Tag Archives: Government debt

Water Tunnel: A Government Success Story

Last week wasn’t a proud one for America’s federal government, was it? A badly divided Congress barely managed to cobble together an agreement to avoid an unprecedented default. Had it not managed to do so, some believe that the entire global financial system would have descended into chaos.

Many global rivals took advantage of the opportunity to criticize American democracy. The Chinese publication Xinhua, for instance, decried the actions of a “hypocritical nation” and called for “building a de-Americanized world.”

Despite all the hullaballoo about the fiscal crisis in Washington, though, an American government success story appeared in the headlines as well. A major segment of the largest construction project in the history of New York City was completed underneath Central Park.

It was New York City’s Water Tunnel 3, a $4.7 billion engineering marvel that is designed to satisfy the Big Apple’s water needs for the foreseeable future. For some reason, commentators in China (a nation faced with its own severe water crises) declined to take note of this success story.

New York City, of course, has been faced with the challenge of establishing a reliable water supply since its days as a colonial city. By the 1700s, New Yorkers had turned their original Collect Pond water reservoir into “a very sink and common sewer.”

They then turned to Aaron Burr, a political leader, to create a public company that would pipe fresh water from the Hudson Valley to Manhattan. Burr, seeking to maximize his corporate profits, decided to use the water company’s surplus capital to launch a major bank instead.

What happened then? Burr went on to become the third President of the United States, serving under Thomas Jefferson. He later shot and killed Alexander Hamilton, the first Treasury Secretary in United States history, in a duel and subsequently sank into penury, illness, and death. And Burr’s Manhattan Bank grew into Chase Manhattan Bank, which then evolved into today’s JP Morgan Chase.

New York City went on to build a series of water reservoirs and tunnels, but its water supply remained at risk until Mayor Michael Bloomberg opened the water spigot on Tunnel 3 last week. It may have been a bad week for America’s federal government, but it was a very good one for its municipal leaders.

Lies, Damn Lies, and Economics

Have you heard about the recent scientific project that validated the Mediterranean diet? Researchers completed a massive five year study of over 7,000 people; they found that individuals can significantly decrease the probability of heart attacks and strokes when they focus their diets on olive oil, nuts, fish, fruits and vegetables, and (of course!) wine.

The study was particularly persuasive because it tracked three identical groups of people at the same time. They all lived in Spain and maintained similar life styles; the only differences that could have caused any variations in cardiovascular health were their (carefully controlled and measured) differences in dietary patterns.

When scientific medical studies are able to control for all relevant variables across very large groups of experimental participants, it’s easy to trust the results of the research activities. But should we place the same level of faith in the economic studies that are influencing the global fiscal policies of our political leaders?

Do Your Homework!

Three years ago, a pair of globally renowned economists from Harvard University published a study that demonstrated a significant relationship between levels of government debt and levels of economic growth. Specifically, they found that nations that run up massive deficits in order to “jump start” growth often learn that such strategies are counter-productive because the resulting debt obligations weigh down their economies.

At first, conservative Republican politicians in the United States embraced the findings as evidence that drastic austerity measures should be implemented to reduce the federal government’s budget deficit. And, after all, who could argue with them? If economists at a quintessentially progressive school like Harvard University could demonstrate that debt-financed government spending represents a counter-productive policy, how could any one continue to support economic stimulus activities?

Last week, however, a student at the University of Massachusetts named Thomas Herndon completed a homework assignment that required him to check the calculations of these two distinguished economists. Amazingly, he discovered that the economists made a number of simplistic mistakes and questionable judgment calls, actions that may have invalidated their conclusions.

The GIGO Principle

Most of the negative publicity regarding this controversy focused on a simple spreadsheet calculation error, one that significantly biased the economists’ results. That single error, on its own, attracted a significant amount of scorn towards the researchers and their findings.

But a closer reading of the student’s homework assignment, which is now being repositioned as an academic study, reveals an array of additional concerns concerning the validity of the original research activities. For instance, the Harvard researchers apparently ignored a number of highly indebted (and yet quickly growing) economies from the late 1940s, cases that would have served to contradict the findings of the original study.

Are you familiar with the phrase Garbage In, Garbage Out, or the relevant acronym GIGO? It refers to situations where faulty data is fed into information systems, which inevitably produce analyses and recommendations that are faulty as well. Can this GIGO principle, in fact, be applied to the original Harvard study?

Over a century ago, the great American humorist Mark Twain addressed such concerns. “Figures often beguile me, particularly when I have the arranging of them myself,” he wrote, adding “there are three kinds of lies: lies, damned lies, and statistics.” With this philosophy in mind, what are we to make of the brouhaha regarding the Harvard study?

The Nature of Economics

To be fair to the Harvard economists, one can argue that the excluded nations of the 1940s bear little resemblance to the nations of today. Considering that the purpose of their study was to provide information to contemporary political leaders about the impact of large budget deficits, it might indeed be reasonable to exclude such cases that have little in common with the modern world.

And yet, when making such exclusionary decisions, where does one draw the line? Are the nations of the 1950s, for instance, similar to the nations of today? Or the nations of the late twentieth century … or even those in the years prior to the 2008 / 09 global crash? Are any of those time periods — and the nations that existed during those periods — relevant to the economic challenges that face today’s political leaders?

Let’s think about the circumstances of the Mediterranean diet study. To create a highly reliable data set that is relevant to the contemporary world, the researchers closely followed the dietary habits and health outcomes of more than 7,000 people in “real time.” A macro-economic research study, though, cannot follow 7,000 nations in “real time” because the world contains fewer than 200 countries.

Thus, the only way to create a macro-economic data set with a significant sample size is to roll back through history and include periods of time that may (or may not) be relevant to the research question. The resulting uncertainty is, regrettably, an inevitable result of the nature of economics.

Government Spending: A Matter Of Priorities

I’ll gladly pay you Tuesday for a hamburger today.

Who coined that famous phrase? It was J. Wellington Wimpy, the intellectual hobo in the classic Depression era comic strip Popeye. Wimpy loved to consume hamburgers, but he was perpetually short of funds, and so he would incur debts (in exchange for meals) that would never be repaid.

Oddly enough, Wimpy was always a well dressed hobo. He often wore a blue suit, white shirt, and red tie, with brown leather shoes on his feet and a sturdy hat on his head. Although the authors of the strip never explicitly identified his original profession, his name and attire served as an effective parody of the banking industry.

After all, a well dressed man like Wimpy likely could have financed his own meals; the fact that he chose to borrow from others was simply a matter of priorities. And though his comic strip peaked in popularity during the 1930s, his strategy of debt financed consumption survives to the current day.

Desperately Seeking Shovels

Consider, for instance, the operating practices of the state of Connecticut. Last week, the Land of Steady Habits was buried in a blizzard. The city of Hamden led the region with 40 inches of snow fall, and the metropolis of Milford was right behind it with 38 inches.

Regrettably, for the residents of Milford, its municipal leaders had not invested in sufficient snow removal equipment to clear the roads on a timely basis. Thus, its citizens were stranded in their homes for days after the storm. Mayor Ben Blake was eventually forced to hire sixteen payloader vehicles from privately owned construction firms to free his own town residents.

So what is the town doing now? Is it establishing a fund to purchase additional snow removal equipment? Well, no … priorities being priorities, the city has issued a call for brigades of citizen volunteers to carry their own shovels to the next calamitous blizzard.

And what are the tax expenditure priorities of the State of Connecticut? If not directed towards snow removal, where are the funds being spent?

$2 Billion And Counting …

Connecticut Governor Dan Malloy answered that question last month with the unveiling of a new investment initiative entitled Next Generation Connecticut. Originally introduced as a $1.5 billion series of investments in the academic programs of the University of Connecticut, the total tab for the initiative was revalued at more than $2.0 billion after its full scope was released to the public.

Ironically, State House Republican leader Larry Cafero predicts that $2.0 billion will also represent the size of the government’s annual budget deficit during the next two years. “We’ve got other problems, too,” protested Cafero when he learned about the initiative. “We have roads, we have bridges.”

Of course, they also have snow. Lots of snow. And an insufficient number of snow removal vehicles to clear it all away. That’s why Mayor Blake issued his call for a volunteer snow shovel brigade.

Investments vs. Expenditures

The Governor characterizes the Next Generation initiative as an investment in the future of the state, and not as a series of expenditures. The bioscience, digital media, and engineering programs at the University are all expected to receive significant funding increases.

The initiative is also expected to increase the size of the student body at the institution. The University’s total enrollment is expected to grow by 30%, or by 6,580 students, with many joining an expanding engineering program.

Other university systems, of course, are choosing far less expensive paths to growth. The university systems of Florida and Texas, for instance, are each focusing on the development of a $10,000 undergraduate degree, one partially based on online education technologies. And university systems from California to North Carolina to Pennsylvania are beginning to embrace the free or extremely low cost offerings of online-only courses that are offered by organizations like Coursera.

Unlike its rivals, the University of Connecticut will be growing in a more traditional manner. And if the institution manages to generate long term economic benefits in excess of $2 billion, it may yet demonstrate that it is the beneficiary of the wiser investment strategy.

Still Wimpy!

Nevertheless, even if the Nutmeg State’s initiative eventually generates a positive return on investment, its strategy will maintain a decidedly Wimpy perspective. That’s “Wimpy” as in “J. Wellington Wimpy,” of course.

After all, Wimpy managed to acquire stylish clothing and to satisfy his taste for hamburgers simultaneously. But he needed to become a debtor to do so, and he never actually paid his debts.

Likewise, the state of Connecticut is managing to build its university system and to (eventually) clear its roads of snow. But it is borrowing billions of dollars to finance its operating activities, and for the sake of the Next Generation initiative, it is about to go even deeper in debt.

Will Connecticut be able to pay its debts, or will it eventually renege on them like Wimpy? The fate of the state hinges on this question, and only time will yield the answer.