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Recessions under “demand side” versus those under “supply side”.

Which is better for the economy? The golden era of economics practiced more “demand side” theory in the 50’s and 60’s. And in the late 60’s and early 70’s our economy started to shift to “supply side” theory, where neo-liberal policy took hold (neo-liberals consist of democrats and republicans).

Here is a list of recessions in those two eras of differing economic theories.

Demand side era:

1960 a 1.6% drop in GDP and a peak of 7.1 UE. 10 months

1969 1 .9% dip in GDP and a peak of 6.1 UE. 11 months.

Supply Side era:

1973 recession a near 7% decline in GDP and a peak of 9% UE. 2 years, and UE never fully recovered to its pre recession levels until 1997!

1980s recession had a dip in GDP of 4% and a peak UE of over 10%, it lasted 2 years as well.

2008 recession is called the GReat Recession for a reason because only the Great Depression dwarfed it in size. 4.9% dip in GDP and 10% plus in UE, still haven’t recovered 5 years later.

Demand side recessions averaged a 1.75% dip in GDP and a 6.6 UE rate and average of 10.5 months.

Supply side recessions averaged 5% dip in GDP and 9.75% UE average.

And since we entered into the post Keynes era we have never reached the levels of 4% UE (for a brief time in the late 1990’s).

I realize that comparing the two era’s may seem rather specious, but the two eras represent two completely different eras of economic practices.  From the pro-labor era where unions were strong and the middle class heavily bolstered from WW2 era government spending programs, to today’s era of anti-labor with shifting jobs overseas, dismantling unions, and government policy geared towards supply side thinking.


The Endless Demand for US Treasuries

Guest post by Laura Elizabeth Teller

I hear people’s worries that, one day, nobody will want to buy Treasury debt – that “other opportunities” will be more attractive, and Treasuries will be left sitting on the shelf at Fed auctions, with no interested buyers.

That, basically, is impossible. Here’s why:

When the federal government spends money in deficit, it (simplistically) writes a check without having money in any bank account anywhere.

The recipient of that check deposits it into a bank account. The depositor’s bank then creates a liability balance for itself by increasing the depositor’s bank balance (if you haven’t ridden in this rodeo before, a bank deposit is a liability of the bank – the bank’s promise to pay the depositor cash, or to make any ATM or check payments the depositor may want to make with that balance).

The bank now needs an asset which it can use to honor its promise to its depositor. It presents the check to the Fed which, as fiscal agent for the Treasury, it has to honor. The Fed then creates a liability for itself, a deposit balance in the depositor’s bank’s reserve account with the Fed.

The balance in the reserve account is now an asset of the depositor’s bank, and can be used to make any interbank check or ATM payments that the bank needs to make on the depositor’s behalf.

The bank has a little problem, though. The Fed requires that the bank maintain reserve balances as a percentage of the demand deposits (like checking deposits) it has on hand. That requirement is between 0% and 10% of deposits, depending on the total value of the bank’s demand deposit liabilities.

So the bank has all of these reserves on hand, the vast majority of which it doesn’t need in order to meet reserve requirements, which pay a meager 0.25% interest, which is less than the bank’s cost of maintaining and administering the depositor’s money. The bank is losing money by accepting the depositor’s deposit. No, the bank can’t lend the deposit. It’s a bank liability. You can’t lend out your liabilities, or promises, to other people. That deposit has to stay on the bank’s books, right where it is.

The bank can’t do anything with these reserves. It has no “investment opportunities”. It can’t turn them into cash, it can’t buy stocks or derivatives with them, and it can’t lend them to customers. Reserves are purely an interbank scrip used to settle interbank payments. They aren’t accepted anywhere else in the economy, and the Fed does not allow them to be removed from their books.

But Congress gives the bank an option to make a little more money: it issues Treasury securities, which pay a little better interest rate. The bank would definitely rather have Treasury securities which pay a little interest than reserves, which pay virtually none. So it is guaranteed that the bank will buy Treasuries when they are offered by the Fed.

Treasuries are issued in quantities matching deficit spending – this assures that, as they are issued, there will be banks who suddenly find themselves with excess reserves from that deficit spending which they would prefer to trade for something with a higher interest rate – and the ONLY thing they can buy with them is Treasuries.

There is ZERO possibility that the Fed cannot find buyers for all Treasuries issued by the government, because the banks who cash government checks have no other opportunities to invest the reserves they receive in trade for government checks.

Fret not. There will always be buyers for as many Treasuries as government cares to issue.

A Little Micro for Today

For those that follow my macro musings I have started a new blog with my wife where we are writing about how we are attempting to eliminate our debt within a year.

The Changing of the Guard

There has been something bugging me about how unimaginative our country is in policing our major urban cities.  Ever since property became a major thing to protect we have had the system of policing that we do now.  Where we have a police force, with several police stations throughout the city, and the officers patrolling the streets looking for “wrong doers”.  Obviously it is much more complicated than this from a police officers position, but from a normal civilian position this is exactly how it appears.  And as cities begin to grow and become more crime ridden police officers start to look more militarized, and police stations begin to look more like fortresses, and the police force starts to look more like an “occupying force”, which is a point made in many periodicals and blogs.

With family members and friends that are police officers I really can’t stand the scrutiny they are under and the general mistrust and fear the public has in them.  I know they are all amazing people who do deserve respect and trust and it disheartens me that it has come to this point in this country, where the general public fears them more than trusts them.  So I find myself awake at 4:30 in the morning writing this because I woke up with an idea on how to change this perception and how to demilitarize the police force and I simply couldn’t fall back asleep without getting pen to paper, so to speak.

Ruralizing the Urban Police Force

In small towns across the U.S. you have the saying that everyone knows everybody because the town is so small that you end up eventually going to school, or going to work, or shopping at the same stores with mostly everyone in the town.  So the idea here is that you also know who the town’s police officers are and the police officers also know who you are.  Call me naive or call me silly, but I think this could be an important factor in why we see white people being arrested at a lower rate than black people for non-violent crimes.  Demographically speaking the poor white sector in this country is spread out across the thousands of small rural towns and the poor black sector is concentrated in the urban ghettos.  So do you think that knowing the person that you respond to on a “call” might not result in an arrest, or an accidental shooting because you may have more trust in that person from knowing just a little bit about them and their family?  This could be a major factor in why we see such a large race discrepancy in drug arrests in this country and other non-violent related arrests.

Contrast this to the urban areas of our country, where the police officers typically have to live in that city, but because the city is so large there is no possible way for them to know on any given day who the person is they have to respond to on any type of “call” they go on.  So when they do have to respond in any situation they have little to no knowledge of who the person is that they are dealing with, this puts both the officer and the civilian in a situation of mistrust and fear from the onset.  Our urban police structure is dooming our police officers before they even start training at the academy.

Time to Get Creative

So how is it possible to get larger urban areas to become more ruralized in this country?  How do we get our police officers to become more trusted and less feared, and how do we get police officers to trust and know the civilians they protect?  This is where I ask police officers to constructively criticize what I am about to propose and tell me if I am way off here or if this could possibly be something.

In Chicago we have exactly 50 Alderman and 50 wards, and on any given day a civilian can get access to that Alderman just by going into the Alderman’s office (some are more accessible than others).  The elected Aldermen typically are very visible and very active in their communities and typically live in the ward that they represent, and thus they are the local official that is known and trusted by residents and business owners.  These Aldermen are also being paid about $115,000 a year to do this, which is a damn good salary in any major city in the U.S.

In Chicago we have about 12,250 police officers and 2,000 other employees that make up the police force, and their median salaries come out to near $55,000 per year.  Typically speaking, police officers aren’t as active or as visible in street clothes as an Alderman is.  And there is no way any civilian can expect them to be, as that is not their job to do so, and they are not paid enough to expect this.

But what if we were to have police officers have more involvement in the ward they serve?  What if we were to drastically reduce the size of the police force and pay them near the equivalent of an Alderman?  Let’s say on average we had 50 police officers assigned to each ward, where certain crime ridden wards had more police officers and other less crime ridden wards had less police officers.  Right there we cut the size of the police force to about 2500, which I am sure the police union would not be to happy about, but then again a raise to $100k per year could be rather convincing to laying off almost 10,000 people.

Obviously this would also call for drastic changes in the daily duties and usage of a police officer (community policing), there wouldn’t be a typical 8 hour shift anymore.   In addition to an officers typical 8 hour day they would also need to adapt more Alderman like roles in getting to know their wards civilians more and to make them a more trusted and less fearful police force.   They would also need to live in the ward they serve as it would give them the incentive to be more invested in that ward, and having a higher salary would also recruit better officers.  Police officers and Alderman actually have one major cross over responsibility in major cities, and that is to protect personal property for residents and business owners, so why is that in Chicago they aren’t working more closely together on this?

As this idea is very fresh, and evolving and I want it to be open to criticism, I am going to leave it very vague as to invite discussion and ideas on how this could be accomplished.  So if you are reading this from my Facebook feed or stumbling upon it from a google search please leave a comment below as to your thoughts on this.

I also found this to be rather refreshing from the Nashville Police Chief:

“As imperfect humans, we have a tendency to limit our association with other persons to those persons who are most like us. Unfortunately, there is even more of a human tendency to stay within our comfort zone by further narrowing those associations to those persons who share our thoughts and opinions. By doing this we can avoid giving consideration to thoughts and ideas different than our own. This would make us uncomfortable. By considering only the thoughts and ideas we are in agreement with, we stay in our comfort zone. Our own biases get reinforced and reflected back at us leaving no room for any opinion but our own. By doing this, we often convince ourselves that the majority of the world shares opinion and that anyone with another opinion is, obviously, wrong.

It is only when we go outside that comfort zone, and subject ourselves to the discomfort of considering thoughts we don’t agree with, that we can make an informed judgment on any matter. We can still disagree and maintain our opinions, but we can now do so knowing that the issue has been given consideration from all four sides. Or, if we truly give fair consideration to all points of view, we may need to swallow our pride and amend our original thoughts.

And, it is only by giving consideration to the thoughts of all persons, even those that disagree with us, that we can have an understanding as to what constitutes a majority.”

Why the Fair Tax would fail, and is regressive.

The Fair Tax is the idea that by repealing all income taxes and replacing it with taxing sales on any newly produced item by 23% will create an influx of spending that will cause a boom to the economy.  You could read all you need to know about it from the hyperlink.  I’ve read both books and read the bill that has been proposed numerous times in congress.  At one time I had thought it was a great idea, that keeping all your income and only being taxed on what you bought was a great idea to revitalize the economy.  I believed this until I took a few economic classes and was able to better scrutinize the plan.  There are several things that I would like to point out that the plan hasn’t taken into consideration.

1)  A tax on sales is a tax on demand, and a tax on demand is a tax on employment.  So anyone that is forced to spend all of their income to survive are going to pay 23% on anything considered a new item.  So in order for people to save some money there is going to be a new reason to purchase “used goods” as they are exempt from this tax.  So factory orders on new merchandise will decrease, meaning factory workers, who are already hurt from shipping their jobs overseas, will now see their jobs being cut.  Either that or they will have to get a job in retail working at a used goods store, likely making near minimum wage.

2)  The tax is sold as being revenue neutral, as they tout it will obtain the same revenue as we obtain now with our collective taxes we already pay.  But after taking some advanced classes in economics one learns that the purpose of taxation should not be to obtain revenue but to slow down an overheated economy.  Any kind of tax, no matter how big or how small, is considered a demand drain.

3)  The prebate is a good idea, but people will still have to pay 23% on the money they get back from the prebate.  So no matter what, every class of people will be paying 23% of their discretionary income on taxes.   But people who support the Fair Tax try to explain that this is avoided by purchasing used goods.  Hence why point number 1 is the most important.

4)  Let’s get back to the idea of discretionary income.  In this chart provided by the proponents of the Fair Tax, it shows that if a rich person spends $2,000,000 they will pay 23% on that, which it tries to play off as the same rates as the lower classes.  But this is discretionary income, not income.  A rich person that spends $2,000,000 per year, could be very well earning $100,000,000 per year.  So if you take the 23% of the $2 million in discretionary income, you get $460,000 out of $100,000,000 of income being taxed.

That is a tax rate of .46% on the mega rich, while the rest of us pay 23%!

5)  Last but not least is the idea that savings generates investment in new businesses.  This is a belief of supply side economic theorists, that somehow our savings, while not being spent, will be realized with new jobs and investment.  This goes counter to what Keynes taught us that “aggregate demand” is the driver of our economy and makes it grow.  Increasing aggregate demand, put simply, is increasing sales, not increasing savings.  While savings is great for the individual, it is damaging to the economy as it is a demand drain.  So even if this does promote more savings for Americans, is that something this economy can really handle?

The important thing to remember in regards to any kind of plan or idea, is to measure it by it’s results, not by it’s name.  “Fair” is a very subjective word based on the morals of the person using the word fair.  So this Fair Tax may be fair to those who propose it, it really isn’t fair when the results are measured on who pays less as a percentage of their total income.  Sure someone that makes $100,000,000 a year could spend all of their income, but I doubt they got that rich by spending all their money.

Divided and Conquered Part 4

Positive feedback loop with news- does it show that news reflects us?  Does it feed upon a divide?

If an alien race were to learn about our world from watching the news what conclusion would they come to?  This question reminds me of the movie “The Explorers”, a great movie for me as a kid, but one with a hidden message in it for adults.  In that movie a couple of kids build a spaceship that ends up boarding another alien ship, and on that ship they see that the aliens have a view of us that is represented by everything we put out in space via our airwaves.   They end up seeing us as a very savage race and one that is doomed to destroy each other.  I have to admit, I would probably come away with the same impression if I was subjected to only what our airwaves produced.

If we were truly as violent as our media would make a spying alien race believe, they may have a distinct fear of us and come armed to the teeth instead of coming as a peaceful ally (think about that approach for a second, let it sink in).  It is obvious that what the media puts on the news is important to shaping our view of the world.  There is evidence that if the media shows an abundance of black people in poverty, that white people will have an unfavorable view of anti-poverty programs.  There is also evidence in the same link above that the media can shape our beliefs by obscuring inter-group boundaries (reducing stereotypes) and thereby diminishing group differences, and start to build bridges, instead of destroying them.

The media does an excellent job of increasing stereotypes by specifically referring to people with certain labels, especially those politicians with “D’s” and “R’s” next to their names.  Thus whenever a negative report comes out on a certain political party member that negative impression creates a boundary and it is slung onto the party itself.  Do we do this in team sports?  Why do we do this with our political parties?   When Ray Rice was seen beating his wife, did that automatically taint the image of the football team (assuming we leave out the team PR reaction on this)?  Or was the reputation of only Ray Rice effected?  I am trying to draw up some reasoning as to why it is important for media to slow down on the automatic labeling and simply refer to the person who was guilty of some crime or infraction or morally ambiguous behavior, or supporting a certain policy.  It is the individual we should hold responsible and not the entire party, unless of course the entire party is guilty in that matter.

This constant barrage of negative news does lead to what psychologists refer to as a “feedback loop”, where a systems outputs (media messaging) are fed back into its inputs (humans).  It is an effective marketing technique to keep people watching and confirming a bias, and continually buying a product.  This obviously will have an effect on public opinion and can create a larger political divide in this country.

So with the evidence that the media feeds on this divide that we have, we must acknowledge that it doesn’t really reflect society.  Our media should adapt a certain responsibility and a certain professional code not just to capture audiences (the profit motive), but to also have a social responsibility to keep us more informed and more balanced in news (the non-profit motive).   How do we do this?  I am not so sure how, but it is something I want to explore in future posts.

So let’s ask ourselves this question:  Do we want aliens to come at us armed to the teeth?  Or do we want them to come at us looking to share ideas, thoughts and technology, knowing we are a race that works together?  I know it is a lot to ask but let’s turn off those cable news networks, let’s not be divisive and combative in our politics, and let’s work together to come to an understanding.



Divided and Conquered Part 3

Is the media causing a larger political divide?

The human race is in a new era of assimilating information because of the recent advent of cable news and the internet in the past 25 years.  Science has still yet to determine how this is effecting our divide but there is plenty of valuable tidbits that are correlative that could lead one to believe that media is playing a major role in creating a political divide.

The onset of cable news channels began when CNN first aired in 1980, but at that time cable wasn’t as prevalent as it is today, so it went without much in competition for nearly 16 years, until MSNBC and FOX News both aired in 1996.  At first intuition one would think that more competition is a great thing, to which I would agree.  But has this competition led to greater news coverage?  Or has it lead to more divisiveness in this country?

Since the inception of other cable news networks fostering this competition of opinions, there has been a steep incline in creating a political divide.  According to Pew Research (read through this whole thing, it’s amazing):

“The overall share of Americans who express consistently conservative or consistently liberal opinions has doubled over the past two decades from 10% to 21%. And ideological thinking is now much more closely aligned with partisanship than in the past. As a result, ideological overlap between the two parties has diminished: Today, 92% of Republicans are to the right of the median Democrat, and 94% of Democrats are to the left of the median Republican.”

The above survey was conducted over a 20 year period and dates back to 1994, so it is feasible to pin some of this divide on the sudden rise in cable news, and the opinions they state on their stations.  Of course this is highly susceptible to the fallacy of correlation implies causation, but it ought to make someone wonder why the specific divide started to occur then, and continues to worsen.

According to the same Pew research the views of opposing parties have also become more extreme.  In 1994 16% of democrats had an unfavorable view of republicans and today that number is up to 36%, and republicans had a 17% unfavorable view of democrats in 1994 and is now up to 43%.

Pew has also done great research on who watches cable news, and what they are watching.  At prime time, cable news will focus on talk shows to capture their audience.  Those that are heavy watchers of cable news, will be more prone to develop issues of group think as they are only listening to opinions on one side.

If you read the first link I posted from Pew, it goes on for several pages as to just how divided people are.  There are increasing percentages of people who are so ideologically cemented in their beliefs that they don’t want to live near people opposed to them, and often times won’t befriend them.  As shown on page 4 of that report it shows that consistent liberals have over a 70% unfavorable view of Fox news and over 70% of consistent conservatives have an unfavorable view of MSNBC.  So if our two main partisan cable news stations are fostering such a divide it makes it safe to ascertain that they are part of the blame for such a divide in our country.