That argument swings both ways. You are right…it’s a truly trivial amount of money. So was the bruhaha over the AIG ‘bonus’…so, I can see where there might be a certain amount of rebound bitterness on both sides here.
Excellent point. We don’t seem to be leaving any time soon either, unfortunately.
-XT
In fairness, he probably opposed AIG bonuses for the Demi-crats, because they would just spend the money on tie-dye shirts and Grateful Dead albums.
As much as I see where you’re going, I can’t bring to mind of any country that’s been bread-and-circussed to death. Care to name one? (And don’t say Imperial Rome). If we’re headed down that path, we should expect Europe to get there first, particularly countries with high immigration of people new to the idea of social safety nets with relatively little grounding in any traditional work ethic.
The U.S. public debt as a ratio of GDP is about 40%. At the end of Obama’s second term, it will be 80%. This is much higher than the average public debt in Europe today.
I didn’t say the country would be bread-and-circused ‘to death’. I said there would have be to dramatic cuts in the level of services. There will also probably be a round of high inflation, which will wipe out savings of a lot of people.
There have been plenty of occasions in the past few decades were government spending hit a wall and a serious retrenchment too place. In the 1970’s and 1980’s, New Zealand had increasing levels of social service and increasing numbers of domestic subsidies in agriculture and other industries. Much of this was financed with debt. When the oil shock of the late 70’s hurt the economy, New Zealand responded with a Keynesian stimulus using borrowed money. The result didn’t stimulate a thing, but doubled the debt of the country. Eventually, new taxes had to be imposed, and government services slashed. The result was a loss of 20 years of economic growth.
Japan tried to borrow its way out of a recession with stimulus and public works projects. The result was a ‘lost decade’ of growth and a public debt that is now about 150% of GDP, and debt servicing eats up somewhere around 60% of all tax revenue.
Japan is a reasonably good illustration. Let’s look at its situation - it responded to an economic downturn with a ‘stimulus’ package that was about 4 times the size of Obama’s as a percentage of GDP. It didn’t do a damned thing except create a whole bunch of debt and dot the country with useless infrastructure it doesn’t need. Today, Japan has to use 60% of its tax revenue to pay service on that debt, and it’s borrowing money to make up the difference. Debt service makes up 25% of the entire government budget, and this huge fiscal imbalance means that Japan is now planning on cutting social services by 2% per year, which won’t fix the problem and in fact will only slightly slow down the rate at which the imbalance grows until some kind of collapse or major retrenchment takes place.
As for the U.S. debt, you’re in uncharted waters. All other debt defaults to date have occurred in smaller economies, which means they didn’t have the kinds of global effects a U.S. collapse would have. Also, in the smaller countries that have had fiscal crises, the IMF has been able to help, which it would not be able to do with an economy the size of the U.S.'s.
In the short term, the effects are already showing up:
The Treasury had to increase the interest rate from 4.11% to 4.29%. They sold 14 billion dollars worth of 30 year bonds. The servicing cost for that would have been 32.87 billion dollars. At the interest rate they were forced to pay because of weak demand, the servicing cost will be 35.36 billion. That’s about 2.5 billion extra dollars the government will be paying in additional debt servicing costs from that one auction. No one knows where this is headed.
This problem could get much worse if the major foreign governments stop buying American debt. China and Japan have both issued warnings about U.S. debt. The U.S. has traditionally benefited by being the ‘safe harbor’ currency of the world. The result is that there has always been a gap between what the U.S. had to pay to finance debt and what everyone else had to pay. If the U.S. loses that status, its borrowing costs will jump dramatically.
Another short-term effect is that as the U.S. increasingly relies on foreign investors to sustain its debt, it increasingly loses control over foreign policy. For example, the U.S.'s ability to deal with a problem arising in China will be greatly restricted by China’s ability to crater the U.S. dollar.
Which brings us to the next near-term effect: The potential for the U.S. dollar to collapse in value, driving up the cost of imports to a country which has a lifestyle heavily dependent on cheap imports.
But hopefully the ‘stimulus’ will turn all that around, and the magical multiplier effect will cause the economy to create enough wealth to pay back all the borrowing and then some, and everyone will live happily ever after. Except that it didn’t work in New Zealand. It didn’t work in Japan. It didn’t work for Bush’s big increases in deficit spending. If it worked at all during the New Deal, the effect was small enough that economists still argue over it today.
If only we had some hard metrics to judge the effect of the stimulus, and not just handwaving about jobs 'created or saved", which is impossible to prove.
Oh wait, there is one. Cristine Romer, Obama’s chief economic advisor, did put some numbers to the expected results of the stimulus. One famous chart used to justify the stimulus can be seen in Paul Krugman’s column in January.
Said Krugman at the time:
So, according to Krugman, this is hard data that can be used to evaluate the effect of the stimulus, and the results are ‘very close’ to his own analysis.
Well, the first few data points are in so we can start reconstructing the actual performance curve and overlay it on the predictions. And what does it show? Unemployment is trending higher than the ‘non-stimulus’ projection.
So far, the first test of the stimulus model has been an utter failure. Granted, it’s still early days. But this can’t be giving you stimulus supporters the warm fuzzies.
In addition, the Treasury has already announced that the annual deficit forecast has been increased by 200 billion. The increase in the forecast is bigger than some of Bush’s entire deficits, and half the size of his biggest.
These are totally uncharted waters you’re swimming in. You’ve bet the farm on the ability of the U.S. to sustain debt levels indefinitely the likes of which have not been seen since WWII.
As for long term effects, here’s one for you: The insolvency date for Medicare has been moved up seven years to 2019. At that time, the Medicare system will not be able to pay its obligations, and will need to be reformed or subsidized. But that’s just the start of the problem: at current rates, medicare will grow from about 4% of GDP today to about 12% by 2030. That’s an increase greater than the entire U.S. military budget today over the next 20 years. About five or ten years after that, entitlement spending will be greater than the entire U.S. federal budget today, and will consume almost 25% of American GDP (from less than 10% today).
This is the very definition of ‘unsustainable’ - especially when you also factor in the current government’s plans to run trillion dollar deficits indefinitely. Won’t it be fun when entitlements consume 25% of GDP, and the debt is 80% of GDP, and debt servicing costs are 5-10% of GDP? 'Cause that’s where all the trend lines are headed.
I don’t know how you can support spending $400,000 to fly to Denver to sign a piece of paper. He spends a great deal of time (and money) flying to public events. The idea that his budget proposals are unsustainable isn’t a new revelation. He’s just now admitting it.
The “notorious” AIG bonuses were paid to people who were working for a dollar a year. They were selling assets of the company to repay the loan and it was their entire wage. If you don’t understand this then you are willfully ignorant of the situation because it’s been discussed at length.
That was mighty big of them. They looted the system for a decade and then looted the TARP funds. Makes me all warm and fuzzy. I will work for a buck if I am guaranteed a multi million dollar bonus. If that means they were making a dollar a year, math is not your strength.
Obama realizes our economy is screwed. There is no way to get enough political will to attempt a real fix. We are going down fast. Foreclosures and unemployment are the products we create now. The bailouts may have been necessary but when Obama got in the funds were being looted. They still are.
Because everyone and their mother damn well knows that the President is going to travel around the country, doing various things, and if we want the President to travel securely, it is going to cost a lot of money.
Excellent thread, and I agree with several points:
The ONLY thing I can see happening in the near future is a bout of massive inflation. Once we get to the point where our interest payments on our debt become such a large portion of the debt that our creditors start to bail, then the hyper-inflation will start.
Money in the bank will be worthless, but all debts will be gone. We will all start over trading gold or USB thumb drives as media of exchange.
Does anyone honestly see a different end game?
How soon do you predict this? Dates, man; dates.
I maintain that Obama is smart enough to know that the debt is unsustainable. His plan is to let it swell to such levels that there is enough support to raise taxes not just on the perpetual whipping-boys at the top 1%, but to hike middle-class taxes as well. This will let him maintain his dramatic expansion of government, moving the US towards a European welfare state, which was his plan all along. Redistributing from the productive sectors of the economy towards those he was huffing and puffing about in his community-organizer days. He is only one man, of course, but he can move us much closer to that redistributionist European model.
This bears repeating. Of course it can always be argued that it’s hard to know what could have happened if there were no stimulus, but that argument is so flexible as to be essentially meaningless: short of asteroids hitting the earth there could always “have been” something worse.
Here’s a unique visualization of the swelling federal deficit.
Really, everybody thinks the President should spend $400,000 to sign a piece of paper? Everybody thinks touring the country for honorary degrees is a good use of his time and our money during an economic crisis?
Does everybody not want the President to leave the White House? What kind of fuel economy does his new limo get, anyway?
October 11, 2031 at 3:37pm Zulu Time
Bring an umbrella!
Republicans would prefer that he doesn’t, so that they can then say he is desperately out of touch with common Americans and so entrenched in the DC culture that he never is seen at the salad bar at Applebee’s.*
If only he had a “ranch” where he could go to clear brush. Those travel costs would be a worthwhile expenditure.
*Yes, I know.
It’s too bad that Obama’s, albeit fake, epiphany didn’t occur before the omnibus, that thing he rubber stamped claiming it wasn’t any of his business what was in it? Then again, maybe someone of his handlers taught him some basic mathematics, noting there is no “hope” variable, function, or axiom.
Thus the need for tax increases during good times, above and beyond the increase in receipts from the improving economy. (I assume this estimate includes the expiration of the Bush cuts already.) And I think this is what Obama is setting up.
It’s true that extra spending during recessions should be targeted towards productive uses, but this isn’t your garden variety recession, and more extreme measures are required. We managed to pay off the WW II debt during the 1950s with increased taxes while maintaining prosperity. Yes, we were in a better global situation then, but a balanced budget, even today, is feasible.
The problem Obama has is that he would have to raise taxes a LOT (that $600 deficit number is a joke, by the way. The CBO doesn’t think the deficits will be anywhere near that small). And even by the Obama administration’s numbers, that deficit is the minimim that will be reached, and immediately thereafter it starts to climb again.
Just to refresh everyone’s memory, here’s the budget projection chart: Budget to 2019.
In 2019, the Obama administration’s numbers say the deficit will be about 700 billion, while the CBO says it will be 1.2 trillion. I trust the CBO numbers more, and so far this year, the CBO projection is much closer than the Obama administration’s. In fact, I think the CBO might even be low - they predicted 1.85 trillion for a deficit this year, and I think it’s trending more like 2-2.1 trillion.
And what you don’t see on this graph is the next ten years after that, and those numbers should be downright terrifying, because that’s when the major crunch to entitlement spending blows out the budget. This is the decade we should be saving money to pay for the next decade’s huge imbalances, but instead the Obama administration is running deficits four times higher than Bush’s, which were already irresponsibly high.
Then there’s the matter that the fed has been pumping money into the economy like crazy, and if it starts to recover, that money will translate into inflation. The cure for inflation is higher interest rates, so at best we’re looking forward to a decade of low growth caused by higher interest rates acting as a drag on the economy. Those higher interest rates will also increase debt-service costs, putting further pressure on the government’s finances.
And in the middle of all that, Obama is going to increase taxes by enough to balance the budget? Good luck with that. Tax increases + higher interest rates = another recession.
The bottom line is that you can’t make reality go away by playing games with numbers. This stimulus is not free - it will have to be paid back with future economic growth. So it had better work as advertised, or the U.S. is looking at a very, very difficult next 20 years.
Sam: you make excellent points. But we also know that neither OMB or CBO numbers reflect the future. For example, when George HW Bush raised taxes, both organizations still foresaw significant deficits for many, many years, and the same guidance existed when Bill Clinton raised taxes.
But it is my opinion that Bush I’s tax increases paved the way for the surpluses realized under Clinton. Like you said, I think we will have to hope that the stimulus will do the job it promised. I think it will, but time will tell.
We paid off some debt, but it wasn’t through increased taxes; it was through decreased government outlays. From 1947-1951, we chopped the public debt by 11.4% on a dollar basis. From 1947-1950, tax receipts were flat on a dollar basis and declined slightly as a % of GDP. Tax receipts rose in 1951. From 1947-1949, outlays declined, resulting in significant surpluses. In 1950, outlays rose, and a deficit was registered. In 1951, outlays fell again, resulting in a decent surplus when combined with the increased tax receipts. Then for the next decade or so, federal budgets were largely balanced, debt on a dollar basis held fairly steady, and so debt/GDP ratios fell. If anything, this period shows that holding taxes steady and living within your means is solid way to maintain growth. Of course, there are substantial differences between the economic environment after WWII and today, so the situations are not analogous. But there are lessons to be learned from history.
That’s what you call “the near future”?
