So I’ve recently written about the GAO’s overview of the US Economy. The CBO has just released its own report projecting economic activity and the budget for the next ten years. It is, again, a bracing report. Despite the President’s inauguration address indicating the contrary, most actors in Washington recognize that action must be taken and must be taken now.
Even though it has had to triple the deficit projections it made just last August, or maybe because so, the CBO leaves no doubt concerning the unsustainability of our current borrowing path:
Such high and rising debt would have serious negative consequences: When interest rates rise to more normal levels, federal spending on interest payments would increase substantially. Moreover, because federal borrowing reduces national saving, the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced. In addition, lawmakers would have less flexibility than they might ordinarily to use tax and spending policies to respond to unexpected challenges. Finally, such a large debt would increase the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.
The information on interest payments is especially alarming, both for its effect on the economy as a whole and on households. Interest payments are non-deferrable and non-negotiable, so any future budget must include them in its payment structure. Furthermore, federal interest payments have been kept artificially low as a result of the Fed’s depressing of rates, a policy that can’t continue forever, at least not without serious inflationary consequences.
The amount of interest paid currently stands at 1.4% of GDP. By 2023, the CBO projects, it will be 3.3 percent of an increased GDP. What does that mean in real dollars? The FY2012 budget earmarked roughly $223 billion in interest payments. By 2023 that amount would be roughly $850 billion. There are currently 114,000,000 households in the US. Assuming some immigration patterns, but also birth patterns, let’s project the 2023 number to be 120,000,000. That would mean that average federal tax burden for each household, for interest payments alone, would be $7000 annually.
Then too there are the implications in other sectors of the economy. The CBO estimates that in the next decade one of the effects of the ACA will be to move 7 million Americans off employer-based insurance. Because of the fines the employers will pay this will mean a net revenue increase for the Federal Treasury. But it will also mean that the ACA hasn’t accomplished one of its central purposes – expanding coverage – especially if states refuse to put together the exchanges the government insisted on. The CBO has also changed its estimates of the costs of the Affordable Care Act, indicating they are 29% higher than previous estimates. I’m guessing the upward adjustments aren’t done.
As if the federal tax burden is not bad enough, consider what is happening at the state level. Illinois, for example, is facing catastrophic budgetary problems as a result of it woefully underfunded pension programs. According to a recent report “Illinois’ pension systems are in the worst financial shape of any state at 39 percent funded when no less than 80 percent is considered healthy. State pensions are in the hole by the staggering amount of nearly $97 billion, or $20,000 per Illinois household and nearly four times the annual state revenue.” A fascinating story in The City Journal investigates the systemic problems in California’s pension system – mismanagement, lack of foresight, corruption, political jockeying – that have resulted in drastic underfunding. “Right now, the pension bill that Californians owe because of CalPERS is enormous. In a December 2011 study, former Democratic assemblyman Joe Nation, a public finance expert at Stanford University, estimated that CalPERS’s long-term pension debt is a sizable $170 billion if CalPERS achieves an average annual investment return of 6.2 percent in years to come. If the return is just 4.5 percent annually—a rate close to what more conservative private pensions often shoot for—the fund’s long-term liability rises to a forbidding $290 billion. By contrast, CalPERS itself estimated its long-term unfunded liability at merely $80 billion, using a lofty projected annual investment return of 7.75 percent. (The fund has recently cut that estimate to 7.5 percent.)”
I’ve been harping lately on budgetary issues because I believe them to be issues of great public and moral significance, and we have governments crippled in their capacity to respond. Part of the measure of any person is taken by what he or she hands on to his or her children: financially, culturally, politically, and environmentally. We are failing on every measure. Our biggest public spectacle, the Super Bowl, featured 20 minutes of high-class and high-paid stripping as its centerpiece. We are living large and lasciviously and passing the bills to our progeny.
America has faced financial crises before. Indeed, the Constitution itself may be thought of as a response to a debt crisis. Many of the Constitution’s critics were concerned about the use of paper money with its inflationary complications, or other financial schemes, to get America out of its predicament. But they saw that the cunning and ambitious could use this as an opportunity to create a more powerful and potentially despotic government. Centinel noted that the evils of depreciated money “upon the patriotic and virtuous part of the community.” Federal Farmer:
Our governments have been new and unsettled; and several legislatures, by making tender, suspension, and paper money laws, have given just cause of uneasiness to creditors. By these and other causes, several orders of men in the community have been prepared, by degrees, for a change of government; and this very abuse of power in the legislatures, which, in some cases, has been charged upon the democratic part of the community, has furnished aristocratical men with those very weapons, and those very means, with which, in great measure, they are rapidly affecting their favorite object.
Perhaps the most prominent and relevant sentiment of the time was expressed by Patrick Henry:
“Will the adoption of this new plan pay our debts? This, Sir, is a plain question. It is inferred, that our grievances are to be redressed, and the evils of the existing system to be removed by the new Constitution. Let me inform the Honorable Gentleman, that no nation ever paid its debts by a change of Government, without the aid of industry. You never will pay your debts but by a radical change of domestic economy…The evils that attend us, lie in extravagance and want of industry and can only be removed by assiduity and economy.”
Whatever the lessons of the 1780’s, it seems worth recalling that one. America’s budgetary woes are colossal bordering on catastrophic. These are not the result of gridlock, safe districts, ideology, or bad faith. Ultimately, they have their roots in a public that wants a broad panoply of public services without having to pay for them. Politicians lack the political will to fix the problem not because they don’t think it’s a problem but because they know they can’t get elected if they earnestly try.
We the people are trying to maintain an extravagant lifestyle without having to work and save for it. We think we can insure that every person in America can have Cadillac-quality health care. We think we can insure that every person in America can enjoy a long, healthy, and leisure-filled retirement. We think, as the President said, that government can “protect its people from life’s worst hazards and misfortunes” and continue to pursue possibilities that are “limitless.” We think we can maintain a worldwide empire that will “extend our capacity to manage crisis abroad.”
This refusal to live within limits is butting up against reality more violently daily, and the longer we persist the more reality will extract its cost. Americans can embrace the message or learn it the hard way: we’ve created a massive mess for ourselves and our posterity, and the only way out is hard work, saving, learning to do with less, a lowering of expectations and material advantages, and to stop being so extravagant with other people’s money. Sadly, the politician who says any of these things has no chance of being elected, and so we will continue to stumble toward the precipice until we fall off. At that point we get to look our grandchildren in the eye and figure out how to respond to their question: “What were you doing when we were busy getting screwed?” I hope we can give a better answer than “Well, I was golfing in Florida during the winter.”
It does seem that counterexamples abound to the prognostication that the U.S. debt burden is so heavy that it will eventually crush us. Japan, to name one. That country has double the debt-to-GDP ratio of the U.S. and their borrowing costs are only marginally higher than ours. Further, Japan has been servicing that level of debt for nigh onto twenty years. Their re-taking office, their prime minister, Shinzo Abe, announced a $100 billion stimulus plan and encouraged a much greater degree of monetary expansion by Japan’s central bank. How have bond markets responded? A resounding, “Meh.” (A post by Krugman has the most accessible graphs: http://krugman.blogs.nytimes.com/2013/01/12/japans-teachable-moment/)
So I’m not really sure what the worry is. “Inflation rates will someday rise”? Sure, but inflation rises on expectations of increased spending – which is just to say, economic improvement in the form of lower unemployment, etc. In the meantime, all of the hand-wringing about “saving for our childrens’ collective future” dismisses as “luxurious” and “lavish” programs of domestic improvement, like education and health care, that will make those oh-so-bleak futures worth having in the first place.
I mean, ask yourself: would your present self have advocated for the monetary expansion and fiscal stimulus that ended the Great Depression? Sure, there was a debt burden for future generations, but there were also massive social gains made that never would have happened had the country continued to contend with 20% unemployment for years to come. Those social gains improved the lives of subsequent generations in untold and unexpected ways. It seems hard to argue that the borrowing was immoral then. It’s not really obvious what makes it immoral now.
You might want to say something like, “That assumes a limitlessness in human and economic capability that in antithetical to the Front Porch, and that limitlessness is precisely what I’m arguing against.” That’s an interesting notion of ‘limit’, I would say. Government borrowing and spending seems ‘limitless’ only because it seems ‘abstract.’ But it’s not abstract to the construction worker whose job was provided by fiscal stimulus, or to the small town with a new library, or to the family farmer whose crops were stricken by drought (caused by global warming, to put a fine point on it). Communities and families cannot issue currency, and so they cannot service long-term debt in the way that sovereign countries can. And thus they cannot respond to crises in the way that those countries can. What you seem to argue is that in the face of an unemployment crisis, the country should do nothing, for fear of the lasting damage that borrowing would do future generations. But damage them how? Higher levels of unemployment, perhaps?
To be frank, the only ‘limitlessness’ to be feared here is a limitless indifference towards the tragic, preventable human suffering going on right now. A college professor pointed out to me once that, as The Simpsons teach us, “Won’t somebody please think of the children!” is a punchline for a reason.
I’m hesitant to speak for the writer, but I don’t think he’s arguing “indifference” or “doing nothing” but rather to cut spending aggressively. I am with him.
As he says, “the only way out is hard work, saving, learning to do with less, a lowering of expectations and material advantages, and to stop being so extravagant with other people’s money.”
So in some ways, you are saying, to do that would mean a lower “standard of living!” Well, yes, although I wouldn’t use the word “lower” here, just different. Sure, to quit buying things we can’t afford would “hurt” the macro economy, which is to say it probably wouldn’t grow at inflated rates. Our lifestyles would have to adjust (heaven forbid we grow a garden, depend on neighbors, and don’t buy the latest technological toy!), but we’d be better off for it in the long term.
Of course the Bond Markets and Wall Street in General would respond positively to this change in Japan. The markets are in favor of government largesse, it backstops their casino and covers the gaps in the ongoing bunko.
Mr. Schroeder reminds me of the Red Leg soldier in Outlaw Josey Wales: “Doin’ good ain’t got no end.” In the past decade federal spending is up 43% in inflation adjusted dollars. In 2002 was there wailing in the streets? Was there mass starvation? Was the nation stricken by plague? But apparently, that spending wasn’t enough. And current spending isn’t enough. There is so much good to do.
I tell my students that the virtue/vice of debt depends on two conditions. 1. Is is debt for a good thing (e.g., a house rather than pizza) and 2. Is it debt you can service (if you can only afford a $150,000 house, don’t buy a $250,000 house). Our debt is not to fund infrastructure or lasting investments, but to fund current consumption. Prof. Polet provides some of the evidence that it is debt we cannot service. So our debt is the equivalent of running up the credit card to pay for pizza and beer.
Even if Keynesian economics is correct (and I don’t think it is), Keynes was arguing for short term deficits to stimulate growth (remember, in the long run we are all dead). And the classic Keynesian spending is on infrastructure projects. Keynes was not advocating for a permanent deficit of large proportions to fund consumption. I guess someday perhaps some politician will have to tell the truth, which is that we need to raise taxes on nearly everyone and cut entitlements. But it will take a near implosion to bring that eventuality about, one suspects.
I think that the initial fact that the Superbowl, replete with its public displays of ‘manliness’ in the guise of violence and viciousness of human form, is our biggest public spectacle is more worrying than the fact that a woman dressed in a bathing suit sang in the middle of it. “I’ll watch disgustingly proportioned men knock the hell out of each other for three hours, but I’ll be damned if I let my kids sit through Beyonce’s hips gyrating.”
It strikes me that people are simply not attending to the economics of the matter when they advocate that our country needs to ‘live within its means’ – whatever that means when you can print your own currency. If all that a lower standard of living meant was less technology-worship and planting a few tomatoes, no one would object, but there’s just no way that ‘saving’ on that level pays for a $13tril debt. And the author admits as much when he decries the spending priorities of adequate health care coverage, the military-industrial complex, and Social Security. Okay, so if those are the spending priorities that are driving our deficits, then what, pray, is the solution? Growing a garden doesn’t quite seem to be what he has in mind.
And anyway, all of this ignores the actual economics of depressed economies when interest rates are against the zero lower-bound. By taking money out of the economy during periods of depression, you increase the depression, because you reduce the demand for goods and services, thereby reducing the demand for employment. This increases the demand for unemployment benefits, thereby increasing the demand for government services. As Krugman writes on this point, the deficit hawks (curiously silent for most of the 2000s) are equivalent to 18th century blood-letters: take a sick patient and make them sicker in order to cure them.
What happens when you decrease access to health care, and in such a way as will noticeably impact our deficit? The short answer: millions of people don’t go to the doctor when they’re sick. Seriously? Our debt is so burdensome, even though borrowing rates are at all-time lows, that our solution is to tell sick people that they can buy Campell’s Soup by the case? “Turn to your families, your communities, when you have cancer?” What about Social Security? Read some of the history of these programs. We came up with them because families and communities could not support their sick, their elderly. In whatever bygone period so-called ‘conservatives’ are pining for, it wasn’t like families and communities provided care for their aging, for their sick. The aging and sick simply didn’t get taken care of.
What this whole line of thinking represents is not only Republican Party orthodoxy and falsified economic theory, but what amounts the putrid aspect of nostalgia. Nostalgia serves the function of reminding us of the things are losing or have lost by allowing us to recall those lost things in specific emotional way. It fails us, though, when it leads us to recall those lost things as something other than what they were. It leads us to remember the past falsely. Deliberately inflicting false beliefs upon ourselves just is what insanity amounts to. Whatever families were like pre-WWII, they didn’t care adequately for their elderly and sick, most often because they couldn’t. And it only from the perspective that the terrible care provided these groups in the days before the massive social programs was, in fact, adequate care that one could have the face to call our present system ‘luxurious.’ In other words, it’s a view that requires a putrid sort of nostalgia.
On the point about Keynesianism, just remember that plenty of economists were calling for the government to start paying on the debt with the surplus in the early 2000s. Instead, the GWB administration proposed the massive tax breaks we just spent two months arguing about, wrote Medicare Part D, and, lest we forget, started two deficit-financed wars in the Middle East.
So, yes, Keynes did favor short-run deficits to pay for decreased consumption during times of crisis. (Though, it’s not clear what is meant by “short run.” And either way, the deficits we’re running now aren’t anything close to what was needed to deal with the crisis – so deficit relative to what?) What we saw with the Bush Administration, of course, was basically the opposite of that: increased government spending during a time of plenty. I can’t see how that should be a point against Keynesianism (or properly, New Keynesianism) now when we’ve returned to a period of want.
Oh, and the point about infrastructure is well taken, but it’s not a view easily attributable to Keynes. Recall his famous example: in times of economic crisis, the government would be as well served to pay one group of people to bury bottles of money in undisclosed locations, and then to pay a second group of people to search for and dig them up. Hardly the kind of infrastructure spending that most would have in mind.
First of all, I don’t think too many writers or readers on this blog are “Republicans.” Conservative, sure, but most of us would easily concede that the Bush Administration was about as bad as the Obama Administration on any of this stuff. Both increases the size of government, participated in the decision-making and funding of several wars overseas, and do next to nothing to decrease entitlements. The reality is that our age has put in our minds that we have so many “needs” and “rights” that are not really needs and rights. The amount of potential examples here are really quite endless, but let’s start with your Super Bowl commentary as a spring board. So many cities are taxing citizens to pay for huge new stadiums. A necessity? Not even close. But it is the attitude of our age.
As for your example about healthcare and going to the doctor, I resist your either/or (either the Federal government funds healthcare, or millions die!), but I will say that in the last decade I’ve been in a variety of scenarios (employee-paid healthcare, purchasing my own healthcare, no healthcare at all) and the best thing that instability has done for me is to live as if it’s not the solution to every cough or sniffle. Sure, doctors and hospitals are of some use (insurance companies are a little more controversial but maybe that’s a different conversation), but the reality is I don’t ever “need” or want a flu shot, and when I do get the flu, that means it’s time to stay in bed for 2-3 days, vomit when I need to vomit, and eat bland food. It’s amazing how capable our bodies are of defeating the illness, but the problem is, we think we’re entitled to a pain-free existence, which we’re not. Obviously, this is only one of many examples. I, personally, have had five surgeries in my life, which surely costed insurance companies thousands of dollars. Now those all improved my life a bit, but not one of them saved my life or even fixed something that was essential to my well-being. Truthfully, they were all to get me back on an athletic field quicker. Our whole healthcare system is full of this kind of thing and so people grow up thinking they need it. But they don’t.
(By the way, I, for one, would be glad if our government began slashing from the Military Industrial Complex as well…)
It seems like the defense for every spending cut offered up is “That’s only $_____ which is only ______% of the deficit/debt, so what’s the point?” It’s a bury-our-head-in-the-sand approach. The reality is that the possibilities for spending cuts really are endless, but yes, we would feel those cuts. And that would probably be good for us even when it hurts…
Do you seriously believe in Krugman’s Keynesian claptrap? He proposes supposedly pain-free stimulus for every crisis, even those caused by overspending. And when those don’t work, he cries that we didn’t spend enough. How asinine! According to him (and you, I can see), the state can handle it because it’s big and powerful. Yet where does that size and power come from? The people. It’s not the people being empowered; it’s the state being empowered, at the people’s expense.
While Krugman and company believe we can borrow ad infinum, this is simply not true. Just look at the debt crisis perpetually placing the European Union in jeopardy. Greece and Spain thought that increasing benefits and services would help their economies; instead, they are collapsing miserably along with the political structures that put them in that position. Their young wander aimlessly in the streets without jobs, pecking away mindlessly on their Iphones or burning cars. If the example of those countries don’t apply, let’s look closer to home. Every state that valiantly tries to increase the range of their social safety nets, like California, like New Michigan, like Illinois, like Ohio, and protect their unions, eventually end up decreasing the standard of living for their inhabitants while also crippling their economies. All of of these states rely on an unsustainable system of borrowing, which eventually turns into gouging their constituents more each year. Inevitably, those government workers formerly saved from the perils of unemployment are released back into the jobless masses, and even deprived of their pensions which were frittered away. And their children? They move to Texas.
Interest rates, though low, still exist. They continue to take a larger chunk of the budget, which then denies funding to other program they used to pay for. We pay more for less. Quality of life goes down, and not for a short while, but for a very long time, for the debt remains and increases indefinitely while we continue to pay more to keep the country solvent.
And those amazing investments we made with the money we didn’t have, what of them? Most of them will go away because they weren’t meant to last. They were only made to get votes. This may be a cynical view, but the only real change I’ve seen in in a thing like the ACA is an increasing burden on the young to pay higher rates. Any change in lifestyle has only negative one. Healthcare costs are still quite high and I’ll avoid the doctor if I can. A victory for the elderly, I suppose, but rather discouraging for the young people hoping to start a family. Rather, I’m asked to use contraception to avoid that expense altogether. As for the renewable energy boondoggles, the shameless crony capitalism enlarging the subcontractors in DC, and the shovel-ready fantasies, those will quickly pass while the debt remains.
You can make it a partisan issue, but that’s beside the point. Our governments need to be careful with their spending, or else the cuts we’ll eventually have to make, or the tax hikes will have to foist, will be devastating. It’s that simple.
“The amount of interest paid currently stands at 1.4% of GDP. By 2023, the CBO projects, it will be 3.3 percent of an increased GDP… That would mean that average federal tax burden for each household, for interest payments alone, would be $7000 annually.”
That would imply a median household income of $212,000. Either we or going to be an extremely prosperous country in 2023, or that $7,000 figure is wrong.
$850 billion divided by 120 million equals roughly $7000. It’s 3.3% of GDP, not median income.
Aaron: I’m not sure what’s worse, taking our moral cues from The Simpsons or believing that thinking of the children is a punchline. What kind of monster wouldn’t put the well-being of his children of ahead of his own? But I suppose economics is the dismal science for a reason.
All of this assumes of course, that prosperity can come out of the machinations of technocrats free of the countervailing impositions of a truly informed society. The greatest asset of the current slide is the general erosion of the citizen’s awareness . Television coupled with our Public Education has inculcated a kind of institutional awareness that disdains skepticism as something altogether anti-social. Hell, where I come from, skeptics are gate keepers of the social construct because the social construct is manifestly comical. Unfortunately, the humor is quickly evaporated in the cold light of what is happening
I should have said mean, not median, but my point remains.
A technical note: It doesn’t matter whether you deduce the average interest payments by calculating 3.3% of mean household income or 3.3% of GDP, it works out to the exact same implied mean household income either way.
I.e. 3.3% of GDP divided by 120 million households, is the exact same thing as 3.3% of mean household income.
Mathematically: (0.033*GDP)/120M = 0.033*(GDP/120M)
…and with a little algebra, you will see that however you want to do it, if 0.033*GDP/120M = $7,000, then GDP/120M = $212,121.21.
So yes, I stand by my original statement, that either we are going to be very prosperous in 2023, or that $7,000 figure is wrong.
Here’s the more intuitive way of looking at it: 3.3% of GDP is simply 3.3% of all American incomes combined… by definition. So on average CBO projects that interest payments in 2023 will be 3.3% of each household income, on average. Obviously there can be outliers — households that pay more and households that pay less — but at the end of the day 3.3% of GDP is just 3.3% of everybody’s income, household or individual or any unit you like, on average. Ergo if 3.3% of everybody’s income is $7,000 per household, then each household must be earning ~$220,000, because 3.3% of $220,000 is roughly $7,000.
So which is it: are we going to be very prosperous in 2023, or is the $7,000 figure wrong?
Let’s see what the CBO says, since that’s the report you’re basing this prediction on. Actually, the CBO *does* project a mean household income of about ~$220,000 in 2023 (see page 64, bottom of Table B-1).
OK, not exactly, because they don’t project household income. But they do project a nominal GDP of $26.18 trillion, which, divided by 120 million households (the figure *you’re* assuming), comes out to a mean household income of $218,166.67.
So is the $7,000 figure correct, but we’re living large in 2023? Or are we living not-so-much-better-than-we-are-now in 2023, and the $7,000 figure is wrong?
I think it’s basically wrong, because these are all nominal, not real, figures. And when your readers read them — especially the $7,000 figure — they’re not thinking of it as a fraction of their incomes in 2023, nor in terms of purchasing power in 2023 — both of which will be different (incomes higher, purchasing power lower) — they’re thinking of $7,000 as $7,000 *today*, i.e. in terms of *today’s* nominal income at *today’s* purchasing power, which of course makes $7,000 seem like a lot of money. But it shouldn’t, because $7,000 in 2023 will *not* be the same thing as $7,000 in 2023.
Ten years of inflation (even low inflation, as the CBO projects) will erode the real value of both the nominal $7,000 in interest payments and the $220,000 in nominal income. So no, households won’t be making a quarter million dollars on average in 2023, and their interest payments will not be $7,000 in real terms.
It makes much more sense, I think, and is much more intuitive, to think of the cost of interest payments in 2023 as being 3.3% of mean household income — period, end of story. Is 3.3% a lot or a little? That’s a value judgement, but it’s certainly a more meaningful statistic than $7,000. $7,000 is an unnecessarily misleading figure.
PS — Economics is the dismal science because in the view of Thomas Carlyle, the Victorian historian and anti-abolitionist who coined the term in 1849, economists “find the secret of this Universe in ‘supply and demand’… reducing the duty of human governors to that of letting men alone.” He was arguing re-introduction of slavery in the West Indies — that the “idle Black man in the West Indies” should be “compelled to work as he was fit” — something that labor economists will tell you is not a great idea.
Maybe historians are the dismal scientists…
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