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.
ABC is reporting there may have been agreement reached between Congressional Republicans and Democrats.
Here, according to Democratic and Republican sources, are the key elements:
- A debt ceiling increase of up to $2.1 to $2.4 trillion (depending on the size of the spending cuts agreed to in the final deal).
- They have now agreed to spending cuts of roughly $1.2 trillion over 10 years.
- The formation of a special Congressional committee to recommend further deficit reduction of up to $1.6 trillion (whatever it takes to add up to the total of the debt ceiling increase). This deficit reduction could take the form of spending cuts, tax increases or both.
- The special committee must make recommendations by late November (before Congress’ Thanksgiving recess).
- If Congress does not approve those cuts by December 23, automatic across-the-board cuts go into effect, including cuts to Defense and Medicare. This "trigger" is designed to force action on the deficit reduction committee’s recommendations by making the alternative painful to both Democrats and Republicans.
- A vote, in both the House and Senate, on a balanced budget amendment.
Of course we’ve seen deals much like this before. Committees never seem to get around to the promised business and triggers never seem to get pulled and, as anyone would tell you now, the balanced budget amendment will never pass. Meanwhile, Obama is authorized to spend another 2 plus trillion we don’t have.
Madness. Smoke, mirrors and madness.
That’s twice now that the Democratically controlled Senate has rejected the GOP House’s plan on the debt ceiling and debt.
The onus, now, is on the Senate to do something. That means Democrats and Harry Reid.
Feeling all warm and fuzzy about that right now? After all, it’s been about 900 days since Senatorial Democrats have offered up a budget – one of the primary duties of Congress. In fact they’ve instead spent all their time rejecting Republican proposals and then tried to blame Republicans for inaction and intransigence. The irony, of course, apparently escapes them.
The 59-41 vote, on a motion to table the resolution passed by the House less than two hours before, ran mostly along party lines, easily reaching the simple majority required to sink legislation in the upper chamber.
Six Republicans joined Democrats to table the Boehner resolution: Sens. Jim DeMint (S.C.), Lindsey Graham (S.C.), Orrin Hatch (Utah), Mike Lee (Utah), Rand Paul (Ky.), and David Vitter (La.).
Boehner’s office said the Senate’s refusal to take up the House plan puts the blame on Democrats if the U.S. defaults.
“For the second time, the House has passed a reasonable, common-sense plan to raise the debt limit and cut spending and, for the second time, Sen. [Harry] Reid [D-Nev.] has tabled it," spokesman Michael Steel said in a statement. "The responsibility to end this crisis is now entirely in the hands of Sen. Reid and President Obama.”
Hard to argue otherwise, wouldn’t you say?
Of course this isn’t the end game, but Senate Democrats have to pull a few Republicans into the game before they can execute it and escape blame:
Senate Democrats’ strategy is to send such a compromise vehicle back to the House on Tuesday, which would put intense pressure on House GOP leaders to accept it or risk a national default after Aug. 2.
If Reid can persuade at least seven Republicans to join the Democratic caucus in passing debt-limit legislation, it would give him the upper hand in the standoff with Boehner.
Chicken Politics … all bloody chicken politics. If 7 Republicans join Reid, they’ll have sold Boehner and the rest of the GOP down the river. If they don’t, Reid and Obama are going to try to blame Senatorial Republicans for any default.
I offer the following:
President Obama, warning that time is running out to lift the federal debt ceiling, said Friday that a House GOP plan has “no chance of becoming law,” and he urged Senate Democrats and Republicans to come together on a “bipartisan compromise.”
Compromise? Where? This isn’t about compromise, this is about political timing. And apparently Obama is willing to see the default deadline pass because a short-term debt limit increase would put him at a political disadvantage next year (I don’t think he realizes what a default will do coupled with a dismal economy and high unemployment rate).
Meanwhile the Democrats still haven’t offered anything concrete. They seem content with the role of feces throwing monkeys. Perhaps they could dump the donkey and adopt that as their party symbol?
This isn’t leadership, it’s simply saying “no” without offering a viable alternative. But that’s nothing new with this president or the Democrats.
So you’re wondering why the “recovery” stalled? Well we all know that correlation is not causation, but this sure looks suspicious doesn’t it?
So looking at the chart, we see job growth starting to pick up at an average of 67,000 a month. Not earth shattering, but much better than the average (ten times less) after the passage of ObamaCare.
Why, people wonder, would something like that happen with the passage of a bill that is supposed to improve health care and make it cheaper to boot? Wouldn’t that encourage people to hire and expand.
Well … no. Because we had to pass the bill to find out what was in the bill. And what we’ve found out is none to pleasing.
As the report states, correlation cannot prove causation — but the change in course is statistically measurable and testing reveals a structural break between April and May of 2010. Moreover, small-business owners have said Obamacare is a deterrent to hiring. Take Scott Womack, the owner of 12 IHOP restaurants in Indiana and Ohio, as just one example. Before Obamacare became law, he had development plans in Ohio. Now, he’s worried he won’t be able to carry out his original plans unless Obamacare is repealed. Those restaurants he planned to open would provide jobs not only for his future employees, but also for everyone involved in the construction of the restaurant buildings themselves.
But … and you knew there was one, this threw a wrench into everyone’s works. Why? The Heritage Foundation points out 3 reasons businesses are discouraged from doing so by the law:
- Businesses with fewer than 50 workers have a strong incentive to maintain this size, which allows them to avoid the mandate to provide government-approved health coverage or face a penalty;
- Businesses with more than 50 workers will see their costs for health coverage rise—they must purchase more expensive government-approved insurance or pay a penalty; and
- Employers face considerable uncertainty about what constitutes qualifying health coverage and what it will cost. They also do not know what the health care market or their health care costs will look like in four years. This makes planning for the future difficult.
Korb provides the link between what that law is doing and the current debt and deficit talks going on in Congress:
The Heritage report recommends repeal — and comes as a welcome reminder that the health care law can’t be ignored as the president and Congress attempt to address the debt and deficit or as the nation attempts to right the still-struggling economy. Nor can it be ignored in the upcoming presidential election. Likely U.S. voters have said jobs and the economy are their No. 1 issue. That means the repeal of Obamacare should be a top priority, too.
Couldn’t agree more. I’ve seen any number of people saying “yeah, repeal it” but then asking “what are you going to replace it with”?
Uh, personal responsibility? How about we try that for a change? It is each citizen’s job to care for themselves and do (and pay for) those things necessary to see that they aren’t a burden on the rest of the citizenry.
What a concept, huh?
I have to admit, I sometimes get tired of being the voice of doom. Sadly, our political class–Republicans and Democrats alike–seems determined to follow the worst policy options available. So, doom slouches closer. The proximate doom they’re fiddling with this time is the approaching debt limit. Now, I yield to no man in my hatred for ever-increasing government spending, but this debt-limit battle is pointless. We will increase the debt limit. We have no choice.
Here’s the current situation:
OMB estimates federal revenues for 2011 will hit $2.17 trillion. Granny, our servicemen, and other such untouchables — by which I take him to mean Social Security, Medicare, national defense, and debt-service payments — will add up to $2.21 trillion, meaning that even if we cut the rest of the federal budget to $0.00 — no Medicaid, no food stamps, no Air Force One — revenues still would not cover these untouchables, according to OMB estimates…
Our deficit is about 40 percent of spending this year; continued recovery, if the estimates hold, will do some of the work for the 2013 regime, but even under current forecasts that are arguably too rosy, we’ll still be running a 26 percent deficit in 2013.
Even if we eliminate every penny of spending this year except for Social Security, Medicare, and Defense, we still can’t cover this year’s spending. And next year’s spending projects an economic recovery will save us, and reduce the deficit to 26% of spending. Absent such a recovery, next year we’ll be back to another 40% deficit.
And the politicians of both parties are nowhere near to making the appropriate cuts in the budget in years farther out than that. The biggest deficit reduction package currently on the table is for $4 trillion over the next 10 years. Which sounds impressive, until you remember that the actual projected budget deficit over the next 10 years is $13 trillion. So, we’re still $9 trillion short of closing the budget deficit for the next 10 years.
But, wait! It gets better! This $13 trillion figure assumes that interest rates will remain stable where the currently are. If interest rates for treasuries go up by 1%, that wil add 1.3 trillion to the deficit over the same period. As the moment, the Office of Management and the Budget (OMB) projections are for a stable average interest rate of 2.5%. Of course, the current 20-year average is closer to 5.5%, so a return even to normal interest rates will add up to $3.9 trillion to the deficit.
But the magic doesn’t stop yet! OMB forecasts growth rates of between 4%-4.5% from 2014 to 2014. The average trend rate of growth is between 2.5%-3% however. So, if we don’t get the strong growth the OMB is predicting over the next three years, and the following years, we’ll need to add another $3 trillion or so to the deficit over the next decade. And, frankly, if you believe Goldman Sachs today, a return to trend rates of growth seems..unlikely, as they’ve lowered 2Q GDP growth to 1.5% from 2.5% and 3Q to 2.5% from 3.25%. They also forecast unemployment at end of 2012 to be 8.75%.
So, the best case scenario is that we’ll add $9 trillion to the deficit over the next decade. A return to historical growth and interest rates–even if we assume the $4 trillion of budget cuts will actually happen–means a 10-year deficit of $16 trillion. Essentially, we will more than double the National Debt, pushing the debt to GDP ratio to about 160% by 2021.
And that’s the good news.
The bad news is that, in the current debate over the debt ceiling, everyone involved seems determined to play chicken with a default–even if only a selective default–of US treasury obligations.
Tim Pawlenty even suggested that a technical default might be exactly what Washington needs to send a wake-up call to the politicians about how serious the situation is. Others, like Michelle Bachmann, and a not inconsequential number of Tea Party caucus members are steadfastly against raising the debt ceiling for any reason at all.
This is insanity.
Any sort of default, even a selective default that would suspend interest payments only to securities held by the government, while paying all private bondholders in full, will have completely unpredictable results. The least predictable result, however, would be business as usual. A technical default–i.e., delaying interest payments for a few days–or selective default, or any other kind of default is…well…a default. It is a failure to make interest payments.
The most obvious possible result of any sort of default will be to eliminate the US Treasury’s AAA rating, and push interest rates up sharply. If we’re lucky, we’d be talking about a yield of 9%-10%…and an additional $5 trillion added to the deficit (running total in 2021: $21 trillion added to the national debt).
And, again, that’s a best case scenario. Because it assumes that everyone will be willing to hold their T-Notes through all of this. If any major overseas institution or government–say, China–decides to unload their holdings, it could be the start of a flight from treasuries that will destroy the US Dollar in the FOREX, vastly increase the price of imported goods, like, say, oil, and spark uncontrollable hyperinflation in the US. The life savings of every person and institution would be wiped out.
Naturally, yields on interest-bearing instruments would then pull back on the stick and climb for the skies. Not that it’d matter much at that point, since the currency would merely be ornately engraved pieces of durable paper. Suitable for burning in the Franklin Stoves with which we will be heating our homes, in the absence of oil.
Flirting with default is extraordinarily reckless. I don’t even have the words to begin to describe how badly any sort of default might go.
The thing is, we don’t know–we can’t know–what the results of a technical or selective default might be. It might be the judgement of worldwide investors that there are no better alternatives to US-denominated securities, so they’ll just have to ride out a technical default, and accept their interest payments coming a few days late. It might be their judgement that unloading their US-denominated securities and losing a little money is better than the risk of losing everything through a currency collapse. It might be a lot of things, and we have no way of knowing which of those things might come to pass.
As Tim Pawlenty says, a default might be a wake up call. From an exploding phone filled with napalm and plutonium.
Whatever political points might be at stake, is it worth this level of risk?
The safe path here is a simple $500 billion debt limit increase. That’ll give us 6 months to figure things out, and try to discover some way to get our fiscal picture under control, and avoid a default. Government spending is out of control, but a default is really not the best way to impose fiscal discipline.
Especially when you’re talking about GDP growth:
The "new normal" is a term coined by the brain trust at the giant bond fund PIMCO. Anthony Crescenzi, a PIMCO vice president, strategist and portfolio manager, is part of that brain trust.
"The difference between 2 percent growth and 3 percent growth is of major importance and has major implications for the entire economy, for financial markets, for the budget," he says. And the heart of the problem is job creation.
Crescenzi and his colleagues argue that the U.S. economy could actually grow 2 percent a year without adding any new jobs. That’s because the productivity of current workers is rising at about 2 percent a year. "In other words a company can produce 2 percent more goods and/or services a year even if it doesn’t increase the number of people it employs," he says.
Smaller Incomes Mark Zandi, chief economist at Moody’s Analytics, thinks some new jobs would be added in an economy growing 2 percent a year, but far fewer than one growing 3 percent. "In a 3 percent world we’d create roughly 1.6 million jobs a year," he says. But he says that in a 2 percent world, job creation would be less than half — around 700,000 jobs.
Meanwhile, in China, growth hit 9.5%. So what is China doing, policy wise, that the US isn’t? Well, for one thing it is encouraging businesses and has established a positive business climate. Additionally, it isn’t borrowing money to pump into some black hole it calls “stimulus” at a rate faster than we’ve seen in recent history. Etc.
It’s pretty bad when you have to look to China to point out what the US should be doing. As Henry Kissinger recently said, the Chinese used to think we had the financial side of things pretty much figured out. Then this mess and resultant stupidity in reaction to it. The one thing we should have had the inside track on, we didn’t, because we chose to recreate the failed policies of the Hoover/FDR era without a world war to finally pull us out of the mess (or at least I hope that’s the case).
Is this the “new normal” as Crescenzi claims? PIMCO, btw, is the world’s largest bond fund (almost 2 trillion). PIMCO also recently announced that it would no longer be buying US debt.
Why? Because no one is confident the Federal Reserve knows what it is doing:
Some Fed officials at the June meeting also said additional monetary stimulus would be appropriate “if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated,” according to the minutes.
So they are considering a “QE3”? Note the change from “last August” to now.
Last August, when Bernanke signaled in a speech in Jackson Hole, Wyoming, that the Fed would embark on a second round of Treasury bond purchases, employers were cutting jobs, pushing up the unemployment rate to 9.6 percent. The weakness in the economy prompted Bernanke to focus on the possibility of deflation, or a broad-based drop in prices and asset values including homes and stocks.
The economy is in better shape now than in August, though hiring remains “frustratingly slow,” Bernanke said at a June 22 news conference. Employers added 18,000 jobs to their payrolls last month, the fewest in nine months, the government reported last week.
The Fed’s $600 billion Treasury bond-buying program, completed in June, was designed to spur economic growth, employment and consumer spending by lifting stock prices and reducing borrowing costs.
Is the economy in “better shape now than in August”? I say ‘no’. And so do most of the economic indicators. Dr. Robert Barro, Paul M Warburg Professor of Economics at Harvard University makes it clear where the current policy is leading:
Turning to quantitative easing, he warned that the US and UK are storing up inflation and that the Bank of England may be too complacent. Although there is no threat to inflation now, he said: "You have to have an exit strategy. Ben Bernanke [chairman of the US Federal Reserve] and [Bank Governor] Mervyn King are aware of this, but I think they are a little over confident about how they can accomplish it. Because you want to have this exit strategy without having a lot of inflation.
"That’s when the inflation would occur. If there’s a recovery and there’s all this liquidity and somehow the central bank has to reverse it."
That’s precisely where this is all headed – somehow at, at some point, the Fed has to wring out all this money it pumped into the economy. And that stored up inflation is likely to explode during that process – a real economy killer. Barro is saying he has little confidence in the Fed, deeming them “over confident” in their ability to do that while avoiding letting the inflation dragon out of the cage.
Meanwhile, in Europe …
Yeah, it’s a mess. And given the propensity of our policy makers to recreate the policies of the Great Depression, I don’t see it getting better any time soon. So yes, for at least the foreseeable future, the “new normal” may be 9.2% unemployment. Because there is still no reason or incentive for US businesses to take the chance of expanding and hiring in such an uncertain economic atmosphere.
Until they are much more confident in the policies of this administration and the Federal Reserve, few if any are going to change the status quo.
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Cluelessness seems to be a fairly rampant disease among those who seem unable to peer objectively at reality and analyze it. They prefer to pretend they know what they’re talking about and unhelpfully prescribe exactly the wrong antidote every single time (in this case, more of what we’ve watched fail for two plus years). And, as it turns out, the New York Times editorial board is peerless among that group:
It was not surprising to hear the Republican presidential candidates repeat their tiresome claim that excessive government spending and borrowing were behind Friday’s terrible unemployment report. It was depressing to hear President Obama sound as if he agreed with them.
And the NYT’s claim as to why that’s not the case?
There has never been any evidence that the federal debt is primarily responsible for the persistent joblessness that began with the 2008 recession. The numbers have remained high because of weak consumer demand and stagnant wage growth, along with an imbalance between jobs and job skills.
Who has ever argued that “federal debt is primarily responsible for the persistent joblessness?” Certainly there are other factors. However, there’s no question that excessive government spending – i.e. borrowing to spend – has had a hand in the stagnation we’re now undergoing. In fact, increased and excessive government spending has had no effect and, given the promises made, could be argued to have had a negative effect.
The debt is the indicator of the problem – excessive and unaffordable spending. As we’ve been pointing out for months, revenue isn’t the problem – spending is. So pointing to this strawman, as the NY Times does, is just more politics from the side who thinks it prudent to penalize those who produce in order to bail out those who spend what they produce (and the reason the Democrats insist on calling the present income tax levels “Bush tax cuts”). What doesn’t seem to penetrate the thinking of those who continue to push this line is one of the reasons we’ve had weak consumer demand and stagnant wage growth is the unsettled business and regulatory atmosphere this administration has created in its 2 plus years. That, of course is pushed aside by the NYT in favor of this argument:
The president may have a nebulous approach to unemployment, but he is hardly indifferent to it. His re-election hinges on reducing it. It is hard to understand, though, why Mr. Obama has adopted the language of his opponents in connecting the economy to the debt. To his credit, he talked about the one step that would work — investing money in rebuilding the country. But the debt-ceiling ideas he is now considering would make that investment much less likely by pulling hundreds of billions of dollars out of the economy at precisely the moment when the spending is needed most.
Yeah, there’s absolutely no connection between the “economy” and the “debt” is there? Of course there is? And pretending that borrowing money we don’t have to push it out in the economy and calling it an ‘investment’ doesn’t fool most rational folks. The NYT even points out that the last time the money was thrown out there is it mostly went to service state debt which only delayed the inevitable. Now, apparently, that will somehow be different in the face of “weak consumer demand”. Really? And, of course, the jobs the NYT laments about aren’t private sector jobs but government jobs (state and local) which we all know are the engine of our economy (/sarc).
The types of increases in revenue that government should be encouraging are those that come from private sector jobs. They provide tax revenue from created wealth. They don’t require the government to borrow money to “invest” (i.e. borrow money, create jobs and then tax the jobs created with the borrowed money and claim “increased revenue”. Make sense to you?).
So while I don’t disagree with the Times when it says “his re-election hinges on reducing” unemployment, it appears the Times would opt for the easy and wrong way to do it – borrow more money, pump it into creating make-work jobs just long enough to get Obama past the 2012 election. Then, who care? Debt ceiling, increased drag on the economy’s GDP and all that stuff, forgetaboutit. Well, at least till they get this guy re-elected. Then, of course, I expect a clarion call by the Times wondering how this could have all be so mismanaged and spinning and twisting it, as they have in this editorial, so it all ends up being the fault of the Republicans.
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