In case anyone doesn't check CNN, S&P downgraded the US's credit rating on Friday from AAA to AA+. So of course everyone is predictably up in arms. The right is blaming "runaway spending". The left is blaming "Crazy Tea Partiers". The proximate cause is exclusively the latter-- Republicans in Congress decided to make a political issue out of what should have been a routine debt ceiling hike in hopes of extracting a pound of flesh. Had a clean hike in the debt ceiling been routinely passed, I can say with absolute certainty that S&P wouldn't have blinked. Instead, months of debate led to a crummy "deficit reduction" bill that won't reduce the deficit, and will hurt the economy, and S&P went ahead with its downgrade anyway. But the point of this post isn't to point fingers; it's to summarize what the downgrade means. And what it means is... next to nothing.
First, it's important to note that nothing fundamentally changed between a week ago, a month ago, a year ago, and today in terms of the budget picture, and S&P doesn't have any kind of special knowledge that no one else does. We've still got a big budget gap that is attributable predominantly to the fact that we're in the longest, deepest period of economic stagnation since the Great Depression, and we've still got a health care sector with runaway costs. That's all publicly available information, and it's something everyone who was paying attention knew if they could do basic math (which, granted, many Congresspeople either can't or pretend they can't). And, knowing all of this information, bond investors are still lending long-term to the US government at exceptionally low interest rates. S&P's opinion isn't going to force them to dump Treasuries that they've been holding for long periods of time.
Second, S&P has a miserable track record in, you know, doing its job. The most obvious example is the financial crisis, in which all three major rating agencies, S&P included, put their AAA stamp of approval on all kinds of financial toxic waste, and then were humiliated when those products blew up, endangering the entire global economy. But that's far from their only failure. As bad as they were at evaluating financial products and corporate bonds during the financial crisis, Mike Konczal presciently points out that they've been worse at evaluating sovereign debt. So, essentially, these agencies are consistent failures at their jobs. So there's absolutely no reason to care about what they have to say now. In 2002, S&P downgraded Japanese debt. In response, the markets... ignored them and continued to lend to the Japanese government at extremely low interest rates. In this case, markets will almost certainly do the same, mostly because nothing in S&P's track record should give anyone confidence in anything they say.
So do I think the downgrade is completely meaningless? Well, not COMPLETELY. I know some institutional investors like pension funds are contractually obligated to hold some proportion of AAA-rated securities, so if there are enough of those that have to dump their holdings as a result, there could be some spike in yield. But I don't think it will be too significant.
In short, don't panic-- the world isn't ending. What the US needs now is the same thing it needed a month ago and a year ago: more action by the government and the Fed to stimulate spending and job creation, and a long-term plan to raise more revenue and tackle the health care cost issue.
Showing posts with label Debt. Show all posts
Showing posts with label Debt. Show all posts
Friday, August 5, 2011
Monday, August 1, 2011
What Would I Do About the Debt?
A common refrain in this debate over the debt ceiling was John Boehner's assertion that "at least he had a plan," whereas Obama and the Democrats hadn't offered anything concrete. This is true. It's also kind of like saying, "The patient has cancer. Our proposal is cutting off his head. Why don't you have a proposal?" But that got me to thinking about what actually has to be don to reduce the country's long-term fiscal picture. There are two majors drags on the US's finances, as anyone looking at the numbers can tell. One is the impact of the recession, and the other is runaway health care expenditures, in the public and especially the private sectors. Revenue taken in is also inadequate, but that's an easier problem to solve (mechanically if not politically).
But assuming we had to do something, here's what my plan would have included:
1. A trigger for when any tax hikes and spending cuts kick in. In an economy with already depressed demand, we can hardly afford to depress demand further by cutting spending in a down economy. So any deal that I wrote wouldn't kick in until unemployment dipped below 6.5% at the most, which would indicate that it might be able to weather contractionary fiscal policy. In the meantime, I would call for further fiscal expansion to stimulate the economy (fat chance, I know) and get to the point where spending can be cut and taxes raised without harming the economy.
2. Revenues would have to be raised. I might raise the payroll tax cap, remove a bunch of distortionary subsidies (farm subsidies, capital gains tax hike), and institute a value-added tax, while cutting the income tax rate.
3. Health care would need to be addressed. This is easier said than done. I'd institute a panel to work on it. Not a "bipartisan" panel, but an expert panel comprised of health care economists, practitioners, actuaries and others to look at the current system, identify flawed incentives and sources of waste and recommend ways to fix them. Health care is, at the end of the day, a technocratic and economic rather than a political problem, so plugging in politicians to fix it is a recipe for disaster. Especially when those politicians are self-styled "economists" who don't understand the first thing about economics (see: Paul Ryan).
There are some other areas where tweaks could be made-- Social Security could be tweaked around the edges, and defense could be cut, especially the R&D end (we've got billions of dollars in contracts out to defense firms working hard to build sweet weapons to win the Cold War), but the three points I've outlined are the ones that would be crucial to fueling a real recovery.
But assuming we had to do something, here's what my plan would have included:
1. A trigger for when any tax hikes and spending cuts kick in. In an economy with already depressed demand, we can hardly afford to depress demand further by cutting spending in a down economy. So any deal that I wrote wouldn't kick in until unemployment dipped below 6.5% at the most, which would indicate that it might be able to weather contractionary fiscal policy. In the meantime, I would call for further fiscal expansion to stimulate the economy (fat chance, I know) and get to the point where spending can be cut and taxes raised without harming the economy.
2. Revenues would have to be raised. I might raise the payroll tax cap, remove a bunch of distortionary subsidies (farm subsidies, capital gains tax hike), and institute a value-added tax, while cutting the income tax rate.
3. Health care would need to be addressed. This is easier said than done. I'd institute a panel to work on it. Not a "bipartisan" panel, but an expert panel comprised of health care economists, practitioners, actuaries and others to look at the current system, identify flawed incentives and sources of waste and recommend ways to fix them. Health care is, at the end of the day, a technocratic and economic rather than a political problem, so plugging in politicians to fix it is a recipe for disaster. Especially when those politicians are self-styled "economists" who don't understand the first thing about economics (see: Paul Ryan).
There are some other areas where tweaks could be made-- Social Security could be tweaked around the edges, and defense could be cut, especially the R&D end (we've got billions of dollars in contracts out to defense firms working hard to build sweet weapons to win the Cold War), but the three points I've outlined are the ones that would be crucial to fueling a real recovery.
Sunday, July 31, 2011
Courting Disaster (Or: Why the Media is a Joke)
So apparently a deal over the debt limit was reached today. This is better than the alternative in the same way that giving yourself AIDS is better than shooting yourself in the head. Sure, markets like that something happened (there won't be an immediate default, which is better than the alternative), but the deal struck is going to make our economy worse, it is going to damage our quality of life, AND (the most ironic part), in all likelihood, it will make our fiscal problem worse. I say this not because I think I'm super smart-- I don't know anything your average person shouldn't-- but because it seems like a whole lot of people have gotten really, really stupid.
So, the simple reason the deal will make things worse is simple- cutting spending in a depressed economy is contractionary. It's not a difficult principle. Somehow, Congress doesn't understand that. The worst comes from the Republican Party. They rail about how we can't afford tax hikes "in this economy," but in the same breath swear that we need to cut spending NOW. Tax hikes are "job-killing"; spending cuts are "confidence-restoring." It's not just a wrong but debatable claim-- it's just complete nonsense on its own terms. Yes, hiking taxes takes money out of people's pockets and puts it in the hands of the government. Some of that money would have been spent (demand that we forego), some of it would have been saved (demand that we don't forego), and some of the drop in income is replaced by spending from savings. So there's a contractionary effect, but every dollar in tax hikes does not contract the economy by a dollar. On the contrary, spending cuts ARE contractionary in just that way. If you pay a dollar less for MediCare, that's a dollar less in someone's pocket. If you fire a worker in the federal government, you have to pay them unemployment benefits, and lose the tax revenue you'd get from their salary. They also have to consume less because they don't have a job, so everyone with whom they do business is also impacted. It's not a hard concept, but people in Washington seem to have forgotten it. In normal times, government spending can crowd out private sector spending. We're not in normal times. Unemployment is over 9% and interest rates are at 0. In this case, government spending can crowd in private spending by spurring demand that signals to businesses that they should expand and hire to meet that demand.
Opponents of this idea argue that businesses are far-sighted and know taxes will be raised on them in the future if the government runs a deficit. That's baloney. Businesses respond to market conditions, not long-run guesses about the state of the economy in 15 years. If you own 20 taxis that operate in New York, and slack demand from the recession has led you to sideline half of them, but suddenly your 10 operating taxis are booked non-stop, you're going to send some of the taxis that have been standing idle back out on the road. You're not going to care if that demand comes from 2000 new attorneys hired by the SEC, or 2000 new analysts hired by Goldman Sachs. On top of that, depressed demand now makes our fiscal outlook in the future weaker. The longer the economy is depressed, the less tax receipts the government will take in, meaning that even if spending is cut, the shrinking economy and drop in tax receipts will actually likely make the deficit problem WORSE. But this is what we got, and it's depressing.
But the real reason I'm writing this post is to address the scaremongering coming from the "respectable" mainstream media. I have a subscription to Bloomberg Business Week, and I think it's normally a pretty good magazine. It provides a decent pulse of the market. But I came back to New York from my summer internship this evening and found that Peter Coy had written the worst article I've read in the magazine since I started getting it a year ago. It talks about our "long-term fiscal condition" and claims that we have hundreds of trillions of dollars in unfunded liabilities stretching into the future. That sounds scary. In a way it's true. But take the claim apart, and it's a profoundly stupid statement meant to mislead gullible people. There are so many things wrong with the article, I don't really know where to start, but this one's as good as any.
First, it readily concedes that it's making a present value calculation without explaining the implication. So here's the implication: a big number has to be divided by a time period for it to matter. In a present value calculation, it's discounted to forever into the future. In straightforward terms, it says two very different things to say that I owe $10 million to be paid back tomorrow, or I owe $10 million to be paid back over the course of a hundred-year period. If it's the former, I'm bankrupt. If it's the latter, depending on my salary and inflation, it could be very little. What the present-value calculation does is assume that expenditures grow the same way in the future as they did in the past, while tax revenues also follow the past course. It conveniently ignores the impact of adjustment. For instance, if you raise the retirement age by a year or two OR raise the maximum salary at which payroll taxes are deducted (currently a little over $100,000), OR means-test the program, OR tweak benefits, depending on how much you changed each, you could easily turn a program projected to run massive deficits into a program projected to run massive surpluses. Magic.
Then Coy pretends that the way deficits in programs like Social Security are calculated is an accounting trick. He says that if today's workers were required to buy X amount of bonds that they could redeem when they retired, our debt would look much worse than it does. That's nonsense. Social security is NOT a retirement account, nor is it an obligation. It's an insurance fund. It guarantees you a certain bare-bones level of income if you reach a certain age. If you die, you don't collect anything. Plug that into Coy's example, and you realize what baloney he's spouting. Imagine for a second that your bonds disappear if you die. Instead of being sold into the open market, they just up and evaporate. That's the equivalent. There are plenty of things we can do to fund programs like Social Security that wouldn't substantively change too much about how those programs work.
Medicare and Medicaid are a different story (as is all health care spending)-- we spend way too much at all levels, as I discussed in this post, but that doesn't mean that cutting indiscriminately or passing costs to the private sector is the way to go. Frankly, the scaremongering just frustrates me because the supposedly respectable media is pushing lies on people.
So, the simple reason the deal will make things worse is simple- cutting spending in a depressed economy is contractionary. It's not a difficult principle. Somehow, Congress doesn't understand that. The worst comes from the Republican Party. They rail about how we can't afford tax hikes "in this economy," but in the same breath swear that we need to cut spending NOW. Tax hikes are "job-killing"; spending cuts are "confidence-restoring." It's not just a wrong but debatable claim-- it's just complete nonsense on its own terms. Yes, hiking taxes takes money out of people's pockets and puts it in the hands of the government. Some of that money would have been spent (demand that we forego), some of it would have been saved (demand that we don't forego), and some of the drop in income is replaced by spending from savings. So there's a contractionary effect, but every dollar in tax hikes does not contract the economy by a dollar. On the contrary, spending cuts ARE contractionary in just that way. If you pay a dollar less for MediCare, that's a dollar less in someone's pocket. If you fire a worker in the federal government, you have to pay them unemployment benefits, and lose the tax revenue you'd get from their salary. They also have to consume less because they don't have a job, so everyone with whom they do business is also impacted. It's not a hard concept, but people in Washington seem to have forgotten it. In normal times, government spending can crowd out private sector spending. We're not in normal times. Unemployment is over 9% and interest rates are at 0. In this case, government spending can crowd in private spending by spurring demand that signals to businesses that they should expand and hire to meet that demand.
Opponents of this idea argue that businesses are far-sighted and know taxes will be raised on them in the future if the government runs a deficit. That's baloney. Businesses respond to market conditions, not long-run guesses about the state of the economy in 15 years. If you own 20 taxis that operate in New York, and slack demand from the recession has led you to sideline half of them, but suddenly your 10 operating taxis are booked non-stop, you're going to send some of the taxis that have been standing idle back out on the road. You're not going to care if that demand comes from 2000 new attorneys hired by the SEC, or 2000 new analysts hired by Goldman Sachs. On top of that, depressed demand now makes our fiscal outlook in the future weaker. The longer the economy is depressed, the less tax receipts the government will take in, meaning that even if spending is cut, the shrinking economy and drop in tax receipts will actually likely make the deficit problem WORSE. But this is what we got, and it's depressing.
But the real reason I'm writing this post is to address the scaremongering coming from the "respectable" mainstream media. I have a subscription to Bloomberg Business Week, and I think it's normally a pretty good magazine. It provides a decent pulse of the market. But I came back to New York from my summer internship this evening and found that Peter Coy had written the worst article I've read in the magazine since I started getting it a year ago. It talks about our "long-term fiscal condition" and claims that we have hundreds of trillions of dollars in unfunded liabilities stretching into the future. That sounds scary. In a way it's true. But take the claim apart, and it's a profoundly stupid statement meant to mislead gullible people. There are so many things wrong with the article, I don't really know where to start, but this one's as good as any.
First, it readily concedes that it's making a present value calculation without explaining the implication. So here's the implication: a big number has to be divided by a time period for it to matter. In a present value calculation, it's discounted to forever into the future. In straightforward terms, it says two very different things to say that I owe $10 million to be paid back tomorrow, or I owe $10 million to be paid back over the course of a hundred-year period. If it's the former, I'm bankrupt. If it's the latter, depending on my salary and inflation, it could be very little. What the present-value calculation does is assume that expenditures grow the same way in the future as they did in the past, while tax revenues also follow the past course. It conveniently ignores the impact of adjustment. For instance, if you raise the retirement age by a year or two OR raise the maximum salary at which payroll taxes are deducted (currently a little over $100,000), OR means-test the program, OR tweak benefits, depending on how much you changed each, you could easily turn a program projected to run massive deficits into a program projected to run massive surpluses. Magic.
Then Coy pretends that the way deficits in programs like Social Security are calculated is an accounting trick. He says that if today's workers were required to buy X amount of bonds that they could redeem when they retired, our debt would look much worse than it does. That's nonsense. Social security is NOT a retirement account, nor is it an obligation. It's an insurance fund. It guarantees you a certain bare-bones level of income if you reach a certain age. If you die, you don't collect anything. Plug that into Coy's example, and you realize what baloney he's spouting. Imagine for a second that your bonds disappear if you die. Instead of being sold into the open market, they just up and evaporate. That's the equivalent. There are plenty of things we can do to fund programs like Social Security that wouldn't substantively change too much about how those programs work.
Medicare and Medicaid are a different story (as is all health care spending)-- we spend way too much at all levels, as I discussed in this post, but that doesn't mean that cutting indiscriminately or passing costs to the private sector is the way to go. Frankly, the scaremongering just frustrates me because the supposedly respectable media is pushing lies on people.
Monday, July 25, 2011
Greece: Strike... Five
So Moody's downgraded Greece again this morning. They're now down to Ca, which is Moody's lowest rating, one notch above default. Of course, for all intents and purposes, Greece is in default already- bondholders are going to have to take haircuts sooner or later- but I think this shows the ratings agencies aren't impressed with the latest "rescue" plan. Of course, the ratings agencies' opinions aren't necessarily useful. Especially, as Mike Konczal pointed out in the link I posted yesterday, when it comes to rating sovereign debt. But they tend to be useful as gauges of conventional wisdom. And conventional wisdom says that Greece is screwed.
I think saying Greece isn't in default right now is just semantics-- right now participation in the latest rescue plan is, as I mentioned earlier, voluntary. So really, the only thing that keeps Greece technically out of default is the fact that bondholders don't HAVE to restructure their debt. But sooner or later, pretty much everyone agrees, they will have to. So we might as well call a spade a spade...
I think saying Greece isn't in default right now is just semantics-- right now participation in the latest rescue plan is, as I mentioned earlier, voluntary. So really, the only thing that keeps Greece technically out of default is the fact that bondholders don't HAVE to restructure their debt. But sooner or later, pretty much everyone agrees, they will have to. So we might as well call a spade a spade...
Sunday, July 24, 2011
Credit Downgrade Consequences
The Nobel-winning economist Paul Krugman cites Mike Konczal for the proposition that the ratings agencies are really bad at rating government debt. The context for this is that S&P is now claiming that it's ready to downgrade the US's debt if Congress passes a clean debt ceiling hike without a budget plan. Moody's is taking the opposite tack, saying that the US should get rid of the debt ceiling (a proposition I agree with-- it's redundant and really serves no purpose but to create gridlock).
I actually agree with Konczal. Really, it's hard not to. The ratings agencies have been pretty terrible at their job, especially in recent years. But Krugman extrapolates that to mean that it doesn't matter if the US gets downgraded. And I have a harder time agreeing with that. Krugman's argument isn't illogical-- he points us to Japan, which was downgraded by S&P and Moody's in 2002, but whose interest rates have hardly changed since. This, Krugman argues, means ratings don't matter.
Now, Paul Krugman is way, way smarter and way, way more knowledgeable about these issues than I am. But one thing I'd like to see him address is this. First, Japanese bonds are held by different investors than US Treasuries. As I understand it, Japanese bonds are held largely by Japanese citizens, who are big savers. Americans, on the other hand, have long been big dissavers. Our bonds are held by foreign governments (China especially), all kinds of investors seeking an investment as safe as cash, but yielding something rather than nothing, and institutional investors like pension funds and university endowments. Second, and this is related, Japan was downgraded from AA to AA- by S&P, and from AA3 to A2 by Moody's. The US, on the other hand, is rated AAA. And that's significant. Third, the US has a lot more outstanding debt than Japan does. Japan's economy is about a third the size of the US's, and it has less outstanding debt as a result.
I'm not entirely positive of the mechanics of this rule, but I know that there are plenty of institutional investors that are only allowed to hold AAA-rated bonds. And the safest of the AAA investments has long been US Treasuries. Now, institutional investors alone aren't enough to generate the demand that has driven the massive quantity of Treasuries in the market down to the interest rates that Treasuries pay out today. Investors have genuine faith in the creditworthiness of the US government. But these investors dumping US Treasuries if the US got downgraded almost certainly WOULD drive up the US's borrowing costs. And that would be a big deal, as our future budgets would have to pay significantly more toward servicing the debt. And every dollar we spend servicing the debt is a dollar that isn't spent on education, health care, infrastructure, or any number of worthwhile uses.
And if that's the case, then we SHOULD be worried about a US debt default, contrary to what Krugman tells us. Not because we should trust Moody's and S&P's opinions, but because of the cascade effect that those opinions could have on institutional investors.
I actually agree with Konczal. Really, it's hard not to. The ratings agencies have been pretty terrible at their job, especially in recent years. But Krugman extrapolates that to mean that it doesn't matter if the US gets downgraded. And I have a harder time agreeing with that. Krugman's argument isn't illogical-- he points us to Japan, which was downgraded by S&P and Moody's in 2002, but whose interest rates have hardly changed since. This, Krugman argues, means ratings don't matter.
Now, Paul Krugman is way, way smarter and way, way more knowledgeable about these issues than I am. But one thing I'd like to see him address is this. First, Japanese bonds are held by different investors than US Treasuries. As I understand it, Japanese bonds are held largely by Japanese citizens, who are big savers. Americans, on the other hand, have long been big dissavers. Our bonds are held by foreign governments (China especially), all kinds of investors seeking an investment as safe as cash, but yielding something rather than nothing, and institutional investors like pension funds and university endowments. Second, and this is related, Japan was downgraded from AA to AA- by S&P, and from AA3 to A2 by Moody's. The US, on the other hand, is rated AAA. And that's significant. Third, the US has a lot more outstanding debt than Japan does. Japan's economy is about a third the size of the US's, and it has less outstanding debt as a result.
I'm not entirely positive of the mechanics of this rule, but I know that there are plenty of institutional investors that are only allowed to hold AAA-rated bonds. And the safest of the AAA investments has long been US Treasuries. Now, institutional investors alone aren't enough to generate the demand that has driven the massive quantity of Treasuries in the market down to the interest rates that Treasuries pay out today. Investors have genuine faith in the creditworthiness of the US government. But these investors dumping US Treasuries if the US got downgraded almost certainly WOULD drive up the US's borrowing costs. And that would be a big deal, as our future budgets would have to pay significantly more toward servicing the debt. And every dollar we spend servicing the debt is a dollar that isn't spent on education, health care, infrastructure, or any number of worthwhile uses.
And if that's the case, then we SHOULD be worried about a US debt default, contrary to what Krugman tells us. Not because we should trust Moody's and S&P's opinions, but because of the cascade effect that those opinions could have on institutional investors.
The Source of the Deficit
The New York Times has a pretty informative editorial today about where our deficit comes from. When Bill Clinton left office, the budget was running a surplus, and surpluses were predicted to get bigger. Under Bush, the budget fell into deficit, and the deficit grew as the Administration went along. There were four different drivers of this shift, one of which isn't a long-term problem, two of which (TAX CUTS and RECESSION) don't have to be long term problems, and one of which is a long-term problem.
The four are, 1) The wars in Iraq and Afghanistan, 2) The Bush tax cuts, 3) Two different recessions, and 4) Exploding health care costs.
The war in Afghanistan, at least, was pretty much accepted by both Democrats and Republicans as a justified response to the 9/11 attacks. The war in Iraq was not, and was sold on false pretenses, but that discussion is irrelevant to the budget debate. While wars are generally expensive (and there are no exception), they're not unaffordable. Sooner or later, they'll wind down, which in turn erases them from the books. So they're really not a drag on the long-term budget picture.
The Bush tax cuts, on the other hand, were neither necessary nor unaffordable. They were initially sold as a way to spend the surplus accumulated during the Clinton years. Then, when the tech bubble burst at the beginning of the Bush Administration, they were sold as a way to stimulate the economy back to growth (a very Keynesian prescription, given that the Fed had plenty of traction to lower interest rates in the economy). On the surface, those tax cuts looked affordable, simply because the CBO scored them as if they would expire on schedule instead of being extended indefinitely. Letting them expire in 2012, as they're scheduled to do, roughly cuts the structural deficit in half. The issue is convincing anti-tax nuts in Congress to let that happen.
Recessions were another major part. By definition, recessions have significant adverse effects on budget conditions. They cut tax receipts (as GDP falls), but hike auto-stabilization spending through unemployment benefits and Medicaid, creating bigger budget deficits. It's this factor that is primarily responsible for the big deficits during the Obama administration. The size of government, contrary to BS claims to the contrary, has not grown under Obama. But the economy has shrank. The reason this doesn't have to be a long-term issue, though, is that the government COULD still take steps to fight the downturn. Fiscal policy to stimulate the economy and get it back to full employment and jump-start a self-sustaining recovery would fill a significant part of the budget gap that currently exists as a result of the depressed economy. Sure, that would hike the deficit in the short-term, but the longer the economy stays depressed, the bigger the long-term debt picture will be anyway, so you end up with a healthier budget picture, despite more spending by the government, since that spending is smaller as a portion of the bigger economy.
The last major part of the budget picture is health-care spending. For a long time, the rate of growth of health care spending has been faster than the rate of growth of the economy. This is unsustainable, and needs to be addressed. We'll see if Congress is willing to address this issue, but it's the biggest and hardest to resolve issue plaguing our budget.
The four are, 1) The wars in Iraq and Afghanistan, 2) The Bush tax cuts, 3) Two different recessions, and 4) Exploding health care costs.
The war in Afghanistan, at least, was pretty much accepted by both Democrats and Republicans as a justified response to the 9/11 attacks. The war in Iraq was not, and was sold on false pretenses, but that discussion is irrelevant to the budget debate. While wars are generally expensive (and there are no exception), they're not unaffordable. Sooner or later, they'll wind down, which in turn erases them from the books. So they're really not a drag on the long-term budget picture.
The Bush tax cuts, on the other hand, were neither necessary nor unaffordable. They were initially sold as a way to spend the surplus accumulated during the Clinton years. Then, when the tech bubble burst at the beginning of the Bush Administration, they were sold as a way to stimulate the economy back to growth (a very Keynesian prescription, given that the Fed had plenty of traction to lower interest rates in the economy). On the surface, those tax cuts looked affordable, simply because the CBO scored them as if they would expire on schedule instead of being extended indefinitely. Letting them expire in 2012, as they're scheduled to do, roughly cuts the structural deficit in half. The issue is convincing anti-tax nuts in Congress to let that happen.
Recessions were another major part. By definition, recessions have significant adverse effects on budget conditions. They cut tax receipts (as GDP falls), but hike auto-stabilization spending through unemployment benefits and Medicaid, creating bigger budget deficits. It's this factor that is primarily responsible for the big deficits during the Obama administration. The size of government, contrary to BS claims to the contrary, has not grown under Obama. But the economy has shrank. The reason this doesn't have to be a long-term issue, though, is that the government COULD still take steps to fight the downturn. Fiscal policy to stimulate the economy and get it back to full employment and jump-start a self-sustaining recovery would fill a significant part of the budget gap that currently exists as a result of the depressed economy. Sure, that would hike the deficit in the short-term, but the longer the economy stays depressed, the bigger the long-term debt picture will be anyway, so you end up with a healthier budget picture, despite more spending by the government, since that spending is smaller as a portion of the bigger economy.
The last major part of the budget picture is health-care spending. For a long time, the rate of growth of health care spending has been faster than the rate of growth of the economy. This is unsustainable, and needs to be addressed. We'll see if Congress is willing to address this issue, but it's the biggest and hardest to resolve issue plaguing our budget.
Thursday, July 14, 2011
Debt Deal Politics
Now, I'm gonna be honest, I hate partisan politics. People treat it like some kind of professional sport, where they pick a "team" and pull for that "team" to win, good of the country be damned. Which is why it's so frustrating to have seen the Republican Party go completely off the rails, from a reasonable small(er) government party under Eisenhower through Nixon to a catch-all anti-tax coalition. Their rhetoric has matched that stance, but it really has no basis in reality. Turn on Fox News or read a George Will or George Krauthammer column, and they moan about the "expansive welfare state", Obama's "socialist health care plan" and "suffocating taxes." What they don't mention is that the US welfare state, for better or worse, is smaller than what you find in just about any other advanced democracy; the "socialist health care plan passed by Obama looks... functionally identical to the one passed by Mitt Romney in Massachusetts, and the ones proposed by Richard Nixon in the 70's, and Congressional Republicans at the beginning of Bill Clinton's term (when the Democrats were, wrongly I think, pushing for single-payer). But a plan that was the GOP alternative as late as 1993 somehow turned into "socialist health care"...? Sorry, it's BS. The tax issue is even more absurd. Obama is raising taxes on everyone! is their mantra. Businesses aren't hiring because of crippling taxes! (and because of socialist health care). Never mind that businesses aren't hiring because, you know, more than 9% of the workforce is unemployed and people aren't buying enough of what they're making for it to be worth their while. Businesses are still profiting and sitting on piles of cash because there's plenty of demand in the developing countries for their product, and they've trimmed their operations domestically, but it's very clear that taxes aren't what's driving the lack of jobs. Especially because Obama hasn't, you know, raised taxes. In fact, taxes have only ever been cut on his watch. Think about it- name a single tax Obama has raised. He extended the Bush tax cuts (which were intended to be temporary, though I don't think that was ever the Bush people's plan), and cut more taxes with the stimulus (which was about 1/3 tax cuts). Last year, the US collected 14.9% of GDP in taxes, which is the lowest level since just after World War II (before Medicare, Medicaid and Social Security!), AND this is considering that the denominator of that equation (GDP) was depressed, meaning that even less taxes were collected than normal.
Which brings me to the latest issue-- the debt ceiling. As I've pointed out before, the US has a long-term structural budget issue, but there's no debt "crisis". The government borrows at a historically low rate. But that rate is in danger. Why? Because of the debt ceiling impasse. Now, the debt ceiling vote is a stupid idea anyway. Congress ALREADY votes on the debt ceiling by making taxing and spending decisions. Raising the debt ceiling amounts to a second vote to confirm the first vote. Though I hate the analogy of a government as a corporation (it's completely inane and there's really not much parallel), it's the equivalent of a company first having a committee meet to offer a worker a contract for a certain length of time and a certain amount of pay, then taking a separate vote to actually disburse the funds to pay the worker. If you pass one and not the other, you didn't perform. And if the US doesn't perform its obligations, it's in default. No, you can't avoid default just by paying interest on the debt, any more than a company can avoid lawsuits by paying its bondholders interest but refusing to pay its workers. Moody's, the giant credit agency, put the US on alert over this impasse, and the results of a downgrade would be horrifying. Not necessarily because the ratings agencies have been all that reliable (they kind of stunk at their jobs during the years leading up to the crisis), but because institutional investors like pension funds are only allowed to invest in AAA-rated securities. If they start dumping their holdings, the interest rates on US debt will go up and it'll be American taxpayers who will pick up the (dead weight cost) that is paying higher interest rates on that debt. But all of that is unnecessary if, in the short run, the government raises the debt ceiling while, in the long run, it tackles the real problems-- health care spending is on an unsustainable upward trajectory, and taxes are too low.
But those are issues that can be dealt with in the next few months and years, not the two weeks we have before the government defaults on its obligations. In fact, making that kind of important deal on a tight timeline is a completely ridiculous idea. Which hasn't stopped the Republicans from deciding to hold the debt ceiling hostage to extract... short-term cuts in discretionary spending. Now, anyone who's taken a look at a federal budget knows that the US government is best thought of as an insurance company with a military. Over 80% of outlays are some combination of Social Security, Medicare, Medicaid, and automatic stabilizer (unemployment insurance, welfare, etc.) transfers, plus interest on the debt and military spending. Republicans like to conjure an image of useless bureaucrats getting paid $100,000 a year to sit in offices in Washington and scratch themselves, but the reality is that federal workers are paid less than private workers with similar credentials (albeit with more job security and probably shorter hours; also, lower-end federal workers like the custodians cleaning Congress earn more than, say, custodians at corporate offices, but there just aren't many of those workers to cut, period). Which is what makes the "grand budget deal" to cut $4 trillion over a decade so silly. Yes, cuts will have to be made. To spread the pain around, social security and the military could be tweaked (though it's not absolutely necessary). But there's no pressing need to make a deal NOW, while it absolutely IS pressing to raise the debt ceiling.
So, with all the background out of the way, even looking at these debt negotiations makes it clear that the Republican Party is completly nuts. Nate Silver has a nice article in the New York Times showing what Americans think should go into a budget deal. In short, the average self-identified Republican voter thinks the deal should be 26% tax hikes, 74% spending increases; for independents, the ratio is 34-66, while for Democrats, the ratio is 46-54. The Obama deal the Republicans rejected was... 3/4 spending cuts, 1/4 tax increases. In other words, it was more tilted toward spending cuts than what the average REPUBLICAN voter wants. Not to say that voters are the end-all, be-all. Plenty still think refusing to raise the debt ceiling is somehow an acceptable, viable option, which no one with a pulse can believe. But it's very clear that the "no new taxes" pledge the GOP "mainstream" locked itself into is ridiculous and ought to be called out for the absurdity it is.
Which brings me to the latest issue-- the debt ceiling. As I've pointed out before, the US has a long-term structural budget issue, but there's no debt "crisis". The government borrows at a historically low rate. But that rate is in danger. Why? Because of the debt ceiling impasse. Now, the debt ceiling vote is a stupid idea anyway. Congress ALREADY votes on the debt ceiling by making taxing and spending decisions. Raising the debt ceiling amounts to a second vote to confirm the first vote. Though I hate the analogy of a government as a corporation (it's completely inane and there's really not much parallel), it's the equivalent of a company first having a committee meet to offer a worker a contract for a certain length of time and a certain amount of pay, then taking a separate vote to actually disburse the funds to pay the worker. If you pass one and not the other, you didn't perform. And if the US doesn't perform its obligations, it's in default. No, you can't avoid default just by paying interest on the debt, any more than a company can avoid lawsuits by paying its bondholders interest but refusing to pay its workers. Moody's, the giant credit agency, put the US on alert over this impasse, and the results of a downgrade would be horrifying. Not necessarily because the ratings agencies have been all that reliable (they kind of stunk at their jobs during the years leading up to the crisis), but because institutional investors like pension funds are only allowed to invest in AAA-rated securities. If they start dumping their holdings, the interest rates on US debt will go up and it'll be American taxpayers who will pick up the (dead weight cost) that is paying higher interest rates on that debt. But all of that is unnecessary if, in the short run, the government raises the debt ceiling while, in the long run, it tackles the real problems-- health care spending is on an unsustainable upward trajectory, and taxes are too low.
But those are issues that can be dealt with in the next few months and years, not the two weeks we have before the government defaults on its obligations. In fact, making that kind of important deal on a tight timeline is a completely ridiculous idea. Which hasn't stopped the Republicans from deciding to hold the debt ceiling hostage to extract... short-term cuts in discretionary spending. Now, anyone who's taken a look at a federal budget knows that the US government is best thought of as an insurance company with a military. Over 80% of outlays are some combination of Social Security, Medicare, Medicaid, and automatic stabilizer (unemployment insurance, welfare, etc.) transfers, plus interest on the debt and military spending. Republicans like to conjure an image of useless bureaucrats getting paid $100,000 a year to sit in offices in Washington and scratch themselves, but the reality is that federal workers are paid less than private workers with similar credentials (albeit with more job security and probably shorter hours; also, lower-end federal workers like the custodians cleaning Congress earn more than, say, custodians at corporate offices, but there just aren't many of those workers to cut, period). Which is what makes the "grand budget deal" to cut $4 trillion over a decade so silly. Yes, cuts will have to be made. To spread the pain around, social security and the military could be tweaked (though it's not absolutely necessary). But there's no pressing need to make a deal NOW, while it absolutely IS pressing to raise the debt ceiling.
So, with all the background out of the way, even looking at these debt negotiations makes it clear that the Republican Party is completly nuts. Nate Silver has a nice article in the New York Times showing what Americans think should go into a budget deal. In short, the average self-identified Republican voter thinks the deal should be 26% tax hikes, 74% spending increases; for independents, the ratio is 34-66, while for Democrats, the ratio is 46-54. The Obama deal the Republicans rejected was... 3/4 spending cuts, 1/4 tax increases. In other words, it was more tilted toward spending cuts than what the average REPUBLICAN voter wants. Not to say that voters are the end-all, be-all. Plenty still think refusing to raise the debt ceiling is somehow an acceptable, viable option, which no one with a pulse can believe. But it's very clear that the "no new taxes" pledge the GOP "mainstream" locked itself into is ridiculous and ought to be called out for the absurdity it is.
Tuesday, July 12, 2011
Too much debt!
One of the most puzzling things that I read in today's public discourse is the fixation on debt. "We're too indebted," people complain. The conventional wisdom is that debt is debt is debt, and there's way too much of it in the "system". You see it in discussions of Greece, the US, and every other depressed country. "You can't solve a debt crisis with more debt" is a common argument against fiscal stimulus in a depressed economy.
It sounds good. And reasonable. But think about it for 5 minutes, and you realize that it's complete nonsense. Not to say that excessive debt for a government, for consumers, or for corporations is a good thing-- being heavily indebted can be a huge drag on economic growth, as consumers focus on paying down debt instead of spending or investing, which in turn drags down demand.
But think about what it means for there to be "too much debt in the system." The implication there is that somehow everyone can be overindebted. But, if anyone has ever looked at a balance sheet, you know that there are two sides to it-- assets and liabilities. Everyone's liability is someone else's asset. And it makes a lot of sense if you cut through the mind-numbing rhetoric. If I loan you $10 plus interest, that loan is an asset for me and a liability for you. There's no way to unbalance the global balance sheet so that there are more liabilities than assets in the system.
Which is why the claim that "You can't solve a debt problem with more debt!" is so ignorant. Take the US. Yes, American households were overindebted in the run-up to the housing collapse. Yes, their finances were a mess once they came to the realization that the house they bought in Florida which they thought had doubled in value between 2002 and 2007 was actually worth half of what they thought. But somehow, because households had ugly balance sheets, the politicians decided that the GOVERNMENT shouldn't borrow. That idea is silly, stupid, and counterproductive.
The government, since the financial crisis, has been borrowing at historically low rates. But somehow, politicians have decided that, because tax revenues collapsed as a result of the crisis and health care spending is on an unsustainable long-run trajectory, the government shouldn't borrow in the short term. That might be good politics for the ignorant, but it's terrible economics. There are two ways for government to help debt-strapped consumers. The first is by putting money directly in their pockets through tax cuts. That's somewhat effective at deleveraging the consumer, but not very effective at restarting the economy. If someone with an income of $40K and $100K in debt gets an extra $1000 a year in tax cuts, all they'll do is use that G to pay off creditors. Without doing anything to bolster demand in the economy. Businesses, in turn, won't be more likely to hire because there's no extra demand for their product to justify that expenditure. If a factory owner has 5 factories, and 3 of them are idle because there isn't enough demand, the factory owner isn't going to build a new factory or hire more workers just because their taxes have been cut-- he'll pocket the money and pay it out in dividends, or just keep it on hand.
And that problem comes into even sharper focus when you consider the unemployed worker who doesn't have the $40K a year in salary anymore due to layoffs, but still has the $100K in debt. He's not getting the benefit of the tax break, and without a job, he has no means to pay down his debt. The solution to that is for government to put people directly to work and invest in building infrastructure, high-speed rail, wireless internet, and other improvements that benefit business productivity. Doing so not only puts more money into consumers' pockets, but, unlike with tax cuts, there's a return on the investment (the government pockets less money when they cut taxes, but there's no guarantee that anything productive is bought with the savings, and with demand generally depressed, investment is unlikely in a depressed market). Now, here, critics argue that we "tried" stimulus when Obama took office and it somehow failed. That claim is also silly. Think about it-- what big public works projects have you seen take place since 2009? Where's the new Hoover dam? The high speed rail line? Wireless internet in our cities? I've been all over the country since 2008, and all I've ever seen that has "ARRA" signs on it are a few road resurfacing projects. Which, fine as they are, aren't going to get a $15 trillion economy with a $1.5 trillion output gap on a road to full employment. So why haven't we seen those big projects? Because, simply, the stimulus wasn't that big, and most of it was aid to states and localities, tax cuts, and social insurance (unemployment benefits, etc.). You're not going to see the impact of aid that goes toward keeping a teacher or a cop who would otherwise be laid off on the job. And tax cuts aren't going to be spent when people have debts to service, but a whole lot of them don't have jobs. And, if you look at the numbers, government employment is actually DOWN since the crisis. So much for "failed" stimulus...
So, really, government going further into debt has a few benefits. It gives people jobs directly, influencing the unemployment rate. Those jobs translate into income that people can use to pay down their debts. And, once those debts are paid off, people will be more inclined to spend, which in turn spurs a self-sustaining recovery that allows government to ease off the spending and work on paying its own debt (which will be easier since an economy that isn't depressed means more tax revenues). Long-term, sure, the government will need to figure out how to control health care costs, which is the key to fixing the long-run budget picture. But, for now, with unemployment over 9% and borrowing really cheap, there's no reason for the government not to take advantage of the free capital to spur the economy. Now if only the politics could catch up to the reality...
It sounds good. And reasonable. But think about it for 5 minutes, and you realize that it's complete nonsense. Not to say that excessive debt for a government, for consumers, or for corporations is a good thing-- being heavily indebted can be a huge drag on economic growth, as consumers focus on paying down debt instead of spending or investing, which in turn drags down demand.
But think about what it means for there to be "too much debt in the system." The implication there is that somehow everyone can be overindebted. But, if anyone has ever looked at a balance sheet, you know that there are two sides to it-- assets and liabilities. Everyone's liability is someone else's asset. And it makes a lot of sense if you cut through the mind-numbing rhetoric. If I loan you $10 plus interest, that loan is an asset for me and a liability for you. There's no way to unbalance the global balance sheet so that there are more liabilities than assets in the system.
Which is why the claim that "You can't solve a debt problem with more debt!" is so ignorant. Take the US. Yes, American households were overindebted in the run-up to the housing collapse. Yes, their finances were a mess once they came to the realization that the house they bought in Florida which they thought had doubled in value between 2002 and 2007 was actually worth half of what they thought. But somehow, because households had ugly balance sheets, the politicians decided that the GOVERNMENT shouldn't borrow. That idea is silly, stupid, and counterproductive.
The government, since the financial crisis, has been borrowing at historically low rates. But somehow, politicians have decided that, because tax revenues collapsed as a result of the crisis and health care spending is on an unsustainable long-run trajectory, the government shouldn't borrow in the short term. That might be good politics for the ignorant, but it's terrible economics. There are two ways for government to help debt-strapped consumers. The first is by putting money directly in their pockets through tax cuts. That's somewhat effective at deleveraging the consumer, but not very effective at restarting the economy. If someone with an income of $40K and $100K in debt gets an extra $1000 a year in tax cuts, all they'll do is use that G to pay off creditors. Without doing anything to bolster demand in the economy. Businesses, in turn, won't be more likely to hire because there's no extra demand for their product to justify that expenditure. If a factory owner has 5 factories, and 3 of them are idle because there isn't enough demand, the factory owner isn't going to build a new factory or hire more workers just because their taxes have been cut-- he'll pocket the money and pay it out in dividends, or just keep it on hand.
And that problem comes into even sharper focus when you consider the unemployed worker who doesn't have the $40K a year in salary anymore due to layoffs, but still has the $100K in debt. He's not getting the benefit of the tax break, and without a job, he has no means to pay down his debt. The solution to that is for government to put people directly to work and invest in building infrastructure, high-speed rail, wireless internet, and other improvements that benefit business productivity. Doing so not only puts more money into consumers' pockets, but, unlike with tax cuts, there's a return on the investment (the government pockets less money when they cut taxes, but there's no guarantee that anything productive is bought with the savings, and with demand generally depressed, investment is unlikely in a depressed market). Now, here, critics argue that we "tried" stimulus when Obama took office and it somehow failed. That claim is also silly. Think about it-- what big public works projects have you seen take place since 2009? Where's the new Hoover dam? The high speed rail line? Wireless internet in our cities? I've been all over the country since 2008, and all I've ever seen that has "ARRA" signs on it are a few road resurfacing projects. Which, fine as they are, aren't going to get a $15 trillion economy with a $1.5 trillion output gap on a road to full employment. So why haven't we seen those big projects? Because, simply, the stimulus wasn't that big, and most of it was aid to states and localities, tax cuts, and social insurance (unemployment benefits, etc.). You're not going to see the impact of aid that goes toward keeping a teacher or a cop who would otherwise be laid off on the job. And tax cuts aren't going to be spent when people have debts to service, but a whole lot of them don't have jobs. And, if you look at the numbers, government employment is actually DOWN since the crisis. So much for "failed" stimulus...
So, really, government going further into debt has a few benefits. It gives people jobs directly, influencing the unemployment rate. Those jobs translate into income that people can use to pay down their debts. And, once those debts are paid off, people will be more inclined to spend, which in turn spurs a self-sustaining recovery that allows government to ease off the spending and work on paying its own debt (which will be easier since an economy that isn't depressed means more tax revenues). Long-term, sure, the government will need to figure out how to control health care costs, which is the key to fixing the long-run budget picture. But, for now, with unemployment over 9% and borrowing really cheap, there's no reason for the government not to take advantage of the free capital to spur the economy. Now if only the politics could catch up to the reality...
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