something when Rome fell, and I thought about how more much scientifically and cultural advanced we would have been if Rome had not fallen.  We forget the ancient Greeks and Romans discovered concrete, and had created the beginnings of a steam engine.  Just think how much different the world would have been if the steam engine had been discovered in 500 AD, and not the 18th century. 

We see the rediscovery of human imagination and progress when we view Renaissance art. The rediscovery of proportion and the golden mean, a renewed emphasis on human development!  This sparked a period of every increasing human advancement. After the Renaissance we have the enlightenment.

And after the enlightenment. Just look at the play of shadows in light in a painting.  This was the area when Benjamin Franklin discovered electricity and when a new concept called liberalism, the real sort not the bastard child we have today, came into being.  The science of economics was created; everyone should read 'The Wealth of Nations.'

The Industrial revolution, increased human productivity and wealth

The Victorian age, scientific discovery and the rapid advancement of human knowledge!

Human beings progress ever further and further, culminating in....this.

When art like that is celebrated; is it any wonder when we get people like this

Artist used to be the most intellectually superb amongst us. DaVinci was a painter, a sculpture, and architect, and an inventor. True he was a giant amongst geniuses, but at one time it wasn't uncommon to expect those inclined towards the arts to excel in a variety of fields.  That is what the liberal arts used to mean.  It meant a broad mastery and knowledge of the entirety of human knowledge.  A true liberal artists would know biology, astronomy, physics, the law, art, history, literature, politics, theology, philosophy, finance, and engineering.  But how many liberal arts major fits that description today? How many are renaissance men, or women?  No, today the average liberal arts major is just like the art we see in a modern art museum, or the fetid turd atop our beloved flag.

I left the museum in a dour mood, my girlfriend knowing how much I detest modern art, express gratitude that I accompanied her. I spared her the rant of the collapse of western civilization that was burning inside me.  And I don't know if our republic can be saved, but one thing I do know. Modern art is the perfect symbol for what is wrong with us today.

ADDENDUM (6/8/12)

Now it isn't as if there aren't great 'modern' artists today. But that sad fact is they labor in obscurity. Museums today seem to honor the sycophant, not the genius. If you want to see real modern artists your better off going to deviant art than an art museum.  I'll quote something my brother once quoted me. It was a professor of his who taught art.  This professor detested art today because it had become a sham of what it once was.  The quote is this.

"Those great 'artists' that you see in the museums today, the ones that show blank canvases, barb wired, garbage, or a paint splattered board as something with deep meaning. The ones that draw in distorted styles that are supposed to be in the style of cubism. Do you know why they do so? Because they cannot really create art, they never learned the basics and built from there.  Go to any one of those artists and ask them to simply paint their mothers face as it is. And I wonder, how many of them could do so? I am sad to say that there probably not many. Sad because what is more personal than the woman who gave birth to you? If a man or woman cannot draw theirs mothers face, every detail and age line on it, then that person is no real artist. Because if you cannot draw the very thing that is most personal to you then how can you be expected to use art to convey truth?"

Quoted for truth professor.


Monday, May 14, 2012

China crashing?

It looks like China might be contracting. Now granted, it is an op/ed piece written by a company with an American centric view; however, it makes a few good points.  a) The electrical consumption of the nation isn't even above 1%, and electrical consumption generally outpaces inflation. b) This is around the time Chinese companies would gear up for christmas season, however output remains stagnant. And c) If the Chinese economy is contracting then there isn't much the chinese government can do.  The chinese state run banks are already swollen with Yuan from the last stimulus they enacted, which was much larger than the U.S when taken as a percentage of the countries GDP, meaning that any short term benefit that would be accrued will be minimal at best because of diminishing returns.  If Gordon Changs predictions re correct, then we might be entering the 2nd round of this economic roller coaster.

Friday, May 11, 2012

GDP growth and Goverment Spending.

Andrew Jackson, 7th President of the
United State's last words were
"I killed the Bank" Quote for truth.
After spending a post comparing average ten year growth rates. I decided to throw up a ten year rolling growth rate chart, where each year’s growth rate shown on the chart is an average of the previous ten years.  What it does show is that after tthe end of the 1940s we have not held decade long growth above the national average, excluding the 1960s.  During the 1940s we had a ten year rolling average showed near 10% growth that included part of the years of the great depression and WWII.  Now ostensibly this makes sense because our federal government added so much extra money to the economy via government sponsored projects, the resulting deflationary pressure due to people turning in their increasingly worthless paper money into gold, forced FDR to confiscate private stores because it decreased the money supply making it harder for the government to continue deficit spending.

I then did some digging around and found out how much the government spent each year from 1792.  This gave me an opportunity to ask a few questions.  Would our economic growth look much different sans government spending?  I think this would give us a better picture of the overall health, and trajectory, of our economy. 

Now, there are individuals that would argue that you cannot simply subtract government spending out of GDP; that spending on social services and defense has net economic benefits to society. I am personally inclined to disagree. While I would be willing to concede that it is morally just to have a social safety net for those temporarily without work due to economic conditions, or those who are simply mentally incapable for normal work due to circumstances outside of their control, I would argue that such spending accounts for a very small portion of social services. Much of it amounts to little more than a transfer of wealth from the most productive to the least. 

Secondly, while I am no dove, I am disinclined to think military spending is a net economic plus as well.  Yes it makes sense to spend money on our national defense, but at what point do we hit diminishing returns?  Is spending 5% of GDP on defense the right amount, or is it 25% of GDP?  That number is a moving target and it depends on the situation our nation finds itself in, and one thing I do know, and a former President by the name of Eisenhower would agree, that we have a military industrial complex that compels us to spend money on military projects, even if those funds could be better spent elsewhere.  So I decided to take out all of government spending from GDP. Yes state and local spending will still be accounted for, but I simply would not be able to find data on state and local government spending going back to the 1790s, so I will not agonize over it. 

 The blue line of the chart shows real GDP growth, according to 2005 dollars and the red line shows GDP growth less government spending. From this point on I will call this figure economic productivity.

What we see when looking at this chart is that for much of our history government spending amounted to a very small portion of GDP, around 2-5%, so this means that most of our economic growth was driven by private enterprise and local projects. Even during the civil war government spending didn’t top out above 15% of GDP, and you would be hard press to see the divergence between GDP and GDP less federal spending.  It isn’t until 1918 that we see a real divergence, and even then only temporarily, as government spending shoots above 20% as we dealt with WWI.  The permanent disconnect between the two GDPs charted, occurs right around FDRs presidency. The New deal began tremendous expansions, especially considering that it was peace time, of government spending.

Now while many a middle school teacher will say that the New Deal helped end the depression, few economists will say as so.  At most you will hear them say that FDRs actions prevented the economy from getting worse.  But even some ardent Keynesians economists, my college professor being one of them, will admit that FDRs actions were less than effective. The classic defense of government spending comes from WWII.   They argue that there was a real need for government to increase spending to fight Nazi Germany and Imperial Japan.  I wouldn’t argue against them, there was a real need, however, as this chart shows, there were serious economic consequences that resulted.
Even though GDP grew during WWII we see that real economic activity decreased.  This explains why the US economy contracted after the end of the war.  When the nation demobilized the economy had to reset to levels supported by private enterprise, in fact, we see that even during the 'after war recession', even as GDP shrank, actual economic production grew.  Too put it simply, the after war recession wasn’t a real recession, and that is the reason why it was so short.
As time goes on, we see that as government spending increases as a share of GDP, by the late 1950s spending would almost perpetually sit above 20%, the gap between the two charts increases.  It should also be noted, because it is easy to miss, that in 1965 federal spending decreased and that the rate of growth of non-federal spending GDP increased at a greater rate than overall GDP closing the gap between the two charts.  We also see the effects of the breaking of the Breton Woods agreement.
In 1972 Nixon said we would no longer redeem US dollars held by other nations for gold, effectively taking us off any semblance of a gold standard. In 1973 we experience a recession and the GDP chart shows it to be relatively mild, however, looking at the real economic activity of the nation, we see that the recession was more severe than official estimates because the federal government papered over the recession by increasing spending.  We never again come close to closing the gap between officially reported real GDP and actual economic production, even the New Economy of the 1990s doesn’t close the gap.
Lastly, we see that the recession of 2008 is much more severe, a near half a trillion dollar drop in economic production versus the drop of a hundred billion officially reported. Currently, according to this chart, our real economic activity (Real GDP less Federal spending) stands at just a hair under ten trillion dollars.  This is not good citizens, having anywhere from a quarter to a third of GDP being a result of federal spending means that a quarter or a third of GDP is illusory. The pundits are right to say that GDP would contract if we cut our deficit spending, however, what they fail to mention, or more than likely fail to realize, is that after the short term pain long term real economic growth can begin.

When I was looking at the data I decided to compare economic growth rates between Real GDP and Actual economic activity. The chart I made didn’t tell me much, it was too muddled and confusion, so I decided to take a ten year average and look at it then. 

What I found and you know see is that up until the 1930s we had instances of real economic activity outpacing GDP growth; meaning that real economic production, and not government spending, drove our economy.  In fact, prior to 1930 we had only 5 decades were government spending accounting for greater growth in GDP than economic production. T

he first instance occurred in the decade that the United States tried for a second time to create a national bank in 1816. It was this bank that caused the panic of 1819 by creating a massive property bubble.  The bank limped on until the 1830s, when Andrew Jackson killed it.  The next instance was government spending was a greater factor in growth than economic production was during the civil war.  It isn’t too surprising since the federal government grew dramatically during this period, and also issued it’s the second fiat currency, currency not backed by gold or silver, in the nations existence, the first was the continual.  The war notes, known as greenbacks, were discontinued after the war, and economic activity resumed. 

The US experienced the greatest growth in our history during the decades of the 1870s and 1880s; both periods were economic activity outpaced GDP growth. It wasn’t until the late gilded age, when wealthy robber barons tried to use government force to secure their monopolies that GDP backed by federal spending grew more than economic production.  The next two decades, known in politics as the progressive era, was a period of increased government spending and involvement in our economic affairs.  Economic production grew at a tremendous rate during the 1920s, but shrank dramatically during the 1930.
We see that since World War II there has been one instance of real productive economic growth outpacing GDP. It occurred during New Economy of 1990, when information technology systems were revolutionizing the United States.  Now, you see that outside of the 1990s, economic production grew almost as much as real GDP during the 1960s.  This was a period when government spending was decreasing during the early half of the decade.  However, the great society, and Nixon’s economic fallacies of removing us off of the final tie to gold and his price controls, saw a tremendous decrease in both GDP and economic growth.  But perhaps the most alarming is that we see that during this last decade, real economic production barely averaged above 1% growth.
This is the greatest relative gap we have seen between GDP and economic production since the 1930s, and it offers a dire warning for the United States.  The United States cannot use government spending to increase GDP growth. The growth rate chart shows that at best you’ll yield GDP growth 1% higher than actual production and more than likely only fractionally better, and more importantly, as government spending becomes a greater portion of GDP it makes GDP even less useful in telling Americans how the economy is doing.  Taking actual economic production and dividing it by our population would make our GDP per capita around 35,000 not 48,000. This doesn’t even begin to address the effects that rabid money supply increase has on GDP reporting.  But regardless of that fact, one thing that can be ascertained from the data I have presented, our economy is not doing nearly as well as our leaders would have us believe.

Why is this front page news?

Apparently our news media will post anything as long as it deals with people who have no sense of humor and get butt hurt at a joke.

The heartland and the life blood of our Nation.

"And if you fancy yourself a fancy trip
Might I  suggest to you, a boat down the Missisip!"
If the Midwest is the heartland, that stretch of land that forms the cultural and agricultural center of the nation then the Mississippi is the circulatory system.  If there was any one thing that could be linked as to why the US is a super power it would be the mighty Mississippi.  The Mississippi and the other rivers that connect to it, the Ohio, Tennessee, Missouri, Arkansas and the Red Rivers form the Great Mississippi watershed. Creating a fertile basin that stretches as from the Rockeys to the Appalachians.  These rivers are, almost literally, the lifeblood of this nation.  It is because of these rivers that the United States’ Midwest is known as the bread basket of the world.  Of the four main cropland areas of America, the Columbia Basin, the California interior, inland New York, and the Southern Coastal plains, non-come even close to the size of the croplands in the Mississippi Basin, one of the largest contiguous agricultural lands in the world.  It is this nations extreme fortune that it is blessed with such a perfect area for growing food, because not only do we have more than enough food to eat ourselves, we have enough to export, and moreover, the very river system that feeds us, also transports our goods for us.

The Mississippi river system is one of the few slow moving, few to no rapids, and navigable river systems in the world.  Goods could be shipped to and from Minneapolis in the Great Lakes all the way down to New Orleans and the world.  This is important because shipping is one of the most cost effective ways to send goods from one place to another, at its most primitive you could simply load goods up on a barge and let it drift down river.  It’s very cost effective and the additional benefit that the Mississippi offers us is that it removes many of the contstraints that face other nations, such as Russia, when it comes to shifting goods.  This means that the United States doesn’t have to spend money to achieve a workable infrastructure through which we can transport our goods, and any additional infrastructure we have is a bonus.

If you look at our tonnage map you see that while our highway system handles a lot of tonnage, it the heaviest amount of traffic occurs near the river system.  It is quite apparent that the large railway tonnage, seen in states like Wyoming and the Dakotas, are freighting their goods to the nearest terminal where it can be then loaded onto a board and sent out through New Orleans. Another way to look at this image is to mentally erase the National Highway system. Without it you see that the railways, excluding cross continental travel, pretty much run towards the Mississippi.  It was because of this natural highway system that we had the future capital to build the world class highway system we have today.

In fact the Mississippi is so important to the United States that it makes New Orleans the most important city in America.  Washington D.C may be the capital, New York the financial center, and Los Angeles the cultural mecca of the Nation, but it is New Orleans that is the gateway to the Mississippi.  Whoever controls New Orleans essentially controls the Midwestern states ability to ship their goods to the rest of the world.  If a foreign power were to hold New Orleans and cut off shipping, the rest of the country could rely on freight and our highways to move our goods.  But it is prohibitively more expensive to do so, and it could possibly cripple the United States.  Because of this the US has taken many actions throughout history to ensure that New Orleans and the Mississippi have unfettered access to the rest of the world, and ensuring that access has been the instigator of many a political event in our history.

War of 1812 and the Jackson defense of New Orleans

Even though the war was officially over by the time this battle occurred; neither of the belligerents knew this. Moreover, if Great Britain had gotten the news that New Orleans had been captured it probably wouldn’t have relinquished it back to the United States.  We need to remember that this is before the advent of highways or even railways.  The Mississippi was the only way goods from the Midwest were going to make it the world and the rest of the country.  Fortunately for the United States, General, and future president, Jackson triumphed, and New Orleans remained secure. But it alerted the nation to how vulnerable its river system was and imperative that its access to the Gulf of Mexico remain unhindered or unblockadable.

Monroe Doctrine 1823

Scarcely a decade after the war the United States put into place what was called the Monroe doctrine.  It essentially stated that any European power that meddled in the Western Hemisphere would be tantamount to an act of war.  Now the US never went to war over the Monroe Doctrine, however it did use it to assert its right to intervene in other nations that were thought to fall too far under the influence of another nation. However the Mississippi was still too vulnerable. The Mexican Empire bordered only a few hundred miles from New Orleans, easily within invasion distance if the Empire ever worked the logistical support and had the desire to do so

Mexican American War

For decades the United States had encouraged Americans to settle into the sparsely populated Texas.  The Mexican government welcomed settlers at first; however, they began to exert more control over the region as they feared the growing American influence.  Texas later revolted and succeeded in establishing an independent republic, though Mexico never recognized the republic but was unable to do anything because the nation was on the verge of civil war.  Moreover, the recent alliance between Great Britain and Texas raised objections within the states.  An independent Republic sympathetic to the US was tolerable as a buffer zone between America and Mexico, but one aligned with the British was not. With Mexico in a weakened state the United States saw an opportunity to stake a claim on Texas.  This would move the Mexican border from 250 miles to almost a thousand miles from New Orleans, ensuring that if Mexico ever tried to invade the US it would have a very difficult time in getting to New Orleans.  This annexation leads to war between the two states, a war which Mexico lost, and removed Mexico as a competitor for the dominance of the continent and removed potential British pressure from the United States border.

With the primary objective to secure New Orleans on the continent the US then began to ensure that no foreign power could potentially blockade her by sea. 

Spanish American War 1899 and the annexation of Puerto Rico

 If you look at the Gulf of Mexico you see that the Caribbean islands form a belt in the north with the Lesser Antilles former the other part of the belt in the south, however, the biggest challenge lay with Cuba.  Almost as if it were a cork stuffing a bottle, whoever controlled Cuba controlled, or had the option to control; shipping that would leave the gulf.  For decades the US had talked about purchasing the island from Spain but nothing ever came of it. By the end of the 19th century Spain was sufficiently weak enough, with a growing armed rebellion, lead to the United States intervening.  The US won and up until 1902 the United States exercised formal control over the island.  From then on, up until the over through of Batista the United States maintained a strong economic, political, and military influence over the island. Too this day the US still holds Guantanamo bay, situated on the eastern end of the island, which despite its notoriety in the American public as a prison base, and primarily exists to act as a forward station to intercept any hostile nation before it could close off the Gulf of Mexico.

Cuban Missile Crisis 1962

When the US government discovered that the Soviet Union was trying to place medium and intermediate ranged ballistic missiles it caused a worldwide crisis that threatened to drive the world to the brink of nuclear war.  Now the desire to keep nuclear missiles away from nations near the US was a core concern, yet there is another aspect to consider as well.  Whether or not a nuclear conflict would erupt, the presence of soviet offensive military systems was intolerable simply because such a system would require a significant Soviet presence.  The Cubans would not control the missiles, it would be Soviet soldiers in Cuba, and with the soldiers manning the missiles there would be the logistical support team behind it.  In the end this would mean a large increase in the amount of Soviet forces stationed on the island, and would give the Soviet Union an opportunity to blockade the gulf if non-nuclear conflict ever erupted.  In the ended the conflict was resolved when the Soviet leader called off the 60 ship Navy from going to Cuba, in return the United States dismantled its offensive nuclear system in Turkey

The heartland idea of geopolitics, as wuoted by Mackinder
 "Who rules East Europe commands the Heartland.
Who rules the Heartland commands the World-Island.
Who rules the World-Island commands the World"

The US follows the Alfred Thayer Mahan idea on geopolitics.
Where the nation that commands the sea lanes controls the course
of the world. Image from STRATFOR.

In the realm of geopolitics each nations has goals, and when they are achieved, or when they aren’t achieved, new goals are created.  Each nation will strive to achieve the best possible position that it can. And for the United States, that is to ensure the safety of its life blood.  As long as the United States controls the Mississippi, and as long as it can ensure unfettered access from the Mississippi to the oceans, the US will always be a great power. Possessing Hawaii and the pacific coast aren’t core interest in ensuring the Nations ultimate economic well-being, though possessing them certainly offers tremendous advantages and abilities.  It is imperative to remember that nations take actions according to the reality that they live in, and not according to some political ideology.  Everything a nation does, it does because it feels that it is advantageous for it to do so, and if it ever gives up on its goals it is either because it was unable to do so, or the cost of achieving those goals were higher than the relative benefit. For the United States protecting the heartland is imperative, and it has done so surprisingly well.

Thursday, May 10, 2012

America's Economic Growth

The 1960s. The Jetsons
best describe it.
Captain Capitalism gave me an interesting idea when he presented a chart in one of his lectures on historic GDP growth.  He chose to look trailing twenty year growth increments because, in his opinion, it better reflected overall growth in the economy and its trend, rather than simply looking at economic data at any single point in time.  I agree with this methodology, it helps eliminate the noise due short term economic occurrences.  The one disagreement, or rather a concern, I had was that he only went back to the years after World War II.  I didn’t disagree with his point that the United States had a much more friendly economic environment and policy then that helped foster economic growth, but I also knew that for a decade or so the US benefited by being one of the few industrial powers that did not have to rebuild after WWII.  This meant that it could grow by a few methods.  One, it pretty much dominated international transportation after the war, I have been unsuccessful in finding this statistic but at one point I heard that 90% of all goods shipped were shipped on American ships.  Two, after decades of forceful under consumption via rationing, there was a huge consumer base hungry for new goods and willing to spend. Three, being the only industrial power still standing allowed the US to move in and fill new markets without major competition. During this period American steel was fabricated and shipped to almost everywhere in the world; since the other industrialized nations had to reindustrialize themselves before they could manufacture these materials.  Lastly, the very need for many nations to rebuild creates a demand for products needed towards rebuilding.  Given the US competitive advantage that I mentioned earlier, and given its size, the US benefited greatly.  I thought that unique, and unlikely to be repeated, conditions let the US grow in spite of the burgeoning regulation that was beginning to strangle the nation.  Given these concerns I decided to take the data back farther, all the way to 1790.

I decided to get a 10 year average growth rate for our nation going back to 1790.  There isn’t any real reason why I chose 10 years versus Captains 20, I just happened to organize my search that way.  I also found the average economic growth rate for the nation since its inception.  I have to give credit to Measuring Worth, it made doing this so much easier rather than having to find disparate pieces of information and cobble them together.  What I found was that the United States long term historical average growth rate is 3.74%.  This number includes every economic catastrophe we have ever faced. So if the US is growing just shy of 4% annual then the US is doing well.  Here is the chart I put together. Remember it’s a 10 year average so if you look at the year 1900 the number presented is the growth rate from 1890 to 1900.

We see a few things.  One is that the growth shortly after WWII, 50 on the chart, which represents the years 1940-1950, there was a tremendous spike in economic growth. This is largely skewed by war spending. Growth from 1935 to 1940  decreased by -.06% over the course of five years and it exploded by 11.45% during the war years. This seems to give credence to Keynesian economic policy but a few things need to be remembered.  Much of the economic growth during World War II was not real growth.  By not real, I mean not sustainable in the long term.  Yes there was a need to produce tanks, planes; ships, guns, and draft millions of Americans thereby lower the unemployment rate. But this all came at the cost of real long term growth. For every tank, plane, or ship made that was one less car, toaster, or some other consumer item. Shortly after the war, when we demobilized, we experienced a small economic contraction. This was the result of the nation needing to rebalance itself into a more sustainable economy, and I am willing to wager that the US unique position in the late 1940s kept the negative 5 year number from going any higher. 

We also see solid economic growth from the 50-70s.  While one could argue the much of the late 40s, and perhaps early 50s, the US enjoyed a tremendous economic advantage by the 1960s this wasn’t exactly the case.  European nations grew at a good rate, and the western European nations had largely reindustrialized at this point. The Captain was right, our growth in the 1950s and 1960s wasthe result of sound economic policy.  During this 20 year period the US enjoyed a growth rate slightly above the historic average at 3.85%. Not since the 1960s have we enjoyed a 10 year growth rate that was above our countries historic average.  And that raises the next issue.

Outside of a rather small period in US history, from the end of WWII to the 1970s the US has not trended above our historical growth average.  From 1870 to 1890 we enjoyed two decadesof growth that averaged above 5%.  We also had enjoyed above average growth during the 1820s, 1840s, and 1850s.  Looking at the chart during this period; 3% economic growth was a signal of economic weakness not strength.  Now, this was partly because of industrialization and the US expansion out west.  However, this was also a period of freedom for the American people when it came to commerce. Government was limited and people were free to eke out a living however they chose. I would argue that our growth rates are a result of this, and not our need to industrialize at the time.  There are plenty of nations now that are in dire need for economic modernization yet because of a culture of corruption those nations cannot sustain any sort of real economic growth.  In fact I would argue it is much easier for a nation like China to modernize itself, with the world wide accessibility and inexpensiveness of modern technology than it would have been for 19th century America.  China sustained impressive growth rates by being the manufacturer of least cost; copying, or sometimes outright stealing, technology and methods that helped them produce the goods they exported. 19th century America utilited and invented new methods and technologies, such as the telegraph, cotton gin, telephones (invented by our friends to the north, Canada), electricity, phonographs etc., that allowed the US to become an industrialized powerhouse.
We see that in the last decade of the gilded age economic growth slowed dramatically.  This is in large part due to the economic crisis of 1893, but thereafter growth continued at a slower pass than it had in the past. What had happened in the United States was a that there was dramatic change in the American political landscape.  This was the beginning of the progressive era of politics.  Now the progressives of yesteryear are not like the progressives today, but they did seek the use of government to influence society towards their social ends.  This marks the beginning of government meddling in the American economy and life. Public schools, regulations, and agencies began to grow. It looks like these policies had a negative effect on economic growth from the 1900s to the 1930s, when it was argued that the progressive era ended.

What we see though, is that outside of the 1950-70, is that growth has largely been beneath our ‘potential’.   The decades of the 70s to the millennium saw the US achieve growth rates closer to that potential, but not quite, and I think that much of this growth was the result of very loose monetary policy.  The US became complacent after the 1960s and began implementing grandiose social policies that were intended to eradicate racism and poverty. We could afford these policies at the time, however, few asked what the long term rammifications would be. Also notice that the above average growth ended right about the time Nixon killed Breton-Woods.  This alone isn’t the cause for the gradually deteriorating economic condition of this nation, more a symbolic moment.  When the US killed the agreement; it signaled to the world that it would no longer abide by the promises it had made, or keep spending within tolerable limits.  The reason why the US broke the agreement was that the eggs it had made during the previous three decades had now hatched and our economic output alone wasn’t enough to service these promises.  And rather than make the politically unpopular decisions that would ensure long term economic vitality. Our politicians decided to prime the pump.

Most telling is when you look at economic growth from 2000-2010.  A mere 1.55%, the worst at any point in American history, and the question is why?  The answer is relatively simple. The promised debt load that US now holds has become far too large, even with our ability to print money, and the US has slide drastically when it comes to economic competitiveness.  Our government has long been unable to pay the promises that it had made according to the gold chart from the late 1960s on. And the recent spike in the early millennium shows us that our economic output cannot as well. It’s a whole other topic but monetary policy is directly related to economic health.   Popularly elected governments stay in power by keeping their constituents happy, there a myriad of ways it can do this, but two stand out. One is economic growth, and the other is social programs.  What the gold chart and the 10 year rolling GDP chart shows us, is that around the 1970s our government decided that social programs, and not economic ones, were the key to obtaining voter approval. This meant that whenever the government couldn’t pay for its programs it would engage the printing press, and then search for ways to squeeze tax dollars our of its citizens and businesses.  This is done by taxation and regulation; both were utilized by our government. However, given the general anti-tax attitudes of most Americans taxes, regulations became the vehicle of choice.  It was through regulation that our government either received additional funds to fund its programs, or forced the private sector to take care of the promises that it had made but couldn’t keep, i.e. retirement and healthcare.

This leaves the United States in a very dire situation.  We cannot come close to paying our debts, or hold our standard of living, if we grow at less than 2% a year, and perhaps even 3% is too low.  It is unlikely that our government will stop its deficit spending, but if it could do anything to help make the burden easier to shoulder, and not destroy America’s standard of living, it would be to make the United States more economically competitive and return us to our historic growth averages.

About Me

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Seattle resident whose real name is Kevin Daniels. This blog covers the following topics, libertarian philosophy, realpolitik, western culture, history and the pursuit of truth from the perspective of a libertarian traditionalist.