Deficits: What is the meaning for the individual investor?
This week has a new avalanche of articles and TV programs about deficits. All emphasize the maximum in scare tactics. The sources are readily identifiable:
- The politcians on the "outside." This is currently the GOP, but it can work either way. (Regular readers know that I made similar comments when President Bush was in office).
- The perma-bears. They are talking their books.
- The top bloggers. They have accurately identified their Internet audience and know how to go for page views.
None of this has anything to do with investment returns — unless you are willing to consider the opposite side.
Let me state this quite simply and clearly:
If you are going to wait for a widely accepted solution to the deficit problem, you are a PermaBear!
We have faced federal budget deficits for decades. The Clinton Administration was the only surplus producer in recent times. This problem will eventually be addressed. As an investor, if you wait for the official solution, you will be far too late. The key problem is that most observers want to "solve" the deficit question while we are still in the middle of an economic crisis. Savvy public policy analysts take a different view.
Here are some hints:
- It is going to take a bi-partisan commission so that neither party can be ostracized for cutting benefits.
- Benefits will be cut — most prominently for social security recipients. People are living longer so the ratio of beneficiaries to payees is totally out of proportion. When the program was started, people only lived to 68 or so on the average. It is past time to increase the official retirement age. 72 is the new 65!
- Increased immigration will help. Immigration has been demonized and mis-represented. I was surprised at the consensus at Kauffman — supporters of immigration.
Where to Find Information
I am delighted to see the debate about lightweight versus long-form blogging. Abnormal Returns has an excellent article on the subject.
This is an important subject that deserves some extra time. Do you want to read short-form, bullet point pieces, or do you want more analysis? Do you want something that caters to your pre-existing opinion, or something that challenges you to think?
An interesting question is whether gatekeepers like Abnormal Returns will start to make these distinctions. One of the key lessons from the Kauffman conference was the overwhelming flow of information and the importance of knowing what to read.
A Suggested Answer
In the aftermath of the passage of the health care legislation, there is renewed interest in deficits. The actual experts on this subject are specialists in public policy — people who understand how the US government grapples with long-term issues.
To my amazement, the Kauffman Conference on Economic Blogging had a featured panel on this topic with no representation from a political scientist or public policy expert. No wonder they concluded that we have no hope! (I am still waiting for the link to the final video. I'll update when available).
I wrote one of my best pieces on this subject a month ago, before it hit the mainstream radar. If you want a politically neutral article — policy analysis and investment implications — it is still worth a read. I got a few emails thanking me for clarifying a scary topic, so at least some have been helped.
Meanwhile, here is a good alternative — a discussion from Modeled Behavior. Karl Smith is a young Public Policy prof whom I hope to meet some day. This is a nice departmental discussion that captures many of the current issues. It goes on for several articles and lots of video time, so it is a nice test of how serious people are about learning. I recommend that you try it — at least for a few minutes. Karl makes many strong arguments that deserve a wider audience. There are a number of practical solutions that will enhance your understanding.
It is easy to write the short takes and the list of bullet points. Writing a thoughtful, analytical piece takes hours. Meanwhile, the market treats both equally. Those sources that rely on revenue and page views have an easy choice of strategy.
As the financial noose tightens, MSM bloggers may be tempted into sensationalism and symbiotic relationships with the most popular "independent" bloggers. We live in an interesting time.