Archive for the ‘Debt’ Category

It’s amazingly simple to reduce the burden of government spending. Policy makers simply need to impose some modest spending restraint so that government doesn’t grow faster than the economy’s productive sector.

In a display of humility that can only be found in Washington, DC, I call this Mitchell’s Golden Rule.

And, amazingly, even the International Monetary Fund agrees that spending caps are the most effective strategy for good fiscal policy.

Since I’m not a fan of the IMF, this is definitely a case of strange bedfellows!

Let’s look at some case studies of what happens when there are limits on the growth of government.

A review of data for 16 nations reveals that multi-year periods of spending restraint lead to lower fiscal burdens and less red ink.

Between 2009 and 2014, a de facto spending freeze at the federal level dramatically reduced burden of spending in the United States.

Thanks to a spending cap, Switzerland has shrunk the public sector, balanced its budget and reduced government debt .

These real-world examples provide compelling evidence on the value of long-run spending restraint.

By the way, when I challenge my leftist friends to provide similar examples of nations that have achieved good results by raising taxes, they become uncharacteristically quiet. Just like you can hear crickets chirping when I present them with my two-question challenge to identify statist nations that are good role models.

But I’m digressing. Let’s get back to the main topic.

In addition to the data cited above, there are also hypothetical examples showing why it is important to have government grow slower than the private sector.

A column published by Investor’s Business Daily reveals that the United States would have avoided the multi-trillion dollar deficits of the Obama years had a Swiss-style spending cap been in effect.

The oil-rich Canadian province of Alberta would have avoided its current fiscal crisis had it followed my Golden Rule over the past 10 years.

Now let’s add to our list of hypothetical examples. Writing for Real Clear Markets, Professor Jeffrey Dorfman of the University of Georgia cleverly suggests that Republicans simply take Bill Clinton’s last budget and then adjust it for inflation and population growth.

…a Clinton is ready to show them a path to nearly everything a dream Republican budget might have. …President Bill Clinton’s last budget was for fiscal year 2001, which began just before the 2000 election. That budget spent $1.86 trillion, less than half of what President Obama is proposing. If this final Clinton budget is adjusted upwards for subsequent inflation (32 percent) and population growth (12 percent), we arrive at a figure of $2.76 trillion, still only 69 percent as much as President Obama wants to spend. This difference is what Republicans should exploit.

And since federal revenues for next year are projected to be $3.46 trillion, that means not only a smaller burden of government spending, but also a huge budget surplus.

Professor Dorfman then proposes that this gives Republicans leeway to show that they can compromise.

… appropriate spending for each agency equal to a minimum of the population and inflation adjusted amount in President Bill Clinton’s final budget plus 50 percent of the additional growth between President Obama’s proposal and the adjusted Clinton budget. That is, Republicans would not even try to roll federal spending back to when we last had a balanced budget, but only move to reverse half of the enormous spending increases that have occurred under Presidents George W. Bush and Barack Obama. Such a budget would spend $3.25 trillion and would come with an estimated budget surplus of $220 billion based on the latest Congressional Budget Office projections of 2016 federal revenue.

Dorfman hypothesizes that this rhetorical approach will give advocates of smaller government the upper hand.

After all, the statists presumably wouldn’t want to say Bill Clinton’s last budget was somehow draconian or heartless. And if Republicans are proposing to take that Clinton budget, adjust it for inflation and population, and then add even more money, it should be equally improbably to characterize their proposals as being draconian and heartless.

At a time when Hillary Clinton certainly appears set to run for president, Republicans can stake their claim to reduced spending in many areas by pointing out that they are being 50 percent more generous in inflation and population adjusted spending than President Clinton was. Will Democrats in Congress, or even President Obama, want to claim that President Clinton was insufficiently generous with the poor and working classes? Will they really want to take a stand in opposition to the Clintons at this point in time? I doubt it. Certainly Hillary Clinton is unlikely to want to criticize a Clinton budget. That will make other Democrats hesitate and likely bite their tongues. Using the Clintons against the rest of the Democrats offers the Republicans in Congress a clear path to almost all their budgetary wishes.

I agree that this is an astute strategy. I particularly like it because it puts the focus on how much government has grown since Bill Clinton left office.

And the notion of letting the budget grow as fast as population plus inflation is very similar to Colorado’s Taxpayer Bill of Rights, which is the best spending cap in America.

That being said, I’m far less optimistic than Professor Dorfman that this approach will produce a victory in the short run. Simply stated, President Obama is too ideologically committed to big government. Moreover, I doubt that he will feel any special pressure to accept Bill Clinton’s last budget as some sort of baseline.

But having this debate would still be useful and could pay dividends in 2017 and beyond.

P.S. Speaking of President Obama, let’s close with some political humor that showed up in my inbox yesterday.

P.S. If you want more Obama humor, check out this t-shirt, this Pennsylvania joke, this Reagan-Obama comparison, this Wyoming joke, this Bush-Obama comparison, this video satire, this bumper sticker, and this very timely bit of Bowe Bergdahl humor.

And sometime there’s even humor that makes me sympathize with the President.

Read Full Post »

There’s a big fiscal battle happening in Europe. The relatively new Greek government is demanding continued handouts from the rest of Europe, but it wants to renege on at least some of the country’s prior commitments to improve economic performance by reducing the preposterous burden of spending, regulation, and intervention.

That seems like a rather strange negotiating position. Sort of like a bank robber holding a gun to his own head and saying he’ll shoot himself if the teller doesn’t hand over money.

At first glance, it seems the Greeks are bluffing. Or being suicidally self-destructive.

And maybe they are posturing and/or being deluded, but there are two reasons why the Greeks are not totally insane.

1. The rest of Europe does not want a Greek default.

There’s a famous saying, attributed to J. Paul Getty, that applies to the Greek fiscal fight. Simply stated, there are lots of people and institutions that own Greek government bonds and they are afraid that their investments will lose value if Greece decides to fully or partially renege on its debts (which is an implicit part of Greece’s negotiating position).

So while Greece would suffer if it defaulted, there would be collateral damage for the rest of Europe. In other words, the hypothetical bank robber has a grenade rather than a gun. And while the robber won’t fare well if he pulls the pin, lots of other people may get injured by shrapnel.

And to make matters more interesting, previous bailouts of Greece have created a rather novel situation in that taxpayers are now the indirect owners of a lot of Greek government debt. As you can see from the pie chart, European taxpayers have the most exposure, but American taxpayers also are on the hook because the IMF has participated in the bailouts.

The situation is Greece is akin to a bankruptcy negotiation. The folks holding Greek government debt are trying to figure out the best strategy for minimizing their losses, much as the creditors of a faltering business will calculate the best way of extracting their funds. If they press too hard, the business may go bust and they get very little (analogous to a Greek default). But if they are too gentle, they miss out on a chance of getting a greater share of the money they’re owed.

2. Centralization is the secular religion of the European elite and they want Greece in the euro.

The bureaucrats at the European Commission and the leaders of many European nations are emotionally and ideologically invested in the notion of “ever closer union” for Europe. Their ultimate goal is for the European Union to be a single nation, like the United States. In this analogy, the euro currency is akin to the American dollar.

There’s a general perception that a default would force the Greek government to pull out of the euro and re-create its own currency. And for the European elite who are committed to “ever closer union,” this would be perceived as a major setback. As such, they are willing to bend over backwards to accommodate Greece’s new government.

Given the somewhat blurry battle lines between Greece and its creditors, what’s the best outcome for advocates of limited government and individual liberty?

That’s a frustrating question to answer, particularly since the right approach would have been to reject any bailouts back when the crisis first started.

Without access to other people’s money, the Greek government would have been forced to rein in the nation’s bloated public sector. To be sure, the Greek government may also have defaulted, but that would have taught investors a valuable lesson about lending money to profligate governments.

And it would have been better if Greece defaulted five years ago, back when its debt was much smaller than it is today.

But there’s no point in crying about spilt milk. We can’t erase the mistakes of the past, so what’s the best approach today?

Actually, the right answer hasn’t changed.

And just as there are two reasons why the Greek government is being at least somewhat clever in playing hardball, there are two reasons why the rest of the world should tell them no more bailouts.

1. Don’t throw good money after bad.

To follow up on the wisdom of J. Paul Getty, let’s now share a statement commonly attributed to either Will Rogers or Warren Buffett. I don’t know which one (if either) deserves credit, but there’s a lot of wisdom in the advice to stop digging if you find yourself in a hole. And Greece, like many other nations, has spent its way into a deep fiscal hole.

There is a solution for the Greek mess. Politicians need to cut spending over a sustained period of time while also liberalizing the economy to create growth. And, to be fair, some of that has been happening over the past five years. But the pace has been too slow, particularly for pro-growth reforms.

But this also explains why bailouts are so misguided. Politicians generally don’t do the right thing until and unless they’ve exhausted all other options. So if the Greek government thinks it has additional access to money from other nations, that will give the politicians an excuse to postpone and/or weaken necessary reforms.

2. Saying “No” to Greece will send a powerful message to other failing European welfare states.

Now let’s get to the real issue. What happens to Greece will have a big impact on the behavior of other European governments that also are drifting toward bankruptcy.

Here’s a chart showing the European nations with debt burdens in excess of 100 percent of economic output based on OECD data. Because of bad demographics and poor decisions by their politicians, every one of these nations is likely to endure a Greek-style fiscal crisis in the near future.

And keep in mind that these figures understate the magnitude of the problem. If you include unfunded liabilities, the debt levels are far higher.

So the obvious concern is how do you convince the politicians and voters in these nations that they better reform to avoid future fiscal chaos? How do you help them understand, as Mark Steyn sagely observed way back in 2010, that “The 20th-century Bismarckian welfare state has run out of people to stick it to.

Well, if you give additional bailouts to Greece, you send precisely the wrong message to the Italians, French, etc. In effect, you’re telling them that there’s a new group of taxpayers from other nations who will pick up the tab.

That means more debt, bigger government, and a deeper crisis when the house of cards collapses.

P.S. Five years ago, I created a somewhat-tongue-in-cheek 10-step prediction for the Greek crisis and stated at the time that we were at Step 5. Well, it appears my satire is slowly becoming reality. We’re now at Step 7.

P.P.S. Four years ago, I put together a bunch of predictions about Greece. You can judge for yourself, but I think I was quite accurate.

P.P.P.S. A big problem in Greece is the erosion of social capital, as personified by Olga the Moocher. At some point, as I bluntly warned in an interview, the Greeks need to learn there’s no Santa Claus.

P.P.P.P.S. The regulatory burden in Greece is a nightmare, but some examples of red tape are almost beyond belief.

P.P.P.P.P.S. The fiscal burden in Greece is a nightmare, but some examples pf wasteful spending are almost beyond belief.

P.P.P.P.P.P.S. Since we once again have examined a very depressing topic, let’s continue with our tradition of ending with a bit of humor. Click here and here for some very funny (or sad) cartoons about Obama and Greece. And here’s another cartoon about Greece that’s worth sharing. If you like funny videos, click here and here. Last but not least, here’s some very un-PC humor about Greece and the rest of Europe.

Read Full Post »

I had a very bad lunch today.

But not because of what I ate. My lunch was unpleasant because I moderated a noontime panel on Capitol Hill featuring Senator Ron Johnson of Wisconsin and my Cato colleague Chris Edwards.

And I should hasten to add that they were splendid company. The unpleasant part of the lunch was the information they shared.

The Senator, in particular, looked at budgetary projections over the next 30 years and basically confirmed for the audience that an ever-expanding burden of federal spending is going to lead to a fiscal crisis.

To be blunt, he showed numbers that basically matched up with this Henry Payne cartoon.

Here’s a chart from his presentation. It shows the average burden of spending in past years, compared to various projections of how much bigger government will be – on average – over the next three decades.

The Senator warned that the most unfavorable projection (i.e., “CBO ALT FISC”) was also the most realistic one. In other words, federal spending will consume a much larger share of economic output over the next three decades than it has over the past two decades.

But our fiscal outlook is actually even worse than what you see in his slide.

The Senator’s numbers are based on average spending levels over the 2015-2044 period. That’s very useful – and sobering – data, but if you look at the annual numbers, you’ll see that the trendline gives us additional reasons to worry.

More specifically, spending for the major entitlement programs (Social Security and Medicare, as well as Medicaid) is closely tied to the aging population. So as more and more baby boomers retire over the next couple of decades, spending on these programs will become more burdensome.

In other words, our fiscal problem will be much larger in 2040 than it will be in 2020.

Here are the long-run numbers from the Congressional Budget Office. The blue line is federal spending on various programs and the pink line is total spending (i.e., programmatic spending plus interest payments). And keep in mind that these numbers don’t include state and local government spending, which presumably will chew up another 15 percent of our economic output!

In other words, America will become Greece.

And don’t delude yourself into thinking that CBO must be wrong. I’m not a big fan of the Congressional Budget Office (particularly CBO’s economic analysis), but these numbers are driven by demographics.

Moreover, CBO’s grim outlook is matched by similarly dismal numbers from the IMF, BIS, and OECD.

By the way, CBO doesn’t do projections once federal government debt exceeds 250 percent of GDP, so the gray-colored trendline beginning about 2048 is not an official projections. It’s merely an estimate of the total spending burden assuming that the federal budget is left on autopilot.

Of course, we’ll never reach that level. We will suffer a fiscal crisis before that point. But when it happens to us, the IMF won’t be there to bail us out for the simple reason that the IMF’s credibility is based on the backing of American taxpayers.

And we’ll already have been bled dry!

So unless we find some very rich Martians (who are also stupid enough to bail out profligate governments), it won’t be a pretty situation. I’m not sure we’ll have riots, such as the ones that have taken place in Europe, but there will be plenty of suffering.

Fortunately, there is a solution. All we need is a modest bit of fiscal restraint so that government grows slower than the private sector. That would completely reverse Senator Johnson’s dismal long-run numbers.

And some countries have shown that multi-year periods of fiscal restraint are possible.

The real question, though, is whether politicians in America would be willing to adopt the entitlement reforms that are needed to control the long-run growth of spending.

Read Full Post »

Libertarians tend to like – or at least have a grudging respect for – the underground economy.

For instance, even if we’re personally very straight-laced, we don’t like government prohibitions against gambling, drugs, and prostitution. This is why we’re not upset when these things happen in spite of the laws enacted by the political class.

But this isn’t just about victimless crimes. We also dislike high taxes, so you won’t find libertarians shedding many tears when we read about tax avoidance and tax evasion in nations (such as France and Greece) with punitive tax systems.

Politicians tend to have a different perspective. They generally get very upset if we’re not following their societal diktats and acquiescing to their fiscal demands.

But now we’re suddenly seeing that some politicians have a new-found appreciation for the underground economy.

The New York Times reports that European nations want to add these activities to their estimates of GDP.

As of September, all European Union countries will be required to take fuller accounting of trade in sex, drugs and other underground businesses as part of an overhaul of economic measurements by Eurostat, the European statistics agency. The point of counting everything, including the wages of sin, is to get a more accurate reading of each country’s gross domestic product.

Sounds reasonable, right? Who objects, after all, to more accurate numbers?

But it’s always good to be suspicious of governments.

And why is suspicion warranted in this case? Well, it appears that this effort to re-measure GDP may give politicians more ability to spend.

With European Union governments obliged to reduce debt as a percentage of their economies, the changes are also expected to make growth rates from Spain to Sweden look better, possibly also making debt ratios seem rosier. …In Italy, Ireland, Portugal and Spain, …G.D.P. could increase by as much as 2 percent, Eurostat estimates, while Germany and France could see expansions of as much as 3 percent. Britain might show a gain of 3 to 4 percent, Eurostat said.

To elaborate, there are “Maastricht rules” in the European Union that (at least in theory) obligate governments to keep deficits from rising about 3 percent of GDP and to keep debt from climbing above 60 percent of GDP.

So if politicians and bureaucrats can figure out ways to make GDP appear bigger, that means they can have more red ink. Which means, of course, that they can spend more money.

So now it should be abundantly clear why governments have an incentive to add the underground economy to their GDP estimates.

But there’s one little problem with this approach. The whole purpose of the Maastricht rules was to keep nations from spending themselves into a fiscal crisis. The rules obviously didn’t work very well (perhaps because they focused on the symptom of red ink rather than the underlying disease of too much government spending), but there presumably would have been even more profligacy if they didn’t exist.

So what’s the point of adding the underground economy to GDP when that simply gives politicians more leeway to spend?

Indeed, the NYT article notes that some of the bean-counting bureaucracies in Europe are concerned that this new approach won’t work because there won’t be any new tax revenue to accompany the new spending.

Statistics agencies, though, say that whatever the improved ratios, debt will not be easier to service, because governments cannot collect taxes from illegal underground activity.

And just in case you don’t trust the New York Times, here’s a blurb from Money News making the same point.

No country is supposed to let their annual deficits exceed 3 percent of GDP or accumulated debt exceed 60 percent of GDP. Countries that don’t comply with the debt limits are to be penalized — 0.2 percent of GDP, plus a “variable component” that can range up to 0.5 percent of GDP annually as long as the breach continues. Boosting GDP helps lower the debt ratio.

The bottom line is that these changes will enable Europe’s politicians to postpone much-needed fiscal discipline.

In other words, they’ll have the ability to spend themselves deeper into a hole.

And as you can see from these sobering IMF, OECD, and BIS estimates, the hole is already enormous.

Not that America is any different. Our economy may be doing better (or less worse) today, but our future fiscal outlook is worse than many other nations thanks to a combination of poorly designed entitlement programs and changing demographics.

And just as is the case for Europe, counting our underground economy would not be a substitute for the reforms needed to save the nation.

Read Full Post »

What happens when you mix something good with something bad?

To be more specific, what happens when you have a big success story, like the spending cap in Switzerland that has dramatically slowed the growth of government, and then expect intelligent and coherent coverage by a government-run media outfit that presumably wants a bigger public sector?

Well, the answer is that you get a very muddled story.

Here’s some of what Swiss Info, which is part of the Swiss Broadcasting Corporation, wrote about that nation’s “debt brake.”

The mind-boggling…debt racked up by governments…has turned some heads towards Switzerland’s successful track record… Swiss voters approved a so-called ‘debt brake’ on federal public finances in 2001, which was put into operation in 2003. A decade later, the mountain of government debt – that soared to dangerous levels during the 1990s and early 2000s – has been reduced by CHF20 billion ($23 billion) from its 2005 peak. The ratio of debt to annual economic output (gross domestic product or GDP)…fell from 53% to 37% between 2005 and the end of 2012.

There’s nothing wrong with that passage. Indeed, you could almost say that Swiss Info was engaging in boosterism.

Moreover, the story points out that other nations have been going in the wrong direction while Switzerland was enjoying success.

…as Switzerland was chipping away at its mountain of debt, other countries were building theirs up. …Since the middle of 2007 public sector debt alone has soared 80% to $43 trillion, according to the Bank for International Settlements.

And the story even notes that other nations are beginning to copy Switzerland.

The Swiss debt brake is the perfect model for other countries to embrace… Germany applied its own version of the Swiss debt brake in 2009, followed by Spain and other European countries.  …“Switzerland came up with the blueprint for what I am sure will be the standard fiscal model of the future,” said Müller-Jentsch.

So why, then, do I think the story has a muddled message?

The answer is that there is no explanation of how the debt brake works and therefore no explanation of why it is a success.

A reader will have no idea, for instance, that the debt brake is actually a spending cap. Readers also will have no way of knowing that red ink has been controlled because the law properly focuses on limiting the growth of spending.

By the way, it wouldn’t have required much research for Swiss Info to include that relevant data. If you do a Google search for “Swiss debt brake,” the first item that appears is the column I wrote in 2012 for the Wall Street Journal.

In that piece, I explained that “Switzerland’s debt brake limits spending growth to average revenue increases over a multiyear period” and I added that “Before the law went into effect in 2003, government spending was expanding by an average of 4.3% per year. Since then it’s increased by only 2.6% annually.”

So why didn’t Swiss Info mention any of this very relevant information? Is it because it tilts to the left like other government-owned media outfits, and the journalists didn’t want to acknowledge that spending restraint is a successful fiscal policy?

I have no idea whether that’s the case, but there is a definite pattern. When I appear on PBS, the deck is usually stacked in favor of statism. Moreover, you won’t be surprised to learn that I’ve had similar experiences with government-run TV in France. And it goes without saying that the BBC in the United Kingdom also leans left (though at least they seem to believe in fair fights).

This video from Swiss Info is similarly vague. It’s a favorable portrayal, but people who watch the video won’t know how the debt brake works or why it has been successful.

P.S.  I don’t know the details about the German version of the debt brake, but it’s probably having some positive impact. The burden of government spending has not increased in that nation since 2009, at least when measured as a share of GDP. Though the Germans also weren’t as profligate as other nations (including the United States) in the years before they adopted a debt brake, so I’ll have to do more research to ascertain whether the German approach is as good as the Swiss approach.

P.P.S. In any event, the moral of the story is that good fiscal policy should be based on the Golden Rule of having government grow slower than the productive sector of the economy.

P.P.S. The Princess of the Levant and I continued our tour of the French Riviera. This photo is from Les Jardins Exotiques at Chateau d’Eze.


As part of my travels, I’ve learned that the unluckiest people in the world are from Menton and Roquebrune in France. That’s because they were part of Monaco until 1860.

So now, instead of enjoying an income tax of zero under Monegasque rule, they are part of France’s wretched fiscal system.

Read Full Post »

My tireless (and probably annoying) campaign to promote my Golden Rule of spending restraint is bearing fruit.

The good folks at the editorial page of the Wall Street Journal allowed me to explain the fiscal and economic benefits that accrue when nations limit the growth of government.

Here are some excerpts from my column, starting with a proper definition of the problem.

What matters, as Milton Friedman taught us, is the size of government. That’s the measure of how much national income is being redistributed and reallocated by Washington. Spending often is wasteful and counterproductive whether it’s financed by taxes or borrowing.

So how do we deal with this problem?

I’m sure you’ll be totally shocked to discover that I think the answer is spending restraint.

More specifically, governments should be bound by my Golden Rule.

Ensure that government spending, over time, grows more slowly than the private economy. …Even if the federal budget grew 2% each year, about the rate of projected inflation, that would reduce the relative size of government and enable better economic performance by allowing more resources to be allocated by markets rather than government officials.

I list several reasons why Mitchell’s Golden Rule is the only sensible approach to fiscal policy.

A golden rule has several advantages over fiscal proposals based on balanced budgets, deficits or debt control. First, it correctly focuses on the underlying problem of excessive government rather than the symptom of red ink. Second, lawmakers have the power to control the growth of government spending. Deficit targets and balanced-budget requirements put lawmakers at the mercy of economic fluctuations that can cause large and unpredictable swings in tax revenue. Third, spending can still grow by 2% even during a downturn, making the proposal more politically sustainable.

The last point, by the way, is important because it may appeal to reasonable Keynesians. And, in any event, it means the Rule is more politically sustainable.

I then provide lots of examples of nations that enjoyed great success by restraining spending. But rather than regurgitate several paragraphs from the column, here’s a table I prepared that wasn’t included in the column because of space constraints.

It shows the countries that restrained spending and the years that they followed the Golden Rule. Then I include three columns of data. First, I show how fast spending grew during the period, followed by numbers showing what happened to the overall burden of government spending and the change to annual government borrowing.

Golden Rule Examples

Last but not least, I deal with the one weakness of Mitchell’s Golden Rule. How do you convince politicians to maintain fiscal discipline over time?

I suggest that Switzerland’s “debt brake” may be a good model.

Can any government maintain the spending restraint required by a fiscal golden rule? Perhaps the best model is Switzerland, where spending has climbed by less than 2% per year ever since a voter-imposed spending cap went into effect early last decade. And because economic output has increased at a faster pace, the Swiss have satisfied the golden rule and enjoyed reductions in the burden of government and consistent budget surpluses.

In other words, don’t bother with balanced budget requirements that might backfire by giving politicians an excuse to raise taxes.

If the problem is properly defined as being too much government, then the only logical answer is to shrink the burden of government spending.

Last but not least, I point out that Congressman Kevin Brady of Texas has legislation, the MAP Act, that is somewhat similar to the Swiss Debt Brake.

We know what works and we know how to get there. The real challenge is convincing politicians to bind their own hands.

Read Full Post »

Based on what’s happened in Greece and other European nations, we know from real-world evidence that even nations from the developed world can spend themselves into debt trouble.

This has led to research that seeks to pinpoint when debt reaches a dangerous level.

Where’s the point where investors stop buying the debt? Where’s the point when interest on the debt becomes too much of a burden?

Most famously, a couple of economists crunched numbers and warned that nations may reach a tipping point when debt is about 90 percent of GDP.

I was not persuaded by this research for two reasons.

First, I think it’s far more important to focus on the underlying disease of too much government, and not get fixated on the symptom of too much borrowing. If I go see a doctor because of headaches and he discovers I have a brain tumor, I want him to address that problem and not get distracted by the fact that head pain is one of the symptoms.

Second, there are big differences between nations, and those differences have a big effect on whether investors are willing to buy government bonds. The burden of debt is about 240 percent of GDP in Japan and the nation’s economy is moribund, for instance, yet there’s no indication that the “bond vigilantes” are about to pounce. On the other hand, investors are understandably leery about buying Argentinian government debt, even though accumulated red ink is less than 40 percent of economic output.

So what about America, where government borrowing from the private sector now accounts for 82 percent of GDP? Have we reached a danger point for government debt?

According to Matthew Yglesias (who says I’m insane and irrational), the answer is no.

I have several comments on this video.

1. Some people have complained that the video is deceptive because it focuses on debt held by the public rather than the gross federal debt. The video could have been more explicit and explained why that choice was made, but I have no objection to the focus on publicly-held debt. After all, that’s the measure of what government has borrowed from the private sector. The gross federal debt, by contrast, also includes money the government owes itself (such as the IOUs in the Social Security Trust Fund), but that type of debt is merely a bookkeeping entry.

2. The video asserts that inflation is low and therefore we don’t have to worry that government might have to “print money” at some point to finance additional debt. I don’t think there’s any immediate danger that the Fed will be put in a position of financing the federal government, but I nonetheless don’t like this logic. It’s sort of like saying it wouldn’t be a problem to start eating ten pizzas per day because you currently aren’t heavy. The simple truth is that low inflation now doesn’t mean low inflation in the future.

3. I also reject the assumption in the video that interest rates drive the economy. Indeed, it’s probably more accurate to say that the economy drives interest rates, not the other way around. Suffice to say that the video is based on the same thinking that led the Congressional Budget Office to imply that you maximize growth by putting tax rates at 100 percent.

4. The video also warns that politicians shouldn’t raise taxes or reduce government benefits since either policy would “take money out of people’s pockets.” This is Keynesian economic theory, which I’ve explained many times doesn’t make sense. No need to regurgitate those arguments here.

5. Which brings us to the main problem of the video. It ignores the problem of unfunded liabilities. More specifically, it doesn’t address the fact that politicians have made commitments to spend far too much money in the future, largely because of poorly designed entitlement programs. And it is these built-in promises to spend money that give America a very grim fiscal future, as show by this BIS, OECD, and IMF data.

Here’s the video, produced by the Center for Prosperity, that accurately puts all this information together (the data is now several years out of date, but the analysis is still spot on).

Remember, the problem – both today and in the future – is the burden of government spending.

Read Full Post »

Older Posts »


Get every new post delivered to your Inbox.

Join 2,706 other followers

%d bloggers like this: