Let’s watch a great nation’s wealth burn away

Summary:   Part of our year-end national festivities should be looking at the deterioration of the Federal government’s finances. Especially since the resolution of the fiscal cliff follies shows that neither party in fact cares.  There are few deficit fighters, mostly arsonists.  As for spending our money, it’s burnt for political profit and private gain. Here we review the damage, put it in context, and consider an alternative.

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Contents

  1. Deficit = our love of spending + reluctance to pay
  2. The alternative
  3. More details: the debt, and our liabilities
  4. Comparing us to our peers
  5. For More Information

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(1)  Deficit = our love of spending + reluctance to pay

One measure of the Federal deficit is the increase in the government’s public debt (ie, net debt — that not held by the social security trust funds).  In 2012 the debt grew $1.1 trillion to $11.6 trillion (that’s our gross debt).

That’s a large number, but tells us little.  More useful is to compare it to our national income: the deficit is aprox 7.2% of 2012’s GDP, the debt is 73% of GDP.  Also important is the rate of growth: it grew by 11% in 2012.

See the numbers for yourself: the US Treasury website shows the Federal debt for everyday from 1993.

What did we get in return? Prosperity, one of the strongest economies among our peers. But like last winter’s snow, only an ephemeral gain. The failed hypersonic cruise missile, the insanely expensive F-22 and F-35 fighters, the massive domestic surveillance apparatus reading everybody’s email, the legions of domestic securities agencies busy entrapping dumb Arab-Americans, the vast flow of public funds into the maws of large corporations — and the wars. All these things comprise Federal spending beyond the baseline, funded by borrowing.

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In brief, our recovery results from government borrowing on a scale other nations either cannot or choose not to do.  We are borrowing and in effect burning the money, leaving behind little but a rotting infrastructure and memories of better days.  Only the debt will remain.

Government expert at work!
Government expert at work!

(2)  The alternative

We could use these borrowed funds to rebuild America’s infrastructure, preparing us for prosperity in the 21st century — putting tens of thousands of people back to work.

We have the ability to borrow vast sums at historic low rates; let’s not waste this opportunity.

(3)  More details: the debt, and our liabilities

This post looks at debt, the result of past spending.  It does not include obligations to spend money in the future (liabilities), which come in 4 forms.

  1. Firm obligations: pension benefits to government employees.
  2. Legislated obligations (ie, can be changed): Social Security, Medicare, TRICARE.
  3. Contingent obligations: sums which might be owed, such as the mortgage guarantee programs (eg, FNMA, GNMA).
  4. Implicit obligations: not legislated, but often assumed to be guaranteed (eg, FDIC, Pension Benefit Guarantee Corporation).

Categories three and four have received too little attention, and might be quite large.  For more about these see the IMF’s “Contingent Government Liabilities, A Hidden Fiscal Risk“, Hana Polackova, March 1999.

(4)  Comparing us to our peers

From “Taking Stock – A Progress Report on Fiscal Adjustment“, IMF Fiscal Monitor, October 2012 — Gross debt includes treasuries held by the public and the social security trust funds.

We’re on the upper right frontier: high debt, rapidly growing.  We’re keeping company with (slightly behind) Spain, Portugal, Ireland, and Italy.

IMF Fiscal Monitor, Oct 2012
IMF Fiscal Monitor, Oct 2012

(5)  For More Information

Other posts about the US Federal Deficit:

  1. A certain casualty of the recession: the US Government’s solvency, 25 November 2008
  2. Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009
  3. Government economic stimulus is financial heroin, 28 December 2009
  4. The limit to America’s power is our ability to pay for it, 18 April 2011
  5. About America’s economic recovery: the good news and the bad, 1 May 2012
  6. America is rich and powerful because we can borrow. Will this debt build a stronger America?, 5 June 2012
  7. US economic update. Everything that follows is a result of what you see here., 8 June 2012
  8. America’s strength is an illusion created by foolish borrowing, 10 October 2012
  9. Ed Dolan Asks: What Does it Mean for Fiscal Policy to be “Sustainable”? MMT and Other Perspectives, 30 November 2012

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17 thoughts on “Let’s watch a great nation’s wealth burn away

  1. I (still) refuse to worry about the Federal debt. I recently found one of clearer explanations I’ve seen of why the debt is not, and will not be, a problem from Forbes: No, The United States Will Not Go Into A Debt Crisis, Not Now, Not Ever.

    Krugman gives us some perspective on “the fundamental mismatch between what we want and what we’re willing to pay for that people like to claim exists” in On the Economics and Politics of Deficits.

    Our political dysfunction, though, is very scary. Three of our immediate economic problems—unemployment, instability originating in the FIRE sector and wildly rising health care costs—don’t even require creative solutions: successful approaches are already known from experience (ours and other nations’), yet we can’t address them effectively. Appropriate investment in infrastructure (as mentioned) and in education are other shortcomings where little imagination is required to see obvious possibilities for improvement.

    Even recognizing, let alone confronting, the problems engendered by almost unprecedented inequality, the complexity of our economic position within an evolving global context, and the unfolding impact of new technologies would seem to be entirely beyond the reach of our current politics.

    1. Coises,

      Reading stuff like that article by Pascal-Emmanuel Gobry is a waste of time. He has no idea what he’s talking about, and is just passing on gibberish he’s picked up somewhere. I strongly recommend sticking to articles that either by actual sources or cite experts for such large claims.

      His reason for not worring about inflation is moronic.

      But waaaaaaait, you shout, what about inflation? If the government prints money like crazy, won’t that create inflation? Well, in theory, yes. But probably not. Why is that? Because the US has an even bigger advantage than just being sovereign in its own currency (hi Greece), it also holds the reserve currency. The US dollar is the main currency that is used in most international transactions, it is held by all of the world’s central banks, and so forth.

      Why is this important? Well, another way to define inflation is to say that the supply of a currency gets out of whack with its demand: too much currency chasing too few people who want to hold it, and so its value drops. Well, when you have the reserve currency, the demand for your currency is always going to be extremely strong. There’s always going to be tons of people, all around the world, who want to use US dollars, because their transactions are conducted in US dollars. (And it’s highly unlikely that this will change soon–being the reserve currency has a network effect, meaning everyone uses the dollar as the reserve currency because everyone else uses it, creating a self-reinforcing cycle that’s extremely hard to break.)

      That didn’t work in the 1970s, when the US dollar’s status as the currency was much stronger than it is today (no Euro or RMB to challenge it). Under Nixon nations were exchanging gold for dollars, forcing him to close the gold window. Under Carter the US issued foreign currency bonds (d- marks and J-yen), and in desparation he appointed Volcker to administer shock therapy.

      Also, he appears quite ignorant about the nature of a reserve currency.

    2. I wondered about the reserve currency argument, too. It was a new one on me.

      I am aware that I am engaging in something not unlike “motivated reasoning”: intuition combined with what limited knowledge I have of economics leads me to believe that the folks who say the Federal debt is not a valid source of concern are correct. I would like to find a simple, clear and succinct explanation of their argument (one that doesn’t, for example, start by insisting that you must accept the One True Theory of Money before you can understand anything…), so that either the conclusion would be obvious to anyone not determined to believe otherwise, or else the flaws in the reasoning could be demonstrated.

      Not nearly as brief and simple as I would like, but from someone whom I think is a more reliable source (correct me if that’s wrong), here are four pieces by or with James K. Galbraith:

      Is the Federal Debt
      Unsustainable?

      Statement to the Commission on Deficit Reduction

      In Defense of Deficits

      Conversation between James Galbraith and Ezra Klein

    3. Coises,

      I think you grasped the nettle, something few people in these comments choose to do. The world is complex, and our views are shaped by the sources we rely on. My recommendation is to read a wide range of experts on the important stories you follow, to above all understand their range of views — and the key aspects of the debate.

      That’s what we seek to do at the FM website. Most posts are in effect journalism, reporting debates with quotes and citations of expert sources.

      You point to JKG, a clear writer among mainstream economists. He has had some interesting debates with Krugman (another clear writer in the econ mainstream). Here’s one:

      http://www.pkarchive.org/theory/dialogue.html

      Instead many people prefer to read bloggers at heavily ideological sources like Forbes and Zero Hedge, which rots the mind!

  2. How does the picture change if we take into account the debt of States and Municipalities? I suppose that i dominoes are to fall, they will start there.

    1. guest,

      Thanks for mentioning that. The data in the IMF monitor includes government debt at all levels. For the US that includes Federal, State, and local. Our net debt 73% ogf GDP for the Federal govt and 84% for “general government” (ie, all levels).

      For a look at the States’ financial condition, see American States on the brink of financial catastrophe, 5 April 2010. Most are OK, a few are in bad shape. The situation is worse at the local level.

  3. I was excited to see the title of the article and even much of the anyalsis which quite realistic and pragmatic (ie. conservative), leaving me wondering why you take some of the other positions we’ve discussed previously.

    As to Coise……. “I (still) refuse to worry about the Federal debt. I recently found one of clearer explanations I’ve seen of why the debt is not, and will not be, a problem from Forbes: No, The United States Will Not Go Into A Debt Crisis, Not Now, Not Ever”

    So foolish one hardly knows what to say in response…And, yes, I read the accompanying article.

    Krugman——————Krugman, I don’t like to prejudge, but when his name comes up you know that complete garbage is about to follow. Really a shame as i assume he is really quiet an intelligent person. And, yes, I forced my way through his article as well.

    Our political dysfunction, though, is very scary. Three of our immediate economic problems—unemployment, instability originating in the FIRE sector and wildly rising health care costs—don’t even require creative solutions: successful approaches are already known from experience (ours and other nations’), yet we can’t address them effectively. Appropriate investment in infrastructure (as mentioned) and in education are other shortcomings where little imagination is required to see obvious possibilities for improvement.

    Even in those cases nothing is “obvious”, imagination is required, and proof that what is necessary is in fact necessary without even saying what those necessary things are……

    Even recognizing, let alone confronting, the problems engendered by almost unprecedented inequality, (not true) the complexity of our economic position within an evolving global context, and the unfolding impact of new technologies would seem to be entirely beyond the reach of our current politics.(don’t see why)

    But, that’s just me..

    Thanks.

    1. “Krugman——————Krugman, I don’t like to prejudge, but when his name comes up you know that complete garbage is about to follow.”

      Thanks for saying that. Such statements are in my experience a reliable indicator of total nonesense to follow, and I can stop reading. I doubt you have any understanding of Krugman’s beliefs about ecnoomics, or any rational basis to disagree with them.

  4. http://krugman.blogs.nytimes.com/2012/12/24/the-fed-and-interest-rates/

    I’m not usually part of the Krugman fan club, but on this one he’s right.

    But maybe the killer is this: since when do the kinds of people who worry all the time about deficits believe that the Fed can monetize a substantial part of a large deficit, for four whole years, without any negative consequences? If you believed in the framework these people have, all that expansion of the monetary base should have produced runaway inflation by now, as many of them did in fact predict early in the game. It hasn’t — and no, don’t give me the bit about the government hiding the true rate of inflation. Independent estimates are not significantly different from the official gauges.

    Who is the prominent ‘deficit hawk’ economist? I’d honestly just like to know. Is there someone out there, with tenure, who is publishing who is worried about the US budget deficit?

    1. Science is, and has been since the 1800s, often a servant of politics. For wonderful examples see the books of Stephan Jay Gould.

      We see that today in climate science in economics, when these disciplines are used a hammers to mold public opinion. Used by people on the Right. And on the Left.

      Money and power are at stake, and experts can always be found to say what needs to be said to gain that power & money.

      “Is there someone out there, with tenure, who is publishing who is worried about the US budget deficit?”

      Most (not all) economists are worried about the US budget deficit. But public policy works over many time horizons (this is a critical concept when doing policy for both climate and economics).

      The deficit is not a problem today. But the aging of the boomers will put growing stress on the US economy during the next few decades, and entering this period with high debt AND deficits is not prudent. Since the US economy is like a battleship — it turns only slowly — we need a plan to steer it onto a sustainable course.

      That’s difficult due to the current economic weakness. Scylla and Charybdis. There are no easy solutions.

      The IMF’s reports (one is cited in this post) discuss this dilemma in detail, and give several solutions.

  5. Excellent discussion by FM. Also a great point by guest, who notes that states and municipalities are in even worse shape fiscally than the federal government. To a large extent, the federal government has saved money by sloughing off obligations (unfunded mandates) on the states — but since the states can’t print their own money and are in almost all cases by their state constitutions required to balance their state budgets annually, this results in a veritable debt holocaust in the states and consequent destruction of basic social services.

    To give just one example, the federal government’s ACA health care “reform” scheme dumped chronic uninsurable sick people into state medicaid and state health insurance exchanges. The problem is that so many chronically ill people with sky-high medical bills are flooding into state medicaid that the cost is bankrupting the states (medicaid is typically the highest or second-highest state expense in almost all states) so the states have responded by savagely upping the requirement to qualify for medicaid. This leaves millions of chronically ill people out in the cold with no health care. In many states, for example, if you own a car or have more than $1000 in the bank or more than $3000 worth of property, you don’t qualify for medicaid. This cuts out the working poor, who are exactly the group who most desperately need medical care and can’t afford it. The state health insurance exchanges have seen almost no one entering them, for the obvious reason that people with income so low they can’t afford to pay health insurance premiums also can’t afford the co-payments or nominally lower health insurance premiums in the exchanges. To put it bluntly, if you’re working part-time at Wal-Mart for minimum wage, you don’t have any money left at the end to the month to pay for *any* kind of health insurance premiums for your sick kid with Downs syndrome, so setting up state health insurance insurance exchanges is a phony non-solution.

    Again and again, the federal government has dumped problems on the states and then sprinkled a few dollars as grants, hugely underestimating the cost of these programs to the states, and dishonestly kicking the can down the road. The obvious solution to America’s health care problem is not to dump the chronically ill uninsurable poor people with sky-high medical bills on the states, but to reform America’s broken medical system to put in line with the rest of the developed world — i.e., nationalized single-payer health care. But this would cut the incomes of too many doctors and pharmacists and medical devicemakers and nurses (all of whom make between 200% and 2000% of what equivalent health care professionals make in Europe or Japan or any other developed nation), so that solution is off the table.

    The “No child left behind” mandates have likewise been a disaster. Huge costs for states, zero actual benefit since schools wind up teaching to the test and actual learning declines.

    Using ten states that have conducted cost analyses on all children meeting state standards, the study concludes that it will cost states between 24 percent and 46 percent to meet NCLB requirements. Helping low-performing students will cost approximately 100 percent more per needy student. Examining a number of studies of test score improvement, the article demonstrates that meeting Adequate Yearly Progress (AYP) goals is statistically unrealistic.

    Source: “No child left behind costs and benefits,” Phi Delta Kappan magazine, May 2003 vol. 84 no. 9 679-686.

    Also see Diane Ravitch’s interview on national public radio: “Standardized testing undermines teaching,” NPR radio, 2011.

    “I had never imagined that the test would someday be turned into a blunt instrument to close schools — or to say whether teachers are good teachers or not — because I always knew children’s test scores are far more complicated than the way they’re being received today.”

    No Child Left Behind required schools to administer yearly state standardized tests. Student progress on those tests was measured to see if the schools met their Adequate Yearly Progress goals. or AYP. Schools missing those goals for several years in a row could be restructured, replaced or shut down.

    “The whole purpose of federal law and state law should be to help schools improve, not to come in and close them down and say, ‘We’re going to start with a clean slate,’ because there’s no guarantee that the clean slate’s going to be better than the old slate,” says Ravitch. “Most of the schools that will be closed are in poor or minority communities where large numbers of children are very poor and large numbers of children don’t speak English. They have high needs. They come from all kinds of difficult circumstances and they need help — they don’t need their school closed.”

    Once again, yet another unfunded mandate — and, as so often happens, a mandate by the federal government that’s not only unfunded, but unrealistic and counterproductive as well.

  6. By accounting identity, deficits by government must accrue to actors in the private sector as net savings which can be used to pay down debt. We have a huge private sector debt overhang problem, so some way must be found to make that debt payable (otherwise it likely will be defaulted-bad for everyone).

    The current problem is that the deficits are accruing to our creditor class instead of our debtor class; people like the Crown family that owns General Dynamics stock, and a lot of bankers. These are the elites mentioned often here by FM. No progress toward debt reduction/relief will be made until government directs its largess toward the debtor class.

    I believe this is largely what happened during WWII that got us out of the Great Depression. The deficit spending went to Rosie the riveter, and Joe the steel worker, not a bunch of creditor fat cats like we have now. This is the one thing MMT (from the left) gets right. What MMT gets wrong is government cannot print goods or services nor can it effectively determine which G&S are needed by each of us; that’s what markets are for. The best use of our necessary and potentially beneficial deficits (create them by tax reduction for maximum benefit) is therefore transfer payments to those most in need. Military expansion and banker bail-outs not so much.

    For those taking notes:

    • Lower tax revenues to create desired deficits as they are a drag on growth by suppressing demand.
    • Spend printed dollars on helping the poor, the elderly, the sick, and the young thus stimulating demand.
    • Stop wasting money on military spending and on transfer payments to the FIRE and health care sectors, diverting such funds to infrastructure improvement.
    • When this works, (and it will), the resulting overheated economy will suffer inflation which can be used to reduce real incomes in the bloated FIRE sector, the MIC, and the Health Care sector by not keeping up on wage rates there. Debts can be more easily paid down with the inflated money as well.

    Basically this is a variation on “euthanize the rentiers” as advocated by Keynes.

    1. Peterblogdanovich goes to an important issue too often ignored by economists: aggregate identities often conceal important distributional effects.

      We saw this before the 2007-2008 crash, with many economists assuring us that US household debt levels were not too high. Unfortunately Bill Gates didn’t help out all those subprime debtors with their mortgages.

      These kind of distibutional effects are also important when considering the effects of the robot revolution (aka next waves of automation). Que bono from the productivity gains?

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