Loquacious commenter Nick has contributed a long but interesting soliloquy on the mentality and concerns of the average American voter. However, what most struck me about his analysis was that his list of “tsunamis on the horizon” didn’t include any economic factors. Nor has the post-election conversation here at Troppo or elsewhere in the blogosphere discussed matters economic to any significant extent.
I suppose that reflects the fact that the Kerry campaign almost totally failed to cut through and get Americans focusing on economic issues, even though the economy was (and remains) one of Bush’s major weak points. The US trade deficit came in at $54 billion in August, the second highest on record, and it’s widely expected that the September figure (due for release tomorrow) will be just as high. More importantly, the US budget deficit for 2003-4 came in at a massive $412.55 billion. However, even though it was released during the election campaign period in early October, this news failed to make a ripple on the public consciousness. The budget announcement was timed for the day after the last televised debate between Bush and Kerry, and the actual deficit figure was slightly lower than the White House’s July deficit forecast of $445 billion. Some suggested that the Bush administration deliberately inflated its forecasts so the actual figure would look like good news by comparison.
I guess these figures are so mind-numbingly huge that they’re mostly meaningless to the average voter. America’s total public debt is more than $7.43 trillion. But what does that mean, apart from a long string of digits? As John Quiggin frequently observes, these deficit levels just aren’t sustainable in the long term. The annual US budget deficit is 3.5% of GDP and total public debt is on track to reach 40% of GDP in the near future, an unprecedented level for such a large industrial country (although the latter figure is around the OECD average, it’s quite another thing for the world’s largest economy to carry that level of debt because there aren’t many others able or willing to lend to America in such huge amounts).
By comparison, Australia’s federal government has been running unbroken budget surpluses for the last decade, and total public debt at both federal and state level is almost non-existent. Although that isn’t necessarily a totally good thing either, at least it gives us a much higher level of assurance of being able to withstand international economic shocks (e.g. oil prices), although the combination of worryingly high private debt and a stubbornly high trade deficit (around $2 billion per month – just as high proportionately as the US trade deficit) mean that our economy also doesn’t present an unreservedly rosy picture.
This article by Daniel Gross in MSN Slate dramatises the US deficit/public debt situation in a way that John Kerry signally failed to achieve:
On Nov. 3, as the bleary-eyed nation returned to work, the Treasury Department announced an impending crisis. If the lame-duck Congress doesn’t raise the statutory $7.384 trillion debt limit, which was intentionally breached in October, by Nov. 18, the world’s greatest power will run out of cash.
Congress, with the White House’s blessing, left town before the election without dealing with the debt limits¢â¬âbut not before passing an appalling, special-interest-written, corporate tax bill that will deprive the government of more than $100 billion in future revenues. That double irresponsibility¢â¬âthe lousy tax bill and the ignored debt limit¢â¬âwas a fitting end to the past four years of essentially one-party rule.
The only solace for sullen Democrats is that now Republicans might have to clean up their own fiscal mess. The fiscal record of the past four years has been one of unmitigated¢â¬âand seemingly intentional¢â¬âirresponsibility. A Republican Congress working with a Republican president created the massive new Medicare prescription-drug entitlement, passed a new, subsidy-crammed farm bill, committed hundreds of billions of dollars to war efforts, and loaded up on pork-barrel spending. Meanwhile, taxes were reduced¢â¬âon wage earners, investors, and companies. The end result: We collected about the same amount of taxes in fiscal 2004 as we did in fiscal 1999. But we spent 34 percent more. The total national debt has risen 30 percent in the past four years. The fiscally conservative Clinton administration had committed government to restraining spending. But now a massive structural gap has opened up between the country’s financial inflows and outflows. It’s only the willingness of the Chinese and Japanese central banks to buy our debt that keeps us afloat.
Gross suggests there’s Buckley’s Chance of a new Bush administration reining in the fiscal excesses:
Freed of the need to run for re-election, will Bush act more fiscally responsible in a second term? Wishful thinking. This crowd literally doesn’t have a clue when it comes to fiscal matters. Bush actually believes he has restrained Congressional spending, Cheney believes deficits don’t matter, and most members of the Bush economic team can’t¢â¬âor won’t¢â¬âspeak truth publicly. …
And so, while the moral-values crowd may have won, the fiscal orgy in Washington is sure to continue. Given Bush’s mandate and his stated desire to fix the Alternative Minimum Tax (a huge tax reduction), make the temporary tax cuts permanent (ditto), and transform Social Security (massive borrowing), his pledge to halve the deficit by 2009 is absurd.
Presumably that’s what Bush means by “spending his electoral capital”. An additional factor Gross fails to mention is Iraq. In order to avoid spiralling chaos there, allow some semblance of democratic elections to occur and facilitate ongoing reconstruction (inter alia to allow the oil to flow and mitigate the current price spike), it’s widely expected that Bush will need to significantly increase the US military commitment to Iraq.
In that situation, the chances of the second Bush administration achieving the promised halving of the budget deficit within 5 years are minimal. The potential consequences for the next Presidential election in 2008 are immense. It’s very unlikely that Bush will be able to suspend the laws of economics for that long. Drastic adverse economic consequences will almost certainly occur before then if the budget deficit isn’t reined in: massive panicked capital outflows, large rises in interest rates, major recession etc. And the deficit is so large that any serious attempt to reduce it will cause a lot of pain to a lot of voters. So, as Scott Wickstein commented yesterday: “Four years is a long time in politics.” Bush is caught between a rock and a hard place. It doesn’t seem to worry him though, either because he’ll never have to face the voters again and answer for the consequences, or because he’s too thick to realise they’re going to happen. But whatever he does, the economy will certainly haunt the next Republican Presidential candidate.
Lastly, Gross’s article made another important point on the Red State/Blue State divide that hasn’t so far figured at least in the Oz blogosphere’s US election post-mortems:
In decades past, increasing Republican dominance of the House and Senate would have meant more fiscal discipline. But Republicans increasingly dominate the states that are net drains on Federal taxes¢â¬âthe Southern and Great Plains states¢â¬âwhile fading in the coastal states that produce a disproportionate share of federal revenue. (It’s Republicans, not Democrats, who are sucking on the federal teat.) What Amity Shlaes quaintly identified in today’s Financial Times as the “southern culture of tax cutting” has been married to the southern culture of failing to generate wealth and the southern culture of depending on federal largesse. The offspring is an unsightly deficit monster.
Maybe all those redneck Bushies aren’t voting against their economic interest after all. And Bush won’t be able to rein in the budget deficit (even if he wants to) without directly attacking his core voter support.
PS – This paper at the IMF website provides a more careful evaluation of US fiscal policy under Bush:
Although U.S. fiscal policy has undoubtedly provided valuable support to the global economy in recent years, large U.S. fiscal deficits also pose significant risks for the rest of the world. Simulations reported in Section II suggest that a 15 percentage point increase in the U.S. public debt ratio projected over the next decade would eventually raise real interest rates in industrial countries by an average of ½1 percentage point. Higher borrowing costs abroad would mean that the adverse effects of U.S. fiscal deficits would spill over into global investment and output.
Moreover, against the background of a record-high U.S. current account deficit and a ballooning U.S. net foreign liability position, the emergence of twin fiscal and current account deficits has given rise to renewed concern. The United States is on course to increase its net external liabilities to around 40 percent of GDP within the next few years¢â¬âan unprecedented level of external debt for a large industrial country (IMF, 2003b). This trend is likely to continue to put pressure on the U.S. dollar, particularly because the current account deficit increasingly reflects low saving rather than high investment.
Although the dollar’s adjustment could occur gradually over an extended period, the possible global risks of a disorderly exchange rate adjustment, especially to financial markets, cannot be ignored. Episodes of rapid dollar adjustments failed to inflict significant damage in the past, but with U.S. net external debt at record levels, an abrupt weakening of investor sentiments vis- -vis the dollar could possibly lead to adverse consequences both domestically and abroad.
I suppose this is where I peddle the Austrian line that having a central banking system makes these kinds of deficits possible?
On an aside, future candidates – Republican or Democrat – wishing to place distance between themselves and neoreaganite spendies could point out that deficits represent, in a way, a future tax. “How much will we tax our children?” has a nice emotive tug, don’tchathink?
Ken, a tsunami is an appropriate image. There’s already speculation that the willingness of Japanese banks to continue to buy US bonds might be weakening. It’s possible as well that the devaluation of the dollar recently might reflect a strategy of the Fed to try to make exports more competitive – but the problem here (and one of the reasons why the American recovery has been comparatively jobless) is that the US has gone so far down the de-industrialisation route this may not work. The dot com bubble was to some degree cushioned by the reasonably sound fiscal policies of the Clinton era – but that will not be the case when the current credit-induced bubble bursts in the States. Some of our economic danger signs are reproduced in America, but writ much larger. The US economy basically at the moment is a huge vortex sucking in money from the rest of the world, and this in itself impacts on world economic growth. The consequences of a major recession in the US will be felt here as well.
On another note, I read somewhere recently something about the psychology of the Bushies – Bush and Cheney appear to believe that if they say something is true, that makes it so. The ultimate faith-based affirmation, if you like.
Hey Ken, in fact Kerry did refer to the budget deficit in more than a few stump speeches & I tentatively propose that the majority of American adults are aware of this ballooning debt”
After that comment from Nick all further comment seems redundant.
Looking at the “Most Important Issue” category on the CNN Exit Poll were:
ISSUE (%) BUSH/KERRY
Moral values (22%) 80/18
Economy/jobs (20%) 18/80
Terrorism (19%) 86/14
Iraq (15%) 26/73
In addition, Kerry cleaned up on Health (8%) and Education (4%) while Bush won on Taxes (5%).
But in the main, terrorism and moral values (fear and God) trumps mammon and Iraq. Economic management was a winner for Kerry as I understand it normally is for the Dems.
It seems to me that his main option would have been to raise the profile of the economy as an issue. I’m not sure that he could have done that without being negative (and honest) about the economy and the coming tsunami.
On reading Kerry’s acceptance speech I was favourabvly impressed with his desire to establish decent basic public services and safety nets. It sounded like a new social contract with the people. It’s just that it was hopelessly unrealistic in terms of the resources that would be available to him.
Unrealistic too was the notion of increasing milatary personnel by 40,000 and the whole notion of greater engagement in Iraq by the Europeans and others.
To me, Kerry whimped out on being honest and forthright about the economy. Why, I don’t know. Possibly he didn’t have enough grasp of the issues to carry the story. Maybe he wasn’t game to sound negative on this one because it would throw his whole program into jeopardy. Perhaps it doesn’t fit in with the notion of American exceptionalism and America’s ordained mission in the world which seems mandatory for aspiring presidents. And maybe it just wouldn’t wash with his paymasters, the big corporations.
btw Gerry Van Wyngen in the last BRW was saying that investors and T-bond buyers like the Japanese are getting edgy about investing in US$.
Will Hutton in “The World We’re In” said that with the US$ being the effective replacement of the gold reserve standard, the Americans please themselves as to what they do and the world gyrates around them. So if they go down we won’t just be spectators!
This is one of my pet topics.
It took Clinton to remove the excesses of Reagan and he was a politician of a vey high order.
I can’t see anyone having the same skills being able to do the same thing with the Bush extravagances.
It is sometime since I looked at US budget but I seem to recall that there are few items you can really take the knife to.
Add in the inability to raise taxes and it spells trouble for holders of US treasuries.
Homer – you’re quite right. With funded entitlements and debt servicing taking up a huge chunk of the budget, there are few areas for cutting discretionary federal spending. Obviously the military budget offers the most possibilities, but that’s not on the table. The US public debt is (if memory serves me right) $5.7 trillion. Imagine – or calculate – the cost of servicing that. Bush has also cut a lot of grants to states and passed unfunded mandates such as the No Child Left Behind Act – whose effects can largely be described as symbolic due to the lack of funding attached. Clinton grasped the nettle and cut the deficit in his first term thus increasing market confidence and leading to a prolonged economic expansion. Bush, by contrast, is practicing Reagan style supply side tax cutting combined with a generous dash of military Keynesianism.
Perhaps if you had read Ken’s post a little more attentively, Mark, you wouldn’t need to rely on memory. And you if you were to follow the convention of expressing debt as a percentage of GDP, you could also rely less on imagination. The gross debt – Ken’s figure – is about 64% of GDP, while net public liabilities are more like 48%. The interest bill is actually around 2% of GDP, less than at any time in the last twenty years, thanks to the low interest rate. To put the 48% figure in perspective, it’s still lower than the 1994 peak (59%), a bit lower than the public debt for the Euro area (53%), and much lower than for Japan (85%) and Belgium (90%). In fact the US public debt ratio is the same as the OECD average.
So the current level is not in itself cause for hysteria, but Ken is right about the trend. In the short term it’s a sharp rise in the interest rate that would dramatically raise the interest bill. On the other hand, a healthy dose of inflation, though not in itself desirable, would reduce the debt in real terms.
Thanks James – comment made on the run at a library computer on the way to an appointment.
You’d be surprised how blowin’ off a million or trillion bullets & missiles can stimulate an economy…i notice the Japanese who’ve been in a sorta recession for a decade or so are learnin’ this lesson. Again…plus ce change…
Nick, the idea that destruction can create wealth is called the “Broken Window Fallacy”. As the name implies, it’s a furphy. Destruction cannot create an increase in wealth.
This is because destruction diverts resources away from what would have been preferred uses, to a hitherto undesireable use. So where the missile manufacturer likes them to be fired, the taxpayer will find that he has less money to spend on movies or clothes or whathaveyou.
The broken window fallacy seems to prosper amongst schools which do not view capitalism as a stand-alone way of increasing wealth. Marxism and Keynsianism both take the view that war is good for capitalist economies. This is obviously and patently absurd: war destroys the wealth of both the aggressor and the victim.
How about Schumpeter, Jacques?
It depends how you define wealth. Part of the problem the world economy has is overcapacity in production which is deflationary and also puts downward pressure on profits. There’s an argument that war destroying fixed capital negates this problem, as well as stimulating demand.
Inherent also in the nature of capitalism is that it produces winners and losers. That’s one of the main motivators for corporations seeking to preserve monopsonic, monopolistic or oligopolistic market positions.
Your points are valid Jacques…wholesale destruction of the infrastructure & assets of a nation can lead to a diversion of capital & funding away from important social & cultural programs, force govt’s of whacked & teetering nations to rebuild utilities & essential services & keep propping up the military machine. Case in point are nations like Ethiopia & Rwanda where the main beneficiaries of guerilla vs Gov’t civil wars seems to be the top of the regime & those supplying the armaments.
However, this thread has been focused on the US…military titan…aspects of Sparta & Prussia in their focus on a strong military at the cost of compassionate social security & health safety nets”
Mark;
The “overcapacity” furphy – that’s what it is, by the way – has lingered ever since Marx dropped Das Kapital vol. I on an unsuspecting world.
The concept of “structural overcapacity” is profoundly marxist. So to is the idea that this will lead to a capitalist crisis. Luckily for western civ, Marx’s economic theory is deeply flawed. It relies completely on Objective or Intrinsic Value. Since, as we have subsequently realised, there can be no such thing, economics has moved on, and left the bold edifice of Marxist thought in its wake.
Nick;
What you have described is not capitalism, it is mercantile imperialism. It is still harmful to agressor and victim.
Who pays Halliburton to build stuff in Iraq? The US taxpayer, either now or later. Who paid for this awesome military power? The US taxpayer again, now or later. Who pays the wages of those well-behaved soldiers? Who pays for Marshall plans? Who? The aggressor’s own subjects.
Libertarians like to point out that if taxes are a species of aggression, than war is the highest form of life for States. It is able to be aggressive abroad and to a higher extend aggressive domestically.
War is a loser. Other than in self-defence it cannot be fought morally. That a few well-connected types will make a lot of money does not actually improve the overall good.
The US public debt pales into insignificance compared with that of Japan, plus strong net immigration of young people means that the US does not face the same aging population problem as Japan. Yet this article in the Economist
http://www.economist.com/research/backgrounders/displaystory.cfm?story_id=2790217 suggests that the Japanese public debt problem, though likely to be painful, remains manageable.
If by “manageable” you mean “ten year recession”, then sure, the Japanese run a sensible economic ship.
So, Jacques, how then do you explain recessions?
ps – the point about overcapacity comes from The Economist, hardly a Marxist journal.
The Economist is hardly a marxist journal, but the idea is marxist in origin. It lingers because Keynes revisited the idea, and because Keynes, more than anyone else, has framed the entire course of modern economic debate.
Recessions are explained in a number of ways. After going over a few in my time I’ve thrown in my lot with the fringe opinion espoused by the Austrians – that the business cycle is generated by central and fractional reserve banking.
In the case of recessions, there is the general mechanism of the business cycle, and there are of course more specific causes; in the case of Japan a massively mercantile system of Government. You’ll recall that in the 80s, the “Tokyo Settlement” was where it was at. That house of cards came completely unstuck after the Kobe earthquake, when Swiss reinsurance valuers dramatically revised downwards Japanese property prices. The Japanese have been stumbling ever since. Attempts thus far to restart that economy along “soaking up excess capacity” lines have utterly failed. So to attempts to create business activity (more of that evil capacity) by lowering interest rates nearly to zero.
In the case of Japan, one of the main problems has been the continuation of the mad practice of building totally unnecessary “infrastructure” – for example, concreting 70% of the coastline – driven by the corrupt relationships between government and the construction industry. Unfortunately, this still continues. The US equivalent is undoubtedly the military/industrial complex (remember the $1,000 ashtrays?). One of the reasons we don’t have similar government debt problems in Australia is that we have remained (relatively) free of such corrupt relationships – although I am sure that there have been some similarly corrupt things going on from time to time, it doesn’t seem to be a systemic problem to the same extent.
Alex, I agree. I would submit that since our governmental spending is smaller, both in total and as a percentage of GDP, there’s less incentive to enter dodgy deals.
Though I expect there are some going on. Manildra is an obvious example.
Jacques, I don’t know that because an idea originates with Marx and Keynes and they’re not your favoured economic theorists invalidates it. The problems with the Japanese economy over the past 10 years or so are certainly able to be explained in part by excess manufacturing capacity over demand. Obviously other factors come into play – such as the currency exchange rate and balance of trade (related), but it’s an empirical fact.
Mark, my comment on the Japanese problem being related to corrupt government/construction industry links was more related to their government debt problem than to their broader economic woes. On the broader front, the issues you raised have certainly played a part, although the property and stock market bubble of the late eighties also have a lot to answer for – if we had intergenerational mortgages, that might curtail demand here also.
Don’t disagree, Alex – I think we’d both agree that the problems of the Japanese economy are not reducible to any single explanation – clearly the different way of providing finance for corporations (through bank loans rather than raising money on the equities market) is another factor.
One interesting thing about the Japanese though is that they now have enormous power over the US economy through their holdings in T-Bonds. Bush’s debt binge potentially cedes economic sovereignty.
Mark;
Putting it briefly, the intinsic theory of value fails to explain why diamonds, which have few intrinsic uses, are much more valuable than water, without which life is impossible. This old saw is the “diamond paradox” and it stumped intrinsic value theory for ages.
The way out was to adopt subjective value theory. A thing is worth what somebody is prepared to forgo to have it – either in savings, consumption of saved capital, or exchange. That is, value arises from our perception of value. There is nothing inherent in objects that makes them valuable of themselves (at least not to humans – which raises interesting questions about a potential “exoeconomics”, but I digress).
Marx’s theory of production, capital, labor exploitation, and historical progression, are all based on the classical conception of value. His theory is explicitly based on the objective theory of value. Since he passed away the thorny issues arising from that conception were solved by switching to subjective value theory. In the process, most of Marx’s theory (not all, mind, but most) is rendered obsolete.
On the question of Japanese overcapacity, Mises rather deftly defines these problems as “malinvestment”. Such a thing happens naturally in an economy, however malinvestments are generally quickly squished.
However in an economy where new money is being created, at a very low cost, malinvestments can burgeon and linger far longer than they would have otherwise. The dot-com boom is a perfect example of cheap, newly created money chasing puffs of wind.
The Japanese “miracle” was similarly structured. The six kereitsu which dominate Japanese economic life each have their own industrial, commercial and retail banks. These banks would loan money to their familial companies on incredibly generous terms, secured against real-estate assessed at very high prices. The Bank of Japan would in turn loan money to the banks at very low rates and often dramatically increased the supply of money to make this possible. Finally, a constant and enormous flow of deficit spending by the Japanese Government, funded out of booming tax receipts and Japanese treasury bonds, helped to prop the large industrial collectives up.
As I noticed the thing came somewhat unstuck when the Kobe earthquake struck. Swiss reinsurance agents refused to pay any more than a few cents in the dollar on the value of the land being used as collateral. This triggered a wide reassessment of land values throughout Japan, which in turn meant that the banks found themselves with gigantic portfolios of poorly secured debts in very long and unprofitable positions.
It all sort of went to hell from there.
You are correct that the Bank of Japan holds enormous unrealised power over the US through US Treasury Bonds. One of these days the Japanese or the Chinese will stop buying the t-bonds or try to renegotiate them, and all financial hell is going to break loose. At this stage I expect that the Euro will take over as the dominant currency, and that we will start to see oil and gold being quoted in euros instead of dollars.
In any case it’ll be awful for the yanks. And everyone else for that matter.
Jacques
So that was putting it briefly, was it? When do we get the unedited version?
Got a few weeks?
Jacques, I’m not sure of your reading of Marx. Marx had a labour theory of value. He had to stretch it a lot to account for the value of commodities which serve as symbolic markers for exchange (money) or status (diamonds). It’s one of the least convincing of his economic theories, and has often been jettisoned in subsequent Marxian economics.
But I’m confused as to the link you make between theories of value and the argument about overcapacity. The first seems to me to be a fairly abstruse theoretical point, but the second, as I’ve suggested, is empirically demonstrable.
Mark;
One of these days I suppose I should really tackle Marx with more enthusiasm than I have to date. However if you run back to the first few pages of Das Kapital, you discover that Marx says that items have a fundamental value. The Labor Theory of Value, if I’m reading him right, is a second way of valuing goods. Marx’s point is roughly that workers are getting shafted somewhere in the gap.
The problem being that it’s difficult to get labour value by itself (how is to be measured?), and I’ve already pointed out the problems with anything relying on the objective theory of value.
I know that the difference between overcapacity and malinvestment may seem abstract, but malinvestment can encompass things such as the diversion of labour to areas not desired by true underlying consumer preferences. Again the dot com boom gives a recent example – talented engineers were lured away from real products to make websites.
Malinvestment from loaned money tends to spread, too. Companies which have otherwise saleable products find that they must pay more for access to labour, land and capital than they did before. This squeezes good companies as much as bad ones, and it can lead to otherwise OK firms being shaken out with the duds when the house of cards comes undone.
Jacques, Marx’ theory of value as outlined at the beginning of Capital Vol. 1 distinguishes between three types of value.
Use value is the qualititative relation between material commodities and human needs. Exchange value is a quantitative relation between commodities.
David Harvey, in Limits to Capital explains Marx’s value theory as follows:
Marx defines the commodity as an embodiment of use and exchange values, abstracts immediately from the former, and proceeds directly to analyse exchange values. Putting two different use values (which are themselves qualitatively different) equal to each other in exchange implies that both use values have something in common. The only attribute that all commodities have in common is human labour. When ‘commodities are looked at as crystals of this social substance, common to them all, they are – Values’.
Harvey notes that Marx follows Ricardo here, but introduces the distinction between concrete and abstract labour, and modifies Ricardo’s notion of labour time by qualifying it as ‘socially necessary labour time’.
We then are taken to the theory of surplus value which is at the heart of Marx’ analysis of capitalism and the foundation of his analyses of the cycle of valorisation and the labour process, etc.
I won’t go on, but David Harvey’s book is a very good and careful introduction to Marx’ actual arguments.
As to malinvestment vs. overcapacity, I suspect the two are differening theoretical treatments of the same empirical phenomenon, but also with differing policy prescriptions.
Sorry, the link to David Harvey’s book is here.
Mark,
I promise that I will add the book to my growing “must read” collection.
I poked around and saw some literature saying that Hayek expanded on Mises’s malinvestment theory. Unfortunately I’ve not read much Hayek.