Presimetrics

Copyright © 2010 by Mike Kimel and Michael E. Kanell

All rights reserved. No part of this book, either text or illustration, may be used or reproduced in any form without prior written permission from the publisher.

Published by
Black Dog & Leventhal Publishers, Inc.
151 West 19th Street
New York, NY 10011

Distributed by
Workman Publishing Company
225 Varick Street
New York, NY 10014

Manufactured in the United States of America

Interior design by Susi Oberhelman

Cover illustration by Nigel Holmes

ISBN-13: 978-1-57912-835-7

h g f e d c b a

Library of Congress Cataloging-in-Publication Data available upon request.

“Facts are stubborn things; and whatever
may be our wishes, our inclinations,
or the dictates of our passions, they cannot
alter the state of facts and evidence. . . .”

—JOHN ADAMS,
in his summation to the jury in defense of
British soldiers accused of murder during the
1770 trial after the Boston Massacre

Contents

Introduction

Chapter 1: Real GDP per Capita

Chapter 2: Fiscal Responsibility

Chapter 3: Debt: What Real GDP per Capita Leaves Out

Chapter 4: Employment

Chapter 5: Income and Wealth

Chapter 6: Republican Issues

Interlude: On Taxes

Chapter 7: Democratic Issues

Chapter 8: Health Care

Chapter 9: Crime

Chapter 10: The Public Mood

Chapter 11: Family Values

Chapter 12: Investing in the Future

Conclusion

Appendix 1: Is It Congress?

Appendix 2: Explaining Growth in Real GDP per Capita

Appendix 3: The Budget of the Executive Office of the President

Appendix 4: Try This at Home

Appendix 5: Obama

Notes

Acknowledgments

Index

Introduction

CHAPTER 1

Real GDP per Capita

They’re not all economic;
the primary problem is our economy.

GEORGE HERBERT WALKER BUSH
State of the Union Address, January 28, 1992¹

Some people may argue that the measure of a country’s wealth is summed up in one word, uh . . . make that an acronym: GDP. In fact, you might have overheard one or two of those people at a cocktail party, with a glass of pink zinfandel in one hand and a mini quiche in the other, expound with conviction: “It’s all about GDP.” So is it all about GDP? Well, not exactly. But if you’re trying to figure out the state of the U.S. economy and you want to use only one number to describe it, then a good place to begin is with GDP.

GDP, which stands for “Gross Domestic Product,” is more or less supposed to be a gauge of all the economic activity in the country in any given year. It measures the value (i.e., the price times the quantity) of just about all the stuff (goods and services) made in the country that year. But not everything gets counted in GDP. Goods and services that aren’t marketed don’t get counted. Criminal activity isn’t counted. Volunteer work is also not counted. Cleaning your home is not counted—unless you hire someone to do it for you.

And then there are things like pollution. You might think a company that dumps a lot of pollutants into the water, causing harm to people and wildlife, would subtract from GDP, but you’d be wrong.

Consider that in 2008, the GDP for the United States was about $14.265 trillion,² give or take a few billion. That’s the official figure computed by the Bureau of Economic Analysis (BEA), which is an agency in the Department of Commerce responsible for a lot of our country’s national accounting. So even in the midst of a harsh and long recession, about fourteen and a quarter trillion dollars’ worth of marketable goods and services were produced in the United States in 2008. Fourteen and a quarter trillion dollars! That’s a huge number—and that’s good, right? Well, $14 trillion and change doesn’t actually mean anything. It lacks context.

CHAPTER 2

Fiscal Responsibility

It is big enough to take care of itself.

RONALD REAGAN
Joking at the Gridiron Club, March 24, 1984

If your neighbor makes $30,000 a year, but spends $50,000, he is running a deficit. That’s the opposite of running a surplus, which would require him to be spending less per year than he makes. But is running a deficit fiscally irresponsible? It depends.

If your neighbor runs a deficit because he throws weekly catered pool parties, takes the family twice a year to Bali, or insists on buying a new Lexus every year, most people would question whether he’s spending his money wisely. After all, to run a deficit, your neighbor may be using up his savings, which means he won’t have that money later on when he might really need it. Like many Americans, he might simply be borrowing to finance his spending habits. But every dime of borrowed money eventually has to be paid back. And not just paid back, paid back with interest, or “the vig,” depending on where the money was borrowed from.

However, if your neighbor is running a deficit to pay for his degree in electrical engineering while subsisting on Ramen and canned peas, wearing threadbare clothes, and showering infrequently to save money, you might think he’s being frugal and wise, if a bit aromatic. Even so, his behavior might not be frugal and wise if he never gets that degree and drops out of school. After all, running a deficit indefinitely means running down your savings and having to borrow more and more and more.

A lot of things are different about household and national budgets. But some things are similar for both the individual and the country. For example, the country finances its deficits the same way a person does: The money either comes out of past savings or from borrowing. And since the United States hasn’t been saving for a long time, our deficits are financed by adding to our debt, which is a topic that we’ll cover in more detail in the next chapter.

And, as with individuals, it’s okay for the country to run a big deficit for a while, but eventually the costs pile up. A deficit that is very small relative to the size of the economy is not a big deal, and may be akin to a person using her credit card for day-to-day bills, but still paying off the credit card balance in full at the end of each month.

Whether the country runs a deficit or has a surplus comes down to two things: how much money the government receives, mostly through taxes, and how much the government spends. As we will see in this chapter, the president doesn’t dictate the details, but he bears most of the responsibility for the budget. Whether the government has a surplus or a deficit is largely up to the person in the Oval Office. Not every deficit is bad, of course, and sometimes they’re necessary, but barring extreme circumstances, such as a major war like World War II or some large catastrophe, a president who regularly runs large and increasing deficits is irresponsibly saddling the country with more debt. A president who year after year produces surpluses, avoiding the temptation to spend unnecessarily, is making the country better off.

Government Spending

Outside of the most fervent libertarians, anarchists, and off-the-grid survivalists, there is general agreement that yes, we ought to have a government. But what should the government do? What are its limits? Just about everyone draws the line in a different place.

The Constitution says the federal government’s role is to “provide for the general welfare.” That’s not too specific, but most people have taken it to mean that the government should provide services that the public needs and that the private sector cannot provide efficiently or should not be trusted with. These include services like building infrastructure, fighting epidemics, and protecting us from the Canadian hordes. It also includes whatever our leaders decide is “welfare,” from bailing out bankrupt businesses to bombing the bejeezus out of other countries.

Which brings up the problem with government, or rather, for government—all those services cost money and somebody has to pay for them. It seems as if we’re always part of that somebody—maybe you are, too—that ends up paying the bill through taxes. We the People who get government services, but also pay our taxes, hope that the government will be judicious about what it chooses to spend our money on.

Through the decades, the role of government has ebbed and swollen, doing more swelling than ebbing, if truth be told. But the federal tide has not always risen at the same rate. Needs change. For instance, we just might want a bigger military budget when we’re fixing to defeat a couple of terrifying fascist states as in World War II. And sometimes we collectively decide that the government should do more. For example, until the Nixon administration, there was no Environmental Protection Agency, but nowadays most people accept that there is a role for the government in keeping the environment clean.

Some presidents are intent on “Doing Things,” and Doing Things generally costs money. One president who wanted to Do Things was LBJ, and the things he did—from ramping up the Vietnam War to launching a war on poverty—were expensive. Some presidents at least talk about doing less—although it’s a little tougher to find presidents who actually cut services to voters. Reagan came to office promising to be such a president, one who would reduce the footprint of the federal government. And then there are the presidents who, like Bill Clinton, promise to make the government more efficient.

Regardless of what the president intends to do, the process of actually Doing Things always begins the same way: The president submits a budget proposal to Congress. At the same time, the president unleashes his people; waves of economists and policy wonks who work for the Office of Management and Budget and the Treasury Department descend upon Congress and the Sunday talk shows to lobby, bribe, threaten, wheedle, and cajole. Members of Congress then do their own lobbying, bribing, threatening, wheedling, and cajoling on the Sunday talk shows and on the floor of the House of Representatives and the Senate. Eventually, a budget gets passed; a few of the items that the president put in get tossed out—some of those throwaways are put in for that very purpose—while powerful members of Congress add some new items (but not too many or the president will veto the whole thing and start the process all over!) and voilà, the final budget ends up looking a lot like the proposal the president submitted in the first place.

CHAPTER 3

Debt: What Real GDP per Capita Leaves Out

First Inaugural Address, January 20, 1981¹

In the previous chapter, we looked at real GDP per capita, how it grew under the various administrations and why. But we left out something important—debt. In this chapter, we will explain what debt is and how it matters to real GDP per capita. We will also show what happens to the economic performance of each presidential administration once debt is taken into account.

The National Debt

Debt is as American as, well, spending. Maybe it wasn’t always this way, but buying now and promising to pay later is how we do things these days. “Charge it!” is the American rallying cry. “Charge it!” is what we say when we’re buying homes, cars, clothes, and groceries. And “Charge it!” is what we say when we’re buying an aircraft carrier.

Now you may be thinking to yourself, “Wait a minute, I don’t remember ever buying an aircraft carrier.” But collectively, we, through the U.S. government, do purchase aircraft carriers . . . and roads and radio telescopes and mine-safety equipment. And whenever the government buys these things, ostensibly on our behalf, it usually says, “Charge it!”

When you say “Charge it!” you are incurring a debt. Maybe that debt is to a bank, maybe to a credit card company, or perhaps to the guy who sold you a mattress. But regardless of whom you owe that money to, you have to pay it back. And if you don’t pay it back quickly, within some grace period, you will also have to pay interest on that debt.

Government debt works about the same way but with a few minor differences. The government doesn’t borrow by putting things on its credit card, going to the bank, or asking a loan shark for money, as most people do. Instead, as we noted in Chapter 1, when it needs money, the Treasury Department issues (i.e., sells) “securities,” which are just promises made by the Treasury on behalf of the rest of the government to repay whatever amount is being borrowed, without even having to put up any collateral. Some of those securities are very short-term, and get paid back after a few weeks. Some are longer-term; thirty-year bonds are not uncommon.

But sometimes when the Treasury sells debt on behalf of the government as a whole, the buyer is a government agency. In fact, a large chunk—over 40 percent—of what the government owes is owed to government agencies. That, in effect, is a situation where the government owes money to itself. For example, contrary to what most people believe, the Social Security Administration has accumulated a large war chest,² which it has lent to the U.S. Treasury. That doesn’t mean the money doesn’t have to be returned—the Social Security Administration also has obligations, and while it has generally run a surplus,³ it is anticipated that it will need some of that money back to meet those obligations in the coming years. And if the Treasury doesn’t have the money to pay back Social Security when Social Security needs that money—and we can safely forecast that it won’t—it just means the Treasury will have to borrow that much more.

The Federal Reserve also holds significant amounts of Treasury debt. In fact, as we saw in Chapter 1, the way the Federal Reserve creates money is by buying up debt from the Treasury; when it buys debt, it essentially exchanges money it conjures (out of thin air!) for government bonds.⁴ Neat trick, huh? Most of us dream of being able to create unlimited amounts of money, but unless you want to be incarcerated for fraud or counterfeiting, we suggest that you leave that trick to the Fed.

As of December 31, 2008, about 29 percent of that debt was held by foreigners, both investors and foreign central banks.⁵ The breakdown of foreign ownership of U.S. debt is shown in Figure 3-1.

CHAPTER 4

Employment

March 8, 2002¹

We all need to eat. Unfortunately, food doesn’t grow on trees or come out of the ground. It appears magically in markets, restaurants, and movie theaters where you need money if you want to buy it. Money is also used to pay for many more things we need to live, like housing, clothes, and most important, cable television. Ergo, we all need money.

For most of us, making money means having a job or a business. This chapter looks at issues relating to jobs over the past few decades, such as how easy they were to come by and how much they paid. We also look at the degree to which jobs provided an important benefit easily worth its weight in cash—health insurance.

Do People Have Jobs? A Look at the Employment-to-Population Ratio

Being unemployed is, like many maladies, contagious. People who lose their jobs are beset with money worries. Because of those worries, they cut back on spending. If a bunch of people lose their jobs, especially if they live in the same area or buy from the same merchants, the effect can cascade throughout the economy. If a lumber mill closes down, the employees of that lumber mill aren’t the only ones to get hurt. The restaurants, stores, and services that cater to the former employees of the lumber mill also lose money and shed jobs.

And when a lot of people lose their jobs (or are afraid they might lose their jobs), the effects spread widely. Businesses lose business. They too can start to lay off workers and the process feeds on itself. As a result, investors, economists, elected officials, and planners all pay a lot of attention every month when the Bureau of Labor Statistics releases the new unemployment rate figures.

But the way the unemployment rate is computed has a very serious flaw. It purports to show the percentage of Americans of working age who would like a job but cannot find one. (Running one’s own business, by the way, is considered a job by the numbers crunchers at the Bureau of Labor Statistics.) However, what it really shows is the percentage of Americans of working age who want a job but have not given up looking for one.

See, unemployment figures do not count so-called “discouraged workers.” Discouraged workers are people who want jobs but have stopped searching for them. Truth be told, some discouraged workers may be discouraged because they are unemployable. However, when economic conditions are tough and jobs are scarce, the number of people competing for a small pool of jobs can make it hard for even the very talented to find work. And when that happens, the number of discouraged workers can rise as people throw in the towel. And because discouraged workers are not counted in the unemployment rolls, as it gets harder to find a job, the unemployment rate can actually fall for a while. Nope, we’re not kidding.

So a better measure of the job market’s shape, that is, whether economic conditions allow people to find jobs or start businesses, is the employment-to-population ratio. It measures the percentage of noninstitutionalized civilians (i.e., folks who aren’t in jail, in the military, or in nursing homes) sixteen years old and over who have jobs or businesses.²

The employment-to-population ratio figures, going back to 1948, the first year for which the data is available on the Bureau of Labor Statistics (BLS) Web site,³ appear in graphic form in Figure 4-1.

Figure 4-1 shows that the employment-to-population ratio in the 1950s was in the neighborhood of 56 percent but it slowly rose in the 1980s; since then it has remained above 60 percent. A big part of this increase involves the changing role of women, who, perhaps to the surprise of 1950s-era patriarchs, are generally able to loaf at the office or goldbrick as well as any man.

Additionally, people live longer, healthier lives these days; it isn’t uncommon to see people over sixty-five keeping their jobs or even getting new ones. Another factor that affects people’s decisions about whether to get a job—and their ability to do so—is the economy. In bleak times, finding a job becomes harder. On the other hand, if jobs are plentiful and pay well, an otherwise-stay-at-home mom (or dad, in this liberated, twenty-first-century America) or retiree might find it advantageous to get a job.

CHAPTER 5

Income and Wealth

Remarks to Small Investors in Alexandria, Virginia, February 12, 2003¹

We Americans love television. On average, Americans age fifteen and over watch about 2.62 hours of TV a day.² That’s more than 18 hours a week, and about 956 glorious hours per year. And while that television is on, it rewards us with all manner of wondrous things: poorly drawn cartoons, badly written sitcoms, and inane chatter about second-rate celebrities. But it also gives us news shows, some of which purportedly make an effort to tell us about, among other things, the economy.

CHAPTER 6

Republican Issues

Remarks in New York City at a Reception for Delegates to the State Republican Convention, June 17, 1982

Some issues matter to everyone. We all want the economy to grow. We want more jobs and rising incomes. And we prefer a smaller national debt to a larger one.

But on some important issues there is disagreement and that disagreement can define your political identity. There are some issues that don’t necessarily matter to Democrats or Independents, but matter to just about all Republicans. What’s more, Republicans tend to find themselves in near-unanimous agreement on these issues.

INTERLUDE

On Taxes

Address Before a Joint Session of the Congress Reporting on the State of the Union, January 26, 1982¹

At the risk of oversimplification, the Republican view of government is that it’s too big, too intrusive, and too inefficient. Worse, government funds itself by taking people’s hard-earned money—money that its rightful owners would have used more productively. And taxes also harm the economy, discouraging people from working; after all, why put in the work needed to make an extra dollar (or million, for that matter) if the government is going to tax it away?

Nevertheless, most Republicans will admit that the government is more than a simple pie-eating mooch. Many of the things the government does—from building roads to enforcing patents—are necessary for the economy to be efficient and to grow. And all these things have to be paid for, which means that all these things require some form of revenue. And the government’s revenue—the revenue that pays for all this good stuff and a whole lot more—has a name: taxes.²

That means that cutting taxes could shortchange these essential services, and if it does it will make us all poorer. So under ideal circumstances the government will straddle the line, staying small enough to be (relatively) nimble and efficient but large enough to provide the level of services we need for the economy to grow; put another way, taxes shouldn’t be so high that they strangle economic growth and hurt our living standards, nor should they be so low that we don’t get the services we need for growth.

In this interlude chapter, we’re going to examine whether lower tax burdens (or cuts in the tax burden) have been associated with improvements in the economy.

Taxes—In Practice

As we saw in Chapter 6, though marginal tax rates can remain unchanged for a long time, the tax burden—the share of their income Americans actually pay in taxes—moves up or down every year. Similarly, the growth rate in real GDP per capita is constantly changing. If lower taxes are better for growth, we should generally expect to see faster growth in real GDP per capita when the tax burden is lower and slower increases in real GDP per capita when the tax burden is higher.

So let’s see if that’s true, shall we? Figure I-1 below shows the tax burden and the one-year change in real GDP per capita for every year from 1953 to 2008.³

CHAPTER 7

Democratic Issues

CHAPTER 8

Health Care

Its strength can be no greater than the
health and vitality of its population. Preventable
sickness, disability, and physical or
mental incapacity are matters of both
individual and national concern.

JOHN F. KENNEDY
Special Message to the Congress on National Health Needs, February 27, 1962¹

No matter how you slice it, the United States spends more on health care than any other country. In fact, in 2005, at prevailing exchange rates, 45 percent of all expenditures on health care anywhere in the world took place in the United States. On a Purchasing Power Parity (PPP) basis (i.e., adjusting for differences in the cost of living across countries), that figure dropped to 24 percent of the world’s spending,² but it was still pretty impressive. And still more spending than anyone else.

And that’s not just because we’re big relative to other wealthy countries or rich relative to other big countries. Even on a per capita basis, we’re still spending more than everyone else. For instance, among members of the Organization of Economic Cooperation and Development (OECD)—a group of democracies that includes the world’s wealthy industrialized countries³—we spend almost 50 percent per person more than second-place Norway on a PPP basis.⁴

That might be acceptable if we were getting our money’s worth. But we’re not. Despite paying more, Americans as a group tend to do worse than people in most wealthy countries. For example, life expectancy (both at birth and at more advanced ages) in the United States is below that of most developed countries, and infant mortality rates—the ratio of children who die at less than a year of age—are higher.⁵