Okun’s Law and Sequestration

This isn’t rocket science.  For anyone wondering why Austerity doesn’t produce Prosperity, the answer lies in this simple formula.  We measure our economic growth in terms of the gross domestic product, the GDP.

Investopedia explains:

“GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country’s standard of living. Critics of using GDP as an economic measure say the statistic does not take into account the underground economy – transactions that, for whatever reason, are not reported to the government. Others say that GDP is not intended to gauge material well-being, but serves as a measure of a nation’s productivity, which is unrelated.”

In short, we can critique the use of the GDP as a measure of our economic well being for not including bartered transactions, or private sales in which sales taxes aren’t applied, or we can note that the notions of productivity and economic health aren’t necessarily related.  However,  what we can’t do is dismiss the utility of the formula, nor can we argue it isn’t one of the most commonly used (and understood) metrics applied as an economic description.

So, why is this formula plastered on this blog for the umpteenth time?  Because when Uncle Fester brashly opines that “We’ve got to cut government spending and get the economy back on track,” he’s offering up a classic demonstration of his ignorance about how we measure our economic situation.

Consumers buy things.  That’s the C in the formula. Companies and corporations buy things.  That’s the I in the formula.  Governments buy things. That’s the G in the formula.  We sell things to other countries, and we buy things from other countries. Those are the X and the M in the formula.  The greater the DEMAND for goods and services (aggregate demand in some explanations) the more wealth is generated.

Now let’s bring this down to Uncle Fester’s level by considering the life of the lowly paper clip.  Consumers buy paper clips, which are mostly used to hold sheets of paper together, or may find themselves altered to perform other tasks like being poked in the little hole in the electronic gadget to “reset” the thing, or to hang Christmas ornaments, or whatever a person might think to do with a piece of bent wire.  Businesses buy paper clips.  And, yes, various levels of government purchase paper clips.  In fact, there are about 11 billion paper clips sold in the U.S. every year.  [WSJ]

Now, imagine the impact of taking one part of the formula out of the whole.  What if government cut backs caused agencies to scale back on the purchase of office supplies?  This is the point at which the artificial demarcation between enterprise and government breaks down.  If the government manufactured it’s own paper clips there would be no need to put the G in the formula, but it doesn’t.  The federal government, like the consumers and the companies, gets its paper clips from one of two domestic producers of bent wire clips. [WSJ]

Here comes the obvious.  When the government scales back purchase orders for office supplies (like our lowly paper clip) that represents a decline in demand.  And, guess what! The formula for Aggregate Demand is exactly like the formula for the GDP.  [Investopedia]

“The total amount of goods and services demanded in the economy at a given overall price level and in a given time period. It is represented by the aggregate-demand curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally there is a negative relationship between aggregate demand and the price level. Also known as “total spending”.  [Investopedia]

To see an example of the classic aggregate demand (AD) curve click here.   The FRED graph for our GDP to date looks like this:

The gray area shown on the chart is the recent Recession.  The blue line graphs the trajectory of our GDP to date, and the thinner red line is more technical. It’s the “Nominal potential gross domestic product,” [CBO 2001 pdf]  which assumes that the line would show what happens if everyone who wanted a job had one, and all resources were being used efficiently.  [See also: KCFED, pdf] Frankly, this one is a bit technical for Uncle Fester, so let’s keep it simple.

If the demand for paper clips is reduced, when consumers, businesses, and governments stop purchasing, the micro-graph for the subcategory of office supplies and the sub-classification of paper clips,  would mirror the overall aggregate demand.  And, the bottom line?  That which reduces the aggregate demand also reduces the GDP.

This simple, but basic, proposition from classical economics is precisely why austerity measures never produce prosperity — which we measure by using the gross domestic product.

If we can hold Uncle Fester’s attention this long, perhaps we can introduce Okun’s Law.   Okun’s Law observes that for every 1% decline in unemployment there’s a 3% increase in the GDP.  There are some issues with the “law” the first of which is that it’s not really a law, but an observable component of the United States’ economy; and, it’s a bit funky when we add in some other variables like productivity.   That said, for all its imperfections, when we reduce unemployment in the United States the GDP moves up.   This isn’t just common sense — it’s an observable and quantifiable fact.

Now we get to the meaty part.  If Uncle Fester is adamant about reducing federal spending because it’s a drag on the U.S. economy, then we can respond by saying if we lose 700,000 jobs as a result of the sequestration austerity measures, then according to Okun’s Law we will see a reduction in the U.S. gross national product.

A reduction in federal purchasing means a reduction in demand for goods and services.  Each decrease in demand means layoffs or reduction in production or offering of services and in turn means a reduction in the gross national product.   This is probably the point at which Uncle Fester will want to change the subject to something like “wasteful government spending.”

This recitation doesn’t assume that all government spending is productive.  The Pentagon has already said it doesn’t want some items Congress is enthusiastic about procuring.

“In February, the Pentagon released a budget that began the process to cut at least $487 billion in defense spending over the next 10 years. This included terminating the Global Hawk, which the military estimated would save $2.5 billion over five years; the C-27J, at a savings of $400 million; M1 Abrams updates, saving hundreds of millions of dollars; and cutting roughly 5,000 positions from the Air National Guard and reducing that agency’s budget about $300 million.”  [Military.com]

Since the cutbacks in these examples would come from Ohio, it’s predictable that Ohio representatives in Congress would revert to Okun’s Law and decry the loss of jobs in their districts.

“The budget is expected to be finalized after the November election, though the struggle over continued funding could extend long beyond that. Grant Neeley, professor of political science at University of Dayton, called this a “collective action problem.”

“(Legislators) need to cut the budget but (won’t) take those jobs in our state. Especially in an election year in a battleground state,” he said. “They’re going to provide rationale, but at the end of the day, it’s about protecting jobs in their district. If they have the choice between making a cut in their district and making a cut somewhere else, which one do you think they’re going to choose?” [Military.com]

What we can’t do is proclaim austerity begets prosperity calling for wider and deeper cuts in government spending — which turns the aggregate demand, the GDP measurements, and Okun’s Law upside down — while at the same time demanding that jobs not be cut from corporations and businesses within Congressional districts because of what will happen to aggregate demand and the local GDP and assuming Okun’s Law is still applicable.

Let’s guess that this is the point at which Uncle Fester pontificates that 25% of our federal budget goes to foreign aid.  In the fact based universe this isn’t the case: “Since the 1970s, aid spending has hovered around 1 percent of the federal budget. International assistance programs were close to 5 percent of the budget under Lyndon B. Johnson during the war in Vietnam, but have dropped since.“  [WaPo] OK, it’s not foreign aid, then it has to be “welfare.”

The total spending for Temporary Assistance to Needy Families program uses up a grand total of o.7% of our entire federal budget. [Klein]  “But, but, but,” squeals Uncle Fester, “There are more Takers than Makers…” whatever that means.  What it doesn’t mean is that there is an upward trend in the number of people participating in the TANF program.

Nor does it mean there’s an upward trend in Food Stamp program participation and costs.  (SNAP)

In our factually based universe, all federal programs for those in poverty comprise about 7% of the total federal budget. [MJ]  Yes, this is where Uncle Fester breaks in with the anecdote that he saw someone at the Food Bank who was driving a newer pickup than his.

However, all the mis-information, mis-conceptions, and anecdotal observations don’t repeal the basic rules of capitalism, and its basic understanding of Supply and Demand.  Nor, do they discredit the veracity of Okun’s Law.

We do need to reduce unnecessary spending, and we do need to increase revenue by closing loopholes which only serve to place more of the taxation burden on the middle class for the benefit of the top 0.1%.  What we do not need to do is torture the rules of American capitalism into a contortion which renders them risible and unrecognizable.  Okun’s Law is still functional, and as we see from the unfortunate examples in the Eurozone, austerity doth not begat prosperity.

Odds, Ends, Pleas, and Thank You

Pleas: It’s time to blatantly plead for nominations for Desert Beacon as a part of the Washington Post’s Blog list.   If you enjoy this blog, and would like to continue to find it on the WP’s list of state blogs — please consider clicking the link and saying a few kind words!  T’would be much appreciated.

Thank You: For your patience, somewhere between the Crud, a few civic duties, and more Crud, the Blog’s been given short shrift.  Life is now getting back to some semblance of normal and the schedule will be much more regular. I hope.

Odds:   Here we go again — the old Causality Claims — this time it’s the continual lament that people on welfare (that would probably be TANF) are using drugs and the Law Abiding Righteous Taxpayers should not be paying out for those rascals who spend the welfare money on drugs.   Nevada State Employee Focus notes state senator James Settlemeyer’s bill on the subject.  The problem is that while it can be demonstrated that a small percentage of the low income population does indulge in contraband substances; the research also demonstrates that a small percentage of the Law Abiding Righteous Taxpayers  are also engaging in the same forms of recreation.   Thus, it’s really hard to make the claim that being “on welfare” allows the indigent to engage in “recreation” at a rate higher than the general population.  Oh, and there’s another problem — the idea isn’t working in Florida:

“The utter absurdity of this law is magnified when you realize how much it cost the state of Florida to run this program. The data released today shows that Florida spent $118,140 reimbursing the overwhelming number of Florida TANF applicants — 3,938 to be exact — who tested negative for drugs. That is far more than any money saved by the program, at a net cost to the State of over $45,000. And that’s only part of the cost to the state to run this program. There are also the administrative costs, staff costs, and, of course, the litigation costs. Furthermore, the testing program didn’t deter individuals from applying for help — an internal document about TANF caseloads revealed that, at least from July through September, the policy did not lead to fewer cases.”

It is also hard to argue in favor of drug testing the welfare recipients as a way to curtail government spending, and then spend more government dollars implementing a program than the net benefit.  If we apply the cost benefit analysis so popular in some conservative quarters — the costs in this instance outweigh the benefits.   Bottom line?  If one is looking for ways to improve the state’s bottom line — this isn’t it.

NSEF is also on to another element generally not pointed out by the Law Abiding Righteous — illegal drugs aren’t the most common addictions in the United States, that dubious honor goes to (1) alcohol and (2) tobacco/nicotine.  And, while we’re about it — What if I asked, as a Law Abiding Righteous Taxpayer, that no law shall be enacted the vote upon which was taken while any member of the Assembled Wisdom was under the influence of a lovely Cabernet or Chenin Blanc from the cellars or stores of any public relations, government relations, or other Good Old Boy purveyor network?

Ends:  For all the blather about the nomination of former Senator Hagel to be confirmed as Secretary of Defense, or of John Brennan to secure the CIA Directorship — there’s an official whose term needs to end — Ed DeMarco, currently running the FHFA.

“DeMarco says his emphasis on protecting investors in mortgage-backed securities has been mischaracterized as sympathy for corporate interests when it’s really concern for ordinary Americans.

“Mortgage-backed securities are critical elements in the investments of our retired citizens that have bond portfolios and are relying on that as a source of income,” he said. “We’re thinking, ‘This isn’t some huge hedge fund that’s at risk here. This is citizens across the country.’ ” [WaPo]

OK, let’s ask: How many retired citizens have bond portfolios? Have bond portfolios which are a significant source of their retirement income?  54% of Americans estimate that Social Security will be a major source of their retirement income.  34% believe it will be their primary source.  22% of Americans are counting on their savings accounts with their local bank as a major source of retirement income.  About 9% believe that annuities and insurance will comprise a major part of retirement income.  45% are counting on Retirement Accounts like 401(k)’s.  23% are counting on Retirement Pension Plans; and 20% were counting heavily on stock portfolios and mutual funds. [Mainstreet] [See also: ICI pdf 2008]   Mr. DeMarco’s concern gives every appearance of being lashed to the interests of a very small, and recently declining, number of retirees who are not relying on Social Security, Individual Retirement plans, Pension Plans, or personal savings for their retirement income.   The rest of us would be better off if concern for struggling homeowners were higher on the FHFA’s priorities.

Amodei, Heck: Fire, Ready, Aim on TANF Waivers

Don’t look now, but Nevada Representatives Amodei (R-NV2) and Heck (R-NV3) just voted to usurp the power of governors in our 50 states to implement ‘welfare to work’ programs designed to  increase the number of persons finding employment who are now receiving public assistance.  [vote 589]  Voting against new programs to move more people from welfare to work doesn’t sound like a traditional GOP position — However, that’s what happens when guns are jumped and propaganda replaces position papers.

Here’s what the House Republicans passed:

HJRes 118  Providing for congressional disapproval of the rule submitted by the Office of Family Assistance of the Administration for Children and Families of the Department of HHS relating to waiver and expenditure authority under the Social Security Act with respect to the Temporary Assistance for Needy Families program…

Here’s what the Department of Health and Human Services actually said:

“HHS is encouraging states to consider new, more effective ways to meet the goals of TANF, particularly helping parents successfully prepare for, find, and retain employment.  Therefore, HHS is issuing this information memorandum to notify states of the Secretary’s willingness to exercise her waiver authority under section 1115 of the Social Security Act to allow states to test alternative and innovative strategies, policies, and procedures that are designed to improve employment outcomes for needy families.“  (emphasis added)

Note: The states only get the waiver on the work rules IF their new policies Improve Employment Outcomes — translation — IF more people are moved form the welfare rolls to the employment rosters.

Who requested the waivers?  Nevada and Utah, both with Republican Governors.

“Nevada is very interested in working with your staff to explore program waivers that have the potential to encourage more cooperative relationships among the state agencies engaged in economic stimulus through job creation, employment skill attainment and gainful employment activities. Nevada is also interested in exploring performance measures that ensure program accountability and also increase the probability of families becoming self-sufficient by providing meaningful data as to the services or combination of services with the best outcomes. [Nevada Department of Health and Human Services, 8/2/11, via The Huffington Post]” (emphasis added)

So, congratulations Representatives Amodei and Heck, you’ve both voted in favor of less program accountability, and against innovations that might increase the probability families in Nevada currently receiving public assistance could become self sufficient.

An unsolicited suggestion — next time turn off the cable TV broadcast and read the relevant statutes  before voting?  Just Sayin’

Ripping the Safety Net: The Conservative Welfare Mythology

One of the cherished myths of conservative ideology is the comfortable welfare recipient cashing in checks which amount to “more” than a poorly paid job. This isn’t the real picture in Nevada.  Or, anywhere else for that matter.  Consider the following chart for a moment:

Life gets a little more complicated when eligibility or need calculations are added.

Liquid and non-liquid resources are evaluated to determine whether or not they are countable. Countable resources cannot exceed $2,000 per TANF household. When resources exceed this limit the case is ineligible.

“Types of countable resources are cash on hand, stocks, bonds, mortgages, deeds of trust, bank accounts, real property, etc. There are certain types or resource amounts which are not counted when determining eligibility such as:

• One automobile.
• The home, including any contiguous land, which is the usual residence of the assistance unit that the household owns or is buying.
• One burial plot for each member of the household.
• Burial funds up to $1,500 equity value for each household member
• Household goods and personal items.”

Let’s go back to the “countable resources” for a moment.  In the FAQ section the Nevada Department of Welfare describes some assets that count against eligibility or need:

“However, these are some of the items counted as assets: checking and savings accounts, Individual Retirement Accounts (IRAs), certificates of deposit, stocks and bonds. Recreational vehicles and property other than that listed above.”

Here’s the Catch 22.  One vehicle, probably needed to get to work, doesn’t count against the recipients, nor do the clothes on their backs, or the furniture and appliances, or the burial funds and plots.  Or the house with the roof over their heads.  BUT keeping these items is another matter.  While conservatives bemoan the lack of “savings” evidenced by the poorest among us, the rules of the game are rigged so that if a person does manage to put some money away for retirement, educating children, paying for medical services (like a Health Savings Account) — THEN those are countable assets which diminish the support for the family because Heaven forefend! They’d be Welfare Queens.  In short, damned if they do and damned if they don’t.

Gee, if “those people” would “just save” then they wouldn’t need public assistance, but if they are eligible for public assistance and DO save they are penalized. If, of course, they don’t save then they can get the help they need to keep the family afloat for the month.

Quite recently a Republican candidate for the presidency of the United States said he wasn’t worried about the very poor because they have a “social safety net.”  This would be former Governor Romney’s classic: “We have a safety net there. If it needs a repair, I’ll fix it,” Romney said. “We have food stamps, we have Medicaid, we have housing vouchers, we have programs to help the poor.” [HuffPo]

Yes, as we’ve seen we do have TANF. We have nutrition assistance programs.  What used to be called food stamps is now the SNAP program.  The chart for SNAP benefits looks like this:

Getting out the calculator and punching in the numbers yields an average SNAP benefit of about $4.40 per day in FY 2011. [CBPP]  The latest reports compiled by the Bureau of Labor Statistics [pdf Table 723] show food prices for FY 2010, and demonstrate rather quickly that the $4.40 isn’t going too far too fast.  Apples? $1.20 per pound. Oranges? $1.02 per pound, up from $0.62 in 2000.  Bread? $1.39/loaf, up from $0.99 in 2000.  Milk? $3.32 per gallon, up from $3.11 the year before.  Meat? Bringing home the bacon isn’t what it used to be. It was $4.06 per pound in FY 2010, up from $3.57 in 2009.

Thus far we have people living in poverty, who are admonished to be thrifty savers — but find their monthly benefits reduced (or eliminated) if they do, being asked to feed family members for $4.40 per day.

“If it needs a repair, I’ll fix it,…”

After trying mightily to get Governor Romney on record supporting the Ryan Plan the Democrats watched as the Romney campaign did it for them last December.  [WashMonthly]

And, what would the Ryan Budget Plan do to SNAP recipients?  Slash approximately $127 billion from the program for the next ten years.  [CBPP]

And more, what would the Republican Budget Plan do to TANF (Temporary Assistance to Needy Families)?  This program has already stagnated, tied as it is to block grants which in turn are linked to out-of-date levels: “basic federal TANF block grant funding has eroded substantially in inflation-adjusted terms over the years available.  The value of the TANF block grant has declined about 30 percent in real value since 1996. “  [CBPP] (emphasis added)  In Nevada, the value of TANF benefits for a single parent with three children declined by 22.7% since 1996.

Rep. Ryan was pleased to call this state of affairs an “unprecedented success.” [MC]  Here’s a picture of what he was speaking to:

Quite simply, it doesn’t do to describe the block grant TANF program as an unqualified success if it is insufficiently funded to meet the current needs of families faced with reduced circumstances, and worse still to contemplate it as the “model” for further reducing federal expenditures for SNAP.

Therefore, convinced as Governor Romney may be that the poor are secure, that ephemeral security means severely limited resources for daily living, indexed to long out of date base numbers (TANF) supposedly supplemented by SNAP funding which requires recipients to limit their expenditures for food to $4.40 per day.

Anyone with a $4.00 plastic calculator and 6th grade arithmetical skills can determine that the Romney/Ryan prescription for the social safety net is more likely to shred the net than secure it.