How to Read Consumer Survey Data

Yesterday it was reported that US consumer confidence has plunged recently:

Consumer confidence plunges as hope dims
Expectations at the lowest level in two years

WASHINGTON (MarketWatch) — Consumer confidence plunged in August as expectations dived, with worsening views on future business conditions, jobs and income, the Conference Board reported Tuesday.

The nonprofit organization said its consumer-confidence index fell to 44.5 in August, the lowest level since April 2009, from a slightly downwardly revised 59.2 in July. It was the sixth-largest one-month decline in the past 21 years. Economists surveyed by MarketWatch had expected an August reading of 51.9.

When news headlines breathlessly announce breaking news about consumer expectations, it's worth taking a step back and remembering what these surveys actually tell us.

Consumers expectations typically are much more reflective of the past than the future. Put another way, they're backward looking. And that makes perfect sense, since if you don't really know how to reliably forecast the future (and let's be honest, none of us are particularly good at that) then it's usually a very reasonable strategy to assume that the future, at least in the near term, will look a lot like the recent past.

To see how this works regarding these consumer surveys, I pulled the data on consumer inflation expectations and overall consumer sentiment in the US since 1978, and compared it with actual inflation and consumer spending. The first chart illustrates that consumer inflation expectations (measured by the University of Michigan's monthly survey) match up almost perfectly with actual inflation -- over the previous 12 months. Inflation expectations do not match future inflation nearly so well. (If you can imagine shifting the red line to the left by 12 months, you can see what I mean.)


The next chart shows "consumer sentiment" (the name used in the University of Michigan's monthly survey) plotted against the 12-month change in real consumer spending -- again over the previous 12 months. The series match extremely well, but would not match nearly so well if we tried to compare sentiment with future spending changes instead.


To be slightly more rigorous, the following table shows correlation coefficients between consumer expectations, the past, and the future. The first column shows the correlation between consumer inflation expectations, inflation over the previous 12 months, and inflation over the subsequent 12 months. The second column shows the correlation between consumer sentiment, changes in real consumer spending over the previous 12 months, and spending growth over the subsequent 12 months. A zero would indicate no correlation, while a score of 1.00 would indicate perfect correlation.


Consumer expectations regarding inflation are almost perfectly correlated (the correlation coefficient = 0.94) with actual inflation over the previous 12 months, but significantly less so with future inflation. And on the spending side, consumer sentiment is also much more correlated with the change in real spending that took place over the past 12 months (coef = 0.76) than over the coming 12 months (coef = 0.42). So for both inflation and spending, the consumer survey data tells us much more about the past than the future. Something that's important to keep in mind when trying to read the economic tea leaves.

Europe's Banking System: How Weak Is It?

To be diplomatic, let's simply say that opions differ over how weak Europe's banking system really is. Over the weekend Christine Lagarde, former Finance Minister of France and now the head of the IMF, said that a significant amount of new capital should be provided to European banks in order to help contain contagion:

A Call to Arms

The world economy, [Lagarde] said, was entering a “dangerous new phase” driven by a sense that “policymakers do not have the conviction” to take decisions that are needed. That must change, and now. Ms Lagarde laid out a bold to-do list to support growth, including a forced capital injection into Europe’s banks, aggressive new action to deal with America’s foreclosure crisis, and a broad rebalancing of fiscal priorities.

The most headline-grabbing prescription was for Europe’s banks. More capital, Ms Lagarde argued, was essential to “cutting the chains of contagion” in the euro crisis. Without it there could easily be “the further spread of economic weakness to core countries, or even a debilitating liquidity crisis”. She called for what would essentially be a European version of America’s policy for its biggest banks in 2008—a mandatory capital increase using public funds if necessary. Those funds could come from the European Financial Stability Facility.

But this suggestion was rebuffed by many political and financial leaders in Europe:

Europe officials defend banking systems

MADRID — Top European officials defended the health of the continent’s financial system Monday, trying to stem concerns that Europe’s slowing economy and high levels of government debt may cause some of its banks to fail.

In separate statements European Central Bank President Jean-Claude Trichet and European Economic and Monetary Affairs Commissioner Olli Rehn said banks within the 17-nation euro currency zone have been steadily raising the amount of capital set aside as a cushion against losses and will not face the sort of cash crunch that helped trigger the recession in 2008.

Meanwhile, ground zero for possible banking crisis contagion (Greece) had its own set of developments. For one, the second and third largest banks in Greece announced plans to merge, along with, crucially, an injection of fresh capital from Middle East investors:

Alpha to Acquire EFG Eurobank to Create Biggest Greek Lender

Aug. 29 (Bloomberg) -- Alpha Bank SA, Greece’s third- largest lender, will buy EFG Eurobank Ergasias SA and increase capital by as much as 3.9 billion euros ($5.7 billion) to ride out a deepening recession and the country’s sovereign debt crisis.

...Following the merger, the bank plans to strengthen its finances with a 1.25 billion-euro rights offer, a 500 million- euro convertible note to be taken up by Qatari-backed Paramount Services Holding Ltd., and more than 2.1 billion euros of internal measures, the statement said. That will help give the lender a core Tier 1 capital ratio of 14 percent, even after accounting for writedowns of Greek government bonds, the companies said.

Meanwhile, the National Bank of Greece (NBG), the largest bank in that country (18% owned by the Greek government), reported a large loss due to a writedown of part of its stock of Greek government bonds:

National Bank of Greece Posts EU1.31 Billion Loss on Bonds

Aug. 30 (Bloomberg) -- National Bank of Greece SA, the country’s biggest bank, reported a first-half loss after writing down its holdings of Greek government bonds.

The net loss was 1.31 billion euros ($1.89 billion), compared with a profit in the year earlier period of 146 million euros, according to a faxed statement from the Athens-based lender today. National wrote down the value of its bonds by 1.645 billion euros, according to the statement. Stripping out that figure, profit was 29 million euros.

One worrying statistic reported along with this news about the write-down was the continued shrinkage in deposits kept with NBG. In fact, deposits with the Greek banking system as a whole have fallen by almost 10% so far this year. And that's why Lagarde's suggestion was rejected so forcefully by leaders in Europe. Because if people start calling into question the viability of the big European banks and start withdrawing money from them as a result, the euro-zone debt crisis will take on a whole new dimension of horribleness.

Doing More with Less Driving

While Americans will probably end up driving slightly more miles in 2011 than last year, they do appear to be getting more done per mile of driving. That's the story told by the statistics recently released by the Federal Highway Administration describing the amount of driving done in the US. Plotting the total miles driven in each 12-month period ending in June (the most recent period being up through June 2011), we see that total vehicle miles has basically leveled off over the past few years, after approximately ten decades of continuous growth.


The End of an Era?

Is this the end to the heretofore endless rise in the amount of driving done in the US? Or is this just a temporary pause in the upward trajectory?

As much as I'd like to be able to conclude that we've already seen the all-time high for the amount of driving done in the US, that's probably not the case. There are a few important drivers (ahem) of the current pause in the growth in total vehicle miles. The first is the Great Recession. When fewer people are working, and when businesses are selling less output, some cars and trucks that would otherwise be on the road stay home. As economic activity picks up, those idle cars and trucks will increasingly be back on the road.

Second, there's population growth. More people in the US means more driving, of course. And population growth in the US slowed in response to the recession (the US naturally attracts fewer immigrants during recession), though only by a bit -- in 2010 the US resident population grew by about 0.85%, compared to an annual average of about 0.95% during the years 2001-2008. Once the economy strengthens, the US population will likely resume its ~1% annual average growth rate, once again putting a larger increment of new drivers on the road every year.


Improved Driving Efficiency

But then there's the most interesting force affecting the amount of driving in the US: the secular trend toward doing less of it. A combination of factors has contributed toward a steady increase in what I call "driving efficiency": the number of miles driven for each dollar of economic activity.

This has fallen quite steadily since the early 1990s. In 1992 approximately 0.27 miles were driven for each dollar of economic activity in the US, but so far this year that figure is down to about 0.225 -- a 17% improvement. (Note that recessions clearly have an impact on driving efficiency as well, as can be seen in 1991, 2001, and 2009.)

There are a number of possible explanations for this 20-year trend in improved driving efficiency. Of course higher gas prices have played a role. The last chart plots the spot wholesale price of a gallon of gas (petrol) in constant 2005 dollars against driving efficiency in the US.

The chart confirms what we already know: gas has gotten more expensive in recent years (with the exception of the recession year of 2009), and that has surely been a catalyst for some improvements in driving efficiency recently. But it's important to note that the secular trend toward increased driving efficiency was well underway before the high gas prices of the last several years, so clearly there are other forces at work as well.

Widespread changes in behavior unrelated to the price of gas must be a part of the story. People (and presumably businesses as well) have obviously been choosing to do more with less driving, whether out of environmental concerns or simply because they're sick of sitting in traffic.


Driving Efficiency: Better, but Not Better Enough

But the secular trend towards improved driving efficiency that the US has enjoyed over the past 20 years is not going to be enough to keep the overall total miles driven in the US from rising again. To see why, we simply need to compare increases in driving efficiency with the forces that tend to cause more driving, such as population and economic growth.

Since 1992 driving efficiency in the US has improved by an average of about 1% per year. Efficiency improvements at that rate were more than enough to keep up with the growth of economic activity in the US recently, since GDP growth has averaged only 0.2% per year over the past 4 years. But once real GDP grows at more normal (faster) rates, driving effiency is going to have to improve by faster rates as well, or we'll see the total miles driven in the US start to rise again. So for example, if real GDP grows at 3% in 2012 while driving efficiency only grows by 1.5%, the total miles driven in the US will reach record levels by the end of 2012.

More generally, in order for the total number of miles driven in the US to level off permanently, the US is going to have to experience improvements in driving efficiency that are at least as large (in % terms) as GDP growth. Note that the biggest gains in driving efficiency happened in 1999, 2006, and 2011, when Americans were able to cut the driving needed for each dollar of economic activity by about 2.3%. The US is going to need to improve its driving effiency by that much or more every year, on a sustained basis, before the total amount of driving done in the US peaks.


The World in the Hands of City Planners

Perhaps such sustained rates of improvement in driving efficiency in the US -- more than double the rates we've seen over the past 20 years -- are simply not possible, and the amount of miles driven in the US (and the amount of greenhouse gases emitted in the process) is destined to continue rising inexorably. But who's to say we couldn't do better? There's no theoretical reason that driving efficiency couldn't improve by 3 or 4 or 5% per year. But if such faster rates of driving efficiency are going to materialize, it seems likely that the only way to acheive them will be by making gradual but significant changes to the economic geography of the US.

Geography is not fixed, of course. Most of the geographic features that matter to us in our day-to-day lives were designed and built by humans: neighborhoods, roads, bridges, cities. And seemingly innocent and well-meaning ideas for how to structure our physical surroundings can have pernicious unintended consequences, particularly on the amount of driving that is done.

Take, for example, the parking lot. (Really, please take it. I don't want it near me.) We're all familiar with how a few large, badly-placed parking lots can destroy a neighborhood or a city center. But in a recent post about parking lots (yes, it is possible to write a post just about parking lots), a friend who's a city planner points out that there's a flip side to that: small changes in zoning requirements can potentially have big effects on the geography of cities, very possibly for the better.

The science of urban planning has evolved significantly over the past 20 years, and we have a much more sophisticated understanding of the unintended consequences (what economists generally refer to as externalities) of specific, local decisions made about our economic geography. If we want to permanently break the trend of ever-increasing driving in the US, that understanding, and how we apply it to our economic geography, is going to be crucial. So if it's going to happen, it will be up to the city planners to show us the way.

How QE3 Could Help

With Bernanke's speech today at Jackson Hole, QE3 is in the news. Yesterday Izabella Kaminska at Alphaville wrote about the Fed's use of Jedi mindtricks -- its influence on market expectations -- and rightly noted that one of the important impacts of any additional QE would be its effect on market expectations. Agreed.

But a couple of times now she has made reference to her belief that QE3 "might only prolong the liquidity trap or make it worse." I'm trying to understand the argument, and I'm not sure that I get it. When I hear the term "liquidity trap", I think about a situation (like the present) in which nominal short-term rates have been pushed down to zero, so conventional monetary policy has no impact on the economy. By selling short-term assets and buying long-term assets, how exactly would a new round of LSAPs by the Fed make the liquidity trap worse?

More generally, I have yet to see a convincing argument for why QE3 would be a bad idea (in the previous post I explained why I find Woodford's arguments unconvincing, for example), and I can see a couple of ways in which it might help.

1. Market expectations. First, as Kaminska and others have pointed out, additional QE (or LSAP, which is the more accurate name) could have an impact on market expectations. But that's a good thing. Anything the Fed can do right now to communicate that it will do work hard to avoid further disinflation, and that in fact it is willing to tolerate a bit of inflation, will help to spur new spending.

But I think it's just as important to remember the rather prosaic but very real impact that further QE would have on long-term interest rates. As I've summarized before, there are a number of rigorous empirical studies that show that the Fed's QE programs had a significant impact on long-term interest rates. And if QE can push long-term interest rates down, it can have additional positive impacts on the economy through a couple of channels.

2. Help push investors out of US Treasuries. For one, driving down long-term Treasury rates will, at the margin, push some investors who have been parking their cash in government bonds to move their wealth into other assets. Anything that persuades investors to take on a bit more risk, undertake new investments, and lend money to businesses and individuals has to be a good thing. (Yes, this is another way of saying that QE pushes down interest rates throughout the economy, not just in the market for US Treasuries.)

3. The housing market. Perhaps more importantly, lower long-term interest rates lead directly to lower mortgage rates. And mortgage rates have a well-established and signficant impact on the housing market. (See, for example, this 2008 paper by Clayton, Miller, and Peng (pdf) for some recent empirical estimates of the impact of mortgage rates on house prices and transaction volumes.) Since the housing market is probably the sickest part of the US economy right now, and is certainly a serious drag on economic growth (as highlighted by Bernanke in today's speech), there's every reason to think that pushing down long-term interest rates could have some real positive effects on the economy.

So yes, Jedi mindtricks are important, but there are other mechanisms through which QE3 could have a real, positive impact on the US economy. It would not be a miracle cure, of course, but it would have a positive impact at the margin. And at this point, we should be happy to take whatever we can get.

QE Confusion

Michael Woodford has a piece in today's FT warning against QE3 today in the FT. There are a few problems with it, however.

Woodford's arguments are:
1. QE and QE2 were supposed to work by raising the price level, which is theoretically unlikely. Agreed -- and the Fed specifically said that the LSAP was intended to be different from QE^(*) precisely because it was not going to lead to a permanent expansion of the money supply. So an impact on the actual price level was never intended to be the mechanism through which QE helped the economy. Note that Woodford's argument here is exactly at odds with the primary criticism of QE2 that we were hearing a couple of months ago, when the inflationistas were breathlessly proclaiming that the US was entering a period of runaway inflation.

2. QE and QE2 were supposed to work by flattening the yield curve and reducing long-term interest rates... but while QE1 accomplished this, QE2 did not. Woodford does not explain why he thinks the first round of QE worked but the second round didn't. Furthermore, there are a number of empirical studies that provide consistent estimates that QE2 did in fact have a significant impact on long-term interest rates. (See here for a summary of some of them.)

3. QE2's main impact was through altering the market's expectations about future policy... but this is a bad way for the Fed to communicate with the markets. I agree that probably the most powerful single weapon left at the Fed's disposal right now is its ability to change market expectations. But now that the Fed has explicitly described its intended policy with respect to short-term interest rates (i.e. zero for the next two years), why discount the possibility that QE3 could change expectations regarding long-term interest rates?

In fact, QE2 did reduce long-term interest rates, and there's no reason to think that QE3 wouldn't do the same. How much of a boost this would provide to the economy is another matter, and if you want to argue against QE3 because you think that lower long-term interest rates won't do much for the economy, then we can probably have a reasonable discussion. But to say that it won't work because it won't work (which is the best summary I can come up with for Woodford's piece) does not seem a helpful way to advance the debate.


^(*)Note that, as I've written before, "quantitative easing" is a bad name for the Fed's program of Large Scale Asset Purchases (LSAP), because the program is not really intended to increase the money supply in the way that, say, Japan's QE program did in the early 2000s. But I'll use the common shorthand for convenience.

Stimulating the Economy for Free (Almost)

Yesterday the CBO released new figures describing both its projections for the US federal budget deficit, and its estimate of the impact on the economy of the 2009 stimulus package (the ARRA). The budget forecast is grim, of course, and the CBO attributes much of the bad budget outlook to the bad economy.

But while there's a lot of good stuff in both documents, I was particularly intrigued by a rather remarkable sidenote included in the budget forecast document. The CBO explained that they believe that the Great Recession will have very persistent effects on long-run economic growth in the US. From yesterday's CBO budget update, p. 54 (pdf):

The financial crisis that began in 2007 had a sharp impact on the U.S. economy, nearly freezing credit markets and pushing the economy into the most severe recession since World War II. International experience shows that downturns following financial crises tend to be more prolonged than other downturns, and the return to high employment tends to be slower. In addition, because such recessions—more so than typical recessions—raise the level and duration of unemployment, reduce the number of hours that employees work, and dampen investment, they are more likely to reduce potential output for some time.

...Combining estimates of the effects on capital accumulation, potential hours worked, and potential total factor productivity, CBO projects that potential output will be about 2 percent lower, on average, between 2017 and 2021 than it would have been without the financial crisis and the recession.

This is a point that Brad DeLong has particularly emphasized (see for example here and here); it's good to see the CBO incorporating the recession's "shadow", as Brad calls it, into their forecasts.

But this has important implications for projections regarding the costs and effects of stimulus spending right now. If a new stimulus plan had been implemented at the start of 2011, for example, the economy would be significantly stronger this year and the long-run effects mentioned by the CBO would be smaller going forward. And this in turn means that stimulus spending right now would, according to the CBO, significantly improve long-run growth prospects, and hence the budget outlook for the federal government.

In the other document put out by CBO yesterday there are estimates of the economic impact of the ARRA (pdf). And in the CBO's January 2011 budget outlook (pdf) the CBO provides, in table B-1, some "rules of thumb" to translate changes in forecast economic growth into changes in the forecast budget deficit.

This gives us all the ingredients we need to create a back-of-the-envelope estimate of the long-run budgetary impact of new stimulus spending. Suppose that a new stimulus package of $800 billion (about the size of the ARRA) had been enacted early in 2011. Suppose that its impact on economic growth was half way between the CBO's high and low estimates of the impact of the ARRA. And suppose, finally, that the resulting return to strong economic growth in 2011 and 2012 allowed the US economy to reduce by half the long-run, persistent impacts of the Great Recession highlighted by the CBO above (i.e. the recession's "shadow"). Using the CBO's rules of thumb for how this would impact the budget deficit, we get the following:


Using the CBO's estimates, the additional economic growth that such a stimulus package would cause -- particularly over the second half of the decade -- would mean that the $800 billion stimulus would indirectly reduce the budget deficit by $634 over ten years. So the net deficit impact of such stimulus spending would only be $166 billion, or about 20% of the initial outlay. And of course, if we extended the time horizon beyond just the next ten years, the payback would be even greater.

Note that this is not a normal result for additional government spending. The beneficial effects on the budget deficit over the long run would disappear if the US weren't trapped in this ongoing debilitating recession. But given our current situation, the US can actually get a remarkably good deal on new stimulus spending: for every dollar the US government spends to stimulate the economy and create jobs, the economy will pay back 80 cents as a way of saying thanks...

A Silver Lining to the Italian Debt Cloud

Okay, I admit it: I'm so depressed by the unrelentingly bad state of the world right now -- particularly but not exclusively in the realm of economics and finance -- that it's an ongoing struggle for me to make myself read through the news in the morning. And providing commentary about each day's Awful News often just seems simultaneously obvious and pointless. The fact that much of the news concerns Self-Inflicted Awfulness makes it even more depressing than it otherwise would be.

But I found a glimmer of light shining from Europe this morning as I was reading today's installment of Awful News. Okay, you have to squint really hard to see it, and it will probably be extinguished by more self-inflicted, intentionally generated black smoke. But for today, I saw a small hint of a possible beneficial side effect of the Euro debt crisis spreading to Italy.

The news item that gave me pause this morning was this:

ECB settled 14.3 bln euros of bond buys last week

FRANKFURT (MarketWatch) -- The European Central Bank on Monday said it settled 14.3 billion euros ($20.6 billion) in purchases of government bonds last week as part of its Securities Market Program. The ECB settled purchases totaling 22 billion euros the previous week. The purchases come as the ECB was seen stepping back into bond markets this month to push down yields on Italian and Spanish government debt in an effort to halt the spread of the euro-zone sovereign debt crisis... The ECB, which sterilizes purchases under the SMP, announced it would drain 110.5 billion euros from the system on Tuesday through a one-week deposit auction.

What does that mean? As you probably know, the ECB is buying Italian and Spanish government bonds to try to reassure investors that those bonds are safe, and will be defended vigorously by the ECB (and presumably other European institutions). But there's a curious technical side-effect of this action: these purchases of Italian debt end up boosting the eurozone's base money supply (i.e. bank reserves) by an equal amount, since that is essentially how the ECB pays for those Italian bonds.

Now, the ECB is widely recognized as the most hawkish central bank on the planet. (Obsessively so, in fact.) And one facet of that hawkishness is that the ECB is adamant that all such operations will be "sterilized", i.e. neutralized by countervailing operations. In essence, the ECB has said it will always and completely mop up any increase in the eurozone's base money supply that results from its efforts to support the Italian bond market. So that's why this week (tomorrow, in fact), the ECB will try to remove about 110 billion euros from the banking system.

But what happens when they are no longer able to do that? 110 billion euros is a LOT of money to vacuum out of the European banking system in one go. Even if the operation goes off without a hitch tomorrow, the ECB is now in the position of having to do that every couple of weeks. At some point the European banks may not be in a position to cooperate voluntarily. Already earlier in the summer the ECB was having difficulty with such vacuuming operations, and the quantities of euros to be soaked up were much smaller back then.

If the ECB is no longer able to completely sterilize the large-scale purchases of Italian bonds needed to keep the bond market stable (and thus to keep a potentially self-fulfilling euro crisis from becoming inevitable), the ECB will face a stark choice:

1. Cease purchases of Italian bonds in sufficient quantities to avert the crisis.
2. Give up on the commitment to always and completely sterilize.

It's quite simple: there are no other options. And the participants in the bond market know this as well as I do, which means that they will start selling off Italian bonds, forcing the issue to come to a head, the moment there is a sign that the ECB can not easily sterilize.

So what will the ECB do? If it chooses option 1, then there will probably be a rout in the Italian bond market, leading to all sorts of Awful Things, possibly and eventually including the crumbling of the eurozone to just a few core member countries. The ECB might decide that its reputation for utter and absolute inflexibility is more important than keeping the eurozone from falling apart, so it might choose option 1.

But maybe, just maybe, the ECB will choose option 2. And if it does so, the result could be a deep and lasting shift in the market's perceptions of the ECB. For the better.

Choosing option 2 will signal that the ECB is willing to allow bank liquidity to rise enormously in order to defend Italy and Spain's participation in the eurozone. And that, in turn, could cause inflation expectations in Europe to start rising, for the first time in many years, which could provide an important boost to the European economy. (Mark Thoma today provides a handy review of Krugman's explanation of that point.)

Note that I am not arguing that a massive expansion of the European monetary base would actually cause inflation; it almost certainly would not, just as such an expansion of the US monetary base has had no inflationary effects in the US. But I do think that it would have a dramatic effect on market perceptions and expectations, which in this case could be just as good, if not better.

And so we finally arrive at the promised silver lining to this massively dark cloud: At some point the ECB may find it difficult to soak up the excess liquidity it creates by supporting the Italian bond market. In which case, it might stop trying to do so.

It's not much of a hope, but it's better than nothing.

Backwards Priorities

This point can not be repeated often enough right now. I direct you to the excellent Ryan Avent:

I trust the analyses showing that a long-term fiscal crisis looms, and I note that America's gross debt-to-gdp ratio is uncomfortably high. It's not obviously too high to sustain, however. It's far from obvious that swingeing cuts are necessary to right the fiscal ship—as opposed to, say, moderate increases in revenues combined with a meaningful slowing of the projected rate of growth of health spending. And markets, which should be heeded, could not be shouting any more forcefully that whatever cuts need to be made certainly don't need to be made now.

...I see Americans as distressed by a dismal economy, frustrated at years of stagnant pay amid rising costs, and outraged by a system of government institutionally incapable of addressing basic concerns. Europe hasn't proceeded with dramatic austerity because austerity is popular in Europe. Oh no. Europe has proceeded with austerity because markets posed a real threat, because European parliamentary systems lack the anti-majoritarian bottlenecks that constrain America's government, and because European electorates accepted that policies they dislike were necessary to avoid potential outcomes they dislike even more.

Lampooning American voters as idiots living fat off the government teat obscures the reality of the present situation. Fiscal issues are not and should not be the principal worry in an America with high unemployment and rock-bottom sovereign-debt costs.

This is going to be my new mantra.

Fiscal issues are not and should not be the principal worry in an America with high unemployment and rock-bottom sovereign-debt costs.

Fiscal issues are not and should not be the principal worry in an America with high unemployment and rock-bottom sovereign-debt costs.

(By the way, life has almost finished with its current bout of overwhelming interference with my blogging. More regular posting to resume in the next few days.)

Cutting Our Way to a Smaller Future

I'm not generally very interested in lionizing specific companies. But in this piece, David Weidner makes what I think is a very good analogy:

How Apple would solve the debt crisis

NEW YORK (MarketWatch) — Spending is good. Borrowing is better. Washington is doing neither. It’s liquidating.

I’ve been covering Wall Street and corporate America for going on two decades, and if there’s anything I’ve learned it’s that there are really only two kinds of companies: those growing and those shrinking.

The U.S. government today has officially become the latter.

The difference between a growing business like Apple Inc. and a shrinking one such as Eastman Kodak has less to do with spending and revenue and than with psychology. Growing companies go through tough times. They adapt, and they’re poised to strike when conditions are right. They don’t stop innovating.

Defeated companies may be producing steady profits. But they lose their entrepreneurial spirit. They stop looking at the future. They get intimidated. They quit fighting. They look for a sale. They try to buy growth. They play not to lose — and end up losing anyway.

Which of those does Washington sound like?

...Ultimately, what’s happened to our government, lawmakers, elected officials and ourselves is that we’ve have taken on a mind-set of defeat. It doesn’t seem to matter that the business model — taxing for revenue, spending for growth — isn’t broken. After all, it’s working in Germany, Canada, India and China.

We’ve given up on the model because of our debt situation. It’s a problem, and a pressing one. A default or lower credit rating would cause further damage to our credit picture.

But there are really two ways to handle it. We could take a balanced approach of reining in spending and increasing revenue (cutting costs, raising taxes), or we could simply cut, slashing incomes (Medicare, Social Security, the military). These drastic cuts, which will balance annual budgets, are in effect a surrender.

The very basic and (I thought) uncontroversial notion that the government can make useful investments in the nation, that it can do things to help make the economy stronger and more productive, has been thrown out the window in the US recently. And the result, I fear, will be a decidedly smaller, meeker, and poorer future for this country.