Per Capital Government Spending Chat Draws Fire

Economist Mark Thoma, spurred by commentary from Paul Krugman regarding President Obama’s real government spending, created a graph to compare Obama’s annualized growth in real per capita government spending with that of the last six presidencies. The result, which reflects the Obama Administration’s comparatively low spending, created a small storm among partisan and non-partisan economists regarding the breakdown of the numbers and Obama’s perceived austerity in the face of economic crises. For more on this continue reading the following article from Economist’s View. 

Via email:

Seeing the Krugman commentary comparing real government spending under Obama and Reagan made me curious about what it looks like if you express it in per capita terms?  In particular, how does the Obama period compare with other presidencies in terms of penury/austerity versus spendthriftness?

To compare presidencies, I did the calculation two ways.  One starts in the quarter before the president was elected (e.g., 2008Q4), the other starts in the first quarter of the presidency (e.g., 2009Q1).  (The ARRA probably had some effect in Q1, but most of the change was simply economic conditions that the incoming president had nothing to do with, so I think I prefer the Q1 to Q1 method). Ranking since Johnson (starting in 1968), and using the first-quarter comparisons, and calculating growth under Obama through 2011Q4, Clinton is the most austere, followed by Obama.  The most spendthrift are (1) Nixon-Ford, (2) Reagan, and (3) Bush II.   The figure is pasted below:

This blog post was republished with permission from Economist's View.

Fiscal Cliff Deal Inadequate

The simple fact is that the deal that was reached to avoid the so-called “fiscal cliff” is nothing more than a postponement of the real negotiation, which will have to bear results if the country is to avoid across-the-board spending cuts in the form of sequestration. The March deadline looms larger than that of the cliff and Republicans and Democrats have already drawn lines in the sand. The GOP will refuse to vote for an increase in the debt ceiling unless Democrats agree to cuts to entitlement programs, and the entire drama will be played out again, although this time experts feel there is less chance of positive resolution. For more on this continue reading the following article from Iacono Research. 

My takeaways from the recent fiscal cliff deal.


First, thank God people will now stop talking about “going over the fiscal cliff”.  Fed Chief Ben Bernanke has done many terrible things at the central bank, but coining the phrase “fiscal cliff” was clearly one of the worst.

Second, anyone thinking that this is somehow the end of the story when it comes to the U.S. budget difficulties should be immediately absolved of that notion since, before you know it, there will be another catchy phrase to describe what is about to happen over the next two months.

Based on what I’ve been reading, it will be termed an “abyss” of some sort – the debt ceiling abyss, the sequestration abyss, the government funding abyss, or, my personal favorite appearing in the title above, sans the “abyss” moniker. This Bloomberg report summarizes what lies ahead:

If anything, the U.S. faces an even more ominous deadline in a few months. The debt ceiling was hit as of New Year’s Eve. The U.S. Treasury will dip into its tool bag to keep the country’s borrowing ability going, but that will last only about two months. Also in early March, the sequestration — $110 billion in across-the-board spending cuts, half in defense and half in domestic programs – springs back, unless Congress finds a way to offset it with other spending cuts. Weeks later, the law that keeps the government funded expires. It all means that, in late February and early March, Congress will face a sequestration, a government default and a government shutdown. Republicans say they’ll use the leverage created by the debt ceiling to force Obama to accept spending cuts, particularly in entitlement programs. Obama resisted that notion on Dec. 31, saying he wants more tax increases and won’t accept Republican plans to “shove” spending cuts past him. “If they think that’s going to be the formula for how we solve this thing, then they’ve got another thing coming,” he said.

Per this story at The Hill, the duo of Simpson and Bowles probably best characterized the result as follows:

“We have all known for over a year that this fiscal cliff was coming. In fact Washington politicians set it up to force themselves to seriously deal with our Nation’s long term fiscal problems,” Simpson and Bowles added. “Yet even after taking the Country to the brink of economic disaster, Washington still could not forge a common sense bipartisan consensus on a plan that stabilizes the debt.”

What does this mean for financial markets in general and precious metals in particular? These thoughts from the Bank of Nova Scotia appearing in this Globe & Mail report today provide a good summary:

The U.S. budget agreement is likely to prove [U.S. dollar] negative in the medium term as it averts the fiscal cliff today but fails to provide a credible medium-term fiscal plan and instead forces major issues, like the debt ceiling and $110-billion in spending cuts, out to March 1, and highlights how challenged the U.S. political system has become. In addition, it potentially lays the foundation for a rating agency downgrade.

Anyone who grew tired and angry about the fiscal cliff debate over the last couple months should enjoy the current reprieve while they can because it will be just days (maybe only hours) before we start hearing about the much more difficult (and dangerous) debate that lies ahead.

This post was republished with permission from Tim Iacono.

Ron Paul Talks Gold Standard

Presidential candidate Rep. Ron Paul (R-TX) spoke with Judge Andrew Napolitano, host of FOX Business News “Freedom Watch”, about his belief in the gold standard and the current state of U.S. monetary policy. Paul discusses the transition from fiat currency back to the gold standard by legalizing gold and silver tender without having a fixed exchange rate between the two currencies. Judge Napolitano questions whether there is a possibility of a true gold standard that allows exchange between the two, and Paul responds that while that scenario is a long way off, the current system cannot sustain itself and that an audit of the Federal Reserve is a good place to begin reform. For more on this continue reading the following article from Tim Iacono.

Rep. Ron Paul (R-TX) appeared on Fox Business News yesterday to talk about the nation’s money and a return to the gold standard in the unlikely event that he’s elected president.

His discussion of the U.S. dollar throughout American history reminded me of a Wall Street Journal book review yesterday by James Grant that, from what I could tell, was a lot better than the book – Greenback Planet by H.W. Brands. From the book review:

“Greenback Planet” is the story of this amazing monetary transformation. The narrative begins in the 18th century and races to the present, pausing to catch its breath at some of the great American monetary landmarks: Andrew Jackson’s veto, in 1832, of legislation rechartering a predecessor to the Federal Reserve; Abraham Lincoln’s recourse to greenbacks, or fiat currency, to finance the Civil War; resumption of the gold standard in 1879, with which it once more became possible to exchange gold for paper and vice-versa at a fixed and statutory rate; J.P. Morgan quelling the Panic of 1907; the Federal Reserve not quelling, never mind preventing, the Great Depression; the crazy-quilt monetary improvisations of the 1930s; the halfway gold dollar of the post-World War II era; and the creation, in 1971, of the pure paper (later digital) model of today.

Mr. Brands is a paper-money man, though the subtitle of his book—”How the Dollar Conquered the World and Threatened Civilization as We Know It”—seems to betray some reservations.

This blog post was republished with permission from Tim Iacono.

Ross Perot Prophecy Comes True

Economist Tim Iacono reflects on the wisdom of Ross Perot during the 1992 Presidential election. He highlights a video made of a debate between Bush, Clinton and Perot wherein Perot warns of a wage convergence between Mexico and the U.S., and notes how now the country at issue is China as their wages climb while America’s falls. Meanwhile, he notes, everyone is too busy talking about taxing and spending to take note of the problem. For more on this continue reading the following article from Tim Iacono.

Spotted over at Patrick.net this morning, 1992 Presidential candidate Ross Perot’s warning about a steady decline in U.S. wages from almost 20 years ago sounds quite prophetic. All you have to do is substitute “China” for “Mexico” when you hear about wages converging at six dollars an hour – ours going down, theirs going up.

Sadly, no one talks about his much – instead, you get a political debate about taxes and spending. And, of course, monetary policy at the Federal Reserve that is largely based on a consumer price index that doesn’t distinguish between imported goods and goods that are produced domestically only exacerbates the problem.

This blog post was republished with permission from Tim Iacono.

Debt Ceiling Disagreement Persists

Economist Mark Thoma argues that the disagreement between Republicans and Democrats over whether to increase the debt ceiling is less about reducing the debt and more about controlling the size and role of government by either maintaining or changing the current tax structure. Thoma points out that even conservative supporters are mystified by Republican stubbornness when it comes to arguably helpful ideas about how to steer federal revenue, citing the GOP’s refusal to close the tax loophole on the ownership of corporate jets by way of example. For more on this continue reading the following article from Economist’s View.

If you had any doubt that the fight over the debt ceiling isn't really about the debt:

Paul Ryan Responds To David Brooks: We Won’t Cut Loopholes To Reduce Deficit, Only To Finance More Tax Cuts, ThinkProgress: As the August debt ceiling deadline looms and Republicans continue refusing to consider revenue increases, conservative New York Times columnist David Brooks excoriated the GOP for its intransigence. Writing yesterday that it “may no longer be a normal party” but rather a movement of “fanatic[s]” with a “sacred fixation” on tax cuts, Brooks slammed the GOP for rejecting a “no-brainer” compromise with Democrats, which would include closing tax loopholes for things like corporate jet ownership...

But Brook’s plea for sanity was lost on House Budget Committee Chairman Paul Ryan (R-WI), who responded to the column on conservative radio host Laura Ingraham’s show this morning. Ryan said that if Republicans gave up the loopholes now without securing a deal to lower marginal tax rates overall, they would lose an opportunity to demand new tax cuts in the future:

RYAN: What happens if you do what he’s saying, is then you can’t lower tax rates. So it does affect marginal tax rates. In order to lower marginal tax rates, you have to take away those loopholes so you can lower those tax rates. If you want to do what we call being revenue neutral … If you take a deal like that, you’re necessarily requiring tax rates to be higher for everybody. You need lower tax rates by going after tax loopholes. If you take away the tax loopholes without lowering tax rates, then you deny Congress the ability to lower everybody’s tax rates and you keep people’s tax rates high.

...Ryan is arguing that raising taxes on corporate jet owners and others is only acceptable if the money raised is plowed back into new tax cuts, not to paying down the deficit. He is clearly more interested in cutting taxes than dealing with the deficit, and is willing to let these egregious loopholes stay in the tax code until he can best exploit their removal to lower taxes...

With Republicans nitpicking at spending programs and eliminating their favorite targets, even small ones that don't generate much revenue, I appreciated this:

Ironically, just moments earlier in the interview, Ryan attacked President Obama for wanting to close the loopholes, saying doing so would generate an insignificant about of revenue to pay down the deficit. But when it comes to tax cuts, closing those same loopholes would apparently generate plenty of revenue.

The GOP argues that we must eliminate all wasteful spending no matter how small the expenditure (where wasteful means it does not agree with Republican ideology), deficit reduction demands it! Or so they argue. But closing tax loopholes would generate too little revenue to be bothered with?

But it's the "we're open to tax increases so long as they don't increase taxes," i.e. the insistence that all tax changes be "revenue neutral" that gives away the real game. This is about the size and role of government, it has very little, if anything, to do with the debt.

This article was republished with permission from The Economist's View.

Parties Differ On U.S. Economic Policy

Opinions about how to repair the economy in the United States vary from one party to the next, but broadly trend either toward reducing debt or spending more to in an effort to stimulate the financial infrastructure. The vast majority of conservative Republicans and a majority of Independents advocate reducing debt, while Conservative and Liberal Democrats favor more spending. For more on this continue reading the following article from Tim Iacono.

There’s nothing really surprising about the results of a new Pew Research poll in which one party favors deficit reduction to boost the economic recovery while the other party favors more spending, but, it is kind of interesting to see the data all in one graphic.

Following the departure of another Republican from the debt ceiling/deficit reduction negotiations, President Obama has injected himself directly into the talks in the hope that some kind of a deal can be struck prior to the debt ceiling deadline on August 2nd. Somehow, the fat tail of a U.S. debt default seems to have grown just a bit fatter.

This post was republished with permission from Tim Iacono.

Think Tank Calls For More Government Spending

A paper by a think tank at the Levy Economics Institute calls for a temporary bank closure and increased government spending in order to help the economy recovery. However, at some point government spending can become counterproductive and the burden of proof should be on those who call for more spending. James Picerno from The Capital Spectator discusses this in the following blog post.

Is it time to consider more radical strategies for repairing the U.S. economy? Perhaps, although as a recent essay from the Levy Economics Institute argues, it’s also clear that the old game of trying to reflate bubbles isn’t going to work this time.

“Like the Bush administration before it, the Obama team appears to be trying to re-create the bubbly financial conditions that led to disaster,” a research paper from LEI asserts. “This tack is not likely to succeed, and it is displacing policies that might actually prevent a recurrence of the Great Depression.”

The paper continues,

In our view, most administration proposals are fundamentally misguided, since they are based on the twin presumptions that Big Banks face only a liquidity problem and that, if this problem is resolved, the economy will recover. We believe these presumptions are entirely mistaken. The Big Bank problem is insolvency, and these banks should not be saved because they form a barrier to a sustainable recovery. Given a chance, they will resurrect the bubble conditions that led to the current crisis.

What’s the solution? LEI argues that a banking “holiday” is needed. The biggest institutions are temporarily closed and the books are closely analyzed, including a careful look at cross-bank liabilities. The immediate goal is “consolidating the balance sheets” in order to “downsize the financial sector and reduce monopoly power.”

The basic motivation for these changes, according to LEI, is that borrowers can’t service their debt. But the think tank’s solution isn’t exactly novel. “A major increase in government spending is the only way to smooth the deleveraging process.”

The reasoning, the paper concludes: “It is better to spend on a much bigger scale now in order to create jobs and rekindle private sector growth. If we do that, the budget deficit will shrink and GDP will grow, while government debt- and deficit-to-GDP rates will fall.”

Even assuming that huge amounts of new spending are the intelligent choice (a debatable proposition, to say the least), the conceit here is that Congress will make intelligent decisions when it comes to directing the new monies.

Ultimately, there’s a question of whether the government, any government, can create jobs worthy of the name on a grand scale over long periods of time. One problem: the funding of such a massive public enterprise has to come from somewhere, which raises questions of whether we're simply borrowing from Paul to pay Peter. There are three basic methods for such programs: raise taxes, borrow more, or quietly devalue the currency. Perhaps a mix of all three is coming.

Yet the burden should be on those who call for a colossal increase in government’s role at this juncture in the economic cycle. Does history suggest this is a logical path that will bear fruit? We think not, although the devil's in the details. But as a general proposition, economic growth doesn’t flow from government mandates. Governments have some capacity for keeping disaster at bay, but that's quite a different state of affairs than promoting growth.

We can make a case for intervention to stave off some immediate threat. But let’s not fool ourselves into thinking that economic expansion can be engineered as one more state program. The limited response (so far) of the so-called stimulus program from earlier this year suggests as much. Clearly, many disagree, although the "solution" in some corners is always: spend more. If $800 billion wasn't enough, $1.6 trillion would have been. Ah, if it was only that easy.

And so we ask a simple question: What does history say? To be precise, what does history say about government spending on promoting growth beyond some immediate crisis?

By all means, we need to encourage economic expansion by all reasonable methods and use government levers in a prudent fashion. But there are limits to everything, just as public spending at some point becomes counterproductive. And so let’s not kid ourselves: we’re looking at a period of subpar growth on a number of levels, and the brilliant ideas cooked up in, say, the U.S. Senate or the Department of Energy probably can't save us from this fate.

The only thing worse than an unsatisfactory recovery is one that's also laden with an even higher level of excess debt and questionable expansions of the public sector.

This post has been republished from James Picerno's blog, The Capital Spectator.