Recently I’ve been finding all I’ve learned about economics turned on its head. As someone recently graduated from a university undergraduate program, I am not too far removed from economic abstraction. How economics should work, an ideal if you will.  Real world effects either confirm or confuse what’s been learned in the classroom. One such effect is to see how two accepted economic models react to a recession. On one side, we have the microeconomic model of the firm and it’s pathway to success, and on the other, the macroeconomic model of growth of a domestic economy. I accepted both of these models from lesson one. Now I see how one can work against another.

In a microeconomic model of the firm and its means to real profit, a business reacts a certain way to revenue. They reinvest, and try to grow the business. The business does not discriminate income, whether it is from a productive source, like other businesses and private consumers, or from the non-productive government. A dollar by any name still smells as sweet. A business can pay their people, fund their projects, and produce more products or services. Therefore, a business has every incentive to chase down a dollar, whereever it may lay. It could be with a private company or it can be with government work. A business does not have a social responsibility to discriminate dollars. Those who do so are bound for bankruptcy. A government injection of dollars provokes a stampede toward that money. This is all rational. A business owner wants to stay open tomorrow and the next year. If he can’t find business in the open market, then why not the government?

In a macroeconomic model of an economy and its means to real growth in GDP, the behavior I just explained is counter-productive. A business will eat into social profits by precluding competition. He will get monopoly and he will spend a certain amount to gain and maintain his monopoly. The best way to provoke this kind of behavior is to put massive spending power at the government’s whim. Companies no longer compete based on a good product, decided by an open market. They now compete for the ears of politicians, and lobby for favorable action. They compete for monopoly power. This leads to a degradation in product and an overall higher price for a product. Governments are best served by making laws, enforcing them, and settling disputes. So goes the theory anyway.

So it looks like my economic training has lead me to a fatal flaw between the models. When the macroeconomic model I just explained is run by government money, it inevitably chokes and sputters. But it is completely rational for the single business owner to want the money. But it turns his motivation from the customer to the government. What is good for the individual may not be good for the whole. That is why it is dangerous for the government to spend like it does, and budget like this. The worst part about this economic crisis is that there is no consensus answer. All this spending may be in vain. People are losing personal wealth at an alarming rate. The government cannot substitute for that. The lost efficiency will slow a downfall and slow a recovery. I guess we’ll just have to guess at how bad it is until we’re there, which we won’t know til we’re past it. That’s the breaks.

Just a quick idea on Barack Obama (among the millions). As he says, in no other country is his story possible. I heard one commentator mention that his election is much like an Algerian being elected in France. If you are familiar with the situation in Europe you know this is very unlikely.  Just another thought as we march toward the Inaugaration…

Credit Card Fallout?

If you really want to think about how scary this recession will be, consider this: Everything individuals and families were doing with their credit cards and homes, businesses were doing on a much larger level. Cheap credit pervaded every facet of the economy. From Construction to the Federal Government, expansion was fuelled by credit. Credit through low interest bonds, finance companies, and government debt selling. So how much of this credit-fuelled bubble is going to be around after this is all over? After this heavy recession and possible depression, how many companies will be left?

Every company that borrows to finance its operations will most certainly feel the squeeze. Now that credit markets are drying up and banks are charging punitive rates, credit is not so easy. Many banks have begun screening individuals much more strenously. Chase has raised thousands of people’s interest rates. Credit has now become difficult. For those companies that chose to finance through short-term debt will find that the banks are denying more credit. Using short term credit and debt means that a company cannot finance its operations in-house, through profits. Now the dreaded underbelly is being shown to companies that are not run well(Chrysler) or are obsolete(GM). The future presages doom for these dinosaurs and underperformers. So what would be the effect of such companies falling to the wayside? Would it open up capital and fuel the next craze? Or might it cost so many jobs that there is little to no capital. If people can’t earn money, they cannot buy things or save. Which will it be?

You may say so what? What does reading ability have to do with recovery? As a former soldier in the US Army, I’m not sure how much I could have learned if I couldn’t read. With these two statistics, one can see the uphill battle the United States and NATO will have with restoring peace to Afghanistan.

When the United States invaded Iraq in 2003, we not only allowed looting, but also disbanded the Army. It was apparent that the next few years would be a mess. Everyone watched in horror as Iraq descended into sectarian violence and ethnic cleansing. No doubt most saw Iraq as a failed state, with good reason. Former Iraqi soldiers had joined various causes to lend their military training to an insurgent movement. In addition to many forces, Iraqis’ basic education has helped them recover in a relatively short time. As poor a decision it was to disband the Army, it was infinitely easier to train them once they have been gathered again. When soldiers can read and have a fundamental education, this allows training to be effective much quicker. This is a luxury the Afghan people do not have.

Part of the “Surge” was training a regular army to take up the space insurgent militias were occupying in Iraqi life. Once insurgents stopped attacking Army recruiting lines, the Army grew exponentially. This Army is now far more sophisticated than it was even two years ago. They were able to battle and win against the feared al-Sadr militia. A measure of security is finally beginning to take hold in Iraq. So why won’t this work in Afghanistan?

After a successful NATO campaign in Afghanistan, it appeared things were looking up for the broken state. They had elected a popular head of state, the cities were secured, and attacks waned. As someone who watches the news knows, this situation has been rapidly deteriorating since 2006. It had taken the Taliban about four years to regroup and continue the jihad begun in 2001. This is not dissimilar to how the Iraqi insurgency began. Although it was not nearly as long as in Afghanistan, Iraqi insurgents regrouped after the invasion and attacked with full force. Afghans are now attacking with equal force. Unfortunately, the same strategy that worked so well for the US in Iraq will not have the same effect in Afghanistan.

In addition to the religious and cultural differences between Afghans, there is an extremely high poverty rate and a high illiteracy rate. Indeed, Afghanistan is one of the poorest nations on Earth. With opium production where it is, there is also an ubiquitous drug problem. Training an Army to protect a population this destitute will be an enormous task to undertake. If people cannot read, how do you recruit? You can’t pass out flyers or pamphlets. Building an Army takes that much longer. Without the aid of manuals and written protocol, an Army must be trained with pictures and gestures. If not impossible, it will at least take far longer to train a regular Army than it did in Iraq.

As an NCO in the Army, I was able to train my soldiers relatively quickly because of my soldiers’ basic education (they could read). I used manuals, written tests, and hands-on evaluations to grade and train soldiers. Since most Afghan men are illiterate with little to no education, the task of training them becomes monumental. With the country as spread out as it is, the Army’s task becomes that much harder.

Consider this: 67% of Iraq’s population is in cities. Compare this to 23% in Afghanistan. This statistic alone portends great strife in the future of Afghanistan. When the United States and its allies invaded and took Afghanistan’s major cities in 2002, many Americans believed the war to be over. After the fighting in Tora Bora, it appeared as if the Taliban and Al-Qaeda were routed. In our Western thinking, once the capital city falls, the war is over. This is not so in Afghanistan. We made the same mistake USSR made, the same mistake Alexander the Great made: we took the cities and called it a day. Remember nearly 3/4 of Afghanistan’s population lives in rural areas. The cities in Afghanistan are peripheral at best. Now they too are under attack. It is frightening to realize that an American-style “surge” may not work in Afghanistan. The attacks are occuring in Afghanistan at an alarming rate, and are looking much like those we saw several years ago in Iraq. Iraq was relatively easier to corral because so many people live in the cities. There are not enough troops in NATO to complete a successful surge. The Taliban explode schools after they come up. This will not work as it did in Iraq, and I weep for the future of Afghanistan.

“War is the reciprocal and violent application of force between hostile political entities aimed at bringing about a desired political end-state via armed conflict.” – Wikipedia

What is it about America that sets this country apart? We’ve never warmed to metric systems or soccer. There is a real sense of American Exceptionalism. We are different, we like different things than everyone else. So what it is it? Why are we so different from the rest of the world?

Perhaps it is because we have not had a major national conflict occur in the continental United States since 1865. We have not suffered the destruction of war as Europe and Asia has. The last war in Europe was in 2008. The wars Asia are currently hosting are in Sri Lanka, Pakistan, Afghanistan. These countries can attest to the poorness that war causes. The last armed conflict on American or Canadian or Mexican soil was Pearl Harbor in 1941. The last time an armed conflict has been fought in the Continental United States was the American Civil War which ended in 1865. To be sure, we have been attacked on the fringes in our territories. Technical American soil has seen war since and we were attacked on September 11. But, that was not a state. For all intents and purposes, the US has had 143 years of war-free existence.

War is so bitter, horrible and costly that it stings for years, if not decades afterward. Look at Congo, who are currently fighting a conflict that began 11 years ago . Wars are breaking out all over Africa. It seems when they takes steps forward, some war breaks out and people are cast back decades having to subsist in a refugee camp. In addition to the emotional damage of war and the cost to families, there is extensive structural damage both politically and architecturally. The surviving citizens have to deal with a bumbling government as well as poverty and misery. This is known throughout Europe, Asia, Africa, and South America. It seems the simple rule of national wealth is to prevent war and promote trade. This is where the US differentiates itself.

Our political problems are never bad enough to escalate to war. We have a civilian government that controls a non-partisan army. These two entities have never truly come to blows. Our country has lived relatively peacefully for a very long time. Imagine how our country would be today if the army had split over the 2000 election results. If that split in the army led to two rival generals fighting in the streets of America over the election results. Instead of political parties, we would have factions in the Army. How damaged do you suppose how DC, Chicago or Cleveland might be if armies had fought in the streets? The country would be in shambles and trade would become impossible.

We would be as poor as any Third World nation in a matter of years. War is not productive, it does not boost economies. At least not the one who endure the fighting. America’s economy did fine in the 60′s while Vietnam’s fell in the toilet. For those who believe that World War II got us out of the depression, consider the monetary damage our soldiers and machinery inflicted on other countries in that period. If that War would have been fought on American Soil, I don’t believe we would be so well off today. It’s important to recognize the value of war, but also the very real cost of war.

It only destroys it does not create. It kills citizens, destroys homes and building, wrecks lives. Capitalism creates. Wealth creates. It enriches lives.

Country Politician - George Bingham

In my other recent blog, In Defense of Capitalism, I argued that increased government activity would exacerbate this crisis. I argued that, in the long-run, investment will fix itself. As I read the news, I hear good and bad things. I cringe when I hear that the government is going to spend $850 billion for a stimulus package. But, I am encouraged when Barack Obama wants to cut taxes to stimulate the economy. I fear that government spending, on this scale, is bound to be inefficient and may makes things worse. But, I also know that tax cuts tend to stimulate economies in the long run. When people can spend their own money, they tend to benefit an economy. Money is invested wisely, looking for returns. The government is a bureaucratic mechanism that is extremely slow to work. When it does finally work, it tends to lend and trade favors not always for the social economic good. Governments tend to overspend on shotty merchandise. You need only look at the J. Edgar Hoover building to see how poorly the American government spends its citizens’ money. What makes you think they will use $850 Billion any wiser?

You may ask what proper role the government should be playing during the crisis. It seems the social consensus is that the government should be spending. Even the Economist argues for such stimulus and spending. I can’t agree with the consensus. I know that the government will not spend it wisely, and projects will only begin simply to get government money. Many argue for infrastructure repairs, public repair efforts. These contracts beg to be bought and bribed. If there is one thing politicians always owe, it’s favors. Horse-trading is notorious in Washington. With that $850 billion, we have given them all the tools they need to repay favors. Every one of those dollars is a corruption charge waiting to happen. As if Ted Stevens wasn’t evidence enough.

As bad as this economy has gotten, I imagine government spending will avert a complete economic collapse. I only fear that if the government cannot avert the collapse, they may end up exacerbating it. Zimbabwe is clearly trying to spend their way out of a crisis, with millions percent inflation. As a result, their currency is worthless and a society continues to spiral down. I understand we are one of the richest countries in the world, but many lessons await a government that tries too hard. Every world ruler has eventually fell, before us it was England, and before them Spain, and so on. With poor governance and corrupt spending, we only move ourselves closer to being the next fallen World Power.

President McKinley falls prey to an assassin's bullet

One thing I have noticed when I talk to people about President-elect Barack Obama, is their fear for his safety. It seems like every person I talk to about the President-elect brings up that same fear. I must admit, I have had the same worries. As most people no doubt remember, the last President we lost to an assassin’s bullet was John F. Kennedy. Unfortunately, many people relate Obama’s vivacity and charisma to one JFK. So it is not too unreasonable that people worry that Obama will share Kennedy’s fate.

As many may have heard during the campaign, there was a plot to assassinate Barack Obama. This was a very rudimentary plan, that had little chance of success. But, it brings up a very important point, Barack Obama is in much more danger because of who he is and what he is. As the first African American President, there are many Americans who hate Barack Obama. As far as we’ve come in this country, racism is still very much a violent threat. So, all this fuss begs the question, if someone wanted to enough, could they assassinate the President in this day and age?

As some may remember in March 1981, John Hinckley shot President Reagan and inflicted life-threatening wounds. That was the last time the President came so close to mortal danger. A grenade was lobbed at President Bush (II) in 2005, but the grenade was a dud. These are the real threats that the Secret Service face every day guarding the new President-elect. One must ask, how is their track record since JFK?

Ever since that rifle bullet pierced President Kennedy’s head in the fall of 1963, the Secret Service has been impeccable in protecting the President’s life. The test of their legacy lies with Barack Obama. I’m sure I’m not the only American who realizes this. I do take comfort in knowing that he survived his campaign without any real threat coming to fruition. This is probably a combination of good reconaissance by the Secret Service, a watchful eye (or eyes), and plain dumb luck. To be sure, if the Secret Service fails in their mission to protect this President, I fear for the future of this country. This country needs Barack Obama right now, if something did happen, only chaos could follow such calamity. There is precedent of such rage, and that wasn’t even a beloved head of state. Joe Biden is many things, but he is no unifier; he is no Barack Obama.

Up up and away!

As I hear more and more about this economic crisis, the pundits and politicians’ voice begin to merge and it becomes a sort of white noise. There isn’t much sense to be made out of most the reports, so as a statistician I prefer to look at data and see what the real story is. Data sometimes lies, but to be frank it lies a lot less than politicians and businessmen scrambling to keep their jobs. I went to the Bureau of Labor Statistics (BLS) website for some graphic interpretations of various economic data. As I had said back in March, the United States is in a recession, perhaps the worst in a very long time. But what does the data say about this? Inflation is currently at 3.7%, not much different from last year. The unemployment rate (6.7%) increases every month, but we’re still nowhere near where we were in 1982 when the rate was around 10 percent. What really worries me is not the labor indicators, it’s the monetary indicators. Check out the latest data and you will see what worries me.

In a little over a month the total money supply for Treasury and the Federal Reserve have sky-rocketed. This is the medicine that is supposed to soothe the credit markets. But at what cost? As Milton Friedman pointed out, inflation is always a monetary problem, how prescient. Some may say, so what? These are hard times that call for drastic measures. The cost of these drastic measures has been the potential implosion of the American government’s credit-worthiness. To increase this money supply, debt must be sold, and interest paid to debt-holders. As this debt grows, it is nearly certain that the dollar will begin to lose its value. We saw this last year when the dollar plummeted against the Euro. This would change after Europe entered its own downturn, but the lesson remains. The danger of applying Keynesian economic theory is that in trying to breathe life into an economy one may end up destroying it instead.

One must ask during times such as these, how much government intervention is necessary to stave off disaster? Many people, including the insulated folks in DC, ponder this question as if it is abstract, and there are no real consequences to such tinkering. Much of this downturn can be attributed to overzealous tinkering in the housing market. If the government cannot take responsibility for their complicity in this matter, what makes you believe they have the wherewithal to fix it? We are witnessing the government solution, which is to print money. We are walking down a dangerous road, not unlike the 1930′s. Government interference in economic markets exacerbated what could have been a severe recession and helped it become a depression. We have historical precedent, I can only hope that decision-makers will pay attention, but you’ll pardon me if I doubt it.

"I want you all to myself, you big bunny!"

Oh, you disappoint me President Bush. After all the shenanigans with starting a war, raising terror alerts, huntin’ down evil-doers dead or alive, you would think he would have one more trick up his sleeve. I truly thought that there would be some major terrorist attack before the election and President Bush would declare himself President for a “little longer.” I dreaded the election because I really thought something tragic was going to happen. Fortunately it turned out okay (so far), we just have a bit of an economic crisis. George gave up so easily, he is just coasting out of power with all the cares of a rich, retired ranch man. Why is this President unlike so many others?

Why hasn’t George Bush done what Robert Mugabe has done in Zimbabwe? Mugabe clings to power like a scared child holding on to her parent. And why hasn’t George Bush done what Vladimir Putin has done with his puppet show of a government? Putin retains his power-hold on Russia, despite having stepped down as President. Most importantly, why hasn’t George Bush done what Michael Bloomberg has done? He petitioned a council to allow him to stay governor for a third term. One of the most unpopular Presidents of all time is stepping down with relative grace. In so many other countries and even in some localities this isn’t the case.

I have always held my country’s government in the highest regard as far as its planning. There are so many checks and balances that shift power away from one body and give it to another; they compete for power. This competition acts as a check on the other’s powers. There are so many rivalries in our government that power is generally very hard to garner for any one body. That is what keeps our government flowing. George Bush doesn’t have enough support to mount such a coup d’etat. He doesn’t have the favor of people’s opinions (and they’re not afraid to express such). He doesn’t have an ally in Congress, and it seems as if even his dog is ignoring him these days. He is the most powerless guy right now because of checks and balances. It’s amazing that our country can hand over power so easily; it’s not so easy in other countries.

If the people of Zimbabwe were truly allowed to express their opinions without fear of reprisal, they would most certainly vote Robert Mugabe out of office. There has been smothering inflation, there is no work, and now there is a cholera epidemic. He has allies in his Parliament, they fear for their lives. The opposition is beat down with thug violence. This is not so in America. The President doesn’t even have the power to change laws to run for office again.

I believe the checks and balances installed hundreds of years ago when this country was born has managed to keep the flow of power moving. It is so ingrained in our society that the Constitution is sacrosanct. Politicians are rarely successful at changing it so the rules stay in place for a very long time. As I have said in past blogs, giving up power is the greatest gift you can give your country. A new path. A new direction. It is finally with appropriate aplomb that George Bush finally does something redeeming. He gives up his power and lets his country thrive.

This was a moment like few others. In so few moments in our lives, do we remember the places we were when we heard the news. So many times it’s tragic news that tattoos our memories forever. Americans seem to all remember where they were when they heard of John F. Kennedy’s assassination, when the Challenger space shuttle exploded, and where they were on that horrific Tuesday morning in the autumn of 2001. For once, Americans can now happily remember the exact time and place when they heard that America had elected it’s first black President.

In our country’s history there has never been a moment quite like this. Not since the end of World War II has the country seemed this united in celebration. Anyone watching on TV or standing in Times Square in New York, in Grant Park in Chicago, or in Little Havana in Miami or even a world away in Kenya felt the electricity in the air. Those who said that Latin-Americans would never vote for an African-American candidate saw just how wrong they were. Those who said Americans would tell pollsters one thing only to change their vote in the booth found that racist assumption appropriately obselete. Whether you are white, black, hispanic, asian or whatever, you can take pride in knowing that our country has symbolically taken an enormous leap forward out of our divided past.

So take a moment and relish this slice of history. With any luck, there will be many more moments like this. Remember where you were and how you felt when you realized that for just one moment, this country was united. We had finally lived up to the high expectations so many have had of us for the relatively short history of this country. The beacon of hope indeed shines bright on the rest of the world. Now we can only hope we can continue to shine as darker times approach. But all that can wait, for now the celebration is ours, and as is said so often these days we are truly the United States of America.