Sequestration Frustration and the White Queen’s Economics

Alice WonderlandThe House Republicans continue to manufacture mountains of problems out of mole-hills of economic issues, and they can’t be completely oblivious to the ramifications of their ideologically driven proposals for Nevada.  Here’s a hint:

“In fact, Nellis Air Force base has no new information about how the sequester changes might affect their operations, and is making no different plans to react to sequestration than they were a month ago, according to spokeswoman Jessica Turner. Civilian furloughs begin at the end of April, and from there on, will be equivalent to about a 20 percent pay cut through September.” [LVSun]

That’s five months with 20% pay cuts for civilian workers at Nellis AFB.  Although the article doesn’t give the average pay for a civilian worker at Nellis, we might reasonably assume that it’s comparable to other AFBs around the nation, in which case the average annual pay is about $50,000. [Portales] It’s also public knowledge since November 2011 that there have already been cuts to civilian employment at Nellis and other installations in Nevada:

“Combined, the Southern Nevada bases and range installations account for 10,393 military and 4,366 civilian employees with a payroll of nearly $1.2 billion. In 2010, there were about 6,416 indirect jobs created with an annual dollar value of $257 million. “We’ve had a civilian hiring freeze for some time. Of those 155 being considered, some or all might be cut,” Lustig said Thursday.”  [LVRJ]

If all the positions were cut back in 2011-2012, then we could estimate there are about 4,211 civilian jobs associated with military installations in southern Nevada.   4,211 employees multiplied by the average salary or wages of $50,000 comes out to $210,550,000 annually.  If we shave 20% of the total then we’d calculate a loss of $42,110,000 to the regional economy of southern Nevada.   It’s at this point where the square peg of ideological purity meets the round hole of economic reality.

The White Queen’s Economics

“Alice laughed: “There’s no use trying,” she said; “one can’t believe impossible things.”
“I daresay you haven’t had much practice,” said the Queen. “When I was younger, I always did it for half an hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.”
Alice in Wonderland.

Impossible Thing One:Spending is the Problem.”  We have the Sequester because it is taken as an article of faith in Republican quarters that federal government spending is “out of control.”  Much was made of the fact that the U.S. was borrowing 36¢ on the dollar back in late 2011 , but there wasn’t much  said about the fact that this rate had been DECREASING.  For fiscal 2009 the rate had been 40¢ and 37¢ in FY2010.  [FactCheck]   This brings us to the report from the BEA in February 2013:

“The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment that were partly offset by negative contributions from private inventory investment, federal government spending, exports, and state and local government spending.  Imports, which are a subtraction in the calculation of GDP, decreased.” (emphasis added)

If the amount borrowed per dollar of revenue is declining, and if the sluggish rate of growth indicated by the 4Q GDP report is partially explained by a reduction in federal spending — then how on earth can a sentient person maintain the fantasy that “spending is out of control?”

Impossible Thing Two:   “Every dollar borrowed by government is a dollar that is not being invested in our private sector economy.”  This is an articulation of the Crowd Out Theory — this makes some sense IF and ONLY IF interest rates are HIGH.  Even then it’s a bit sketchy because some government revenues are invested in research, development, business subsidies, commercial ventures,  and the like.   Dare we venture into the real world and look at corporate borrowing costs?  If the Crowd Out Theory is correct, and government borrowing is making corporate borrowing more expensive, then what do we make of the following chart?

Corporate Bond Yields

Moody’s forecast shows top quality corporate bonds paying about 4.01% interest through August 2013.  As of July, 2000 corporations were paying 7.67%  interest. [FRB H15]  Thus much for government borrowing crowding out corporate borrowing.

Impossible Thing Three:   “Government can’t create jobs.”  When pressed about the relationship between teachers, firefighters, police officers, social workers, and “government” the answer from right wing ideologues is often punctuated by stammers — or pontifications about how public employees are Piggies At the Public Trough.  A decision must be made at this juncture: Does government not create jobs, or is it that government creates too many “good” jobs?

Caution must be taken with charts purporting to “prove” government employees are making “too much money” in comparison to the private sector, especially when educational and expertise requirements are taken into consideration.  Additionally, even the AEI is moved to report that workers moving from public to private sector employment are more likely to take a cut in pay.   However, this isn’t the core of the issue.

Government does create jobs, and in the private sector.   “But, but, but,” stammers our hypothetical ideologue, “Those aren’t REAL jobs. Permanent Jobs.”   Ask any construction contractor and the individual will tell you the obvious: No construction job is permanent.  When the highway is finished the job runs out and it’s time to bid for another contract.  Since we have a lovely backlog of clean water, sewage treatment, bridge building, and transportation related projects we’re fobbing off on our descendants, wouldn’t it be a nice “job creating” thing if we paid some of this bill ourselves and at least made a head start on the payments?

Impossible Thing Four:  “The national debt will turn us into an unstable place like Greece.” (Or Spain, or Italy, or Ireland, or Cyprus).   Nonsense.  For one thing we have our own national currency, [Creamer] and secondly, the economic policy process in the Eurozone should remind us all that the authors of the Federalist Papers were absolutely right in arguing we needed a unified national structure (our Constitution) in order to put ourselves on a sound fiscal basis.   If a person might wonder about what happens when a loose confederation attempts to behave like a sovereign nation, it’s advisable to look at Hamilton’s response in Federalist 15.  He was even more blunt in Number 17,  “Commerce, finance, negotiation, and war seem to comprehend all the objects which have charms for minds governed by that passion; and all the powers necessary to those objects ought, in the first instance, to be lodged in the national depository.”

Another factor too often overlooked during periods of hyperbolic hysteria is that the U.S. has something else the Eurozone does not — a federal monetary policy compliments of the Federal Reserve System which can monetize the federal debt, and a process by which we prevent “runs.”

Impossible Thing Five:  “Our national debt is a serious and immediate problem! Just look at all those digits on the debt clock.”   Calm. Down. The debt isn’t an immediate problem (even some members of the House GOP are beginning to back off this canard) what we need to be doing — in a rational universe — is to stabilize the national debt.   Here’s what our debt looks like compared to our Gross National Product:

Debt GDP

In the wake of the Great Recession and wars in Iraq and Afghanistan, we’re now looking at a 67.7 ratio; [Atlantic] but then Germany’s public debt is at 80.6, Canada’s is at 87.4, Italy’s is 120.1. [Atlantic]  The average in the Eurozone is about 82.5.   The trick isn’t to “pay off the national debt” because who would want their long term Treasury notes paid off before collecting all the interest?  The U.S., as noted previously, doesn’t have creditors — it has Investors, and as of right now the 30 year U.S. note is paying a rather measly 3.15% interest rate.  The ten year notes are only paying 1.95%, and the 20 year notes will earn an investor 2.77%.  [TreasuryYieldCurve]  If we aren’t obliged to pay higher interest rates to people who are investing in our national notes, then why should anyone believe that The Debt is a terrifying thing?

Impossible Thing Six:   “Federal Spending hurts our economy.”  Now, we’re back to Nellis AFB in southern Nevada, or to northern Virginia — home to thousands of federal employees, or to Youngstown, Ohio with its TechBelt Initiative.  What happens in places like Las Vegas and surrounds when $42 million is removed from the local economy in a year?  As repeated ad nauseam herein, “government spending” doesn’t fall into a black hole.  Salaries and wages are spent in the local economy, for everything from apples to zoology textbooks.  Those unsure of the importance of federal spending in local economies have only to look at the various renditions of grief on display when the Department of Defense seeks to close a base.  Once more, with great feeling — the formula for both aggregate demand and for the calculation of the GDP assumes government spending at national, state, and local levels.  GDP= C+I+G (for government) + (X-M).

What is truly alarming is the capacity of members of Congress to believe all six of these impossible things before breakfast.

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