Andrew Sullivan has some rather sharp things to say about George W. Bush and the ballooning budget deficit.
About time! Sullivan has tended, I think, to give the President a fairly easy time on a lot of issues, perhaps on the basis of natural loyalty to a conservative pol and hatred of the other side. But there’s no getting away from the fact that the US budget deficit is set to grow at an alarming pace.
At the core of the problem is the raft of domestic programmes Bush feels obligated to support or which the GOP in the House and the Senate refuse to kill off. At least the defence spending aspect to the budget can be justified by the war. But although I support Bush’s tax cuts, especially the abolition of tax on dividends because of the economic benefits, he could be storing up trouble unless some discipline is imposed.
Why am I, as a Brit, fretting about the US deficit? Well, given the enormous importance of a vibrant US economy, it is in my interests that Bush doesn’t fall asleep at the wheel on this issue. There are no excuses.
I blog some comments in response here.
One reason to give Bush an easy time, in general, is that he is that the war is far more important than any of the rest.
I don’t like the in my direct monetary interests reason for Brits caring about the US. It’s a bit amoral.
I have a simple requests. Let’s leave aside for a minute the merits of what Bush is proposing spending the money on. What I want to focus on is the obesssion with deficits and surpluses. Could someone please explain to me the economic problems with budget deficits? Specifically, the economic problems with Bush’s proposed deficit that while in actual dollars is the biggest ever, is really only around 2.7% of GDP. That’s no where near the bad deficits of Reagan/Bush 1 nor is it as bad as the deficits regularly run by Japan and pre-euro Europe (in fact that deficit figure would be just fine under the euro requirements were the U.S. a part of such a thing).
I’m serious about this. I see all these fiscal conservatives (and opportunistic liberals) fretting over the deficit, while not mentioning why the deficit is bad and moreoever not taking into account the likely positive impact of the tax cuts.
Any takers?
Deficits are bad because they drain away resources from the productive sector of the economy into government – the parasitic wasteful sector. They raise interest rates and thereby hinder growth.
However, the worst part of the budget aren’t the deficits, but the great increase in government spending.
Jacob,
Am I correct that your stance is “governments are bad, so the more money they use, the worse”? (And thus has nothing to do with deficits.)
Also, I’ve just written about governments on my blog here.
Jacob, the position that deficits are bad because they raise interest rates and hinder growth is a re-hash of the cautionary notes sounded when Reagan tacked counter to ‘conventional wisdom’ of no deficit, no way, no how, bad, bad, bad – to the point that even his close advisors were squeamish about the potential impact, and the term voodoo economics was coined by his detractors.
The outcome, however, failed to realize any of these dire prognostications. Interest rates didn’t skyrocket. The economy climbed out of their 70’s doldrums.
It also gave us an example in practice of the theory that with overall rising economic tide, so rises the general revenue flowing in to governmental coffers.
While you’ll find a lot of agreement that there a lot of programs wasting a lot of revenue (particularly agriculture programs originally structured in the 30’s due to the depression), the thought of running a deficit of a modest percentage of GDP, for a short term, isn’t necessarily the horrendous practice the spinmongering will present it to be.
It might be helpful to keep in mind that the same offices which are now being heralded as Oracles of Delphi in their conveniently twistable renditions of the graphs and tea leaves of red ink gloom and doom, are the same folks that produced the much heralded ‘surplus’ numbers, which seemed to evaporate quicker than a light morning fog when the economy grunted and took a dump.
Russ, you ignorant slut (to paraphrase SNL).
The problem with the Bush economic program is two-fold. First, in the first 3 years of the Administration, they spiked non-defense discretionary spending at an 18% rate. Faster than any President of the prior 20 years. Just stupid. An education bill that Teddy Kennedy loved AND a Homeland Security boondoggle that will cost us a fortune for decades, and with NO RETURN.
Much worse than the proliferation of discretionary spending is the fact that the Social Security and Medicare time-bomb is ticking away. Recall that since the government accounts for itself on a cash basis, the enormous unpayable obligations of the future have no basis on current-year statements.
But when the baby boom generation begins to slowly retire in 2010 and then retires at a rapid clip beginning in 2015, the government deficits will explode. As dumb as the “lock box” Clinton and Gore language was, the concept was valid – the nation will be much better off if we run surpluses going into the Social Security and Medicare budget debacle, because it’s going to be a helluva mess to deal with.
It’s not short-term deficits that people are crowing about, it’s the fact that they will be long term do to structural reasons (the last tax cut! and baby boomer social security outlays that are coming).
It’s fretting about keeping the belt tightened NOW, so that we don’t face the type of demographic induced fiscal crisis that’s looming in Europe in the coming decades.
Cutting irrational agriculture subsidies (it really ISN”T about the small farmer anymore over here in the US) and ending the drug war (think of the new tax base, and profits to US pharmas) would help a lot, but those positions aren’t popular enough yet…and keeping immigration up will help the income tax base economically…US fertility rates have fallen comparably to those in Europe and Japan, and assimilated immigrants keep the economic machine rolling here (come get bootstrapped into the middle class!)
You know, I’ve got a libertarian pal who says it’s stupid for a libertarian (like me, he adds pointedly) who cares about the size of government to vote Republican, their small-government rhetoric notwithstanding. He notes that when Repubs are out of power, they spend their time swatting down Democrat initiatives and thereby restraining government growth. But the moment they assume power, they pull out all the stops and spend like sailors in a whorehouse while the Democrats look sullenly on and do nothing. Someone who wants smaller government, this friend of mine argues, should do all he can to make sure the Republicans are the permanent minority party.
I kinda think he might be right.
As usual, this site full of wonderful libertarians across the pond never disappoints.
First off, to G. Haubold, I’m not ignorant of anything you pointed out, which were all fine points (though I’m always happy to see an SNL reference enter into the discourse) . But, the crux of my question was with the obsession with deficits, not the merits of Bush’s spending plans. Hence the statement at the beginning of my post “Let’s leave aside for a minute the merits of what Bush is proposing spending the money on.”
Also, you said “Much worse than the proliferation of discretionary spending is the fact that the Social Security and Medicare time-bomb is ticking away”. Agreed. The problem is that it is Bush who is the only guy seriously discussing any sort of reform for this. Sadly, it’s a political non-starter because the AARP has every politician too scared like a like French poodle in order to do anything about this issue.
Jacob, you gave just what I expected. The textbook econ 101 answer that totally ignores what our actual experiences have been. Deficits are skyrocketing, yet I just refinanced my house for a over a percentage point less than when I purchased in the grand ol days of surpluses. Thanks to Wind Rider for stepping up to the challenge and reminding everyone of exactly what happened back in those supposedly terrible days of voodoo economics.
Um, according to an article in today’s WSJ, revamping of medicare is in the works. More block-grants, let the states decide what to do. And headstart. What I would truly like to see is each department audited. Put lots of those accountants back to work. Time to focus on the basics.
check out citizens against government waste– cagw.org for info.
So, really what I’m getting at is that the obsession with deficits and surpluses is a political smokescreen. Sullivan is a great columnist but I’ve noticed for a while he’s rather a lightweight in economic or fiscal issues.
Repeat after me. Supply-side works. Tax cuts do NOT cause deficits. Spending causes deficits. Reagan’s tax cuts did not cause the record deficits of the 80s & 90s. Rapid year-to-year increases in spending caused the budget deficit.
The reason I bring all this up is that Sullivan, and many people who want to root for Bush, are fretting over the deficits as if they are political suicide. THey are not. If the tax cuts cause the economy to bounce back further than it already has (never thought I’d see the day where 3% growth rate was considered stagnant), then the deficits won’t matter a bit. For 2 reasons, everyone over here knows the Democrats never met an appropriations bill they didn’t like. And everyone is going to be thinking “if deficits are bad, why are things going so well?”
My biggest pet peave in watching the political world has got to be budget battles. There is simply no other topic that is laced with more dishonesty and people who constantly want to change the subject.
The surplus did not occur because of fiscal responsibility. It occured because the budget gurus in Washington did not predict the economic growth of the late 90s and the resulting flow of tax revenue. And that’s a good thing, because they would have spent it. Both parties would have.
But, as I told many a Republican friend, Bush way oversold his first tax cut. He said we can do this because of 10 year surplus projections yada yada.
Repeat after me, the only budget number that matters is this year. Anyone projecting budget numbers more than 2 or 3 years out is a raving lunatic. Anyone spending projected money more than 5 years out is robbing your retirement.
Again, most everyone’s points about Bush’s spending proposals are pretty good points.
But, the reason I bring up the deficit is because the original post was fretting over the deficits (as was Sullivans). Deficits aren’t the point. Deficits and Surpluses, like all tax revenue will always be subject to the vaguaries of macro-economics, a subject no one has ever been able to accurately predict over the long haul. This is especially true if spending is never reigned in.
But, believe me, don’t fret over deficits. As long as they aren’t TOO big, they aren’t going to break the country, they aren’t robbing the private sector like your econ books say they are (at least not any worse than other government induced problems like regulations and general waste). And they might actually put a small cap on spending. But they sure as hell ain’t going to raise interest rates (ooops, did I say ain’t, yep I’m a Southerner!).
Please, put all deficit and surplus discussions in the trash can. THey are side shows to the real debates. The real debate over exactly what the size and scope of government should be. That’s what we should always be talking about. Politicians know this. If they mention deficits, that’s a sure sign they don’t have any desire to answer the hard questions.
Enjoyed the discussion as always!
Sorry about the condescending “repeat after me’s”. I got a little carried away. This topic is a pet peave of mine incase you guys didn’t know. Hope the discussion is still on tomorrow.
Folks, thanks a lot for all the above comments. Just one point here as I hope I wasn’t being misunderstood. I don’t think deficits are dangerous per se. I supported Ronald Reagan’s tax cuts in the 1980s, even though they were criticised at the time from folk obsessed about balanced budgets, etc. Deficits can force governments to rein in spending. My beef with Bush is that there appears to be no real rationale for the sharp projected rise in domestic spending. As I said, I backed Bush’s tax cuts, especially on dividends, which I would like to see replicated here in Britain.
Russ’s general point about cutting the size of government, is, of course, totally dead-on. I couldn’t agree more.
Elliott Temple’s comment at the top struck me as a bit unfair. What is wrong with a non-American taking a close interest in what goes on in Washington for personal reasons, including financial ones? And for that matter, why shouldn’t an American be interested in, say, the financial doings of EU governments?
Thanks again.
[sigh]
I observe that one couldn’t fit an individualist ontology into this discussion with a bloody shoehorn, so, naturally, I thought I’d give it a go.
I object to government deficit spending for the plain and simple reason that I do not stand for some goddamned creeping bureaubot threatening my life with a gun unless I hand him my money for his disposal.
Get it?
Russ, Wind Rider,
We all agree that the main problem is the size of government and the need to cut it.
I’m also willing to unlearn my Eco 101, and to concede that temporary deficits aren’t any worse than personal debt, which is normal.
The point is that in the last 40 years or so there hardly was a year without a deficit. (as far as I remember, 2000 was the only one). So running deficits on a permanent and ever increasing scale could be a sustainable policy ? Are there free lunches after all ?
I’m no econ wiz, but, concerning the size of government which rice bowl is going to be broken by the politicians in order to get this smaller government? Certainly not one with power. It will only happen around the edges and that will not solve anything. Can anyone tell me they see any evidence of smaller government? I think the electorate has the hang of this transfering tax revenues directly into their own hands – via groups like AARP etc. so I don’t think we will see the end of this for a long time.
Jacob, I reread my comments and realized I was a little more punchy than I meant to be. I didn’t mean to berate you over your comment. My entire point about harping on the deficit/surplus arguments is because many many smart people buy into it. Principly because our media is too frickin lazy (not to mention biazed) to do some simple research on what the impact of surpluses and deficits are. Nothing chafes my ass more than seeing a reporter say “but some experts claim that tax cuts could lead to bigger deficits.” This naturally causes me to yell at the TV “spending causes deficits you moron! Tax Cuts RAISE revenue” Like I said, there is very little honesty where budget battles are concerned and a whole lot of misinformation which lead to ignorance.
And Jacob, you ask a great question: “So running deficits on a permanent and ever increasing scale could be a sustainable policy ? Are there free lunches after all ?”
First off, they aren’t ever increasing. They ebb and flow like the economy. But, yeah, while they aren’t permanent, they sure seem like it. The surpluses we just experienced were an anomoly. But, understand it coincided with a nasty market bubble and a speculative financial sector that we haven’t seen in over 6 decades. So, the surpluses, just like the dot.com boom were an unnatural economic event.
But, the lunches aren’t free. They are financed through debt. Debt has a cost. But debt also has a maturity. The deficits are financed through T-Bills. T-Bills have varying maturity levels and they are being paid off all the time. Don’t think of the national debt as something that is continually being added to, like a pile of styrofoam cups that never decompose. That debt is a contantly changing pie. Old debt is constantly being retired while new debt is being added to it.
Now, going back on your first post, you could argue that money going into T-bills is money NOT going into other investments, therefore it is a drain on the economy and financial sector. But investors really don’t look at it that way. All investments have a price that is relative to the level of risk involved in that investment (or at least are supposed to). The 30-year U.S. T-Bill is considered by investors and financial appraisors to be the least risky investment on the planet. In fact, it is considered equivalent to the “risk free rate.” So, if a 30-year T-Bill is paying out 4% (for example, haven’t looked at their rates in a couple of years), then all other investments will need to pay out a higher amount to be considered worthy of the “risk” of the investment (because of the opportunity costs of forgoing a safe investment like a T-Bill). And those investments’ price will adjust accordingly.
So, in other words, the T-Bills actually meet a market demand. There is a demand for low risks or virtually risk free investments in order to diversify portfolios or to earn a moderate return if someone is nearing retirement. So, I don’t think the fact that deficits are financed with T-Bills is really taking away from the economy. It, in fact is performing an important function. This is probably unique to U.S. debt securities though I honestly don’t know that. So, debts in other countries may be finance through different mechanisms and the financial sector may view those differently. But, again, I don’t think deficits necessarily “take away” from the private sector. Or at least not anymore than any other government boondoggle expense.
Now, do not mistake me as someone who thinks all debt is good. Like anything in life, moderation is the best course. But, to answer your question, there are no free lunches and the government isn’t actually receiving such a thing. They have to pay for their debt just like any individual or corporation. In fact, the difference is that the U.S. government has never defaulted. And, barring an economic disaster, never will. THerefore, if they are paying out an amount higher than a savings account or money market fund, AND they are risk free, their will always be a market such securities.
And, yes the interest paymenst to the T-Bill investors are a large expenditure in the annual budget, but compared to other things the U.S. government is paying for, it’s hard to get too upset about it. And again, those expenditures do perform an important function in the market.
Hopefull I explained all that correctly. That is how I understand government debt financing anyway.
Russ,
I think there is a fundamental point you miss.
The deficits, in each year’s budget fluctuate, but the total national debt doesn’t, it just increases each year by the amount of that year’s deficit. (It could decrease if there were a surplus, and it was used to repay debt – never happened, at least from WW2 on).
So T bills are recicled, correct, some come due and are paid out, new ones are issued, but the total allways increses.
Do you suppose that this debt bubble could increase infinitely without consequences? USG allready pays maybe 10-15% of it’s annual budget in debt servicing (I am not sure about the exact percentage) – could this percentage increase infinitely ?
You say there is a demand for “risk free” (again the free lunch) investment in T bills. Correct. But USG has to offer that (say) 4% interest because it needs to sell a minimum amount of T bills, and that is the market level at which they acheive their goal. If they needed less money, maybe they could get it at 3%. And all other borrowers, who need money to start a bussiness or buy a home have to pay interest above the Gvmnt bench mark to get the money. So – much Gvmnt debt means higher interest rates. ( Unless there is inflation, which is the way excessive gvmnt borrowing and deficits leads).
“the U.S. government has never defaulted. And, barring an economic disaster, never will. ”
You have mighty confidence in the Government, too much for a libertarian. Rest assured – they will default – one way or another, and I don’t know at what point in the future. There is no way the current policies, with the national debt, and with Social Security can go on infinitely. And there was no Gvmnt yet in history that has not defaulted one way or another.
By the way – take Argentine – they also thought that deficit spending has no consequences.
I think there’s confusion about deficits, debt, and economic growth. Debt is only a problem if it hurts productivity. It’s perfectly fine to borrow to finance productive investment, e.g., to expand your business. However, as government spending is generally less productive than private investment, allowing the govt to run a surplus means money that would have been spent more productively in the private sector gets spent by govt instead. It’s better to make up for deficits by borrowing or, preferably, cutting spending. It’s generally best to reduce govt debt by encouraging economic growth rather than by raising taxes or running a surplus (the same thing), because surpluses and tax increases discourage economic growth, and deficits don’t.
Jonathan Pearce,
I didn’t mean they should not care, I think they generally should. I was objecting to the notion that a good reason to give for caring is “direct monetary interest”.
There are two ways to be self-interested. Some people mean it in the sense of trying to maximise one’s own gain, while ignoring morality. The other meaning, is to not be interested in anything immoral, and then follow self-interest.
Usually, the term means the first thing, which is a bit amoral and objectionable.
I would happily accept “it’s important to the future of the world” and “it’s interesting” as reasons to care about the US budget.
Hey Jacob, you made some good points. Another long response follows.
First off “Do you suppose that this debt bubble could increase infinitely without consequences?”
No, not really. Again, I am not saying deficits and debt are always good. I’m saying that they miss the larger argument. The federal government’s goal should not be to balance the budget, their goal should be to deliver services that are a) consitutionally required or allowed and b) necessary for the public good. Once you’ve answered that, then you decide how to raise the money to pay for such things.
But, no serious discussion on spending priorities is allowed if the short term impact are deficits. The debate then becomes “fiscal responsibility” and “taking money from the taxpayers” and “giving it to the rich” blah blah blah.
One other point is the level of the deficit and the debt relative to the Gross Domestic Product. This dictates “affordability”. Japan and Canada have national debts that exceed their annual GDP (i.e. over 100% of GDP). The U.S. national debt is right now (according to my quick Googling) roughly 60% of GDP. And the 300bil. deficit is around 2.7% of GDP this year, according to a table from Fox News last week. This is well below the percentages we saw under Reagan/Bush 1. So, can we afford it? For the time being. But, again, if you spin your wheels on fiscal balance, you never get to the larger questions. The questions that might actually get you to cut spending, which is the one thing politicians can actually control.
And your point about the U.S. defaulting simply isn’t a good one given the fact that it’s never happened. The U.S. is not Argentina and I don’t have the space here to go into detail why but most people here should know why. The U.S. government values the health of it’s financial system over most everything else. If the U.S. government allowed itself to default it would literally destroy that financial system. So, I don’t think it’s a stretch to say that we’ll tear down the Pentago before we default T-Bill payments.
I believe in the incompetence of government as much as anyone else here, but to default on that debt would require handing over the treasury to Barbara Streisand and Kenneth Lay for what you speak of to happen.
Surpluses do not mean fiscal responsibility. In fact, Jonathan Gewertz point probably best illustrates why. But, for the sake of rambling more, I’ll point out another problem with the recent surpluses. They single handedly put most of State budgets in dire straights? Why? Because the state legislatures committed all sorts of spending outlays that essentially bet that the unprecedented tax revenues would continue indefinately. Politicians NEVER predict recessions. Well, when our recession hit, those tax revenues dried up, but the spending commitments were already made.
Daschle would love to blame this on Bush, but his tax cuts did not do a damn thing to state tax rates. Nor did his spending proposals negatively impact state funds they receive from the federal government. The states are hurting because of mismanagement during the swinging 90s. So, please do not confuse the surplus as fiscally responsible. I mean think about it, if they are taking 70% of my income (for which I would revolt) wether or not they are spending 95%, 100% or 120% of that amount really doesn’t change the fact that the government robbed me.
I think what you are confusing is the idea that the surplus automatically means we are paying down the debt. That’s not the case. A surplus is simply extra money that has to be decided on how to spend it. If you don’t legislatively dictate the retirement of debt, then the debt doesn’t get paid down (outside normal maturity rates), regardless of the size of the surplus. Does that make since? A deficit does add to the debt, but only the amount net of any debt that is retired due to the normal maturity of T-Bills. But, the reverse does not happen unless the politicians write a bill doing so. A surplus does not automatically pay down the debt.
I have plenty more to say (like how the recent surplus can be traced to BAD budgeting, not good budgeting), but I think I’ve taken up enough bandwidth for now. Bottom line, deficits and surpluses have very little bearing on wether or not the politicians are spending the tax money wisely or not. And any debate focusing on “fiscal responsibility” is a sure sign of people who prefer not to face the big questions (like Social Security, medicare, defense, education, on and on and on).
Enjoyed it!