Tag: gdp

Latvia, the Country Prof. Krugman Loves to Hate, Wins 1st Prize

I constructed a misery index and ranked 89 countries from most to least miserable based on the available data from the Economist Intelligence Unit. My methodology is a simple sum of inflation, bank lending and unemployment rates, minus year-on-year per capita GDP growth. The table below is a sub-ranking of all former Soviet Union (FSU) states contained in my misery index.

For these FSU states, the main contributing factors to misery are high levels of unemployment and high interest rates.

The low misery index scores in Estonia and Lithuania don’t surprise me as I helped both countries establish sound money with the installation of currency boards in 1992 and 1994, respectively. Latvia, a country Paul Krugman loves to hate, takes the prize for the least miserable of the former Soviet Union countries in this sub-ranking.

Iran, Stable but Miserable

Since Hassan Rouhani assumed the presidency of the Islamic Republic of Iran in August of last year, the economic outlook for Iran has improved. When Rouhani took office, he promised three things: to curb the inflation which had become rampant under Mahmoud Ahmadinejad, to stabilize Iran’s currency (the Rial), and to start talks to potentially end the sanctions which have battered Iran since 2010. Rouhani has delivered on each of these promises. From this, one might assume that the Iranian economy, and the Iranian people, are headed towards better times.

Unfortunately, the Misery Index paints a different picture. The Misery Index is the sum of the inflation, interest, and unemployment rates, minus the annual percentage change in per capita GDP. It provides a clear picture of the economic conditions facing Iranians.

France to Ban School Homework

Let’s say that you are a newly-elected French president and you have a lot on your plate. The unemployment rate is 10.2 percent and youth unemployment hovers around 23 percent. The budget deficit is 4.5 percent of the GDP and the explicit national debt 90 percent of the GDP. Your economy is at a standstill and your currency is on the verge of collapse. Many of your most productive people wonder if they should pack up and leave, because you have just asked them to fork over 75 percent of their earnings to the taxman. Your popularity is shrinking faster than you can say sacre bleu! So, what do you do?

Easy. You switch the subject and start talking about something completely different …  even if it is, well, a little crazy.

Thus, “French President François Hollande has said he will end homework as part of a series of reforms to overhaul the country’s education system. He doesn’t think it is fair that some kids get help from their parents at home while children who come from disadvantaged families don’t.”

Better that all children suffer, so long as they suffer equally. Equality of misery—that pretty much sums up socialist mentality everywhere.

More Skepticism on Romney’s Military Spending Promise

On Sunday, Defense News published a good article by Kate Brannen that looks into Mitt Romney’s plans for military spending. This is not the first examination of Romney’s lofty campaign promise to spend at least four percent of GDP on the Pentagon’s base budget. Since October 2011, when I first crunched the numbers on his plan, others have followed with their own estimates.

In my first analysis, his plan totaled $2.046 trillion above projected defense budgets based on CBO totals from FY 2012 to FY 2021. That total does not include war costs, nor does it take into account the possibility of military action toward Iran, which Romney has made clear is on the table, with or without Congressional approval. My number one question at the time—beyond the fact that GDP is not the proper guide for military spending—was: Where is this money going to come from?

In April, I recalculated Romney’s gimmick, adjusting my numbers with the help of my colleague Charles Zakaib, based on the Obama administration’s latest 10-year projections. We presented the data in the graph below:

The conclusion: Romney’s four percent gimmick would now necessitate $2.58 trillion in additional military spending above the new baseline. I tried to put this in context:

Romney’s Four Percent Gimmick would result in taxpayers spending more than twice as much on the Pentagon as in 2000 (111 percent higher, to be precise), and 45 percent more than in 1985, the height of the Reagan buildup. Over the next ten years, Romney’s annual spending (in constant dollars) for the Pentagon would average 64 percent higher than annual post-Cold War budgets (1990-2012), and 42 percent more than the average during the Reagan era (1981-1989).

Does Romney genuinely believe we have enemies that approach the Soviet Union’s might, let alone ones that are 42 percent more threatening? We would be wise to question his judgment if so.

Back in the realm of the reality, further cuts to military spending are fast approaching as sequestration looms. The debate in Washington is now largely focused on how much to cut from the defense budget and in what manner. This is consistent with what the majority of Americans favor and has sidelined those arguing for ever-greater military spending. And yet Mitt Romney remains committed to his Four Percent idea. In this instance, Romney should embrace his supposed conservatism and leave the spendthrift gimmicks to the opposition.

Much more in the podcast below:

Updated Cato Budget Plan

Over at Downsizing the Federal Government, Chris Edwards has released an updated version of his “Plan to Cut Spending and Balance the Federal Budget.” The plan proposes spending cuts of more than $1 trillion annually by 2021, which would balance the budget without resorting to damaging tax increases. Federal spending would be reduced to 18 percent of gross domestic product by 2021 under the plan, which compares to President Obama’s projected spending that year of 24.2 percent of GDP.

Some key points:

  • No sacred cows are spared. Defense, domestic, and so-called entitlement programs are all cut.
  • The plan recognizes that the scope of federal activities must be curtailed. It would begin the reversal of decades of federal expansion into hundreds of areas that should be left to state and local governments, businesses, charities, and individuals.
  • Instead of viewing federal spending cuts as a necessary evil, the plan recognizes that the cuts would shift resources from often mismanaged and damaging government programs to the more productive private sector, thus increasing overall GDP.
  • The plan doesn’t achieve budget balance by increasing taxes. Under current tax policy, federal revenues as a share of GDP will gradually return to levels considered normal in recent decades. It is federal spending that has reached abnormally high levels. It must be reduced in order to get the government’s spiraling debt under control.

New Era of Big Government

The George W. Bush administration ushered in a new era of big government. The Obama administration has built on Bush’s profligacy, and the president’s new fiscal 2012 budget proposal would further cement the trend.

Spending as a percentage of GDP has increased dramatically since the surplus years of the late 1990s. As the chart shows, the president’s budget once again seeks a permanently high level of federal spending as a share of the economy:

While the numbers drop from their stimulus- and recession-induced highs, it is not because the president has suddenly decided that he desires a less active government. Rather, optimistic economic assumptions largely account for the slight retrenchment.

Tax increases and optimistic economic assumptions explain the projected rise in revenue as a share of the economy. While the president would like us to believe he’s found religion on spending cuts, he’s actually relying on a rosy economic forecast and sucking more money out of the private sector to reduce annual deficits.

Taking more money from the productive private economy to maintain destructively high levels of federal spending is not a recipe for economic growth. Therefore, this budget proposal is as dangerous as it is disingenuous. Fortunately, it’s also dead on arrival in the Republican-controlled House.

Which Nation Will Be the Next European Debt Domino…or Will It Be the United States?

Thanks to decades of reckless spending by European welfare states, the newspapers are filled with headlines about debt, default, contagion, and bankruptcy.

We know that Greece and Ireland already have received direct bailouts, and other European welfare states are getting indirect bailouts from the European Central Bank, which is vying with the Federal Reserve in a contest to see which central bank can win the “Most Likely to Appease the Political Class” Award.

But which nation will be the next domino to fall? Who will get the next direct bailout?

Some people think total government debt is the key variable, and there’s been a lot of talk that debt levels of 90 percent of GDP represent some sort of fiscal Maginot Line. Once nations get above that level, there’s a risk of some sort of crisis.

But that’s not necessarily a good rule of thumb. This chart, based on 2010 data from the Economist Intelligence Unit (which can be viewed with a very user-friendly map), shows that Japan’s debt is nearly 200 percent of GDP, yet Japanese debt is considered very safe, based on the market for credit default swaps, which measures the cost of insuring debt. Indeed, only U.S. debt is seen as a better bet.

Interest payments on debt may be a better gauge of a nation’s fiscal health. The next chart shows the same countries (2011 data), and the two nations with the highest interest costs, Greece and Ireland, already have been bailed out. Interestingly, Japan is in the best shape, even though it has the biggest debt. This shows why interest rates are very important. If investors think a nation is safe, they don’t require high interest rates to compensate them for the risk of default (fears of future inflation also can play a role, since investors don’t like getting repaid with devalued currency).

Based on this second chart, it appears that Italy, Portugal, and Belgium are the next dominos to topple. Portugal may be the best bet (no pun intended) based on credit default swap rates, and that certainly is consistent with the current speculation about an official bailout.

Spain is the wild card in this analysis. It has the second-lowest level of both debt and interest payments as shares of GDP, but the CDS market shows that Spanish government debt is a greater risk than bonds from either Italy or Belgium.

By the way, the CDS market shows that lending money to Illinois and California is also riskier than lending to either Italy or Belgium.

The moral of the story is that there is no magic point where deficit spending leads to a fiscal crisis, but we do know that it is a bad idea for governments to engage in reckless spending over a long period of time. That’s a recipe for stifling taxes and large deficits. And when investors see the resulting combination of sluggish growth and rising debt, eventually they will run out of patience.

The Bush-Obama policy of big government has moved America in the wrong direction. But if the data above is any indication, America probably has some breathing room. What happens on the budget this year may be an indication of whether we use that time wisely.

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