QuERI Papers and Analysis -- Downloadable papers and studies written over the years that may be of interest today.
26 Trillion is just a number
Twenty-six trillion is just a 26 with 12 zeros, from an economic point of view it is just a number, but from a political perspective, it is a cause. My first job in the US government was in the Pentagon at the end of the Carter Administration and through the first years of the Reagan period. I remember my first meeting with OMB listening to their explanation of how supply side economics worked – miracle of miracles that cutting taxes and more than doubling defense spending could end up balancing the budget. Reagan grew the deficit from around $ 900 billion in September, 1980 to $ 2.6 trillion. GW Bush added a bit more to the red ink, and the beat goes on. When the Republicans are in office, money flows easily for friends and neighbors, but the deficit hawks come out for Democrats.
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.
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. To do this we need to adopt the Trump’s idea of American First, moth ball the carrier groups, cut the Army to the size to support defending the Mexican-Canadian borders, mothball the Air Force fighter groups as unnecessary, beef up Space Command because its, let’s admit SG1 fans, sexy, keep Central Command to take care of terrorists, and modernize the nuclear deterrence welcome back the old Dr. Strangelove concept MAD—mutual assured destruction.
We need more to pay down the debt so reigning in entitlements is the only place to do this. 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, Ron Johnson says we have to not burden our children and grandchildren with it.
If this is all making you as sick as its making me, raise your hand. We can solve the entitlement mess by just eliminating the cap on Social Security and Medicare taxes, gradually raise the retirement age, and enforce age discrimination in the private sector. We need our defense spending because it supports a high technology sector of the economy and maintains American influence in the world.
The Real Answer is that the Debt Overhang Doesn’t Effect Anything in the Economy
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 today. Inflation was higher during the Reagan years, the Fed was far more restrictive. Reagan average deficit $ 1.75 t /10.75%, GW Bush, $3.46 t/7.98%, Clinton $ 5.2t/6.16%, GWBush $12.65 t/4.14%, Obama $16.08/2.58%, Trump $22.86/2.02%. If the higher levels of debt doesn’t cause high rates (low rates are a function of the fact that government has to support a weaker economy). Reagan was able to get by averaging the yearly marginal gain in GDP to gain in debt, $ 1.70 increase in GDP for each $ 1 increase in debt. Bill Clinton had an average of around $ 6.00 per dollar of debt due to running a surplus in his last year. 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 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. Failure to spend is more dangerous than spending too much.
Winners and Losers from Global Trade
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A Micro-regional Strategy for Developing Countries
Industrialization has been happening in stages since the start of the machine age in the late 17th century. Robbing countries of their intellectual property isn’t something new to the world, but has been going on since the start of the industrial period so we should not be surprised by Chinese industrial espionage. When most of the advanced countries developed they were operating using a mercantile model, thus England had colonies for supply of raw materials and markets for finished manufactures. The price of raw materials, wages of workers, and the finished price of the manufactured products were all in some alignment. But what about today—what if the price that we pay for finished products including iron and steel and plastics is in line with the wages of workers in the advanced countries. The price of raw materials then must reflect that higher prices. Making a car in China with imported iron ore then may cost more than the prevailing wages of most workers. When Ford made the Model T he priced it in a way that it could be afforded with some financing by the average worker in his factories. Economists have spent many hours comparing the real cost of living in China compared to the United States – it is about 1/3rd as expensive for a similar standard of living for a Chinese than for an average American. Thus the PPP index for China is 3 and the US 1. But have Chinese wages kept up with Chinese internal prices. Based on the graph below the Chinese wage compared to the US wage is 1/7th the US wage and the PPP is 1/3rd US living standards. One reason for this is that the cost of raw materials to make the products is set not by Chinese internal prices but by international prices. The cost of steel is set in Detroit, not Shanghai.