Monday, February 24, 2014

Peace Through Poverty: The Pentagon's New Budget

Today the Defense Secretary Chuck Hagel is announcing the the Department of Defense will deal with a shrinking budget largely by reducing the number of paid soldiers, with additional cuts coming from some weapons programs. He would not be doing that if President Barack Obama had not signed off on the ideas. Congress will, as usual, muck with the plan, as each Representative and Senator tries to protect military spending inside his or her district, no matter how at odds with the Pentagon's plans. [See 2015 DoD budget speech transcript]

Bit picture, the ability of the U.S. to bully the other nations of the world will decrease. Bullying will be more selective. We will keep all 11 aircraft carriers, which are great for threatening or bombing nations that don't toe the American line, if they border an ocean. We won't have enough soldiers to easily invade and control large countries like we did in Iraq and Afghanistan.

We should not need too. Imperialism was all fine and good from an economic, if not an ethical, standpoint, during the 20th century. But times have changed. Imperialism is a money loser. The U.S. has proven in the 21st century that it is quite capable of losing all the money it needs to domestically, without loosing even more abroad.

Anyone who does not understand that new roads and bridges in Afghanistan means potholes and collapsing bridges in the U.S. needs an economics course.

In the short run, at least, the American economy continues to recover from the deep dip of 2009. Unfortunately the nation already had a multi-trillion dollar national debt in 2000. Starting in 2002 the national deficit exploded to pay for the "war on terror," and despite that the economy nearly collapsed in 2008, due to the greed and stupidity of—admit it—not just Congress and Bush and Banks and mortgage brokers, but also relatively ordinary Americans who bought vastly overpriced McMansions and bungalows and ordinary track homes and condominiums. In other words, the same idiots, I mean citizens, who elect our Congress and Presidents.

Then in 2009 massive deficit spending began to try to revive the economy, keep people from starving, and prevent a rebellion. The result was a $17 trillion national deficit by the end of 2013. The Federal Reserve kept interest rates extraordinarily low, meaning the interest on the national debt was minimal, like those low-interest introductory mortgage offers of 2005.

As bits of the debt come due for payment the Treasury Department issues new debt. Unless the economy fails to revive, interest rates will rise. Short term debt pays the least interest, but is risky because it has to be renewed often. Long-term debt is safe once placed, but pays much higher interest. As I write this essay 3 month federal debt pays 0.043% per year, zero for practical purposes. 30 year debt pays 3.71%. 2 year debt pays 0.33%.

What the President and Pentagon are acknowledging is that as the average interest rate paid on U.S. debt increases, the amount of tax dollars available for all spending, including military spending, is going to decrease. 1% of $17 trillion is $170 billion. 5% is $850 billion. 10% is $1.7 trillion. Higher interest rates leave politicians 3 options: higher taxes to pay them, lower spending to pay them, or just taking on even more debt, no matter what the interest rate.

Wars and military spending no longer stimulate the economy.

World War II stimulated the depression-era economy, but initial conditions were different back then. There was little national debt when the depression began. The war started in Europe, resulting in a couple of years of peace during which the U.S. could sell anything it could make without actually being in the war.

Iraq and Afghanistan, in contrast, were pure expense for the American taxpayer. They drained the U.S. economically the same way World War II drained the British Empire. That empire, despite its size, fell apart in the 1950s. The Brits could not afford it any longer.

America can no longer afford an empire. Expect that it will be easier for regimes independent of the U.S. to prosper in the future. Expect sane U.S. Presidents (if there were such a thing) to be very careful before committing U.S. fighters to combat in large numbers. If a President wants to both keep up the economy and a military capable of defending U.S. territory, he won't want any international adventures further draining our empty coffers.

U.S. propagandists will probably come up with a better slogan for the new policy than "Peace through Poverty." But that is the era we appear to be heading into.

Thursday, February 20, 2014

Unemployment, Debt and Demand

I quote the following passage from William Manchester's The Glory and the Dream because it summarizes the liberal, New Deal position on the cause of the Great Depression and recessions in general:

"The real blame lay in he false underpinnings of the Coolidge-Hoover prosperity. Seen in perspective, the Depression appears to have been the last convulsion of the industrial revolution, creating a hiatus [break] before the technological revolution. In the aftermath of the World War [One], the techniques of mass production combine to increase the efficiency per man-hour by over 40 percent. This enormous output of goods clearly required a corresponding increase of consumer buying power—that is, higher wages. But the worker's income in the 1920s didn't rise with his productivity."

But some of the increased efficiency became consumer buying power through the issuing of credit. Hence people bought on credit during the 20s, and when credit-based buying collapsed in 1929-1930, the entire economy went into a downward spiral. Less demand resulted in less production, and so in workers being fired, and so in a further decrease in demand. It was Herbert Hoover himself who used the term "Depression," trying to imply the whole affair was about a wrong mindset, a lack of confidence. If only confidence would return, the economic downturn would reverse itself.

The natural conclusion, if you buy the analysis is the quoted paragraph, is that all society needed to do was to give people more buying power. Society needed to "share the wealth" as socialists said. Then better-paid workers would buy more things; manufacturers would hire more people to make more things, then these hired people would also spend more, until "happy days are here again" [the Democratic Party theme of 1932] and there's "an automobile in every garage" [the Republican slogan on 1928].

But the problems of the Great Depression must have been more fundamental. Under the New Deal [often passed by an alliance of progressive Democrats and progressive Republicans; both parties had conservative wings that resisted the legislation] the federal government used a variety of methods to increase aggregate purchasing power. By 1934 deficit spending was the order of the day. The economy did improve off its 1932-33 lows, but not to anything resembling prosperity. Beginning roughly in 1939 with war orders from Europe, and accelerating in 1940 when U.S. deficits became even larger to prepare for war, the economy finally got back to where it had been in the mid-20s.

Even Democrats worried about the national debt after World War II; by American standards it was unprecedented. But with the slow-motion collapse of the British Empire, the U.S. had become the dominant world power. The revived economy, and high income-tax rates, generated an equally unprecedented stream of revenue to the federal government. Most federal programs were cut back only minimally, and new programs like the Interstate Highway System created jobs and demand for commodities.

When President Franklin Delano Roosevelt and Congress started running up deficits and the national debt in the 1930s they were starting off a small base, most of it left over from military expenditures for World War I. By the late 1950s even most Republican politicians and businessmen believed in deficit spending. Workers and capitalists alike were prospering, if some more than others. It seemed like capitalism propped up by heavy federal spending was the recipe for permanent prosperity.

This all turned sour in the 1970s, following the prosperity of the 1960s resulting from economic imperialism, spending on the Vietnam War and cold war, and the expansion of the New Deal into the Great Society "War on Poverty" programs.

Demand, in itself, could lead to the opposite problem from the Depression: inflation. In order to stop inflation, the Federal Reserve raised interest rates (and tightened the money supply). A series of recessions, interleaved with booms, followed, with aftermath of the most recent and most serious of the recessions still lingering with us.

Also lingering with us is a $17 trillion federal debt. And therein lies the real problem for America and the world. If during periods of prosperity the debt had been paid down (as happened until about 1930), then the only federal debt today would be from the latest recession. Call it $3 to $5 trillion. But no, instead every problem since 1933 has been solved with debt. If you are ideological you can consider it military debt or welfare debt, but it is an obligation of the citizens, regardless of the specifics of its origin.

So where we are now, in early 2014, can be summed up as:

1. The economy has been growing slowly since 2009, partly because of high deficit spending by the government and partly because of the natural tendency to grow off a bottom.
2. Unemployment is well over 6%, and even that excludes a lot of individuals who are under-employed. It's not Depression or even Great Recession levels, but it isn't prosperity either.
3. Inflation has been minimal, lately.
4. People would buy more products if they made more money. Most employees are highly productive because of technological advances.
5. Because there are plenty of unemployed people, wages are stagnant; employers don't have to bid up wages to retain employees.
6. Economic imperialism is not really working anymore. It costs more to patrol the American empire (the entire world, for practical purposes) than the U.S. gets in economic benefit from the rest of the world (as seen by our negative balance of trade).
7. There is a $17 trillion and growing federal deficit. Interest payments already make up a considerable part of the federal budget, and if interest rates (on average on government debt) climb to say 5%, they will eat up a huge part of the annual federal budget.

In a Goldilocks scenario the capitalist class, either out of self-interest or forced by the federal government, would both increase wages significantly for workers and pay off a substantial part of the federal debt. The wage increase would increase demand, resulting in profits that would compensate the capitalists for their sacrifices. With increased demand more of the federal debt could be paid off; prosperous workers could help some with that. Inevitably another recession would roll around, at which time deficit spending would be appropriate to counter the economic cycle until growth resumed.

Do not plan on the Goldilocks scenario. It won't happen in our broken political system. Republicans have done a good job emphasizing the debt issue, but are unwilling to raise wages or tax the super-rich to reduce the debt. Democrats would raise the minimum wage, but won't tax the capitalists and won't do anything about the debt.

The Federal Reserve will keep making excuses to keep interest rates low, saying it is to help revive the economy. But the real reason is allowing interest rates to rise will show how naked the economy really is. The math is simple. 5% of $17 trillion is $0.85 trillion per year. The fiscal year 2013 federal budget resulted in spending $3.45 trillion. But revenue was just $2.77 trillion. So if interest rates rise to 5% on average, and revenue stays flat, interest payments on the federal debt will eat up over 30% of revenue.

So less spending, even on the military. And less spending means less demand, meaning fewer jobs. And lower tax revenue.

Or Congress can kick the can down the road a few last inches, into the wall of reality, and continue to increase the debt even when the economy is relatively good.

Which just happened when the Democrats and Republicans in Congress raised the debt ceiling.

Sunday, February 16, 2014

Satan, God, and Arguing Angels

"And his tail drew the third part of the stars of heaven, and did cast them to the earth."
Revelations 12:4

According to Christian theology, of the angels created by God, one-third joined with Lucifer (or Satan, the Devil) while two-thirds remained loyal. Bad things happen on earth because some people listen to the devils; there would be nothing but good if we would all just listen to the good angels.

But what could they possibly have argued about, resulting in the split? The Bible does not say. God made them all, but apparently they were not identical. God presumably made Heaven, but apparently 1/3 of his creation thought it was defective in some way.

If earth is a reflection of heaven, if man is made in God's image, then the trouble probably started on a committee. An unimportant committee, like one set up to decorate for an annual event. "Do we have to do all gold again? I mean, everything is gold here. How about a little platinum? Platinum would really liven things up!"

The next thing you know all sort of reform and improvement movements would crop up among the angels. "I call this piece of gold a saxophone." But no, God and his gang of followers have decreed harps are the only musical instruments allowed. Soon angels are having secret, informal meet ups in platinum rooms to listen to saxophonists and watch performance art.

Or it could have started with some angel, not necessarily the eventual leader, Lucifer, being a smarty-pants. Authorities don't like smarty-pants, as I learned from my parents and Catholic School. Smarty-pants have trouble understanding that most angels like the way things are, and prefer stupidity to change. Smarty pants and heresy amount to pretty much the same thing.

"Hey, here's an idea, since this breathing life into clay figurines hasn't worked out very well. Let's start out with building something simple, I call it a protozoa. The protozoa will be able to adapt to the environment (a major reason for clay figurine failure) and have sex, and thereby produce improved protozoa each generation. They can evolve over time to have many cells, be bigger, and differentiate into species to form a mutually evolving ecosystem."

Then again it could have been cosmological questions that set angels against each other and against God. Perhaps that started as a philosophical argument about determinism (fate) and free will. The determinism angels favored the clockwork universe. The free will angels favored introducing chance, in the form of quantum probability waves for the small particles which they argued would make a better universe than just paving the streets with gold.

I suspect that God gave the smarty-pants angels earth because he could not get it to work to his liking. It was just a bunch of clay figurines dancing to his instructions on a globe of solid gold. The lazy two-thirds of the angels just went back to God and their harps.

But the entrepreneurial angels mixed things up. Earth ended up with an iron core and a stony crust with water that could support bacteria and then algae and protozoa and higher life forms.

So here we are. Unfortunately, apparently when God saw how well things were going he got jealous and tried to take earth back. Having perhaps learned a bit from the smarty-pants angels, he decided to invent a dozen or so major religions to compete with each other for the hearts and minds of homo sapiens. If you want a stupid religion to believe in, there are plenty of choices.

Wednesday, February 12, 2014

Opportunity Costs of War, Population, and Education

It should not be surprising that the leaders of the British Empire decided to use the same genocidal tactics as the Nazis in World War II. Americans used similar tactics against the Native American Indians and later against the Philippine Islanders and the Vietnamese (to keep the list short). Mass murder is a strategy that a lot of other leaders have used throughout history, limited only by their power and technologies.

Overlaying an indigenous group we can call Celts (though they also were a mix of invaders and indigenous peoples), the people we call English are a mixture of Germans (Angles and Saxons), Vikings, Danes (who were just well-organized Vikings) and eventually the Normans, who were slightly Frenchified Vikings.

If you enjoy Vikings on The History Channel, you can see the leadership qualities of later-day leaders in Ragmar Lothbrok, brilliantly played by Travis Fimmel. A calculating greed and willingness to unleash mayhem eventually allowed these barbarians and their descendents (including cultural as well as genetic descendents) to conquer most of the world.

Being allied with the British, we Americans have been taught a great deal about Hitler's (and Tojo's) war crimes, but very little about our own. But this essay is not meant to recount those crimes. Here they serve as fodder for an exploration of opportunity costs. As in so many things, it is easier to see opportunity costs in retrospective than in the present or in the future.

For a more detailed (but still brief) review of opportunity costs in World War II, specifically those associated with aerial bombardment, I would recommend "Opportunity Costs" by Edward Luttwak in the November 21, 2013 London Review of Books [subscription required], which in turn is a book review of The Bombing War: Europe, 1939-1945 by Richard Overy.

In summary, mass murder, including genocide, is not always the best tactic. The British did very little face-to-face fighting with the Germans; that was left to the Russians [resulting in an atheist holocaust]. The Germans wasted effort (men and materials) killing their perceived internal enemies. The British used up (threw away) astonishing resources in their failed attempt to firebomb Berlin (though they succeeded in firebombing other cities). If the atomic bomb (which the British helped develop) had not worked (or just taken longer to get working), it might be argued today that using the same resources to advance other high-technology weapons would also have forced Japan to surrender earlier, if not unconditionally.

Every choice made implies choices not made. Resources devoted to the military deprive the civilian sector, and vice versa. In California the current drought has intensified the usual fight over the allocation of water to farmers, fish, and urban/suburban uses. Opportunity costs are the losses created when resources are not devoted to a particular pathway.

Forcing (or tricking) an enemy to waste resources is a classic strategy. Much of modern warfare has been quantified: the cost of wiping out a village in Vietnam with napalm, as opposed to the cost of winning over the village by providing running water or other desirable goods. So too it is possible to quantify the opportunity costs that different strategies and tactics might inflict on an enemy. The reason Al Qaeda is, on the whole, winning its war against the U.S. and our (more or less) allies is not based on large masses of people buying a peculiar brand of Islam. Al Qaeda has encouraged the largest waste of resources in history, by the United States. Al Qaeda has grown its capabilities while the U.S. has reaped a national debt that will cripple it for the rest of history.

Even before 2001 the U.S. wasted a lot of money on its military establishment. It could be argued that military expenditures in the brief era between the end of the war on Communism and the war on Islam might have been necessary to maintain America's commercial empire. But clearly the decision to invade both Afghanistan and Iraq while building an unprecedented Homeland Security force (and not raising taxes to pay for it) meant making sacrifices in the domestic economy. We have had two major recessions since 2001. Meanwhile, China, mostly at peace with the world, has grown to be a serious economic rival.

Some opportunities slip away with time. Education is a good example. The children who did not get enough education in first grade in 2002 are now mostly in their first year of work (or unemployment) or first year of college. We are working on creating a full generation of people who could have been better educated if there had been less spending on security. They, in turn, are and are going to be less economically productive than they could have been.

The national debt ($17 trillion), which may have complex sources but which I think can be fairly blamed on an inappropriate response to Al Qaeda, is now seriously limiting what the federal government can accomplish. It can stand as a proxy for the opportunity costs of bad political decision making. As interest rates rise the payments on the debt will cut further into the budget. I project that within five years both military and education budgets will need to be cut dramatically, at the same time taxes are raised, if the U.S. is to avoid bankruptcy.

Population control and (its close relative) global warming are time-sensitive issues where the bulk of the opportunities have now been lost. A one-and-done (1 child per family) global program would take so long to institute that the bulk of its effects would likely take place long after some other cause (war, disease, and famine, most likely).

Global warming is not likely to decelerate. Manufacturing more solar panels just adds more greenhouse gasses now, making people feel good about their energy consumption and breeding habits. Stopping global warming would require a bottoms-up fundamental change of how humans live, even if the population began to fall for some reason. Global warming itself won't kill many people, not anytime soon. It will cause negative feedback, but at too slow of a pace to be of much help reducing the homo sapiens plague.

Is there hope for the human population of the world? In Barack Obama's speeches, yes. But not in his policies, or those of other world leaders.

But don't worry, the U.S. and global economies should continue to pick up until the next round of free-market or government-mandate human folly precipitate another crisis. Environmentalists will use slightly less energy than their non-enviro neighbors, who are limited only by their ability to cope with their energy bills. People will pass on their culture of failing to educate, failing to take care of the planet, and failing to take the long view.

Pessimistic analysis is not popular. Happy talk is the order of the day. But I did not want to miss the opportunity to be straight with you on Darwin Day.

Sunday, February 2, 2014

How Holy got added to Roman Empire

I have previously written how the Nazi Third Reich was (in part) an attempt at a modern restoration of the Holy Roman Empire. [See Adolf Hitler, Charlemagne, and the Holy Roman Reich]

One interesting historical tidbit is about the name itself. For centuries western European mass murderers (I mean kings, or emperors) just used the name Roman Empire to designate their fancy that they rightfully ruled the entire world. We usually distinguish a Western Roman Empire from the Eastern Roman Empire that existed at Constantinople [Istanbul] from the time of Saint Constantine (aka Constantine the Great), but they just called it the Roman Empire.

Constantine's successors made the Empire a Christian theocracy. When the Popes and another mass murderer, Charlemagne, revived the empire in the west of Europe it was Roman Catholic, the Popes having made up some stories about their theological supremacy since the beginning of the Dark Ages.

But this neo-Roman Empire, with the Pope in charge of theology and the Emperor in charge of killing anyone who disagreed, only got the tag "holy" during the reign of Frederick I. He used it in a letter sent in 1157 to his vassals asking them to follow him over the Alps to massacre the Lombard (northern Italian) cities that thumbed their noses at this pretensions to being their ruler.

Frederick did not consistently use the term "Holy Roman Empire." His successors used it on occasion for generations, until by the time of Charles IV it was used consistently and was adopted by most of Europe, even by those resisted the idea that it granted any right to boss around distant kingdoms like France, England, and Spain.

No constitutional changes in the Empire came about with the name change. It may have been a ploy to give the Emperors a leg up in their struggle with the Popes. The Popes claimed to be supreme by their direct connection to God, and the right to recognize or not recognize the Emperor and the Christian kings of Europe. The Emperors believed or at least proclaimed they received the crown directly from God, so that the Pope was in effect their chaplain, a guy they could hire, fire, and disagree with within their royal powers.

Adolf Hitler was a Roman Catholic, put in power partly by a Pope who wanted Hitler to slaughter the atheists (socialists and communists included) of the world. When Hitler was defeated (mostly by the Communists, with some minor help from America and the British Empire) the Pope [Pius XII] tried to pretend he hardly even knew Hitler. Their occasionally vehement disagreements (about the curriculum in schools, for instance) are often trotted out by historians to obscure the overall picture. Hitler was Catholic, and thought the Pope should obey him. The Pope had brought Hitler to power, bent Mussolini to his will, and also was recognized as supreme by General Franco. Their disagreements were among allies, not among enemies.

Holy indeed.