Waking up and smelling the crazy

24editorial_graph2-popup.gifDeficitChart.png

From the Atlantic Monthly. Paul Keating’s line comes to mind.  “Where do you people get off?”

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john walker
john walker
10 years ago

Nicholas which one of Bushes cronies years ago spoke of the end of “reality politics”.

We had fed the heart on fantasies,
The heart’s grown brutal from the fare,
More substance in our enmities
Than in our love; O honey-bees,
Come build in the empty house of the stare

Too much newly woven toxic cleverness and not nearly enough honey and wax .

wizofaus
wizofaus
10 years ago

I don’t think it really alters the substantial point, but isn’t the effect somewhat exaggerated by counting tax cuts as purely deficit-generating, when it’s reasonable to assume they will have at least some stimulatory effect?

Ken Parish
Admin
10 years ago

Mind you, this graph appears to be based on forward projecion of Obama’s spending/taxing commitments made in his first 2 years in office. If he stays in office for 2 full terms as Bush did and keeps promising and spending more at the same rate as in those first 2 years, their respective records will end up around the same. However, with a Republican majority in both houses at the moment that’s highly unlikely to occur.

john walker
john walker
10 years ago

I have read that the war in Iraqi has cost more than the cost of just about every other US big foreign project ( barring WW2 ) – purchase of Alaska, WWI, Vietnam and so on totaled up .
Don’t expect to see a repeat of that one .

Speaking of fantasies Bush’s reversal of a century of Anglo/American policy wisdom about an area of vital national interest; the ahem Persian Gulf, will make an excellent extra chapter for ‘The March of Folly’.

Patrick
Patrick
10 years ago

Building on KP’s comment, the moral of that chart is that America should amend the Constitution to outlaw one party controlling simultaneously the Presidency, Senate and House.

KB Keynes
KB Keynes
10 years ago

No Patrick,

The moral of the story is as usual Keynes was right.

you need to build surpluses ( usually substantial at that) in the good times to offset the deficits ( they should only be substantial in times such as the GFC) in the bad times.

The Republicans chose to have deficits in good times , like they chose in the 80s and then when they lost power to miraculously have surpluses in bad times ( which is just not possible).

john walker
john walker
10 years ago

This sums it up nicely.

Obama’s Elitism, Republican Principled Ignorance and the Debt Ceiling Debate

Although many come from more privileged backgrounds than the president, the Republicans in the House of Representatives, on the other hand, cannot be accused of being elitists. On the contrary, they are contemptuous of formal education and wear their ignorance of the world and the economy as almost badge of honor. The contrast between the House Republican outlook and that of the president is extreme and playing itself out over the debt ceiling negotiations in a dire manner. Where President Obama, based on his negotiating strategy, sees a troubled but complex economy and recognizes the reality that failing to extend the debt ceiling would be a devastating mistake, the House Republicans see another opportunity to bang the anti-tax drum while continuing to live in an economic fantasy world where they can cut taxes and balance the budget either by magic or, failing that, by eviscerating what is left of the American economy and social fabric.

.
.
10 years ago

No Patrick,

The moral of the story is as usual Keynes was right.

Um yeah sure. Obama is the worst President ever.

http://portalseven.com/employment/unemployment_rate_u6.jsp

KB Keynes
KB Keynes
10 years ago

I’m sorry Marky when did Obama become President?

When was the large increase in unemployment?

Like statistical significance you have never heard of lags.

why has it levelled out even falling a tad now?

It is another reason why tax cuts are not very good as stimulus measures. not only does spending have a larger multiplier as Nick points out they are finite.

Tax cuts always needs to be financed and are the largest reason for the present deficit.

.
.
10 years ago

I’m sorry Marky when did Obama become President?

Over two and half years ago. It’s time embrace responsibility. He refuses to cut the budget even as debt to GDP approaches 100% of GDP.

Tax cuts always needs to be financed and are the largest reason for the present deficit.

But spending doesn’t. You are a charlatan and a numbskull.

KB Keynes
KB Keynes
10 years ago

Marky,

I’m sorry you cannot blame Obama for the Unemployment rate. That is rather silly.

A bit hard to blame him for the deficit when as has been shown few of his measures have contributed to it.

is spending the problem in the US. NO.

Like all subjects you talk about you never understand it at all.

would austerity measures help the US economy and bring down the deficit?
of course not.

KB Keynes
KB Keynes
10 years ago

I should also say the net stimulus was not very large at all in the US hence the weak recovery

.
.
10 years ago

is spending the problem in the US. NO.

If you are spending too much you cannot pay back and have massive unfunded contingent liabilities, yes you have a problem.

I’m sorry you cannot blame Obama for the Unemployment rate. That is rather silly.

He has been President for 2.5 years. He had a Democrat congress for 2 years. When will he be accountable?

would austerity measures help the US economy and bring down the deficit?
of course not.

This is the best example of hijacking the evidence I have ever seen. Paxton the twit has just concluded that no deficits can ever be paid back – except for going into more and more debt, even when the debt repayments exceed GDP growth.

What a clown.

KB Keynes
KB Keynes
10 years ago

Marky,

I have provided evidence on both cases .
Naturally you haven’t and cannot because classical econmics has been shown to be complete bunk.

Bring in Austerity measures now and you would make the deficit worse. If you understood the Unemployment graph you would know that but unfortunately you do not.

And as shown above tax cuts are by far the largest reason for the deficit.

.
.
10 years ago

Naturally you haven’t and cannot because classical econmics has been shown to be complete bunk.

Like what? If output growth is 3% and the national debt is 100% of GDP and the interest rates go to 4%, how are they going to pay that off let alone have positive GDP growth?

Insolvency has been debunked!

You are hijacking more articles again Homer. The point of the Atlantic Monthly article is that the buck stops with Obama.

KB Keynes
KB Keynes
10 years ago

hijacking what?

We have the IMF showing if you introduce austerity measures it will depress growth. I could have linked a BIS study showing the same thing.

so your measures will simply make the defcit worse. You cannot get debt or the defcit down without decent growth. Austerity at present unemployment levels is madness and won’t work.

As Keynes put it Austerity works in good times. As usual all we have now is further confirmation of Keynes

.
.
10 years ago

We have the IMF showing if you introduce austerity measures it will depress growth.

No it doesn’t. Growth is already low. Growth grows after the fiscal consolidation.

so your measures will simply make the defcit worse. You cannot get debt or the defcit down without decent growth. Austerity at present unemployment levels is madness and won’t work.

No, you’re insane.

If output growth is 3% and the national debt is 100% of GDP and the interest rates go to 4%, how are they going to pay that off let alone have positive GDP growth?

KB Keynes
KB Keynes
10 years ago

what is the point.

The IMF paper says Our estimates imply that a 1 percent of GDP fiscal consolidation
reduces real private consumption over the next two years by 0.75 percent, while real GDP
declines by 0.62 percent. but Marky says it doesn’t.

go away.

in both this study and the BIS Study they find the contractionary fiscal measures are offset by cuts in interest rates and a large depreciation. In ALL cases the economy is going fine as is their major trading partners.

In other words Keynes was correct austerity works in good times.

another example of you simply making things up.

goodbye

.
.
10 years ago

reduces real private consumption over the next two years by 0.75 percent, while real GDP
declines by 0.62 percent. but Marky says it doesn’t.

The next two years. Also you’re lying whilst freely accusing others of “making things up”, you illiterate clown. I never said it didn’t do that, I said it didn’t matter in toto.

Big frickin deal. How long do you think it takes to pay off the US debt? The costs of a prolonged debt repayment are far larger.

In other words Keynes was correct austerity works in good times.

O RLY?

If output growth is 3% and the national debt is 100% of GDP and the interest rates go to 4%, how are they going to pay that off let alone have positive GDP growth?

Fyodor
10 years ago

Love that first chart – a picture of polemic perfection.

Dude! Where’s my surplus?!!

BTW, “(inc. projections)” is there, coyly, to remind the folk of Warmish persuasion that forecasts aren’t facts. You know, just in case they hold Obama to yet another under-delivered over-promise.

Meanwhile, the SS Entitlement careens majestically towards the iceberg.

john walker
john walker
10 years ago

Suggest reading William James ‘On the varieties of religious experience’ – especially the chapters on how the sociology of the individually revealed truth religion(s) of the North German plain developed in America- And while your reading it have a listen to ‘ The WC Wallcots medicine show’.

The combination of slightly juicy faith healing , sexy entertainment and snake oil has very deep roots in the republican heartlands . The tea party is (like rock and roll before it ) a surprise only if you do not understand its origins in a crossing of the ecstatic Dionysian with north German Lutheran anti authoritarian faiths.

Expect they will eventually sober up, but it could be an exciting night.

desipis
10 years ago

If output growth is 3% and the national debt is 100% of GDP and the interest rates go to 4%, how are they going to pay that off let alone have positive GDP growth?

I guess all those people with mortgages 600+% of their annual income with interest rates of ~7% and an annual salary increase of ~3% are financially doomed! DOOMED!

JC
JC
10 years ago

I guess all those people with mortgages 600+% of their annual income with interest rates of ~7% and an annual salary increase of ~3% are financially doomed! DOOMED!

Lets see if you’re premise is correct, Desipis.

$100,000 income for a $600,000 home.

With roughly $60,000 take home pay and $51,000 annual loan repayment, they wouldn’t be doomed, as you say. They would be unlikely to qualify for a loan in the first place, so you’re right in a sense. They would/wouldn’t be doomed.

You also didn’t compare like with like. If rates are going up for the sovereign, they aren’t exactly going to stay steady for the home borrower either.

The rough rule of thumb according to an academic study I read recently was that 90% is the cut off point where nations eventually go broke.

TerjeP
TerjeP
10 years ago

I would think the problem with government spending is that it creates an impost on taxpayers. As such it seems odd to label a tax cut as a “cost”. How much did the tax cut “cost” taxpayers?

wizofaus
wizofaus
10 years ago

I don’t think anybody’s suggesting there’s no problem, but I am curious – what exactly is so terrible about the 100% of GDP figure? Sure, it means that every year ~4% of the nation’s productivity goes towards paying interest, but it’s at least feasible in principle that the debt was used to make investments that are generating better than 4% returns, yes? I’m not sure I understand why Desipis’ parallel with home mortgages is so wrong – people can and do incur debts that are 3 or 4 times their current income potential, and banks are happy to lend that sort of money. The obvious difference I can see is that debts this size are typically secured.

JC
JC
10 years ago

I don’t think anybody’s suggesting there’s no problem, but I am curious – what exactly is so terrible about the 100% of GDP figure?

You’re potentially screwed.

If there’s a down turn, more debt will pile up and according to an econometrician 90% is generally the level where nations begin to pile debt as a result of interest accumulation piling up also as debt. It doesn’t have to happen but the risk is extreme.

The MMT guys at this point usually suggest the nation can print more money and of course it can if it is able to like the US and unlike Greece. This of course assumes the bond markets will of course sit there like patsies and lap up all the issuance.

But it’s at least feasible in principle that the debt was used to make investments that are generating better than 4% returns, yes?

Sure, it’s feasible. In the old days and not far off times sovereigns would issue non-recourse loans tied to specific projects. Maybe it would be a good idea reprising that again. The Chunnel was funded non-recourse I believe and it went bust, which is a good thing for the Brit and Frog taxpayers I guess, as they didn’t have to support over capitalized risk.

I’m not sure I understand why Desipis’ parallel with home mortgages is so wrong – people can and do incur debts that are 3 or 4 times their current income potential, and banks are happy to lend that sort of money.

You just lowered what he based his premise on by 42%, thereby almost 1/2ing it. Any reason?

desipis
10 years ago

You just lowered what he based his premise on by 42%, thereby almost 1/2ing it.

Even then it’s still ~5 times the debt ratio of the 100% / 4% example.

If there’s a down turn, more debt will pile up and according to an econometrician 90% is generally the level where nations begin to pile debt as a result of interest accumulation piling up also as debt.

I guess it’s possible governments in economic trouble are more likely to act like a gambling addict with a credit-card than a responsible home owner.

murph the surf.
murph the surf.
10 years ago

“The Republicans chose to have deficits during growth”?
Was it considered good and educated analysis to work towards the government having a balanced budget during the 90’s?
Gold was $300 an ounce and it’s role as a store of value laughed at …..I don’t recall one party being held responsible for this or am I mistaken?
http://www.gfmag.com/tools/global-database/economic-data/10395-public-deficit-by-country.html#axzz1TD4rALaT
Since the early 90s most OECD governments have run deficits so is this a case of Non keynesian strategies having an ascendency? As I remember there wre 2 shocks -the tech crash and the GFC which had the shared feature of loads of liquidity being supplied to the markets.
Was there any opportunity for surpluses to be accumulated in other countries? I ask this because apart form Norway , Korea and Switzerland the surpluses in the UK, Ireland and the US coincide with the craze of CDOs whcih unbalnced the system so their side effect of surpluses seems a mixed blessing.
It intrigues me that the answer after the fact if so clear- just what combination of features made is so unappealing in the past?

PSC
PSC
10 years ago

In the old days and not far off times sovereigns would issue non-recourse loans tied to specific projects. Maybe it would be a good idea reprising that again.

Still around – revenue munis. A USD trillion-odd on issue, very often bonds with say $500k face value.

JC
JC
10 years ago

PSC

Aren’t most of them…ummmm either implicitly or explicitly guaranteed? I can honestly only recall one time when there was a non-recourse financing done and that was the Chunnel and there was a great deal of howling but neither government forked over any more cash.

Wizo

It’s also really misleads people like Desipis to talk about debt as an expression of GDP and then look at it from an individual’s perspective, as it mkes people think the wrong things.

Firstly, as we all know GDP is a nation’s annualized production. But it all doesn’t belong to the government. The government however rakes in about 24% of that to pay its running costs. Of that 24%, around perhaps 70% of that goes to paying recurrent spending like pensions and social security etc., which is solidly fixed like the rock of Gibraltar.. In reality a government is left very little with what they call discretionary spending from which they have to pay interest on debt, as well as meet other “recurrent discretionary” spending (?) If the debt figure becomes too big it will be forced to do either of two things. It has to cut spending in other areas, which pisses a lot of people off or it has to raise taxes, which also pisses a lot of people off. And governments hate to piss anyone off.

The MMT guys say… oh but they can just print it. They can, however if the government, any government’s explicit game plan whenever it got into trouble was to simply print the cash, I can’t for the life of me think there would be any bidders their auctions again.

PSC
PSC
10 years ago

Aren’t most of them…ummmm either implicitly or explicitly guaranteed?

The explicitly guaranteed ones from GO revenue are called “double barrel” munis. There are also numbers explicitly guaranteed by such luminaries as FGIC, AMBAC and MBIA.

There is an implicit guarantee – but at the end of the day, they’re mostly to pay for natural monopoly infrastructure services, and the operator always has the option to put charges up.

JC
JC
10 years ago

I guess it’s possible governments in economic trouble are more likely to act like a gambling addict with a credit-card than a responsible home owner.

Governments don’t act like home owners. It’s wrong to even think of it like that for the most part as it leads you to think in the wrong direction.

What happens in a recession? Automatic stabilizers built into the system begin to do their work such as unemployment insurance and other welfare transfers. Don’t forget also that tax receipts take a dump. So spending/receipts ratio widens out for governments.

What would happen if say your job was threatened? I could guess you would rationally act to lower your spending to income, as all rational people would, so it’s the opposite.

JC
JC
10 years ago

There are also numbers explicitly guaranteed by such luminaries as FGIC, AMBAC and MBIA.

Lol good luck collecting…

(I think) AMBAC ratted on bank of America over some phoney deal recently and BAC settled out of court, while AMBC’s stock price took off because they had a $1 billion coming back to them.

I hate AMBAC, as I own a little BAC stock. They signed the guarantee as professionals and then go bawling when the security fell over suggesting they were defrauded. BAC management were wuzzes for settling.

wizofaus
wizofaus
10 years ago

JC, yes, the fact that US federal take of GDP is only about 25% is why their debt is more akin to a home borrower on an 100K income borrowing 400K. So, yes, rather high, but not, I would have thought, immediate concern for panic.

KB Keynes
KB Keynes
10 years ago

Terje,

The tax cut cost taxpayers a surplus and guaranteed future deficits.

The 90% figure is taken from Rogoff and Reinhart. Their methods are questioned here.

You cannot reduce debt or a deficit for that matter by slowing the economy down.

Otherwise you end up like Japan.

You get the economy going first. Anybody that believes you introduce austerity when Unemployment is above 9% is simply a loony.

Once you get the economy in a healthy state you bring in austerity measures which then help economic growth not hinder it. the defcit should go away and debt levels will fall.

Patrick
Patrick
10 years ago

JC, you know perfectly well that the US debt level as a percentage of GDP is entirely manageable. That’s nothing to do with whether it is the right level but it is certainly manageable.

Whether the deficit, including entitlements programs, is manageable is a separate issue.

Whether there is the political will to manage either either is another separate issue.

Pedro
Pedro
10 years ago

Patrick, I don’t think there is much disagreement about the problem caused by the trajectory of future spending in the US with health and social security on top of other govt spending.

As for the chart, so what. How does Bush era spending stupidity or otherwise impact on the proper assessment of current proposals? It’s just stupid name calling. Spending cuts either do or do not make sense now irrespective of how the current and future spending level was reached.

“You get the economy going first. Anybody that believes you introduce austerity when Unemployment is above 9% is simply a loony.”

Two problems with that statement. First, it begs the question of whether the administration policies are going to get the economy going. Not much sign of that so far. The second sentence is a straw man.

JC
JC
10 years ago

Patrick

Current US liabilities are ‘manageable” or at least grown ups aren’t panicking just yet. But what is both your point and Wizo’s, as I don’t really understand what you’re trying to say.

The US has reached a concerning level of debt which if it goes further will mean trouble and something has to be done to stop the piling on.

Whether the deficit, including entitlements programs, is manageable is a separate issue.

Frankly it’s a little hard to separate when the entitlements and projections are where they are.

KB Keynes
KB Keynes
10 years ago

no Pedro,

The first sentence has nothing to do with the Administration.It is simply a matter of fact.
So is the second sentence. here is more evidence from the BIS and here is what happened in Japan.

It is a pity you blokes never read about these situations or can’t comprehend.

classical economics is a dead parrot. It is no more. all the evidence points to Keynes being correct as usual.

Read about that on Catallaxy. Nosiree.

desipis
10 years ago

JC,

Last time I checked the world economy was in pretty bad shape meaning the automatic stabilisers would already be in effect when considering debt. I think the important question is how much of the GDP is currently being used to pay off the debt. It’s not a question of whether the interest exceeds growth, but rather whether the interest minus payments exceeds growth. If in the proposed example (4% interest rate, 3% growth), less than 1% of GDP was being used to pay off debt, then the problem could spiral out of control without some change. If more than 1% of GDP was being used to pay off debt then the debt would eventually be paid off without much problem.

What sort of change is required depends on the particular circumstances. Raising taxes or cutting spending risks slowing the economy too much and reducing the ability to pay off the debt beyond the gains of the extra short term payments. While attempting to boost the economy with debt based spending risks increasing the debt more than the ability to pay it off.

Fyodor
10 years ago

JC, yes, the fact that US federal take of GDP is only about 25% is why their debt is more akin to a home borrower on an 100K income borrowing 400K. So, yes, rather high, but not, I would have thought, immediate concern for panic.

O rly? Borrowing on the credit card to make your mortgage payments because your spending exceeds your income ISN’T a concern? Phew. For a mo there I thought shitloads of debt was something to worry about. FFFS, HAVE YOU LEARNED NOTHING?

Homerkles,

Your link and attempted argument point @ #36 on R&R is bullshit.

The points you attempted to make @ #40 are shrouded in your usual clumsy obtuseness. What arguments are you trying to support with your references?

JC
JC
10 years ago

Raising taxes or cutting spending risks slowing the economy too much and reducing the ability to pay off the debt beyond the gains of the extra short term payments. While attempting to boost the economy with debt based spending risks increasing the debt more than the ability to pay it off.

Which is why there’s a central bank that ought to be doing its job and if they fail the senior guys ought to get booted.

The Fed’s primary job is to ensure Nominal GDP doesn’t collapse the way it did during periods of the GFC. They were absoltuely freaking woeful, perhaps not the worst because that trophy belongs to the ECB, but bad all the same.

Money was tight and credit was even tighter. People generally think the two are the same but they’re not. If they had done their job properly we wouldn’t have been in this mess.

Last time I checked the world economy was in pretty bad shape meaning the automatic stabilisers would already be in effect when considering debt.

I don’t understand your point. We talking about the US economy and the relationship of debt to equity as it pertains to the US. Now you’ve decided to swing this to ‘the world economy”? What are you doing?

Secondly the world economy did fine last year. It grew at around 4.9%. If that’s bad shape, i would really love to know your definition of “good shape”.

KB Keynes
KB Keynes
10 years ago

fyodor,

of course they are bullsh.t to you are you have no understanding of economics.
your arguments are nothing.

try reading this.

if you continue not to understnd try commenting at Catallaxy. They just love ignorance indeed as we have witnessed they thrive on it.

wizofaus
wizofaus
10 years ago

Fyodor, I never said it wasn’t something to worry about – but as long as that 100% figure is stable or preferably declining, then I fail to understand your parallel with borrowing on the credit card to make mortgage payments.
The immediate problem the U.S. government would seem to have is that it’s not collecting sufficient revenue to cover its ongoing expenses, which would be a problem eventually no matter what its current debt level is.

JC
JC
10 years ago

Homer
re the link. You’ve stumbled on some MMT advocate. Those schelps always start off the same way by going the GDP equation and saying if this or that happens GDP is therefore must be impacted this way or that. Seen it all before.

The problem is that the economy isn’t the GDP equation but an illustration of it.

GDP = C + I + G + (X – M)

That’s just a representation of the economy in the format of an equation. It’s wrong to say that if there’s a fall in G it will cause a fall in GDP for a simple reason. G derives from the activities of the other variables and is totally dependent on them.

Try and think a little more if that’s possible and you’ll make far less (thinking) mistakes in future.

desipis
10 years ago

Borrowing on the credit card to make your mortgage payments because your spending exceeds your income ISN’T a concern?

What if we’re borrowing on the credit card to pay for a training course so we can get a new job because the job we had has been shipped off overseas? Sure, buying the McMansion a few years back now seems like a pretty silly move, but that doesn’t mean that all future debt is just as bad. I suppose we could just try to work minimum wage until we’re forced into defaulting on the mortgage…

wizofaus
wizofaus
10 years ago

Except I somehow doubt Fyodor believes there should even be a minimum wage.

desipis
10 years ago

The Fed’s primary job is to ensure Nominal GDP doesn’t collapse the way it did during periods of the GFC.

I think it’s a bit much to make the Fed solely responsible for nominal GDP. The Fed relies on the banking system to have influence over the economy. If the banking system grinds to a halt the Fed doesn’t have much power.

KB Keynes
KB Keynes
10 years ago

JC,

the papers ( I have linked) from the IMF and BIS show that to be incorrect.

In a country with a low export intensity and zero bound interest rates where is the growth coming from when government spending will pound it into submission.

That is the problem with trying to talk to Catallaxy types. Haven’t read the literature and therefore have a poor understanding of how economies work.

By the way he isn’t an MMT type