The Multiplier that Matters

John Phipps takes on Greg Mankiw. Here's a taste:

The esoteric world of economists is reveling in the attention the ideas put forth to revive our languishing economy have generated. I have watched with interest as the normally tepid prose of the profession becomes more heated (OK - warmed) as various proposals are offered.

One powerful argument is represented by Greg Mankiw, who offers (to me at least) persuasive reasons why tax cuts at the top and to businesses will give us the biggest bang for the buck. He has also offered reasoned arguments on the issue of growing inequality over the past few years....

Let me suggest it is far more crucial to our economic health to convince more Americans our system still works for them, not just some. Further, doing more of the same, i.e. cutting top tax rates, does little toward that goal, even if the models suggest it is the best of all possible choices. In contrast, everybody gets to use good roads or new schools.

I get proponents' point about multiplier effects and how tax cuts are the fastest, easiest most powerful way to jump-start the economy. But it looks a like a economic sugar high to me. And recent tax cuts produced an awful lot of ephemeral wealth, it seems. Surely a mixture of the two should not be dismissed out of hand by the economic community.

Academia's estrangement from the real world by virtue of tenure allows it a curious detachment from such ideas that engage non-tenured minds, at least until sufficient historical data accrues to make it worth studying. This myopia seems most pronounced the further up the ladder experts ascend. I have begun to weigh opinions from private sector economists with more respect, since they have much more on the line when they put forth proposals.

Our economy is suffering from a crisis of confidence by a large number of people who don't even know what a multiplier is. Or particularly care. And oddly enough, their opinions matter too. Actions that cause them to view the future with less alarm, or make less dysfunctional econiomic decisions are not to be despised.

Right now everyone, including the rich, is unnerved by the economy. The money being sent to the banks by the Feds is not being lent. Some of it is being blown on bonuses, dividends and acquisitions—but a lot of it is being stuffed in the vaults. Tax cuts without a change in social psychology will just lead to more money being "stuffed into mattresses".

Moreover, as Mr. Phipps points out, infrastructure has tremendous multiplier effects on the future productivity of the economy. America has suffered through years of underinvestment in the public and private sector. We plunged into debt to fund consumption, not investment. Now we have a fairly massive infrastructure deficit along with an enormous financial debt. The ribbons of steel, concrete and fiber that our economy flows across are worn out and overloaded. Rebuilding them will not only put people to work (and in the process inspire confidence) but also lays the groundwork for future growth and prosperity.

Military Budget Crisis looming

The Big Picture: US Military Force Structure

My takeaways:
Massive Defense Budget cuts are coming due to competing Civilian Demands.
Military budgets are already inadequate for stated plans.
The Military is not structured for the missions it is taking on (Iraq, Afghanistan)
"....you can NOT train a force to do both kinetic war and win “Hearts and Minds” the psychological imbalance not only precludes a force from doing both, but when you try, you fail at both."
Procurement is utterly broken.
"....our current direction of recapitalization cannot be sustained in the face of fiscal realities, and it is probably the wrong direction anyway. Give the delays in new programs and the “LULL” that will exist in delivering them, there is about a 5 year gap in the 2013-2018 timeframe when our current readiness will drop below operational levels. Our current inventory was built on non-wartime metrics.
The 5 years of combat we have had has aged equipment 16-20 years and acquisition programs cannot keep pace and they are unfunded at even that level. For example HUMVEES were programmed for 8000 miles per year. The current inventory in the past 5 years has surpassed the 20 year life of the vehicle (i.e. the average is in excess of 150,000 miles). The vehicles replacement is due in 2014, but is expected to slip to 2018."

Opinion:
Either we need to transition to a full war footing or we need to disengage from Iraq and Afghanistan. No matter what we do we are going to be un-breaking the military for years, possibly a decade or more. We need a military that can "kill people and break things" a lot more than we need one for peacekeeping and that should be the basis for allocating resources.

Our one defining victory of the 20th Century was won on the China model. The "arsenal of democracy ' and the Russian war machine produced vast quantities of adequate weapons swamped the small number of fussy wonder weapons the Germans had. Like a bronze age king though we brought the vanquished enemy's fallen idols into our temple and bowed down before them. We became the ones counting on our wonder weapons that we could never afford to produce in quantity. Our resources are much larger than the German state so it took longer for us to hit a wall but we have. Moore's law does not apply to defense. If anything, it seems to be inverted.

The Death of Perspective

Michael Lewis, writing about the financial crisis, offers this bon mot:

OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.

This is the essence of the crises we face politically and economically: the short term has utterly eclipsed the long term in the consciousness of our leaders. We have sold our inheritance for a bowl of Porridge. Whether it is the Congressman handing the bill writing over to the Lobbyist or the Rating Agencies selling AAA ratings to Investment Banks. Credibility earned over decades is being pissed away for short term advantage.

Economically, it is even worse, as Angry Bear guest writer "Edward Charles Ponzi Jr" writes:

In time, our current society will be seen as one that ate all the food in fridge, all the food in the pantry, sent out for pizza, maxed out the credit cards and then burned the furniture while proclaiming that we are really very warm and well-fed. Financial historians in the future will say, "what were they thinking?" about our era.

We are seeing the inevitable conclusion of the World's dumbest pyramid scheme wherein those at the top of the pyramid have sought to destroy those at the bottom. Demand, kept on life support by the pawning of America, has finally collapsed.