Economist Advocates Expansionary Debt Relief Plan

Rober Shiller is convinced that a plan requiring raising taxes and government spending on a one-for-one basis – a “balanced-budget multiplier” – will help stimulate the economy and reduce the deficit without endangering the possibility of economic recovery. Shiller argues this will help solve real problems like high unemployment without necessarily expanding the size of the government, if spending is focused on infrastructure projects and funding private-sector projects. He also skewers ratings agencies for making the problem worse by promising to downgrade the country’s credit rating if it doesn’t figure out how to trim trillions from the deficit while also avoiding another recession – what many analysts now see as impossible. For more on this continue reading the following article from Economist’s View.

Robert Shiller:

Taxing and Spending, in Balance, by Robert Shiller, Commentary, NY Times: The fight over the debt ceiling has deflected attention from the serious problems of fixing the economy and finding jobs for the 14 million unemployed. Worse, it has created strong negative feelings about fiscal policy, just when other policy measures seem incapable of restoring economic health.

The very term “fiscal stimulus” has become tainted. ... Fiscal stimulus is actually very useful and appropriate in the current circumstances. But rather than despair, we should ... never give up proposing sensible economic policies. ...

In December, I wrote about the concept of the balanced-budget multiplier and of raising taxes and government expenditure by the same amount, dollar for dollar..., such a policy would be one-for-one expansionary...

This is an expansionary change in fiscal policy that won’t require additional increases in the national debt. We should start a dialogue right now about taking such action, before the damage of protracted unemployment worsens. ...

Such a policy needn’t make government substantially bigger. Instead, the government would act as a kind of investment banker specializing in public goods. It wouldn’t need a lot of employees itself. It would seek private-sector proposals for building infrastructure and other useful projects, and bring in private-sector panels to review them. This would be akin to the role government already plays for science with the National Science Foundation. ...

Current trends suggest that we may be dealing with high unemployment for years. We should be prepared to provide balanced support to the economy.

I appreciate the sentiment that "we should ... never give up proposing sensible economic policies." We should certainly do our best to educate people and to fight for better policy. But there's no way a policy that involves a substantial increase in taxes will pass right now.

But do I have something better to offer that might pass? Nope -- "might pass" and "better" are non-intersecting sets, and that won't change before the debt ceiling deadline. My effort right now is directed toward avoiding the stupidity that might lead to a failure to raise the debt ceiling, or almost as bad, a deal that raises it stupidly (I avoid using the word stupid here for the most part so that when I do use it, it will have more force).

In that respect, I am annoyed at the (demonstrably incompetent) ratings agencies, S&P in particular. They are now saying that simply raising the debt ceiling is no longer enough, there must be trillions in deficit reduction -- enough to derail the recovery and potentially send the economy back into recession -- to avoid a ratings downgrade. So S&P is making it more likely that a recovery killing deal will be made, and less likely that there is a last minute deal that "cleanly" raises the debt limit, avoids the recession risk associated with immediate debt reduction, and also avoids the risk of the severe economic problems associated with default. [Update: see here too, and here.]

This blog post was republished with permission from Mark Thoma.

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.

The Growing Cost To Service The National Debt

It is no surprise to anyone anymore when they hear that the U.S. national debt is over $14 trillion (although it should), but what if you were told that the cost to simply service that debt over the next decade will be $5.5 trillion? What if you were then told that this was the absolute best case scenario as reported by the government? Tim Iacono, from The Mess That Greenspan Made, gives his take on the numbers in his blog post below.

Here’s a fun little graphic from a report at CNN/Money on the possible costs to service the national debt in the not-too-distant future, that is, when interest rates are closer to historical norms, inflation in the U.S. rises to more natural levels, and the rest of the world has had more time to reflect on our borrow-and-spend ways.

The scariest part of this, as noted in the story, is that the un-smiley face on the left is the optimistic scenario as presented by the Congressional Budget Office recently – debt service of more than ten times the current level. This is akin to looking back to the early-80s when the national debt was rising through the $1 trillion level towards $2 trillion, when, to most people, the idea of $14 trillion in outstanding debt would have seemed incomprehensible.

This post was republished with permission from The Mess That Greenspan Made.

Excessive Debt: A Destroyer Of Great Nations

Moses Kim writes that news of an economic recovery is nothing more than propaganda to distract people from the government destroying the economy with debt. With a record budget deficit for the month of October that included a $17.93 billion payout for interest alone, the national debt continues to spiral out of control. See the following from Expected Returns.

Forget all the hoopla you hear from the mainstream media and focus on reality. We are far, far away from any sustainable recovery. With tax receipts collapsing, and American businesses and consumers on life support, there is really nothing our government can do to stop this economic collapse. Of course that won't stop our clueless officials from trying, and in the process of doing so, destroying the dollar. From the WSJ, U.S. posts $176.6 Billion Deficit for October:

The federal government kicked off fiscal year 2010 by posting its widest-ever October budget deficit, the Treasury Department said Thursday.

The $176.36 billion gap is more than $20 billion wider than the shortfall recorded in October 2008, driven up by lower tax receipts, stimulus-related revenue reductions and consistently high government outlays.

Treasury's monthly budget statement shows receipts were $135.33 billion in October, down 18% from a year earlier and at the lowest level since October 2002. Meanwhile, outlays were $311.69 billion, down 3% from a year earlier and at their second-highest monthly level on record.

So much for "green shoots"- our budget shortfall is already well-beyond crisis levels. The budget deficit in October would have been the equivalent of the annual budget deficit a mere decade ago. Even with all this government stimulus, is unemployment improving? Are new businesses opening? Sans government propaganda, does anyone really "feel" that this recession/depression is actually over?
Debt Reduces Productive Capacity

At the equivalent of 9.9% of gross domestic product, the figure is the widest U.S. deficit as a share of GDP since 1945.

The government paid $17.93 billion in net interest last month on the federal debt. Net interest on the federal debt excludes interest paid on nonmarketable government securities held by federal trust funds, such as Social Security.

The only ways to make up for shortfalls in tax receipts are through higher taxes, debt issuance, or inflation. Study your history books and see that excessive debt has always destroyed great nations. Governments throughout history have taken on the responsibility of trying to "fix" debt crises, and have succeeded only in making the problem worse.

We are experiencing a debt crisis in all sectors of the economy. Overleveraged individuals are being gouged by credit card companies, which means that there is no more money left to organically stimulate the economy and create real jobs. Banks are overleveraged, which means their primary focus will not be to lend to consumers, but to repair capital ratios. And then you have the U.S. government- the most overleveraged entity in the world. There is no doubt in my mind that the cascading effect of debt defaults- from states and municipalities, to individuals and the federal government itself- will wreak utter havoc on our economy.

All of our potential productive capacity is being wasted to service our exponentially growing debt. You just don't solve a debt problem by blindly throwing money here and there, and getting deeper and deeper into debt. It's been tried before in Japan, and that experiment has failed magnificently. It's a sad fact, but our country is being destroyed before your very eyes.

This post has been republished from Moses Kim's blog, Expected Returns.