Thursday, June 11, 2009
Glenn Reynolds rounds up links, commentary, and factoids on the federal budget deficit in the Age of Obama, noting that even principled liberals are starting to get worried. The Democrats, who spent most of the Bush years complaining about relatively manageable deficits, have turned right around with their massive majorities and programmed deficits that at their minimum will still be almost twice the size of Bush's worst performance as a percentage of GDP.
The current condition of the economy is an excuse, of sorts, for the next year or two, but not the middle or the tail of the right side of the graph. Those deficits are not only unsustainable, but probably even unachievable without a damning and destructive debasement of our currency which would destroy our standard of living and that of our children.
There are, apparently, only two devices available to discipline this rank -- and I use that adjective advisedly -- and cynical irresponsibility. Either the bond vigilantes -- who in this generation speak Mandarin -- will drive interest rates so high that these deficits are effectively unfinanceable and our economy sinks beneath the weight of high long-term interest rates, or the voters will first scare and then punish the offenders. The former will be extremely expensive to our standard of living, so if you care about our future prosperity you had better get cracking on the latter.
The people that are the wealthiest 10 per cent will be okay, although they will gripe about their taxes.
The people that are in the bottom 20% of income will remain poor no matter what.
The people in the middle will probably pay the biggest price in a drop in the standard of living. We will all be poorer in the next five years, either in relative or in absolute terms. There is no other conclusion.
The value of our dollars will be less, our investments and houses will worth less, and all the concomittant consequences of the present economic policy will reinforce that fact. The present Administration seems hell-bent on destroying capital (bail-outs of Chrylser and GM), throwing good money after bad (Citi Bank, etc.), reducing productivity (cap and trade, card check). This, along with the still-collapsing real estate market, can only mean one thing.
Hope and Change! Hurrah!
You know, when other nations end up in pickles like this (inflation, unsustainable debt payments and actual or threatened default) they can ask international institutions for help, like the World Bank. This help is usually conditional upon free market reforms and trade liberalization.
Wouldn't that be ironic?
David, I disagree insofar as I think the situation TH highlights will leave everyone poor. No one will be OK. Democrats and Republicans alike should realize this situation is a threat to everyone's way of life.
There are two problems with the "vote 'em out" theory. The first is that, with the exception of the '09 through '11 budgets, the deficit is largely structural. It is baked into the mix of growing, mandatory entitlement spending and general operations of the federal government. This can be seen by drawing a visual line between the '08 deficit and the '19 deficit. Once the stimulus spending is disregarded it leaves a fairly linear growth in deficit spending. In the Reagan era deficit reduction was about cutting a few wasteful federal programs. No longer. As opposed to the Reagan era, dealing with our deficits now means fundamentally restructuring the relationship between the government and the citizenry. This is not going to happen without an economic catastrophe.
The second problem is that Republicans no longer have any credibility on deficit reduction. (Democrats never did and never will.) Republicans, formerly deficit hawks, are complicit in the making of this disaster and have been shockingly silent on the issue. The notion that Republicans are suddenly going to find the cajones to tackle this issue is risible.
Democrats will attempt to reduce the deficit by increasing taxes. It will fail miserably as a shrinking GDP reduces the income available to tax. California is experiencing this right now.
The absence of a viable political solution means we are going to inflate our way out of this mess. Period. The Fed is already accommodating this plan by more than doubling the monetary base in the past 12 months. Get ready for double-digit inflation and a stagnant economy, a virtual repeat the Carter years.
You'll know the fix is in when Paul Volker resigns from the administration. He's 81 years old. His current legacy is the greatest Fed Chairman in history for breaking the back of the Carter era stagflation. He can't afford to be part of the administration that destroys his legacy.
I'm not a believer, but may God help America because Americans certainly aren't going to do so.
The US will be similar to Brazil or Mexico in 5-10 years unless we can abandon the politics of reproductive physiology and concentrate on the politics of fiscal responsibility.
Reinflating the economy is the same thing as trying to solve the problems with more of the same.
What we really needed here was a true price correction, which political party is willing to do.
Because we have no discipline, we get what we deserve.
By the way, the top 1 % of the US population that controls 40% of the wealth will not suffer. In the search for higher returns they will diversify their portfolios and include a larger proprotion of more stabile foreign investments. The truly wealthy in Mexico and Brazil are still pretty well off by international standards despite years of feckless monetary policy.
Forgot to add that we will have the aircraft carriers but not the means to man them, since most of our government revenue will be going to debt service.
So national security is also at issue.
If you are a true conservative you should be more worried about this than what doctors in Kansas are doing.
I've come to the conclusion that most of the "so-called" neo-cons are nuts since they abandoned financial responsibility for foreign adventuring. The corner stone of our security is, and always will be, our economy.
RE: Viking Kaj
The US will be similar and disimilar to Brazil and Mexico in several other ways.
1)Ruled by a permanent Leftist oligarchy. The permanent marginalization of a Right or Center-right majority party. Once we enter the stagflation stasis (coming soon to a country near you!) of permanent economic crisis, the growing dependent class (oldsters on SS and those that get Earned Income Tax credits, etc.) will never vote again for any party that says "be responsible for yourself".
2) I was in Wal-mart early this morning to buy something I needed. That is the face of the future American working class. Not in a factory "producing", but warehousing, retailing, etc. The people there are nice, and I have no axe to grind with Wal-Mart, but it's a very depressing future. I don't think we can recapture our manufacturing base that has been exported to Mexico, Brazil, China and other parts.
3) Unsimilar to Brazil and Mexico in that we are about to enter an economic downward glidepath that has no exit. Those countries still have some youthful vibrancy that could energize their economies. We will become more like the moribund economies of Western Europe, with permanent 10-12% unemployment, high taxes and low growth.
That chart at the top is premised on 2-3% economic growth, I think (in the Obama years and forward). We aren't going to get there from here. It will be worse.
TH, what do you make of today's bond auction? Seems like it went better than expected. Maybe Geithner's trip to China helped.
4.7% doesn't seem high enough to me. I am not confident that 4.7% won't be entirely offset by inflation.
Bambi will solve this the same way FDR did. Hopefully, we again wind up a manufacturer to the world, and not leveled like much of the world was by 1945. Works well for thinning the herd of folks looking for jobs also ... you work for the guvment, and wear a uniform, unless you get dead.
I believe that there is a growing majority of Americans who do NOT want to pile more and more hope/change onto the deficit, and know by now that it was all bullshit. Few have seen a nickel under the alleged plan that Obama enacted, so they assume it's gone to someone 'non rich', implying that they're rich. Anyone with a "JOB" needs to worry that their taxes are going up.
Some great comments above. Here's a few more angles to our "sleep of reason."
This graph is Obama's "business plan." Even if he hits his targets, his plan fails. CBO says our growth rate will be lower than Obama's assumption, so it has Obama's plan failing faster. I expect even lower growth than the CBO, as real growth is not a number you plug into a spreadsheet.
We've had this graph for several months -- it's why the Chinese and other nations are so worried. They see the train wreck coming. These numbers are shockingly bad because they're so huge. There won't be easy fixes.
A company CEO who presented a long term budget like this would be fired. So would most small town mayors. So why does the President of the United States get a pass?
....Our media coverage of this has been abysmal. One reporter asked a hard question at Obama press conference -- Obama has been kept in a bubble ever since. Critics like Fox News and Rush have little reach beyond their base. It's doesn't matter if they're right, they're ignored by the rest of the country. Other outlets -- MSNBC, NYT etc have drunk so much kool-aid that they can't admit to it. Our collective innumeracy doesn't help.
When Obama took office he used the crisis as an excuse to jam his proposals through. The crisis wasn't priority #1, his agenda was. His stimulus spending wasn't fast and targeted -- it was cover for the ultimate in pork. I saw it as one big 2010 campaign war chest.
Fixing the banks wasn't a high priority either. They've been used for political theater. Obama even talked the economy down during his early months. We still haven't found an adequate replacement for our shadow banking system -- securitization. Failures in this market created the problem -- but we need a replacement to get us out. Fannie and Freddie are critical to this -- but when's the last story you heard about them, since Freddie's CFO offed himself.
Stimulus is but one example of where Obama's agenda tops our collective needs:
We have an auto industry crisis -- Obama is using it as cover to make us all drive the cars he wants us to drive.
We many or may not have a global warming crisis -- Obama is using it as cover to make our energy industry look more like Spain or Denmark ... why, because they're chic. He could have at least picked France as a model.
Healthcare -- he's trying to sneak through nationalized healthcare with no plan to pay for it.
Now Obama says he for PAYGO. What a howler.
Anyone who runs numbers knows you can solve this by just taxing the top 1% or even 5%.
So what's really going on between those two jug ears of his? Obama is either very deluded, or dangerous, or both.
I've feared that Obama purposefully intends to give us a stimulus sugar rush in 2010 so that we forget about all this for awhile. We have a near-term recession we're working our way out of -- and would if left alone. We have severe long-term budget issues that if unchecked will become crippling in a few years. We have a President intent on re-ordering America by fiat with the complicity of his Democratic Congress. Holy Cow, Batman ... what to do?
We should all 1) buy Ford, 2) elect Republicans to the House from our Blue states, and 3) jump all over the bullshit spending we're about to see ... California can't pay its teachers, but it's applying to Obama for its share of $100 billion in bullshit education grants. We need to create a broad-based understanding of how bad this all is ... and make it clear that in 2010 we're going after House and Senate with lighted torches and pitchforks and toss out as many Democrats as we can. Even Chuck "who cares about a little pork" Schumer should be made afraid. Pelosi and Frank have too safe seats, but we can take away their Committee chairs.
We actually have better demographics than the European countries. Our young are a big potential voting block -- I do see them rising up at some point. Even with few young voters, many European countries have been tilting to the right. As I understand it, a few years ago Germany put an overall cap on social spending -- it can't grow faster than the overall economy. We should at least be doing the same right now.
Why should we care about "recapturing our manufacturing"? When you move up the economic food chain, you don't want to do manufacturing, the value-add is too low. The real value is in design and IP. A service-oriented economy, far from being a bad thing, is evidence of vast and growing (before Obama anyway) wealth.
^ Where does the money come from to pay for IP filings?
Speaking as an IP attorney, most of it comes from comes from companies that make things.
Without a manufacturing base, we are in serious trouble.
The whole idea of lowring the value of your currency doesn't work because you have nothing to export.
You're buying the smoke and mirrors from DC and Wall street, which by now your should realize are less than reliable sources.
Without a manufacturing base, we are in serious trouble.
Since manufacturing output in the US is the highest it has ever been, measured by revenue, profits, or wages per employee, claims that we're losing our manufacturing base are pure propaganda. Do you think of Apple as a company that "makes things"? Apple manufactures nothing, not a single screw. I hardly think that an economy moving towards the Apple model of doing business constitutes disaster. In fact, I think it great progress.