Eliminating the Deficit

The White House released figures this week stating that the federal government will run up $9,000,000,000,000.00 in deficits over the next ten years. That’s on top of the current national debt of roughly the same amount. Of course, they are quick to point out that the Bush administration is partly to blame. This is akin to the kids in the schoolyard pointing at some other kids and saying “Well, they were doing it, too,” as if somehow this is an adequate justification. (I am reminded of my mother saying “And would you jump off a bridge if they did?”)

What is more disturbing is that no one in Washington is actually talking about what would be necessary to end the deficits. In fact, if you dig around and listen to what the policy wonks are really saying, you will find some unpleasant news: no one really wants to end deficits, nor do they want to end the other curse that comes with deficits: inflation. Oh, sure, they throw the occasional bone to the taxpayer with ‘pay as you go’ and claims of a balanced budget long after they will have left office, but it is hard to take them seriously when they continue to talk about all the programs that ‘need’ funding.

To set the matter straight, inflation is when more dollars chase the same number of goods and services. If there is one million dollars in circulation and a loaf of bread costs $1, and then, without changing anything else, another one million dollars were put into circulation, within a short period of time a loaf of bread would cost $2. The important point here is that the baker didn’t cause the inflation, the folks printing the money did. With very, very few exceptions over the past 100 years, every incident of inflation has been caused by similar actions by governments – increasing the money supply to ‘stimulate the economy’ in the face of stagnant (and low) production.

So, despite the fact that the government isn’t talking about it, the deficit spending we are all engaged in involves not simply raising our national debt, it also involves raising the money supply, which means inflation. What is worse is that wide ranges of government economists view this as necessary. In fact, this is how they will eliminate the current debt: if the economy grows large enough in dollar volume the debt will be easily paid.

Here’s how this works: for ease of numbers, I’ll round things off. Let’s say that the US Gross Domestic Product (GDP) is $14 trillion, the national debt is $10 trillion, and annual payments are $500 billion. If we had a 7% inflation rate, in 10 years the US GDP would be $28 trillion (note: the US isn’t producing any more; like the loaf of bread above, the money supply has increase, your money means less, so the total dollar volume is more). If the US GDP is $28 trillion, the payment of the $500 billion for our current debt, which will still be only $500 billion, works out to only half the real value ($500 billion only buys half of what it used to).

To accomplish this the government must keep increasing the money supply, so the deficit keeps getting bigger. But the theory is that as long as the government economists can keep ahead of the problem then this is ‘manageable.’ Of course, if they make a mistake there is a problem – this can come down around our ears. If this all sounds like something that would get you run out of Las Vegas if you tried it there, you are correct. The only organizations that are allowed to do this kind of thing legally are national governments, ones that can control their own money supply.

The even darker side to all this is what this does to the individual. Government economists are often quick to point out the positive impact of ‘sustained growth, keeping money available helps capital investment and new home growth, etc.,’ but they usually don’t mention what it does to anyone who has been diligent in planning for the future.

If you have a fund or savings plan that you are trying to manage and grow, and it is growing at 5 percent per year, and you manage to sustain 5% growth per year every year for the next ten years, while the government manages to sustain a 7% inflation rate, at the end of that 10 year period you will have effectively lost about 20% of your savings and investments. If you have already retired, you will have no more chance to add to your fund. In short, the scheme of controlled, sustained inflation to pay off controlled, sustained deficit spending will have put you and your planning into the poor house.

But, it doesn’t stop there: in the example above, assume that your actual dollar income increases from $50,000 per year to $80,000 per year over that 10-year period (while your effective purchase price has 20% because of the 100% inflation). The best part of this for the government is that you have now moved into a higher tax bracket! You are making less money (measured in your purchasing power), but you get to pay more taxes.

So, how do you stop this?

There is no easy path. The only thing that can be done is to deny the organs of government the authority to engage in this behavior. Remember, ‘We the People’ are the actual authority; government derives its powers from what We grant it. The obvious, but difficult answer is that we should not expect government, which created the problem, to find a solution to the problem. They need to be told the correct answer. And the correct answer is a constitutional amendment for a balanced budget.

A Failure Of Imagination?

Last week two British economists sent a letter to Queen Elizabeth in which they explained their failure to foretell the current financial crisis as a ‘failure of imagination.’ The same phrase has been used before, noticeably with people trying to explain the failure of various intelligence agencies in the US to foretell the attacks on September 11th, 2001.

It is a catchy phrase: ‘a failure of imagination.’ As if something mystical and creative simply failed to happen. Along the lines of ‘my Muse abandoned me,’ or ‘the Fates conspired against me.’ There is another name for it, one that is a more accurate descriptor: poor analysis. And an accompanying phrase should be associated with it: ‘poor leadership.’

Analysis is the process of using various specific processes to construct a logical, defensible argument to reach a conclusion. Analytics have certain key elements; in broad terms they are: facts, assumptions, an analytic approach or model, and a conclusion. Each of these requires honesty and intellectual rigor. There is a place for imagination, but it comes after you have completed all the appropriate analytic steps.

Whether you are engaged in intelligence or economic modeling or stock-market forecasts or designing a new wing for an aircraft or a host of other possibilities, predicting what is going to happen requires that you do several things.

First, you must use all the appropriate means of analysis available to, as best as possible, model what might happen. One set of answers isn’t enough, no matter how convenient they are.

Second, remember the limits of any particular model. As anyone who has studied analysis at even the most basic level remembers, every analytic model has strengths and weaknesses; each analytic model was developed for application to a certain set of circumstances and should not be applied to certain types of problems. Don’t try to make ‘the foot fit the slipper’ if it doesn’t fit.

Third, understand your assumptions and recognize that as your assumptions change, so do your answers. Understand all your assumptions; most analytic cases involve not only several explicit assumptions, but also a host of implicit assumptions. For major problems it is important to list your implicit assumptions and then identify which ones are based on hubris. Various government economists around the world are guilty of failing to do this vis-à-vis the current economic crisis, confident both that they had accurately accounted for all the possible permutations and that the various government ‘safety valves’ were adequate for coping with any perturbations. They were wrong.

Fourth, check your facts. Do you have all the relevant facts? Where you can’t get all the relevant facts are you adjusting your assumptions accordingly? When you get new facts do you re-run your analysis?

Fifth, regularly review your findings – with a clean slate. Are your assumptions still valid? Are there newly obtained facts that need to be included in the analysis? Is your model still correct? Is there a better model? This is where peer review really comes into play. Do others get the same answers you do? If so, are you engaged in Group Think? If not, why not? You need to answer both questions.

As for the role of imagination… Are bubbles in the economic sector new? No. In fact, they are routine and the subject of literally hundreds of books. Every student of economics has read about a wide range of economic bubbles where, due to a host of reasons, the price of a particular item or commodity rose far above what the market could bear. The story of the tulip bulb market of the early 17th century is a favorite example in economic history. Bubbles, and other such events are not new, just as the attack on the World Trade Center was not new in 2001. Not only had it been attacked before (1993), attacking it had been discussed in at least one book as early as 1979 (Terrorism: Threat, Reality, Response by Kupperman and Trent). The idea of crashing aircraft into things was not new either, beginning with the Kamikaze attacks of World War II, and including the 1994 Air France hijacking by Algerian terrorists in which the hijackers intended to crash the aircraft into several ground targets. Tom Clancy’s ‘Debt of Honor’ (written in 1994) includes a terrorist/Japanese nationalist crashing an airliner into the Capitol during the President’s address to Congress.

Counting on the ‘imagination’ of the analyst to think up new ways things might happen is as dangerous as counting on the Fates or a Muse. The fact is that there are wide ranges of historical examples that will usually suffice to point the analyst in new directions of inquiry if the analyst is rigorous. Sound analysis should involve not only the construction of complete analytic arguments based upon well defined facts and models, but also upon expanded assumptions, assumptions that can be crafted by working backwards from worst case scenarios.

This leads to a simple but profound change in perspective: one the one hand, the process that led the US into the economic situation we find ourselves in, analysis is weighed against risk. Leadership then weighed the benefits of taking the risk against the probability of something going wrong. Beginning under the Carter administration rules were changed to increase the availability of housing loans to those who otherwise would not qualify. The idea was that the US Government would insure the loans and, given the level of government oversight there was a low risk of things going horribly wrong. The Reagan administration took the position that the government oversight was not as capable as others were suggesting and the result of things going ‘bad’ was not worth the risk, and accordingly tried to tighten up on the government backed programs. This unraveled in the 1990’s and the ‘race’ to a bubble was on.

In simple terms, those in the government confused the probability of an event with the consequences of the event. If the members of the Carter administration had focused on consequences, and the possible consequences of the concept of government backed loans to people who would otherwise not qualify had been well discussed, it is possible that they would have realized that the long-term implications were in no way worth the risk and would never have started us down this road. Furthermore, sound analysis at such institutions as the Federal Reserve Board and the Congressional Budget Office should have, over the years, revisited these decisions and pointed out the consequences if the system faced a burst bubble. That they failed to make this case is an indictment against both the leadership and the analysts.

These kinds of events are not simply failures in analysis, they are failures in leadership. Analysts will only produce sound analysis if held to rigorous standards. When the leadership becomes sloppy or worse, partial to an answer irrespective of the analysis, the analysts will eventually lose their ‘edge.’ It is incumbent upon the leaders of any organization that is charged with trying to ‘see’ into the future to demand the maximum rigor in such analysis. The leadership needs to take the time to understand not only the strengths and weaknesses of the various analytic approaches, but the strengths and weaknesses of each element of the analysis, to include the analysts themselves. It is incumbent on the leadership to both insist on analytic excellence AND provide the means to ensure that excellence. That is not something left to the Fates or the Muses or ‘Imagination.’

Compassionate Release

By now most of the world is aware that a Scottish judge has released Abdel Baset Ali al-Megrahi, the man convicted of killing 270 in the Lockerbie bombing. The basis of the release is ‘compassion’ because Abdel Baset has prostate cancer and doctors estimate he has less than 3 months to live. The man has been released so that he can die at home while receiving appropriate care.

Several issues come to mind in looking at this:

What is the definition of Compassion? The dictionary will tell you that compassion is both the awareness of and sympathy for the suffering of another. If I see someone in a hospital who is suffering I become both aware his suffering and I can sympathize with him. Doing so, I then do what I can to ease his suffering.

Can I feel compassion and not act with compassion? Certainly. The notion encapsulated in the term ‘tough love’ is based on just idea: I can be aware of the suffering of another, I can feel sympathy for that suffering (I may even have found myself in a similar position once), but I can also realize that to act on that sympathy would mean that the suffering individual would be rescued from a situation that he is responsible for and doing so would prevent him from accepting that responsibility.

And then there is the issue of the greater good of society: acting with compassion may well send a signal to others that they need not accept responsibility for suffering they caused themselves, that they can (and should) expect relief from others.

What is the proper role of ‘compassion’ in the law? Compassion makes for good theater and for excellent closing arguments by defense attorneys, but compassion is not something that is normally defined in law. Our own Constitution talks about a number of principles that are essential to the conduct of courts and judges and criminal punishment. There is no discussion about compassion. One obvious reason for this is that compassion is normally directed at an individual (though sometimes at a group that is suffering). Having compassion for an individual would automatically place the other party in the legal proceeding at a disadvantage. And the law is supposed to be fair (Justice is blind.) In short, there is no role for compassion in the law. The law is, instead, supposed to be dry, crisp, clean, and defined (though it sometimes doesn't quite get there.)

So, if that is the case, what is the proper role of compassion in the courts? Well, again we are back to theater. It is the purpose of the defense attorney to defend his client, with intellect, rhetoric and passion. It is the job of the prosecution to use all his skills to convict the defendant. Both may use whatever passions they can to bring to bear to affect the outcome. It is the role of the Jury to act as the representatives of the community as a whole. In that sense, the ‘jury of peers’ are, in fact, supposed to bring compassion, as well as all the other characteristics that make them human, and part of the community, into the court room in order to reach the best conclusion they can reach. And the judge’s role? The judge applies the law.

Both our Constitution and the constitution of Great Britain, from which we draw many of our notions of law, recognize that only the legislature can create law. Courts – Judges – apply the law. Any emotion brought into the legal decision is brought not by the judge but by the jury – the representatives of the people.

It is worth noting that because judges acted too often on their own feelings that US legislatures, responding to the anger of the people (the source of real power in a democracy), passed mandatory sentencing laws, the same that have so many commentators around the world up in arms about the number of prisoners in the US.

What is the lesson learned here? I’ll begin this by saying that I do not know how the laws of Scotland or the United Kingdom define ‘compassionate release,’ but I am reasonably certain that it has been defined not by legislatures but by judicial decisions which have, over time, given more and more latitude to judges. But is that really the purpose of the courts or the intent of the laws?

The fact is that these kind of decisions are exactly what judges should be constrained against. Judges are supposed to apply the law, not create it or interpret so that they feel good while the people – the real source of the law – are outraged.

This kind of decision is another straw on the back of a very tired camel, one that is trying hard to sustain the primacy of the legislature against both the negligence of legislators who are too lazy to put the judges in their place, and by activist judges who daily usurp the power of the legislatures and in so doing undermine the constitutions and very nature of government by the people.

The judge’s decision in respect to Abdel Baset is gross and disgusting, but it is to be expected as long as we allow the courts to rule as they feel rather than to apply the law as they are told, and as long as we elect legislators who wish to give away the sacred trust placed in their hands by the electorate.