Relevant and even prescient commentary on news, politics and the economy.

It’s about the nation’s equity. We are better than this… by Professor Edward Kleinbard

Videos below the fold.

I caught Edward Kleinbard the other morning on Cspan.  He is a professor of law and business at USC and a fellow at the Century Foundation.  His book: We are better than this: How Government Should Spend our Money.  If you google his name, articles will come up from October 2014.   It attracted my attention because of my thinking as expressed in my article back in February of 2013.   The rest of the dinner table deficit/debt discussion: Equity  His thesis is that we need to be spending more as it is investment that creates the capital needed to grow the nation.  Focusing just from the view summed up in the phrase “tax and spend” misses what government is about.  Government doesn’t tax, government “principally spends money” via investment and insurance.  Spending should be complimentary to the private sector.  When government “invests” the pie gets bigger not smaller.

He worked on Wall Street for “many decades” also.   How he kept his humanity as you will hear in the presentation while being on Wall Street…?

Let me start though with this short video as it is another business person like me who appears to get my posts regarding what is needed in this country to go along with the equity spending.   I first mentioned this position in 2010 regarding the SOTU address.  Here we are 2015 and we small business people are still saying the same thing.  Professor Kleinbard addresses small business too as part of understanding the overall condition and needs.

I give you Dave Boris, owner of Hel’s Kitchen Catering.

Tags: , , , , , , Comments (1) | |

Where Has the Spending Gone, Joe Dimaggio?

by Mike Kimel

Where Has the Spending Gone, Joe Dimaggio?

Lately there’s been a gnashing of the teeth about the deficit and the debt and what to do about it. Democrats point out that when GW took office, there was no deficit, and that a big part of the problem is that federal tax revenues have fallen from 20.6% of GDP in Fiscal Year 2000 to 14.9% in Fiscal Year 2010 (warning – Excel file), and are slated to fall to 14.4% this fiscal year. I found a nice graph here. Despite the nonsense that gets referred to as Hauser’s Law, the big fall in tax revenues is is in large part due to the tax cuts, although the poor economy also plays its share.

(Note – so I don’t have to keep typing it, all years in this post are fiscal years.)

But for there to be a deficit, tax revenues (whether high or low) have to be less than spending. And spending has also gone up (again see OMB Table 1.2 referenced above) from 18.2% of GDP in 2000 to 23.8% of GDP in 2010, and is slated to go above 25% of GDP this fiscal year. (It is worth noting – federal spending as a percentage of GDP fell in every single year during the Clinton administration… which means Newt Gingrich doesn’t get credit for it unless you believe he had one heck of a time machine.)

I thought it would be interesting to see where that spending is going, so I pulled the data from OMB Table 3.1 and graphed it below. (Dotted lines indicate future projected spending.)

Figure 1

The figure indicates that for the most part, spending in most categories has been pretty flat. Defense spending, though, rose from 3% of GDP in 2000 to 4.3% in 2008, 4.8% in 2010, and is slated to go above 5% this year. Afghanistan, Iraq, and now Libya all cost money, especially if conducted with sweetheart no-bid deals. The bigger ticket category that saw increases was “human resources” – that was 11.4% of GDP in 2000, reached 13.2% of GDP in 2008, and is expected to top 16% this year.

So what are these human resources? I don’t have the definition in front of me, but I think that includes things like unemployment compensation, food stamps, and the like. Put another way, some of the spending (it’s 3:36 AM right now – I think the “how much” part of “some” has to wait for another post) is happening because the tax cuts didn’t work as advertised. But then, its not like that should have been a surprise.

Cross-posted at the Presimetrics blog.

Tags: , , Comments (14) | |

O.K., let’s just think about this budget thing for a while, Part I

To be sure, the U.S. government deficit is shocking; but it’s not anymore shocking than the recession through which we have all lived. Tax receipts plummeted (see the second chart from this post) and spending on cyclical social programs (like unemployment benefits) is surging. This adds up to an exponentially rising budget deficit, and thus an increasing debt burden.

The resulting hysteria leads to headlines like that from Reuters on March 11, 2010: “Fed’s Dudley: Waiting to fix fiscal problems risky”.

Be very careful when reading these articles, as the title implies that William Dudley, president of the New York Federal Reserve Bank, is advocating “fixing fiscal problems” right now – cutting spending and/or raising taxes now – while that is not the case at all. According to Reuters, Dudley says:

The issue, Dudley said, is not fiscal stimulus, which he noted had been necessary in the United States to stabilize the economy, even though it drove up the deficit. That spending is temporary, he added. The bigger long-term problem for the United States and other advanced economies is structural deficits — those likely to persist absent changes in tax and spending policies.

A link to Dudley’s speech. He does refer to structural deficits that may result from recent countercyclical policy. However, these long-term structural deficits have essentially nothing to do with the current downturn, in my view. In fact the effects of the current deficits are simply a speed bump on the road to structural indebtedness.

Just look at the CBO’s extended-baseline projection for the long-term budget published in June 2009.

This above scenario projects the spending share on social security, Medicare and Medicaid, and Other Federal Noninterest Spending through the medium and long term under current law. Notice the blip that is 2009 and 2010?

What is key to this outlook is the assumption on economic growth and productivity trends (among others, of course!). GDP is assumed to grow an average 2.2% per year. I didn’t delve into this full report and conduct a full alternative scenario test. But it is pretty clear that GDP growth of anything less than 2.2% (on average) – holding all else equal, of course – would have a deleterious impact on the outlook for government financing.

Japan provides a perfect case study of what not to do when the economy is recovering from a financial crisis: raise taxes too soon. You do that, and the probability of a “lost decade” rises quickly. You suffer a lost decade, and the outlook on the structural budget looks a lot worse than that illustrated above.

Marshall Auerback has argued time and time again that the government should run deficits until private saving adjusts so that the economy can stand on its own two feet, i.e., grow. As long as the currency floats and is fully non-convertible, the government’s debt burden will not become a solvency issue. Hence, his interview titled fighting deficit hysteria.

I would say, rather, that the deficit hysteria is appropriate, but very much misallocated intertemporally toward the short-term outlook.

Part II coming to a post near you!

This article is crossposted with News N Economics

Tags: , , Comments (44) | |

It Takes Two to Tango: A Look at the Numerator AND Denominator

This is a guest contribution by Marshall Auerback, Braintruster at the New Deal 2.0

by Marshall Auerback

A new book by Kenneth Rogoff and Carmen Reinhart, “This Time It’s Different: Eight Centuries of Financial Follies”, has occasioned much comment in the press and blogosphere (see here and here)

The book purports to show that once the gross debt to GDP ratio crosses the threshold of 90%, economic growth slows dramatically.

But that’s too simplistic: a ratio is just a number. Debt to GDP is a ratio and the ratio value is a function of both the numerator and denominator. The ratio can rise as a function of either an increase in debt or a decrease in GDP. So to blindly take a number, say, 90% debt to GDP as Rogoff and Reinhart have done in their recent work, is unduly simplistic. It appears that they looked at the ratio, assumed that its rise was due to an increase in debt, and then looked at GDP growth from that period forward assuming that weakness was caused by debt instead of that the rise in the ratio was caused by economic weakness. In other words, they have the causation backwards: Deficits go up as growth slows due to the automatic countercyclical stabilizers.They don’t cause the slow down, etc.

After the Second World War, the debt ratio came down rather rapidly—mostly not due to budget surpluses and debt retirement but rather due to rapid growth that raised the denominator of the debt ratio. By contrast, slower economic growth post 1973, accompanied by budget deficits, led to slow growth of the debt ratio until the Clinton boom (that saw growth return nearly to golden age rates) and budget surpluses lowered the ratio.

From 1991 through 2001 the growth of government debt had been falling and since then rising most recently at a faster pace. The raw data comes courtesy of the St. Louis Fed (and attached spreadsheet).

The Ratio of the rates of change of Debt / GDP is rising faster than the change in Debt indicating that both the increase in Debt and the fall in GDP are contributing to a rising Debt / GDP ratio. For policy makers who obsess about a rising Debt / GDP ratio, they fail to understand that austerity measures that cut GDP growth will cause a rise in the Debt to GDP ratio. Basically, it boils down to this simple observation: it is foolish, dangerous, and thoroughly counterproductive to treat fiscal balances in isolation. In particular, setting a fiscal deficit to GDP target equal to expected long run real GDP growth in order to hold public debt/GDP ratios at a completely arbitrary (indeed, literally pulled out of thin air) public debt to GDP ratio without for a moment considering what the means for the feasible range of current account and domestic private sector financial balance is utterly nonsensensical.

It is crucial that investors and policy makers recognize and learn to think coherently about the connectedness of the financial balances before they demand what is being currently called fiscal sustainability. As it turns out, pursuing fiscal sustainability as it is currently defined will in all likelihood just lead many nations to further private sector debt destabilization. To put it bluntly, if the private sector continues to pursue a high net saving/financial surplus position while fiscal retrenchment is attempted, unless some other bloc of nations becomes large net importers (and the BRICs are surely not there yet), nominal GDP will fall in the fiscally “sound” nations, the designated fiscal deficit targets WILL NEVER BE ACHIEVED (there can also be a paradox of public thrift), and private debt distress will simply escalate.

In fact, if austerity measures are based on measures of debt relative to economic growth there is a very real risk of a downward spiral where economic growth declines at a faster pace than government debt and the rising Debt / GDP ratio leads to ever greater austerity measures. At a minimum, focusing only on the debt side of the equation risks increasing the Debt / GDP ratio that is the object of purported concern is likely to lead to policy incoherence and HIGHER levels of debt as GDP plunges. The solution is to recognize that the increase in the ratio is in some fair measure the result of declining economic growth and that only by increasing economic growth will the ratio be brought down. This may cause an initial rise in the ratio because of debt financing of fiscal stimulus but if positive economic growth is achieved the problem should be temporary. The alternative is to risk a debt deflationary spiral that will be much more difficult (and costly) to reverse.

This article is crossposted with News N Economics

Tags: , Comments (12) | |

Worried about Interest Rates? WHY?

Not only did the U.S. Treasury just sell $29 Billion worth of four-week bills at par (i.e., they got $29 Billion for them, and will return $29 Billion on 29 December), but the bid to cover ratio was over 5:1 (pdf link; had $154B in bids for $29B in securities).

This is down 0.06% from last week’s auction (pdf again).

Tags: , , , Comments (22) | |

Social Security and the Debt Clock (why I get headaches sometimes)

by Bruce Webb

The Treasury Department maintains a handy web application called Debt to the Penny. As the name suggests it will give you total Public Debt to the penny for specific dates in the past or for a range of dates. It is this total Public Debt figure that is generally cited in news coverage, resulting in reporting that debt under Bush went from $5,727,776,738,304.64 on Jan 19, 2001 to $10,626,877,048,913.08 on Jan 20, 2009. If theoretically Bush had continued Clinton era fiscal policies and had Clinton era outcomes would the the final Total Debt figure be higher that $5.7 trillion? Or lower? or About the same?

The obvious, intuitive answer would be ‘lower’. That is even small General Fund surpluses serve to lower overall debt and that effect combined with the higher rate of real wages experienced in Clinton’s terms means higher revenue and an even greater surplus in Social Security, so General Fund surplus plus Social Security surplus = lower debt. Right?

Hmm, well, no, not necessarily. To see why you can follow this below the fold. Just be sure to bring your headache medication of choice.

Because a closer look at Debt to the Penny shows that Treasury tracks two different debt categories: Debt held by the Public and Intragovernmental Holdings and combines them to get total Public Debt. And more than half of Intragovernmental Holdings are made up of the Special Treasuries in the Social Security Trust Funds. The Bush years did not put any serious holes in long-term possibilities for Social Security solvency, results approaching total system solvency being by my calculations more probable than not. That doesn’t mean the TF came through unscathed. Per the 2001 Report’s Intermediate Cost projections toward year end 2008 TF balance was projected to be $2.808 trillion up from $1.049 trillion. Table II.D1.- Abbreviated Operations of the Combined OASI and DI Trust Funds, Calendar Years 2000-10 [Amounts in billions] Instead it ended up at $2.4 trillion.

So if we return to our theoretical scenario we would have Clinton era small General Fund surpluses combined presumedly with Intermediate Cost SS surpluses. But our equation changes. Now we have General Fund surplus MINUS Social Security surplus = total debt. Whether the resultant is higher or lower than the original $5.7 trillion in total debt is difficult to calculate in precise terms but it seems likely that the growth in the TF by $1.75 trillion (2001 projection ) would have likely been significantly more than the cumulative GF surplus meaning that the Debt Clock would have continued to tick.

If we examine the Social Security Reports from 1997 to 2007 we see that the optimistic Low Cost alternative projects what would seem to be a Goldilocks outcome, with the porridge being neither too hot or too cold. After all what is it about fully funded benefits with no needed changes in taxation or retirement age is there not to like? Well nothing really. Until you start looking at issues of intergenerational equity. Because how does Low Cost translate to the Debt Clock in future years?

Table VI.F8.—Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2008-85 [In billions]
2040 $11.7 trillion; 2060 $28.3 trillion; 2080 $88.0 trillion and all of that scoring as debt on the Debt Clock. That is why I get headaches, fully funded Social Security translating to ever mounting total Public Debt.

Which only compound when I consider the flipping point. Under Low Cost assumptions Social Security relies on interest earned on the TF to fill the gap between revenue from taxes and total cost for every year from 2023-2064. But the actual principal in the TF is entirely due to excess contributions made by workers from 1983-2023. In 2065 Low Cost projections would have tax revenues once again exceeding cost without needing to tap the interest on the principal which at that point would total $37.0 trillion. Who has the moral claim to that money? In 2065 there will be substantial numbers of retirees who were in the work force prior to 2023. But only that fraction of them who owe tax on benefits are still contributing anything and their whole cohort has secure benefits going forward, they can be made whole by eliminating tax on benefits. So what claim do those workers who entered the work force after 2023 but before 2065 really have? Sure their contributions served to largely fund the retirement of people before them, but only ‘largely’ because a substantial part of that cost was picked up by interest on surplus payroll contributions they never had to pay, to some degree they have had a subsidized ride and have been made whole as is. And the worker entering the workforce in 2065 doesn’t have too much of a claim on the balance given that he has yet to pay anything at all and is projected to get full benefits.

The simplest answer is to first simply write down the TF in 2065 from $37 trillion to $7.5 trillion (one year of reserves) and then reduce FICA to the level where it plus interest on the remaining $7.5 trillion will continue to meet total cost. And then secondly commit to rebating to surviving retirees any lifetime tax on benefits paid. In this scenario nobody gets seriously screwed, they paid their insurance premium in the form of payroll tax, everyone gets full benefits. But viewed from another light it is just a $29.5 trillion dollar gift to those people who were on the hook previously, i.e. high income earners who just end up with a huge liability lifted. Meaning that the people who borrowed all that money from 1983 to 2023, or at least their heirs, get a windfall while still have being able to put their boots in the sides of Boomers and Gen-Xers (who themselves would have been fooled into blaming Boomers all along).

This is not a simple story, which is why it gives me headaches to explain. But it goes to show why Social Security surpluses are not an unalloyed good. Instead they can serve to create a mental picture of total debt that is disconnected with economic reality. If we end up achieving Low Cost outcomes, or outcomes close to that, and as a result at some point in the next fifty years we end up writing down the TF by $29 trillion, is that portion of the principal really debt that should be scored on the Debt Clock in the meantime? Certainly it was a liability to the degree that interest had to be paid on at least a portion of it (in the mid-thirties this approaches 50% of accrued interest needing to be tapped in any given year, that percentage drops over time). Well it is hard to say.

Moral? Don’t let the Pete G. Peterson people get a backdoors victory by trumpeting Total Debt while slyly denying that the Trust Fund is real. Because if it is not real to the degree that Peterson et al are never going to have to pay the borrowed money back, either because the economy grows fast enough to mean it is not needed in the end or because they will just get us to accept lower benefits, then it ends up being no more debt than ‘unfunded liability’ means an actual liability. They are calling ‘debt’ to scare you into actions that remove that debt. From their ledgers. Because Peterson would still have workers be screwed in the form of lower benefits.

(BTW these calculations show why Buffpilot’s claim that Clinton didn’t reduce debt is not quite right. First of all some of that ‘debt’ was really SS surpluses, and second he ignores inflation by using nominal and not real numbers.)

Tags: , Comments (0) | |