Deficit spending has risen faster under Barack Obama than any other president in history. That’s not to say other presidents weren’t in the red during their administrations, but in the case of Obama, its over 4 trillion dollars in less than a single term.
The latest posting by the Treasury Department shows the national debt has now increased $4 trillion on President Obama’s watch.
The debt was $10.626 trillion on the day Mr. Obama took office. The latest calculation from Treasury shows the debt has now hit $14.639 trillion.
It’s the most rapid increase in the debt under any U.S. president.
The national debt increased $4.9 trillion during the eight-year presidency of George W. Bush. The debt now is rising at a pace to surpass that amount during Mr. Obama’s four-year term.
The immediate problem isn’t about taxes or revenues, “it’s the spending, stupid!” Byron York echoes the point:
It’s conventional wisdom in Washington to blame the federal government’s dire financial outlook on runaway entitlement spending. Unless we rein in Social Security, Medicare and Medicaid, the conventional wisdom goes, the federal government is headed for disaster.
That’s true in the long run. But what is causing massive deficits now? . . . The bottom line is that with baby boomers aging, entitlements will one day be a major budget problem. But today’s deficit crisis is not one of entitlements. It was created by out-of-control spending on everything other than entitlements. The recent debt-ceiling agreement is supposed to put the brakes on that kind of spending, but leaders have so far been maddeningly vague on how they’ll do it.
Precisely. When treating a badly wounded person the immediate need is to stop the bleeding, not treat them for heart disease. Once the bleeding is stopped, then you can worry about their heart and future treatments.
The spending has to stop. And President Obama is not the man to do that. He blames his spending on everyone but himself which indicates to many that he has no intention of slowing it down:
Mr. Obama blames policies inherited from his predecessor’s administration for the soaring debt. He singles out:
- "two wars we didn’t pay for"
- "a prescription drug program for seniors…we didn’t pay for."
- "tax cuts in 2001 and 2003 that were not paid for."
While there is some truth to what he points too, the last is nonsense unless you believe the government has first claim to your earnings. Those aren’t tax cuts, they’re tax rates. They’ve been in place for almost 10 years for the first and eight for the second. Tax rates are changed all the time, but until recently they’ve never been referred too as “tax cuts … that were not paid for”. Also not mentioned in Mr. Obama’s litany is TARP – something he voted for – and the trillion dollar stimulus bill, not to mention the new health care law which analysis now shows bends the cost curve up.
Just as this economy is all his, so is the 4 trillion in borrowed money he’s spent during his term to little or no effect during his term. And the budget he submitted to Congress this year, the budget that was rejected 97-0, indicated he still doesn’t understand the spending has to stop.
Our debt now stands at 97.6% of our GDP. That’s default territory. Yet there are those who have attacked Standard and Poors for downgrading their rating to reflect that reality. This is serious business that effects or will effect everyone if it isn’t stopped. GOP candidates need to concentrate on the immediate problem and announce and run on their plan to stop the bleeding.
It might come as a surprise to some, but the bill Democrat Representative Jan Schakowsky (IL) plans to introduce as a jobs bill is long on borrowing money we don’t have and funneling that money through ineffective government programs. Apparently they still don’t get it.
The member of the Congressional Progressive Caucus would spend $227 billion dollars and, best case, create 2.2 million jobs (or, again best case, a little over $108,000 a dollar a job). Her plan reads like something from the Franklin Roosevelt administration:
Under her plan, the following policies would be implemented:
- The School Improvement Corps would create 400,000 construction and 250,000 maintenance jobs by funding positions created by public school districts to do needed school rehabilitation improvements.
- The Park Improvement Corps would create 100,000 jobs for youth between the ages of 16 and 25 through new funding to the Department of the Interior and the USDA Forest Service’s Public Lands Corps Act. Young people would work on conservation projects on public lands including the restoration and rehabilitation of natural, cultural, and historic resources.
- The Student Jobs Corps would create 250,000 more part-time work study jobs for eligible college students through new funding for the Federal Work Study Program.
- The Neighborhood Heroes Corps would hire 300,000 new teachers, 40,000 new police officers and 12,000 new firefighters.
- The Health Corps would hire at least 40,000 health care providers, including physicians, nurse practitioners, physician assistants, nurses, and health care workers to expand access in underserved rural and urban areas.
- The Child Care Corps would create 100,000 jobs in early childhood care and education through additional funding for Early Head Start.
- The Community Corps would hire 750,000 individuals to do needed work in communities, including housing rehab, weatherization, recycling, and rural conservation.
Perusing the list, there’s absolutely no possible threat of waste, fraud and abuse, is there? 750,000 people hired to “work in the community” doing “recycling” and “rural conservation?” “Weatherization”? Nope, no chance of waste, fraud and abuse, none at all.
Of course, nowhere in there other than initially, is there any mechanism to fund the “jobs” created in the future. They’d last as long as the $227 billion did and then the jobs would go away. That would include the teachers, police officers and firefighters. Those are simply in the plan to make it sound more acceptable. If the localities who will get the teachers, police and firefighters funded by this boondoggle can’t afford to hire them now, chances are very good they won’t be able to keep them when the money runs out.
The jobs listed are also mostly make work jobs on make work projects that might be nice to have done, but aren’t going to contribute to the private economy (the actual engine of the economy) in any meaningful way. Nothing is really “produced”, no wealth is created, no revenue – other than salaries – is taxable.
And finally, which health care providers is “Health Corps” going to hire? There’s a shortage of health care providers in the private market. Why in the world would they leave that to work for government in “underserved rural and urban areas?”
It is clear with Rep. Schakowsky’s proposal that the Progressive side of the aisle still don’t get it. How much louder do the American people have to shout to be heard?
Cut spending. Make government smaller. Make government less costly.
Rep. Schakowsky and the Progressives are still stuck in the 20th century. We’re already living the Raw Deal thanks to spendthrifts like her.
One of the irritating things about being deeply in debt is dealing with your creditors. Happily, if your creditor is, say Wells Fargo, they tend to stay within strict legal bounds when dealing with you. If you’ve been unfortunate enough to seek credit from fellows whose last names end in vowels, they tend to be more…forceful in delivering their messages to you. As it happens one of the United States’ creditors also has a name that ends with a vowel: China.
And they have a message. The more or less official organ of the Chinese Communist Party—which is to say the Chinese Government—is the newspaper People’s Daily. So, it is with much interest that I read an op/ed piece in that fine journal with the title, "China must punish US for Taiwan arm sales with ‘financial weapon’". As messages go, this one’s pretty simple.
Now is the time for China to use its "financial weapon" to teach the United States a lesson if it moves forward with a plan to sale arms to Taiwan. In fact, China has never wanted to use its holdings of U.S. debt as a weapon. It is the United States that is forcing it to do so.
The U.S. House of Representatives just passed a debt ceiling bill on Aug. 1. On the next day, a total of 181 members of the House of Representatives signed a letter sent to U.S. President Barack Obama stating that the federal government should approve the sale of F-16 C/D fighter jets to Taiwan as soon as possible to help ensure peace and stability across the Taiwan Strait…
Despite knowing that major creditor countries, especially China, would be the main buyers of its new debt, certain arrogant and disrespectful U.S. Congress members have totally ignored China’s core interests by pressuring the president to sell advanced jets and even an arms upgrade package to Taiwan.
U.S. treasuries will lose value if China stops or reduces its purchases of them on a large scale, which will also affect the value of China’s U.S. treasury holdings. However,as the situation has gotten out of hand, allowing Washington politicians to continue their game might lead to more losses.
U.S. arms sales to Taiwan can only create more jobs for the United States but cannot improve the ability of Taiwan’s military force to compete with the Chinese mainland. The essence of the problem is that some U.S. Congress members hold a contemptuous attitude toward the core interests of China, which shows that they will never respect China. China-U.S. relations will always be constrained by these people and will continue along a roller coaster pattern if China does not beat them until they feel the pain.
I am mildly amused by the claim that such sales both threaten "China’s core interests", but "cannot improve the ability of Taiwan’s military force to compete with the Chinese mainland." Both of these arguments cannot simultaneously be true.
Less amusing is the common attitude of loan sharks to their creditors displayed here using much the same language that Tony "The Shark" would use: Namely, if creditors don’t do what they’re told, you have to "beat them until they feel the pain."
With the recent rise in bond prices and drop in yields, the Chinese have a number of options. The least damaging to the US would be to sit out a few bond auctions, which would force interest rates up. But they’ve also got the nuclear option of selling off as much paper as the market could bear. Yes, they’d forego some yield payments, but they’d probably make a nice tidy premium over the original purchase price to make up for it. Rising interest rates now, at a time when the economy is weak, and short-term rates are already effectively zero, would slow the US economy. At the same time, a massive repatriation of renminbi to China would cause a steep drop in the value of the dollar in foreign exchange markets. This would raise the price of imports equally steeply. This would cause something very similar to the oil price shocks of the 1970s, that plunged the US into stagflation.
Naturally, the Chinese would be hurt by the reduction in their export capability. The question then becomes, "Which of the two political systems, China or the US, is more concerned about democratic pressure to change policy in order to improve the economy?" Who is more responsive to public pressure: our government, or the government that initiated the Tiananmen Square massacre?
I don’t know about you, but I wouldn’t expect Hu "The Kommissar" Jintao to be the one that blinks first.
Of course, if we weren’t $14 trillion in debt, we wouldn’t be very vulnerable to this sort of thing.
Mark Steyn, writing in Investors Business Daily, isn’t pulling any punches about what the near future holds for us if the Federal government keeps spending like there is no tomorrow. There won’t be.
[B]y 2020 just the interest payments on the debt will be larger than the U.S. military budget. That’s not paying down the debt, but merely staying current on the servicing — like when you get your MasterCard statement and you can’t afford to pay off any of what you borrowed but you can just about cover the monthly interest charge.
Except in this case the interest charge for U.S. taxpayers will be greater than the military budgets of China, Britain, France, Russia, Japan, Germany, Saudi Arabia, India, Italy, South Korea, Brazil, Canada, Australia, Spain, Turkey and Israel combined.
When interest payments consume about 20% of federal revenues, that means a fifth of your taxes are entirely wasted. Pious celebrities often simper that they’d be willing to pay more in taxes for better government services.
But a fifth of what you pay won’t be going to government services at all, unless by "government services" you mean the People’s Liberation Army of China, which will be entirely funded by U.S. taxpayers by about 2015…
And even those numbers presuppose interest rates will remain at their present historic low. Last week, the firm of Macroeconomic Advisors, one of the Obama administration’s favorite economic analysts, predicted that interest rates on 10-year U.S. Treasury notes would be just shy of 9% by 2021. If that number is right, there are two possibilities:
The Chinese will be able to quintuple the size of their armed forces and stick us with the tab. Or we’ll be living in a Mad Max theme park. I’d bet on the latter myself.
And we all know who’ll be running Bartertown.
Look, there’s no way to sugar-coat this. What’s coming isn’t gonna be pretty. Too many politically powerful groups have their fingers stuck too deeply into the DC pie to let it all just slip away without fighting tooth and nail. There are too many people who believe the gravy train of benefits coming out of DC should be endless to kiss that goodbye without a fight.
Look at what has been happening in Greece. They’ve built up two generations of people who cannot and will not accept that they’re simply out of money. Despite the fact that system has been thoroughly looted, they are adamant that the looting should continue.
If we don’t cut spending—and I mean real cuts, not cuts to some imaginary baseline that has $9 trillion is spending increases baked in—and some sort of serious tax reform that widens the tax base to raise more revenue, we’re done.
And don’t come back at me with some lame "Our GDP:Debt ratio was 120% at the end of WWII" silliness. Yes it was. And you know how we fixed it? We cut Federal spending from $92 billion in 1945 to $38 billion in 1949. For 2011, 40% of the federal budget was financed with borrowed money: We’ll spend $3.818 trillion, of which $1.645 trillion is borrowed. If we funded only defense, Medicare/Medicaid, and Social Security, and interest on the debt, we’d still have a deficit of $673 billion. Just to balance the budget this year—forget paying off any debt—we’d have to cut an additional ~25% from Health, Defense, and Pensions. Follow the link and download the CSV file, open it up in Excel, and run the numbers yourself. The magic number to balance the budget this year is the revenue of $2.174 trillion.
There’s no big mystery as to why we got a downgrade from S&P. The mystery is why Fitch and Moody’s haven’t downgraded US debt yet.
To begin paying down the debt will require massive cuts in government spending, substantially widening the tax base, and some healthy economic growth—and good luck with that as we add another couple hundred k government workers to the unemployment roles, lay off 1/3 of government contractors to boot, and start asking the bottom 50% of taxpayers to actually, you know, pay taxes, along with everyone else.
If you’re under 50, and reach retirement age with any modicum of personal wealth, you can forget seeing a dime in Social Security or Medicare benefits when you retire. You’ll be means-tested right out of all that.
You think the debt ceiling battle was disruptive? Well, hold on to your hats, folks.
One of the well known institutions that politicians like to point to when things are going well or bad is Wall Street’s stock markets. They’re an indicator that at times are used to point out that things aren’t as bad as they seem and as well as illustrate how bad things really are.
Today is one of those latter examples. The Dow and other indices plunged. The Dow Jones Industrial is off 512 points, its 9th steepest drop ever.
The question of course is “why” and what one has to hope is the answer is something to do with a temporary situation. But it doesn’t appear that’s the case. Looking out at the broad economy, it seems, investors don’t at all like what they see. Add the government’s continued inability to address the debt and deficit and you have what could be the beginning of many down days on the street.
"The conventional wisdom on Wall Street was that the economy was growing — that the worst was behind us," said Peter Schiff, president of Euro Pacific Capital. "Now what people are realizing is the stimulus didn’t work, and we may be headed back to recession."
That’s not what you want to hear when you’re hoping to see investment and an economy turn around. And unfortunately, Wall Street is a place with a herd mentality, and when some investors get spooked, they all get spooked. Yesterday indicated they’re spooked.
There’s "total fear" in the market, said Bob Doll, chief equity strategist at the world’s largest money manager, BlackRock.
European and Japanese policy makers had to step in and shore up their markets as the sell off gained momentum.
"In the last two weeks, we’ve been through the ringer," said Rich Ilczyszyn, market strategist with futures broker Lind-Waldock. "When we start looking at the recovery, there’s nothing to hang our hats on anymore."
So despite assurances that a “deal” to raise the debt limit would have a calming effect on world markets, the reality is it didn’t. And Europe is in pretty deep trouble which is also reflected in this loss. Add in the poor economic reports here that continue to pile one on the other and you have a situation that looks increasingly bleak. The unemployment report today is most likely only going to underline that fact with most economists expect poor job growth to continue and the unemployment rate to stay at 9.2%. And now the Dow has lost all of what it had gained in 2011.
Stay tuned. Rocky road (continues) ahead.
One of the smoke-and-mirrors aspect of this debt deal that experienced observers noticed immediately was the “super-committee” that would negotiate the cuts before the December 23 deadline. If that committee doesn’t agree upon suitable cuts, then the meat-axe of across-the board cuts, mostly focused in the defense area, will take effect.
Everyone with any sense understands that part of the process of making meaningful cuts in spending and thus the debt must address entitlement spending. But apparently the liberal left is fine with gutting defense instead. Nancy Pelosi has basically declared that any committee members she appoints will oppose all entitlement benefits cuts.
The debt limit fight is over, but the fight over entitlement programs will continue for months. In the weeks ahead, the leaders of both parties in both the House and Senate will name three members each to a new committee tasked with reducing the deficit by at least $1.2 trillion.
The ultimate makeup of that committee is key. It will determine whether this Congress will pass further fiscal legislation, and, thus, what the major themes of the 2012 election will be.
At a pre-recess press conference Tuesday afternoon, TPM asked House Minority Leader Nancy Pelosi (D-CA) whether the people she appoints to the committee will make the same stand she made during the debt limit fight — that entitlement benefits — as opposed to provider payments, waste and other Medicare spending — should be off limits.
In short, yes.
"That is a priority for us," Pelosi said. "But let me say it is more than a priority – it is a value… it’s an ethic for the American people. It is one that all of the members of our caucus share. So that I know that whoever’s at that table will be someone who will fight to protect those benefits."
Right. “Benefits” make up their “value” and “ethic”, meaning they’ll decide what you owe others and what you’ll pay for it and you just shut up, sit back and be quiet. That’s their “ethic”. Their “values” lie in redistributing wealth they don’t earn but they certainly find no problem in dividing yours out to those who they favor and/or who will vote for more “benefits” from your pocket book (or in this case, out of borrowed money).
Obviously Ms. Pelosi hasn’t yet quite figured out that the “benefits” that are key to her political agenda and provide her political power are no longer affordable. Claiming she’s clueless is an insult to the really clueless of the world. The welfare state has run out of money and all that is has promised is no longer affordable.
Until these people are replaced with people who actually understand the concept of limited government, property rights and the fact that they don’t have the right to anyone else’s earnings, nothing will change in DC or for us.
Let’s see how today went, shall we? We got our debt ceiling deal, but the Dow dropped 266 points, and the S&P 500 fell 33 points, so it’s now negative for the year. The yield on the 10-year T-note dropped to 2.61%. Gold, meanwhile, hit a fresh record high of $1,644.50/oz. So, I guess this year’s Recovery Summer is over.
None of this, by the way, has anything to do with the debt limit battle in DC. No one on Wall Street really thought a deal wouldn’t be struck. At the end of the day, everybody was pretty confident that the debt ceiling would be raised, and a default avoided.
Stock prices are volatile, of course, so one day’s movement doesn’t mean much, but we have lost about 800 points on the Dow since 22 July, so the trend isn’t good. What’s worse is the steady decline on treasury yields and the climbing price of gold. When you couple that with the 0.4% 1Q GDP increase, and the danger of downward revisions to the lackluster 2Q GDP over the next two months, the evolving picture doesn’t look pretty. We’ve also has a few weeks of unremittingly bad economic releases, showing the economy might be heading back towards recession, and unemployment getting closer to 10% than 8%.
So then what’s the problem? I mean, we’ve had our big stimulus, and our TARP and our Quantitative Easing I and II, and we’re still not only barely budging into positive GDP territory, but now all the signs are showing the economy slowing. What’s happening? Why isn’t any of this working?
I think the answer can be found in what I wrote in my previous post about debt levels, and how over the last several years…
…a body of peer-reviewed work has been developed (PDF) that shows that an excess of government debt serves as a drag on the economy, shaving at least a full percentage point off of annual GDP growth. And we’ve learned that this negative economic effect has a non-linear effect on economic growth as debt increases.
What seems to happen is that, as you begin to approach a debt-to-GDP ratio of 100%, economic growth slows. As you add debt, there’s a non-linear decrease in economic growth. and each additional increment of debt slows growth more than the last. As I also pointed out, this has some pretty scary implications for Keynesian policies, because as you add debt, you’re no longer stimulating growth, you’re hindering it ever more strongly.
That puts policy makers in a pretty bad spot. For instance, right now, real short-term interest rates are effectively zero, so the interest rate tool is no longer of any use to the Fed. You can’t lower rates below 0%. With that tool gone, the only thing left to try and stimulate the economy is to add more debt. Conversely, cutting spending will result in more government workers and contractors being moved over to the unemployment line, and the economy still slows. It’s a trap, where all the standard policy moves result in a slowing economy.
Back in the 80’s my fellow Econ and Business undergrads would debate about all the debt Reagan was adding, and trying to figure out when all that debt would begin crowding out private investment and slowing economic growth. As it turned out, it took far longer than any of us believed it would, but I think we finally have the answer.
The really scary this is that, if we decided that we had to bite the bullet, and impose some austerity, it really wouldn’t help much. We could cut discretionary spending by half, and all it would do is gain us a few years of breathing space before the coming explosion in Social Security and Medicare entitlements—about $60-76 trillion worth of them—eat up any short-term savings and debt reduction we might acquire. After all, discretionary spending—including defense—is only about 39% of the current budget anyway.
What part does economic growth play in all this? Well, it’s clear that 2% per year isn’t going to help much.
It is a generally accepted truism that the trend rate of growth in a mature economy is 3%. There are a lot of reasons given for this; slower population growth in developed countries, large sunk costs in plant and capital, blah, blah, blah. But why should any of that matter? Just because population growth is slow, it doesn’t necessarily follow that the growth of wealth or human ingenuity is hampered.
Here is a reason for that slow growth that’s almost never given. You see, one of the things that mature economies all seem to have in common is large government expenditures, extensive entitlements, massive regulatory oversight, and increasing debt. All of that is financed by taxation to remove money from the productive portion of the economy. So, one of the primary reasons we have slower economic growth is because we trade it for public goods.
Now, we may love these public goods. And they are certainly nice to have if you can afford them. But the evidence is increasingly that we cannot. if we could, we wouldn’t be racking up a level of peacetime debt that’s nearly 90% of GDP. Not only do we give up a lot of economic growth to sustain these public goods, but, apparently, we eventually give up all of it…at which point, we have to give up the public goods as well.
If we really want to climb out of this hole, then what we really need to do is to radically rethink what government should be, what it should be allowed to do, and how it’s funded. It’s not enough any more to cut budgets, while leaving the regulatory, entitlement, taxation, and spending structure intact. A truly radical solution would be to limit government spending and revenues to no more than 10% of GDP in peacetime. Replace the income tax with a 10% VAT. Eliminate the departments of Education, Commerce, Labor, Transportation and Agriculture. Repeal most Federal criminal laws. Privatize social security. Enforce free markets, rather than the crony capitalism we have now.
No one in our current political class has the slightest interest in any of those suggestions. Drastically reducing the size and scope of government is the only solution that can possibly increase economic growth substantially, and give us a shot at paying off our ever-increasing debt, but our current political class will never embrace that.
The thing is, reality doesn’t care what the political class—or anyone else for that matter—wants. It just is what it is. So, no matter what happens, we won’t have to worry about the deficit or government spending for much longer. Either we’ll fix the problem by electing a political class that’s devoted to cutting government across the board and paying down the debt. Or we won’t fix the problem, and the resulting bankruptcy and hyperinflation will allow us to monetize our debt, wipe out the life savings of every person in the country, and we will start over from scratch with a bright shiny new currency!
But the problem will get solved. The only question is how much control we’ll retain over the process, and how much government we’ll retain at the end of it.
Sen. Dick Durbin is an angry man, because he sees the debt deal as the death of Keynesian economics. For some reason, he appears to see this as a bad thing. In his comments today, discussing the debt ceiling deal, he noted:
“I would say … that symbolically, that agreement is moving us to the point where we are having the final interment of John Maynard Keynes,” he said, referring to the British economist. “He nominally died in 1946 but it appears we are going to put him to his final rest with this agreement.”
That’s a bit of hyperbole, but even if true…well…so what?
Lord Keynes had some valuable insight into how fiscal and monetary policy can work inside certain parameters, but outside those parameters, it fails. And I have no doubt whatsoever that even Lord Keynes would recognize that, once a country has accumulated enough debt, the debt itself becomes a drag on economic growth, and attempting to inflate your way out of it by piling on more debt is a solution worse than the disease.
We’ve actually learned quite a lot about how the economy works since the General Theory was published in 1936, not the least of which were the limitations of Keynesian theory in the 1970s. Keynes famously noted that politicians are almost always influenced by the opinions of some long-dead economist. Like John Maynard Keynes.
Keynesian economics should be dead. If nothing else, the existence of stagflation in the 1970s should have shown that Keynsian policy prescriptions were ultimately unworkable. Indeed, the very existence of Stagflation shows that several central tenets of Keynesianism are simply flat wrong. The response to this is usually that the 70s were an aberration due the oil shocks of the Arab Embargo, and the subsequent price hikes enforced by OPEC.
I am, of course, quite well aware of this. I did, after all, live through it.
I am also aware that Keynesianism regarded inflation and recession as being mutually exclusive--an idea that fostered a reliance of the Philips Curve, and constant seeking by the Fed to find the NAIRU. I am further aware that the Fed’s response to the oil shocks was a highly expansionist monetary policy that ultimately kicked off a wage-price spiral in a recession, rather than causing an economic expansion. Apparently, we found the limit at which expansionist policy ceased to be expansionary, and became merely inflationary.
What solved that problem was Paul Volcker’s Fed adopting an explicit Monetarist policy at the Fed to essentially ignore interest rates and concentrate on money supply growth. As hard as it may be to believe now, markets would almost shut down on Thursdays waiting for the M1, M2, and M3 numbers from the Fed. We mostly ignore that Thursday money supply release now. It took a fair amount of pain, and back-to-back recessions in 1981-82 with 11% unemployment to solve the inflation problem, but it did wring inflation out of the economy.
What we learn from all this is that Keynes had some serious policy limitations in the real world. I believe that we are currently discovering more of those limitations.
We’ve actually learned quite a bit about how economies actually work in the 75 years since The General Theory was published. Over the last decade, for instance, a body of peer-reviewed work has been developed (PDF) that shows that an excess of government debt serves as a drag on the economy, shaving at least a full percentage point off of annual GDP growth. And we’ve learned that this negative economic effect has a non-linear effect on economic growth as debt increases. I would submit that in light of this, that no matter how workable Keynesian theory may be in a regime of moderate public debt, with judiciously applied counter-cyclical monetary and fiscal policies, that it simply falls apart as the debt approaches 100% of GDP. One of the key problems is, of course, that we’ve rarely seen the high levels of public indebtedness we’re currently experiencing, so prior to this decade, much of the work in this area was theoretical, except for data from highly indebted emerging countries, which may not be entirely applicable to mature economies.
Sadly, we’re collecting that empirical data now.
I’d also point out that we also don’t have to rely solely on 1970s stagflation to note the failure of Keynesian predictions in the real world. One merely has to look at the wide-spread Keynesian predictions in the immediate Post-WWII era that massive budget cuts to pay down the war debt, coupled with the demobilization of 12 million soldiers, would lead to a return of the US to a depression economy. Of course, no such depression occurred. Quite the opposite, in fact.
It was clear, even a decade after the General Theory was propounded, that it was…incomplete.
One more thing that relates the current level of indebtedness is that attempting to apply Keynes over and over again–but only the deficit spending part–is that, in effect, you’re arguing that the Keynesian solution is to spend, spend, spend, not matter what the level of debt.
There’s simply no evidence at all that even Keynes would have bought into that sort of argument. Indeed, quite the opposite is true. Lord Keynes never argued for increasing public spending as a matter of course, but rather tempering spending with budget-cutting at the appropriate time. Properly applied, even Keynesianism tends towards a balanced budget over time. What we’ve done over the past three decades isn’t Keynesianism, it’s a perversion of it. We’ve spent like drunken sailors attempting to stimulate the economy, but we’ve never actually gotten around to cutting budgets and paying down the debt in the good times. We’ve simply accepted the new level of increased spending as the baseline.
My argument is that we’ve reached beyond the outer bounds where Keynes is applicable. However relevant his observations may be in a regime of limited public debt and counter-cyclical fiscal and monetary policy–which we’ve never really applied by the way, as we’ve ignored the budget-cutting bits–we’ve simply passed the point at which his policy prescriptions can be relied upon, even if they are correct in other contexts.
If Keynesianism is dead, it’s mainly because we’ve killed it.
UPDATE: From Billy Hollis in the comments:
One of the main reasons I have disdain for experts that are part of the political class is the Honors Economics course I took in 1975-76. The professor (an excellent one, and one of the few non-collectivist professors in the department) had us read and contrast John Kenneth Galbraith, who was the leading Keynesian proponent of the time, and Milton Friedman. Galbraith sounded like nonsense to me, and Friedman seemed logical and reasonably clear…
Pumping up the money supply artificially increases demand, trading present good stuff for future bad stuff (inflation, high interest rates, etc.). The only way you can believe that such a technique works in the long term is to assume people are stupid and will fall for the same short term thinking every time you try it.
I’d respond that what JKG called Keynesianism…wasn’t.
Keynes said that in recessions or depressions, the government should use deficit spending to pump more money into the economy. This extra spending would increase the money supply, and stimulate the economy. In addition, the government could cut taxes, allowing people to keep more of what they’d earned.
In good economic times, he said the government should operate at a surplus. That would keep the economy from heating up too fast, and set aside a store of money to be spent in the recessionary times. It would also reduce the money supply, and erase the inflationary pressures bought about by increasing the money supply during the recessions. Taxes could also be raised to help make up the previous budget shortfalls.
So, in a perfect world, the budget would balance, over the course of a business cycle. You’re still trading present good stuff for future bad stuff, but in relatively tiny increments. You really aren’t supposed to do it $14 trillion at a time.
What we had in the 1970s–and since–was half of Keynes. The easy bit. The bit that allowed us to spend, spend, spend, with nary a thought of ever applying fiscal austerity in the good times. Austerity is hard and unpopular. It’s easier just to spend money as a way to buy votes.
Since Keynesianism essentially requires the administration of wise philosopher-kings to administer it, democratically-elected polities have failed at implementing it.
Even more than that, Keynesianism essentially requires the ability to rather precisely target both the timing and amount of stimulus needed to ameliorate a recession, and the timing and amount of austerity to apply in an expansion to wring the expansionary and inflationary pressures out of the economy. But, absent a philosopher king who can operate in synch with the state of the economy, things begin to break down.
Timing the changes in fiscal and monetary policy are, at best, difficult in a democratic state. Messy political deals have to be made and legislation gets held up while waiting for amendments to satisfy some special interest, without which, too few politicians are willing to vote in favor. On the monetary policy side, the effects of policy changes aren’t realized for 8-16 months after a policy change, such as a change in interest rates. And, in either case, no one actually knows what the state of the economy is right now. At best we know what the state of the economy was last month, or three months ago, when the statistics were compiled.
Even at the best of times, with political players of unquestioned integrity, the immense difficulty of knowing the precise timing and amounts of expansionary or contractionary policy that is needed is a daunting task.
Theoretically, Keynes theory is elegant, and explains much about money-based economies. In practice, it’s so difficult and messy to try and implement, and so filled with negative incentives for the politicians who are asked to administer it, that it has simply proven unworkable.
Like communism, the fact that it’s never been properly implemented, or achieved the claimed result, raises serious questions about whether, in the messy world of real people, it ever can be.
Paul Krugman leads the “reaction” brigade with a lament that says cutting government spending while the economy is deeply depressed is a mistake. I have to say, that is not “unexpected”. Krugman has been a one-trick-pony ever since this recession/depression began. Spend, spend, spend – spend more, spend it even if you don’t have it and keep spending until we spend ourselves out of a recession/depression. For most that simply is counter-intuitive.
Krugman also does another thing that is not unexpected. He attempts to blame all of this turbulence on the Republicans while claiming the Democrats got rolled:
It is, of course, a political catastrophe for Democrats, who just a few weeks ago seemed to have Republicans on the run over their plan to dismantle Medicare; now Mr. Obama has thrown all that away. And the damage isn’t over: there will be more choke points where Republicans can threaten to create a crisis unless the president surrenders, and they can now act with the confident expectation that he will.
In the long run, however, Democrats won’t be the only losers. What Republicans have just gotten away with calls our whole system of government into question. After all, how can American democracy work if whichever party is most prepared to be ruthless, to threaten the nation’s economic security, gets to dictate policy? And the answer is, maybe it can’t.
The Republicans called “our whole system of government into question?” No overstatement there. Actually I saw it as more as the Republicans calling attention to the fact that this spending spree and expansion of government intrusion is anathema to “our whole system of government” as first envisioned and then founded. I think what Krugman really means is the GOP has laid claim to the narrative that the current size and cost of government isn’t at all what the founders established and it is time to get back to that vision.
Wow … terrible, huh?
Then there’s the NY Times editorial page. It too laments the deal. More so it laments the fact that Republicans used the crisis to push their election promise to cut spending. Apparently never letting a crisis go to waste only is good for one side. You have to love the phrasing of the editorial – Democrats apparently held out for a few principles while Republicans were simply political barbarians out to loot, plunder, kill and maim (politically speaking, of course):
For weeks, ever since House Republicans said they would not raise the nation’s debt ceiling without huge spending cuts, Democrats have held out for a few basic principles. There must be new tax revenues in the mix so that the wealthy bear a share of the burden and Medicare cannot be affected.
Those principles were discarded to get a deal that cuts about $2.5 trillion from the deficit over a decade. The first $900 billion to a trillion will come directly from domestic discretionary programs (about a third of it from the Pentagon) and will include no new revenues. The next $1.5 trillion will be determined by a “supercommittee” of 12 lawmakers that could recommend revenues, but is unlikely to do so since half its members will be Republicans.
The only somewhat good thing that came out of it, says the NYT, is the ability to continue to spend on entitlements even though we can’t afford them. And note too, the NYT is certainly not for any sort of a balanced budget. And trying to make government smaller, less intrusive, less costly and to have to live within its means makes the Speaker of the House and the rest of the GOPers who committed to all of that “radicals”. Goodness, if that’s how a radical is now defined, count me in.:
Democrats won a provision drawn from automatic-cut mechanisms in previous decades that exempts low-income entitlement programs. There is no requirement that a balanced-budget amendment pass Congress. There will be no second hostage-taking on the debt ceiling in a few months, as Speaker John Boehner and his band of radicals originally demanded. Democratic negotiators decided that the automatic cut system, as bad as it is, was less of a threat to the economy than another default crisis, and many are counting on future Congresses to undo its arbitrary butchering.
Sadly, in a political environment laced with lunacy, that calculation is probably correct. Some Republicans in the House were inviting a default, hoping that an economic earthquake would shake Washington and the Obama administration beyond recognition. Democrats were right to fear the effects of a default and the impact of a new recession on all Americans.
Well of course they were since they were primarily responsible for doubling the national debt in a few years and adding trillions upon trillions of dollars to it. It is they who ran it up against the debt ceiling in record time and now they want to claim that the GOP held the country hostage instead of letting them again have their way with spending money in the trillions of dollars that we don’t have? Balderdash.
Meanwhile, here is how some Democrats reacted:
* Representative Emanuel Cleaver, Democrat of Missouri: “If I were a Republican, this is a night to party,” he said to MSNBC.
* Representative Raul Grijalva, Democrat of Arizona: “This deal trades people’s livelihoods for the votes of a few unappeasable right-wing radicals, and I will not support it. This deal weakens the Democratic Party as badly as it weakens the country,” he added. “We have given much and received nothing in return. The lesson today is that Republicans can hold their breath long enough to get what they want.”
* Representative Nancy Pelosi of California, the Democratic leader: “I look forward to reviewing the legislation with my caucus to see what level of support we can provide.”
* Donna Brazille, Democratic strategist, via Twitter: “Fellow citizens, good night. The debate was one sided – so no winners, no losers. Claim your JOY! No whining because we’re in this together.”
“The GOP won the debate by playing quick & loose w/the truth. Bullyingeveryone, incl media. Stonewalling. Arrogance. This was unnecessary.”
* Robert Reich, former secretary of labor under Bill Clinton, via Twitter: “The heinous deal is preferable to economic catastrophe. The outrage and shame is it has come to this choice.”
“The radical right has won a huge tactical and strategic victory. Democrats have proven they have no tactics and no strategy.”
“It is not the case that ‘both sides’ gave up ’sacred cows.’ Rs linked the debt ceiling to their demand for smaller govt. They’ve got it.”
Got that folks – the “radical right” linked the debt ceiling increase to a demand for smaller government and got it. Isn’t that what they’d said they’d do? Had something like that have occurred on the left, of course, it wouldn’t have been “radical” and people like Reich would be calling it brilliant politics. Of course in this hyper-partisan atmosphere it mostly comes down to whose ox is being gored to understand which side is the radicals are on and which side has the brilliant politicians (well, at least situationaly brilliant).
Some Republican reactions:
* Representative Allen West of Florida: “At this time I believe this is a good plan for the American people.”
* Jon Huntsman, former governor of Utah and presidential candidate: “While some of my opponents ducked the debate entirely, others would have allowed the nation to slide into default and President Obama refused to offer any plan, I have been proud to stand with congressional Republicans working for these needed and historic cuts. A debt crisis like this is a time for leadership, not a time for waiting to see which way the political winds blow.”
* Representative Michele Bachmann of Minnesota, a presidential candidate: “Throughout this process the President has failed to lead and failed to provide a plan. The ‘deal’ he announced spends too much and doesn’t cut enough. This isn’t the deal the American people ‘preferred’ either, Mr. President. Someone has to say no. I will.”
* Representative Connie Mack, Republican of Florida, On MCNBC: “I don’t think the American people are looking for a deal or a compromise, they are looking for a solution to the problem. At the end of the day, I can’t vote for something that is going to ensure that we have over $17 trillion in debt.”
So, reading most of this, it would appear we can safely conclude no one is satisfied with the deal although given the spin coming from both sides, that most think the GOP got most of what it wanted. OK. And the Democrats are supposedly willing, at least for the most part, to sign on.
That’s “compromise” in today’s politics isn’t it? After all, when the “health care crisis” was upon us a little while back, Democrats certainly weren’t at all concerned with compromise or, for that matter, Republicans in general. Now they have to deal with the pesky bastards and their radical brethren and suddenly life is no longer good or simple.
Tsk, tsk (cue world’s smallest violin).
Oh, and I did love this, speaking of trying out a narrative:
The White House is straining to make the case that they’re playing a long-game. David Axelrod: “In the short term, everyone suffers politically. In the long term, I think the Republicans have done terrible damage to their brand. Because now they’re thoroughly defined by their most strident voices.”
Is that right, Mr. Axelrod? Well this little debacle has also “thoroughly defined” the Democrats and the President, and in a most unflattering light. Spendthrifts with no problem whatsoever in piling mountains of debt on future generations being “led” by an empty suit. Yeah, it’s really hurt the Republican brand to actually try to stand up for the principles they were sent to DC to uphold. They won’t be judged as Axlerod would hope they’ll be judged, but instead on how effective they were in accomplishing those principles
The so-called “Budget Control Act of 2011” (assuming both the GOP and Dem caucuses in Congress agree) has the following provisions per Katie Pavlich at Townhall:
* More than $900 billion in deficit reduction over 10 years through discretionary spending caps . $350 billion of that comes from the Pentagon;
* Debt limit increased by at least $2.1 trillion — through 2013…see below for more on how that happens;
* Bipartisan super-committee is tasked with finding $1.5 trillion in deficit reduction by November 23 presumably through tax and entitlement reform. There will be 12 members of the super-committee. House Speaker John Boehner, R-Ohio, House Minority Leader Nancy Pelosi, D-Calif., Senate Majority Leader Harry Reid, D-Nev., and Senate Minority Leader Mitch McConnell, R-Ky., each get to pick three members;
* Congress must vote on recommendations made by the bipartisan Congressional deficit reduction committee by December 23;
* If Congress fails to pass the committee proposal, triggers are enacted that spur at least $1.2 trillion in cuts and those will be close to 50/50 split between domestic/defense spending. But the triggers exempt cuts to Social Security, Medicare beneficiaries and low income programs. The cuts will take effect on January 2, 2013.
So over a third comes from the Pentagon with the remaining two thirds or just less than $600 billion from other discretionary spending. You can ensure that Democratic politicians will try to frame that as granny being pushed over the cliff.
Also note what the “trigger” exempts. As noted then, over 50% or $600 billion in cuts would come from the Pentagon budget and the rest from other discretionary spending. No mandatory spending is touched. That means they can’t use the “I don’t know if [name of favorite government redistribution program here] checks will go out this month” scare tactic. But it also means no serious work will be done on the programs that are killing us – the entitlements. It also means almost a trillion dollars in cuts in defense spending if Congress doesn’t act before December 23 of this year.
Assuming both houses of Congress pass this and Obama signs it, how does it work?
* Immediately after passage of this bill, the president certifies the US government is within $100 billion of hitting the debt ceiling and is given authority to raise the debt ceiling by $400 billion.
* That also triggers a request to increase the debt ceiling by $500 billion — with a process in which Congress can vote to disapprove. The expected outcome: the president vetoes the disapproval, Congress fails to override the veto, and the President is given the authority to raise the debt ceiling by $500 billion.
* The second tranche comes in December. If the super-committee fails to produce a path to reduce the deficit by $1.5 trillion, or Congress fails to pass it, the president makes a request for the authority to raise the debt ceiling by $1.2 trillion. Congress votes to disapprove, the president vetoes it, Congress fails to over-ride the veto, he gets the authority to raise the debt ceiling by $1.2 trillion.
* OR the super-committee succeeds in finding anywhere between $1.2 trillion and $1.5 trillion in deficit reduction and Congress passes it. The president automatically is given the authority to raise the debt ceiling by an equal amount, with no disapproval process.
In the previous cite you saw the make up of the “Super Committee”. Can you really imagine them coming up with all those cuts? My guess is many will be of the Harry Reid variety, where he counted future war spending that we weren’t going to spend.
Also look at the process of raising the debt ceiling. Obama must veto any Congressional disapproval. In a political sense that’s almost as good as having a short term debt ceiling increase to feature during the re-election campaign, because that’s going to come up more than once.
Boehner issued a slide show to put out the GOP’s side of the argument for what they got. One thing not mentioned in Pavlich’s summary is the fact that the bill requires a vote in both the House and Senate on a Balanced Budget Amendment. I’ll just be the first among many to declare that DOA.
Meanwhile the spinmeisters for the President have been busy this morning. More on the politics of all this and reactions in a later post.