Deflation is Really Bad

One constantly here's about the dangers of inflation and constantly rising prices.  However, what about the opposite of inflation:  Deflation?  If inflation is bad, than it's antithesis should be good, right?  Well, not exactly.  While a decrease in prices is normally a good thing.  Check out the video below.

The video does a pretty good job of explaining one of the way that deflation can hurt the economy.  There's a couple more ways that deflation can wreak havoc on an economy.  One way is the additional burden it puts on those with any outstanding debt like on a mortgage, car, or student loan.  Paul Krugman summarizes it well.

even aside from expectations of future deflation, falling prices worsen the position of debtors, by increasing the real burden of their debts. Now, you might think this is a zero-sum affair, since creditors experience a corresponding gain. But as Irving Fisher pointed out long ago (pdf), debtors are likely to be forced to cut their spending when their debt burden rises, while creditors aren’t likely to increase their spending by the same amount. So deflation exerts a depressing effect on spending by raising debt burdens – which, as Fisher also points out, can lead to another kind of vicious circle, in which depressed spending because of rising real debt leads to further deflation.

The third way is the problem known as the Liquidity trap.  Since the most active way to fight a recession is by increasing the money supply, deflation poses a particular challenge.  Once the federal reserve lowers the interest rate to near zero, it has no further tools to stimulate the economy.  In deflation, the value of money grows even if it doesn't earn interest.  Therefore, even with near zero percent interest rate, there's no other monetary solution to try and get an economy going again.

How We Currently Control Inflation

I laid out all the bad things about inflation and why it should be kept low and steady.  So how does our policy makers currently control inflation?  By trying to wreck the economy.  Long ago, congress entrusted the federal reserve to conduct monetary policy to promote "promote maximum employment, production, and purchasing power".  The people at the federal reserve have tried many different things to stop inflation and encourage "full employment".  In the end, the tool they use most often is by setting interest rates.

When unemployment is high, the federal reserve leaders lower interest rates.  This encourages people to borrow money to buy stuff which creates demand.  It also encourages businesses to expand and invest which increases demand and creates jobs.  Unfortunately, all that borrowed money increases the money supply and all that spending and investing can increase demand faster than supply.  All of this combines to cause the inflation rate to rise.  Once that happens, the federal reserve leaders decide to raise interest rates.  This discourages consumer borrowing and business investment.  Those two things cause unemployment to rise.

So, when I say that we control inflation by wrecking the economy.  This is such an accepted and non-controversial idea, that the federal reserve freely admits that they willingly cause unemployment.

Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services.

So why do these people constantly vote to wreck our economy, and why does congress let them?  It's not because their evil.  It's not even because their stupid.  It's just that it's the only way they know how to control inflation and think it's the best way to control unemployment.  It's a way of thinking based heavily in the Monetarism school of economics.  It is pretty much the dominant economic theory in congress and government, business, and even the International Monetary Fund.

They believe that both some inflation and some unemployment is a good thing.  The belief is that having a little bit of each will keep both of them low.  It's a good theory that I think is a correct observation.  My problem is with the solution.  Causing unemployment and all the problems it causes society(poverty, loss of work ethic, disrupted families) is a very high price to pay for price stability.  Unfortunately, it's the best our mainstream thinking offers.  Given that, I understand why they do it, I just think we should be actively looking for a way to lower inflation without causing massive unemployment.

I bring this up for a reason.  When talking about other possible solutions, I think it's important to compare those solutions to what we currently do.  Right now our only solution to lowering inflation means that people must be laid off and rendered unemployed.

Why is Inflation Bad?

Yesterday I talked about what inflation is and what can cause it.  Today, I'm laying out the all the reasons that I can see as to why inflation is a bad thing.  In preparing this article, I was shocked to find how few people actually talk about the negative sides of inflation.  For something that economists study, and the department of labor measures, and market watchers fret over, and the entire federal reserve board is obsessed over, you would think there would be plenty of articles explaining all the negatives behind inflation.  Therefore I've decided to lay out all the negative effects of inflation that I could find.

I found an article where the Federal Reserve lays out all the problems it has with inflation.

What's so bad about higher inflation?High inflation is bad because it can hinder economic growth, and for a lot of reasons. For one thing, it makes it harder to tell what a change in the price of a particular product means. For example, a firm that is offered higher prices for its products can have trouble telling how much of the price change is due to stronger demand for its products and how much reflects the economy-wide rise in prices.

This is a legitimate concern.  Inflation can cause inefficiencies in the market.  However, this isn't a problem with inflation per se, it's a problem with inflation that was constantly accelerating and decelerating.  If inflation was at a steady rate, this wouldn't be a problem.

Moreover, when inflation is high, it also tends to vary a lot, and that makes people uncertain about what inflation will be in the future. That uncertainty can hinder economic growth in a couple of ways—it adds an inflation risk premium to long-term interest rates, and it complicates further the planning and contracting by businesses and households that are so essential to capital formation.

Again, this isn't a problem with inflation per se, it's a problem with unsteady inflation.  High inflation is only described as a problem because that tends to lead to a unstable changes in inflation.

That's not all. Because many aspects of the tax system are not indexed to inflation, high inflation distorts economic decisions by arbitrarily increasing or decreasing after-tax rates of return to different kinds of economic activities. In addition, it leads people to spend time and resources hedging against inflation instead of pursuing more productive activities.

There are two good points about the problem of inflation.  The first is that it can shift the tax burden in ways the legislatures may never have intended.  For instance if your wages rises precisely at the same rate as inflation, you will not actually be making more money.  However, its possible that your income tax could slip into a higher bracket and you would end up paying more taxes.  Another example would be a sin tax.  At first an extra 5 cent bottle deposit might sound like a lot, but over time, that 5 cent deposit isn't the incentive it used to be to recycle cans.  Fortunately, this can be solved by indexing some taxes to rise and fall with inflation, as well as a legislature that's ready and willing to adjust tax rates as needed.

The second point is a good one.  If you are worried about inflation, then instead of being a productive person and making more money, you may find yourself wasting time managing your current savings so that it isn't eaten up by inflation.  Unfortunately, as long as inflation is anything besides zero, this problem will always exist.  The only way to mitigate it is to keep inflation low.

Another problem is that a surprise inflation tends to redistribute wealth. For example, when loans have fixed rates, a surprise inflation redistributes wealth from lenders to borrowers, because inflation lowers the real burden of making a stream of payments whose nominal value is fixed.

Once again, this isn't an argument against inflation itself, just unsteady, rapidly changing inflation.  If the inflation rate was always constant, the person making the loan could adjust the interest rate to accommodate long term inflation.

So of the 5 reasons the federal reserve gives of why inflation is bad, 3 of the reasons aren't against inflation, just "surprise" inflation.  Of the other 2, one could be solved by small tweaks to tax laws.  So that leaves only 1 reason for the fed to hate inflation.  People spending time hedging against it, instead of being productive.  It kind of makes me laugh to think that we have an entire institute dedicated to fighting inflation for that one reason.

Fortunately, that's not what the fed does.  The fed likes to set a target rate of inflation and try to keep it as close to that target as possible.  That way 3 of the 5 problems go away.  They also try to set that target for inflation to be low.  That's to mitigate the last 2 problems as well.

There are other very good reasons to keep inflation low that the federal reserve doesn't mention.  For instance, inflation can make some one destitute if they are living off of a fixed income.  Examples would be people living on a pensions or a "reverse mortgages".

Inflation can also hurt people living off of their savings because the value of their savings goes down.  Of course people can mitigate this problem by try and invest and hedge against inflation, but then you have the problem the fed mentioned which is people wasting time managing their existing savings instead of trying to add to it.

The last problem with standard inflation is the "menu" problem.  Imagine inflation was 10% a year - that's a high rate.  That would mean restaurants would have to order a new menu every 6 to 12 months that adds 5 to 10% to all the prices on the menu.  This, of course, wouldn't be a problem just for restaurants, but any retail or service company.  Instead of spending money on hiring new staff or expanding, they have to waste time and energy constantly updating their prices.  Obviously, not a productive use of time.

Finally, we come to "hyperinflation".  Some people describe Hyperinflation as very very high inflation.  I think that undersells the problem with hyperinflation.  Hyperinflation is usually a self-feeding loop.  More money is needed, so more is created, which leads to more inflation, which leads to more money being needed.  This results in ridiculously high inflation of 100% per month and even higher in some cases.  Hyperinflation can be both a symptom and cause of a bad economy - usually both.  So it's important to make sure that inflation never starts to get that high.  How high does inflation have to be to qualify as hyper-inflation?  Unfortunately, there's no set definition, but it must be ridiculously high and keeps accelerating.  I personally define it as more than 100% a year, but that's purely subjective on my part.   I'll talk more about hyperinflation in the future.

So that's all the reasons that inflation is bad.  As you can see, most of the problems with inflation deals with surprise accelerating and decelerating inflation.  There are also problems with a high inflation rate.  Therefore the goal of our economy should be to keep inflation at a very steady, low rate to avoid these problems.

What is Inflation?

The basic idea of inflation is deceptively simple.  It describes a phenomena where the price of everything tends to rise. However, understanding what inflation is, what does and doesn't cause it, and even just trying to measure it, are incredibly difficult and leads to lots of really smart, educated people to argue and vehemently disagree. In fact, if you were to know everything there is about inflation, then you'd probably know everything there is to know about macroeconomics. I'm just going to lay out the generally accepted concepts.

Definition

Here's three definitions of inflation from three different sources.  The Merriam-Webster dictionary defines inflation as "a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services". Whereas Wikipedia defines it as "a rise in the general level of prices of goods and services in an economy over a period of time". Finally, the International Monetary Fund defines inflation as "A sustained increase in the general price level, often measured by an index of consumer prices. The rate of inflation is the percentage change in the price level in a given period."  These definitions are pretty much the same with one subtle difference.  The dictionary and IMF define inflation as "continuing" or "sustained", Wikipedia doesn't give that stipulation. I think the difference here is how economists define inflation and how the general public defines it.  On this blog I'll try to use the more correct term of inflation as being "sustained" or "continuing".

So what causes inflation?

There are several things that can cause inflation, however, they all boil down to 1 of the following 3 situations:

1. An increase in the money supply
2. A decrease in the amount of goods in the economy (or "aggregate supply")
3. An increase in the demand for goods in the economy ( or "aggregate demand")

1) An increase in the money supply is just a fancy way of saying "everybody has more money".  If the amount of money everyone has increases but the amount of goods doesn't, then all you've really done is made money worth less.  This is best demonstrated by an example:  If 10 people live on an island, and on this island there is nothing but coconuts.  Let's also say that there are only 20 coconuts and $20 on the island.  Therefore each coconut is worth $1.  But let's say everybody wakes up the next day and find an extra $10.  People who want to buy coconuts will be willing to offer more than 1$ for a coconut so as to outbid other buyers, but those other buyers will also have more money, so they too will offer more than a dollar and the bidding will continue to "inflate" the value of coconuts until price stability is achieved.

Every economist agrees that expanding the money supply can cause inflation.  In fact, it is the original definition of inflation.  Back in the days when money was backed by gold or silver, private and public banks would print paper money that could then be redeemed at their bank for a set amount of gold.  "Inflation" referred to the practice of banks printing more money than they could back.  They "inflated" the amount of gold they claimed to have.

2) A decrease in the amount of goods in the economy (or "aggregate supply") can also cause inflation.  Aggregate supply is, again, a fancy term economists use.  It means all the goods and services that are produced within an economy.  Going back to the coconut island example, let's say that, instead of everyone finding more money, they all wake up one day and half the coconuts are gone.    The value of the remaining coconuts would go up.  People would be less willing to sell their coconuts and buyers would have to offer more money until the sellers finally agree to sell.

In a modern economy, this would have to happen on a large scale to lots of products.  For instance, if the amount of DVDs decreased because a DVD factory burned down it wouldn't really cause inflation because only DVDs would be affected and inflation, by definition, is a "General Rise" in prices.  An example would be a natural disaster destroying a large portion of crops and factories.  If this were to happen, the number of goods being produced in the economy would go down, if the amount of money doesn't also go down, it can cause inflation.

3)  An increase in the demand for goods in the economy ( or "aggregate demand").  Aggregate demand is, again, a fancy term economists use to mean all the stuff that people are offering money to buy.  Taking one last trip to our coconut island.  Let's say that everyone needs only 1 coconut a day to live.  But, they all wake up one morning to find their metabolism has changed and they all need 2 coconuts a day to live.  The price of coconuts would go up because people will want more coconuts.  In a modern economy this can only happen if a very large number of people are demanding more goods and services from a variety of industries.

What inflation isn't.

Inflation is not, by definition, the event of the price of a single good going up.  For instance, in a large, complex economy, if the price of pianos suddenly skyrocketed, that would not be inflation because it is only one good.  Inflation must be a "general rise" in all prices.  For instance if the cost of milk, gas, and DVDs rise that would be better described as inflation.  (This doesn't mean that a rise in the price of a commodity can't lead to inflation)

How to measure inflation?

There are several different ways to measure inflation.  Here in the U.S. the two most common are the Consumer Price Index(CPI) and the Producers Price Index(PPI).  The difference is that the CPI measures what consumer's pay for goods that they consume, and the PPI is a measure of what businesses pay for the goods they use or consume to make other goods that they sell.  Both indexes require exhaustive research, adjustment, and calculation.  If I understood everything that goes into figuring out these indexes, I would be seriously underpaid.

You might think it would be as easy to measure inflation.  One would only have to select a few random stores and see how much they charge for a few "random" items and see if the prices go up or down every month.  That might seem simple, until some common problems come up.  Just to give you an idea of how hard it is to measure inflation on a large scale, let's give some example problems.

1.) Obsolete items:  Let's say that one of the items that you're measuring the price of is typewriters.  Circa 1975 this might have made sense.  However, 20 years later, nobody is buying a typewriter because they've been replaced with computers.  You could substitute computer's, but they're more expensive because they do more things.

2.) Combined items:  Let's say that two of the items that you're measuring the price of are DVD players and VCR players.  How do you measure DVDVCR combos?

3.) Replacement:  Let's say that one of the items that you're measuring is iceberg lettuce.  For some reason, there is a shortage from drought or flooding.  The price of iceberg lettuce would go up and consumers instead decide to buy romaine lettuce instead.  Would you continue measuring the price of iceberg lettuce or switch to romaine or some combination of both?

I hope this gives you an idea of how hard it must be to measure inflation.

My Next post will explore the negative impacts of inflation and why it's considered an economic pariah among economists and politicians alike.

Ireland's Budget Cuts: A Case Study on the rewards of Austerity

For those who don't know, austerity is "a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to reduce debt".

In the United States, our government is now beginning to understand the importance of Austerity and how its the responsible thing to do when in hard economic times.  Therefore, I though I'd review all the good things that happened to Ireland as it pursued its own austerity.

In late 2008, as the world financial markets were crashing and burning, Ireland, like other nations, saw tax revenues dip, money disappear overnight, and the economy quickly contract.  As you can imagine it caused huge budget deficits and it's debt started rising.  Unlike most other nations in the EU, it did the responsible thing and declared that Ireland would not take part in EU stimulus plans.  Ireland continue to reap the rewards of it's responsible actions.

September, 2008.  Ireland cuts spending by another 1.5% or a total of 4% less from the year before.

With September tax returns expected to be very bad and the economic climate rapidly deteriorating, a further 1.5% reduction in 2009 spending is now up for debate. This would bring planned cutbacks in current expenditure for next year to more than €2bn.

April, 2009.  Ireland announces more emergency budget cuts and this time, income tax increases as well.

From May 1, a 2 percent “income levy”—effectively a pay cut—is to be imposed on all those earning between €15,028 and €75, 036. This doubles a levy first introduced last October and reduces the tax threshold to incorporate large numbers of low paid workers. Those on higher incomes will be levied at 4 percent and 9 percent of their income.
A health levy is also to be increased to 5 percent. This, as with other levies, is to be taken directly from the pay packets of workers whose tax payments are collected by their employers. This will be added to the pension “levy” also extracted from public sector workers in February.
The government also announced there will be no Christmas welfare payment for social security claimants in 2009. More damningly, childcare allowances for pre-school children are to be halved immediately and abolished by the end of 2009. Child benefit, currently paid to all parents, is to be means tested.
Payments to unemployed workers under 20 are also to be halved and rent support payments reduced, while new punitive measures will be introduced against welfare claimants. Mortgage interest relief will now only apply to the first seven years of its commencement.

December, 2009.  More drastic budget cuts are announced.  This time an additional 4 billion euros were being cut out of their budget.  All the cuts came out of wage cuts on public workers, reduced benefits for the unemployed, other reduced social welfare programs, and less spending on infrastructure

Public sector workers bore the brunt of cutbacks in Lenihan’s Budget with €1 billion in pay cuts ranging from 5 per cent for those on average pay to 15 per cent for those at senior level.
The rest of the €4 billion in savings will come from a €760 million reduction in the social welfare, a €980 million cut in day-to-day spending programmes and €960 million in savings on capital investment projects.
Cuts to Child Benefit will see a €16 euro per month reduction with the lower and higher rates now €150 and €187 per month respectively. Families on social welfare will be compensated with an increase of €3.80 a week in qualified child allowance.

At the same time, unlike previous budgets, taxes were heroically kept the same or lower.

VAT will be cut by half a percentage point from January for 12 months, while the corporation tax rate will not change from 12.5 per cent.

In February 2010, a levy(tax) was placed on the generous pension plans of government workers to save the government even more money.

In March 2010 , public sector wages were cut again, despite freak out from the greedy public sector unions.

Tax revenues have collapsed, the government has run out of money, we can't afford to pay state workers as much as they have been getting.
In fact tax revenues here have now fallen to the 2002 level. But since then, the payroll for state workers has increased by 35%.
So far the government has cut them back by an average of 12% over two budgets. But the state workers won't accept it.

By April 2010, Ireland's bold moves were rewarded by the financial industry, praised by the EU Central Bankers, and declared a model for Greece.

As a result, the country's government and taxpayers have been rewarded. The "spread" the bond markets charge to hold Irish 10-year debt over the German "bund" equivalent is now 139 basis points, less than half as wide as this time last year. The Greek spread over the bund, meanwhile, is 316 basis points – more than twice as high as that of the Irish – with Athens now paying far, far more than Dublin to service government debt.
"Greece has a role model and that role model is Ireland," said Jean-Claude Trichet last week, the European Central Bank president singling out the Emerald Isle for praise. "Ireland had extremely difficult problems and took them very seriously – and that's now been recognised by all."

Despite all these spending cuts and increased taxes on the public sector employees and middle class, Ireland still found itself facing another deep budget hole in October 2010.

DEEP welfare cuts loomed last night as ministers began a marathon session thrashing out how to bridge a €5 billion black hole in the budget.

A property tax and specific projects like the Dublin Metro North line were under discussion, as was cutting welfare which is set to take a hit of some €2bn. The Greens are keen to save Metro north and some ministers fear cutting the capital building programme too far will damage the economy in the medium term.
Education is also expected to be a big loser.

Last week, the outcome of the cuts were announced to be another 6 billion Euros cut from spending.

Irish Finance Minister Brian Lenihan plans to slash the budget deficit by 6 billion euros (US$8.5-billion) in 2011 as he fights to save the nation's economic independence.

How did the financial markets respond to these even more drastic budget cuts?  It rewarded them with higher interest rates.

Brian Lenihan, Ireland's Finance Minister, described the country's borrowing problems as "very serious", as the yields on its bonds hit yet another all-time high. The yield on 10-year bonds peaked at 9.26 per cent yesterday, almost four times the yield that is demanded by investors in equivalent German bonds.

The ultimate outcome of 2 years of fiscal austerity?

Senior officials in Ireland and the European Union yesterday moved closer than ever to conceding that the indebted country may now have no choice but to seek a bail-out.

Queue the Trombone:

What's the Big Deal with the Fed Buying Treasury Debt?

Last week the Fed announced that it was going to Buy $600 Billion in Debt, Hoping to Spur Growth.  The idea is to increase the amount of bank reserves so that it'll lower interest rates which will spur more borrowing to fund real economic activity(i.e. buying stuff and starting new businesses).  This move by the Fed was quickly followed by a lot of people freaking out about it (see here, here, here, and here).  The basic criticism that I see is that the Fed is "monetizing debt" which will - at some point - cause inflation.  Not being an economist, I feel that I must be missing something because I don't understand the logic of the Fed's actions nor the logic of its critics.

First, here's why I don't understand the Fed's actions.  Banks already have a record high level of cash reserves.  What that means is that the banks are already sitting on a pile of cash in their vaults(Okay, I know most of it is just numbers in a computer, but the physical metaphor makes it easier for me to comprehend).  The banks are already not loaning out this money.  What makes the Fed think that making them have bigger piles of cash will suddenly induce them to start making loans?  Will making already historically low interest rates go even lower get the economy going again?  My point is that I don't think monetary policy alone is going to get us out of our depression.

Now, onto the critics of the federal reserve.  The argument is that for the Fed to buy these treasury securities is that it will increase inflation either now or in the long-term.  To see the ridiculousness of this argument let's first review what treasury securities are:

A United States Treasury security is government debt issued by the United States Department of the Treasury through the Bureau of the Public Debt. Treasury securities are the debt financing instruments of the United States Federal government, and they are often referred to simply as Treasuries.

So, by law, every time the Treasury spends money that hasn't been collected in taxes, it must issue some type of treasury security to "finance" that spending.  For those who purchase this treasury securities(mostly domestic commercial banks and foreign central banks) they get to earn interest on the debt.  So if the United States spends $1,000 that it doesn't have and Chase Bank purchases the security, it will make $1,000 plus interest.  At 3% over 10 years, that will be 1,300 dollars.  When 10 years is up, the U.S. treasury pays Chase 1,300 dollars.  When all is said and done, Chase makes 300 dollars and the U.S. Treasury is out another 300$ on top of the original debt.  (This, BTW, is why people are worried about the growing debt)

Now let's look at what happens when the Federal Reserve buys the debt instead of Chase Bank.  The Federal Reserve gives the U.S. treasury a thousand dollars.  At the end of 10 years the U.S. Treasury gives the Federal Reserve 1,300 dollars.  The Federal Reserve just made 300 dollars.  Now, here's the kicker.  By law, any money that the federal reserve makes must go to the U.S. Treasury at the end of the year.  So that 300 dollars the Fed just made by loaning to the U.S. Treasury... goes back to the U.S. Treasury.  (addressing the absolute absurdity of this system is beyond the scope of this post, I will address it some other time)

Whether Chase Bank or the Federal Reserve purchases the original treasury security, neither scenario causes long term inflation as long as the Federal Government brings it's budget back into balance at the end of the 10 years. This is true because no money is "created".  The government eventually pays off its debt by collecting more tax dollars than it spends and that goes to paying its debt.

However, since the federal budget has only been balanced about 7 times during it's entire existence(and each time it lasted only 2 years or less), it would be a dumb assumption to assume that the debt won't continue to go up over time as it always has.  What that means is that when the debt comes due, the federal government will invariably have to issue new debt to pay for the old debt.  If Chase bank owned the debt, the U.S. Treasury will have to create $1,300(the original 1,000 plus 300 in interestprofit) in new debt to pay for the old debt.   If the Federal Reserve owned the debt, the U.S. Treasury will only have to create only a $1,000 in new debt because the Federal Reserve had to give back it's profit.

So, if you assume that the U.S. debt will still be growing in 10 years, which scenario is more inflationary:  Chase owning the Treasury security, or the Federal Reserve?  Chase owning it is more inflationary.  Why?  Because to pay Chase, the U.S. Treasury will have to create $1,300 total in new money to pay for the debt(1,000 plus 300 in interest) where as if the Fed owns the debt, only $1,000 dollars in new money gets created.  In other words, in the long run, it's actually less inflationary for the Fed to own this debt than private banks.  So all these people yelping about this causing long-term inflation are arguing for policies that will increase long-term inflation.

Now, I'm not an economist, so I admit that I could be wrong.  I could be missing something here, but as far as I can tell, the Federal Reserve's latest move won't jump start the economy, and neither will it be more likely to cause long term inflation.  Right now, the only things that can hurt or save us will be what our congress does to address the economy.

Election "Day" is an Outdated concept

Why do we have an election "day"?  I was thinking about this today while I stood in line to vote.  In the age of on-demand rentals, super sonic jets, and email on our mobile phones... why does it take 2, 4, even 6 years to change our minds on who should be running our country?  If my representative votes differently than he or she promised, I should have the ability to instantly register my displeasure.

In my opinion, election "day" and "lame duck" sessions are a holdover from a time before phones, computers, and interstate highways.  Back then ballots had to be hand-counted, and the winners had to travel via horse & buggy to get to Washington.  Of course it would be impractical to have elections more than once every few years.  However, in the digital age, we are no longer under the same restrictions as our forefathers.

Here is what I'm thinking:  (As I only thought of this today, I haven't completely thought through all the problems, but everything I'm proposing is completely feasible with today's technology.)  Let's just take the house of representatives to start:  In each district, everybody votes for whoever they want to be their representative.  At the end of the month, the votes are tallied and whoever gets the most votes(even if it's not over 50%) gets to be in congress.  Now, let's say 15 days later that person breaks several campaign promises.  I just go down to my election headquarters (during any weekday) and change my vote to somebody else.  If enough people change their vote, then at the end of the month, there will be a new congressman from that district.  Now that's a responsive democracy.

This has ancillary benefits too.  It could severely weaken the two-party system we have in the United States.  If there's a viable third party candidate you will know at the end of each day.  Because there's no reason the tallies can't be updated every day and reported online.  Congressman could instantly be notified when they're losing support.  At that point they either have to try and change their constituents' minds, or change their own vote.

Some might decry this because it would mean politicians would be in constant "campaign" mode.  To that I say, GOOD!  With each and every vote, congressman would have to think long and hard about what the people of their district want.

Another problem some might have is so-called "continuity".  A constantly changing congress might mean nothing gets done.  I disagree, I think more would get done.  Because when you have only a month to prove yourself, you aren't going to wait around.

Some might argue the opposite.  Too many things would get done in an ever shifting congress.  Again, I disagree.  Only the things that voters want would get done because congressman would know they have to face the voters everyday.  If voters do something that congress doesn't like, it'll probably only be about a month or two before it gets repealed as congressman are replaced.

In the end, I think the consistency of the system would probably surprise most people.  As the best get in, they would stay and would likely only get voted out when they start taking their constituents for granted.  I'm willing to bet that month-to-month districts would be fairly stable with only a few getting voted out.

I'm not saying this would be the absolute best way, but give me a break.  It's only my first time completely re-inventing democracy for the digital age.  If you got a better idea, let me know in the comments.