“Since we decided to adopt the leaf as legal tender, we have all of course become immensely rich. But we have run into a small inflation problem owing to high leaf availability. That means the current rate is something like three major deciduous forests buy one ship’s peanut. In order to obviate this problem and revalue the leaf, we’ve decided on an extensive campaign of defoliation and burn down all the forests. I think that’s a sensible move, don’t you?”
– The Management Consultant to Fintlewoodlewix (later called Earth) – “Hitchiker’s Guide to the Galaxy”
It’s good to have a lot of money, assuming that not everyone has a lot. Inequality is apparently bad when it gets too big, but it also makes the whole economy possible in small doses. But how much money is really out there, and where is it going? It turns out that this is more complicated – and hidden – than most thought.
Borrowing money isn’t bad. When it’s used to purchase something big that will last for years, like a house or a car, it often makes sense to do it now and pay the finance charge. Borrowing to buy equipment or a build to be rented is an investment – as is borrowing money to learn a good trade.
When we look at how the Federal government borrows to keep itself going we can and should be able to ask the same questions – was this an investment? Did we get anything good for the money? Unfortunately, the accounting practices used by the Feds lump capital and other investment into the same pot as operational expenses, making it impossible to tease everything out. It’s a procedure the Founding Fathers would recognize, if you wanna get all Tea Party on the practice. But it’s still a dangerously stupid way to run things – and totally counter to the way any business or state is run.
As we talk about the need for serious reform in Washingtoon, we should add this to the list.
Is wealth and income inequality holding the economy back? A recent study by the Pew Foundation shows that from 2009-2011 the wealthiest 7% of the US saw their net worth climb 24% – to an average of nearly $3.2M – while the other 93% of the population saw their wealth plummet 7%. More than being unfair, it may also be holding back economic growth overall. The rich may be happy with their take, but it may stop coming.
A number of studies have shown the effect over a number of countries, and the effect is undeniable. At what point does income and/or wealth inequality slow growth? Like an excess of debt it’s hard to say, but the two taken together lead to a compelling argument that the search for sustainable, meaningful growth is a strongly bipartisan, left and right issue – and something we should get moving on as a priority.
At what point does public debt become a problem? If you ask many Republicans when the debt hits 90% of GDP we’re in trouble. Given that the Federal Debt is above this level you can see why there is a push for budget control if not outright austerity. But where did that magic figure come from?
The answer is a work by two Harvard economists, Reinhart and Rogoff’s 2010 paper “Growth in a Time of Debt.” But now that this magic number has been debunked in spectacular style, will the call for austerity ease? Given how the sides have retrenched, no way. But it is true that a certain level of debt is indeed a problem – it just isn’t something you can pull from a formula and throw onto autopilot.
How is that recovery going for you? Overall, the first quarter of 2013 has been a decent one. Nothing is moving very quickly, but we are seeing progress. It’s time to check back on the predictions Barataria made for the year and see how we are doing.
Back at the start of the year, it seemed as if the recovery had something to prove. 2012 was not a bad year, but it was only the foundation of a recovery. A little bit of faith that things were getting better certainly had a lot to do with Obama winning re-election, among other things. But 2013 is indeed shaping up to be the year the recovery starts to seem real.