PLEASE - before you read this diary I would like you to spend a maximum of 10 seconds to read the following question and then answer it in the poll box below before reading the rest of the diary. Do not take more than 10 seconds, and do not use a calculator.
Q: How many millions are there in a trillion?
Answer below in the poll.
The diary continues below the fold.
Up until about 12,000 years ago our ancestors lived as hunter nomads. This was pretty much the same way that our ancestors lived from the time 4 million years ago when we split from our common ancestor with the chimps. During that time it seems unlikely that natural selection was working to weed out those that could not tell a million from a trillion.
Quite simply most humans are just not that good with big numbers.
We know how much 1 is, and 2 and three ... but even at say a thousand how confident are you that you could estimate a crowd of 1,000, let alone a hundred thousand with any accuracy. At some point numbers just become "big", and all "big" numbers seem to take on the same form - "big". So if someone tells you your odds of winning a prize in a sweepstakes are 1 in 1000, it really does not seem that much different than odds of 1 in a million, even though the latter is 1,000 times less likely.
So if a government runs a deficit of $150 billion how many people really can "understand" the fact that a deficit of $1.5 trillion is actually 10 TIMES bigger. For most people I'd guess that $150 billion is a lot and $1.5 trillion is a lot and there is not much "sense" of the proportionality involved.
On Friday the government released estimated retail sales for February. The headline said sales were unexpectedly UP by 0.3% over January. Sounds good, right? Well let's see. The initial February sales were $355.4 billion versus initial January sales of $355.7 (which were revised to $354.3 billion). In the most extreme case (until February is revised down next month), we are talking about an increase in sales of about $1 billion. So...is $1 billion a big deal ... or is it just noise?
Let's look at the what the government impact might be on these numbers. Right now the federal government is running a deficit equal to about $120 billion each month (on average) - that is money the government is spending that is borrowed - much of it going in transfers to people (who actually end up spending the money buying groceries and contributing to retail sales). So the mere fact that unemployment benefits get extended is likely enough to pump up retail sales - of course all this money is actually borrowed money. So really ... how good were retail sales?
Another way to look at it is that the average monthly federal deficit is equal to about 34% of all retail sales in the country in any given month. By looking at only the retail sales number we are deluding ourselves. It tells us nothing about the economy unless we lay trends in government spending (especially in transfers to people) on top of it. The 0.3% rise is simply noise.
So ... do deficits matter?
They do. No doubt the massive stimulus that has been provided has kept the economy from going over the cliff, and that is a good thing. But the cost has been and will continue to be tremendous. When people see the economic statistics getting better, they have to realize that this positive effect, while real, is also artificial and unsustainable. We have seen Latvia and Ireland and Greece already having been forced to cut their deficits ... more countries will soon grab the headlines, and the time will come for the US.
$1.5 trillion a year is a lot of money. It is a big number. It is a number so big that it numbs people. And because people are numb to its size they are unable to effectively analyze whether the pain it is ameliorating is worth the truly massive cost incurred. And that is why I suspect that many people feel that the deficit does not matter at this point in time.
But deficits do matter, and massive unbelievably large deficits matter even more. $1.5 trillion is enough to make 1.5 million Americans instant millionaires this year, and another 1.5 million instant millionaires next year and....
It is now high time for some sane discussions on spending/taxing trade-offs:
- Stop subsidizing Wall Street. 0% interest rates are a license to print money for Wall Street and a heavy penalty on families that want to try to save.
- Cut defense spending. When you have to borrow the money from your enemy to fund your own defense, it is time to ask if all that expenditure is worthwhile. Now unaffordable.
- It is time for China to stop pegging its currency. China has used its unfair advantage to destabilize the world economy and the world economy CAN NOT recover until China stops cheating.
- Tax the rich. The rich have benefited disproportionately from the "boom". It is time for them to pay their share, and their share of the debt that was run up while they were not paying their fair share.
- A crash program for energy self sufficiency. The monthly bill for imported oil is approximately $20 billion ... for what? So people can drive energy inefficient cars and trucks. Now unaffordable.
Yes deficits matter, but how deficits are spent matters too. Over the last 20 years Japan has proven that merely spending money building bridges to nowhere does not cure the problem.
So in the most simple terms take a dollar from defense (which provides little of value at the margin) and spend it on energy self sufficiency, which reduces energy imports on a long term basis, year after year.
Mankind is stuck with its inability to naturally handle large numbers well. But, we can also be aware of that "fault" and act to mitigate its adverse effects. Deficits of this size need to matter.
Update: The results of the poll seem to indicate that a few people may have some problems with big numbers (billions, trillions, millions). Less than 60% of respondents were able to get the correct answer, which is a bit worrisome to say the least.