Economic Memo #30 – The Scorpion and the Frog

A scorpion and a frog meet on the bank of a stream and the
Scorpion asks the frog to carry him across on its back. The
Frog asks, “How do I know you won’t sting me?” The scorpion
Says, “Because if I do, I will die too.”
The frog is satisfied, and they set out, but in midstream,
The scorpion stings the frog. The frog feels the onset of
Paralysis and starts to sink, knowing they both will drown,
But has just enough time to gasp “Why?”
Replies the scorpion: “It’s my nature…”

Senator John McCain, former Republican Presidential Candidate two weeks ago said, “Republicans ought to understand if we shut down the government, Congress always gets blamed–rightly or wrongly–Congress gets blamed. We’ve seen the movie before. It’s just some of them weren’t around at the time; I was, and for us to say you’ve got to repeal Obamacare in order to get that done, as Charles Krauthammer suggests (Fox news conservative), that’s a suicide note.”
President Obama said four days ago, “Right now, the hard work we’ve put in to get our economy back on track is at risk. And there’s only one reason for it: A group of far-right Republicans in Congress is obsessed with making an ideological point. They refuse to pass a budget unless I let them sabotage Obamacare; something they know is not going to happen. Now, we’re left with only four days before a government shutdown.”
“This is reckless and irresponsible. Republicans are not focused on what’s best for you. They’re playing political games.”
Is Obama right? It’s clear our Tea Party buddies are at it again. They came to Congress with a set of goals and they are going to follow them to the bitter end. The question now is how much damage will be done to the economy, if any?
Let’s go back to the business cycle graphic. Remember the economy goes through several stages if the government does not act. The average business cycle is 8.4 years but some stages can last longer as we saw with the 2008-2012 Great Recession and the Great Depression 1926-1940.
economic memo #30The business cycle is like a rollercoaster. It goes up (creeping inflation) hits a peak (hyperinflation), goes down (recession) and hits a trough (depression). Of course, if you look at it in fine detail it is not smooth but can have little or big bumps within the up and down areas. The ideal when you get to my age is to ride the tunnel of love, like the one at River View (The Great America of my youth). Nice and flat and great memories. (We will not go into that today.) The point is that from the late Reagan administration thru the Clinton Administration we had 20 years of sustained growth which was unprecedented in economic history. So we know what it takes even though some of our politicians have not learned the Keynesian lessons.
Monetary Policy (very low interest rates and increased money supply) and Fiscal policy (government spending stimulus and lower taxes) has finally got the economy moving again. When the George W. Bush Great Recession started in 2008 we were losing 700,000 jobs a month and now we are creating 150,000 to 200,000 a month. The unemployment rate was a 10%+ in 2008, 8.1% in 2012 and is now 7.3%. In August, 2.3 million persons were marginally attached to the labor force, down by 219,000 from a year earlier. The consumer price index is 1.5% so prices are rising moderately. The GDP was up 1.7% in the second quarter.
We are not out of the woods and are still at the lower end of creeping inflation. We need around 3% GDP growth to really cut into the unemployment numbers. We need housing to recover more and provide capital gains to our middle class. Not everyone is sharing in the recovery and the distribution of income has the widest gap between the rich and poor since the Great Depression. In other words it is not time to screw around with the economy.
Let’s see if our Tea Party politicians threaten our recovery as Obama contends. First we need to remember the formula that says we have three actors in the economy: The Consumer, Business (Investment) and Government. The following shows the numbers for each in billion in August (Department of Commerce data)

Gross domestic product: $17170.0
Personal consumption expenditures: $11,427.1
Gross private domestic investment: $2,621.0
Government consumption expenditures and gross investment: $3,121.9
So the consumer is currently: 66.6%
Business is currently: 15.2%
Government is currently: 18.2%
I think you can do the math here. Just take anything away from the 18.2% of the equation and GDP is not going to rise. We need to continue increase demand, not kill it. The Federal Reserve has lowered the interest rate so low that is currently nearly giving the money away to banks to loan out. The stock market has already dropped.
On Wednesday September 18 the S&P500 index was 1725.2 and today September 30, it was 1681.55, a 2.5% drop. The Dow industrial index was 15,676.94 and is now 15,129.7, or a 3.5% drop. That is not going to help the 401K’s and investment formation.
According to the Office of Management and Budget, the two shutdowns in 1995 and 1996 cost taxpayers $1.4 billion combined. Adjust for inflation and you’ve got $2 billion in today’s dollars.
The cost of shutting the government down for a single day at $8.2 million, or almost $21 million in today’s dollars. A House panel later concluded that the day-long furlough cost taxpayers 10 times more than that.
So there you have it. The loss will be $210 million dollar to the economy every day the government is shut down.
It doesn’t matter what the issue is, the real effect is we are going to hurt ourselves.
I guess the next memo should address Obama care, if we are paying the price for the fight.

Here is a list of things that will and will not shut down. (Source: MSNBC)
1. Air Traffic Control Open
2. Social Security Checks Delivered (New disability claims will be delayed)
3. Mail Delivered, there is no daily government subsidy to the Post Office
4. The military’s 1.4 million active-duty personnel would stay on duty. About half of the Defense Department’s civilian employees would be furloughed. On Sunday, Sen. Time Kaine (D., Va.)
told Fox News that the U.S. Senate will likely pass legislation to keep paying military salaries even if lawmakers are unable to avert the first government shutdown. The House of Representatives approved such legislation early Sunday.
5. National Parks Closed (You didn’t need to go to Mount Rushmore anyway…it Sucks! Just a bunch of Rocks)
6. Low-to-moderate-income borrowers and first-time homebuyers seeking government-backed mortgages could face delays.
7. Unemployment checks will go out
8. New patients would not be accepted into clinical research at the National Institutes of Health.
9. Medical research at the NIH would be disrupted and some studies would be delayed.
10. Centers for Disease Control and Prevention would be severely limited in spotting or investigating disease outbreaks, from flu to that mysterious MERS virus from the Middle East.
11. Visitors using overnight campgrounds or other park facilities would be given 48 hours to make alternate arrangements and leave the park. (Wal-Mart lot parking here we come.)
12. NASA will continue to keep workers at Mission Control in Houston and elsewhere to support the International Space station, where two Americans and four others are deployed. (Tom Hanks will lose the chance for an Apollo 13 squeal).
14. But that means “fewer than 600 of NASA’s 18,000 or so employees would likely keep working.
15. The National Weather Service would keep forecasting weather and issuing warnings and the National Hurricane Center would continue to track storms. The scientific work of the U.S. Geological Survey would be halted.
16. Federal courts would continue operating normally for about 10 business days after the start of a shutdown, roughly until the middle of October. If the shutdown continues, the judiciary would have to begin furloughs of employees whose work is not considered essential. But cases would continue to be heard.
17. All 116 federal prisons would remain open, and criminal litigation would proceed. (Well, we have concealed weapons in Illinois now so let the loose, right!)

About Larry Hill

Dr. Larry Hill is Chair and Professor of Economics. Areas of interest include economic analysis, energy economics cost benefit analysis and economy. To subscribe to the email list of Dr. Larry Hill's Economic Memos, contact Tracey O'Brien at Credentials include 1967 B.S., Indiana State University, 1968 M.S., Indiana State University, 1976 Ph.D., Northern Illinois University He is a member of honorary fraternities in economics and social science. He is currently writing a book on Managerial Economics and revising previous book, "The Basic Macroeconomics of the American Economy"

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