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The Deficit Picture
Posted by: Jon Henke on Tuesday, July 11, 2006

The budget deficit is declining...
The Bush administration is planning to trumpet today a midyear revision of its budget estimates projecting that a recent surge in tax revenue will help to shrink this year's federal deficit below $300 billion, according to sources familiar with the estimates.
Naturally, the Bush administration is arguing that the tax cuts were responsible for revenue growth. No doubt, the tax cuts had some stimulative effect, but I'm not sure how supply siders could possibly bifurcate out the myriad other effects that contribute to economic and tax revenue growth in order to assign credit so specifically to tax cuts. . .especially after such a long lag.
I'd like to see evidence a bit more rigorous than "taxes were cut...and eventually, a few years later, revenues rose!"
In any event, I'd like to see evidence a bit more rigorous than "taxes were cut...and eventually, a few years later, revenues rose!" Revenues rise after tax hikes as well as years during which there are no significant tax changes at all, so the mere fact that revenues are rising does not imply that they would not have risen in the absence of tax cuts. As Steve Verdon writes...
While the tax cuts probably did help keep the recession short and shallow, the idea that 4 years latter they are just now causing the receipts to increase is highly suspect. The problem is that tax receipts follow the business cycle: tax receipts fall during a recession and rise during an expansion. The economy would have recovered from the recession without the tax cut, and receipts would have risen anyways. To what extent receipts are no higher than they otherwise would be is highly debatable. Basically, some of the increase may be due to the tax cuts, but it is far, far less than Bush and other conservative commenters are implying.
The former Chairman of Bush's Council of Economic Advisers Gregory Mankiw has estimated that, over the long run, tax cuts will only partially 'pay for themselves'...
"In the long run, about 17 percent of a cut in labor taxes is recouped through higher economic growth. The comparable figure for a cut in capital taxes is about 50 percent."
So let's not get carried away with singing the praises of Supply Side economics and the Laffer Curve.

And let's take the "cut the deficit in half" rhetoric with a few grains of salt, too. The benchmark figure the administration is using is the absurdly overstated $521 billion deficit they projected for FY2004. The actual deficit that year was $412 billion, so if the deficit ends up being around $300 billion, then the deficit will have been cut by ~25%, not "in half". This overestimation is a long-standing pattern for the administration, in order to "claim credit later when the actual figures came in below forecast." (and the current forecast of ~$300b is in line with previous estimates from non-administration agencies, so this is really only a big surprise if you were buying what the White House was selling)
This is a huge structural deficit at a period right before entitlement spending is about to explode.
But this doesn't really brighten the long term budget picture very much. Bear in mind, though revenues are growing, we still have a $300 billion deficit...during an economic expansion. That is, we have a $300 billion structural deficit.

This isn't a cyclical deficit that could be erased with the next recovery. This is a huge structural deficit at a period right before entitlement spending is about to explode.
Heritage sees an $800 billion deficit in 2016, assuming tax cuts are extended and spending stays on its present course. If the economy and tax receipts continue to outperform, the deficit would still be at least $600 billion, Riedl said.
Enjoy the "tax cuts" while you can. They won't last long.
 
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Enjoy the "tax cuts" while you can. They won’t last long.
The President’s healthcare program suddenly has an identifiable upside—

—the financial cataclysm that has been inevitable since FDR and the New Deal happened will happen when I’m young enough to do something about my and my families’ circumstances.

More tax cuts!

Hurry the day.


Yours, TDP, ml, msl, & pfpp
 
Written By: Tom Perkins
URL: http://
In any event, I’d like to see evidence a bit more rigorous than "taxes were cut...and eventually, a few years later, revenues rose!"
Well, it’s true, innit? :-D

Successes are always bastards with everyone claiming fatherhood and all. One wonders where everyone will hide when the fit hits the shan as SS and medicare balloon out of control?
 
Written By: D
URL: http://
Let’s get real here.

The NYT is opining that Bush is ginning up while deparate for good news.

They are partially right. Getting the Time to publish any good news is quite an effort so I can understand the President actually making an appearance to help add to the weight of it.

A good analysis of the current economic outlook is pretty darn good, but by the media coverage you would never know it. When the next recessions comes (and it will happen), that economy is going to look like a depression as noone will remember that "now" should have been known as the "good old days."
 
Written By: Neo
URL: http://
Enjoy the "tax cuts" while you can. They won’t last long.
I would say "enjoy the explosive entitlements while you can. They won’t last long."

Do you really believe that when faced with European levels of taxation and exploding entitlements generations X, Y and Whatever will go for the taxes?

yours/
peter.
 
Written By: Peter Jackson
URL: http://www.liberalcapitalist.com
That is, we have a $300 billion structural deficit.
While not intending this as an argument against cutting spending (let’s start with the Medicare prescription plan), it’s inaccurate to say that all $300 billion is part of a structural deficit. The Iraq War (a nonrecurring cost) is a $100 billion dollar item this year and then there’s $132 billion for last year’s hurricanes.

So if the structural aspect of the deficit appears to be less than a third of what you claim. I’m all for cutting entitlement spending and earmarks and the like, but let’s be accurate in our discussion of what’s structural and what’s cyclical.
 
Written By: Jody
URL: http://
It’s not clear that there’s any harm in a "structural" deficit. Contrary to conventional wisdom, it doesn’t have to be paid back, it can just be rolled over. One interesting source: the "Skeptical Optimist", e.g. Why Debt Doomsday is a Myth

He’s also points out that it’s vital to measure the deficit (and total accumulated debt) as a fraction of GNP rather than just looking at the absolute number. The historical chart of the total national debt is a nice scary exponential curve — but GNP has also been rising.
 
Written By: Scott Lawton
URL: http://Pajamasphere.com/
Jon is correct, it is hard to discern the exact effect the tax cuts had on the economy, as tax cuts do not happen in a vacuum. In addition to the tax cuts pumping more money into the economy, the FED also drastically cut interest rates which also had a highly stimulative effect. Obviously both of these policy actions resulted in the reversal of the recession. That said, I remember a whole lot of rhetoric during the election that tax cuts ALWAYS result in huge budget deficits. I believe that tax RECEIPTS have been going up for a number of quarters now - it did not take 4 years to show up (although there usually is a lag in the effect of changes in fiscal policy and that is why monetary policy is usually a better instrument to use to fine tune the economy, and even with monetary policy, it is generally held that there is a 6 month lag) The only problem was that govt EXPENDITURES were increasing faster resulting in a growing budget deficit and the appearance that tax cuts put us in the hole. The real news in this latest release is that tax receipts have now gone up faster than govt spending resulting in a decline in the amount of the budget deficit. This is pretty amazing when you consider the record Bush spending program (Katrina, prescription drugs, war, homeland security, etc.). Not to mention, the FED has been increasing interest rates for the last couple of years in a move to keep inflation under control, i.e. to keep the economy from growing too fast.
 
Written By: Greg Abbott
URL: http://
First of all, there is no such thing as a tax "cut" when you are running a deficit. There are merely tax "shifts." After all, someone will eventually have to pay the bill.

Why isn’t there any moral outrage on the right about passing a tax burden on to the next generation? There was a time when conservatives worked for the sake of the next generation. Now, they expect the next generation to work for them.

And remember, it was the Bush tax "cuts" that created the deficit. When Bush took office, the government was running surpluses. Wingers are hilarious; they hail the Bush tax "cuts" for bringing down the deficit when it was the Bush tax cuts that created the deficit in the first place.
 
Written By: mkultra
URL: http://
http://www.publicdebt.treas.gov/opd/opdpenny.htm
09/28/2001 $5,807,463,412,200.06
09/29/2000 $5,674,178,209,886.86
09/30/1999 $5,656,270,901,615.43
09/30/1998 $5,526,193,008,897.62
09/30/1997 $5,413,146,011,397.34
09/30/1996 $5,224,810,939,135.73

The debt went up each year. Moonbats can say there was a surplus, but when the debt increases, there is no surplus, unless moonbats use Enron style accounting.
The last time there was a decrease in debt was 1960, thus that is the last time there was a surplus.
 
Written By: ABC
URL: http://
actually, yeah, as time goes by i think generations x,y, & z just might accept the ungodly tax rates needed to keep the entitlement programs afloat. they’re quite a meek bunch, these modern children, having been taught by the government schools to get along; and the importance of being nice; and going with the groupthink "flow".

think about it: when have the generations in question ever protested anything political that the teachers and profs didn’t put them up to? and, since entitlements is a cornerstone of the professional educator’s statist philosophy, it’s not likely they’ll allow the mindless children to ever protest any aspect of it, ever.

ergo....the kids’ll get stuck with the bill, and they’ll accept it. just like they were taught.
 
Written By: jimmyquest
URL: http://
"taxes were cut...and eventually, a few years later, revenues rose!"
Could be worse, they could legitimately be trumpeting: "Massively increased spending...and eventually, a few years later, revenues rose!"

This being one of those other things that happened in the same period and which had an effect.

If only there was some libertarian group to opine "Why isn’t there any moral outrage on the right about passing the costs of lavish spending on to the next generation? There was a time when conservatives worked for the sake of the next generation. Now, they expect the next generation to work for them." (to paraphrase MK).
 
Written By: Unaha-closp
URL: http://
mkultra, you are partially correct, people on the right used to hyperventilate about deficits and now its the left that does so, its something about the party who is not in power vrs. the party in power.
Now, I am not saying Deficits don’t matter, and I would love to cut spending, but neither the deficits nor even the total debt is all that much of a problem as long as it is moving in the right direction. We can handle it.
Tax cuts, on the other hand are a good unto themselves even if they do not stimulate the economy. That is because it lets US keep more of our money. and puts pressure on the government to at least think about slowing spending growth.
 
Written By: kyle N
URL: http://impudent.blognation.us/blog
"After all, someone will eventually have to pay the bill . . .
Now, they expect the next generation to work for them.

See, but that’s not the only concern. By any stretch. Don’t get me wrong, I think we should drastically cut the deficit — and were I king, I could do it in an instant. I could probably done with just spending cuts and without much real pain to the country, but political forces being what they are I’d pretty much have to be King . . . but I digress.

Point is, the country that will likely have to pay the debt — assuming that ever really exists — is likely to be much richer than we are. Given that it makes sense to pass the debt on. Much for the same reason that, while payments on my $140K in student loan debt weren’t fun when I graduated law school, it also made little sense to scrimp to try to pay them off, given that the monthly payment is a nuisance for a partner in most firms and I was better off in the long run investing my paycheck in things like my 401K than I was reducing my debt load.

For example, the debt hasn’t been below a billion dollars since 1863, a staggering amount for the time that forced the government to print paper money. Today, we could pay THAT debt that was passed on to us in the blink of an eye. Given what we got for that debt, I’m rather glad it was passed on, personally. (It’s also the reason that this Bush’s $300B deficits are much less worrisome than were his father’s 15 years ago).

Which leads me to my next point — if you look at the historical record, the % debt increase we’ve experienced is rather mild for a country fighting a war on terrorism AND saddled with the permanent costs of Mr Johnson’s War on Poverty (not to mention recession for much of the term). Consider the change in debt for our previous wars:

1812-1814: Increase from $45,209,737 to $81,487,846 (and $127,334,933.74 two years later)

1846-1849: $15,550,202.97 to $63,061,858.69

1860-1865: $64,842,287.88 to $2,680,647,869.74

1917-1919: $5,717,770,279.52 to $27,390,970,113.12

1941-1946: $48,961,443,535.71 to $269,422,099,173.26

Given all this, the fact that the debt has less than doubled in the midst of a major war is quite astounding. And again, I’m rather glad that none of this debt was defeated with the argument that it shouldn’t be passed on to me. I’m paying interest on this just as much as the next guy (except the debt from the War of 1812, since Jackson paid all but $33K off — amazing that I today as we sit here could write a check for the nation’s 1828 debt).

http://www.publicdebt.treas.gov/opd/opdhisto1.htm
http://www.publicdebt.treas.gov/opd/opdhisto2.htm
http://www.publicdebt.treas.gov/opd/opdhisto3.htm
http://www.publicdebt.treas.gov/opd/opdhisto4.htm
 
Written By: Sean
URL: http://www.myelectionanalysis.com
Sean: I doubt very much that you could do that, mate.

Those were real dollars.

What you’re holding today are undoubtedly practically useful today — so far — but they represent nothing at all like the wealth comprised in 1828 dollars.
 
Written By: Billy Beck
URL: http://www.two—four.net/weblog.php
Billy’s right it would take about US$1 million to pay off that $33k debt in gold standard currency at current gold prices.
 
Written By: Unaha-closp
URL: http://
Point is, the country that will likely have to pay the debt — assuming that ever really exists — is likely to be much richer than we are. Given that it makes sense to pass the debt on. Much for the same reason that, while payments on my $140K in student loan debt weren’t fun when I graduated law school, it also made little sense to scrimp to try to pay them off, given that the monthly payment is a nuisance for a partner in most firms and I was better off in the long run investing my paycheck in things like my 401K than I was reducing my debt load.
We are that richer country now. We could pay off our deficit and debt rather easily and painlessly. But the political will is not there to do it. Of course, it would entail taxing the very wealthy on their wealth. And that ain’t gonna happen with the GOP in power. After all, the GOP exists to protect the very wealthy from being taxed.

As for your student loans, I imagine you paid them back. You didn’t pass them on to your children. Debt isn’t bad, as long as there is a plan to pay it back. The GOP has no plan or intentions of ever paying the debt back. After all, according to Bush, the economy is doing great. And if you don’t pay down debt when the economy is great, when do you pay it down?
 
Written By: mkultra
URL: http://
We could pay off our deficit and debt rather easily and painlessly. But the political will is not there to do it. Of course, it would entail taxing the very wealthy on their wealth.
Couldn’t it instead entail cutting spending on federal social programs?
 
Written By: Scout
URL: http://
According to my inflation calculator, it is about $500K. Regardless, it’s a manageable amount of debt for an individual, less than the value of many DC townhouses these deays. You get my drift. http://www.westegg.com/inflation/infl.cgi.

mkultra,

If you really believe that taxing the wealthy on their WEALTH would be painless (anymore than we already do through property taxes) — or that we’d be a particularly wealthy country after doing so — then there’s really no rational basis for us to continue our conversation. From what I’ve seen here, though, I should expect this to be an exercise in futility.

As for my loans, if I could work out an interest-only agreement with the bank for perpetuity I would take it — unfortunatley unlike a country, I have a finite lifespan. As for passing debt to the children, there’d be circumstances where that would actually make sense. For example, if I was 80 years old and saw a house valued at $500K on the market for $400K, it would make sense to take a mortgage and buy the house, even though my children would almost certainly have to pay the mortgage to enjoy the house.

Or, you can just look at the analogies put above. I’m quite GLAD that earlier debt has been passed down to me — you and I are still paying interest on the Mexican-American war, Civil War, WWI, WWII, etc. And I’m glad that the government didn’t resort to long-term economy-crippling fiscal policy such as what you suggest in order to try to pay that debt off — its the reason why you and I can shoulder the burden of the debt quite easily today rather than actually being crushed by it.
 
Written By: Sean
URL: http://www.myelectionanalysis.com
MK a tax on wealth? Good plan take the money from the productive sectors of the society and give it to the government...THAT will simply ensure that the deficit is large, taxes are high, and growth is low. Have you not noticed this trend in Europe MK?
 
Written By: Joe
URL: http://
Why isn’t there any moral outrage on the right about passing a tax burden on to the next generation? There was a time when conservatives worked for the sake of the next generation. Now, they expect the next generation to work for them.
Isn’t this exactly what Social Security does? Where’s your moral outrage at that?

yours/
peter.
 
Written By: Peter Jackson
URL: http://www.liberalcapitalist.com
"Have you not noticed this trend in Europe MK?"
MKUltra = Dorian Gray as "this trend" = Gray’s Protrait.

Yours, TDP, ml, msl, & pfpp
 
Written By: Tom Perkins
URL: http://
Couldn’t it instead entail cutting spending on federal social programs?
Which ones? For all the talk about drastically cutting the Federal budget that I read on this site, I have yet to read one comprehensive and realistic proposal to do that. Cut Medicare? Are you going to pay for Grandma’s pills? Cut SS? Is Grandma going to move in with you?

The bottom line is that the kind of massive cuts you are talking about would cause so much economic disruption that their benefits would be outweighed by their costs, even assuming the political will to cut was there.
If you really believe that taxing the wealthy on their WEALTH would be painless (anymore than we already do through property taxes) — or that we’d be a particularly wealthy country after doing so — then there’s really no rational basis for us to continue our conversation. From what I’ve seen here, though, I should expect this to be an exercise in futility.
Yes, all that wealth is really being put to productive use. Right.

You have yet to make the case that paying down debt - and reducing the interest we pay on the debt - would make us "unwealthy." How? You obviously don’t understand international finance. It’s not as if there is only American money from which we can borrow to invest. But that seems to be your position.

Some day soon this country will have to decide if it wants to tax the rich to move closer to the black, or if it wants to continue borrowing. I know which side you are on.
As for my loans, if I could work out an interest-only agreement with the bank for perpetuity I would take it — unfortunatley unlike a country, I have a finite lifespan. As for passing debt to the children, there’d be circumstances where that would actually make sense. For example, if I was 80 years old and saw a house valued at $500K on the market for $400K, it would make sense to take a mortgage and buy the house, even though my children would almost certainly have to pay the mortgage to enjoy the house.
Governments have finitie lifespans too. Espcially democratically elected ones. Think massive debt can’t bring a government down? I take it you have never cracked a history book.
Or, you can just look at the analogies put above. I’m quite GLAD that earlier debt has been passed down to me — you and I are still paying interest on the Mexican-American war, Civil War, WWI, WWII, etc. And I’m glad that the government didn’t resort to long-term economy-crippling fiscal policy such as what you suggest in order to try to pay that debt off — its the reason why you and I can shoulder the burden of the debt quite easily today rather than actually being crushed by it.
So I guess you are for the insecurity that is bred by indebtedness to Asian banks? For paying interest on debt to those banks instead of investing it in America?

Great.
 
Written By: mkultra
URL: http://
[the deficit] puts pressure on the government to at least think about slowing spending growth.

The problem is that the Congress and the President can think about it all they want, but they won’t actually do it absent something like pay-go. There’s also good reason to question the thesis that deficits lead people to think spending should be cut. As some guy @ Cato observed, deficit spending looks like free money, and actually incentivizes further deficit spending. The beast doesn’t starve itself; it’ll gorge until it dies some painful, awful death.
 
Written By: jpe
URL: http://
Fiscal judgment day comes when SS revenues are less than SS outlays.

This date keeps moving a bit, but it’s roughly 10 years out. When it occurs, there will have to be some portion of the budget targeted to making up the difference. Of course, this difference will get larger every year, until all of SS in on-budget.

Please none of the moot arguments about the T-bills in WV. New T-bills, old T-bills, what’s the difference when you try to go sell them .. no difference. You have to sell them to write the checks.

(OK, the old T-bills, because of their historical value, might fetch a bit more on the collectors market or e-Bay, but there are so many of them, I wouldn’t count on it.)

The real pain of this is that millions of "baby boomers" will be retiring to full time membership in AARP, the folks who vote more than any other demographic. No one will dare touch the "third rail."

Some how I see in my future, a series of political commercials with a replay of Bush’s SOTU saying that SS reform was block and the Democrats jumping up an applauding. These commercials won’t solve the problem either, but there will be plenty of time for recriminations and recriminations there will be.
 
Written By: Neo
URL: http://
Couldn’t it instead entail cutting spending on federal social programs?
Which ones? For all the talk about drastically cutting the Federal budget that I read on this site, I have yet to read one comprehensive and realistic proposal to do that. Cut Medicare? Are you going to pay for Grandma’s pills? Cut SS? Is Grandma going to move in with you?

The bottom line is that the kind of massive cuts you are talking about would cause so much economic disruption that their benefits would be outweighed by their costs, even assuming the political will to cut was there.
mkultra,

Certainly it would be disruptive if you just cut the programs quickly, is that your assumption?

Let’s remove the argument over which programs to cut — let’s assume we decide to cut them all. I’m not advocating eliminating the programs, I’m advocating removing them from the federal level. One by one, in a phased removal, each program is analyzed and a plan designed to best transfer a particular program to any state that wants to continue it. States that don’t want it just drop it. How a state determines if it wants a program or not is up to that state. If details are planned correctly, disruption should be minimal. There would be little perceived change for many people except an increase in state tax and reduction in federal tax.

I do agree that you haven’t read a "realistic" proposal for cutting federal social spending anywhere. I suspect that you never will. Cutting such programs would be the death of the modern Democratic party, which has made federal social spending one of its cornerstones, and as an obvious partisan no program will ever be realistic in your view.

Democratic pols also know this and fight against any attempt to cut. And this is what I don’t understand. Why do true liberals not embrace federalism? It is the perfect mechanism to put social programs into place. Many blue-staters complain that the red states prevent them from implementing their desires, but that’s because liberals seem to see only the federal level. A true blue state should have the political will to implement any social program it desires with no chance of a red state blocking it. Why not consider federalism as a realistic way to implement them? Each blue state could try different methods until the best emerged and could be emulated, then could demonstrate to the ignorant red-staters that their method does work for the greater good.

The liberal assumption for a time was that most Americans were liberal but just didn’t vote. It was "safe" and good to take the fights to the federal level because most people would approve. This assumption is now starting to look false, and it appears conservatives may have learned how to play the game the same way. Since liberals don’t want conservative social values forced onto them any more than conservatives wanted it the other way, doesn’t it make sense to reduce the power of the federal government so that there is less "forcing" going on?
 
Written By: Scout
URL: http://
As long as our GDP growth exceeds growth of the deficit, then the deficit will go down, not up. Also, government debt can be rolled over indefinitely. There is not some date in the future where our grandchildren have to "pay the bill" because they too can roll it over.

The key is not cutting spending or raising taxes, but promoting growth.

Someone else mentioned the Skeptical Optimist blog, and that’s a great blog.

 
Written By: Harun
URL: http://
Yes, all that wealth is really being put to productive use. Right.
So MK, do you think that it’s all buried in the back yard somewhere?
 
Written By: Mark A. Flacy
URL: http://
Neo,if the SocSec IOUs are worthless,then so are the pension obligations of the government to the military retirees as well as government retirees. On the monthly Treasury reports,the debt is listed on Sch.D around p.35.
For the government to redeem the IOUs in the amount necessary to pay the SocSec obligations,then current collections of taxes wil be used. At most,through the projection horizon,2% of GDP is needed in any one year to meet the redemption obligations or the funding shortfall.

Medicare,OTOH,will bankrupt the government much sooner than any SocSec shortfall has to be funded.The Trustees report shows that Medicare may consume as much as 18% of GDP or more than the entire government takes in from taxes of all types.
 
Written By: TJM
URL: http://
Whatever we consume today, including government services, reduces the wealth we pass on to later generations. (This is not, by the way, an argument against consumption but only the assertion of what should be so painfully obvious it should not have to be pointed out.)

Thus, and for about the umpteenth time, the issue is how much the federal government is spending and what it is spending for, NOT how it is financing that spending. If we finance a billion dollar project through current tax revenue, then as private citizens we collectively have a billion dollars less to leave to our heirs but also leave them less federal debt; if we finance it through debt, we leave them a billion dollars more but they also inherit a larger federal debt. For the most part, it’s a wash.

Obviously, what the government spends that billion on matters in terms of what future generations inherit. So, all other factors being equal, federal dollars spent on capital improvements is preferable to the same dollars spent on entitlement programs. But that is equally true regarding how we expend or invest our own individual wealth.

Typically, someone chimes in at this point to claim that debt financing is still worse than tax revenue financing because the lenders are substantially and increasingly foreign. Foreign debt can be troubling from a political perspective, but the economics in question are largely unaffected by the source of the capital being borrowed.
 
Written By: D.A. Ridgely
URL: http://
Yes, all that wealth is really being put to productive use. Right.
{snip}
I take it you have never cracked a history book.
I take it you have never cracked an economics book. Even one by Keynes or Galbraith, never mind Smith, Ricardo, or Friedman.

I love it when you say stuff like that. It tell anybody who actually understands economics just how seriously they should take your "analysis".
 
Written By: Billy Hollis
URL: http://
Ah, mkultra, so much sound and fury, signifying nothing. As per usual. Like I said, this is an argument that is probably pointless, if you honestly believe that a tax on wealth wouldn’t have devastating effects on the economy, both in terms of destroying that wealth and destroying the incentives to achieve that wealth (the latter are my more serious concerns). As for the case for not paying down debt, it has been made again and again, but you’re not interested in hearing it. Obviously, governments can be brought down by debt, but generally with a much larger debt-to-gdp ratio.

But you seem to think wealth grows on trees, and that we could have financed most of our previous debt by simply soaking the rich even more than we have in the past, and still have achieved the level of prosperity we have in our country today. With that set of beliefs, there really is no further point in arguing.
 
Written By: Sean
URL: http://www.myelectionanalysis.com
There are a lot of issues I would love to touch on here (including why something as empirically rock solid as the Laffer Curve keeps getting slagged on just because supply side popularizers keep overstating the case?) but I just don’t have the many hours required to go over them all. One however I would like to address and it is actually a fair question from mk!
So I guess you are for the insecurity that is bred by indebtedness to Asian banks?
This goes to something I am busy writing about that seems to afflict all of us, including professionals and economists. Jon touched on it a few posts back, and that is the prevalence of psychological barriers or biases to learning or analyzing information. Our impression of how the trade deficit and fiscal deficit are created and financed are awash in such a sea of misleading and incomplete information that real communication is often pointless. The accumulation of large foreign reserves in China is a good example.

The fact is that despite all the talk about it and all the numbers thrown around which supposedly we are to use to figure out what is going on, we don’t really know. Most of the data we have available to us is incomplete, doesn’t necessarily mean what we think it does, and we really have nothing but aggregates from which we are supposed to infer the actual situation.

When it comes to who owes who what (and the whole idea that a trade deficit should be thought of as debt is highly questionable) let us look at a surprising and rarely mentioned fact. To start I’ll reference a little known or talked about Dow Jones story:
China’s short term foreign debt far exceeds the level deemed safe by international standards, raising the risk of insolvency for some companies, a person at the State Administration of Foreign Exchange (SAFE)… At the end of 2005, China’s outstanding foreign debt totaled $281.05 billion, a 13.6% increase from the year earlier (or an amount equivalent to 32.8% of China’s total reserves)...
First, realize that SAFE is not prone to alarmist chatter. They keep a rather low profile, so I suggest this has to be taken seriously. Is this doom for China? No, SAFE is concerned and something will have to change if SAFE is correct. Now this might surprise people here in the US talking about our debt, and specifically to the Chinese, that China has outstanding foreign debt equal to about 1/3 of their foreign reserves. That is especially true if one believes that the massive growth in China’s foreign reserves is a product of our trade deficit (and it would absolutely astound people how little they actually know about our trade deficit and who it is really with) and if I told you we really don’t know how they have accumulated their reserves. So mk, maybe you are right, but the fact is we do not know what those reserves are made of, how they have been accumulated or many other things, people are just inferring your conclusion.

So anyway, we have our first clue. What is our second?

Well, if one examines China’s Trade Surplus & Fixed Direct Investment (FDI) inflows which should approximate what China earns each year we see something really odd. In 1998, 1999 and 2000 those numbers combined to far exceed the growth in China’s US$ reserves. That seems plausible, you don’t have to save everything you earn in US$. However, starting in 2001 we start to see these numbers diverge as China begins accumulating huge reserves denominated in US$. The only problem is China’s earnings are dwarfed by the amount being accumulated. In fact in 2004 for example China’s earnings surplus and FDI amounted to about US $60 billion while their US$ reserves grew over $200 Billion.


All kinds of theories might be proposed as to why this is true, but the obvious one is that the Chinese are borrowing massive amounts in US$ and that tantalizing clue from Dow Jones shows how much of that is short term. I am going to steal a bit from Gavekal who do some of the best work on this:
As our reader will not fail to notice, something a bit odd started to happen in 2001: China started saving substantially more money than it was earning. An odd fact from which we could only draw the following conclusions:

A) Large amounts of capital found its way to China through unofficial channels (although Macao’s growth would have led us to the opposite conclusion!).

B) Chinese and foreigners were betting on a revaluation of the RMB by borrowing US$ and buying RMB assets (real estate, factories…). Having ourselves participated in such trades (i.e.: buying Beijing apartments with 80% variable rate mortgages in US$), our natural inclination was to think that the explanation might lay there.
Given what we hear from SAFE I am going to infer a huge part of the reserve growth has been accounted for by B and other reasons for borrowing US$. What does this mean? It has a number of implications, but one of them is people such as mk should be careful about assuming we and not the Chinese have a problem with owing the other money. The data is very unclear except to those looking to confirm what they already believe. Somehow the Chinese are accumulating year after year twice as many dollars as they could possibly earn, my guess is they are borrowing and in huge amounts.

Another implication, also from Gavekal:
Chinese policy-makers could see their hands forced by the Fed who would in essence say: “either you tighten policy, or I (the Fed) will have to continue raising rates, hereby hurting my low end consumer (on which you depend) and/or your construction sector”… The second thing that strikes us is the admission that nearly a third of China’s reserves can be accounted for by short term US$ debt. This puts the Chinese economic miracle in a somewhat different light.
 
Written By: Lance
URL: http://
Scott Lawson posted a link to a essay purporting to tell us we should take the blue pill and relax. The highlights from that are below:
• The outstanding treasury securities will not all mature simultaneously, not even close;
Who cares? No one said that was the problem.
• When an old bond matures, it is exchanged for dollars that the government gets from selling a new, fresh bond;
And his point—and he has one—will follow.
• The steadily-increasing number of bonds held by the public requires a steadily-increasing number of tax dollars each year to be paid out as interest;
Yep. And they want that money back with interest without regard to how profitably that borrowed money was spent/invested.
• A steadily-growing economy generates steadily-growing federal tax receipts, even with no change in tax rates;
All other things being equal, yes.
• Therefore, in reality, it’s not an inevitable disaster, it’s a race between two growing numbers: interest payments and tax receipts;
Actually, in reality, it is a confidence game. Am I confident there always be people to buy new bonds when the old ones mature. This means I have to be confident that the tax rates the economy can bear will also allow the economy to grow in such a manner as to permit tax levels to the left of the Laffer curve to be maintained for the life of the bond. Also, am I confident the economic areas where the government’s taxed and borrowed moneys are being spent ones likely to contribute enough to economic growth.
• For several years, tax receipt growth has outpaced interest payment growth; in other words, the burden of debt has decreased."
The difficulty of paying the loans represented by bonds has decreased. For several years. Also, for several years, we have experienced a runup in real estate prices. If the relative ease of the government’s acquiring tax receipts is predicated on speculation, then how does that help our problem? How real is the GDP figure? And if one figures the relative cost per capita, will the influx if illegal immigrants who have recently raised our denominator for the equation past 300 million be people who are likely to be a net plus or negative? Recall those who stay will in their declining years expect government assistance to the degree natives expect it.
Conclusion: If interest payment growth stayed even with tax receipt growth, year in and year out, our grandchildren’s debt burden would be no greater than ours is today.
Like I said, a confidence game.
Bottom line: If the economy grows at least a fast as the debt grows, and inflation is low and under control, our ability to make growing interest payments will increase at least as fast as our obligation to make those interest payments.
Real bottom line, if.

If.

Yours, TDP, ml, msl, & pfpp
 
Written By: Tom Perkins
URL: http://

 
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