An Economist on the Deficit

The kooky degrowth movement advocates for a radical reduction in economic growth to achieve its social and environmental goals. Degrowthers argue that the continued pursuit of infinite growth is ecologically unsustainable on Spaceship Earth, causing massive environmental destruction, social inequality, and political instability. Given that current global per capita GDP is currently around $12,000 a year, we’re either talking about a big reduction in rich country living standards or a world with far fewer people.--Pethokoukis 

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It is said U.S. maternal deaths are up. But methods of classifying them have changed. Calculating maternal mortality rates in 2015 and 2016 in a consistent manner for the entire United States without using the standard checkbox item yielded rates similar to the maternal mortality rates calculated from vital statistics before the standard checkbox item was introduced.

At least some, and perhaps all, of the apparent increase in recent years of maternal mortality rates in the United States is an artifact of a change in death certificate recording.

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E.V. graveyards are therefore an indictment of government policy, not capitalism. When private entrepreneurs enter into a nascent market, they put their own capital on the line; their ambition is tempered by the fear that failure will mean losing their shirt. But when the government agrees to cover part of the bill, or requires people to use that product, then it artificially lowers the risk.--Lancaster

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An Economist on the Deficit

The Federal government is spending a lot more than it receives in taxes, so it is running a deficit that is financed by borrowing in the bond market. The size of the deficit relative to total domestic production (GDP), a rough measure of our ability to pay for our indebtedness, is about 6% in 2023. That percent has been higher in the past, during wars and recessions, but those episodes required deficit spending, and then the government returned to fiscal responsibility. Not so today. We are at full employment and not engaged in world conflict, so the 6% deficit is an unprecedented problem, especially since about 30% of our debt is held by foreigners. The chart below from a paper by George Hall and Tom Sargent shows holders of U.S government debt from 1900 through 2022. The fraction held by foreigners (shown in orange) remained small through the mid-1970s but has ballooned since 2000, and this is cause for concern on a number of levels. First, we can no longer claim the old refrain, “we owe the interest and principal to ourselves so the government debt does not burden our children.” China and Japan, the largest foreign holders of U.S. obligations, receive interest payments that will eventually require higher taxes, especially with the new era of high rates. The budget deficit will grow as current government bonds mature and are replaced with higher interest-rate obligations. Second, foreigners can stop investing in U.S. government debt whenever they please, and that would either drive down the value of the dollar in the foreign exchange market, raise U.S. interest rates, or both. Those unpleasant outcomes are unlikely to occur as long as the dollar remains international money, the world’s medium of exchange, but that needs a commitment to fiscal discipline. The pound sterling was once the world’s reserve currency but lost its “exorbitant privilege” to the American dollar during World War I as Britain turned from creditor nation to debtor. It is not easy to replace the established medium of exchange, but it has happened before. America should tighten its belt when it can, not when it has to.--Bill Silber,
Former Marcus Nadler Professor of Finance and Economics, Stern School of Business, NYU; Author;

August 13, 2023, 4:30pm.

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The Third Rail

As sweeping layoffs plague Big Tech, DEI jobs are taking the brunt of the blow.
According to a Bloomberg report, listings for DEI roles were down 19% last year — a larger downtick than in legal or general human resources departments per data from Textio, a company helping businesses create unbiased job ads.
“I’m cautiously concerned — not that these roles will go to zero but that there will be a spike in ‘Swiss army knife’ type roles,” Textio Chief Executive Officer Kieran Snyder told Bloomberg.
Other sectors besides have dramatically carved into their DEI departments after deploying mass layoffs in anticipation of a pending global recession.

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Buoyed by imports from China and exports to Russia, Turkey’s economy grew by 5.3% in 2022, after expanding 11.4% in 2021. Only two years ago, the country’s currency was melting down and government bond yields spiked to 24%.
Now its stock market is the world’s top performer with a year-on-year gain of 70% while the Turkish lira has stabilized.
This is the most remarkable turnaround in the checkered history of emerging markets, and what makes it all the more remarkable is that domestic economic policy had little to do with it. Turkey’s wily president Recep Tayyip Erdogan traded political chips with China, Russia, the Gulf States, Israel and Europe to position Turkey in the middle of a flood tide of trade flows created by American sanctions on Russia.--Goldman

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Jamaica experienced no economic growth in exports per capita from the Napoleonic Wars to the end of the Second World Wars. Since there is a high correlation between exports per capita and GDP per capita, at least after 1850, Bulmer-Thomas argues that there are solid grounds for concluding that the Jamaican economy on a per capita basis experienced no growth at all for more than a century after the end of slavery.

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The Third Rail

Social Security and Medicare.

Spending on these two programs alone consumes 45 percent of the federal budget. Along with Medicaid, these programs drive our current and future debt. And to emphasize the seriousness of our predicament, note that Medicare and Social Security together face a shortfall of $116 trillion over the next 30 years.

$116 trillion!

This is not a situation created by serious people. So where will the solutions come from?

Well, not from the Democrats or the Republicans. Joe Biden's State of the Union address included many slurs amid the astonishing volume of personal invasions and fine tunings he thinks we need. One slur was the charge that the Republicans want to cut Social Security. The Republicans were outraged. Cries and catcalls! Of course, the Republicans would never think of such a thing.

That's probably true. As Sowell has said, "If the Democrats came up with a plan for all Americans to jump off a thousand-foot cliff tomorrow, some Republicans would come up with an “alternative’ plan in which we would all jump off a 500-foot cliff next week."

How can we escape these numbers?

Limits on Social Security and Medicare are a minor threat to the elderly in this country compared to the disaster of a $116 trillion deficit in 30 years. The evil is not in its control, it's in the mindless pandering that created it. And the insincere and foolish claim that such a deficit will not be interfered with is not open to debate; the question is how it will be interfered with and how much destruction will be reaped from what the incompetents disguised as American leaders have sown.

Taxes, Death and Debt

                         Taxes, Death and Debt

(These numbers are estimates just prior to the several trillion  dollars in new debt created because of a virus. For some reason, Black Swan events are rarely positive.))
Debt held by the public will rise from 81% of GDP today to above 98% by 2030 — from $17.2 trillion today to $31.4 trillion then.

This fiscal year, 2020, the federal government will collect $3.6 trillion in tax revenues. But the government will expend $4.6 trillion. This means that the government will have to borrow $1 trillion this year alone, in order to cover a deficit of 4.6% of GDP. This is the first trillion-dollar deficit not due to a global recession.

The money to fund the deficit comes from individual and institutional investors, both domestic and foreign. China is the second largest foreign investor in our federal debt, behind Japan.

According to the CBO, this overspending will continue and expand over the next decade, from 21% of GDP to 23.4%. Revenue as a share of GDP is projected to grow from its current 16.4% level to 18% in 2030, or $5.75 trillion. But that's not enough to cover the $7.5 trillion the federal government will spend then, hence a projected budget deficit of $1.74 trillion.

Debt held by the public will rise from 81% of GDP today to above 98% by 2030 — from $17.2 trillion today to $31.4 trillion then.

It is interesting that we are very worried about the theoretical risks of global warming to subsequent generations when the absolutely certain risks of debt to subsequent generations are ignored.

Trade and Jobs

                            Trade and Jobs
The current administration has linked the loss of manufacturing jobs with the trade deficit. This is extremely difficult because the world economy is not a level playing field and one circumstance in one area can not necessarily be applied elsewhere. Textile jobs in Vermont will not compare easily to sweat shops in Asia. 
Manufacturing jobs in the U.S. have fallen since the mid-70s and, during the same period, the trade deficit has risen. But, contrary to superficial thinking and politicians--not always the same because the politicians always have an extra mendacity card to play--, the two are not necessarily related. There may be a cause and effect relationship or it may be entirely coincidental. Or, like cats and the Plague, it may be a very complex relationship. 
While the percentage of Americans today employed in manufacturing occupations is indeed about half of what it was in the mid-1970s (14 percent today compared with about 28 percent back then), the decline in manufacturing jobs as a percentage of all American jobs started way back in 1945 (when it was about 44 percent of all jobs). Because for most of the period between the end of World War II and 1977 America ran annual trade surpluses, it is illegitimate to read the data as simply that trade deficits reduce manufacturing employment.

The Answer to Debt

From an article in Reason by Veronique de Rugy  addressing the deficit:

"The great news is that if lawmakers decided to do the right thing, we would know what to do. There is not only a large amount of literature but also a consensus among economists about what fiscal adjustment packages are the most effective at reducing the debt-to-GDP ratio with the lowest level of short-term costs.

First, based on past experiences in developing countries, we know that spending-based adjustments are more successful than tax-based adjustments at reducing the debt-to-GDP ratio. They also last longer.

Second, consolidations based on spending cuts are more effective if they focus on reforming entitlement programs. Spending-based adjustments, unlike tax-based ones, also lead to long-term growth.

Third, spending-based packages can sometimes encourage economic growth in the short term. Tax-based ones never do. Even the International Monetary Fund recognizes in its research that when spending-based adjustments impose a short-term slowdown, the declines in consumption and GDP are three or four times smaller than tax-based fiscal consolidations. These findings were confirmed in a recent paper by Harvard economist Alberto Alesina and his co-authors.

Now, the more depressing part of this body of research is that a vast majority of the fiscal adjustment experiences end up as failures because politicians choose to raise taxes rather than cut spending. Maybe that's because they continue to be more committed to the special interests benefiting from the government programs—e.g., seniors—than to the long-term health of their country."

"The great news is that if lawmakers decided to do the right thing, we would know what to do." Managing spending works better and last longer in controlling debt and may encourage growth, as well.... If lawmakers decided to do the right thing....
The problem here is that such approach would be hard, would require careful management, and demand leadership.

The New Budget

From the rugged Veronique de Rugy in Reason on the new budget deal:

 

"The bipartisan budget deal that the senators proclaimed so proudly yesterday would add $300 billion over two years to discretionary spending, not counting emergency funds and other add-ons. It would yet again burst the budget caps that Republicans negotiated in 2011 during a debt ceiling deal in exchange for giving more borrowing authority to the Department of Treasury. The debt ceiling would be hiked once again, allowing the Treasury to keep borrowing without asking Congress for an increase. Legislators wouldn't even have to pretend they care about how fast our national debt is growing.
Trillion-dollars deficits are coming back fast and probably are here to stay. And this time you can't blame that on a recession or a major war. It's a direct result of a Republican spending binge—an unwillingness to couple tax cuts with reductions in spending.

...we've repeatedly witnessed Republican hawks make deals with Democrats that amount to mutual back scratching: You can spend more at home if we can spend more abroad. This week's deal resembles those earlier ones in many ways, except that it's even worse. Military spending caps were $549 billion. The Senate wants to jack that up to $629 billion, with an addition $71 billion for war supplementals and emergency funding. The total for this year would be a cozy $700 billion, rising to $716 billion in the 2019 fiscal year.
In exchange, the Democrats get to hike nonmilitary spending by $131 billion over two years. The spending cap in this area stood at $516 in the 2018 fiscal year. It will now be $579 billion, with an extra $12 billion for war supplementals. That results in a sweet balance of $591 billion this year and $605 billion in the 2019 fiscal year. All this extra money will be spending on largely bipartisan priorities, such as infrastructure and the opioid crisis. The deal will probably pass in the House, despite the objections of the Freedom Caucus.
Worse still, the Republican leadership is trying to sell this spending spree as a bipartisan budget victory."

​
How many of our problems would be solved by the simple added sentence on every ballot, "None of the above."

Government Assets

While it is a bit hard to explain why, the U.S. government owns a lot of things.

A 2013 report from the Institute for Energy Research (understandingly writing about energy), states that the government owns “above ground” assets such as “buildings, lands, roads, railroad infrastructure, levees, dams, and hydroelectric generating facilities, to name just a few, many of which are underutilized,” and “below ground” assets such as “rights to mineral and energy leases, from which they receive royalties, rents, and bonus payments.” The IER report said  the mineral rights for oil and gas reserves are  worth $128 trillion.
128 TRILLION dollars!

Every once in a while, when William Devane somberly announces an update of the national debt, currently 19 trillion(!) dollars, it is reassuring to know that all these underutilized resources exist and that even a government official could, with a modicum of good sense and a smidgen of public responsibility, exploit to the nation's advantage

Some Graphs on Debt and Deficits‏

A common theme among conservative talkshow guys and gold salesmen has been the Federal Debt. The debt is the accumulation of annual Federal deficits, the amount the government spends minus what the government takes in. Given the disaster of 2008, the recent administration has not been terrible year to year. The crucial problem is that such annual debts are added onto total deficits, year by year. These astonishing graphs are from http://www.usgovernmentspending.com/

Sometime they load, sometimes they don't.

Here is the recent deficit history, remembering the national earnings are a factor in addition to government spending:

Here is the deficit as a percentage of Gross Domestic Product:

And a broader time chart of percentage of GDP:

Gross public debt is the sum of all sources of U.S. debt:

And this is the total Federal debt over the years as a percentage of GDP:

These last two show Monetized debt (blue), i.e., federal debt bought by the Federal Reserve System,  debt held by the federal government (red) e.g., as IOUs for Social Security, and other debt (green), i.e., debt in public hands, including foreign governments.

Chart D.11f: Recent US Federal Debt

Accumulating and Compounding Debt

Albert Einstein famously said, "Compound interest is the eighth wonder of the world. He who understands it earns it...he who doesn't ...pays it." 

This is an adaptation of an example of compounding numbers adapted from Dr. Albert Bartlett by the always very alarmed Chris Martinson.

Dr. Bartlett said, “The greatest shortcoming of the human race is the inability to understand the exponential function.”

"Suppose I had a magic eye dropper and I placed a single drop of water in the middle of your left hand. The magic part is that this drop of water is going to double in size every minute.
At first nothing seems to be happening, but by the end of a minute, that tiny drop is now the size of two tiny drops.
After another minute, you now have a little pool of water that is slightly smaller in diameter than a dime sitting in your hand.
After six minutes, you have a blob of water that would fill a thimble.
Now suppose we take our magic eye dropper to Fenway Park, and, right at 12:00 p.m. in the afternoon, we place a magic drop way down there on the pitcher’s mound.
To make this really interesting, suppose that the park is watertight and that you are handcuffed to one of the very highest bleacher seats.
My question to you is, “How long do you have to escape from the handcuffs?” When would it be completely filled? In days? Weeks? Months? Years? How long would that take?
I’ll give you a few seconds to think about it.
The answer is, you have until 12:49 on that same day to figure out how you are going to get out of those handcuffs. In less than 50 minutes, our modest little drop of water has managed to completely fill Fenway Park.
Now let me ask you this – at what time of the day would Fenway Park still be 93% empty space, and how many of you would realize the severity of your predicament?
Any guesses? The answer is 12:45. If you were squirming in your bleacher seat waiting for help to arrive, by the time the field is covered with less than 5 feet of water, you would now have less than 4 minutes left to get free.
And that, right there, illustrates one of the key features of compound growth…the one thing I want you take away from all this. With exponential functions, the action really only heats up in the last few moments.
We sat in our seats for 45 minutes and nothing much seemed to be happening, and then in four minutes – bang! – the whole place was full."

Deficit and Debt

"At every step, we were told our goals were misguided or too ambitious; that we would crush jobs and explode deficits," Obama said in this year's State of the Union address. "Instead, we've seen the fastest economic growth in over a decade, our deficits cut by two-thirds, a stock market that has doubled, and health care inflation at its lowest rate in 50 years."



He is right regarding medical costs--but not for long, as recently reported by the Congressional Budget Office (CBO). Changes to the American health system will result in the government spending 2 trillion(!) dollars over the next decade and take in 642 billion dollars in new taxes, penalties and fees related to Obamacare, about 50,000 dollars per person. Nonetheless between 29 and 31 million people will still be without medical insurance.
And regarding the deficit, the presidential math is again correct: The deficit has shrunk from its astonishing $1.4 trillion in 2009 to a projected $468 billion this year. That's a lot--but manageable as a percentage of the economy — 2.6%, about the historical average, compared with 9.8% in 2009. But this isn't about the deficit — it's about the debt.

"Deficit" is the amount we spend in excess of what we bring in every fiscal year. "Debt" is the total amount of money borrowed over the years to cover those excesses. We pay interest on the debt.

At the end of this fiscal year, debt held by the public will be 74% of gross domestic product. That is, as the CBO notes, "more than twice what it was at the end of 2007 and higher than in any year since 1950." Scarier still, it's getting worse, not better; beginning in 2018, deficits start to grow again. As a result, "by 2025, in CBO's baseline projections, federal debt rises to nearly 79% of GDP."
This year, thanks to historically low rates, interest payments on the debt are projected to total $227 billion. By 2025, according to the CBO, that cost  will more than triple, to $827 billion.

The government's appetite for debt will raise the cost of private-sector borrowing, lowering economic growth. More, unlike at the start of the financial crisis, when debt amounted to just (!) 43% of GDP, the overhang of already-huge debt could "restrict policymakers' ability to use tax and spending policies to respond."
This is not about politics; every political group is a party to this problem. Now the Left thinks we can grow out of it, the Right wants to shut the whole spending problem down. But this is not "Obama's Problem" or "Bush's Problem," it is "Our Problem."

Quiddity and Tweedledum

Thank Heavens! The fiscal cliff has been averted. Or crossed. Or climbed. Or breached. Or something. But the real story is how the administration outmaneuvered the Republicans. How there is dissension among the House Republican membership. Can a coherent philosophy be developed now? Is their base alienated? Will the current Republican leadership ever be able to match the Democrat expertise?

Of course, this is all nonsense. None of these presumed crucial questions are important at all but instead are part of  an intricate and refined political dance that has rules and judgments but is almost completely separate from the circumstances that surround it. What is important is how the nation is going to manage one trillion, trillion, dollars of deficit annually and the accumulation of that deficit into sixteen trillion, trillion, dollars of debt. For some reason the brilliant political guns that have been used to defeat the Republican rubes cannot be trained upon this more important problem.

It is like having a minuet contest in a burning house. And the press continue to judge the dance.

National Saving and Borrowing

What happens with the society's money? It can be divided up into three segments: 1. What the private (household and business community) does with its net activity (borrow or save/pay down debt) 2. what the government does net (borrow or pay down debt) and 3. what happens with the Current Account Balance (is there a trade surplus or deficit.) Indeed, the three are intimately related: X+Y=Z. If private activity is positive (i.e. savings are generated) and the government activity an equal amount of money borrowed (i.e. deficit equals the savings in the private sector) then the Account Balance is zero.

X+Y always equals Z

100 dollars private savings/debt reduction + 100 dollars government surplus = 200 dollars trade surplus.
100 dollars private debt + 200 dollars government surplus = 100 dollars trade surplus.

When the government starts to run big deficits, the only answer is to have the private sector start to run a surplus or to create some huge trade surplus. The government might look at some things we could export and encourage it.

(N.B. Natural gas in Japan is over $15, compared to $3.78 in the US. In Europe is in double digits.)

Illegal Deficits

When a nation is running a deficit, that means the net income in taxes and fees is less than the amount the nation pays out. Another way of looking at it is that the average American is taking more money from the government than he pays out in taxes. In essence, the average American household gets in government money more than it pays.

The average illegal immigrant household is instructive. There are about 13 million households of illegal immigrants in the U.S.. If one calculates the amount of money illegal households get per household from the government and subtract the taxes they pay, you get $17,000,(according to some guy named Edwin Rubenstein from a think tank in Chicago.) That calculates out to about $220 Billion dollars a year, or about 17% of the entire national deficit and about the annual interest paid out on the national debt.

If Confidence Falls in the Forest...?

The battle drags on. Productive vs. nonproductive spending. Freedom vs. planning. Confidence in macro policies vs. caution.

First, Robert Reich for the State (from Slate):
"If consumers can't and won't buy, and employers won't hire without customers, the spender of last resort must be government. We've understood this since [massive] government spending on World War II catapulted America out of the Great Depression --reversing the most vicious of vicious cycles. We've understood it in every economic downturn since then.

The only way out of the vicious economic cycle is for government to adopt an expansionary fiscal policy -- spending more in the short term in order to make up for the shortfall in consumer demand. This would create jobs, which will put money in people's pockets, which they'd then spend, thereby persuading employers to do more hiring. The consequential job growth will also help reduce the long-term ratio of debt to GDP. It's a win-win.

This is not rocket science. And it's not difficult for government to do this -- through a new WPA or Civilian Conservation Corps, an infrastructure bank, tax incentives for employers to hire, a two-year payroll tax holiday on the first $20K of income, and partial unemployment benefits for those who have lost part-time jobs. . . ."

And the always cautious Amity Shlaes on the other side:
On the lessons of Japan and the '30's: http://www.washingtonpost.com/wp-dyn/content/article/2008/12/09/AR2008120902785.html

No Lobbyist Left Behind

While we are being told always that the independent voter is the crucial piece to any successful campaign and election, we see in Washington two sides negotiating from positions hostage to their peripheral antagonistic bases. There is no plan to solve a problem; there is only maneuvering to force the opponent into repudiating some position that will outrage its already outraged support. The majority watch helplessly as the intense hourly evaluation of "no progress" is dutifully reported. Problems that have been apparent for more than a generation are being ignored as if a wreck was slow motion and could be suddenly reversed on demand.

Years ago Michael Crichton wrote a book connected to the question of global warming and opined that the American political system was dependent upon creating arbitrary crises before anything could be done and what was done usually had a random connection to problem solving. We were "a state of fear."

One of these days we will need a statesman or two for more than theater.

The Three Horsemen of the Apocalypse

Jason Hsu, a partner at Research Affiliates, has an article on the current Western economic conundrum called The 3-D Hurricane and the New Normal. It describes how Debt, Deficit and Demographics are working to the disadvantage of the developed nations and to the advantage of the emerging ones. The West has become top-heavy with older citizens. There are less workers to work and produce and to subsidize the older ones. Deficit spending is acceptable as a short term adjustment to a downturn but, when used long term, it becomes debt which steals from productivity and buying power. Inflation and a decrease in living standards is the eventual outcome.

This conflict seems so clear and civilized. Both sides of this coin are so plainly etched. One wonders what progress could be made if we faced these problems squarely.

On the other hand we could confront the problems squarely and have a nice St. John's Dance.