The Deficit Reduction Myth
Congress is reducing the deficit? Bert McLachlan says it's a joke. Congress has outspent its own income in 45 of the last 50 years, thereby running up deficits by over $5 trillion. $4 trillion of those deficits were in just the last 20 years. And then President Bush's budget submission this last February projected $3 trillion more of deficits in just the next 6 years. Congress spends $1.42 for every $1 it collects in income tax. FULL ARTICLE
Comments (17)
Nothing is more indicative of the delusional wonderland which this government inhabits, than the plea emanating from the US Navy the other day, that billions more of borrowed Chinese money be spent on doubling the size of the fleet, in order to counter the threat posed by - you guessed it - China.
This is not going to end well.
Published: December 6, 2005 10:12 AM
Most amazing is that "fiscal conservative" now means "balanced budget" instead of "small government budget". Tax cuts are irrelevant only spending cuts matter.
Published: December 6, 2005 10:33 AM
John Christopher is absolutely right, the congress signally lacks budget conservatives--preferably ARCH conservatives--of the Ron Paul type resolved to balance annual federal budgets at the lowest possible taxing & spending levels consonant with pre-war of northern aggression strict constitutionalism specifically & broad consideration of natural right based ideologic versus partizan republicanism generally. My dis-inchantment with Reagan began at the very start of his administration after his first official act was to request a federal debt limit hike that allowed the federal debt to exceed $1 trillion for first time in national history & his unconvincing claim he ran on not a platform demanding absolute spending cuts but reductions in projected rate of spending increase; made very plausible extreme populist allegations he was a life long pinko if not communist.
The simple keys to the solution can not be simply implemented though; massive resistance to such re-forms as repeal of direct taxes, central bank abolition, sweeping de-regulation & de-bureacratization, isolationism, pre-war of norther aggression strict constitutionalism/state rights, deafness to special interest demands & other imperative measures have been sought for generations by patriots & we are farther from satisfaction than ever.
Maybe we should follow Leonard Peikoff's 1996 example in urging dogmatic Objectivists to strive for Clinton re-election: only by purposely helping things get as bad as possible will tipping point whereat people will revolt be reached fast enough. Sort of a real life inactment of plot of Taylor Caldwell's 1952 novel The Devil's Advocate.
Published: December 6, 2005 12:20 PM
As much as I like the articles usually posted on mises.org, I have to say this one is really bad. It's dishonest and clearly agenda driven.
What is the point of throwing out raw numbers? Not even inflation adjusted. As a matter of fact when speaking of budget deficits the only valid metric is deficit as % of GDP - the problem for the author would be that with nominal GDP growing 7-8%/year the debt/GDP ratio actually went down recently and it's about half of historical record (during WW2) and also is lower that other in developed countries.
If you focus on the correct metric (debt/GDP ratio) you will notice that a much better way to control it is to grow economy.
There is also another otpimistic note: market is so confident in US economy and its ability to pay off debt that the rates is incredibly low which makes our debt servicing cost very low (it's less than a half of what it was in mid 90s). This is not the time to pay off the debt - this is the time to focus on growing the economy.
Commenting on one of the comments: what's up with this scare of Chinese holding our debt? Well first of all they hold a few times less than Japanese and also less than European Union countries. Secondly holding our debt does not give them any control over us, quite opposite.
Come-on Mises ... after a series of really fantastic articles you give us this Krugman-like propaganda?
Published: December 6, 2005 2:35 PM
"There is also another otpimistic note: market is so confident in US economy and its ability to pay off debt that the rates is incredibly low which makes our debt servicing cost very low (it's less than a half of what it was in mid 90s)."
That's one way to look at it. Then there's reality: http://ezinearticles.com/?expert=Bill_Haynes
Published: December 6, 2005 2:45 PM
One more point:
How exactly saving of Social Security surplus should look like? Investing it in private market creating state owned economy?
Or maybe return it to people, for example by lowering their taxes, so they can take initiative into their own hands and save or invest or by plasma TV - seems like a nice libertarian idea to me :-)
Of course we will not escape comming Medicare spending (Social Security is pretty insignificant compared to it), but the bigger GDP/capita we will have when it comes the easier it will be to deal with it. So again - growing the economy is the most important thing.
Published: December 6, 2005 2:47 PM
Answer to David White:
That's one way to look at it. Then there's reality: http://ezinearticles.com/?expert=Bill_Haynes
1. The guy is partially wrong - out of $8T official debt about $3.5T is owed to Social Security trust - so this one is counted (Medicare is not - the rest is insignificant).
2. Price of gold hitting high signifies one thing: inflation. Which is obvious given about 4 years of Fed supplying cheap money. Expect inflation to get higher before easing off (there always has been a lag between fed policy and inflation of about 2-3 years). And I'm talking about the real inflation and not official CPI statistic which clearly understates the real one (as you can see in the price of gold).
But again by far the best way to deal with future obligations (Medicare) is to grow economy!
Published: December 6, 2005 3:02 PM
Right on, Krzysztof! We might add a limit to the debt/gdp ratio, say 40%, as the Europeans do. That would force balanced budgets when approaching the limit.
Published: December 6, 2005 3:25 PM
A "debt/dgp ratio" limit? You mean like the present "debt ceiling?
Gimme a break.
As for growing the economy, you can't do that by borrowing money from foreigners to consume things you can't otherwise afford.
The US economy is a hourse of cards, guys, and the wind is picking up.
Published: December 6, 2005 3:33 PM
Right now growing the economy really means growing the state, making war... whatever is done through "legal plundering" and statist redistribution. I don't buy into the scheme that tax cuts could improve the situation. "Returning the money to the people" is pretty much irrelevant because of the amount of debt that is to be paid off. What we don't pay today will be paid tomorrow. Cutting taxes is George Bush speaking. The bottom line is that only massive spending cuts will bring any good. Freedom please! No more economic engineering (even done by the most free-market/pro-growth minds). Just get government people out of our lives.
Published: December 6, 2005 3:35 PM
EU has _guidelines_ about yearly deficit being no more than 3% GDP, however as soon as big guns (France/Germany) started to exceed those limits it shown that there is nothing EU could done to punish them.
Better solution I think is the one Poland took (my native country). Poland in the constitution has 60% as an upper limit and there can be no more budget deficits after that. It really works - especially now when this limit can be reached any year if gov doesn't pay attention.
debt ceiling in nominal dollars doesn't make any sense ... only good (or bad) news. $8T now is just 65% of GDP (an average level for developed countries) - 20 years ago it would be probably about 250% of GDP - a disastrous level.
Look here: http://www.cia.gov/cia/publications/factbook/rankorder/2186rank.html
Country like Malawi (or even Japan) are really in big trouble with their debt level, however if Malawi grows fast enough (and they could be able to have 10% or even 15% real GDP growth thanks to catch-up effect. If they grow this fast it really doesn't matter if their budget is balanced or if they have deficit of 3 or 5%. As a matter of fact assuming there is a certain level of governament spending needed to obtain social order it would be probably better to borrow some money and cut taxes so economy can grow even faster.
The same really apply to US ... I guess you can even dream of situation federal spending is low enough to be financed entirely through deficit and have debt/GDP ratio falling down. (that's why the article's metric of federal spending/income tax receipts doesn't make too much sense).
One can argue about what the size of governament should be (and I assume readers of Mises would go on the low-end rather), but saying that $400B deficit in economy that grows $700B or $800B/year is just not true. Au contraire. I wish it could be maintained.
In terms of owning to foreigners ... we owe about $1T (about 16% of total), out of it most is owed to Japan - about $600B I think. So what? Is it more dificult to pay of because it's Japan governament and not Mutual of Omaha? Of course not. Can they demand to pay it of early? No way. Do we have to pay more interest on debt? Actually quite opposite - the demand from foreigners is probably the most significant force behind keeping the interest low. So if anything owing to foreigners vs internally seems like a good thing.
In my opinion the biggest chalange that lies ahead is a growing gap in wealth (GDP/capita PPP) between US and the rest of developed world (maybe except Ireland and a few even smaller states). I'm talking here especially about Japan, Germany and France. If the trend of last 20+ years will continue it can lead to some really nasty social problems.
Well comming back to the subject the article reads as if written by someone who probably knows the facts, but want to present them in a dishonest way to drive certain political agenda.
Published: December 6, 2005 7:56 PM
If you read the articles here regularly you should know that the general position is against deficit spending of any kind, as it amounts to a tax on the next generation.
The trouble with looking at things the way you do is it assumes some collectivist concept of servicing "our" debt, like the productive portion of society simply exists to support the spending habits of the goverment.
Also, using percentages of GDP to measure a deficit is just a way to hide the obscene amounts of money involved.
It's a question of principle, not "getting away" with deficit spending by playing accounting games. Ultimately individual people have the burden of supporting this ridiculous system which creates gigantic bills for them to pay.
Published: December 7, 2005 5:10 AM
Krzysztof,
You're going to have to explain how an economy can "grow" in the way you want it to (provide higher tax receipts while cutting tax rates) in the absence of printing more money.
I can't imagine any.
Which means that your plan involves fraud, as well as relying on foreigners to continually dump their money into our economy in order to avoid inflation. The second that they stop buying our bills, inflation returns, big time. And when that happens, if we rely on your proposal, we won't be able to turn off the presses - we'll still owe way too much money. So, we'll have to live with crippling inflation, or turn off the presses and jack up tax rates.
In other words, your proposal, as I understand it, is basically a gamble that foreigners will continue to pour good money after bad in an attempt to rescue the "sunk costs" of their previous investments in the dollar.
I'd prefer not to take that gamble, personally. It's too high risk, with essentially very little upside. But, unfortunately, I have no choice - people like you are in control...
Published: December 7, 2005 7:23 AM
I see in the latest report from the Congressional Budget Office that the budget deficit during the first two months of the new budget year (October-November) have once again started to increase after last year's decrease. Both because revenue growth have slowed significantly, to "only" 6% during the first two months of the new budget year and because spending growth have soared to 11.4%. It remains to be seen whether or not this trend will continue, but I for one find it more likely than not that the deficit will continue to increase, although perhaps not as fast as during October-November.
Published: December 7, 2005 11:46 AM
Washington has more "growth" in the plans by way of Iraq war expenditures.
"Murtha revealed, for the first time, that the Pentagon will ask for an additional $100 billion for operations in Iraq next year:"
http://thinkprogress.org/2005/12/07/murtha-100b/
I think belt tightening is going to have to wait for a little while. Let's say ten or more years. The costs of Iraq so far are just a taste of things to come. There's still Iran and Syria to take care of at the very least. And who knows, somewhere along the way N. Korea and China may get their day in the sun as well. But money for these adventures doesn't grow on trees does it, but rather, it grows in the federal banking system. Deficit reductions or a slowing in inflation? Sweet dreams baby! :)
Published: December 8, 2005 12:40 PM
GDP can go up and down, but the debt stays.
How do you propose to pay off debts when productivity drops? The only solution in DC's la-la land is to get into more debt!
DC is going to go bust worse than a dot com.
Published: December 8, 2005 2:26 PM
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Published: April 17, 2006 3:24 PM