Debt burden continues to decline under profligate Democrats

First, household debt:

(Image from Quartz, via Barry Ritholtz)

Now, that’s pretty easy. If the bank forecloses on your house, your debt is extinguished. This is not really the kind of debt decline we’d like to see. But actually the federal deficit has been falling since the end of the recession.

(image from FRED)

So, yes, at 8.6% of GDP as of 2011, the deficit is too high. As more people go back to work, the payroll tax holiday goes away, and the wealthy are cajoled into paying a little more in taxes, the deficit should drop swiftly… it’s already down from the 10.1% of GDP achieved by Dubya Bush in fiscal year 2009 (ending in October 2009, and therefore preceding almost all of the stimulus spending, contrary to what James “Dow 36000″ Glassman thinks, only 22%–$33B– had been spent, most in the form of a special payment to Social Security recipients).

The magic number is about 3% of GDP. As long as the deficit remains under that limit, the debt burden will not rise, since it will be within population + productivity growth. Notice which presidents achieved that level of deficit or better.

Taking a Rasor to military costs

It should scandalize all of us, whether hawks or peaceniks. Defense contractors are making enormous profits because there are no effective cost controls in place. They tell the government to pay so-and-so much, and the government does–without even checking that the exp. They are endangering it by guaranteeing that there will be backlash against defense spending.

Dina Rasor has a piece out on t/o (it’s a few months old) in which she interviews Director of Defense Pricing Shay Assad on what is called “should cost pricing.”

…there are very few people left in the DoD and in the United States who really know how to do the traditional should cost studies that made US manufacturing so effective 40 years ago. The DoD has spent years making sure those types of industrial engineers were purged from the system and all traces of should cost were swept away. Assad vows to train and rebuild a professional corps who can do real should-cost studies on weapons and make it a permanent fixture on how we price weapons. He said that he was “absolutely” going to purge the historical pricing system in the DoD for good.
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The Japanese still have some should-cost methodology left and they should be used as a template. The DoD should go into its archives of the work of DoD whistleblower Ernest Fitzgerald, who worked his whole career to establish should cost. His past should-cost studies on various weapons would also be an important template for future genuine should-cost studies.

•The contractors generally don’t do these types of studies anymore and thrive on keeping their records on pricing, audits and payments in chaos so they can’t be closely monitored either by the DoD or by government lawsuits.

I would not be surprised if one-third of the cost of most weapons systems isn’t waste. Ironically, the contractors only get a fraction of what is wasted. It would be less expensive if we offered them higher profit margins on honest costs.

FDR would not fall into the trap economists like Krugman and Baker have

Eswar Prasad and Mengjie Ding, Brookings:

Our analysis paints a sobering picture of worsening public debt dynamics and a sharply rising debt burden in advanced economies. These rising debt levels combined with heightened concerns about fiscal solvency now constitute a major threat to global financial stability.

What is a reasonable debt burden? We routinely accept personal debt burdens two, three, or four times the size of our annual income when we buy a house. In college, we may accept a debt burden ten or twenty times our income. In war, the US comfortably carried a debt burden over 100% of GDP. And Japan currently has a debt of 200% of GDP (figures for all countries in 2007, 2011, and 2016 are here). At the moment, the US is in the middle of the pack, and expected to stay there.

But there is a reason to be concerned about debt levels, both in the US and in other countries. Paying interest on the debt subtracts from productive investment that government can engage in. Interest on the US debt in 2010 was over $413B. We are already at that level in 2011 with two months to go. If interest rates were to rise to 5% on all debt, its average level, we would be paying $730B. When one considers that the entire stimulus devoted to jobs (federal contracts, grants and loans) was $275B, the problem should be obvious: we are spending too much on past wars, pork, and tax giveaways versus what we spend on creating jobs.

Many liberal economists, people like Dean Baker [added: a minor example is here and another here. I will replace thesse with a better link if I can find one] and Paul Krugman say, in effect, Just spend! The consequences of the output gap created by mass unemployment are larger than the interest payments! They have a point. With interest rates this low, borrowing looks attractive. [Added: And, as the output gap is closed, revenue collections increase...assuming we're collecting the taxes.] But interest costs are already way too high. They represent a burden roughly equal to 15% of the entire 2007 budget. We can expect them to rise to 25% or more if the right-wing has its way. They are, in short, socialism for the very wealthy extracted from the society as a whole in the form of benefit cuts and poorer governance.

The game plan of the Republicans is transparent. Increase the debt to high levels, create a panic about the debt that will lead to interest rates rising to very high levels, and then sit back and clip coupons. It’s an insane strategy, one that will lead to a further decline in the dollar and in the US as a nation. But it worked for them in the 1980s, and they clearly intend to try it again.

FDR would never fall into this kind of trap. Democrats have to demand responsible budgeting–including higher taxes–in order to generate revenue for jobs. If they fail in this, falling either into reckless budget cuts without tax rises or into spending without concern for how many jobs are created, they cannot generate the political will to fix this national economy.

By the way, an interest burden of 15% is above the uncomfortably high level of the household debt service ratio. 25% (with exceptions) is the level of debt of a household about to become homeless. There is a limit to the level of debt that countries can carry, and it can be deduced by principles similar to those surrounding household debt: figure out a reasonable level for the big expenditures, things like Medicare and Social Security. Subtract out a minimal amount for national defense (Say, 2% of GDP, which is the European level of spending). How much is left over to accomplish anything else?

The upper limit that debt can ever achieve, then, is that sum, divided by the expected interest cost. One can debate the exact size of that number. It is not, however, infinite, nor even that much larger than what the debt is today.

The need for Jubilation

Here’s the very definition of political risk. The Chinese are threatening, in a hectoring tone that does not befit a nation that suffered from debt slavery for two centuries or so, to refuse buy any more debt unless we cut Social Security and Medicare. The current Chinese government is, by the way, about as popular (except among their ex-pats) in Asia, as we are in Iraq, which is to say, about as popular as drought and famine.

More to the point, the Eurozone is playing extend and pretend at a time when even the most basics of business transactions demands clarity. The Germans are acting like southern Europe is naughty children, rather than the very nations whose deficit spending helped fuel German manufacturing. And the US is run by incompetents, deadbeats and lunatics. As the Guardian editorializes, “Financial Markets and Governments: No one’s driving“. A Babel is arising, in which nations are unable to talk to one another and plan a sensible strategy forward.

And so we get this news from Toby Helm, Nils Pratley, and Tania Branigan of the Guardian:

World leaders are battling to prevent panic from spreading across financial markets as the sudden downgrading of the US credit rating triggered fears of global turmoil when stock exchanges open.

Finance ministers from the G7 leading industrial countries – many of them away on summer holiday – agreed to a series of urgent weekend telephone talks to try to prevent a loss of confidence in the world’s biggest economy.
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[Chancellor George] Osborne was reported to be urging richer eurozone states such as Germany and France to back the radical step of issuing so-called “eurobonds”, meaning they would underwrite the debt of poorer eurozone nations in return for gaining a formal say in the future running of their economies.
…
China, the largest foreign holder of US debt, issued an extraordinary demand that Washington change its economic ways and address its “debt addiction”. It said the rating reduction would be followed by more “devastating credit rating cuts” and global financial turbulence if the US failed to learn to “live within its means”.
…
It also insisted the US should slash its “gigantic military expenditure and bloated social welfare costs”

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Deficits driven by Bush tax cuts, recession

From CBPP via Avedon:

Yeah, the wars are a factor, they should add in Medicare D, but the picture is clear: without ending the Bush tax cuts, there is simply no way to close the budget gap except to outright steal the Social Security and Medicare trust funds.

Read the article. It refutes the Heritage Foundation apologia for the Bush tax cuts, noting:

1. Heritage admits that it understates the cost of the tax cuts by omitting their impact on rising net interest costs.
2. Heritage ignores the fact that the share of deficits accounted for by the Bush-era tax cuts will grow in future years as the impact of the economic downturn on deficits diminishes
3. Heritage assumes that regular discretionary spending (other than war costs and stimulus funds) will grow at the same rate as the GDP over the next 10 years. In contrast, we assume that such appropriations will grow somewhat more slowly in the 10-year budget window because they will grow with inflation; this is the standard, widely accepted baseline assumption.
4. It was not a sudden spurt of growth in Social Security, Medicare, and Medicaid that turned projected budget surpluses into deficits [these were accounted for in baselines developed by CBO].

If you start out from wrong assumptions, which Heritage and therefore the Republicans are doing, you will end up doing things that will simply make the deficits worse.

Growth Dance Religion

Near the depths of Plains Indians defeats in the American conquest, the Paiute shaman Wovoka had a vision of the Second Coming of Christ in which the resurrected Jesus promised to save the Indians from the white man. The new religion was widely adopted. (The religion figured in the massacre at Wounded Knee Creek, since the Indian Agency had become convinced that the Lakota were blessing shirts to be invulnerable to bullets). In fact, the religion would have facilitated the acculturation (genocide) of the Plains Indians by accommodating demands that children be sent away for schooling, among other points:

According to the prophecy, the recent times of suffering for Indians had been brought about by their sins, but now they had withstood enough under the whites. With the earth destroyed, white people would be obliterated, buried under the new soil of the spring that would cover the land and restore the prairie. The buffalo and antelope would return, and deceased ancestors would rise to once again roam the earth, now free of violence, starvation, and disease. The natural world would be restored, and the land once again would be free and open to the Indian peoples, without the borders and boundaries of the white man.

Needless to say, the vision remains unfulfilled.

The fables we hear about the debt are far more pernicious than the Ghost Dance. For all I know, Wovoka’s vision was true. The same cannot be said of Catherine Rampell’s column in the New York Times, which promises us that we can painlessly grow out of our debt. (Atrios, in his appealingly simplistic way, described this as “the other way to cure the deficit is, you know, awesome”):

But there is, in theory, a happy solution to our debt troubles. It’s called economic growth. No need to raise taxes or cut programs. Just get the economy growing the way it used to.
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We wouldn’t need any of that [taxes, cut spending, have inflation, or default] if we could restore economic growth. If that happened, Americans would become richer and pay more taxes. Et voilà! — we’d pay down the debt painlessly.

Crazy as that might sound, particularly given Friday’s figures, the possibility isn’t some economic equivalent of that nice big farm where your childhood dog Skip was sent to run free. There are precedents.

Well, actually, it is on par with telling kids that you’re sending the family dog to the farm when you’re prepping him for euthanasia. Rampell cites as a precedent Ireland, which did indeed enjoy some good decades of growth: partly because it was starting from a very low base, partly because it was able to exploit the American trend of capital flight to low-wage countries, and partly because a large part of the growth was illusory, based on massive overvaluation of real estate… all of these much like the Japanese “miracle” which crashed two decades ago and has never been revived.

Jack Kemp used to tell us that he was running on “hope, growth, and opportunity.” It was a great slogan. But on the growth part, let’s be realistically. The American economy has never sustained 5% growth in the modern era. Even if we regarded the bottom end of our economy as the Third World that it is rapidly becoming, by properly investing in it, we might be able to get 7-10% growth of 10-20% of our economy… in other words, we might add about a percent to our historic growth to get near 4%. For that matter, since we need to reduce resource consumption, we might have to achieve higher standards of living without raising GDP as much as we are accustomed to… which has implications for debt service.

Ultimately, we do need higher taxes, less wars, and a much more efficient medical insurance system. The latter will cost, not create jobs, and winding down our overspending on the military will cause great pain to some areas. There is no solution to our problems that is pain free. But let the pain be inflicted on those who have enjoyed decades of overstuffing themselves, not on the poor, the sick, the elderly, and those struggling just to stay in a home.

(written in partial answer to Atrios, and Chicago Dyke in comments)

Default now appears inevitable

43 Republican Senators Sign Letter Opposing Reid Debt Plan

Of course, three Republicans could decline to join a filibuster. Looking at who signed the letter, even the so-called “responsible Republicans” (Lugar, McCain) are on board with blowing things up. I guess that the Democrats could cave and do what the Republicans want. But that would probably be worse than default.

Or a meteor could land on Washington. That would certainly would gratify a large swathe of the American public and lead to better economic policies than are presently under consideration.
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Update: So, we get worse than default. Ten years of a contracting economy and joblessness levels to rival the Great Depression. This agreement will definitely put the US back into recession. And by caving, Barack Obama has left the only healthy part of the American polity leaderless, adrift, and tearing at one another.

We gotta have a debt deal or the markets will crash!

Truly our political dialogue is insane.

Adding: this is not to say that default would leave the markets–or the economy–unscathed. It would be a disaster. But the markets are clearly convinced that the politicians will work it out. We don’t have a market crisis. We have a political crisis.

Read it and weep

Bruce Bartlett does the math (based on CBO; via Ritholtz):

It’s not blank. It’s made out to G.O.P.

Robert Borosage:

Seldom have we witnessed a more dishonest speech in prime time than that delivered by House Speaker John Boehner last night on the debt ceiling crisis. “The sad truth,” he declared, “is that the president wanted a blank check six months ago, and he wants a blank check today. That is just not going to happen.”

The sad truth is that statement is a bald lie, applied to a president who, far from wanting a “blank check,” has endorsed Senate Majority Leader Harry Reid’s plan for an unconscionable $2.7 trillion in over ten years from discretionary spending as ransom to Republican threats to blow up the economy by not raising the debt ceiling.

The largest lies in Boehner’s speech were the unspoken ones, namely the claims that:
* The GOP didn’t create the debt
* The rise in debt is due to spending, rather than the collapse of employment
* The GOP isn’t responsible for creating the debt ceiling crisis

How can a human being stand up and mislead the American people this way? It’s very similar to the story of Raquel Nelson, the woman whose child was killed by a drunk driver being threatened with more jail time than the guy who killed the child (fortunately the sentence was suspended). John Boehner is the drunk, the Democrats are the mother, and the child….