Washington’s Folly

I have to be careful!  I find myself shaking my head so frequently at what is transpiring in Washington DC, that I might suffer permanent nerve damage.  It is scary how uninformed our politicians are regarding economics, and specifically the role of federal deficits in generating economic activity.

There are four primary sources of profits at the macro level of the US economy including, consumption (consumer spending), corporate investment (plant, equipment and inventory), net exports (exports minus imports) and net government spending (deficit spending minus tax receipts).  Since the great recession, it has really only been the federal spending that has kept corporate profits at all-time highs (averaging > 10% of GDP).  The consumer and corporations have kept spending and investment below normal historical levels, and our net exports are nearly -$500 billion. If it weren’t for the fact that the US fiscal deficit was as great as it has been, the economic recovery would have been far more muted, especially in 2010 and 2011.

Remember, the Federal deficit = private savings! Cut back too much on the federal deficit spending without a commensurate pick up in investment and consumption, and we could teeter on the brink of another recession.  With employment remaining weak, we need corporations to pick up the slack.  We may also benefit by becoming a bigger energy exporter, reducing the negative consequence of being a net importer nation, but that might take years.  Until then, we need Washington to stop focusing on the debt ceiling and expend their energy on creating an economic environment that creates jobs and stimulates demand for goods and services.

Youth unemployment’s second derivative effect

Much has been written about the growing unemployment crisis for those under 30 in the US, with <50% of that cohort working a full-time job, but there is a secondary effect that hasn’t gotten much notice.  With the demise of defined benefit plans as the primary source of retirement income, defined contribution plans are rapidly becoming the only retirement game in town.  However, for DC plans to be effective, employees need to fund as much as they can, as early as they can, in order to build a nest egg that will accumulate the necessary assets for a 20-25 year retirement.  With the younger workers not entering the workforce until they are in their late 20s, they are missing out on several years of contributions and compounding.  Unfortunately, managing a DC plan has proven difficult enough for most of us.  We certainly don’t need further impediments exacerbating an already tough situation.