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benveniste

July 2017

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In the last couple of week, you may have seen several stories about how the U.S. debt crisis is “over.”  Political flack Ambrose Evans-Pritchard even wrote a column in the Daily Telegraph entitled “America has conquered its debt crisis with incredible speed.”  Too bad it hasn’t.

The source of all this optimism is the latest report from the Congressional Budget Office.  Yep, that’s the same office that initially claimed Obamacare was going to be “revenue neutral,” but we’ll get back to that later.  The report does indeed contain good news; for the next few years the deficit is forecast to remain slightly below its long term average of 3.1% of GDP.  In part, we can thank budget sequestration (aka “the sequester"), which I admit I never expected to actually go into effect at all.  Another chunk comes from the economic recovery; however sluggish and uneven it is.  But a big chunk has come from the energy sector in general and shale oil and fracking in particular.  I find it ironic that many of the same people attributing the reduced deficit to the current administration are ardent opponents of the very activities which made that reduction possible.

A less cursory look at the report shows that things are not all skittles and beer.  Starting in FY2016, the nominal amount of the deficit starts to grow again, and in no year in the next decade does the CBO forecast a deficit of less than 469 billion dollars.  As a percent of GDP, the deficit starts rising again in 2019.  So the debt crisis is still with us, but we are, for at least the next few years, losing the war a bit more slowly.  Keynesian theorists such as Paul Krugman would ask “who cares?”  My answer to that can be found in on the “net interest outlay” forecast as found on page 3 of the report.  Here are the numbers in billions of dollars and percent of GDP:

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
221 227 266 323 400 491 567 635 694 755 818 876
1.3 1.3 1.5 1.7 2 2.3 2.6 2.8 2.9 3.1 3.2 3.3


In other words, by 2019 we’ll be spending twice as much of the U.S.’s total economic resources paying off interest and that amount will just continue to rise.  To paraphrase President Eisenhower, every interest payment that is made is in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.  It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.  In less flowery words, every dollar spent paying for the deficits of the past is one less dollar available to solve the problems of the present.

I see no way out of this mess that doesn’t result in a significant cut in the overall standard of living in the U.S.  To my mind, the only question is whether that comes about in a controlled manner through broad-based tax increases or through less controlled means such as inflation and collapse of credit markets.  I don’t have the answer to this crisis, but I will attempt to answer, in advance, some objections to my analysis.

Q.           Why don’t we make the top x% (i.e. someone else) pay their fair share?
A.            I could write at length about how and why wealth distribution is so skewed and how current laws allow wealth to accrue to corporate management and money managers rather than to the shareholders they are supposed to be working for.  Suffice it to say that there’s a limit to how much tax you can place on the wealthy before practical concerns of wealth mobility and political influence kick in.

Q.           Why not use tax cuts to create an economic stimulus?  After all, after the “J” curve period it would increase the proportionate size of the private sector and tax revenue.
A.            The Heritage Foundation made that argument for the Bush-era tax cuts.  In 2001, they went so far as to claim such cuts would wipe out the debt (not just the deficit) by now.  Needless to say, it didn’t happen.  Part of the blame goes to pretending that we wouldn’t have to pay for a couple of wars, but the rest came from a gross overestimation of the Keynesian multiplier.  Tax cuts do create an economic stimulus, but as we saw, that stimulus did not translate either into jobs or increased tax revenues sufficient to overcome the loss from the cut.

Q.           So is a smaller government the answer?
A.            It's easy to want smaller government.  It's harder to define where are you willing to accept cuts.  Darwinian Theory applies quite well to bureaucrats; the only ones who survive are those who develop the skills to defend, nurture, and grow their fiefdom.  Every cut, even the relatively minor ones imposed by sequestration, prevents every government department from achieving their critical mission objectives.  Just ask them.  That’s why agencies cut services during the shutdown in the most publicly visible way possible.

In fact, the CBO report shows that as a percentage of GDP, only interest payments, social security and major health care programs are rising.  “All other” government programs fall steadily over the 10-year forecast period.  So while a smaller, more efficient government has many benefits, the benefits for the deficit are lost in the random noise unless social issues are put on the table.

Q.           The figures you cite include Social Security.  But Social Security doesn’t contribute to the deficit by law, so how can it contribute to the debt?
A.            By law, Social Security is “off books.”  But it still contributes to the debt.  Here’s how.  The Social Security Trust fund is held in special interest bearing notes of the Federal Government.  Those count against the debt.  For the foreseeable future, without changes in the law Social Security will pay out more in benefits than it takes in as taxes.  Until 2020 or so, the balance will be made up by interest payments from the Government on the Trust fund.  In order to pay this interest, the Treasury has no choice but to issue bonds in the public markets, thus adding to the debt.

After 2020, Social Security will have to start “cashing” in the trust fund to continue to pay benefits.  In order to redeem the special bonds the trust fund holds, the Treasury will have no choice but to issue still more bonds in the public markets.  The amount of overall debt will be a wash, but more of it will be publicly held.

Q:           Are you saying that Keynesian Theory is wrong?  What makes you an expert?
A:            The way it’s defined today and under today’s conditions, yes.  Keynes wrote “The General Theory” in the midst of a depression.  In that book, he argued that government should take an active role to induce people to increase aggregate demand.  He advocates deficit spending to create that demand as needed, going as far as to commit a broken window fallacy in chapter 10.

But Keynes himself warned of the dangers of such actions.  Quoting, “Each time we secure today’s equilibrium by increased investment we are aggravating the difficulty of securing equilibrium tomorrow.”  Modern politicians and Keynesians seem to ignore that part.  Since he wrote those words, every U.S. President has left office with the U.S. owing more money than when he took office.   While the assumption of “too little aggregate demand” was likely true during the Great Depression, and it was true during the recent/current “Great Recession,” political pressures either to spend more or cut taxes will always ensure there’s never a good time to pay such loans back.

I’m not an expert.  Unlike Dr. Keynes, I have the advantage of hindsight.  To quote Keynes himself, “practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

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