The Economist Cafe -- Analysis, Forecasts, and Data on the Global Economy
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The combined debt of the Federal government finally topped $ 21 trillion dollars and a Democrat is in the White House after four years of good Republican fiscal discipline, so the deficit hawks are all out in force once again. The usual argument against more deficit spending, even in the midst of a disaster like the Covid19 shutdown and overhang, is that we can’t afford to spend that kind of money. The latest Republican plan to pare down the Biden proposal from $ 1.9 trillion to just $ .6 trillion is an example of how Republicans go little when it comes to people and go big when it comes to corporations and wealthy supporters. What the right number or mix of spending needs to be to get through the next six months is not important, what is important is the thinking that argues that someday, in the future, our children or grandchildren will have to begin to pay down the debt. For the true deficit hawks it’s this idea of repaying the debt, of the burden on future generations, that makes them fiscally conservative when any other party than their own is in the White House, but perhaps we should entertain the idea of repaying the debt or at least starting the process. So what must be done to do this given the way we allocate the money in the budget between discretionary and non-discretionary expenditures? Some interesting ideas and a few rules…. If Republicans are interested in paying down the debt then they should read my lips – don’t cut taxes as you cut spending. You can’t get surpluses without collecting taxes and it would be nice too not to cut the budget of the IRS as part of your plan for paying off the debt as that’s, frankly, stupid and self-defeating and yet somehow part of the Republican playbook, beats me why? Okay, then if you get that – no reduction in revenues or tax rates, then we can begin with going after the debt overhang. Let’s start with the largest single discretionary expenditure in the Federal budget – the DOD budget. It stands at over $ 750 billion so that if we just half it, then we can get a good $ 350 billion in savings to be put to the paying down of the debt. Some good ideas to do just this is to reduce the Army to just the Central Command, moth ball the tanks, APC, Humvees, and concentrate on mobility forces able to be used to go after terrorists outside the country. We should also pull the Navy back and put into storage all but maybe one or two of the Carrier battle groups (we have 12) since we no longer need to project American influence and protection outside our borders. We do the same with most of the Air Force, beef up the Space Command because its sexy and we depend upon satellites, and support the submarines, bombers and nuclear missiles returning to the good old days of Dr. Strangelove and Assured Mutual Destruction, the all or nothing strategy of deterrence. It might be hard to save much on discretionary social programs and other parts of the budget as they are small and we can only shave around the edges. We will have to increase direct support to allow all those defense workers laid off and military personal for a few years and investors in the Defense Industrial Complex will be harmed, but what the hell, we are paying down the debt. So I suspect that there will have to be some additional unemployment and food stamps for the laid off defense workers. Let’s get $ 300 billion a year out of defense and another twenty or twenty-five billion by starving social programs, this would not slow the increase in the size of the debt outstanding by enough because we still have to pay interest. So we need to tackle the real problem – non-discretionary spending on Social Security, Medicare and Medicaid. I don’t think waste fraud and abuse will cut it for savings. Most of the money for Medicare and Medicaid goes to the oldest and frailest and the most costly to keep alive. So here’s a good idea – lets phase out government payments for people over 85. As to paying for nursing homes beyond that time, forget it, we need to save money, we need to pay down the debt, we need not to burden our poor children and grandchildren. And then there’s Social Security. Must be when they talk about reigning in entitlements they skip over the details. Not sure how much could be saved by cutting benefits which are already for many low wage earners closer to poverty line. A good junk of the money is paid for disability and there is some fraud or waste there, but I doubt if we could get much out of this pot in the way of savings. Moreover everyone with half a brain knows that the simple an most efficient way to save Medicare, Medicaid, and Social Security is to gradually raise the retirement age and not cap the maximum amount of income taxed. If anyone is getting sick to the stomach about all of these suggestions, raise your hand for they are just that –stupid, not necessary, and likely impossible in our bifurcated political environment , but it’s important to call out those people who worry about debt and ask them to discuss the fixes they propose that will get some serious money – just saying cut waste and abuse in government – just doesn’t cut it. Miracle of Miracles We Start to Pay the Debt Down, Anyone Happy? Let’s imagine that we find savings or new tax revenues and begin to seriously pay down the debt. Clinton was hampered by controls on spending in his last term and managed to actually start to pay down the debt or at least not to add to it in his last year. The financial community was upset when the steady diet of new T-bills started to dry up. It is critical to remember that one man’s debt is another man’s assets. So when there is a lesser supply of no risk bonds available, then this causes a problem since the economy continues to grow, and the financial sector has gotten used to having these handy risk free securities around to pedal to investors. The Real Answer is that the Debt Overhang Doesn’t Effect Anything in the Economy It is interesting how when you start to study the question and pull the details over the past forty years of debt, GDP, interest rates, and match it against who is the President, everything becomes much clearer. In the table below I summarize the forty years between Reagan and Biden with respect to the government debt outstand – from the Reagan average of $ 1.75 trillion to the Trump average of $ 22.86 trillion. Interest rates over this entire forty years have been falling from the artificially inflated highs of the Reagan years to today’s rock bottom interest rates. Global trade and low cost imports from foreign suppliers have kept rates low and made it harder for companies to raise prices much over costs. Managing this government debt is made easy by the low rates, but even higher rates would not make it hard for a country like the United States with its currency playing the role of numeraire difficult. Of more useful information than the debt is the comparison of the bang for the buck. Measured by the change in GDP and the change in the debt, the average ratio measures the usefulness of the deficit spending. Reagan was able to get $ 1.70 increase in GDP for each $ 1 increase in debt. Bill Clinton had an average of around $ 6.00 primarily due to the last years when the Pay-Go plan for the government spending limited the increase in the deficit driving it to zero in the last year of his Presidency. Obama facing the deep recession of the 2008-09 period and the increased spending to get the economy moving again was able to get a 65 cent return on the increase in debt, while Trumps return on debt is just 56 cents with an average growth in GDP of less than 1% for the four years of his Presidency (Obama averaged 1.6% growth over the eight years.). So Joe Biden and the Democrats need to go big. The half a loaf offered by the few Republicans who still have a care for their constituents in order to get bipartisanship isn’t worth the trouble. If the plan needs to be amended, amend it to reflect priorities, like getting the money to the people unemployed rather than to everyone making less than $ 75,000 dollars, a fictional number reflective of last years income not this year’s problems. But don’t assume that adding to the government debt isn’t necessary or proper or dangerous to the health of the economy. Failure to spend is more dangerous than spending too much. |
Best guesses about the future of the world economy....
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A short summary of the latest QuERI Integrated Global Model World Forecast of Real GDP Growth -- 1990 through 2030 |
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Gross Output Growth and GDP Growth rates differ for many reasons, not the least may be the fact that one reflects the productive activity of companies and individuals across products with different wage and profit shares. GDP growth is less volatile. We expect that the gross output for the world will recover rapidly returning following the pattern set by the 1997-99 recession, the 2007-2010 recession before trending back in line with the pre-Covid growth rate for both GDP and Gross Output.
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To get the latest forecast for the post-Covid period, download our newest study covering the period 1990 through 2030 for the world economy. |
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