Is it too big to fail? Megan McArdle believes the possibility certainly exists (I mean was Arnie really in DC yesterday just to see the sights). Says McArdle:
If the government does bail out the muni bond market, how should it go about things? The initial assumption is that they’ll only guarantee existing debt. Otherwise, it would be like handing the keys to the treasury to every mayor, county board, and state legislature, and telling them to go to town.
But once the treasury has bailed out a single state, there will be a strongly implied guarantee on all such debt. So you don’t give them the keys to the vaults, but you do leave a window open, point out where the money’s kept, and casually mention that you’ve given the armed guards the week off.
Of course the right answer is not to bail out either. Failure is a great teacher. And then there’s the moral hazzard angle.
But in this day and age, that’s approach is almost unthinkable apparently. Government, as we’re being told, is the answer to everything.
My fear, based on what the federal government has done to this point, is they’ll “hand the keys to the treasury” on both the muni bond market and the states (with bailouts). They have no business doing anything in either place, but we’ve already seen that the arbitrary assessment that some entity is too big to fail apparently takes priority over economic law.
Once a single state is bailed out, there is nothing to stop other states from making a similar claim on the treasury.
Should such a thing happen in either case (or both), Federalism, which is on its last legs anyway, will be officially dead.
The expected happened:
California voters soundly rejected a package of ballot measures Tuesday that would have reduced the state’s projected budget deficit of $21.3 billion to something slightly less overwhelming: $15.4 billion.
The defeat of the measures means that Gov. Arnold Schwarzenegger and the state Legislature will have to consider deeper cuts to education, public safety, and health and human services, officials have said.
Propositions 1A through 1E – which would have changed the state’s budgeting system, ensured money to schools in future years and generated billions of dollars of revenue for the state’s general fund – fell well behind in early returns and never recovered.
The only measure that voters approved was Proposition 1F, which will freeze salaries of top state officials, including lawmakers and the governor, during tough budget years.
Schwarzenegger, however, still doesn’t get it:
In a written statement Tuesday night, Schwarzenegger said that he believes Californians are simply frustrated with the state’s dysfunctional budget system.
“Now we must move forward from this point to begin to address our fiscal crisis with constructive solutions,” the governor said.
In reality it has nothing especially to do with the state’s “dysfunctional budget system”, but instead with the state’s profligate spending which has landed it in overwhelming debt. And the most “constructive solutions” would be to – wait for it – cut spending.
Why is it I have a feeling that such a solution will be mostly absent from whatever CA legislators come up with?
Bruce Bartlett gives you a different way of looking at the mess your political leaders, over a number of generations, have gotten us into and what it will cost, at a minimum, to fulfill the promises they’ve made over the decades.
To summarize, we see that taxpayers are on the hook for Social Security and Medicare by these amounts: Social Security, 1.3% of GDP; Medicare part A, 2.8% of GDP; Medicare part B, 2.8% of GDP; and Medicare part D, 1.2% of GDP. This adds up to 8.1% of GDP. Thus federal income taxes for every taxpayer would have to rise by roughly 81% to pay all of the benefits promised by these programs under current law over and above the payroll tax.
Since many taxpayers have just paid their income taxes for 2008 they may have their federal returns close at hand. They all should look up the total amount they paid and multiply that figure by 1.81 to find out what they should be paying right now to finance Social Security and Medicare.
To put it another way, the total unfunded indebtedness of Social Security and Medicare comes to $106.4 trillion. That is how much larger the nation’s capital stock would have to be today, all of it owned by the Social Security and Medicare trust funds, to generate enough income to pay all the benefits that have been promised over and above future payroll taxes. But the nation’s total private net worth is only $51.5 trillion, according to the Federal Reserve. In effect, we have promised the elderly benefits equal to more than twice the nation’s total wealth on top of the payroll tax.
We again have a new crop of political leaders making similar promises about a range of things, from energy to the environment to health care. Look at what they’ve done with the portion of health care they were given previously?
Someone – anyone – tell me how, given the performance of government to this point with Medicare and Medicaid, it is going to provide lower cost health care when it is obvious that it has been instrumental in doing just the opposite?
For some reason, I just can’t get past that negative and inconvenient truth enough to suspend disbelief and decide that once government is running the whole show, everything will fall in line and we’ll have world-class health care at a much lower price – all managed by government.
And one other point Bartlett makes – this mess was made by politicians and, as our laws are written, can only be fixed by politicians. But politicians rarely, if ever like to make decisions which will be unpopular and cause them to have to find new employment. No one likes to be the bad guy. So don’t expect much in the way of “fixing” this mess. You’re more likely to see the whole house of cards collapse because it is unsustainable and the administration in charge at the time blame the previous one (kind of like what you’re seeing now on just about everything else) than to see any political leader actually make the hard decisions necessary (and then win over the Congress) to actually take care of these looming problems.
Enjoy your Sunday.
These don’t really need much explanation. But they also should come as news to anyone who has paid even passing attention to the entitlement bomb over the years. From the Heritage Foundation:
More here if you can stomach them.
In addition to Bruce’s post below, chartng the rise in debt since Pres. Obama took office, I think it’s important to look at whether we can find historical parallels, and try to identify how closely such parallels may apply to the current economic situation in the US. Fortunately, a historic parallel–and a very close on at that–comes easily to hand.
The chart on the right is a comparison of how Japan’s increase in debt since 1989 compares with the performance of the Nikkei stock index.
As the authors of the chart point out:
[I]f large increases in government debt were the key to economic prosperity, Japan would be in the greatest boom of all time. Instead, their economy is in shambles. After two decades of repeated disappointments, Japan is in the midst of its worst recession since the end of World War II. In the fourth quarter, their GDP declined almost twice as fast as that of the U.S. or the EU. The huge increase in Japanese government debt was created when it provided funds to salvage failing banks, insurance and other companies, plus transitory tax relief and make-work projects.
In 2008, after two decades of massive debt increases, the Nikkei 225 average was 77% lower than in 1989, and the yield on long Japanese Government Bonds was less than 1.5% (Chart 6). As the Government Debt to GDP ratio surged, interest rates and stock prices fell, reflecting the negative consequences of the transfer of financial resources from the private to the public sector (Chart 7). Thus, the fiscal largesse did not restore Japan to prosperity. The deprivation of private sector funds suggested that these policy actions served to impede, rather than facilitate, economic activity.
They say that insanity can be defined of repeating past actions with the expectation of a different outcome. If so, how do we characterize the current government activity in response to the economic situation?
Happily–if that is the appropriate word–we may be able to put to rest fears of hyperinflation.
The bottom line, however, is that it is totally incorrect to assume that the massive expansion in reserves created by the Fed is inflationary. Economic activity cannot move forward unless credit expansion follows reserves expansion. That is not happening. Too much and poorly financed debt has rendered monetary policy ineffective.
So, we’ve got that going for us.
I put economics is [""] for a reason. And that has to do with the fact that there was little about the first 100 days which had much to do with economics and certainly wasn’t economical. Feast your eyes on this. Yes, it’s from the GOP, but “numbers is numbers”, folks, and check out the quote attached to the chart:
Heritage also weighs in with a few trenchant observations:
In his first 100 days, President Obama will have quadrupled the budget deficit he inherited while pledging to cut it in half, which would still leave a deficit double the size it was in January 2009.
Make sure you get that – quadrupled the budget deficit within 100 days. Promised to cut budget deficit in half. Even if he does that, it will still be twice the size of the budget deficit in Jan 2009 when he made the promise. Yup, smoke and mirrors.
The President came into office promising a “net spending cut” then signed the stimulus bill, which will dump $9,400 in new debt on the average American household. Under CBO’s estimate, if some programs become permanent, this would skyrocket to $26,600 per American household.
And we are reminded that there is nothing more permanent than a temporary government program (REA anyone?).
Just to give this all a little more perspective:
In his first 100 days, President Obama proposed a budget that would dump a staggering $9.3 trillion in new debt—$68,000 per household—into the laps of American children. This is more debt than has been accumulated by all previous Presidents in American history combined.
And yeah, for the lefties that includes the “selected but not elected” George W. Bush among all the president’s combined. Or said another way, 44 is spending more than the previous 42 combined (and no I didn’t screw up, Grover Cleveland was president twice at two different times).
So while you see the informationally deprived “celebrating” the “accomplishments” of his first 100 days, don’t forget that those yet to be born aren’t going to be quite as enamored with Obama as the present spendthrifts who think he’s doing such a great job economically.
For those of you who believe that you can spend yourself out of debt and enjoy the same level of taxation, a little dose of economic cold water is in order, appropriately on the day after tax day.
Many economists, including some who voted for Obama, do not believe that he can indefinitely avoid imposing tax increases much further down the income scale — on the middle class.
“You just simply can’t tax the rich enough to make this all up,” said Martin A. Sullivan, a former economic aide in the Reagan administration who said he backed Obama last fall.
“Especially just for getting the budget to a sustainable level, there needs to be a broad-based tax increase,” said Sullivan, now a contributing editor at Tax Analysts publications. “If you want to do healthcare on top of that, almost certainly, it just makes [a middle-class tax increase] all the more certain.”
And toss a little “cap-and-trade” on top of that, and whoa Nellie, the sky is the limit when it comes to the taxation necessary to support all of that.
How about those that believe that taxes should be used for “income equality” (also known as “tax the rich”)?
But even economists sympathetic to tackling income inequality say it will be difficult to avoid other tax hikes.
“There’s no way we’re going to be able to pay for government 10, 20 years from now without coming up with a new revenue source,” said Leonard Burman, director of the Tax Policy Center, during a forum on Obama’s tax proposals earlier this month.
Burman said a value-added tax is “inevitable.” Burman, deputy assistant Treasury secretary during the Clinton administration, said Obama should consider using revenue from the broad-based VAT to fund his healthcare plan. That would give middle-class and lower-income people incentive to keep taxes and health costs low, he said.
Translation for those who didn’t pick up on Burman’s last point – the “incentive” provided by the VAT (or Value Added Tax) is it will discourage “middle and lower income people” from using the medical system thereby keeping “health costs low”. If you want the real short version – rationing by price, the price being the cost of a visit plus the tax. Naturally, as a percentage of income, that would hit the middle and lower income levels much harder than the higher income levels.
And that 95% tax cut for Americans?
The president’s overall tax proposals, including perpetuating most of Bush’s tax cuts rather than allowing them to expire, will lead to $3 trillion in lost tax revenue over the next decade, according to an estimate by the Joint Committee on Taxes, which provides independent projections to congressional tax writers.
So $3 trillion in lost tax revenue, but an increase in the debt and debt service requirements:
More revenue will be needed to service the growing national debt. Because annual deficits are expected to remain above $500 billion for the next decade, Sullivan expects debt payments to more than double, from about 1.2 percent of GDP to more than 3 percent.
What does that mean for that “permanent” tax cut for the 95%?
Obama’s budget proposed that his signature Making Work Pay tax credit be made permanent, but it was not included in either the House or Senate budget blueprints, partly because doing so would have increased the size of the deficit on paper.
Lies, damn lies and “permanent” tax cuts.
All the promises are BS, folks – and that’s not because I want them to be, its simply how the law of economics works. We will end up paying for all of this fiscal profligacy somewhere in the very near future. And anyone that says differently or promises otherwise is blowing smoke up your skirt.
Sometimes, a message has to get out there, so that the people who need to hear it can hear it. Often, however, the message can’t be gotten out by presidents, finance ministers, or Fed officials. But, someone has to make the arguments. Samizdata’s Brian Micklethwait takes up the task today.
It needs to be said that under certain circumstances easily now imaginable, many Western citizens would argue, strongly and vocally, that those idiot foreigners who are now lending money to Western governments should in due course be told: sorry sunshine, you ain’t ever going to get it back. Our governments are bankrupt. Why the hell should we and our descendants in perpetuity be paying tribute to you? You knew that the money to pay you back would have to be stolen from us. You assumed we’d just cough up indefinitely. Well, we damn well won’t. You are now a definite part of our problem, and telling you to take a hike is going to be part of our solution. Our thieving class is now “borrowing” money from your thieving class like there is no tomorrow, and we are not responsible for the actions of either gang. A plague on both your houses.
We want you foreign thieves to stop lending to our thieves, now. And the best way for us to convince you that you should indeed stop lending, is to tell you that you are extremely liable never to see most of your money back.
Which has the added virtue of probably, approximately, being true, already.
The last sentence is the real kicker, because it’s beginning to look more like a question of when, rather than if. And, who of course. Of the Western nations, my favored picks, in no particular order, for winning 1st place in the 21st Century Debt repudiation race are, in no particular order: Hungary, Italy, Ireland, Spain, and Portugal.
Second place will be too close to call.
And you don’t have to couch it in Mr. Micklethwait’s incendiary libertarian rhetoric about their thieves and our thieves. I mean, I agree with it, but the plain fact is that even if you grant that everyone has the best intentions in the world, it still seems that we are very close to a tipping point where it could begin to happen. Bruce wrote about it earlier today.
If one of the Euro Zone nations decide to revert to Lira or Escudos, or whatever, the news that such a deal is in the offing will not only hammer the nation that tries, but anyone else who looks iffy, and, untimately, the Euro itself.
Investors are not going to sit around and wait to have their Euro-denominated paper revalued in Drachma. They’ll immediately start dumping that paper, and moving all the assets they can out of not only the offending nation, but any other country that looks like a weak sister. As the article Bruce quoted notes, “Such a wholesale shift would lead to a collapse in the money supply…” Gee, you think?
Germany, of course, would probably get the lion’s share of that new money, and to avoid a general economic collapse, they’d probably have to dump the Euro, too, and redenominate all that nice cash in Deutschemarks to avoid getting hammered as the rest of the Euro Zone economies collapse. Or, Germany might be the Euro Zone. Maybe France, too. France is more of a hindrance than a help, really, but palling around with the French is the price Germans paid for re-admittance to the human race, after the recent…unpleasantness.
No finance minister can yet say such unpleasant things publicly. But someone needs to to say them, especially since they are starting to sound less and less extreme.