National debt: The ugly facts

[neecheepure]

Saw this this morning on CNN.com. A very succinct read on the current mess, imho.

http://money.cnn.com/2011/01/17/news...dex.htm?hpt=T2

[Pete]

Originally Posted by neecheepure

Saw this this morning on CNN.com. A very succinct read on the current mess, imho.

http://money.cnn.com/2011/01/17/news...dex.htm?hpt=T2

I don't.

I read it as "If the Evil Republicans would just raise taxes on everything and everybody things will be OK."

While the article talked about the big government programs it didn't wang the bell about cutting them like it did for raising taxes.

CNN

[nmap]

The author of the CNN article speaks of the "the abominable $858 billion tax deal" - and therein lie so many problems.

Why did the deal get proposed and approved? Because we're following the Keynesian policy of increasing spending during recessions. Unfortunately, we aren't willing to try running a surplus during good times...but the tax deal is really just another case of stimulus.

If we suppose that increased spending during a recession is good policy, let us consider the numbers the author uses. Tax revenues are 16% of GDP. Spending is 25% of GDP. The norms are, according to the article, about 20% for taxes and 21% for spending. So...during the present recession, we're going to increase taxes? Going from 16% of GDP to 25% of GDP is about a 50% increase. Likewise, going from 16% to 20% is really a 25% increase in taxes. If one believes in Keynesian economics, this is not going to end well.

The next issue is "entitlement reforms done progressively." So if one has saved a few dollars, one is rewarded with cuts in their Social Security payments and increases in their Medicare costs along with various other changes. In essence, then, thrift is punished and profligacy rewarded. And, while I certainly do not advocate such behavior, I strongly suspect that the policy will increase tax evasion.

The underlying problem? We as a society have decided to subsidize a great many things, with purchases of houses as a recent case in point. The decision to subsidize health care will lead to a host of unintended consequences. We are spending too much and putting it on the national credit card. IMO, we need to stop it.

On one point, I agree with the author - there is an inevitable crisis. We will do nothing until it strikes. The safety net will be shredded. Perhaps we need to revisit that safety net and examine just how much we should buy with our limited funds.

[Richard]

RE Post #4

I disagree. I tutored a sophomore at Bama this summer in Macroeconomics, Business Stats, and Accounting, and their focus is Keynesian whose analytic framework, focusing on the factors that determine total spending, remains the core of modern macroeconomic analysis.

The two major economic theories being taught today are Keynesian and Austrian - and the U of Chicago (which was cited in the previous post) favors the Austrian school of economic theory over the Keynesian.

This is important to know when talking to an economist or taking a test in economics today.

Richard

[Team Sergeant]

I don't think it really matters anymore as this train wreck was set in motion years ago when our brilliant goberment at the behest of the dim's decide to force banks into making unsecured housing loans to morons.


Thanks to barney frank and many others lib's this economy is on its last breath.


With 1 millions houses repossessed in 2010 and the banks poised to repossess 5 million in 2011, China stating that their currency should now be the global standard and Dims wanting to print & spend even more currency that is quickly becoming less and less valuable, this train wreck is about to become terminal.

2012 may not be the end of the world but it might be for the American economy.

When this repo starts in earnest and "ALL" house/property prices will fall to an unprecedented level, then the local, state and national tax generated revenue from the housing market is basically gone that will be all she wrote. At this point cutting local, state and national "social services" will not work. We are about to from recession, to deep recession, to economic collapse.

Right now we're cutting military spending to the bone. Unemployment is rising, not falling. Many U.S. states are on the verge of economic collapse, because of poor spending.


This tsunami is inbound. Right now its building steam out on the horizon, it may be hard to see for most but it's coming.

[Team Sergeant]

Originally Posted by Broadsword2004

I think China is going to hit a wall at some point. All developing economies do. They are going to experience a crash at some point in the future, and people I think will see that their economy is not as "super" as many make it out to be (my belief anyway).



Well I had thought nmap was the negative one on this forum, but you just took it to a whole new level Sir

I'd like to say I am wrong, but I was not wrong about the the fall of fanny and freddy, as it did cause a global domino effect.
I do believe we are about to enter into another great depression. I don't see a positive or a way out in the current situation.

[Richard]

Well Sir, from my understanding, the major theories taught today are New Keynesianism (this is what economists such as Greg Mankiw, Ben Bernanke, etc...are) and monetarism.

I would disagree with you that the U of Chicago favors the Austrian School. They favor monetarism, which was created by Milton Friedman, which is very similar to the Austrian School, but has some differences.

Go talk with some recent economics grads - I think you'll discover as I did that, despite the nuances and prefixes used by academics defending their personal points-of-view and training, they commonly refer to the theories as fundamentally either of the Keynesian or Austrian schools.

And of course:

A man walking along a road in the countryside comes across a shepherd and a huge flock of sheep. He tells the shepherd, "I will bet you $100 against one of your sheep that I can tell you the exact number in this flock."

The shepherd thinks it over; it's a big flock so he takes the bet.

"973," says the man.

The shepherd is astonished, because that is exactly right, so he says "OK, I'm a man of my word, take an animal."

The man picks one up and begins to walk away.

"Wait," cries the shepherd. "Let me have a chance to get even. Double or nothing that I can guess your exact occupation."

The man says sure.

"You are an economist for a government think tank," says the shepherd.

"Amazing!" responds the man, "You are exactly right! But tell me, how did you deduce that?"

"Well," says the shepherd, "just put my dog back down and I will tell you."

And then:

A mathematician, an accountant and an economist apply for the same job.

The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."

Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."

Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal?"

It is always important to remember that economics is the only field in which two people can share a Nobel Prize for saying opposing things.*


Richard

* Myrdal and Hayek in 1974

[mark46th]

This is from a column written by Thomas Sowell from August 2010. Mr. Sowell is not a fan of Keynes. If I were the Prez, I would make Thomas Sowell my Chief Economic advisor and anything else he wants to be...

"The CBO report points out that the national debt, which was 36 percent of the Gross Domestic Product three years ago, is now projected to be 62 percent of GDP at the end of fiscal year 2010 - and rising in future years.

Tracing the history of the national debt back to the beginning of the country, the CBO finds that the national debt did not exceed 50 percent of GDP, even when the country was fighting the Civil War, the First World War or any other war except World War II. Moreover, a graph in the CBO report shows the national debt going down sharply after World War II, as the nation began paying off its wartime when the war was over.

By contrast, our current national debt is still going up and may end up in "unfamiliar territory," according to the CBO, reaching "unsustainable levels." They spell out the economic consequences - and it is not a pretty picture.

Although Barack Obama and members of his administration constantly talk about the so-called "stimulus" spending as creating a demand for goods that is in turn "creating jobs," every dime they spend comes from somewhere else, which means that there is less money to create jobs somewhere else.

There is no reason to believe that all this runaway spending is creating jobs - on net balance. The fact that the unemployment rate remains stuck at nearly 10 percent belies the idea that great numbers of jobs are being created - again, on net balance.

White House press Secretary Robert Gibbs' recent rant against Rush Limbaugh for criticizing the bailout of General Motors went on and on about how this bailout had saved "a million jobs." But where does Gibbs think the bailout money came from? The Tooth Fairy?

When you take money from the taxpayers and spend it to rescue the jobs of one set of workers - your union political supporters, in this case - what does that do to the demand for the jobs of other workers, whose products taxpayers would have bought with the money you took away from them? There is no net economic gain to the country from this, though there may well be political gains for the administration from having rescued their UAW supporters.

The same principle applies to money that came from selling government bonds, thus adding to the national debt..."

[Team Sergeant]

Originally Posted by mark46th

This is from a column written by Thomas Sowell from August 2010. Mr. Sowell is not a fan of Keynes. If I were the Prez, I would make Thomas Sowell my Chief Economic advisor and anything else he wants to be...

"The CBO report points out that the national debt, which was 36 percent of the Gross Domestic Product three years ago, is now projected to be 62 percent of GDP at the end of fiscal year 2010 - and rising in future years.

Tracing the history of the national debt back to the beginning of the country, the CBO finds that the national debt did not exceed 50 percent of GDP, even when the country was fighting the Civil War, the First World War or any other war except World War II. Moreover, a graph in the CBO report shows the national debt going down sharply after World War II, as the nation began paying off its wartime when the war was over.

By contrast, our current national debt is still going up and may end up in "unfamiliar territory," according to the CBO, reaching "unsustainable levels." They spell out the economic consequences - and it is not a pretty picture.

Although Barack Obama and members of his administration constantly talk about the so-called "stimulus" spending as creating a demand for goods that is in turn "creating jobs," every dime they spend comes from somewhere else, which means that there is less money to create jobs somewhere else.

There is no reason to believe that all this runaway spending is creating jobs - on net balance. The fact that the unemployment rate remains stuck at nearly 10 percent belies the idea that great numbers of jobs are being created - again, on net balance.

White House press Secretary Robert Gibbs' recent rant against Rush Limbaugh for criticizing the bailout of General Motors went on and on about how this bailout had saved "a million jobs." But where does Gibbs think the bailout money came from? The Tooth Fairy?

When you take money from the taxpayers and spend it to rescue the jobs of one set of workers - your union political supporters, in this case - what does that do to the demand for the jobs of other workers, whose products taxpayers would have bought with the money you took away from them? There is no net economic gain to the country from this, though there may well be political gains for the administration from having rescued their UAW supporters.

The same principle applies to money that came from selling government bonds, thus adding to the national debt..."

"unsustainable levels" can you see that tsunami now?

[nmap]

Originally Posted by Broadsword2004

I think China is going to hit a wall at some point. All developing economies do. They are going to experience a crash at some point in the future, and people I think will see that their economy is not as "super" as many make it out to be (my belief anyway).

Let's suppose that's true. What happens next?

China will have less money, lots of unemployed people, and an unhappy population that feels betrayed by their rulers. True?

So...China will cease to buy U.S. debt and may have to sell some of what it has. Which will tend to cause our interest rates to go up. That means our debt costs more to service. Which makes our annual deficit go up even more than it has.

China will want to get those unemployed people back to work. So...they ignore U.S. and world opinion and cut the value of the Yuan. Meaning that Chinese wages become really cheap. Which adds to the already existing deflationary pressures on U.S. wages.

It has been said of singularities (black holes) that once you pass the event horizon, all time lines lead through the singularity. I suspect we've passed the economic event horizon - and all paths will lead us through an economic crunch.

We owe some $14 trillion dollars. We can cut spending by about 40% or raise taxes by a similar amount, or some combination thereof. I can't see any of those as politically viable. We could default - again, not viable. Or we can inflate the debt away. That will destroy the savings of the middle class, the value of pension payments and social security, and the value of our foreign obligations. Those who are positioned advantageously will profit nicely.

Gee, I wonder which path is most likely?

The coming tsunami....I suspect the waves will be four hundred (400) feet high. It's going to hurt.

[mark46th]

Just keep an eye on Europe. When the other members of the European Union suck the life out of Germany, it will be an economic Dark Ages for Europe. The U.S. government had better be paying attention to the economic policies that are leading to the collapse.

Personally, I think it is like the old Rabbi who prayed at the Western Wall every day for 40 years when asked if his prayers had been answered. "It's like talking to a fxxking brick wall...."

[mark46th]

Great Britain is looking pretty smart to stay out of that mess...

[mark46th]

The problem with Keynesian economics is that it throws some one else's money at a problem. As noted by Thomas Sowell, it is impossible to get ahead because Keynsians take from Peter to pay Paul...

[silentreader]

Originally Posted by Broadsword2004

Stimulus proponents say America is making Japan's mistake by not spending enough (I don't know how much they want us to spend though, and IMO it's way too risky), while the critics say we are making Japan's mistake by spending what we are.

First of all, good post.

Second of all- how do you define risk in this case? For example- would it have been more or less risky to bail out Lehman Brothers vs letting it fail? Is the prospect of future debt really worse than the prospect of a current crash?

As Richard's line about economists and nobel prizes shows, smart people can dedicate their lives to economic questions and come up with completely different answers. What is seen by some as being "too risky" can be seen by others as being the only safe play.

Finally, those looking to discredit Keynesian economics have to explain WW2 and it's effects on the American economy, because from where I'm sitting it looks like a classic example of a massive stimulus program reviving an economy.

[nmap]

Originally Posted by silentreader

Finally, those looking to discredit Keynesian economics have to explain WW2 and it's effects on the American economy, because from where I'm sitting it looks like a classic example of a massive stimulus program reviving an economy.

Please see page 4 of the PDF at this LINK

Excerpt:

Another way to understand the problem is through the marginal productivity of
debt. This is the ratio of additional GDP to additional debt, or the amount of new GDP contributed by the creation of $1 in new debt. It is this ratio that determines the quality of total debt. Indeed, the higher the ratio, the more successful entrepreneurs are in increasing productivity, which is the only valid justification for going into debt in the first place. The concept is due to the Hungarian-born Chicago economist Melchior Palyi (1892-1970), although its name has been introduced after he died.

And from page 6:

The year 2006 was the watershed. Late in that year the marginal productivity of debt dropped below zero for the first time ever, switching on the red alert sign to warn of an imminent economic catastrophe. Indeed, in February, 2007, the risk of debt default as measured by the skyrocketing cost of CDS (credit default swaps) exploded and, as the saying goes, the rest is history.