This is something I wrote a couple months ago, during the U.S. Government shutdown when we were very close to breaching the political debt ceiling. Political meaning there is absolutely no economic reasoning behind the idea. I posted it on facebook for friends and family to read, and more people were likely to there than here. But I want it to be part of this blog, because I think it is one of my most coherent and insightful political economic writings so far. We may have passed this point in time without further crisis, but the information is still relevant in the context of the argument on national debt, and we still have a debt ceiling that will need to be extended once again in another crisis hanging over the nation’s head.
" In 1979, because of congressional brinkmanship over a proposed balanced budget constitutional amendment, the U.S. Government came within a day of exceeding the debt limit (a stupid, non-economical, completely irrational political limit). Because of this, the U.S. technically defaulted on the interest of some Treasury Bonds, and those investors/holders were not paid what they were owed (but repaid a week later). Those investors sued the Government seeking interest for the days they went without receiving their return. Anyways, as is the case with a crisis of confidence and flat out default on U.S. debt, even if on only a small amount of debt, the Treasury Bond interest rates soared (the amount of interest the Government has to pay back on top of the principal it borrows from investors increased significantly). This increase of rates turned out to cost the U.S. $12 Billion more in interest than the rates would have been had congress not come so close, and the government not fails to pay any interest.
Why do I mention this history I learned today? Because we are just under two days before the day we breach the current debt ceiling (October 17th). There is no deal agreed to at any point in the process, the Senate may be reaching one sometime soon, but that isn’t saying what the Republican House leaders will choose to do, and the current talks seem to be breaking down.
There’s more though, that result could play right into the hands of this ideology’s argument, not just because more spending on interest means more spending to be critical of. But also because it would contribute more to the likelihood we approach an actual debt crisis, which is when the market wants to abandon the Government’s debt and results in dangerously high Treasury rates. That will then cause the Government’s extremely expensive borrowing to crowd out private firms from borrowing (crowding out investment) costing them even more in interest rates than the Government to do so. In our current state, even with, and majorly because of slow economic growth, we don’t have anything close to a debt crisis. In fact, Treasury rates (10 year, 2.75%) are still low and just a year ago significantly lower (2012 10-year 1.50-2%) than the historical average rate of interest on Treasuries (4-6%).
Because Treasury Bonds, aka U.S. Government Debt, are the safest, most reliable, and most sought out investments in the Global Market, when the economy (U.S. and Global) is not doing very well treasury rates are low as more people shelter their savings and investments with the Treasuries’ very safe, consistent, modest rate of return. This is a basic mechanism enforcing the paradigm of the central government’s economic role that has existed since the advent of Keynesian economics, replacing the old Classical economics.
This where I take issue with one side’s economics or lack thereof, because that paradigm is not akin or similar in any sense to the operation of a private business or household finances, as they suggest. It is basically the opposite. When household spending is low (maybe also because business spending is low) the Government has a Keynesian role of filling in the spending (demand) hole through things like automatic stabilizers (entitlements i.e. unemployment insurance, nutrition assistance). When the Economy is booming and private spending is high, the automatic stabilizers back off. The Treasury securities’ interest rate fluctuation is a mechanism of this, leading to cheaper borrowing for Government during downturns. Also, as the economy improves, the Treasury interest rates increase, resulting in all private borrowing cost increases.
What will happen, be there contact with the debt ceiling and the Government fails to pay all of its obligations, especially if those obligations are the Treasury securities themselves, is the same thing that happened in 1979, or possibly worse as it seems there is even less hope than then of our Congress reaching an agreement to raise the debt ceiling. Treasury interest rates will soar, and the U.S. Government’s cost of borrowing increases, contributing much more to the possibility of a debt crisis. That is if it doesn’t trigger a debt crisis right away. Then the same people and their ideology that caused us to default on our debt would turn around and say, “See the Government can’t safely borrow money for its spending. And not only that, Government spending does hurt the rest of the economy, it costs too much for anyone to borrow.” But the only reason that would result would be a purely political one, but with true economic effects. There is no economic reasoning behind the idea that Government spending has a negative impact in an economic downturn, other than old, not widely held theories.
That Catch 22 will just give more validation in the minds of those that believe such theories, deepening the degree to which that side of the political spectrum is stubborn and refusing to compromise on any policy that isn’t a full adoption of their viewpoints against the Government’s role in the economy, or any other facet of the American situation. That severity of ideology is exactly what got us in this mess to begin with. It’s a downward cycle into lower and lower confidence in Government, against the grain of truth that actually Government has an extremely important role in supporting the backbone of this nation.”
And I start with the following. The implications in a long running debate re left for your personal inference.
The International Monetary Fund has estimated that around 60% of all Government/National/Sovereign Debt increases since 2008 is due to low and uncollected tax receipts, double the amount the result of bail outs and stimulus combined.
(Source: The Economist, September 28 - October 4, 2013, “Stimulus v austerity: Sovereign doubts”)
I heard the most interesting idea today addressing why perhaps income inequality is more exasperated in this modern age, and that the U.S. political climate has tended to disgregard and disvalue the social safety net. In the early 20th century, there was an ever creeping example of communism all over the world, and to avoid having it creep into the capitalist societies, the political leaders of the time had to take much greater care to have capitalism be more equitible and supportive of the lower and middle class. Thus fair and simple regulation was more prevalent, organized labor was popular, and social safety programs were more popular. With the idea of communism virtually gone and discredited, the capitalist political leaders, and the economic elite, now have the incentive to disregard those values and take an even bigger slice of the pie for themselves.
As though our social safety net, for the people who need it, is really as far reaching as it should be. And of course to the right wing ideologues, well of course a social safety net is needed, and the welfare reform of ‘96 put it right where it needed to be (in the middle of a booming economy.) Without a booming economy, the largest gap on this chart is about as far reaching as that version of Welfare (Temporary Assistance for Needy Families TANF) can be at the very exit of the worst recession since the Great Depression. Maybe according to that ideology the majority of people in poverty should be out of reach of welfare, while high income benefiting tax expenditures, deductions, and/or write offs (a legitimate category of social safety net spending) amount to $900 Billion of lost revenue to the Government.
Hello folks, hello anyone who might read this blog. My Stat counter tells me someone occasionally does. Anyways, I know I haven’t made a post or written anything very substantial in a little while. This is not because I’m not very interested in what is going on in domestic and international economics. I can’t say it isn’t because I’ve lacked motivation, because perhaps I have a little bit. But I can say it’s not because I don’t want to write something or that there hasn’t been many thoughts and ideas on any issues. There has been quite a bit recently, and for the most part there is a lot going on these days, and it’s not so easy to stick on top of everything in very much depth. I think also for the most part that with so much going on (domestically and internationally) that I’ve been having a profound desire to more deeply study and comprehend much of these things in a way that eventually I will be able to more accurately and efficiently write about these things on my blog.
There are a few topics also that I have had a desire to do a more comprehensive piece on such as income inequality in the United States and elsewhere in the world. Despite the more cultural political issues in national focus such as gun safety and voting rights, the State of the Union was quite a pivotal moment in the President announcing his desire for an agenda that addresses a few big economic topics such as improving preschool education, investing in infrastructure, tax reform, and raising the minimum wage as a way to address income inequality (or more appropriately stated the inability of a full time worker on low or minimum wage not being able to afford even the most basic standard of living). That sort of reignited an interest and focus for many in the media as well as my self on that issue. So in the weeks after the SOTU there was an enormous wealth of new policy wonk coverage of it.
Part of my idea of what I wanted to do a comprehensive piece on was the fact that also recently the Chinese Government announced a whole new set of actual policies to address their own developing income and wealth inequality resulting from the growth of much of their population to a new standard of living. It is quite an interesting world picture painted when a nation with such a shoddy human rights record as China is pursuing actual substantive policy to address socioeconomic inequality within its borders, when the best the wealthiest nation, the United States, can accomplish in its political process is just the mention a long overdue policy idea in what is usually the most unrealistically aspiring policy speech every year. So while I have delved into that issue a lot, I just feel like there is so much more I want to learn about it before I actually set out to accomplish the writing.
There have also been even smaller writings I have wanted to write for quite some time now but have completely failed to do so. One idea was about a case of successful regulation in a story of a radically depleted fish population in some area off the coast of New England, and which the state Government created new regulation over the fishing area. It ultimately resulted in the regrowth of this particular fish population and dnow sustainable fishing there. Another was just simply going to be an overview of how Government regulators in Iceland dealt with their banks in the ‘08 financial crisis in way of actual justice and nationalization instead of the quasi-ass nationalizing crony and corrupted bailout way in which it was handled in the U.S. (Not that I entirely disagree with the way it was handled here, but Iceland was a shining example.)
Otherwise there is still so much going on this world. Syria has gotten worse in that estimates of civilian casualty have reached the height of a potential 70,000 and the situation’s deterioration to the point where even Russia, Syria’s ally, has evacuated all of its citizens living there, with the help of the U.S.
The economic crisis in Europe continues to be a clusterfuck. The technochrat Mario Monti’s role as Prime Minister of Italy has come to its legal end and a new election has taken place where the old complete hysterical joke of a PM they used to have, Silvio Berlusconi, might be the actual winner. Austerity continues to be heavily pursued policy in many troubled Euro nations. It continues to hold down economic growth in the region of zero or even negative percent. The people of these nations continue to be frustrated and angered by such policy choices. More positively, also mentioned in President Obama’s State of the Union, is the idea of talks between the United States and European Union officials to form a trade pact that would do a large deal to encourage greater economic growth in both economies. The European Union has also been talking about implementing a financial transactions tax in their financial markets.
Another big deal in current economic activity across the globe are the policy actions of Central banks that potentially artificially undervalue domestic currencies to gain an unfair competitive advantage on the stage of international trade. There has been the mention of the term “currency wars’ that the G-20 and G-8 have addressed or more so dismissed as Japan’s central bank has pursued policies of monetary easing, and the U.S. Federal Reserve has undertaken a new phase of Quantative Easing ($85 Billion of asset purchases each month).
And of course there is the topic of the “sequester” in the U.S. Government where there is going to be a $900 Billion reduction of spending across the board over 10 years, or more importantly $85 Billion in this fiscal year. This policy was not actually intended. It was supposed to be an incentive for the Congress and the White House to come to a compromise on dealing with the National debt level with more reasonable cuts to spending or raising of revenue. Instead the sequester is a very radical program where spending is cut drastically in the worse places, so that instead of cutting where politicians most believe it is needed, it is cut in places where cutting is not wanted and it will most effect the U.S. economy by effectively reducing people’s pay, reducing low income family support, and cutting back on Government contracts with the private sector.
On this issue, which is not exactly the most interesting or sexy, there is even way more policy wonk coverage, and much written about the issue of a long term problem of Government debt (of which I don’t necessarily agree exists) that is behind it.
So overall, there has been so much for me to read about, learn about, and think about. So much so that it is rather overwhelming and giving me the impression that there is so much more for me to understand before I feel like I can really do my own writing about whatever I want to write about. Hopefully soon I will come to a point, or a certain fusion of thought and knowledge that I will be motivated to write something very substantive.
Thank you so much to anyone who has read anything on this blog ever.
The Economist-Pundit Divide on Debt and Deficits - Neil Irwin, Washington Post Wonkblog
Actually, I strongly recommend the above article for an analysis of the argument over whether or not the National Debt and the budget deficits are major crises like many center-right and even center-left pundits suggest. It provides true economic thinking to address this question.
Here is another excerpt from the article leading up to the above quote.
"And there is a quite real risk that efforts to cut the deficit could be counterproductive in bringing down the debt burden. Britain has been implementing deficit-reduction measures for the past three years, and while it has succeeded in cutting deficits, its economy has been stagnant as austerity sucks the wind out of growth. As a result, its debt to GDP ratio has been rising!"
(To be updated with further figures on economic activity as well as sources, but for now this is the gist of my purpose in this piece.”
Today, the 30th of January, 2013 the Commerce Department said that for their first estimate of GDP growth in the fourth and final business quarter of last year, the economy did not grow and actually shrunk at .10%. In the headlines surrounding this announcement, media outlets offered explanations for what the Federal Reserve called “paused growth,” such as the impact of Hurricane Sandy and the uncertainty surrounding the “fiscal cliff” negotiations at the end of 2012.
In my opinion and my personally accented understanding of economics so far they are likely not completely wrong to suggest such reasons, but that also likely there is a bigger but more nuanced picture of reason behind this supposed contraction considering that recently including in Q4 of 2012 many areas and indicatio0ns of economic activity have actually been quite positive. (If you want to skip all of the “empirical evidence” of a growing economy you can skip down to continue reading my analysis and opinion.)
First and foremost Consumer Spending grew in the fourth quarter to 2.2% from 1.6% in the third, adding 1.5% to GDP despite its overall contraction.
Similarly, After-Tax Income increased at a 6.8% annual rate from October to December, the highest since Q2 2008.
Business Investment increased as well adding 0.8% to GDP.
Purchases of Durable Goods increased by 13.9%
"Cars and light trucks sold at a 15.3 million annual rate in December after a 15.5 million pace the prior month, the best back-to-back showing since early 2008, data from Ward’s Automotive Group showed earlier this month.”
"Combined sales of new and previously owned properties last year rose 9.9 percent, according to data compiled by Bloomberg, for the biggest annual gain since 1998 and an indication residential real estate is helping drive growth.
Home prices in 20 U.S. cities rose in the 12 months to November by the most in more than six years. The S&P/Case- Shiller index of property values increased 5.5 percent from November 2011, the biggest year-over-year gain since August 2006, according to data released yesterday.” - Bloomberg
Housebuilding climbed 11.9% in 2012.
Yields on benchmark 10-year Treasuries rose to 1.99 percent from around 1.70 percent back when the Federal Reserve announced a third round of Quantitative Easing in September of 2012.
Mortgage backed bonds increased to 2.01 percent from 1.26 percent at the same time in September.
Some say the rising yields on Treasuries is an indication opposite of effective Quantitative Easing, but this is only part of the picture because bond yield rises such as these are obvious indication of higher investment activity and thus likely overall increased economic activity.
All of that proof of recently exceptional economic positivity now brings me to my overall point of discussing the GDP figure from 2012 Q4, and that is, in addition to the economic shock events that negatively impacted GDP there was an overall decrease in Government spending at all levels, apparently a 15% decrease and government outlays decreased at a 6.6% annualized rate (The latter is likely pertaining to Federal Government only). In fact, I don’t really need to write about this trying to prove it to you with my own knowledge, the Commerce Department itself said that a “decline in government outlays and smaller gain in stockpiles” took off a total of 2.6% from GDP or 1.3% (from Bloomberg and again probably Federally only). Estimates for GDP growth in the business quarters leading up to 2013 Q4 haven’t even been much more than 2.6%. To be more specific the Department of Defense “blocked purchases” resulting in a 22.2% decrease in DoD spending. So with that you can make your own obvious conclusions about how much the decrease in Government spending had to do with the negative growth.