September 06, 2004

Curious George: Where does the deficit come from? I see that the U.S. has a $3.9 trillion debt, and in 2003 had the highest deficit in recorded history ($375 billion). What keeps Bush/Congress from, say, creating a $425 quadrillion defense budget? Can we theoretically just keep racking up a debt that goes on forever? And how does this affect the average Joe Sixpack?
  • The constraint is confidence in the US economy. If the government keeps borrowing, investors eventually lose confidence in the ability of the US to repay. Credit gets more expensive. It's like personal finance writ large: my mortgage is at around 7%. A second mortage would get a higher rate. You can print more dollars if you're the government to repay US dollar denominated debt, but the value of the dollar collapses, which makes foreign debt incredibly expensive, and people stop loaning you money, because they know you'll repay them with junk scrip and all the t-shirts you get cheap from China suddenly increase dramatically in price, so all the defence personel riot because their money is worthless. From there on in, it all turns *really* nasty.
  • But that's what all the doomsayers said in 1983 when the national debt hit $1 trillion. Isn't median income in the U.S. still outpacing inflation? My understanding is that the bad effects will kick in but no one knows at what debt level it will occur.
  • Yeah, what rodgerd said. Although, we are racking up a debt that goes on forever. The government can probably continue to finance its spending for quite a few years, as long as it dosen't kill the economy by doing it to excess. Not that we should be putting our country in hock just cause we can...
  • Roger is right, but there's another aspect to it as well. Our economy is driven by confidence. When small-business owners are confident in the economy, they spend money. They buy capital improvements or hire new staff or whatever. When they're not confident, they hang on to their money. The same thing is true of consumers, but the activity of small-business owners has more of an impact. One school of thought—the one I happen to subscribe to—is that there are times when deficit spending is called for (war, economic contraction due to a bubble bursting, etc.), and the right way to get out of that deficit is to cut taxes, create incentives and grow the economy out of it. This isn't universally accepted, but it's one theory. Incidentally, deficit spending is good for American investors. Do you own T-bills? The government sells Treasury bills to finance budget deficits. They're excellent investments especially for seniors who need a safe way to invest. Bottom line: Deficits, like most other things, have good and bad effects. It's hard to point to a deficit and say "this is good" or "this is bad" without ignoring lots of important things.
  • rolypolyman: Seen the value of the dollar lately? A few years ago, the NZ$ used to buy about US$0.5-0.6. When the Euro came in, it was a little less valuable than the dollar (less market confidence in the currency, less interest in owning it). Now the NZ$ is around US$0.6-0.7; the I get considerably fewer Euros than US$ for my NZ$, as it's become relatively more expensive. One problem is that these sorts of things are governed more by a tipping point. In the late 60s, New Zealand was a very rich country; our dollar was worth more than a US$; we had few enough unemployed that politicians knew them by name. We were dependent on access to British markets, though, and when Britain joined the EU and told its former colonies to go fuck themselves (unlike the French, who made provisions for theirs...), we hit tough times. The governments of the day, the Muldoon govt of the 75-84 in particular, decided to spackle over the cracks by massive, debt-funded goverment spending, soaking up unemployment with a bunch of projects now referred to as "white elephants"; restrictions on goods transport by road to force up the use of rail; huge over-employment in goverment departments; and running stuff that doesn't really seem like goverment business[1]. When even that began to fail, the government began borrowing to manipulate the currency; instituted price and wage freezes to control resulting inflation; enacted rigid controls on how much money people could leave the country with to stop people taking it overseas. When there was a change of government in 1984, we were quite literally within days of an Argentina style complete financial meltdown, defaulting on our international loans, and being subjected to forced restructuring. Point is: we had mabe 15 years when responsible governments would have been gearing up for the British entry into the Common Market and the loss of one of our most valuable markets by reviewing spending, looking at access into new markets, and responding to our changed circumstances by gradual realignments of our economy. Instead, we borrowed and spent, and then crashed and burned - while the 1984 Labour government's changes may not have been as harsh as, say, IMF mandated ones, health, education, you name it, were all slashed in a nationally traumatic process. We came through it, but with scars. And we're a very small economy, without spectacular growth, so it his quite quickly. The US is a huge economy, which generally has excellent growth, which helps limit the negative effects of borrowing as more wealth in generated to keep up with borrowing. So it takes longer to hit that tipping point than an Argentina or New Zealand, but boy, it'll be messy if it happens. To take it back to the personal finance example, going from a $3000 VISA, a $100,000 mortgage, and a 10 year old car you own, to a $10,000 VISA, a $300,000 mortgage might be sustainable if your income goes from $40,000 to $120,000. But if you then commit to a brand new car on fincance, you'd better hope you get another raise. And if you lose your job and have to take a pay cut to get another, you're fucked. If you die first, of course, it's your debtor's problem. Say, isn't the tax base in the US shrinking as companies move head office to the Bahamas and fire their domestic workers, while you do all this borrowing? [1] Compared to the average Yank, I'm a screaming red, but the extent of goverment involvement in general society was ludicrous.
  • Another point I forgot to add: while you're correct the 1980-1992 period was a massive supply-side borrow-and-spend exerciese (with only modest crowth overall, much though supply-side zealots like to pick and chose years from the period to claim otherwise), 1992-2000 was very fiscally orthodox, with some surpluses (ie ability to repay debt) and significant growth. So the total picture from 1980-2000 wasn't as bad as it could be, because of a good 8 years. Now it's swinging into the crapper. I imagine how close y'all get to any fiscal catastophes will be largely dependent on whether you get another 4 years of mediocre growth, massive borrowing, and tax base erosion through cuts and net employment losses.
  • I think Chinese banks are lending the US lots of money right now. Ironic, no?
  • And French and German banks, too
  • Yeah, and they owe me a tenner too. Bastards.
  • Roger, you kind of have it backwards. During the early-to-mid-1980's, deficit spending wasn't an option. It was absolutely necessary. There was a war on. It was the tax cuts that exacerbating the deficits that also enabled the economy to grow at more than 3% during that period. Manufacturing output grew by 4.5% and the unemployment rate dropped by half a percent. The Bush (41) tax increases reduced the deficit, but at the cost of slowing the rate of economic growth to 2.3%, pushing unemployment back up to pre-1982 levels, and generally putting the brakes on the economy. In other words, the Reagan tax cuts revved up the economy to the point where it could withstand tax increases that increased government revenues but that curtailed real economic growth. The Internet bubble of the 1990's put a blip on the curve, making it look like the economy was growing faster than it really was. When that bubble burst—which would have happened no matter what anybody did—the economy contracted. Things were good in the early 1990's because of the Reagan tax cuts, not because of the Bush (41) tax increases. To the contrary, it was probably the Bush increases that caused the boom of the 1990's to end as quickly as it did. The economy is a big system, and there's a significant lag between input and output. If you cut taxes today, you'll see real benefits from it in four years. If you raise taxes today, you'll see negative effects in four years. Basically, the Congress under Bush (41) tried to apply the SimCity cheat to the U.S. economy. It didn't work.
  • i don't agree with you, jeff harrell. tax raises don't simply take away money from consumers. if the government is unstupid, it puts the money where it will improve society (socially, culturally, etc.) if taxes went up 5% across the board and all of it went into improving secondary schools and making post-secondary education more affordable, the long term result could only be economic benefit. invest in da people, for a future full of radness
  • the step i left out of that description is: a more educated populace is more employable, so unemployment is reduced. more accessible higher education leads to more chances for technological innovation. more workers in decently-paying jobs and more technological innovation means more taxes comin' in. with tax cuts come rewards directly proportional to financial well-being, which is rather useless to the more unproductive members of society. the counter argument is 'the trickle down effect' but..... ... yeah.
  • [and where i said "socially" two posts up, i meant "economically"]
  • if the government is unstupid, it puts the money where it will improve society (socially, culturally, etc.) Which amounts to a big fat zero, economically speaking. Raise taxes, slow growth. Lower taxes, speed growth. It's not a law of nature or anything, but it's pretty darned close. the long term result could only be economic benefit Yes, that's true, but the trick is figuring out how to get through 20 years of slowed or negative growth and correspondingly decreased revenues at the same fixed rates. The better plan is to cut taxes now, let the economy grow, then use the additional revenues to pay for additional social services.
  • Which is nice in theory, but could lead to debt massively outpacing revenue if the economy doesn't play ball. It would be a fine course if our fiscal policy matched tax cuts with cuts in spending, but that's not the case. The real problem is putting too much capital in the hands of the government, which has no real incentive to use it efficiently. I agree that taxes should be low, but not without cutting spending at the same time.
  • diverting money from social services leads to privatization of social services, which in the case of the USA has led to terrible schools, unaffordable and inefficient health care and other ungood stuff with the degree of concentration of wealth in north america today, tax cuts are incredibly beneficial to a few only, and since the trickle down effect is fictional, the economic improvement doesn't translate to a general improvement for society.... is my view.
  • Money doesen't necessarily need to be diverted from social services to cut spending. The military is pretty bloated. I'm getting tired of paying for a two-theater standing force and enough firepower to give your family a permanent orange afro. I think much of the money could be put to better economic use. Also, sutureself, tax cuts can be beneficial to poor and middle-class people, as long as they're fairly targeted. That might not be the reality of things, but it's possible to do.
  • During the early-to-mid-1980's, deficit spending wasn't an option. It was absolutely necessary. There was a war on.
    No, there wasn't, in any meaningful sense of the word "war". And the US covered much of the cost of previous wars - like World War II - with a raised tax base. In fact, the government investment in war programs, the and lending of US money overseas, played a big part in driving the prosperity of the 40s and 50s in the US. The deficit spending of Vietnam, on the other hand...
    Raise taxes, slow growth. Lower taxes, speed growth. It's not a law of nature or anything, but it's pretty darned close.
    Right. That explains why the less avoiwedly neoclassical Australians have growth that has shat all over New Zealands between 1984 and 1999, while they persued a policy of higher taxation and more government intervention, while New Zealand persued an agenda that wet the knickers of the Milton Friedman fan club, but didn't produce the results claimed for it. And if the good ninties were the delayed effect of Reagan, how can you claim that the good years in the 80s were immediately the effect of Reagan, too, rather than, say, Carter? Or that those "immediate effects" in the 80s can only exist for Reagan's voodoo economics, but not for Clinton's orthodox ones? Oh, right, you're one of those supply-siders I was maligning earlier, picking your data and arguments oh-so selectively, and not very honestly.
    The better plan is to cut taxes now, let the economy grow, then use the additional revenues to pay for additional social services.
    Right. So, buy shares on your credit card, and hope they increase in value faster than the interest.
  • Niall Ferguson:
    Foreign lending also underwrites the American government. Some 46 percent of the total federal debt in public hands is now held by foreigners, and the bulk of the most recent purchases have been made by Asian central banks, particularly the Japanese and the Chinese. The fact that the financial stability of the United States today depends on the central bank of the People’s Republic of China is not widely known. Yet the significance is great. A debtor power can’t possibly exert the same leverage as a creditor power, and U.S. deficits look likely to grow as the baby-boom generation approaches retirement, because only a minority will have made adequate provision for the idleness and illness of old age. One recent estimate of the implicit “fiscal imbalance” between future spending and tax revenue arrived at the mind-boggling figure of $45 trillion.
  • You're always going to hear this: The better plan is to cut taxes now, let the economy grow, then use the additional revenues to pay for additional social services. People aren't going to say their taxes are too low, ever, unless they don't pay anything. So in a few years -- and let's pretend those tax cuts have the desired effect -- you'll have people making the exact same argument. That is, let's cut taxes now and spend the money we'll make later. So, even if we accept this version of economic theory, it's never an all-or-nothing deal. You have to decide how much you want to invest in social programs versus how much you want to cut taxes. Except cutting taxes doesn't always help growth, or, as is more often the case, not enough to justify the tax cuts. If your taxes are already low, cutting them isn't going to make as much of a difference as increasing spending in education, say, because the disinsentive to generate wealth and the so-called 'dead weight' is already negligable or at least not as significant as what a government can do with the money. Americans already enjoy low taxation relative to other developed countries. I'm curious, Jeff, what do you consider to be a desirable level of taxation?
  • I should probably add that I basically agree with roger. I just wanted to examine Jeff's economic theory from within the confines of supply-side economics itself.
  • Where does the deficit come from? well, see son, when a rich man and a rich woman love each other and they want to show that love, they get naked and fuck over the middle class. and then george bush feasts on the corpses and shits huge deficits right out of his ass.
  • Just want to say that this is an interesting and thought-provoking discussion, you Monkeys. Should be required reading for some in our gummint. Tax free bananas to all.
  • So what happens when an OBGYN loves a woman?
  • And to think, everybody was having such a good time, too. Then along comes:
    george bush feasts on the corpses
    By, y'all. See you in another thread.
  • I'm getting here late, but I'd like to share a few memories from Germany of that war in the eighties. I was raised in Darmstadt, a small city south of Frankfurt. In about '82, all the local Army kaserns and housing areas got a new coat of paint. Then, the officer's club got a nice new disco-style dance floor with lights. A little while later, we got a new bowling alley, to replace the old one. Was it worth the deficit spending? Well, I keep seeing around town, freedom isn't free.
  • Uh-oh. Somebody insults Bush and the far right runs because "we've lowered the level of discourse!". I love that. Maybe I'm wrong though. Maybe he had to run out and yell, "Flip Flop" at a Kerry campaign stop...
  • heynow heynow heynow
  • Wow, it's getting just like MeFi. Very impressive. I wondered when that was going to happen.
  • Ah, get over it. Stop comparing MoFi to Mefi all the time, it's getting a little old. It's an online community, people bicker. I personally think we're still doing pretty well. Very educational thread, by the way. Suddenly I'm an expert in NZ economic policy, but still a little dazed that a country can actually get into debt into the trillions. That's like some fantasy number, like infinity, or something. I can't remotely imagine what a trillion dollars looks like.
  • $1,000,000,000,000
  • This is what $191 billion looks like....
  • Apparently you've been able to run the deficit because the Japanese (scroll down a bit) have been balancing the books for you by buying huge piles of your dollar-denominated bonds. What nice chaps.
  • This is what a million dollars looks like. Now simply multiply that a million times in your imagination... owww, brain hurts... ears bleeding...
  • atcha! darmstadt! that's where my sweetie lived for 10 years. great little town.
  • anyone interested in an, um, *interesting* view of economics, here's perpetual u.s. presidential candidate lyndon larouche's opinions, which begin thusly: "The ancient model for our Alan Greenspan, Apollo's gibbering priestess Pythia, was seated on her stool by the Delphi cult's grave-site of the ancient serpent-god."
  • So, if someone ever asked for $191 billion, you'd need a pretty big suitcase, huh?
  • you'd just need a long cheque or small writing
  • Is someone trying to make Bruce Sterling's "Discharge" read like a historical novel?
  • Good for him for taking a tough line.
  • What a crapped up mess. Bush's ass ought to be in jail.